Tuesday, February 16, 2016

I Knew The Wells Were Good, But Not This Good -- February 16, 2016


February 17, 2016: the NDIC has updated this. The correct IP, as surmised, was/is 1,516
Original Post
I can't make this stuff up. A screenshot from the NDIC:

For newbies, an IP of 300 to 1,500 is what I expect to see in the Bakken. A very, very good good well in the Bakken will produce 15,000 bbls in a month.

An IP of 15,161 bbls in one 24-hour period is ... well, pretty interesting.

Yes, I know -- it's a typo. Most likely, "1,516 bopd." But, if indeed, it's 15,161, it will be a new record.

Why I Was Off The Net Last Night And Why I Am So Far Behind In My Blogging -- February 16, 2016

It's possible the Director's Cut will be released today. If so, I won't see it until late this evening. The link is here for those waiting.

Most of this was writtenTuesday night, but it was put in draft form and did not "go live" until Wednesday, February 17, 2016.

This is entirely personal and has nothing to do with the Bakken. It is for the granddaughters.

This is why I was off the net last night. Olympic trials for water polo are being held in Lewisville, TX, about 20 minutes north of where we live. Our daughter was part of a group of eight water middle school water polo players invited to participate in the "opening ceremonies."

Below are the notes I took while watching the first two games. We did not stay for the third game (Japan vs Canada). Three games will be held each day through the rest of the week, and then the championship round will be played on Saturday and Sunday.

There are six teams, represented here this week, including China, Australia, and Brazil; all three have qualified for the 2016 Summer Olympics. Others competing but not yet qualified: Japan, USA, and Canada. I assume other water polo teams are competing in other venues around the world.

The notes were written in real-time while watching the games.

First game, China (black/guest) v Australia (white/home).

I was surprised; not particularly exciting. After score went to 2 - 2, I watched more closely to see why it doesn’t seem so exciting compared to high school play. This appears to be the reason: the distance between the defenders and the offense is a good two feet, maybe a meter. Unlike high school water polo where the players seem to literally fight each other making it a contact sport. This hardly seems like a contact sport. I expected a little bit more like our professional NBA, but nothing of the sort.

China started out a bit slow, took the early lead, 2 - 1 but then Australia tied it in the first period. Australia seems to have a stronger throwing arm, from farther out. The “expert” next to me “likes the way China passes the ball around.

The game is little different than what high school water polo teams play — no differences as far as I can tell — except each of the four periods last eight (8) minutes instead of four (4) minutes.

I am incredibly negatively impressed. These are the “finals” for determining who goes to the Olympics, or something to that effect, and the stands are empty. Admission was $5, although this weekend with the championship rounds, the price will go to $10/day.

After an unexciting first half, the score is tied, 5 - 5.

The third period begins. The Australians “break away” in this period, moving to a two-point lead early on. Australia was able to hold onto that margin and the third period ended 9 - 7.

The final period begins. Australia scores with 6 minutes left in the fourth quarter, and a three-point lead, 10 - 7. Less than 30 seconds later, Australia scores again, now an insurmountable 11 - 7 score. It’s just a matter, now, of finishing the game.

The final: 12 - 10, Australia.

Opening ceremonies.  

Arianna (our oldest granddaughter, age 12) held the Brazilian placard. Surprisingly and unbelievably she was given a Brazilian warm-up jacket from the team captain, priceless to say the least. Arianna is having the time of her life.
Now, the second game of the tournament: USA (black/guest) vs Brazil (white/home).

The other thing I noticed is how “genteel” the sport is. Swimmers on the bench sit throughout, and those in the second (back) row must crane their necks to see the action at times. During the introductions of the teams, when individuals are introduced by name, there is a quiet, simple short clap.

The first period begins slowly; well into the first period, with less than 5 minutes to play, the game is scoreless.

The stands are now full with the USA playing.

