Replies to post #3492 on The Rising Influence of Rising Affluence

[old man]

Dew-- this has been the position of Yergin, CERA, and the industry for a long time. I'm inclined to put more credence in the estimates of government entities. Nor am I sure that an even longer period of using fossils fuels is in our interests.
John

[mauser96]

From an investors viewpoint there is a difference between "Peak Oil" and "Peak Cheap Oil". Neither require a sharp pointed peak, a rounded or flat one is OK too, it just takes longer to start the down slope. The down slope isn't needed to make profitable investments, just a tad less supply than demand.

New oil in general is expensive to produce. I understand that even land based oil wells in the Bakken cost close to $9 million each to drill and complete. Deep water wells are even more expensive. These costly wells require expensive oil to be economic. Many areas lack infrastructure, it will be a long time before they produce and market significant amounts of oil. I am dubious about claimed reserves for new fields. There are few typical oil fields, especially not the new ones , which are made feasible by a combination of new technology and high prices. You need both to make them work.

[old man]

Rebuttal to D. Yergin’s letter (scroll down). Any bets that the WSJ will publish it?
John

http://www.energybulletin.net/stories/2011-09-18/daniel-yergins-letter-peak-oil-community-and-rebuttal
Daniel Yergin's letter to the peak oil community, and a rebuttal
by Daniel Yergin and Jeffrey J. Brown

________________________________________

There Will Be Oil
Daniel Yergin, Wall Street Journal
For decades, advocates of 'peak oil' have been predicting a crisis in energy supplies. They've been wrong at every turn, says Daniel Yergin.
---
Since the beginning of the 21st century, a fear has come to pervade the prospects for oil, fueling anxieties about the stability of global energy supplies. It has been stoked by rising prices and growing demand, especially as the people of China and other emerging economies have taken to the road.
This specter goes by the name of "peak oil."
Its advocates argue that the world is fast approaching (or has already reached) a point of maximum oil output. They warn that "an unprecedented crisis is just over the horizon." The result, it is said, will be "chaos," to say nothing of "war, starvation, economic recession, possibly even the extinction of homo sapiens."
The date of the predicted peak has moved over the years. It was once supposed to arrive by Thanksgiving 2005. Then the "unbridgeable supply demand gap" was expected "after 2007." Then it was to arrive in 2011. Now "there is a significant risk of a peak before 2020."
But there is another way to visualize the future availability of oil: as a "plateau."
In this view, the world has decades of further growth in production before flattening out into a plateau—perhaps sometime around midcentury—at which time a more gradual decline will begin. And that decline may well come not from a scarcity of resources but from greater efficiency, which will slacken global demand.
[More at original article]
Mr. Yergin is chairman of IHS Cambridge Energy Research Associates, an energy research and consulting firm. This essay is adapted from his new book, "The Quest: Energy, Security and the Remaking of the Modern World." He received the Pulitzer Prize for his book "The Prize: The Epic Quest for Oil, Money and Power."
(17 September 2011)
The complete text of Danel Yergin's opinion piece is now online at the Wall Street Journal.
- BA

________________________________________
Rebuttal to Daniel Yergin
By Jeffrey J. Brown
Jeffrey J. Brown is an independent petroleum geologist in the Dallas, Texas area. He has just been named to the ASPO-USA board of directors and has been a frequent contributor to Energy Bulletin and The Oil Drum. His website is GraphOilogy.
He submitted a letter to the Wall Street Journal in response to Daniel Yergin's article. The letter has not yet been published by the WSJ.
-BA


To the Editor:
Contrary to Mr. Yergin’s assertion that advocates of Peak Oil have been wrong at every turn, six years of annual global production data show flat to declining crude oil and total petroleum liquids production data.
The EIA shows that global annual crude + condensate production (C+C) has been between 73 and 74 mbpd (million barrels per day) since 2005, except for 2009, and BP shows that global annual total petroleum liquids production has been between 81 and 82 mbpd since 2005, except for 2009. In both cases, this was in marked contrast to the rapid increase in production that we saw from 2002 to 2005. Some people might call this "Peak Oil,” and we appear to have hit the plateau in 2005, not some time around mid-century.
Only if we include biofuels have seen a material increase in global total liquids production.
In the US, there are some good stories about rising Mid-continent production, and US (C+C) production has rebounded from the hurricane related decline that started in 2005, but 2010 production was only very slightly above the pre-hurricane level that we saw in 2004, and monthly US production has been between 5.4 and 5.6 mbpd since the fourth quarter of 2009, versus the 1970 peak of 9.6 mbpd. Incidentally, US net oil imports of crude oil plus products have fallen since 2005, primarily as a result of a large reduction in demand, because of rising oil prices (which Mr. Yergin predicted would not happen), but EIA data show that the US is still reliant on crude oil imports for two out of every three barrels of oil that we process in US refineries.
However, the real story is Global Net Oil Exports (GNE), which have shown a measurable multimillion barrel per day decline since 2005, and which are measured in terms of total petroleum liquids, with 21 of the top 33 net oil exporters showing lower net oil exports in 2010, versus 2005. An additional metric is Available Net Exports (ANE), which we define as GNE less Chindia's (China + India’s) combined net oil imports. ANE have fallen at an average volumetric rate of about one mbpd per year from 2005 to 2010, from about 40 mbpd in 2005 to about 35 mbpd in 2010 (BP + Minor EIA data, total petroleum liquids).
At the current rate of increase in the ratio of Chindia's net imports to GNE, Chindia would consume 100% of GNE in about 20 years. Contrary to Mr. Yergin’s sunny pronouncements, what the data show is that developed countries like the US are being forced to take a declining share of a falling volume of GNE. In fact, our work suggests that the US is well on its way to “freedom” from its reliance on foreign sources of oil, just not in the way that most people hoped.
In a November, 2004 interview in Forbes, Mr. Yergin asserted that oil prices would be back to a long term price ceiling of $38 by late 2005--because of a steady increase in global crude oil production. It turned out that Mr. Yergin’s predicted price ceiling has so far been the price floor. The lowest monthly spot crude oil price that the EIA shows for post-November, 2004 is $39.
I suspect that just as Mr. Yergin was perfectly wrong about oil prices, he may be confidently calling for decades of rising production, just as we come off the current production plateau and just as an accelerating decline in Global Net Exports kicks in.
Sincerely,
Jeffrey J. Brown
Original article available here

