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31 May 2014

Press review 31-05-2014 - More "shale" jitters

Shock waves from the radical cut of source rock petroleum reserves estimates in the US have reverberated through the press this past week. Some claim this adjustment to be overdue, others try to convince investors that source rocks still turn a profit. At least one thing is certain: the optimism over these resources has been definitely shattered.

The revision to these source rock reserves came at a specially critical moment. OPEC faces all sorts of political constraints to petroleum extraction; meanwhile NATO plays games with Russia, the world's largest petroleum producer. These past few years have been characterised by remarkably stable prices and a dynamic market, but can it last under present circumstances?

Resource Insights
The great imaginary California oil boom: Over before it started
Kurt Cobb, 25-05-2014

The firm hired to do the original estimates, INTEK Inc., was saying as recently as December that it planned to raise its estimate for the Monterey to 17 billion barrels, presumably based on representations made to it by the industry.

The firm assumed, apparently without any justification, that the Monterey Shale would be just as productive as other shale deposits such as the Bakken in North Dakota and the Eagle Ford in Texas.

But the geology of the Monterey is riddled with folds and far more complex than other U.S. shale deposits, something that wouldn't have been too hard to find out from existing geological studies and well logs.

We cannot be sure whether those who wrote the wildly overoptimistic INTEK report were eager to encourage drilling and investment in the Monterey, something the oil industry certainly favored. But the colossal miss suggests the possibility that INTEK and its analysts have grown too close to the industry and are serving it rather than the EIA which commissioned the report.

[...] The other explanation for the Monterey miss is that the analysts at INTEK are simply colossally inept. Note that INTEK was also responsible for the overall U.S. assessment of 23.9 billion barrels of technically recoverable oil lodged in deep shale formations. The California miss alone reduced estimated U.S. resources to 9.1 billion barrels, a cut which by itself calls into question the entire premise of renewed American oil abundance. But, the gargantuan misreading of the Monterey Shale's resources also suggests that the firm's estimates for other areas of the country need review as well.
Following, an example of how the mainstream media tried to deal with this announcement. It amounts to little else than "keep the faith", but the change of sentiment is evident.
Relax: Monterey downgrade won’t dent US shale boom—yet
Javier E. David, 23-05-2014

How does a country cope when nearly 13 billion barrels of oil reserves vanish overnight?

A soon to be released government forecast says that California's Monterey Shale deposit will yield only 4 percent of what was originally hoped. The downgrade immediately raised questions about the sustainability of the still nascent U.S. energy boom, which has sent domestic oil and gas production to its highest level in nearly 40 years.

Because the Bakken and Eagle Ford shale plays currently generate nearly 70 percent of U.S. unconventional oil and gas, experts say the downgrade to Monterey does little to alter the near-term trajectory of the energy renaissance. However, they added it does bring into focus two major red flags: A well depletion factor that ramps up the urgency of finding new shale plays, and the need to upgrade new technology for that same purpose.
Below an excellent piece by Chris Martenson, pointing to the growing gap between promises and the reality of source rocks. Huge amounts of capital have been invested on these resources and it is looking less and less likely that all of it will be repaid.
Dream of U.S. energy independence was just revised away
Chris Martenson, 22-05-2014

Investors need to be wary here too. The hype about shale prospects are wedded to a Wall Street cheap capital machine that is showing clear signs of over-heating.

Up to now, shale companies, even those with the riskiest credit scores, have been finding no trouble raising gobs of capital from yield-starved investors. But those investors would do themselves a favor to run the numbers and think critically and carefully.

Taken as a whole, the independent petroleum producers in the U.S. will spend $1.50 drilling for every $1.00 of revenue they get back this year. That same spend-more-than-you-get dynamic has been in play since 2010. After four years of spending more than they get back, the free cash flows (FCF) of these companies have been quite negative.

