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Why Malthus got his forecast wrong The one chart about oil's future everyone should see The Montana Bakken oil play: 'Great news for a great play'
OilVoice Magazine | JANUARY 2013
Adam Marmaras Chief Executive Officer Issue 10 – January 2013 OilVoice Acorn House 381 Midsummer Blvd Milton Keynes MK9 3HP Tel: +44 208 123 2237 Email: email@example.com Skype: oilvoicetalk Editor James Allen Email: firstname.lastname@example.org Chief Executive Officer Adam Marmaras Email: email@example.com Social Network Facebook Twitter Google+ Linked In Read on your iPad
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Welcome to the 10th edition of the OilVoice magazine, the first for 2013. 2012 was a year of innovation for the site. We launched this magazine, completely overhauled the jobs board, and improved our newsletters. But we can never sit still, and have plenty of exciting plans for 2013. Be sure to keep a regular eye on the site. December is usually a quiet month for the industry, and I was worried that the January issue might be a little 'light'. But I've been happily proven wrong and this month we have great articles like Why Malthus got his forecast wrong, The one chart about oil's future everyone should see and The Montana Bakken oil play: 'Great news for a great play'. What are your plans for 2013? If it involves reaching more people in the industry, then there is no better place to advertise than on our site and this magazine. Take a look at our media pack for our reasonable rates. Have a great 2013!
Adam Marmaras CEO OilVoice
OilVoice Magazine | JANUARY 2013
Featured Authors Biographies of this months featured authors Why Malthus got his forecast wrong by Gail Tverberg Will artificially high oil prices last much longer? by Andrew McKillop The one chart about oil's future everyone should see by Kurt Cobb Recent Company Profiles The most recent companies added to the OilVoice directory The Montana Bakken oil play: 'Great news for a great play' by Keith Schaefer The global anti-fracking movement: What it wants, how it operates and what's next by Jonathan Wood Why world coal consumption keeps rising; What economists missed by Gail Tverberg AIM Oil & Gas - 2013 likely to kick off takeover activity by Richard Jennings Argentina and protectionism: Shooting itself in the foot by Richard Ethrington Venezuela: Six more years of decline under Chavez by Richard Ethrington
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OilVoice Magazine | JANUARY 2013
Andrew MacKillop OilVoice Contributor
Andrew MacKillop is an energy and natural resource sector professional with over 30 years experience in more than 12 countries.
Jonathan Wood Control Risks
Jonathan Wood leads Control Risks’s strategic analysis practice, which provides analysis and consultancy on global business risks to oil and gas operating companies, service companies, shipping companies, and investment community.
Kurt Cobb Resource Insights
Kurt Cobb is an author, speaker, and columnist focusing on energy and the environment. He is a regular contributor to the Energy Voices section of The Christian Science Monitor and author of the peak-oil-themed novel Prelude. In addition, he writes columns for the Paris-based science news site Scitizen, and his work has been featured on Energy Bulletin, The Oil Drum, OilPrice.com, Econ Matters, Peak Oil Review, 321energy, Common Dreams, Le Monde Diplomatique, and many other sites.
Gail Tverberg Our Finite World
Gail Tverber has an M. S. from the University of Illinois, Chicago in Mathematics, and is a Fellow of the Casualty Actuarial Society and a member of the American Academy of Actuaries.
Richard Jennings Spreadbet Magazine
Richard’s background is from within the traditional fund management environment and he has been an active spread better for over 15 years now, making almost 7 figures from his trading during this period. Qualified as a Chartered Financial Analyst, and with a thorough understanding of technical analysis, derivatives and economic issues, he provides the bedrock to the blog content.
Keith Schaefer Oil & Gas Investments Bulletin Keith Schaefer. . He is a former equities reporter and columnist. who specialised in small cap drilling and mining companies – during which time he built up an impressive portfolio of industry contacts. is also a fully trained sub-editor and reporter. 24. a BA Hons Political Science graduate.4 OilVoice Magazine | JANUARY 2013 Richard Etherington Finding Petroleum Richard Etherington. works as a freelance journalist. Richard. editor and publisher of the Oil & Gas Investments Bulletin.
This issue is relevant today. But most of us don’t understand why he was wrong. World Energy Consumption by Source. Based on Vaclav Smil estimates from Energy Transitions: History. Per capita world energy consumption. What Malthus Didn’t Anticipate Malthus was writing immediately before fossil fuel use started to ramp up. Requirements and Prospects together with BP Statistical Data for 1965 and subsequent) by population estimates. On a per capita basis. as we grapple with the issues of world hunger and of oil consumption that is not growing as rapidly as consumers would like–certainly it is not keeping oil prices down to historic levels. based on Angus Maddison data.6 OilVoice Magazine | JANUARY 2013 Why Malthus got his forecast wrong Written by Gail Tverberg from Our Finite World Most of us have heard that Thomas Malthus made a forecast in 1798 that the world would run short of food. Figure 2. and trains for long distance transport). Figure 1. calculated by dividing world energy consumption (based on Vaclav Smil estimates from Energy Transitions: History. barbed wire fences. . These and other inventions allowed the number of farmers to decrease at the same time the amount of food produced (per farmer and in total) rose. Requirements and Prospects and together with BP Statistical Data on 1965 and subsequent The availability of coal allowed more and better metal products (such as metal plows. and that great famine would result. energy consumption rose (Figure 2) allowing farmers and others more efficient ways of growing crops and manufacturing goods.
Malthus might in fact have been right. in the 1950s and 1960s (Figure 3). such as cars. based on Angus Maddison estimates. on average. above). A person can see that there was a particularly steep rise in population. population was able to ramp up quickly after the addition of fossil fuels. A ramp up in debt fixed several problems at once: Allowed low-paid workers funds to buy new products. and medical advances such as antibiotics. As it was. The reason I say that debt likely played a role in this ramp is because at the end of World War II. use of tractors and other farm equipment. based on Z1 Debt data of the Federal Reserve and GDP from the US Bureau of Economic Analysis. many would be unemployed. and other support for ramped up oil extraction Provided jobs for many coming home from the war effort . people were. Figure 4. The United States had recently been through the Depression. pretty poor. This is when oil consumption mushroomed (Figure 2. Many were soldiers coming back from war.7 OilVoice Magazine | JANUARY 2013 If it hadn’t been for the fossil fuel ramp up. right after World War II. interpolated where necessary. Figure 3. starting first with coal. US Debt excluding Federal Debt as Ratio to GDP. and when oil enabled better transport of crops to market. Without a ramp up in factory work and related employment. that used oil Allowed entrepreneurs funds to set up factories Allowed pipelines to be built. World Population. without jobs. It is likely that increased consumer and business debt following World War II (Figure 4) also played a role in the post-World War II ramp up.
unemployment. and governmental debt problems in oil-importing countries. This mostly relates to growth in the economies of Asian countries. Figure 2 shows that the increase in per capita energy consumption was far greater in the 1950 to 1970 period when oil production was ramped up than in the coal ramp-up between 1840 and 1920. with trend lines fitted by the author. Debt problems . it is easy to reach the conclusion that all of our problems are past. The reason I write posts is to try to pull together the big picture. which are large users of coal. Understanding Our Oil-Related Fiscal Cliff. Unfortunately. The higher cost of oil is a problem. Debt problems are closely related to high oil prices in recent years. Looking Ahead I am not sure that we can conclude that we are headed for catastrophe the day after tomorrow. If we only look at the latest new item forecasting huge increases in tight oil production or talking about 200 years of natural gas. and non-government debt seems to be contracting relative to GDP. The cost of oil has more than tripled in the last ten years. The long coal ramp-up period does not appear to have been accompanied by such a big ramp-up in debt. If we look at the big picture. the big increase is in coal (Figures 1 and 2). See my posts High-Priced Fuel Syndrome. and the resulting increase in oil production. The world has been able to increase production of other fuels to compensate so far. World oil production has been close to flat since about 2005 (Figure 5). things aren’t looking as benign today. but the graphs give a person reason to pause to think about the situation. Malthus’s views are not very relevant. because it leads to recession. Federal government debt is in the news every day. they clearly are not. Figure 5. based on Figure 4. Of course. raised living standards.8 OilVoice Magazine | JANUARY 2013 The debt ramp up. and Recession. and The Close Tie Between Energy Consumption. Tentative Conclusion A tentative conclusion might be that as long as we can keep ramping up availability of energy products and debt. Continued increase in debt now seems to be running into limits. World crude oil production (including condensate) based primarily on US Energy Information Administration data. Employment.
