What follows is a discussion in which I will post/share industry related articles that I believe to be of general interest to some who frequent this site.

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Source: http://www.bizjournals.com/pittsburgh/blog/energy/2014/11/shale-wel...

Shale wells become leading source of natural gas - and Pennsylvania is second-biggest producer

Nov 25, 2014, 11:48am EST
Sam KusicStaff Reporter- Pittsburgh Business Times

Shale gas wells accounted for more natural gas production than any other type of well in 2013, marking the first year that has happened, according to the U.S. Energy Information Administration.

According to the administration, shale gas wells provided 40 percent of the gas produced in the United States last year, about 33 billion cubic feet per day.

"New technology has enabled producers to shift production to resources that are now easier to reach and have lower drilling costs. These trends have been reflected in a lower market price of natural gas," the administration said in a report.

Of the shale gas states, Pennsylvania has become the second-largest producer, producing 8 billion cubic feet per day in 2013.

Almost all the production growth came from the Marcellus Shale, the administration said.

"Shale gas production from the Utica play is increasing, but this volume remains small by comparison."

The administration said the top producing state is Texas, and its shale fields yielded 11 billion cubic feet per day in 2013.

Combined, Texas and Pennsylvania, along with Louisiana and Arkansas, accounted for 79 percent of U.S shale production.

Sam Kusic covers energy for the Pittsburgh Business Times.

PA will overtake Texas for NG, it is trending towards this. Of course, it wont come near Texas in Oil production.

Barry Soetoro's BFF, Warren Buffet, buys the Fracing Chemical subsidiary of Weatherford International.

Eat your heart out Paul Heckbert, your hero has (once again) sold you out!

Source: http://fuelfix.com/blog/2014/12/01/weatherford-to-sell-units-to-buf...

Weatherford to sell units to Buffett-owned company for $825 million

HOUSTON – Swiss oil-field equipment provider Weatherford International is planning to sell its chemistry and drilling fluids businesses for $825 million in cash plus potential earnout to a chemicals company owned by billionaire Warren Buffett.

The sale, announced Monday, includes an influx of $750 million in cash and a $75 million potential increase tied to the businesses’ earnings after the deal closes. The deal is expected to close before the end of the year.

Weatherford said it will use the proceeds of the deal to pay down debt, in the latest in a string of moves by the company to sell off its least lucrative businesses. The sale comes as oil prices have fallen below $70 for the first time in four years.

The company’s engineered chemistry business is central to the chemical cocktails the oil and gas industry uses as additives for drilling and stimulating wells. The drilling fluids business boosts the additives oil companies use in drilling operations.

The deal boosts Weatherford’s cash from its divested proceeds to $1.8 billion this year, and will likely mean it will have $6.6 billion to $6.8 billion in debt by the end of the year, “substantial progress” on its goals to dial down the debt on its balance sheet, Weatherford CEO Bernard Duroc-Danner said in a written statement.

The buyer, Ohio-based specialty chemicals company Lubrizol Corp., gets a bigger footprint in the oil and gas industry.

“For us, it is a decisive move into a large adjacent market space that, we believe, will value the combined technologies, fluid formulation capabilities and applications knowledge of our legacy and newly acquired businesses,” said James Hambrick, CEO of Lubrizol, in a written statement.

The two businesses will probably collect a combined $425 million in revenue this year, said Thomas Curran, an analyst with FBR Capital Markets, who was citing Spears & Associates.

“There is an expanding pack of general industrials/conglomerates — more numerous and diverse than most appreciate — that are executing or seriously considering acquisitions as a means of entering or expanding within certain oil field services niches,” Curran wrote in a note to clients.

Source: http://www.foreignpolicy.com/articles/2014/06/20/russias_quiet_war_...

Could it be that our resident Troll, is paid by someone (maybe Vladimir Putin) to post anti-fracing propaganda?

Anti-fracing is pro-Russia.

Anti-fracing is pro-Saudi Arabia.

Anti-fracing is Anti-America!

Comrade, would you please tell us who is paying you to post your agitprop; enquiring minds want to know?

Report

Russia's Quiet War Against European Fracking

Environmentalists trying to block shale gas exploration across Europe are unknowingly helping Putin maintain his energy leverage over the continent.

Russia is trying to maintain its energy stranglehold over Europe by backing movements across the continent to demonize fracking, the head of NATO alleged. It is part of Russia's broader use of soft power and covert means to complement its more overt efforts to reassert influence in Europe and keep countries there from developing alternatives to an energy addiction worth $100 million a day to Moscow.

"I have met allies who can report that Russia, as part of their sophisticated information and disinformation operations, engage actively with so-called non-government organizations -- environmental organizations working against shale gas -- obviously to maintain European dependence on imported Russian gas," NATO chief Anders Fogh Rasmussen said after a Chatham House speech this week.

NATO officials said Rasmussen's remarks were meant to underscore NATO's growing unease with Europe's energy security situation. "Clearly, it is in the interest of all NATO allies to be able to have adequate energy supplies. We share a concern by some allies that Russia could try to obstruct possible projects on shale gas exploration in Europe in order to maintain Europe's reliance on Russian gas," a NATO official told Foreign Policy.

Hydraulic fracturing, or fracking, has unleashed an energy boom in the United States. But the practice, which is designed to tap previously unreachable stores of natural gas by injecting a chemical cocktail at high pressure to break apart shale formations deep underground, also generates plenty of environmental opposition. Critics say fracking can poison underground stores of drinking water.

In Europe, that opposition is particularly fierce, both because environmental groups have more political power than in the United States and because higher population densities magnify the possible damaging effects of the drilling practice. Some countries have banned fracking outright; others, including France and Germany, have imposed onerous regulations that effectively make the practice illegal, though they are reconsidering fracking in light of the standoff with Russia over Ukraine.