Here’s another comment.
Oil Spring Eternal

Writing The Prize (1991) , and winning a Pulitzer for it, brought Daniel Yergin automatic creds in the energy industry. Through Cambridge Energy Research Associates (CERA) , he has consistently maintained a cornucopian viewpoint about the future availability and price of oil, to the point that the energy depletion community has defined a Yergin unit as the $38 per barrel that in 2005, Yergin predicted would be the steady price of oil. Oil reached two Yergins in 2006, spiked to 3.6 Yergins in 2008, and currently Brent crude is trading at 3 Yergins.
Yergin is in the contradictory position of claiming both that oil prices will stay low and that there will be more extraction of ‘proven reserves” through advanced techniques. Proven Reserves means, “Quantity of energy sources estimated with reasonable certainty, from the analysis of geologic and engineering data, to be recoverable from well established or known reservoirs with the existing equipment and under the existing operating conditions.”
But those advanced techniques cost more money per barrel, which can only be supported by higher and higher oil prices or government stimulus. If prices had stayed at 38/bbl, as Yergin predicted, “additions and extensions” to extraction would never have been profitable. In fact, collapsing and rebounding demand make it difficult to know which extraction technologies will cost less than the price of oil.
Nevertheless, in his Saturday Essay in the Wall Street Journal, Yergin still wants to assure us that There Will Be Oil and that Peak Oil will always be pushed back as we shift more oil from not recoverable to proven reserves. He admits that geologist M King Hubbert got the date of the US Peak correct, but claims that:
Hubbert’s original projection for U.S. production was bold and, at least superficially, accurate. His modern-day adherents insist that U.S. output has “continued to follow Hubbert’s curve with only minor deviations.”
But it all comes down to how one defines “minor.” Hubbert got the date exactly right, but his projection on supply was far off. He greatly underestimated the amount of oil that would be found — and produced — in the U.S.
By 2010, U.S. oil production was 3½ times higher than Hubbert had estimated: 5.5 million barrels per day versus Hubbert’s 1971 estimate of no more than 1.5 million barrels per day. Hardly a “minor deviation.”
What Yergin doesn’t explain is that Hubbert’s 1956 prediction was only for conventional oil extraction in the lower 48 states. Hubbert could not have included the immense amount of oil extracted from Alaska’s Prudhoe Bay – discovered in 1968. But Prudhoe reached peak in 1979 and there haven’t been any comparable discoveries in the US. Cornucopians talk about ANWR and coastal drilling, but we’ve reached a level of consumption where new discoveries would have to be more than immense to make a difference.
Hubbert also did not include deep sea oil from the Gulf of Mexico, like that in the BP oil spill. Hubbert did not include synthetic oils from the environmental disaster of Canadian tar sands. Hubbert didn’t include oil drilled or fracked from the shale in the Bakken Formation. Hubbert also didn’t include biofuels made from crops that require natural gas to make fertilizer and oil to make diesel fuel.
Extracting unconventional oil is far more destructive to the environment than raising a derrick and drilling a pipe. We as a society seem all-too-willing to countenance the loss of fish, birds, bats, bears and people without influence if it will keep the cars running and the lights on, but are we willing to give up our fresh water aquifers, too?
In the comments, Richard Heinberg wrote:
For decades there have been those who warned of oil shortages and high prices, and those who promised there would be plenty of cheap oil for the foreseeable future. For the first three-quarters of the twentieth century, the “cornucopians” proved right. Then, as oil discoveries declined, country after country began to see peaking and declining production. “Peak oil” analysts successfully forecast these production declines nation-by-nation, and during the past tumultuous decade also were generally right about world oil production rates and prices. Meanwhile, the price and production forecasts of cornucopians like Daniel Yergin have diverged further and further from reality. World oil reserves may be large, but the oil industry is replacing cheap, easy-to-get oil with dirty, expensive substitutes. Under these circumstances, reserves are a poor basis for forecasting future production rates. The “peak oil” analysts evidently understand the complexity of the situation, but Yergin–despite his encyclopedic knowledge of oil industry history–seems not to.

