mfioretti: shale oil*

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  1. The so-called US shale oil revolution got stuck in 2015. The longer oil prices remain low, the more the 2015 peak will establish itself. There are no free-bees here. Pay less for oil and you will get less oil.
    http://crudeoilpeak.info/us-shale-oil-peak-in-2015
    Tags: , , by M. Fioretti (2016-04-13)
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  2. Before the global financial crisis, a rise in raw-materials prices used to be bad news for the economy and stocks in general. Since central bank easy-money policies took off, that's become a thing of the past.

    One possible explanation is the level of exposure that banks and investors have to the industry. The 5,000 biggest publicly traded companies tracked by Bloomberg in the iron and steel, metals and mining, and energy sectors have a combined $3.6 trillion in debt, according to their most recent financial reports, double what they had at the end of 2008.
    Gushing IOUs

    Much of the increase is due to money that was borrowed to dig mines and wells whose output, at previous prices, would have easily repaid most maturing bonds and loans. But as commodity prices have tumbled, so has the ability of companies to meet their obligations. The Bloomberg Commodity Index is still only 3.9 percent higher than a 25-year low hit on Jan. 20.

    Five years ago, those companies tracked by Bloomberg had more operating income than debt, on average. Now, it would take them more than eight years' worth of current earnings, without provisioning for interest, taxes, depreciation or amortization, to clear their combined net obligations.

    It's unclear where the other portion of the $3.6 trillion in liabilities lies but probably, most of it is owed to banks. If the remaining $1.5 trillion is indeed on the balance sheets of financial institutions, that would represent about 1.5 percent of the total assets of all the world's publicly traded banks. That doesn't seem very significant, or any cause for concern. But to put it in some context, U.S. subprime mortgages represented less than 1 percent of listed banks' assets at the end of 2007.
    http://www.bloomberg.com/gadfly/artic...ve-built-a-3-6-trillion-debt-mountain
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  3. Within a few years the current low prices may be just a memory, as society struggles with escalating prices that do not readily produce a resulting demand response. If David Hughes is correct in his assessment that the shale oil plays will peak quickly and rapidly decline in production due to fast depletion rates and limited “sweet spots” v » , there may be actual declines in production well into a period of rising prices. The result may be an economic recession that reduces demand just as the new supply start to come on stream, producing another price overshoot to the downside. The impact of such price volatility, repeated oil business failures (as well as individual career failures), and the resulting investment losses and bad load write-offs, will reduce even more the readiness to finance new oil investments. If the recession had a significant impact upon the financial system (e.g. bank failures), the ability to finance new oil investments may be even more constrained. I will cover the possibility of an oil industry/financial system positive feedback loop in a future post.
    http://www.humanitystest.com/the-hog-cycle-and-oil-prices
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  4. In 2013 the growing production curve intersects with the declining import curve at around 7.5 mb/d i.e. a production/import ratio 50:50. Since then production grew another 2 mb/d but has peaked in April 2015 because of low oil prices which hit the shale oil industry. Imports did not continue to decline but remained basically flat.

    Contrary to general belief, and mis-information by the media the US is far away from being “energy independent” in terms of crude oil imports. Maybe some may find the above analysis statistical hair-splitting but the narrative of US energy independence has shaped public opinion to such an extent that prudence has given way to complacency. There is a danger that wrong geo-strategic views are formed, especially in the context of evolving and worsening conflicts in the Middle East.
    http://crudeoilpeak.info/the-myth-of-us-self-sufficiency-in-crude-oil
    Tags: , , by M. Fioretti (2016-01-26)
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  5. My own pick might be a story that passed largely unnoticed in our American world. Sitting atop some of the planet's great oil reserves and getting 73% of their revenues from oil sales (income that dropped by 23% last year), the Saudi royals just hiked the domestic price of gas at the pump by 40%. Though it still remains dirt cheap by global standards, that act -- which is like charging for salt water in the middle of the ocean -- is an indication that something startling is going on. And note that, in the years to come, that kingdom's rulers are planning to cut back on similar subsidies for “electricity, water, diesel, and kerosene.” In other words, the world’s largest oil producer and a country of striking wealth (and foreign reserves) no longer feels comfortable giving away gas to its own population, even though this is part of a bargain it struck long ago for peace in the kingdom.

