$60 / Barrel by year end

[a_majoor]

wo articles from "The American Interest" on what is now being called "Cost recalibration". The new realities of oil production and pricing will change a lot fo long held assumptions, and not just about energy:

https://www.the-american-interest.com/2017/05/18/shale-isnt-opecs-only-problem/

Shale Isn’t OPEC’s Only Problem

When OPEC meets in Vienna next week to discuss an extension of the production cut agreement it brokered with eleven other non-cartel petrostates, America’s shale producers won’t be the only suppliers on its mind: a number of other non-OPEC nations are also notching production increases that, taken together, are counterbalancing the petrostate effort to reduce the global oversupply of crude. The WSJ reports:

Not counting the U.S. and the 24 countries in the OPEC-led coalition, the next five biggest producing countries are poised to increase their combined output by around 300,000 barrels a day, according to a Wall Street Journal survey of five oil research agencies and investment banks.

Canada and Brazil, the world’s seventh and 10th biggest suppliers, are projected to record the fastest production growth outside the U.S. this year as long-planned projects come online. Norway and the U.K. are also seen as raising production this year, though by smaller amounts. Of the five countries, only China’s output is expected to fall this year.

This is part of the new oil reality that Daniel Yergin recently described as one characterized by a “cost recalibration.” Outside of the petrostate stalwarts, producers are adjusting to today’s lower price environment by trimming the fat and reaping efficiency gains (enabled by information technology) to stay profitable even at $50 per barrel crude. We’re seeing that most clearly in America’s shale formations, but Brazil, Canada, Norway, and the UK are on the same track.

OPEC & co. will almost certainly agree to extend their cuts through the end of the year next week. Saudi Arabia and Russia, the two biggest producers by output in this makeshift coalition, have already expressed a willingness to constrain output through March of next year. At this point, a majority of OPEC’s membership has come out in support of more cuts, which could make next week’s summit “a bit of a non-event,” according to commodity analyst Jan Edelmann.

But if this plan had worked, it wouldn’t need to be extended—the fact that this group is being forced to continue to cede market share is in itself an admission of defeat. America may be this group’s enemy number one, but all around the world oil supplies are surging.

and

https://www.the-american-interest.com/2017/05/17/the-new-oil-reality/

The New Oil Reality
Walter Russell Mead

The global oil market is so different today as compared to what it was three years ago that it’s borderline unrecognizable. These changes are being hammered out in a battle between petrostate producers on the one side pushing for a rebalancing of supply and demand by cutting their own output, and a group of upstarts on the other, led by U.S. shale companies, that want to fight to bring the costs of production down permanently from their previously high ($100+ per barrel) levels. No one is more qualified to put this in its proper context than the famed oil historian Daniel Yergin, and in a recent piece for the WSJ he traces what he calls a “cost recalibration” that’s affecting producers not only in America’s shale formations, but outside of the United States as well. He writes for the WSJ:

This cost recalibration is happening everywhere, as a new analysis by IHS Markit shows. Canada’s oil sands have always been among the highest-cost, yet some new projects can produce near $50 a barrel. In Russia, costs have come down more than 50%. Even deep waters offshore can now produce at less than $50. In March the CEO of the Norwegian company Statoil told the CERAWeek conference that owing to a wholesale redesign, a project in the North Sea that had originally required $75 a barrel to be economical now needs just $27 a barrel. […]

As oil producers get back to business all over the world, some of the big cost savings will be given back, which will support rebalancing—so oil prices will rise. But the entire business has been recalibrated to a lower price level. An industry that had become accustomed a few years ago to $100 oil now regards that as an aberration that will not recur absent an international crisis or a major disruption. The lessons about costs since the price collapse are not going to go away. They are too powerful to forget, and too painful.

From Yergin’s expert point of view, the days of $100 oil are behind us, barring some unforeseen catastrophe. That is a major shift not only for the oil market, but also for how we think of energy in the 21st century. While not entirely diminished, fears of scarcity are being replaced by concerns over downstream bottlenecks and how best to handle this newfound abundance of hydrocarbons. These are, as they say, good problems to have.

There’s another thought here: one of the big drivers in the falling costs of oil production is the use of information technology at all levels of the production process—from looking for likely places to drill to the design of rigs and all through the pumping and refining process. These enhanced efficiencies are likely to continue as the full impact of IT is only beginning to be felt.

It’s hard to exaggerate just how striking this is. The oil industry is more than 150 years old, and oil ‘should’ be getting more expensive to find and to pump, not less. The most obvious oil fields should have been found first, and the most promising wells dug long ago. We should now be living in a world of diminishing returns, with more and more money chasing less and less oil. It was this prospect that led so many doom and gloom thinkers in the 20th century to agonize over ideas like “peak oil”.

All that may happen some day, but apparently not soon. The information revolution is so powerful that it can reverse what would otherwise be the natural tendency of the oil market.

