Half of the 41 fracking companies operating in the U.S. will be dead or sold by year-end because of slashed spending by oil companies, an executive with Weatherford International Plc said.
There could be about 20 companies left that provide hydraulic fracturing services, Rob Fulks, pressure pumping marketing director at Weatherford, said in an interview Wednesday at the IHS CERAWeek conference in Houston. Demand for fracking, a production method that along with horizontal drilling spurred a boom in U.S. oil and natural gas output, has declined as customers leave wells uncompleted because of low prices.
There were 61 fracking service providers in the U.S., the world’s largest market, at the start of last year. Consolidation among bigger players began with Halliburton Co. announcing plans to buy Baker Hughes Inc. in November for $34.6 billion and C&J Energy Services Ltd. buying the pressure-pumping business of Nabors Industries Ltd.
Weatherford, which operates the fifth-largest fracking operation in the U.S., has been forced to cut costs “dramatically” in response to customer demand, Fulks said. The company has been able to negotiate price cuts from the mines that supply sand, which is used to prop open cracks in the rocks that allow hydrocarbons to flow.
Oil companies are cutting more than $100 billion in spending globally after prices fell. Frack pricing is expected to fall as much as 35 percent this year, according to PacWest, a unit of IHS Inc.
While many large private-equity firms are looking at fracking companies to buy, the spread between buyer and seller pricing is still too wide for now, Alex Robart, a principal at PacWest, said in an interview at CERAWeek.
Fulks declined to say whether Weatherford is seeking to acquire other fracking companies or their unused equipment.
“We go by and we see yards are locked up and the doors are closed he said. “It’s not good for equipment to park anything, whether it’s an airplane, a frack pump or a car.”
The oil industry was listening as OPEC talked down crude prices to a more than five-year low.
Drillers, refiners and other merchantsincreased bets on lower prices to the most in three years in the week ended Jan. 6, government data show. Producers idled the most rigs since 1991, with some paying to break leases on drilling equipment.
Companies are hedging more and drilling less amid concern that the biggest slump in prices since 2008 will continue. Oil dropped for a seventh week after officials from Saudi Arabia, the United Arab Emirates andKuwait reiterated they won’t curb output to halt the decline.
“Producers are desperately hedging their production in a drastically falling market,” Phil Flynn, a senior market analyst at the Price Futures Group in Chicago, said by phone Jan. 9. “They’re trying to lock in prices because they are convinced that the market will stay down for a while.”
WTI slid $6.19, or 11 percent, to $47.93 a barrel on the New York Mercantile Exchange on Jan. 6, settling below $50 for the first time since April 2009. Futures for February delivery declined $1.53 to $46.83 in electronic trading at 8:09 a.m. local time.
The Organization of Petroleum Exporting Countries, which pumps about 40 percent of the world’s oil, has stressed a dozen times in the past six weeks that it won’t curb output to halt the rout. The U.A.E. won’t cut production no matter how low prices fall, Yousef Al Otaiba, its ambassador to the U.S., said at a Bloomberg Government lunch in Washington on Jan. 8.
The group decided to maintain its collective quota at 30 million barrels a day at a Nov. 27 meeting in Vienna. Output averaged 30.24 million barrels a day in December, according to a Bloomberg survey.
U.S. crude production was 9.13 million barrels a day in the seven days ended Jan. 2 after reaching 9.14 million three weeks earlier, the highest in weekly Energy Information Administration data since 1983. Stockpiles were 382.4 million barrels as of Jan. 2, a seasonal high.
The nation’s oil boom has been driven by a combination of horizontal drilling and hydraulic fracturing, which have unlocked supplies from shale formations including the Eagle Ford and Permian in Texasand the Bakken in North Dakota. Global oil prices below $40 begin to make wells in such places unprofitable to operate, Wood Mackenzie, an Edinburgh-based consultant, said in a report Jan. 9.
Rigs seeking oil decreased by 61 to 1,421, Baker Hughes Inc. said Jan. 9, extending the five-week decline to 154. It was the largest drop since February 1991, which also followed a slide in prices before the start of the Persian Gulf War.
Helmerich & Payne Inc., the biggest rig operator in the U.S., and Pioneer Energy Services Corp. said last week that they had received early termination notices for rig contracts.
Producers and merchants boosted their net short position by 21 percent, or 17,577 futures and options, to 100,997 in the week ended Jan. 6, according to the Commodity Futures Trading Commission, the most since Jan. 10, 2012.
Hedge funds and other large speculators raised bullish bets by 7 to 199,395 contracts.
