Edition Six – September 2012

The answer to the oil dilemma? Natural gas. China's energy future sets more challenges for oil


OilVoice Magazine | SEPTEMBER 2012

Adam Marmaras Manager, Technical Director Issue 6 – September 2012 OilVoice Acorn House 381 Midsummer Blvd Milton Keynes MK9 3HP Tel: +44 208 123 2237 Email: press@oilvoice.com Skype: oilvoicetalk Editor James Allen Email: james@oilvoice.com Sales Gabby Kotosoba Email: gabby@oilvoice.com Manager, Technical Director Adam Marmaras Email: adam@oilvoice.com Social Network Facebook Twitter Google+ Linked In Enjoy the magazine, and be sure to send copies to your friends in the industry. Adam Marmaras Manager, Technical Director OilVoice Welcome to the 6th edition of the OilVoice magazine.

August is typically a slow month for the industry, and that is normally reflected on the website. We receive less press releases and jobs to the site as everyone enjoys the summer break. So credit must be given to our contributing authors who, despite the allure of a sandy beach, still managed to write the industry's best oil and gas content. We have some great advertising opportunities in the magazine. Our readership grows month on month, and we're confident that the magazine is an ideal place to reach people who work in the industry. If you'd like to discuss the options, then please get in touch with our newest recruit Gabby, at gabby@oilvoice.com, or phone +44 208 123 2237.

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OilVoice Magazine | SEPTEMBER 2012


Featured Authors Biographies of this months featured authors Euro-zone debt crisis: It's impact on the oil and gas industry by Sophia Garfield The answer to the oil dilemma? Natural gas. by Robert Kientz The answer to the oil dilemma? Natural gas - Part 2 by Robert Kientz The coming unholy alliance in natural gas by Wolf Richter What goes up, must go up forever? by Saj Karsan How a U.S. oil refinery got saved - and a supply shut-down averted by Keith Schaefer Recently added companies The latest companies added to the OilVoice database China's energy future sets more challenges for oil by Andrew MacKillop What happened to all the excitement? by Larry Wall Natural gas is pushing coal over the cliff by Wolf Richter Shale growth in other nations: How realistic is it? by Gary Hunt Waterfloods: The next big profit phase of the shale oil revolution by Keith Schaefer

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OilVoice Magazine | SEPTEMBER 2012

High gasoline prices and politics are a volatile mix by Gary Hunt An optimistic energy/GDP forecast to 2050 by Gail Tverberg Natural gas and the brutal dethroning of king coal by Wolf Richter

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OilVoice Magazine | SEPTEMBER 2012

Featured Authors
Andrew MacKillop OilVoice Contributor
Andrew MacKillop is an energy and natural resource sector professional with over 30 years experience in more than 12 countries.

Keith Schaefer Oil & Gas Investments Bulletin
Keith Schaefer, editor and publisher of the Oil & Gas Investments Bulletin.

Sophia Garfield Debt Consolidation Care
Sophia Garfield is a writer associated with various financial communities. She loves to write on financial articles. She has covered topics like Global financial situations, credit card debt, insurance, financial law, Debt consolidation, etc.

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.

Robert Kientz Drop Shadow
Robert has been an investor for many years and has 7 years experience working as a corporate auditor and has 13 years corporate working experience.

Larry Wall HubPages
Larry Wall is a long-time observer of the oil and gas industry as a result of his 16 years newspaper reporter career.


OilVoice Magazine | SEPTEMBER 2012

Gary Hunt TCLabz
Gary Hunt is President, Tech&Creative Labs, a disruptive innovation business collaboration of software, data and advanced analytics technology companies working together to integrate their products to meet the changing needs of the energy vertical.

Saj Karsan Barel Karsan
Saj Karsan founded an investment and research firm that is based on the principles of value investing. He has an MBA from the Richard Ivey School of Business, has completed all three CFA exams, and has an engineering degree from McGill University.

Wolf Richter Testosterone Pit
Wolf Richter has over twenty years of C-level operations and finance experience, including turnaround situations and start-ups. He went to school and worked for two decades in Texas and Oklahoma, with an interlude in France, and then headed east to New York City, Brussels, Tokyo, and finally San Francisco, where he currently lives.

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OilVoice Magazine | SEPTEMBER 2012

Euro-zone debt crisis: It's impact on the oil and gas industry
Written by Sophia Garfield from Debt Consolidation Care The oil and gas industry plays an important role in the world economy. This industry comprises of international and self-regulating oil and gas producers and refiners, gasoline service locations, and natural gas pipeline organizations; it has experienced years of strong influence in Washington. Since the 1990 election, individuals and political agencies associated with gas and oil companies have contributed $238.7 million to applicants and parties; 75 percent of this has been allotted to Republicans. In the last quarter of 2011, crude oil prices continued to be explosive in spite of the partial supply from Libya and advanced OPEC production; this should have lowered price instability correlated with the fear of a supply deficiency. The OPEC Reference Basket continued to be unstable, varying in a range between $98-114/b. This instability was mainly a result of the effect of Europe’s debt crisis on market response and uncertainties that probable corruption effects could badly weaken economic development in Europe and the rest of the world. Lately, these bearish financial apprehensions have been counterbalanced by growing geopolitical insecurities as well as civil turbulence in some developing nations, enhancing the risk payment in the market. Undeniably, the Euro-zone debt crisis has been an important challenge for the world economy and is expected to remain so for at least a few months in 2012. Although Eurozone directors have made a continuous attempt to deal with the sovereign debt crisis, capital markets have not yet gained from the solutions offered to tackle the crisis. The value of euro dropped to its lowest level against the US dollar in a time span of 16 months and weighed against the yen even arrived at an 11-year low. Towards the second half of 2011, the Eurozone debt crisis has had a substantial impact on the international economy through compact global trade, execution of stern measures, and a rising credit crisis with cross effects on the worldwide banking system. The very old inverse connection between the euro exchange rate or US dollar and the value of oil has declined lately. Consequently, the potency in the US currency has had diminutive effect on crude oil prices. However, it is uncertain if this decoupling will continue. With the increasing impetus in the US economy together with the weaker stance for the Euro-zone, the value of euro is not expected to experience resurgence against the dollar, unless there is any instant solution to the debt crisis. Besides, there is still some other risk that the Eurozone market may even contract in 2012. This is obvious in the waning trend in Euro-zone PMI in the previous six months to less than 50, the point detaching expansion from contraction. According to the government’s statistics office, even the most powerful economy


OilVoice Magazine | SEPTEMBER 2012

in the Euro-zone, Germany, is exhibiting marks of weakness, with GDP falling by 0.25% in the concluding part of 2011. On the whole, this involves a drop in regional and worldwide trade and thus would give rise to a further decline in the demand for oil. According to a recent study, exports to the EU from China (a chief trading associate) have dropped drastically. Author Bio: Sophia Garfield is a financial writer, associated with Debt Consolidation Care community. She loves to write articles on financial situations, bankruptcy, Tax debt relief, Debt crisis and related topics.

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The answer to the oil dilemma? Natural gas.
Written by Robert Kientz from Drop Shadow Natural gas is making a big comeback. I don’t mean the price yet, but the use of it as a vital fuel in the economy. Natural gas is right now the only fuel we have that can be used as a substitute for oil in transportation energy. Hydrogen is but a dream and electric cars are failing because they lack the features people are used to in gas engines. Those options are still on the table, but they are future options and not in the here and now. Natural gas will be the complementary transportation energy to oil of the now and near future until a we find a better technology that doesn’t require enormous trade-offs to implement. Natural gas in the US is so cheap it has become a substitute for coal in grid power. And coal is still really cheap. The advances in fracking gas have increased supplies and production rates of gas to the point that it is the cheapest and cleanest of the fossil fuels, which came at the right time. As I wrote in Beyond Thunderdome, oil is getting harder to drill and therefore more expensive. We have enough left for the short term, but it is high time we identify serious alternatives if we don’t want to go back to driving horse and buggies. The CIA estimates we have over 6 quadrillion cubic feet of proved natural gas reserves worldwide. Quoted:


OilVoice Magazine | SEPTEMBER 2012

Proved reserves are those quantities of natural gas, which, by analysis of geological and engineering data, can be estimated with a high degree of confidence to be commercially recoverable from a given date forward, from known reservoirs and under current economic conditions. A quadrillion is a lot of something. The number is hard to imagine even in the era of trillion this and that. A quadrillion is still a 1000 times a trillion. Here is a quadrillion dollars on pallets stacked against the tallest building in the world, Burj Dubai. Now think of every dollar bill as a cubic foot of natural gas, and the resource image gets several iterations larger.

Natural gas is in abundance at the moment, and it may help address our most pressing current energy dilemma, transportation fuel. We are lucky and should count our blessings here. If we didn’t have this cheap and clean fuel, our entire life quality paradigm would change much more quickly than it already is.

Natural gas reserves are distributed fairly well globally with some denser concentrations in Russia and the middle east.


OilVoice Magazine | SEPTEMBER 2012

world.bymap.org The US has quite a large store by itself. See the following chart provided by the Energy Information Administration in their Annual Energy Outlook presentation.

BP has done the work for us on global gas demand and supply. Thanks BP!


OilVoice Magazine | SEPTEMBER 2012

As we can see, production keeps up with demand quite nicely without a huge spike in the price. There was a short term demand spike in natural gas a few years ago, but production ramped so fast that the spike is now a trough. And now for another pretty chart by the EIA showing that US production is humming right along as well.


OilVoice Magazine | SEPTEMBER 2012

The argument is clear: Natural gas is our best current alternative transportation fuel. But how much of an impact can natural gas make in the this energy space? We have to start with some assumptions to answer this question. One, that my hypothesis about thorium is correct and cheaper, cleaner grid energy is on the way in a relatively short time frame (5-7 years), meaning coal and natural gas eventually get edged out as primary grid power. We have to also assume, for the next few paragraphs, that there are no infrastructure and conversion costs to natural gas switchover in cars and trucks. We’ll get to those costs in a bit, but for now I want to ignore them to give the best case scenario for natural gas adoption as a transportation fuel source. At current global oil usage and growth rates over the last 25 years (1.6% growth annually), we double our use of fuels every 45 years. That doesn’t seem significant at first until you realize we have already been through the first couple of doubling periods and are advancing on another. Note that while some economies in the emerging world are increasing rate of fuel usage faster, at the end of the day, the global needle hasn’t moved much the last couple of decades. So how long can natural gas last? We have to figure out how much oil is used for transportation, and then compare that with what our Gasoline Gallons Equivalent (GGE) available in natural gas. Here is a chart showing the typical breakdown in US crude oil products for every barrel of oil produced.


