Economic & Petroleum trends collide this week, or do they?
Some very interesting coincidences this past week.
US recent economic growth has been revised upward to close to 4%, while the IEA has been once again warning that high oil prices will ruin growth (presumably trying to scare OPEC into thinking that, despite the data, they are killing the goose that laid the golden egg). Obviously the current prices of petroleum is not slowing growth significantly.
Interestingly enough, and contrary to what many individuals are experiencing in their own live, the US Govt. reported lower inflation number this week, to go along with the higher revised growth. One would think that, it would be through inflation that high oil and gas prices would cause economic damage. So far, apparently the damage has been light. Certainly not enough to scare OPEC into taking a gigantic pay cut by reducing prices. Remember that the only way to reduce prices is for the Saudis to produce more. This might maintain their income, but all the other exporters would see reduced revenue because they can't increase their production.
Do you think that Govt. and Industry observers have been able to put two and two together and start to understand the import of the "Peak Oil" concept at this late date? With only one country as swing producer for World Petroleum supply, is it any wonder that forward looking governments, like those in Asia, are out spreading around cash, trying to guarantee their own future supplies, while there are still some uncommitted? If you look at the Backwardization of the prices in oil future contracts in the farther out months and years, you will note that the prices decline farther out into the future, although Contango (increasing prices) has shown up in the near months. With the futures markets allowing you to buy crude for future delivery, at prices significantly cheaper than you can today, the inescapable conclusion is that more traders (and their brokerage houses, financial institutions, and hedge funds that buy and sell the contracts) apparently still don't get it. The are banking (literally) on their belief that prices will decline significantly and stay there. The evidence for this apparently is that prices have declined in the past and that nothing ever really changes. Since oil used to sell for $3 for many years, this belief is not difficult to demolish with actual facts.
Also this past week, we saw the Department Of Energy issue their weekly petroleum storage and inventory numbers a day late because of the holiday on Monday. The levels came in at amounts that should have been bearish for oil and gas, but the commodities moved higher and stayed well above $50. Could the Markets be starting to consider the secular trend rather than minor daily changes in demand due to weather and "lumpy" shipment schedules (where an extra ship or two unloading can temporarily change the storage numbers, until the next week when there are a couple fewer landings)?
The Saudi OPEC representative, in an interview this past week, said that they'd be content with $45 to $50 oil, moving the prior $40 OPEC floor higher than any other OPEC member statement to date, at least that I have seen. I have contended that we have a $40 (spot WTI price) floor on crude and that the Saudis, as the only OPEC swing producer, will cut production only if prices fall below that level. Lately they seem to have added a storage ceiling to the Intervention Trigger. If storage exceeds 51 days of supply, they will restrict supply in order to reduce inventories and support the price.
As usual, the Analysts seem behind the curve, so here is a story that gives (only) some of the reasons why almost every Major Broker firm analyst has been consistantly wrong about petroleum prices (and therefore petroleum companiy profits) for the past few years.
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Oil price surge defies forecasters
Even investors aren't factoring in $50 crude
By Lisa Sanders, MarketWatch
Last Update: 12:01 AM ET Feb. 26, 2005
DALLAS (MarketWatch) - As crude-oil futures climbed above $51 a barrel this week, analysts threw up their hands and wondered why.
"None of the historical correlations analysts have used - inventories primarily for oil, storage for natural gas, natural-gas and oil prices for rig counts -- work," said Jim Wicklund, managing director of energy research at Banc of America Securities.
"No one can really explain, with anything but a very broad brush, why crude oil prices are as high as they are."
Pointing to the Energy Department and American Petroleum weekly U.S. inventory reports, James Williams, an energy economist at WTRG Economics, said nothing in the data supports prices at this level. See Futures Movers.
That view is widely shared. Nevertheless, the benchmark light, sweet crude oil contract for April delivery finished the week up 10 cents at $51.49 a barrel despite the Energy Department's report of a build in crude supplies. For the week, the contract was up 5 percent.
A few analysts upped their price forecasts this week, including Deutsche Bank and Prudential Equity Group. Prudential increased its outlook for 2005 oil to $42 a barrel from $35 amid an upgrade of integrated oil stocks. See Ratings Game.
Still, analysts polled by Thomson First Call said they expect oil to average $40 a barrel. That's $1 higher than the January estimate and $2.43 more than the December estimate. See archived story.
Raymond James is ahead of most brokers' estimates with a $44 oil price forecast for 2005.
"But we're still too low," said Marshall Adkins, managing director of energy equity research at Raymond James. "There has been a fundamental shift in the oil markets."
One reason for the disparity between forecasts and the current price of crude is a bias on the part of analysts. Most analysts believe that oil will return to normal levels, though he said there's no longer a good way to gauge what is normal.
"This time is different than other times," Adkins said. "We've always had an oil bubble in our existence, where there was more supply capacity than demand, and that's essentially not the case anymore."