Brazil scored first, but with about 3 minutes left in the first period, USA scored, bringing the crowd to its feet, and with a loudness of cheering that was deafening. At the end of the first period, the US leads 3 - 1. One wonders if they are that good, or if Brazil will find its footing. Remember: Brazil has qualified for the Olympics; the US has not. With less than 30 seconds into the second period, we might have our answer: US just scored another commanding point. But Brazil answers quickly, 4 - 2.

Isn’t this interesting? During the first game I mentioned that the defenders played a full three feet from the offense. I thought that was the college / Olympic style. Apparently not: it was team specific. In the USA vs Brazil game, the one-on-one is very, very lively. A lot of contact. Prior to the game I did not see the individual Brazilians but I did see the individual Americans on the deck. The thing that struck me was how “big,” muscular, the American women were. I was also surprised that this was not an all-white sport that I expected. I would not be surprised if the majority of Americans were not African American.

The Americans are clearly the dominant team. They seem to be scoring at will. One member already has four goals, and another member just scored her first goal from “3-point land.” The Americans are stealing the ball, bringing it the length of the pool, and here again, on a close-in shot, a player scores her first point, making it an American blow-out, 8 - 2, with just over 4 minutes to play in this period. Again, a reminder, periods are 8 minutes long, so this period is just barely half over.

Compared to the first game, China vs Australia, this game is much, much more physical. And much more exciting to watch. The American goalie is quite incredible blocking shots. I can’t tell but it looks like the US has only four swimmers on the bench. It appears Brazil has six. I could be wrong. I missed the last goal, but it’s now 9 - 2. It appears now it’s just a matter of how many goals the US “allows” Brazil to get. Another US score with 3 minutes to play, this player's second goal of the game, 10 - 2.

It’s funny. This is the level of play, the level of competition I expected. When I saw the first game, I was concerned. It seemed our high school players played at a higher level than these college/Olympic players. The Brazilians are now taking wide shots that have no chance of scoring. One minute to play in this half. The US can play keep-away for the full 25 seconds before shooting; the Brazilians, as they say in some sports, are being schooled by the Americans. (For newbies, there is a 30-second shot clock.)

I had not planned to come to any more games — I came today because our granddaughter was in the opening ceremonies — but with this level of play, I may, in fact, come out all week. We will see.

The first half ends 10 - 2.

I got into a sidebar with the facility manager of this natatorium and although I watched the third period, do not remember enough to blog about it. This $21 million facility was opened two years ago. It hosted the US national high school tournament last fall. It was the second year in a row for the national tournament to be held here. Until now, US Water Polo had never held national championships in the same venue two years in a row. The Lewisville Natatorium was the first to score two consecutive national water polo championships and they did it the first two years after the facility opened its doors.

The third period ended with the US on top, 15 - 2.

There has been absolutely no scoring in the fourth period. With only three minutes left to play in the game, the US finally scores. It was the player’s first goal of the game, now 16 - 2.

The game ends with one last shot by the Americans with less than 10 second to play. Yes, 17 - 2.

And that’s the ball game.

The US has yet to qualify for the Olympics.

Brazil has qualified.


Opening Ceremonies
Granddaughter Arianna is holding the Brazil placard; the Brazilian team captain behind her gave Arianna her warm-up jacket (not shown). The jerkiness is due to long telephoto lens not on a tripod.

This Is So Cool: Watford City's New High School -- Doors Opened Today -- February 16, 2016

While I was up in the Bakken, I was told that Watford City might be in a "better financial" environment than Williston during this slump in oil prices. I don't know. A number of reasons were provided.

