Thursday, November 03, 2011

North Dakota Oil Boom Sparks a Huge Rail Boom



Video above is from the Wall Street Journal.  

Related: Today the Association of American Railroads reported a 20.5% increase in shipments of petroleum products by rail for the week ending October 29 compared to the same week last year.  More evidence that drill, drill, drill = jobs, jobs, jobs. 

24 Comments:

At 11/03/2011 6:24 PM, Blogger PeakTrader said...

North Dakota may become the Norway of America:

Norway - Wikipedia

Large reserves of petroleum and natural gas were discovered in the 1960s, which led to a boom in the economy.

Norway has obtained one of the highest standards of living in the world in part by having a large amount of natural resources compared to the size of the population.

Norwegians enjoy the second highest GDP per-capita (after Luxembourg) and fourth highest GDP (PPP) per-capita in the world.

Cost of living is about 90% higher in Norway than in the United States and 50% higher than the United Kingdom.

Norway has a very low unemployment rate, currently 3.1%.

30% of the labour force are employed by the government, the highest in the OECD. 22% are on welfare and 13% are too disabled to work, the highest proportions in the world.

In 2011, 28% of state revenues were generated from the petroleum industry.

Export revenues from oil and gas have risen to 45% of total exports and constitute more than 20% of the GDP.

Norway is the fifth largest oil exporter and third largest gas exporter in the world.

 
At 11/03/2011 6:48 PM, Blogger PeakTrader said...

And some comparisons (income inequality is high in the U.S.. However, the upper half of U.S. households likely has the highest standard of living in the world, which is remarkable for a large country).

Median household income
Wikipedia

1 Luxembourg 34,407
2 United States 31,111
3 Norway 31,011
4 Iceland 28,166
5 Australia 26,915
6 Switzerland 26,844
7 Canada 25,363
8 United Kingdom 25,168
9 Ireland 24,677
10 Austria 24,114
11 Netherlands 24,024
12 Sweden 22,889
13 Denmark 22,461
14 Belgium 21,532
15 Germany 21,241
16 Finland 20,875
17 New Zealand 20,679
18 France 19,615
19 Japan 19,432
20 South Korea 19,179

 
At 11/03/2011 7:01 PM, Blogger Larry G said...

I was under the impression that moving crude oil by rail was not economic... and the primary reason that refineries are located where tankers offload or move by pipeline.

no?

 
At 11/03/2011 7:17 PM, Blogger Craig said...

I was under the impression that moving crude oil by rail was not economic

Well, it probably isn't. But try and build a pipeline these days and it looks pretty attractive, I'd guess.

 
At 11/03/2011 7:45 PM, Blogger VangelV said...

North Dakota may become the Norway of America:...

No chance in hell. You can make a lot of money by producing oil from the fields in the North Sea. There is very little money in shale so far unless you are a speculator or provide services to the producers who are chewing through their cash.

 
At 11/03/2011 7:47 PM, Blogger VangelV said...

I was under the impression that moving crude oil by rail was not economic... and the primary reason that refineries are located where tankers offload or move by pipeline.

No it isn't. But it takes a lot of time, effort, and money to build pipelines so rail will have to do for now. The railways will become much richer until the producers have lost so much money that their financing is reduced or cut off.

 
At 11/03/2011 8:01 PM, Blogger Breaker Morant said...

Vange said>>>>There is very little money in shale so far unless you are a speculator or provide services to the producers who are chewing through their cash.<<<

Look at EOG's 3rd Quarter.

 
At 11/03/2011 8:18 PM, Blogger Bruce Oksol said...

Mark, You do a great job. Thank you.

Bruce

 
At 11/03/2011 9:41 PM, Blogger JPINTX said...

Moving crude by rail is much, much more expensive than by pipeline, maybe 5 to 10X per barrel depending on the particulars, in that sense rail transport of crude is un-economic. But the choice is to pay the incremental cost and net back to the wellhead a still very profitable price per barrel, or leave it in the ground.

 
At 11/04/2011 4:35 AM, Blogger rjs said...

larry G, et all, re rail; that's why willison sweet is $65 at the wellhead...

 
At 11/04/2011 5:49 AM, Blogger totrdahl said...

Actually, North Dakota has the highest percentage of Norwegians of any state in the US, and has found ways to preserve the culture, traditions, foods, and language of its ancestral land....

 
At 11/04/2011 8:42 AM, Blogger VangelV said...

Look at EOG's 3rd Quarter.

Let's do that. First, on its conference call, EOG management made it very clear that shale natural gas is a loser at a 22:1 price ratio. This is a very clear opinion that opposes much of the optimism that Mark has been hyping on this site.

