It's Starting -- The Implosion -- January 9, 2015

Updates

January 10, 2015: it's getting serious now -- why oil prices could go below $35/bbl. 

January 10, 2015: without the details, China appears to have simply restructured $20 billion of debt with Venezuela "over the next decade."

Original Post

This is a huge story a reader sent to me, reported by Bloomberg. Folks are worried about Greece. There's a bigger worry coming down the pipeline (pun intended). I have no idea how big a deal the Greece story is (and I'm probably really, really ignorant on the subject) but however bad Greece is, one can only assume if Venezuela defaults and if Venezuela falls into anarchy, that's going to be a much, much bigger story.

Then the western African oil nations; they're next.

Libya, more of the same.

I wouldn't be a bit surprised if Mexico becomes a big, big story due to the slump in oil prices.

More on this later, but the linked Bloomberg story is huge. Didn't want to forget posting it.

The Bloomberg story begins:

Shoppers thronged grocery stores across Caracas today as deepening shortages led the government to put Venezuela’s food distribution under military protection.

Long lines, some stretching for blocks, formed outside grocery stores in the South American country’s capital as residents search for scarce basic items such as detergent and chicken.

“I’ve visited six stores already today looking for detergent -- I can’t find it anywhere,” said Lisbeth Elsa, a 27-year-old janitor, waiting in line outside a supermarket in eastern Caracas. “We’re wearing our dirty clothes again because we can’t find it. At this point I’ll buy whatever I can find.”

A dearth of foreign currency exacerbated by collapsing oil prices has led to shortages of imports from toilet paper to car batteries, and helped push annual inflation to 64 percent in November. The lines will persist as long as price controls remain in place, Luis Vicente Leon, director of Caracas-based polling firm Datanalisis, said today in a telephone interview.

Government officials met with representatives from supermarket chains today to guarantee supplies, state news agency AVN reported. Interior Minister Carmen Melendez said yesterday that security forces would be sent to food stores and distribution centers to protect shoppers.

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Stories To Follow Up On

From Rigzone: nearly 2% of global crude oil could be cash negative at $40/bbl Brent.

A recent analysis by Wood Mackenzie found that 1.6 percent, or 1.5 million barrels of oil per day, of global oil supply could be cash negative on an operating basis if Brent crude falls to $40/barrel. Wood Mackenzie’s analysis of 2,222 producing oil fields, which account for 75 million barrels per day of total liquids production, determined at three price points the impact on oil production and percentage of global supply which will turn cash negative. The firm concluded that producers would begin shutting in production at $40/bbl Brent crude or lower, to a point where a significant reduction in global supply would result.

From Rigzone, John Kemp: Bakken oil producers need $55 to keep production steady.

North Dakota needs an oil price of around $55 per barrel at the wellhead and a fleet of about 140 rigs to sustain production at the current level of 1.2 million barrels per day, the U.S. state's chief regulator told legislators on Thursday.

Department of Mineral Resources Director Lynn Helms outlined breakeven rates for wells across the state and production projections for a range of prices in a presentation for the House Appropriations Committee of the State Legislature (https://www.dmr.nd.gov/oilgas/presentations/FullHouseAppropriations010815.pdf).

Breakeven rates for new wells, the level at which all drilling would cease, range from $29 in Dunn county and $30 in McKenzie to $36 in Williams and $41 in Mountrail. These four counties account for 90 percent of the drilling in the state.

Breakevens in counties on the periphery of the Bakken play, which have far fewer rigs, range up to $52 in Renville-Bottineau, $62 in Burke and $73 in Divide. But Flint Hills Resources' posted price for North Dakota crude was just $32, Helms said, compared with almost $49 per barrel for WTI. Wellhead prices, which are roughly an average of the two, are around $40 and have been falling since the start of this year.

Even before prices hit these minimum levels, drilling will slow sharply. The number of rigs operating in the state has already fallen to 165, down from 191 in October, according to the department.

From Rigzone, Shell to cut 5 to 10% of jobs at Canada oil sands.

Royal Dutch Shell will cut from 5 to 10 percent of the about 3,000 jobs at its Albian Sands mining project in northern Alberta, a company spokesman said on Friday, but refrained from connecting the move to plunging oil prices.

Spokesman Cameron Yost said the actual number of job reductions at the Canadian operation had not yet been finalized, adding it would be "well below" 10 percent.

The cuts were announced to Shell employees internally on Thursday. "It's not layoffs in the traditional sense of the word," Yost said. "It's adjustments to the organizational structure."

Albian Sands is the mining portion of Shell's Athabasca Oil Sands project near Fort McMurray, Alberta, which also includes the 255,000 barrel-per day Scotford upgrader.

Last February, Shell halted work on its proposed 200,000 bpd Pierre River oil sands mine in Alberta, saying it was re-evaluating the timing of various asset developments. Asked whether the reductions were related to the halving of global oil prices in the past six months, Yost said: "Even if oil price had remained stable we would still be looking at these areas of our business."