“You have this tension and lack of consensus among money managers of what to do with a price under $50,” Tim Evans, an energy analyst at Citi Futures Perspective in New York, said by phone Jan. 9. “People tend to think of money managers as a black box where they all use same strategy and march in lockstep, but this highlights that it’s not really the case.”
Bullish bets on Brent crude rose to the highest level in more than five months, according to ICE Futures Europe exchange.
Net-long positions gained by 24,598 contracts, or 21 percent, to 140,169 lots in the week to Jan. 6, the data show. That’s the highest since July 15.
In other markets, bearish wagers on U.S. ultra-low sulfur diesel decreased 12 percent to 23,789 contracts as the fuel sank 7.6 percent to $1.7262 a gallon.
Net short wagers on U.S. natural gas fell 15 percent to 10,323 contracts. The measure includes an index of four contracts adjusted to futures equivalents: Nymex natural gas futures, Nymex Henry Hub Swap Futures, Nymex ClearPort Henry Hub Penultimate Swaps and the ICE Futures U.S. Henry Hub contract. Nymex natural gas dropped 5 percent to $2.938 per million British thermal units.
Bullish bets on gasoline declined 0.4 percent to 44,050. Futures slumped 6.8 percent to $1.3543 a gallon on Nymex in the reporting period.
Regular gasoline slid 1.3 cents to an average of $2.139 on Jan. 10, the lowest since May 5, 2009, according to Heathrow, Florida-based AAA, the country’s largest motoring group.
The global crude oversupply is 2 million barrels a day, or 6.7 percent of OPEC output, Qatar estimates. Only 1.6 percent of supply would be unprofitable with prices at $40 a barrel, according to Wood Mackenzie.
“If you’re a producer and your cost is below the price in the market, if you hedge it even at depressed prices you can still make money,” Tom Finlon, Jupiter, Florida-based director of Energy Analytics Group LLC, said by phone Jan. 9. “Somebody’s locking in profits even at these low prices.”
Goldman Sees Need for $40 Oil as OPEC Cut Forecast Abandoned
Goldman Sachs said U.S. oil prices need to trade near $40 a barrel in the first half of this year to curb shale investments as it gave up on OPEC cutting output to balance the market.
The bank reduced its forecasts for global benchmark crude prices, predicting inventories will increase over the first half of this year, according to an e-mailed report. Excess storage and tanker capacity suggests the market can run a surplus far longer than it has in the past, said Goldman analysts including Jeffrey Currie in New York.
The U.S. is pumping oil at the fastest pace in more than three decades, helped by a shale boom that’s unlocked supplies from formations including the Eagle Ford in Texas and the Bakken in North Dakota. Prices slumped almost 50 percent last year as the Organization of Petroleum Exporting Countries resisted output cuts even amid a global surplus that Qatar estimates at 2 million barrels a day.
“To keep all capital sidelined and curtail investment in shale until the market has re-balanced, we believe prices need to stay lower for longer,” Goldman said in the report. “The search for a new equilibrium in oil markets continues.”
West Texas Intermediate, the U.S. marker crude, will trade at $41 a barrel and global benchmark Brent at $42 in three months, the bank said. It had previously forecast WTI at $70 and Brent at $80 for the first quarter.
Goldman reduced its six and 12-month WTI predictions to $39 a barrel and $65, from $75 and $80, respectively, while its estimate for Brent for the period were cut to $43 and $70, from $85 and $90, according to the report.
“We forecast that the one-year-ahead WTI swap needs to remain below this $65 a barrel marginal cost, near $55 a barrel for the next year to sideline capital and keep investment low enough to create a physical re-balancing of the market,” the bank said.
Goldman estimates there’s sufficient capacity to store a surplus of 1 million barrels a day of crude for almost a year. It expects the spread between WTI and Brent to widen in the next quarter as discounted U.S. crude prices and “strong margins lead U.S. refineries to export the glut to the other side of the Atlantic.”
The Brent-WTI spread will average $5 a barrel in 2016, according to the bank. The gap was at $1.50 today.
Oil Falls to 5 1/2-Year Low as Russia, Iraq Boost Output
Oil dropped to the lowest since May 2009 amid growing supply from Russia and Iraq and signs of manufacturing weakness in Europe and China.
Futures headed for a sixth weekly loss in New York and London. Oil output in Russia and Iraq surged to the highest level in decades in December, according to data from both countries’ governments. Euro-area factory output expanded less than initially estimated in December. A manufacturing gauge in China, the world’s second-largest oil consumer, fell to the weakest level in 18 months, government data showed yesterday.
