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27 February 2016

Press review 27-02-2016 - Shale oil at the edge of time

Volatility marked again petroleum markets this week, with prices varying over 5% in every session. Friday the Brent index flirted with 37 $/b, the highest value since the very beginning of the year, but went on to close just over 35 $/b. This volatility was greatly fuelled by a constant stream of news regarding the US industry, that seems on the brink of a watershed of defaults and bankruptcies.

This was also the week when news finally broke of companies halting petroleum extraction from the Bakken formation in North Dakota. It took over one year of depressed prices for these low EROEI resources to be abandoned. And this is just the beginning, as many other low quality resources around the world meet a similar fate. 2016 is setting to stage what may be the deepest fall in worldwide petroleum extraction since the beginning of the Iran-Iraq war.

Financial Times
Continental and Whiting to halt new Bakken formation wells
Ed Crooks, 25-02-2016

The two largest oil producers in the Bakken formation of North Dakota, one of the heartlands of the US shale boom, are giving up bringing new wells into production, in a stark illustration of the problems faced by the industry.

Continental Resources and Whiting Petroleum are cutting back on well completions as part of steep reductions in capital spending intended to stabilise finances following the fall in crude prices.

The moves will lead to significant cuts in their production this year, part of a forecast decline in US oil output that is expected to help curb the oversupply in global crude markets.
The stock market reaction to these announcements attests well to the reigning mindset that brought about the present downturn. Most investors seem largely disconnected from reality.
Whiting slashes budget, suspends fracking; shares jump
Ernest Scheyder, 24-02-2016

North Dakota oil producer Whiting Petroleum Corp said on Wednesday it will suspend all fracking and spend 80 percent less this year, the biggest cutback to date by a major U.S. shale company reacting to the plunge in crude prices.

Shares of Whiting jumped 7.7 percent to $4 per share in after-hours trading as investors cheered the decision to preserve capital. During the trading session, Whiting had slid 5.6 percent to $3.72.

Whiting's cut is one of the largest so far this year in an energy industry crippled by oil prices at 10-year lows. The cuts will have a big impact in North Dakota, where Whiting is the largest producer.
Take good notice of the figures referenced below. These source rock (or "tight") resources in the US are flowing around 140 Mb each month, harnessing just over 4 G$ in the period. Out of that companies must pay all operational, transport and storage costs and still find 1.2 G$ to pay interests.
Shale Faces March Madness With $1.2 Billion in Interest Due
Asjylyn Loder, 18-02-2016

The U.S. shale industry must come up with $1.2 billion in interest payments by the end of March as $30-a-barrel oil makes it harder for companies to scrape up the cash needed to stay current on their debts.

Almost half of the interest is owed by companies with junk-rated credit, according to data compiled by Bloomberg on 61 companies in the Bloomberg Intelligence index of North American independent oil and gas producers. Energy XXI Ltd. said in a filing Tuesday that it missed an $8.8 million interest payment. The following day, SandRidge Energy Inc. announced that it didn’t make a $21.7 million interest payment.

"You’ve seen two of these happen in two days, and I wouldn’t be surprised to see more in the next month as these payments come due," said Jason Wangler, an energy analyst at Wunderlich Securities Inc. in Houston.

A parallel story is evolving around two particular bankruptcy processes in the gas industry that threaten to contaminate the whole downstream sector. With a third of the industry at risk of bankruptcy this might well be inevitable.
As U.S. shale sinks, pipeline fight sends woes downstream
Tom Hals, 23-02-2016

In the two court fights, U.S. energy producers are trying to use Chapter 11 bankruptcy protection to shed long-term contracts with the pipeline operators that gather and process shale gas before it is delivered to consumer markets.

[...] Pipeline operators have argued the contracts are secure, but restructuring experts say that if the two producers manage to tear up or renegotiate their deals, others will follow. That could add a new element of risk for already hard-hit investors in midstream companies, which have plowed up to $30 billion a year into infrastructure to serve the U.S. fracking boom.

"It's a hellacious problem," said Hugh Ray, a bankruptcy lawyer with McKool Smith in Houston. "It will end with even more bankruptcies."

