OilVoice Magazine - June 2014

Edition Twenty Seven June 2014
Stirring the pot: the North American energy revolution

Offshore regulators talk tough but are oil companies listening?
The great imaginary California oil boom: Over before it started

Cover image by magnera

1 OilVoice Magazine | JUNE 2014

Issue 27 June 2014
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Adam Marmaras
Chief Executive Officer

Welcome to the 27th edition of the
OilVoice Magazine.

We introduced our new look 2014
Media Pack at the beginning of the
month, updated with current pricing
and advertising opportunities. Our
cost-effective advertising opportunities
place your company in front of 170,000
unique visitors and 700,000 page
views per month.
This month we have great articles from
Eka, FTI Consulting and Mars Omega
LLP. We'd also like to welcome back
some of our regular authors, including
Gail Tverberg, and Kurt Cobb.
If you're interested to know more about
seeing your articles featured on
OilVoice, please get in touch.

Adam Marmaras
CEO
OilVoice

Contents

Featured Authors
This months featured authors
3
Russia and the Ukraine - The worrisome connection to world oil and
gas problems
by Gail Tverberg
5
Stirring the pot: the North American energy revolution
by Andy Bout
16
The great imaginary California oil boom: Over before it started
by Kurt Cobb
18
Oil & gas boom 2014: No end in sight
by David Blackmon
21
Could NAFTA force the Keystone XL pipeline on the United States?
by Kurt Cobb
25
Offshore regulators talk tough but are oil companies listening?
by Loren Steffy
27
How much water is used in the Alberta oil sands?
by Mark Young
30
Iraq and Kurdistan: Oil becomes a source of friction
by Anthony Franks OBE
34

3 OilVoice Magazine | MARCH 2014
Featured Authors

Gail Tverberg
Our Finite World
Gail the Actuarys real name is Gail Tverberg. She 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.

Mark Young
Evaluate Energy
Mark Young is an analyst at Evaluate Energy.

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.

Anthony Franks OBE
Mars Omega LLP
Anthony is responsible for managing and controlling the extensive information
networks, as well as directing and working with the analysis team to create
reports for clients, and also works with Hamish in the Liaison and Mediation
service.

David Blackmon
FTI Consulting, Inc.
David Blackmon is managing director of Strategic Communications for FTI
Consulting, based in Houston.

4 OilVoice Magazine | MARCH 2014

Loren Steffy
30 Point Strategies
A senior writer for 30 Point Strategies and a writer-at-large for Texas Monthly.
Loren worked in daily journalism for 26 years, most recently as an award-
winning business columnist for the Houston Chronicle, and before that, as a
senior writer at Bloomberg News.

Andy Bout
Eka
Andy is based out of Calgary and is responsible for the energy markets
served by EKA. He is the founder of EnCompass Technologies and has over
25 years of experience in the commodities market, specifically in the energy
trading and risk management areas.

Russia and the Ukraine
- The worrisome
connection to world oil
and gas problems

Written by Gail Tverberg from Our Finite World
What is behind the Russia/Ukraine problem? It seems to me that what we are seeing
is Russias attempt to fix a two-part problem:
1. Some oil and gas exporters, including Russia, are not receiving enough oil
and gas revenue to meet their needs. They are not able to collect enough
taxes to provide the services they have promised to their citizens, plus allow
the amount of reinvestment that is needed to maintain production. Russia is
starting to experience economic contraction because of the low revenue
situation. This situation very closely related similar problems I have written
about previously. In one post I talked about major independent oil companies
not producing enough profit to provide the revenue needed for reinvestment,
and because of this, cutting back on new investment. In another, I talked
about the problem of too low US natural gas sales prices, relative to the cost
of extraction.
2. Some oil and gas importers, including the Ukraine, are not using their
imported oil and gas in productive enough ways that they are able to afford to
pay the market price for oil and gas. Russia gave the Ukraine a lower natural
gas price because some of Russias pipelines cross the Ukraine, and the
Ukraine must maintain the pipeline. But even with this lower natural gas price,
the Ukraine is behind on its payments to Russia.
If a person thinks about the situation, it looks a lot like a situation where the world is
reaching limits on oil and gas production. The marginal producers (including Russia)
are being pushed out, at the same time that the marginal consumers (including the
Ukraine) are being pushed out.

Russia is trying to fix this situation, as best it can. One part of its approach is to make
certain that the Ukraine will in fact pay at least the European market price for natural
gas. To do this, Russia will make the Ukraine prepay for its natural gas; otherwise it
will cut off its gas supply. Russia is also looking for new customers who can afford to
pay higher prices for natural gas. In particular, Russia is working on a contract to sell
LNG to China, quite possibly reducing the amount of natural gas it has available to
sell to Europe. Russia is also signing a $10 billion contract with Iran in which it
promises to construct new hydroelectric and thermal energy plants in Iran, in return
for oil exports from Iran. This contract will increase the amount of oil Russia has to

sell, and will increase the oil available on the world market. Russias plan will do an
end run around US and European sanctions.

Gradually, or perhaps not so gradually, Russias exports are being redirected to
those who can afford to pay higher prices. European Union purchases of natural gas
imports have declined since 2008, presumably because they are having difficulty
affording the current price of gas, so they are being relied on less for future sales.

The Russian approach seems to include building a new axis of power, including
Russia, China, Iran and perhaps other countries. This new axis of power may
threaten the US dollars reserve currency status. With the dollar as reserve currency,
the US has been able to buy far more goods from other countries than it sells to
others. Putting an end to the US dollar as reserve currency would leave more and oil
and gas for other countries. If purchases by the US are cut back, it will leave more oil
and gas for other countries. The danger is that prices will drop too low because of
the drop in US demand, leading to lower production. It this should happen, everyone
might lose out.

I am doubtful that Russias approach to fixing its problems will work. But if Russia is
between a rock and a hard place, I can understand its willingness to try something
very different. It now has more power than it has had in the past because of its oil
and gas exports, and is willing to use that power.

The US/European approach to this problem is to loan the Ukraine $17 billion to pay
for past natural gas bills. The hope is that with this loan, the Ukraine will be able to
make changes that will allow it to afford future natural gas bills. There is also the
hope that the United States can step in with large natural gas exports to Europe and
the Ukraine. In addition, the US and Europe are trying to impose sanctions on
Russia.