But this points to two even bigger stories. One is that the same forces that are making oil and gas so much cheaper and easier to find and extract will also be affecting other commodities. We can expect mining to become more efficient as well, and in fact there’s already evidence of that happening.

And there’s more. One of the big mysteries of the information revolution is the question of productivity. We keep using all this tech that clearly lets us do more with less, but instead of galloping higher, productivity levels have stagnated. What’s going on?

It’s possible that the productivity increases are appearing as lower prices rather than as higher incomes. If the price of oil falls from $100 per barrel to $50 per barrel due to increasingly cheap and efficient methods of production, then everybody in the industry is more productive in terms of barrels of oil per hour of work, but since the oil price has gone down, that productivity increase won’t be captured by statistical methods that calculate productivity in terms of money.

And that is just part of the larger story: that the extraordinarily deep and sustained collapse in the price of information is disguising the enormous increase in the productivity of everyone who works with the defining product of our time. Journalists, to take one (for the staff here at TAI) depressing example, are producing much more “information” than ever before. Armed with the internet, the TAI writers can cover a range of subjects with a wealth of detail on a daily basis in a way that a much larger staff simply could not have matched 20 years ago.

On the other hand, the very explosion in the productivity of writers generally has meant a rapid collapse in advertising revenue. Measured in units of information processed and produced, the TAI staff is much more productive than past generations of journalists; but the very abundance of supply caused by the productivity of the sector leads to a crash in values that, again, makes the productivity revolution invisible to methods of measurement that look solely to revenue per work hour.

At the same time, the collapse in the cost of information helps disguise the enormous increase in living standards for most people. Anybody connected to the internet and using a smartphone today devours quantities of information today that medium sized companies could not produce in the 1970s. The African villager with a solar powered smartphone has more access to more information than Louis XIV in the halls of Versailles.

But since the cost of this product is falling so quickly, the rise in living standards we are living through isn’t measured.

Just as the industrial revolution forced economists and businesses to find new ways to measure output, the information revolution is likely to lead to revolutions in the way we measure economic performance in the 21st century.

 

[a_majoor]

Inexpensive oil has other follow on effect, such as an expansion of the petrochemical industry:

https://pjmedia.com/instapundit/268418/

PLASTICS: The Shale Revolution’s Staggering Impact in Just One Word.

That boom in drilling has expanded the output of oil and gas in the U.S. more than 57% in the past decade, lowering prices for the primary ingredients Dow Chemical Co. uses to make tiny plastic pellets. Some of the pellets are exported to Brazil, where they are reshaped into the plastic pouches filled with puréed fruits and vegetables.

Tons more will be shipping soon as Dow completes $8 billion in new and expanded U.S. petrochemical facilities mostly along the Gulf of Mexico over the next year, part of the industry’s largest transformation in a generation.

The scale of the sector’s investment is staggering: $185 billion in new U.S. petrochemical projects are in construction or planning, according to the American Chemistry Council. Last year, expenditures on chemical plants alone accounted for half of all capital investment in U.S. manufacturing, up from less than 20% in 2009, according to the Census Bureau.

Integrated oil firms including Exxon Mobil Corp. and Royal Dutch Shell PLC are racing to take advantage of the cheap byproducts of the oil and gas being unlocked by shale drilling. The companies are expanding petrochemical units that produce the materials eventually used to fashion car fenders, smartphones, shampoo bottles and other plastic stuff being bought more and more by the world’s burgeoning middle classes.

“It’s a tectonic shift in the hemispherical balance of who makes what to essentially feed the manufacturing sector,” said Dow Chief Executive Andrew Liveris, referring to the growth of production in the U.S. His company now plans to double down on its U.S. expansion with a $4 billion investment in a handful of projects over the next five years.

 

[a_majoor]

A twofer today. The effects of shale oil have been immense on their own, but the downstream effects and forcing industry to modernize and squeeze out costs in more conventional oil plays is also impressive:

https://www.the-american-interest.com/2017/06/26/release-the-kraken/

"PEAK" OIL?
Release the Kraken

North Sea oil and gas production has been waning for years now, leading to major energy security concerns for the United Kingdom. But as fields mature and companies face down the technically difficult and extraordinarily expensive task of decommissioning inactive offshore rigs, bright spots still remain for production in the region. The latest comes to us courtesy of the FT, which reports on the Kraken, a new field that has come online just in time to save the British oil company Enquest from insolvency:

EnQuest has started producing oil from its Kraken field in the North Sea, one of the most significant projects in the region in the past 10 years, paving the way for it to pay down its hefty debt load…Kraken has an estimated life of up to 25 years and is forecast to produce 50,000 barrels of oil a day at peak. Cash generated from production will help EnQuest strengthen its stretched balance sheet, which came under significant strain as the company was forced to press ahead with the costly project while crude prices crashed.

