The Oil of Iraqi Kurdistan: A Power Showdown

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1940bkg
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International oil plays have produced some big wins in the junior energy markets in 2012. This year alone, companies like Mart Resources (MMT-TSXv) and Africa Oil (AOI-TSX) were huge wins for risk-tolerant investors (Africa Oil—a 10-bagger).

I’m trying to stretch my political risk comfort zone by flying into Kurdistan—in northeast Iraq—this week to tour the operations of Western Zagros (WZR-TSXv). It’s in a world hotspot, surrounded by Syria to the west, Iran to the east, Iraq to the south and Turkey to the north.

Yet the size of the prize is huge—billions of barrels of oil, and wells that flow over 10,000 barrels a day with low decline rates.

I’ll be giving you an on-the-ground report later this week.  First, I want to give you a sense of how important this area of the world is in keeping global oil supplies strong.  Here is a great introduction by writer Jen Alic.

Stay tuned…later this week I’ll be releasing one of my top picks in the international arena for the rest of 2012 and 2013.

– Keith

Baghdad is Losing Iraqi Kurdistan – Empowered by Oil and Gas

With an estimated 45 billion barrels of oil and perhaps as much as 6 trillion of cubic meters of gas, Iraqi Kurdistan is using smaller companies—like Canadian listed Western Zagros (WZR-TSXv)—to develop its resources… while gradually luring in the big oil majors, despite threats from Baghdad.

For the Kurdistan Regional Government (KRG) of Northern Iraq, it’s all about control:

1.      vis-à-vis the central Iraqi government,

2.      over the oil and gas resources on its territory, and thus,

3.      setting the stage for independence.

And so far, the KRG has the advantage.

How do we know this? Oil majors like ExxonMobil, Chevron and Total are willing to sign deals with the KRG at risk of losing big contracts with Baghdad.

Another indicator is—Baghdad has finally released its first tranche of payments for oil arrears owed to foreign companies operating in Iraqi Kurdistan. The situation was untenable for both sides, with Baghdad not paying for past exports and the KRG halting exports to Iraq in April in response. That means less Iraqi oil exports, and less foreign currency coming in.

It is important to keep in mind that when Iraq announced in August that production had reached its highest levels in 30 years, this was in no small part because the KRG had resumed exports from its fields, temporarily.

In September, the KRG and the Iraqi central government ratified an agreement to this end, prompting the KRG to resume exports, tentatively. On 8 October, Baghdad paid the KRG US$558.9 million, and the KRG pledged to keep the crude flowing.

Whether exports continue to flow will depend on whether Baghdad pays its second tranche—which is about half the first amount—on time.

Iraqi Kurdistan Oil - Area Map

For now, exports from Kurdistan are at about 170,000bpd, with Turkey’s Genel Energy, the lead producer in the region, contributing 110,000bpd of that output. If the deal remains in place and Baghdad pays the outstanding $857 million owed for foreign companies, the KRG plans to boost production to 200,000bdp for the rest of 2012.

Minors Give Way to Majors: A Dangerous Trend for Baghdad

Until very recently, smaller companies who had the wherewithal to enter the Northern Iraq oil and gas market—such as Gulf Keystone Petroleum, Addax, Heritage Oil, Western Zagros, and Genel Energy—were playing a major role in the region’s energy exploitation.

They were on to a good thing, while the oil majors were forced to sit back and hedge their bets. They could not risk angering Baghdad and upsetting their oil and gas deals with the Iraqi central government by dealing on the side with the Kurds. 

That began to chance late last year. The oil majors grew impatient: The KRG was offering more flexible and lucrative production-sharing agreements and despite modest output, the potential was clearly vast. Iraqi Kurdistan’s oil exports are predicted to reach 1 million bpd by 2015, while the region could produce as much as 15 million cubic meters of gas annually.

Baghdad attempted to preempt this by threatening the oil majors, warning that any contracts signed with the KRG would be viewed as illegal.

It was not enough to keep the oil majors back. First ExxonMobil signed a contract with the KRG in October last year, and then things began to snowball. Chevron and Total would follow suit, and even Russia’s Gazprom Neft. Baghdad continues to threaten ExxonMobil, particularly as the company prepares to dig its first exploration well in Northern Iraq.

There is a lot at stake. So why are the oil majors willing to risk their contracts with Baghdad? They are hedging their bets that Baghdad has more to lose than they do by blacklisting them.

What exactly does Baghdad have to lose?

Particularly, the Iraqi central government needs massive revenues in order to improve its energy infrastructure and for this it depends on the oil majors. This is why Baghdad hasn’t made good on its threat to cancel ExxonMobil’s contract for the West Qurna field (8.6 billion barrels), near Basra.

And no threats have been leveled at Gazprom, which on top of its KRG deals is also developing the central Iraqi Badra field. Chevron, on the other hand, was an easy target: It has no contracts with the central government, so Baghdad lost nothing by blacklisting it.

Baghdad also stands to lose the 17% portion of revenues it earns from KRG transactions.

Baghdad could move to block the use of its southern pipelines, but it would only be shooting itself in the foot at a time when exports have finally resumed. And with the KRG’s new “independent” pipeline plans in motion, this threat becomes even less significant.

But the power showdown is certainly not over.

There are much deeper problems than non-payment by Baghdad.  Nothing can be resolved without a ratified national hydrocarbons law, which continues to languish in parliament, tainted as it is by territorial and sectarian sentiments.

While there is no national law, the KRG has its own oil and gas regulations—and this is good enough for foreign companies operating in the region.

“The end objective is clearly independence, and the KRG has no desire to trap itself into a national hydrocarbon law at this point—at least not as long as independence aspirations continue to be boosted by economics and logistics,” Michael Bagley, President of Jellyfish, a DC-based private intelligence firm advising multinational corporations in Iraq, told Oilandgas-investments.com.

“What we essentially have is an Iraq that has already been carved up, with Northern Iraq controlled by Turkey, the US, Saudi Arabia and Qatar, and the rest controlled by Iran,” Bagley said. “From this perspective, there are plenty of external forces who would like to see greater autonomy, and even independence, for Iraqi Kurdistan.”

