The Changing Face of World Oil Markets  

Posted by Big Gav in ,

James Hamilton at Econbrowser started one of the year's more interesting peak oil debates back in July with a post on developments in the oil markets - The Changing Face of World Oil Markets.

This year the oil industry celebrated its 155th birthday, continuing a rich history of booms, busts and dramatic technological changes. Many old hands in the oil patch may view recent developments as a continuation of the same old story, wondering if the high prices of the last decade will prove to be another transient cycle with which technological advances will again eventually catch up. But there have been some dramatic changes over the last decade that could mark a major turning point in the history of the world’s use of this key energy source. In this article I review five of the ways in which the world of energy may have changed forever.

1. World oil demand is now driven by the emerging economies. ...
2. Growth in production since 2005 has come from lower-quality hydrocarbons. ...
3. Stagnating world production of crude oil meant significantly higher prices. ...
4. Geopolitical disturbances held back growth in oil production. ...
5. Geological limitations are another reason that world oil production stagnated. ...

Although the oil industry has a long history of temporary booms followed by busts, I do not expect the current episode to end as one more chapter in that familiar story. The run-up of oil prices over the last decade resulted from strong growth of demand from emerging economies confronting limited physical potential to increase production from conventional sources. Certainly a change in those fundamentals could shift the equation dramatically. If China were to face a financial crisis, or if peace and stability were suddenly to break out in the Middle East and North Africa, a sharp drop in oil prices would be expected. But even if such events were to occur, the emerging economies would surely subsequently resume their growth, in which case any gains in production from Libya or Iraq would only buy a few more years. If the oil industry does experience another price cycle arising from such developments, any collapse in oil prices would be short-lived.

My conclusion is that hundred-dollar oil is here to stay.

Reuters' John Kemp was moved to respond in disagreement - Kemp: Forecasts For Higher Oil Prices Misjudge The Shale Boom.

The shale revolution will turn out to be only a pause in the upward trend in prices, Hamilton argues, as growing demand from emerging economies and stagnant supplies from conventional oil fields push prices higher in the long term. "Rather than a force pushing oil prices back to historical lows, it seems more accurate to view the emerging tight oil plays as a factor that can mitigate for a while what would otherwise be the tendency for prices to continue to rise."

The problem with Hamilton's analysis is that it largely ignores the impact of the shale revolution on the economics of oil production and understates the tremendous variability in real oil prices in response to changes in technology. The professor devotes just 400 words out of almost 4,000 to discussing the production of crude oil and gas from shale formations.

Most of that discussion focuses on the high cost of drilling and fracturing shale wells; the rapid decline in production; the alleged unprofitability of shale wells; and question of whether the conditions that produced the shale revolution in North American can be replicated in other parts of the world. But this part of the paper is also the weakest, and it highlights the fundamental limitations with Hamilton's entire argument about the increasing difficulty and costs of producing crude oil.

Since 2008, the dramatic increase in oil and gas production from shale formations in North America, and the abundance of shale resources around the world, has discredited theories about peaking oil production. The simple theory that supplies will run out has been reframed as a more sophisticated one about rising prices.

Peak oil supporters now point to the increasing cost of oil production, diminishing energy return on investment and the diminishing energy return on energy invested to claim that it is becoming harder and more expensive to sustain, let alone increase, crude output. Prices must continue to rise in real terms, they say, to reflect the increasing cost of producing crude and to restrain demand. Price increases will prove to be just as disruptive as physically running out of the stuff.

Hamilton's paper lends influential support to this view. He notes that oil demand is now being driven by rising incomes in emerging markets, even as high prices restrain consumption in the advanced economies.

Platts then had a follow up post from Steve Kopits - Guest blog: Hamilton has it right on oil.

Kemp seems to be arguing that shale oil is a game-changer which will materially change the supply outlook and catalyze a fall in oil prices.

To test this assertion, it is worth asking if shale production has actually led to the predicted fall in oil prices. As is well known, the shale surge caused a divergence of the West Texas Intermediate (WTI) oil price, the US domestic standard, from Brent, the international standard. Historically, these two prices rarely diverged by more than a dollar or two. Notwithstanding, from late 2011, surging shale production depressed the WTI price as US supply outran domestic infrastructure capabilities, and government regulations prevented the export of US crude.

Have prices fallen since? Growth of field production in the lower 48 states has been impressive, increasing by 400,000 b/d in the 12 months ending in mid-2011, and rising to a gain of 1 million b/d by mid-2012, a pace it has held ever since.

How did prices react? In the three months ending July 2011, WTI averaged $98, falling to $88/b a year later. On the other hand, by July 2013, WTI was back to $98, and will close this July around $104. Has surging shale production caused the US oil price to collapse? Not all at. It has been accompanied by increasing oil prices, even in the US.