We live in a new oil reality, characterized by low prices and a heightened focus on increasing productivity while reducing expenses. The shale boom has made the global oil market much more competitive, and companies have had to become leaner and meaner to survive. That’s been borne out in the North Sea, where producers have fought tooth and nail to cut costs to stay afloat plumbing a resource well past its prime. Average operating costs in the North Sea have fallen 45 percent over the past few years, and EnQuest’s Kraken project has been similarly streamlined. The FT continues:

The company has fought hard to reduce the costs of the Kraken development, and the final gross capital expenditure cost of $2.5bn was $700m lower than the original budget when it was sanctioned in 2013.

EnQuest said the 13 wells at Kraken that had been drilled so far were being brought online in a “phased manner” in an effort to maximise long-term productivity. The field’s production capacity would increase next year as further wells came on stream, the company added.

Back in March, a different British oil firm announced the discovery of a new oil field that analysts said was “likely to be the biggest new oil discovery beneath UK waters this century.”

The North Sea drilling industry’s best days are still almost certainly behind it, but its future isn’t as grim as it once looked, thanks to new finds and a steady pursuit of cost cutting. That’s an important development for UK, European, and global energy security.

and:

https://www.the-american-interest.com/2017/06/27/even-shales-secondary-effects-staggering/

KNOCK-ON
Even Shale’s Secondary Effects Are Staggering

Hydraulic fracturing and horizontal well drilling have given American companies access to vast new reserves of oil and gas, and have dramatically increased the production of hydrocarbons here in the United States. Since 2010, the U.S. has added roughly 5 million barrels of oil per day, and natural gas production is up roughly 33 percent over that same time period.

The effects of this energy revolution have been felt the world over—they’ve brought gasoline prices down for American drivers while remaking the global oil market. But here in the U.S., they’ve been an enormous boon to an industry most Americans are likely unfamiliar with: petrochemicals. As the WSJ reports, cheap petrochemical feedstocks (a byproduct of oil and gas drilling) are pushing the U.S. petrochemical industry to new heights:

The scale of the sector’s investment is staggering: $185 billion in new U.S. petrochemical projects are in construction or planning, according to the American Chemistry Council. Last year, expenditures on chemical plants alone accounted for half of all capital investment in U.S. manufacturing, up from less than 20% in 2009, according to the Census Bureau. […]

“It’s a tectonic shift in the hemispherical balance of who makes what to essentially feed the manufacturing sector,” said Dow Chief Executive Andrew Liveris, referring to the growth of production in the U.S. His company now plans to double down on its U.S. expansion with a $4 billion investment in a handful of projects over the next five years. […]

The new investment will establish the U.S. as a major exporter of plastic and reduce its trade deficit, economists say. The American Chemistry Council predicts it will add $294 billion to U.S. economic output and 462,000 direct and indirect jobs by 2025, though analysts say direct employment at plants will be limited due to automation.

That’s a lot of money, and it’s a staggering number of jobs. This is one of the unheralded consequences of this new energy renaissance that the U.S. finds itself in, and it’s creating a rosier economic outlook for years to come.

This big win for America has also produced a number of losers, namely Middle Eastern petrostates who in years past had looked to petrochemicals as an important industry to help them diversify away from simply pumping and exporting crude oil and natural gas. But thanks to cheap shale-sourced petrochemical feedstocks, the lion’s share of new investment money in the industry is heading the United States’ way. Once again, shale is lifting the U.S. up even as it puts petrostates in peril.

 

[a_majoor]

The big problem for Canada is the NIMBY,  "Greens" and others are working against the exploitation of our oil wealth, driving up prices for consumers (and especially the poor) and depriving Canada and Canadians of massive amounts of income. The Americans will benefit the most from the metro-revolution, and we can see our economy lifted somewhat by the growth of the US economy, but that also puts us more firmly in the American orbit and at the whims of any US Administration:

https://www.the-american-interest.com/2017/07/02/north-america-making-opec-irrelevant/

THE NORTH AMERICAN ENERGY BOOM
North America Is Making OPEC Irrelevant

A coalition of OPEC members and other petrostates agreed to reduce its collective production by 1.8 million barrels per day through next March, but surging North American crude production is threatening to effectively cancel out those cuts. As the FT reports, oil output in Canada’s oil sands is set to jump as projects funded well before the decline in crude prices come online over the next year and half:

A forecast released this month by the Canadian Association of Petroleum Producers sees the country’s output increasing by 270,000 barrels a day in 2017 and another 320,000 b/d next year. That combined two-year Canadian increase is equal to almost a third of Opec’s production cuts that it made with allies like Russia at the beginning of this year in an effort to raise prices.

Canada isn’t even the sharpest North American thorn in OPEC’s side, though. The United States has seen its own oil output jump 550,000 barrels per day since last November, when these petrostate cuts were first announced. American production has dipped slightly in recent weeks as producers have scaled production back slightly due to flagging oil prices, but the outlook for shale over the rest of the year is still quite strong.