But the timing isn’t quite right yet. The events in Syria lend some uncertainty to these ambitions, particularly for Turkey.

“Everyone will have to wait for the dust to settle in Syria, which has its own Kurds, to determine how the Iraqi Kurdish question will be answered,” he said.  


How Turkey Fits in – Where All (Pipeline) Paths Lead

Turkey is the largest investor in Iraqi Kurdistan, and the two conclude some $12 million in trade annually, but it also has considerable interests in the rest of Iraq. This double game is becoming somewhat problematic for the Turks, and the first week of October saw Baghdad threaten to take diplomatic action if Ankara continued to launch cross-border raids on Kurdish militant positions in Northern Iraq. Suddenly, for Baghdad, this is a question of sovereignty.

But what it’s mostly about is economics. Turkey began importing crude from northern Iraq in July, bypassing Baghdad. Worse, the KRG and Ankara are planning additional pipelines connecting Northern Iraq and Turkey and affording the KRG significantly more control over its oil and gas resources—and less concerned about payments coming in from Baghdad. 

Two new pipelines would pump crude from Kirkuk, in Northern Iraq, to Ceyhan, in Turkey. The first is scheduled to come on line in August 2013; the second, in early 2014. This would all tie into the Baku-Tbilisi-Ceyhan (BTC) pipeline and its capacity of 1 million bpd of oil Caspian oil. Expanding the BTC to include sizable Iraqi Kurd output would turn Ceyhan into a major hub.   

Furthermore, the Turks have contracted out an infrastructure project to transport Kurdish natural gas to Turkey.With this in mind, the KRG is busy negotiating future contracts with energy majors, though no one’s willing to go into detail on this.

Geopolitical dynamics aside, if this situation is to be resolved, and if the central government is to maintain some semblance of control over the KRG, it will be Baghdad that has to budge.

There is, however, a legal hiccup related to the KRG’s oil and gas law, specifically with regard to Kirkuk, the hub of new pipeline activity. Kirkuk’s official status remains unresolved and it is not officially under the KRG’s jurisdiction, though this is how it is treated. A referendum on this issue is long overdue and this is one weakness Baghdad will seek to exploit.

– Jen Alic

Geopolitical analyst and consultant

QE3 Changes Everything : The New Orleans Investment Conference

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dj
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Dear Friend,

As one of today’s more sophisticated investors, I think you understand what’s about to happen.

But tell me if you disagree with my assessment: The launch of the Fed’s new program of quantitative easing will mark the start of an explosive new rally in gold.

Of course, we’ve already seen gold and silver react to the announcement. But there’s much, much more to come.

Consider that the Fed’s previous two easing programs — QE 1 and QE2 — multiplied the price of gold by 2.67 times. So far, gold’s up only about 10% since the Fed announced QE3.

And also consider this: The first two programs were limited in both time and scope. The Fed is stressing that QE3 is unlimited.

Even scarier, they’re saying that they’ll ramp up the program until it works. And once the economy turns around, they’ll keep the printing presses humming on and on.

This is a new era. It will be like the 1970s on steroids. And we need to be prepared.

I’m writing to tell you that this year’s New Orleans Investment Conference will help you get prepared as nothing else can.

There’s simply no better place to get the tips and strategies you’ll need in this environment of easy money and soaring metals prices.

Yes, I’ll have the typical geopolitical celebrities at this year’s Conference. You may not agree with all of them, but you’ll definitely find Sarah Palin, Dr. Charles Krauthammer, Rick Santelli, Dinesh D’Souza, Peter Schiff and James Carville to be entertaining.

But forget about the sizzle — the steak comes with our roster of top investment experts, particularly our pros in metals and mining.

You’ll get the hottest recommendations of Rick Rule…Doug Casey…Dennis Gartman…Brent Cook…Adrian Day…Lawrence Roulston…Louis James…Marin Katusa…Mark Skousen…Frank Holmes…Ian McAvity…Mary Anne and Pamela Aden…Gene Arensberg…Scott Gibson…Bob Prechter…Nick Hodge…Keith Schaefer…Lindsay Hall…Bill Murphy…Chris Powell…Mickey Fulp…Jim Wyckoff…and, of course, yours truly.

You already know how profitable the advice of these experts can be when gold and silver prices are rising like they are right now.

And there’s no doubt that, at this crucial turning point in America — with towering debts, unlimited money printing and an historic election — there’s an opportunity for truly extraordinary profits just ahead.

There’s also the risk of financial catastrophe for the unprepared.

So I’m asking you to seriously consider preparing — right now, while there’s still time — by attending the New Orleans Investment Conference in a few weeks.

And to help convince you, I’m going to guarantee that you’ll quadruple your money on the investment advice you receive.

You won’t find this kind of a guarantee anywhere else: If you attend New Orleans 2012 and don’t make back at least four times the money you paid to register — in six months or less — just let me know.

I’ll happily give you a prompt, hassle-free refund on your entire registration fee. Every penny.

It’s that simple. Come to New Orleans, enjoy a spectacular event, gather invaluable investment intelligence and specific stock recommendations that could make you a fortune…

…Or go it alone in what is undoubtedly the most dangerous investing environment since the 1970s.

Call us now while there’s still time to reserve your place.

Time is short. I urge you to call our office now, toll free at 800-648-8411, to reserve your place at New Orleans 2012.

Or, visit www.neworleansconference.com to register.

Quite literally, the stakes have never been greater in our investing careers.

Looking forward to seeing you here in New Orleans,
Brien Lundin
President and CEO
New Orleans Investment Conference

Albania’s Oil Shake-Up: Will Bankers Petroleum Stock Keep Up?

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1940bkg
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By guest contributor Jen Alic

Jen Alic is a geopolitical analyst and consultant based in Sarajevo, Bosnia-Herzegovina, and the former editor-in-chief of the Zurich-based ISN Security Watch.

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Albania’s Albpetrol Goes to Highest Bidder in Geopolitical End Game

Shareholders in Canadian-owned Bankers Petroleum (BNK-TSX) have profited from two huge runs in the stock since they went into Albania eight years ago, developing the country’s oil capacity. Albania’s National Oil Company, Albpetrol, lacked the resources.