Based on earth’s long-term history. Humans would of course like to push this possibility back as long as we can. Also. what should our response be? View more quality content from Our Finite World . so there is a direct connection with debt. At this point. Is the shift in the cycle very close at hand? If so. at some point in the future. and the likely resulting recession (leading to lower oil prices. in a way that other analysts usually miss. The picture may not be pretty. easily extractable supplies of many types of resources will run short. my goal is to pull together a view of the big picture. rather than animals. The new tight oil and the new shale gas resources likely will need to be financed by increasing amounts of debt. higher taxes. but we at least need to understand what the issues are. and they are not being considered in the huge oil and gas forecasts we see everywhere. it is interesting that the supposedly huge increases in US oil supply don’t really translate to any discernible bump in world oil supply in Figure 5. We know that the world is finite. perhaps too low to sustain the high cost of extraction). The new dominant species will likely ones that can benefit from our waste. There is also an indirect connection. perhaps hundreds or thousands of years from now. and as we pull increasingly “dilute” resources from the ground.9 OilVoice Magazine | JANUARY 2013 are today’s issue. through governmental debt problems. the earth will cycle to a new state–a new climate with different dominant species. as an increasing number of humans inhabit the earth. it is clear that at some point. We also know that pollution (at least the way humans define pollution) can be expected to become an increasing problem. and that in some way. It may turn out that these new species are plants. and on the experience of other finite systems.
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AND OIL PRICES Every single year since the year 2000.Nymex and ICE prices for WTI and Brent in late December 2012 are around $89 and $108 per barrel. Also using IEA data. and unsurprising impacts in the energy sector. political policy and corporate decisions. the US is the world's biggest importer of oil? HIGH OIL PRICES Ed Morse. From more than 38% of world energy in 2000 to 33% in 2011. worldwide. like Daniel Yergin and plenty of other oil boomers. that is "unconventional .2 million barrels per day by 2020. What would this do for global oil prices. straight reason is that oil is overpriced. Again in the US but soon to be followed worldwide.6 million barrels per day from around 15.4 million per day at the end of 2011". and theoretically total oil production from the three countries could rise by 11. Wrting in 'Wall Street Journal' in late December.50 per barrel of oil equivalent . These stubbornly high. The decline of oil is written in stone. noting that with China. unrealistic price levels for oil have had surprising. Citigroup's Ed Morse (formerly Lehman Bros' chief energy analyst) wrote: "The United States has become the fastest-growing oil and gas producer in the world. He continued: "Add to this output the steadily growing Canadian production and a likely reversal of Mexico's recent production decline. Two simple examples of how far oil energy prices have gotten out of line with non-oil energy prices is shown by US natural gas an coal prices: gas prices are now around $20 per barrel of oil equivalent. the role of oil in world energy has fallen. shale gas output now followed by shale oil output are growing fast . and coal prices are as low as $2. and media notions about Black Oil are stubborn when it comes to accepting and recognizing change. and it is likely to remain so for the rest of this decade and into the 2020s". using IEA data. oil supplied about 53% of world energy in 1973.with an already inevitable impact on US natural gas prices. to 26. and one simple. That is the simple "fundamentals based" bottom line but the global economy.11 OilVoice Magazine | JANUARY 2013 Will artificially high oil prices last much longer? Written by Andrew McKillop from OilVoice TALKING UP OIL .
not the reverse of this paradigm. the supposed "current analyst consensus" right price would be let us and them say . black image for public opinion. The perverse energy economics of the real world has high-priced oil dragging up all other energy prices. Supplies and prices are unpredictable even when supplies are growing and prices are rather slowly falling! Environmentalist antioil campaigning. Nissan. economic and industrial policies. Retreating some. or US energy at least and given a highly positive spin but oil still has a sticky. and emerging economies. the energy price pyramid can go on growing. BYD. trimming a little. and more. With oil at $100 a barrel. environment policies and other scene changers. which totals at least $500 billion-ayear. Doubters can for example check any failing and unconvincing publicity campaign for all-electric sedan cars produced by Renault. Reva. The result is an unreal energy economic structure and system. One figure bandied around is $50 to $60 per barrel. drill!".12 OilVoice Magazine | JANUARY 2013 oil" boomers. Fisker or other hopefuls: these are always a lot more consumer-friendly when or if oil prices hit $200 a barrel. steer clear of what price level is needed. In turn the bottom line is very simple: without "stubbornly high" oil prices this spending cannot happen. operating breakeven price level. has educated consumers on the not-obligatory role of oil as an energy source and better uses for it. at least as unreal as the towering fiscal cliffs and government spending deficits in almost all OECD countries. but not a lot. Certainly for the moment and for some while ahead the jury is out to lunch on this one. to keep shale oil output growing. GM. With the spinoff and derived spending. despite Goldman Sachs officially backing off from its late 2011 forecast that the "right price" for Brent and WTI in 2012 would be $130 and $125 per barrel. over the decades. A rather large number of corporate and governmental players are highly satisfied with this: if oil price are artificially high. but never mind! We are talking about the real energy world where high oil prices are a critical prop to a shaky pyramid of global energy investment spending. These figures are at least 20% above anything corresponding with fundamentals. this number can easily be doubled. who wants a $35 000 all electric sedan car with a realworld range of maybe 60 miles? OIL PRICES SPEEDING OIL'S DECLINE US domestic shale oil can be and is presented as the ultimate gamechanger for world energy. Tesla. Plenty of energy analysts place the bar higher. Taking $1 trillion a year as a handy figure we find this is light years away from hoped-for and projected global energy spending. Contrarians can and do argue that oil prices have plenty of upside potential. climate policies. as high as $70 per barrel for the price level below which shale oil output growth runs out of steam .5 trillion a year. as a raw material for petrochemicals. needing tax gouging . will not happen. who have no problems talking $1. Canadian tarsands production and financial performance for operating companies through 2008-2009 gives some support to the higher-placed. spinning off tax revenues and profits and the banker-broker-trader clique can play their daily routine of adding a little.or rather water and hydraulic fracking fluids and the constant need to "Drill baby. as projected and forecast by the IEA.$100 for Brent and maybe $80 for WTI. US EIA and other agencies. let alone non-oil and nonfossil energy policies.
13 OilVoice Magazine | JANUARY 2013 and austerity to resolve. why should we pay $100/bbl? This analysis and rationale can only grow and develop. In other words. but below 25% of global energy is a probable or likely role for oil in world energy by 2020. Energy Information Administration (EIA) official. Oil's role in global energy is surely and certainly compressible. The following chart from that . Oil is overpriced but we do not exactly know how much its price should fall. As a Christmas message for stressed consumers this could be nice news .S.S.if they still use a car! By Andrew McKillop View more quality content from OilVoice The one chart about oil's future everyone should see Written by Kurt Cobb from Resource Insights When people read about a long-term forecast of world oil supply--say. The EIA is the statistical arm of the U. Perhaps the best ever illustration of this comes from a 2009 presentation made by Glen Sweetnam. Department of Energy. a U. Nothing could be further from the truth. out to 2030-they often believe that the forecasters are merely incorporating our knowledge of existing fields and figuring out how much oil can be extracted from them over the forecast period. At present it is not possible to give hard-edged numbers to the rate of decline or the "equilibrium level". Since at latest 2008 the figures leap out from the statistics of major energy agencies like the IEA. Much of the forecast supply has not yet been discovered or has no demonstrated technology which can extract or produce it economically. or when and how its price should fall. At this level. such forecasts are merely guesses based on the slimmest of evidence.
Only a small portion of NGPLs can directly substitute for oil. the vast effort . and their production grew recently with the natural gas drilling boom in the United States.14 OilVoice Magazine | JANUARY 2013 presentation will upend any notion that we know exactly where all the oil we need to meet expected demand will come from. and ramping up production of that portion independently is impossible since it is mixed in the methane.) This drop is consistent with the observed decline in the worldwide rate of production from existing fields of about 4 percent per year. Certainly. the chart takes into account known projects expected to be producing by 2012. The chart shows that by 2030 world output of oil and other liquid fuels from current fields is expected to drop to 43 million barrels per day (mbpd). But. But even if the optimists are correct--and there can be no guarantee that they will be--this source of oil will only add 3 to 4 million barrels of daily production. And.7 mbpd of oil and other liquids. What Sweetnam's chart tells us is that we must find and bring into production the equivalent of five new Saudi Arabias between now and 2030 in order to meet expected demand even if the volume of tight oil reaches its maximum projected output. NGPLs are components of natural gas other than methane such as ethane.) Because Sweetnam's chart is for total worldwide "liquid fuel supply. (Though prepared in 2009. there will be more projects identified in the 18 years ahead. and pentane. (The Saudis currently produce about 11.This makes the oil situation all the more concerning. But oil proper--defined as crude oil including lease condensate--continues to trace out a plateau in production that began in 2005. It is true that rising and ultimately record high oil prices in the last decade have prompted oil companies to increase capital expenditures including those for exploration and drilling to their highest level ever. some 62 million barrels below projected demand of 105 mbpd. butane." it's worth noting that in recent years something called natural gas plant liquids (NGPLs) have been included in world oil supply based on the assumption that these hydrocarbons are 100 percent interchangeable with oil.propane. many people will say that we already have a large new resource of tight oil (often mistakenly referred to as shale oil) which can be extracted through hydraulic fracturing or fracking.
