Wow, What A Treat -- The Myths Of Shale -- Richard Zeits -- March 22, 2018

One of the reasons I went into such depth on two Slawson wells was to eventually get to Part III: observations and comments regarding the myths of shale. So, what a treat to see Richard Zeits continue his series on the myths of shale oil.

Today, over at SeekingAlpha, the shale oil myth, "it is too light and no good." [The blog has talked about his often.]

Summary by Zeits:

• shale oil skeptics claim that the global crude supply is turning alarmingly light due to the growth of shale production
• the world is facing acute shortages of heavy and medium grades, the argument goes, and shale oil is of little help in meeting that demand
• market data indicate that the claim is without merit
• shale growth has been perfectly well accommodated by the global refining system
• shale oil is fully "sold out" and trades at premiums to heavy grades

Hubbert and Peak Oil folks never saw this graphic coming:

Observations from Richard Zeits:

Is the shortage of heavier crude grades acute? We would argue, not more so than the shortage of all other grades. While global demand for distillates has been on the rise, demand growth for lighter products - gasoline and naphtha - has also been quite strong. Light crudes have been sold out just as much as heavier crudes.

The global refining industry has proven very capable of using all available crude grades to meet demand for products and we do not see this changing anytime soon.

Amazingly, and coincidentally, Zeits has a great graph on the very day that John Kemp noted over on twitter that the delta between WTI and Brent was narrowing, almost nil.

I'll post that graph elsewhere.

More from Zeits:

On a per degree of gravity basis, the narrowing is ~$1/barrel per 10 degrees API for the Middle East and West Africa baskets. For the Gulf of Mexico example, the narrowing was more pronounced, roughly twice as great.

In percentage terms, the differentials narrowed by ~20% for the Middle East basket and ~30% for the Gulf of Mexico basket.

This is the measure of Mr. Market's reaction to what one might think of as a "perfect storm" for the global light/heavy supply mix. In other words, the impact of the lighter global supply slate on prices has been minimal.

In our interpretation, this market data disprove the claim that the global supply mix is significantly out of balance and the world is facing acute shortages of heavier crudes.

Much, much more at the link.

If there is a shortcoming in his essay today (and far be it for me to come up with anything negative with regard to Zeits, a "shale demi-god") it would have to be that he did not mention the reason behind and the importance of the Keystone XL. Although not treasonous to have stopped it, but ... I consider "killing" the Keystone XL right up there with the Continental Congress refusing to fund George Washington's troops so they afford parkas and water-proof boots.

Richard Zeits On Ten Million BOPD And What It Means For The US, Saudi Arabia -- February 2, 2018

I have a fairly long post with updates regarding all the hand-wringing about "decreased conventional discoveries" and how that will lead to a scarcity of oil in the "near future." Some refer to this as "peak oil."

Richard Zeits has an incredibly good column today over at SeekingAlpha further suggesting that "peak oil" will be pushed further to the right. Archived.

It's one thing to read "ten million bopd" but when one sees the graphic, it's absolutely stunning.

It should be noted that the US is producing way below its potential. The Bakken has about 2,000 wells that are either DUCs or completed/shut in for operational reasons. I don't think 2,000 wells have ever been drilled in one year in North Dakota, even at the peak of the boom. In addition, there are less than 60 active rigs in North Dakota; at the peak of the boom, more than 200. Everyday more and more infrastructure is being put in place in North Dakota. Unfettered, North Dakota will produce 2.2 million bopd.

By the way, this is the third or fourth article by Richard Zeits regarding ultra-lights. Others have referred to 'ultra-lights" as "light ends" and that's how I've tagged articles on "ultra-lights." I may start using both tags ("light ends"; and, "ultra-lights"). 

And then there's the Permian. Oasis just moved into the Permian this past year. And Exxon, too, just moved in this past year. Exxon may not be in a panic, but investors are not happy; something tells me Exxon will hit the Permian, "full speed ahead, damn the torpedoes."

Much could be written but it's easier to just go to the linked article by Zeits.