So what will happen now that Albpetrol has been sold to the highest bidder—an Albanian tycoon with deep ties to the government and the regional energy elite?

The answer is a cocktail of optimism and uncertainty, with a heavy dose of geopolitics. The sale of Albpetrol has three clear winners:

1. The Albanian economy

2. Western gas pipeline ambitions

3. A controversial Albanian tycoon

But the outcome is less clear for Canadian energy companies that have been the backbone of Albanian oil.  Other Canadian juniors operating in Albania include Stream Oil and Gas (SKO-TSXv) and Petromanas (PMI-TSXv).

On October 3, Albanian Prime Minister Sali Berisha announced that a private, US-based consortium Vetro Energy had won the tender for Albpetrol.

The price: €850 million—but the actual assets were only valued at one-third of that price shortly before the tender process opened on 7 September.

What will Vetro Energy actually get for nearly $1.2 billion? Quite a lot, under the surface.

While Albpetrol maintains only 5% of the country’s oil field shares and operates only one oilfield, Amonica, the government took steps right before the tender was opened to sweeten the deal.

Legislation governing Albpetrol was amended, granting the new owner licenses to build a refinery and to transport and distribute natural gas. This addition to the Albpetrol dossier is worth an estimated €20 million in revenues annually.

In total, Albpetrol’s above-ground assets, including oil and gas fields, are worth about €322 million, and Vetro Energy has won the right to explore and exploit these assets for 25 years.

Calgary-based Bankers Petroleum was one of the six bidders for Albpetrol, but its €304 million offer was turned down. Stream Oil and Gas did not participate in the tender.

Was Bankers Petroleum disappointed? Yes, but there is a silver lining. According to Mark Hodgson, Vice-President of Business Development for Bankers, the high price tag placed on Albpetrol raises the estimated value of Bankers’ own assets.

“If you look at the assets of Albpetrol, a good portion of that value is future royalty payments [from Bankers Petroleum],” Hodgson told OilandGas-Investments.com in an October 9th interview, suggesting that the value attributed to Albpetrol’s assets with the nearly $1.2 billion bid immediately raises the estimated value of Bankers’ own assets.

Albpetrol was on a downward spiral during the post-independence transition period of the 1990s and was in dire straits by the time Bankers Petroleum entered the market in 2004, acquiring the lion’s share of Albpetrol’s key oilfield holdings.

Since then, Bankers Petroleum has been responsible for a massive increase in Albanian oil production—from 600bpd in 2004 to 13,000bpd in 2011. Average third-quarter 2012 production from the Patos-Marinza oilfield was 15,616 bpd.

The company’s $450 million in investment in the Patos-Marinza field alone between 2007 and 2011 has increased proven and probable reserves, making it one of the biggest onshore fields in Europe. Probable (2P) reserves are now estimated at 227 billion barrels, compared with 100 million in 2006.

In 2011, Bankers Petroleum acquired Albpetrol’s remaining shares in the Patos-Marinza field. That same year, it began re-development in the Kucova field, with production targets of 2,250 bpd for 2015. Exploration in Block F, next to Patos-Marinza, represents an additional $215 million investment and is scheduled to begin in the first quarter of 2013.

Acquiring Albpetrol would have been ideal, giving Bankers control over the extraction, processing and distribution of oil and gas. It was, however, up against the formidable force of Albanian oil tycoon Rezart Taci and his US partners.

The Chicago-based Vetro Energy consortium consists of Singapore-registered YPO Holdings, owned by Taci, and Vetro Silk Road Equity. The deal saw YPO gain a 51% share in Albpetrol, with a 49% share for Silk Road. On October 5, two days after it was announced that Vetro Energy won the bid, the consortium stepped out publicly with Taci, introducing him as the man behind the deal.

Taci, whose main business empire hinges on the Taci Group and Taci Oil, also owns the country’s only refineries, the largest chain of gas stations and a key TV station which boasts more than 10 million viewers. He is a personal friend of Silvio Berlusconi and a member of Berisha’s inner circle.

In 2009, Taci managed to acquire Albania’s state-owned refineries (ARMO) for €128.7 million by having a previously unknown Swiss company close the deal. Shortly afterwards, he re-registered ARMO under the Taci Group.

So where does all of this leave companies like Bankers Petroleum and Stream Oil and Gas, who have developed Albania’s oil production capacity?

Bankers Petroleum is “not overly concerned,” said Hodgson, noting that “as a state-run entity, Albpetrol was often bureaucratic and slow, and its decisions were often politically rather than financially motivated.”

“We’re excited to be working with a new party with similar motivations, to expand Albanian oil production and increase revenues,” he said.

On the subject of Taci, there was more reservation. Hodgson said that Bankers Petroleum had a “long history” with the Albanian tycoon, and that history was not without its problems, particularly concerning the timing of payments for crude deliveries.

ARMO has had difficulties keeping current on their payments to Bankers, according to Hodgson. “We’ve had payment delays in the past and we’ve worked hard to resolve them with [Taci].”

Albpetrol’s newfound power, however, should not be underestimated. After all, Taci is part of the prime minister’s inner circle and he has worked to secure his hold on Albania’s energy industry at an even pace.

The acquisition of ARMO, to complement his chain of gas stations was a logical step. Another logical step would be to win back some of Albpetrol’s lost oilfields, particularly since they have now been successfully developed. While this latter ambition would be legally out of Taci’s reach as Vetro Energy will be bound to honor Albpetrol’s previous agreements, the Albanian tycoon could make things very difficult for his foreign competitors if he chose.

Essentially, he will have the power of Albpetrol, Berisha and a key link in the future of the Trans-Adriatic pipeline behind him. And when Taci makes an acquisition, no one sees it coming. This is his modus operandi. His involvement is only revealed after the deal is done.

What if relations with Taci went sour?

One concern for both Bankers Petroleum and Stream Oil and Gas could be how a mounting battle over non-payment of corporate income taxes plays out. Presently, the opposition Socialists are attacking the two Canadian companies for allegedly taking unfair advantage of a 1994 law that exempts them from paying corporate income tax as long as investments outpace profits.

