Thoughts On Repeal Of US Ban On Crude Oil Exports -- December 18, 2015

Updates

December 19, 2015: from Yahoo!Finance --

Nothing will change any time soon now that Congress has repealed a 40-year ban on oil exports, allowing U.S. producers to sell crude overseas. But the surprising change in policy—once strongly opposed by President Obama and fellow Democrats—could become rather significant when (or if) oil prices rise again.

The near-zero impact on consumers is one big reason Obama signed the law, which energy companies such as Exxon Mobil and Continental Resources have sought for years. Gasoline prices are low, and the repeal of the export ban is unlikely to change that. More oil will be flowing into global markets when Iran, which has been subject to sanctions, begins exporting oil again as the sanctions lift. Those low prices for raw crude are the main thing keeping the price of gasoline and other finished energy products low.
If oil rises above $50, however, the picture could change. And the higher prices go, the stronger the incentive will be for U.S. producers to crank up drilling and send the crude overseas. “With higher prices, U.S. producers would produce more again,” says analyst Mark Broadbent of research firm Wook Mackenzie. “In a stronger price environment I’d expect to see more exports and producers eager to ramp up prices.”

That sounds like it might be bad news for consumers, and an oversimplified read of cause and effect in the energy markets might make it seem that way. In reality, however, energy prices in the United States will be set by the global price of oil, which is set by worldwide supply and demand. If U.S. producers export more, it will be unlikely to change gas prices by much, even if prices are high.

That might sound counterintuitive, since it seems like the best way to keep prices low at home is to keep as much of the raw material as possible inside U.S. borders. Here’s the catch: Most of the U.S. oil is of the “light, sweet” variety, whereas most U.S. refineries are configured for heavier crude that comes from places like Canada, Saudi Arabia and Venezuela. Prior to the shale-oil boom—a phenomenon of the last 10 years—heavier crude was the main product available, so the companies that turned it into gasoline made the long-term decision to gear their equipment toward the product they had.

A few refineries have reconfigured their equipment to handle the lighter crude pulled from U.S. ground, but that’s expensive and risky, given that oil prices are so volatile to start with. And the construction of new refineries is fraught with costly regulatory headaches. So the majority of refiners still need the type of oil that comes from outside U.S. borders. The irony is obvious: The bounty of crude produced by the shale revolution has limited use as a domestic product.

Everything I've read elsewhere (from credible sources) and from RBN Energy suggests the above is accurate. The comments again, are most entertaining, and reveals that a lot of folks are not paying attention. 

Original Post

 

From Rigzone with regard to the lifting of the ban on US crude oil exports -- again, remember, the bill has not been finalized, and it has not been put on the president's desk:

Not everyone is optimistic, however. At the University of Houston, energy fellow Ed Hirs, said the import-export math simply doesn’t work.

“If the U.S. is able to start exporting a million barrels of oil a day, that means we’re going to have to start importing another million barrels a day,” he told Rigzone. “The producers in the Bakken still don’t understand that they don’t sell their oil below what OPEC can sell it for, and they’ve been pushed out of the refineries in Philadelphia because they won’t compete on price.”

Of course that doesn't make sense at all, "If the U.S. is able to start exporting a million barrels of oil a day, that means we’re going to have to start importing another million barrels a day." Two reasons that is illogical: one, the US doesn't need more light oil; it needs heavy oil. Exporting light oil won't have any effect on importing heavy oil. Second, unfettered, the Bakken can easily ramp up to 1.5 million bopd, and if the price was right, the Bakken could ramp up to 2 million bopd -- and that's just the Bakken. Texas (Permian and Eagle Ford) could do even more. Hirs obviously has much more knowledge and experience with this, so I'm wrong, but I would like to know why I'm wrong.

The article continues:

Hirs isn’t the only one not quite ready to pop open the champagne.

Analysts at Raymond James (RayJa) said in a note to investors Decemeber 16, 2015, that assuming the framework remains intact, the obvious winners would be U.S. Lower 48 oil producers who would benefit from a narrower WTI discount to Brent and U.S. solar developers, who would avoid the looming tax credit fall-off at the end of 2016.

“On the other hand, domestic refiners – which have long lobbied against lifting the export ban – would find a narrower WTI-Brent spread unhelpful, though there is the possibility of a new refining subsidy being added to the package, thus cushioning the effect on margins. On a side note, we cannot help remarking on the peculiar timing of this (relatively sudden) deal in the making: Congress is doing this on the cusp of 2016, a year when U.S. net oil imports are set to expand for the first time in a decade,” RayJa wrote.

These are interesting tea leaves:

• Jack Kemp has noted that US oil imports have already begun to surge (without explanation);
• Hirs above suggests the US will require an increase in imports; and,
• RayJa says US net oil imports are set to expand for first time in a decade.

I don't think most Americans are aware of that. I have only recently become aware of that, and the explanations are not forthcoming.

The article continues:

What producers are counting on is the crude exports would provide some uplift to WTI oil prices relative to Brent.

“It allows us to pull that release valve to let that bathtub empty a little bit in the United States. That’ll help to lift the WTI price and all the crudes that are bench-marked off of that, and so that will help all parts equal in the U.S., but it’s not going to put us back into the same commercial health that we had back when we were at $80 a barrel,” Medlock said.

“If the ban is lifted tomorrow and you could actually move the crude to coast and get it away from Cushing, you would see that pressure in Cushing subside and the price of WTI should creep up toward the price of Brent. In WTI terms, that gives you a buck. It gives you back more in the lighter, sweeter crudes because those are discounted even more heavily. So you might see $2, $3 come back to the wellhead for those guys, and in a business where everyone is scraping for margin, that’s incredible. So it’s going to help the industry, but it’s not going to result in a revitalization of the industry.”

My thoughts if President Obama signs off on exporting US crude oil:

• short-term (one to five years) -- won't affect the actual price of oil much. However, it has a huge geopolitical effect.
• long-term (> five years): will dampen volatility and will continue to have a huge geopolitical effect. 

Failed: OPEC's mission is "to coordinate and unify the petroleum policies of its member countries and ensure the stabilization of oil markets, in order to secure an efficient, economic and regular supply of petroleum to consumers, a steady income to producers, and a fair return on capital for those investing in the petroleum industry." It looks like that mission is becoming another US responsibility, by default.

These are the tectonic changes taking place and might take place with regard to the oil industry, not in any particular order:

• Iran is back in the game
• Libya changes its name to the ISIS Republic of North Africa (IRNA)
• Russia has a toehold in Syria and could become a major Mideast energy thorn in Saudi's backside
• Canada remains the canary in the coal mine, whether it can survive $40 oil much longer
• Based on comments by Trudeau in last 48 hours, Canada might get its act together with regard to pipelines to west coast
• Venezuela could get its act together; I wonder if Venezuela might not be #1 competitor (vs Canada) for US source for heavy oil; remember: biggest beneficiary of the killed Keystone XL was Venezuela
• Mexico looks like it is getting its act together
• for first time in a long time, oil is a true commodity; no more cartels; Saudi Arabia sets no quotas; completely market driven; US (if President Obama signs) will export oil which ends the other cartel
• oil no longer a geo-political weapon -- at least not globally; perhaps regionally (EU, Ukraine, Crimean)
• the big unknown: is the Mideast / Turkey becoming more stable or more unstable? We have some adult leadership in the Mideast now but not sure how long he plans to stay or what his real intentions are
• the other big unknown: exactly how much deferral/cancellation of big CAPEX projects from 2014 - 2017 are really going to affect global supply of oil; I used to think not at that much; looking at historical data, I'm not so sure; much of this depends on China's growth

Some say at current prices only 1/6th of the Bakken is economical. Let's go with that.

• OOIP: 500 billion bbls
• rate of recovery: 20%
• recovery: 100 billion bbls across the Bakken
• 1/6th of 100 billion bbls: 16 billion bbls
• North Dakota currently produces 1 million bopd x 365 days = 365 million bbls, rounding to 500 million bbls/year -- with 60 rigs and lots of real and artificial restrictions on production 
• 1/6th of the Bakken: basically, the quadrangle formed by Williston-Tioga-Parshall-Watford City (and SM Energy up in Divide County, as an outlier)

US crude oil imports from Venezuela:

The Fracklog -- December 14, 2015

On December 10, 2015, I expressed my opinion that the number of wells waiting to be fracked seemed "odd." I had expected the number to increase, at least slightly, and probably significantly month-over-month (September to October). In fact, the Director's Cut suggested the fracklog had decreased but the "math" was not "correct."

The daily activity report released today was a fairly typical daily activity report and suggests why I was surprised by the number of wells on the fracklog.

In today's daily activity report -- a report that covered three days -- Saturday, Sunday, and Monday -- there were seven more DUCs. Of the eight wells that came off the confidential list (and not "permits canceled") -- of the eight wells that came off the confidential list over the three last days, seven of them were DUCs.