how can we expect that the next seven years and the next seven after that will be filled with nothing but good news on supply? If the answer to this question is that technology will unlock new resources and overcome the declines in existing fields. they need to do a little research. there can be no assurance of this. see my recent piece on unconventional oil resources. In fact. Unless oil production rises from here. both of which are difficult and costly to extract and refine. But right now commercial production of oil from this source is exactly zero. With conventional oil in decline since 2006 according to the International Energy Agency. The global economy is entirely dependent on continuous flows of energy and raw materials. biofuels. current reserves are also exactly zero since reserves are defined as those underground resources that can be produced profitably at today's prices from known fields using existing technology. natural gas plant liquids. Huge discoveries mean little if we cannot extract the oil profitably and at rates that are commensurate with our desired rate of consumption. easy-to-get. a consortium of 28 mostly importing nations. For those who point to hydraulic fracturing as a recent technological breakthrough. If seven years of very high prices can only marginally move the rate of production of all liquids (which includes crude oil.15 percent and if crude oil proper can only stay flat during the same period. (For a more detailed discussion. More than 30 years later in the early 1980s. building on government research.) Perhaps most important is that Sweetnam's chart shows not how much oil we must discover. It should be apparent that energy policy around the world is essentially based on the idea that Sweetnam's gap will be filled in time and comfortably. it will make almost no difference in the 18 years between now and 2030. Hydraulic fracturing was first used in 1947. and refinery processing gains) up about 3. So far the flows of unconventional oil have only just offset declines in the rate of production of the cheap. keep this is mind. global economic growth will eventually stall (if it hasn't already). such production would barely put a dent in the anticipated supply gap by 2030. Oil is absolutely central because it provides one-third of the world's energy and more than 80 percent of its transportation fuel.15 OilVoice Magazine | JANUARY 2013 represented by those expenditures has failed to boost true crude oil production definitively above the current bumpy plateau. but the rate of flow we must achieve from any discoveries in order to match supply with projected consumption. Even if the EIA is too pessimistic on oil production from oil shale by a factor of 10. George Mitchell and his company Mitchell Energy and . free-flowing conventional oil which has powered modern civilization to date. we will now be forced to rely increasingly on sources of unconventional oil such as the tar sands of Canada and the heavy oil of Venezuela. Some will point to vast deposits of so-called oil shale in the American West and suggest that production from these can fill the gap in the coming years. And. And yet. we should not expect to close Sweetnam's deficit of 62 mbpd from this source. With the EIA projecting oil production from oil shale of 140.000 barrels per day by 2030. If that technology is not on the shelf and ready to deploy today. the ongoing plateau in the rate of world oil production in the face of record high prices ought to give us pause.
It took Mitchell 20 years of experimentation.16 OilVoice Magazine | JANUARY 2013 Development began pursuing natural gas in deep shale deposits. We should ask ourselves whether it is wise to base energy policy on the fantasies of industry and government forecasters. government help and government incentives to perfect the type of hydraulic fracturing which is now used to release both natural gas and oil from deep shales. we should look at Glen Sweetnam's chart with considerable concern. It took 60 years from the time the technique was first deployed until it was refined and widely adopted by the industry for the specific purpose of extracting natural gas and oil from deep shale deposits. View more quality content from Resource Insights . while the technique has allowed us to recover oil from previously inaccessible deposits. Don't look for any new miracle technologies to make a significant difference in oil production between now and 2030 unless they are already in the field performing their magic today and have not yet been widely adopted. it has not allowed us to grow oil supplies worldwide as declines in production elsewhere have offset increases in production of oil from shale deposits (properly called tight oil). Perhaps we should focus instead on the trends and data we can verify and prepare ourselves and our economies for a world that may not have the copious amounts of oil that the industry is promising. With high oil prices and the hottest new technique unable to move the needle on worldwide production of crude oil. The effects of hydraulic fracturing on oil production are already in evidence. So. here's the timeline on hydraulic fracturing. And. It took another 10 years for his methods to be widely deployed by the oil and gas industry.
Alberta and Weyburn. Bering Exploration's OilVoice profile Tamaska Oil & Gas Oil & Gas It is the Company's aim to maximize returns on funds invested. and well testing.'s OilVoice profile CWC Well Services Corp. LLC Oil & Gas Parallel Resource Partners. Tamaska Oil & Gas’ OilVoice profile Titan Energy Ltd. large hydrocarbon in place properties within the Western Canadian Sedimentary Basin. Titan Energy's OilVoice profile Parallel Resource Partners. oil and gas exploration and production company. Provost. The Company's operational locations are in Grande Prairie. is a Dallas-based. Each of these profiles feature key data that allows users to focus on specific information or a full company report that can be accessed online or printed and reviewed later. The Company will undertake investments that it sees as being able to generate significant commercial returns through strategic investments and acquisitions in the oil and gas sector. Servicing Teine Energy Oil & Gas Teine Energy Ltd. is a premier well servicing company operating in the Western Canadian Sedimentary Basin with a complementary suite of oilfield services including service rigs. Oil & Gas Petron Energy II. snubbing. Registration with the SEC as an investment adviser does not imply that Parallel or any principals or other persons associated with Parallel possess a particular level of skill or training in the investment advisory or any other business. covering new start-up companies through to multi-national groups. Red Deer. LLC (“Parallel”) is registered as an investment adviser with the SEC. Inc. Teine's focus is to find and develop high netback. is a private Canadian oil and gas exploration and development company. Saskatchewan. Teine Energy's OilVoice profile CWC Well Services Corp. coil tubing. Oil & Gas Western Australian-based Titan Energy Ltd is a global oil and gas explorer with growing interests in Australia and the United States. Inc. Petron Energy II. CWC Well Services Corp. Start your search today! Bering Exploration Natural Energy Resources Bering Exploration look to generate industryleading shareholder value and returns by developing and executing their distinctive business strategies that are focused exclusively on exploring for and producing natural energy resources in the continental United States. Parallel Resource Partners. Inc. Brooks.17 OilVoice Magazine | JANUARY 2013 Recent Company Profiles The OilVoice database has a diverse selection of company profiles.'s OilVoice profile . with an initial focus on North America. LLC utilizes its unique capabilities to invest in distress driven opportunities in the North American upstream oil and gas sector. Teine is one of the largest land owners in Central West Saskatchewan and is one of the most active drillers in the Saskatchewan Viking play. Parallel Resource Partners' OilVoice profile Petron Energy II. Lloydminster.
are there any big fields still hiding? Will there be an 'exploration Spring?' to follow the political one? London.if there are any to be found! London. 09 Apr 2013 Finding big oil & gas fields in South East Asia The Politics may overwhelm the Geoscience! London. returning to the onshore! London. 09 Jan 2013 North Africa . 14 May 2013 .Finding Opportunities in Southern Africa Reviewing the potential oil and gas industry in Southern Africa London. 12 Feb 2013 The next generation of exploration technologies Back to the future.. 07 Mar 2013 Finding big oil fields offshore East Africa .
Several other companies.000 acres of oil and gas leases. Thanks to the Federal Reserve Bank of Minneapolis for the figure. where the Bakken was originally discovered. are working to expand the boundaries of the state’s most productive Bakken field. In October a Texas company paid $13. known as Elm Coulee. drilled by Lyco Energy Corp in . Montana’s Department of Natural Resources and Conservation issued a record 356 oil drilling permits in the first ten months of the year. Investors often forget that the first successful horizontal well drilled into the Bakken was drilled into the Elm Coulee field in Montana. easily beating the previous record of 313 set in 2005. including Bakken leader Continental. one of the largest federal lease acquisitions by a single company in Montana in recent years. Drilling equipment and crews are moving back across the border from North Dakota—where the Bakken Boom has been the Biggest—boosting Montana’s rig count to 22 from just eight at this time last year. Note the declining rig count in North Dakota (blue line) contrasted with the rising count in Montana (red line). Home is Montana.19 OilVoice Magazine | JANUARY 2013 The Montana Bakken oil play: 'Great news for a great play' Written by Keith Schaefer from Oil & Gas Investments Bulletin Activity in the huge Bakken field is going home.5 million for 75.
