GWPF | 15 Jan 2015
Cheaper Oil Reduces Chances Of Meaningful UN Climate Agreement
In a twist of irony, the very country green activists are trying to “save” from global warming has turned on them for allegedly comprising its economic security. The Indian government has cracked down of Greenpeace and other U.S. environmental groups for protesting its use of coal-fired electricity, India’s biggest source of energy. Last year, India’s Intelligence Bureau issued a report declaring Greenpeace “a potential threat to national economic security… growing exponentially in terms of reach, impact, volunteers and media influence.” The report added that Greenpeace was finding “ways to create obstacles in India’s energy plans” and to “pressure India to use only renewable energy.” –Michael Bastsch, The Daily Caller, 15 January 2015
The drastic fall in global crude oil prices over the past six months could reduce the chance of a universal agreement on climate change policy this year, according to HSBC. Falling oil prices will challenge countries’ ability to implement climate policy, HSBC said in a recent report. –Nyshka Chandran, CNBC News, 12 January 2015
Due to its flexibility, shale oil has greater resiliency to oil price swings in terms of returns than conventional oil mega-projects. The US shale oil industry will likely emerge from the current turmoil somewhat smaller and slower, but leaner and more competitive. –Richard Zeits, Seeking Alpha, 13 January 2015
1) India Cracks Down On Green Campaigners For Harming Economic Security – The Daily Caller, 15 January 2015
2) Cheaper Oil Reduces Chances Of Meaningful UN Climate Agreement – CNBC News, 12 January 2015
3) Oil Has To Plunge To $40 Before It Hurts Shale Investment – Business Insider, 12 January 2015
4) Saudi And Iran’s ‘Cold War’ Will Keep Oil Price Low, Warns Nomura – City Wire, 14 January 2015
5) ‘Don’t Panic’ Plea To Russians As Kremlin Warns Of Budget Cuts – The Yorkshire Post, 15 January 2015
6) Venezuela In Chaos as Oil Prices Collapse – NBC News, 13 January 2015
7) Low Oil Price Could Revive US Shale Gas Development – The Advocate, 15 January 2015
8) What If OPEC Doesn’t Understand The Real Shale Revolution? – Forbes, 15 January 2015
9) US Shale Revolution: Smaller, Leaner, Stronger – Seeking Alpha, 13 January 2015
Even after a massive plunge in oil prices, which have dropped more than 50% in less than six months, analysts are saying that it won’t be enough to put much of the US oil industry out of business. Goldman Sachs researchers say that oil prices would have to drop to $40 per barrel for six months, down another 15% from their current level, to “keep capital sidelined.” That’s the level at which Goldman says high-yield defaults might start. —Mike Bird, Business Insider, 12 January 2015
Nomura has warned that a growing ‘Cold War’ between Saudi Arabia and Iran will keep the oil price lower for longer. ‘The key message from the Kingdom of Saudi is that they will maintain production and tolerate low oil prices in order to drive (1) market share and (2) to drive Iran to regime change. To be clear, we believe this is all about Iran, and not about ‘hanging the US shale assets out to dry’,’ Nomura said. What Nomura views as a Cold War between Saudi Arabia and Iran is the key reason behind their lower for longer thesis. –Danielle Levy, City Wire, 14 January 2015
Russian government officials have appealed for calm after predicting budget cuts and a further surge in inflation as the country faces its worst economic downturn in 15 years. With the currency and economy wilting under the twin blows of Western sanctions and a fall in the price of oil exports, finance minister Anton Siluanov proposed slashing some 10 per cent from most areas of the state budget. —The Yorkshire Post, 15 January 2015
It’s easy enough to read the basic policy that OPEC is following over the oil price at present. They’re losing market share to unconventional oil producers and they’re not happy about that. So, they’re entirely happy to allow the price to fall so as to keep their own market share. The basic assumption is that those large conventional reservoirs will always be cheaper to produce from than those unconventional deposits. Thus, as the price falls, the unconventional producers go out of business, OPEC retakes market share and all is rosy in their garden. However, this only works if that analysis about who is the low cost producer is actually correct. –Tim Worstall, Forbes, 15 January 2015
As the price of crude oil has collapsed in recent weeks, Americans have celebrated as the price of gasoline followed suit. But in Venezuela, where oil is the country’s economic lifeblood, the collapse is pushing a country already on shaky ground to the edge of default. In Venezuela, long lines for even the most basic products like toilet paper, toothpaste, soap, and even food. All of the goods continue to be scarce as Venezuela’s economy collapsed as the price of oil plummeted over the last year and the consumers, especially poor consumers, are becoming desperate. —NBC News, 13 January 2015
Cratering oil prices may convince some energy companies that drilling for natural gas is a more profitable venture, and the Haynesville Shale in north Louisiana is already seeing more activity, Louisiana Oil and Gas Association President Don Briggs says. Comstock Resources has already announced it will move rigs from other oil formations back to the Haynesville, Briggs says in his weekly column. —The Advocate, 15 January 2015
1) India Cracks Down On Green Campaigners For Harming Economic Security
The Daily Caller, 15 January 2015
Michael Bastsch
India is a friendly place, but they can only take so much before their government decides to kick you out of the country.