Secondly, demand from China has skyrocketed. And thirdly, in some areas of the world, supply growth has hit a wall.
Analysts are biased in another way.
"We're as guilty of this as anyone," Adkins said. "As analysts, you would rather be too conservative on your forecasts than too aggressive because you have to do more explaining on the high side than on the low side."
Even oil and gas equity investors aren't factoring in $50 oil or $7 natural gas into their equations, though the meteoric rise in the share prices of those companies, including Exxon Mobil Corp. (XOM: news, chart, profile) , give some pause. See Energy Stocks.
Adkins estimated that most investors are still using $30 oil and $5.50 natural gas prices as their market yardsticks.
"If you plugged in $50 oil and $7 gas into the numbers for exploration and production companies and the majors and carry that through to the service companies, you would end up with phenomenally large earnings," he said.
Under that scenario, oil and gas earnings would account for 20 to 25 percent of all S&P 500 earnings. Last year, they accounted for about 15 percent of the S&P 500 earnings.
Looking ahead, Raymond James has an oil price forecast of $40 for 2006 and beyond.
"We view that specifically as a floor, recognizing that in all probability, the prices will be meaningfully higher," Adkins said. "It's a floor because that is the price OPEC now seems willing to defend."
China is the BIG domino in the Currency Wars
Why China Won't Revalue
by Steve H. Hanke
Steve H. Hanke is a professor of Applied Economics at the Johns Hopkins University in Baltimore and a Senior Fellow at the Cato Institute.
In the wake of the Asian financial meltdown, experts predicted that China would devalue the renminbi. So did traders: Currency forwards priced in a significant devaluation. I didn't jump on that bandwagon. Indeed, the title of my Sept. 6, 1999 column, "Why China Won't Devalue," indicated my contrary call. And the right call it was. The exchange rate of 8.28 renminbi to the dollar hasn't budged since 1995. That fixed exchange rate doesn't suit everyone, however. Led by the U.S., a chorus of countries is loudly demanding that China ratchet up the value of its currency against the dollar. Such a revaluation is intended to make Chinese exports more expensive and less competitive. The Chinese authorities have politely demurred, but most experts think they will eventually succumb to international pressure. The markets agree. Hot money continues to flow into China, and the currency forward markets are pricing in a 5% renminbi revaluation against the dollar during the next year. Once again, I think the experts and the markets will be caught wrong-footed. I was introduced to the current Chinese currency flap on May 1, 2002, when the Senate Banking Committee held hearings on exchange-rate policy. This was pursuant to a 1988 law requiring the Treasury Department, in consultation with the International Monetary Fund, to determine whether countries like China are gaining an "unfair" competitive advantage in international trade by manipulating their currencies. Then-Treasury Secretary Paul O'Neill declared that none of our important trading partners had manipulated their exchange rates during the July-December 2001 reporting period. Five follow-up witnesses took the other side. They launched a well-choreographed attack on China's fixed exchange-rate regime and the 8.28 renminbi/dollar exchange rate. According to them, China was manipulating the exchange rate and the renminbi was undervalued. Consequently, China was an unfair trader. My testimony came last, and I took Secretary O'Neill's side. Since those 2002 hearings, foreign mercantilists have pushed revaluation of the renminbi to the front burner and turned up the heat, but with no results. The Chinese authorities refuse to alter the long-standing renminbi/dollar rate. In their eyes a fixed exchange rate, economic growth and stability are all tightly linked together. And in Beijing, stability might not be everything, but without it, everything is nothing. For this reason alone, it's hard to fathom a renminbi revaluation. There is, of course, plenty of local and regional history to reinforce Beijing's views about the dangers of meddling with an exchange rate. Consider Hong Kong, which abandoned its fixed exchange rate and floated its dollar in November 1974. The Hong Kong dollar did not float on a sea of tranquility, however. The volatility reached epic proportions in September 1983 when financial markets and the Hong Kong dollar sank. Hong Kong was in a state of panic, with people hoarding toilet paper, rice and cooking oil. The chaos ended abruptly on Oct. 15, 1983. That's when Hong Kong decreed that its dollar would be fixed at 7.8 to the U.S. dollar. The currency remains at that rate today. Japan is yet another object lesson. Under the Bretton Woods system the yen/dollar exchange rate was fixed at 360. Japan realized rapid growth and stability with this setup, which lasted until 1971. Since then Japan has been under mercantilist pressure, primarily from the U.S., to ratchet up the yen's value against the dollar. Tokyo has complied. Consequently, the economy has suffered from strong-yen-induced recessions and hasn't yet recovered from the enormous deflation of the 1990s. And the mercantilists in the U.S. remain agitated because Japan continues to register large trade surpluses. Now add to these factors the thoughts of Nobelist Robert Mundell. In July of last year he hosted some of his friends at Palazzo Mundell, a Renaissance villa near Sienna, Italy. When it came to China, I took careful notes. According to Mundell, a renminbi appreciation would cut foreign direct investment, cut China's growth rate, delay convertibility, increase bad loans, increase unemployment, cause deflation distress in rural areas, destabilize Southeast Asia, reward speculators, set in motion more revaluation pressures, weaken the external role of the renminbi and undermine China's compliance with World Trade Organization rules. Mundell is not a fan of revaluation. I recount these points because on October 28, 2004 Beijing announced the establishment of the Mundell International University of Entrepreneurship. It will be located in the Zhongguancun area, the "Silicon Valley of China." Connect the dots and you get a fixed exchange rate. This article also appeared in the February 28th issue of Forbes.
