Tag Archives: Oil prices

Why cheap oil is the key to beating climate change

Repost from The Guardian

Why cheap oil is the key to beating climate change

Keeping the price of a barrel of crude at $75 or less will devastate the profitability of fossil fuel extraction – as the shelving of three tar sands projects demonstrates

By Mitchell Anderson, 11 December 2015 11.59 EST
‘If the Canadian tar sands investments that were halted this year stay dead, the world will avoid another 1.6tn tonnes of dangerous carbon emissions.’ Photograph: David Levene for the Guardian

As world leaders enter the home stretch of the Paris climate negotiations they should keep in mind a key measure of success in limiting carbon emissions: cheap oil. The lower the global price of oil, the more it stays in the ground – due to the brutal, if counterintuitive, logic of the petroleum marketplace.

Most of the easily extracted oil deposits are long gone. What’s left are high-cost, high-risk long shots such as the Alberta tar sandsdeep-water reservoirs off Brazil, and drilling the high Arctic. Companies hoping to profit from the last dregs of the petroleum age need to convince their investors to part with massive amounts of capital in hopes of competitive returns often decades down the road.

Billions have already fled the Alberta oil sands in the last year as the global price of oil collapsed from over $100 per barrel to below $40. Shell has just called a halt to its Carmon Creek project in Northern Alberta, writing off $2bn in booked assets and 418 million barrels of bitumen reserves. A barrel of bitumen will release about 480kg of carbon dioxide from extraction, refining, transport and combustion. This head office write-down means that 200m tonnes of carbon will not be released into the atmosphere.

Two other tar sands projects were also shelved this year with reserves of about 3bn barrels. If these investments stay dead the world will avoid another 1.6tn tonnes of dangerous carbon emissions. Together the cancellation of these three projects alone amount to the equivalent of taking more than 14m cars off the road for the next 25 years.

There a simple correlation between future emissions and the price of oil needed to make that profitable. Such a graph has been compiled by Carbon Tracker, a UK-based non-profit organisation set up to educate institutional investors on the increasing financial risks of the fossil fuel sector.

Its message to investors is simple: the world must limit additional emissions to below 900 gigatons to avoid potentially catastrophic climate consequences – and 40% of this future carbon budget – about 360 gigatons – is projected to come from the oil sector. Anything more than that must stay in the ground – the so-called unburnable carbon.

And what’s the price of oil that could save to world? Anything below $75 a barrel of Brent crude means that companies cannot profitably extract more than 360 gigatons of the world’s remaining reserves – no messy policy solutions required.

Just last year the price of Brent crude was about $110 a barrel, a price that would gainfully produce about 500 gigatons of carbon emissions by 2050. Now it is less than $50, which would only produce 180 gigatons over the same period. If prices stay where they are, the world will avoid some 320bn tonnes of carbon emissions by 2050 in precluded production from uneconomic oil fields.

To put this in perspective, that is 25 times larger than reductions the Kyoto protocol was supposed to achieve if it had worked (it didn’t), and 180 gigatons below the oil emissions limit scientists say we need to avoid a world with more than two degrees of warming. Economic turmoil aside, the global commodities market just served up massive progress on an issue in desperate need of some good news.

Carbon Tracker recently revised its calculations to include the turmoil in the oil market, but the basic correlation is the same: lower fossil fuel prices devastate the economics of future extraction.

Seen through this lens, a key measure of our success in controlling carbon emissions should be keeping commodity prices of fossil fuels low. And while the main driver of the current slump in prices is the current glut of supply, it’s important to realise that almost every policy intervention to avert climate disaster is directly or indirectly aimed at lowering the price or profitability of fossil fuels such as oil and coal.

Efficiency and conservation incentives reduce demand, as do vehicle emission standards and investing in public transit. Carbon pricing means that fossil fuel companies can no longer use the atmosphere as a free dumping ground for CO2, so also lowering profitability.

But doesn’t cheap gas mean that people just use more of it? Not really. While there is a weak economic link between declining prices and increasing consumption, key producers like Saudi Arabia are in fact fretting that slowing growth in Asian markets and already peaked demand in developed countries will lead to a long-term decline in the world’s appetite for oil.

I dearly hope that world leaders can somehow negotiate transformative change. But perhaps the best they can do is nudge economic indicators like crude prices in the right direction and get out of the way. The unstoppable forces of the global marketplace will hopefully do the rest.

    How Cheap Crude Stalled America’s Booming Oil Trains

    Repost from Bloomberg Business

    How Cheap Crude Stalled America’s Booming Oil Trains

    It was a record year for oil train mishaps—and the year crude-by-rail hit the brakes.