Russian energy firms and officials, as well as Kremlin-controlled media, have lambasted fracking on environmental grounds for years. Top Gazprom officials and even Russian President Vladimir Putin have attacked the technology, which, if adopted, could ease Europe's dependence on Russian gas.

But one thing has for years puzzled energy experts: Well-organized and well-funded environmental opposition to fracking in Europe sprang up suddenly in countries such as Bulgaria and Ukraine, which had shown little prior concern for the environment but which are heavily dependent on Russia for energy supplies. Similar movements have also targeted Europe's plans to build pipelines that would offer an alternative to reliance on Moscow.

"It's very concrete; it relates to both opposition to shale and also trying to block any alternative pipelines with environmental challenges," said Brenda Shaffer, an energy expert at Georgetown University.

"There is a lot of evidence here; countries like Bulgaria, Romania, Ukraine being at the vanguard of the environmental movement is enough for it to be conspicuous," she said.

"There is a lot of evidence here; countries like Bulgaria, Romania, Ukraine being at the vanguard of the environmental movement is enough for it to be conspicuous," she said.

Bulgaria's anti-shale movement is particularly telling. The country initially embraced fracking as a way to develop its own energy resources and reduce reliance on Russia, even signing an exploration deal with Chevron in 2011. But then came an eruption of seemingly grassroots environmental protests and a televised blitz against fracking. In early 2012, the government reversed course and banned the practice.

Researchers who've worked on the ground in Central and Eastern Europe say there is plenty of anecdotal evidence, if no smoking guns, of Russian financial support for some environmental groups that have recently mobilized opposition to shale gas development.

In Ukraine, for example, anti-fracking movements became more organized and better funded just as the government worked to finalize shale gas deals with Western energy firms, officials there say. In Lithuania, "exactly the same thing is happening," said a government official, who described the mushrooming of anti-shale billboards and websites there as "an integrated, strategic communications campaign." As in Bulgaria, the well-funded groups organized screenings of Gasland to galvanize opposition to fracking.

"All of a sudden, in societies that never did grassroots organization very well, you saw all these NGOs well-funded, popping up, and causing well-organized protests," said Mihaela Carstei, an energy and environment analyst at the Atlantic Council.

To be sure, much of Europe's anti-fracking movement is motivated by genuine environmental concerns, just as in the United States; much of that opposition was catalyzed by the controversial 2010 anti-shale documentary Gasland. There are fears about fracking's effect on groundwater and the link between fracking and increased seismic activity. France, for instance, banned fracking before Bulgaria. And despite the Ukraine crisis and the rumblings of pro-fracking sentiment from some senior government officials, which could open the door to France rethinking the ban, fracking is still off the table there for now. Environmental groups such as Greenpeace scoff at the NATO chief's allegations, saying that they oppose fracking for sound environmental reasons. What's more, there's little love lost between Greenpeace and Russia, because Moscow detained dozens of the group's green activists last year.

"I wouldn't underestimate the role that Russia plays in shale gas in Europe, but I wouldn't overestimate it, either," said Andreas Goldthau, an energy expert at Harvard University's Belfer Center who has extensively researched shale gas policies in Europe. "Overall, particularly in Bulgaria and Romania, the causes of shale's problems are varied; it's not only the Russians coming in and trying to start protests."

Ultimately, Russia's efforts to derail Europe's alternative pipeline projects, more than its possible support for anti-fracking groups, represent a more immediate threat to Europe's efforts to diversify its energy supplies, Shaffer said.

"These rival projects are even more of a threat than fracking because shale gas will take a long time to develop, but these projects will soon bring gas to Europe; they are practical and concrete," she said.

Daniel Mihailescu - AFP - Getty

Source: http://www.eia.gov/todayinenergy/detail.cfm?id=19011&src=email

December 2, 2014

32% of natural gas pipeline capacity into the Northeast could be bi...

graph of planned interregional natural gas pipeline projects in the Northeast, as explained in the article text

Source: U.S. Energy Information Administration, Pipeline Projects
Note: In this context, the Northeast includes the Northeast Census region as well as Delaware, Maryland, Ohio, and West Virginia.

Republished December 2, 2014, 11:00 a.m. to update text.

Spurred by growing natural gas production in Pennsylvania, West Virginia, and Ohio, the natural gas pipeline industry is planning to modify its systems to allow bidirectional flow to move up to 8.3 billion cubic feet per day (Bcf/d) out of the Northeast. As of 2013, the industry had the capacity to transport 25 Bcf/d of natural gas from Canada, the Midwest, and the Southeast into the Northeast. In addition to these bidirectional projects in the Northeast, the industry plans to expand existing systems and build new systems to transport natural gas produced in the Northeast to consuming markets outside the region.

Flows on ANR Pipeline, Texas Eastern Transmission, Transcontinental Pipeline, Iroquois Gas Pipeline, Rockies Express Pipeline, and Tennessee Gas Pipeline accounted for 60% of flows to the Northeast in 2013. Flows on these pipelines in 2013 were between 21% and 84% below 2008 levels, with the largest percentage decline occurring on the Tennessee Gas Pipeline. In 2014, the Tennessee Gas Pipeline and the Texas Eastern Transmission began flowing gas both ways between states along the Northeast and Southeast region borders.

graph of flows of natural gas into the Northeast on selected pipelines, as explained in the article text

Source: U.S. Energy Information Administration estimates based on Ventyx's data

As a result of these pipelines being underutilized, the pipeline companies have announced plans to modify their systems to allow for bidirectional flow, adding the ability to send natural gas out of the Northeast region:

  • Columbia Gulf Transmission completed two bidirectional projects in 2013 and 2014 that enable the system to transport natural gas from Pennsylvania to Louisiana.
  • ANR Pipeline, Tennessee Gas Pipeline, Texas Eastern Transmission, and Transcontinental Gas Pipeline are planning to send natural gas from the Northeast to the Gulf Coast because of the potential of industrial demand and LNG exports from the Gulf Coast. These projects total 5.5 Bcf/d of flow capacity.
  • The Rockies Express Pipeline's partial bidirectional project (2.5 Bcf/d of capacity) is primarily to flow Marcellus natural gas to more attractive markets in Chicago, Detroit, and the Gulf Coast.
  • The Iroquois Gas Pipeline's bidirectional project (0.3 Bcf/d of capacity) will deliver natural gas from the Marcellus to Canada. Iroquois will receive gas from the Dominion, Constitution (expected in service in 2016), and Algonquin pipelines.