    And the reason for this has little to do with Iran or Syria or Yemen or Iraq or the Islamic State. The problem is far more basic, as TomDispatch’s resident energy expert Michael Klare points out today. It’s the price of oil, which in the last 18 months has dropped through the floor. In a sense, the oil business -- with its constellation of giant energy firms, until recently among the most profitable companies in history, and its energy-producing states, until recently riding high -- may prove to be the natural-resource equivalent of a failed state, and, as Klare makes clear, the changing economics of oil will transform the political face of the planet. So keep your eye on Saudi Arabia. Things there could get ugly indeed.

    As of this moment, however, Brent crude is selling at $33 per barrel, one-third of its price 18 months ago and way below the break-even price for most unconventional “tough oil” endeavors. Worse yet, in one scenario recently offered by the International Energy Agency (IEA), prices might not again reach the $50 to $60 range until the 2020s, or make it back to $85 until 2040. Think of this as the energy equivalent of a monster earthquake -- a pricequake -- that will doom not just many “tough oil” projects now underway but some of the over-extended companies (and governments) that own them.

    Brent prices rose to stratospheric levels, reaching a record $143 per barrel in July 2008. With the failure of Lehman Brothers on September 15th of that year and the ensuing global economic meltdown, demand for oil evaporated, driving prices down to $34 that December.

    With factories idle and millions unemployed, most analysts assumed that prices would remain low for some time to come. So imagine the surprise in the oil business when, in October 2009, Brent crude rose to $77 per barrel. Barely more than two years later, in February 2011, it again crossed the $100 threshold, where it generally remained until June 2014.

    Several factors account for this price recovery, none more important than what was happening in China, where the authorities decided to stimulate the economy by investing heavily in infrastructure, especially roads, bridges, and highways. Add in soaring automobile ownership among that country’s urban middle class and the result was a sharp increase in energy demand.

    in early 2014, when the price pendulum suddenly began swinging in the other direction, as production from unconventional fields in the U.S. and Canada began to make its presence felt in a big way. Domestic U.S. crude production, which had dropped from 7.5 million barrels per day in January 1990 to a mere 5.5 million barrels in January 2010, suddenly headed upwards, reaching a stunning 9.6 million barrels in July 2015. Virtually all the added oil came from newly exploited shale formations in North Dakota and Texas.

    In mid-2014, these and other factors came together to produce a perfect storm of price suppression. At that time, many analysts believed that the Saudis and their allies in the Organization of the Petroleum Exporting Countries (OPEC) would, as in the past, respond by reining in production to bolster prices. However, on November 27, 2014 -- Thanksgiving Day -- OPEC confounded those expectations, voting to maintain the output quotas of its member states. The next day, the price of crude plunged by $4 and the rest is history.

    Aside from the continuing economic slowdown in China and the surge of output in North America, the most significant factor in the unpromising oil outlook, which now extends bleakly into 2016 and beyond, is the steadfast Saudi resistance to any proposals to curtail their production or OPEC’s.

    Many reasons have been given for the Saudis’ resistance to production cutbacks, including a desire to punish Iran and Russia for their support of the Assad regime in Syria.

    In the view of many industry analysts, the Saudis see themselves as better positioned than their rivals for weathering a long-term price decline because of their lower costs of production and their large cushion of foreign reserves. The most likely explanation, though, and the one advanced by the Saudis themselves is that they are seeking to maintain a price environment in which U.S. shale producers and other tough-oil operators will be driven out of the market.

    Only three developments could conceivably alter the present low-price environment for oil: a Middle Eastern war that took out one or more of the major energy suppliers; a Saudi decision to constrain production in order to boost prices; or an unexpected global surge in demand.
    http://www.tomdispatch.com/blog/17608...e%2C_the_look_of_a_badly_oiled_planet
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  6. By 2009 a huge amount of money had been spent on oil and gas leases, especially in Pennsylvania. To protect this billion-dollar investment, the shale gas boom continued independently of falling prices. The effect was that gas prices decoupled from oil in January 2009 and stabilized at about $3.5 per thousand cubic feet – compared with a peak of just under $13 – whereas oil started to recover and returned to the $80 a barrel range in 2010, within 12 months of its crisis low of under $40.

