WTI Clawing Its Way Back -- July 11, 2017

Active rigs:

$45.13	7/11/2017	07/11/2016	07/11/2015	07/11/2014	07/11/2013
Active Rigs	57	29	73	190	185

RBN Energy: existing and planned gas pipelines out of the Permian, part 2.

Production of associated natural gas in the Permian’s Midland and Delaware basins is forecasted to continue rising through the early 2020s, challenging existing pipeline takeaway capacity out of the region. There also are limits to how much gas can flow northeast into the Midcontinent and the Upper Midwest — after all, those regions have access to gas from other areas too, including the Rockies, western Canada, the Marcellus/Utica and the Midcon itself. The same holds true for Texas’s Gulf Coast, which has emerged as another battleground for gas producers. Today we continue our series on the ability of existing pipes out of the Permian to move natural gas to market and the enhancements that will be needed to allow Permian production to keep growing.

In Part 1 of our series, we said that the pace of Permian production growth will be influenced by many factors, including the degree to which the market price for crude oil exceeds the play’s breakeven prices and the ability of midstream companies to add incremental pipeline takeaway capacity as that capacity is needed. While the pursuit of crude oil is driving drilling and production activity in the Permian, rapid growth in crude output is being accompanied by large volumes of associated gas and natural gas liquids (NGLs) that also must be dealt with.

Fortunately, the Permian has been a major production area for decades — a lot of crude, gas and NGL pipeline infrastructure is already in place. But, as we’ll get to, it won’t be enough. Part 1 built on our It Was Good Living With You, (W)aha series, which described the hub-and-spoke pipeline networks in West Texas that play critical roles in transporting large volumes of Permian gas to customers as far away as Southern California and Minnesota.

Idle Chatter On The Market -- UNP, Specifically -- July 11, 2017

Disclaimer: this is not an investment site. Do not make any investment, financial, job, travel, or relationship decisions based on what you read here or what you think you have may have possibly read here.

I started investing in 1984 or thereabouts. One of my fondest investments was BNSF (BNI at the time). I have no idea how well I did or how badly I did. But it seemed like a great investment for a number of reasons and I loved investing in BNSF/BNI. Then Warren Buffett bought BNI.

Some years later I started investing in UNP as a replacement for BNI. UNP is another holding that I "enjoy" having in my portfolio. I don't know if it's a great holding or not, but it seems to be doing okay.

I bought more shares yesterday. I see the Dow dropped about a 100 points this morning (sort of a "flash crash") before it recovered a bit. I was curious how UNP did. Currently it is off 0.36%. A third of a percent. 4 cents on a $100 stock.

Out of curiosity I looked at the UNP share price over the past  year. This is quite remarkable:

• recent low, November 1, 2016, just before the election when all the polls showed Hillary winning, one could have bought UNP at $87
• by November 16, 2016, just after Donald Trump elected president, UNP at $100
• since then the high, I believe, has been about $113 -- that's 13% greater than $100

So, we'll see.

I'll never see the money. My investments all go into portfolios that will be passed on to the daughters and granddaughters. I don't know if I will hold UNP "forever." I may sell it tomorrow. I doubt I will buy more simply because I am "over-weighted" in UNP now, as they say on Wall Street.

I sort of like regional monopolies with huge moats.

****************************

Flathead Lake

It's going to take awhile to readjust to living in an urban area again after returning from a week at Lakeside, Montana. I had not been to Flathead Lake for twenty years. It's possible I had been there more recently but I do not recall.

It was a sort of mini-family reunion at the lakeside home our father/mother built back in 1979 during a recession, if not nationally, at least regionally. There is a very limited amount of land available for development on the lake. Dad got "in" early, and he has one of the best lots on the lake. The only ones better are the lots that actually extend to the lake. "Our" house is on a lot that has a small, community grassy area in front of it, and then the lake. The view of the Mission Mountains and the Swan Range is incredible.