There were earlier wells. which means investors can still find ways to profit from this fantastic formation. a more savvy choice might be to check out the new scene next door. And the oil is stuck there in the middle Bakken reservoir.pdf) But geology doesn’t pay attention to state lines… and even though the Bakken boom started with a few good wells in Montana. The industry calls that the reservoir. So why did North Dakotans get all the fun? Because of geology. The Bakken therefore touches four states and provinces. BACKGROUND – WHY THE BAKKEN MOVED TO NORTH DAKOTA The Bakken is a 200. The upper and lower layers are organic-rich black shales that gave birth to the formation’s oil. even horizontal ones. The middle layer is made up of more porous rocks—which also means more holes and less pressure in those rocks—so the oil seeped away from those higher pressure. looking to a more porous resting place. . where six years of profits have left slim pickings.20 OilVoice Magazine | JANUARY 2013 2000. There is still an immense amount of oil in the Bakken. (For more. denser layers. check out this a cool timeline of the Bakken here: http://www. and in the early days of the Bakken boom – way back in 2006 – drilling was fairly evenly split between North Dakota and Montana. an ancient inland sea that reaches from southern Saskatchewan to North Dakota and eastern Montana.000-square mile rock unit within the even larger Williston Basin. The Bakken is generally divided into three stacked layers—Upper.undeerc.org/bakken/pdfs/BakkenTimeline2. The industry calls those layers “source rocks”. but this 2000 Lyco well is widely cited as the first successful one. Middle and Lower. But instead of coming late to the North Dakota Bakken party. attention shifted next door after operators decided the geology in North Dakota offered more potential.
----“NO OIL LEFT BEHIND” Did you know that today’s primary oil recovery methods can leave up to 90% of a formation’s oil trapped in the ground? The industry calls this “stranded oil.” For oil producers. Meanwhile Montana was largely forgotten. and geologists thought a thin Middle Bakken would translate into poor recoveries and flow rates. In Montana the middle layer is thinner. Click here to get caught up on the whole story. In the early days of the Bakken boom. even though the heart of the formation extends across state lines. Helping the move is new data showing that geology may be less of an obstacle in Montana than originally thought.21 OilVoice Magazine | JANUARY 2013 That’s why the Middle Bakken generates the best production volumes…and the Middle Bakken is thickest in North Dakota. because North Dakota requires mineral lease holders to explore their acreages within three years. pinched by the Upper and Lower Bakken layers.000 wells in the world that could (and should) use this technology. North Dakota produced those gushing Bakken wells because the primary reservoir layer. ----Those few gushing wells in North Dakota sparked a land grab there. it could mean an absolute windfall for investors. (This company’s patented technology is being used successfully by clients on 3 continents. And so North Dakota became the Bakken boom ground. BAKKEN MOVING HOME TO MONTANA NOW Now that is starting to change. companies with ground in North Dakota had to spend their money there. the Montana Bakken has started to steal some of the spotlight. Then. In recent months. with no environmental footprint. the Middle Bakken. In fact it is proven to extend the field life – the lifeblood – of oil fields throughout the world… including today’s massive new shale formations. a couple high-volume wells tapped into the Middle Bakken drew almost all of the attention to North Dakota. . with a rig count that climbed from 25 in 2005 to 213 in mid-2012.) What’s more – with over 200. is thickest within its portion of the Bakken. Fortunately for them there’s now a technology that can actually produce all this stranded oil… quickly and effectively. it can mean millions of dollars left on the table. Remember.
22 OilVoice Magazine | JANUARY 2013 But recently. In this area the Middle Bakken becomes very thin. is cautiously optimistic about the potential for a Montana Bakken boom. pinched out by a broad Upper Bakken. Sometimes drills “…find things you weren’t looking for. but they declined more slowly and had a better oil-to-gas ratios (98% oil) than normal.” he said. Halverson also spoke to the possibility that drills might hit into something unexpected – and exciting. We will have good wells. then less good wells. “We’ve got lots of rigs. The result is making geologists rethink the potential of the Upper Bakken – and therefore the potential of the entire Montana Bakken.” View more quality content from Oil & Gas Investments Bulletin . The result is a world-class source rock – remember that the organic-rich Upper Bakken is the source rock for the formation’s oil – with no nearby reservoir. “And we’ve got a fair amount of development that’s targeting the upper shale.” That being said. “Here in Montana we’re going to have the western edge of the Bakken. “That edge is going to be economic.” However. That means all the oil has remained in place. The wells don’t have the big initial flow rates as in North Dakota.” he said in an interview. Halverson is not letting himself get carried away with dreams of a major Montana Bakken boom. there’s lots of stuff going on right now. saying these results from the Upper Bakken represent “great news for a great play. so just getting more wells drilled here is a good thing. several explorers have had success with wells that targeted the Upper Bakken. A productive Upper Bakken is particularly significant in Elm Coulee. Maybe a year from now we’ll all be doing something we never thought we were going to be doing. the bestproducing part of the Montana Bakken to date.” Jim Halverson. Colorado School of Mines professor Steve Sonnenberg pushed the potential of the Upper Bakken in a recent article. Middle Bakken wells. a geologist with the Montana Board of Oil and Gas. then wells that are uneconomic – the price of oil is going to be critical.
a revolution heralding a golden age of cheap. and compensation. and most commonly. national moratoriums in France and Bulgaria. But only if it makes it out of the ground. economic and health and safety impacts of intensive unconventional gas development. how it operates and what's next Written by Jonathan Wood from Control Risks Unconventional natural gas is often described as game-changing and transformative. Second. and has repeatedly been caught off guard by the sophistication. taxation. and tighter regulation in Australia and the UK.whether on water quality or climate protection grounds . First. the anti-fracking movement wants tighter regulation of . What the anti-fracking movement wants The anti-fracking movement wants four main things. it wants a better deal in terms of economic opportunity. Meanwhile.want moratoriums and outright bans on drilling activity. Moves by some local governments to extract 'impact fees' fall into this camp. plentiful energy for a resourceconstrained world. Finally. Third. the oil and gas industry has largely failed to appreciate social and political risks. As shown by local bans in the US and Canada. the global anti-fracking movement has mounted an effective campaign against the extraction of unconventional gas through hydraulic fracturing.23 OilVoice Magazine | JANUARY 2013 The global antifracking movement: What it wants. speed and influence of anti-fracking activists. partly to inform regulatory and tax policies but also as a stalling tactic to impede the industry's expansion. some strongly opposed to the industry . anti-fracking activists want further study of the environmental.
highimpact tactic. labour. Some activists and groups also believe direct action against the industry is necessary. Project site blockades. But it also reflects a perceived need to maintain momentum and block attempts to roll back regulation of the industry. Direct action is intended to draw media attention to the anti-fracking movement. water and environmental concerns in Argentina. coal. How will the movement adapt? First. to name a few prospective countries. and physically disrupt operations. parts of the movement could radicalise in response to both internal fragmentation and the spread of the industry. India. and shared ideological and political frameworks. nuclear. . Mexico and Ukraine. Partly. From Pennsylvania to Poland. The anti-fracking movement is particularly adept at organising online campaigns through social media. Environmental groups have played a key role in subsequently organising and professionalising grassroots activists. Finally. Regulatory reviews concluded in key battlegrounds have set the tone for stricter long-term management of the unconventional gas industry. and the anti-fracking movement itself is grappling with the consequences of its successes. The movement may be able to tap into existing indigenous rights. The anti-fracking movement has also started to engage a wider set of policy issues related to energy and the environment. How the anti-fracking movement operates The movement's grassroots foundation is reflected in the hundreds of communitybased anti-fracking groups that have emerged worldwide. international environmental NGO campaigns. especially in North America and Western Europe. oil and gas regulation is being updated to address issues raised by hydraulic fracturing and increase environmental controls. technological innovations are reducing environmental impacts. This occurs through peer-to-peer activist networks. Online communications also enable a further pillar of the anti-fracking movement: global networking.24 OilVoice Magazine | JANUARY 2013 unconventional gas development. What's next for the anti-fracking movement 2012 is likely to set the high-water mark for the anti-fracking movement. timber and other sectors. have emerged as a favoured low-cost. this could make unconventional oil and gas a target of more radical direct action. in particular. this is a natural outcome of its close organisational and ideological links to the climate change movement. it will seek out new geographies outside North America and Europe where unconventional gas development is just beginning. motivate the anti-fracking opposition. The extensive use of free or low-cost online platforms such as Wordpress and Facebook has both facilitated grassroots participation and increased organisational efficiency. As with the conventional oil and gas.
providing jobs and training to local workers.25 OilVoice Magazine | JANUARY 2013 How should the industry respond? Parts of the anti-fracking movement will never be reconciled to fossil fuel extraction. the industry should create more winners by widely distributing the direct benefits of gas development. and . paying required taxes. noise. Movements towards greater transparency and voluntary disclosure. however grudging. are a positive step in this direction. especially in terms of mechanisms to register and redress grievances. But the industry can take steps to offset social and political opposition.groundwork with local communities. Second.crucially . the industry needs to continue to make good faith efforts to reduce adverse impacts in terms of water pollution. First and foremost. erosion. View more quality content from Control Risks . the industry needs a broad-spectrum political and social engagement strategy.even if expensive . both now and in the future. this means procuring as much as possible locally. Third. the industry needs to acknowledge the legitimacy of local grievances. For most communities. whether through hydraulic fracturing or conventional drilling. road damage and so on.making long-term investments that deliver a sustained economic boost. This means laying stable . Finally. health and safety.
