Blinkered Barack Obama aims the non-existent oil weapon at Vladimir Putin but will he pull the dud trigger?
The Unhived Mind
Obama aims oil weapon at Putin but will he pull the trigger?
Oil prices heading for major correction after Russia’s attempt to use crude as a weapon to bully Western powers backfires
By Andrew Critchlow, Business News Editor5:39PM BST 11 May 2014CommentsComments
http://www.telegraph.co.uk/finance/commodities/10823349/Obama-aims-oil-weapon-at-Putin-but-will-he-pull-the-trigger.html
Oil prices are on the brink of possibly their biggest correction since the global financial crisis after Vladimir Putin’s gamble to use Russia’s crude as a political weapon backfired spectacularly on the Kremlin.
A potent energy superpower, Russia had thought that it could use its status as the world’s largest oil producer and biggest exporter of natural gas through cross-border pipelines to intimidate and quite literally bully Western powers into submission over Ukraine.
The mere suspicion among oil and gas traders that the country’s president would turn off the taps on the thousands of kilometres of pipelines that snake their way from fields in Siberia’s steppe to export terminals and urban consumers in Europe – in retaliation for economic sanctions imposed by the US and Brussels – had been enough to keep energy markets artificially frothy.
The risk premium on Russian supplies that had inflated oil prices came at a time when many experts were beginning to warn of too much crude sloshing around on world markets.
Brent oil – a global benchmark – had gained about 10pc to comfortably trade above $110 per barrel since February, when the regime of the then Ukrainian president Viktor Yanukovych came crashing down under the weight of protests in Kiev’s Independence Square.
Ole Hansen, head of commodity strategy at Saxo Bank, has now made the bold call that about $25 could be slashed off the price of a barrel of crude if the US government were to open its huge stockpiles of oil stored in the nation’s Strategic Petroleum Reserve (SPR).
Set up in 1975, the reserve was intended to provide at least 90 days’ worth of imports to protect Americans from the kinds of intermittent “oil shocks” that two years earlier, during the Arab oil embargo, had seen petrol pumps run dry.
The reserve was first seriously tapped into in 1990, when coalition forces launched military action to evict Saddam Hussein’s Iraqi forces from Kuwait.
In 2005, 11m barrels were released in response to Hurricane Katrina, and in 2011, Washington again offered to place crude on the market from the SPR to ease pressure on markets after production in Libya was knocked out by the civil war.
The reserve, which is held in huge tank farms across America, now contains 700m barrels of crude, enough to meet the entire world’s oil consumption for almost eight days. According to Hansen, most of it was accumulated at an average cost of about $30 per barrel – a significant discount to current prices.
Aside from making a big profit, releasing oil from the SPR would be one of the American government’s most effective strategies to nullify Putin’s “energy weapon” and humble the Russian economy further.
The Department of Energy gave traders a small taste of the SPR’s potential in March, when it unexpectedly placed 5m barrels on the market. The release was a rare move that many experts interpreted as a tacit warning to the Kremlin to keep its oil and gas flowing as it annexed Crimea.
At the same time, Hansen points out, US domestic crude inventories are surging. According to the latest figures available from the US Energy Information Administration, America was producing 8.3m barrels per day (bpd) of crude last month, the highest level achieved since 1988.
At this rate, the US government will soon have no alternative – irrespective of the situation with Russia – but to lift its ban that was first introduced in 1979 on domestic exports of oil.
“Although the world is mostly focused on the risk of oil prices spiking higher, there is another dimension in this story, which could completely change the outlook,” said Hansen. “A resumption of US exports would seriously alter the global oil market, which is already seeing supply growth rising faster than demand, and it is not difficult to envisage a drop in Brent crude.”
Saudi Arabia is sitting on about 2.5m barrels of spare capacity, while Iran and Iraq harbour ambitions to at least triple their output in the medium term. Even if the 12-member Organisation of the Petroleum Exporting Countries were to agree to cut production at it next meeting, it’s unlikely that many of its members would comply in the current environment, in which producers must chase market share.
Regardless of the fracking revolution in the US, the world appears to be flooded with crude.
According to Hansen, this would not be the first time that Russia has had the “oil weapon” turned against itself. In 1986, Saudi Arabia gave in trying to keep oil prices stable after the Kremlin increased oil production at its expense.
Hansen said that Riyadh was subsequently forced to reduce production in order to keep prices stable. “Once the kingdom began increasing production in 1985 and 1986, oil prices collapsed from around $30 per barrel before bottoming at $10.50 per barrel in March 1986. The result of this was a massive loss of revenues for the Soviet Union, and it most likely played its part in the Soviet disintegration a few years later in 1991.”
But flooding world markets with US oil could be ruinous for many of Washington’s closest allies in the Middle East and arguably destabilising for the rest of global economy. Therefore, Hansen argues that such a move would be unlikely unless provoked by Russia, which would have little to gain.