Prices slumped 46 percent in New York in 2014, the steepest drop in six years and second-worst since trading began in 1983, as U.S. producers and the Organization of Petroleum Exporting Countries ceded no ground in their battle for market share. OPEC pumped above its quota for a seventh month in December even as U.S. output expanded to the highest in more than three decades, according to data compiled by Bloomberg.
“We’re seeing more of the same,” John Kilduff, a partner at Again Capital LLC, a New York-based hedge fund that focuses on energy, said by phone. “The Chinese and European PMI figures signal weaker demand, while there’s ever-increasing supply. Nobody is cutting back on output and now the Russians are posting post-Soviet production highs.”
Brent for February settlement fell 53 cents, or 0.9 percent, to $56.80 a barrel on the London-based ICE Futures Europe exchange at 11:31 a.m. It declined to $55.48, the lowest since May 7, 2009. Volume for all futures traded was 30 percent below the 100-day average. The European benchmark slumped 48 percent last year, the second-biggest annual loss on record behind a 51 percent tumble in the 2008 financial crisis. Brent traded at of $3.24 premium to WTI.
West Texas Intermediate for February delivery rose 32 cents, or 0.6 percent, to $53.59 a barrel on the New York Mercantile Exchange after dropping to $52.03, the least since May 1, 2009. Volume for all futures traded was 34 percent below the 100-day average. Prices are down 3.2 percent this week.
The surge in oil supplies in Iraq and Russia signaled no respite in early 2015 from the glut that’s pushed crude prices lower. The two countries provided 15 percent of world oil supply in November, according to the International Energy Agency.
Russian oil output rose 0.3 percent in December to a post-Soviet record of 10.667 million barrels a day, according to preliminary data e-mailed today by CDU-TEK, part of the Energy Ministry. Iraq exported 2.94 million barrels a day in December, the most since the 1980s, Oil Ministry spokesmanAsim Jihad said.
The final two burning crude-storage tanks were extinguished at Es Sider, Libya’s biggest oil port, National Oil Corp. spokesman Mohammed Elharari said by phone from Tripoli. The fires started Dec. 25, when Islamist militants shot rockets at the port in a second attempt to capture it.
OPEC’s production slid by 122,000 barrels a day from November to 30.24 million last month, led by losses in Saudi Arabia, Libya and the United Arab Emirates, a Bloomberg survey of companies, producers and analysts shows. The 12-member group has a collective target of 30 million a day.
U.S. oil production averaged 9.12 million barrels a day in the week ended Dec. 26, according to the Energy Information Administration. Output increased to 9.14 million a day through Dec. 12, the most in weekly data that started in January 1983.
Inventories of gasoline surged in the week ended Dec. 26 as production climbed to a record, EIA data showed.
Gasoline futures declined 3.14 cents, or 2.1 percent, to $1.4407 a gallon in New York. Diesel decreased 3.18 cents, or 1.7 percent, to $1.8018.
Regular gasoline at U.S. pumps fell to the lowest level since May 2010. The average retail price slipped 0.9 cent to $2.231 a gallon yesterday, according to Heathrow, Florida-based AAA, the nation’s biggest motoring group.
Sector will respond to the lower commodity price but their share price will decline – example;
NEW YORK (MarketWatch) — Linn Energy LLC LINE, +15.20% said Friday it has approved a 2015 budget that cuts oil and natural gas capital spending to $730 million from about $1.55 billion in 2014, the latest company to respond to the recent slide in crude oil prices. “After careful consideration, LINN’s senior management proposed and the Board of Directors approved a 2015 budget that contemplates a significantly lower current crude oil price than in 2014,” Chief Executive Mark Ellis said in a statement. The budget assumes an unhedged NYMEX price of $60 a barrel. The company is cutting its annual dividend to $1.25 a share from $2.90, he said. Linn Energy has signed a non-binding letter of intent with GSO Capital Partners LP, the credit arm of The Blackstone Group LP BX, +0.56% to fund oil and gas development. GSO has agreed to commit up to $500 million to fund drilling programs. Shares were down 6.2% in premarket trade.
Blackstone’s $70 billion credit arm, GSO Capital Partners, committed as much as $500 million to fund oil and natural gas development for Linn Energy LLC (LINE), according to a statement today. The Houston-based energy producer rose as much as 18 percent after the announcement, after losing almost 70 percent of its value in six months as crude prices plummeted.