[DewDiligence]

New Fields Propel Americas to Top of Oil Companies’ Lists

http://www.nytimes.com/2011/09/20/world/americas/recent-discoveries-put-americas-back-in-oil-companies-sights.html

›September 19, 2011
By SIMON ROMERO

RIO DE JANEIRO — Brazil has begun building its first nuclear submarine to protect its vast, new offshore oil discoveries. Colombia’s oil production is climbing so fast that it is closing in on Algeria’s and could hit Libya’s prewar levels in a few years. ExxonMobil is striking new deals in Argentina, which recently heralded its biggest oil discovery since the 1980s.

Up and down the Americas, it is a similar story: a Chinese-built rig is preparing to drill in Cuban waters; a Canadian official has suggested that unemployed Americans could move north to help fill tens of thousands of new jobs in Canada’s expanding oil sands; and one of the hemisphere’s hottest new oil pursuits is actually in the United States, at a shale formation in North Dakota’s prairie [the Bakken] that is producing 400,000 barrels of oil a day and is part of a broader shift that could ease American dependence on Middle Eastern oil.

For the first time in decades, the emerging prize of global energy may be the Americas, where Western oil companies are refocusing their gaze in a rush to explore clusters of coveted oil fields.

“This is an historic shift that’s occurring, recalling the time before World War II when the U.S. and its neighbors in the hemisphere were the world’s main source of oil,” said Daniel Yergin, an American oil historian. “To some degree, we’re going to see a new rebalancing, with the Western Hemisphere moving back to self-sufficiency.”

The hemisphere’s oil boom is all the more remarkable given that two of its traditional energy powerhouses, Venezuela and Mexico, have largely been left out, held in check by entrenched resource nationalism. Venezuela is now considered to have bigger oil reserves than Saudi Arabia, putting it at the top of OPEC’s rankings. If it opened up more to foreign investment, it could tip the scales further in the hemisphere’s direction.

Exactly how the Americas’ growing oil clout might rebalance energy geopolitics remains an open question. The Middle East can still influence oil prices greatly, its oil fields are generally cheaper to develop, and some countries in the region are endowed with great reserves.

Moreover, the Americas still vie for investment with other oil-rich regions, like Russia’s portion of the Arctic Ocean and West African waters. Security concerns like the abduction of oil workers could, as they have in the past, prevent Colombia from continuing to raise output. And environmental and financing questions pose persistent challenges to the rapid growth of the hemisphere’s oil production.

Still, the new oil exploits in the Americas suggest that technology may be trumping geology, especially in the region’s two largest economies, the United States and Brazil. The rock formations in Texas and North Dakota were thought to be largely fruitless propositions before contentious exploration methods involving horizontal drilling and hydraulic fracturing — the blasting of water, chemicals and sand through rock to free oil inside, known as fracking — gained momentum.

While the contamination of water supplies by fracking is a matter of fierce environmental debate, the technology is already reversing long-declining oil production in the United States, with overall output from locations where oil is contained in shale and other rocks projected to exceed two million barrels a day by 2020, according to some estimates. The United States already produces about half of its own oil needs, so the increase could help it further peel away dependence on foreign oil.

The challenges of tapping Brazil’s new offshore fields, located beneath 6,000 feet of water and salt beds formed by the evaporation of ancient oceans, are even greater. Petrobras, which has ambitions of surpassing ExxonMobil as the world’s largest publicly traded oil company, is investing more than $200 billion to meet its goals.

“Brazil will become an oil power by the end of the decade, with production in line with that of Iran,” said Pedro Cordeiro, an energy consultant here for Bain & Company, who sees the country’s oil production climbing to 5.5 million barrels a day by 2020.

Construction backlogs could slow Brazil’s offshore expansion. But resurgent industries related to the oil boom, like shipbuilding, and strategic efforts like nuclear submarine construction to defend oil wells, underscore Brazil’s plan of using its energy resources to project global power from this hemisphere.

“No other place on the planet is seeing this kind of investment,” said Márcio Mello, a former Petrobras geologist who is now the chief executive of HRT, a new oil company based here. “This decade is our chance to rise.”

Optimism is plentiful here, and even a bit of hubris can creep into conversation. Still, oil analysts say the hemisphere’s new energy profile is already challenging the sway OPEC has long held [duh].

Canada, for instance, is already the top petroleum exporter to the United States, followed by Mexico. Beyond that, output from Canada’s oil sands may almost double to three million barrels a day by 2020, and there is an effort under way to build a pipeline to the Gulf Coast, stirring an environmental debate.

Investors from other regions, notably Chinese oil companies, are also wading into the hemisphere’s oil plays, whether in Brazil’s “pre salt” fields or the tight oil areas in the United States. They are looking to secure new oil supplies or gain expertise that would help them explore similar rock formations within their own borders.

The United States and Brazil do not see eye to eye on every issue — the Obama administration is still hesitant about endorsing the country’s ambition for a permanent seat on the United Nations Security Council — but the hemisphere’s two largest economies are strengthening energy ties, further cementing an already expansive economic relationship.

As the United States has cut OPEC imports by more than a million barrels a day since 2007, Brazil and Colombia have emerged as leading suppliers to the American market, surpassing Kuwait.

President Obama visited Brazil in March, refusing to delay the trip even as war was raging in Libya, emphasizing while here that he wanted the United States to be a “major customer” for Brazil’s oil once production climbed at new fields.