Greenpeace is learning this the hard way. In a twist of irony, the very country activists are trying to “save” from global warming has turned on them for allegedly comprising its economic security. The Indian government has cracked down of Greenpeace and other U.S. environmental groups for protesting its use of coal-fired electricity, India’s biggest source of energy.
Indian officials barred a Greenpeace staff member from travelling to London to testify against a British company for human rights violations, reports the Los Angeles Times. This comes after the government blocked Greenpeace’s access to foreign funding last year. Indian media outlets also reported this month that the government imposed financial restrictions on four other U.S.-based environmental groups.
“The groups who’ve been working on coal and climate change are the groups that are being singled out,” said Priya Pillai, the Greenpeace staff member who was not allowed to travel to London. “But this is a democratic country and I have a right to speak my mind.”
“Is it now an offense in India to speak out for the most marginalized people in the country?” Pillai asked.
A member of one eco-group told the Times he had “his personal bank account frozen and been ordered to explain every deposit sent from the group’s U.S. office since 2010.”
Last year, India’s Intelligence Bureau issued a report declaring Greenpeace “a potential threat to national economic security… growing exponentially in terms of reach, impact, volunteers and media influence.” The report added that Greenpeace was finding “ways to create obstacles in India’s energy plans” and to “pressure India to use only renewable energy.”
Indian intelligence officers said Greenpeace’s activities have cost the country between 2 and 3 percent of its gross domestic product every year.
Greenpeace was outraged by the report and argued its push to end coal use would stave off global warming. But with some 300 million Indians lacking access to electricity, abandoning coal — their most affordable and reliable energy option — is out of the question. India’s government says not using coal and other fossil fuels would relegate its population to poverty.
2) Cheaper Oil Reduces Chances Of Meaningful UN Climate Agreement
CNBC News, 12 January 2015
Nyshka Chandran
The drastic fall in global crude oil prices over the past six months could reduce the chance of a universal agreement on climate change policy this year, according to HSBC.
Environmentalists hope the widely-anticipated Paris Climate Summit in December will bring about two key outcomes: a universal accord that enables the world to transition to a low-carbon future as well as concrete measures to limit global warming to 2 degrees Celsius above pre-industrial times. Discussions in Peru last month saw all participating countries commit to lowering greenhouse gas emissions for the first time ever.
However, falling oil prices will challenge countries’ ability to implement climate policy, HSBC said in a recent report. Oil benchmarks Nymexand Brent are trading below $50 a barrel, levels not seen in over five years.
Lower oil prices suggest a deflationary pattern, which means the world economy remains in relatively poor shape, the bank said. Its economists forecast 2.6 percent global gross domestic product growth for 2015, well below the International Monetary Fund’s 3.8 percent forecast.
Sluggish economic growth translates to lower public sector funding for low-carbon energy, HSBC said. Major oil exporting countries like Venezuela and Canada are expected to see the biggest funding declines given their reliance on crude oil revenues.
“Lower economic growth means lower national income generation. This leads to difficult choices on capital resource allocation, which in turn could mean high carbon lock-in over the long run as a result of the less immediate focus on low-carbon infrastructure scale-up,” the bank said.