Over the same period of time, the same three days, there was reported only one producing well that was completed. With a typical daily activity report of seven DUCs and only one producing well being completed, we are taking one step forward, seven steps backward on the list of wells waiting to be fracked.

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A Week-Long Beer Summit Following False Arrest Of One Harvard Professor; The President Ignores San Bernardino -- Largest Terrorist Attack on US Soil Since "9/11"

The Los Angeles Times reports:

The overwhelming drama of Giuliani's first televised statements — which segued into round-the-clock news conferences and a constant physical presence in the wounded city by Guiliani, then-Gov. George Pataki and, occasionally, President George W. Bush — contrasted with the underwhelming response 11 days ago to the terrorist attack in San Bernardino.

Local officials arrived promptly, aided by geography. Gov. Jerry Brown showed up only briefly before heading to Paris for the international conference on climate change. President Obama has yet to visit, though his spokesman would not rule out a trip before his Hawaii vacation begins at the end of this week. Obama did deliver Oval Office remarks on the shooting, which appeared to do little to calm nerves.

UN Climate Change Conference Will Release "Plan" Today -- December 12, 2015

Updates

December 13, 2015: there was only one "binding" agreement to come out of the climate conference -- something about an effort to set a price on CO2 emissions for "trading purposes." If you read this closely, this has no chance of succeeding. Most countries did not agree to such a framework but agreed with this vague statement to be able to go home to report a "successful" outcome.

The entire agreement, 99% of which, apparently, is non-binding, does not go into effect for five year, not until 2020. This is much, much weaker than the Kyoto Protocol which required signatures. Anyone paying attention can see that the outcome of this conference was to simply kick the can down the road for five years. This is the capstone for the global climate movement. Nothing else will come of it. There will be no interest in re-convening another conference between now and 2020 and by then folks will say let the current agreement (that goes into effect in 2020) run for a few years before we have another global warming conference. That puts us out to about 2025.

Obama will not do anything with this (for a multitude of reasons) and the Time Person of the Year is also on her way out. No one else matters -- certainly not Russia, China, India. This whole movement will die on the vine assuming the next US president is not Hillary. Unfortunately with the Balkanization of the GOP, it is very likely Bill will be back in the White House in 2017.

Original Post

 

From The New York Times, "At the Paris climate conference, China has won praise for pledging to stop the growth of its greenhouse gas emissions by 2030, largely by reducing its use of coal."

And in other news -- 

The New York Times is reporting that Chinese state enterprises have built or have contracts to build 92 coal plants in 27 countries since 2010:

Altogether, Chinese engineering firms have built or signed contracts to build 14 coal-fired plants along the Vietnamese coast over the past five years, most of them with the help of loans from the government’s China Export-Import Bank.

The building spree here is hardly unique. Since 2010, Chinese state enterprises have finished, begun building or formally announced plans to build at least 92 coal-fired power plants in 27 countries, according to a review of public documents by The New York Times.

And more:

Once complete, the 92 projects will have a combined capacity of 107 gigawatts, more than enough to completely offset the planned closing of coal-fired plants in the United States through 2020. The expansion is the equivalent of increasing China’s own coal-fired electricity output — already more than twice as much as any other country’s — by more than 10 percent.

The United States, Japan and other industrialized nations have helped finance the construction of coal-fired power plants in the developing world for decades, including in joint projects with China. Like China, they have usually required that contracts go to their companies. 

The final draft of the Paris climate change conference agreement to be released today, Saturday, December 12, 2015. And it looks like ... drum roll ... the number is .... 1 point ... drum roll .... 1 point 5 degrees ... 1.5 degrees....

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Thoughts -- Not Ready For Prime Time

Now that the conference is over -- I'm writing this at 2:15 p.m., Sunday, December 13, 2015 -- here are my thoughts. This is why I know President Obama, SecState Kerry, and Algore (as well as the rest of the world) know that "anthropomorphic global warming" is a scam.

Imagine that NASA scientists -- a NASA scientist is considered the "grandfather" of global warming -- announced that there was an asteroid ten times bigger than the one that hit the earth 65 million years ago wiping out the dinosaurs was on course to hit the earth in ten years (that's ten years longer than they first told us "we" had to do something to prevent global warming to "save" the earth). Although they could not say (yet) where the asteroid would hit, it would destroy the earth. There were no doubts about it. The asteroid was on course to hit the earth.

NASA scientists provided a glimmer of hope saying that if adequate resources were available there might be a way to prevent the asteroid from hitting the earth. It would require a "Manhattan-like" project that would require pretty much the entire GDP for several years of the US, the EU, China, India, Russia, and Ireland.

My hunch is there would not be a two-week conference to decide if this was necessary. The only delay would be that delay for the Chinese, the Russians, the French space program, Ireland, and Apple to confirm that NASA was correct.

Once that confirmation was made, there would be no limit to the monetary expenses any of the countries would be willing to spend to fund the project, no matter how much the odds were against this from happening.

Again, remember that the global warmists have said that the earth will be "destroyed" if we don't prevent global warming, that 1.5 degrees (which, by the way, they can't even agree on that; some say 2.0 degrees; some say 3.0 degrees).

The most recent global warming conference which wrapped up this past weekend came up with an agreement that is non-binding, unsigned, and does not take effect for five years. 

If there was an asteroid heading directly for earth, I doubt global leaders would delay action for five years. The "agreement" that global leaders came up with is even less than the agreement the US made with Great Britain once it was determined that the UK had to be saved in WWII. There was a bigger financial and a bigger emotional commitment by Roosevelt to save Great Britain than there is currently to save the entire earth.

And that's why I know President Obama, SecState Kerry, and Algore (along with Angela and all the rest) do not take anthropomorphic global warming seriously. 

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Further Proof (As If Any Is Needed)

Further evidence that President Obama does not take AGW seriously. This major wind farm was proposed during the Bush administration and is nowhere close to getting off the ground. The Denver Post is reporting.  The headline: Bureaucratic gauntlet stalls renewable energy development on BLM land. Long-planned Anschutz Corp. wind power generation and transmission project in Wyoming might be functioning by 2023. The process began in the Bush administration, around 2006.

The story:

When Bill Miller first met with officials from the Bureau of Land Management to talk about his company's vision of building a 1,000-turbine wind farm on a checkerboard expanse of public and private land in Wyoming, President George W. Bush was in the White House. When agency officials warned Miller it could take five years for such a gigantic project to wade through environmental reviews, he told them: "That's the craziest thing I ever heard."

So it was music to Miller's ears when President Barack Obama's first Interior Secretary, Ken Salazar, in 2009 announced as a top objective turning Western federal lands into hotbeds of renewable energy to deliver on two of the new president's pledges — creating jobs and transitioning to clean energy.

Miller's Chokecherry and Sierra Madre wind farm was named a priority project. The BLM also fast-tracked a transmission-line project to carry the electricity — enough to power about 1 million homes.

And yet, all these years later, the wind and transmission projects still have not made it through BLM's bureaucratic gantlet.

But seven years into his presidency, Obama's record on renewable energy projects on public lands is mixed. His administration has done far more than any other to make the BLM a welcoming landlord for solar, wind and geothermal electricity, but there is also a lot of room for improvement. There still is great potential for reshaping public land-use policy in the West to take much greater advantage of abundant clean-energy resources such as wind and solar.

"We have come light years," says Michael Nedd, BLM's assistant director of Energy, Minerals and Realty Management and who oversees the agency's renewable program.

In 2009, the BLM had no staff, funding or rules dedicated to renewable energy projects. The agency now counts 57 projects that it has approved since then. The list includes some projects that have been canceled and others where the BLM plays only a bit part.

So far, only four solar arrays, five geothermal projects and three wind farms on BLM land actually deliver electricity to the grid in Western states. Still, Nedd says the agency is well on the way to meeting the president's goal of permitting enough renewable projects to provide electricity to 6 million homes by 2020. That will also mean setting up the infrastructure needed to keep permitting renewable power long into what Interior Secretary Sally Jewell calls "the renewable energy future."

Looking Forward, Looking Back -- December 10, 2015

It is time to bring this forward. I posted my commentary on Friday night, December 4, 2015, but have provided external links subsequent to the original post to support my commentary.

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Pricing Of Oil 
I Was Wrong

Commentary -- Not Ready For Prime Time

Updates

December 10, 2015: Reuters is reporting that OPEC points to larger 2016 oil surplus as group's output hits multi-year high:

OPEC pumped more oil in November than in any month since late 2008 and forecast little increase in demand for its crude next year, pointing to a larger supply surplus even as low prices hurt rival producers.

The Organization of the Petroleum Exporting Countries in a report also forecast supply from non-member countries will fall more sharply next year, which would suggest its strategy, reaffirmed last week of defending market share, is working.