Keeping your oil in the ground
by: agrossfarm 02/23/05 12:25 pm
Keeping your oil in the ground (certainly the incremental production that would be costly to produce) is understandable and predictable, given the supply/demand outlook going forward (for those of us who look forward, rather than backward like many oil analysts, Majors, rating agencies, etc.).
Once this sinks into the petroleum outlook in your brain, I suggest you start to think about how this will increasingly affect oil exporters (if you haven't considered this already).
Rising prices and continued depletion
1. give them a disincentive to rush expensive recovery programs
2. makes selling additional volume unnecessary to meet their capital needs
3. makes it less adviseable for them to reduce their prices if/when demand temporarily declines
4. will eventually convince them that, even if alternatives like FT-conversion of gassified coal, nukes, and wind get competitive, that
a. petroleum prices will tend to stay high because of its use as chemical feedstock
b. the long timelag before the expensive alternatives are ubiquitous enough to be a competitive threat will still leave them with plenty of pricing power
I am looking for the extension of Contango further out the curve as the situation sinks into the hard heads of the disbelievers. This, IMO, includes many future traders and mid- to large sized industry players who are hedging and, by doing so, shooting themselves in the foot, month after month.
Perhaps we need a Petroleum Hedgers Anonymous, who like Goldcorp, can publicly make a committment to kick the habit and clean up their act.
some reasons why oil will get more expensive, from an industry insider
A letter from oil exploration insider
by Anonymous
I work for a major international oil company, in the exploration area. Peak oil is a fact – we are all on the back side of the bell curve.
While this is true, it might be better to term it the “Cheap-Oil Peak”. The US/UK/Western Europe are the entities primarily responsible for using up most of the oil prior to the mid-1980’s. Around that point, Asia and China got into the mix. As their economies heated up – more oil was used. This trend is still in effect.
I followed the link to that “Beware of the Peakoil Agenda”, which I probably shouldn’t have done. The ignorance of most of the world about what we do in oil exploration is amazing. Even the DOE has no idea how or what we really do – they are academics, and exist in their own government-funded bubble.
Provided the world can resist pulling the trigger on our debt, and we can resist pissing them all off in unison, we just might be ok for another 10 years, basically rolling along “as-is” but with higher oil/gas prices. We do have some untapped resources here, but there are some facts that most people do not understand with respect to the exploration industry.
1) We are drilling rig limited – we are at full capacity world wide in the offshore rig market, and even the small number of new drilling rigs they are building will not improve that appreciably. No drilling contractor is going to build rigs rapidly ever again – not after the disaster of cheap oil in the late ‘70’s and ‘80’s. Assuming oil jumped to $100/bbl tomorrow, little in our industry would change, because the drilling infrastructure has been cannibalized for 20 years…..we are already drilling as fast as we can!
2) We are personnel limited – in 1982 there were 1.6 million Americans working in the Oil & Gas sector, and today there are roughly 500,000. Imagine the hue and cry from any other industry at a job loss of well over 70% nationally!! The average age of people like me is 45 years old or older, with a great many facing retirement in the next 10 years. The age bracket between 30 and 45 is basically empty – who enters a consolidating, shrinking field intentionally? We simply do not have the available manpower to ramp-up in response to any stimulus - we are currently each doing the work of 2 or more people as we exist today!!
3) The notion that we are sitting on “capped wells” of oil or gas is utterly ludicrous. We simply do not drill and sit on reserves – they must be produced to pay for the enormous expenditures we have in drilling them, or shareholders would evaporate as our bottom lines became nonexistent. Wells are drilled based on the estimated oil price 6-12 months ahead, and that estimate is very bearish due to what happened in the 1980’s oil bust. Oil and gas actually move through rock – “sitting on capped wells” must have been invented by some environmental nut-basket, because there is no business or geological sense to it, and smart people follow the money.
4) We are finished with most of the “second tier” exploration domestically. What we have left in the ground is either uneconomical due to depth, temperature, technology or “other”. “Other” includes those wonderful people who NEVER want to see a drilling rig anywhere near them (NIMBY) or in their view. Thus we have been essentially “frozen out” of the west coast, the east coast, all of Florida and the Arctic frontier. If we were “turned loose” on all this acreage, it would require well over 36 months for the first drop to get to market. We must find it, delineate it, build a producing structure, and then ship it in states or areas that have no oil transportation or drilling support infrastructure!