OilVoice Magazine | SEPTEMBER 2012

About 72% is used in diesel and gas products for cars and trucks. We’ll ignore jet fuel for now as the conversion of jets to natural gas is not immediately likely. We know the world uses about 88 million barrels of oil a day, so about 63 million barrels per day are for car and truck transportation uses. Each barrel has 42 gallons, so we come up with 2.6 billion gallons of gasoline/diesel per day or roughly 960 billion gallons of gasoline/diesel per year. The GGE of natural gas for 1 gallon of gasoline is 126.7 cubic feet. Given that we have 6.5 quadrillion cubic feet of gas reserves, that equates to 51 trillion (GGE) (6.5 quadrillion / 126.7 GGE ). With 51 trillion GGE, the world could transport itself at current usage, plus current usage growth of 1.6% per year, for 250 years. That’s quite a reservoir of energy we can draw from. I think this is what changes the debate on oil as our primary source of energy. Now back to costs. Popular Mechanics estimated that a gas station would spend about $750,000 on conversion costs to a natural gas system. We have about 130,000 gas stations in the US. So, it would cost around $97 billion to convert every station. Of course, the costs would be spread out over a number of years, or even a decade. How much does it cost to convert a vehicle? People have done it for about $1000 themselves for a 2-gallon unit allowing 50 miles per fill-up. For about $1600, a person can convert to a 5.5 gallon system that would more than take care of daily driving needs for the vast majority of people. Installed professionally, $2500 would be the tops anyone would pay to convert their car to a gasoline / natural gas hybrid. It has also been reported that prices are much cheaper in third world countries who have higher rates of natural gas cars already on the road, meaning costs fall pretty quickly as more units are installed and more mechanics know how to install them.


OilVoice Magazine | SEPTEMBER 2012

The average savings of natural gas per GGE, based upon gasoline and natural gas pump rates, is currently sitting at around $1.00 or so per gallon. Depending on the system and options used to install the conversion, payoff could be between 2-4 years on a car getting 25mpg at 15,000 miles per year. I could think of worse investments. The world has over 1 billion cars, according to the Huffington Post. Assuming all cars have to be converted using a $1500 system, that is a price tag of about $1.5 trillion for the entire world’s fleet. New CNG cars cost anywhere from $3500 to $5000 more than their gas counterparts, but given economies of scale, that number should come done substantially given a large move to CNG vehicles. Then we have the infrastructure. Natural gas pipelines are not cheap. But, 64% of the world’s pipelines are already for natural gas compared with 17% for oil. The US has an extensive pipeline network. Natural gas pipeline construction costs are about $60k per inch mile, according to the Intrastate Natural Gas Association of America (INGAA). At current rates, between 1000 and 1500 miles of new pipe are expected to be built between in the US and Canada now and 2030, given current rates. At least $160 billion in pipeline expenditures are expected annually until 2030 including the arctic pipelines needed. If the nation converts it’s fleet of cars and trucks, this can be expected to increase significantly. Pipelines are by far the safest way to transport natural gas, through trucking it around regionally shouldn’t be ruled out. The INGAA estimates current pipeline costs in three scenarios. It is impossible to tell what the total pipeline expenditures would be for a conversion process of the world’s fleet of cars over to natural gas from oil, but it would conservatively be in the hundreds of billions of dollars. If we just estimate a $2 trillion total, all-in cost of oil to NG conversion, we are probably in the right ballpark. If we compare that to the $1.2 trillion the US alone has spent on wars in the Middle East, then about 60% of that world conversion cost could have been paid for already. We would have been well on our way. The numbers are big, but so are the payoffs. Natural gas is cleaner and very abundant. We have enough oil to get us through a transition to natural gas, or looked at another way, we have two fuels to use for transportation for the foreseeable future. That is not a bad situation


OilVoice Magazine | SEPTEMBER 2012

to be in, and it is certainly not as apocalyptic as many analysts make it out to be. If our anticipated grid solutions in thorium nuclear work out, we will have plenty of safer and cheaper energy options for us and a few succeeding generations to use.

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OilVoice Magazine | SEPTEMBER 2012

The answer to the oil dilemma? Natural gas Part 2
Written by Robert Kientz from Drop Shadow

This is Part 2 of 2 of the natural gas energy series titled ‘The Answer to the Oil Dilemma? Natural Gas’. Please see Part 1 for the macroeconomic analysis of Natural Gas as a growing global transportation energy solution. This part concentrates on investment opportunities in this sector based upon the analysis. The US, dubbed the Saudi Arabia of natural gas, has surpluses that are expected to be exported to Asia and Europe. While competing countries are coming online by the end of the decade, including China and Australia, the US is positioned as the first mover position in this market which has offered strong pricing advantages for those who can export the gas. This is done by liquefying it at -270 degrees, compressing the gas to 1/600th of normal volume and making it economic to ship by tanker. The companies that can liquefy the gas, ship and regasify it will benefit until gas production evens out across the globe in the next 10-20 years. Countries like Japan and South Korea have historically relied on all imported gas. Japan has increased imports 12% in the first four months after the Tsunami. Germany, expected to turn down its nuclear reactors by 2015, will become a major LNG importer. China is expected to increase natural gas consumption 4-fold by 2030 in an effort to reduce reliance on coal. The country has five LNG terminals and is building six more to accept LNG imports. India is also looking to increase imports. US companies will be best positioned to fill those import gaps in the next decade. The US currently has one liquefaction facility and shipbuilders are building LNG FSRU’s as fast as possible to transport and regasify those inventories onsite at various demand locations. In addition, as oil gets more expensive, infrastructure build outs in the US geared toward natural gas transportation will be a booming industry. Several companies are positioning themselves to take advantage of this industry shift.


OilVoice Magazine | SEPTEMBER 2012

What is the best way to capitalize on the growing market in natural gas? Several opportunities have presented themselves to the market based upon the factors just outlined. Chicago Bridge and Iron (CBI) provides engineering and fabrication services to the midstream energy and natural resource industries worldwide, which includes LNG liquefaction and regasification facilities and gas processing plants. CBI recently acquired Shaw Group, which builds downstream facilities that utilize gas. In addition, Shaw Group builds nuclear power plants, and will benefit from renewed nuclear growth sector as well. CBI is now well positioned as one of the largest energy construction and engineering contract firms in the world. While some analysts were not bullish on the Shaw acquisition for $3 billion, the facts are the combined companies have a $28 billion backlog in orders and should be well positioned to finance the acquisition while growing earnings 10% in the first year according to company estimates. Cheniere (LNG) owns and is developing 3 LNG terminals along the US Gulf Coast. They have additionally been granted rights to the largest US gas liquefaction plant. The plant cost them $5 billion in financing, $1.5 billion of which was contributed by Blackstone. The plant will position Cheniere as a leader in LNG exporting. The company owns long term, 20 year contracts which guarantee them income from buyers regardless if the plant is actually used, so financing the build out is already in place. Their weakness is current financials. They will need additional funding between 20013 and 2014 to remain solvent, partly due to decreasing demand for receiving terminals in the US which is ripe in shale gas. If they can survive the next few years, the Sabine Pass liquefaction facility will offer strong revenue growth moving forward. Chart Industries (GTLS) specializes in providing equipment for natural gas market, and operates in three segments: Energy and Chemicals, Distribution and Storage, and Biomedical. The company is based out of Ohio and has international facilities in Australia, China, Germany, the UK, and Czech Republic. Chart Industries will be a big factor in the LNG tank business if natural gas fuel expansion occurs in the US. Note that while the US only has 120,000 natural gas


OilVoice Magazine | SEPTEMBER 2012

vehicles, the world count is up to 14 million. The biggest near term growth have been from companies transporting large volumes of natural gas. Chart Industries will benefit from more LNG infrastructure stateside but may also suffer from competition from Chesapeake, Shell, and Cheniere. Also note that expansion has come at a cost of shrinking margins. The stock is priced high on expectations of earnings growth, but may be due for a slight correction. Clean Energy Fuels (CLNE) is a leading developer and operator of natural gas fueling stations in the US. Like Chart Industries, CLNE is a story stock benefiting from the coming natural gas conversion in the US. Clean Energy gets investment from gas producers looking to capitalize on increased natural gas transportation usage, including $450 million from Chesapeake to build 150 gas stations by 2013. The US lacks fueling stations nationwide to benefit from a conversion, but the rising cost of oil and lack of alternatives is driving future investments in this sector. Revenues are growing but the company is yet to record a profit. They will have name recognition as natural gas consumption rises and may turn out to be a takeover target from one of the larger gasoline station companies. Financials are solid but investors want to see a profit from this company soon. Perhaps the 2013 station build out will help them reach that goal. Westport Innovations (WPRT) is a global leader in natural gas engines. The company has made the most headway in heavy duty engines, including a JV with Cummins. They also have alliances with CAT, GM, Volvo, Ford, Peterbuilt, Daimler Trucks, Canadian National Railways, and Navistar. They have purchased AFV and Emer to boost their natural gas technologies. The company beat Q2 earnings and revenues estimates. They may not be profitable for two more years, but expectations of profits are forthcoming in 2015. One current weakness is that 35% of their business is in a tight Asian market, which has been reducing margins. They need the US and other Western markets to boost margins and lead the company to profits. So, this company hitches its fortunes to the same natural gas domestic growth model as the likes of Clean Energy and Chart Industries. Teekay LNG Partners (TGP) is one of the largest tanker companies in the word. They have 25 LNG carriers to add to their 11 conventional oil tankers.