Supply outside OPEC is expected to decline by 380,000 barrels per day (bpd) in 2016, the report said, as output falls in regions such as the United States and former Soviet Union. Last month, OPEC predicted a drop of 130,000 bpd.

But OPEC also increased its 2015 non-OPEC supply growth forecast by 280,000 bpd, citing upward revisions to output from the United States, Brazil, Russia and the UK, among other countries.

As a result of the report's changes to 2016 and 2015 non-OPEC supply forecasts, demand for OPEC crude next year is expected to average 30.84 million bpd - just 20,000 bpd more than OPEC expected previously.

OPEC production, which has surged since the policy shift of November 2014 led by Saudi Arabia and Iraq, is far higher than forecast demand. Supply rose by 230,000 bpd in November to 31.70 million bpd, said the report, citing secondary sources. [Let's do the math: 31,700,000 - 230,000 = 31,470,000.  230/31,470000 = 0.73%. That's the surge in production. Yes, I know that's not the production number from a year ago. Wiki says OPEC produced 30,560,000 bopd in November, 2014. 31,700,000 - 30,560,000 = 1,140,000. 1,140,000/30,560,000 = 3.73% -- that's the OPEC surge, year-over-year.]

That is the highest monthly rate since late 2008 when Indonesia was still an OPEC member, according to a Reuters review of OPEC's previous reports on the group's website. The latest figure does not yet include Indonesia, which rejoined OPEC last week boosting its ranks to 13 countries.

December 10, 2015: I predict a major geopolitical event will occur not later than August, 2016, to greatly affect the price of oil (a greater than $10/bbl move).

December 10, 2015: from Yahoo!Finance --

Fadel Gheit, managing director and senior analyst at Oppenheimer, told Yahoo Finance's Alexis Christoforous in the video above that $100-per-barrel oil is a thing of the past—$60 to $70 per barrel is the new normal.

December 10, 2015: a must-read analysis from RBN Energy -- A New World Order? -- Global Crude Supply and Demand Through 2025.  Bottom line: Although demand will increase, the report projects that demand growth is not expected to push prices back to 2014 levels before 2025. As the current crude oversupply is brought back into balance with demand the report suggests that we can expect a sustained period of supply/demand equilibrium with lower price volatility.

December 9, 2015: this is a teaser article to sway you to subscribe to an investment news letter, so consider that when reading it. But this writer says what I'm saying: we're not going to see $60 oil any time soon.

“The decision by the Organization of the Petroleum Exporting Countries to keep pumping at current production levels is either the ‘stupidest’ possible move the cartel could make or the ‘right call’ to defend market share from U.S. shale producers,” a handful of analysts told MarketWatch.

Most of the talking heads these days make it seem like OPEC has options in today’s oil market. Newsflash: They don’t. Once the U.S. shale boom made obvious the fact that the globe is NOT running out of black gold, it fundamentally changed the oil game.

“Oil sheiks don’t hold all the trump cards. Sure, they have the option to cut production. But when you actually look at the facts surrounding a production cut decision, you’d quickly realize that the amount of oil that OPEC would conceivably cut, wouldn’t rally oil prices much at all,” explains our resource maven Matt Insley. “It’s not like a few million barrels per day off the quota is going to get oil prices back to $80 – that simply won’t happen.”

The real trump card is the fact that the U.S. has a hell of a lot of economic oil at $50-60 per barrel. So we won’t see the price of oil rally much higher than that for any extended period of time, Matt says. Simply put, once the price of oil heads above $60, the U.S. shale spigots open up.

December 8, 2015: from the EIA, today:

While U.S. onshore oil production is expected to continue declining through most of next year, offshore oil output in the Gulf of Mexico is on track to steadily rise.

In its new monthly forecast, the U.S. Energy Information Administration said offshore Gulf oil production is expected to increase to 1.7 million barrels per day during the fourth quarter of 2016 up about 250,000 barrels per day from the fourth quarter of last year.

December 7, 2015: this article over at Platts is additional support for my argument that we are not going to see any supply-demand re-balance for a very long time. Everyone, including me, thought by shutting down those big CAPEX projects, oil prices would start to stabilize as early as 2016. Yergin has moved that out to 2017. But it turns out a lot of big CAPEX projects were well on their way in 2013 and will be coming on-line in 2016 and 2017:

Global oil supply is continuing to increase faster than demand in a trend unlikely to be reversed next year, Total CEO Patrick Pouyanne said Monday.

"The market is oversupplied and production capacity will continue to grow because a lot of projects were sanctioned in 2013 and 2014," Pouyanne told reporters on the sidelines of the International Petroleum Technology Conference in Doha.

The bulk of those upstream oil projects would come on-stream in 2016 and 2017. As a result, the international market would remain oversupplied in 2016.

Global crude and condensate output capacity this year was expected to rise by 1.7 million-1.8 million b/d in total from the 2014, marking one of the two biggest annual increments of the past decade, he said.

Original Post

My Disclaimer/Welcome provides my philosophy regarding my commentaries and the purpose of this blog. The bottom line is that this is idle chatter, personal thoughts, probably not ready for prime time, and certainly not well written, but it provides a bit of my thoughts on the current situation in a very, very general way.

There are two questions that need to be addressed. The first has to do with the price of oil, the second has to do with how this will all play out.

Price of oil

As I've stated many times, I won't predict the price of oil -- there are just too many variables. It's a fool's errand to predict the price of oil.

However, many talking heads suggest that prices will "stabilize" -- whatever that means -- sometime next year (2016) or 2017 at the latest. These talking heads argue that all the cancelled CAPEX projects will eventually catch up with us and sooner or later we will see a relative shortage of oil. I've said the same thing, using hyperbole, suggesting we will hear talk of $200-oil when we start to see the effects of those cancelled CAPEX projects, that is, a shortage of oil. The most recent to suggest a relative shortage sooner than later was Dan Yergin, in a video/article over at CNBC. Not only did he suggest the cancelled CAPEX projects would result in a shortage of oil, he suggested that by 2020, the world will require an additional 7 million bopd.

I mentioned that I disagree with Yergin, and I am now convinced that I have been wrong suggesting that we will "soon" hear talk of $200-oil in the not-too-distant future due to all those cancelled CAPEX projects. I'm wrong; it's not going to happen.

I am not aware of any cancelled CAPEX projects in Saudi Arabia or anywhere else in the mideast  -- the CAPEX projects that have been cancelled have been off-shore deep sea projects and projects in the Arctic. It's my impression that the Mideast has more than enough oil to adequately supply Europe, and along with Russia enough to supply China, for the next several years without any major new projects. Iran is soon to come on board (Saudi Arabia, by the way, says Iran is a "non-factor"; despite the sanctions, Iran has been producing, exporting oil all along and once sanctions are removed, we won't see that much difference; I don't agree; there are reports already of any number of German companies ready to move into Iran as soon as sanctions are lifted).

Meanwhile, in the western hemisphere, the glut of North America oil will last quite some time. I assume western Canadian oil production has been cut considerably. US shale production has not been reduced all that much yet, but potential production has been greatly reduced. I can't speak to the Permian or the Eagle Ford because I don't follow them closely. But I do follow the Bakken pretty closely. Unfettered, Bentek said North Dakota could produce 2.2 million bopd; that was at the beginning of the boom; since then, potential production in North Dakota has increased significantly.

If in the December Director's Cut (October data), North Dakota production comes in over 1 million bopd that will speak volumes. Bentek has already said that North Dakota's October production will come in at 1.2 million bopd. If that's accurate, that will be huge. The number of active rigs have been below 70 for quite some time, and despite that, there are now more than 1,000 wells waiting to be fracked.

I only assume it is "worse" in the Permian and the Eagle Ford.

As the price of oil starts to move up, those SI/NC or TATD wells in the Bakken will be fracked, and operators will add more rigs.

If the price of oil moves toward $60 and if the tea leaves suggest the price will remain above $60 and perhaps even increase, then the other plays, such as the Niobrara will come back into play.

Bottom line: with OPEC's failure to discipline itself this past week, we will see a new trading range for the next six months, a trading range between $30 and $40. (By the way, when Janet Yellen raises rates, that will strengthen the dollar, and oil will fall -- all else being equal -- another $3 to $5 3 - 5%. If there is a recession next year, the price of oil will drop even further.)

The $30 to $40 trading range will last until the middle of the year (2016) when it will "stabilize" or get back to $40 - $50, where it will remain for quite some time. We might see $60 again in my investing lifetime but I doubt it. [About ten minutes after I wrote and posted that, I find that Platts is saying the same thing: the "fat python may be here to stay."]