How have they plugged the gap? With financing, of course, which is where Wall Street and the investors come into the story. But four years into the shale miracle is plenty of time to ask the obvious question: When will all these shale drilling efforts finally generate positive FCF?
Homage to Bloomberg, that has make it very clear this week that a sweep of bankruptcies is coming to the US petroleum and gas industry. Small enterprises over-leveraged on gas reserves are especially vulnerable.
Shakeout Threatens Shale Patch as Frackers Go for Broke
Bloomberg, 27-05-2014

The U.S. shale patch is facing a shakeout as drillers struggle to keep pace with the relentless spending needed to get oil and gas out of the ground.

Shale debt has almost doubled over the last four years while revenue has gained just 5.6 percent, according to a Bloomberg News analysis of 61 shale drillers. A dozen of those wildcatters are spending at least 10 percent of their sales on interest compared with Exxon Mobil Corp.’s 0.1 percent.

“The list of companies that are financially stressed is considerable,” said Benjamin Dell, managing partner of Kimmeridge Energy, a New York-based alternative asset manager focused on energy. “Not everyone is going to survive. We’ve seen it before.”
Closer to home, another blow was delivered to source rock hopes in the UK. The government has firmly promoted these resources in detriment of renewable energies, but things are not turning out as expected. The "shale" gas boom in Europe seems forever adjourned.
The Guardian
No shale gas potential in Weald basin, concludes British Geological Survey
Terry Macalister, 23-05-2014

Government hopes that Britain can emulate the US by starting a shale-gas revolution have been knocked back after a long-awaited report unexpectedly concluded there was no potential in fracking for gas in the Weald region of southern England.

Michael Fallon, the energy minister, insisted he was neither "disappointed nor happy" at the findings from the British Geological Survey and denied the government had hyped the potential for extracting shale gas in Britain.

He preferred to focus on more positive BGS findings that there could be 4.4bn barrels of oil in the shale rocks of the area, which stretches from Salisbury to Tunbridge Wells – although in practice recoverable reserves are likely to be a fraction of this.
Russia, a country that possesses real gas reserves, has been trying to diversify its pool of clients to the East. In the wake of events in Ukraine nothing else would be expectable. Bear in mind though that none of these plans can materialise in the short term.
Putin says Russia may speed up alternative gas route to China

Russia's President Vladimir Putin said on Saturday a route to supply gas to China via western Siberia may be implemented faster than the eastern route, through which Moscow has agreed to ship the fuel to its Asian neighbor.

Moscow and Beijing clinched a $400 billion gas deal this week after years of talks, which will help Russia to diversify gas supplies away from Europe, its main export market.

"The second project, if Chinese partners are positive towards it, may be implemented even faster than the eastern one," Putin said on Saturday.
Russia now seems to expect its costumers to the West to start really bidding for their share of gas.
Gazprom CEO says gas supply deal with China may affect European prices

The chief executive of Russia's state company Gazprom said that the company's deal to supply natural gas to China signed earlier this week may affect prices in Europe.

Russia and China signed a 30-year gas supply contract, worth a total of more than $400 billion, earlier this week during President Vladimir Putin's visit to the country.
And here some sharp commentary on this rapprochement between Russia and China. NATO is slowly losing its status has the strongest politico-military block in the world; in great because it no longer has access to the resources that allowed its dominance.
David Stockman's Contra Corner
When A “Pivot” Becomes A Boomerang: Obama’s Russian Sanctions Folly
Eric Margolis, 27-05-2014

Russia’s leader Vladimir Putin usually wear a perfect poker face. But last week in Shanghai, the icy-cold Russian president came awfully close to bursting into a big grin.

And why not? Putin had just stolen a march on his western rivals. The US-British attempt to wound Russia’s economy and punish Putin for disobedience had just blown up in their red faces.

After 20 years of difficult talks, Russia and China had just signed a huge deal that called for Russia to export 38 billion cubic meters of gas worth some $400 billion to China. The agreement begins in 2018 and will involve one of the globe’s largest engineering projects that links Russia’s remote gas fields to China’s pipeline system.