Second, EOG has been hyping the Eagle Ford operations. While the company has been reporting decent initial production rates for new wells the depletion issue has not been dealt with adequately.

Third, other companies in the area have abandoned operations after figuring out that the EURs cannot justify the investments. Last quarter we saw Petrohawk Energy end its own development of the Eagle Ford Shale at the company's highly hyped Red Hawk prospect.

Forth, EOG is chewing through a huge amount of capital and cannot generate a growing positive cash flow from operations without access to new financing. It had to borrow $2.5 billion in order to generate $2.7 billion in operating cash flow. The problem for EOG is the simple fact that depletion causes operating cash flows to drop by around 80% per year. If you do the simple math you can't find an easy solution out of the large debt problem that is facing the company. I suspect that EOG will probably find that it has to sell off assets in order to keep its ratios in line. That would not happen if shale oil production were viable.

My argument is that the average shale play cannot make much in the way of profits. Even your example, EOG, suggests that Eagle Ford is a much better play than Bakken. But if you look at the Eagle Ford companies you don't find much in the way of positive cash flow.

By the way, I suggest that you pay attention to the 'funding gap' issue that management has talked about.

makes money from oil and gas production in many formations, not just in ND. The industry

 
At 11/04/2011 8:51 AM, Blogger VangelV said...

Moving crude by rail is much, much more expensive than by pipeline, maybe 5 to 10X per barrel depending on the particulars, in that sense rail transport of crude is un-economic. But the choice is to pay the incremental cost and net back to the wellhead a still very profitable price per barrel, or leave it in the ground.

But you are assuming that it is profitable. The reported profits depend on the EURs provided by the companies and by the SEC reserve estimates. Both are easy to manipulate and have been manipulated. If you look at the cash flows you don't see many (I have yet to find any) shale producers who can generate a positive free cash flow that can be used to finance future production.

 
At 11/04/2011 12:56 PM, Blogger Breaker Morant said...

Vange>>>Let's do that. First, on its conference call, EOG management made it very clear that shale natural gas is a loser at a 22:1 price ratio. This is a very clear opinion that opposes much of the optimism that Mark has been hyping on this site.<<<

Yes, they have no interest in developing shale gas because there is so damn much of it that the North American market has been ruined. They have been
transitioning to a liquids company for several years now.

 
At 11/04/2011 1:00 PM, Blogger Breaker Morant said...

Vange>>>>Third, other companies in the area have abandoned operations after figuring out that the EURs cannot justify the investments. Last quarter we saw Petrohawk Energy end its own development of the Eagle Ford Shale at the company's highly hyped Red Hawk prospect. <<<

Petrohawk doesn't exist anymore. BHP bought them to get a foothold in the valuable North American shale plays.

 
At 11/04/2011 2:07 PM, Blogger VangelV said...

Yes, they have no interest in developing shale gas because there is so damn much of it that the North American market has been ruined. They have been transitioning to a liquids company for several years now.

Correct. But my point is valid. We had the shale gas hype shoved down our throats for years. While it was true that the industry could produce a lot of shale gas it could not do it at a profit because the energy invested is higher than the energy produced.

The failure of gas meant that the producers had to do something. So they transitioned to 'shale liquids'. But if you look at the results, they could not self finance because they had the same type of problems with shale oil as with shale gas. The costs are so high and the depletion so rapid that the producing wells cannot generate enough cash flows to make the operations truly profitable.

In the case of EOG it had to borrow around $2.5 billion in order to generate $2.7 billion in operating cash flow. In the conference call the management was very clear about the need to sell off assets if debt were to be kept in line and mentioned the 'funding gap' a number of times. Being the skeptical type who has seen a lot of bubbles and has been watching shale manias for several decades the data and comments are red flags. I also note that while many are hyping the Bakken EOG is more interested in the Eagle Ford shale formation, which some companies are abandoning. Based on history I would say that this indicates that the formations are not nearly as homogeneous as the USGS has been assuming.

 
At 11/04/2011 2:19 PM, Blogger VangelV said...

Petrohawk doesn't exist anymore. BHP bought them to get a foothold in the valuable North American shale plays.

Petrohawk ran out of capital. There were no options but to take advantage of the shale oil and gas mania and find a bigger fool. Luckily for shareholders they found one such fool in BHP. But before the deal closed Petrohawk abandoned its Red Hawk prospect after having hyped it to shareholders and analysts as a play with great potential.