5) Many people foolishly believe that higher prices will make the oil as valuable as gold is today. What they fail to realize is this: as liquid energy (oil) prices rise, all associated prices rise! Even if oil sells for $100/bbl, everything built with this $100/bbl oil will experience the same price increases, and likely more. This includes all plastics, steel, transportation and chemicals! We are currently bypassing the drilling of certain wells right now because the cost to get them out of the ground cannot be recovered. If our material costs (what we buy or rent to actually build an oil or gas well) rise with oil prices, many fields will never be produced, as it will always be uneconomical due to the small size of the oil trap.
6) For the most part, the biggest fields have been discovered world wide. What remains is technologically prohibitive (water depth, downhole temperature or sheer depth of the deposit). We are all fighting for the scraps as things exist today, with the exception of the African coast. There, we are fighting for our lives as well as oil. I have personally been shot at during overseas stints, and once held hostage by guerillas as they blew up our rig while we watched. We are not a bunch of sissy-boys in this industry, but we also have wives and children. West African production will never increase appreciably until their governments achieve stability. In other words, West Africa cannot help us in the foreseeable future.
Some numbers for the number bunch to crunch: The average offshore rig cost $24,000 per day to rent in 2003, and today the same 30 year-old-rig costs $40,000 per day to rent due to rig availability. Yes, most of our rigs are 30 or more years old – would you rent a cabin on a 30 year-old cruise ship? Yet this is what we drill oil wells with in the new millennium…..
Multiply that times the average 45 days to drill a “second tier” oil or gas well, you get $1,800,000 just for renting the drilling rig! No other mining industry or industry I know of has such tremendous up-front costs. The average price for a typical offshore well is around 3.7-4 million dollars. A production platform to bring the oil to is easily in excess of $10 million…….and these prices will escalate with energy costs!
It is not a question of “if” peak oil has occurred – it has! The better question might be “when are the crows coming home to roost?” When will we begin to actually experience the shortages and the rising prices? I think we might make a decade, if everybody plays nice across the world. But when has that ever happened when something got scarce?
Just wanted to get that off my chest. I have been maligned and spit on by too many people who drive cars and use electricity, and then bitch about prices or claim some kind of “Big Oil Conspiracy”…. I can tell you that the collective consensus within my business will be “let the bastards freeze in the dark” when the big wail arises.
Respectfully, (name withheld)
Myths about why we don't have to worry about future oil supplies
It seems like Major Oil Companies, Investment Brokers, and governments are convinced that, as usual, things will revert to the way they used to be, with unlimited cheap petroleum supplies becoming available in the near future. The author of the article below considers some of the reasons why this belief is held and easily shows why they are unrealistic.
The only addition I would make is that the Clean Coal Technology, that would allow the removal of essentially all pollutants, does exist and is economic at this time. The problem to date is that, because of the belief that cheap petroleum is coming back, people have been hesitant to invest in the infrastructure needed to spread the Clean Coal technology, Fischer-Tropsch conversion of gasified coal, which has been around in a less sophisticated form since about 1940.
Mythology
Andrew Nikiforuk
Canadian Business
17 Jan 2005
Eight wrong ways to think about the future of energy.
In 1976, Marion King Hubbert, the visionary U.S. geophysicist who once worked for Shell, warned that North Americans would soon face a bigger problem than US$50-a-barrel oil and astronomical gas prices. He defined the challenge as a "cultural" blindness to the realities of resource depletion. Because North Americans have known nothing but "exponential growth" in fossil fuels, Hubbert reasoned that we had become incapable of "reckoning with problems of non-growth."
Hubbert, who in the 1950s accurately predicted when oil production would peak in the United States (1970), also had a practical solution. He thought North Americans needed to undertake a "serious examination" of oil and gas trends, and their formidable economic implications, before shortages or price spikes made things really messy for ordinary business.
But a number of energy myths continue to smother, if not deter, the debate Hubbert envisioned. The status quo in industry and government avoids the word depletion; most argue that technology, looser regulations, more drilling or price mechanisms will keep the hydrocarbons flowing. (Statistics show Canadians are producing, consuming and exporting more energy than ever.) The oilpatch can't imagine the end of affordable fossil fuels any more than cod fishermen could imagine the end of cod.
An increasing number of geologists and gas analysts, however, believe that a fact does not cease to exist just because it is ignored. One of Canada's most serious examiners of energy trends and forecasts is Dave Hughes, a calm, deep-voiced Calgary-based geologist with Natural Resources Canada. Over the past two years, Hughes has put together (in his spare time, no less) an exhaustive open file on oil and gas supplies. His detailed presentation has surprised, alarmed and rankled bureaucrats, professional oilmen and CEOs alike. The facts not only question the country's pervasive energy myths; they warn that Canadian business will face crippling bills and shortages if the country takes a business-as-usual approach to energy supplies. "We are facing an energy crunch," says Hughes. "We can smoothly manage the transition to a more sustainable energy future, or the transition will manage us."