Private equity firms, while taking steps to shore up energy companies in their portfolios, are hunting for investments in oil and gas producers after Brent tumbled more than 50 percent since June. Energy presents the best opportunity for Blackstone in many years, especially for the New York-based firm’s credit unit, Schwarzman said at a Dec. 11 conference.
“There are a lot of people who borrowed a lot of money based on higher price levels, and they’re going to need more capital,” he said at the conference in New York. “There are going to be restructurings to do. There’s going to be a fallout. It’s going to be one of the best opportunities we’ve had in many, many years.”
Under the five-year agreement with Linn, Blackstone would fund drilling programs at locations selected by Linn for an 85 percent working interest in the wells, according to the statement. If the projects produce a 15 percent annualized return for Blackstone, its stake will drop to 5 percent.
The plunge in oil may usher in a new era for investing in distressed debt, according to Howard Marks, the billionaire co-founder of Oaktree Capital Group LLC. In a letter to clients last month, Marks said his Los Angeles-based firm is becoming more aggressive as companies that borrowed heavily in the low-interest rate environment now come under pressure.
“We knew great buying opportunities wouldn’t arrive until a negative ‘igniter’ caused the tide to go out, exposing the debt’s weaknesses,” Marks wrote. “The current oil crisis is an example of something with the potential to grow into that role.”
Linn, a master-limited partnership, is the latest producer to cut spending on expectations of lower oil and gas prices. The company said today it expects oil to average $60 a barrel in 2015, although it has hedged about 70 percent of its expected output at higher prices. Brent fell 1.9 percent to $56.23 a barrel at 2:38 p.m. in New York.
The agreement with Blackstone, which is non-binding, is “designed to allow Linn to be an active developer of assets with growth capital,” Mark Ellis, Linn’s chief executive officer, said in the statement. “This agreement creates a dynamic alliance.”
The company’s shares rose 13 percent to $11.44 at 2:47 p.m. in New York.
Please see our recent articles published this week on 2015 Energy Sector Forecasts ( archived)
Founded in 2004, Teekay LNG Parters (TGP) is the third
largest independent owner of LNG carriers. TGP was
organized as a publicly-traded master limited partnership by
Teekay Corporation (TK) as part of its strategy to expand its
LNG and LPG shipping sectors. TGP provides seaborne
transportation of LNG, LPG and crude oil under long-term,
fixed-rate time charter contracts.
All amounts in US$ unless otherwise noted.
Energy — Maritime TEEKAY IS A-OK Investment recommendation
We are initiating coverage of Teekay LNG Partners (TGP) with a BUY
rating and a $46 price target. Teekay’s strategy of growing organically
primarily through joint ventures with vessels fixed to long-term
contracts is ideally suited to the nature of the LNG business. Investment highlights
Substantial long-term charter coverage leads to cash flow visibility:
Teekay’s LNG fleet has substantial charter coverage, with an
average remaining contract length of 14 years. Long-term charter
coverage is critical for shipping MLPs in order to provide stability to
cash flows and maintain the safety of the distribution.
Organic growth should drive distribution increases: With 15 LNG
vessels and 10 LPG vessels expected to be delivered through 2020,
Teekay LNG already has significant built-in growth. We expect a 6%
net income per distribution CAGR through our forecast period
(2017). The company’s growth profile is heavily weighted to 2017+,
which is when we expect the LNG market to be most robust.
Leader in developing new technologies: The company was a leader
in developing LNG vessels with the new MEGI engine, which
provides substantial fuel savings to charters. While this is one of the
rare cases where ships were ordered by Teekay without charters
attached, the gamble paid off as five of the remaining vessels
(including options) were recently chartered to Shell for 6-8 years. Valuation
Our $46 price target is based on dividend discount model using a 9%
discount rate and 3% distribution growth rate. Risks
Geopolitical risks may hinder LNG projects in Russia from coming
online, and delays/cancellations of planned LNG export terminals in
North America and elsewhere may negatively impact fundamentals.
Getty ImagesAn engineer walks in the Barjisiya oil fields in Iraq. Bank of America says the OPEC cartel is dead and free markets now control the global cost of oil.
The OPEC oil cartel no longer exists in any meaningful sense and crude prices will slump to $50 a barrel over coming months as market forces shake out the weakest producers, Bank of America has warned.
Revolutionary changes sweeping the world’s energy industry will drive down the price of liquefied natural gas (LNG), creating a “multi-year” glut and a much cheaper source for Europe’s gas needs.
Francisco Blanch, the bank’s commodity chief, said OPEC is “effectively dissolved” after it failed to stabilize prices at its last meeting. “The consequences are profound and long-lasting,” he added.