Rationales for modifying existing pipelines rather than building new pipelines include:

  • Modifying existing pipeline to enable bidirectional flow requires significantly less capital investment, fewer regulatory permits, and lower construction and labor costs, while resulting in fewer environmental impacts.
  • Existing long-haul pipeline capacities to flow gas into the Northeast are underutilized. Modifying these systems to be bidirectional can be executed quickly to respond to new market dynamics that will improve pipeline utilization rates.

In addition to bidirectional pipeline projects, the industry is planning to build 35 Bcf/d of additional capacity to support the growth of natural gas production in the Northeast. As of November 7, 2014, the industry added more than 2 Bcf/d of additional capacity in the Northeast, following 1.6 Bcf/d of additional capacity coming online a week earlier. Even though the Northeast has seen increased natural gas production and new infrastructure, consumers in New England continue to pay high natural gas prices during peak demand days. Algonquin Gas Transmission and Tennessee Gas Pipeline, which supply most of the natural gas to New England, plan to increase their capacities into New England by 4.1 Bcf/d by the end of 2018. These proposed additions could increase natural gas supply in New England and reduce extreme prices at the Algonquin Citygate, near Boston on peak demand days.

Principal contributor: Tu Tran

Source: http://finance.yahoo.com/news/constitution-pipeline-receives-ferc-a...

Constitution Pipeline Receives FERC Approval to Construct Project

Pipeline to Help Meet Growing Natural Gas Demand in New York, New England by Winter 2015 or 2016

Business Wire

ALBANY, N.Y.--(BUSINESS WIRE)--

Constitution Pipeline Company, LLC announced today that the Federal Energy Regulatory Commission (FERC) has issued an order approving construction of its proposed pipeline to increase natural gas supply to New York and New England markets, subject to certain conditions that will ensure the protection of natural resources.

FERC on Dec. 2, 2014 issued its certificate of public convenience and necessity for the 124-mile Constitution Pipeline. Assuming timely receipt of all remaining necessary regulatory approvals, Constitution Pipeline would begin construction as early as the first-quarter next year in order to help meet growing natural gas demand in New York and New England by the winter of 2015 or 2016.

“We’re pleased that the FERC has approved construction on this key piece of natural gas infrastructure to the U.S. Northeast after a long and comprehensive review of this project,” the project sponsors said in a joint statement. “Once in service, the Constitution Pipeline will provide critical access to new, domestic sources of natural gas, bolstering supply reliability and contributing toward stabilization of the prices consumers pay for energy.”

In New York and New England, insufficient natural gas pipeline infrastructure last winter had the effect of exposing consumers to high natural gas prices and, as a result, significantly higher electric-power costs. The Constitution Pipeline is designed to enhance New York’s natural gas supply options via an interconnect with the existing Iroquois Pipeline. Additionally, the Constitution Pipeline will provide New England markets with abundant, low-cost, cleaner energy via an interconnect with the existing Tennessee Gas Pipeline.

“Now that FERC has issued its order, we look forward to receiving the remaining approvals we need to begin construction on this pipeline so that we can deliver much-needed additional natural gas supply to New York and New England as quickly as possible,” the project sponsors said.

FERC on Oct. 24 published its final environmental review of the proposed 124-mile Constitution Pipeline. The Environmental Impact Statement (EIS) assessed the potential environmental effects of the construction and operation of the project in accordance with the requirements of the National Environmental Policy Act. The EIS concluded that environmental impacts would be reduced to “less than significant levels” with the implementation of proposed mitigation measures by the company and FERC. The FERC served in a coordinating role with relevant federal and state agencies in developing its final EIS. The U.S. Environmental Protection Agency, the U.S. Army Corps of Engineers, the Federal Highway Administration, and the New York State Department of Agriculture and Markets participated as cooperating agencies in the preparation of the EIS.

The Constitution Pipeline is designed to transport enough natural gas each day to serve approximately 3 million homes in the U.S. Northeast. The project involves the construction and operation of 124 miles of 30-inch-diameter pipeline from natural gas supply areas in northeast Pennsylvania and connecting with existing transmission pipelines in Schoharie County, N.Y. Earlier this year, Constitution Pipeline and Leatherstocking Gas Company, LLC announced plans to install four delivery taps along Constitution's proposed route to facilitate local natural gas service to homes and businesses in southern New York and northern Pennsylvania.

Constitution Pipeline Company

Constitution Pipeline Company, LLC is owned by subsidiaries of Williams Partners L.P. (WPZ), Cabot Oil & Gas Corporation (COG), Piedmont Natural Gas Company, Inc. (PNY), and WGL Holdings, Inc. (WGL). The 124-mile pipeline project is proposed to connect domestic natural gas production in northeastern Pennsylvania with northeastern markets by late 2015 or 2016. Additional information about the Constitution Pipeline can be found at www.constitutionpipeline.com.

Portions of this document may constitute “forward-looking statements” as defined by federal law. Although the company believes any such statements are based on reasonable assumptions, there is no assurance that actual outcomes will not be materially different. Any such statements are made in reliance on the “safe harbor” protections provided under the Private Securities Reform Act of 1995. Additional information about issues that could lead to material changes in performance is contained in the company’s annual reports filed with the Securities and Exchange Commission.

Source: http://finance.yahoo.com/news/shale-gas-pipeline-developer-threaten...