    By Matthew Philips , December 2, 2015 – 4:00 AM PST

     

    David Wilson/Flickr

    It’s been several months since an oil train accident grabbed big headlines—but not because there haven’t been any. A single weekend in November saw two trains derail in Wisconsin. The first spilled about 20,000 gallons of ethanol into the Mississippi River, followed a day later by a spill of about 1,000 gallons of North Dakota Bakken crude.

    This year has already been the costliest by far for crude train explosions. Derailments in 2015 have caused $29.7 million in damage, according to data from the U.S. Department of Transportation, a huge increase from $7.5 million in 2014. Most of this year’s price tag can be attributed to two crashes within a three-week span. The Feb. 16 derailment of a CSX train in West Virginia triggered a massive explosion near a cluster of homes along the Kanawha River and led to more than $23 million in damage. A BNSF train that derailed and exploded in Illinois on March 5 caused an additional $5.5 million in damage. Both trains were carrying highly explosive crude from North Dakota.

    The lesser-noticed recent accidents haven’t come with explosions or towering fireballs. At least some of the ruptured tank cars were the newer-model CPC-1232, which are supposed to be less likely to split open. The U.S. and Canada earlier this year announced stricter tank car standards, mandating further improvements in the future. Those rules will cost companies—mostly those that ship crude—an estimated $2.5 billion from 2015 to 2034; government estimates suggest the benefits will range from $912 million to $2.9 billion, presumably from fewer accidents.

    But even without changing safety standards, there’s reason to suspect that costly train accidents will decline. While 2015 will go down as the worst year for crude train disasters, it’s also shaping up to be the year crude-by-rail hit the brakes. The crash in prices has slowed activity in the oilpatch and reduced the amount of petroleum riding the rails. The number of train carloads carrying petroleum has fallen 30 percent through Nov. 20 since peaking in December 2014, according to the American Association of Railroads. The monthly data on crude-by-rail shipments kept by the U.S. government lags a few months behind, but as of September those shipments had dropped 21 percent from their peak in January 2015.

    Rail shipments of petroleum are down 30 percent in 2015.
    Rail shipments of petroleum are down 30 percent in 2015.

    This marks the first sustained decline in crude-by-rail traffic since it took off in 2009, jumping an astounding 5,000 percent in a little more than five years. Putting oil on trains was never the most efficient way to move it. It’s expensive and slow, not to mention dangerous. But in the places where the shale boom has unlocked the biggest amounts of crude, trains were often the only option.

    That’s especially true in North Dakota, home to the Bakken formation, where oil production has risen from about 200,000 barrels a day to more than 1 million. By 2013, 71 percent of Bakken crude was transported by train. North Dakota has almost single-handedly driven the crude-by-rail boom, accounting for 80 percent of all oil train traffic in the U.S. as of earlier this year.

    Since the third quarter of 2014, however, two pipeline projects have been completed in North Dakota, increasing the amount of oil that can be piped out of the state by nearly 200,000 barrels a day. There’s also a new refinery that opened earlier this year, reducing the amount of oil that needs to be railed down to the large refineries outside Chicago. Since 2011, North Dakota’s combined pipeline and refining capacity has doubled, from 400,000 barrels a day to 800,000. By the end of 2017 it’s slated to double again, to 1.5 million barrels a day.

    Oil traders now have options for how to move oil out of North Dakota. But there’s another reason they’re pulling back on the amount they put on the rails: It’s not as profitable as it used to be. Early on, the shale boom created an enormous glut of crude that ended up stuck in the middle of the country. Getting it to market meant putting it on trucks and trains and barges, which was expensive and slow. So the price of U.S. crude fell compared with international prices. By October 2011 a barrel of U.S. oil pegged to the West Texas Intermediate contract that trades in New York was $27 cheaper than an equivalent barrel priced against the Brent contract trading in London.

    That differential led to one of the biggest arbitrage opportunities the oil market has ever seen. Savvy traders could buy cheap oil in the middle of the U.S., find a way to move it, and sell it for higher prices along the coasts, where the market is more exposed to Brent prices. The price to send a barrel of oil by rail from North Dakota down to the U.S. Gulf Coast was about $9 or $10; the rest became profit. Over the past few years, millions of barrels of oil in North Dakota got loaded onto trains bound for the East Coast and the Gulf.

    But as the U.S. oil infrastructure reoriented around the shale boom and pipelines began moving domestic oil to the coasts, instead of moving imports into the heartland, the spread between WTI and Brent has narrowed. The crash in global oil prices has closed the gap even further, to the point that a barrel of WTI crude is now just $3 cheaper than a barrel of Brent. That’s not enough to make money if you have to ship it hundreds of miles on a train. Refineries in Texas and Louisiana have switched from railing oil in from North Dakota to importing more crude from West Africa.