American officials came again for talks in August, focusing on offshore exploration and biofuels cooperation. The United States is close to overtaking Brazil as the world’s largest ethanol exporter, a significant turn, and American producers may actually increase their corn ethanol exports to Brazil. The shift stems from factors including weak harvests of sugar, which is used in Brazil to produce ethanol, and rising costs for land and labor.

The hemisphere’s capacity to meet demand for fuels from sources of new importance, whether agriculture or shale formations, is arguably what makes it competitive with countries like Iraq and Libya, which have abundant conventional reserves but face hurdles getting the oil out of the ground.

“Middle East turmoil is almost always bad for oil production,” said Amy Myers Jaffe, associate director of Rice University’s Energy Program. “This should make the world’s megasuppliers nervous, since the pendulum has already begun to move in this direction.”‹

[DewDiligence]

How North Dakota Became Saudi Arabia

[Warning: This WSJ piece contains more than a modicum of political recriminations.]

http://online.wsj.com/article/SB10001424052970204226204576602524023932438.html

›Harold Hamm, discoverer of the Bakken fields of the northern Great Plains, on America's oil future and why OPEC's days are numbered…

OCTOBER 1, 2011
By STEPHEN MOORE

Harold Hamm, the Oklahoma-based founder and CEO of Continental Resources, the 14th-largest oil company in America, is a man who thinks big. He came to Washington last month to spread a needed message of economic optimism: With the right set of national energy policies, the United States could be "completely energy independent by the end of the decade. We can be the Saudi Arabia of oil and natural gas in the 21st century."

"President Obama is riding the wrong horse on energy," he adds. We can't come anywhere near the scale of energy production to achieve energy independence by pouring tax dollars into "green energy" sources like wind and solar, he argues. It has to come from oil and gas.

You'd expect an oilman to make the "drill, baby, drill" pitch. But since 2005 America truly has been in the midst of a revolution in oil and natural gas, which is the nation's fastest-growing manufacturing sector. No one is more responsible for that resurgence than Mr. Hamm. He was the original discoverer of the gigantic and prolific Bakken oil fields of Montana and North Dakota that have already helped move the U.S. into third place among world oil producers.

How much oil does Bakken have? The official estimate of the U.S. Geological Survey a few years ago was between four and five billion barrels. Mr. Hamm disagrees: "No way. We estimate that the entire field, fully developed, in Bakken is 24 billion barrels."

If he's right, that'll double America's proven oil reserves. "Bakken is almost twice as big as the oil reserve in Prudhoe Bay, Alaska," he continues. According to Department of Energy data, North Dakota is on pace to surpass California in oil production in the next few years. Mr. Hamm explains over lunch in Washington, D.C., that the more his company drills, the more oil it finds. Continental Resources has seen its "proved reserves" of oil and natural gas (mostly in North Dakota) skyrocket to 421 million barrels this summer from 118 million barrels in 2006.

"We expect our reserves and production to triple over the next five years." And for those who think this oil find is only making Mr. Hamm rich, he notes that today in America "there are 10 million royalty owners across the country" who receive payments for the oil drilled on their land. "The wealth is being widely shared."

One reason for the renaissance has been OPEC's erosion of market power. "For nearly 50 years in this country nobody looked for oil here and drilling was in steady decline. Every time the domestic industry picked itself up, the Saudis would open the taps and drown us with cheap oil," he recalls. "They had unlimited production capacity, and company after company would go bust."

Today OPEC's market share is falling and no longer dictates the world price. This is huge, Mr. Hamm says. "Finally we have an opportunity to go out and explore for oil and drill without fear of price collapse." When OPEC was at its peak in the 1990s, the U.S. imported about two-thirds of its oil. Now we import less than half of it, and about 40% of what we do import comes from Mexico and Canada. That's why Mr. Hamm thinks North America can achieve oil independence.

The other reason for America's abundant supply of oil and natural gas has been the development of new drilling techniques. "Horizontal drilling" allows rigs to reach two miles into the ground and then spread horizontally by thousands of feet. Mr. Hamm was one of the pioneers of this method in the 1990s, and it has done for the oil industry what hydraulic fracturing has done for natural gas drilling in places like the Marcellus Shale in the Northeast. Both innovations have unlocked decades worth of new sources of domestic fossil fuels that previously couldn't be extracted at affordable cost.

Mr. Hamm's rags to riches success is the quintessential "only in America" story. He was the last of 13 kids, growing up in rural Oklahoma "the son of sharecroppers who never owned land." He didn't have money to go to college, so as a teenager he went to work in the oil fields and developed a passion. "I always wanted to find oil. It was always an irresistible calling."

He became a wildcat driller and his success rate became legendary in the industry. "People started to say I have ESP," he remarks. "I was fortunate, I guess. Next year it will be 45 years in the business."

Mr. Hamm ranks 33rd on the Forbes wealth list for America, but given the massive amount of oil that he owns, much still in the ground, and the dizzying growth of Continental's output and profits (up 34% last year alone), his wealth could rise above $20 billion and he could soon be rubbing elbows with the likes of Warren Buffett.

His only beef these days is with Washington. Mr. Hamm was invited to the White House for a "giving summit" with wealthy Americans who have pledged to donate at least half their wealth to charity. (He's given tens of millions of dollars already to schools like Oklahoma State and for diabetes research.) "Bill Gates, Warren Buffett, they were all there," he recalls.