Combined, Canadian and U.S. oil production is set to grow more than a million barrels per day next year, as compared to where these North American countries were when the petrostate cuts first went into place. That nullifies more than half of that petrostate production draw down.

And it’s important to note that, going forward, OPEC will be the victim of any success it manages with these cuts. If prices do start to rise—a very big if, given current market conditions—then shale producers will quickly be able to take advantage of the rebound by ramping up their own production.

This all adds up to a truth that the oil historian Daniel Yergin hit on last year: ““[t]he era of Opec as a decisive force in the world economy is over.” And while these petrostates are coming to terms with their decline in relevance, it’s North American producers that are emerging as the new dynamic force in the global oil market.

and if you want a non fossil fuel alternative to keep your green crews:

https://www.the-american-interest.com/2017/07/03/growing-better-biodiesel/

ALGAE WHIZ
Growing a Better Biodiesel

It’s been a good week for biofuels—one of the first ones in recent memory—as fresh off the heels of ExxonMobil’s announcement of an algae-based biofuel breakthrough, researchers in Chile have reported their own progress in extracting biodiesel from microalgae. Reuters reports:

Experts from the department of Chemical Engineering and Bioprocesses at Chile’s Catholic University said they had grown enough algae to fragment it and extract the oil which, after removing moisture and debris, can be converted into biofuel.

“What is new about our process is the intent to produce this fuel from microalgae, which are microorganisms,” researcher Carlos Saez told Reuters. […]

Saez said a main challenge going forward would be to produce a sufficient volume of microalgae. A wide variety of fresh and salt water algaes are found in Chile, a South American nation with a long Pacific coast. The scientists are trying to improve algae growing technology to ramp up production at a low cost using limited energy, Saez said.

This isn’t only exciting because it has the potential to provide a new source of valuable transportation fuel—it also represents an alternative to corn-based ethanol, the predominant source of biofuels in the American market, and an energy option that causes many more problems than it solves. To recap, corn-based ethanol: raises global food prices, starving the world’s poor; raises prices at the pump; hurts American refiners; has been shown to hurt honeybee populations; and has been shown to actually raise greenhouse gas emissions, not lower them.

Yet here in the U.S., a 2007 law—the Renewable Fuel Standard (RFS)—mandates that increasing quantities of this problematic ethanol be blended in to our country’s fuel. Biofuels’ appeal is obvious: being able to grow transportation fuel could, under the right circumstances, be both beneficial to energy security and the environment. That’s not happening under the RFS, but it could happen if we focused more on advanced biofuels like, say, those sourced from algae than we did on ethanol distilled from corn.

 

[a_majoor]

The long term price seems to have stabilized at @ $50/bbl, and it is hurting many or our potential enemies. We need to work on advancing the benefits of cheap energy to as many Canadians as possible to reap the benefits both individually and was a nation:

https://www.the-american-interest.com/2017/07/22/cheap-crude-hell-oils-old-guard/

PETROSTATES IN PERIL
Cheap Crude Is Hell for Oil’s Old Guard

We live in a new oil reality. Production is surging around the world, and supplies are coming from a number of new places (read: from outside of the oil cartel OPEC). Crucially, the price of a barrel of oil today is less than half of what it was three years ago, and $50 seems to be the new market equilibrium for crude. North America, and in particular the United States, has emerged as the biggest winner in this global transition, but this new reality has produced a large number of losers, too. Petrostates—countries whose regimes have grown fat on oil revenues—have adapted poorly to changing market conditions, and as Bloomberg reports the future looks dim for this category of producers:

Energy-rich Gulf Arab nations have scrambled to adjust to the slump in oil prices since 2014. Three years on, their economies are mired in weak growth and largely just as dependent on crude as they ever were.

The six members of the Gulf Cooperation Council have curtailed subsidies and introduced new taxes to bolster non-oil revenue and reduce ballooning budget deficits. Much of the savings, however, have been due to spending cuts and the pace of reforms has slowed across the region, said Monica Malik, chief economist at Abu Dhabi Commercial Bank. Overall progress in economic diversification has been limited, she said.

The collapse of crude prices hurt everyone in the business of supplying oil, but it was especially painful for petrostates, whose national budgets require a strong oil price to stay in the black. In an attempt to prod prices in the upward direction, OPEC and its ilk cobbled together a weak consensus in order to collectively reduce supplies, but that strategy has been wholly ineffective thus far. Prices remain stubbornly low, while petrostates are ceding valuable market share to upstate producers like America’s frackers. Meanwhile, OPEC members are openly bucking their commitments to cutting production. The cartel’s ability to influence the global market has never looked weaker.

If you’re a major oil producing country like Saudi Arabia, your options for balancing the national budget are few and far between. Without a way to induce a price rebound, petrostates are instead forced to cut national spending, though many are wary to do so as it runs the risk of fomenting social unrest.