    As a result, there’s now a glut of tank cars on the market. According to energy research firm Genscape, lease rates have fallen from $2,500 a month to about $500. Big refining companies, which are among the largest crude-by-rail shippers, are shifting their strategy and trying to lock in prices for three and four years rather than just a few months.

    David Vernon, a transportation analyst at Sanford C. Bernstein, thinks crude-by-rail traffic has peaked. “The heyday is over,” he said. “The high-water mark has likely been set in terms of volumes.”

    Canada’s growing oil production is expected to outpace its capacity of new pipelines.
    Canada’s growing oil production is expected to outpace its capacity of new pipelines.
    Citigroup

    Canada, however, could be a different story. Although the country’s oil sands industry is struggling against low prices, there are projects currently under construction that will be finished over the next few years. That extra oil will have to move somehow, and as of now, trains are looking like a strong candidate. Canada’s oil production is forecast to grow faster than pipelines can be built, especially now that the Keystone XL is officially dead. So while the number of trains loaded with crude crisscrossing the U.S. may diminish in the next few years, rail may remain a viable option in Canada.

     

     

      Oil Crash Means Biggest Boomers Halt Supply Growth in 2016

      Repost from Bloomberg Business

      Oil Crash Means Biggest Boomers Halt Supply Growth in 2016

      Grant Smith and Julian Lee, November 19, 2015 — 4:00 PM PST Updated on November 20, 2015 — 6:53 AM PST

      HIGHLIGHTS
      •  U.S., Iraq to both stop adding barrels amid price drop
      •  Faltering growth to spur global oil market rebalancing in 2016

      To understand what the oil price crash will mean for global crude supplies next year, look no further than the two nations that added more barrels to world markets in 2015 than anyone else.

      The U.S. and Iraq, whose extra crude this year equates to about 80 percent of the global surplus, will fail to boost output in 2016, according to the world’s biggest forecasters. While the U.S. curtailment is mainly because prices are too low to spur fresh supply, the Middle East country’s ability to boost output is also being crimped by a need to fund its battle with Islamic State.

      Slowing output in the the two fastest-growing producers signals the global glut, which has depressed oil prices to near $40 a barrel, may begin to dissipate next year, according to Barclays Plc. While that would start to fulfill Saudi Arabia’s plan to re-balance world crude markets, Iraq’s struggles show that producers in OPEC are also suffering as that strategy takes effect.

      “The U.S. and Iraq have been two of the biggest contributors to the global oil surplus and when we look at 2016, production in both will be challenged,” Torbjoern Kjus, an analyst at DNB ASA in Oslo, said by e-mail. “Accelerating decline rates and reduced investment will lead to falling U.S. output, while Iraq is unlikely to see much growth from further levels.”

      The two nations are now pumping the equivalent of 4.88 billion barrels a year, an increase of 1.77 billion barrels, or almost 60 percent, compared with their output rates at the start of 2012. To put that in context, oil inventories in Organization for Economic Co-operation and Development nations expanded by 314 million barrels, or 12 percent, in the corresponding period.

      U.S. shale production, which has driven a six-year boom in the nation’s oil output, will decline by 600,000 barrels a day next year, according to the International Energy Agency. Total U.S. oil supply is set to surge by 830,000 barrels a day this year, powered by shale formations in Texas and North Dakota. Oil traded at $40.39 a barrel in New York at 9:49 a.m. New York time.

      Iraqi production “is likely to remain broadly flat” next year as the OPEC member “is struggling with the stress of $50-a-barrel oil and a costly battle” with Islamic State militants, the IEA said in a report on Nov. 13. Baghdad is also straining to reimburse international oil companies for investments in southern fields. BP Plc cut this year’s operations budget by 60 percent to $1 billion. As oil prices halved, Iraq has had to pay twice the amount of crude to foreign firms who receive per-barrel fees in the form of cargoes.

      In the north, the semi-autonomous Kurdish region is struggling to pay partners amid a budget dispute with Baghdad. DNO ASA, the Norwegian operator of the Tawke field, and Gulf Keystone, which operates Shaikan, have said their plans are on hold until they receive overdue payments for output from the government. The Kurdistan Regional Government began making regular monthly transfers to companies in September, although DNO says it’s only receiving half of what it is owed for monthly exports and nothing towards reducing accumulated arrears.

      With output gains in jeopardy, “there are signs that the supply glut is easing,” said Kevin Norrish, managing director for commodities research at Barclays in London.

      “U.S. shale oil growth measured over last year’s levels is now coming to an end at last and given the infrastructure constraints in Iraq, plus an end to the upward trend in Saudi output it seems the phase of steadily rising OPEC production may be pausing for now as well,” he said. “The long, slow process of re-balancing the oil market continues.”