Nor has Brent collapsed. True, Brent averaged $115/b in the three months to July 2011, and fell to $103 just a year later. But it will close this July at about $111/b, not much different from three years ago, and higher than it was at the beginning of the “shale gale.” Shale oil has not led, as a statistical matter, to lower oil prices in the US—or globally—in the last two years.

How can this be, if the oil supply is in such fine fettle? Has peak oil really been debunked? Is Kemp right when he says: “Since 2008, the dramatic increase in oil and gas production from shale formations in North America, and the abundance of shale resources around the world, has discredited theories about peaking oil production.”

As the chart shows, just as many analysts have contended, the oil supply hit an inflection point in 2005. That year signals the high water mark of conventional crude and condensate production, which is 2.1 mbpd less than it was then.

Even if we include refinery processing gain, biofuels and NGLs (these latter two adjusted for energy content equaling about 70% of that of a barrel of crude), we find the oil supply is up only 0.4%, 300,000 b/d, compared to 2005.

Virtually all of the growth—92%, on an energy-adjusted basis—has come from unconventionals, specifically, Canadian oil sands and US shale (tight) oil. Indeed, 70% of the net growth of the global oil supply from 2005 through 2013 came from US shales alone. Shales are not the icing on the cake; they are the cake itself.

This matters, because shale production in turn depends overwhelmingly on only two plays, the Eagle Ford and the Bakken, where production is expected to peak in 2016 or 2017 or see much slower growth in production as the sweet spots there are exhausted. The Permian Basin may pick up the slack, but to date has not done so in needle-moving quantities.

Meanwhile, lagging oil prices are calling into question a number of oil sands projects, particularly those slated to begin production after 2020. Unconventional growth may well be approaching its high water mark. If 1 million b/d growth has led to higher oil prices, what will happen when unconventional growth slows to 300,000 b/d in two or three years?

And there’s more. Kemp states: “North American shale is currently the marginal source of supply in the world oil market, and most producers claim they can break even at $70 or even $60 per barrel.”

It is not clear that the US independents are profitable. An industry can see a boom irrespective of profits or free cash flow if banks and investors are willing to underwrite the promises of future profits. The internet bubble showed us that.

We do not yet know if shale oil and gas will be consistently profitable. We do know, however, that US independents have been massively free cash flow negative in recent years.

D Ray Long has a postscript to the debate - Geology Is Crushing Technology.

In July, I highlighted James Hamilton's paper "The Changing Face of World Oil Markets," as well as the critical response from Reuters writer John Kemp. But I didn't circle back to also highlight Steven Kopits reply to Kemp that appeared in Platts: "Hamilton has it right on oil."

You should definitely read the entire thing, but here's a short quote below on Capex. Kopits discussed the capex issue in great detail in his Columbia University presentation earlier this year (and if you haven't seen that, then go watch it immediately). But the short and simple version: Oil companies are spending more money, while gaining less production. Here's Kopits:

"...productivity of capital has deteriorated by a factor of four, from $5,300 capex b/d of oil production in 2004 to $21,400 in 2013. This deterioration is net of technology improvements. Geology is not only winning, it is crushing technology.

Hamilton’s graph testifies to the grizzly unraveling of the economics underpinning oil production since 2005. For the oil business as a whole, productivity has imploded, not improved."

Total global solar heads for 200GW, 50GW in 2014  

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RNE has a look at the global solar power market - Total global solar heads for 200GW, 50GW in 2014.

Total global solar installations are well on the way to the 200GW mark, with the amount of PV added in the fourth quarter of 2014 forecast to fall just short of 20 gigawatts at 19.5GW, according to new data.

According to findings in the latest NPD Solarbuzz Quarterly, the amount of solar PV deployed worldwide in QSB_Q4 Solar PV Demand and Year-End Cumulative Installed PV_1410064 is forecast to be equivalent to the energy supplied by five large-scale nuclear power plants and will surpass the total annual solar PV deployed in 2010.

Global Oceans Break All-Time Heat Record; World on Pace for Warmest Year Ever  

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Slate has a look at the latest global warming data - Global Oceans Break All-Time Heat Record; World on Pace for Warmest Year Ever.

The Earth’s oceans have never been this far beyond the bounds of normal.

New data released Thursday by the National Oceanic and Atmospheric Administration showed that Earth’s oceans reached a level last month not seen since humans have been keeping comprehensive records. Global ocean temperatures in August 2014 warmed to “the largest departure from average for any month on record” according to a NOAA statement. The previous record was set just two months ago, in June 2014.

The NOAA data also showed the temperature of the Earth as a whole hit a new all-time August record last month, confirming similar results earlier this week from NASA and the Japanese Meteorological Agency, which use slightly different ways of crunching the numbers.

