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Monday, October 25, 2010

Update on the Keystone XL Project (Not a Bakken Story)

Well, this is interesting, very interesting.

Just a few days ago (October 18, 2010), I posted on this blog that the TransCanada's Keystone XL project had been stopped in its tracks.

Speaker of the House Nancy Pelosi and Massachusetts Congressman Edward Markey oppose the project -- although there is also evidence that the Speaker might be less firm than headlines would suggest. Be that as it may, Ms Hillary Clinton, Secretary of State has voiced support for the project. She was criticized for her remarks but she stands by what she said.

From the Bismarck Tribune:
Because both pipelines (Keystone and Keystone XL) cross the U.S.-Canadian border, presidential permits from the State Department are required. But department officials have given no signal about when they might approve the final permit for Keystone XL, despite enthusiastically touting the Keystone pipeline as a project with little opposition when it was at this stage three years ago.
The Keystone XL project,  a massive pipeline project -- about five times the length of the trans-Alaska oil pipeline -- is projected to move up to 1.1 million barrels of Canadian oil each day to U.S. refineries. This project should not be confused with TransCanada's Keystone project; oil began flowing through that 36-inch pipeline this past June (2010).

Interesting, very interesting.

Scenario for Spike in Price of Oil (Not a Bakken Story)

Note: I posted the blog below on October 25, 2010. Today, one day later, October 26, 2010, I stumbled across this article: further pressure on OPEC to keep oil prices high. This is one further data point that supports my view below.

Original Blog

Back in late September, 2010, I wrote a long piece why I was bullish on oil as an investment. My basic premise is this: the price of oil will bounce around pretty much tied to the strength of the dollar until the global economy turns around and oil consumption starts moving up.

It has been shown, and I'm not going to go through all the links again, but it has been shown, that regardless of the price of oil, global daily production of oil has not changed much over the years. Even with the spike to $150/barrel, daily oil production remained fairly stable. There was a flurry of increased drilling activity but the actual amount of oil production did not change much. With all the activity in the Bakken, has the daily global production of oil changed much? No. Not even.

Others argue, and I agree, that the reason oil production has not changed much over the years is because "it" can't. Some argue this is because it has to do with declining fields, and some even suggest "peak oil" theory. That may be true, but that's not the reason that production has not increased. The biggest reason, in my humble opinion, and I don't have data to back it up, is the fact that infrastructure can only find, produce, ship, and refine so much oil on a daily basis. [Enbridge announced it will be forced to ration oil shipments next month due to over-supply and under-capacity due to pipeline repairs, as just one very minor example.]

Whatever the reason, why daily production does not increase over time does not change the fact that daily production does not change much.

Once the global economy turns, and most economists and "talking heads" think the economy will eventually improve, the demand for oil will go up. There may be a slight increase in production, but close observers of the situation will notice that demand will start to rise faster than any change in global production. At a certain point, a tipping point will be reached, and whether you want to call it speculative or not, the price of oil will start to rise dramatically based on concerns that production can't be ratcheted up. And once the spike begins, the price of oil will move up quickly.

I wrote all that back in September, but tonight there was yet another article that supports my contention. Brietbart reports that "Chinese Investment Soars in Brazil, With Eye on Resources," dated October 25, 2010.

[As you read this, remember, the Chinese have bought resources in Canadian oil sands and have taken a huge position in Chesapeake's Eagle Ford oil assets in south Texas. That Texas oil is fungible; anyone can contract to buy it, but I would assume that whoever finds, produces, and ships it will have first chance at contracting for it. Remember also, that China has significant presence in Africa, specifically Sudanese oil: it is estimated that China imports 50% to 60% of Sudan's oil.]

Now back to the Breitbart Brazilian story:
  • Chinese investment is expected to reach $30 billion this year
  • This investment is aimed at securing access to Brazilian oil
  • Prior to the end of 2009, Chinese investment was less than one-half billion dollars
  • In the first half of 2010, Chinese investment exceeded $20 billion
  • Two-thirds of that investment will be invested in the oil secor
  • China has privileged access to Brazilian oil after extending a $10 billion credit to Petrobras
  • China's Sinopec bought the Brazilian subsidiary of Spain's Repsol for $7 billion dollars
  • In 2009, China became Brazil's top trading partner, overtaking the United States
The perfect storm: when the global economy turns, and there is a psychological (speculative) upward pressure on the price of oil, it will be exacerbated when there is a realization that global daily production will not change much, regardless of the price of oil. But it will be the headlines that China has secured oil assets around the world, oil that may not be available to the market if China needs that oil.

The price of oil is not set by the cost of producing the first barrel (about $5/barrel in Saudi Arabia); the price of oil is set by the cost of producing the last barrel (about $60/barrel for Canadian oil sands). That puts the price of oil in a trading range between $60 and $80 based on the strength of the dollar.

If the global recovery comes around slowly, at best there will be an orderly upward trend in the price of  oil. Once folks realize that daily production cannot be increased significantly, the price of oil will start to rise more quickly. Once more Breitbart-like stories come out, showing who controls the oil, the price of oil will spike.

That's just my humble opinion.

[I would love to see an exhaustive report detailing Chinese oil activity in 2010 compared to 2009. For all the talk about how big ExxonMobil is, in 2008 this company produced about 3 percent of total global oil production, which is less than several of the largest state-owned petroleum companies. According to Wikipedia, when ranked by oil and gas reserves ExxonMobil is 14th in the world with less than 1 percent of the total.]

