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18 October 2014

Press review 18-10-2014 - Shale Zeppelin

The market slide of recent weeks gave place to full panic, with large volumes of capital fleeing all kinds of assets. In what concerns commodities (and energy in particular) this trend is resembling ever more the crash of 2008. So far OPEC has remained put, avoiding any export cuts to support petroleum prices. All look out for a bottom that is not divisible for the time being.

Companies operating on the source rocks of the US seem the hardest hit, with many imprudent investors swiftly loosing their money. And it is not just the market downturn, these investors where seduced by a marmaid's chant that now turn sour.
We're Sitting on 10 Billion Barrels of Oil! OK, Two
Asjylyn Loder and Isaac Arnsdorf, 10-10-2014

Lee Tillman, chief executive officer of Marathon Oil Corp., told investors last month that the company was potentially sitting on the equivalent of 4.3 billion barrels in its U.S. shale acreage.

That number was 5.5 times higher than the proved reserves Marathon reported to federal regulators.

Such discrepancies are rife in the U.S. shale industry. Drillers use bigger forecasts to sell the hydraulic fracturing boom to investors and to persuade lawmakers to lift the 39-year-old ban on crude exports. Sixty-two of 73 U.S. shale drillers reported one estimate in mandatory filings with the Securities and Exchange Commission while citing higher potential figures to the public, according to data compiled by Bloomberg. Pioneer Natural Resources (PXD) Co.’s estimate was 13 times higher. Goodrich Petroleum Corp.’s was 19 times. For Rice Energy Inc., it was almost 27-fold.
One of the dramas for many of these companies are production quotas associated to land leases, that force them to keep extracting petroleum irrespective of prices. Much seems yet to be lost in this fool's game.
Here's why shale oil stocks are tanking
Bob Pisani, 10-10-2014

[...] But there's no doubt that things get a bit difficult for some producers when oil is in the low $80's, which is where it is heading now.

And rather than differentiate between companies...which is what analysts are paid to do...there is a lot of indiscriminate selling. Oil vs. gas, doesn't matter. Sell and ask questions later.

Here's another point: the depletion rate is very high in these wells. You are literally squeezing oil from a rock. It can be on the order of 80 to 90 percent depletion over a couple years. So you have to constantly keep drilling new wells to meet the production quota.

And there really isn't a lot of options. They have to drill, or they don't have cash flow. And they still have to make the interest payments!
In fact this price crash seems to be in large measure itself produce of the so called "shale boom". The treadmill into which many companies fell created an highly inelastic supply curve, almost unresponsive to prices. Their troubles cold be just beginning.
Business Week
U.S. Oil Producers May Drill Themselves Into Oblivion
Matthew Phillips, 13-10-2014

Remember the fall of 2008? As the world spun out of control and the price of everything crashed, a barrel of oil lost 70 percent of its value over about five months. Of course, prices never should’ve been as high as $146 that summer, but they shouldn’t have crashed to $40 by the end of that year either.

As the oil market has recovered, there have since been three major corrections, when prices have fallen at least 15 percent over a few months. We’re now in the midst of a fourth, with oil prices down more than 20 percent since peaking in late June at around $115 a barrel. They’re now hovering in the mid-$80 range and could certainly go lower. That’s good news for U.S. consumers, who are finally starting to reap the rewards of the shale boom through low gasoline prices. But it could spell serious trouble for a lot of oil producers, many of whom are laden with debt and exaggerating their oil reserves.

In a way, oil companies in the U.S. are perpetuating the crash by continuing to drill and push up U.S. oil production to its fastest pace ever. Rather than pulling back in hopes of slowing the amount of supply on the market to try and boost prices, drillers are instead operating at full tilt and pumping oil as fast as they can. Just look at the number of horizontal rigs in the field:
The amounts loss just in stock value are staggering already. As these companies hit the end of the line there will be even higher losses with the debt they have racked up the past few years.
Business Insider
There Has Been A Massive Rout In Oil Drillers And We Might Be Nowhere Near The Bottom
Myles Udland, 15-10-2014

On Wednesday, crude fell below $81 a barrel, its lowest level since 2012 and more than 20% lower than it was this past summer when it was trading above $105.

There are numerous possible reasons for and repercussions from this decline, but one sector of the market has really been taking it on the chin as crude has tumbled: oil drillers.

Almost the entire sector is in a bear market, or has seen stock prices fall at least 20%, over the past couple of months.

