Category Archives: Oil Industry

Oil Trains: The Industry Speaks for Itself – a record of denial and deceit, in photos

Repost from Sightline Daily
[Editor: These images would be great for posters  (see below) – and the author speaks for me when he writes, “Government regulators have been slow to act, their responses painfully milquetoast. As a result, much of what I do involves research into the often-complex details of federal rulemaking procedures, rail car design standards, insurance policies, and the like—all the issues that Sightline is shining a light on….Yet on some level it’s not about any of that. It’s about a reckless and unaccountable oil industry that—in the most literal and obvious way—profits by putting our lives at risk. Every time I hear one of their accountability-shirking lines, I can’t help recalling images from those tragedies and near-tragedies.”  – RS]

Oil Trains: The Industry Speaks for Itself – a record of denial and deceit, in photos

By Eric de Place and Keiko Budech, December 30, 2014

A year and a half after an oil train inferno ended 47 lives in Lac-Megantic, Quebec, the crude-by-rail industry rolls on, virtually unimpeded. It’s hard not to feel horrified when, one after another, we register the place names of oil train explosions—Aliceville, Alabama; Casselton, View PostNorth Dakota; Lynchburg, Virginia—as grim warnings of what could happen in so many other North American communities.

Government regulators have been slow to act, their responses painfully milquetoast. As a result, much of what I do involves research into the often-complex details of federal rulemaking procedures, rail car design standards, insurance policies, and the like—all the issues that Sightline is shining a light on.

Yet on some level it’s not about any of that. It’s about a reckless and unaccountable oil industry that—in the most literal and obvious way—profits by putting our lives at risk. Every time I hear one of their accountability-shirking lines, I can’t help recalling images from those tragedies and near-tragedies. The juxtaposition is startling that we decided to undertake a small photo project to capture it. We hope that you’ll find the following useful in your own work, and if so, that you’ll share the images with your own networks.

It’s a practically a given that we’ll hear more empty reassurances and lies from oil and rail executives in the new year, and as growing numbers of oil trains crisscross the continent, there’s every likelihood we’ll have another catastrophe to catalog. To grasp the magnitude of the oil industry’s cynicism, it’s best to hear them in their own words.

Lynchburg, VA, Derailment by LuAnn Hunt
Lynchburg, VA, Derailment by LuAnn Hunt
Aliceville, AL, Derailment, by John Wathen
Aliceville, AL, Derailment, by John Wathen
Lac-Mégantic Derailment by TSB Canada
Lac-Mégantic Derailment by TSB Canada
Lac-Mégantic Derailment by TSB Canada
Lac-Mégantic Derailment by TSB Canada
Lac-Mégantic Derailment by David Charron
Lac-Mégantic Derailment by David Charron
Lac-Mégantic Derailment by TSB Canada
Lac-Mégantic Derailment by TSB Canada
Lynchburg, VA, Derailment by Michael Cover
Lynchburg, VA, Derailment by Michael Cover

Richard Heinberg report: The Oil Price Crash of 2014

Repost from RichardHeinberg.com

The Oil Price Crash of 2014

Museletter 271, December 23, 2014

Oil prices have fallen by half since late June. This is a significant development for the oil industry and for the global economy, though no one knows exactly how either the industry or the economy will respond in the long run. Since it’s almost the end of the year, perhaps this is a good time to stop and ask: (1) Why is this happening? (2) Who wins and who loses over the short term?, and (3) What will be the impacts on oil production in 2015?

1. Why is this happening?

Euan Mearns does a good job of explaining the oil price crash here. Briefly, demand for oil is softening (notably in China, Japan, and Europe) because economic growth is faltering. Meanwhile, the US is importing less petroleum because domestic supplies are increasing—almost entirely due to the frantic pace of drilling in “tight” oil fields in North Dakota and Texas, using hydrofracturing and horizontal drilling technologies—while demand has leveled off.

Usually when there is a mismatch between supply and demand in the global crude market, it is up to Saudi Arabia—the world’s top exporter—to ramp production up or down in order to stabilize prices. But this time the Saudis have refused to cut back on production and have instead unilaterally cut prices to customers in Asia, evidently because the Arabian royals want prices low. There is speculation that the Saudis wish to punish Russia and Iran for their involvement in Syria and Iraq. Low prices have the added benefit (to Riyadh) of shaking at least some high-cost tight oil, deepwater, and tar sands producers in North America out of the market, thus enhancing Saudi market share.