By the way, the "peak oil" folks are now talking about the end of Tier 1 drilling locations. "Peak oilers" never quit.

I Have To Call It A Day For Now -- Leave You With This -- Off The Net For Awhile -- Zeits On US Light Oil / Condensate Production -- January 24, 2018

Link here over at SeekingAlpha.

Summary:

• claims that U.S. crude growth is dominated by super-light and ultra-light grades is a misconception
• in fact, production data show the opposite trend
• she super/ultra-light component of the U.S. crude stream has shrunk significantly in the last three years
• a recovery in these categories is in progress. In our expectation, future volumes will surprise to the upside 

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Tammany Hall Redux

I have two books on my nightstand that I really enjoy: one I have had quite some time and it often ends up back on the shelf only to be pulled down and placed back on the nightstand, and then a more recent one. Neither of them are "about" Tammany Hall (NYC) but both of them have devoted a considerable amount of space to Tammany Hall.

When I read about Tammany Hall, I immediately think of Barack Obama. He came close to re-establishing his version of Tammany Hall. If Hillary Clinton had been his successor, without a doubt, Tammany Hall would have been re-created. It would have just gone by a different name.

On US Petroleum Exports -- Al Troner's Article In Oil & Gas Journal On Light Ends -- June 6, 2016

From Al Troner's June 6, 2016, article in Oil & Gas Journal:

Almost unheralded, the US has emerged as the largest exporter of oil products, based on Gulf Coast refiners' use of relatively inexpensive, domestically produced tight oil. The product-export flood has been paralleled by large-volume NGL sales, with LPG (liquid petroleum gas) leading the way, in particular propane.

US sales have not only saturated the Atlantic Basin market but also become important to Asia Pacific supply. At mid-2015 China was the biggest single customer for US propane. And the opening of a revamped and enlarged Panama Canal by yearend will likely increase westbound LPG exports from the Gulf Coast even further. By 2018 US exports of LPG exports will likely equal or exceed those of the United Arab Emirates and Qatar combined.

Canada remains the top condensate US export market. APEC expects US supply to dominate Canadian diluent use until at least end-decade. Yet domestic condensate output has been growing rapidly in Canada, based on tight oil and shale gas development, in a trend APEC expects will gradually back out US sales in the coming decade. A steadier though smaller market emerged for slightly refined condensate in Europe, where refiners use the material regularly to fill out crude slates. By 2018 US condensate exports will exceed overseas sales by Saudi Arabia, and possibly by the kingdom and Qatar combined.

Ethane exports have begun as US sellers pioneered waterborne ethane shipments to buyers in the UK, Norway (Ineos and Sabic), and Sweden (Borealis). This has been followed by sales to India (Reliance) and China (Orient Energy).

The emergence of the light-ends space has not been solely a western market phenomenon. It has had East of Suez impacts as well, much of it centered on the Persian Gulf.

That opening line: Almost unheralded, the US has emerged as the largest exporter of oil products,.... occurred during the Obama administration.

Things to think about:

• Saudi's challenges
• US shale oil revolution
• 90% of tankers carrying petroleum products will be able to transit the Panama Canal starting next year
• Asian countries want to diversify their source of petroleum products; do not want to depend on Mideast as sole supplier
• Poland diversifying petroleum sources; doesn't want to rely solely on Russia
• India's growing demand for transportation fuel
• the global demand for naphtha
• "friendly" regulatory environment along the US gulf coast
• QUALITY -- the US sets the standards
• outside the US, instability seems to be the by-word; I can't say the global environment is any worse, but if Nigeria and Iraq are any examples, I would say the global environment is as bad as it's ever been
• US oil exports rise 7-fold in three months
• it never seems to quit

Al Troner's Article In Oil & Gas Journal On Light Ends -- June 6, 2016

Link here: http://www.ogj.com/articles/print/volume-114/issue-6/general-interest/surge-in-ngl-and-tight-oil-supplies-creates-worldwide-light-ends-space.html. It begins:

While many analysts agree that oversupply, rather than weak demand, led to the current slump in the price of crude oil, few have looked closely at the nature of that supply overhang.