OilVoice Magazine | SEPTEMBER 2012

The oil tankers are currently in oversupply to the market, and margins are falling. The glut is not expected to be alleviated soon. However, Teekay’s revenues are bolstered by a strong LNG fleet. Teekay has contracted for 6 additional LNG tankers from AP Moller Maersk, which has been financed mostly by their JV partner. Most of the tanker fleet is on long term contract, but two current LNG tankers come off soon and will benefit from higher current rates in the market than what the previous contracts had been worth. The company is dependent on the debt markets currently, and has high current liabilities. However, they also have a steady stream of income and should increase LNG margins a bit in the future. Most likely there will be some share dilution here and dividends may need to be cut back to cover short term obligations. Right now, the dividend is very healthy at 6.7%. Golar LNG (GLNG) operates exclusively in the LNG tanker market so they have no downside exposure to oil shipping. They have 13 tankers operating with 13 more on order. 2 of their current fleet operate in the spot market and benefit from high shipping day rates. Golar’s revenues come mostly from three companies, BG Group, Shell, and Pertamina. Golar focuses both on LNG tankers and FSRU’s, which offers the ability to regasify transported gas on site. Golar expects its current and future FSRU’s offer an advantage in a market looking for fuel transportation and regasification from US exports. The number of importing countries has doubled since 2005, and 50% of all new LNG import markets have chosen FSRU’s over land facilities according to company statistics. Like many of the natural gas companies engaged in build out phases, Golar has a short term cash crunch which will need to be financed and may put pressure on profits and share price near term. In addition, the company faces pressures in currency conversions and floating interest rates that may reduce margins in the wake of current global economic conditions. Overseas Shipholding Group (OSG) receives most of its revenues from crude oil transport versus LNG, and is facing weak demand and overcapacity issues in the crude oil transportation market. The company is highly leveraged and has been


OilVoice Magazine | SEPTEMBER 2012

drawing from a credit facility to increase cash on hand. The company appeared to overbuild the oil fleet despite capacity issues, and continued to issue strong dividends while facing 2 straight years of losses. They finally suspended the dividend, but still need to prune their fleet and shed excess debt to recover. Current management does not appear to be embracing an aggressive fleet realignment strategy, however, and investors should beware this stock even given the cheap current share price. Gaslog (GLOG) is an international operator of 10 LNG carriers with 8 more on the way. Most of the new fleet has already been contracted and demand should drive profits in the future. Gaslog’s fleet will be 1.9 average years old upon arrival of the new vessels which is the youngest in the industry and will be among the most efficient to operate. The company has a large finance payment due in Q1 of 2014 but should be able to refinance given current assets. 2012 profits are expected to be weak due to staffing increases for the coming new fleet. Profits are expected to rise in 2013 and 2014. An earnings call is scheduled for August 21 which may impact the stock short term. But this story is a medium term play. Once the company gets past its current financing challenges, annual earnings growth is full speed ahead.

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OilVoice Magazine | SEPTEMBER 2012

The coming unholy alliance in natural gas
Written by Wolf Richter from Testosterone Pit

Natural gas traded at $3.22 per million Btu (MMBtu) at the Henry Hub on Monday (30th July), a seven-month high, and a jump of 69% from its April low. Breathtaking when you think that a few months ago, the doom-and-gloomers, who'd been right for a very long time, were predicting chillingly that the price would hit zero by the fall, when storage would be full and excess production would have to be flared. But the pains for the industry are far from over. Natural gas spot prices can spike locally due to transportation constrains and demand conditions. Earlier this year, while Japan paid $17/MMBtu, New York $12/MMBtu, and Boston $9/MMBtu, prices at the Henry Hub, which is in southern Louisiana, marched towards their decade low and dropped below $2/MMBtu [for that phenomenon, read.... The Natural Gas Massacre And The Price Spike]. Conversely, there are regions in the US where natural gas prices lag behind those at the Henry Hub. A salient example is the daily spot price at the Tennessee Gas Pipeline (TGP) Zone 4 Marcellus, a hub that serves part of the vast Marcellus formation that extends across much of Virginia, Ohio, Pennsylvania, and New York. Drilling by horizontal fracking has been phenomenally successful in this shale formation. In Pennsylvania, production of dry natural gas in June has doubled over last year, reaching 5.7 billion cubic feet per day-9% of overall US production. But it outstripped the take-away pipeline capacity, despite new pipelines that entered service in 2011 and added 1.5 Bcf/d in capacity. As a consequence, according to Bentek Energy, over 1,000 natural gas wells in northern Pennsylvania are not yet producing natural gas because of pipeline constraints. With production outrunning pipeline capacity and creating a local glut, spot prices have separated from those at the Henry Hub. At the TGP Zone 4 Marcellus, starting in May, prices fluctuated widely and dipped below $1/MMBtu even has prices at the Henry Hub had started


OilVoice Magazine | SEPTEMBER 2012

their track towards $3 MMBtu. Producers in that region are hurting even more than elsewhere. The 1,000 wells that have been drilled but aren't producing and cash-flowing yet are a drag on the companies that own them. And wells that are producing have had to sell their unhedged production at a discount to already depressed prices that remain below the cost of production in most of the nation. So the natural gas massacre hits northern Pennsylvania with even greater violence. Rig count is a good indicator of the health of the drilling industry, and also of the direction of future production-though there is a considerable lag between the number of rigs drilling for gas and actual production of gas. And the rig-count is beginning to be worrisome. At 505 rigs as of July 27, the count is down 46% from October last year, and hit the lowest level since July 1999. Somewhere between 700 and 900 rigs might be required to maintain current production levels, given the sharp decline rates of horizontally fracked wells (up to 90% over the first 12 to 18 months). These wells will then have to be refracked, or new wells will have to be drilled to make up for the declines-at an additional cost. An eternal rat race. But the hard-hit industry is stepping away from drilling for dry natural gas; drilling at today's prices is still a losing proposition. Those that can have switched to drilling for oil and natural-gas liquids (priced similar to oil), which are profitable. Of the natural gas rigs in operation-fewer and fewer every week-an increasing number are focused on plays that contain more liquids and less dry natural gas. It's how producers hope to survive. Turmoil and financial stresses may further reduce drilling activities-though it seems unthinkable that the rig count could fall even further! Record demand is eating up the


OilVoice Magazine | SEPTEMBER 2012

remnants of the glut. Supply appears to be leveling off and will eventually follow the rig count down. If that happens during heating season, when seasonal demand skyrockets, it will be an unholy alliance. We have seen violent spikes before. And we will see them again. It's the nature of the business. In the great natural gas shakeout, less efficient or poorly capitalized producers may get wiped out. It's capitalism's creative destruction. But the price of natural gas has been below the cost of production for so long that the damage is now huge. Read.... Natural Gas: Where Endless Money Went to Die.

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What goes up, must go up forever?
Written by Saj Karsan from Barel Karsan There appears to be a prevailing market belief that commodity prices can only rise in the long-term, despite short-term fluctuations. Inelastic demand from developed countries and unremitting demand growth from emerging markets are the most commonly cited reasons for this. As a result, investors are putting companies in this space on a pedestal, taking recent earnings growth of such firms for granted. Value investors must be careful not to get caught up in this game of rising commodity prices leading to rising earnings expectations; it can result in portfolio disaster. One commodity in particular that well-represents the general consensus of that of commodity bulls is the oil market. Demand for oil is indeed inelastic in the short-term; one cannot design a more fuel-efficient car overnight, and nor does one upgrade his car overnight in response to a change in the price of oil. But over the long-term, the market for


OilVoice Magazine | SEPTEMBER 2012

oil is like any other market in that it responds to price signals. To see this in action, consider US oil imports over the last several years:

In the chart above, it is clear that oil consumers react to high oil prices, it just takes them time. In both the early 80's, and in the last five years or so, high oil prices resulted in downtrending consumption in the ensuing years. Though it may be argued that part of the reason for the fall in consumption is thanks to the recession, it is worth noting that US GDP today is around 50% higher than it was in the mid to late 1990's, which was the last time the US was importing so little oil according to the chart. Of course, making up for this demand are emerging markets like China and India, where economic growth is strong. Despite this, however, global "proved" oil reserves are actually increasing despite these draw-downs. But what happens if these emerging markets have not conquered the business cycle? If growth slows or a recession is experienced in these economic behemoths, expect there to be a lot of oil for sale without a lot of takers. Furthermore, as oil prices currently remain high, a number of new technologies are about to make it possible to consume less oil without lowering our cushy living standards. For example, hybrids and electric vehicles continue to improve in fuel efficiency and price. Since transportation fuels make up more than 70% of oil consumption, expect technology changes in this space to meaningfully reduce oil consumption in the coming years. Though I am clearly a long-term bear on oil, the end result of all this may very well be that oil (and other commodity) prices will continue to rise as they have over the last decade. But


OilVoice Magazine | SEPTEMBER 2012

hopefully it is clear that whether this will happen or not is not clear at all. The future is uncertain, and considering the cyclical nature of this industry, it would be very dangerous to extrapolate the last ten years into the future. For example, can you really predict what an oil services firm will earn five or ten years from now with any reasonable standard of deviation? Probably not. But if you pay 10 times earnings for such a company, you are implicitly saying that you can. Commodity prices are volatile and difficult to predict over the next week, let alone over the next few years. As such, it is best for investors to stay away. Why place a bet when the odds are uncertain? Place your bets when the odds are in your favour.

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Doing more with data
Kuala Lumpur, October 24-25, 2012

Finding Petroleum / Digital Energy Journal is running 2 one day conferences in Kuala Lumpur, Malaysia, on October 24 and 25 on doing more with drilling and subsurface data. These 2 events will present the most exciting new technology to help manage and work with all aspects of data in the upstream all and gas industry. The conferences are for people who want to learn about new ideas and new technologies to make their data work harder, to improve efficiency and safety of drilling, ability to find new reservoirs and extend existing ones, and maximise production. The event is scheduled to co-incide with the Energistics National Data Repositories conference in KL on October 21-24. Attendance is free - register now to secure your place.

October 24 - Doing more with with drilling data October 25 am - Doing more with subsurface data October 25 pm - Getting data tools implemented faster
The aim is (i) to make it easier for people working in KL oil and gas companies and service companies to find out more about the latest new technology to help manage data, and (ii) to provide technology companies attending the National Data Repositories event with a chance to meet a local audience during the same trip. The events will be free to attend. For days 1 and 2, we will look for financial contributions from speakers - in the range 14600 MYR / USD 4760 / GBP 3000 for a morning slot and MYR 9750 / USD 3200 / GBP 2000 for an afternoon slot. Sponsorship opportunities are also available. For enquiries about sponsorship and speaking please contact our sales manager John Finder on +44 208 150 5292, e-mail jfinder@onlymedia.co.uk

Reserve your place now at FindingPetroleum.com


OilVoice Magazine | SEPTEMBER 2012

How a U.S. oil refinery got saved - and a supply shut-down averted
Written by Keith Schaefer from Oil & Gas Investments Bulletin These guys got it done. In a few short months, they saved hundreds of jobs, increased industry profits, created some energy security for the US east coast, and set the stage to improve the environment through reduced air emissions. They are the epitomy, the poster child, of how business, labour and government can and should work together to create solutions in the North American oil patch. Who are 'these guys?' They are the United Steelworkers of America, Pennsylvania Governor Tom Corbett's team, Sunoco senior management, and management from the Carlyle Group, a large private equity firm. What they did was save 850 direct, high-paying jobs at the Sunoco refinery in Philadelphia. But even more important, if this 330,000-barrel-a-day refinery closed, there was a serious supply issue for drivers on the east coast-and the industry. They are a textbook lesson that certainly the polarized Canadian stakeholders should be reviewing in issues like the Northern Gateway oil pipeline from Alberta to the Canadian west coast. And if the American stakeholders around the Keystone pipeline could work together like this, there would be environmental and economic security-and commerce would flow. What's surprising to me is that this monumental feat of consensus got only one day of media attention in the US. I interviewed several people involved in the negotiations to get a sense of the attitudes, the friction points, and the lessons that this issue brought to the oil patch.