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starting when the World Trade Organization was formed in 1995. including steel.27 OilVoice Magazine | JANUARY 2013 Why world coal consumption keeps rising. and greatly ramping up when China was added in December 2001. it is relatively cheap to extract. A person can see a sharp “bend” in the coal line. China and many other Asian countries had not previously industrialized. It can be used to make many of the basic items used by industrialized countries. The advent of international trade gave them opportunities to make and sell goods below the cost of other countries. The fuel the West had used when it industrialized was coal. concrete. What economists missed Written by Gail Tverberg from Our Finite World A primary reason why coal consumption is rising is because of increased international trade. The Kyoto Protocol offered no penalties for exporting products made with coal. Figure 1. China’s data also shows a sharp increase in coal use at that time. however. Coal had many advantages for a newly industrialized countries: it often can be extracted without advanced technology. Buyers were happy with lower prices. In order to do this. and it is often available locally. immediately after China was added to the World Trade Organization. so it put countries that used coal . This document made it clear that countries signing the document wouldn’t be in the market for coal. they needed fuel. The industrialization of Asian countries was pushed along by many forces. Companies in the West were eager to have a way to make goods cheaper. Figure 1 shows world fossil fuel extraction for the three fossil fuels. World fossil fuel supply based on world production data from BP’s 2012 Statistical Review of World Energy. this would help hold coal prices down (at least in the export market). From the point of the developing countries. It also likely meant a better long-term supply of coal for developing countries. Even the Kyoto Protocol tended to push international trade along. and electricity.
. and this means that economies of countries that disproportionately use a lot of oil in their economies are at a competitive disadvantage. based on BP’s 2012 Statistical Review of World Energy. In terms of oil leverage (total energy consumed /oil energy consumed).28 OilVoice Magazine | JANUARY 2013 to make products for export in a better competitive position. Apart from the international trade /industrialization issue. the GDP of countries with a lot of coal in their mix seems to grow more quickly than other countries. They do this with their heavy use of coal. and thus keep overall energy costs down. Thus. Figure 3. In recent years. Let’s look at a few graphs. 2009-2011 Average Real GDP % Growth. Countries coming “late to the party” are in a good position to develop their economies using little oil and much coal. Figure 4 below shows average oil. natural gas. on average. oil has been the most expensive of fossil fuels. This approach gives the developing countries a competitive advantage over the developed countries. a country that uses mostly oil will. there is another issue that is helping to keep coal consumption rising. Based on USDA International Macroeconomic Data Sets. have higher energy costs than a country that can dilute out its oil use with the use of cheaper fuels. below. Figure 2. China and India come out way ahead of several other selected country groups. Ratio of total energy consumed to oil (including biofuels) consumed. This was especially the case if Kyoto Protocol countries used carbon taxes to make their own products higher priced. It is the fact that oil supply is in short supply and high priced. and coal prices for some representative categories of these fuels. World GDP reflects 2005$ weighting. Based on Figure 3.
In Europe. Also. since these can be expected to behave differently than other countries. such as adding the effect of carbon taxes on fossil fuel to the costs for European countries. the cost of transport will add to its price. based on distribution of fuels used. oil is the highest-priced. from BP Statistical Review of World Energy. A person can see from Figure 5 that the average cost of fossil fuel energy is higher for the countries at the top of the chart. Price per barrel of oil equivalent. Quite a few of these exporters can afford to subsidize oil costs for their own people and for manufacturing within their countries. hydroelectric. and solar PV.29 OilVoice Magazine | JANUARY 2013 Figure 4. If we were to adjust for this. and natural gas). and prices from Figure 4. Rough estimate of average cost per barrel of oil equivalent for the various countries and groups shown. 2012. If it is transported long-distance. the world average fuel cost is probably overstated in Figure 5. Such an approximation is shown in Figure 5. but tend to be between coal and oil prices. Figure 5. the world average fuel price in Figure 5 would probably be reduced. In my list of country groups analyzed. The coal price is much lower. especially if it is locally produced. oil. Fossil fuels represent 92%-93% of energy supply in China and India. Both of these would tend to raise the average cost of fossil fuels for European countries. The Figure 5 averages include only fossil fuels (coal. Among the types of fuels shown. Natural gas prices vary around the world. such as Saudi Arabia. in . because their actual oil extraction costs are lower than the world oil price. There are various adjustments that might be made.Nov. based on BP Statistical Review of World Energy data. but we can make a rough approximation using the average prices shown in Figure 4. and lower for those near the bottom of the chart. fossil fuels represent 79% of total fuels. based on World Bank data for the period Jan. All prices have been converted to a barrel of oil equivalent basis. wind. I purposely excluded major oil exporters. and adjusting for the low value of the Euro recently. and exclude other fuels such as nuclear.1 It is not possible to know exactly what the average fuel price of each country group shown on Figure 2 and 3 is.
The most basic issue economist missed is that energy is required to make goods and services. it can be leveraged up by a factor of 5. India. or Japan. Percentage growth in oil consumption between 2006 and 2011. a reduction in demand does temporarily reduce . World oil supply is constrained. easy to extract. means another barrel that can stay on the world market and be used by China. more of the oil is going to the countries that can leverage its use better. 1. A reduction of demand. A barrel used in the developed world would “only” be leveraged up by other fuels by roughly a factor of 2.30 OilVoice Magazine | JANUARY 2013 the US and Japan. simply reduces price. based on BP’s 2012 Statistical Review of World Energy. and we want our own citizens to be employed. Additional demand doesn’t do much more than raise price. without really reducing production. If we want products to be made in an environmentally sound way. and other developing countries with better leveraging. from the point of view of producing cheap consumer products and a greater negative impact. a barrel of oil saved by Europe. It doesn’t make much sense to look at fossil fuel consumption. I would interpret this to mean that as the weaker economies (which tend to use a higher proportion of oil in their energy mix) are priced out of the market. Thus a barrel of oil saved by the developed world can be transferred to China and used to greater positive effect. This means that even with additional demand. energy supplies–to make that product. If that same barrel of oil is instead used by China. they represent 86% to 87% of the total. from the point of view of CO2 impact.0 to 2. Unfortunately. A Look at How Fuel Consumption Is Actually Changing Oil consumption is decreasing in the countries with relatively slow GDP growth. that country will need energy supplies–probably cheap. the US. Beyond a point. and figure out a better way of counting CO2 production. oil supply can’t rise very much. and some of this leveraging would be hydroelectric or nuclear electric. If production of a product is transferred to another country. the list is rather long. What did Economists Miss? Unfortunately.7. stopping at a country’s own borders. and increasing in India and China: Figure 6. which is fairly benign from a carbon dioxide point of view. 2.75. within a range. we need to make them at home.
Figure 7. in Figure 7 below. I have written about this issue in my post. as it did in 2008. This same pattern of all three types of fuel use dropping simultaneously can also be seen when viewing recent changes in world oil. it is necessary to make a smaller batch. in Figure 1 at the top of this post. For example. the availability of additional oil on the market because of the Developed Countries cutting back in their use may help China’s economy grow. the mix is fixed.31 OilVoice Magazine | JANUARY 2013 both price and production. In general. A drop in oil consumption tended to lead to a drop in electricity consumption as well. because it is very difficult to substitute one kind of fuel for another without significant investment (for example. The mix of types of energy used by a country changes very gradually over time. and natural gas supply. and lower employment. In a situation of constrained oil supply. lower electricity use. The statement is often made that once oil prices rise high enough. World oil price (Brent) in 2011$ from BP’s 2012 Statistical Review of World Energy and Leverage based on ratio of total fuel consumption to oil consumption from the same report. flour in the case of a batch of cookies). 3. with lower oil use. the oil saved goes back on the world oil market (perhaps at a slightly lower price) and is bought by someone else who can make better use of it. renewables will become competitive. and further constrained supply. in a world market for . 5. the world oil leverage remained constant in the period prior to 2000. 6. But demand is likely to quickly bounce back. as oil prices rose. it doesn’t mean that more oil will be left in the ground. for the short term. This statement is made with blinders on. How Is an Oil Shortage Like a Missing Cup of Flour? In that post. the savings in oil may theoretically lead to increase in coal consumption. leading to another price spike. In the case of an economy. and a drop in fuel use of all kinds. There was no big change when the 2008-2009 recession hit. if there is a shortage (or excessively high price) of one necessary input (oil in the case of the economy. If an economy such as China is not growing as fast as it might otherwise grow because of constrained oil supply. China is likely to be able to use the additional oil (as for truck transport) to make it possible to make more goods using coal. It then gradually increased. if a country reduces its oil consumption. 4. In fact. a smaller batch looks like a recession. Thus. on a world basis. Standard economic models seem to assume this situation can’t exist. Instead. modifying cars to use natural gas and building pipelines for the natural gas). I pointed out that to the extent proportions are fixed by built infrastructure. coal.