By the way, do you want to be reminded of something staggering? Earlier today I posted this snippet:

Oil's finite nature has proven remarkably slippery. Peak Oil theories dictate that there can only be so many barrels beneath the ground, and at some point the world will have pumped more than half of them, and it's all downhill from there. But how many barrels are available is a function of money as well as rocks: If you make it cheaper to get at barrels, then more of them "exist." Consider that since 1980, the world has produced just under 900 billion barrels of oil -- and its proved reserves actually went up by just over 1 trillion barrels in that time. 

Let's parse that last sentence. Since 1980 -- 35 years -- the world has produced less than 900 billion barrels of oil. During that time global reserves actually went up by 1 trillion bbls.

Does anyone remember the estimated original oil in place (OOIP) in the Bakken alone? Five hundred (500) billion bbls. At a recovery rate of 20% that equals 100 billion bbls or more than 10% of all the oil produced globally since 1980. A lot of companies are going to go bankrupt or otherwise disappear but the Bakken oil is not going to go anywhere, and operators are not going to forget how to frack. And with less than 60 active rigs and 1,000 wells drilled to depth but not completed, and production still at one million bopd, it's not difficult to see that if push comes to shove, North Dakota can easily get to two million bopd. And that's just the Bakken. They say the Permian is better and the Eagle Ford is probably just as good.

How will this play out?

The other question is how this plays out? The question is asked with a country like Venezuela in question. I don't know; I don't understand macroeconomics and the oil industry well enough to even hazard a guess.

For those who are trying to answer the question, it's not as simple as saying there is a "glut of oil." It's not just "a glut of oil" but it's the kind of oil that matters. US refineries are optimized for heavy oil (a long, long story, that involves the Keystone XL which we've discussed numerous times before). The only reason Bakken oil "works" is because it is mixed with heavy oil before refining. Despite the glut of US shale oil, the US still needs to import heavy oil from somewhere -- Canada, Venezuela, for example. So, although Venezuela itself looks like it's about ready to implode, the fact is that US imports of Venezuela oil -- though way down by historical standards -- seems to have plateaued for the past several years. Canada is even more interesting -- staggering, one might say. If there is such a huge glut of US oil, one has to ask the question why Canadian imports are where they are -- and this is without the Keystone.

By the way, did you see what Venezuela was asking OPEC to do? All Venezuela was asking for was a 5% cut in production. Five percent would not have made a difference in the actual glut; but just the psychology of a "cut" would have "stabilized" prices -- or at least that's what it appears Venezuela was suggesting. 

Bottom line: the US will need to continue importing heavy oil from somewhere -- Venezuela, Canada, regardless of the political events in those countries.

Existentialism

I think the more interesting question is the existential question. Saudi Arabia needs $100-oil, as do most other OPEC countries. $20-oil could do significant harm to the US oil industry but $20-oil won't destroy the US oil industry. Saudi and the Mideast do not have enough oil to supply the entire world with $20 oil. It will be interesting to see how long Saudi Arabia and the other Mideast countries can survive on $30 oil. I personally don't think very long.

This all precludes a major geopolitical event such as a) an all-out war in the Mideast; or, b) the entire state of California falling into the Pacific Ocean. Either of those two things happening will have a significant effect on the price of oil. I say that because my hunch is that President Putin is also very interested in the existential question, specifically Russian existentialism. Forcing a bear into a corner is not necessarily something one wants to do.

Looking Forward, Looking Back, Slim Dusty

Week 48: November 29, 2015 -- December 5, 2015

The biggest non-story this week was the fact that OPEC punted, agreeing to agree to disagree, and letting members pump what they want. Although it rebounded slightly by the end of the week, WTI settled below $40 for the first time in more than three months earlier in the week.

The week ended with North Dakota issuing seventeen new permits, and QEP renewing twelve permits that were, apparently, about to expire. Meanwhile, the EIA is reporting a significant increase in crude oil storage capacity and inventory at Cushing, OK, and along the Gulf Coast. I did not link the article, but there was a story this past week that "a lot of money is being made in oil storage." If I see the article again, I will try to remember to link it. It was also noteworthy that Saudi oil imports into the US have plummeted in the most recent reporting period, though that was simply a snapshot in time. Most surprising, given the low cost of gasoline, demand for gasoline dropped for the first time this year below that demand for the same time period one year ago. Call me crazy, but that may be the biggest US economy story this week. If it's not the biggest US economy story this week, it's certainly the biggest story not reported. There are some analysts suggesting the US may slide into a recession next year; I ignored that talk until I saw the "gasoline demand" graph.

Pipelines
South Dakota approves its segment of the ETP Dakota Access Pipeline 

Bakken economy
Williams County's largest man-camp closes

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Commentary -- Not Ready For Prime Time

Updates

December 10, 2015: from Yahoo!Finance --

Fadel Gheit, managing director and senior analyst at Oppenheimer, told Yahoo Finance's Alexis Christoforous in the video above that $100-per-barrel oil is a thing of the past—$60 to $70 per barrel is the new normal.

December 10, 2015: a must-read analysis from RBN Energy -- A New World Order? -- Global Crude Supply and Demand Through 2025.  Bottom line: Although demand will increase, the report projects that demand growth is not expected to push prices back to 2014 levels before 2025. As the current crude oversupply is brought back into balance with demand the report suggests that we can expect a sustained period of supply/demand equilibrium with lower price volatility.

December 9, 2015: this is a teaser article to sway you to subscribe to an investment news letter, so consider that when reading it. But this writer says what I'm saying: we're not going to see $60 oil any time soon.

“The decision by the Organization of the Petroleum Exporting Countries to keep pumping at current production levels is either the ‘stupidest’ possible move the cartel could make or the ‘right call’ to defend market share from U.S. shale producers,” a handful of analysts told MarketWatch.

Most of the talking heads these days make it seem like OPEC has options in today’s oil market. Newsflash: They don’t. Once the U.S. shale boom made obvious the fact that the globe is NOT running out of black gold, it fundamentally changed the oil game.

“Oil sheiks don’t hold all the trump cards. Sure, they have the option to cut production. But when you actually look at the facts surrounding a production cut decision, you’d quickly realize that the amount of oil that OPEC would conceivably cut, wouldn’t rally oil prices much at all,” explains our resource maven Matt Insley. “It’s not like a few million barrels per day off the quota is going to get oil prices back to $80 – that simply won’t happen.”

The real trump card is the fact that the U.S. has a hell of a lot of economic oil at $50-60 per barrel. So we won’t see the price of oil rally much higher than that for any extended period of time, Matt says. Simply put, once the price of oil heads above $60, the U.S. shale spigots open up.

December 8, 2015: from the EIA, today:

While U.S. onshore oil production is expected to continue declining through most of next year, offshore oil output in the Gulf of Mexico is on track to steadily rise.

In its new monthly forecast, the U.S. Energy Information Administration said offshore Gulf oil production is expected to increase to 1.7 million barrels per day during the fourth quarter of 2016 up about 250,000 barrels per day from the fourth quarter of last year.

December 7, 2015: this article over at Platts is additional support for my argument that we are not going to see any supply-demand re-balance for a very long time. Everyone, including me, thought by shutting down those big CAPEX projects, oil prices would start to stabilize as early as 2016. Yergin has moved that out to 2017. But it turns out a lot of big CAPEX projects were well on their way in 2013 and will be coming on-line in 2016 and 2017:

Global oil supply is continuing to increase faster than demand in a trend unlikely to be reversed next year, Total CEO Patrick Pouyanne said Monday.

"The market is oversupplied and production capacity will continue to grow because a lot of projects were sanctioned in 2013 and 2014," Pouyanne told reporters on the sidelines of the International Petroleum Technology Conference in Doha.

The bulk of those upstream oil projects would come on-stream in 2016 and 2017. As a result, the international market would remain oversupplied in 2016.

Global crude and condensate output capacity this year was expected to rise by 1.7 million-1.8 million b/d in total from the 2014, marking one of the two biggest annual increments of the past decade, he said.

Original Post

My Disclaimer/Welcome provides my philosophy regarding my commentaries and the purpose of this blog. The bottom line is that this is idle chatter, personal thoughts, probably not ready for prime time, and certainly not well written, but it provides a bit of my thoughts on the current situation in a very, very general way.

There are two questions that need to be addressed. The first has to do with the price of oil, the second has to do with how this will all play out.

Price of oil

As I've stated many times, I won't predict the price of oil -- there are just too many variables. It's a fool's errand to predict the price of oil.

However, many talking heads suggest that prices will "stabilize" -- whatever that means -- sometime next year (2016) or 2017 at the latest. These talking heads argue that all the cancelled CAPEX projects will eventually catch up with us and sooner or later we will see a relative shortage of oil. I've said the same thing, using hyperbole, suggesting we will hear talk of $200-oil when we start to see the effects of those cancelled CAPEX projects, that is, a shortage of oil. The most recent to suggest a relative shortage sooner than later was Dan Yergin, in a video/article over at CNBC. Not only did he suggest the cancelled CAPEX projects would result in a shortage of oil, he suggested that by 2020, the world will require an additional 7 million bopd.