[...] So far, relatively few oil and gas producers have entered bankruptcy, and most were smaller firms. But with oil prices down 70 percent since mid-2014 and natural gas prices in a prolonged slump, up to a third of them are at risk of bankruptcy this year, consultancy Deloitte said in a Feb. 16 report.
Here is an interesting take on these matters that bundles stock market weakness with the rapid decline of petroleum prices. The outlook for the financial system is somewhat benign, which parts of the interview itself contradict.
The Danger Of Low Oil Prices For The Global Economy
Nick Cunningham, 21-02-2016

We should dissect the term "shut in." In the case of crude oil, I would say, shutting down is happening in several ways. One is no new investment in drilling. Any offshore drilling ship that is coming off a charter won't get another charter. It will have an anchor for a while waiting for the markets to come back. If the market doesn't come back sooner or later they are going to scrap it.

One of the reasons that the stock market is so negative on the outlook is that we...I'm a professor of finance so I say "we"...we don't know what percentage of the capital assets in the world are tied to crude oil - exploration, production, transport, refining, and distribution. That might be 25 or 30 percent of the [total] capital assets in the world. It wouldn’t be as low as 10 percent.

So if somewhere between 10 and 30 percent of the fixed assets in the world are considerably less valuable than they used to be...I'm not saying they are worthless. I'm just saying that they are a lot less valuable than they used to be. If you own an oil rig right now in Oklahoma or North Dakota, um, good luck man. I'm not sure you are going to find any work for that thing very quickly.
Perhaps banks can survive this market, but some countries might not. For Iraq this downturn comes at the wrong moment, when it would need to rebuild what Daesh destroyed.
Iraq On The Brink Of Chaos As Oil Revenues Fall
Charles Kennedy, 21-02-2016

Iraqi oil revenues have fallen to just 15 percent of what they used to be, the embattled prime minister said, despite a boost in production ordered last year.

The surge in production has failed to compensate for the collapse of oil prices, and the situation is dire when oil revenues constitute around 43 percent of Iraq’s gross domestic product (GDP), 99 percent of its exports and 90 percent of all federal revenues.

[...] This has prompted the Al Abadi government to announce strict austerity measures across institutions, including significant salary cuts for middle-class government employees. Protest rallies were held against delayed salaries, which later turned violent in some parts of Iraq, including the Kurdistan region.
It is not only the Bakken shutting in, the North Sea follows down the same path. In this latter case the outlook can be somewhat more permanent.
Financial Times
North Sea exploration nears standstill
Kiran Stacey, 23-02-2016

Exploration for oil and gas in the North Sea has all but ground to a halt as low oil prices take their toll on companies, according to a report published on Tuesday by the industry trade body.

Oil and Gas UK predicts companies could drill as few as seven exploration wells this year — fewer than at any time since it started collecting the data in the late 1970s. That would compare with 13 last year and 40 in 2008.

The organisation also says that the North Sea industry as a whole will spend just £1bn looking for new sources of oil and gas — one eighth of the average over the past few years.

[...] Oil and Gas UK, which represents members from across the British offshore oil industry, said revenues dropped last year by 30 per cent. Nearly half of all fields are now loss-making.
Propaganda, wishful thinking, there are many names to describe what Euan Mearns tackles below. The way these "news" develop point to how prevailing the flat earth doctrine still is.
Energy Matters
The Gatwick Gusher
Euan Mearns, 22-02-2016

Rumours are circulating that a hundred billion barrels of oil has just been discovered at Gatwick airport. I first came across this story at WUWT who tipped their hat to the GWPF. To place this in context, the UK North Sea has produced around 28 billion barrels of oil since production began in 1975. How could we Brits be so dumb as to miss 100 billion barrels just waiting to be pumped from under the home counties?

The well that has caused so much interest is called Horse Hill 1 (HH1) located to the south of London near Gatwick airport on a geological structure called the Weald Basin. This area is already home to a number of small oil fields (Figure 1). HH1 made an oil discovery that flowed at 456 barrels per day from a Kimmeridge age limestone (See Figures 1 and 2). This is very decent for an onshore well these days but at this rate it would take 219 million days to produce that rumoured 100 billion barrels, i.e. 600,817 years. Alternatively, 1000 wells producing at this rate would produce the oil in just 601 years. That’s still a long time for investors to wait for their returns. How do we bridge this gap between 100 billion barrels of oil in the ground and a flow rate of 456 barrels per day?