Bankers insists that it continues to reinvest revenues in development. Certainly that has been the case, most recently in the Kucova fields. Despite Socialist claims, audits are conducted frequently to this end. And Taci is not going to help the Socialists.

Regardless, it remains an issue of contention that could be easily manipulated through the media.

Bankers is also dogged by recent allegations that its drilling caused a series of earthquakes in June which resulted in structural damage to (illegally built) homes in the rural area of Zharres, followed by protests and an attack on Bankers facilities. This issue could also gain  momentum, particularly through the media, in which Taci owns significant stakes.

For now, these are hypothetical situations and Bankers Petroleum does not view Taci as a threat to their future operations. As Hodgson reminds us, “[Taci’s] business is very much dependent on our own business.”

And indeed, business is good. Bankers’ third-quarter output has risen 18% and sales agreements have been signed for most of its 2013 production. Shares were up 3% at C$3.18 on October 4 on the Toronto Stock Exchange, boosted, rather than shaken, by reports of the sale of Albpetrol.

THE GEO-POLITICAL TWIST

From a geo-political perspective, the acquisition of Albpetrol by Vetro Energy resounds all the way from Albania and Azerbaijan, to Western power corridors, eyeing an opportunity to further the plans of the Trans-Adriatic Pipeline (TAP).

TAP will carry Azerbaijani gas across Greece and Albania to Italy.  It is a key strategic element of Europe’s plans to reduce its dependence on Russian gas and the stranglehold Gazprom has on Europe’s supplies and distribution network.

Vetro Energy will guarantee the West additional gas supplies for the TAP along with a convenient place to store those supplies to boost European energy security.

From the perspective of the TAP, Albpetrol’s value far exceeds the estimated value of its tangible assets. There is another deal sweetener, too: The new owner of Albpetrol will also be granted the use of the country’s vast salt mines for natural gas storage. The largest of these salt domes, at Drumea, can hold up 2 billion cubic meters of natural gas, or 70.6 billion cubic feet (bcf).

Essentially, the privatization of Albpetrol will render Albania a warehouse for TAP gas supplies, strengthen ties between Albania and the US, and help Albania—and the Balkans—keep a safer distance from Russian dependence.

Gazprom did bid on Albpetrol, but it has fallen on hard times in the face of the US shale gas boom, and offered up a paltry $52 million.

Even before the tender results were announced, on September 27 officials from Albania, Azerbaijan, Greece and Italy signed an intergovernmental MOU in New York on the TAP pipeline.

– Jen Alic
Geopolitical analyst and consultant

Publisher Note:  Without question, it has been the international juniors that have produced some of my most profitable trades of the last 5 years… Bankers Petroleum, highlighted in today’s story, being one of the big ones (traded 3 times for gains of 67%, 181% and 338%).  It’s a great example of how it really does come down to pinpointing the right company, in the right place, at the most opportune time. Well – guess what – All 3 of those factors are aligned for me again, right now. I have an amazing resource story – very early in the making, and in a part of the world most people know little about. Let me send you this new research. Look for it soon. – Keith

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*Sources:

http://community.nasdaq.com/News/2012-09/bankers-petroleum-announces-bid-submission.aspx?storyid=17105
http://www.heraldonline.com/2012/10/04/4313040/bankers-petroleum-operational.html
http://rezarttaci.com/2010/11/armo-bankers-sign-agreement-interview-with-rezart-taci-general-director-of-armo-company
http://world.einnews.com/article/117772159
http://in.reuters.com/article/2012/06/18/albania-bankers-attack-idINL5E8HIHN720120618

http://www.neurope.eu/article/italy-greece-albania-sign-mou-trans-adriatic-pipeline

www.trans-adriatic-pipeline.com

How a Switch Back to Coal Could Halt the Natural Gas Rally

By
1940bkg
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0

When will electricity producers in the US switch over from using natural gas back to coal?

It’s an important question this week as natural gas prices are breaking out above their recent low trough in the $2.60/mcf-$3.10/mcf (million cubic feet) range.

Electricity producers in the US decide natural gas prices in North America.  The gas producers have held supply constant—even in the face of $2/mcf gas—of roughly 64 bcf/d (billion cubic feet per day) this year.  Power companies have increased demand by about 6 bcf/d in 2012—even in the spring, before the torrid summer heatwave began.

That represents just under 10% of total US demand.  They are the big swing vote.  Without them, gas would still be under $2/mcf.

So if the power producers switch back to coal, the natural gas rally could get halted dead in its tracks.

“I would predict that if the price of natural gas climbs sustainably above US$3.25, some 10 per cent of that switched would switch back to coal. And that percent would climb if prices rose to US$4,” said energy veteran Thomas Drolet, who is formerly head of Ontario Hydro International.

When natural gas prices started falling from averages of around US$4.50 per mmBtu in January 2012, power generators started switching to the cheaper fuel from coal.

I follow the natural gas markets closely, but I’m not an engineer.  So I wanted to know—logistically, how easy is it for these big electricity companies to switch back from natural gas to coal?

Well, it’s as easy as changing a nozzle.

In most power plants, fuel is pushed to boilers via nozzles.  The nozzles either spray powdered coal or natural gas to ignite and heat up tubes with water circulating in them. The steam generated by the hot water drives the turbines, which in turn generate electricity.

It’s quite simple to change nozzles to accommodate different diameters and pressures. Many plants can handle both gas and coal and can move from one to another in a matter of hours—as in one, eight-hour shift. Older plants can take days, however.

As well, access to natural gas for a change-over to coal would be an issue if the power plant is not located close to a pipeline system, Drolet noted.

So, as natural gas prices are now rising-up to $3.50/mmBtu (1 mmBtu ~ 1.1 mcf), coal prices have dropped to around US$52 per ton from US$78 per ton, the equivalent of US$2.03 per mmBtu.

The $1.40+ per mmBtu discount to natural gas this week is the largest relative price difference since August 2011, according to Reuters data—providing, on paper at least, lots of incentive for electricity producers to start switching back and reducing natural gas demand—potentially a lot.

However, the tipping price point for fuel switching depends on the utility and the age of the generator.