Shale gas pipeline developer threatens to seize land

Pennsylvania-New York gas pipeline developer threatens to seize land through eminent domain

Associated Press

ALBANY, N.Y. (AP) -- The developer of a $750 million natural gas pipeline from Pennsylvania into New York has threatened to seize land from reluctant landowners through eminent domain.

A letter obtained by the Albany Times Union (http://bit.ly/12SNKHQ ) tells landowners who have refused to sell rights of way for the Constitution Pipeline that they have until Wednesday to accept offered prices. After that, developers will take them to court to force such sales for possibly less money.

The letter was sent from the law firm Saul Ewing.

Project opponents filed a complaint against the letters with New York State Attorney General Eric Schneiderman. His office declined comment but confirmed receipt of the complaint.

Lawyer Daniel Estrin of the White Plains-based Pace Environmental Litigation Clinic said the letter is meant to "bully landowners ... into waiving their property rights."

Asked about the legality of invoking eminent domain prior to meeting conditions outlined in the FERC approval, Constitution Pipeline Company spokesman Tom Droege told the Times Union, "We continue to communicate with landowners along the route to seek easement agreements ... We continue to work closely with other state and federal permitting agencies and remain optimistic that we will receive necessary clearances."

U.S. energy regulators approved the pipeline project last week. It's designed to bring cheap shale natural gas from Pennsylvania into high-priced markets in New England and New York.

The 124-mile pipeline could be operational by next winter if it gets the remaining regulatory approvals from various state and federal agencies in a timely fashion. It would run from Pennsylvania's Susquehanna County through New York's Broome, Chenango and Delaware counties to connect with the existing Tennessee and Iroquois pipelines in Schoharie County.

The lead partners are Tulsa, Oklahoma-based Williams Partners LP and Houston-based Cabot Oil & Gas Corp. Williams will operate the pipeline, while Cabot and Southwestern Energy have long-term agreements to supply the gas.

Source: http://www.zerohedge.com/news/2014-12-08/10-reasons-why-severe-drop...

10 Reasons Why A Severe Drop in Oil Prices Is A Problem

Tyler Durden's picture

Ten Reasons Why a Severe Drop in Oil Prices is a Problem

Not long ago, I wrote Ten Reasons Why High Oil Prices are a Problem. If high oil prices can be a problem, how can low oil prices also be a problem? In particular, how can the steep drop in oil prices we have recently been experiencing also be a problem?

Let me explain some of the issues:

Issue 1. If the price of oil is too low, it will simply be left in the ground.

The world badly needs oil for many purposes: to power its cars, to plant it fields, to operate its oil-powered irrigation pumps, and to act as a raw material for making many kinds of products, including medicines and fabrics.

If the price of oil is too low, it will be left in the ground. With low oil prices, production may drop off rapidly. High price encourages more production and more substitutes; low price leads to a whole series of secondary effects (debt defaults resulting from deflation, job loss, collapse of oil exporters, loss of letters of credit needed for exports, bank failures) that indirectly lead to a much quicker decline in oil production.

The view is sometimes expressed that once 50% of oil is extracted, the amount of oil we can extract will gradually begin to decline, for geological reasons. This view is only true if high prices prevail, as we hit limits. If our problem is low oil prices because of debt problems or other issues, then the decline is likely to be far more rapid. With low oil prices, even what we consider to be proved oil reserves today may be left in the ground.

Issue 2. The drop in oil prices is already having an impact on shale extraction and offshore drilling.

While many claims have been made that US shale drilling can be profitable at low prices, actions speak louder than words. (The problem may be a cash flow problem rather than profitability, but either problem cuts off drilling.) Reuters indicates that new oil and gas well permits tumbled by 40% in November.

Offshore drilling is also being affected. Transocean, the owner of the biggest fleet of deep water drilling rigs, recently took a $2.76 billion charge, among a “drilling rig glut.”

3. Shale operations have a huge impact on US employment. 

Zero Hedge posted the following chart of employment growth, in states with and without current drilling from shale formations:

Jobs in States with and without Shale Formations, from Zero Hedge.

Figure 1. Jobs in States with and without Shale Formations, from Zero Hedge.

Clearly, the shale states are doing much better, job-wise. According to the article, since December 2007, shale states have added 1.36 million jobs, while non-shale states have lost 424,000 jobs. The growth in jobs includes all types of employment, including jobs only indirectly related to oil and gas production, such as jobs involved with the construction of a new supermarket to serve the growing population.

It might be noted that even the “Non-Shale” states have benefited to some extent from shale drilling. Some support jobs related to shale extraction, such as extraction of sand used in fracking, college courses to educate new engineers, and manufacturing of parts for drilling equipment, are in states other than those with shale formations. Also, all states benefit from the lower oil imports required.

Issue 4. Low oil prices tend to cause debt defaults that have wide ranging consequences. If defaults become widespread, they could affect bank deposits and international trade.

With low oil prices, it becomes much more difficult for shale drillers to pay back the loans they have taken out. Cash flow is much lower, and interest rates on new loans are likely much higher. The huge amount of debt that shale drillers have taken on suddenly becomes at-risk. Energy debt currently accounts for 16% of the US junk bond market, so the amount at risk is substantial.

Dropping oil prices affect international debt as well. The value of Venezuelan bonds recently fell to 51 cents on the dollar, because of the high default risk with low oil prices.  Russia’s Rosneft is also reported to be having difficulty with its loans.