Over the previous quarter, some of the notable losers include Nabors, down 42%, Seadrill, down 40%, Whiting Petroleum, down 33%, Transocean, down 33%, Concho Resources, down 34%, and Helmerlich & Payne, down 32%.

And while these might not be megacap companies like ExxonMobil or Chevron, these aren't microcaps either: all of the above companies have market caps above $5 billion.
In spite of this débâcle some still see hope for source rocks. In the end it all boils down to the ability to find enough inprudent investors to pay the tab.
Business Insider
Argentina Is On The Verge Of A Huge Boom In Shale Oil Fracking
Stefano Pozzebon, 14-10-2014

Argentina could be the forefront of the next shale oil revolution, according to a report Morgan Stanley published today. Of all the areas analyzed, the Latin American country displays the most favourable conditions, and the lowest investment costs (graphic above).

[...] The Vaca Muerta basin has similar characteristics to one of the richest drilling areas in the US, the Eagle Ford basin in Texas. It is sufficiently thick and rich of liquid resources to foresee a consistent output.

Its richest area, the Loma Campana highlighted in the graphic above, is already producing 21,000 barrel of crude a day for a joint venture of YPF and Chevron.
Heavy petroleums are in most cases costlier than the liquids extracted from compact rocks. Even though not affected by the drilling treadmill of the US, these resources are naturally set to take too the hit from the price crash. This is another risky class of investments where a downturn is no surprise.
The Daily Impact
Letting Go of the Tar (Sands) Baby
Tom Lewis, 10-10-2014

Just as is the case in the American tight (shale) oil plays, things in the Canadian tar sands are breaking down fast, and for the same reason: wringing the last few barrels of oil out of the earth is proving to be far more expensive than hoped. Two weeks ago the Norwegian energy giant Statoil postponed for at least three years building a new tar sands project designed to pump 40,000 barrels a day; earlier this year Total SA of France, the fifth-largest oil company in the world, suspended operations at its $10 billion oil sands mine while it tries to figure out a way to make a profit; and Shell announced in February indefinite suspension of work on a prospective 200,000-barrel-a-day mine. (The same Shell that has been quietly folding its 13-billion-dollar hand in the US shale-oil bonanza and tiptoeing from the building? Yes, the very same.)

Meanwhile the US government remains catatonic about deciding whether to permit a pipeline to be built from Canada to the Gulf of Mexico to carry a product that no one seems to be able to produce profitably, to refineries whose customers are overseas.
Iraq briefly emerged in the news this week. While the US and its allies focus their air strikes on regions bordering Kurdish control, the Islamic State army keeps advancing to the south, where it seems to retain the initiative.
The Independent
War against Isis: US air strategy in tatters as militants march on
Patrick Cockburn, 12-10-2014

[...] Unfortunately for the US, Kobani isn't the only place air strikes are failing to stop Isis. In an offensive in Iraq launched on 2 October but little reported in the outside world, Isis has captured almost all the cities and towns it did not already hold in Anbar province, a vast area in western Iraq that makes up a quarter of the country. It has captured Hit, Kubaisa and Ramadi, the provincial capital, which it had long fought for. Other cities, towns and bases on or close to the Euphrates River west of Baghdad fell in a few days, often after little resistance by the Iraqi Army which showed itself to be as dysfunctional as in the past, even when backed by US air strikes.

Today, only the city of Haditha and two bases, Al-Assad military base near Hit, and Camp Mazrah outside Fallujah, are still in Iraqi government hands. Joel Wing, in his study –"Iraq's Security Forces Collapse as The Islamic State Takes Control of Most of Anbar Province" – concludes: "This was a huge victory as it gives the insurgents virtual control over Anbar and poses a serious threat to western Baghdad".

The battle for Anbar, which was at the heart of the Sunni rebellion against the US occupation after 2003, is almost over and has ended with a decisive victory for Isis. It took large parts of Anbar in January and government counter-attacks failed dismally with some 5,000 casualties in the first six months of the year. About half the province's 1.5 million population has fled and become refugees. The next Isis target may be the Sunni enclaves in western Baghdad, starting with Abu Ghraib on the outskirts but leading right to the centre of the capital.
Fears of an advance towards Baghdad have been spun for long, but in great measure to emphasise the need of foreign help by the Shiites. However, after over one year of war, the Shiites are yet to turn the table on the Islamic State, so far doing little more than managing their retreat. Lacking a disruptive event, the Shiite army seems fated to consign itself to the areas where it has popular support.
International Business Times
Iraqi Troops Abandon Military Base To ISIS Raising Concerns Over Military Strategy In Iraq And Baghdad's Safety
Christopher Harress, 14-10-2014

The Iraqi military's abandonment of a military base near the town of Hit, near the capital of Anbar province, calls into question the strategy of coalition airstrikes supported by local army units as sufficient to stop the Islamic State advance on Baghdad. The base abandonment left Hit under full jihadist control.

