My 5 Favorite Books of 2013

These are books I read in 2013, they weren't necessarily published in 2013. I have no idea how books 'should' be written, so my judgement is based on how engaging they were. I suspect that Isaacson is a very good biographer, but I suppose the content might be driving my interest. Either way. Here are my five favourite.

How Good We Have It!

Alberta Pipeline Update

(photo credit: Transcanada)

It's been a busy past couple of weeks on the Alberta pipeline front. Positive (and negative) news has an added inertial positive feedback effect on the other projects which adds some added interest to each incremental step. We know Obama has stipulated that XL's impact on GHG emissions will be a key determinant of approval. Which can be read as: whether or not the oil sands be developed at a significantly reduced rate with or without it. Every time we get closer to moving that bitumen by other means, we get closer to Obama's approval.

The Mackenzie Valley Pipeline: Will Bill C-15 Bring it back to life?

(from the website: www.internationalfrontier.com)

Implications of Mexican Oil Reforms

Mexico: The Recent News

As a primer, the first thing you need to know about the Mexian oil industry is a single name: Petroleos Mexicanos, more commonly refereed to as PEMEX. Formed in 1938 via the expropriation of all foriegn oil entities by President Lazaro Cardenas, Pemex has had an effective monopoly on all matters oil & gas in Mexico since.

The Mexican senate passed, on Dec. 12, additional (to the 2008 amendments allowing third party service contracts) amendments to articles 25, 27, and 28 of the constitution which forbade private sector contracts and outlawed non-Mexican entities from the energy sector.  While details on taxation, royalty, and the legal framework within which foreigners can enter the market are still to come, the immediate details appear to be a pretty radical turn away from historical norms.

The Peak Oil Dynamic in the Globe and Mail

I'm not sure if I've seen an article that nails down the issues on both sides of the oil market so concisely in a proper publication as this one. Eric Reguly nails it in the Globe and Mail. We've got the decline rates of existing conventional fields, the relative expense of unconventional production, the export land model phenomenon, and the elevation of price to a more central role in the conversation.

Here are a few of the highlights, but give the entire article a read it's short.

Eric Reguly: Inexpensive Oil Vanishing at Alarming Rate (Globe and Mail).

Inequality does not equal Inequality does not equal Inequality.

A bit of a rant coming on here. I'd consider myself politically libertarianish/liberal. By which I mean, I think governments do have a role to play, both in facilitating well markets and stepping in for markets where they aren't efficient. Conservatism has kind of been hijacked in the US to the point where I'd probably be considered a true Democrat in that black and white world (and would certainly have voted Obama in the last couple of elections). But that's not how I'd describe myself.

Developed Economies (formerly) Falling Consumption: Stagnation or Efficiency?

We'll probably have to wait a few more years before we can make a confident pronouncement but in the following Platts article the data seems to suggest, as I speculated in this post, that the decline in developed world oil consumption was more due to economic decline/stagnation then efficiency gains and substitutions.

The article is suggestive of some other interesting trends, namely the slowdown in China's and the developing world's consumption growth. ** Notice, that's slowdown in growth, not a decline.**

Book Review: The China Development Bank: Debt, Oil and Influence

The China Development Bank (CDB), in 2010 held $687 Billion in loans. Over twice as much as the World Bank. And I knew almost anything about it prior to reading this book by Henry Sanderson and Michael Forsythe:

China's Superbank: Debt, Oil and Influence - How China Development Bank is Rewriting the Rules of Finance

My main interest was loan-for-oil financing. This is a topic I've been following over the last few months. Info is hard to come by, but as this post outlined, China has been securing oil supply as repayment for debt. Sometimes via the NOC's, but sometimes it's the Export-Import Bank (EXIM) and other times it's the CDB. But these deals are everywhere.

Build it and they will come (because that's how China rolls!)

This story, asking: "Will China's new hi-tech airport prove to be a flight of fancy?" popped on my Google News Feed this weekend and it just got me to thinking about the western world's fascination with China's ghost anything.

IEA's 2013 World Energy Outlook Summary

The IEA has published their 2013 World Energy Outlook and in it they raise some interesting issues going forward. Unfortunately, I don't have access to the full report (paywalled here). However, the Executive Summary does sketch out the main points.