As I have written, if you are playing the greater fool angle you may do well until the bubble bursts because one thing the world is not short of are fools. But if you want to buy into a good company with sustainable production you may be much better off to look elsewhere.

 
At 11/05/2011 7:21 AM, Blogger juandos said...

"Second, EOG has been hyping the Eagle Ford operations. While the company has been reporting decent initial production rates for new wells the depletion issue has not been dealt with adequatel"...

Well then you might find this potentially interesting: EOG Resources announced its best wells to date in the Eagle Ford Shale. The company reported several wells coming online at more than 1,500 b/d. The company’s Mitchell Unit #1H and #2H set records in Gonzales County producing 2,821 and 3,090 b/d with 2.8 and 2.9 mmcfd of gas, respectively...

One more thing vangeIV that has folks in my hometown rather excited (or overly optimistic?) regarding Eagle Ford: Four natural gas rigs dropped off to bring us to a count of 106. We’re down almost 20 rigs from just less than a month ago. The decline in gas rigs has been completely offset by the increase in oil rigs, now at 136. We also have one disposal well being drilled in Webb County. Webb (37), Karnes (32), and La Salle (32) counties lead the region in terms of active drilling...

 
At 11/05/2011 8:08 AM, Blogger VangelV said...

Well then you might find this potentially interesting: EOG Resources announced its best wells to date in the Eagle Ford Shale. The company reported several wells coming online at more than 1,500 b/d. The company’s Mitchell Unit #1H and #2H set records in Gonzales County producing 2,821 and 3,090 b/d with 2.8 and 2.9 mmcfd of gas, respectively...

First, on its conference call the company made it clear that natural gas was a big loser and it had no interest in it.

Second, a high IP rate is not a big deal when you lose 75-90% of production by the time the first year is over. This is the reason why EOG needs to borrow a few billion a year. Existing production cannot finance new wells.

Third, EOG has already claimed that it will reduce Bakken drilling. If the Bakken were so great why would it do that.

Forth, company management has been bringing up the 'funding gap' and asset sale issues for quite some time. It would not surprise me if management tried to find a bigger fool once funding sources were exhausted in the same way that Petrohawk did.

 
At 11/05/2011 8:17 AM, Blogger VangelV said...

One more thing vangeIV that has folks in my hometown rather excited (or overly optimistic?) regarding Eagle Ford: Four natural gas rigs dropped off to bring us to a count of 106. We’re down almost 20 rigs from just less than a month ago. The decline in gas rigs has been completely offset by the increase in oil rigs, now at 136. We also have one disposal well being drilled in Webb County. Webb (37), Karnes (32), and La Salle (32) counties lead the region in terms of active drilling.

I am pointing out the obvious. Not long ago we had a lot of shale gas hype. That is now dying because the economics did not work. People like me had argued that the economics made no sense but optimists like Mark were passing on the hype from the promoters.

Since the gas does not work the hype has moved on to shale liquids. But the economics for the industry does not look very good. While (just as in gas) there will be companies that can make a lot of money because they are in the sweet spots of the formations the shale liquids industry is a loser on average. That means that many of the companies will wind up destroying capital.

Note what I have NOT said. I have never said that the lucky speculator or employee cannot take advantage of the bubble. A few people will make a lot of money off of this bubble just as a few made a lot of money from the internet and housing bubbles. The few always make money from any bubble. But those that don't recognize the bubble for what it is and drink the Kook-Aid will wind up getting what they deserve. And will have nobody to blame but their own foolishness.

 
At 11/05/2011 9:38 AM, Blogger juandos said...

vangeIV says: "First, on its conference call the company made it clear that natural gas was a big loser and it had no interest in it"...

This is what you're talking about right? 2010 Annual Report - Letter to the Stockholders...

The Form 10-K is making for some interesting reading...

 
At 11/05/2011 10:32 AM, Blogger VangelV said...

This is what you're talking about right? 2010 Annual Report - Letter to the Stockholders.

No. I am talking about the last conference call. If you listen carefully you will hear some very interesting things. Pay attention to the growth in gas quote at the beginning of the call, the 'funding gap, comments and the possible sale of assets.

 
At 11/05/2011 3:21 PM, Blogger Mkelley said...

Who needs oil and gas? We have the old "reliables", wind and solar. Er, unless it's cloudy, or the wind stops, or it's dark out:
http://www.smalldeadanimals.com/archives/018293.html

 
At 11/05/2011 3:24 PM, Blogger Mkelley said...

Try here:
http://www.bizjournals.com/charlotte/blog/power_city/2011/10/duke-energy-shuts-wind-farm-at-night.html

 

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