Diversifying away from the oil business is the best long-term strategy for these struggling regimes, but that shift will take years if not decades—if it happens at all. In the meantime, OPEC’s members will be forced to accept tepid economic growth for the foreseeable future. If you live by the price of oil, you have to know that you’re going to die by it, too.

 

[a_majoor]

Some factors which may change the game yet again. The upside for President Trump is this will make oil shale and fracking even more valuable, and provide thousands of new American jobs as US production rushes to meet the demand. Equilibrium may still be between $50-60 USD/bbl, but we will see:

https://www.cnbc.com/2017/08/22/two-october-surprises-could-boost-oil-prices-analyst-says.html

Two October surprises could boost oil prices above $50
Oil prices will remain stuck around $50 a barrel unless the market gets an "October surprise," one analyst says.
Venezuela's state oil giant is barreling toward a debt default as soon as October.
President Donald Trump could snap sanctions back on Iran's oil industry.

Tom DiChristopher | @tdichristopher
Published 12:26 PM ET Tue, 22 Aug 2017  | Updated 2:36 PM ET Tue, 22 Aug 2017

Oil prices will remain stuck in a range near $50 a barrel unless one of two global hotspots delivers an October surprise to the market, jolting the cost of crude higher, according to Helima Croft, global head of commodity strategy at RBC Capital Markets.

The first potential shock Croft and her team at RBC are monitoring is a debt default by Venezuelan oil giant Petroleos de Venezuela SA. Oil production from the state-owned PDVSA has steadily slipped as the country grapples with a financial crisis after the collapse in crude prices in 2014 and years of economic mismanagement.

"They have $3.5 billion in national oil company debt coming due in October-November. If they default, that could be significant for Venezuela's production outlook," Croft told CNBC's "Squawk on the Street" on Tuesday.

Lower crude production from Venezuela would tend to support the oil market, which has been oversupplied for years.

The second surprise would come if the United States abandons an international deal that lifted sanctions on Iran. President Donald Trump could refuse to certify that Iran is complying with an accord that puts limits on its nuclear program. That could lead to the renewal of sanctions, which could impact Iran's oil production.

John Kilduff, founding partner at energy hedge fund Again Capital, said these geopolitical concerns may be somewhat overstated. He noted that the five other nations that negotiated the Iran nuclear deal would probably break with the U.S. and refuse to snap sanctions back on Iran.

He also noted that Venezuela is indebted to Russia and China. Russian oil giant Rosneft has amassed a large stake in PDVSA's U.S.-based refiner Citgo by bankrolling Venezuela. China has long lent Venezuela money in exchange for oil.

However, Rosneft has recently suggested it is done lending to PDVSA, which has less than $10 billion left in reserves, according to Croft.

"The math simply does not work on PDVSA staying solvent" without help from Russia and China, she said. "So we think this default is a clear and present danger.

 

[a_majoor]

However, free markets come to the rescue yet again:

https://www.the-american-interest.com/2017/08/23/mexicos-most-promising-shale-region-is-open-for-business/

Mexico’s Most Promising Shale Region Is Open for Business
JAMIE HORGAN

Don’t look now, but Mexico is hoping that its recent energy reforms will turn the shale boom from a uniquely American phenomenon into a uniquely North American one. This summer, Mexico opened up onshore blocks of its Burgos basin region, just south of Texas.

To date, the country’s state-owned oil company Pemex has been unable to successfully start commercial production in the basin, in part due to geology but certainly also the result of the company’s lack of expertise in shale. Now that Mexico’s oil and gas reserves are being opened up to private (and foreign) companies, there’s an opportunity for firms with the personnel, the experience, the equipment, and the culture necessary to get the country’s shale production up off (or maybe more accurately out of) the ground.

Prior to Mexico’s market reforms, Pemex was in a tailspin. The company was running the Red Queen’s race, spending more money and hiring more personnel while seeing production fall precipitously as fields matured. President Enrique Peña Nieto pushed through unpopular reforms to open Mexico’s struggling oil and gas industry up to competition, and after some fits and starts he’s seen that effort rewarded: on one day in July, there was a “world-class” oil discovery in the Gulf of Mexico by a group of private companies, a major increase in the estimated potential of another offshore field, and the successful sale of 21 out of 24 other offshore blocks on auction. In other words, there’s a lot of momentum building up in Mexico’s offshore hydrocarbon industry.

Onshore, progress has been slower, but Mexican shale—especially in the Burgos basin—looks to be a winner. America’s own highly productive Eagle Ford shale formation is part of that same basin, so there are hopes that Mexico might be able to replicate that success in their own shale fields.