All in all, the message is pretty similar to the world view encapsulated in the definition of the Peak Oil Dynamic (as I've described it) where the supply side (and falling demand in the developed world) faces significant challenges to maintain pace with the developing world's growing appetite for oil.

The centre of gravity of energy demand is switching decisively to the emerging economies, particularly China, India and the Middle East, which drive global energy use one-third higher.

A Surprising Graph

I think western perception of China is heavily skewed by it's aggregate numbers. I suspect that this GDP per capita comparison would surprise alot of people:

Capitalism, like Democracy, gives the people what they want... What they want is Consumerism... and of course, more oil.

It's that time of the year again. Shopping and people complaining about our culture of shopping. The Dish referenced this article: Don’t Go Shopping on Thanksgiving. Just Don’t. Where the author, Ellen Galinsky pleads with shoppers to stay home on Thanksgiving Days to punish those stores that open up their doors.

The author starts off by implying that workers shouldn't HAVE to work on certain holidays. I agree. But acknowledges that, "it’s also true that it’s what some employees want as well, especially when retailers offer to pay time and a half, or when labor agreements include provisions for premium pay." So if there are people who want to work, and people who want to buy, who should make the call? And what should they base that call on? (I think the store owner is pretty well positioned to make that call).

Here to me is her big hook (her punchline, or where she intends to win the reader over):

But what I want to do is encourage people to look at the bigger work-life picture. Giving up our holidays can negatively impact our well-being and our personal and family lives. Creating traditions with our children and continuing traditions with our elders can also suffer. More important, it further erodes the already faint distinction between our work and our personal lives, and it’s a trend that just may move from retail to white collar jobs. After all, 50 years ago no one would have thought that professionals would be working nights and weekends, and we all know how that turned out.

First, I am ALL for encouraging people to look at other view points. In fact, I'm ALL for everything she said. People should consider everything in their life when making choices of all sorts. Knowing nothing of her politics or agenda, I can't say if she's pushing for more informed decisions or actually pushing for legislature (in which case I would very much disagree with her, as it would be an imposition of her ideals on others).

But to me, the market is the most equitable place to sort these things out. And where these decisions are currently being sorted out.

The author provides a number of companies that currently keep their doors closed on Thanksgiving and defend their decisions in a moralistic/paternalistic manner. I'm all for their decision to keep their doors closed, and also for them to defend it in the tone they've chosen (despite disagreeing with their moralistic/paternalistic logic).

The author concludes:

It’s about keeping the ever encroaching workweek at bay and preserving the notion that we are all entitled to some rest and rejuvenation.

While I disagree with the article's conclusions, I completely agree with the premise. Consider everything in your life. Your family, your traditions, your bills, your future, etc. And make an informed decision.

Some companies will keep their doors closed and, if the article is to be believed, will benefit from healthier and more motivated employees. In fact, we might even expect a employees to prefer working resulting in a preferential labor pool. Or perhaps, the opportunity to gain overtime premium paying hours by working at a job that keeps their doors open on holidays is preferential.

The bottom line is: Create a system where individual choices govern these decisions. Who am I to tell someone that paying their bills aren't as important as taking time off (or vice versa). Employees and employers should be upfront about policies prior to employment.

I wonder if the author would agree that the market would find the 'optimal' outcome?

There is spill over. As the title of this post suggests.

Lost in all the rhetoric about climate change, doing what's right, and "leaving carbon in the ground" is the fact that as a society we still want to consume oil. It's not that we'd prefer to consume oil because it's oil; we prefer to consume oil because we'd have to sacrifice alot of things that we like if we didn't.

The same holds with politics. People get who they vote for. I've never gotten the whole "american people deserve better" notion. People vote for who they want. Particularly with the highly publicised American political world, poll number are constant and immediate. I suspect that most politicians consider this realtime feedback, and perhaps the cynic in me would suspect that their positions are about as flexible as they believe the public wants them to be.

When it comes to Oil and thinking about those who hold an opposing view I'm not a, "how did you get to this protest" kind of person. I believe that many of them would happily abstain, or at least try (I do think alot of them might be a bit naive as to how much they enjoy petroleum based products), from consuming petroleum.