I find it very difficult to believe that the US/European approach will work. The idea
that the United States can start exporting huge amounts of natural gas to Europe in
the near future borders on the bizarre. There are many hurdles that would need to be
overcome for this to happen. Installing LNG export facilities is among the least of
these hurdles.

In fact, the West badly needs both the oil and gas that Russia is producing, so it
really is in a very precarious position. If Russia cuts off exports, or if Russia is forced
to cut off exports because of financial difficulties, both the US and Europe will suffer.
It is clear that Europe will suffer because of its dependence on pipeline exports of oil
and gas from Russia. But the US will suffer as well, because the US is tied closely to
Europe by financial ties, and by import and export arrangements with Europe.

Furthermore, the US/European approach involves a great deal of new debt, in an
attempt to fix an inherent inability of the Ukrainian economy to afford high energy
prices. Without a huge transformation, the Ukraine will be in even more financial
difficulty when it comes time to pay back the new debtit will need make debt
payments at the same time that it needs to pay for more expensive future natural
gas. More debt doesnt necessarily fix the situation; it may make it worse.

The US powers that be do not understand what Russia (and the world) is up against,
so the policies they propose are likely to make the situation worse, rather than better.

Background

We live in a world in which some countries use far more energy products than
others. One question that the new proposed axis of power raises is whether this
disproportionate share of energy use should be allowed to continue to exist.

Figure 1. Per Capita Energy Consumption, based on BP 2013 Statistical Review of
World Energy data and EIA population data.

The United States, Europe and Japan got to the position of using a disproportionate
share of energy resources by way of being first with industrialization. This early
industrialization set up a pattern of using energy for frivolous thingslarge, heated
homes; private passenger automobiles for individual citizens; businesses that were
not necessarily as energy-efficient as they might be. In the early days, imports were
limited and cheap. As local supplies became depleted, imports rose. The cost of
imported oil and imported gas (except for natural gas in the US) rose as well, making
the imported fuel harder to afford. Now the early usersthat is, the US, EU, and
Japan, are the ones struggling to keep up past consumption levels.

In some ways, the Ukraine is not too different from the EU is this respect. The
Ukraine also got to the position of using an above average share of energy
resources, by being early in its industrialization, during the era of the Soviet Union.
The Ukraine, prior to the collapse of the Soviet Union, was using as much as energy
on a per-capita basis as the US-Europe-Japan group (Figure 2), because of its
heavy industry.


Figure 2. Figure similar to Figure 1, but including Ukraines per capita energy
consumption as well.

Once the Soviet Union collapsed, the Ukraine had huge difficulties: Exports of oil and
gas from Russia (upon which the Ukraines industry depended) collapsed. The
Ukraines industry had been set up under the Soviet-Era model, and didnt produce
the variety of goods, cheaply, that people outside the Soviet Union expected to buy.
The Ukraine also didnt have alternate sources of energy supply, if Russian supplies
were cut off, because a major source of energy was pipelines of both oil and gas
from Russia.

The Ukraine economy has struggled for many years. Trying to transform it now to be
successful competitor in the world economy is likely to be a difficult task. If the
Ukraine tries to make goods for the world market, it will find itself in competition with
Asian competitors. The Asians are hard to outcompete, in part because their labor
costs are low (because it uses workers with little energy use, so they can live on low
salaries) and in part because their energy costs are low (often from coal). Safety
standards are often low as well, adding to their low-cost structure.

If, instead of making goods for the world market, the Ukraine decides to specialize in
high-priced services, such as financial, medical, or educational services, it will find
that it has a great deal of competition from the EU. It will also find that the EU is
having difficulty making the service model work. The service model provides little for
export, for one thing.

The Russian Energy Situation

Russias cost of producing oil is among the highest in the world. Mark Lewis, in a
presentation at the November 2012 ASP-USA meeting estimated that Russia
needed a price of $115.90 a barrel, to cover both its cost of extraction, plus Russian
budget needs from taxes. If costs are rising at, say, 10% per year, the current

required cost today would be about $134 barrel. Current oil prices are not much over
$100 barrel, which is too low.

Russia is the second largest oil exporter in the world (after Saudi Arabia), exporting
approximately 7.2 million barrels a day. We in the rest of the world very badly need
Russias oil exports to continue, to keep up world oil supply. Without this oil, the
world economy would suffer badly.

With respect to natural gas, Russia is the single largest exporter in the world (Figure
3, below), exporting more natural gas than all the Middle Eastern countries
combined. The cost of producing Russias natural gas is likely very high, because
Russia is extracting it from more and more difficult locations. Also, Russia is
transporting this natural gas greater and greater distances. New pipelines or LNG
facilities are necessary to facilitate this transportation, and these are expensive as
well.

Figure 3. Natural gas exports by country, with some countries grouped. Exports from
the New World are excluded, since they historically have mostly stayed in the New
World. For example, Canada exports natural gas to the United States by pipeline.

When an oil/natural gas exporter doesnt get enough revenue, there is a danger of
recession, or even collapse. A major part of the problem is that oil and gas exporters
depend on tax revenue to fund government services, such as roads, schools, and
public health. This tax revenue depends on profitability of the companies selling oil
and gas. If prices are not high enough, tax revenue suffers. In fact, the 1991 collapse
of the Soviet Union took place after a period of low oil prices made it impossible to
justify investment in new more-expensive-to-extract fields. Russia began to recover
once oil prices began rising again, making new investment oil investments profitable
again.

The Ukraine has been a particular problem with respect to natural gas exports for

Russia, because it has used a significant share of Russias natural gas exports,
without paying market price for them (Figure 4). In fact, some of the time, it didnt
even pay the below-market price the Ukraine had contracted for, for natural gas
exportsthe reason for the Ukraines debt to Russia.

Figure 4. Ukraine natural gas imports as a percentage of Russias natural gas
exports.

Also, with Russias total natural gas exports close to flat (see Figure 3), the high
exports to Ukraine have limited the amount available to members of the European
Union. If Russia bases its economy on the sale of oil and natural gas, it needs a high
enough average price, to fund its overall costs.