In addition, China will invest at least $20 billion in Russian industry and boost imports of Russian products, notably military systems. China will become Russia’s largest trade partner.
Time now to revisit a long standing problem: the growing cost of finding and extracting petroleum. This decline of the "majors" is also a reflex of the concentration of remaining resources in an ever limited number of countries, that by various reasons, escape to their sphere of influence.
Big Oil Spending More, Getting Less in Production
Karen Boman, 27-05-2014

Exxon Mobil Corp., Chevron Corp., Royalty Dutch Shell plc and BP plc recorded declines in their 2013 production. ExxonMobil reported an average production of 4,175 million barrels of oil equivalent per day (MMboepd), down 1.5 percent from 2012, and Chevron saw its production decline by .5 percent from 2012 to 2013 to 2,597 MMboepd. Shell’s average 3,199 MMboepd of production for 2013 was down 1.9 percent from 2012 levels, while BP saw its production volumes fall to 2,256 MMboepd, or 2.7 percent, from 2012 to 2013.

France’s Total S.A. was the only company to buck the trend in declining production, with average hydrocarbon production in 2013 of 2,299 MMboepd, Zacks Equity research analyst Nilanjan Choudhury said in a May 16 report.

“But overall, most ‘Big Oil’ is suffering from marginal or falling returns even as crude prices stay strong, reflecting their struggle to replace reserves, as access to new energy resources becomes more difficult,” said Choudhury. “As it is, given their large base, achieving growth in oil and natural gas production has been a challenge for these companies over the last many years.”
Not only the western majors face declines, in Saudi Arabia the sate petroleum company is also bracing for coming changes. Note here that until very recently the kingdom was still obtaining more than half of its petroleum from a single field: Ghawar.
The Barrel
New Frontiers: Change is coming to Saudi Aramco, the state oil company
Tamsin Carlisle, 19-05-2014

Time was when Saudi Aramco didn’t need to worry much about its ability to deliver all the oil needed to maintain Saudi Arabia’s share of the global market.

Throughout most of its 80-year history, the Saudi national petroleum company was in charge of unquestionably the world’s largest oil reserves with production costs among the world’s lowest. Pre-occupied mainly with maximizing the life-spans of big Saudi oil fields and enabling the kingdom to act as OPEC’s swing producer, Aramco hired or trained superb petroleum engineers to manage its massive reservoirs so that adjusting output from any given field became as easy as tweaking a valve.

However, much has changed in recent years, both globally and at home, to rock Aramco’s former equanimity. It is now being forced to consider such previously unthinkable strategies as putting gas development ahead of oil, getting serious about unconventional oil and gas resources, and conserving energy.
Another petroleum exporting country facing the dire of depletion is Norway, the second most important supplier to Europe, only behind Russia. The writing was on the wall for decades, but the addiction to the black gold is mighty. So far a tenant of wealth and social cohesion, it will be interesting to see how the Scandinavian country can preserve its values and social model when it stops being a net petroleum exporter.
IMF says Norway must spend less oil money

The IMF called on Norway to cut back on spending its oil income, saying the economy needs no further stimulus and the government should focus on fostering private sector growth instead as it begins the long transition to life after oil.

The budget has provided the economy with repeated stimulus even though it is running near capacity. The government needs to cut back, both to save the oil income and maintain a more neutral fiscal stance, the Fund said on Friday.

"The upward trend in government consumption and investment, together with the increasing labour demand from the oil and gas sector ... has crowded out and increased labour cost pressure in other exposed industries," the IMF said after ending its annual consultation with Norway.
The death spiral brought on fossil fuel electricity generation by affordable and decentralised renewable suppliers goes on. Not only these novel resources are slowly improving the resilience of the European economy, they are also dealing away with ill conceived policies. Such is the case with CCS.
IEEE Spectrum
Vattenfall Ditches Carbon Capture and Storage Research
Katherine Tweed, 09-05-2014

Vattenfall, one of Europe’s largest energy producers, announced this week that it will discontinue its research and development activities in carbon capture and storage (CCS) for coal-fired power plants.