Liza Horne on The Straight.com tackles this in an article titled: Oil is our heroin.

Our current consumer society greatly depends on oil and, like the sign suggested, we are addicted. Plastics, waterproof materials, stretchy fabrics, medicines, makeup, cleaning supplies, and countless other objects we use daily all contain traces of oil. On the odd chance they don't, they were certainly transported to our store shelves by a gas-powered vehicle.

I think people generally understand how pervasive petroleum actually is in our everyday lives beyond transportation. But it never hurts to remind people. And I don't mean in a condescending dismissive way; but in an educational way.

I can understand why someone would still want the oilsands shut down or fracking to be stopped. For me, the benefits of their development far out weigh the costs. And I do try to understand the costs.

So like the author in the article above I just want a full discussion on the benefits. And be honest about what 'the people' want. After all, I'd love to not consume oil and have my car powered by ________. But my consumption habits reveal my true preference. Given my options, I'm going to consume oil. The world continues to increase oil consumption levels despite a tripling of oil price in the past decade. It's hard not to accept that the world clearly wants to consume more oil.

The article then turns to where I think this debate needs to be at in order to be constructive. Accepting that people clearly want to consume oil, let's figure out the least damaging way to get it to them.

Coincidentally, we share a fence with that someone else. If all pipeline proposals were rejected and the oil companies decided to go through the Northwest Territories, the Yukon, and over to Alaska, that would put the USA in charge of ocean transport. The world has already witnessed weak American regulations by what happened with the Gulf of Mexico oil spill and, based on my personal experiences and knowledge of American oil and environmental standards, I would prefer to have the British Columbian and Canadian governments in control of this project.

As I argued in this post, the State Department believes that the oil sands will be produced and get to market regardless of XL approval. If emissions and minimizing the impact on global warming are the main concern then why cede control to other powers and force transportation by less efficient methods?

B.C. should take control. Demand that Northern Gateway and the Kinder Expansion be the best pipelines ever constructed, that the tanker facilities are the best in the world, and that accountability for non-compliance is as strict as our laws will allow it. Make those pre-conditions and focus on executing them.  I think there may even be popular support for reforms and regulation that push these agenda items.

Consumers reveal their preferences with their wallet like voters reveal their preferences with their votes. We get what we want, and markets and democracy. Some stores will remain open on Thanksgiving day because the owners think enough people want to buy their product on those days, and they have staff willing to sell it to them. Oil production will continue because people around the world keep buying oil. L

Chinese Control of Global Oil Assets

China's thirst for oil has been a point of interest on this blog. The incredibly low levels of per capita consumption, the incredibly poor but growing populace, and the sheer magnitude of the market create a situation where any convergence to global norms would have huge implications.

Hattip to Rockman over at Peakoil.com, and The Oil Drum previously, for emphasizing the potential impact of Chinese E&P and Refinery joint ventures, and loans for oil deals that would give 'China' the right of first refusal on oil from the ground and/or finished product.

Peak oil DEMAND!

Peak oil DEMAND theory is the counter point to 'peak oil theory' which generally describes a supply side phenomenon. Peak demand, in a literal sense, purports that the level of demand has or is near it's peak level and will soon decline. More nuanced versions might suggest, similar to (but the opposite) of my definition of the Peak Oil Dynamic, that the demand side will be the driving force of the oil market going forward.

How not to argue for pipelines.

As someone who wants pipelines south and especially west out of Alberta, sometimes it's frustrating watching the debate unfold. The political calculus, the economic justifications and the social issues give all sides plenty of empty rhetoric, plenty of absolute positions to hold, and plenty of talking points to fumble around to prolong the whole mess.

It's akin to an American presidential debate. A question is asked, one of the candidates reads a prepared statement that might kind of border on some aspect of the topic, the other candidate responds by reading a prepared statement that doesn't address anything the other candidate said on a topic the has nothing to do with the original question. The moderator, having posed a question that was not answered, is somehow satisfied, so he moves on to the next question; that won't be addressed.

More Thoughts about China.

Reaction to the third plenum has been overwhelmingly positive. Market reaction, social and economic commentary, as well as the sentiment in the mainstream media have all hailed Xi's first step towards a pretty aggresive reform agenda.