OilVoice Magazine | SEPTEMBER 2012

Here's how it got done: Last September when Sunoco and ConocoPhillips announced they would each be closing their Pennsylvania refineries, it seemed like a dark day for energy in the Northeast. The facilities - Philadelphia and Marcus Hook for Sunoco, Trainer for ConocoPhillips - not only kept the region supplied with the fuel it needed… but they accounted for hundreds of direct jobs. The closure of these three refineries would have led to increased unemployment figures and rising fuel prices. September 2011 to July 2012 When the United Steelworkers (USW) heard of Sunoco's announcement to shutter the refineries if buyers couldn't be found, they sprang into action. Letters were written to politicians and officials to call attention to the situation. After all, it could cause a huge negative impact on the region. By October, Democratic House Leader Nancy Pelosi had mentioned the closure of the refineries at a White House briefing. But the USW didn't let the issue fade away and kept up its tireless campaign to raise awareness among the country's top decision makers. In January, Gene Sperling, President Obama's top economic advisor, was involved in the process. The end of February saw a report from the U.S. Energy Information Administration come out that confirmed many people's fears: The Northeast's fuel situation would be in dire straights if the refineries were to be shuttered. In March, Sperling organized a conference call with newly promoted Sunoco chief executive officer Brian P. MacDonald, who had previously been the company's chief financial officer. As it turns out, that call was a major turning point in keeping the Philadelphia refinery-with its 330,000-barrel-a-day output and its 850 direct jobs-open, according to The Philadelphia Inquirer. During that call The Carlyle Group was identified as a possible buyer for the facility. In addition, the government gave assurances to MacDonald it would do whatever possible to allow a deal to get done. David M. Marchick, Carlyle's managing director for external affairs, touched on a point that


OilVoice Magazine | SEPTEMBER 2012

would be echoed by all sides in the matter when he told The Inquirer, 'This is a rare example of federal, state and local officials, business and labor, Republicans and Democrats, all coming together for one common purpose.' In April, Sunoco announced that it had established an exclusive sales negotiation agreement with Carlyle, and by July the two companies said they would form a joint venture called Philadelphia Energy Solutions, which would keep the plant open. Just days after, USW ratified their contract with a near unanimous vote. And so, the Philadelphia refinery was saved. How the Labor Union Saved a Shut-Down The news of the refineries closing last fall went largely unnoticed by the national media, but it was obviously big news to the USW. And they worked hard to get it on the political agendaincluding a candlelight vigil at Pennsylvania Governor Tom Corbett's mansion. Lynn Hancock, a USW spokesperson, says that if not for the union, the plant would have been shut down. 'If these facilities had been non-union you wouldn't have seen this kind of campaign. They probably would've been shut down by now,' she said. Bringing together the stakeholders and the government was an important step, but that didn't guarantee that a deal would get done. Hancock said that she knew Carlyle was serious about its offer when they wanted to talk to the union. 'When I heard that they were going to meet with the local union, 10-1, leaders I knew that this was moving and there's a good chance it was going to result in a sale,' she said. And when Carlyle and the union did meet to talk about the workers' contract, both sides worked together to get something done. Ultimately, a three-year contract was negotiated that gave the union a 2.5% raise the first year and a 3% raise in years two and three. In exchange, the union would give up its defined-benefit pension plan for a 401(k) and allow some union jobs to be performed by contractors.


OilVoice Magazine | SEPTEMBER 2012

These negotiations are another example of the cooperative theme that permeated the whole campaign and talks about keeping the facilities open. Hancock emphasized what can be done when business and labor get together: 'It shows that a lot can be accomplished when business works together with its unions. Instead of seeing them as adversaries they should see them as helpmates in improving things and in making businesses stronger,' Hancock's spokesperson reported. Private Industry's Part When Brian MacDonald became the CEO of Sunoco in March of this year, it marked a turning point in the process. Hancock said that MacDonald's involvement was vital in getting a deal done. After his meeting with Sperling, MacDonald left a message for Carlyle Managing Director Rodney S. Cohen, who had previously helped save a refinery in Kansas. Having someone with previous experience was likely a big plus in the deal. After several weeks of negotiations a deal was struck to create a joint venture that would see Sunoco get a one-third, non-controlling stake in the venture, and Carlyle would get control of the 1,400-acre facility. In addition, Carlyle will receive $25 million in state funds to match its $200 million investment in upgrades to the plant. MacDonald said that the joint partnership was an example of across-the-board cooperation. 'This partnership is a great example of what can happen when motivated people think creatively to solve pressing problems,' he said. 'The private sector, government and labor all played important roles in getting this done. This is the best possible outcome for everyone involved: existing jobs will be saved, new jobs will be created and new business opportunities will be given the chance to develop.' Still, some key technical concerns remained in order for the partnership to succeed. One of the key questions was: Where would oil come from for the refinery? Typically refineries in the area have relied on expensive, imported Brent crude. But Carlyle's investment will open the door for the light shale oil from North Dakota-the Bakken formation-


OilVoice Magazine | SEPTEMBER 2012

to be shipped in. Carlyle officials said that plans are in place to connect the facility to the west through a highspeed train unloading facility, which could reportedly handle 140,000 barrels a day. The Pennsylvania Department of Transportation will reportedly be contributing about $10 million to the effort to extend the rail lines. Dennis Buterbaugh, a spokesman with the Pennsylvania DOT, said that more details will emerge in the coming weeks once Carlyle's application comes through. The Bakken won't be the only play that will be a part of this venture, as the Marcellus shale will also be involved. Carlyle said that it plans to use natural gas from the formation to power the refinery, and also said it would explore the possibility of liquid natural gas at the plant. Government's Part Many prominent politicians including Governor Corbett, U.S. Representative Bob Brady and Philadelphia Mayor Michael Nutter were involved. What was impressive about their efforts is that no one took the opportunity to try to get a political 'win.' Corbett, a Republican, decided that even if this project would be good for the Democratic White House in the upcoming election, he would not let so many of his constituents lose their jobs. 'Obviously, if you take it from a political perspective, this is important to the White House. They're going to be able to count this in an election year… Working together and getting this done was a lot better than seeing this facility shut down,' he said. Support from these high-level lawmakers was an important factor in the refinery being saved but there was also a great deal of behind-the-scenes effort from local officials and government employees-like Mike Krancer. Krancer is the secretary of Pennsylvania's Department of Environmental Protection (DEP), part of a team put together by the governor in December to evaluate what could be done to save the refinery. Krancer said his job was to make sure all the stakeholders knew the government was here to solve problems, not create barriers.


OilVoice Magazine | SEPTEMBER 2012

Once Carlyle was identified as a potential buyer, he said it was important they had confidence in the government to help them through any air permitting issues. Krancer and key members of his team had spent a large part of their career in the private sector. He said that he knew what it is like to work with stubborn government officials who have no interest in solving problems. By bringing a 'can-do' attitude to the table, Krancer helped give Carlyle the confidence it needed to make the investment. One of the technical keys that made this deal viable for Carlyle, Krancer said, was bringing in Bakken crude, which is lower in sulfur than many other crudes. This light oil leads to lower emissions, so it was a win-win for both the environment and economics. Another state agency that was on Governor Corbett's task force was the Department of Community & Economic Development. Steven Kratz, the department's press secretary, said that one of the keys for the government's success in this situation was that it was extremely active, but not visible. This allowed strong bipartisan cooperation within the government. Kratz said that the project was a 'terrific example of … coordination within state government' and a 'great example of all levels of government working together.' While the deal is not yet finalized (that is expected to happen in the third quarter), the example of the Philadelphia refinery should be held up as what can happen when the private sector, labor and government put their heads together to solve energy problems.

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OilVoice Magazine | SEPTEMBER 2012

Recent Company Profiles
The OilVoice database has a diverse selection of company profiles, covering new start-up companies through to multi-national groups. 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. Start your search today!

Big Sky Petroleum
Oil Big Sky Petroleum Corporation (TSXV: BSP) focuses on a concentrated portfolio of resource assets located in the Montana portion of the “Alberta Basin”.
Visit Big Sky Petroleums' OilVoice profile

Canadian Phoenix Resources
Oil & Gas Canadian Phoenix Resources Corp. is a publicly-traded junior oil and gas exploration, development and production company with operations in Western Canada.
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Canadian Energy Exploration
Oil & Gas Canadian Energy Exploration Inc. is a conventionally-focused oil-based company seeking to add internally-driven drilling locations to bolster a focused acquisition program.
Visit Canadian Energy's OilVoice profile

Instinct Energy
Oil, Gas, Power and Coal Instinct Energy Limited (Instinct) is an Australian company focussing on Coal Bed Methane (CBM), unconventional gas and coal exploration.
Visit Instinct Energy's OilVoice profile

Stag Energy Petro One Energy
Oil & Gas Petro One Energy Corp. engages in the acquisition, discovery, exploration, and development of oil and gas properties in Canada.
Visit Petro One Energy's OilVoice profile

Electricity and Gas Stag Energy is an independent UK based energy company involved in the development and management of innovative projects in the rapidly evolving electricity and gas sectors.
Visit Stag Energy's OilVoice profile

Gulf United Energy QGOG
Oil & Gas Oil & Gas Gulf United Energy Inc. is an oil and gas exploration and production company with a unique portfolio of potential large-reserve projects in central Colombia and offshore Peru. Based in Houston, Texas, Gulf United Energy is led by a veteran professional management team with significant experience in South America.
Visit Gulf United Energy's OilVoice profile

Queiroz Galvão Perfurações S/A was established on April 1980 when the second worldwide oil crisis was taking place, and facing the following challenges: following Brazil’s activity growth and expanding on services rendering industry for oil and gas drilling.
Visit QGOG's OilVoice profile