I mentioned that I disagree with Yergin, and I am now convinced that I have been wrong suggesting that we will "soon" hear talk of $200-oil in the not-too-distant future due to all those cancelled CAPEX projects. I'm wrong; it's not going to happen.

I am not aware of any cancelled CAPEX projects in Saudi Arabia or anywhere else in the mideast  -- the CAPEX projects that have been cancelled have been off-shore deep sea projects and projects in the Arctic. It's my impression that the Mideast has more than enough oil to adequately supply Europe, and along with Russia enough to supply China, for the next several years without any major new projects. Iran is soon to come on board (Saudi Arabia, by the way, says Iran is a "non-factor"; despite the sanctions, Iran has been producing, exporting oil all along and once sanctions are removed, we won't see that much difference; I don't agree; there are reports already of any number of German companies ready to move into Iran as soon as sanctions are lifted).

Meanwhile, in the western hemisphere, the glut of North America oil will last quite some time. I assume western Canadian oil production has been cut considerably. US shale production has not been reduced all that much yet, but potential production has been greatly reduced. I can't speak to the Permian or the Eagle Ford because I don't follow them closely. But I do follow the Bakken pretty closely. Unfettered, Bentek said North Dakota could produce 2.2 million bopd; that was at the beginning of the boom; since then, potential production in North Dakota has increased significantly.

If in the December Director's Cut (October data), North Dakota production comes in over 1 million bopd that will speak volumes. Bentek has already said that North Dakota's October production will come in at 1.2 million bopd. If that's accurate, that will be huge. The number of active rigs have been below 70 for quite some time, and despite that, there are now more than 1,000 wells waiting to be fracked.

I only assume it is "worse" in the Permian and the Eagle Ford.

As the price of oil starts to move up, those SI/NC or TATD wells in the Bakken will be fracked, and operators will add more rigs.

If the price of oil moves toward $60 and if the tea leaves suggest the price will remain above $60 and perhaps even increase, then the other plays, such as the Niobrara will come back into play.

Bottom line: with OPEC's failure to discipline itself this past week, we will see a new trading range for the next six months, a trading range between $30 and $40. (By the way, when Janet Yellen raises rates, that will strengthen the dollar, and oil will fall -- all else being equal -- another $3 to $5. If there is a recession next year, the price of oil will drop even further.)

The $30 to $40 trading range will last until the middle of the year (2016) when it will "stabilize" or get back to $40 - $50, where it will remain for quite some time. We might see $60 again in my investing lifetime but I doubt it. [About ten minutes after I wrote and posted that, I find that Platts is saying the same thing: the "fat python may be here to stay."]

By the way, do you want to be reminded of something staggering? Earlier today I posted this snippet:

Oil's finite nature has proven remarkably slippery. Peak Oil theories dictate that there can only be so many barrels beneath the ground, and at some point the world will have pumped more than half of them, and it's all downhill from there. But how many barrels are available is a function of money as well as rocks: If you make it cheaper to get at barrels, then more of them "exist." Consider that since 1980, the world has produced just under 900 billion barrels of oil -- and its proved reserves actually went up by just over 1 trillion barrels in that time. 

Let's parse that last sentence. Since 1980 -- 35 years -- the world has produced less than 900 billion barrels of oil. During that time global reserves actually went up by 1 trillion bbls.

Does anyone remember the estimated original oil in place (OOIP) in the Bakken alone? Five hundred (500) billion bbls. At a recovery rate of 20% that equals 100 billion bbls or more than 10% of all the oil produced globally since 1980. A lot of companies are going to go bankrupt or otherwise disappear but the Bakken oil is not going to go anywhere, and operators are not going to forget how to frack. And with less than 60 active rigs and 1,000 wells drilled to depth but not completed, and production still at one million bopd, it's not difficult to see that if push comes to shove, North Dakota can easily get to two million bopd. And that's just the Bakken. They say the Permian is better and the Eagle Ford is probably just as good.


How will this play out?

The other question is how this plays out? The question is asked with a country like Venezuela in question. I don't know; I don't understand macroeconomics and the oil industry well enough to even hazard a guess.

For those who are trying to answer the question, it's not as simple as saying there is a "glut of oil." It's not just "a glut of oil" but it's the kind of oil that matters. US refineries are optimized for heavy oil (a long, long story, that involves the Keystone XL which we've discussed numerous times before). The only reason Bakken oil "works" is because it is mixed with heavy oil before refining. Despite the glut of US shale oil, the US still needs to import heavy oil from somewhere -- Canada, Venezuela, for example. So, although Venezuela itself looks like it's about ready to implode, the fact is that US imports of Venezuela oil -- though way down by historical standards -- seems to have plateaued for the past several years. Canada is even more interesting -- staggering, one might say. If there is such a huge glut of US oil, one has to ask the question why Canadian imports are where they are -- and this is without the Keystone.

By the way, did you see what Venezuela was asking OPEC to do? All Venezuela was asking for was a 5% cut in production. Five percent would not have made a difference in the actual glut; but just the psychology of a "cut" would have "stabilized" prices -- or at least that's what it appears Venezuela was suggesting. 

Bottom line: the US will need to continue importing heavy oil from somewhere -- Venezuela, Canada, regardless of the political events in those countries.

Existentialism

I think the more interesting question is the existential question. Saudi Arabia needs $100-oil, as do most other OPEC countries. $20-oil could do significant harm to the US oil industry but $20-oil won't destroy the US oil industry. Saudi and the Mideast do not have enough oil to supply the entire world with $20 oil. It will be interesting to see how long Saudi Arabia and the other Mideast countries can survive on $30 oil. I personally don't think very long.

This all precludes a major geopolitical event such as a) an all-out war in the Mideast; or, b) the entire state of California falling into the Pacific Ocean. Either of those two things happening will have a significant effect on the price of oil. I say that because my hunch is that President Putin is also very interested in the existential question, specifically Russian existentialism. Forcing a bear into a corner is not necessarily something one wants to do.

Looking Forward, Looking Back, Slim Dusty

Energy Tweets -- November 11, 2015; Saudi Oil Production Dropping

Platts survey of oil industry officials/analysts estimates Saudi Oct crude oil output at 10.1 mil b/d, 3rd straight month volumes down; see re-posted post below the break.

• OPEC Oct crude oil output drops 120,000 b/d to 31.08 mil b/d, led by Saudi & Iraq falls, Platts survey of industry officials/analysts shows
• Annual non-OPEC oil production to fall in 2016 for first time since 2008, EIAgov STEO says.
• EIA sees US crude oil output losses continuing through Sept 2016, when it avg 8.5MM b/d
• EIA estimates total US crude oil production has dropped 500K b/d since April, averaging 9.1MM b/d in October, 2016
• Midwest US gasoline differentials continued to plummet Tuesday amid an abundance of supply
• US refiners continue to enjoy golden period. Strong gasoline margins more than offset disappointing cracks on diesel

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Re-Posting A Note Regarding Saudi Arabia

Updates

November 17, 2015: I think this article is a bit of hyperbole, written to attract "clicks" or "eyeballs." But one can argue the slump in the price of oil is an existential problem for Saudi Arabia. Investopedia is reporting that Saudi Arabia could run out of cash in as little as five years if excessive spending is not curbed. 

Saudi Arabia is doing what it can to get its fiscal house in order, but it remains to be seen if they are doing enough to deal with the current economic reality facing the country. 

Bloomberg reports that the government is creating a project management office that will report to the Committee of Economic Development, chaired by Deputy Crown Price, Mohammed Bin Salman to tighten oversight of government spending.

This will be sorely needed to prevent the IMF’s warning from coming true. Bloomberg reports that Saudi’s 2015 total budgeted spending is $229.3 billion, and the FT says foreign reserves as of September 2015 are $647 billion. So at the current rate of spending, current reserves are exhausted in a little less than three years.

Original Re-Posted Note

 

Long-term readers know my views on Saudi's ability to produce oil. I was most intrigued by the first tweet posted at the very top of this page. With that in mine, I am re-posting, almost in its entirety, is a post from June 13, 2015.

I think one of the most interesting stories to follow for the next two years will be OPEC oil production. Well, duh.

I keep going back to the graph at that post:

Look at that graph closely; pay attention to oil production. It appears Saudi crude oil production in 2013 was about 12 million bopd; and, about the same, 12 million bopd in 2014. Maybe only 11 million bopd but clearly well above 10 million bopd but about the very same that it was in 2008.