In a new study, Asia Pacific Energy Consulting (APEC) has examined in depth the role of NGLs, in particular condensate, in creating the current surplus, as well as the impact of tight oil and its light derivatives.1 The condensate, other NGLs (LPG and ethane), light products, and tight oil yielding much of the new light-product supply all occupy the same light segment of the hydrocarbon spectrum.

The shale revolution has spurred a ballooning of NGL output, paralleled by dizzying growth in tight oil production. Almost all of this incremental liquids production has been light and sweet. The growing volume of this material, with incremental supply in the millions of barrels per day, has begun to shift pricing, trade, marketing, and supply-demand balances for crude-light-heavy vs. sweet-sour-and in products, with notable supply gains in LPG, gasoline, and naphtha in contrast to middle-barrel and heavy products.

A "light-ends space" is emerging, not only in the US and the Atlantic Basin but also globally, as markets attempt to adjust to this surge in light, low-sulfur hydrocarbon supply.

Archived; great article. Lots of implications for the Bakken, for export. 

Light Ends / Light Ends Space-- A New Term (At Least For Me) -- June 5, 2016

Updates

June 12, 2016: this is pretty cool. As noted below, when I googled this term just a few days ago there were five hits. Today, googling "light-ends oil" there were 131,000 hits. Of the 131,000 hits, my post was #14, near the top of the second page. Whoopee. 

 

Original Post

 

There is an incredible amount of information in this paper. I've read the introduction and the conclusion; scanned the information in between. The information "in between" will remain a great reference. 

This link takes you to a "working paper" out of Rice University's Baker Institute for Public Policy, titled "Childhood's End: Developing Asian Giants and the Future of Global Oil Demand." It is dated 2016. A quick look at the paper suggests that Prince Salman is thinking along the same lines.

However, there is a new term -- that's probably been around for decades -- but I just stumbled across it and will come back to it later.

The term is "light ends" or "light ends space." A google search "'light ends space' oil 'natural gas'" led to only five hits, and one of them was a "linked in" hit.

By the way, this subject ("light ends space") and the "working paper" linked above seem, at first glance, to dovetail well with the very astute observation made by Don regarding "gasoline production" numbers, which is noted at length in the "update" at this post. 

Wow, if I miss one day of blogging, I fall behind.

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A New Term

The link above takes you to a linked "working document" authored by Al Troner. His thesis/article is featured in this month's issue of the Oil & Gas Journal, which requires a subscription. [Update: it looks like one can get to the entire article by googling "'light ends' oil". Here's the link: http://www.ogj.com/articles/print/volume-114/issue-6/general-interest/surge-in-ngl-and-tight-oil-supplies-creates-worldwide-light-ends-space.html.]

Putting "2" and "2" together, it appears that Al Troner, Asia Pacific Energy Consulting, Houston, has not necessarily coined a new term but will do much to put it the term in the everyday lexicon of those of us who follow the oil and gas industry.

I'm pretty jazzed, to say the least, to have come across this. It will be interesting to see where this leads.

The article begins:

While many analysts agree that oversupply, rather than weak demand, led to the current slump in the price of crude oil, few have looked closely at the nature of that supply overhang.

In a new study, Asia Pacific Energy Consulting (APEC) has examined in depth the role of NGLs, in particular condensate, in creating the current surplus, as well as the impact of tight oil and its light derivatives. The condensate, other NGLS (LPG and ethane), light products, and tight oil yeilding much of the new light-product supply all occupy the same light segment of the hydrocarbon spectrum.

The shale revolution has spurred a ballooning of NGL output, paralleled by dizzying growth in tight oil production. Almost all of this incremental liquids production has been light and sweet. The growing volume of this material, with incremental supply in the millions of barrels per day, has begun to shift pricing, trade, marketing, and supply-demand balances for crude -- light-heavy vs sweet-sour --- and in our products, with notable supply gains in LPG, gasoline, and naphtha in contrast to middle-barrel and heavy products.

