Saturday, February 18, 2012

Saturday Energy Links

1. "Airline boardings at North Dakota's eight large airports in January were up 19 percent over the year. The jump was due in large part to booming business at the Dickinson and Williston airports in western North Dakota's oil patch. Boardings at Dickinson were up nearly 78 percent, and they rose more than 172 percent in Williston."

2. Delta Airlines plans more flights and larger planes that could mean more boardings at Minot International Airport. Boardings in January already were up 63 percent from January 2011.  Andrew Solsvig, airport director, said that Delta will be bringing in an Airbus A-319 aircraft beginning the evening of March 4. The aircraft will be the first plane operated by the mainline company rather than by a regional carrier to fly out of Minot in almost three years." (ht: BakkenBlog News)

3.  From a new report from Citigroup Global Markets: "The concept of peak oil is being buried in North Dakota, which is now leading the US to be the fastest growing oil producer in the world.  We expect oil production in the U.S. to surprise to the upside. We expect industry expectations to lag behind reality, just as they did with shale gas for many years." (ht: BakkenBlog News)

Meanwhile, things aren't as bright for green energy....

4. "The wind power industry is predicting massive layoffs and stalled or abandoned projects after a deal to renew a tax credit failed Thursday in Washington.  Up to 37,000 jobs, many in Illinois, could be lost as projects are halted or abandoned."  Peak wind subsidies?  


11 Comments:

At 2/18/2012 2:54 PM, Blogger Michael Hoff said...

And Pennsylvania just dumped $13 million in tax payer money into a wind farm. Unbelievable.

 
At 2/18/2012 3:12 PM, Blogger Benjamin said...

Re oil: At $100 a barrel, almost any oil anywhere is worth extracting by any means. Meanwhile, demand will stagnate.

Look for gluts.

 
At 2/18/2012 7:58 PM, Blogger kmg said...

Like I said, North Dakota is such a thinly populated place that even 50,000 new people distorts the infrastructure over a 200-mile radius.

The Ohio shale is even more exciting, for this reason, as the region not only is more populated (and not as cold as ND), but has a surplus of houses due to population loss. A oil boom there could be exactly what the doctor ordered.

 
At 2/18/2012 7:58 PM, Blogger VangelV said...

From a new report from Citigroup Global Markets: "The concept of peak oil is being buried in North Dakota, which is now leading the US to be the fastest growing oil producer in the world. We expect oil production in the U.S. to surprise to the upside. We expect industry expectations to lag behind reality, just as they did with shale gas for many years."

LOL...Not too long ago we were being told how shale gas was a game changer. But as I write this the companies in the sector are pulling back on their investments, looking to sell off assets, and scavenging for new loans. Comstock is now moving away from gas towards shale liquids. Chesapeake is in big trouble as it has to add massive amounts of debt to finance its drilling activities because its operations cannot generate positive cash flows. Manufacturers and suppliers of the ceramic proppants that are used in hydraulic fracturing have reported that their revenues might come in below expectations because of declines in Haynesville activity. Not too long ago that was one of the areas hyped by the promoters.

Re oil: At $100 a barrel, almost any oil anywhere is worth extracting by any means.

Actually, it isn't. Most shale liquids production would not have a decent return at $100 per barrel oil because the costs are still too high and EUR is not sufficient to justify them.

Haven't you noticed how the people that were hyping shale gas not that long ago have now moved on and no longer even pretend that shale gas production can produce a profit? The same is likely for shale oil not all that long into the future.

 
At 2/18/2012 8:20 PM, Blogger VangelV said...

I forgot this commentary.

Now, one reason that the United States imports so much oil is that many of its domestic fields, in places like Texas and California, have been in steep decline for decades. Back in 1970, the United States churned out 10 million barrels of oil per day. Now? We produce just 6 million. The Citigroup analysts expect that new shale oil plays, if combined with further exploration in the Gulf of Mexico and Alaska, could add 3.5 million barrels per day between 2010 and 2022. But as long as other domestic fields keep declining, the shale boom won’t be enough to get back to our peak. The industry will have to drill furiously simply to maintain the status quo. (Indeed, the International Energy Agency sees U.S. oil production rising briefly to 6.7 million barrels per day and then sinking back down to 6.1 million barrels through 2035 — about where we are today.)

What’s more, there are a lot of assumptions in Citigroup’s analysis that are far from certain. Take the decline rate. Conventional oil fields typically see a drop in output of about a 5 percent to 8 percent rate per year. But, as some companies working in the Bakken field in North Dakota are now discovering, shale oil can dwindle far more rapidly than that. One oil executive tells Foreign Policy’s Steve LeVine that oil wells in the Bakken field can decline by more than 90 percent in the first year, leveling off at 8 percent per year thereafter. Once a well dries up, the company has to move over to a nearby spot in the field. That’s a lot of new drilling. And all that drilling is pricey. Which means, the executive notes, that if the price of oil were to suddenly drop, a lot of companies could quickly go bust and production could dry up in short order."