The Ukraine continues to need Russia, because Russia is the source of its oil and
gas supplies. The IMF recently approved a $17 billion loan to the Ukraine, to pay off
its debt to Russia and for other purposes. The loan is contingent on fiscal reforms,
including a 50% increase in natural gas prices, raising taxes and freezing the
minimum wage. My expectation is that the Ukrainian situation will spiral downward,
with lower and lower energy use (because citizens wont be able to afford the high
cost of energy).

Russia needs the US, because it is having trouble obtaining enough investment
capital, because of current low oil prices. It needs to continue relationships with oil
companies such as Exxon Mobil, hoping these companies will help provide
investment capital. The catch is that they too are having difficulty. Exxon Mobil has
reported falling profits for four quarters. The same Exxon article mentions that the
company cut capital and exploration costs by 28% as a way of getting income and
outgo back into line. So Exxon Mobil is hurting as well, for the same reason that
Russia is hurting: inadequate oil and gas prices.

To keep income in line with necessary expenditures, Russia has essentially no

choice but to insist on higher prices from the country that is a big consumer, but cant
pay its billsthe Ukraine. These higher prices are likely to push the Ukraines
economy down further, likely making the IMF loan impossible to repay.

To Which Countries Can Russias Natural Gas Be Exported?

The market for Natural Gas imports is somewhat restricted, as shown in Figure 5,
below. This chart includes natural gas imports from all sources, including the Middle
East and Africa, not just Russia. I have omitted the Americas, because it currently
tends to operate as a separate system, with the US, Canada, and Mexico connected
by pipelines.

Figure 5. Natural gas imports (excluding new world) by country grouping. FSU is
Former Soviet Union. Based on EIA data. Chart omits Switzerland and other non-
EU European natural gas importers.

When it comes to finding locations for Russia to export natural gas to, the countries
of the European Union are a large share of the natural gas market. (In Figure 5, I
have omitted a few small European importers that are not part of the EU, and not
part of the FSU, such as Switzerland, but this omission should be small.) The
Ukraine and other Former Soviet Union countries are gradually being squeezed out,
because they cannot afford todays natural gas prices. Asia is growing in its natural
gas use. The prices paid in Asia have tended to be higher than in Europe (Figure 6,
below), so it is natural for Russia to look to Asia as a growth area for its natural gas
exports.

Russia cannot easily walk away from the countries it currently exports to, because it
needs natural gas revenue, and the pipelines are already in place.

Can the United States Actually Help the Ukraine with Natural Gas?

The Ukraines big problem with natural gas is that it cant afford to pay market prices
for it. This issue is likely to continue to be a huge problem in the future, regardless of
which country is planning to export natural gas to it. Greece has had a similar
problem, with inability to pay for natural gas imports from Russia. On my view, the
Ukraines inability to afford natural gas is its number one problem. The problem can
be temporarily papered over with an IMF loan, but unless there are huge structural
changes to the economy, the basic problem wont be fixed.

Lets suppose that the Ukraine actually finds money to pay for imports. Can the US
provide the natural gas imports required? Can it also help with European imports?
Many people look at the disparity in natural gas prices around the world (Figure 6),
and expect that US can provide natural gas to Europe as well .

Figure 6. Comparison of natural gas prices based on World Bank Pink Sheet data.
Also includes Pink Sheet world oil price on similar basis.

If a person looks at the situation closely, it is hard to see that US exports will happen
in large enough quantity, in a fast enough time frame, to make any difference. I
recently wrote a post pointing out some of the issues, called The Absurdity of US
Natural Gas Exports. I point out in that post that the United States is currently a
natural gas importer. Our own natural gas in storage reservoirs is at record low
levels, and there is concern that we may not be able to refill them in time for next
winter. The amount of natural gas required by Europe is huge, if it were to try to
replace Russias contribution. So we are talking about the need for a very large
change for the US to be able to help Europe and the Ukraine.

There is one scenario in which the United States might theoretically be able to help
Europe. This scenario would require a lot more than putting LNG export terminals in
place. In particular, we would need:

Much higher US natural gas prices than are currently the case, in order to
make it economic to extract shale gas that seems to be present, but that is not
economic to extract at this time. US natural gas prices would likely need to
rise to two to three times current levels, perhaps to current European levels.
The US economy would need to weather the storm that these higher natural
gas prices would cause. Homeowners would find that the cost of heating their
homes is much higher, but that their salaries are not any higher. Utilities that
use natural gas would find that their sales price of electricity needs to be
much higher, affecting both homes and businesses. The US economy would
suddenly become much less competitive in the world market place, because
of its higher cost structure compared to countries using coal as their primary
fuel.
In order to extract this higher-priced natural gas, we would need to greatly
ramp up the number of shale gas wells drilled, perhaps to 10 times the current
number of wells drilled per year. Part of the big increase would take place
because of the greater total amount of natural gas required. Part of the
increase would take place because we would now be drilling wells with lower
productivitypartly because of lower monthly output, and partly because of
shorter productive lives. Without adding low-productivity wells such as these,
there is no way that production can be ramped up as much as required. (This
is the reason that higher natural gas prices are needed.)
To drill this huge number of wells, we would need many more drilling rigs. We
would need many more engineers. We would need many more trucks hauling
water for hydraulic fracturing fluid. In dry areas, we would likely need to
transport the water required for fracking much longer distances than in the
past. We would need to dispose of much more waste material, causing
potentially many more problems with pollution and with earthquakes. We
would need communities willing to put up with all of these problems, in order
to help other countries in need of natural gas imports.
Someone would need to build a huge number of LNG transport ships to carry
all of this natural gas. It is not clear whether LNG import terminals would be
needed as wellthe ones currently in place tend to be underutilized.
Many more pipelines would be needed, both in the US from the new wells to
the terminals, and in Europe, connecting LNG terminals to the new users.
Many of these pipelines will be used for only a short period of time, as wells
deplete quickly.
The cost of LNG the US will be able to send to Europe will likely be more
expensive than current European natural gas prices, when the combination of
the higher US natural gas cost, plus LNG transport cost, is considered. If
there are new European natural gas imports, say from Israel, the additional
high-priced natural gas from the US may not be needed. It is also not clear
that Europeans will be able to afford the new expensive natural gas, either.
The high-priced gas will tend to make the European economy shrink, because
salaries will not rise to match the new higher costs.
Conclusion

The US approach to the Russia /Ukraine situation reflects a serious
misunderstanding of the situation. Russia has little choice but to try to raise the price
of products it is selling, any way it can. It needs to cut out those who cannot afford its

products, including the Ukraine. If Europe increasingly cannot afford its products,
Russia needs to find customers who can afford them.