OilVoice Magazine | SEPTEMBER 2012

China's energy future sets more challenges for oil
Written by Andrew MacKillop from OilVoice From July 2012 onward, mounting news releases and data on China's energy-economy presents a picture of energy transition, happening in the real world, here and now. Some of the changes are predictable - but others are not. We get the impression that China's energy-economy is moving towards a "clean energy" future, but this has now moved into faster than planned acceleration, generating highly complex outlooks for oil and oil price forecasting, in a global energy scene that is also changing fast. In August, the State Council announced that China may spend as much as 2.37 trillion yuan (about US$ 373 billion) on projects for conserving energy and reducing emissions in the less-than-four year period to December 2015. This comes on top of previous energy economy and green energy plans and programs set for the 2005-2015 period. The cumulative impact is therefore higher than this already-large new program might itself alone imply. One predictable result on Asian stock markets was a surge in share values of cleantech, green energy and environmental protection companies. The more complex follow-on for share values in this equities grouping, outside Asia, also testifies to the multiple pathways that China's changing energy future will take, on a global level. DECLINING ENERGY INTENSITY One clear target in the new plan announced is that by 2015, China will reduce the amount of energy it uses to produce every unit of gross domestic product by 16% compared with 2010 energy intensity levels. This would theoretically generate annual energy savings of about 670 million tons coal equivalent energy (based on 8000 kWh thermal energy per standard ton of coal). This however also implies continued high levels of economic output, and growth of output in China's manufacturing and heavy industries, which is a long way from certain. If the economy moves faster to higher value added activities and output, China's energy


OilVoice Magazine | SEPTEMBER 2012

intensity reduction from the new plan may surpass 16% by 2015. China is raising energy efficiency and improve environmental conditions through several policy levers especially including a now-rapid reduction in the growth of output by energyintensive heavier industries, and the increasingly probable decline of total output from heavier industries by about 2015. In the three decades of expansion through 1982-2012 China's economy has grown more than 90-fold, featuring the heavy industries and lower value added manufacturing. China's government has previously announced energy-focus State plans and projects where cutting the amount of carbon it emits per unit of economic output by up to 45%, by 2020, from 2005 levels were the high-ground targets, enabling us to scenarize a reduction in total energy demand growth for the world's second biggest economy that can have far reaching global impacts. For oil and coal this is especially significant due to China being the world's undisputed No 1 coal consumer, and until 2010 having the fastest growing rate of oil import demand within the G20 countries. Through 1999-2009, China's rate of oil consumption growth averaged about 9.4% per year, but even by 2009 the annual rate had fallen to nearly one-half the 10-year average rate. ENIVRONMENT - AND ECONOMY The new energy saving and green energy promoting plan and programs of China address several issues, including attempts to bolster China from the effects of a global economic slowdown. They also respond to public outrage over a surge in urban pollution leading to several municipalities, including Beijing, introducing car ownership growth limits for new urban development set on fixed limits for the maximum number of cars per unit area. For non-thermal and electric cars, these new limits will not apply, in an incentivizing process similar to but stronger than reduced taxes and charges for urban electric car ownership in many western cities. The real and basic problem, over and above and separate from the now controversial real degree of linkage between CO2 emissions and global warming, if there really is global warming, is "everyday pollution" especially in urban areas. Also important, economists including those at the International Monetary Fund have recommended spending on environmental protection as a way to support growth as the European debt crisis, and the USA's slow economic growth saps overseas demand for China's exports. The role of environmental spending to bolster the domestic economy and generate a new type of sustainable economic activity is recognized. This adds another strand to the


OilVoice Magazine | SEPTEMBER 2012

development of cleantech, green energy and environmental protection, where China's global role is now preponderant. To be sure China's Asian rivals India, Japan and South Korea are pursuing a similar track, for similar reasons including their intention to cut oil import demand growth where it is still growing, and increase its rate of annual reduction, where it is already falling. The environmental protection industry is now one of the few areas where good growth potentials in China, and other countries are attractive to governments seeking to bolster investment and spending, to prevent or trim the downturn in economic activity. Market analyst reasoning is that share values in the sector will do well in an emerging scenario where most "classic industries" are slowing down. The role of global economic trends, cutting overseas demand for industrial exports, and already-operating but perhaps surprisingly successful national action for reducing energy intensity is especially shown by China's electricity demand trends. Surprise data announced by the China Electricity Council in July showed that power demand in the 12 months July 2011-July 2012 had "flat lined", that is showed zero growth. http://dallasfed.org/research/eclett/2012/el1208.cfm Industrial electricity consumption is a classic "proxy" for industrial output, making many foreign observers think that two trends are now operating. Firstly, China is moving away from heavier-type industrial and manufacturing activity at a fast pace; secondly the State's ability to create a mechanism to control total energy consumption has advanced faster than even its architects hoped: Liu Tienan, vice chairman of the National Development and Reform Commission has written that this is the final goal of his Commission (writing in the Qiushi Magazine, in July 2012). At the same time, staying with electricity, China's push to develop renewable energy resulted in clean energy generation rising by 31% to 106.8 billion kWh in July from a year earlier, according to the State Electricity Regulatory Commission. Here agai however, the pace of change may produce surprising results. This massive annual growth may in fact be a "highwater mark", due to many factors, including the industrial slowdown and shift away from energy-intensive industry, in China. As in Germany, the second-biggest country in the race to develop clean energy, worldwide, energy-economic bottlenecks and pinch points are making for slower growth rates of clean energy output, which are intensified by an economic context where demand growth for electricity, and other energy, may fall to very low levels near zero growth, for some while ahead.


OilVoice Magazine | SEPTEMBER 2012

The challenging context for corporate planners and strategists and government deciders may result in shorter-term contraction of energy company investment plans and programmes, in a new and uncertain, complex global framework. At this time, one of the few fundamentals supporting high oil prices is slow output growth, or declining oil output by a large range of companies, from the "historic oil majors" to the NOCs of several countries. China's rapidly changing energy scene underlines the rate of change and the high-ground potential of decline in total energy demand without a corresponding and similar decline in economic output. Other environment-related sectors, especially food and food processing, will also be among the likely winners, due to system-wide analysis of all energy and resource inputs highlighting where total energy demand, and total environment impacts are presently highest. Written by Andrew MacKillop

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What happened to all the excitement?
Written by Larry Wall from Larry Wall It was not that long ago we were hearing stories about the polar ice cap melting, ocean levels rising, the possible extinction of the polar bear and then nothing. As most know, there is a lot of oil and gas activity in the arctic and Polar Regions. It is rather odd that planned activities by Shell Oil Co. are being scaled back, according to a July 28, 2012 article in the "Houston Post," The article added, "Shell is scaling back plans to drill up to five wells in Arctic waters this summer amid a series of setbacks, including stubborn sea ice clinging to Alaska's shores and delays in construction of an emergency oil spill containment barge.'


OilVoice Magazine | SEPTEMBER 2012

The story adds, 'In the past five years, ice has encroached over the planned drill sites as early as Nov. 1, but this summer. The slow melt of multi-year ice at the season's start means the water is colder and is a signal it could return even earlier.' It was not that long ago that we were hearing about the polar ice cap melting, the polar bears being at risk and all sorts of bad things. Even so, someone kept sending ice-breaking ships through the area of gather this data. In its Feb. 8, 2012 edition, The "U.S. News and World Report" had a story that said, among other things, about 30 percent less ice is melting than was previously predicted. Amazing, someone had an incorrect estimate that many people just had to believe. Meanwhile, scientists are studying core samples taken from the polar regions and are finding that they have been warming and cooling trends for at least one million years and probably much longer. It is conceded that greenhouse gases have some impact, but the question remains how much of an impact. Furthermore, the polar bears are a threatened species, which is less serious than being an endangered species. Global warming is cited as one of the causes for the decrease in the Polar Bear population, but hunting and poaching are also major issues. Loss of sea ice is another problem. However, there appears, at least based on the difficulties Shell Oil is encountering an increasing accumulation of sea ice in some areas. No one wants the Polar Bear to become extinct. Nevertheless, a reaction to a situation that is governed by panic will not be successful. Furthermore, the late Dr. Roy Dokka of Louisiana State University did extensive studies showing that Louisiana was, in fact, sinking because of subsidence and the fact the Mississippi River was collecting large amounts of sediments that once went into the wetlands, but because of levees being built, were just stopping at the mount of the river causing a gradual sinking impact. The point of all of this is that the world is not going to end tomorrow because of oil and gas activities. Evidence is disputing the impact of oil and gas in the Polar Regions and the coastal issues in Louisiana. Evidence is also being produced that supports the claiming that hydro fractionation or fracking as it is commonly known is not posing any serious health impacts and are not damaging underground drinking-water supplies. What we have learned is that there much more oil and gas to be found in the United States and in other areas. The question that remains is who is going to take advantage of this knowledge and state developing these resources?


OilVoice Magazine | SEPTEMBER 2012

The alternative-fuel supporters have less evidence today than they did a year ago about the danger of oil and gas exploration and production, since more experts are agreeing that fracking is safe. Furthermore, none of the alternative-fuel supporters or those just opposed to the use of oil and gas have come up with anything that can be used as a building block for our civilization. Solar and wind power, along with electric cars and other similar devices only provide a small percentage of our total energy demand. The ability to take any of those resources and make the products that come from a barrel of oil has been addressed, much less resolved. Finally, the push, regarding motor vehicles, has got to come to a consensus on several issues. First, what is going to be the alternative-fuel source of choice? It is just not going to be practical to have cars and truck running on a variety of fuel sources that may not be interchangeable, i.e., allowing motor vehicles to use any fuel source that might be available. There are some relatively minor issues to be addressed. At one time, railroads decided their own track width, thus making it impossible for one train to use the tracks of another company. Congress passed a law setting a standard for the width between the rails on train tracks. If we are going to have cars that we charge up at home, we are going to need a standard plug and receptacle system. Granted, that is a minor point, but no one wants to spend money if they decide to buy one electric car one year and then buy a different brand as a second car the following year. Oil and natural gas are our primary fuel sources. We are not running out. Thus, it is time for the supporters of alternative fuels to come together with a unified approach that recognizes the importance of oil as a building block and determines the best uses for other fuels while ensuring those fuels are compatible with our current and anticipated lifestyles. (Larry Wall is a long-time observer of the oil and gas industry as a result of his 16 years newspaper reporter career and his 22 years as Director of Public Affairs for the Louisiana Mid-Continent Oil and Gas Association. Additional columns by Mr. Wall may be found at http://larrywall.hubpages.com)

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OilVoice Magazine | SEPTEMBER 2012

Natural gas is pushing coal over the cliff
Written by Wolf Richter from Testosterone Pit Natural gas may well be the most mispriced commodity these days. Its price has been below the cost of production for so long that the industry is suffering serious consequences with billions of dollars in losses—dollied up as “non-cash accounting charges” as to be ignored by “analysts.” The more leveraged players are trying to keep their chin above water by selling priced assets. There has been a mad scramble to abandon drilling for dry natural gas, and what little drilling still takes place is focused on wells that also produce oil or gaseous liquids. Countless wells have already been drilled and could produce but have not been brought on line due to pipeline constraints or local prices that have collapsed [read...The Coming Unholy Alliance in Natural Gas]. And yet, even that mayhem hasn’t been enough to push the price above the cost of production. But production is now finally tapering off from record highs on a week-to-week basis, though it’s still above last year’s level. Storage levels are high for this time of the year, but are rapidly regressing towards the mean due to soaring demand, driven by the hottest July on record and power generators that have switched from coal to gas due to price. But this is just noise as natural gas continues its relentless conquest. It started in the 1990s when highly efficient natural gas combined-cycle (NGCC) turbines arrived on the scene. For the first time, gas was able to compete with coal on cost. By 2000, there was a building boom of NGCC plants underway that, over the next ten years, nearly doubled the natural gas-fired generating capacity. And every one of these plants helped natural gas gain ground on coal. And during the first six months of 2012, 165 power generators came on line with a total capacity of 8,098 megawatts (MW), but only one was a coal-fired plant. At 800 MW, it’s less than 10% of total capacity added. The remaining 90% were gas-fired generators and renewables, including solar and landfill gas, which tend to be small—hence the large number of generators.