it tends to use less oil. US natural gas supply will drop with fewer producers. This would reduce fossil fuel usage. This would make your country poorer. It would have been good if economists had foreseen this kind of impact before wholeheartedly endorsing the expansion of world trade. given the way Chinese government interacts with businesses. besides low fuel prices and low wages. What matters in a world market is the lowest total cost of production. and still provide an acceptable standard of living. because many goods cannot be made without imported raw materials from elsewhere. 9.32 OilVoice Magazine | JANUARY 2013 goods and services. 7. and still provide an acceptable profit level. too. natural gas prices are currently below the cost of production for many producers because of oversupply. one possibility is that some natural gas producers will leave the market. Another method that would work is to tax (or forbid) fossil fuel extraction in your own country. 8. This gives China another competitive advantage. businesses can earn a lower rate of return than Western countries. but probably would not be well received. Note:  In the United States. but a country that uses cheap fuels can pay their workers less. There are two ways of reducing fossil fuel use that might be effective. See Rise of the FerroDollar. and less able to buy imports (such as oil and gas) on the world market. they are coal or natural gas substitutes. The extra oil tends to go to a more competitive country. and US prices will rise. perhaps by reintroducing taxes on trade. Most renewables aren’t even oil substitutes. Obviously wages make a difference. and these are cheaper. and may help raise coal usage. I talked about what seems to be the effect of China’s competition on US jobs in another post. When a country less competitive. It has recently been pointed out to me by a reader that the way China’s economy works. One is to cut back on international trade. Anything that raises the average energy cost of a country relative to other countries makes it less competitive. This is not a sustainable situation. View more quality content from Our Finite World .
One of the sectors we have alighted upon aside from Japan. that’s no error .33 OilVoice Magazine | JANUARY 2013 AIM Oil & Gas .com/blog/bonds-bubble-over-for-now.S. It is now time to take another look at this battered sector and try to assess the path it will follow next year… The Financial Meltdown In May 2008. In such an environment there was no hiding for illiquid. the sector lost three-quarters of its value and traded below 1. even though at the headline level the likes of the S&P 500 are actually substantially higher YTD.2013 likely to kick off takeover activity Written by Richard Jennings from Spreadbet Magazine This year has been mixed for some sectors of the equity arena. the oil sector also recovered and the AIM Oil & Gas index hit 5. from 5.html. With a financial crisis threatening the whole world economy.600 for some time.100. and prompted them to search out safe havens as detailed in our bond bubble blog here . 2012 has not been much better than 2011 for the sector. Europe and even the U. With the recovery of the U.S. Our magazine issues in February and September looked deeply into the Falkland Islands stocks prospects and and also some undervalued gems that we think have positive risk:reward potential within the AIM Oil & Gas sector. Unfortunately.S. economy. demand for oil was significantly cut and thus oil prices came down from a high above $140 to hover around $40.500 at the beginning of last year but suddenly dropped again in the mess that was 2011 in geo-political terms.6. and consequent downgrade in the credit rating of the country led to a massive selloff in equities in August and similar declines in commodities.419. Again. The first few months were great for the bulls but then everything turned negative as economic fears in China. weighed on investors’ minds. the AIM Oil & Gas sector was hovering around 6.http://www. it .100! It was valued at almost two times what it currently is. As a result. high risk AIM Oil & Gas plays and many stocks were truly decimated. SBM has been searching for value inside the market in recent months and looking for the most undervalued assets which may be able to deliver a hefty return into 2013.500 registered in the opening months of 2011. Yup. China and the Mining arena is the Oil & Gas sector. Conflicts in the MENA region and the earthquake in Japan did push oil prices up for a while but the debt ceiling debacle in the U. the AIM Oil & Gas sector retreated 38% and closed the year at 3. In just a few months between May 2008 and March 2009.spreadbetmagazine.
some projects may in fact need to be abandoned given the exploration costs.000 in February but then dropped again and currently trades around 3. a lot of . European sovereign yields rising…these are just some of the reasons why oil has struggled to rise this year. economy growing at less than desired by the Fed. several downgrades to the World’s growth prospects. At a time when banks are deleveraging just where can these small companies get the funds they need? That’s a question many Oily CEO’s would love to see answered and as they have been out to their & their shareholders cost in recent months. Brent crude managed to rise 2% so far but its Light Sweet counterpart is down 10% . the U. the actual costs of exploring and drilling still have become more expensive for the smaller companies that make up the the AIM sector. and as has been referred to many times by us here at SBM. oil prices will likely continue to go sideways for the near terms.25% YTD. Sentiment is battered down and it will take some time to recover. At $200 a barrel.the real question is choosing those companies where they are not. we must also consider the effects of the debt crunch. excuse the pun. At current prices. hence the discounts languish… Adding to the pressure from current moribund oil prices and some drilling disappointments. We suspect that this type of “risk-on” catalyst is required in order to pull the AIM oilies off their oversold floors and historically the days over the Xmas period have delivered some exceptional returns to stock holders in these companies. XEL & BLVN. This is likely however to kick of a spate of farm-ins or takeovers .342. hell I would even try and dig in my own backyard and try my luck but with the current oil price being under pressure. If there is a resolution however in the very near future then get set for an explosive Christmas rally. This is putting lethal pressure on some of those companies as they try to raise cash in an increasingly difficult environment and. the Japan-China crisis.S. China’s economic slowdown.this in fact is the questions hanging over what are extremely undervalued companies like BOR.34 OilVoice Magazine | JANUARY 2013 started with some strength rising to 5. The Future With the fiscal cliff problem currently remaining on the table. The AIM Oil Companies With the oil price off its peak. a drop of 2. as is illustrated so aptly in the case of the Falkland Islands stocks. Management know the stock is worth more but they don’t have the muscle to raise cash on attractive terms. literally “over a barrel” and need to give the assets away at the detriment of current shareholders .an opportunity we have touched upon previously with regards to the oil spread widening and offering an opportunity in the mid $20’s differential range to short Brent and buy Nymex.
S. oil prices will kick in. During 2013 we think Ithaca. Xcite.com/spreadbetmagazine/ docs/spreadbet-magazine-v8_generic p. And if Buenos Aires continues to meddle in the oil industry in the manner to which it has become accustom over recent months then nobody else will be willing to help it . Gulfsands and Borders & Southern will most lilkely attract predatory attention.35 OilVoice Magazine | JANUARY 2013 the AIM Oil & Gas sector are prime takeover targets. Bowleven. With renewed momentum in the global recovery. and so most likely will oil share prices. 35). The next year will see improved economic conditions in Europe and the U. For now we leave you with some data from the AIM Oil & Gas Sector for you to take a look. View more quality content from Spreadbet Magazine Argentina and protectionism: Shooting itself in the foot Written by Richard Ethrington from Finding Petroleum President Cristina Fernandez de Kirchner's administration simply cannot help itself. Don’t forget to also take a look at our picks in the September edition of our Magazine (http://issuu. and the fiscal cliff will (hopefully) be a distant memory.
however. Indeed. and unfavourable ones at that. and US$7 billion per year from 2013 to 2017 in an attempt to boost production by as much as 35% came soon after. was that all three of these cash sources remain subject to a number of conditions. Reluctant to be dictated to . such a basket of headwinds would likely serve to prevent the very sort of high-tech exploration and production companies that Argentina is attempting to attract from going about their normal business . right? Well that certainly appeared to be the case until the Argentine courts decided to thrown the country into the middle of a bitter dispute between the firm and the government of Ecuador. be frozen until the firm pays damages to Ecuador for environmental damages caused by Texaco (which was .Buenos Aires sanctioned the grab of YPF from Repsol's hands. for what Buenos Aires perceived to be a sustained lack of investment in the sector that as a consequence had turned the nation from net exporter to net importer. YPF's average profit of US$1.5 billion into the energy sector before the end of 2012. In solidarity with its South American ally.36 OilVoice Magazine | JANUARY 2013 either. So with YPF now re-nationalised. What is more only two months earlier. the majority stakeholder in YPF for over a decade. an Argentine judge ordered that Chevron's assets. however. The move.at least in a profitable way anyway. An announcement from Buenos Aires that that the company would be investing US$3. which would be enough to double the country's output in a decade. The finger of blame had long been pointing at Spanish major Repsol. Argentina's creditworthiness is being hurt by the government's rising determination to protect scarce dollar reserves. debt issues and strategic partnerships with overseas players. The government made the decision to re-nationalise the industry giant in an attempt to arrest the South American nation's deteriorating energy trade balance. Repsol YPF had upped its estimate for the shale oil and gas it found in Argentina to nearly 23 billion barrels.2 billion in 2011 and had planned to increase that figure in 2012. which total around US$19bn in Argentina alone. YPF invested a record US$3. This would be financed by cash from the company's revenue stream. Beyond protectionism. What is more. First came the expropriation of former state oil company YPF back in April 2012. served to score Fernandez a few cheap political points in the process too. and in the process rubbed Fernandez up the wrong way by warning that Argentina would need to overhaul its energy policy to attract the necessary investment to implement such a programme. the Argentine government has one overseas player in the form of US oil group Chevron that it can rely on for investment though. But the Spanish company said it would cost US$25 billion a year to develop. Fear not. To the contrary. the evidence suggests that such claims were ill founded. additional challenges for foreign companies looking to operate in the South American nation include artificial oil and gas prices. One problem with this plan. which was met by popular nationalist support at the time.or be willing to let the facts get in the way of a good expropriation . the plan for the government was simple: reverse falling oil and gas production levels in proven reserves by getting YPF back on its feet. and a growing number of overseas firms will be thinking twice about investing in the country after the way YPF was unfairly extracted from Repsol. currency controls and import restrictions.5 billion per annum represents nothing more than a drop in the ocean for the level of investment required. under Repsol's control.