    By then, the oil and gas rush was back on. The Marcellus surpassed its pre-collapse peak rig count by April 2009, while the Bakken surged beyond its previous peak a year later. Both plays arrived at their maximum rig counts, the peak of the boom, about a year apart in 2011 and 2012, respectively.

    At that point, however, the market realities finally caught up with energy producers. For the Marcellus gas boom, the rig count slipped downward by about 50% by the end of 2012 because of lower prices. The same downward adjustment of rigs in the Bakken is presently taking place, driven by last year’s sharp drop in oil prices. As measured by rig counts, both booms ended without any help from OPEC.

    Despite a production slowdown in early 2015, oil in the Bakken is not going away. To date, the Bakken has yielded 1.2 billion barrels, and the US Geological Survey estimates there is another 7.4 billion barrels of recoverable oil.

    To keep US oil in the ground and out of markets, OPEC has to produce and sell its commodity at bargain basement prices. One wonders if this is the wisest long-term policy for OPEC.

    The boom as measured by rig count may be over for both US gas and oil but the resource is still there. The abundance of US gas and oil will continue to be a threat to OPEC at all but rock bottom prices and OPEC, countries with an economy based on one commodity, would suffer as much or more from lower prices than the US industry.
    https://theconversation.com/is-us-oil...onversationedu+%28The+Conversation%29
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  7. The 'death of peak oil' has been much exaggerated, writes Paul Mobbs. Take out high-cost 'unconventional' oil and production peaked ten years ago, and even North America's fracking and tar sands boom has failed to open up new resources both big enough to make good the shortfall, and cheap enough to reward investors. We really do need to be thinking 'beyond petroleum'.

    It wasn't simply the economic failure of fracking (covered in The Ecologist last December) and the subsequent collapse in drilling (covered in January). The news from the USEIA was far more grim for those who understood its deeper meaning. Their press release was very matter-of-fact:

    "EIA's most recent Drilling Productivity Report (DPR) indicates a change in the crude oil production growth patterns in three key oil producing regions... The DPR estimates include the first projected declines in crude oil production in these regions since publication of the DPR began in October 2013."

    In the shale oil producing areas of Eagle Ford, Niobrara, and the Bakken, production had reached a peak and was beginning to decline. What the USEIA is not clear about is whether this is the result of recent economics, or some longer-term trend.

    This message was echoed a few weeks later in the Post Carbon Institutes's new analysis of Marcellus shale production, along with a warning about the future prospects:

    "Industry invariably drills its best prospects first, hence the cheapest gas is being exploited now. Infinite faith in technology cannot make up for the realities of geology. These realities are showing up now in the most productive counties."

    .

    'Peak oil' - or the peaks of other resources such as copper or rare metals - is not equivalent to 'running out'. The 'peak' is the point in time when half the available non-renewable reserve has been extracted - somewhere between a half and two-fifths through the lifetime of the resource.

    From that point on it gets progressively harder to maintain production. Supply begins to fall, and both the energy and resources expended to produce a given quantity of the resource begins to increase exponentially over time.

    This effect is the result of the interaction of geology and economics:

    Geology gives a natural distribution of resources - with a few large high-quality deposits, a slightly larger number of middling-quality deposits, and a lot of very small low-quality deposits.
    Economics dictates we use the easiest to exploit and cheapest first, which means we use the biggest, easiest to access ones. Over time what's left gets progressively harder and more expensive to produce as we work through the 'stock' of the resource.


    The difficulty is that when we're talking about essential industrial minerals and energy resources, tight supply and rising prices - like the trends operating across the decade of the 2000s - can destabilise the economy.

    That's very bad for business and our resource-consuming lifestyles.

    In 2008 the crash came. What was worse, the warning signs related to the problems of finite energy supplies, ecological limits and debt were ignored; their message smothered beneath billions of pounds and trillions of dollars of quantitative easing.

    As billions poured into the banks, all the bankers could do in the midst of a recession was to lend to the few large industrial investment projects which were under-way - such as 'fracking' in the USA, or the housing market in Britain.