There are many ways banks might be adversely affected by defaults, including

  • Directly by defaults on loans held be a bank
  • Indirectly, by defaults on securities the bank owns that relate to loans elsewhere
  • By derivative defaults made more likely by sharp changes in interest rates or in currency levels
  • By liquidity problems, relating to the need to quickly sell or buy securities related to ETFs

After the many bank bailouts in 2008, there has been discussion of changing the system so that there is no longer a need to bail out “too big to fail” banks. One proposal that has been discussed is to force bank depositors and pension funds to cover part of the losses, using Cyprus-style bail-ins. According to some reports, such an approach has been approved by the G20 at a meeting the weekend of November 16, 2014. If this is true, our bank accounts and pension plans could already be at risk.1

Another bank-related issue if debt defaults become widespread, is the possibility that junk bonds and Letters of Credit2 will become outrageously expensive for companies that have poor credit ratings. Supply chains often include some businesses with poor credit ratings. Thus, even businesses with good credit ratings may find their supply chains broken by companies that can no longer afford high-priced credit. This was one of the issues in the 2008 credit crisis.

Issue 5. Low oil prices can lead to collapses of oil exporters, and loss of virtually all of the oil they export.

The collapse of the Former Soviet Union in 1991 seems to be related to a drop in oil prices.

Figure 2. Oil production and price of the Former Soviet Union, based on BP Statistical Review of World Energy 2013.

Figure 2. Oil production and price of the Former Soviet Union, based on BP Statistical Review of World Energy 2013.

Oil prices dropped dramatically in the 1980s after the issues that gave rise to the earlier spike were mitigated. The Soviet Union was dependent on oil for its export revenue. With low oil prices, its ability to invest in new production was impaired, and its export revenue dried up. The Soviet Union collapsed for a number of reasons, some of them financial, in late 1991, after several years of low oil prices had had a chance to affect its economy.

Many oil-exporting countries are at risk of collapse if oil prices stay very low very long. Venezuela is a clear risk, with its big debt problem. Nigeria’s economy is reported to be “tanking.” Russia even has a possibility of collapse, although probably not in the near future.

Even apart from collapse, there is the possibility of increased unrest in the Middle East, as oil-exporting nations find it necessary to cut back on their food and oil subsidies. There is also more possibility of warfare among groups, including new groups such as ISIL. When everyone is prosperous, there is little reason to fight, but when oil-related funds dry up, fighting among neighbors increases, as does unrest among those with lower subsidies.

Issue 6. The benefits to consumers of a drop in oil prices are likely to be much smaller than the adverse impact on consumers of an oil price rise. 

When oil prices rose, businesses were quick to add fuel surcharges. They are less quick to offer fuel rebates when oil prices go down. They will try to keep the benefit of the oil price drop for themselves for as long as possible.

Airlines seem to be more interested in adding flights than reducing ticket prices in response to lower oil prices, perhaps because additional planes are already available. Their intent is to increase profits, through an increase in ticket sales, not to give consumers the benefit of lower prices.

In some cases, governments will take advantage of the lower oil prices to increase their revenue. China recently raised its oil products consumption tax, so that the government gets part of the benefit of lower prices. Malaysia is using the low oil prices as a time to reduce oil subsidies.

Most businesses recognize that the oil price drop is at most a temporary situation, since the cost of extraction continues to rise (because we are getting oil from more difficult-to-extract locations). Because the price drop this is only temporary, few business people are saying to themselves, “Wow, oil is cheap again! I am going to invest a huge amount of money in a new road building company [or other business that depends on cheap oil].” Instead, they are cautious, making changes that require little capital investment and that can easily be reversed. While there may be some jobs added, those added will tend to be ones that can easily be dropped if oil prices rise again.

Issue 7. Hoped for crude and LNG sales abroad are likely to disappear, with low oil prices.

There has been a great deal of publicity about the desire of US oil and gas producers to sell both crude oil and LNG abroad, so as to be able to take advantage of higher oil and gas prices outside the US. With a big drop in oil prices, these hopes are likely to be dashed. Already, we are seeing the story, Asia stops buying US crude oil. According to this story, “There’s so much oversupply that Middle East crudes are now trading at discounts and it is not economical to bring over crudes from the US anymore.” 

LNG prices tend to drop if oil prices drop. (Some LNG prices are linked to oil prices, but even those that are not directly linked are likely to be affected by the lower demand for energy products.) At these lower prices, the financial incentive to export LNG becomes much less. Even fluctuating LNG prices become a problem for those considering investment in infrastructure such as ships to transport LNG.

Issue 8. Hoped-for increases in renewables will become more difficult, if oil prices are low.

Many people believe that renewables can eventually take over the role of fossil fuels. (I am not of view that this is possible.) For those with this view, low oil prices are a problem, because they discourage the hoped-for transition to renewables.

Despite all of the statements made about renewables, they don’t really substitute for oil. Biofuels come closest, but they are simply oil-extenders. We add ethanol made from corn to gasoline to extend its quantity. But it still takes oil to operate the farm equipment to grow the corn, and oil to transport the corn to the ethanol plant. If oil isn’t around, the biofuel production system comes to a screeching halt.

Issue 9. A major drop in oil prices tends to lead to deflation, and because of this, difficulty in repaying debts.

If oil prices rise, so do food prices, and the price of making most goods. Thus rising oil prices contribute to inflation. The reverse of this is true as well. Falling oil prices tend to lead to a lower price for growing food and a lower price for making most goods. The net result can be deflation. Not all countries are affected equally; some experience this result to a greater extent than others.

Those countries experiencing deflation are likely to eventually have problems with debt defaults, because it will become more difficult for workers to repay loans, if wages are drifting downward. These same countries are likely to experience an outflow of investment funds because investors realize that funds invested these countries will not earn an adequate return. This outflow of funds will tend to push their currencies down, relative to other currencies. This is at least part of what has been happening in recent months.

The value of the dollar has been rising rapidly, relative to many other currencies. Debt repayment is likely to especially be a problem for those countries where substantial debt is denominated in US dollars, but whose local currency has recently fallen in value relative to the US dollar.