When it was Mr. Hamm's turn to talk briefly with President Obama, "I told him of the revolution in the oil and gas industry and how we have the capacity to produce enough oil to enable America to replace OPEC. I wanted to make sure he knew about this."

The president's reaction? "He turned to me and said, 'Oil and gas will be important for the next few years. But we need to go on to green and alternative energy. [Energy] Secretary [Steven] Chu has assured me that within five years, we can have a battery developed that will make a car with the equivalent of 130 miles per gallon.'" Mr. Hamm holds his head in his hands and says, "Even if you believed that, why would you want to stop oil and gas development? It was pretty disappointing."

Washington keeps "sticking a regulatory boot at our necks and then turns around and asks: 'Why aren't you creating more jobs,'" he says. He roils at the Interior Department delays of months and sometimes years to get permits for drilling. "These delays kill projects," he says. Even the Securities and Exchange Commission is now tightening the screws on the oil industry, requiring companies like Continental to report their production and federal royalties on thousands of individual leases under the Sarbanes-Oxley accounting rules. "I could go to jail because a local operator misreported the production in the field," he says.

The White House proposal to raise $40 billion of taxes on oil and gas—by excluding those industries from credits that go to all domestic manufacturers—is also a major hindrance to exploration and drilling. "That just stops the drilling," Mr. Hamm believes. "I've seen these things come about before, like [Jimmy] Carter's windfall profits tax." He says America's rig count on active wells went from 4,500 to less than 55 in a matter of months. "That was a dumb idea. Thank God, Reagan got rid of that."

A few months ago the Obama Justice Department brought charges against Continental and six other oil companies in North Dakota for causing the death of 28 migratory birds, in violation of the Migratory Bird Act. Continental's crime was killing one bird "the size of a sparrow" in its oil pits. The charges carry criminal penalties of up to six months in jail. "It's not even a rare bird. There're jillions of them," he explains. He says that "people in North Dakota are really outraged by these legal actions," which he views as "completely discriminatory" because the feds have rarely if ever prosecuted the Obama administration's beloved wind industry, which kills hundreds of thousands of birds each year.

Continental pleaded not guilty to the charges last week in federal court. For Mr. Hamm the whole incident is tantamount to harassment. "This shouldn't happen in America," he says. To him the case is further proof that Washington "is out to get us."

Mr. Hamm believes that if Mr. Obama truly wants more job creation, he should study North Dakota, the state with the lowest unemployment rate in the nation at 3.5%. He swears that number is overstated: "We can't find any unemployed people up there. The state has 18,000 unfilled jobs," Mr. Hamm insists. "And these are jobs that pay $60,000 to $80,000 a year." The economy is expanding so fast that North Dakota has a housing shortage. Thanks to the oil boom—Continental pays more than $50 million in state taxes a year—the state has a budget surplus and is considering ending income and property taxes.

It's hard to disagree with Mr. Hamm's assessment that Barack Obama has the energy story in America wrong. The government floods green energy—a niche market that supplies 2.5% of our energy needs—with billions of dollars of subsidies a year. "Wind isn't commercially feasible with natural gas prices below $6" per thousand cubic feet, notes Mr. Hamm. Right now its price is below $4. This may explain the administration's hostility to the fossil-fuel renaissance.

Mr. Hamm calculates that if Washington would allow more drilling permits for oil and natural gas on federal lands and federal waters, "I truly believe the federal government could over time raise $18 trillion in royalties." That's more than the U.S. national debt, I say. He smiles.

This estimate sounds implausibly high, but Mr. Hamm has a lifelong habit of proving skeptics wrong. And even if he's wrong by half, it's a stunning number to think about. So this America-first energy story isn't just about jobs and economic revival. It's also about repairing America's battered balance sheet. Someone should get this man in front of the congressional deficit-reduction supercommittee.‹

[DewDiligence]

Jim Chanos thinks Big Oil stocks are a sucker bet:

http://blogs.barrons.com/stockstowatchtoday/2011/10/17/chanos-exxon-and-other-big-oil-names-are-value-traps

True, the cost of finding and developing a barrel of oil has gone up; however, the dirt-cheap valuations of Big Oil stocks already reflect their higher finding costs and, further, the valuations extrapolate the trend toward higher costs to a degree that is unwarranted, IMO. In other words, I do not find Chanos’ argument compelling.

Comments?

[DewDiligence]

US Becomes Net Exporter of Liquid Fuels

[The US continues to be an importer of crude oil, of course.]

http://online.wsj.com/article/SB10001424052970203441704577068670488306242.html

›NOVEMBER 30, 2011
By LIAM PLEVEN And RUSSELL GOLD

U.S. exports of gasoline, diesel and other oil-based fuels are soaring, putting the nation on track to be a net exporter of petroleum products in 2011 for the first time in 62 years.

A combination of booming demand from emerging markets and faltering domestic activity means the U.S. is exporting more fuel than it imports, upending the historical norm.

According to data released by the U.S. Energy Information Administration on Tuesday, the U.S. sent abroad 753.4 million barrels of everything from gasoline to jet fuel in the first nine months of this year, while it imported 689.4 million barrels.