    The quiet reality of North American oil

    Canada produces a lot of conventional and unconventional oil - a large proportion of which gets sent to the USA. This fact is used as a positive message by the tar sands lobby to promote their industry.

    What that message misses is that the whole of the continent of North American acts as a single market - in part due to NAFTA.

    Mexico used to supply a lot of oil to the USA too, but production in the Cantarell field peaked in 2003 and is now in decline. For the last few years all that those increases in Canadian production have done is to roughly keep pace with the decline of Mexico's production.

    In the USA, yes they've produced a lot of new oil and gas from shale. What's equally significant is that, as a result of the economic downturn, they're also consuming 10% less oil than they were before the crash.

    Within the North American energy system, the impacts of the US economic recession on consumption is every bit as important as all those fracking rigs. In the global context too, the recent Chinese economic slowdown is a major factor in OPEC having the ability to floor the price of oil, thereby curtailing unconventional sources of oil.

    The figures are clear - we've peaked!

    If we take the data from the BP Annual Statistical Review for 2014, global oil supply was higher than in any other previous year. Peak oil averted? - arguably not.

    BP's figures include fracked shale oil, Canadian tar sands, and natural gas liquids from unconventional gas production. As outlined recently by the USEIA and Post Carbon Institute, shale oil is beginning to hit the limits of production. In Canada too, production is being constrained by a lack of new investment due to currently low prices.

    The other major factor is that, even amongst conventional producers, all is not rosy. Six nations produce half the worlds oil, three of which have peaked conventional production; 14 produce 75%, six of which are arguably past their conventional oil peak.

    For the last decade fracking and tar sands have produced enough oil to influence the global figure - but only by a few percent. Strip out that few percent of unconventional oil (let's ignore the gas liquids for now) and that small buffer evaporates.

    Once shale production falls significantly, or Mexico or another key producer begins to hit the steeper part of their depletion curve, or just a few more oil producers reach their peak, production will fall more steeply - portending yet another global energy, then economic crisis.

    The data on this and other ecological issues indicates that the core of neoliberal theory - of continual growth, technological progress and monetary wealth creation - is fatally flawed.
    http://www.theecologist.org/News/news..._heralds_the_arrival_of_peak_oil.html
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  8. Shale debt, falling prices and slack demand has tight oil producers in trouble. And yet, there is still burgeoning production. Why? Well, we’ve seen this before. It’s the shale debt redux. Operators did it a few years ago in natural gas and prices have yet to recover. Unfortunately cheap money in the form of debt can mean poor investment choices for businesses and for investors. But it can also lead to an aberrant market because operators deep in debt won’t curtail production even though it is glutted. Debt coupons simply have to be met.

    The shale revolution has always been funded by massive debt. Operators who were drilling for gas back in 2009-2011 used debt extensively. And just like now, they overproduced. By 2011, supply exceeded demand by four times. Then prices tanked. It is curious that so few asked the questions: why did they produce so heavily and glut the market; and why did they continue to produce into a glutted market? The answer is really quite simple. Many couldn’t afford to pull back production to help stabilize prices. Had they done so, they would not have been able to meet their debt payments. So they kept pumping…and pumping…and pumping.

    And now they’ve done it again.

    Much of the debt issued by shale operators has been high yield or what is commonly referred to as junk. According to the Wall Street Journal:

    “Junk bonds have financed the U.S. shale boom, and now the sharp drop in oil prices could lead to a massive wave of defaults on that high-yield debt.”

    JP Morgan Chase estimates that as much as 40% of this junk debt may be defaulted on by shale companies in the next two years if prices stay below $65/bbl. Yeah, you read that right…40%! Prices are currently trading around $45/bbl and operators are still pumping huge amounts of crude into the market so a $20/bbl price rise would seem unlikely.

    This picture is complicated enormously by the overwhelming need for cash by shale operators. Energy was the fastest growing sector of junk debt in 2014 and is the largest chunk of the high yield market.
    http://energypolicyforum.com/2015/03/23/the-shale-debt-redux
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  9. Companies are betting big on forecasts of cheap, plentiful natural gas. Over the next 20 years, US industry and electricity producers are expected to invest hundreds of billions of dollars in new plants that rely on natural gas. And billions more dollars are pouring into the construction of export facilities that will enable the United States to ship liquefied natural gas to Europe, Asia and South America.