OilVoice Magazine | SEPTEMBER 2012

Coal plants are shut down at a stunning pace. In 2012, a total of 9 gigawatts (GW) of coalfired capacity will be retired, the largest one-year exodus in the history of the US! In 2015, a new record: 10 GW. Between 2012 and 2016, 175 coal-fired generators with a total capacity of 27 GW will get axed—8.5% of the total coal-fired capacity. Each wave is comprised of the oldest and most inefficient units. At the same time, the few coal-fired generators coming on line are much more efficient and burn significantly less coal than the capacity they’re replacing. A double whammy for coal demand. The reason: cost. More precisely, variable operating cost, an important factor in deciding which power generators to operate to satisfy a given demand. Generators with the lowest variable operating costs are dispatched first. Older inefficient coal plants are more expensive to operate than new coal plants—and more expensive than NGCC plants, even if the price of natural gas were higher. But there are other costs as well, such as complying with the Mercury and Air Toxics Standards. Smaller, older, inefficient units are not worth upgrading. And natural gas, being a cleaner-burning fuel, doesn’t have these issues. Coal-fired plants are geezers: they were built during the halcyon days of King Coal before 1980. Back in 2010, 73% of the capacity was over 30 years old, while most gas-fired capacity was less than 10 years old. Coal is a commodity whose demand in the US is being strangled powerplant by powerplant, and at an accelerating rate. Even a surge in the price of natural gas—and there will be one— will only fiddle with the numbers at the margins. A dire situation for coal. Read... Natural Gas And The Brutal Dethroning of King Coal. And in another hemisphere, there is a country that is desperately trying to stave off a collapse by imposing ever more bizarre trade barriers and capital restrictions. Read....Argentina: Creeping State Control, by stilettos-onthe-ground economist Bianca Fernet.

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OilVoice Magazine | SEPTEMBER 2012

Shale growth in other nations: How realistic is it?
Written by Gary Hunt from TCLabz

American leadership in developing horizontal drilling and hydraulic fracturing used in shale oil and gas plays is spreading around the world making it possible to extract previously uneconomic oil and natural gas resources from shale. These resources are often called unconventional because the horizontal drilling and fracking are newer techniques than the conventional methods of drilling vertical wells down into large pools of hydrocarbons. While we think of these technologies as 'new' in fact they have been commonly in use in the US oil fields for more than 20 years. What changed was the price of oil and gas that made their use more attractive.


OilVoice Magazine | SEPTEMBER 2012

A little more than five years ago we saw natural gas prices at near record levels above $13 per MMBTU and the US was expected to be a major importer of liquefied natural gas (LNG) from some of the same volatile places in the world that supply imported oil. Those high prices started an unconventional revolution applying these new technologies to domestic US shales. Today we are awash in natural gas and our entire energy strategy is being turned on its head by the prospect of abundant supply and low-very low-prices. The market forces that created this boom are at work today correcting the market excess as more E&P companies shift their drilling from natural gas to oil and natural gas liquids attracted to their higher prices. We also expect to see some of this excess natural gas turned into LNG and exported to global markets which are have higher prices. But more than 96% of America's domestic energy growth from shale has taken place on private lands beyond the onerous regulatory reach of the Federal Government where property owners have mineral resource rights on their land. The pace of shale development in other nations will have less to do with technology than with the legal status and tradition of private property and mineral rights. The other challenges nations will face in developing their own shale resources include logistics, technology access and the balance of energy infrastructure necessary to support such development. US EIA and the IEA have both done studies on the shale potential around the world so check those sources for better technical information. As we have seen in our own domestic energy growth from shale here in the US the logistics of getting the extracted oil and gas to market from its remote location can be a big problem. The Bakken shale in North Dakota for example has grown substantially but the bottleneck has been a lack of pipeline and storage capacity for the product produced. This will be equally true or worse in China and other emerging markets lacking in infrastructure development or starting from scratch. Why Keystone XL Pipeline Matters Here in the US the recent controversy over the Keystone XL pipeline was a byproduct of the process of rationalizing energy infrastructure to take shale development growth into account. The Keystone XL pipeline extension was designed in part to bring additional pipeline capacity to Bakken so its production growth could be transported to the gulf coast for


OilVoice Magazine | SEPTEMBER 2012

storage, refining and export. To achieve that transport involves building additional pipeline capacity and reversing the direction of some pipeline flows to reflect the new shale realitythat is more oil is now moving from North to South bringing product from North Dakota to Texas and Louisiana rather than from the Gulf of Mexico North through the US Midwest markets. For China and other nations to take full advantage of their own shale potential will also require addressing the logistics to make that development possible as well as modifying its energy infrastructure of pipelines, storage, refining and export capabilities to satisfy its needs.

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Waterfloods: The next big profit phase of the shale oil revolution
Written by Keith Schaefer from Oil & Gas Investments Bulletin The cheapest and most profitable oil North America has ever seen is now 'flooding' into the market, as producers once again use old technology to create a wave of new profits. Producers are using 'waterfloods'-pushing water into underground formations to flush a large amount of oil out to nearby producing wells-to increase production and profits. It's the next big money-making phase of the Shale Revolution.


OilVoice Magazine | SEPTEMBER 2012

Waterflooding has been around for 70 years or more, but the Big Question over the last five years has been-can you do it effectively with tight oil? The answer is a Big Yes, and waterflood potential has become so important that institutional investors now see them as major share price catalysts for junior producers-and track them closely. Waterfloods start 1-2 years after drilling the well, in a time window producers call 'secondary recovery.' (Drilling is primary recovery.) Waterfloods are cheap to try and cheap to run (with most operations costing just $5-10 per barrel!), and now the industry is seeing that they are sometimes doubling reserves from a well. 'Secondary recovery is where you really make all your money in this industry,' says Dan Toews, VP Finance and CFO of Pinecrest Energy (PRY-TSX.V). Pinecrest is very vocal about their waterflood potential. They say they can double the amount of oil they recover (called the Recovery Factor, or RF) from a well-at less than $15/barrel-half the price of primary recovery costs, which are over $30/barrel.

'Everyone is trying to find a new resource play,' says Toews. 'First you find a resource, and then you drill it like crazy. But the second stage is to go in for your secondary recovery, through waterflooding of some kind if possible.'


OilVoice Magazine | SEPTEMBER 2012

To date, Pinecrest isn't yet flowing even one barrel of waterflooded oil-so their powerpoint slide is just projections. Toews and his team expect to be waterflooding all of their operations by the end of this quarter. But analysts are already seeing the waterfloods as a share price catalyst. 'Just about every investor and institution we talk to wants to know the status with our waterfloods,' says Toews. 'The buyside (fund managers= buyside, brokerage firms=sell sideed.) is very savvy on waterfloods. Once we apply the method, this is what has the potential to shoot up our share prices.' Realistically, the effects can be seen within 2-3 months, but it's best to give them a year-or more-of operations before judging their impact. Waterfloods can last up to 20 years or more. Another Canadian oil junior, Raging River Exploration (RRX-TSX), also explains the waterflood potential in their powerpoint. They expect to be swimming in 1 million EXTRA recoverable barrels of oil per square mile, courtesy of waterfloods-at an even cheaper cost of $5-10 barrel, vs $30 barrel for the first 600,000 barrels. Raging River is developing the Viking formation in SW Saskatchewan-a large, tight oil play that since the 1950s has had an improved outlook from 2 billion barrels of oil to an estimated 6 billion barrels of oil in place, all thanks to horizontal drilling. Raging River expects waterflooding to increase its RF from 8% from primary recovery methods (drilling vertical and horizontal wells) using 16 wells/section, to 16-20%. The simple math says that will increase the number of barrels recovered from 480 million at 8% to 1.25 billion at 20% RF. If Raging River-or any producer-can show a steady RF for over a year, I would suggest to investors those barrels will be worth $10-$15 each-creating huge value to shareholders on a buyout. Some Viking waterfloods have even seen results as high as 30% RF. 'A small change of recovery over a large oil field is significant and adds a tremendous amount of value,' says Scott Saxberg, President and CEO of Crescent Point Energy (CPG TSX), arguably seen as the industry leader in the waterflooding revival. 'A lot of these unconventional plays (tight oil) are in high decline. By implementing


OilVoice Magazine | SEPTEMBER 2012

waterfloods, we can lower the declines in the field, and increase reserves. There's huge value to that.' Crescent Point started waterflooding its properties five years ago when multi-stage fracking (MSF) was new on the scene. Now they have five years of knowledge that the method works, and that they can use it across all of their fields. 'We recognized right away to implement a strategy to increase the recovery factor on a multi billion barrel pool,' says Saxberg. 'If you change even 1%, that ends up being huge.' 'Waterflooding is the next step past in-fill drilling (ie. drilling more holes in less space to increase ultimate recovery). It takes a lot of time to accrue knowledge and data on how to properly implement it. The sooner you start, the better data you have.' According to Saxberg, waterflooding is more than just a cheap way to float balance sheets. Over the course of Crescent Point's five-year waterflooding program, they've developed hundreds of different combinations of waterflooding techniques coupled with fracking techniques, well spacing and plenty of other factors. 'Water flooding is basic, in that you pump water into the ground,' says Saxberg. 'So to enhance that, you have to look at what type of patterns are in your reservoir. Now these are unconventional tight reservoirs, so the question was, can they actually be water flooded?' Again, the Big Answer is Yes, and management teams are now using the promise of waterfloods as a cheap way to float their balance sheets earlier in a resource play. But Saxberg says waterfloods are truly more long-term value. 'They are a long term day-after-day technical grind and process. So it's not the same as drilling a well and seeing 100bbls/day. It's a lot of ups and downs and a lot of long term view.' There's only one negative here that I see-how will all that cheap oil affect North American pricing, when the continent is already swimming in the stuff? In the short term, the pro-forma economics of waterfloods are making a splash with both management teams and the market.