The author brings up many of the points that we have brought up on this site but Mark has failed to deal with. First, increases from shale will not be enough to offset long term declines in conventional fields. Second, shale depletion rates are much greater than conventional wells. Many new wells will have to be drilled just to keep shale production flat. Third, shale wells are very expensive and require massive amounts of capital.

As I pointed out, the shale gas optimists are now very quiet about the prospects of the industry. Having lost their argument they simply move the goalposts and talk about the POTENTIAL of shale liquids instead. That focus on potential seems to be a good way to lose one's investment capital.

 
At 2/18/2012 9:09 PM, Blogger juandos said...

Well vangeIV here's a Forbes editorial dated Dec. of '11 of either optimism fueled by 'special insider knowledge' or hyperbole run rampant...

Note this particular line by Robert Bradley Jr.: 'An estimated 1.4 trillion of those barrels are buried under American soil. For some perspective: the total proven reserves in Saudi Arabia is just about 260 billion barrels'...

I'll bet you're impressed...:-)

 
At 2/19/2012 1:20 PM, Blogger Che is dead said...

"... crude's days of energy domination are numbered, not because the world is running out but because other fuels are on the rise, like natural gas ... "We expect the oil industry's monopoly on transportation to be broken," Mr. Verleger wrote in July. In an interview, he adds, "There will be oil. I'm just not sure there will be anybody to consume it." Natural gas as an energy source is now roughly the equivalent of $24-per-barrel oil, says Philip Verleger, an energy economist and publisher of Petroleum Economics Monthly.

Funds that hold commodities futures, Messrs. Grice, Bernstein and others pint out ... because commodities don't pay dividend or interest income, Mr. Grice says, they only benefit long-term investors if prices are on a one-way ride up. Therefore, he says, pension funds and others looking years ahead should avoid them. Mr. Grice favors stocks of companies that are innovative and cost-efficient producers of raw materials. "With commodities, there's nothing you can add to the top line," he says. "I would rather back guys who are trying to find clever ways to extract copper, natural gas, etc." -- WSJ

"The Honda Civic GX runs on compressed natural gas, spews hardly any emissions and can go 250 miles on a single tank of fuel." -- The Greenest Car You Never Heard Of, Discover

"One company that stands to benefit handsomely from the president’s proposal is Westport Innovations. The company converts diesel engines to be fueled by natural gas. Wall Street analysts predicted a boom for the company if the NAT GAS Act were passed … If Westport reaps the predicted windfall, one of the chief beneficiaries will be George Soros, a major Obama donor and supporter. Soros’s hedge fund holds 3,160,063 company shares (as of its last SEC filing) ... (5.5 million as of today) ... Soros has given $384,090 to the Democratic Party, Democratic PACs, and Democratic Candidates in the three election cycles beginning in 2008 ..." -- Hot Air

It's starting to look as if Chesapeake may just be a little bit ahead of the curve.

 
At 2/19/2012 3:07 PM, Blogger Benjamin said...

Study Of Coal Plant Closures Identifies Gas As Major Driver
"In the past year, coal plants have been facing a perfect storm of falling natural gas prices, a continued trend of high coal prices, and weak demand for electricity," so-concluded Dr. Susan Tierney of the Analysis Group. http://www.analysisgroup.com/article.aspx?id=13178. The study details how crashing gas prices have been the key reason why electricity prices have fallen and why old coal plants have been running a lot less, even before any formal closure decision. Tierney notes that rising coal prices, driven up in part by coal exports jumping 31% in 2011, also add to the pressures on old, inefficient coal plants.

Low gas prices, high coal prices, low-demand for electricity all mean that wholesale power prices are low and operating revenues may not match production costs at the most inefficient, most-expensive to run plants.

What is the role of the EPA Air Toxic rule in closing plants right now? None. The rule does not take effect until January 2015 and might not even then.

Yesterday, at least the first 3 lawsuits challenging the EPA Air Toxic Rule were filed, and nobody ought to bet their house that the EPA rule will withstand legal challenges. Going back to the administration of George W. Bush, the federal courts have not been reticent about overturning EPA rulemakings.

 
At 2/19/2012 4:23 PM, Blogger Che is dead said...

"The author brings up many of the points that we have brought up on this site but Mark has failed to deal with. First, increases from shale will not be enough to offset long term declines in conventional fields." -- Vag

Define "long term". As has been pointed out before, new discoveries and reserve growth have always outpaced consumption. What's more, new technologies have pushed recovery rates to 35 percent, an additional 10 percent increase that rate would be the equivalent of discovering two new Saudi Arabias.

Bentek Energy, a Colorado firm that tracks energy infrastructure and production projects estimates that by 2016 combined U.S. and Canadian oil output will exceed 11.5 million barrels per day, which is more than their combined peak in 1972. They predict that the West Texas Permian Basin, the South Texas Eagle Ford shale and North Dakotas Bakken shale will increase production by 2 million barrels per day from 2010 levels.