A "light-ends space" is emerging, not only in the US and the Atlantic Bais but also globally, as markets attempt to adjust to this surge in light, low-sulfur hydrocarbon supply.

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A New Term: Light-Ends Space

NGLs: Definition

The article focused on the role of condensate as the spearhead creating the light-ends space.

Why? Because condensate is the only NGL that does not need specialized containment and that, when refined, yields a full range of products, from LPG to residual.

Where? Bakken, Eagle Ford, and the Permian.

Facts about condensate:

• once condensate becomes a liquid, it remains a liquid
• in a refinery or condensate splitter, it acts much like crude in the slate
• often confused with light, sweet crude oil but it has distinctive characteristics
• unlike crude oil, condensate always originates with gas, whether nonassociated or associated
• whole condensate almost always yields more than 50% naphtha; and is almost always quite clean, low not only in sulfur but also in metals and acid
• condensates are exceptionally clear, most containing 0.3% sulfur or less

More facts about condensate:

• most observers try to define condensate by setting an arbitrary API gravity breakpoint
• in the US commonly 45 degrees API
• international trade, usually 50 degrees API

But rules are made to be broken

• there are some crude condensates well above 50 degrees API; e.g., Saudi Arabia's Super Light and Australia's Laminaria
• there are some crude condensates below 50 degrees API; e.g., Kazakhstan's Karachaganak and Nigerian Oso
• in definition, what constitutes condensate, API gravity is only a general indicator, not an exact test of what is condensate and what is crude

Bottom line: what makes a condensate a condensate

• always originates in gas
• almost always yields 50%+ naphtha
• is exceptionally sweet
• contains little if any metals
• produces little residual oil
• a crude and condensate can have exactly the same API gravity but the condensate will always yield far more naphtha and far less fuel oil

The US and condensates?

• the US has emerged as a major NGL power due to the shale revolution
• despite recent events (2016), overall NGL output will continue to rise despite declining condensate volumes produced with tight oil (EIA)

Why?

• NGLs are caught in a twilight zone: NGLs come from both the crude and gas sides of total production
• while condensate has been the most prominent NGL derived from gas produced in association with tight oil, plays such as the Eagle Ford shale; Permian basins also have produced sizable volumes of LPG and even commercial volumes of ethane
• yet NGLs also come from primarily non-associated gas production as well, such as the Marcellus and Utica shales

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Notes From a Working Paper

Six chapters:

• Chapter 1: Introduction
• Chapter 2: Asia Pacific Demand Growth: Demand Growth by Sector
• Chapter 3: Recent Developments in Middle-Distillate Retail Price Subsidies
• Chapter 4: Asia Pacific: Comparing Light-Ends and Middle Distillate Growth
• Chapter 5: Product Quality Premiums
• Chapter 6: Conclusion

Chapter 1, Thesis: 

• Asia Pacific will remain the engine of world oil demand growth
• but future growth will be at a lower rate of expansion
• in addition, future demand will shift away from mid-barrel to light-ends products, such as LPG, gasoline, and naphtha
• bad news: US oil exporters will not get the growth they saw 1990 - 2000, or even 2000 - 2010
• Asia has begun to exhibit characteristics of more mature economies
• good news: Asia Pacific will likely continue to lead world oil demand growth for the remainder of this decade and the next (through 2030)
• the growth will be greatest in the light end of the barrel
• the working paper focuses on China, India, and Indonesia

Chapter 1.  Introduction

Sections A - H: 

• historical review

Section I: US exports -- a natural fit. 