The media frame this situation as an oil “glut,” but it’s important to recall the bigger picture: world production of conventional oil (excluding natural gas liquids, tar sands, deepwater, and tight oil) stopped growing in 2005, and has actually declined a bit since then. Nearly all supply growth has come from more costly (and more environmentally ruinous) resources such as tight oil and tar sands. Consequently, oil prices have been very high during this period (with the exception of the deepest, darkest months of the Great Recession). Even at their current depressed level of $55 to $60, petroleum prices are still above the International Energy Agency’s high-price scenario for this period contained in forecasts issued a decade ago.

Part of the reason has to do with the fact that costs of exploration and production within the industry have risen dramatically (early this year Steve Kopits of the energy market analytic firm Douglas-Westwood estimated that costs were rising at nearly 11 percent annually).

In short, during this past decade the oil industry has entered a new regime of steeper production costs, slower supply growth, declining resource quality, and higher prices. That all-important context is largely absent from most news stories about the price plunge, but without it recent events are unintelligible. If the current oil market can be characterized as being in a state of  “glut,” that simply means that at this moment, and at this price, there are more willing sellers than buyers; it shouldn’t be taken as a fundamental or long-term indication of resource abundance.

2. Who wins and loses, short-term?

Gail Tverberg does a great job of teasing apart the likely consequences of the oil price slump here. For the US, there will be some tangible benefits from falling gasoline prices: motorists now have more money in their pockets to spend on Christmas gifts. However, there are also perils to the price plunge, and the longer prices remain low, the higher the risk. For the past five years, tight oil and shale gas have been significant drivers of growth in the American economy, adding $300 to 400 billion annually to GDP. States with active shale plays have seen a significant increase of jobs while the rest of the nation has merely sputtered along.

The shale boom seems to have resulted from a combination of high petroleum prices and easy financing: with the Fed keeping interest rates near zero, scores of small oil and gas companies were able to take on enormous amounts of debt so as to pay for the purchase of drilling leases, the rental of rigs, and the expensive process of fracking. This was a tenuous business even in good times, with many companies subsisting on re-sale of leases and creative financing, while failing to show a clear profit on sales of product. Now, if prices remain low, most of these companies will cut back on drilling and some will disappear altogether.

The price rout is hitting Russia quicker and harder than perhaps any other nation. That country is (in most months) the world’s biggest producer, and oil and gas provide its main sources of income. As a result of the price crash and US-imposed economic sanctions, the ruble has cratered. Over the short term, Russia’s oil and gas companies are somewhat cushioned from impact: they earn high-value US dollars from sales of their products while paying their expenses in rubles that have lost roughly half their value (compared to the dollar) in the past five months. But for the average Russian and for the national government, these are tough times.

There is at least a possibility that the oil price crash has important geopolitical significance. The US and Russia are engaged in what can only be called low-level warfare over Ukraine: Moscow resents what it sees as efforts to wrest that country from its orbit and to surround Russia with NATO bases; Washington, meanwhile, would like to alienate Europe from Russia, thereby heading off long-term economic integration across Eurasia (which, if it were to transpire, would undermine America’s “sole superpower” status; see discussion here); Washington also sees Russia’s annexation of Crimea as violating international accords. Some argue that the oil price rout resulted from Washington talking Saudi Arabia into flooding the market so as to hammer Russia’s economy, thereby neutralizing Moscow’s resistance to NATO encirclement (albeit at the price of short-term losses for the US tight oil industry). Russia has recently cemented closer energy and economic ties with China, perhaps partly in response; in view of this latter development, the Saudis’ decision to sell oil to China at a discount could be explained as yet another attempt by Washington (via its OPEC proxy) to avert Eurasian economic integration.

Other oil exporting nations with a high-price break-even point—notably Venezuela and Iran, also on Washington’s enemies list—are likewise experiencing the price crash as economic catastrophe. But the pain is widely spread: Nigeria has had to redraw its government budget for next year, and North Sea oil production is nearing a point of collapse.

Events are unfolding very quickly, and economic and geopolitical pressures are building. Historically, circumstances like these have sometimes led to major open conflicts, though all-out war between the US and Russia remains unthinkable due to the nuclear deterrents that both nations possess.