Both cities (Williston and Watford City) approved new high schools during the past few years to accommodate the growth. Watford City's new high school officially opened for students today; Williston's new high school is on track to open for the 2016 - 2017 school year. From The Bismarck Tribune:
Every building has a story and the first pages have been turned for the new $53 million Watford City High School.
The school is perhaps the most emblematic new structure of Watford City’s dynamic growth and stands for its hopes for the future and for all the children — native residents and newcomers — who will pass through its doors.
The 160,000-square-foot building may not have as many feet of glass going vertical as floor going horizontal, but head custodian Nick Segneri was already pondering the job of keeping it sparkling.
“It’s going to take lots of Windex,” said Segneri, noting the lighting is a “daylight harvesting” design, with an automatic eye that can dial the wattage up or down depending on outside conditions.
Horizontal? I love that word. I wonder if the head custodian make a Freudian slip or knew exactly what he was saying.

I Think It's Due To Global Warming

The Bismarck Tribune is reporting a huge increase in the North Dakota sheep population:
Brad Gilbertson is optimistic and knowledgeable about North Dakota's sheep industry. But even he was surprised to hear the number of sheep in the state soared 14 percent in 2015, the largest percentage increase in the nation.
"Really? It was that much? That's a big increase," the Sherwood, N.D., sheep producer and state Lamb and Wool Producers Association spokesman said of the increase.
His best explanation is that a "combination of things," including more young producers, pushed up sheep numbers in the state.
The sheep industry nationwide -- which had been in long-term decline -- continued to rally in 2015, according to the National Agricultural Statistics Service, an arm of the U.S. Department of Agriculture.
The U.S. had 5.32 million sheep and lambs on Jan. 1 -- up 1 percent from a year earlier. It was the second straight year that sheep numbers rose nationally.
This is of particular interest to me. My paternal grandfather raised sheep when he homesteaded south of Newell, South Dakota.

While driving through Newell last week, I noted one flock of sheep. I have seldom become emotional driving through the Newell area. In fact, I don't recall ever tearing up a bit when driving through Newell -- except if I stopped during "allergy season," but for whatever reason it happened this time. I think it was because while getting the exact mileage between landmarks in the area, I really, really "saw" my grandfather's field in which I ran freely when I was five years old. And six years old. And every year after that until I left for college in the autumn of 1969.

I saw the short grass. I saw the irrigation ditch. I saw the row of trees in the distant. Nothing had changed. It was like seeing myself in one of those montages they do on Cold Case on television. I saw my grandfather behind three horses with a one-blade plow. For a five-year-old the fields were immense; I only recall once running all the way to the tree line. Now the fields look much more manageable. This last trip my dad told me his father gave him, when he was a teenager before he left for Sioux Falls, and then for military (WWII), 2 1/4 acres to farm -- one acre each for two vegetables (I've already forgotten the specifics) and one-fourth acre for strawberries. He gave one of his older sisters a nickel for each pint of strawberries she picked; he sold the strawberries in Rapid City for 25 cents/pint (or whatever size those little boxes are; maybe they are a quart; I don't know; I would not make a good businessman nor a good farmer).

Another digression I see. I don't remember much about the sheep except that they were there. Occasionally we got there early enough in the spring to see the sheep sheared. At the time I thought it must have been painful with all the screaming the sheep did, but obviously they were just frightened or embarrassed but they were not hurt. The sheep even had painless branding unlike their cattle friends. Brands were painted on sheep. My granddad's brand was a red splotch that was supposed to be an "O" I suppose.

Victor Hugo wrote:
When people look back at their childhood or youth, their wistfulness comes from the memory, not of what their lives had been in those years, but of what life had then promised to be. The expectation of some indefinable splendor, of the unusual, the exciting, the great, is an attribute of youth -- and the process of aging is the process of that expectation's gradual extinction.
I disagree with the first assumption. I do agree that the process of aging may include the process of a gradual extinction of one's expectations, in some cases. But not in all cases. My father's expectations, at age 94, have never diminished. He still assumes he will win that new lottery that promises $1,000-a-day-for-life. Which he thinks is unfair to those his age. LOL.

But even more so, I strongly disagree that the wistfulness of looking back comes from memories of what life "then promised to be." While running through my grandfather's fields I recall absolutely no memories of any expectation of the future. Why would I? I was already in heaven.