Additionally, the combined temperature of June, July, and August was also unprecedented in historical records. According to the JMA, four of the last five months have now been record-breaking for that particular month. (July was No. 2, just a hair behind the super-charged El Niño year of 1998.) The eastern United States is among the only land areas on Earth still running below normal for 2014, a legacy of the polar vortex outbreaks of earlier this year.

Later Thursday morning, NOAA expanded on the implications of the new records in a conference call, saying that on its current pace—and with the help of a newly resurgent El Niño—2014 is poised to become the warmest year ever measured.

CitizenFour: Documentary Film Claims That There Is Another NSA Leaker with Higher Rank Than Snowden  

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The Hollywood Reporter has an article on a documentary about Edward Snowden - Documentary Film Claims That There Is Another NSA Leaker with Higher Rank Than Snowden.

A second National Security Agency whistleblower exists within the ranks of government intelligence.

That bombshell comes toward the end of Citizenfour, a new documentary from filmmaker Laura Poitras about NSA informant Edward Snowden that had its world premiere on Friday at the New York Film Festival.

In the key scene, journalist Glenn Greenwald visits Snowden at a hotel room in Moscow. Fearing they are being taped, Greenwald communicates with Snowden via pen and paper. While some of the exchanges are blurred for the camera, it becomes clear that Greenwald wants to convey that another government whistleblower — higher in rank than Snowden — has come forward.

The revelation clearly shocks Snowden, whose mouth drops open when he reads the details of the informant’s leak. Also revealed by Greenwald is the fact that 1.2 million Americans are currently on a government watch-list. Among them is Poitras herself.

Adrift in Oil Country  

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TomDispatch has an article on life in the Bakken - Adrift in Oil Country.

I hadn’t driven nearly 2,000 miles from Brooklyn to work as a cocktail waitress in a strip club. (That only happened after I ran out of money.) I had set off with the intention of reporting on the domestic oil boom that was reshaping North Dakota’s prairie towns as well as the balance of both global power and the earth’s atmosphere.

This spring, production in North Dakota surged past one million barrels of oil a day. The source of this liquid gold, as it is locally known, is the Bakken Shale: a layered, energy-rich rock formation that stretches across western North Dakota, the corner of Montana, and into Canada. It had been considered inaccessible until breakthroughs in drilling and hydraulic fracturing made the extraction of oil from it economically feasible. In 2008, the United States Geological Survey (USGS) announced that the Bakken Shale contained 25 times more recoverable oil than previously thought, sparking the biggest oil rush in state history.

Now, six years later, the region displays all the classic contemporary markers of hell: toxic flames that burn around the clock; ink-black smoke billowing from 18-wheelers; intermittent explosions caused by lightning striking the super-conductive wastewater tanks that hydraulic fracturing makes a necessity; a massive Walmart; an abundance of meth, crack, and liquor; freezing winters; rents higher than Manhattan; and far, far too many men. To oil companies, however, the field is hallowed ground, one of the few in history to break the million-barrel-a-day benchmark, earning it “a place in the small pantheon of truly elite oil fields,” as one Reuters market analyst wrote.

We're Sitting on 10 Billion Barrels of Oil! OK, Two  

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Bloomberg has a look at the tendency to over-hype shale oil reserves - We're Sitting on 10 Billion Barrels of Oil! OK, Two.

Lee Tillman, chief executive officer of Marathon Oil Corp., told investors last month that the company was potentially sitting on the equivalent of 4.3 billion barrels in its U.S. shale acreage. That number was 5.5 times higher than the proved reserves Marathon reported to federal regulators.

Such discrepancies are rife in the U.S. shale industry. Drillers use bigger forecasts to sell the hydraulic fracturing boom to investors and to persuade lawmakers to lift the 39-year-old ban on crude exports. Sixty-two of 73 U.S. shale drillers reported one estimate in mandatory filings with the Securities and Exchange Commission while citing higher potential figures to the public, according to data compiled by Bloomberg. Pioneer Natural Resources (PXD) Co.’s estimate was 13 times higher. Goodrich Petroleum Corp.’s was 19 times. For Rice Energy Inc., it was almost 27-fold.

“They’re running a great risk of litigation when they don’t end up producing anything like that,” said John Lee, a University of Houston petroleum engineering professor who helped write the SEC rules and has taught reserves evaluation to a generation of engineers. “If I were an ambulance-chasing lawyer, I’d get into this.”

Germany Reaches 74% Renewable Energy During May Weekend  

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Inhabitat has a look at Germany's increasing takeup of renewable energy - Germany Was Powered by 74% Renewable Energy Last Weekend.

According to think tank Agora Energiewende, Germany’s renewable usage set a new record on Sunday when wind, solar, biomass, and hydro energy supplied a bulk of the country’s energy. Information supplied by the group shows that the combined contribution of renewables reached 43.54 gigawatts between noon and 1 p.m. That equates to almost three quarters of the country’s demand.