OilVoice Magazine | SEPTEMBER 2012

But medium term and beyond, it will create a quandary for juniors-the easy money comes after huge capital spending.

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High gasoline prices and politics are a volatile mix
Written by Gary Hunt from TCLabz Nothing infuriates Americans more than volatile, spiking gasoline prices. Often the causes given for gasoline price hikes seem contrived. Iran and Israel trade harsh words in press reports and before the ink is even dry of the page oil prices tick up. Word of a fire at an oil refinery is enough to send prices shooting up as high as the flames on the cracker -and just as fast. Those price spikes never seem to come down nearly as fast as they shoot up. Politicians are quick to blame oil companies for gouging customers, speculators for manipulating markets, traders for withholding supply. The truth about gasoline price volatility is both a little more complicated and yet quite simple. The factors that seem to have the most impact on gasoline prices include:

Global Oil Swing Productive Capacity. While the world has plenty of oil overall, prices are set by the amount of excess capacity at the daily margins. That is how much oil is left over when all the contracts for delivery are met. How much oil is available if something goes wrong? If some refinery shuts down? If some pipeline


OilVoice Magazine | SEPTEMBER 2012

bursts? If some war breaks out? This marginal oil quantity has traditionally been controlled by Saudi Arabia's ability to ratchet up or ratchet down the amount of oil pumped each day. This control over swing productive capacity is what gives OPEC its market power and drives the rest of us crazy.

The Refinery Business Model. The oil refining business is a hard way to make a living. These plants are enormously complicated. They require skilled precision to keep them operating at optimal performance and many things can-and do go wrong. Yet it is almost impossible to build new refineries in the US today because of the environmental regulation, high capital costs and the NIMBY pressures in every potential location. We live close the edge of full refining capacity, yet refining margins are very thin because the costs of operation are so high.

Boutique Fuels Mandates Create Monopoly Markets. A recent fire at the Chevron refinery near my home in the San Francisco Bay area adversely affected the supply of the blends of gasoline used in many of the Western States. A pipeline rupture in the Midwest reduced the supply of oil to refineries serving Chicago. While do these incidents have such a major impact on gasoline supply and price? Because the environment restrictions on fuels has created a system of boutique fuel blends that are virtual monopolies in many markets. The gasoline produced in the Richmond Chevron refinery is specifically designed for the Western market and no other gasoline products can be shipped in from other states to make up for a supply shortfall when a fire or other supply chain problem happens. So having reasonable gasoline prices requires that virtually EVERYTHING must work perfectly in the gasoline production supply chain-or else.

It does not have to be this way, but Congress passes laws without the slightest regard to how they will be implemented or enforced in practice. Congress takes credit for Clean Air but allows bureaucrats to impose regulations that have costs or impacts far beyond what the law intended. This happens because our environmental laws are written to ignore the cost while taking credit for the benefits. Our laws allow Federal agencies to set their own standards for measuring benefits. They are not subject to any burden of proof. The laws allow comment periods on rulemaking proposals but the bureaucrats do not have to accept the comments. The system is one-sided and so are the costs! A more balanced and reasonable approach to environmental regulation would require Congress to approve major rulemakings by a Federal agency so it cannot avoid the accountability for imposing the costs. Existing regulations should be subject to sunset provisions and forced to be reconsidered regularly to reflect changes in technology and other factors. New laws requiring regulations should not go into effect until the final rules to


OilVoice Magazine | SEPTEMBER 2012

implement the law are approved by Congress. Just as environmental advocates can sue in Federal Court to enforce environmental laws, those subjected to them should be able to sue over the reasonableness of the impacts of the law and rules to force the government to own its burden of proving that the benefits outweigh the costs and do not constitute an unreasonable taking of private property for which just compensation is required. These changes in our regulatory regime won't get more refineries built, but they would inject some common sense into the regulatory process and force the Federal agencies that dream up all these rules that the benefits are worth the cost and the practical application of proposed rules is reasonable and in the public interest.

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Health, Safety, Environment and Risk Management
RPS Energy is a global multi-disciplinary consultancy, providing integrated technical, commercial and project management support services in the fields of geoscience, engineering and HS&E.

Contact James Blanchard T +44 (0) 20 7280 3200 E BlanchardJ@rpsgroup.com



OilVoice Magazine | SEPTEMBER 2012

An optimistic energy/GDP forecast to 2050
Written by Gail Tverberg from Our Finite World We talk about the possibility of reducing fossil fuel use by 80% by 2050 and ramping up renewables at the same time, to help prevent climate change. If we did this, what would such a change mean for GDP, based on historical Energy and GDP relationships back to 1820? Back in March, I showed you this graph in my post, World Energy Consumption since 1820 in Charts.

Figure 1. World Energy Consumption by Source, Based on Vaclav Smil estimates from Energy Transitions: History, Requirements and Prospects and together with BP Statistical Data on 1965 and subsequent. The biofuel category also includes wind, solar, and other new renewables. Graphically, what an 80% reduction in fossil fuels would mean is shown in Figure 2, below. I have also assumed that non-fossil fuels (some combination of wind, solar, geothermal, biofuels, nuclear, and hydro) could be ramped up by 72%, so that total energy consumption “only” decreases by 50%.

Figure 2. Forecast of world energy consumption, assuming fossil fuel consumption decreases by 80% by 2050, and non fossil fuels increase so that total fuel consumption decreases by “only” 50%. Amounts before black line are actual; amounts after black lines are forecast in this scenario.

We can use actual historical population amounts plus the UN’s forecast of population growth to 2050 to convert these amounts to per capita energy equivalents, shown in Figure 3,


OilVoice Magazine | SEPTEMBER 2012


Figure 3. Forecast of per capita energy consumption, using the energy estimates in Figure 2 divided by world population estimates by the UN. Amounts before the black line are actual; after the black line are estimates.

In Figure 3, we see that per capita energy use has historically risen, or at least not declined. You may have heard about recent declines in energy consumption in Europe and the US, but these declines have been more than offset by increases in energy consumption in China, India, and the rest of the “developing” world. With the assumptions chosen, the world per capita energy consumption in 2050 is about equal to the world per capita energy consumption in 1905. I applied regression analysis to create what I would consider a best-case estimate of future GDP if a decrease in energy supply of the magnitude shown were to take place. The reason I consider it a best-case scenario is because it assumes that the patterns we saw on the upslope will continue on the down-slope. For example, it assumes that financial systems will continue to operate as today, international trade will continue as in the past, and that there will not be major problems with overthrown governments or interruptions to electrical power. It also assumes that we will continue to transition to a service economy, and that there will be continued growth in energy efficiency. Based on the regression analysis:

World economic growth would average a negative 0.59% per year between now and 2050, meaning that the world would be more or less in perpetual recession between now and 2050. Given past relationships, this would be especially the case for Europe and the United States.

Per capita GDP would drop by 42% for the world between 2010 and 2050, on average. The decrease would likely be greater in higher income countries, such as the United States and Europe, because a more equitable sharing of resources between rich and poor nations would be needed, if the poor nations are to have enough of the basics.


OilVoice Magazine | SEPTEMBER 2012

I personally think a voluntary worldwide reduction in fossil fuels is very unlikely, partly because voluntary changes of this sort are virtually impossible to achieve, and partly because I think we are headed toward a near-term financial crash, which is largely the result of high oil prices causing recession in oil importers (like the PIIGS). The reason I am looking at this scenario is two-fold: (1) Many people are talking about voluntary reduction of fossil fuels and ramping up renewables, so looking at a best case scenario (that is, major systems hold together and energy efficiency growth continues) for this plan is useful, and (2) If we encounter a financial crash in the near term, I expect that one result will be at least a 50% reduction in energy consumption by 2050 because of financial and trade difficulties, so this scenario in some ways gives an “upper bound” regarding the outcome of such a financial crash. Close Connection Between Energy Growth, Population Growth, and Economic Growth Historical estimates of energy consumption, population, and GDP are available for many years. These estimates are not available for every year, but we have estimates for them for several dates going back through history. Here, I am relying primarily on population and GDP estimates of Angus Maddison, and energy estimates of Vaclav Smil, supplemented by more recent data (mostly for 2008 to 2010) by BP, the EIA, and USDA Economic Research Service. If we compute average annual growth rates for various historical periods, we get the following indications:

Figure 4. Average annual growth rates during selected periods, selected based on data availability, for population growth, energy growth, and real GDP growth.

We can see from Figure 4 that energy growth and GDP growth seem to move in the same direction at the same time. Regression analysis (Figure 5, below) shows that they are highly correlated, with an r squared of 0.74.


OilVoice Magazine | SEPTEMBER 2012

Figure 5. Regression analysis of average annual percent change in world energy vs world GDP, with world energy percent change the independent variable.

Energy in some form is needed if movement is to take place, or if substances are to be heated. Since actions of these types are prerequisites for the kinds of activities that give rise to economic growth, it would seem as though the direction of causation would primarily be: - Energy growth gives rise to economic growth. Rather than the reverse. I used the regression equation in Figure 5 to compute how much yearly economic growth can be expected between 2010 and 2050, if energy consumption drops by 50%. (Calculation: On average, the decline is expected to be (50% ^(1/40)-1) = -1.72%. Plugging this value into the regression formula shown gives -0.59% per year, which is in the range of recession.) In the period 1820 to 2010, there has never been a data point this low, so it is not clear whether the regression line really makes sense applied to decreases in this manner. In some sense, the difference between -1.72% and -0.59% per year (equal to 1.13%) is the amount of gain in GDP that can be expected from increased energy efficiency and a continued switch to a service economy. While arguments can be made that we will redouble our efforts toward greater efficiency if we have less fuel, any transition to more fuel-efficient vehicles, or more efficient electricity generation, has a cost involved, and uses fuel, so may be less common, rather than more common in the future. The issue of whether we can really continue transitioning to a service economy when much less fuel in total is available is also debatable. If people are poorer, they will cut back on discretionary items. Many goods are necessities: food, clothing, basic transportation. Services tend to be more optional–getting one’s hair cut more frequently, attending additional years at a university, or sending grandma to an Assisted Living Center. So the direction for the future may be toward a mix that includes fewer, rather than more, services, so will be more energy intensive. Thus, the 1.13% “gain” in GDP due to greater efficiency and greater use of “services” rather than “goods” may shrink or disappear altogether.