Hughes and many other analysts don't think we will be able to manage anything well until we reject the reigning assumptions and accept some disturbing realities.
The world has lots of oil
The world may have lots of oil, but it is running out of cheap conventional crude. Since 1965, demand for oil has increased by 150% worldwide, and rapid economic growth is now driving the biggest yearly increase in world demand in more than 20 years. Given that remaining oil supplies largely lie in "volatile terrain (the Middle East, Russia and West Africa), the distribution of oil has become a massive geopolitical headache. China and India's humming economies have added to the strain.
The resource is also in a persistent, undeniable state of decline. As Hughes notes, production has exceeded discoveries since 1983. In 2004, the BP Statistical Review of World Energy, the gold standard for real numbers on oil and gas, looked at 54 producing countries and outlined the disturbing face of oil depletion. Twenty-two nations, representing a third of the world's oil production, are in decline. Another 14 countries, accounting for 42% of the world's output, are producing on average 22% below their peak. Only 18 nations, accounting for a quarter of the world's production, have yet to experience a peak--but they will soon. Iran peaked in 1974 and Nigeria in 1979. The United Kingdom's North Sea bonanza peaked in 1999, and actually declined 9% over 2003.
Between 2008 and 2010, Hughes estimates world oil production will climb to 87 million barrels a day and then falter. Supplies will tighten and prices will continue their steady ascent. This collective peaking in deliverability simply means oil production can no longer grow to meet future demand (or even to offset depletion). As Hughes notes, the oil left "will be the hardest and most costly to extract." And much of it will require transportation through hazardous political geography.
With the world's oil production machine now fully deployed--production is at 99% of global capacity--energy security is now walking a tightrope. A snap cold spell or a hurricane in the Gulf of Mexico (not to mention bombs in Iraq) have already sent prices flying northward and will do so again. Energy vulnerability (what the media has dubbed "the fear factor") has arrived in our living rooms for a long stay.
Canada's oilsands can make up for declines in world conventional oil production
No way. Like most big energy projects, Alberta's oilsands will deliver more hyperbole than oil. The Alberta government claims the prolific sands hold as much as 311 billion barrels of recoverable oil--a prize greater than all of Saudi Arabia's oil wealth. True or not, this figure conveniently masks some key limitations--namely, says Hughes, "at what rate this oil can be produced and what the capital, energy and other limits to production growth are." After the Alberta Energy and Utilities Board and the Houston-based Oil & Gas Journal reported that 175 billion barrels of the tarry goo were proven reserves in 2002, the New York Times challenged the numbers as wishful thinking. In contrast to Alberta's figures, the ever-prudent BP Statistical Review lists only 16.9 billion barrels as recoverable and under active development. As Hughes notes, the 311 billion and 175 billion barrel figures just don't reflect economic, environmental and engineering constraints.
The costs present operational obstacles--and highlight that the oilsands are both an energy and a money pit. Hughes estimates that recovering 175 billion barrels over a 60-year period would require capital infrastructure costs of more than $400 billion, based on the current cost of extracting a barrel of oil from the sands. Such a gargantuan venture would yield an average of less than eight million barrels a day. (The United States consumed 20 million barrels a day in 2003, and the world is heading toward 82 million barrels a day in 2004, according to recent estimates.) Citizens might want to see that $400 billion go elsewhere. The Rocky Mountain Institute, a Colorado non-profit agency devoted to market-based solutions for resource conservation, recently calculated that the United States could end foreign oil imports with a number of measures--including buying up gas-guzzling vehicles--that would cost about US$180 billion over 10 years.
Another brick wall for the oilsands remains natural gas. Today, the oilsands consume nearly 5% of Canada's natural gas supply. It is being burned to extract bitumen, a tarlike mixture of hydrocarbons that is cooked into synthetic crude. By 2025, given a four-to-fivefold expansion in production, that gas addiction could account for 20% of national consumption. By then, the oilsands will burn nearly two billion cubic feet of gas a day--the entire predicted output of the Mackenzie Valley pipeline. "You could just direct that pipeline into Fort McMurray," says Hughes, referring to Alberta's oilsands capital, "unless alternative fuels such as petroleum coke are substituted for gas." Just a year ago, Thomas Driscoll, an analyst with Lehman Brothers Inc. in New York, issued the same warning.
