Tuesday, August 12, 2014

Oil In the News

A few interesting tidbits from the last few days:

First, from Saturday's links, Making Sense of the US Oil Story:

If we believe the stories, the US is now the largest producer of oil liquids in the world. In fact, it has been the largest producer since the fourth quarter of 2012.
One of the issues is that a few years ago, the US created a new oil-related grouping, combining valuable products with much less valuable (lower energy content, less dense) products. Using this new grouping, the US was able to show much improved growth in total “oil” supply. The US EIA now calls the grouping “Total Oil Supply.” I refer to it as “Total Liquids,” a name I find more descriptive. Besides “crude and condensate,” the mixture includes “other liquids,” “natural gas plant liquids,” and “refinery expansion.”
“Crude and condensate” is the original grouping. Often, it is just referred to as “crude oil.”
“Other liquids” is primarily ethanol from corn. If we produced coal-to-liquids, it would be in this category as well.
Natural gas plant liquids (NGPL) are the liquids that condense out of natural gas when they are chilled and compressed in the natural gas processing plant.

Refinery expansion occurs when a refinery breaks long chain hydrocarbons into shorter ones. The resulting products take up more volume, but don’t really have more energy content. In some ways, the process is like making whipped cream out of whipping cream–more volume, but not really more product. The new products tend to be more valuable–say, diesel and lubricating oil made from something close to asphalt.
The process of breaking (cracking) long hydrocarbon chains is a valuable service to those producing heavy oils, because it makes valuable products from crude that otherwise would not have been useful for most purposes. The cracking process uses natural gas. Because natural gas in the US is inexpensive relative to its price in most other countries, the US can perform this process more cheaply than other countries. Because of this, it makes financial sense for the US to import heavy crude oil and process it in this way, whether or not US citizens can afford to buy the finished products. (Cracking is not useful on very light oil, such as Bakken oil, since it has primarily short chains to begin with.) If US citizens can’t afford the finished products, they are exported to others.
Whether or not the US should be credited with this expansion of volume is somewhat “iffy,” since the process doesn’t add energy content. Quite a bit of the oil processed in this way uses imported oil, such as oil from the Canadian oil sands.
If we look at the base figure reported by the US Energy Administration, that is, “Crude and Condensate”(Figure 2), the US does not come out as well in original comparison (Figure 1).