If there are indeed elements of US-led geopolitical intrigue at work here (and admittedly this is largely speculation), they carry a serious risk of economic blowback: the oil price plunge appears to be bursting the bubble in high-yield, energy-related junk bonds that, along with rising oil production, helped fuel the American economic “recovery,” and it could result not just in layoffs throughout the energy industry but a contagion of fear in the banking sector. Thus the ultimate consequences of the price crash could include a global financial panic (John Michael Greer makes that case persuasively and, as always, quite entertainingly), though it is too soon to consider this as anything more than a possibility.

3. What will be the impacts for oil production?

There’s actually some good news for the oil industry in all of this: costs of production will almost certainly decline during the next few months. Companies will cut expenses wherever they can (watch out, middle-level managers!). As drilling rigs are idled, rental costs for rigs will fall. Since the price of oil is an ingredient in the price of just about everything else, cheaper oil will reduce the costs of logistics and oil transport by rail and tanker. Producers will defer investments. Companies will focus only on the most productive, lowest-cost drilling locations, and this will again lower averaged industry costs. In short order, the industry will be advertising itself to investors as newly lean and mean. But the main underlying reason production costs were rising during the past decade—declining resource quality as older conventional oil reservoirs dry up—hasn’t gone away. And those most productive, lowest-cost drilling locations (also known as “sweet spots”) are limited in size and number.

The industry is putting on a brave face, and for good reason. Companies in the shale patch need to look profitable in order to keep the value of their bonds from evaporating. Major oil companies largely stayed clear of involvement in the tight oil boom; nevertheless, low prices will force them to cut back on upstream investment as well. Drilling will not cease; it will merely contract (the number of new US oil and gas well permits issued in November fell by 40 percent from the previous month). Many companies have no choice but to continue pursuing projects to which they are already financially committed, so we won’t see substantial production declines for several months. Production from Canada’s tar sands will probably continue at its current pace, but will not expand since new projects will require an oil price at or higher than the current level in order to break even.

As analysis by David Hughes of Post Carbon Institute shows, even without the price crash production in the Bakken and Eagle Ford plays would have been expected to peak and begin a sharp decline within the next two or three years. The price crash can only hasten that inevitable inflection point.

How much and how fast will world oil production fall? Euan Mearns offers three scenarios; in the most likely of these (in his opinion) world production capacity will contract by about two million barrels per day over the next two years as a result of the price collapse.

We may be witnessing one of history’s little ironies: the historic commencement of an inevitable, overall, persistent decline of world liquid fuels production may be ushered in not by skyrocketing oil prices such as we saw in the 1970s or in 2008, but by a price crash that at least some pundits are spinning as the death of “peak oil.” Meanwhile, the economic and geopolitical perils of the unfolding oil price rout make expectations of business-as-usual for 2015 ring rather hollow.

Bankers See $1 Trillion of Zombie Investments Stranded in the Oil Fields

Repost from Bloomberg News

Bankers See $1 Trillion of Zombie Investments Stranded in the Oil Fields

By Tom Randall, Dec 17, 2014
A disused mining machine is displayed in front of an oil sands extraction facility near the town of Fort McMurray, Alberta, Canada. | Photographer: Mark Ralston/AFP via Getty Images

There are zombies in the oil fields.

After crude prices dropped 49 percent in six months, oil projects planned for next year are the undead — still standing upright, but with little hope of a productive future. These zombie projects proliferate in expensive Arctic oil, deepwater-drilling regions and tar sands from Canada to Venezuela.

In a stunning analysis this week, Goldman Sachs found almost $1 trillion in investments in future oil projects at risk. They looked at 400 of the world’s largest new oil and gas fields — excluding U.S. shale — and found projects representing $930 billion of future investment that are no longer profitable with Brent crude at $70. In the U.S., the shale-oil party isn’t over yet, but zombies are beginning to crash it.

The chart below shows the break-even points for the top 400 new fields and how much future oil production they represent. Less than a third of projects are still profitable with oil at $70. If the unprofitable projects were scuttled, it would mean a loss of 7.5 million barrels per day of production in 2025, equivalent to 8 percent of current global demand.

How Profitable Is $70 Oil?