That the U.S. is shipping out more fuel than it brings in is significant because the nation has for decades been a voracious energy consumer. It took in huge quantities of not only crude oil from the Middle East but also refined fuels from Europe, Latin America and elsewhere to help run its factories and cars.

As recently as 2005, the U.S. imported nearly 900 million barrels more of petroleum products than it exported. Since then the deficit has been steadily shrinking until finally disappearing entirely last fall, and analysts say the country will not lose its "net exporter" tag anytime soon.

"It looks like a trend that could stay in place for the rest of the decade," said Dave Ernsberger, global director of oil at Platts, which tracks energy markets. "The conventional wisdom is that U.S. is this giant black hole sucking in energy from around the world. This changes that dynamic."

So long as the U.S. remains the world's biggest net importer of crude oil, currently taking in nine million barrels per day, it isn't likely to become energy independent anytime soon. Yet its growing presence as an overall exporter of fuels made from crude gives it greater influence in the global energy market [duh].

If the trend toward net exports persists, it could also influence the national political debate over U.S. energy policy, which has been driven primarily by concerns about upheaval in the Middle East over the past decade. The independence of the U.S. from foreign oil sources has long been a lightning-rod issue in Washington, one further inflamed by last year's oil spill in the Gulf of Mexico. Supporters of off-shore drilling have used the desire for independence to push their cause, setting up a battle with environmental groups and others who prefer a shift away from carbon-based fuels.

The growth in exports is part of a "transformation of the energy system," says Ed Morse, global head of commodity research at Citigroup Inc. "It's the beginning signs of a process that will continue for the next decade and will point toward energy independence."

The reversal raises the prospect of the U.S. becoming a major provider of various types of energy to the rest of the world, a status that was once virtually unthinkable. The U.S. already exports vast amounts of coal, and companies such as Exxon Mobil Corp. are pursuing or exploring plans to liquefy newly abundant natural gas and send it overseas.

The shift is one of the clearest demonstrations of the diverging fates of the U.S. and emerging market economies [another duh]. While the U.S. labors under stubbornly high unemployment and sluggish growth, emerging-market economies are growing strongly, bolstering demand for fuel.

U.S. customers have been pulling back in part because an anemic economic recovery has left millions still looking for work. In August, U.S. drivers burned 7.7% less gasoline than four years earlier, when gasoline usage peaked. Production of ethanol made from corn has also ramped up dramatically in recent years, cutting into the need for other fuels.

Now, "we're not using as much," said James Beck, an analyst at the EIA. "Prior to 2008, basically anything we produced, we used."

But U.S. drivers aren't seeing much benefit in the form of lower prices because refineries on the Gulf Coast are shipping much of their output to places where demand is strong, keeping prices high.

The U.S. was a net exporter of petroleum products in six of the first nine months this year, and the trend accelerated in the third quarter, with September data released Tuesday showing net exports of 919,000 barrels per day, more than any month this year. That indicates to observers that this year will be the U.S.'s first as a net exporter since 1949, when the U.S. economy was ramping up rapidly after World War II.

Mexico and Brazil were major consumers of U.S. exports, according to the September data, while the Netherlands—home to key European ports —and Singapore also were significant net importers.

Gasoline and low-sulfur diesel continued to be among the biggest lures for foreign customers, as was petroleum coke, which is used to make steel. Those are among the many products that are thrown off in the process of refining crude oil.

The growing exports have made the U.S. a pivotal part of the supply chain. In 2006, the U.S. was a net importer of petroleum products from Brazil, but last year it sent a net 106,000 barrels a day.

Argentina and Peru are now net importers from the U.S. For the next year or two, "the economies in Latin America will be growing faster than in the U.S. and the trend of increasing exports should continue," says Daniel Vizel, U.S. head of oil trading for Macquarie Group Ltd.

Singapore's net imports from the U.S. roughly quadrupled in the past five years, while Mexico's rose by about two-thirds. Mexico, in particular, is having trouble keeping pace with gasoline demand and buys about 60% of gasoline exports from the U.S.

The figures illustrate the impact of the significant increase in domestic production thanks to new sources of oil coming from North Dakota and Texas. North Dakota's oil production of 424,000 barrels per day in July was up 86% over the same period in 2009. [!]

Growing domestic output means refineries in the U.S. are making more fuel than the local market needs. That has given those on the U.S. Gulf Coast added incentive to look for customers abroad.

Also adding to the U.S. exporting firepower: Refineries are more efficient, giving them an edge over older facilities in Europe. New drilling methods are boosting U.S. oil production, helping ensure steady supplies of raw material for refiners to process.

The U.S. could expand its export trade further next year. Motiva Enterprises LLC, a joint venture between Shell and Saudi Arabian Oil Co., is expected to finish work next year on a refinery expansion in Port Arthur, Texas, which would double the facility's capacity and make it the largest in the U.S. Kinder Morgan Energy Partners LP and TransMontaigne Partners LP plan to build a $400 million terminal on the Houston ship channel.

For decades through World War II, the U.S. was a net exporter of petroleum products, with sales reaching a high of 126 million barrels in 1944. The country then became a net importer in 1950, and grew increasingly dependent on foreign supply in the 1960s. Net imports peaked just above a billion barrels in 1973, the year domestic oil prices spiked amid the Arab oil embargo. After falling off in the 1980s and 1990s, net imports spiked again in the middle of the last decade before tapering recently.