The free market will now set the global cost of oil, leading to a new era of wild price swings and disorderly trading that benefits only Middle East petro-states with the deepest pockets, such as Saudi Arabia.
BoA said in its year-end report that at least 15 per cent of US shale producers are losing money at current prices, and more than half will be under water if US crude falls below $55. The high-cost producers in the Permian basin will be the first to “feel the pain” and may have to cut back on production soon.
The claims pit BoA against its arch-rival Citigroup, which claims the US shale industry is far more resilient than widely supposed, with marginal costs for existing rigs nearer $40, and much of its output hedged on the futures markets.
BoA said the current slump will choke off shale projects in Argentina and Mexico, and force retrenchment in Canadian oil sands and some of Russia’s remote fields. The major oil companies will have to cut back on projects with a break-even cost below $80 for Brent crude.
It will take six months or so to whittle away the 1 million barrels a day of excess oil on the market — with Brent falling below $60 and US crude reaching $50 — given that supply and demand are both “inelastic” in the short-run. That will create the start of the next shortage.
“We expect a pretty sharp rebound to the high $80s or even $90 in the second half of next year,” said Sabine Schels, the bank’s energy expert.
We expect a pretty sharp rebound to the high $80s or even $90 in the second half of next year
Ms. Schels said the global market for LNG will “change drastically” in 2015, going into a “bear market” lasting years as a surge of supply from Australia compounds the global effects of the US gas saga.
If the forecast is correct, the LNG flood could have powerful political effects, giving Europe a source of mass supply that can undercut pipeline gas from Russia. The EU already has enough LNG terminals to cover most of its gas needs but has not been able to use this asset as a geostrategic bargaining chip with the Kremlin because LNG has been in scarce supply, mostly diverted to Japan and Korea. Much of Europe may not need Russian gas within a couple of years.
BoA said the oil price crash is worth $1-trillion of stimulus for the global economy, equal to a $730-billion “tax cut” in 2015. Yet the effects are complex, with winners and losers and diminishing benefits the further it falls. Academic studies suggest that oil crashes can turn negative if they trigger systemic financial crises in commodity states.
Barnaby Martin, BoA’s European credit chief, said world asset markets may face a rough patch as the U.S. Federal Reserve starts to tighten afters year of largesse.
He flagged warnings by William Dudley, head of the New York Fed, that US authorities tightened too gently in 2004 and might do better to adopt the strategy of 1994, when they raised rates fast and hard, sending tremors through global bond markets.
BoA said quantitative easing in Europe and Japan will cover just 35 per cent of the global stimulus lost as the Fed pulls back, creating a treacherous hiatus for markets. It warned that the full effect of Fed tapering had yet to be felt. From now on the markets cannot be expected to be rescued every time there is a squall.
What is clear is that the world has become addicted to central bank stimulus. BoA said 56 per cent of global GDP is supported by zero interest rates, and so are 83 per cent of the free-floating equities on global bourses. Half of all government bonds in the world yield less than 1 per cent. Roughly 1.4 billion people are experiencing negative rates in one form or another.
These are astonishing figures, evidence of a 1930s-style depression, albeit one that is still contained. Nobody knows what will happen as the Fed tries break out of the stimulus trap, including Fed officials themselves.
English: Revenue stamp (2pi) for financing the construction of Hejaz Railway in the Ottoman Empire. Listed as No. 17a in W. McDonald’s Revenues of Ottoman Empire and Republic of Turkey. See also Ottoman Turkish Empire Revenue Stamps of the Hejaz Railway by Steve Jaques, Troy, 2009, pp.22 (Photo credit: Wikipedia)
Shares of Westport Innovations jumped after the company reported their Q2/12 results. For the quarter, the
company reported consolidated revenues of $106.1 million compared with $44.9 million for the same period last year, an
increase of 136.3%.
Earnings were reported at a net loss of $6.1 million ($0.11 loss per share) compared with a net loss of $18.1
million ($0.38 loss per share) for the same period last year.
Breaking down its segments, WPT reported Westport Light-Duty (LD) revenue, which where up 182.2% to $30.7 million, Cummins Westport (CWI) revenue jumped 78.5% to $57.0 million with 1972 engines shipped, and Westport Heavy-Duty (HD) revenue was up 111.3% to $4.3 million with 75 systems shipped.
Service and other revenue was reported at $14.1 million.