I keep repeating the same data points, and adding some:

• Saudi embarked on a $35 billion, 5-year program back in 2012 to sustain oil production
• Saudi's oil production has hardly moved since 2012
• Saudi's budget is based on $100 oil
• domestic consumption of oil and natural gas is increasing in Saudi Arabia
• apparently the Saudi quest to find natural gas in Rub al Khali failed; one of many links; a better link;
• Saudi Arabia is embarking on a huge refinery program (see below)
• the water situation in the Mideast is getting more and more challenging, and the amount of energy needed for desalination is beyond one's imagination (see below)
• Saudi has a huge new terrorist organization to worry about
• Saudi is engaged in a fairly expensive shooting war
• President Obama has made it very clear that Saudi is on their own when it comes to security
• the Saudi oil minister is making some bizarre statements about the end of fossil fuel (bizarre or disingenuous)

Saudi Arabia's huge refining program, The Wall Street Journal reported this earlier this year (2015):

Saudi Arabia plans to become the world’s second-largest exporter of refined oil products in 2017 as part of its drive to diversify its economy and increase its share of the global crude and petroleum products markets, the kingdom’s oil minister Ali al-Naimi said Wednesday.

The kingdom’s two new refineries will add 800,000 barrels a day in refining capacity this year. A planned 400,000-barrel-per-day oil refinery in Jazan will bring Saudi Arabia’s refining capacity to more than 3 million barrels a day.

“That will make the kingdom one of the five largest countries in the world in terms of refined crude capacity and the second largest exporter of refined products after the U.S.,” Mr. al-Naimi said.

And even more:

Last year, Saudi Aramco started output at one of the largest oil refineries built in recent years—a 400,000-barrel-a-day project in a joint venture with Total SA. Another 400,000 barrels a day plant in Yanbu, a joint venture with China’s Sinopec called Yasref, started trial runs in September and exported its first shipment in January.

Saudi Aramco has previously said it plans to increase its refining capacity to 8 million barrels a day in the next decade through expansion both at home and abroad.

To some extent, this is a "wash." Countries currently importing Saudi crude oil may switch to importing Saudi petroleum products instead.

Saudi Arabia's domestic energy consumption and desalination: several links --

• desalination, Mideast, 2013, Stanford University study
• Saudi uses 1.5 million bopd for its 30+ desalination plants (this does not provide water for agriculture; agricultural water comes from non-renewable resources)
• desalination, Saudi Arabia, an overview

If Saudi Arabia's oil reserves were inexhaustible, their desalination program would not be an issue. But apparently, Saudi Arabia has concerns.

The kingdom is now embarking on a huge solar-powered desalination project. It will be the world's first large scale solar powered desalination plant.

Just a few weeks ago, on May 22, 2015, The Guardian had a big story on Saudi Arabia turning to solar energy for its desalination program, and then even made the crazy assertion that someday Saudi's solar energy industry would "export" electricity.

This is where the minister of energy sounded a bit bizarre:

“In Saudi Arabia, we recognise that eventually, one of these days, we’re not going to need fossil fuels,” said Naimi at a business and climate conference in Paris on Thursday.

“I don’t know when - 2040, 2050 or thereafter. So we have embarked on a program to develop solar energy,” he said in comments reported by the Guardian, Bloomberg, and the Financial Times. “Hopefully, one of these days, instead of exporting fossil fuels, we will be exporting gigawatts of electric power.”

Naimi also said he did not think that continuing low crude oil prices would make solar power uneconomic: “I believe solar will be even more economic than fossil fuels.”

Be that as it may; it is what it is. It's bizarre but it may be telling.

However, what caught my eye was this, buried deep in the article, why I wrote that this is reason #4,534 why I love to blog:

Saudi Arabia had already said in 2012 it aimed to be powered by 100% renewable energy and later that year announced a $109 billion solar plan. In January, that plan was delayed by eight years. 

Their solar program wasn't just delayed a year or two or three or four, it was delayed eight years. Anyone who has spent any time living and/or working in the Mideast knows that a) it took a lot for Saudi to admit this 8-year delay ("losing face"); and, b) "eight years" was simply a figure pulled out of thin air. It's as likely that it will be an 18-year delay.

Ever since I began following the Bakken, it's been my understanding that Saudi Arabia's budget is based on $100 oil. Most of that budget, based on conjecture and what little I know, was before these huge big projects and challenges came along.

These are big ticket items that will not do well on $50 Saudi oil:

• fighting the war in Yemen
• fighting ISIS
• preparing to fight Iran
• if Saudi decides to go nuclear (and I think they will) that's another huge financial outlay;
• 1.5 million bopd ($100 million/day on the open market worth of oil) to run its desalination programs; that's about $40 billion /year just for potable water (not agricultural water)
• $35 billion, 5-year program to sustain current oil production; it's not so much the dollar cost; it's the fact it takes so much of their only resource (oil) to run the plants
• a $109 billion solar plan (now delayed); there's only one reason to delay, I would imagine: cash flow
• aggressive, expansive refining program
• a Bentley for each Saudi pilot striking Yemen: 100 Bentleys

That was a long note for just a single point, but it provides a starting point for the archives with regard to big-ticket items that Saudi Arabia needs to pay for and why their crude oil production needs to increase to meet their new refinery requirements. One almost gets the feeling that if Saudi increases their production from 10.3 million bopd to 11.3 million bopd they are simply running faster to stay in the same place.

Idle Chatter; Commentary In Response To A Reader's Question -- October 8, 2015

A reader asks in a comment to an earlier post:

Why do we allow this situation to continue, where US producers are being forced to curtail producing while we are importing very large quantities of crude oil? Would it not benefit our economy to tax imports and if necessary, subsidize domestic oil. I can see a significant reduction in the trade deficit in conjunction with a boost to the economy. What am I missing?

My opinion as I would express them if I were having coffee at Cashwise in Williston.

There are at least two questions being asked. The easy one first: why not, if necessary, subsidize domestic oil industry? Politically it can't happen, especially under this administration. As recently as yesterday President Obama suggested eliminating "subsidies" already in place for the domestic oil and gas industry and "using" that money for intermittent energy (wind and solar). Even under the most conservative administration, subsidizing the domestic oil and gas industry would be the wrong way to go. Taking away some of the regulatory obstacles would be a lot better. Free market capitalism will sort this all out. Low prices have made the industry much more efficient. Some (maybe many) oil and gas companies will not survive but the overall US oil and gas industry will do just fine, over time.

The second question has to do with imports. RBN Energy and others have addressed this very, very well. US refineries were optimized for heavy oil back in the 90's or before, back when US production was "dead" and no suggestion that it was every going to come back. Most of the oil being imported then was heavy oil. Western Canadian oil was also heavy oil and that's why the Keystone was so important -- to continue bringing heavy oil to the refineries along the Gulf coast that were optimized for heavy oil.

Then the perfect storm: the frackers cracked the code on lifting tight US oil; unfortunately it was all light oil and not what the US refiners (except some on the East Coast) wanted or could use. These refiners were holding out for the Keystone to bring heavy Canadian oil; it was way too expensive (billions of dollars) to retro-fit all those refineries to optimize them for light "shale" oil. Those refineries are still optimized for heavy oil -- which US oil is not.

While all the haggling over the Keystone was going on, the refiners jerry-rigged their operations so that with a "mix" of heavy oil and light oil they could make things "just barely" work.

What the US really needs is more imported heavy oil, and that's what is being imported for the most part. Rather than worry about exporting our crude oil in the short time (politically not going to happen), efforts would be better spent to "trade" our light oil for overseas heavy oil (from Venezuela, example). Obviously Venezuela doesn't need our light oil but the global market could come up with a system where trade-offs were made [Venezuela heavy oil to the US; US light oil to Europe or Asia.]

A significant amount of imported Saudi oil is going to the refinery that Saudi Aramco owns along the US Gulf Coast. That, I doubt, will ever stop as long as Saudi has ownership in that refinery.

The one area that is of concern -- and part of your question: recently US refineries on the east coast specifically said they were not going to use any more Bakken light oil (for the time being) because the light oil they were getting from African west coast was less expensive. In a perfect world, the US could have stepped in and targeted West African operators with higher tariffs to protect the Bakken, but trade wars tend not to work out very well.

There is much more that could be written but that's at least a start.

Friday, September 18, 2015 -- Long, Meandering Note

Disclaimers:

This is not an investment site. Do not make any investment or financial decisions based on what you read here or what you think you may have read here. I am not a trader. I invest for the very long term.

I have no formal training, education, or background in the oil and gas industry.

I often make factual and typographical errors.

I often make simple arithmetic errors.

I am inappropriately exuberant about the Bakken.

I have no formal training, education, or prior experience in raising grandchildren.

I am heavily invested emotionally in Big Oil.

I hate blind spots. And I have many.

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Some weeks ago I posted a really, really good post on recovery rates in the Bakken. Unfortunately it was all wrong. Actually, what I posted was correct, except that it was based on a slide that I misinterpreted. A reader caught my mistake (thank goodness) and I immediately pulled that post down. I can't remember, but I believe in my welcome/disclaimer I talk about my philosophy on updating posts and/or removing posts. In general, I will not "hide" my corrections and, in general, I will not remove earlier posts.