Most analysts regard the burning of gas to make oil a process akin to turning gold into lead. The highest-value uses for natural gas are home-heating, fertilizer production and petrochemical manufacturing. Given that nearly 80% of Canadians use natural gas in their furnaces, politicians may have to decide whether the resource will be used to keep Canadians warm, exported for electrical generation to keep Americans cool or burned to cook up bitumen. No Canadian politician has sounded this alarm but, fortunately, Alan Greenspan, chairman of the U.S. Federal Reserve Board, has taken up the cause. In June 2003, he told Congress that Canada "has little capacity to significantly expand its exports [to the U.S.], in part because of the role that Canadian gas plays in supporting growing oil production from [its] tar sands."
In addition to tight gas supplies, the oilsands face critical shortages of water and condensate, a thinner derived from processing natural gas used to dilute the bitumen. It takes on average between one and two barrels of makeup water to produce a barrel of oil and, at forecast production growth, University of Alberta water ecologist David Schindler estimates the Athabasca River could be seriously compromised by 2020. As well, the National Energy Board predicts shortages of condensate needed to liquefy bitumen for pipeline transport as early as this year.
The National Energy Board's happiest scenario at the moment concludes that the oilsands could mine three million barrels of oil a day by 2025. "If this happens, Canada will produce a little more than 4% of forecast 2025 world demand," says Hughes. "It's no big thing in the world's scheme of things." But that resource will keep Canadian cars running.
The world has lots of natural gas
That's true. "The bad news is that most of it is not in North America," says Hughes. Places like the Middle East, Russia and Venezuela hold close to three-quarters of the world's remaining gas reserves and will soon become the new gas czars. North America consumes nearly one-third of the world's production (thanks in large part to industrial use, residential heating and electricity production), but the continent holds only 4% of reserves.
Canada, which boasts just 1% of global reserves, boosted production by 127% between 1986 and 2003 to feed domestic consumption growth and the expanding U.S. appetite for gas, and became the world's No. 2 gas exporter by the late 1990s, after Russia. Yet no federal or provincial government ever stopped to question the logic of rapidly disposing of a declining non-renewable resource at mostly rock-bottom prices.
Now production throughout the Western Canadian Sedimentary Basin is in a freefall (some say gas production peaked in 2001), while costly offshore drilling has come up dry. Canadian exports to the United States fell by 21% between 2001 and 2003. As a consequence, at current production rates Canada has less than a nine-year supply of discovered gas left. (Nearly 80% of Canada's estimated conventional gas endowment has yet to be discovered, according to the National Energy Board.) True, one-quarter of the world's drilling rigs are in Canada. Yet despite record drilling in 2003 (or what one analyst calls "brute force"--there were close to 14,000 successful gas wells drilled), production dropped by 3.6%. In 1997, the initial production of a typical new gas well was about 700 thousand cubic feet per day. Today, the average initial production of a new gas well is about 350 thousand cubic feet a day. That means many more wells must be drilled to offset natural production declines, which in Canada now total 21% a year. "What happens if that trend continues?" asks Hughes. "How many wells will we have to drill to keep production flat?" Rising gas prices in the United States have already shut down one-fifth of its nitrogen fertilizer industry.
The gravity of the natural gas crisis is just beginning to hit the public radar. At a recent National Energy Board conference, even ever-optimistic industry types noted "the gas supply situation is unsettling" and "we have crossed the Rubicon." Julian Darley, the author of High Noon for Natural Gas, says the situation is so serious "that it is too late to panic. It is time to plan." If Canadian politicians were sensible, they would recognize that this is a cold country, says Darley. "They would cut production and exports and work out depletion rates." Yet Canada has had no debate about the crisis. Replacing low-cost conventional gas with high-cost unconventional sources will be "an extreme challenge," according to Hughes.
If current production declines continue and growth in demand forecast by the U.S. Energy Information Administration is realized, a continental shortfall equivalent to 13 trillion cubic feet per year (about 42% of demand) could occur by 2025. Hughes predicts the crunch will arrive much sooner than that, unless as-yet-unproven windfalls result from unconventional gas sources. Banking on such things as gas hydrates or liquefied natural gas to offset declines in conventional production, says Hughes, "is akin to planning your finances on the assumption you will win the lotto in 12 or 15 years' time."
Coal-bed methane will avert a natural gas crisis
Don't bet on it. In the United States, the practice of removing methane from ancient coal seams has proven to be a controversial and emotion-laden issue, given aquifer depletion, contamination and other problems. To date, Canada's coal-bed methane industry has drilled nearly 3,000 wells, but its political and economic future remains uncertain amid heavy public and government consultation. Despite 20 years of conflict-laden pumping, the United States has yet to coax more than 8.5% of its natural gas from coal seams. Yet the National Energy Board predicts the industry could somehow milk between 13% and 23% of Canada's supply from coal-bed methane by 2025. Right now, about 0.5% of our gas comes from coal-bed methane seams in farm country northeast of Calgary.
According to a recent paper by the National Energy Board, coal-bed methane production can grow only with mind-boggling feats of intensive drilling. Projects in central Alberta between Calgary and Edmonton could further industrialize the landscape with up to 50,000 wells, and turn rolling prairie into "a manufacturing process," says the report.