Figure 3. US Dollar Index from Intercontinental Exchange

Figure 3. US Dollar Index from Intercontinental Exchange

The big increase in the US dollar index came since June 2014 (Figure 3), which coincides with the drop in oil prices. Those countries with low currency prices, including Japan, Europe, Brazil, Argentina, and South Africa, find it expensive to import goods of all kinds, including those made with oil products. This is part of what reduces demand for oil products.

China’s yuan is relatively closely tied to the dollar. The collapse of other currencies relative to the US dollar makes Chinese exports more expensive, and is part of the reason why the Chinese economy has been doing less well recently. There are no doubt other reasons why China’s growth is lower recently, and thus its growth in debt. China is now trying to lower the level of its currency.

Issue 10. The drop in oil prices seems to reflect a basic underlying problem: the world is reaching the limits of its debt expansion.

There is a natural limit to the amount of debt that a government, or business, or individual can borrow. At some point, interest payments become so high, that it becomes difficult to cover other needed expenses. The obvious way around this problem is to lower interest rates to practically zero, through Quantitative Easing (QE) and other techniques.

(Increasing debt is a big part of pumps up “demand” for oil, and because of this, oil prices. If this is confusing, think of buying a car. It is much easier to buy a car with a loan than without one. So adding debt allows goods to be more affordable. Reducing debt levels has the opposite effect.)

QE doesn’t work as a long-term technique, because it tends to create bubbles in asset prices, such as stock market prices and prices of farmland. It also tends to encourage investment in enterprises that have questionable chance of success. Arguably, investment in shale oil and gas operations are in this category.

As it turns out, it looks very much as if the presence or absence of QE may have an impact on oil prices as well (Figure 4), providing the “uplift” needed to keep oil prices high enough to cover production costs.

Figure 4. World "liquids production" (that is oil and oil substitutes) based on EIA data, plus OPEC estimates and judgment of author for August to October 2014. Oil price is monthly average Brent oil spot price, based on EIA data.

Figure 4. World “liquids production” (that is oil and oil substitutes) based on EIA data, plus OPEC estimates and judgment of author for August to October 2014. Oil price is monthly average Brent oil spot price, based on EIA data.

The sharp drop in price in 2008 was credit-related, and was only solved when the US initiated its program of QE started in late November 2008. Oil prices began to rise in December 2008. The US has had three periods of QE, with the last of these, QE3, finally tapering down and ending in October 2014. Since QE seems to have been part of the solution that stopped the drop in oil prices in 2008, we should not be surprised if discontinuing QE is contributing to the drop in oil prices now.

Part of the problem seems to be differential effect that happens when other countries are continuing to use QE, but the US not. The US dollar tends to rise, relative to other currencies. This situation contributes to the situation shown in Figure 3.

QE allows more borrowing from the future than would be possible if market interest rates really had to be paid. This allows financiers to temporarily disguise a growing problem of un-affordability of oil and other commodities.

The problem we have is that, because we live in a finite world, we reach a point where it becomes more expensive to produce commodities of many kinds: oil (deeper wells, fracking), coal (farther from markets, so more transport costs), metals (poorer ore quality), fresh water (desalination needed), and food (more irrigation needed). Wages don’t rise correspondingly, because more and more labor is needed to provide less and less actual benefit, in terms of the commodities produced and goods made from those commodities. Thus, workers find themselves becoming poorer and poorer, in terms of what they can afford to purchase.

QE allows financiers to disguise growing mismatch between what it costs to produce commodities, and what customers can really afford. Thus, QE allows commodity prices to rise to levels that are unaffordable by customers, unless customers’ lack of income is disguised by a continued growth in debt.

Once commodity prices (including oil prices) fall to levels that are affordable based on the incomes of customers, they fall to levels that cut out a large share of production of these commodities. As commodity production drops to levels that can be produced at affordable prices, so does the world’s ability to make goods and services. Unfortunately, the goods whose production is likely to be cut back if commodity production is cut back are those of every kind, including houses, cars, food, and electrical transmission equipment.

 Conclusion

There are really two different problems that a person can be concerned about:

  1. Peak oil: the possibility that oil prices will rise, and because of this production will fall in a rounded curve. Substitutes that are possible because of high prices will perhaps take over.
  2. Debt related collapse: oil limits will play out in a very different way than most have imagined, through lower oil prices as limits to growth in debt are reached, and thus a collapse in oil “demand” (really affordability). The collapse in production, when it comes, will be sharper and will affect the entire economy, not just oil.

In my view, a rapid drop in oil prices is likely a symptom that we are approaching a debt-related collapse–in other words, the second of these two problems. Underlying this debt-related collapse is the fact that we seem to be reaching the limits of a finite world. There is a growing mismatch between what workers in oil importing countries can afford, and the rising real costs of extraction, including associated governmental costs. This has been covered up to date by rising debt, but at some point, it will not be possible to keep increasing the debt sufficiently.

The timing of collapse may not be immediate. Low oil prices take a while to work their way through the system. It is also possible that the world’s financiers will put off a major collapse for a while longer, through more QE, or more programs related to QE. For example, actually getting money into the hands of customers would seem to be temporarily helpful.

At some point the debt situation will eventually reach a breaking point. One way this could happen is through an increase in interest rates. If this happens, world economic growth is likely to slow greatly. Oil and commodity prices will fall further. Debt defaults will skyrocket. Not only will oil production drop, but production of many other commodities will drop, including natural gas and coal. In such a scenario, the downslope of all energy use is likely to be quite steep, perhaps similar to what is shown in the following chart.

Figure 5. Estimate of future energy production by author. Historical data based on BP adjusted to IEA groupings.

Figure 5. Estimate of future energy production by author. Historical data based on BP adjusted to IEA groupings.

Related Articles:

Low Oil Prices: Sign of a Debt Bubble Collapse, Leading to the End ...