Agora Energiewende has noted, however, that the inability of some baseload generators to switch themselves off meant that a record level of more than 10 gigawatts of surplus capacity at its peak was exported to neighboring markets.

Germany has always been among Europe’s leaders when it comes to solar energy, and this weekend was no exception with its output at 15.2 gigawatts at its peak. That said, the output is just half its rated peak capacity—which is more than 33 gigawatts—but then most of the northern part of the country was covered in cloud.

The farmer who is crazy in like with his wind turbines  

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RNE has a post on a rural resident who loves his wind turbines - The farmer who is crazy in like with his wind turbines.

Bruce Garratt, who lives south of Geraldton, in WA’s mid north, decided to host the turbines on his 1,000 hectare property 15 years ago. They are part of Alinta’s Walkaway wind farm – the first privately built wind farm in the state.

“People tell me how noisy they are, people tell me how they affect your health,” Garratt told the ABC in an interview aired on the local 7.30 Report. “I’ve had lots of people tell me different things that honestly, unless they have lived on a wind farm, they don’t really know what they are talking about.”

He said the turbines provided an additional passive income, as well as a sense of purpose. “No-one in their right mind could put up an argument and say that wind turbines aren’t of benefit,” he said. "They’re not producing C02.”

Mr Garratt is critical of the recent Warburton review that recommended either closing the Renewable Energy Target (RET) to new entrants or scaling it back. The RET was set up to ensure that 41,000 gigawatt hours of Australia’s electricity, at least 20 per cent, would be generated by renewables by 2020.

Garratt believes the Government should commit to the existing scheme. “We had 36 degrees in the middle of April,” he said. “Now that’s unheard of. I’ve been here for 30 years and I’ve never seen wheat die, ever, until this year. No-one can tell me that global warming is not happening. I think renewables are coming in and it’s going to be a hard fight to stop them.”

Bruce Sterling's "The Epic Struggle of the Internet of Things"  

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Boing Boing has a post on a new pamphlet from Bruce Sterling on The Internet of Things - Bruce Sterling's "The Epic Struggle of the Internet of Things". It's interesting watching the switch from traditional publishing to self-publishing on the Kindle store and other e-book shops. It's also interesting considering Bruce's increasing jaundiced view of "the internet of things" - the first iteration of which he used to promote quite enthusiastically if I recall correctly.

It's a new long-form essay in the tradition of Sterling's must-read, groundbreaking 2005 book Shaping Things, a critical perspective on what it means to have a house full of "smart" stuff that answers to giant corporations and the states that exert leverage over them.

Watching Over the Destruction of Gary Webb  

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As a postscript to the recent article on Mike Ruppert's demise, here's an article from "The Intercept" on a new movie about Gary Webb - MANAGING A NIGHTMARE: HOW THE CIA WATCHED OVER THE DESTRUCTION OF GARY WEBB.

Eighteen years after it was published, “Dark Alliance,” the San Jose Mercury News’s bombshell investigation into links between the cocaine trade, Nicaragua’s Contra rebels, and African American neighborhoods in California, remains one of the most explosive and controversial exposés in American journalism.

The 20,000-word series enraged black communities, prompted Congressional hearings, and became one of the first major national security stories in history to blow up online. It also sparked an aggressive backlash from the nation’s most powerful media outlets, which devoted considerable resources to discredit author Gary Webb’s reporting. Their efforts succeeded, costing Webb his career. On December 10, 2004, the journalist was found dead in his apartment, having ended his eight-year downfall with two .38-caliber bullets to the head.

These days, Webb is being cast in a more sympathetic light. He’s portrayed heroically in a major motion picture set to premiere nationwide next month. And documents newly released by the CIA provide fresh context to the “Dark Alliance” saga — information that paints an ugly portrait of the mainstream media at the time.

On September 18, the agency released a trove of documents spanning three decades of secret government operations. Culled from the agency’s in-house journal, Studies in Intelligence, the materials include a previously unreleased six-page article titled “Managing a Nightmare: CIA Public Affairs and the Drug Conspiracy Story.” Looking back on the weeks immediately following the publication of “Dark Alliance,” the document offers a unique window into the CIA’s internal reaction to what it called “a genuine public relations crisis” while revealing just how little the agency ultimately had to do to swiftly extinguish the public outcry. Thanks in part to what author Nicholas Dujmovic, a CIA Directorate of Intelligence staffer at the time of publication, describes as “a ground base of already productive relations with journalists,” the CIA’s Public Affairs officers watched with relief as the largest newspapers in the country rescued the agency from disaster, and, in the process, destroyed the reputation of an aggressive, award-winning reporter.

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