    All of those investments are based on the expectation that US gas production will climb for decades, in line with the official forecasts by the US Energy Information Administration (EIA). As agency director Adam Sieminski put it last year: “For natural gas, the EIA has no doubt at all that production can continue to grow all the way out to 2040.”

    But a careful examination of the assumptions behind such bullish forecasts suggests that they may be overly optimistic, in part because the government's predictions rely on coarse-grained studies of major shale formations, or plays. Now, researchers are analysing those formations in much greater detail and are issuing more-conservative forecasts. They calculate that such formations have relatively small 'sweet spots' where it will be profitable to extract gas.

    The results are “bad news”, says Tad Patzek, head of the University of Texas at Austin's department of petroleum and geosystems engineering, and a member of the team that is conducting the in-depth analyses. With companies trying to extract shale gas as fast as possible and export significant quantities, he argues, “we're setting ourselves up for a major fiasco”.
    http://www.nature.com/news/natural-gas-the-fracking-fallacy-1.16430
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  10. For policymakers and the public, the EIA and IEA have been the go-to sources for presumed-to-be objective energy information.

    What's changed is the willingness of private donors to fund independent energy supply research on a scale not previously undertaken outside of government and industry control. The implication is that the world needs more diversity than the two current institutional opinions and the cryptic, self-serving pronouncements of the industry.

    Two recent studies illustrate the point. And, they're not good news for the oil and gas industry. First, there is the study by the Bureau of Economic Geology (BEG) at the University of Texas at Austin. On the surface the bureau may seem too embedded in the heart of oil country. But, the money for its recent study on the future of U.S. shale natural gas came from the Alfred P. Sloan Foundation and NOT from the industry. The whole purpose has been to provide an independent, unbiased assessment of the future of shale natural gas in the United States.

    The conclusions of that research--which I mentioned in a previous piece--are far more pessimistic about the future of U.S. shale gas than either the EIA or the industry. Those conclusions became an embarrassment for the EIA when the difference came to light in a recent article in the science journal Nature.

    The second example is a study entitled "Drilling Deeper: A Reality Check on U.S. Government Forecasts for a Lasting Tight Oil & Shale Gas Boom" published by the Post Carbon Institute.

    "Drilling Deeper" aligns quite well with the findings of the BEG on U.S. shale natural gas. But, it goes beyond gas to analyze the future of U.S. tight oil derived from deep shale deposits. In doing so "Drilling Deeper" not only utilizes EIA data, but also data from one of the leading data providers to the oil and gas industry, Drillinginfo. That information costs money, and funders are now willing to provide that money.

    Both the EIA and the IEA have generally released similar worldwide forecasts for energy in the past. The IEA has in recent years, however, taken a more activist tack since its charter allows it to talk about climate change as a danger. And, the agency has warned about the lack of investment in energy of all kinds because of the recent drop in oil prices.

    The IEA was the first to declare that conventional oil--that is, easy-to-get, low-sulfur, liquid crude--peaked in 2006. The world is now increasingly living on expensive, hard-to-get unconventional oil under deep ocean waters, in the Arctic and from deposits that aren't even liquid such as the Canadian tar sands. The IEA still claims, however, that given the proper investment, these unconventional sources can meet rising oil demand for at least another two decades.

    The ever so slowly growing divergence between the EIA and IEA and the advent of well-funded independent original research suggest that the day of looking solely to the two governmental energy entities for energy information are over. Both failed to predict constraints on oil production in the last decade and a half, and both now continue--despite their seeming differences--to assume a business-as-usual future when it comes to energy, if not climate change. This is despite the growing evidence and chorus of experts calling such complacency into question.

    Now, those experts are beginning to garner enough financial resources to create in-depth independent, data-driven analyses and disseminate them to a broad audience--one that no longer has to take either the EIA or the IEA at its word.
    http://resourceinsights.blogspot.it/2...alternate-opinions-worlds-energy.html
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