WSJ Gets it Wrong on “Why Peak Oil Predictions Haven’t Come True”

Eight Pieces of Our Oil Price Predicament

Notes:

[1] There is of course insurance by the FDIC and the PBGC, but the actual funding for these two insurance programs is tiny in relationship to the kind of risk that would occur if there were widespread debt defaults and derivative defaults affecting many banks and many pension plans at once. While depositors and pension holders might try to collect this insurance, there wouldn’t be enough money to actually cover these demands. This problem would be similar to the issue that arose in Iceland in 2008. Insurance would seem to be available, but in practice, would not pay out much.

Also, I learned after writing this post that bail-ins were mandated for US banks by the Dodd Frank Wall Street Reform and Consumer Protection Act of 2010. In the language of the summary, bank depositors are “unsecured creditors,” and are thus among those to whom the burden of loss is transferred. The FDIC is not allowed to borrow extra funds, beyond bank funds, to cover this loss.

[2] LOCs are required when goods are shipped internationally, before payment has actually been made. They offer a guarantee that a buyer will be able to “make good” on his promise to pay for goods when they arrive.

As always in life, typically there are winners and losers; lately, China has been making us look like a bunch of losers.

Source: http://www.bloomberg.com/news/2014-12-12/record-oil-tankers-seen-sa...

Record Oil Tankers Sailing to China Amid Stockpiling Signs

Too bad they did not look more closely at CNG (Compressed Natural Gas), LPG (Liquid Petroleum Gas = NGLs) or LNG as vehicle fuels.  It doesn't get much cleaner than Natural Gas.

JS

Source: http://finance.yahoo.com/news/study-electric-car-may-not-114859842....

Study: Your all-electric car may not be so green

If your all-electric car gets its power from coal, new study says it is dirtier than gasoline

Associated Press

WASHINGTON (AP) -- People who own all-electric cars where coal generates the power may think they are helping the environment. But a new study finds their vehicles actually make the air dirtier, worsening global warming.

Ethanol isn't so green, either.

"It's kind of hard to beat gasoline" for public and environmental health, said study co-author Julian Marshall, an engineering professor at the University of Minnesota. "A lot of the technologies that we think of as being clean ... are not better than gasoline."

The key is where the source of the electricity all-electric cars. If it comes from coal, the electric cars produce 3.6 times more soot and smog deaths than gas, because of the pollution made in generating the electricity, according to the study that is published Monday by the Proceedings of the National Academy of Sciences. They also are significantly worse at heat-trapping carbon dioxide that worsens global warming, it found.

The study examines environmental costs for cars' entire life cycle, including where power comes from and the environmental effects of building batteries.

"Unfortunately, when a wire is connected to an electric vehicle at one end and a coal-fired power plant at the other end, the environmental consequences are worse than driving a normal gasoline-powered car," said Ken Caldeira of the Carnegie Institution for Science, who wasn't part of the study but praised it.

The states with the highest percentage of electricity coming from coal, according to the Department of Energy, are West Virginia, Wyoming, Ohio, North Dakota, and Illinois.

Still, there's something to be said for the idea of helping foster a cleaner technology that will be better once it is connected to a cleaner grid, said study co-author Jason Hill, another University of Minnesota engineering professor.

The study finds all-electric vehicles cause 86 percent more deaths from air pollution than do cars powered by regular gasoline. Coal produces 39 percent of the country's electricity, according to the Department of Energy.

But if the power supply comes from natural gas, the all-electric car produces half as many air pollution health problems as gas-powered cars do. And if the power comes from wind, water or wave energy, it produces about one-quarter of the air pollution deaths.

Hybrids and diesel engines are cleaner than gas, causing fewer air pollution deaths and spewing less heat-trapping gas.

But ethanol isn't, with 80 percent more air pollution mortality, according to the study.

"If we're using ethanol for environmental benefits, for air quality and climate change, we're going down the wrong path," Hill said.

I'm totally shocked this hasn't been given huge coverage by the media....not.   The progs are in full control of the media, along with the entire entertainment industry, the education system, and the legal system.  This country doesn't have long.

A nice article on the O&G situation.

Source:  http://fivethirtyeight.com/features/the-conventional-wisdom-on-oil-...

In 2008, I moved to Dallas to cover the oil industry for The Wall Street Journal. Like any reporter on a new beat, I spent months talking to as many experts as I could. They didn’t agree on much. Would oil prices — then over $100 a barrel for the first time — keep rising? Would post-Saddam Iraq ever return to the ranks of the world’s great oil producers? Would China overtake the U.S. as the world’s top consumer? A dozen experts gave me a dozen different answers.

But there was one thing pretty much everyone agreed on: U.S. oil production was in permanent, terminal decline. U.S. oil fields pumped 5 million barrels of crude a day in 2008, half as much as in 1970 and the lowest rate since the 1940s. Experts disagreed about how far and how fast production would decline, but pretty much no mainstream forecaster expected a change in direction.

That consensus turns out to have been totally, hilariously wrong. U.S. oil production has increased by more than 50 percent since 2008 and is now near a three-decade high. The U.S. is on track to surpass Saudi Arabia as the world’s top producer of crude oil; add in ethanol and other liquid fuels, and the U.S.is already on top.

casselman-feature-oil-new-1

The standard narrative of that stunning turnaround is familiar by now: Even as Big Oil abandoned the U.S. for easier fields abroad, a few risk-taking wildcatters refused to give up on the domestic oil industry. By combining the techniques of hydraulic fracturing (“fracking”) and horizontal drilling, they figured out how to tap previously inaccessible oil reserves locked in shale rock – and in so doing sparked an unexpected energy boom.

That narrative isn’t necessarily wrong. But in my years watching the transformation up close, I took away a lesson: When it comes to energy, and especially shale, the conventional wisdom is almost always wrong.