Furthermore, tepid growth could also see poor deployment of energy efficient technologies, the bank added.
“We think this could potentially lower the ambition levels of Intended Nationally Determined Contributions (INDCs),” HSBC said, referring to documentation detailing what countries propose to do to tackle climate change. These commitments are due within the first three months of the year.
3) Oil Has To Plunge To $40 Before It Hurts Shale Investment
Business Insider, 12 January 2015
Mike Bird
Even after a massive plunge in oil prices, which have dropped more than 50% in less than six months, analysts are saying that it won’t be enough to put much of the US oil industry out of business.
Goldman Sachs researchers say that oil prices would have to drop to $40 per barrel for six months, down another 15% from their current level, to “keep capital sidelined.” That’s the level at which Goldman says high-yield defaults might start.
The prices are already starting to hit some of the more expensive extraction companies:
The more credit intensive companies are already in maintenance mode where cash is being reserved for maintaining fields only. We now expect US supply growth to slow to 400,000 barrels per day, year on year by the 4th quarter of 2015.
However, most aren’t in this position yet, and it’ll take some time before they are:
To keep all capital sidelined and curtail investment in shale until the market has rebalanced, we believe prices need to stay lower for longer. As short cycle shale production is a 12 month investment proposition, producers typically hedge out 9 to 12 months.
In short, this means that it’s not the spot price, but the price over about a year that is relevant to most producers. The energy minister of United Arab Emirates, one of the countries hoping to retake market share and squeeze out domestic US oil, has actually referenced the fact that prices will have to be held low while the companies are still hedged.
Despite the massive drop in prices, most non-OPEC producers are still cost effective at a much lower price. Non-OPEC oil sources produced 56.55 million barrels of oil per day in 2014. About half of this has an operating cost of less than $20 a barrel.
4) Saudi And Iran’s ‘Cold War’ Will Keep Oil Price Low, Warns Nomura
City Wire, 14 January 2015
Danielle Levy
Nomura has warned that a growing ‘Cold War’ between Saudi Arabia and Iran will keep the oil price lower for longer.
Analyst Christyan Malek is maintaining a bearish stance on oil following a recent visit to the Middle East, Nomura said in an informal note, seen by Wealth Manager.
‘The key message from the Kingdom of Saudi is that they will maintain production and tolerate low oil prices in order to drive (1) market share and (2) to drive Iran to regime change. To be clear, we believe this is all about Iran, and not about ‘hanging the US shale assets out to dry’,’ Nomura said.
What Nomura views as a Cold War between Saudi Arabia and Iran is the key reason behind their lower for longer thesis.
‘Saudi are also feeling the pinch of lower oil prices but foreign policy supersedes everything else right now, and it sounds like this view will hold for the next 12-18 months,’ the note said.
5) ‘Don’t Panic’ Plea To Russians As Kremlin Warns Of Budget Cuts
The Yorkshire Post, 15 January 2015
Russian government officials have appealed for calm after predicting budget cuts and a further surge in inflation as the country faces its worst economic downturn in 15 years.
With the currency and economy wilting under the twin blows of Western sanctions and a fall in the price of oil exports, finance minister Anton Siluanov proposed slashing some 10 per cent from most areas of the state budget.
That is a significant turnaround for the government of president Vladimir Putin, who only weeks ago told the nation in a televised address that state spending would not be cut.
6) Venezuela In Chaos as Oil Prices Collapse
NBC News, 13 January 2015
As the price of crude oil has collapsed in recent weeks, Americans have celebrated as the price of gasoline followed suit. But in Venezuela, where oil is the country’s economic lifeblood, the collapse is pushing a country already on shaky ground to the edge of default.
In Venezuela, long lines for even the most basic products like toilet paper, toothpaste, soap, and even food. All of the goods continue to be scarce as Venezuela’s economy collapsed as the price of oil plummeted over the last year and the consumers, especially poor consumers, are becoming desperate.
As Venezuela’s people continue to struggle, the country’s president, Nicolas Maduro, has been in the Middle East trying to convince OPEC partners to cut production to help raise the price of oil back up to levels that can sustain Venezuela’s government.