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So, we start again. Some weeks ago I posted a really, really good post on recovery rates in the Bakken. Unfortunately it was all wrong. Actually, what I posted was correct, except that it was based on a slide that I misinterpreted. A reader caught my mistake (thank goodness) and I immediately pulled that post down.

I bring that up because today over at Seeking Alpha, Richard Zeits has a great article on the potential of US shale. This is a keeper; I assume it will be archived by Seeking Alpha in the near future, with access only for paying subscribers.

There is so much in that article, I'm not going to cut and paste much here. But for those who want to cut to the chase, here is what I overheard at Cashwise in Williston on my most recent visit there:

"All" (except the USGS and a lot of other folks) agree the Bakken has 500 billion bbls original oil in place (currently being depleted by about one million bopd). At one time, Harold Hamm went out on a limb and suggested 903 billion bbls but that has been pulled back to 500 billion bbls (publicly).

When we first started talking about the Bakken, we were talking about 1 - 3% recovery rates (primary production). Early on, I provided evidence and calculations that the recovery rate was actually closer to 8%. After that, one major operator in the Bakken did "admit" that recovery rates in the Bakken were in the 5 - 8% range. There are now folks who feel the recovery rate is or will be 20% (primary production).

When we first started talking about the Bakken, we were talking about EURs of 350,000 bbls, and it quickly went to 500,000 bbls. EURs greater than 500,000 were thought to be exceptional. Now, I can't imagine any operator drilling any well in the Bakken without an expectation of 500,000 bbls even outside the core. Whether one gets 500,000 bbls from wells outside the core will depend on the price of oil some years from now.

Zeits is now taking about 2-million-barrel EURs. 

In the sweet spots of the Bakken, it appears that EURs of 1 million bbls are now the expectation. At one time, a lot of folks thought the sweet spots were limited in the Bakken. In fact, it has become somewhat of a surprise how much of the Bakken is composed of those so-called "sweet spots."

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After reading the Zeits article over at Seeking Alpha (linked above and discussed above), if you haven't already, be sure to look at EOG's most recent presentation. This, too, is a keeper, and will probably be lost in the ether some months from now. [Later, see this note also.]

When looking at this, remember this is EOG only (for the most part).

Before looking at the presentation, it might be helpful to look at the history of EOG in the Bakken, at this link.

The most recent update I had at that link:

• 1Q14: down to 90,000 acres of Core Bakken; Antelope Extension: 20,000 acres; Core well -- 92% oil, 2% gas, 6% NGL; Antelope well -- 78% oil, 11% gas, 11% NGL; source: EOG

Now, compare the new data, at slide 5 (EOG marks it slide 4) of the linked presentation (note: I often make mistakes in interpreting data; I often make factual and typographical errors; it is difficult to separate fact from opinion; I often round numbers; it is difficult to separate my observations from the presented data; these comments are for my use to help my better understand the Bakken; feel free to read them and comment on them but don't quote me on any of this stuff; if it's important to you, go to the source:

• EOG has expanded its core acreage from 90,000 acres to 120,000 acres in the Bakken this past year
• EOG has 110,000 non-core acres in the Bakken
• EOG in the Bakken, core + non-core = 230,000 acres
• At one time, EOG had around 600,000 acres in the Bakken
• I understand the difference between core and non-core, but I don't differentiate between the two (for the most part)
• 230,000 acres / 640 acres = 360 sections
• 120,000 acres core / 640 acres = 200 sections (rounded up from 187)
• 110,000 acres non-core / 640 acres = 175 sections (rounded up form 172)
• 187 sections x 8 wells = 1,407 wells
• 175 sections x 6 wells = 1,050 wells
• EOG says: 187 sections --> 590 remaining drilling locations or 3 more wells per section
• EOG says: 172 sections --> 950 remaining drilling locations or 5.5 more wells per section
• Then note the small print (asterisked): as of January 1, 2015, Bakken/Three Forks); and assumes no further downspacing, acreage additions, or enhanced recovery. Comment: one can assume two of those three assumptions will go by the wayside, and probably all three.
• Years of drilling: note that non-core is missing an estimate. Core area says 590 remaining locations over 14 years = 40 wells / year. In the non-core area, 950 / 20 wells / year would get you almost 50 years of drilling. 
• And then finally this: if EOG has about 250,000 net acres, it is a relatively small player compared to what CLR and WLL hold; and really a small player if one considers the entire size of the Bakken. Both CLR and WLL have around a million acres in the Bakken (if I recall correctly) and Hess has about 650,000 acres (based on old data; I don't have current figures for Hess)
• one last comment: both Zeits and I agree that in the core, one has to assume EURs of one million bbls; with almost 600 drilling locations in the core Bakken, EOG should uplift through primary production 600 million bbls of oil. Note that EOG comes up with 620 million boe for all their core Bakken wells, not just their remaining wells. 

So, other than slide 5, are there any other interesting slides in that presentation? Let's see:

Slide 11 (as marked by EOG):

• completed well cost in the Bakken at $7.1 million; target = $6.5
• spud-to-TD: 8.2 days; record = 5.6 days

Slide 17 (as marked by EOG):

• EOG's Bakken play
• EOG's reserve potential in the Bakken: from 0.4 billion boe (2010) --> 1 billion boe (2015)

Slide 22: it is important to note that peer groups do not include CLR or WLL; does include Hess

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Apples And Oranges

When I was going to high school in Williston, back in the 60's, a $15 million project anywhere in the area would have been headline news. Of course, I would not have been paying attention; my interests were directed elsewhere. But in the 60's and through the 90's and even into 2005, a $15 million project would have been headline news. Now it's just another story in the Bakken. In this case, I'm referring to a project that will hardly be noticed: Kinder Morgan wants to turn a Hiland gathering pipeline into a transmission pipeline. This project will require no new pipeline (minimal digging, in other words); it will require new surface structures including a storage tank. I assume much of the $15 million will be related to salaries and wages.

A second point to take away from this announcement is that despite all the hand-wringing over the low price of oil and its effect on North Dakota, the Bakken keeps chugging along. And it's not going away. Maybe more on that later. The operators are putting this "breather" to good use: putting in more infrastructure. When I was back in Williston just a week ago, the landscape had hardly changed. One can drive for miles and miles and see very few wells. And on much of that landscape, when one sees a well, it is a well -- a singleton. Eventually, wherever there's a single well, there will be a pad with at least four wells. And in the really hot areas, where one sees a pad with four wells, one will eventually see a pad with twice or three times that number.

When oil prices fell -- the "official" date is October, 2014 -- the middle Bakken was well demarcated and operators knew pretty much what they had. However, they were just beginning to get a feeling for the upper bench of the Three Forks, and one can say that with a few exceptions, the second and third benches have not even been explored or evaluated. I'm not sure if the 2nd bench will be all that great, but in places the 3rd bench looks pretty good. But it's all relative and it all depends on the price of oil. So, until prices improve, it looks like the Bakken is in a holding pattern: putting in more infrastructure and drilling out the core middle Bakken. I'm not even sure the Three Forks, upper bench, is getting all that much attention.

The third point to take away from this announcement is the close working relationship among the oil and gas industry (the operators), the state (regulators vs development), landowners, and the public who are not directly involved. When you read The Dickinson Press article linked above, note the comments made about the commissioners who will be looking at this request. I find that very, very enlightening and very, very comforting.

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Other Big Projects

While I was in the Bakken last week, I was surprised at the new residential and commercial development still breaking ground. There was a new residential development project just breaking ground. Two new gas stations were going up: one on the west side of town, one on the southeast side of town. The latter was a brand new station replacing an old one in the same location. The former, the one on the west side, is going to be a huge station, well inside city limits along the bypass.

The truck bypass around Williston is a big, big deal; it will be built with lots and lots of cement.

The new airport is on track, though I don't think ground has been broken.

The huge new four-story renaissance building on south Main is nearing completion including below-ground parking, I believe. I don't know the specifics.

Much of Main Street renovation was complete and now they are working on the north end of Main Street, in the JC Penney block.

There's a huge new rail yard east of Williston that watered my eyes when I saw it; private endeavor.

The four-lane bridge crossing the Missouri southwest of Williston is coming along, and I'm betting that the next time I visit Williston it will be complete. I plan to visit Williston next spring, but, and this is a huge "but," my brother-in-law retires December 1, 2015, and he has always wanted to see Mount Rushmore. If I can swing the dates, I will try to get him and me up to the Bakken, Mount Rushmore, and Chief Crazy Horse in early December. If not, the road trip will have to wait until April, 2016.