Old Rivers, Walter Brennan

Three Wells Coming Off The Confidential List Wednesday -- February 16, 2016

Well coming off the confidential list Wednesday:
  • 30076, SI/NC, BR, Elizabeth Stroh 44-7MBH, Cabernet, no production data,
  • 30636, 623, WPX, Larch 10-3HE, Van Hook, t11/15 cum 24K 12/15;
  • 30733, drl, Slawson, River Rat Federal 5-23-14TFH, no production data,

30636, see above, WPX, Larch 10-3HE, Van Hook:

DateOil RunsMCF Sold

Does Oklahoma Have A Problem? February 16, 2016 -- A Cashless Society And Negative Rates


March 2, 2016: long story in the Los Angeles Times --
More than five years after Oklahoma first saw a startling spike in earthquakes linked to the disposal of huge volumes of wastewater created by hydraulic fracturing for oil, the state continues to shake at an unprecedented rate and the number of strong quakes is increasing. In 2009, there were 20 quakes of magnitude 3.0 or higher, according to the United States Geological Survey. Last year, there were 890. In 2009, no quake measured 4.0 or greater. Last year, 30 did.
Now, however, after quakes have shaken the homes of some top elected officials — and those of the worried constituents who vote for them — the state is taking new steps to address the problem, even as critics say it is too little, too late.
Last month, the Oklahoma Corporation Commission, the agency that regulates the oil and gas industry, asked oil producers operating in the northwest part of the state to reduce the amount of wastewater they are disposing of deep underground by 40%.
Scientists say natural faults in the area are being stirred by billions of gallons of water injected deep into the ground after it is used for hydraulic fracturing, commonly known as fracking. Water and chemicals are used to break oil and gas free from rock formations. A large amount of the water returns to the surface and, under federal law, must be disposed of in a way that does not affect freshwater supplies.
On Feb. 13, a quake northwest of Fairview, about two hours away, registered a magnitude of 5.1, making it the third-strongest quake in the state's recorded history. The strongest was in 2011. The second-strongest was in 1952; and scientists now say it, too, may have been induced by nearby oil production.
February 20, 2016: KOCO.com is reporting -- at least not quite as many (LOL):
Since January 1 of 2016 until February 19 Oklahoma has recorded 339 earthquakes of magnitude 2.5 or greater.  
Through the same period last year the state had recorded 389 quakes.
This year, seven earthquakes of 4.0  magnitude or greater have occurred in the state.
Through the same time last year, four earthquakes of magnitude 4.0 occurred.
The strongest earthquake this year was a 5.1 that occurred February 13 in northern Oklahoma.
Original Post
Sierra Club files suit against several oil and gas companies in Oklahoma regarding salt water disposal wells in light of recent tectonic activity. Notably Continental Resources was not named in this suit nor in an earlier suit filed by two homeowners in Guthrie or Choctaw. It is possible CLR was named but it was not mentioned or I missed it.

I did not see the new fields in Oklahoma on my trip to the Bakken, but driving through the legacy fields along I-35 really demonstrates why the Bakken is the Bakken. Without seeing it firsthand, it is impossible to adequately describe the inconsequential (by comparison) the singleton donkey heads along I-35 in southern Oklahoma with the giant (by comparison) pumping units on multi-well pads in the Bakken. Vern Whitten has done an incredible job documenting the history of the Bakken. One can google Vern Whitten on the blog to see what I mean.


While traveling I am able to watch cable television (which I don't have at home except for the four basic networks). I happened to catch a segment on "negative rates" on CNBC. The "expert" suggested that "negative rates" would lead to a cashless society. I was unable to connect the dots.

However, there may be another dot to connect with regard to a cashless society. The Washington Post is reporting it's time to do away with the $100 bill.
The paper makes a compelling case for stopping the issuance of high denomination notes like the 500 euro note and $100 bill or even withdrawing them from circulation.