CEO David Demers commented, “Key segments of the transport market have begun the inevitable shift from petroleum based fuel to engines powered by cleaner burning, low cost methane (natural gas), and Westport has a substantial presence in each market.” Demers also noted, “We are seeing strong growth in all segments and in all of our global markets, and despite challenging macroeconomic conditions, we expect this to accelerate as new infrastructure comes on stream over the next two years and as we launch new products, opening up significant new
The AMP WOULD NOT INVEST on the basis of the Cat deal – five years hence. Still the Motley Fool choice is a long term prospect for the nat gas vehicle play. Other opportunities exist for the here and now of the market recovery we predict.
Shares of Westport Innovations were up sharply after the company announced that it had signed a deal with Caterpillar (CAT) to co-develop natural gas technology for off-road equipment, including mining trucks and locomotives.
Caterpillar will fund the development program. When the products go to market, Westport expects to participate in the supply of key components. Development programs will start immediately for both new and existing engines, combustion technology and fuel systems. Commercial production is expected to begin in about five years. While the agreements initially focus on engines used in mining trucks and locomotives, the companies will also develop natural gas technology for Caterpillar’s off-road engines, which are used in a variety of electric power, industrial, machine, marine and petroleum applications worldwide.
Usage of LNG within trucking fleets, while still in its infancy, is growing. At current diesel prices, LNG provides a 22% fuel savings, which amounts of well over $20,000 per year for an average truck driver. Those types of savings have already seen several trucking companies make the switch to LNG or CNG. Vedder Transport, a milk hauler in B.C. already operates a fleet of 50 trucks all powered by LNG. There are some drawbacks to running an LNG rig, such as fuel evaporation and the special coolers needed at filling stations to keep the gas at -162 degrees Celsius. These limitations make it mostly suitable for long-haul trucks with large gas tanks. U.S. truckers spent more than $135 billion on fuel last year, according to American Trucking Association.
LNG trucks are also significantly more expensive than regular diesel rigs. Factoring in fuel savings and the extra initial purchase price, it is estimated that it would take between 3-5 years of usage to pay off the initial purchase price premium. An average highway truck engine has a 10 year life span. Truck makers are also gearing up for the coming wave of LNG rigs.
Paccar (PCAR) , which manufactures trucks under the Peterbilt and Kenworth badge, expects the gas-powered-truck market share in North America to expand to about 20% in the next several years, up from about 6% now.
CitiGroup issued a report on the changing dynamics within the North American energy sector. The report titled “North America, The New Middle East” makes the point that technical innovation that has unlocked new sources of energy, demographics and technology will be responsible for making North America virtually energy independent in the coming decade.
The U.S. has become a net petroleum product exporting country and has edged out Russia as the world’s largest refined petroleum exporter. In the report the CitiGroup noted, “A simple explanation would point to lower demand and a struggling economy, which requires less imported energy. But, that would only get you half the answer. U.S. demand has fallen by some 2 million barrels per day since its peak in 2005. The more exciting part of the answer is on the supply side as the U.S. has become the fastest growing oil and natural gas producing area of the world and is now the most important marginal source for oil and gas globally.
Add to this steadily growing Canadian production and a comeback in Mexican production and you get to a higher growth rate than all of OPEC can sustain.”
The report cites five incremental sources of liquids growth that could make North America the single largest source of new supply in the next decade. They include:
1) oil sands production in Canada;
2) deepwater in the U.S. and Mexico;
3) oil from shale and tight sands;
4) natural gas liquids (NGLs) associated with the production of natural gas; and
Putting these together, North America as a whole could add over 11 million barrels per day of liquids going from over 15 million barrels per day in 2010 to almost 27 million barrels per day by 2020-22. The ramifications for such growth within North America and around the world are profound from an economic and geo-political perspective, however the most important impact will be the reindustrialization of America based on dramatically lower cost feedstock than is available anywhere in the world, with the possible exception of Qatar. CitiGroup noted, “The economic consequences from this supply and demand revolution are potentially extraordinary.
We estimate that the cumulative impact of new production, reduced consumption and associated activity may increase real GDP by 2.0 to 3.3%, or $370-$624 billion respectively. $274 billion of this comes directly from the output of new hydrocarbon production alone, while the rest is generated by multiplier effects as the surge in economic activity drives higher wealth, spending, consumption and investment effects that ripple through the economy. This potential reindustrialization of the U.S. economy is both profound and timely, occurring as the U.S. struggles to shake off the lingering effects of the 2008 financial crisis.”
The report does note that risks to the thesis include environmentalism and political interference, especially in Mexico.
We’ll be watching this developing scene with interest – it’s a complicated plot. But North American investors should know something interesting about this play: Both actors can’t dress up as bears.