the Argentine government saw no option but to turn to another traditional source of funds to bankroll YPF's ambitious investment plans. The state looks set to grant approval to YPF to more than double the price of natural gas. at risk. as it is highly unlikely that it will be able to exploit its shale resources alone. behind those in China and the US. however. however. So with Chevron still in the dock in Argentine courts. Argentina's proven shale reserves currently rank as the world's third largest. What seemed like a worthwhile and calculated risk at the time is quickly turning sour for Chevron. with the increase in prices expected to begin before the end of the year. According to Deputy Economy Minister Axel Kicillof. the firm has both denounced the Ecuadorean court's charges under the Inter-American Convention on the Execution of Preventive Measures as fraudulent. View more quality content from Finding Petroleum . In the long-term. producing around 26. Whether this policy will pass. the news is potentially more harmful to YPF. the average price that producers get from the government could reach US$5. Unsurprisingly. and the freezing of its assets by Argentina as without legal merit. Chevron already has all credentials to become a key investor in the YPF project over the coming years. remains to be seen.50MMBtu. However. price hikes.000 barrels of crude and 4 million cubic feet of natural gas daily.50 per million British thermal units (MMBtu) from the existing US$2.37 OilVoice Magazine | JANUARY 2013 acquired by Chevron in 2001) during its time operating in the county. where can the Fernandez administration go for help now? With its back edging ever close to the wall. and even more directly the agreement made only months earlier between Chevron and YPF (the first with an overseas player since the firm's expropriation) to jointly develop the country's vast Vaca Muerta shale reserves. Given the firm's strong presence in Argentina. recent events put that potential role.
saw the likes of Exxon Mobil.5 million barrels per day (bpd). After Hugo Chavez's recent re-election victory in Venezuela the global oil industry knows only too well what to expect from his next six years in power.1 million bpd so far this year. Venezuelan production forecasts make for increasingly grim reading with the consensus seeing oil production levels falling well short of the government's 2012 year-end target of 3. Chavez may have inked deals with the likes of Brazil's state producer Petrobras and Argentina's counterpart YPF in recent times. which have in turn caused a string of deadly accidents in recent years. average output has ranged between 3 million and 3. While some international oilfield services firms such as Halliburton and Schlumberger have opted to continue operating in the country despite the risk of further intervention from Caracas. Chevron and ConocoPhillips all pushed out of the way. pushing away potential investors by expropriating further oil fields and ultimately mortgaging away its future oil production for financing right now. To be sure. but his actions have scared off many a major international oil producer. Lead by the highly-politicised vehicle of state oil firm Petróleos de Venezuela (otherwise known as PDVSA). thanks to the country terminating the publishing of independently certified data back in March 2011. PDVSA has proven that its capacity to increase production on its own is quite limited. same and very little different. much of which has thus-far been put towards the government's impressively ambitious social agenda. Instead things have gone from bad to worse with the Venezuelan oil industry now experiencing (a) rapidly declining production levels. it has not even come close. Chavez's October 7 2012 Presidential election victory over contender Henrique Capriles with more than 54% of the vote hailed a continuation of the strategy which has come to characterise the President's first fourteen years in office. PDVSA's move to take over the oil fields in the Orinoco belt where many of the country's vast reserves are located. To-date. According to Venezuela's oil minister Rafael Ramirez. (b) falling operation standards. Indeed. In fact. the Chavez administration is expected to continue cutting discounted supply deals with allies within its sphere of influence. a more precise figure of the country's oil output remains elusive. Chavez's agenda has failed to help the South American nation live up to its full potential.39 OilVoice Magazine | JANUARY 2013 Venezuela: Six more years of decline under Chavez Written by Richard Ethrington from Finding Petroleum Same. . However. and (c) stifled levels of inbound overseas investment at a time when it is becoming increasingly needed by the domestic oil industry. which have slumped by as much as 26% under Chavez's tenor.
that will only serve to mute the country's long-term production potential. the country's long-term potential is undeniable. And if not oil. India and Russia to help boost production levels. or sooner still if crude continues to decline. Chavez has instead chosen to put the money towards social measures and massive subsidy programmes.despite the catalogue of risks involved. But in the near-to-medium term. and Saudi Arabia. While the fears are growing that six more years of Chavez in power could potentially push production levels lower still. View more quality content from Finding Petroleum . behind only Canada. In 2011. Over time this could provide a shift in the orientation of Venezuela's key export destinations. Bank of America has already forecast that Caracas will run out of off-budget fund deposits by the end of 2013 if oil prices keep steady. In addition it is also the fourth biggest supplier of petroleum to the oil-hungry US market. the future of Venezuela's oil industry looks almost certain to remain characterised by continued underinvestment . then Venezuela appears to have no other way of filling them: EIA data shows that the industry brings in as much as 95% of the OPEC nation's revenue. This view has only strengthened further since the country's active rig count rose to a record high of 373. Venezuela is not only one of the largest producers in the world but it also boasts the biggest crude reserves in the world. With global demand set to increase. Venezuela exported around 350 million barrels to the North American nation. Mexico. and oil prices predicted to continue rising. this is no doomsday forecast for the Venezuelan oil industry. with oil being sold to Venezuela's neighbours at discounted prices.according to Energy Information Administration (EIA). Chavez's most important business partner has long been the US. In fact. all the foundations are already in place for Venezuela to stem the rot and turn-around its ongoing decline in the OPEC rankings. The once full coffers will soon be empty. providing the framework for a sustained increase in production levels over time. interested parties are never going to be too far away . In fact it is far from it. which equates to around 40% of its total output . with an 8. In the meantime while a number of Western international oil companies opt to keep their distance and to wait on the sidelines until the business environment turns about-face. While the outlook is certainly gloomy and warrants the raising of a few red flags. Instead of reinvesting the wealth from this profitable relationship. Despite his incessant anti-American rhetoric. it looks likely that Venezuela will be forced to rely increasingly on investment from industry players in Asia.40 OilVoice Magazine | JANUARY 2013 But things could be so very different for the oil-rich South American nation. First off. thanks largely in part to a growing global population. And investors around the world know this only too well.3% share.due to the preferential oil deals it is tied up in . we may be seeing the start of a gradual transition in Venezuela as it attempts to arrest falling production figures and move itself away from a reliance on exports to the US market. But this cannot go on forever. To be sure. however.
EIA.S. you're not going to thrive in the new oil era. all regularly release long-term forecasts for world energy supplies.S. we are hearing a similar message about the future of oil both from official agencies and the oil industry. the National Intelligence Council (an advisory body to the U. it becomes obvious that drawing an upward line on a chart does not make an oil forecast magically come true. December 14. EIA updated its world projections in 2011. at least for practical purposes. And so. it's all the more astonishing that as Brent Crude--now the true worldwide benchmark price--stands above $100 a barrel. ExxonMobil's . All were considerably off the mark. the IEA. why should we listen now? Written by Kurt Cobb from Resource Insights [I]f you're still operating under the assumption that the earth's petroleum--or at least the cheap stuff--is about to run out. industry oil forecasts badly overestimated supply. He could not have known then that we were about to embark on a bull market that would take oil to its highest price ever--even adjusted for inflation--just 10 years later.S. after oil's run. That oracle's record may be lost in the mists of time. the Paris-based International Energy Agency (a consortium of 28 countries). Energy Information Administration (the statistical arm of the U. The U. Technology is making it possible to find. Director of National Intelligence) and the oil giant ExxonMobil.S. The reverence accorded each new forecast of future energy supplies from international and government agencies and from major oil companies seems to go far beyond that accorded to the oracle of Delphi in ancient Greece. The last three have released their latest forecasts this fall. --Businessweek. and refine oil so efficiently that its supply.41 OilVoice Magazine | JANUARY 2013 Previous long-term government. but we can check the record for these modern energy oracles.S. 1998 The writer of the above sentences was reacting to oil prices hovering around $11 a barrel. Department of Energy). is basically unlimited. and the NIC. Looking back at forecasts made in the year 2000 by the U. produce. The U.