It isn’t just that experts didn’t see the shale boom coming. It’s that they underestimated its impact at virtually every turn. First, they didn’t think natural gas could be produced from shale (it could). Then they thought production would fall quickly if natural gas prices dropped (they did, and it didn’t). They thought the techniques that worked for gas couldn’t be applied to oil (they could). They thought shale couldn’t reverse the overall decline in U.S. oil production (it did). And they thought rising U.S. oil production wouldn’t be enough to affect global oil prices (it was).

Now, oil prices are cratering, falling below $55 a barrel from more than $100 earlier this year. And so, the usual lineup of experts — the same ones, in many cases, who’ve been wrong so many times in the past — are offering predictions for what plunging prices will mean for the U.S. oil boom. Here’s my prediction: They’ll be wrong this time, too.

To be fair, the drop in oil prices is still too new for the experts to have settled on a clear consensus of what it will mean for U.S. producers. But the range of opinions is narrow, ranging from “production will be keep growing, but more slowly” to “it won’t have much effect at all.”1 Author and analyst Daniel Yergin, long the embodiment of the conventional wisdom on all things energy2, put it this way in a Wall Street Journal op-ed late last month, when oil was trading for just under $70 a barrel:

It is now clear that the new U.S. production is more resilient than anticipated. … True, with prices now near or below $70 a barrel, U.S. companies are looking hard at their investment plans — where and how much to cut or postpone. But it will take time for these decisions to affect supply. U.S. oil output will continue to rise in 2015.

I don’t take issue with anything Yergin is saying here. In fact, it makes sense. But that’s the thing about the conventional wisdom: It always makes sense at the time. It’s only later that we can see all the reasons it was wrong.

I don’t yet know why the conventional wisdom will be wrong this time, but I can guess. Not about what will happen — I’m no better at these predictions than anyone else — but about the sources of error. Here are a few of the most likely candidates:

No one has any idea what oil prices will do: In July 2008, my Journal colleague Neil King asked a wide range of energy journalists, economists and other experts to anonymously predict what the price of oil would be at the end of the year. The nearly two dozen responses ranged from $70 a barrel at the low end to $167.50 at the high end.3 The actual answer: $44.60.4

casselman-feature-oil-2

It isn’t surprising that experts aren’t good at predicting prices. Global oil markets are a function of countless variables — geopolitics, economics, technology, geology — each with its own inherent uncertainty. And even if you get those estimates right, you never know when a war in the Middle East or an oil boom in North Dakota will suddenly turn the whole formula on its head.

But none of that stops television pundits from making confident predictions about where oil prices will head in the coming months, and then using those predictions as the basis for production forecasts. Based on their track record, you should ignore them.

Drilling economics are complicated: In recent weeks, Wall Street analysts have published estimates of “break-even prices” for various U.S. oil fields. According to Goldman Sachs, for example, companies need at least $80 oil to make money in Texas’s Eagle Ford shale but only $70 in North Dakota’s Bakken shale. In theory, that makes it easy to see where companies will keep drilling at a given price and where they’ll pull back.

The reality is far more complicated. Not all parts of an oil field are created equal. Wells drilled in a “sweet spot” can be an order of magnitude better than those in less promising areas. Companies will keep drilling in the best areas long after they’ve pulled the plug on more marginal prospects. Break-even prices also change along with the price of oil. As prices fall and companies drill less, that leaves more rigs and equipment available, pushing down the price of drilling a well and allowing companies to stay profitable even at lower oil prices.

With oil under $60 a barrel, it’s a fair bet that many U.S. wells are now unprofitable. But that doesn’t mean companies will stop drilling them, at least right away. Companies often have contracts for rigs and would rather keep drilling than pay a penalty. They also have contracts for the land where they drill. If they don’t drill within a certain period, they lose the right to the land altogether.

Even when drilling does slow, production won’t necessarily follow. Wells keep producing for decades after they’ve been drilled, although at ever-declining rates. Companies prioritize their most promising projects, so the wells that do get drilled will be the best ones. And technology keeps improving, so companies can coax more oil out of each well. Natural gas provides an instructive example: The U.S. is drilling half as many gas wells today as it was five years ago and producing a third more gas.

casselman-feature-oil-3

Drilling finances are even more complicated: One thing I learned in my years covering the industry is that oil companies, and especially small oil companies, will keep drilling for as long as they can get the money to do so.5 That means the key variable in forecasting oil production isn’t drilling costs or even oil prices; it’s Wall Street.

In recent years, investors have handed energy companies half a trillion dollars in loans. That’s partly because of all the promising new oil fields in North Dakota and Texas, but it’s also because with interest rates near zero, investors are hungry for returns wherever they can find them. Now the Federal Reserve is talking about raising interest rates, which could kill the bond bubble, even as falling oil prices make those loans look riskier than they used to. If Wall Street turns off the money spigot, drilling will slow down no matter what oil prices do.

And then there’s politics: Why are oil prices falling? The short answer is lots of supply (the U.S. oil boom) and not much demand (a weak global economy). The longer answer is all about thethe Organization of Petroleum Exporting Countries. OPEC usually tries to keep prices high by limiting supply. But right now the cartel — or at least its dominant member, Saudi Arabia — appears content to let prices fall. The Saudis apparently think they can weather the storm of low prices better than companies in the U.S., where oil is much more expensive to produce.

But the policy has created divisions within OPEC, and no one knows when or if the cartel will start pulling back production. Tumbling prices are wreaking havoc on Russia’s economy, and they could easily lead to political unrest in other countries as well.

Oh, right, and geology: It’s easy to forget, but just a few years ago people were fretting about “peak oil,” the idea that global oil production had reached its maximum capacity and was doomed to start falling. The shale boom pushed those fears out of the mainstream, but the underlying questions remain. The shale boom is still young, and it was unclear how long it could last even when prices were higher. The U.S. government’s official production forecasts are subject to an almost comical level of uncertainty, and independent researchers have called even those estimates into question. The government didn’t see the boom coming, after all; there’s no guarantee it will see the end coming, either.

Footnotes


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