Goldman Sachs estimates that the U.S. could move from being the No. 3 oil producer behind Saudi Arabia and Russia to the No. 1 spot by 2017.

In the long term, oil will be only one of a number of fuels powering our economy.


"Second, shale depletion rates are much greater than conventional wells ..." -- Vag

The depletion rates are overstated because the vast majority of wells being drilled are conventional or vertical wells which have much greater depletion rates, not horizontal wells. This, of course, has the effect of increasing the avererage depletion rate. Something that, again, you fail to mention.

"The shale play that started it all, the Barnett of northern Texas, is today producing more than ever despite there being half as many rigs working the land than there was two years ago. As analyst Dan Pickering of Tudor, Pickering & Holt wrote in a note this morning, “If wells are declining faster than expected, the Barnett would not be at record production with reduced rig count.” -- Forbes

 
At 2/19/2012 4:24 PM, Blogger Che is dead said...

"Third, shale wells are very expensive and require massive amounts of capital." -- Vag

Horizontal wells are expensive to drill, but they are getting cheaper by the day while producing more than ever. Costs have fallen by more than 60 percent in the last three years alone:

"Canadian explorer Talisman Energy Inc. of Calgary is active in the Marcellus and Eagle Ford shales in the United States and the Utica and Montney shales in Canada. The company’s recent economic analysis shows a steady decline in its shale gas development breakeven price over recent years, from $8.50/Mcf in 2008, to $6.50 in 2009, to $4.50 in 2010, to a projected $3-$4 in 2011."

As even arch industry critic Arthur Berman acknowledges:

“One thing we’re seeing is the majors are getting more involved in these plays. They are going to do a different level of science than the independents involved,” he said. “I’m not saying nobody is doing any science,” he added, but the majors can bring a full set of tools to shale play evaluation and development." -- AAPG

ExxonMobile claims to have gotten costs down to as little as $1.00/Mcf in some cases:

The Barnett Shale, where we currently have gross production of approximately 900 million cubic feet per day of gas, is another good example of value creation through technology. We have been able to maximize long-term ultimate recovery with longer lateral lengths and improved drilling and completion efficiency. And our net unit development cost in this shale play is about $1 per thousand cubic feet equivalent ... -- ExxonMobile Perspectives

All of your arguments are based on historically low natural gas prices, but there is nothing to suggest that prices will remain this low forever. In fact, if we follow your arguments to their logical conclusion, accelerating depletion rates alone will cause a near term shortage resulting in increased prices. More likely, however, is that an upward sloping demand curve will result in moderate price increases just as improved technologies drive down the cost of production.

 
At 2/27/2012 10:01 AM, Blogger VangelV said...

Note this particular line by Robert Bradley Jr.: 'An estimated 1.4 trillion of those barrels are buried under American soil. For some perspective: the total proven reserves in Saudi Arabia is just about 260 billion barrels'...

I'll bet you're impressed...:-)


Mr. Bradley is an economist. I have some respect for him and have a copy of his book, Energy: The Master Resource, somewhere in my library.

The problem is that he takes the same Econ 101 approach as Mark and misses the problem in his approach. We did not solve the lighting problem in the 19th century by having the market find more whales. We solved it by finding another economic source of energy.

The same is true today. Mr. Bradley accepts the EIA estimates as fact and goes from there. Well, if we accept a bad assumption as true it is easy to come up with a logical argument that tells us that everything is all right. But if the assumption is wrong the entire argument falls apart. In this case we know that the assumptions are not correct because the data in the 10-Ks and production curves are telling us a totally different story than the optimistic narrative that the promoters are telling us.

Mr. Bradley of all people should know better. After all, he was working for Enron when the company was hyping the huge profits that would be made from Carbon trading. He was actually the guy who wrote many of the speeches for Ken Lay and had lay make claims that were clearly based on a wrong premise. When the carbon trading plans fell through Enron was wiped out.

Now I am not saying that we should not take Mr. Bradley seriously just because he was so wrong about Enron. What I am saying is that we have to go beyond the claims and look to the actual data. Not too long ago we had everyone telling us of great riches from shale gas. They were pointing to rising production and telling us that Econ 101 told us that it must be profitable. But anyone who actually listened to the conference calls and went beyond the hype heard CEOs make it clear that they would not be drilling if they were not forced to by the lease terms. They were chewing through capital because they HAD to produce product at a cost of $7.50 while that product was selling for less than $4.00.

We now know that shale gas has been a bust for the producers. We now know that the production curves suggest that EURs are overestimated by 100%. That means that the depreciation costs are far too low and that eventually many of the 'assets' will have to be written down. This scam has gone on far too long. If any of you want to pick up exposure to energy I suggest some decent heavy oil or coal producers.

 

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