There is little chance that the United States is going to be able to help Europe with its
natural gas needs in any reasonable timeframe. Our best chance at keeping the
global economy working for a little longer is to try to keep globalization working as
best we can. This will likely require making nice to countries we are unhappy with,
and putting up with what looks like aggression.

Policymakers like to think that the US has more power than it really does, and like to
encourage stories suggesting great power in the press. Unfortunately, these stories
are not true; we need policymakers who understand our real situation.

View more quality content from
Our Finite World

Stirring the pot: the
North American
energy revolution

Written by Andy Bout from Eka
North America is undergoing an energy revolution. Technological advancements
particularly in horizontal drilling and massive hydraulic fracturing have opened up
new and abundant sources of natural gas and crude oil to commercial development,
in locations once off-limit to the industry. Andy Bout, Vice President, Energy at
EKA explores how this revolution is shaking up the traditional landscape of the
sector, and how the resulting uncertainties further underline the need for companies
to utilize robust commodity data management processes in order to stay ahead of
the pack.

The times they are a changin

The numbers speak for themselves. Since the widespread adoption of new fracking
technologies in 2007, gas production from shale fields has risen from around 3 BCF
a day to 28 BCF. This in turn has increased total US production from 55 BCFD in
2007 to an estimated 72 BCFD in early 2014. Similarly, oil production from shale
reserves has helped push US crude production from just over 5 million barrels a day
in 2008 (a 50 year plus low) to an estimated 8 million barrels per day in 2013 (a 20
year plus high).

This has rightly been feted by industry and the political class alike. It has spurred
economic growth in parts of the United States, and promises to reduce US reliance
on foreign sources of energy (the Holy Grail). However as one might expect the
sharp transition has also thrown up significant disruption. Much of the new
production has been found outside the fairways of traditional oil and gas
infrastructure, and the industry faces challenges brought about by the lack of
adequate pipeline capacity in proximity to new fields, as well as the impact of
increased volumes on supply patterns and commodity prices.

Looking in more detail at a few examples: the huge increase in oil production
resulting from development of the Bakken Shale field in North Dakota has overrun
local pipeline capacity. This has necessitated alternative means of moving that crude
to refining centers in the Midwest and along the Gulf Coast. Rail has been the most
popular option so far, with an average of 950 tanker cars of oil leaving the state by
this route every day at present around 60 per cent of the states total oil production.

While pipeline is generally considered preferable to rail due to lower costs and
operational risk, this increased reliance on rail (thanks in part to delays in the

construction of new pipeline capacity) has alerted producers to its unique
advantages. More flexible routing allows for delivery to the most lucrative markets
with the ability to re-route mid-journey in response to market conditions. While there
are a number of proposals on the table for new pipeline capacity in this area to pick
up the shortfall, the significant investment in local rail infrastructure combined with
environmental concerns makes it uncertain if and when this new capacity will
actually materialize.

The expansion of the Bakken field has also highlighted another problem: the critical
shortage of natural gas gathering and transportation capacity in the area. The
consequence is that producers are currently forced to flare much of the gas
produced as a by-product of crude. Needless to say, this is wasteful and un-
environmentally friendly. Producers looking to address the issue are consequently
supporting a number of mid-stream operators including Tulsa-based Oneok and
Hess Corporation in the development of new gathering, processing and
transmission facilities which would allow the excess gas to be captured and sold.

As production ramps up, basis differentials between the Gulf Coast and Midwest
supply points and the Northeast markets have tightened, reducing the flow of gas
from the South. This can be seen with the Marcellus Field in the Appalachian region,
where it is making a big and potentially transformational impact on natural gas
markets. Southern producers, unable to compete with Marcellus gas in this market,
are increasingly having to seek out alternatives, often at lower prices, forcing many
to reduce exploration and production budgets for gas projects.

Certain tools for uncertain times

The upshot of all of this is that the industry is in a major state of flux. The map of
North American energy is literally being re-drawn, and re-drawn again, on a
yearly or even monthly basis. While the impact of the shale revolution is undoubtedly
a positive one, it has also created a lot of uncertainty and volatility (as any good
business revolution should).

Given these rapidly shifting supply patterns, and increasing volumes of oil and gas
entering the US markets, wholesale energy traders particularly natural gas traders
are having difficulty remaining abreast of the changes and adopting to the new
dynamics as they emerge. Once-lucrative transportation capacity is often going
unused, and long-term supply or sales agreements are becoming increasingly
uneconomic.

In order to adapt to the impact of new technologies on the energy market, energy
traders must adopt new software technologies in the world of information
management. Energy organizations need technology that provides advanced,
predictive analytics that assist in making informed decisions by transforming large
amounts of data into insights. The software must deliver real-time, meaningful and
actionable information for traders, schedulers, risk managers, and executives to view
and analyze. It must also allow simulation of key performance metrics such as risk
exposure, P&L, counterparty limits, budget and forecast variances, and storage and
transportation costs.

If energy businesses hope to meet the challenges of this Brave New World, they
must have the information and tools that allow them to react appropriately as supply
patterns change, new facilities come online, or when prices spike due to
transportation or supply disruptions during extreme weather (such as that seen
during the recent cold snaps). For traders with easy access to the big picture, these
market imbalances can offer significant upside. Yet in order to take advantage of
opportunities as they arise, traders must utilize systems that consume and aggregate
data from multiple markets, and software that can provide the necessary insight-
generating analysis. The US energy market has been flooded with gas. For energy
traders, its time to sink or swim.

Eka

The great imaginary
California oil boom:
Over before it started

Written by Kurt Cobb from Resource Insights
It turns out that the oil industry has been pulling our collective leg.