I remember that when the euro was being designed in the late 1990s, I argued with my European G7 colleagues that skirmishing over seigniorage by issuing a 500 euro note was highly irresponsible and mostly would be a boon to corruption and crime. Since the crime and corruption in significant part would happen outside European borders, I suggested that, to paraphrase John Connally, it was their currency, but would be everyone’s problem. And I made clear that in the context of an international agreement, the U.S. would consider policy regarding the $100 bill. But because the Germans were committed to having a high denomination note, the issue was never seriously debated in international forums.

The fact that — as Sands points out — in certain circles the 500 euro note is known as the “Bin Laden” confirms the arguments against it. Sands’ extensive analysis is totally convincing on the linkage between high denomination notes and crime. He is surely right that illicit activities are facilitated when a million dollars weighs 2.2 pounds as with the 500 euro note rather than more than 50 pounds as would be the case if the $20 bill was the high denomination note. And he is equally correct in arguing that technology is obviating whatever need there may ever have been for high denomination notes in legal commerce.

What should happen next? I’d guess the idea of removing existing notes is a step too far. But a moratorium on printing new high denomination notes would make the world a better place. In terms of unilateral steps, the most important actor by far is the European Union. The €500 is almost six times as valuable as the $100. Some actors in Europe, notably the European Commission, have shown sympathy for the idea and European Central Bank chief Mario Draghi has shown interest as well. If Europe moved, pressure could likely be brought on others, notably Switzerland.
With regard to the earlier question, how negative rates relate to a cashless society, Business Insider provides this article from last autumn:  People are hiding cash in their microwaves as Sweden gets closer to being the first cashless society with negative interest rates.
Sweden is shaping up to be the first country to plunge its citizens into a fascinating — and terrifying — economic experiment: negative interest rates in a cashless society.

The Swedish central bank, the Sveriges Riksbank, on Wednesday held its benchmark interest rate at -0.35%, the level it has been at since July.

Though retail banks have yet to pass that negative rate on to Swedish consumers, they face increased pressure to do so as long as the rates remain where they are. That's a problem, because Sweden is the closest country on the planet to becoming an all-electronic cashless society.

Remember, Sweden is the place where, if you use too much cash, banks call the police because they think you might be a terrorist or a criminal. Swedish banks have started removing cash ATMs from rural areas, annoying old people and farmers. Credit Suisse says the rule of thumb in Scandinavia is: "If you have to pay in cash, something is wrong." 
The dots are still hard to connect (counterintuitive, might be a better word) but I think I understand what the "expert" on CNBC was suggesting.

Near the end of the linked article:
So two trends are converging on Sweden at the same time:
  • Sweden is using less and less cash. Sweden is an environment of negative interest rates. 
  • And that means many Swedes have no way to "hide" their money.
So Sweden may become the first country whose citizens may have to accept negative interest rates (probably in the form of higher bank charges or fees) or be forced to spend their money to "save" it from those rates.
A resistance is forming, and some people are protesting the impending extinction of cash.
For an even more up-to-date article, the Renegade Tribune, three days ago, posted this article:

Events are moving very quickly in the world of money and banking. One tectonic shift that is being reported on in the alternative media, but very conveniently ignored by the mainstream media is the link between the elimination of cash and negative interest rates. Introducing these two conditions into our economy will bring crushing financial hardship onto the ordinary citizen – yet few understand the critical link between the two.
That linked article led to a zerohedge article.