The Future of Natural Gas Prices

The U.S. Energy Information Administration predicts natural gas consumption, which is estimated to rise by 5% this year from 2011 on power generation demand, will reverse in 2013 as prices rise and utilities switch back to coal.

“Because of the projected increase in natural gas prices relative to coal, EIA expects the recent trend of substituting coal-fired electricity generation with natural gas generation to slow and likely reverse over the next year,” the agency said in its September short-term energy

“EIA expects that coal-fired electricity generation will increase by nine percent in 2013, while natural gas generation will fall by about 10 percent.”

The other side of the coin is voiced by Ziff Energy analysts in Calgary, Alberta, who argue rising volumes of natural gas – produced as associated gas with shale oil and natural gas liquids, as well as shale gas – will conspire to put a ceiling on prices, despite low drilling activity on both sides of the border.

“We see a lot of production in the system and many wells waiting for pipelines to be built and to connect to,” said Ziff’s Senior Manager of Gas Services, Cameron Gingrich. “We’re seeing a big surge in Marcellus and other shale, so taking everything into account, I don’t see gas supply dropping any time soon – or prices rising.”

Drolet also suggests U.S. power generators could also move to natural gas because of looming emissions limitations by the Environmental Protection Agency.

Utilities such as Minnesota’s Xcel Energy said they would shut down smaller coal-fired power plants, saying natural gas-fired facilities were cheaper to build than installing costly pollution control equipment on existing coal units.

Ohio-based American Electric Power Company recently said it has burned a quarter less coal in the past four years, about 55 million tons in 2012 from 75 million tons in 2008, while doubling natural gas use.

“However, should natural gas, as some people believe, increase to an average of US$3.25, then price really becomes the primary reason, especially the more coal prices fall,” Drolet concludes.  And the market is there now.

by +Keith Schaefer

P.S. Analysts are now picking up on one very special oil company – one that has become a big win – a HUGE win – for the OGIB portfolio. And I still think there’s plenty of running room for my subscribers. Continue reading my story on the trade here.

Can Shale Oil & Gas Bring the U.S. Energy Independence?

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1940bkg
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0

Can shale oil and gas carry the U.S. to energy independence?

The short answer is no, says Credit Suisse (CS) in a September 7 report, but North America as a whole could be energy self-sufficient.

CS hangs their thesis on 4 key pegs:

1. Flow rates from oil wells about 25% higher than now, based on future technology advances

2. More wells that are on average 39% closer together than they are now (the industry calls this “downspacing”) 

3. $95/barrel Brent pricing

4. Increased use of natural gas in the economy

The barriers to continental self-sufficiency are:

1. Fast declining production in shale wells

2. Oil below $75/barrel

3. Enough money to build pipelines and refineries

CS says US oil production will peak out at 10 million barrels of oil per day (bopd) by around 2022—a double from 2008’s 5 million. 2011 oil production in the US was 5.7 million bopd.

EIA stats show petroleum consumption has fallen steadily for seven years, and in 2011 was 18.8 million bopd—the same as 1997 and 2 million bopd below the peak in 2005.

Once you include 3 million barrels of US liquids production (natural gas liquids like propane, butane, condensate and biofuels), overall production was still less than 9 million boepd—not even half of the country’s total demand of 19.2 million barrels of oil equivalent per day (boepd).

Canada and Mexico are comparatively small consumers, using only 4.4 million bopd, with combined overall oil and liquids production of 6.6 million boepd of oil and NGLs.

All these numbers show that overall, the U.S. is falling short by 10.7 million boepd itself, and North America as a whole comes up around 8.8 million boepd shy of total demand.

That means energy independence would have the US producing and refining 10.7 million boepd more than it does now. That’s a (very) tall order.

CS expects U.S. oil and liquids production to rise from the current 8.7 million boepd to around 15 million boepd by 2022, while demand will slump closer to 18 million boepd. A modest jump in Canadian output paired with continuing low demand will help bridge the shrinking supply gap, moving North America closer to energy independence. And that assumes a steady decline from Mexico.

The crux of the report’s predictions lies in the Americans’ ability to tap their massive unconventional oil resources.

The first key to this prospective boom is the initial production (IP) rates for the country’s major shale oil fields — the amount produced at each well over the first 30 days. (The industry shows this number in print as the “IP30” rate.)

These numbers are often the most important, since the greatest output comes in the first few months before declining rapidly. CS estimates IP30 rates for each of the major shale plays using production numbers at the end of the fourth quarter of 2011.

Some of these assumptions are set far above what actual production numbers are today. For example, actual output in the Utica shale and Mississipian formation was close to nil—so almost no data on which to guesstimate the future. But CS expects wells to eventually reach around 600 and 400 boepd, respectively, as the plays mature.

Other young plays that lack any production data like the Brown Dense limestone and the Woodford shale are projected to top 300 boepd based on the limited data of those regions.

The biggest producers – the Granite Wash and Eagle Ford shale – are already close to their CS assumptions.

On the whole, CS estimates average a 21%-25% bump over actual output numbers from last year. Only the Granite Wash and Cana Woodford oil plays are projected above the CS exploration and production team’s numbers.

The report backs up its optimistic IP30 rates with strong early numbers in some of the developing unconventional plays. Over three years, IP30 rates in the well-developed Barnett formation more than doubled.

But in the Bakken and Marcellus shale plays, IP rates tripled in 13 months and nine months, respectively. The Eagle Ford is the only exception, and those numbers are skewed somewhat by an early focus on natural gas over liquids.

A large part of rising IP rates is the assumption that oil and gas companies will eventually learn the nuances of each region. But CS also notes the increased use of pad drilling—where four wells can be drilled from one, two-acre pad—should keep more oil rigs online for longer during the first 30 days, as they don’t need to be moved around as much from well to well.

Pad drilling will also play a role in lowering the spacing between unconventional oil wells.

CS projects the U.S. will need to increase its total oil wells by 27% in order to prevent a decline within the next four years. In order to meet the report’s production numbers, the country would have to increase the number of new wells being drilled each year by 39% through 2022.