Pundits have been quick to blame oil’s bearish retreat on economic woes, starting with the never-ending debt situation in Europe. But the plotlines connecting Athens and Madrid to oil centres like Riyadh, Houston and Edmonton are thin. Europe’s economy and its oil (CL-FT90.720.060.07%) consumption have not been correlated for years, so why should oil prices be falling on the euro zone’s troubles?
But there is a tangled thread lurking in the script: If westerners are unemployed, they can’t buy as much stuff from China, which means the Chinese economy loses momentum, which means fewer people in Beijing are able to afford a gas-guzzling car – which, ultimately, means global oil prices turn bearish.
Europe, in fact, is far less important here than China, because half of all new oil consumption emanates from the Asian giant. Yet the sketchy numbers that track China’s economy have been slowing recently and it’s noteworthy that global oil demand has not expanded much in the past year. Overall growth on 89.5 million barrels a day is now tracking less than 1 million barrels a day. Except for 2009, the year of the financial crisis, it has been many years since world oil consumption grew by less than 1 million barrels a day.
This tepid global appetite, combined with momentum on the supply side, is contributing to oil’s newly bearish character.
At the same time, natural gas (NG-FT2.55-0.10-3.66%) has surprised the audience. A 35-per-cent jump in demand from power generators, combined with stagnant production from U.S. gas fields, is helping to burn off the staggering 800 billion cubic feet of surplus storage that accumulated over the past warm winter. Eager market participants are not waiting for that to process to run its course, however. Benchmark U.S. prices have already risen, from $1.90 to $2.70 per thousand cubic feet in one month. Other positive leading indicators, such as declining rig counts, contribute further to natural gas’s newly bullish role.
The most intriguing part of this play is that a bearish oil price performance reinforces a bullish price trend for natural gas. That’s because natural gas is produced from oil wells too.
Indeed, one of the principal reasons for the steep drop in natural gas prices in recent years has been “associated gas,” or gas that bubbles up when pumping oil. As the number of oil rigs has risen in North America – from 200 to 1,600 in three years – there has been a surge in associated gas production. It was up 2 billion cubic feet per day in 2011. An additional 3 Bcf/d is expected in 2012. Right now, the U.S. produces 9.0 Bcf/d in associated gas, which represents 12 per cent of North American production. Without associated gas, overall continental natural gas production would decline – triggering higher prices.
So it’s important to realize that weaker oil prices, if sustained, will tend to dampen the zeal for aggressive oil drilling, thus reducing natural gas production.
The plot is indeed complicated, but all you need to know is that there is only one bear suit possible: If you are bearish on oil, you have to be bullish on gas.
Liquefied natural gas (LNG) tanker, section view from front. (Photo credit: Wikipedia)
By Vaclav Smil
Before the end of 2005, the U.S. price of natural gas rose above $15 per thousand cubic feet (mcf), nearly 12 times the record low reached in 1995. Production was down by about 8% compared to 2001, news reports speculated about supply shortages, and gas companies were gearing for expanded imports of liquefied natural gas (LNG) from overseas. Six years later, by the second week of April 2012, the market price of U.S. natural gas fell to less than $2 per mcf (to levels not seen since January 2002), nationwide gas extraction in 2011 was nearly 12% above the 2009 level, and record production was expected in 2012, when all storage sites would be filled to capacity. No wonder that gas companies are now planning to export LNG, and that new drilling projects have been shelved in the anticipation of gas glut.
This amazingly abrupt change of gas fortunes has been due to the rising production of shale gas. Shale gas is released by horizontal drilling followed by hydraulic fracturing of the porous rock using proprietary high-pressure mixtures of water and chemicals (the practice now widely known as fracking). Rising consumption of natural gas will eventually make it not only more important than crude oil but the single-most important fossil fuel.
Too good to last? Critics say so. They point to a substantial downward revision (roughly a two-thirds reduction) of shale gas reserves in the Marcellus formation that underlies the Appalachian states from West Virginia to New York. They claim that the industry is nothing but a variation of a Ponzi scheme, for example, Rolling Stonemagazine. They note that the gas flow from new wells declines exponentially in a matter of months. Their most often repeated argument is that fracking is a huge environmental disaster that will contaminate aquifers wherever it takes place.