The pending 96 percent reduction in estimated deep shale oil resources in California
revealed last week in the Los Angeles Times calls into question the oil industry's
premise of a decades-long revival in U.S. oil production and the already implausible
predictions of American energy independence. The reduction also appears to bolster
the view of long-time skeptics that the U.S. shale oil boom--now centered in North
Dakota and Texas--will likely be short-lived, petering out by the end of this decade.
(I've been expressing my skepticism in writing about resource claims made for both
shale gas and oil since 2008.)

California has been abuzz for the past couple of years about the prospect of vast
new oil wealth supposedly ready for the taking in the Monterey Shale thousands of

feet below the state. The U.S. Energy Information Administration (EIA) had
previously estimated that 15.4 billion barrels were technically recoverable, basing the
number on a report from a contractor who relied heavily on oil industry presentations
rather than independent data.

The California economy was supposed to benefit from 2.8 million new jobs by 2020.
The state was also supposed to gain $220 billion in additional income and $24 billion
in additional tax revenues in that year alone, according to a study from the University
of Southern California that relied heavily on industry funding.

But that was before the revelation by the Times that the EIA will reduce its estimate
of technically recoverable oil in California's Monterey Shale by 96 percent--almost a
complete wipeout--after taking a close look at actual data for wells drilled there
already. The agency now believes that only about 600 million barrels are recoverable
using existing technology. The 600 million barrels still sound like a lot, but those
barrels would last the United States all of 40 days at the current rate of consumption.

Americans had been counting on the seemingly oil-rich Monterey Shale for more
than 60 percent of a supposed newfound bounty of domestic oil locked up in deep
shale deposits. But it turns out that the Monterey is rich with oil in the same way that
seawater is rich in dissolved gold. In both cases the resource is there, but no one
can figure out how get it out at a profit. The EIA previously estimated that resources
of so-called tight oil, the proper name for oil from deep shale deposits, could reach
23.9 billion barrels for the United States as a whole. Overnight that number shrank to
9.1 billion.

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

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

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

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

It's no surprise that those who work in the oil industry are perennially optimistic. This
high-risk business isn't for the timid. And that optimism is necessary if the industry is
going to raise the capital it needs from investors. But it should be obvious that relying
on the oil industry for objective information that will form the basis for public policy is
a mistake. Independent sources and objective data are important cross-checks on
the industry's understandable but often misleading enthusiasm.


The other explanation for the Monterey miss is that the analysts at INTEK are simply
colossally inept. Note that INTEK was also responsible for the overall U.S.
assessment of 23.9 billion barrels of technically recoverable oil lodged in deep shale
formations. The California miss alone reduced estimated U.S. resources to 9.1 billion
barrels, a cut which by itself calls into question the entire premise of renewed
American oil abundance. But, the gargantuan misreading of the Monterey Shale's
resources also suggests that the firm's estimates for other areas of the country need
review as well.

A February 2013 comprehensive report on U.S. tight oil and natural gas from deep
shales released by the Post Carbon Institute presaged the Monterey disappointment
by pointing out how little oil had been extracted per well using advanced techniques
in the Monterey Shale. A follow-on report issued in December focused exclusively on
the Monterey and concluded that the INTEK/EIA estimate was vastly overblown. Not
surprisingly, neither of these independent reports received any oil industry funding.

It is well to remember that the above numbers are all just estimates, and that they
are for so-called technically recoverable resources. The estimates tell us little about
how much oil from the Monterey or elsewhere might actually be economically
recoverable, that is, profitably extracted. For that reason, the oil that is ultimately
extracted from the Monterey and other deep shale deposits will likely be less than
any estimate of technically recoverable resources. That means that even the 600
million barrel estimate for the Monterey may turn out to be too optimistic.

The industry counters that improved technology could change what seems
unobtainable now into accessible oil. But, it cites no specific developments that are
not already in use and therefore reflected in current estimates of what we can hope
to extract. And the idea that we should base our public policy on innovations that no
one has thought of yet seems more than a little unwise.

Moreover, while technology can improve, the laws of physics don't. The industry is
already moving from the so-called "sweet spots" in shale deposits to those that are
more difficult to exploit. That process will continue until the laws of physics and
economics team up to make drilling unprofitable, and that will be the end of the shale
boom in the rest of the country.

________________________________________________________

P.S. In a previous piece I asked, "Will anyone who is currently predicting U.S. energy
independence be punished if the story turns out to be wrong?" My answer was
probably not. Now, we will find out if that turns out to be the case. My guess is that
the oil industry will redouble its efforts to convince the public and policymakers to
continue to believe something which cannot be supported by the evidence.

P.P.S. Tupper Hull, spokesman for the Western States Petroleum Association, told
the San Francisco Chronicle the following in response to the Monterey Shale
revision: "People forget that the boom taking place in Texas and particularly North
Dakota did not happen overnight. There were decades of operators trying to
understand the technology and the geology." He seems unable to recognize that in

the decades that it may take to figure out how to unlock the Monterey Shale,
California and the world will be working hard to create an advanced energy
infrastructure that will make the Monterey irrelevant. Technology isn't standing still in
renewable energy either.

Resource Insights

Oil & gas boom 2014:
No end in sight

Written by David Blackmon from FTI Consulting, Inc.
In February, oil production in Texas hit a 34-year high, with combined oil and
condensate volumes exceeding 2.9 million barrels of oil per day. For the first time in
memory, Texas now produces more than 36% of all the oil produced in the United
States, and if it were a separate country, Texas would now rank as the 8th largest oil
producing nation on earth. Wow.

We see endless speculation about how long we should expect the current boom in
shale oil and natural gas that is happening in Texas and throughout much of the
United States to last. Prophets of doom like proponents of Peak Oil theory and
radical anti-economic growth activists like Bill McKibben say its all a bubble that
will burst at any moment.

Others actually involved in the development of shale resources tend to believe the
correct answer today will be some variation on the theme: a very long time. One
presenter at the recent Eagle Ford Consortium Conference in San Antonio, Greg
Leveille of ConocoPhillips, told his audience that the 25 county region that makes up
the Eagle Ford Shale play should expect to see decades and decades of
production.


Credit: Dr. Mark Perry at The American Enterprise Institute

People who live in the Eagle Ford region, the Permian Basin of West Texas, and
other significant shale plays around the country naturally worry about when the next
bust will come, which is not an unreasonable concern to have. Previous
conventional oil and gas booms have almost always eventually wound down into a
bust at some level. But there are many reasons to believe that the shale boom will
be different, and the Eagle Ford play provides a very good example why.