These estimates are all a bit voodoo—they depend on tight spacing and a lot higher flow rates than now. However, CS says recent experiments in downspacing in the Eagle Ford shale play should help boost production.

The big question when you downsize your wells is—are you just cannibalizing existing production from existing wells or are you able to recover more oil overall (the Recovery Factor) by draining parts of the reservoir that you wouldn’t have gotten otherwise.

If it’s the former, the impacts on the US production outlook would be dramatic.

The biggest question mark for me, however, is what will the decline rates on shale oil be long term? Right now CS suggests average decline rates in the Bakken and Eagle Ford—the two largest shale oil plays right now—are 60% in Year 1, 30% in Year 2 and falling close to 15% in Year 5. CS puts its estimate for the average terminal decline rate – beyond 20 years – of unconventional US oil resources at 8%.

But the Bakken and Eagle Ford shale plays have only been drilled hard for the past 3-4 years. So long term decline rates—which CS thinks will average out at 4% for the Bakken and 6% for Eagle Ford over the life of the well—is an educated guess.

CS estimates expected ultimate recovery per well for the Bakken of nearly 900,000 boepd and 600,000 boepd for the Eagle Ford shale. Less developed projects like the Permian Horizontal, Woodford shale and Granite Wash are all expected to reach near 500,000 boepd, despite a small sample size.

If declines are steeper than they project, then these wells will get shut-in sooner and produce less than CS suggests. Though they didn’t talk about waterflooding, which will likely GREATLY increase overall reserves in US tight oil plays. Read all about that here in my story on waterfloods.

CS estimates that the oil industry will need Brent prices of at least $95 per barrel to justify investment through 2014. After that, investment costs will drop low enough that shale fields would eventually draw interest even at benchmark prices of almost $75 per barrel.

The CS analysis is most sensitive to a change in rig counts. A drop to $80 per barrel within the next year would result in 180 fewer rigs operating within the country and $60 billion less in total investments by 2014. Oil production in this scenario would reach only 8 million bopd.

The report says that massive infrastructure spending (pipelines, refineries, etc.) is a key to energy independence—and notes that oil companies have already proven unwilling to invest in new infrastructure at prices as high as $90 per barrel, despite most wells remaining profitable.

A lack of infrastructure spending—specifically pipelines to take crude oil out of the Cushing Oklahoma hub, and to get Bakken and Canadian oil to the east and west coasts—have caused a $15/barrel discount in North American crude prices to the rest of the world.

This is huge lost revenue for US and Canadian oil producers.

Pipelines such as the Seaway pipeline and the proposed Keystone XL should add between 950,000 and 1.25 million bopd of capacity away from Cushing OK, to the Gulf Coast. But Bakken oil will continue to rely on rail and barge transportation, and both the Keystone XL and the Flanagan South pipelines that would service the region are yet to be approved.

CS also gives some consideration to possible regulatory restrictions, primarily in terms of water restrictions. Several states have already considered limiting water use in the energy sector to prevent the decline of local agriculture industries, while concerns about water safety have spurred most of the objections to the use of fracking in the U.S.

US energy independence is a hot topic spurred by the rapid rise in shale oil production—The Shale Revolution.

While it’s hard for anybody to guesstimate what such a dynamic industry will be doing 10 years from now, Credit Suisse data suggests that will remain an elusive goal.

by +Keith Schaefer

The Mystery Behind High North American Gas Prices: Solved

By
Keith Schaefer
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0

North American drivers are now competing with global drivers — and global industry — for cheap American crude.

I went on FOX National Business News to explain why that is (click the link at the end to watch the interview.)

For starters, keep in mind that driving gasoline is 50% higher today than in 2008, relative to the oil price.

Put another way, gas prices right now are near the highs of 2008 (when oil was a whopping $147 a barrel.)

Yet the oil price is $50 a barrel lower today — that’s what I mean by 50% higher gas.

Why is that, exactly?

Look at these two charts — I talked about both in the Fox segment — which help explain one part of a complex story.

The first chart says there is a low amount of middle distillates globally—these are the refined oil products that are used to power and transport the world: diesel, jet fuel, home heating oil, etc.

global distillates

The above chart means that either demand is low, or supply is low.  But then I look at the chart below, and I see supply is high and rising—so I conclude demand must be higher (which I have to think is bullish).

gasoline-export

US refineries are dramatically increasing their exports of light/middle distillates from the Gulf refinery complex out into the rest of the world.

And yet global distillate levels are still low.  That intimates a bullish world demand case to me, and tells me we won’t see a dramatic drop in the price of oil.

Refineries export into a global market for their refined products, which are all priced on Brent Crude, while their input costs—North American crude oil—is priced on cheaper WTI, or West Texas Intermediate.

That $15/barrel price difference between the Brent and WTI is pure profit for refineries.  The WTI price is so much cheaper because of the HUGE supply of new oil created by the U.S. in the fast-growing Shale Revolution.

It allows refineries to choose whatever global product has the best price for export—and that’s not always driving gasoline for North Americans.   Several North American refineries are trying their best to move their processing over to other products besides driving gasoline.

But even with lots of gasoline, domestic drivers are now competing with those around the world for cheap North American crude products.

And that should keep retail gasoline prices high.

Click here for my FOX interview.

by +Keith Schaefer

P.S. Meet me at one of these 4 conferences where I’ll be speaking in the next two weeks:

One2one Energy Investor Forums

  1. Calgary September 19th – Please click here to sign up.
  2. Vancouver September 20th— Please click here to sign up.
  3. Chicago Hard Assets Investment Conference September 21-22, 2012 — http://www.hardassetschi.com
  4. Toronto Resource Investment Conference September 27-28, 2012 — http://cambridgehouse.com/event/toronto-resource-investment-conference

 

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BNN Interview: How Fracking Can Find Middle Ground

By
1940bkg
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0

The debate over fracking — as I laid out in my last story — is raging. Among the media outlets that picked up on the story was Canada’s BNN (Business News Network), which promptly invited me in to discuss both sides of the debate (and how I’m presently trading it) with anchor Andrew Bell. I’ve included the transcript of the interview below, and at the end of it I profile a pick from the OGIB trading portfolio — an oil company that has doubled production in the last 9 months, while it embarks on a program that could give them the most profitable oil in North America.