Coal-bed methane production is already proceeding at a rapid pace in the West, but few analysts expect it to make up for conventional declines. "If we are going to meet the NEB prediction," says Hughes, "we have a lot of work to do."
Liquefied natural gas is a knight in shining armour
It might be in Camelot, but not in the real world. Taking gas from the Middle East, cooling it, pumping it onto a tanker and shipping it around the world to terminals where it can be unthawed into a gaseous state is already a major business. In fact, the world's 150 liquefied natural gas (LNG) tankers can now move enough gas to satisfy 6% of world consumption (more than five trillion cubic feet per year).
But LNG has powerful drawbacks. It requires costly infrastructure that takes about five years to build. An entire production and delivery system costs anywhere between $3 billion and $10 billion. The process of cooling, transporting and warming up the gas is energy-intensive, consuming 15% to 30% of the resource transported. And not many communities want an LNG terminal in their backyards. An accidental conflagration at one in Skikda, Algeria, in January 2004, killed 27 people and injured another 74. Terrorists have also targeted the highly flammable facilities. Public opposition has already killed eight North American proposals for LNG terminals over the past two years.
As president of WestPac Terminals Inc., a Calgary-based LNG company, Rob Woronuk has proposed a terminal for an island 11 kilometres off the coast near Prince Rupert, B.C. Unlike many projects, it would run on a quasi-utility model, so consumers wouldn't end up paying inflated prices. "Producers will get their share, but there will be a balance," says Woronuk. "LNG is going to be crucial." Still, everyone agrees it is no silver bullet.
Coal can't help us
Not true. Dirty coal is already experiencing a resurrection for the simple reason that it is the one hydrocarbon resource the world still has in abundance. In fact, 90% of North America's remaining hydrocarbons are coal, which is one resource the Middle East does not possess. Coal boasts a much lower heat cost than gas or oil, is easier to transport, and provides the lowest electricity costs on the planet. But coal also comes with toxic side effects: it produces twice the greenhouse gas emissions of natural gas. "The key to coal is better and cleaner technology," says Hughes. The best technologies now on the market can reduce greenhouse gas emissions and other pollutants by 30%. Even without expensive new technology, coal has became the world's fastest-growing hydrocarbon fuel source in 2002 and 2003.
With better technologies we will squeeze more fuel out of our fossil heritage
We can hope, but technology's track record is not inspiring. In the 1970s, fusion was going to solve our woes, and Richard Nixon even promised "hydrogen-fueled vehicles." But North Americans are still waiting for any meaningful application of either innovation. In fact, hydrogen looks more and more unlikely. It makes little sense from an efficiency perspective--the energy needed to crack the hydrogen for a fuel cell is greater than the energy produced--and many analysts conclude that simple conservation measures would be cheaper than any transition to hydrogen.
The promise of better technology often becomes nothing more than the delivery of greater force. Right now, more technology means more drilling rigs in the field. "That's not a technological innovation," says Woronuk. "That's just high prices and brute force." Nor is anyone really investing in the future. According to Statistics Canada, R&D related to energy fell to about $900 million in 2001 from $1.3 billion in 1983.
It is also instructive to note that the Ford Model T got better fuel mileage than most of its modern counterparts.
Don't worry, the market will take care of things
The National Energy Board believes higher prices will solve our natural gas woes by encouraging fuel switching and conservation. Yet as Houston-based Matt Simmons, the world's foremost private energy banker, has noted, "free markets and energy security do not mix." Deregulation in the 1980s did not expand supply options and only temporarily reduced costs. With no long-term guidelines and no surplus capacity, the only thing the market can deliver is "volatility," argues Simmons. Longtime gas analyst Woronuk agrees that volatility and price shocks don't make a plan. "Economics 101 will solve the mess, but the trouble is it will do so with a machete," he says. "It will hurt."
In November 2003, a number of energy specialists wrote in the British science magazine Nature that almost all forecasts on oil prices have a dismal track record for accuracy--yet decision makers still believe the market will yield enlightened policy. "We view this as recipe for disaster and it is enhanced by the failure of science to be used as fully as it should be," concluded the authors. Hughes draws similar conclusions. He notes business as usual is "not a sustainable option," and argues "a longer view is required than the lifespan of a typical government."
Given Hughes's forecasts, Canadian businesses have three choices: they can demand an energy plan from our political leaders, pray for a technological fix or a world depression--or prepare for a wild ride with energy supplies.