To be sure, the balance could shift back relatively quickly. If the U.S. economy were to rebound sharply, domestic need for fuels refined from crude oil could also shoot back up, which could increase crude import demand. In addition, U.S. refineries could lose customers if foreign economies falter, sending the U.S back to being a net importer.

Meanwhile, export demand is boosting corporate profits for oil majors, such as Exxon and Royal Dutch Shell PLC, and major U.S. refining firms, such as Valero Energy Corp. and Marathon Petroleum Corp.

"Unless there is a recession around the world, we're going to be exporting for quite some time," says Mike Loya, head of Americas for Swiss energy-trading firm Vitol Group, which moves more than five million barrels of crude oil and petroleum products every day.‹

[DewDiligence]

Big Oil Heads Back Home

[This is a passable overview of Big Oil, although nothing written here is especially insightful. (I don’t like the article title, which fails to convey the impetus for the described changes.)]

http://online.wsj.com/article/SB10001424052970204479504576638731600191382.html

›Energy companies are shifting their focus away from the Middle East and toward the West—with profound implications for the companies, global politics and consumers…

DECEMBER 5, 2011
By GUY CHAZAN

Big Oil is redrawing the energy map.

For decades, its main stomping grounds were in the developing world—exotic locales like the Persian Gulf and the desert sands of North Africa, the Niger Delta and the Caspian Sea. But in recent years, that geographical focus has undergone a radical change. Western energy giants are increasingly hunting for supplies in rich, developed countries—a shift that could have profound implications for the industry, global politics and consumers.

Driving the change is the boom in unconventionals—the tough kinds of hydrocarbons like shale gas and oil sands that were once considered too difficult and expensive to extract and are now being exploited on an unprecedented scale from Australia to Canada.

The U.S. is at the forefront of the unconventionals revolution. By 2020, shale sources will make up about a third of total U.S. oil and gas production, according to PFC Energy, a Washington-based consultancy. By that time, the U.S. will be the top global oil and gas producer, surpassing Russia and Saudi Arabia, PFC predicts.

That could have far-reaching ramifications for the politics of oil, potentially shifting power away from the Organization of Petroleum Exporting Countries toward the Western hemisphere. With more crude being produced in North America, there's less likelihood of Middle Eastern politics causing supply shocks that drive up gasoline prices. Consumers could also benefit from lower electricity prices, as power plants switch from coal to cheap and plentiful natural gas.

And the change is reshaping the oil companies themselves, as they reallocate their vast resources to new areas and new kinds of fuel. Working in the rich world—with its more predictable taxes and investor-friendly policies—removes some of the risks about the big oil companies that worry investors, making them less vulnerable to the resource nationalism of petro-states like Russia and Venezuela.

"A company like Exxon Mobil can eliminate the technological risk" of developing unconventionals, says Amy Myers Jaffe, senior energy adviser at Rice University's Baker Institute. "But it can't eliminate the risk of a Vladimir Putin or a Hugo Chavez."

This new way of looking at risk is at the heart of the transformation. International oil companies traditionally face a choice: They can either invest in oil that is easy to produce but located in politically volatile countries. Or they can seek opportunities in stable countries where the oil is hard to extract, requiring complex and expensive production techniques.

Now, in a sense, the choice has been made for them. Big onshore fields in the world's most prolific hydrocarbon provinces are increasingly the preserve of national oil companies, state-owned behemoths like Saudi Aramco and Russia's OAO Rosneft and OAO Gazprom. For foreign majors like Royal Dutch Shell PLC and BP PLC, their former heartlands in the Gulf sands are now largely off-limits.

Shut out of the Middle East, they have responded with a huge push into new areas, both geographic and technological. Over the past few decades, they have built vast plants to produce liquefied natural gas, or LNG. They have drilled for oil in ever-deeper waters, ever farther offshore. They have worked out how to squeeze oil from the tar sands of Alberta. And they have deployed technologies like hydraulic fracturing, or fracking, and horizontal drilling to produce gas from shale rock.

Wood Mackenzie, an oil consultancy in Edinburgh, says that more than half of the international oil companies' long-term capital investments are now going into these four "resource themes" [it seems to be considerably more than half, based on the stated cap-ex plans of the largest companies] —a huge shift, considering how marginal the companies once considered them.

There are also drawbacks to the new focus on nontraditional kinds of hydrocarbons. Environmentalists strongly oppose shale-gas extraction due to fears that fracking may contaminate water supplies, the oil-sands industry because it is energy-intensive and dirty, and deep-water drilling because of the risk of oil spills like last year's Gulf of Mexico disaster.

There are financial considerations, too. While conventional assets are relatively easy to develop and historically have offered good returns, projects in some more technically difficult sectors—like deep-water and LNG—typically take longer to bring on-stream, and are higher cost, meaning returns are lower.

But there is an upside for the majors. "The silver lining is the shape of the profile of these projects, which is different than conventional ones," says Simon Flowers, head of corporate analysis at Wood Mackenzie. LNG ventures, for example, can deliver contract levels of gas at a steady rate over 20 years. "So the returns may be lower, but overall you have a more dependable cash-flow stream," he says.