However, Putin appears to have forgotten the lesson of his fallen Soviet comrades of the old communist order, and in meddling with world oil markets, he may have laid the foundations for his own economic demise.
theunhivedmind says:
Unless the U.S pulls oil out of fresh air then they cannot attack Russia this way having only eight days of world supply is chicken feed. I should point out that 96% of the estimates for shale gas production is a farce so therefore only 4% is available meaning a urination in the ocean. Obama and co are living in dream cuckoo land. It will be great if Nigeria brings its oil into the Yuan payment system next.
-= The Unhived Mind
http://theunhivedmind.com/wordpress3/2014/05/28/the-us-shale-oil-miracle-disappears/
The US Shale Oil Miracle Disappears
The US Shale Oil Miracle Disappears
Tyler Durden’s pictureSubmitted by Tyler Durden on 05/22/2014 14:06 -0400
http://www.zerohedge.com/news/2014-05-22/us-shale-oil-miracle-disappears
Submitted by Chris Martenson via Peak Prosperity,
The US shale oil “miracle” has about as much believability left as Jimmy Swaggart. Just today, we learned that the EIA has placed a hefty downward revision on its estimate of the amount of recoverable oil in the #1 shale reserve in the US, the Monterey in California.
As recently as yesterday, the much-publicized Monterey formation accounted for nearly two-thirds of all technically-recoverable US shale oil resources.
But by this morning? The EIA now estimates these reserves to be 96% lower than it previously claimed.
Yes, you read that right: 96% lower. As in only 4% of the original estimate is now thought to be technically-recoverable at today’s prices:
EIA Cuts Monterey Shale Estimates on Extraction Challenges
May 21, 2014
The Energy Information Administration slashed its estimate of recoverable reserves from California’s Monterey Shale by 96 percent, saying oil from the largest U.S. formation will be harder to extract than previously anticipated.
“Not all reserves are created equal,” EIA Administrator Adam Sieminski told reporters at the Financial Times and Energy Intelligence Oil & Gas Summit in New York today. “It just turned out it’s harder to frack that reserve and get it out of the ground.”
The Monterey Shale is now estimated to hold 600 million barrels of recoverable oil, down from a 2012 projection of 13.7 billion barrels, John Staub, a liquid fuels analyst for the EIA, said in a phone interview. A 2013 study by the University of Southern California’s Global Energy Network, funded in part by industry group Western States Petroleum Association, found that developing the state’s oil resources may add as many as 2.8 million jobs and as much as $24.6 billion in tax revenues.
http://www.bloomberg.com/news/2014-05-21/eia-cuts-monterey-shale-estimates-on-extraction-challenges-1-.html?cmpid=yhoo
From 13.7 billion barrels down to 600 million. Using a little math, that means the hoped for 2.8 million jobs become 112k and the $24.6 billion in tax revenues shrink to $984 million.
The reasons why are no surprise to my readers, as over the years we’ve covered the reasons why the Monterey was likely to be a bust compared to other formations. Those reasons are mainly centered on the fact that underground geology is complex, that each shale formation has its own sets of surprises, and that the geologically-molested (from millennia of tectonic folding and grinding) Monterey formation was very unlikely to yield its treasures as willingly as, say, the Bakken or Eagle Ford.
But even I was surprised by the extent of the downgrade.
This takes the Monterey from one of the world’s largest potential fields to a play that, if all 600 million barrels thought to be there were brought to the surface all at once, would supply the US’ oil needs for a mere 33 days.
Yep. 33 days.
And along with that oil come tremendous water demands, environmental, infrastructure and air pollution damages.
So if you do go for it California, the rest of the country will be your best buddy for a little more than 4 weeks. But don’t keep calling us afterwards, as we’ll be off to the next oil party (if there are any other ones to be had). But know that, sure, we still respect you.
Of course I’m being sarcastic here. But if I lived over or near a shale formation, I would be putting up a hell of a fight to prevent the many long-term damages and airborne pollutants that inevitably accompany such short-lived fracking operations.
At this point, you might be wondering just how the EIA got its estimate so badly wrong. The answer is that the EIA relied on a private firm, one now scraping corporate relations and PR egg off its face:
U.S. officials cut estimate of recoverable Monterey Shale oil by 96%
May 20, 2014
Federal energy authorities have slashed by 96% the estimated amount of recoverable oil buried in California’s vast Monterey Shale deposits, deflating its potential as a national “black gold mine” of petroleum.
Just 600 million barrels of oil can be extracted with existing technology, far below the 13.7 billion barrels once thought recoverable from the jumbled layers of subterranean rock spread across much of Central California, the U.S. Energy Information Administration said.
The new estimate, expected to be released publicly next month, is a blow to the nation’s oil future and to projections that an oil boom would bring as many as 2.8 million new jobs to California and boost tax revenue by $24.6 billion annually.
The 2011 estimate was done by the Virginia engineering firm Intek Inc.
Christopher Dean, senior associate at Intek, said Tuesday that the firm’s work “was very broad, giving the federal government its first shot at an estimate of recoverable oil in the Monterey Shale. They got more data over time and refined the estimate.”
http://www.latimes.com/business/la-fi-oil-20140521-story.html
Wait a minute. The 2011 California shale oil estimate that launched a flotilla of excited “shale miracle” headlines, led the EIA to publish an estimate of the Monterey at 13.7 billion recoverable barrels, and helped to form a national narrative around potential US “energy independence” was done by a Virginia engineering firm?