• the growing Asian demand for light ends has coincided with the shale revolution in the UNITED States and a massive influx of sweet, light crude and NGLs onto the US market. With a crude export ban n place, the US had to focus on exporting light refined products and NGLs. 
• But, since late December 2015, the paradigm has shifted.
• Asia Pacific wants to end dependence on Mideast; long term trend: North America will compete with Mideast for demand growth in Asia Pacific
• US West Coast geographically closer to Asia Pacific
• but US Gulf Coast has a substantial edge in almost every other export factor: 
• relatively easy permitting process for building infrastructure; 
• a greater number of sophisticated refineries with more capacity
• proximity to two of the three largest tight oil basins: Eagle Ford and the Permian
• the Panama Canal serves as an enabler -- it puts the USGC close enough to compete with Mideast sales on the basis of different price formulae
• the author talks about the Panama Canal, saying the same thing RBN Energy has already talked about: the revamped canal will allow transit of all LNG tankers, except the two largest, the Q-Max and the Q-Flex; in other words, the Panama Canal can handle 90% of the world's LNG fleet
• the canal's expansion will be finished in 2017; already talking about further expansion

Section J: Export Opportunities  

• lower growth
• light-ends focus
• Panama Canal changes everything
• powered by the shale revolution -- and an easing of export regulations -- NGL producers responded quickly to marketing in Asia

Section K: Linked Lines of Query

• overall demand growth; changes in sector use
• deregulation and retain subsidies; impact of mid-distillate demand growth
• for Asia Pacific, it's all about naphtha; Asia is structurally depended on naphtha imports
• price deregulation has accelerated the use of light product over middle distillates; most fully achieved in Indonesia; to a lesser extent in Thailand, Malaysia, and Vietnam; we will know more about India by the end of the year; Asia Pacific is switching from diesel to gasoline; naphtha will dominate the petrochemical feedstock supply but naphtha is also required as the basestock for gasoline manufacturing
• future comparative growth rates
• impact of product quality in maturing Asian economies

Chapter 2. Asia Pacific Demand Gowth: Demand Growth by Sector

A. Asia Pacific

1. Basic Parameters of Demand 

2. Demand Trends by Product & Sector: this is a very, very interesting section; the author talks about a breakout point, "when expanding middle class incomes all for the possibility of acquiring private transport." This has recently been discussed on the blog. A reader personally noted this in India. 

B. Developing Asia

1. China: section on gasoline demand is very, very interesting

2. India: 

3. Indonesia:

C. NIC/Near-NIC Asia

1. Taiwan

2. Singapore

3. Hong Kong -- China, Special Administrative Region (SAR)

D. OECD Asia Pacific

1. Japan

2. South Korea

Chapter 3. Recent Developments in Middle-Distillate Retail Price Subsidies

A. China

1. EIA viewpoint

2. Managed float; indirect subsidies?

3. The 2013 reforms

4. Free market fears

5. Lagging prices; refinery investment

6. Guaranteed margins; pass-on

7. Consumption taxes/value added tax (VAT)

8. Last word

B. India

1. Gas oil / diesel vs gasoline subsidies

2. The burden

3. A look at LPG

4. Kerosene corundum (sic)

5. Taxes

C. Indonesia

1. Subsidy reform

2. The reform program

3. Pending reforms

D. Survey of other major gas oil / diesel market countries

1. Malaysia

2. Thailand

Chapter 4. Asia Pacific: Comparing Light-Ends and Middle Distillate Growth

A. Analysis Drivers -- Light-End Products

1. LPG

2. Gasoline

3. Naphtha

B. Analysis Drivers -- Mid-Barrel Products

1. Kerosene

2. Gas oil / ADO

C. Forecast/Outlook - By sector: Demand Giants vs West

1. Sector focus on transport and petrochemicals

2. Comparison of Growth Rates in OECD vs NIC/Near NIC vs Developing Asia Giants

3. What prospects should US exporters watch for?

Chapter 5. Product Quality Premiums

A. The Nature of tightening product specifications: One-directional, progressively cumulative, and irreversible 

B. Product premiums yet to justify high-cost, high-quality investment -- why?

1. Quality and refining

2. Quality and gas-to-liquids (GTL) plants

C. How long will it take for maturing developing Asia quality standards to catch up with OECD and NIC levels?

D. What marketing parameters should US exporters follow in selling products based on quality?

Chapter 6. Conclusions