But a burgeoning Burgos is only going to happen with private investment. As the U.S. Energy Information Administration (EIA) reports, Pemex is going to spend 91 percent less in Burgos this year than it did in 2012 “[in] response to decreasing natural gas prices over the past five years and energy reforms introduced in 2014 that gave priority to oil development.” For drillers north of the border, this should be seen as an opportunity, and thanks to Mexico’s reforms, it’s one they’re finally able to pursue.

Low natural gas prices in the U.S. will make Burgos development more difficult. We’re rapidly building out gas pipeline networks across the Mexican border in order to send our surfeit of shale gas south, which could threaten the viability of these new ventures. But unlike so many other countries with significant shale holdings around the world, Mexico has many things in common with the United States: proven geology, a low population density, and as of this summer, access to a variety of companies that know how to frack.

 

[Colin Parkinson]

Not sure they have enough water in many regions and the corruption and gangs will make working there very scary.

 

[a_majoor]

The internal problems of Mexico are Mexico's to solve.

On a larger scale, the increasing amount of oil being produced will keep prices low, which is a boon to poor people everywhere, provide cheap energy to power the Trump Administration's economic policies and put the hurt on enemies who derive a great deal of their income from petrodollars.

So overall, I think this is a net win for the West.

 

[a_majoor]

This is so far out of left field the initial reaction is WTF? But the person making this prediction apparently knows what he is talking about.....

https://www.forbes.com/sites/davidblackmon/2017/08/17/gilmer-we-should-view-the-permian-basin-as-a-permanent-resource/#43c615af56ff

Gilmer: We Should View The Permian Basin As A Permanent Resource
David Blackmon , CONTRIBUTOR

Opinions expressed by Forbes Contributors are their own.

If Gilmer's estimate of the real scope of Permian Basin oil is on target, it would represent a prize of somewhere between $25 - $100 trillion at current prices. the experts in our industry have historically massively underestimated the resource potential.

Allen Gilmer, Co-Founder and Executive Chairman at DrillingInfo, Inc., is not a man who minces words, an attribute that has served him well during a long career in the oil and gas industry.  When it comes to the Permian Basin and the amount of oil and gas resource contained in it, he becomes positively loquacious.

"We should view the Permian Basin as a permanent resource," he says, "The Permian is best viewed as a near infinite resource - we will never produce the last drop of economic oil from the Basin."

No one disputes that the resource in the Permian is huge, but 'infinite' is a big word.  I asked him to expand on that concept.  "That is the practical reality with the amount of resource that is in the ground," he says, "The research we've done indicates that we have at least half a trillion barrels in the Permian at reasonable economics, and it could be as high as 2 trillion barrels.  That is, as a practical matter, an infinite amount of resource, and it is something that has huge geopolitical consequence for the United States, in a very good way.  It has a huge consequence in terms of GDP, and right now it is creating an American energy global ascendancy."

Obviously, it is also a practical matter that the pace at which the industry produces the crude resource that underlies the Permian region in multiple formations will be constrained to some extent by commodity prices, costs, infrastructure and other potentially limiting factors.  We have seen the Basin go into another boom over the last 12 months despite relatively low prices and, more recently, rapidly rising costs.  Gilmer believes that infrastructure will be the most significant constraint going forward.

"The biggest thing that will get in the way of the Permian's growing to its full potential is infrastructure," he says, "I'm not sure you can really put any more trucks on that main highway [US 285] that goes up from Fort Stockton to Carlsbad."  He relates a story of a recent trip he and his wife took to Ruidoso, where his family has a home, and sitting at single highway intersection for more than 45 minutes because there was a mile-long backup of  mostly oilfield service trucks trying to get through.  "That used to be the back road I would take to go home to Ruidoso when I was a kid.  Those roads can't take that - you literally cannot put 50%, or even 20% more traffic on them.  So we are reaching infrastructure limits in the basin."

I had the idea for this interview when I saw Gilmer give a presentation at a conference in April, during which he discussed his view of the Permian, classifying it as America's "Super Basin." The data he presents to support his findings was stunning, and compelling.  Gilmer says one of the main reasons he's been giving a series of presentations this year was as a response to the current "Keep it in the Ground" movement coming from the anti-fossil fuel community.

 

[Colin Parkinson]

The internal problems of Mexico are Mexico's to solve.

On a larger scale, the increasing amount of oil being produced will keep prices low, which is a boon to poor people everywhere, provide cheap energy to power the Trump Administration's economic policies and put the hurt on enemies who derive a great deal of their income from petrodollars.

So overall, I think this is a net win for the West.

Kicking OPEC in the stones is just pure icing on a cake for us. I forsee a energy potential glut, with a variety of energy choices for Provinces, cities and municipalities to use. The problem might be that because of this glut, you won't be able to raise enough capital to usefully use it. On the westcoast, there are only 2 refineries, the biggest is scheduled to have a shutdown for a major upgrade next year, which means almost all the fuel for the lower westcoast must now come in by barge, tanker truck from Alberta or the US, so I foresee prices here in the $1.60 per litre range. There is no desire to build more refining capacity because the big companies have hita "sweet spot" where any drop in production capacity creates a benefit by driving up the price. Also the west coast refinery is limited by feedstock availability as the existing Kindermorgan pipeline is oversubscribed. Countries may have to step up to build certain energy oriented infrastructure and then lease them to companies to run to ensure that strategic commodities are available in times of crisis.   