Okay, well who are they exactly?
Looking at their website, clearly put together using cheesy stock photos, early Internet font formats, and touting the fact that they’ve been a business “since 1998″ doesn’t quite project the hoped-for aura of gravitas and seasoned competency:
Seriously? A clock in an arch? Typing fingers? A woman gesturing in a meeting and a guy on a phone?
I mean, does anyone other than me have a “no lame stock photos” requirement of the businesses they use to generate the data used to justify a major geopolitical energy realignment? It’s the closest thing I have to a hard rule.
Okay, just kidding again….sort of.
At any rate, the bottom line here is that the EIA relied on this firm’s back-of-the-envelope calculations which turned out to be — surprise! — unreliable. And now, Occidental Petroleum is scrambling to get its assets out of the Monterey and deployed somewhere more promising.
The lesson to be learned here is: don’t believe every headline you read. Consider the source, and more importantly — stock photos or not — always question the data.
Price, It’s Always About Price
However, I cannot completely write off the entire 96% as ‘gone’ because the media has left off the most important part, as they always do: the role of price.
Without having access (yet) to the latest well data to know exactly what sort of potential disaster we’re dealing with, the correct way to write-down an oil resource is to say: at today’s oil prices, this asset can yield (or is worth) $X.
At higher prices, it is certainly true that more of the resource will be ‘worth’ going after.
But as you and I know, the price mechanism is just a means of obscuring the most important variable: the net energy that will be returned from a given play. Generally speaking, the higher the price (which is often a function of the energy required to extract), then the less net energy will come from that play.
So anytime we hear that a given play is being ‘written down’, as the Monterey is in rather spectacular fashion, what’s really being said is that the net energy from the play is a lot less than prior and/or existing plays, and will not be useful to us until higher oil prices come along. In the case of the Monterey, much higher prices.
Whether we have an intact, functioning and highly complex economy of the sort necessary to develop and deliver the technology required to prosecute such low-yielding plays is another matter entirely. My best guess as of today is, ‘probably not.’
Conclusion
Today’s write down of the Monterey shale asset is a huge blow to Occidental Petroleum specifically, to California’s energy and employment dreams more broadly, and to the US’s energy dreams at a national level.
This is not surprising at all to anybody following the shale story with a critical eye. We always knew that the best plays were being prosecuted first for obvious reasons; it’s human nature to go after the easy stuff first. And this is especially true for the folks in the oil patch.
The best plays were tapped first, not by some accident of technology or lucky holes plunged into the ground, but because they were cheapest to prosecute. The remaining shale deposits are less rich, more costly to explore, and the profitable pockets much harder to find.
Your main take-away is this: the US has a lot less shale reserves on the books today than it did yesterday. Look for future downward revisions as the other remnant shale plays are poked and prodded and found to be wanting.
Investors need to be wary here too. The hype about shale prospects are wedded to a Wall Street cheap capital machine that is showing clear signs of over-heating:
Shale Drillers Feast on Junk Debt to Stay on Treadmill
Apr 30, 2014
Rice Energy Inc. (RICE), a natural gas producer with risky credit, raised $900 million in three days this month, $150 million more than it originally sought.
Not bad for the Canonsburg, Pennsylvania-based company’s first bond issue after going public in January. Especially since it has lost money three years in a row, has drilled fewer than 50 wells — most named after superheroes and monster trucks — and said it will spend $4.09 for every $1 it earns in 2014.
The U.S. drive for energy independence is backed by a surge in junk-rated borrowing that’s been as vital as the technological breakthroughs that enabled the drilling spree. While the high-yield debt market has doubled in size since the end of 2004, the amount issued by exploration and production companies has grown nine-fold, according to Barclays Plc. That’s what keeps the shale revolution going even as companies spend money faster than they make it.
“There’s a lot of Kool-Aid that’s being drunk now by investors,” Tim Gramatovich, who helps manage more than $800 million as chief investment officer of Santa Barbara, California-based Peritus Asset Management LLC. “People lose their discipline. They stop doing the math. They stop doing the accounting. They’re just dreaming the dream, and that’s what’s happening with the shale boom.”
http://www.bloomberg.com/news/2014-04-30/shale-drillers-feast-on-junk-debt-to-say-on-treadmill.html
I guess there’s a little less dreaming going on in the Monterey shale patch this morning.
Not to pick on RICE here, because they are more typical than not, but when you are spending $4 to earn $1, somebody ought to be asking some hard questions. Especially the investors.
More broadly, I have been clearly concerned by the recent reports indicating that the shale operators have been spending far more in CAPEX than they’ve been generating in operating earnings.
That’s a larger subject that I’ve covered in more detail in recent reports, but the summary is this: over the past four years, free cash flow (FCF) has been negative for most of the major shale players.
Which leads us to the really big question: When will all these shale drilling efforts actually generate positive FCF?
In the case of the Monterey, and at today’s prices, the answer looks to be ‘Never.’