The Drilling and Oil Price Curves

I´m copying the post from peakoilbarrel.com so I can add the second figure:

The following is a purely conceptual couple of graphs which show how the drilling activity runs in tandem with the oil price forecast. The two are related and act upon each other (this is similar to the way a mass distorts space time, but distorted space time tells the mass which way to go).

I think it´s impossible to build a dynamic system model to predict how these curves evolve, simply because there are too many unknowns, we don´t know for sure how they relate to each other, and we have to throw in human reaction. It´s a typical economic model, but it shouldn´t be visualized as a spreadsheet, but as linear programs which, each time step, exchange information (in other words, a dynamic system).

The Bakken drilling and dynamic system outline from high altitude. 

Highly conceptual set of plots with  oil prices and the Bakken 

drilling activity.  Warning: the curves are drawn by hand. 

We can narrow down the problem by considering only the light tight oil plays and simplifying the heck out of the problem (for example we can ignore the price spread caused by transport bottlenecks, or the fact that refineries will bid up the price as the internal light crude supply drops).

If we narrow the problem the trick is to set up time steps, and establish whether wells will be drilled or not given the price environment (price and forecast). Thus in the example oil price base case I drew an intuitive number of wells which would be drilled. I repeat this is purely intuitive. To understand whether that number of wells would be drilled we need to establish a well price function (the less wells drilled, the cheaper), and an oil rate/reserves function (the more wells are drilled the poorer the average results).

The cost function is not only a result of the number of wells drilled, it´s also a result of the wells drilled elsewhere, learning curves, and technology improvements.

The oil/reserves function should use the number of wells drilled, number of total locations which may available, perceived technology improvements, oil prices beyond 10 years (because they set the economic limit), and operating expenses (I want to keep this short, there are other items we may wish to include).

This isn´t intended to be a paper describing how to set up a model, but I think you got the sense of how complicated it can get. As far as i can see the only thing that´s feasible is to test whether the wells assumed to be drilled at any given time are economic or not based on a given oil price environment.

In a sense, you CAN set the number of wells, see what price justifies this level of activity, set that price for the next time step (use a one year lag), and if the price is higher increase the number of wells. As long as the wells can be drilled and the forecast is dampened (because the reaction outside the “shale world” is more subdued) I think you can get something that´s going to be pretty sophisticated. I guess. I´m not sure. We would need to feel our way through it.

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This was partially copied  from PEAK OIL BARREL BLOG to put everything in one spot, because WordPress wouldn´t let me add the second graph. So there.