 

[a_majoor]

Sadly, the deliberate throttling of infrastructure over the decades is the sticking point for truly bringing energy prices down. I wonder if there are emerging technologies which would allow for the creation of modular or even "mini" refineries which can be established near the oil fields? Decentralizing the system also makes it more robust and anti-fragile.

 

[PuckChaser]

It would also reduce the NIMBY pipeline opposers who love driving their SUV but think stopping a pipeline will save the environment.

 

[SeaKingTacco]

Sadly, the deliberate throttling of infrastructure over the decades is the sticking point for truly bringing energy prices down. I wonder if there are emerging technologies which would allow for the creation of modular or even "mini" refineries which can be established near the oil fields? Decentralizing the system also makes it more robust and anti-fragile.

I am not really sure that is possible. A frac tower is the size it is because of the physics involved. In a refinery, there are a lot of volatile compounds running around under high pressure. It takes a fair bit of effort to keep the whole thing from exploding. That part- keeping it from exploding- is expensive. If you make a refinery too small, it is difficult to pay back your sunk costs.

 

[Kirkhill]

I am not really sure that is possible. A frac tower is the size it is because of the physics involved. In a refinery, there are a lot of volatile compounds running around under high pressure. It takes a fair bit of effort to keep the whole thing from exploding. That part- keeping it from exploding- is expensive. If you make a refinery too small, it is difficult to pay back your sunk costs.

:cheers:

 

[jollyjacktar]

This might be a game changer for Alberta.  I hope so, they and the rest of us need a break.

Balls of bitumen: Calgary breakthrough will make oil pipelines unnecessary, researcher claims

Engineer says his team's spill-resistant pellets of heavy oil can be safely transported by rail

CBC News  Posted: Sep 06, 2017 2:54 PM MT| Last Updated: Sep 06, 2017 10:15 PM MT

A Calgary engineer thinks an invention he stumbled upon in the laboratory could transform the way Alberta gets its heavy oil to market.

Ian Gates was researching ways to upgrade bitumen when he and his team accidentally found a way to degrade it, making it even more viscous — which, in turn, led to a discovery that they could envelope the oil in self-sealing pellets, with a liquid core and super-viscous skin.

These tough little balls of bitumen could be a pipeline-free way of getting Alberta oil to markets cheaply, sustainably and with less risk of environmental harm, said a release from the University of Calgary's Schulich School of Engineering, where Gates is a professor.

"We've taken heavy oil, or bitumen, either one, and we've discovered a process to convert them rapidly and reproducibly into pellets," Gates told CBC News.

"With this, we can put it in a standard rail car. It can go to any port where a rail car goes, which is an immense number of them, to get product out from North America."

Gates says the pellets could be put in the thousands of rail cars built for coal that are now sitting idle.

Gates and his team of researchers have developed the technology to the point where they can make pellets of various sizes right at the wellhead, using about the same amount of energy as it takes to add diluent to the bitumen to liquefy it for shipping via pipelines.

"Think Advil," Gates said. "You have the chemical material ... we're then exposing that material, on the outside, to a set of heat, pressure conditions, that then yield a asphaltine-rich coating. So, really just a coating that bounds the inner material."

Environmentally safe

The pellets are tough and can be safely transported by rail or truck without worrying about spills. Because of a gas bubble injected inside each pellet, they are also buoyant, Gates says.

"They're nice and hardy. If you put them in water, they'll sit like that for a very long time," Gates said.

"It's a safe product for transport."

The research and the effort to translate it into a commercially viable idea was supported by the U of C's Innovate Calgary, the school's technology and business-incubation centre.

"We were able [to] connect with potential industry partners and customers who might help advance the technology to a field trial, and ultimately, a full scale solution," said Stace Wills, vice-president of energy at Innovate Calgary.

By November, the fully automated technology will be producing barrels of the tiny balls, the school says.

Over the next year we'll then scale that up to a several-hundred-barrel per day unit," Gates said.

He says there are several companies interested in moving the invention forward.

Once the pellets are transported, they can be reconstituted back to bitumen to be upgraded in the regular way, or they can be used in their pellet form.

The balls are also ideal for road paving, without the need to upgrade the product any further, Gates says.
\With files from Rebecca Kelly

http://www.cbc.ca/news/canada/calgary/bitumen-balls-pellets-pipelines-rail-train-transport-energy-alberta-technology-1.4277320

 

[a_majoor]

Saw the same story on NextBixFuture. I can only wonder about how the "usual suspects" will react to this development.