February 18, 2016: an op-ed in The Wall Street Journal. I finally understand how negative rates will lead to a cashless society. But it requires a few more steps, including the end of large paper bills (currency) such as the US $100 bill and the EU's 500 Euro bill.
The real reason the war on cash is gearing up now is political: Politicians and central bankers fear that holders of currency could undermine their brave new monetary world of negative interest rates. Japan and Europe are already deep into negative territory, and U.S. Federal Reserve Chair Janet Yellen said last week the U.S. should be prepared for the possibility. Translation: That’s where the Fed is going in the next recession.
Negative rates are a tax on deposits with banks, with the goal of prodding depositors to remove their cash and spend it to increase economic demand. But that goal will be undermined if citizens hoard cash. And hoarding cash is easier if you can take your deposits out in large-denomination bills you can stick in a safe. It’s harder to keep cash if you can only hold small bills.
So, presto, ban cash. This theme has been pushed by the likes of Bank of England chief economist Andrew Haldane and Harvard’s Kenneth Rogoff, who wrote in the Financial Times that eliminating paper currency would be “by far the simplest” way to “get around” the zero interest-rate bound “that has handcuffed central banks since the financial crisis.” If the benighted peasants won’t spend on their own, well, make it that much harder for them to save money even in their own mattresses.
One of my least favorite songs:

Mony, Mony, Billy Idol

Texaco, The Spanish Civil War, And Today's OPEC Announcement -- February 18, 2016

I am reading an "advance reading copy, not for resale" Spain In Our Hearts: Americans in the Spanish Civil War, 1936 - 1939, Adam Hochschild, best-selling author of To End All Wars. When I ordered the book, it became one of three books to be read at the same time. The other two were biographies: one of Ayn Rand and the other of Coco Chanel.

I had no idea where Hochschild's book would take me. I was more than pleasantly surprised. Because it is an advance copy it does not include an index, which is a "plus" since I can't see ahead of time what the author covers in this book. The book does have the notes, bibliography, and references, suggesting that the only "thing" missing is the index.

Today, I read chapter ten which is worth the price of the book. The chapter explains how Texaco, headquartered in New York City became the first, and later, the predominant, supplier of oil and petroleum products to Franco during the Spanish Civil War, and how FDR let that continue, in effect supporting both Nazi Germany and Italy, leading up to WWII. Texaco provided all the oil Germany, Italy, and the Nationalists needed for waging the Spanish Civil War, and the company provided all the oil requested on credit. The Republic held all the Spanish gold; the Nationalists were essentially penniless (or peseta-less, I suppose). I did not recall this story from Yergin's The Prize. I re-checked the latter, and the following words or phrases do not appear in the index in The Prize: Spain, Spanish Civil War, or Torkild Riebur. The chapter concludes:
Years later, when oil companies began issuing credit cards to consumers, a joke made the rounds of industry insiders: Whom did Texaco give its first credit card to? Francisco Franco.
Chapter 10 is worth the price of the book, and it told me all I need to know about the current challenge facing the oil and gas industry.

Did Saudi Blink? -- February 16, 2016


Later, 12:20 p.m. Central Time: Bloomberg says "this" doesn't change anything. The article concludes:
If the intention is real, it may signal panic in OPEC's ranks that a resurgent Iran
-- whose own relations with Saudi Arabia could charitably be described as frozen
-- is about to make a terrible situation a whole lot worse.
Now, back to the article, from the beginning. With regard to the "agreement,"
Written another way, you could say that four large oil producing countries just confirmed that they won't cut output, which was the same situation that prevailed last week, before oil prices rallied on news of talks between OPEC members and Russia.
The writer says the "freeze" faces three big problems:
  • things will get worse, with or without Iran adding more production to the current global glut
  • Saudi Arabia is on the cusp of ensuring its market share; US producers almost ready to go under; does the "freeze" throw them a lifeline?
  • global oil demand is off to a shaky start in 2016 
This is how I see it: a) nothing changes; b) Saudi Arabia throws a bone to the chihuahuas in OPEC; c) it enhances Saudi's image as a deal-maker; d) it allows Saudi to test the waters (how the global investment market reacts); and, e) allows the Saudis an opportunity to "save face" if changes are necessary (in either direction.