There were eight of us out there, all adults, but extending across several generations, from 30-year-old millennials to 65-year-old baby boomers like me.

We subscribed to "vacation" internet. CenturyLink provides internet service on a seasonal basis. We had internet/wi-fi but no television. Looking back, it is interesting that not one person of the eight ever even mentioned television. I take that back: one day we did manage to lift the 8-ton 1950's style television on to the back of the pickup trick to take out to the dump. As far as I know, the set had not been plugged in for years.

Only three of us had laptop computers -- only the men had laptop computers. We were on them for a short time in the morning, and then a very, very short time in the late evening. I was probably on the computer the most, simply because of the blog.

The women, five of them, did not have a laptop among them. One of them did not even have a smart phone or any other mobile device. The others each had a smart phone except for one who had a wi-fi only iPod.

It was incredibly peaceful not having television.

I have a maximum of ten years left of enjoying Flathead Lake. My plans are to go out there at least three times a year -- this year it will only be twice.

If I did not have the responsibility of the granddaughters, I would move out there "permanently." It would be my primary home, but I would spend a significant amount of time in Texas, especially during the winter. It's very possible five years from now when two of the three granddaughters are either in college or high school, and there's only Sophia, I may start extending my stays on the lake.

It's unnerving how addicted I am to the television (when it's available) and how little I miss it when it's not available.

Some Canadian Oil Sands Pipelines At Funding Risk -- Headline -- Bottom Line: Inconsequential In Big Scheme Of Things -- July 11, 2017

From Zacks:

Kinder Morgan, Inc.’s KMI Trans Mountain pipeline expansion may not receive funding from Canadian lender, Desjardins, which cited concerns about the project’s impact on the environment. Desjardins had committed $145 million to Kinder Morgan’s Trans Mountain pipeline expansion.

Desjardins, the largest association of credit unions in North America, is no longer contemplating on funding energy pipelines. Per the sources, on Jul 7, the company temporarily suspended lending for such projects and stated that it could finalize the decision. However, a final statement would be made by the lender in September.

Per sources, Desjardins, a financier of Kinder Morgan Canada Ltd's expansion of Trans Mountain pipeline, has been appraising its policy for such lending for months.

If Desjardins sticks to its decision permanently, the association will stop funding other major Canadian pipeline projects, including TransCanada Corp's Keystone XL, Energy East and Enbridge Inc's ENB Line 3.

Such a move would follow that of Dutch lender ING Groep NV, which has a long-standing policy of not backing projects directly linked to oil sands. It is the latest indication that pipelines could face difficulty while applying for funds as banks face pressure from withdrawals.

Data points:

• Desjardins: largest association of credit unions in North America
• ING Groep NV: Dutch lender -- long-standing policy of not backing projects linked to oil sands
• Desjardins: appears to be taking same stance -- backing away from projects linked to oil sands
• Desjardins: had committed $145 million to KMI's TransMountain pipeline expansion; apparently re-appraising that commitment; decision to be announced September, 2017
• Desjardins decision: if Desjardins sticks to decision permanently, it would not fund -- TransCanada's Keystone XL, Energy East; and, Enbridge's ENB Line 3

That's fine.

********************************

Best State To Start A Business

As soon as I saw Minnesota one place above Texas, I knew the rankings were bogus. The problem: too much weight placed on "education."  Take education off the list of parameters used and Minnesota would be at the bottom of the list. An educated work force is incredibly important but it's not as if Minnesota has a moat around the state when it comes to education. Whatever.

I'm Getting A Headache -- July 11, 2017

Updates

July 15, 2017: This is a great example of a writer suggesting that EVs run on electricity. I said the same thing in the original post. I was surprised no one caught my mistake. EVs do run on electricity, but better said, they run on whatever makes the electricity and right now, for the most part that's natural gas and/or coal. If your EV is running on electricity made by coal, I'm not sure one can say "electricity is ultimately more efficient than gasoline, and the growth of natural gas development and green technologies such as solar and wind have drastically reduced its cost." Running on coal certainly can't be more beneficial than running on natural gas or wind energy, at least according to the Algore crowd, but that's where most of the world's electricity ultimately comes from: coal.