The move comes as Vattenfall looks to shore up costs as profits fall considerably for European power producers. Vattenfall said in a statement that research will continue in smart grid, wind, hydro, coal, and nuclear.

[...] Europe’s power producers are already losing money on many coal and natural gas power plants due to depressed wholesale electricity prices from the recession, coupled with increased renewable capacity due to decarbonization policies. A study earlier this year from Oxford University [PDF] found that coal prices have fallen by about one-third in Europe since 2011.
Chris Nelder has sharp remarks on the present discussion around the Energiewende. The big four have tried hard to pass the idea that it is a failure, with the religious help of certain press groups. Yes it is a failure, but for the big four themselves, which own less than 10% of the renewable energy park installed in Germany the past decade. More than half of these new, decentralised systems are owned by common folk, and herein lies the problem.
The Extra Environmentalist

Chris Nelder, 20-05-2014

So far it’s been a very popular thing; most Germans support it, most Germans want to see the energy transition continuing. Most of the solar capacity and wind capacity, I believe, in Germany is actually not owned by the utilities, it is actually owned by the public where they buy small shares in these little solar and wind projects so everyone’s a stakeholder and it’s been highly effective. Germany does not have a great solar resource but they have managed to do it at a reasonable price. They have more solar capacity per capita than any other country in the world.

Naturally they’ve been the target of incumbents who are trying to fight energy transition and their mouthpieces in the press. Der Spiegel is constantly talking down the energy transition, constantly distorting the debate with sort of mistaken narratives about why grid power is so expensive. Well guess what, most of it isn’t because of the FIT for the solar. You know how expensive grid power would’ve been without it? Their recent uptake in coal power, well, it’s not really because they are phasing out nuclear and it’s not really because of their adoption of renewable power.

If Germany brought its nuclear reactors back online today, it would not displace coal. It would displace gas, because gas if far more expensive then coal over there. While it is a complex topic, I’m definitely a fan and I think Germany is doing a wonderful job of sort of showing the rest of the world how you can produce a large percentage of your grid power from variable sources like wind and solar at a reasonable price without the grid falling down. In fact Germany now has the most reliable grid in Europe. If you go back to 1993, people were saying, ‘If Germany ever had more than 3% of its grid power from renewables the grid would fall very because it is intermittent and it is much too expensive, stilly and stupid.’ Well guess what, they are getting 25% of their power from such sources and the most reliable grid in Europe.

The other side of this story is that the incumbent utility industry in Germany is now in serious serious trouble. The three largest utilities: EON, RWE and ENBW are struggling with what the CEO of RWE called, “the worst structural crisis in the history of energy supply.” They have falling consumption and growing renewable power which has made it unprofitable to continue operating coal, gas and oil fired plants. EON and RWE are going to close or moth ball 15 GW of gas and coal fired plants in the coming years and there’s another 12GW of nuclear plants that are going to be retired by 2020.
Sometimes the ignorance voted by the press to some news pieces is more striking than the news themselves. Such is the case with the announcement by the Chinese government that it is ditching Windows 8 altogether. There is certainly here more here than meets the eye.
China Bans Windows 8 From Use In Government
Joey-Elijah Sneddon, 20-05-2014

China has issued a ban on Windows 8 being used on official governmental computers in a move that may hasten adoption of open-source alternatives in the country.

Microsoft’s latest operating system is said to have continually struggled to find a foothold in China, where more than 50% of desktop computers still run on the 13 year old Windows XP.

China’s Central Government Procurement Center issued the edict banning Windows 8 from being used on government computers last week, as part of a notice on the use of energy-saving products.

Xinhua, the official news agency in China, said the ban was to “ensure computer security” following the axing of official support for Windows XP last month.
Have a pleasant weekend.

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