The latest data shows that “tight oil” production has jumped to 3.7m barrels a day (b/d) from half a million in 2009. The Bakken field in North Dakota alone pumped 1m b/d in May, equivalent to Libya’s historic levels of supply. Shale gas output has risen from three billion cubic feet to 35 billion in just seven years. The EIA said America will increase its lead as the world’s largest producer of oil and gas combined this year, far ahead of Russia or Saudi Arabia.
However, the administration warned in May that “continued declines in cash flow, particularly in the face of rising debt levels, could challenge future exploration and development”. It said that upstream costs of exploring and drilling have been surging, causing companies to raise long-term debt by 9pc in 2012, and 11pc last year.
Upstream costs rose by 12pc a year from 2000 to 2012 due to rising rig rates, deeper water depths, and the costs of seismic technology. This was disguised as China burst onto the world scene and powered crude prices to record highs. Major disruptions in Libya, Iraq, and parts of Africa have since prevented oil from falling much below $100, even though other commodities have been in the doldrums. But even flat prices for three years have exposed how vulnerable the whole oil and gas edifice is becoming.
The major companies are struggling to find viable reserves, forcing them take on ever more leverage to explore in marginal basins, often gambling that much higher prices in the future will come to the rescue. Global output of conventional oil peaked in 2005 despite huge investment.
Steven Kopits from Douglas-Westwood said the productivity of new capital spending has fallen by a factor of five since 2000. “The vast majority of public oil and gas companies require oil prices of over $100 to achieve positive free cash flow under current capex and dividend programmes. Nearly half of the industry needs more than $120,” he said.
Third, from Bloomberg, Oil Rigs Hit Record as Drillers Move Outside Big Basins:
Rigs targeting oil in the U.S. surged to a record as drillers ventured outside the nation’s biggest basins to search for crude in developing plays such as the South-Central Oklahoma Oil Province, known as SCOOP.
Oil rigs jumped by 15 to 1,588 this week, even as the counts in some of the most established basins, including the Permian of Texas and New Mexico, were either unchanged or down, data posted on Baker Hughes Inc. (BHI:US)’s website show. It was the most since Baker Hughes separated the oil and gas rig counts in 1987. Rigs targeting crude outside the major plays jumped by 19 to a record 399, the Houston-based field services company said. The count in Oklahoma rose to the highest level in almost six years.
Drillers are seeking new oil plays as hydraulic fracturing and horizontal drilling help them pull energy deposits out of shale formations across the U.S. The total U.S. rig count has gained by 151 this year as exploration has boomed, raising domestic crude production last month to the highest level in more than a quarter-century.
People are looking for new oil in other areas,” James Williams, president of energy consulting firm WTRG Economics in London, Arkansas, said by telephone today. “The potential of return is good because the price of oil is still high and the cost of leasing outside of the major basins is low. If you can discover oil there and have a fairly large leasehold, the potential returns on your investment are high....”
U.S. oil production climbed 10,000 barrels a day, or 0.1 percent, in the week ended Aug. 1 to 8.45 million, Energy Information Administration data show. Output rose last month to the highest level since 1986.
Oil and gas rigs in Oklahoma gained by two to 211, the highest since Sept. 19, 2008, Baker Hughes data show. The strongest production growth that oil driller Continental Resources Inc. saw in the first quarter came out of SCOOP, Harold Hamm, the Oklahoma City-based company’s chief executive officer, said in a call with analysts Aug. 6.
Finally, at the New Yorker, Oil and Why America is Dropping Bombs to Defend Erbil:
Erbil is the capital of the oil-endowed Kurdish Regional Government, in northern Iraq. There the United States built political alliances and equipped Kurdish peshmerga militias long before the Bush Administration’s invasion of Iraq, in 2003. Since 2003, it has been the most stable place in an unstable country. But last week, well-armed guerrillas loyal to the Islamic State in Iraq and al-Sham, or ISIS, threatened Erbil’s outskirts, forcing Obama’s momentous choice. (The President also ordered air operations to deliver humanitarian aid to tens of thousands of Yazidis and other non-Muslim minorities stranded on remote Mount Sinjar. A secure Kurdistan could provide sanctuary for those survivors.)
“The Kurdish region is functional in the way we would like to see,” Obama explained during a fascinating interview with Thomas Friedman published on Friday. “It is tolerant of other sects and other religions in a way that we would like to see elsewhere. So we do think it is important to make sure that that space is protected.”
All true and convincing, as far as it goes. Kurdistan is indeed one of a handful of reliable allies of the United States in the Middle East these days. Its economy has boomed in recent years, attracting investors from all over and yielding a shiny new international airport and other glistening facilities. Of course, in comparison to, say, Jordan or the United Arab Emirates, Kurdistan has one notable deficit as a staunch American ally: it is not a state. Nor is it a contented partner in the construction of Iraqi national unity, which remains the principal project of the Obama Administration in Iraq. In that light, Obama’s explanation of his casus belli seemed a little incomplete.
Obama’s advisers explained to reporters that Erbil holds an American consulate, and that “thousands” of Americans live there. The city has to be defended, they continued, lest ISIS overrun it and threaten American lives. Fair enough, but why are thousands of Americans in Erbil these days? It is not to take in clean mountain air.
ExxonMobil and Chevron are among the many oil and gas firms large and small drilling in Kurdistan under contracts that compensate the companies for their political risk-taking with unusually favorable terms. (Chevron said last week that it is pulling some expatriates out of Kurdistan; ExxonMobil declined to comment.) With those oil giants have come the usual contractors, the oilfield service companies, the accountants, the construction firms, the trucking firms, and, at the bottom of the economic chain, diverse entrepreneurs digging for a score
Taken separately, the stories each provide an interesting perspective on the oil and gas market.  First, while U.S. production is spiking, a large percentage of it is in non-conventional oil equivalents, like ethanol, natural gas liquids, and refinery gains from imported heavy, sour oil.  Second, the easy and cheap oil is no longer available, and oil companies are spending much more to maintain and slightly increase production.  Third, drillers are utilizing more rigs, and are moving away from the best shale oil basins in search of the next big (albeit, most likely smaller) thing.  Finally, foreign policy pays a lot of attention to oil resources and oil companies' interests in those resources.

Putting all of these stories together, it is hard to accept the oil optimists' claims that technological advances will protect our oil-intensive lifestyle indefinitely. It appears more likely that after the production in the major shale plays peak, we're going to see sharply higher oil prices.  Thus, the squeeze on the middle class in the United States will continue to tighten.  Massive changes in the U.S. economy can be traced back to the peak in U.S. conventional crude oil production in 1971.  I anticipate that developing world demand increases, combined with higher production costs and diminishing production gains will continue to strain our economy.  I agree with the peak oil crowd that our energy-intensive lifestyle is unsustainable, and anticipate years of economic stagnation as we deal with the painful changes that will be required of us to live in the post-cheap energy era.

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