My hunch is that when winter sets in, in a few months, Williston downtown will be "dead." Books on Broadway will be as bus as ever. I still say it's the best private bookstore I've seen. It's more than just a bookstore, with it's unique science sets and projects for students, unique gifts for all ages, and it's coffee bar. Plus good conversation when the employees have time to talk. I assume we will start to see change in ownership of hotels/motels; some will close; we will start to see stories about foreclosures, but there may be some pleasant surprises there; ... much more could be written... but next summer will be another huge summer.

The good news: Debbie Downer will never miss the opportunity to publish a negative article on the Bakken.

A new airport in Williston would have been a huge story if that was the only project being talked about, but it's just one of many.

Shale 2.0 -- September 11, 2015

My observations in the Bakken suggest the same thing as this writer suggests. From economics21:

It is true that the oil-price collapse was caused by the astonishing, unexpected growth in U.S. shale output, responsible for three-fourths of new global oil supply since 2008. And as lower prices roil operators and investors, the shale skeptics’ case may seem vindicated.

But their history is false: the shale revolution, “Shale 1.0,” was sparked not by high prices—it began when prices were at today’s low levels—but by the invention of new technologies. Now, the skeptics’ forecasts are likely to be as flawed as their history. Continued technological progress, particularly in big-data analytics, has the U.S. shale industry poised for another, longer boom, a “Shale 2.0.”

John Shaw, chair of Harvard’s Earth and Planetary Sciences Department, recently observed: “It’s fair to say we’re not at the end of this [shale] era, we’re at the very beginning.” He is precisely correct. In recent years, the technology deployed in America’s shale fields has advanced more rapidly than in any other segment of the energy industry. Shale 2.0 promises to ultimately yield break-even costs of $5–$20 per barrel—in the same range as Saudi Arabia’s vaunted low-cost fields.

The shale industry is unlike any other conventional hydrocarbon or alternative energy sector, in that it shares a growth trajectory far more similar to that of Silicon Valley’s tech firms. In less than a decade, U.S. shale oil revenues have soared, from nearly zero to more than $70 billion annually (even after accounting for the recent price plunge). Such growth is 600 percent greater than that experienced by America’s heavily subsidized solar industry over the same period.

Shale’s spectacular rise is also generating massive quantities of data: the $600 billion in U.S. shale infrastructure investments and the nearly 2,000 million well-feet drilled have produced hundreds of petabytes of relevant data. This vast, diverse shale data domain—comparable in scale with the global digital health care data domain—remains largely untapped and is ripe to be mined by emerging big-data analytics.

Shale 2.0 will thus be data-driven. It will be centered in the United States. And it will be one in which entrepreneurs, especially those skilled in analytics, will create vast wealth and further disrupt oil geopolitics.

Archived. Incredibly good article. A must-read.

Natural Gas Pipelines Changing America; Saudi Arabia Investing In US, China Because Of A Shortage Of Gas -- July 26, 2015

Updates

Later, 11:33 a.m. Central time: after posting the note below, I ran across this story, which supports my these that the shale revolution in the US is huge, much bigger than I think most people know. Bloomberg is reporting: Saudi Arabia's Sabic is considering investing in shale gas in the US.

Saudi Basic Industries Corp., the world’s second-biggest chemicals manufacturer, plans to expand investment in U.S. shale gas projects through joint ventures.

Sabic, as the company is known, signed an agreement with Houston, Texas-based Enterprise Products Partners L.P. to get shale gas.

The company may use the feedstock in the U.S. or export it to other countries such as the U.K., he said. Sabic has converted crackers at U.K. plants to use shale gas as feedstock to produce olefins and their derivatives more competitively.

“The main areas in the U.S. we are looking to invest in are the northeast and the south as they fit our overall expectations including government support, labor laws and unions."

Sabic, which in 2007 bought General Electric Co.’s plastics unit for $11.6 billion, said in April it plans to expand in China and the U.S. because it’s difficult for the company to grow in Saudi Arabia due to a shortage of gas. The Marcellus shale formation spread across Pennsylvania, West Virginia and Ohio is America’s biggest natural gas producer, with output rising more than 14-fold since January 2007.

Oil and natural gas tend to be found together in the same areas of the world, although the mix (natural gas vs oil) will vary in different fields. But when I read that Saudi is expanding in the US and China because it’s difficult for the company to grow in Saudi Arabia due to a shortage of gas it catches my eye. The spokesman didn't say "an anticipated" shortage of gas, nor did he say a "slowing of production" of gas now or in the future, the spokesman said the shortage of natural gas already exists in Saudi Arabia. Its neighbors have a lot of natural gas. Interesting.

Original Post

 

I didn't post this story when it was sent to me by a reader a few days ago. I had a lot to do and this story has so many incredible story lines. BloombergBusiness is reporting that a glut of cheap natural gas trapped in the U.S. Northeast will be heading south by the end of the year, radically changing the price differences between the regions.

For me, the biggest story line is the huge advantage the US will have over the rest of the world with all its cheap energy.

I am not articulate enough to expand on all the story lines in the linked article, and even if I did, I do not have the time. I think I will just throw out some random, stream of consciousness thoughts that come up when reading this story.

The US will have a huge advantage compared to the rest of the world with all its cheap energy.

Europe will be left behind when it comes to energy. 

The US will, if not already, become the largest exporter of energy to the rest of the world.

The war on coal may have been started by a community organizer, but the war was won by roughnecks.

Despite a gazillion dollars to stop pipelines in this country, 1,000 miles of new pipeline was built for every one mile of pipeline stopped (for natural gas and for crude oil).

One of the largest US natural gas pipelines is now on-line. Interestingly, it does not flow west to east, but east to west.

There are only a few companies big enough to tackle these huge pipeline projects, sort of like franchise players on an NBA team: Williams, Kinder Morgan, Spectra, Sempra, and a few others.

After 2017, the renewable energy push is dead. Renewable energy won't be dead, but the "hype" will have ended. Even Jane Nielson might notice (but if she does, she won't talk about it).

Speaking of which, I think Harper Lee made a mistake publishing (or being talked into publishing) Go Set A Watchman. However, it was "made-to-order" under the current racial divisiveness in this country. Ironic. New York Times contributor on this story.

How incredibly spectacular the shale revolution was.

And how long it's going to last. Bentek said the Bakken would max out at 2.2 million bopd; data at that time of the Bentek study suggested new wells would be drilled through 2030, and the Bakken would last through 2100. With so much oil on the market now, it's very possible the Bakken production has topped out at 1.2 million bopd, and will stabilize at 750,000 bopd. That means the Bakken is going to last a lot longer than originally thought. And it's going to be developed at a much more moderated pace, making quality of life in the Bakken so much better.

The cost of energy will definitely be reduced across regions of the country. Manufacturers will move to states where states want them, and where there is a "right to work" regardless of whether one belongs to the right club or not. According to the article:

Spot gas in Florida is at $2.94 per million BTUs, while Marcellus supplies at the Leidy hub slumped to $1.26.

The difference between the two has averaged $1.48 this year and will shrink to about 30 cents as pipelines come online over the next three years, Franjie said. Tudor Pickering analyst Jeff Schmidt similarly forecast between 20 to 30 cents.

Let's keep it simple. Florida, $3.00 per unit; in the Marcellus, $1.25 per unit of natural gas. That's huge.

It's gonna get even cheaper to live in Florida -- BTW, no state income tax in Florida; can't say the same for frack-hating New York state.

Gas output has jumped more than 14-fold since January 2007, reaching a record 16.5 billion cubic feet a day earlier this summer. By the way, the North Dakota Bakken well that started the boom was in 2007. It was an EOG well in the Parshall oil field. How coincidental.

More staggering figures (can you say sayonara to "intermittent energy"?):

An expansion of Williams’s 10,200-mile (16,400 kilometer) Transcontinental Gas Pipeline system on the East Coast may enter service in December. Other proposals totaling as much as 7.5 billion cubic feet a day of capacity are scheduled to come online in 2016 and 2017. One billion cubic feet of gas is enough to heat about 10,000 U.S. homes for a year.

Florida power plant demand for fuel hit a record for April, up 13% from a year earlier. The state is 
home to six of the 20 fastest-growing US metropolitan areas. Can you spell "electoral college"?

Near the end of the article:

The shipments underscore how quickly the Marcellus shale formation -- spread across Pennsylvania, West Virginia and Ohio -- has dominated the gas market. It has become America’s biggest producer in less than a decade and is now spreading its wealth across the country.

By 2017, they say, because of the shale revolution and cheap energy, manufacturing costs in the US will be less than those costs in China.

By the way, EQT reported the biggest natural gas well ever in the Utica just a few days ago, and there are suggestions the Utica is much bigger than previously thought, and could be bigger than the Marcellus. Or maybe it already it. I can't keep track of them.

Finally, at the end of the article:

The pipelines coming online over the next three years will mark an “opening of the floodgates” to the U.S. Southeast.