Later, 2:24 p.m. Central Time: see first comment; includes this link. From the linked FT article:

Two of the world’s largest oil companies have hit back against predictions that electric vehicles threaten a collapse in demand for hydrocarbons and warned that global energy security would be at risk if investment is withdrawn from fossil fuels too soon. [See original post for a most ridiculous story.]

Saudi Aramco and Royal Dutch Shell acknowledged that a shift towards renewable energy — including battery-powered cars — was under way but said oil and gas would remain indispensable for decades to come. 

“There seems to be a growing belief that the world can prematurely disengage from proven and reliable energy sources like oil and gas, on the mistaken assumption that alternatives will be rapidly deployed,” Amin Nasser of Saudi Aramco told an energy conference in Istanbul. 

Addressing the same event, Ben van Beurden of Shell said the transition to low-carbon technologies would “take place over generations” rather than as a rapid “revolution”. 

It didn't take much pushback for Ben to start changing his tune. LOL.

Original Post

The headline caught my attention but then when I saw the source, I realized immediately the whole premise would be wrong.

The premise is this: EVs run on solar power. LOL.

Wrong. EVs run on electricity. And unless we are mandated to use the most expensive electricity available, utilities will provide and consumers will use the least expensive electricity, wherever it comes from: solar, wind, ocean waves, nuclear (fission or fusion), oil, natural gas, coal, hydroelectric.

Over at Bloomberg:

Remember peak oil? Demand may top out before supply does. The premise is this: if EVs become the norm, then oil won't be needed any more for transportation.

Patrick Pouyanne, CEO of Total SA, says demand will peak at some point in the 2040s, which is why the French energy giant he runs has been investing in solar power.

Ben van Beurden, CEO of Royal Dutch Shell Plc, has said the zenith could arrive a lot sooner, in the next 15 years or so, if electric cars became really popular.

“The energy transition is unstoppable,” Van Beurden told the St. Petersburg forum in early June. “In the most aggressive scenario, you can see oil already peaking in late 2020s or early 2030s.” In the time scale of the oil industry, where multibillion-dollar projects often take a decade or longer to come to fruition, that’s as close as it gets to saying “the day after tomorrow.”

If such forecasts prove right, oil prices are likely to remain low for a lot longer. That raises the possibility that some hard-to-reach deposits, like those in the Arctic, may never be tapped, turning what today are considered valuable reserves into assets of questionable worth. That worries big institutional investors such as BlackRock Inc. that manage mutual funds composed of energy stocks.

Maybe I'm missing something, but the whole premise seems wrong.

The premise is so wrong, I can't even begin to articulate it in a short post. All things being equal, EVs will increase the demand for energy, not decrease it. Many readers have written to tell me exactly that: EVs are an inefficient way of using energy.

Saudi uses oil to run their air conditioners because oil is so cheap for them. If demand for oil reaches a peak in 2040, long before the supply of oil reaches its peak ... I'm getting a headache.

Look at the cost of new intermittent farms compared to the cost of natural gas plants:

The capacity-weighted cost of installing wind turbines was $1,661 per kilowatt (kW) in 2015, a 12% decrease from 2013…The cost of utility-scale solar photovoltaic generators declined 21% between 2013 and 2015, from $3,705/kW to $2,921/kW…The average cost of natural gas generators installed in 2015 was $696/kW, a 28% decline from 2013…Construction costs alone do not determine the economic attractiveness of a generation technology. 

"Capacity-weighted cost" (I assume) means that the incredibly inefficiencies of wind and solar have been factored into the cost of these things. It's been my impression that folks "factoring" such inefficiencies err widely on the positive side.