The differences between todays situation and that of prior booms are many. Start
with the fact that previous booms, like the oil boom of the early 1980s, came about
due to high oil prices driven by restrictions in supply. The restrictions in the 1980s
were artificially driven by OPEC, and prior booms came about simply due to a failure
by the global industry to identify adequate new resources. In every case, you had
rising demand and limited supplies to meet it.

Todays boom in the United States is different in that we now have rapidly rising
domestic supplies meeting rising demand. Where in the past the United States was
forced to rely more and more heavily on imports from OPEC countries to meet its
domestic needs, todays shale boom is enabling our country to actually lower oil
imports on a daily basis, having cut them almost in half since 2007. In the meantime,
rapidly rising demand in China, Japan, India and the rest of the Pacific Rim is filling
the void in U.S. imports, consuming all the oil the OPEC countries and Russia can
produce. This all ensures the price of oil will remain healthy enough for the U.S.
drilling boom to continue.

Some in the environmentalist movement, like McKibben, promote what they call the
stranded carbon theory, which posits the world will ultimately leave much of the
known oil and gas reserves in the ground due to concerns over climate change. But
this scenario is unlikely to become reality, because to do that will mean an end to

economic growth in the developed world, and relegating developing nations who
need abundant and affordable energy supplies to improve their economies and help
move their people out of abject poverty to simply accept their current lot in life.

For at least the next 50 years, fossil fuels are the only available source that is truly
scalable to meet those needs. The thought that 4+ billion people who populate
developing nations on this planet are going to quietly accept their current fate is
unrealistic. Yet, those who promote the stranded carbon theory have no real,
current alternative to offer to fossil fuels.

To sustain economic growth here in the U.S. and to have any hope of helping move
the developing world out of squalor, we are going to need all we can get of every
source of energy we can develop. Rather than leave the oil and gas in the ground, it
is more likely the human race is innovative enough to develop technologies
necessary to deal with the carbon dioxide.

Writing in the Houston Chronicle on April 27, columnist Bill King warned Texans not
to put all our eggs in the oil and gas basket, one reason being the potential for
development of a disruptive technology related to Solar power that would make it
more competitive with fossil fuels. That is great advice we do need to continue to
develop renewable fuel sources, and no state or country has done more to
aggressively develop wind power than Texas has over the last decade. But even
with that continued renewable development, and even if the long-awaited disruptive
technology related to solar power or hydrogen cars finally comes about, our reality
is that the world is still going to need every bit of every source of fuel we can
develop.

This isnt 1984 all over again, and we do not have to live in a world of energy
poverty, as some actively advocate. The OPEC nations can still influence the global
price of oil to some extent, but the ongoing shale oil boom in the U.S. means they
can no longer force Americans to wait in endless lines to fill their tanks with gasoline.
We can have a world of energy abundance, and Texas is playing a leading role in
making it all happen.

God Bless Texas.

FTI Consulting, Inc.

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Could NAFTA force the
Keystone XL pipeline
on the United States?

Written by Kurt Cobb from Resource Insights
As the Obama administration puts off once again any decision on authorizing the
Keystone XL pipeline, there are whispers of another intriguing possibility. If the U.S.
government fails to approve the pipeline soon or rejects it outright, the Canadians
may challenge the delay or rejection under the provisions of the North American
Free Trade Agreement (NAFTA) signed by both countries. This move opens up a
politically attractive option not previously available to the Obama administration,
something I'll discuss below. I've been wondering about how NAFTA might affect any
decision. Under its provisions, Canada is obliged to maintain the same ratio of
exports to total production of oil and natural gas as prevailed in the previous 36
months regardless of the situation, that is, emergency or no. The pain of any
voluntary restriction by Canada must be borne in proportion to its current
consumption. Each party to the treaty would be obliged to suffer the same
percentage decline in oil or gas deliveries from Canadian production.

So, what if Canada decides to expand oil production from the tar sands and export
that oil to Asia? Would that production be included in total Canadian production for
the purposes of the treaty? Could the United States proceed against Canada for
reducing the proportion that the United States is receiving from total production? Or,
what if the Canadians build an eastward-flowing pipeline that simply delivers the
extra oil to eastern Canada ending that region's dependence on imported oil? The
answers to these questions are not clear to me. The treaty doesn't seem to envision
such scenarios.

But now it seems that with the U.S. government dithering over the Keystone XL
pipeline decision, it is Canada that is the aggrieved party. Still, until recently I couldn't
see how the NAFTA rules about export ratios would have any bearing on the
Keystone decision. As the importer in the treaty, the United States seems to have an
avenue for protesting any reduction or cutoff of oil deliveries, but the Canadians do
not seem to have any leverage to force the United States to take more Canadian oil.

However, a reader alerted me to the current thinking in Ottawa which includes
preparations for a possible challenge to any rejection by the U.S. government of the
Keystone XL. Under entirely different provisions of NAFTA the Canadian government
is readying itself to claim that the Keystone XL project is being treated differently
from other previously approved pipeline projects which now cross the U.S.-Canadian
border and that such discrimination is not allowed under NAFTA. It turns out that the
company proposing the pipeline, TransCanada, would also have standing under

NAFTA to bring such a complaint. But the company is at present noncommittal about
any such move.

Now let me spin a possible interpretation of these events without claiming any inside
knowledge about the motives of the parties involved. With Congressional elections
coming up later this year, it seems obvious that President Obama is loathe to anger
environmentalists--some of whom are large donors--by approving a pipeline which
they claim will aggravate climate change by increasing the exploitation of the tar
sands. (Of course, oil from the tar sands could simply be shipped elsewhere.)

The president has now put off any decision for two elections hoping to placate his
supporters. But he has angered the Canadian administration in the process. Now,
here is the kind of situation where I've asked myself in the past whether Obama just
doesn't see the whole picture or whether he is actually 10 steps ahead of everyone
else including me. This is because I fully expected him to approve the pipeline after
the 2012 election. I didn't think he could put it off. And, I thought his own supporters
would see him as cynical for merely postponing until after the election a decision he
had already made.