But. It. namely. And..42 OilVoice Magazine | JANUARY 2013 oldest forecast available online dates back to 2006.e. overestimating actual production. it's easy to pick apart long-term forecasts when the actual data become available. let's see by how much each forecast missed. Actual total worldwide liquid fuel production for 2010 was 87. but also natural gas plant liquids (only a fraction of which can be substituted for oil) and refinery processing gain (which is the result of applying energy to break oil into its components. The actual average price for oil traded on the New York Mercantile Exchange in 2010 was $79. The NIC report did not provide an explicit price forecast for oil. however.8 mbpd. Reports issued in the year 2000 by the U. especially oil.S. which put upward pressure on prices. Negative supply surprises have the potential to undermine the very stability of our global system.2 million barrels per day (mbpd) in 2010. First. We have seen just how sensitive it can be as we've watch oil prices reach historic highs in the last decade and remain high. the consequences can be severe because the global system we now have is acutely sensitive to changes in the price and supply of energy. Though the NIC report did not provide an explicit forecast for 2010. There is a basic asymmetry in the effects of energy supply forecasts. The 2000 IEA report forecast an inflation-adjusted price for oil in 2010 only 25 cents higher than the U.S. particularly China and India. continually growing production) as all three forecasts mentioned above did and that forecast turns out to be too low. yet experience should have taught us by now that long-term energy forecasts by anyone--even people whose job it is to study energy markets and supplies--are a poor guide to policy and planning. too.S. but that they were all wrong in the same direction. causing the final volume to expand).61. EIA forecast that total world liquid fuel supplies would reach 93. That's a serious concern because the forecasts provided by these groups are used worldwide for government and corporate planning and policy purposes. but did say this: "Meeting the increase in demand for energy will pose neither a major supply challenge nor lead to substantial price increases in real terms. the implied forecast was around 92 mbpd. and the only way to prevent that is to prepare for scenarios that these official reports refuse to contemplate. Of course. EIA and the IEA contained similar projections. such a forecast turns out to be too high. They are extremely influential. The U.S. Now keep in mind that the comparisons made here between forecast and actual . Extra supply means lower prices and therefore more money available for other things. EIA forecast. EIA report included a price projection for crude oil of about $28 a barrel for 2010 (adjusted for inflation). All those numbers include not only crude oil and lease condensate which constitute the proper definition of oil. The U. Taking an average of all three would still have resulted in a substantial overestimate. has proved wide of the mark. The IEA forecast 95. If. If an oil production forecast promises a business-as-usual future (i. We can now check those numbers. the mistake is benign for most people. All failed to gauge properly the pace of growth in oil demand in Asia. All three groups overestimated production by a considerable margin." All three groups failed to anticipate the plateau in worldwide crude production that began in 2005. This helps to explain the colossal miss on prices.1 mbpd. the point here is not that the forecasts were wrong.
43 OilVoice Magazine | JANUARY 2013 production and prices are for a 10-year period. EIA and IEA world forecasts extend out 23 years to 2035. That way you can say. But the entrenched institutional prejudices in all three groups prevented them from contemplating these outcomes. .S. Imagine if all three groups had predicted a plateau in the worldwide rate of production of crude oil proper (defined as crude oil including lease condensate) starting in 2005. There were voices warning that such things might happen. The accuracy of any forecast deteriorates rapidly the further it goes into the future. They also seem to be missing the fact that high decline rates for such wells mean that rig counts and infrastructure will have to expand almost geometrically to keep supplies growing. Japan and most of Europe--were going to decline consistently starting in 2006. It was assumed that North America would be importing a considerable amount of liquefied natural gas (LNG) by now as domestic supplies declined." As the realities of constrained worldwide oil supply have become apparent. Imagine how different government energy policy and corporate planning would have been had all three forecasting groups predicted in 2000 that oil prices would rise above $100 a barrel by late in the decade. The latest U. it is safer to be wrong when the vast majority are wrong with you. it is possible that all three groups are now simply following the trend and projecting it forward with little skepticism--much as they did for oil in 2000. China.S. all three groups have gradually lowered their long-term oil supply forecasts. None of the three groups foresaw the shale gas phenomenon back in 2000. leading to intense competition for supplies among importing nations. This is because energy transitions can take up to 50 years. But. One thing they all seem to be missing is that production of large amounts of shale gas will depend on much higher prices as drillers move from the easy-to-get gas-which is currently flooding the North American market at prices that are below the cost of production--to the difficult-to-get gas that will flow at slower rates and be much more costly to extract. We are taking many more times the risk if we rely on them. Of course. India. Already U. natural gas production has been essentially flat since December 2011 as prices have vaulted from multiyear lows. Imagine further if all three groups had predicted that global net exports of petroleum liquids--the petroleum fuels available for import by such importers as the United States. and these forecasts go out about twice as far. That expansion will hit a wall at some point when the price of natural gas rises to reflect this reality and forces some consumers to cut back on natural gas use. Waiting until the last minute to begin the inevitable transition away from fossil fuels could cause terrible discontinuity and possibly disaster. It's true that forecasts can miss by being too pessimistic as well. This comes after years of persistent growth in supplies from the low seen after Hurricane Katrina in 2005. So deep are those prejudices that none of the three seems yet to have picked up on the issue of shrinking global net exports even though it is now clear in the data. a dubious assumption given the experience of the last decade. The newest NIC forecast purports to know the state of the world in 2030. "Nobody could have seen it coming. Having missed the rise in gas production. all three continue to believe that supply will be there to match projected demand.
26 in 2000 to an average of $94. we are told again by all three groups that a new miracle technology called hydraulic fracturing is going to make future oil supplies plentiful. even the most conservative in 2000 was still too optimistic about supplies and wildly wrong about prices. If policymakers and planners understood just how big the uncertainty about future fossil fuel supplies is. When the U. But price is not the only variable.S.S. The oldest I could find came in the form of a slide show from 2006. but the most severe because it has the potential to undermine the very stability of global society. they might also require deep reductions in energy use starting now to guard against the day when fossil fuels . And. Long-term forecasts are inherently unreliable. the agency does provide three forecasts based on various price assumptions.60 this year on the New York Mercantile Exchange. And. they are forgetting to point out the obvious. they might also do something else. In the case of the U. It may be for political reasons that statisticians who plot the data for such projections choose to leave out the error bands which they know ought to be there." The NIC even prophesied that natural gas from methane hydrates. concludes that fossil fuels will continue to provide the bulk of the world's energy well into the future and that there will be plenty of them. even though prices have risen from an average $30. the IEA and the NIC made their long-term forecasts in 2000. I had hoped to find the company's report from 2000. No one can know the future. ExxonMobil's forecast was predicting consistent. we would be wise to be cautious. that technology is 60 years old. ExxonMobil's latest report. (By the way. No commercial production of methane from methane hydrates has so far taken place. we are left with evaluating scenarios that help define the risks we face. The company has an interest in convincing consumers and shareholders that oil and natural gas will be the dominant fuels of this century--which is all the more reason to be skeptical about the company's projections. it is not the benign energy supply scenario which should guide us. With the media repeating what will inevitably turn out to be a flawed forecast. and among those forecasts.) Given their record on such pronouncements. When it comes to policy. Even at this late date. At the very least. EIA. But. with regard to oil. Those error bands would aid us in understanding the risks.44 OilVoice Magazine | JANUARY 2013 Because ExxonMobil has recently released its 2013 Outlook for Energy with projections to 2040. So. they might panic. EIA. they might quickly wean society off finite fossil fuels wherever possible in favor of energy sources such as wind and solar which won't be running out any time in the next few billion years. not surprisingly. uninterrupted growth in the worldwide production of crude oil proper and assuming that North America would need considerable LNG imports in the coming decade. supposed game-changing technology was going to make it possible to extract oil in the Arctic and in deepwater "at improbably low costs. essentially methane trapped inside ice crystals in the deep ocean. all long-term forecasts should have wide error bands around them. would become an increasing part of the natural gas supply. The report shows that the conventional wisdom remained intact well into the period when underlying events made them no longer tenable.
and the NIC reports did in 2000. businesses and individuals do little to prepare for scarcity. the IEA. But coal. the stability of which is entirely dependent on highly uncertain long-term forecasts for fossil fuel supplies. oil and natural gas to uranium.45 OilVoice Magazine | JANUARY 2013 decline. and we will someday--perhaps very soon in the case of oil--find that their supply cannot grow any more and will even begin to decline. It comes down to whether it is wise to continue with a system of energy. governments. EIA. Wouldn't it be wiser to build an energy system which would free us from the inherently risky and unreliable racket of longterm forecasts? Wouldn't it be wiser to build an energy system that is forecast-proof because the energy that powers it is constantly renewed? View more quality content from Resource Insights .S. oil. When long-term forecasts promise energy that is both cheap and plentiful as the U. coal to oil and natural gas. Previous transitions gradually moved us to new fuels having increasing energy densities--wood to coal. I repeat: History tells us that it can take up to 50 years to complete an energy transition. natural gas and uranium are all finite.
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