 

[a_majoor]

Good news for consumers, but probably bad news for the Canadian oil sector:

https://oilprice.com/Energy/Energy-General/Is-The-Oil-Glut-Set-To-Return.html

Is The Oil Glut Set To Return?
By Nick Cunningham - Dec 14, 2017, 5:00 PM CST

For the second month in a row, the IEA has poured cold water onto the oil market, publishing an analysis that suggests 2018 could hold some bearish surprises for crude.

The IEA’s December Oil Market Report dramatically revises up the expected growth of U.S. shale, which goes a long way to torpedoing the excitement around the OPEC extension.

Late last month, when OPEC agreed to extend its production cuts through the end of 2018, the U.S. EIA came out with data – on the same day as the OPEC announcement – that showed an explosive increase in shale output for the month of September, up 290,000 bpd from the month before.

Although there is a time lag on publishing production data, the huge jump in output in September, plus the spike in rig count activity over the past few weeks, points to strength in the U.S. shale sector. Against that backdrop, the IEA predicted that non-OPEC supply would grow by 1.6 million barrels per day (mb/d) in 2018, a rather significant upward revision of 0.2 mb/d compared to last month’s report.

Adding insult to injury for OPEC, the IEA sees oil demand growing by just 1.3 mb/d. In other words, supply will grow at a faster pace than demand next year, opening up a global surplus once again. “So, on our current outlook 2018 may not necessarily be a happy New Year for those who would like to see a tighter market,” the IEA said. The surplus will be front-loaded – the first half of the year will see a glut of about 200,000 bpd.

“A lot could change in the next few months but it looks as if the producers’ hopes for a happy New Year with de-stocking continuing into 2018 at the same 500 kb/d pace we have seen in 2017 may not be fulfilled,” the agency wrote. In the past few months, a sense of bullishness and optimism returned to the oil market for the first time in years, but the IEA warned that it won’t last.

The news wasn’t all bad for oil bulls. OPEC production fell by 130,000 bpd in November, due to lower output in Saudi Arabia, a rather large decline in Angola, and the continued erosion of output from Venezuela. It is the fourth consecutive month of falling output from OPEC, and the compliance rate for the cartel jumped to 115 percent in November, the highest rate so far this year. That bodes well for the extension of the deal – OPEC and its partners seem resolved to keep compliance high heading into 2018.

Inventories also continue to decline. The IEA said that OECD commercial stocks fell by 40.3 million barrels in October to 2,940 mb, the lowest level since July 2015. That decline was almost twice as large as usual for this time of year. And for crude inventories specifically, they fell counter-seasonally by 19.7 mb, including the first decline in China this year.

But even there, the IEA was quick to point out reasons to be bearish, noting that the inventory drawdowns will soon end. “Going into 1Q18, our balances imply that global oil stocks will increase by 300 kb/d, assuming stable OPEC crude production of 32.5 mb/d,” the IEA said in its report.

Those increases in inventories in 2018 largely come down to U.S. shale, which continues to grow at an impressive rate. Rystad Energy says that almost 1,000 horizontal wells were completed in October, the highest total since March 2015. That should ensure a rush of fresh supply will be added onto the market by the end of this year and into 2018.

Overall, the downbeat conclusions from the IEA report were largely backed up by OPEC itself a day earlier. The cartel published data that also anticipated large increases in U.S. shale output, including an upward revision for 2017 output by 150,000 bpd – an acknowledgement that shale drillers are adding supply at a faster rate than expected. More ominously, OPEC predicts that the U.S. will add more than 1 mb/d of new supply in 2018 – a truly staggering figure.

Putting it all together, OPEC is essentially keeping 1.2 mb/d off of the market in 2018 so that the U.S. can add 1 mb/d. It’s a quite a gamble; a bet that by doing so, the group can prevent oil prices from falling. But the payoff is debatable. OPEC is selling less oil and allowing the U.S. to sell more.

The bet is that next year inventories will fall and oil prices will gradually rise, but the IEA’s report predicts that such a scenario may not play out.

By Nick Cunningham of Oilprice.com

 

[Cdn Blackshirt]

Bigger issue for Canadian producers (and drillers) is the pipeline shortage created by JT and pals.  Canadian oil is currently selling at at $26 discount to WTI because we don't have the pipeline capacity to get the oil we do produce to markets.

Unforgivable.....

 

[Oldgateboatdriver]

Yes, the lack of pipeline is an issue (partial - even with all the pipeline we want, there would still be a discount on Albertan crude in the market because, while pipeline are cheaper than trains, there is still a much greater transportation cost than Texas light faces), however, let's not then destroy the argument by blaming JT for Canada not having these pipelines today. They take years and years and years to build and bring in line and JT has only been in power of the last two years.

The fault (if any) lies as much, if not more, with the politicians of all stripes that preceded him and did not act at a time where they could have acted.