“There’s no question that there are problems with the current military strategy, but it’s doubtful that ISIS could actually take Baghdad,” said Benjamin Friedman, research fellow in defense and homeland security at the Cato Institute, a Washington think tank. “The Iraqi military should function better defending Baghdad than it does in Anbar, but even if they took control they are gonna have a hard time governing it without suffering the same sort of violent insurgency the United States did.”

[...] However, the fight for Baghdad has seemingly already begun as ISIS sleeper cells carry out daily bombings and assassinations while the main ISIS fighters continue to probe areas around the capital. If it pushes into Baghdad, ISIS, which numbers 30,000 to 50,000 fighters, will come up against 60,000 government troops that have been tasked with defending the capital. But as was seen with Hit and other towns around the country, questions still remain over the discipline of those troops in Baghdad, who may not previously have come up against a group like ISIS.
Closing the petroleum section a note on the second International Congress on Peak Oil held in Barbastro by António Turiel, a friend of AtTheEdgeOfTime. The robotic translation to English can be accessed here.
The Oil Crash
Barbastro llamando a la Tierra
António Turiel, 13-10-2014

Los pasados 9 y 10 de Octubre tuvo lugar en Barbastro (una pequeña localidad situada cerca de los Pirineos, en el nordeste de España) el Segundo Congreso Internacional sobre el Pico del Petróleo. Acudieron como ponentes algunas destacadas personalidades internacionales en el mundo del pico del petróleo, comenzando por el Presidente de la Asociación para el Estudio del Pico del Petróleo y Gas (ASPO), Kjell Aleklett, y media docena de especialistas del más alto nivel. También hubo algunos ponentes de perfil menos técnico pero que se dedican a hacer divulgación sobre este tema, como un servidor. A petición de muchos lectores he elaborado este relato breve, completamente subjetivo, sobre el contenido de las ponencias que hemos podido escuchar estos dos días. Cuando los vídeos estén disponibles los enlazaré en el nombre del ponente.
The soap opera over gas supplies to Ukraine goes on. Russia maintains its ambiguous stance: supplies to Europe will remain reliable as long as Ukraine gets nothing. Attached to these half-threats is another push for the South Stream; Russia may well get what it wants.
Russia Today
Putin: If Ukraine siphons gas from pipeline, Russia will reduce Europe supplies

Moscow will reduce gas supplies if Kiev starts siphoning deliveries destined for Europe, said Russia’s President Vladimir Putin during a visit to Serbia.

“There are large transit risks. If we see that our Ukrainian partners start illegally taking our gas from the export pipeline as it was in 2008, we will equally reduce the amount of supply as happened in 2008,” warned Putin on Thursday at a news conference in Belgrade, stressing he was "hopeful" it would not come to that.

However, the Russian president pledged that Moscow will supply enough gas to Europe this winter.

"I can tell you for sure, and I am saying with absolute responsibility, there will be no crisis in Europe due to the fault of Russian participants in energy cooperation," Putin stressed.

"Russia has always been a reliable supplier, we have enough resources."
And to make sure this is not just barking, Russia started courting another potential costumer for its gas: Japan. The European Commission and the European Council stick to their poker face, but everyone knows they held a week hand.
Russia pitches undersea gas pipeline to Japan
Takayuki Tanaka, 15-10-2014

Russia has proposed building a pipeline to transport natural gas to Japan, an offer apparently aimed at strengthening economic ties between the two countries amid stiff economic sanctions imposed on Moscow by the West.

The plan to connect the gas-rich Russian island of Sakhalin with the northern Japanese island of Hokkaido was presented last month, according to diplomatic sources. This would mark the first pipeline between Japan and another country.