7) Low Oil Price Could Revive US Shale Gas Development
The Advocate, 15 January 2015
Cratering oil prices may convince some energy companies that drilling for natural gas is a more profitable venture, and the Haynesville Shale in north Louisiana is already seeing more activity, Louisiana Oil and Gas Association President Don Briggs says.
Comstock Resources has already announced it will move rigs from other oil formations back to the Haynesville, Briggs says in his weekly column. There are three additional reason that other drillers may join Comstock:
–The first U.S.-based liquefied natural gas export facility, Sabine Pass Liquefaction in Cameron Parish, is expected to begin operations by the end of the year. The $20 billion project will be capable of exporting 3 billion cubic feet of gas per day. Several other LNG export facilities are planned in Louisiana.
–Louisiana’s manufacturing sector continues to grow, with dozens of new facilities locating to the state. Those projects involve as much as $100 billion in investment over the next three to five years, and all depend on natural gas. “As flour is to a baker, so natural gas is the feedstock to this petro-chemical and manufacturing sector,” Briggs says.
–Several coal-fired power plants are converting to natural gas. The conversions take about a year to complete and cost around $1 billion.
Those three factors will drive demand for natural gas, which means drills will be turning in the Haynesville for many years to come, Briggs says.
8) What If OPEC Don’t Understand The Real Shale Revolution?
Forbes, 15 January 2015
Tim Worstall
It’s easy enough to read the basic policy that OPEC is following over the oil price at present. They’re losing market share to unconventional oil producers and they’re not happy about that. So, they’re entirely happy to allow the price to fall so as to keep their own market share. The basic assumption is that those large conventional reservoirs will always be cheaper to produce from than those unconventional deposits. Thus, as the price falls, the unconventional producers go out of business, OPEC retakes market share and all is rosy in their garden.
This does, however, depend upon the assumption that the unconventional producers are the higher cost producers. And while that’s definitely true of some of them, say the oil sands, there’s a remarkable claim out there that this isn’t particularly true of the shale oil developers. Which is something that is, if true, something of a problem for OPEC’s strategy.
The basic idea of what OPEC is doing is here:
“(OPEC) cannot continue protecting a certain price. That is not the only aim of OPEC,” said Suhail Mohamed Faraj al-Mazrouei, the U.A.E. oil minister, at an energy event in Abu Dhabi on Tuesday.
He said it would take time for oil prices to stabilize, but whether that timeline is going to be two or three years depends on how rational oil producers are. He said U.S. shale-oil producers will set the “floor” for tumbling crude prices.
Or as it’s more baldly stated here:
ABU DHABI: OPEC cannot protect world oil prices which have plunged since June, the United Arab Emirates said today, adding that rising North American shale oil output needed to be curbed.
World prices have been falling since June but the pace of the slide accelerated in November when the Organisation of the Petroleum Exporting Countries (OPEC) decided to maintain its production unchanged at 30 million barrels per day.
Analysts say that richer OPEC members like the UAE have been ready to accept the price fall in the hope that it will force higher-cost shale producers out of the market.
OK, that’s fine as a strategy as long as the basic analysis is correct. We might compare this with JD Rockefeller’s usual ambition of giving rivals a “sweating” when he was running Standard Oil. Rockefeller was the dominant producer and also the lowest cost producer (more through his command of transport than drilling technology, but the end result was the same). In any decision to reduce prices he, as that low cost producer, could force the other, higher cost, producers out of the market. And he did so: largely to the benefit of consumers although that’s not how the standard anti-trust histories record it all.
However, that does only work if that analysis about who is the low cost producer is is actually correct. And there’s a rather remarkable claim that it may well not be OPEC that is, but the shale producers:
Papa and Maugeri also understand that the firms executing this business model will slow down but not stop as prices decline, even if the decrease is fifty percent or even greater. They also recognize that the technology changes and operational scale will enable these firms to restart operations quickly once prices recover. They know the equipment will not vanish. They realize that the labor force can be assembled rapidly, and they comprehend that the institutional knowledge will not be lost.
As yet, however, no observer has noted another development that will certainly follow: the migration of oil and gas manufacturing to countries where costs are lower. The oil volumes produced by fracking in other nations will almost surely surpass the US output within the next ten years and perhaps even the next five years. The cost associated with the new manufacturing plants will be low and the productivity will be higher.