By pursuing these nontraditional fuels, the oil companies are committing themselves ever more deeply to the wealthy nations of the Organization for Economic Cooperation and Development. Wood Mackenzie says $1.7 trillion of future value for all the world's oil companies—52% of the total—is in North America, Europe and Australia. The consultancy has identified a "significant westward shift" in oil-industry investment, away from traditional areas like North Africa and the Middle East "towards the Brazilian offshore, deepwater oil in the Gulf of Mexico and West Africa and unconventional oil and gas in North America." And then there's Australia, far out east, "which is in the early stages of a spectacular growth phase" [see map in #msg-40906860].

Consider Shell. Seven years ago, the oil giant, synonymous with turbulent hot spots like Nigeria, decided to shift resources to more-developed nations that offered a friendly environment for investors and predictable tax regimes. Shell used to split spending on the upstream—the basic business of exploring for and producing oil and gas—roughly 50/50 between nations in the OECD and those outside of it. It's now 70/30 in favor of the OECD, with the bulk going to Canada, Australia and the U.S. [Note the recent pullout from onshore Nigeria: #msg-69508755.]

"The risks in OECD are technical, but they're easier to manage than political risk," says Simon Henry, Shell's chief financial officer. "In the OECD, you have more control of your operations."

With the new turf comes a new focus: Shell will soon be producing more natural gas than oil. That might have scared investors a decade or two ago. But with gas demand set to grow strongly, especially in Asia, the future for gas-focused companies is looking increasingly rosy [provided that the gas is tied to the worldwide price of oil, as it typically is for LNG]—especially after the Fukushima disaster, which prompted a rethinking of nuclear power in Japan and elsewhere.

Entrenching Its Position

Like Shell, Exxon Mobil Corp. is entrenching its position in the Americas, home to just over half its resource base. Its unconventional resources have grown by almost 90% over the past five years to 35 billion oil-equivalent barrels—partly thanks to its 2010 acquisition of XTO Energy[#msg-52105887], a big shale-gas player. Exxon's U.S. unconventional production alone is expected to double over the next decade.

Some giants are looking further afield. Chevron Corp.'s three focus areas—the parts of the world that account for the bulk of its exploration budget—are the U.S. Gulf of Mexico, offshore West Africa and the waters off western Australia.

In particular, the company has staked out a huge position in Australian natural gas; its Gorgon LNG project in Australia is one of the world's largest [#msg-41374691]. The push is based on expectations of surging demand for the fuel in Asia, largely in China, which wants to improve air quality in its heavily polluted cities by switching from coal to gas in power generation and running more commercial vehicles and buses on natural gas.

It "wasn't a conscious decision" to move into the OECD, says Jay Pryor, head of business development at Chevron. The company doesn't decide what projects to pursue based on where they are in the world, but on the quality of the resource, the commercial terms and the geopolitical risk. "The best rocks with the best terms are going to get the quickest investment," he says. Money has flowed into the U.S. and Australia because they offer the best incentives to oil companies, he says.

In recent years, Chevron has also expanded into another promising part of the OECD—Europe, which some estimates suggest has shale-gas reserves comparable to those in the U.S. Chevron has picked up millions of acres of land in Poland and Romania, where it will soon be drilling for shale gas. That's part of a wider trend: Dozens of companies are now exporting to Europe technologies used to open up shale deposits in the U.S. [However, the European public has not been especially receptive to this idea.]

Holding Back

Not all oil companies have piled into unconventionals the way Shell and Chevron have. BP, for one, has far fewer investments in tar sands and shale gas than its peers, though it has an unrivaled position in deep-water oil. That means it has less of a presence in the OECD than Shell: Its biggest projects are in poorer countries like Angola, Azerbaijan and Russia, and in recent years it has won a string of licenses and contracts in India, Iraq, Egypt and Jordan.

Yet even BP has been bolstering its position in the OECD. It said recently it was pressing ahead with a £4.5 billion ($7 billion) investment in the North Sea's Clair oil field, part of a five-year, £10 billion program.

Still, being in the OECD doesn't guarantee oil companies an easy ride. Operators in the North Sea were shocked earlier this year when the U.K. government suddenly increased taxes on oil producers. In France, authorities recently banned hydraulic fracturing. And in the U.S., the drilling moratorium in the Gulf of Mexico, imposed after the Deepwater Horizon blowout, threw many of the majors' plans into disarray.

But still, for the most part, the risks are much greater in the non-OECD. "The majors went to Venezuela and lost their property," says Ms. Myers Jaffe of the Baker Institute. "They went to Russia and had to whisk their CEO off to a safe house. They went to the Caspian and realized they couldn't get the oil out. I for one would much rather invest in a company that had 70% of its spending in the OECD."‹

[DewDiligence]

Saudis are pumping oil at record pace:

http://online.wsj.com/article/SB10000872396390444130304577558343380816080.html

The country shows no sign of letting up from its average production levels of 9.94 million barrels a day in the first half of 2012. Output averaged 9.9 million to 10 million barrels a day in July, industry analysts and shippers said, as the country increased exports and burned more crude to meet an increase in domestic demand for electricity…

That puts the top oil exporter in line to exceed its record oil output of 9.901 million barrels a day in 1980, when the country opened the taps to make up for a sharp fall in Iranian output after its 1979 revolution.

Where are the Peak Oil conspiracy nuts who claimed the Saudis were almost out of oil?