OilVoice Magazine | SEPTEMBER 2012

The time periods in the Figure 5 regression analysis are of different lengths, with the early periods much longer than the later ones. The effect of this is to give much greater weight to recent periods than to older periods. Also, the big savings in energy change relative to GDP change seems to come in the 1980 to 1990 and 1990 to 2000 periods, when we were aggressively moving into a service economy and were working hard to reduce oil consumption. If we exclude those time periods (Figure 6, below), the regression analysis shows a better fit (r squared = .82).

Figure 6. Regression analysis of average annual percent change in world energy vs world GDP excluding the periods 1980 to 1990 and 1990 to 2000, with world energy percent change the independent variable.

If we use the regression line in Figure 6 to estimate what the average annual growth rate would be with energy consumption contracting by -1.72% per year (on average) between 2010 and 2050, the corresponding average GDP change (on an inflation adjusted basis) would be contraction of -1.07% per year, rather than contraction of -0.59% per year, figured based on the regression analysis shown in Figure 5. Thus, the world economy would even to a greater extent be in “recession territory” between now and 2050. Population Growth Estimates In my calculation in the introduction, I used the UN’s projection of population of 9.3 billion people by 2050 worldwide, or an increase of 36.2% between 2010 and 2050, in reaching the estimated 42% decline in world per capita GDP by 2050. (Calculation: Forty years of GDP “growth” averaging minus 0.59% per year would produce total world GDP in 2050 of 79.0% of that in 2010. Per capita GDP is then (.790/ 1.362=.580) times 2010′s per capita income. I described this above as a 42% decline in per capita GDP, since (.580 – 1.000 = 42%).) Population growth doesn’t look to be very great in Figure 4, since it shows annual averages, but we can see from Figure 7 (below) what a huge difference it really makes. Population now is almost seven times as large as in 1820.


OilVoice Magazine | SEPTEMBER 2012

Figure 7. World Population, based on Angus Maddison estimates, interpolated where necessary.

Since we have historical data, it is possible to calculate an estimate based on regression analysis of the expected population change between 2010 and 2050. If we look at population increases compared to energy growth by period (Figure 8), population growth is moderately correlated with energy growth, with an r squared of 0.55.

Figure 8. Regression analysis of population growth compared to energy growth, based on annual averages, with energy growth the independent variable.

One of the issues in forecasting population using regression analysis is that in the period since 1820, we don’t have any examples of negative energy growth for long enough periods that they actually appear in the averages used in this analysis. Even if this model fit very well (which it doesn’t), it still wouldn’t necessarily be predictive during periods of energy contraction. Using the regression equation shown in Figure 8, population growth would still be positive with an annual contraction of energy of 1.72% per year, but just barely. The indicated population growth rate would slow to 0.09% per year, or total growth of 3.8% over the 40 year period, bringing world population to 7.1 billion in 2050. Energy per Capita While I did not use Energy per Capita in this forecast, we can look at historical growth rates in Energy per Capita, compared to growth rates in total energy consumed by society. Here, we get a surprisingly stable relationship:


OilVoice Magazine | SEPTEMBER 2012

Figure 9. Comparison of average growth in total world energy consumed with the average amount consumed per person, for periods since 1820.

Figure 10 shows the corresponding regression analysis, with the highest correlation we have seen, an r squared equal to .87.

Figure 10. Regression analysis comparing total average increase in world energy with average increase in energy per capita, with average increase in world energy the independent variable.

It is interesting to note that this regression line seems to indicate that with flat (0.0% growth) in total energy, energy per capita would decrease by -0.59% per year. This seems to occur because population growth more than offsets efficiency growth, as women continue to give birth to more babies than required to survive to adulthood.

Can We Really Hold On to the Industrial Age, with Virtually No Fossil Fuel Use? This is one of the big questions. “Renewable energy” was given the name it was, partly as a marketing tool. Nearly all of it is very dependent on the fossil fuel system. For example, wind turbines and solar PV panels require fossil fuels for their manufacture, transport, and maintenance. Even nuclear energy requires fossil fuels for its maintenance, and for decommissioning old power plants, as well as for mining, transporting, and processing uranium. Electric cars require fossil fuel inputs as well. The renewable energy that is not fossil fuel dependent (mostly wood and other biomass that can be burned), is in danger of being used at faster than a sustainable rate, if fossil fuels are not available. There are few energy possibilities that are less fossil fuel dependent, such as


OilVoice Magazine | SEPTEMBER 2012

solar thermal (hot water bottles left in the sun to warm) and biofuels made in small quantities for local use. Better insulation is also a possibility. But it is doubtful these solutions can make up for the huge loss of fossil fuels. We can talk about rationing fuel, but in practice, rationing is extremely difficult, once the amount of fuel becomes very low. How does one ration lubricating oil? Inputs for making medicines? To keep business processes working together, each part of every supply chain must have the fuel it needs. Even repairmen must have the fuel needed to get to work, for example. Trying to set up a rationing system that handles all of these issues would be nearly impossible. GDP and Population History Back to 1 AD Angus Maddison, in the same data set that I used back to 1820, also gives an estimate of population and GDP back to 1 AD. If we look at a history of average annual growth rates in world GDP (inflation adjusted) and in population growth, this is the pattern we see:

Figure 11 shows that the use of fossil fuels since 1820 has allowed GDP to rise faster than population, for pretty much the first time. Prior to 1820, the vast majority of world GDP growth was absorbed by population growth. If we compare the later time periods to the earlier ones, Figure 11 shows a pattern of increasing growth rates for both population and GDP. We know that in the 1000 to 1500 and 1500 to 1820 time periods, early energy sources (peat moss, water power, wind power, animal labor) became more widespread. These changes no doubt contributed to the rising


OilVoice Magazine | SEPTEMBER 2012

growth rates. The biggest change, however, came with the addition of fossil fuels, in the period after 1820. Looking back, the question seems to become: How many people can the world support, at what standard of living, with a given quantity of fuel? If our per capita energy consumption drops to the level it was in 1905, can we realistically expect to have robust international trade, and will other systems hold together? While it is easy to make estimates that make the transition sound easy, when a person looks at the historical data, making the transition to using less fuel looks quite difficult, even in a best-case scenario. One thing is clear: It is very difficult to keep up with rising world population.

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OilVoice Magazine | SEPTEMBER 2012

Natural gas and the brutal dethroning of king coal
Written by Wolf Richter from Testosterone Pit It’s been tough for natural gas drillers. The boom in horizontal drilling and hydraulic fracturing that gave access to enormous gas-rich shale formations around the nation led to record production. Prices crashed. Drilling activity collapsed: rig count, down 45% from last year, hit the lowest level since July 1999. Producers are writing down their natural gas assets by the billions of dollars. Some will get wiped out. The price of natural gas has been below production costs for years, and the damage is now huge [read.... Natural Gas: Where Endless Money Went to Die]. On the other side, power generators have switched from coal to natural gas—with devastating impact on king coal. Coal has long been the dominant fuel for power generation. But April 2012, for the first time in the history of EIA data, power generation from coal-fired and natural gas-fired plants reached parity, each contributing 32% to total electricity generation. The large fluctuations are a function, in part, of the seasonality of overall power demand. In April, demand was low due to mild spring weather. The price of natural gas dropped to a 10-year low, and power companies laughed all the way to the bank. In May, power production started to rise as air conditioners got cranked up—a trend that will hold for the summer. But the graph shows something far more important: a narrowing of the gap between coal and gas-fired power generation. It’s not just the low price of natural gas that did it—but a new power generation technology and yes, the usual suspect,


OilVoice Magazine | SEPTEMBER 2012

Congress. Gas turbines are an old technology. Most of the energy is wasted as exhaust heat. They’re inefficient, compared to coal-fired steam turbines. But they have an advantage: they can be brought on line quickly to cover peak loads. So coal and gas have been used in parallel: coal to produce low-cost base power and gas to produce more expensive peak power during periods of high demand (daytime, summer). Gas didn't pose a threat to king coal ... until the arrival in the 1990s of the natural gas combined-cycle (NGCC) turbine: like the classic turbine, it drives a generator, but instead of blowing the “waste” heat out the exhaust, it uses the energy to generate steam that, as in a coal plant, drives a steam turbine that powers another generator. Like their old-fashioned brethren, NGCC plants can be brought on line quickly, but when used for base power, their efficiency can exceed 60%—much higher than that of a coal plant. A game changer. With natural gas prices as low as they’ve been over the past years, operating costs for power generators have plunged. It doesn’t hurt that NGCC plants have lower capital costs than coal plants—$600 to $700 per kW versus $1,400 to $2,000 kW— relatively short construction times, and environmental benefits. The long-term shift to natural gas looks like this:

(The data is annual, not monthly; so 2012, with data through April, isn’t comparable to the first graph.) The gray areas in the graph indicate periods of extraordinary changes. Low oil prices in the 1960s caused and uptick in use of petroleum for power generation ... until the two oil shocks


OilVoice Magazine | SEPTEMBER 2012

in the 1970s knocked it into a long decline towards the inconsequential. The winner of the oil shocks was coal, producing at its peak in the late 1980s nearly 80% of all power: truly king coal. And it was Congress that did it! In 1978, in reaction to the oil price shocks, it passed the Powerplant and Industrial Fuels Act (PIFUA) that clamped down on the construction of oil and gas-fired plants and promoted the construction of coal plants. But by 1990, a new world had dawned: PIFUA was buried, natural gas markets were deregulated, and power generators were freer to substitute one fuel for another, based on economic considerations. Just then, the efficient NGCC plants arrived on the scene! Result: a phenomenal ascent of natural gas in power generation, not only for peak power but also for base power, led by a construction boom of NGCC plants. Between 2000 and 2010, natural gas generating capacity jumped by 96%:

The loser was coal. An ugly slide that accelerated over the last few years. Higher natural gas prices—a certainty, given that they’re currently below production costs—will have some impact on the speed of the progression of natural gas. In the short term, power generators switch between fuels to take advantage of lower costs here and there. But as more gas-fired plants have come on line, and as the oldest, most inefficient coal plants are being retired, the shift to natural gas has become structural—pushing up demand inexorably.


OilVoice Magazine | SEPTEMBER 2012

Alas, the price of natural gas doesn’t flow like a tranquil river but has violent ups and downs with sporadic and vicious spikes. Read.... The Coming Spike In The Price Of Natural Gas. And here is a harbinger of other things to come: California Sales Tax Revenues Nosedive By 33.5%, by hard-hitting Chriss Street.

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