[By the way, the opposite is not true. As the price of oil rises, global production does not change much. However, if the price of oil drops below $60 for any length of time, production will be held back.]

Updates

November 8, 2010: OPEC sees increasing demand for oil starting in 2012, but due to "bad image" of fossil fuels, governments may restrict its use. OPEC warns developers from rushing into big oil-related industrial industrial initiatives.

November 5, 2010: More and more difficult to find oil to meet global needs.

October 26, 2010: Average price of gasoline today is $1.01 more than when President Obama took office.  Despite severest recession since the depression which one would think would keep prices down. Moratorium on Gulf of Mexico drilling; de facto moratorium continues; global economy starting to turn; Keystone XL project dead / delayed / maybe (choose one); dollar at lows (driving price of oil up).

EPD Update in Eagle Ford (Not a Bakken Story)

EPD is one of my holdings, so this update caught my interest. Too much to report here, so go to the link; suffice it to say, this (the Eagle Ford) is going to be a huge story. Before it's over, and I hate to say this, it's going to be bigger than the Bakken, at least in my humble opinion.

Although EPD is not in the Bakken (as far as I know), there are a number of Bakken oil service companies in the Eagle Ford.

To keep it straight in my mind, there are currently three big oil stories using Bakken technology: the Bakken (ND); the Niobrara (north central Colorado and southeastern Wyoming); and, Eagle Ford, south Texas.

Fourteen (14) New Permits for North Dakota Today (Bakken, ND, USA)

Fourteen new permits for the following companies: Whiting (4), KOG (3), Zavanna (2), Slawson, XTO, North Plains Energy, Oasis, and Burlington Resources.

Fields: Gaylord (2), South Fork (2), Murphy Creek, Elkhorn Ranch, Glass Bluff, Corinth, Elidah, Mandaree, Sand Creek and three wildcats.

These include two more Whiting wells in the South Heart area. They also include a 2-well multi-pad for KOG.

On track for 1,542 permits this calendar year.

BEXP Announces Another Nice Owan Well West of Williston (Bakken, ND, USA)

Click here for link. IP = 2,640.  One of several Owan wells in this immediate area.

Ten miles west of Williston, 320 feet south of US Highway 2. If anybody drives by, tell me what it looks like. Thank you.

Funding for Minot Bypass Project Could Increase Railroad Oil Capacity (Bakken, ND, USA)

I had not planned to post this link or cover this story because I thought it had limited interest. However, I was sent a nice note pointing out this link and alerting me to "Tiger II" funding by DOT. The individual asked what additional impact DOT funding might have, I assume, in this geographic area.

The reason I post this is because the metric in the story is very useful. The Minot bypass project will improve railroad oil shipment efficiencies.
The Minot oil facility, which is located at the intermodal facility, has the ability to receive and ship 30,000 barrels of oil per day, equivalent to 136 truckloads. With the improvements proposed as a part of the Minot Bypass project, the facility will be positioned to dramatically expand its capacity. 
And that's the key metric: 30,000 barrels/day = 136 truckloads of oil.

I cannot answer the question how much more Tiger II funding from DOT will impact the Bakken. Time will tell.

Update on TransCanada's Marketlink Pipeline (Bakken, ND, USA)

This is really cool.

TransCanada announces update on its Marketlink Pipeline

TransCanada is looking for firm bids from those who want to ship oil on its Marketline Pipeline project. The "open season" for bids ends November 10, 2010.

This pipeline is part of TransCanada's Keystone Gulf Coast project and --- this is why it's really cool -- it will be the first first direct link between the Bakken oil-producing region in the Williston basin and key US markets near Cushing and along the Gulf Coast.

The project is expected to commence in first quarter of 2013.

By the way, did the "red light" just go "amber" on TransCanada's Keystone XL project?

Seeking Alpha on "Peak Oil"

Seeking Alpha article on "peak oil": "The End of Oil's Golden Age."

From the article:

The concept of energy return on energy invested:
A major problem with all sources is decreasing EROEI ratio (energy return on energy invested). For oil it used to be 100 a long time ago and now it is somewhere below 20. EROEI for biodiesel is roughly 3 and for ethanol it is not much more than 1. Depending who to believe, EROEI for oil sands is between 2 and 4. Basically anything above 1 makes sense, but because we are used to a high ratio (= cheap energy), we may have a serious problem when the average EROEI of all supplies of oil goes below 5.
This is just one more reminder that ethanol is one of the most inappropriate uses of a food source. Absolutely incredible.

 Now, even Al Gore, the guy who first promoted it at the presidential level, says ethanol subsidy program was a mistake, but once implemented, next to impossible to kill it due to lobbyists. I guess Al has made all the money he expects in this market and is moving on, trying to regain some credibility. 

Photograph and Video of a Continental Resources Eco-Pad (Bakken, ND, USA)

To see some of the nicest North Dakota landscape and a Continental Resources Eco-Pad, click here, and then go to slide #45 of this series of 79 slides. I assume over time, the corporate presentation will change, and this particular photograph will move to a different location within the presentation.

This is an incredible photograph.

Here is a promotional video of a CLR Eco-Pad.