Original Post
I think the second sentence says it all, "albeit hardly concrete." In fact, it's not a "deal" at all, except to say that production will freeze if "everyone" agrees.
In a sign of tentative cooperation among major oil producers, Qatar, Russia, Saudi Arabia and Venezuela announced a plan on Tuesday to freeze output at current levels, a move intended to help bolster energy prices.
The plan, albeit hardly concrete, reflects the troubled state of the oil industry.
With prices having recently slipped to new lows, major oil producers, particularly in the Organization of the Petroleum Exporting Countries, are trying to calm the markets with talk of a deal. But the proposal gives countries a potential out, a big reason oil prices gave up their initial gains on Tuesday.
While speculation focused for months on production cuts, the talk now centers on holding production steady. Even that would be helpful in a market where countries have been steadily ramping up production to record levels.
The plan represents a reversal for Saudi Arabia. As oil prices have slumped, the country, the de facto leader of OPEC, has avoided trying to manage the market through cuts, or even talking of them. Instead, it has continued to ramp up production, even as prices dropped sharply.
It is also symbolic that Saudi Arabia and Russia are now presenting a united front on oil. The two countries are geopolitical rivals, backing opposite sides in the Syrian civil war.
While major oil-producing countries have been floating ideas to the markets for months, divisions are heating up, as oil prices flirt with $30 a barrel.
Venezuela has been especially vocal about managing production. The country’s economy, which is critically linked to the prices of oil, is in disarray and its leadership has little financial backup.
Now, it appears to be getting support from Saudi Arabia and Russia. While such big players are feeling the pain, they are in better shape, making it easier to weather the price weakness.

But the producers are not committing to a deal, highlighting the difficulty of the process. The four countries said they would freeze their output at January levels only if other major exporters did the same — and that is hardly an easy sell.
Well, we know that's not going to happen.

Since 1998, OPEC has "cheated" on production ceilings/quotas almost continuously. There have only been two (very inconsequential) 'moments' in which OPEC has not exceeded their production ceilings since 1998.

Did Saudi blink? Perhaps a smirk. 

Canadian Update -- Part 2, RBN Energy -- February 16, 2016

Canadian Heavy Crude Oil Producers Can’t Make It Up on Volume -- RBN Energy (archived).
Most Canadian oil sands crude production comes from very expensive mining or underground steam heating operations designed to produce consistently for decades that are costly to shutter in a downturn. Right now the crude netbacks (market price les transport costs) for these projects are more or less under water depending on transport routes. Yet production continues and new projects are still coming online. Today we estimate the netbacks (market price less transport cost) that Canadian producers are realizing.
In Episode 1 of this series we reviewed the woes of hard-pressed Canadian producers in the face of ever lower crude prices. U.S. shale producers are struggling to keep the debt collectors from their doors and cutting capital budgets left and right to survive with prices for benchmark West Texas Intermediate (WTI) trading below $30/Bbl. Yet $30/Bbl probably sounds like lottery money to their counterparts in the Western Canadian oil sands. Crude prices there for benchmark Western Canadian Select (WCS) are currently (11 February 2016) trading at a $12/Bbl discount to WTI in Hardisty, Alberta – reflecting the higher transport cost to get Canadian crude to U.S. refineries and quality differentials for heavier oil sands grades.
That means Canadian producers get $15/Bbl at best ($14.20/Bbl on February 11, 2016) for their crude in Alberta. And some of that $15/Bbl has already been spent to buy the lighter and more expensive hydrocarbon diluent that is required to blend heavy oil sands bitumen at the lease so that it can flow in pipelines.  Since most of the demand for heavy oil sands crude comes from U.S. refiners – in the Midwest or increasingly on the Gulf Coast – producers have to eat high transportation costs to get their crude to market. We also discussed how oil sands extraction plants that use steam assisted gravity drainage (SAGD – used by the majority of recent projects) are difficult to shut down when economics are this bad – because the start up process is very lengthy and expensive and the process of stopping production can damage the resource reservoir.
In the circumstances cash struck producers are selling midstream assets and hunkering down even as – in some cases – they are experiencing a net cash outflow on every barrel produced. In today’s episode we take a look at the economics for a typical oil sands producer to understand just how bad things are in the Canadian oil patch these days.