Source: Goldman Sachs Global Investment Research. Annotated by Tom Randall/Bloomberg

Source: Goldman Sachs Global Investment Research. Annotated by Tom Randall/Bloomberg

Making matters worse, Brent prices this week dipped further, below $60 a barrel for the first time in more than five years. Why? The U.S. shale-oil boom has flooded the market with new supply, global demand led by China has softened, and the Saudis have so far refused to curb production to prop up prices.

It’s not clear yet how far OPEC is willing to let prices slide. The U.A.E.’s energy minister said on Dec. 14 that OPEC wouldn’t trim production even if prices fall to $40 a barrel. An all-out price war could take up to 18 months to play out, said Kevin Book, managing director at ClearView Energy Partners LLC, a financial research group in Washington.

If cheap oil continues, it could be a major setback for the U.S. oil boom. In the chart below, ClearView shows projected oil production at four major U.S. shale formations: Bakken, Eagle Ford, Permian and Niobrara. The dark blue line shows where oil production levels were headed before the price drop. The light blue line shows a new reality, with production growth dropping 40 percent.

Even $75 Oil Crashes the Shale-Oil Party

Source: ClearView Energy Partners LLC

Source: ClearView Energy Partners LLC

The Goldman tally takes the long view of project finance as it plays out over the next decade or more. But the initial impact of low prices may be swift. Next year alone, oil and gas companies will make final investment decisions on 800 projects worth $500 billion, said Lars Eirik Nicolaisen, a partner at Oslo-based Rystad Energy. If the price of oil averages $70 in 2015, he wrote in an email, $150 billion will be pulled from oil and gas exploration around the world.

An oil price of $65 dollars a barrel next year would trigger the biggest drop in project finance in decades, according to a Sanford C. Bernstein analysis last week.

A pause in exploration and development may sound like good news for investors concerned about climate change. A vocal minority have been warning for years that potentially trillions of dollars of untapped assets may become stranded due to climate policies and improved energy efficiency. The challenges faced by oil developers today may provide a small sense of what’s to come.

However, these glut-driven prices can’t stay low forever. Oil production hasn’t slowed yet, but as zombie projects go unfunded, it will. This is how the boom-bust-boom of the oil market goes: prices fall, then production follows, pushing prices higher again. The longer this standoff goes, the more zombies will languish and the sharper the rebounding price spike may be.

Bloomberg News: Exxon Mobil Shows Why U.S. Oil Output Rises as Prices Plunge

Repost from Bloomberg News
[Editor:  An excellent analysis – “follow the money.”  Significant quote: “The average cost to operate an existing well in most parts of the U.S. “is about $20 a barrel,” Petrie said. “It might be $5 higher or it might be $5 lower, that’s the out-of-pocket costs that we’re talking about. Until you dip into that and start losing money on a cash basis day in, day out, you don’t think about shutting in” wells.”  – RS]

Exxon Mobil Shows Why U.S. Oil Output Rises as Prices Plunge

By Joe Carroll – Dec 18, 2014

Crude oil production from U.S. wells is poised to approach a 42-year record next year as drillers ignore the recent decline in price pointing them in the opposite direction.

U.S. energy producers plan to pump more crude in 2015 as declining equipment costs and enhanced drilling techniques more than offset the collapse in oil markets, said Troy Eckard, whose Eckard Global LLC owns stakes in more than 260 North Dakota shale wells.

Oil companies, while trimming 2015 budgets to cope with the lowest crude prices in five years, are also shifting their focus to their most-prolific, lowest-cost fields, which means extracting more oil with fewer drilling rigs, said Goldman Sachs Group Inc. Global giant Exxon Mobil Corp. (XOM), the largest U.S. energy company, will increase oil production next year by the biggest margin since 2010. So far, the Organization of Petroleum Exporting Countries’ month-old bet that American drillers would be crushed by cratering prices has been a bust.

Oil Prices

“Companies that are already producing oil will continue to operate those wells because the cost of drilling them is already sunk into the ground,” said Timothy Rudderow, who manages $1.5 billion as chief investment officer at Mount Lucas Management Corp. in Newtown, Pennsylvania. “But I wouldn’t want to have to be making long-term production decisions with this kind of volatility.”