Sometimes, the information is lost in translation (obfuscation; cluttered paragraph). Let's parse the indented paragraph into data points:

• wind: $1,661 per kW
• solar: $2,921 per kW
• natural gas: $696 per kW

Folks will argue that wind and solar will get cheaper as technology improves; but apparently, the same folks argue that won't be true for natural gas.

Solar is 5 times more expensive than natural gas (on a "capacity-weight basis"); solar is incredibly unreliable (Ivanpah proved that). 

My headache is getting worse.

The bottom line, if oil is so cheap because supply greatly exceeds demand (in 2040) folks will start burning oil to make electricity. The Saudis already do that.

The argument for EVs shifting gasoline consumption to "something else" works if that "something else" is coal or natural gas. But the gedankenexperiment using a supply-demand graph just doesn't work -- at least for me.

By the way, this is one of the reasons I quit subscribing to Bloomberg and when I find a copy at the library I tend to page through it quickly. Too much nonsense.

Reason #2 Why I Love To Blog -- July 11, 2017 -- One Swallow Does Not A Spring Make; Will We See Another Swallow Next Month? Watch Out For The Black Swan

On July 7, 2017, I wrote:

We'll be off the net for awhile -- traveling. But we leave you with this:

July 7, 2017: oil prices plunge 3% as signs of oversupplied market persist.

The S&P 500 energy index sinks to its lowest level since April 2016, with U.S. crude oil now -2.9% to $44.20/bbl following EIA data that showed continued strength in U.S. oil production in the final week of June just as OPEC exports hit a 2017 high, casting doubt over efforts by producers to curb oversupply.

Ah, yes, OPEC exports hit a 2017 high, "casting doubt over efforts by producers to curb oversupply."

Sort of reminds  me of this once said by a disbarred president: "Fool me once, shame on you; fool me twice, shame on me.

Today, just four days later, over at Bloomberg:

Headline: Saudi Arabia Exceeds Oil-Production Cap for First Time

• June crude output said to rise to 10.07 million barrels a day
• Kingdom, major producers agreed to curb global oil supply

Saudi Arabia told OPEC it pumped 10.07 million barrels a day in June, a person with knowledge of the data said, exceeding its production limit for the first time since brokering a deal to curb global crude supply to counter a glut.

The world’s biggest oil exporter boosted output from 9.88 million barrels a day in May, surpassing the limit of 10.058 million it accepted in an agreement between OPEC and other major suppliers including Russia.

Under the deal reached in December, Saudi Arabia agreed to reduce production by 486,000 barrels a day, the most of any country participating in the cuts. The person with knowledge of the June data asked not to be identified because the information isn’t public.

Normally, an increase in production in the middle of the summer for Saudi Arabia would not be significant: Saudi needs huge amount of oil during the summer to run its citizens' air conditioners. But they agreed to a production cut, and they did not keep to the agreement they brokered.

But even more significant: if their only "sin" was to increase production, one might have overlooked it -- due to the "air conditioner issue" -- but in light of the fact that OPEC overall brought 2017 exports to a new record -- that's the real "sin."

By the way, about a year ago I know I wrote on the blog that I doubted we would ever see a Saudi Aramco IPO launch. I just know I wrote that. But I'll never find it. But I will spend the day looking for that post. LOL. Apparently there's a rumor out there (somewhat sketchy, I will admit) that the IPO may not happen. When I saw that, this is what I wrote in an e-mail (not ready for prime time):


With regard to the Arab IPO: I know I posted on the blog a year ago that I doubted we would ever see the IPO -- not because of price of oil, but because the KING would never go along with selling part of his kingdom AND the KING would never go along with the transparency required. I will now spend the rest of the day looking for that post. LOL. I'll never find it.

I have posted several times that if the price of oil failed to move back toward $60, it was "ever Arab for himself." I just did not expect it this (Saudi Arabia breaking the production cap agreement) so soon.

Perhaps this is a one-off, but one wonders. One swallow does not a spring make. The question is whether we will see another swallow next month. If so, watch out for the black swan.