But Obama has successfully delayed once again. So, I began thinking along the
same lines as I did in 2012: He'll surely have to approve the pipeline after the 2014
election. He'll have no choice. His own State Department says that it is no less safe
than any other pipeline. In fact, it will be safer because the latest safety technology
will be applied. And besides, the State Department says explicitly that the oil will
simply go elsewhere if the United States doesn't take it. So, the president will finally
be forced to exhibit his cynicism on this issue. But with the Canadian move, there is
another possibility that would work out perfectly for Obama and the Democratic
Party. After the election and seeming to stand on principle, the president rejects the
Keystone XL pipeline application. This is hailed as a big win for the environmental
movement.

After the celebration dies down, the Canadians challenge the decision under the
arbitration provisions of NAFTA. Any decision by the arbitration panel is final. The
panel then decides that the failure to approve the pipeline is discriminatory under the
treaty and reverses President Obama's decision. The president reluctantly complies.
What else can he do? His hands are tied by the treaty.

Is this what the president wants to have happen? I claim no power to read minds.
But, perhaps some people in the administration know the answer. It is possible that
they haven't thought of this scenario, but I doubt. And so, just this once the president
may not be 10 steps ahead of me. We'll see.

Resource Insights

Offshore regulators
talk tough but are oil
companies listening?

Written by Loren Steffy from 30 Point Strategies
Offshore regulators issued a stern warning recently for oil companies and
contractors that have poor track records for operating in the Gulf of Mexico: weve
got our eye on you. The warning came during a panel discussion on the final day of
the Offshore Technology Conference, the industrys mega trade show in Houston.

The Coast Guards assistant commandant for prevention policy, Rear Adm. Joseph
Servidio, and Brian Salerno, director of the Bureau of Safety and Environmental
Enforcement, warned that they intend to crack down on companies that cut corners.
According to the Houston Chronicle:

Servidio said the Coast Guard will consider launching unannounced inspections of
oil and gas industry vessels after some logged more than five deficiencies during
scheduled probes.

There are significant areas of concern, and we have a ways to go with some
vessels and some companies, Servidio said.

Servidio said the Coast Guard may even resort to unannounced inspections of
vessels with bad track records, similar to a program it already has in place for some
cruise ships. Salerno promised much the same for rig operators, as the Chronicle
noted:

Salerno said the safety bureau he heads, which regulates offshore drilling, also sees
evidence of spotty performance, with a few repeat offenders mingled among
companies with deep commitments to the safety and environmental management
systems now required to minimize process risks offshore.

There are companies we have encountered that think they can cut corners or regard
SEMS as just a plan on a shelf, Salerno said. In some tragic cases, lives have
been lost needlessly for failure to follow established safety processes.

The biggest question, left unanswered, is what will the regulators do when they
identify recidivist safety violators? So far, they have shown little desire to boot
companies from the gulf for repeated safety infractions.

Salernos comments seem to refer to the Black Elk Energy accident in late 2012 that
killed three workers and injured others. Salernos predecessor declared that the

company failed to operate in a manner consistent with federal regulations, and it
wasnt the first time. Black Elk had been cited 315 times in the two previous years for
rules violations. Yet even after the 2012 accident, BSEE simply told the company to
develop a better safety plan.

Black Elk had paid some piddling fines prior to the accident the biggest was
$307,500 for failing to fix a gas leak on one its platforms for 117 days but the
company continued to operate in the Gulf.

As OTC attendees were frequently reminded at the conference, the Gulf is one of the
most lucrative and active areas for offshore drilling in the world, yet companies that
fail to operate safely have little worry of being kicked out of the party.

If Servidio and Salerno really want to catch the industrys attention, they need to
come armed with stricter consequences for recidivist safety violators. Fines currently
are so low, they arent enough to change companies behavior. Only the threat of
losing access to the Gulf will get their attention.

Similarly, the feds need to consider an operators safety record when awarding new
leases in the Gulf. Instead, as we saw after the Deepwater Horizon disaster, BP a
company with a decade of repeated safety and operating failures was among the
first companies to return to the Gulf, and it now is more active there than it was
before the accident.

The Environmental Protection Agency, not offshore regulators, briefly banned BP
from bidding on new Gulf leases, and, as part of the inevitable lawsuit that BP filed,
set up an independent auditor to keep an eye on the companys operations.

BSEE and the Coast Guard should consider a similar program for repeat offenders.
Talking tough is a good start, but it needs to be back up with more than finger
wagging and penny ante fines.

30 Point Strategies

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How much water is
used in the Alberta oil
sands?

Written by Mark Young from Evaluate Energy
It is no secret that to produce any oil from an oil sands project, you need water and
lots of it. To create the steam needed to extract oil in oil sands projects, operators
mainly recycle water that has already been used in the project over and over again.
When this amount of water isnt sufficient, fresh or brackish, saline water (see notes
1 & 2) is obtained from external sources to make up the shortfall. This water can be
taken from surface water sources, such as rivers or lakes, or from underground
sources via water wells. CanOils now provides data on how much water from
external sources is used by producing oil sands in situ and mining projects each
year. Analysing this data, we can see that over time, operators in the Alberta oil
sands have been getting their water usage from external sources increasingly under
control. Total external water use by in situ projects in 2013 was more than double the
amount used in 2002, but high recycle ratios have meant this external water usage
total has been relatively flat since 2010 whilst bitumen production has continued to
rise.

Biggest Water Using Projects in 2013

Of the in situ projects that are currently producing, it is Canadian Natural Resources
Primrose/Wolf Lake project that used the most water from external sources in 2013,
approximately 146,000 barrels per day (bbl/d). Cenovus Energys Foster Creek
(68,000 bbl/d), Nexens Long Lake (56,000 bbl/d) and Imperial Oils Cold Lake
(46,000 bbl/d) were also amongst the highest water using in situ projects in 2013.

Source: The CanOils Oil
Sands Database

Water Use Efficiency Improving Over Time

In situ projects use a lot of water at start-up before production really begins to ramp
up. If all in situ projects production and external water use are combined, we can
see that until production really started to increase in 2009, more external water was
always being used compared to bitumen being produced. Recycle ratios within
projects have improved markedly since 2009 most in situ projects now have
recycle ratios of over 90% and the overall requirement to source water from
external sources has consequently fallen for each barrel of oil produced.