US$ weakness, Reserve/Benchmark Status and Oil prices
Yesterday, the Aussie $ was exceptionally strong, so I guess that was due to the news that went public today about Korea switching out of some of its US$ and into C$ and A$, although the C$ was not strong yesterday. We already know that Russia has reduced US$ holdings and it is a possibility that this is going on quietly in other Central Banks, including in the Middle East, who are trading more with Euroland these days, according to reports. Of course, the lower the US$ goes, the less buying power oil exporters get by selling in US$, but recent statements still suggest OPEC will not reduce production unless one of two things happen:
1. the OPEC basket price gets to $35 (which is at $40 or a bit above on WTI)
2. the worldwide excess supply gets above 51 days
Meanwhile, a significant currency move can change things, with US$ strength hurting the Euro-cost of raw materials, while weakness will hurt the US-cost, the balance of payments, etc. Those who have been reading this and the related threads know that some opinion suggests that the trend to decrease US$ holdings in Central Banks is likely (IMO) to be an increasing and escalating phenomenon unless some concrete measures are taken to solving the underlying problems. The ultimate (possible) end point (IMO) of significant loss of reserve and/or benchmark status will be very harmful for the US and quite disruptive for the World economy...not something to be wished for, unless you want more chaos.
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Published on Tuesday, February 22, 2005 by Reuters
Oil exporters' shift to euros behind dollar's fall: Soros
By Mona Migalla
JEDDAH, Saudi Arabia (Reuters) - Moves by Middle East oil exporters and Russia to switch some revenue from dollars to euros lie behind the U.S. currency's weakness, and a further rise in crude prices could prompt more declines, the billionaire investor George Soros said on Monday.
Soros told delegates to the Jeddah Economic Forum that the dollar's fall should help to lower the U.S current account and trade deficits, but warned that a fall beyond an undisclosed "tipping point" would severely disrupt markets.
The U.S. current account deficit is more than five percent of gross domestic product despite the currency's three-year slide. The dollar, however, has staged a comeback recently, gaining about 3.6 percent against the euro and three percent versus the yen so far this year.
"The oil exporting countries' central banks ... have been switching out of dollars mainly into euros and Russia also plays an important role in this. That is, I think, at the bottom of the current weakness of the dollar," Soros said.
Soros, dubbed "The Man who broke the Bank of England" for his role as a hedge fund manager in betting the pound would drop in 1992, said he was not predicting further falls in the value of the dollar. But he linked its fate to the price of oil.
"The higher the price of oil the more the dollars there are to be switched to euro (so) the strength of oil will reinforce the weakness of the dollar," he said. "That is only one factor, but I think there is such a relationship."
U.S. crude hit a record $55.67 a barrel late last year and prices remain close to $50 a barrel.
In later comments to Reuters, Soros said the U.S. current account deficit could be financed at the current level of the dollar. "There are willing holders of the dollar. There are the Asian countries that are happy to accumulate dollar balances in order to have an export surplus and a market for their dollars," he said.
Soros would not make detailed comments on why long-term borrowing costs have fallen in the face of short-term rate increases, a development U.S. Federal Reserve Chairman Alan Greenspan said on Wednesday he found difficult to explain.
"A flattening of the yield curve is usually an indication of a slowing economy, but here I don't know," Soros said.
The Hungarian-born financier, a critic of U.S. involvement in Iraq, said he was considering backing an Arab foundation to promote the ideals of civil and open societies in the region.
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Simmons on Petroleum Investing Myths & Reality
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http://www.simmonsco-intl.com/files/Maine%20Community%20Fund.pdf
Simmons' data takes on the the ideas used to suggest that history, fundamentals, and economics mean that prices will go back to the days of cheap energy.
A power-point-like presentation that provides some surprising data to counteract the ideas of those who believe/hope that history and progress is on their side, which is to say, that the high price of petroleum is only a temporary abberation.
Yahoo! CWEI
Yahoo! CWEI
Crude Contango reflects a Changed Game
by: agrossfarm 02/18/05 12:03 pm
Msg: 78091 of 78123
The change from Backwardization to contango is the result of dehedging (which lost the oil compnaies $billions) and high current prices plus the prospect that prices will be rising, not falling in the forseeable future.
PHASE 1:
When OPEC indicated it would defend $40 WTI spot, the game changed. The only force able to INCREASE supply and thereby reduce prices, was now going to be focusing on DECREASING supply if/when prices weakened.
PHASE 2:
When OPEC started to threaten to have teleconferences BETWEEN scheduled meeting to REDUCE output PRE-Emptively if/when storage was too high, it signaled that the price of crude was not going to even be allowed to decline to the $40 level.
IMO, this (in addition to the overall precarious supply/demand situation going forward) is why we have very firm petroleum prices, and Contango.
Why Bother?
I am and have been an active poster on quite a few Discussion Boards, both public and private, over the years. Responding to different people on different forums scatters bits of fact and analysis all over the place, so that it is harder to see the coherant progression and draw useful conclusions.
By collecting themes here and sheparding them forward, preferably with a input from readers, we can profit from them by making our lives better, or perhaps just keep things from getting as bad as they might if we were not as aware of what is happening.