Something exceptional is happening in Libya. I suspect that Daesh is gaining such momentum that European powers were forced to act. Even if they can not admit a direct involvement without some sort of political stability.
Report: Germany Mulling Military Training Mission In Tunisia

Germany is considering sending troops to Tunisia to help train soldiers in the fight against the Islamic State group, a newspaper report said on Sunday.

Bild am Sonntag said that representatives of the defence and foreign ministries would hold talks in Tunis on Thursday and Friday about how the German military could lend support in a training mission.

It said the engagement envisaged training Tunisian soldiers first and could eventually be extended to setting up a training camp in Tunisia for Libyan soldiers, run with other international partners.
As noted previously, these recent movements are just preparatory work to what will have to be a large scale operation to stabilise the region that NATO itself destabilised.
The Guradian
French special forces assisting anti-Isis efforts in Libya, say sources
Chris Stephen and Kim Willsher, 24-02-2016

Sources in Libya say French special forces are among those working against Islamic State in the country. A small French detachment has been operating from Benghazi’s Benina airport, the sources have reported, assisting forces of the internationally backed Libyan authorities in Tobruk.

According to Le Monde, special forces units, alongside France’s external security directorate, the DGSE, have been in Libya for several months, and coordinated the November US strike on Derna which killed the most senior Isis leader in the country, Iraqi Abu Nabil al-Anbari. The Pentagon has confirmed that US forces were deployed there in January.

At foreign affairs select committee hearings in London earlier this month, UK Foreign Office minister Tobias Ellwood declined to comment on British special forces operations, but said the RAF was flying missions over the country in preparation for possible attacks on Isis. Italy announced on Monday that it would allow armed US drones to strike Libyan targets from bases in Sicily.
Remember that meme about the US having 250 years of coal underground? It turns it is more like 40 years. Beyond prices, pay special attention to the remarks on "stripping ratio" which can be taken as a an accurate proxy for EROEI. At lest in the US the earth does not seem to be flat.
Associated Press
Amid coal market struggles, less fuel worth mining in US
Matthew Brown, 23-02-2016

To gauge how much coal remains, USGS researchers since 2004 have analyzed the geology from minerals removed by 30,000 holes drilled deep into the earth. The data revealed almost 1.1 trillion tons of coal buried across the 20,000-square mile Powder River Basin. Of that, only 162 billion tons is within coal seams considered thick enough and close enough to the surface to make extracting them worthwhile.

The amount drops even more drastically when the coal's quality is factored in and compared against current prices. When the USGS data was first compiled, in 2013, Powder River Basin coal was selling for $10.90 a ton, resulting in about 23 billion tons being designated as economically-recoverable.

With coal prices down to $9.55 a ton, the reserve estimate has plummeted to just 16 billion tons, Haacke said. That's equivalent to 40 years at the current production pace of 400 million tons annually from the basin's 16 mines in Wyoming and Montana.

Meanwhile, mining costs have trended up. That's been driven by an increase in the "stripping ratio" - how many tons of earth must be removed to mine a ton of coal -- as the region's thick coal seams curve gradually deeper into the earth.
Ending with a note on science. Western countries live in this conundrum where citizens pay for scientific research but cannot access its results. If governments do not act to solve this issue someone else will. If someone has not done so already.
Why one woman stole 47 million academic papers — and made them all free to read
Brian Resnick, 17-02-2016

Many academic journals are extremely expensive. Want to read just one article? That could cost you around $30. The best way to access academic papers is through universities or libraries. But those institutions can pay millions of dollars a year to subscribe to a comprehensive collection.

Alexandra Elbakyan has had enough.

Elbakyan is a Russia-based neuroscientist turned academic Robin Hood. In 2011 she founded the website Sci-Hub, which has grown to host some 47 million academic papers — Elbakyan claims this is nearly all the paywalled scientific knowledge that exists in the world. These papers are free for anyone to view and download.

For students and researchers around the globe who can't afford academic journals, Elbakyan is a hero. For academic publishers that have historically been shielded from competition, she's a villain.
Have a good weekend.

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