Here is my advice. Do not get carried away either by bonanza claims (implying only sinking natural gas prices and seeing Marcellus as the Saudi Arabia of natural gas) or by the negativism of anti-fracking activists (recently joined by Hollywood celebrities). Low prices will slow the development of shale gas. Reserve estimates of any mineral resource are always uncertain during an early stage of development (in 2011, the U.S. Geological Survey boosted its estimate of technically recoverable Marcellus gas more than 40-fold compared with its 2002 figure), and even conservative assessments point to a combination of already available reserves and the most likely additional resources that would suffice (at the current rate of consumption) to supply America for at least the next 50 years.
As for Rolling Stone’s accusation that Chesapeake Energy is running a Ponzi scheme, that company has responded in detail. Although many questions remain about the company’s actions, even if the worst suspicions are proven they do not invalidate long-term viability of shale gas extraction. Exponential decline of gas flow from fracked wells is a well-known phenomenon, taken into account by such pioneers of shale gas development as Terry Engelder at Penn State when they made their estimates of potential recovery. And if there is any water contamination, it is a problem that has well-known technical solutions.
Global LNG trade rose roughly eightfold between 1980 and 2010, and it now accounts for 30% of the worldwide natural gas trade.
All of these have been fascinating, often controversial, and newsworthy developments, and while I would not dismiss them as altogether ephemeral, I see them largely as expected ups and downs along a long trajectory of national and global energy transitions. These transitions are slow but inexorable shifts in the amounts and proportions of different primary sources of heat, light and motion, and while they may be slowed down or accelerated (and temporarily even seemingly derailed), there is no doubt about their long-term persistence and eventual outcomes.
By the end of the 19th century, traditional biomass fuels (wood, charcoal and straw, which together dominated energy use for millennia) were reduced to a small fraction of overall energy supply as coal became the principal fuel. The shift away from coal to hydrocarbons (crude oil and natural gas) began slowly before 1900 in the United States and Russia, and it accelerated only after the Second World War. By 1970, crude oil supplied 46% of the world’s energy and its shares were 43% in the United States and 50% in Europe. There is no mystery about what will come next: Rising consumption of natural gas will eventually make it not only more important than crude oil but the single most important fossil fuel.
Seen from this perspective, U.S. shale gas production must be viewed as only one, albeit a major, component of gas’s global rise. In 1970, natural gas supplied 18% of global commercial energy and that share rose to about 24% by 2010 (with the EU share going from less than 8% to 26%), while the worldwide crude oil share fell from 46% to 34% (and in the EU from 50% to 38%). Natural gas’s rise has been slowed recently by China’s extraordinarily high coal extraction rates, but these cannot be repeated in the future (the country is already a large importer of coal). Natural gas will thus continue its conquest of global and national energy supplies, with five factors behind the rise — discoveries of new large fields, diffusion of shale gas production, expansion of LNG exports, high prices of crude oil, and unrivalled efficiency of gas converters.
Do not get carried away either by bonanza claims or the negativism of anti-fracking activists.
New giant gas fields have been discovered in such previously unpromising places as the Mediterranean off Israel’s shores and deep Atlantic waters offshore near Brazil. There are extensive deposits of gas-bearing shales in Europe (particularly in Poland) and enormous resources in Asia. Recent reductions in the cost of gas liquefaction coupled with increased sizes of LNG tankers (they now rival the size of ships carrying crude oil) made LNG into a trade equivalent of oil: It can now be transported to consumers on any continent, bought without restrictive long-term contracts, and delivered at increasingly affordable prices. The totals speak for themselves: Global LNG trade rose roughly eightfold between 1980 and 2010, and it now accounts for 30% of the worldwide natural gas trade.
Little has to be said about high oil prices (the price spread between liquid and gaseous hydrocarbons has reached an unprecedented level), but the conversion efficiencies achievable by furnaces and turbines burning natural gas are not sufficiently appreciated. New, super-efficient household gas furnaces convert up to 97% of the fuel into heat; combined-cycle generation (using the waste heat from a gas turbine to raise steam and generate more electricity in an associated steam turbine) now produces electricity with 60% efficiency (and 70% will be possible in the future).
Modern (that is, overwhelmingly fossil-fuelled) civilization needs highly concentrated sources of energy that can be conveniently delivered to the megacities where most of humanity will soon live. No other fuel can fit this need as efficiently and with such a relatively low environmental impact as natural gas (its combustion releases less carbon dioxide per unit of useful energy than coal or oil). The conclusion is obvious: The world should speed up its unfolding transition from coal and crude oil to natural gas by using the fuel not only for heating, electricity generation, and as feedstock for industrial syntheses but also as a transportation fuel. Spending toward that goal would bring faster and more durable gains than subsidizing such dubious conversions as turning corn into ethanol or pouring huge sums into money-losing solar enterprises.