As with natural gas in the United States, the world will be awash in oil.
The essential contention is that the development of fracking shale has made oil production like manufacturing, not like traditional resource extraction (ie, that it’s the technology you use to do it which is important, not the limited number of resources you can apply the technology to). And the thing we know about manufacturing is that it becomes ever cheaper to produce things as we’re really pretty good at increasing productivity in manufacturing processes.
The implication of this, if it is true, is rather large. We’ve all been assuming that as the oil price crashes under OPEC’s “no production cuts” policy that we’ll see a fall in unconventional production. That’s still highly likely for oil sands production, where there’s high marginal costs. We assumed that shale production would continue from wells already drilled, but that there would be a fall off in new ones spudded in. Given that a typical shale well has a high degradation rate, it would take 8-18 months for shale production to fall and the market to come back into balance. Oil would go below the all in costs of shale production, those costs including the up front capital, but that in itself would stop new wells and thus curb production fairly rapidly.
However, underlying this new claim is the idea that shale drilling is becoming ever cheaper. At such a rate (and especially if it spreads to lower cost countries) that that floor price for oil keeps slipping. And there’s certainly no shortage of oil shales around the world that can be so exploited.
9) US Shale Revolution: Smaller, Leaner, Stronger
Seeking Alpha, 13 January 2015
Richard Zeits
The shale oil industry will likely emerge from the current turmoil somewhat smaller and slower, but leaner and more competitive
Summary
2014 economic metrics for shale oil are a “rear view mirror”: the industry’s cost structure and average well productivity will look very different a year from now.
An oil price of $60 per barrel may prove sufficient for the aggregate U.S. shale oil production to be sustained at current levels or even grow.
The shale oil industry will likely emerge from the current turmoil somewhat smaller and slower, but leaner and more competitive.
Due to its flexibility, shale oil has greater resiliency to oil price swings in terms of returns than conventional oil mega-projects.
Lack of sufficient correction in the “Super-Majors” stock prices, particularly for Exxon, raises a concern regarding ultimate under-performance.
Shale Oil: Adaptability
In its January investor presentation, Continental Resources provided return estimates for its revised 2015 drilling program (as a reminder, Continental recently reduced its capital spending plan to $2.7 billion from the initial plan of $5.2 billion).
The slide below summarizes estimated returns by play for a wide range of oil prices, from $40 to $90 per barrel, and $3.50 per MMBtu natural gas
The slide illustrates the main challenge U.S. shale oil operators are facing: using the current strip pricing and existing cost structure, the vast majority of existing drilling programs cannot justify investment.
The slide also captures the essence of the industry’s response to the change in the macro environment that will become increasingly apparent as more operators roll out their plans for 2015:
* Drilling programs narrowed down to “core of the core” areas;
* Deep, across-the-board cost cuts;
* More disciplined matching of cash flows and spending;
* Continued search for return-enhancing technical solutions;
* Reduced growth rate and effectively shrunk asset bases.
Many of these remedies are what investors probably desired but could only dream of just six months ago. Arguably, such adjustment is objectively needed in the industry that has been booming for several years in a row. The most important change is the greater focus on efficient use of capital, as the flood of external funding on highly favorable terms has effectively been interrupted.
The obvious (and high) cost of these measures: shale oil will be a somewhat smaller industry in the next couple of years, as the run rate of drilling activity will likely decline by approximately one-quarter to one-third by the middle of 2015 from the third quarter of 2014 (based on my estimate) and may decline even further if low oil prices persist. Capital spending cuts are likely to be even deeper, in part compensated by higher well productivity, lower cost per well and other efficiencies.
With the industry cutting capex and reducing focus mostly to select sweet spots, the exploration and delineation of many promising assets will be put on a back burner. Those assets are not going away, however, and the industry’s technical progress will continue uninterrupted. In fact, those less established or less prolific assets will also indirectly benefit from the adjustments the industry is going through. Due to the industry substantially reducing its cost structure, marginal assets are effectively becoming less marginal (let’s not forget that U.S. shale oil is just a small component of the global oil supply). Still, marginal assets’ valuations will be impacted strongly due to the uncertain timing and pace of their development.