Russian President Vladimir Putin and Japanese Prime Minister Shinzo Abe could discuss the proposal when they meet on the sidelines of the Asia-Pacific Economic Cooperation summit in Beijing on Nov. 10 and Nov. 11.
More hints emerged on the absolute disaster that is the push by the Polish government for the extraction of gas from its source rocks. A rumour has been circulated for years by non-official sources indicating that the gas locked in Polish rocks is mostly composed by nitrogen (i.e. air), with only one third of it actually being methane. The article below is the closest yet to confirm this information.
Fracking Setback in Poland Dims Hope for Less Russian Gas
Marek Strzelecki and Isis Almeida, 10-10-2014

Poland’s ambition to achieve energy independence from Russia is being undermined by drillers giving up on the nation’s shale wells after disappointing results.

The highest test flows during the country’s five-year search for unconventional gas were just 30 percent of what’s needed for commercial production, said Pawel Poprawa, a geologist at the AGH University of Science and Technology in Krakow. The number of active shale permits has fallen 43 percent from a high in January 2013 and explorers probably won’t extend all those expiring this year, according to Slawomir Brodzinski, the nation’s deputy environment minister.
Closing the fossil fuels section an updated on the coal situation in India; an end to shortages is not yet in sight.
Severe coal shortage at Indian power plants hits industries
Krishna N Das, 10-10-2014

A power plant in India's capital New Delhi is among 37 across the country that have either exhausted their coal or have less than four days' supply, a shortage that has forced some states to ration power for industries and homes.

Many states have been hit by a severe power deficit which has dealt a blow to small-scale factories that produce everything from steel to textiles and cannot afford alternatives such as diesel generators.

"The situation is very bad, with power cuts of up to 16 hours a day," said Vijay Agarwal, a director at Puja Ferro Alloys in Goa state. "The shortage has raised our costs while output is at 60 percent of what it should be."
On alternative technologies an announcement by the Nanyang Technical University in Singapore made it to the home page of various media. It all looks too good to be true, but with such a short schedule to expected commercialisation there might be seem something here worthy to keep an eye on. If successful, this is one more technology that has to be barred from common folk by governments, otherwise traditional centralised electricity suppliers will face daunting difficulties.
Nanyang Technical University
NTU develops ultra-fast charging batteries that last 20 years

Scientists at Nanyang Technology University (NTU) have developed ultra-fast charging batteries that can be recharged up to 70 per cent in only two minutes.

The new generation batteries also have a long lifespan of over 20 years, more than 10 times compared to existing lithium-ion batteries.

This breakthrough has a wide-ranging impact on all industries, especially for electric vehicles, where consumers are put off by the long recharge times and its limited battery life.

[...] The technology is currently being licensed by a company for eventual production. Prof Chen expects that the new generation of fast-charging batteries will hit the market in the next two years. It also has the potential to be a key solution in overcoming longstanding power issues related to electro-mobility.

“Electric cars will be able to increase their range dramatically, with just five minutes of charging, which is on par with the time needed to pump petrol for current cars,” added Prof Chen.
And just yesterday came the news of the first commercial project for one of the oldest technologies whose time is yet to come: Maglev. The figures on cost and time put out any hope of a short term impact on the energy balance, but it is good to finally have the test of fire to this technology.
The Japan Times
Tokyo-Nagoya maglev line is a go, government tells JR Tokai

The government on Friday approved an application by Central Japan Railway Co. to build an ultrahigh-speed magnetic levitation railway line linking Tokyo and Nagoya by 2027.

JR Tokai plans to extend the line to Osaka by 2045, shortening the trip between the two metropolises from the current 138 minutes by shinkansen to 67 minutes by maglev.

The overall cost of the work is estimated at ¥9 trillion.
Closing, important information out of Italy, that in spite of being largely ignored by the traditional media, may end up having relevant consequences for the IT industry in Europe. Chances are of this ruling of illegality over the bundling of hardware and software to spread to the rest of EU, in which case many companies will be forced to consider their business models.
The Windows tax fight is finally over: Buyers can get a refund on their Microsoft OS in Italy
Federico Guerrini, 10-10-2014

Not happy to find Microsoft Windows preinstalled in your new computer? In Italy, you can now get a refund on your unwanted OS after a recent ruling handed down by Italy's High Court opened up new possibilities for unsatisfied customers.

Nine years after he first took his case against Windows OEM HP (who originally sold him a PC and Windows software as a bundle) to court, Florence resident Marco Pieraccioli succeeded in having the cost of software license repaid. The decision could set a precedent, speeding up other complaints about hardware and software bundling, but replicating Pieraccioli's success could prove to be more difficult than you might think.
The sun is out for the weekend, enjoy it while it lasts.

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