A U.S. crude bonanza that has handed consumers the cheapest gasoline since 2009 has left oil exporters like Russia and Venezuela flirting with economic chaos. The ruble sank as much as 19 percent on Dec. 16 to a record low of 80 per dollar before recovering to close at 68; Russian bond and equity markets also crumbled. In Venezuela, the oil rout is spurring concern the country is running out of dollars needed to pay debt and swaps traders are almost certain default is imminent.

Profitable Wells

U.S. oil production is set to reach 9.42 million barrels a day in May, which would be the highest monthly average since November 1972, according to the Energy Department’s statistical arm.

Output from shale formations, deep-water fields, the Alaskan wilderness and land-based wells in pockets of Oklahoma and Pennsylvania that have been trickling out crude for decades already have pushed demand for imported oil to the lowest since at least 1995, according to data compiled by Bloomberg.

Existing wells remain profitable even as benchmark crude futures hover near the $55-a-barrel mark because operating costs going forward are usually $25 or less, Tom Petrie, chairman of Petrie Partners Inc., said in a Dec. 15 interview on the Bloomberg Surveillance television program.

Shut Ins

That’s why prices that have tumbled 47 percent from this year’s peak on June 20 haven’t prompted any American oil producers to shut down wells, said Petrie, a U.S. Military Academy at West Point graduate who has advised Saudi Arabia, Alaska and the U.S. government on energy issues.

The average cost to operate an existing well in most parts of the U.S. “is about $20 a barrel,” Petrie said. “It might be $5 higher or it might be $5 lower, that’s the out-of-pocket costs that we’re talking about. Until you dip into that and start losing money on a cash basis day in, day out, you don’t think about shutting in” wells.

Benchmark U.S. crude futures rose 0.3 percent to $56.63 a barrel at 9:55 a.m. in New York Mercantile Exchange trading. The futures are still on track for their fourth straight weekly decline.

Once oil companies sink cash into drilling wells, lining them with steel pipes and concrete, blasting the surrounding rocks into rubble with hydraulic fracturing, and linking them to pipeline systems, they have no incentive to scale back production, said Andrew Cosgrove, an analyst at Bloomberg Intelligence in Princeton, New Jersey.

Sunk Costs

Those investments, which represent “sunk costs,” are no longer a drain on cash flow, Cosgrove said. Instead, they generate capital companies use to repay debt, fund additional drilling, pay out dividends and buy back shares, he said.

Exxon, the world’s biggest oil producer by market value, is expected to boost crude and natural gas output by 2.8 percent next year to the equivalent of 4.1 million barrels a day, based on the average of eight analyst estimates compiled by Bloomberg.

That would arrest a two-year production slide for the Irving, Texas-based company, which is spending about $110 million a day this year on everything from rig leases to offshore platforms to refinery repairs. Chairman and CEO Rex Tillerson pledged in March to raise output by an annual average of 2 percent to 3 percent during the 2015-2017 period.

Cheapest Oil

At the same time, Tillerson said capital spending would drop below $37 billion in each of those years, partly because mammoth investments like the Kearl oil-sands development in western Canada and the Gorgon liquefied natural gas project on Australia’s Indian Ocean coast will no longer be absorbing cash.

In the U.S., Exxon spent an average of $12.72 to extract a barrel of oil last year, its cheapest operating region aside from Asia and Europe, company figures showed. Some operators have even lower costs: Continental Resources Inc. (CLR) spends about 99 cents to pump each barrel from its 1.8 billion-barrel discovery known as the South Central Oklahoma Oil Province, or SCOOP. Continental, controlled by Oklahoma billionaire wildcatter Harold Hamm, discovered the SCOOP in 2012.

Laredo Petroleum Inc., an explorer of Texas’s Permian Basin that has more than tripled production since 2010, said this month it will slash capital spending by about 50 percent next year. The company still sees 2015 output expanding by 12 percent. Shares in the Tulsa, Oklahoma-based company jumped as much as 15 percent after the Dec. 16 announcement.

As oil explorers retrench in response to the market’s decline, they will drill more selectively, Eckard said. Seismic surveys will be more closely scrutinized to ensure the best chances of striking crude and only the most-promising opportunities will be greenlighted, he said.

“We’re only going to see the very best wells drilled over the next 12 to 18 months,” Eckard said. “It’s going to be exciting.”