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Andy:  Environmentalists up and down the continent are up in arms about the impact of fracking — potentially on seismic activity and of course water quality. But our guest says despite all the rhetoric, this process is here to stay.  Joining us from Vancouver, Keith Schaefer, Editor of the Oil & Gas Investments Bulletin.  Great to see you again, Keith.

Keith:  Thanks for having me, Andy.

Andy:  I mean the headlines pile up, don’t they?  The BC government just released a report linking fracking to earthquakes. Now, isn’t this a big threat?  I mean, isn’t fracking going to be under a major cloud for a long time?

Keith:  I think over the next couple of years, you’re going to continue to see the dance that the industry is having with the general public, explaining all the things that go on about fracking and how it’s not only beneficial but safe.  So the general public right now I think is looking for little more from the oil and gas industry… and these reports that the BC government is putting out is just the type of thing that I think can start to bring some consensus together.

So basically this report does say that — yes, there are some environmental issues around fracking, that they do cause earthquakes, and I think the industry accepts that, Andy.  The big thing is — this type of activity is really quite small and doesn’t have any major impact or even really minimal impact at the surface.   And that’s what I think the industry wants to get across to people… that it is safe, it’s not going to affect your drinking water, it’s not going to cause earthquakes and cause your pictures to fall off the walls, but there are small things that are deep underground.

Andy:  But you reckon, I mean, there is just too much money behind this — we’re hearing that President Obama for example has been very careful not to condemn fracking because of course it’s causing an economic boom in many parts of the States… and that may help get him reelected.

Keith:  Absolutely, you are seeing a huge economic input into the U.S. through the shale gas and the shale oil revolution, particularly in the Northeast U.S., where it’s been hit so hard with all the economic downturn… and now all of a sudden people are saying, ‘wow I can get some pretty big royalty checks,’ like the farmers in North Dakota are.  And so you’re seeing neighbor against neighbor, Pennsylvania against New York State.  Pennsylvania farmers are getting great royalty checks from the industry, and New York is sitting back, so it’s really created this dichotomy where there is still a very big concern about environmental possibilities versus, wow, there is a lot of money on the table here… not only for the economy but for individual people.

Andy:  Does the royalty system work the same way?  Do Canadian farmers get royalties in the same way?

Keith:  They do, yes.

Andy:  Okay, well, let’s move on.  And you reckon the industry though, the oil and gas industry — I love your expression here — they’ve just been standing there with their hands in their pockets and a blank stare, saying ‘we’ve always done it this way, we’ve always done it this way.’  Do you think that they need to address these concerns?

Keith:  I think the industry has been doing their best to try and get their message out, but I think they’re really not addressing the concerns that the public wants to hear.  They’re saying ‘yes, we’ve always done it this way, and here is the science,’ but they’ve really kind of missed the boat on guessing where public opinion is going to be next… and really dealing with the real issue of, ‘okay let’s sit down, let me show you how this works.’  And they are using the media, I think they should be doing a lot more grassroots, talking to people and really hearing them… making sure that these people feel heard, and not just putting up a brick wall with the economics and the history that says, ‘yes – this has actually been a very safe practice.’

And so, I’m really hoping that in the very near-term, the industry is going to grab this grassroots consultation and really get going… because there is a lot of money on the table here, and we really can’t afford to have a lot of this delayed for much longer.

Andy:  You reckon that in five years the fracking fluid will be food grade — how could they achieve that?

Keith:  Well, they are already working on that. That’s what – I think this is a great example of what can happen when you start to work together. The industry is very innovative, the oil and gas patch has incredible innovation and technological advancements all the time, and so now the industry is working on making fracking fluid food grade.  And the industry is going to demand – pardon me, the public is going to demand that, and I see that that’s where it’s going.  It’s going to take some time, so we’re still going to see this dance between the public and the industry, but it will happen.

And so now what we need to do is really work together, get both sides to the table, so that they really consider talking to each other to work this out.  And I think this food grade fracking fluid will happen, and it is just one example of the type of things that the industry is going to be doing to keep the public aware and happier.  And so all this public pressure, Andy, is good, but it does mean that for the next couple of years, until we really get consensus, you are going to continue to see this friction.

Andy:  You have a couple of stock ideas for us — Raging River, why do you like that one, Keith?

Keith:  Well, I really like this team, you know, Neil Roszell and Bruce Beynon have been together at Wild Stream before, which was sold to Crescent Point.  They have a history of building these companies up really well.  It has an incredible growth rate right now. They’ve more than doubled production just in the last nine months.  The Street does love this team… it gives a very high valuation.

And again, like Novus, it’s in the Viking formation, Saskatchewan — where the economics are just fantastic.  It’s low cost, and this team is also at the forefront of developing water floods into this formation. That is going to bring out a lot more oil at very cheap prices — probably $5 to $10 a barrel — lifting costs, which is incredibly profitable.  So again, over the next 18 months, I just think shareholders are going to be really well rewarded for that stock.

Andy:  And is Raging River a stock you own?

Keith:  Yes, it is.

Andy:  Great.  Keith, thank you so much for joining us today.

Keith:  Thanks, Andrew.

by +Keith Schaefer

The Stakes Get Higher in the Fracking Debate

By
1940bkg
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0

Is there any common ground in the debate over hydraulic fracturing?  It’s a divisive issue, especially in the U.S., where 90%-plus of all global fracking is done now, pitting neighbor against neighbor.

Two weeks ago I wrote about a success story — How a U.S. Oil Refinery Got Saved — in which different stakeholders were able to put aside differences and create a win-win scenario for everyone.

Can the groups on either side of the fracking debate do the same?

The stakes are higher, as the main concern of those against fracking is that it may contaminate drinking water.  That may or may not be true, but it certainly validates the fierce emotion behind the issue.

Media reports surfaced in late August that New York State Governor Andrew Cuomo may end the ban on fracking the state has had since 2008.  Trouble started immediately.

The Albany Times-Union reports that roughly 1,200 people attended a march through the state’s capital on Monday, August 27, calling on Cuomo to uphold the fracking ban.