Source: The CanOils Oil Sands Database

A Project in Focus: Foster Creek, Cenovus Energy

One project that has improved its efficiency in terms of external water use is
Cenovus Energys 120,000 bbl/d Foster Creek project. In 2002, the project was only
1 year into its producing life, and was using over 2 barrels of water for every barrel of
bitumen it produced. Now, 12 years later with a recycle ratio of around 100%, the
project only needs to source 0.6 barrels of external water to produce a barrel of
bitumen.


Fresh Water Use Falling

As well as this increasing efficiency in terms of external water use, it is also
important to note that Foster Creek is now using much less fresh water than when it
first started producing. From the above graph, we can see that the project is using
almost 3 times as much water in 2013 than in 2002, but this is almost all made up of
brackish, saline water (see note 2). Fresh water use has in fact been reduced to just
5,000 bbl/d or 7% of the total water used in the project.


This is a trend that can again be seen across the board for in situ oil sands projects.
Brackish water use has increased at a much higher rate than the use of fresh water.
In 2002, nearly all external water used by in situ oil sands projects was fresh water,
whereas in 2013, brackish water makes up almost 42% of the total external water
used.


An important project to note here is Jackfish, operated by Devon Energy. This

project started producing in 2007 and is the only producing oil sands in situ project to
have never used fresh water in its operations.

So not only are in situ operators improving the efficiency with which they use water
from external sources in bitumen production, they are also becoming less and less
reliant on fresh water sources and using more and more brackish water when
available that would not otherwise be suitable for human or agricultural use (see note
3).

This report was created using new data now available in Canoils Oilsands product.
CanOils now provides annual fresh and brackish water usage statistics for 7
producing oil sands mining projects and 24 producing in situ projects. This data
complements the already available recycle, steam/oil and water/oil ratios, giving
CanOIls Oilsands subscribers a comprehensive picture of water use in the Alberta
Oil Sands industry.

Notes:

1) Fresh water is either non-saline groundwater, which is groundwater that has total
dissolved solids less than or equal to 4000 milligrams per litre, or surface water,
which is as defined in Section 1(1)(bb) of the Alberta Water (Ministerial) Regulation
as all water on the ground surface, whether in liquid or solid state.
2) Brackish water is saline groundwater as defined in section 1(1)(z) of the Alberta
Water (Ministerial) Regulation as water that has total dissolved solids exceeding
4000 milligrams per litre. Such groundwater is defined as brackish water in
PETRINEX and saline groundwater by Alberta Environment and Sustainable
Resource Development. Brackish water cannot be used in oil sands mining
operations.
3) Most fresh water used in oil sands operations is not immediately suitable for
drinking or agricultural use either. It requires treatment after being extracted from
deep underground sources.
4) All water usage data available in CanOils is sourced from Alberta Environment

Evaluate Energy

Iraq and Kurdistan: Oil
becomes a source of
friction

Written by Anthony Franks OBE from Mars Omega LLP
According to a Deutsche Bank (DB) analysts report this week, the quantity of crude
oil sat in storage tanks in Turkey fed through the Kurdistan pipeline, will reach a
whopping 2.5M barrels in just a few days.

And with oil trading at around $107-110 a barrel that is an awful lot of revenue, and a
big political bargaining chip too, as well as a big gamble for the traders. DB
confirmed his week that both Genel Energy and Gulf Keystone are now a buy
recommendation.

Interestingly, Gulf Keystone struck a note of caution also this week - warning its
revenue outlook was uncertain as it is still owed $24M for oil sales from the field
resulting from a lag in payments for crude from its Shaikan oil field.

However, in an associated move, this March - in a sign of growing business
confidence - Gulf Keystone moved its shares to the main London Stock Exchange
from the Alternative Investment Market, and said it was on track to increase
production from Shaikan PF-1 and PF-2 fields by EOY to 40K bpd, which is a huge
rise from the current 15-16K bpd.

Since January 2014, it says it has received $6.46M for crude oil exports from
Shaikan, but it was still owed around $24M for crude already delivered on trucks. In
a company statement it said "This therefore gives rise to uncertainty in the timing of
revenue recognition and guidance for 2014.

It also gave a full-year revenue guidance of $150-180M, reflecting cash payments
and production outlook and possibly even reflects a nuanced understanding of the
trajectory of Baghdad/Irbil politics.

Both the prime Kurdish Tawke and Taq Taq fields can access export capacity
quickly, turning crude into cash equally quickly; and the expertise of the operators
means that Kurdistan could - in a perfect world - pump 750K bpd, although the
downstream infrastructure can currently only handle 400K bpd (when the pipelines
are not blown up, that is.)

But there are more export pipelines in the pipeline, and more reserves in the ground.
DB reckons that their analysis of the remaining 2014 drilling schedules suggests that
reserves could go up by 30%, along with interest of the FDI community, and the
potential for Kurdistan to contemplate the finer points of economic independence
from the millstone of the federal budget process.

Another interesting indicator of possible disengagement is that the US Nasdaq Stock

Market has invited the Erbil Stock Exchange (ESX) to two international conferences.
Nasdaq and ESX have also signed an agreement to power the ESX with NASDAQ
OMX X-stream trading technology to increase market participant involvement, both
in the region and internationally and of course it could also help Kurdistan it needs
to become cashflow independent.

Abdullah Ahmad, the head of ESX, said that the Kurdish stock exchange will
participate alongside some of the biggest stock markets in two international
conferences, in Dubai and Stockholm, and also explained that ESX will work with the
Nasdaq system, and will launch at the end of June.

In a clear sign of increased frustration, Reuters quoted President Barzani saying in
the last few days: "The political decision has been made that we're going to sell oil
independently. We will continue producing the oil, pumping it out and selling it. If they
continue escalating, we will also escalate from our side."

According to Barzani, If they [Iraq] don't like us to be with them, they should tell us
and we will take another path as well. We are going to have a referendum and ask
our people. Whatever the people decide".

And that referendum is likely to be easier to call than the question of Scotland
devolving from the UK.

Mars Omega LLP

OilVoice Magazine - June 2014

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Edition Twenty Seven June 2014

Stirring the pot: the North American energy revolution

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