“Hydrofracking remains a divisive issue for New Yorkers and presents DEC (Department of Environmental Conservation) and the Governor with a political ‘lose-lose,'” Steven Greenberg, a pollster at Siena, said. “Whatever decision they make is going to upset as many people as it pleases.”

A recent survey from Siena Research Institute found more New Yorkers supported restarting fracking than opposed it… by a razor-thin margin of 39 percent to 38 percent.

Still, the DEC’s research notes that the industry could bring more than 17,600 jobs to the state, and potentially as much as $125 million each year in tax revenue, making a strong counter-argument all on its own.

For many, the issue is jobs and royalties vs. the environment. I don’t see it that way, though.  This multi-billion dollar industry–horizontal drilling and multi-stage fracking–has been around for 15 years, but really only seen major growth since 2007—five short years ago.

And as companies test new fracking technology—plug & perf vs. open hole, slickwater vs. oil vs. propane—new things get developed that keep lowering costs and increasing the amount of oil and gas that can get produced.  What I mean to say is that technology is changing so fast, the industry can hardly keep up–much less the general public.  And the industry is obviously fixated on keeping up with the competition; not explaining things to the public–which, in all likelihood, will all be out of date shortly.

The industry is even developing more environmental ways of fracking.  I believe, for example, that in five years all fracking fluid will be food-grade.  You (ok, maybe not you, but the oil and gas company reps) will be able to drink the stuff. The public is demanding it.  I think it will happen—but not right away.

The industry and the public are going to continue to dance around this issue for the next couple years trying to find consensus.  The Shale Revolution is SO important economically to the United States there is no way fracking is EVER going to get banned in the near-to-mid-term.  But both sides need to work harder to find consensus.

The two sides don’t talk the same language yet.  When regulators produce 450-page studies which have scientific backing that say fracking can be done safely, I don’t hear respect from the people opposed to fracking.

And the industry… well, a lot of them are like deer caught in the headlights.  They’ve been fracking for 50 years, and they just can’t get over what all this new fuss is about.

Get over it, guys.  And hurry.

There is a very bright light of mainstream attention that will forever change the way oil and gas does its business in the developed world, and how it gets permitted.

Sadly, the industry hasn’t been pro-active or successful in getting ahead of public opinion on fracking, and they remain re-active in responding to issues—most of which they clearly never thought were issues in the first place.

And some very aggressive operators who have little bedside manner haven’t helped at local levels—especially in areas that are new to oil and gas, like the northeast US.

Carol French and Carolyn Knapp, two Pennsylvania dairy farmers, are outspoken critics of fracking. They not only point to stories of contaminated wells but to the problems that come with the infrastructure brought in by operators. According to The Associated Press, the pair say that pipelines can cut off access to crops and drilling equipment can cause serious damage to roads.

“I never in my wildest dreams envisioned the industrialization that comes along with this process,” Knapp told a group in North Carolina.

Siobhan Griffin, a New York cattle farmer, told the news source that she fears for her animals if fracking comes to town.

Two incidents stick out in her mind:  the quarantine of 28 cows in Pennsylvania after they drank fracking wastewater and the death of 17 Louisiana cows that died after drinking water that was contaminated. (Fracking involves millions of gallons of water mixed with sand and about 1% chemicals pumped into the earth to fracture shale rock, releasing gas. The wastewater created by this has caused many fears of drinking water contamination.)

Not all farmers have the same view of fracking, however. Some see the wealth it has brought their neighbors, and are anxious to get in on the action.

New York dairy farmer Jennifer Huntington took her town to court after it stopped a well plan on her land. She says that the money brought in by the operation would have paid for a number of updates to her farm.

“We would have used the royalties to update the anaerobic digester that we installed in 1984,” she told the AP. “We would have purchased a better oil seed press to more efficiently press soybeans for biodiesel. We would have invested in our farm, our land and our employees.”

Dan Fitzsimmons, the chief of the 70,000-member Joint Landowners Coalition of New York, has worked to have the Empire State lift its moratorium on fracking so he and others could profit from it like their neighbors in Pennsylvania.

“I go over the border and see people planting orchards, buying tractors, putting money back in their land,” he said. “We’d like to do that, too, but instead we struggle to pay the taxes and to hang onto our farms.”

The picture is not always clear even once fracking starts up, however. While some of the environmental impacts of fracking may often get overstated, and are often misunderstood, some incidents have highlighted the potential for problems just in bringing the gas industry into populated areas.

The Philadelphia Inquirer notes that the town of Dimock, Pennsylvania—made famous by a shot of flaming tap water from the slightly histrionic documentary Gasland—remains deeply divided by the presence of the gas industry.

The town was at one point the epicenter of the hydraulic fracturing debate after initial reports suggested that fracking had tainted nearby wells. The story really kicked off when methane that had collected in one well exploded, ignited by the well’s electric pump.

Investigation from the U.S. Environmental Protection Agency eventually found that the problem was actually with the cement used to seal off the wells, which let gas migrate into the local aquifers. Still, even with extensive efforts to fix the wells and clean the water, many residents remain opposed to further drilling and distrustful of the companies doing the work.

“You sort of have to give them the opportunity to fix your water. It’s all about the water; it’s not about the money,” Bill Ely, a 61-year-old resident of Dimock, told the Inquirer. However, he added, “Once your water is bad, it’s hard to get back to drinking it.”

Even in areas where the environmental impacts have been less dramatic, there has been notable disagreement. The Star-Gazette notes the example of Montana’s Blackfeet Indian Reservation, which leased about two-thirds of its land for oil and gas exploration in 2008.

The reservation has already brought in around $30 million; enough to pay off debts incurred building a casino, upgrade some of the area’s infrastructure and offer some regular income for residents, without any dramatic environmental problems.

However, the land has started to fill up with all the trappings of the oil and gas industry, from drilling rigs to water and chemical containers, leading many to question the decision.

So the debate rages.  The emotional side needs to look at the science, and the engineers need to understand the emotion, which doesn’t get papered over with a study. I would suggest it’s up to industry to make the big first move—whatever that is.  But for it to be effective, it needs to be a Big Leap Forward.

by +Keith Schaefer

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