There have been a few detractors however. Most are skeptical about the implementation process or the seemingly contradictory nature of some of the key points; like strengthening SOE's while pushing for market liberalization, or the target completition date of 2020.

Plenum of good news!

There was a general sentiment of disappointment in reaction to the Plenum's conclusion earlier this week. It was all based on a brief communique from CPC leadership. Consensus seemed to agree that the communique indicated a CPC leadership that was underwhelming in it's commitment to reform and overwhelming in it's vagueness. The reaction seemed pre-mature, why not wait until the expected more, more detailed vauge report that would be rolled out?

Book Review: Joe Studwell: How Asia Works

Over the weekend I read an excellent book titled: How Asia Works: Success and Failure in the World's Most Dynamic Region by Joe Studwell. In it, the author walks us through the economic development of Japan, Taiwan, and South Korea. Outlining what worked in these countries, and why economic development plans in comparable southeast Asian countries like Thailand, Indonesia, Malaysia, and the Philippines didn't.

To climb from the extreme third world poverty that afflicted these northeast Asian countries to the first world countries that they have become, Studwell prescribes three key features:

In the News (pipelines)

Here we have some pipeline politics in the news. Now, in my biased opinion, Keystone XL is a no brainer. That Obama can really only say no to the border crossing (wouldn't it be hilarious to see a pipeline up to the border on both sides, and a bunch of rail-cars running non-stop across the border?), the refinery complex on the gulf coast wants our oil, we want to sell our oil, and MOST IMPORTANTLY citizens of both our countries continue to want to consume oil products, requires us to get on with it.

Now of course that all rests on the assumption that the Oil Sands (or Tar Sands, it's all just symantics) aren't the worst thing in the world. Which is a whole 'nother conversation.

China's reforms: No need to rush!

With the Plenum approaching, and what seems like an important juncture China's at, I have been spending a fair bit of time thinking about what sort of reforms I am hoping to see. In this post I had suggested fairly scaled back reform focused on reducing the effective tax on savers (via interest rate liberalization) and an expansion of credit for smaller independent firms.

I'll stick with that, but I'm reading many new stories and posts suggesting that this Plenum may introduce much more significant and transformational reforms:

China leader promises 'unprecedented' reforms at key Party meeting (Reuters):

A couple of news stories that caught my eye...

Russia - China Import/Export Math (WSJ):

Last week China and Russia announced a JV deal between CNPC and Rosneft to expand E&P in Eastern Siberia. But the volume of supply deals is outlined here:

The two countries have signed agreements that would increase the amount of oil flowing from Russia to China by around 700,000 barrels a day from 300,000 barrels a day currently, prompting oil watchers to ask where the additional supply will come from.

Most of the oil fields in Russia’s biggest production center, Western Siberia, which accounts for around two-thirds of its output, are more than three decades old and in decline.

And the prognosis isn’t promising. Mr. Khaziev noted that no new giant fields have been discovered in Russia since the 1980s, and unless there are such discoveries, “it will be very difficult to replace the declines in production.” The country’s crude-oil output will peak in 2018-2019, by his estimate.

Another option is to reallocate. According to the IEA, Russia exported around 4.8 million barrels a day of crude oil in 2011, with nearly four-fifths destined for Europe and around one-sixth for Asia.

The Third Plenum

After a year filled with headline grabbing events like the leadership transition, and the Bo Xilai trail, the event that has historically made the biggest news is still to come.

The Chinese Central Committee (CC) holds congress once every five years. Between these meetings they have plenary sessions (plenums). Historically, the third plenum has facilitated the unveiling of significant economic directives. Most famous was Deng Xiaoping's "seeking truth from facts" approach over the Huo Guofeng's "two whatevers" (referring to compete deference to the words and deeds of Mao). While this was a culmination of events, the political room created by Deng's acceptance of an approach not clearly defined in communist ideology set the ball in motion. The third plenum of the 12th CC saw Hu Yaobang bring some small scale reform (that moved away from collectivism) that had proved effective in rural areas to urban areas. And in 1993 the third plenum of the 14th CC approved Deng's "Socialist with Chinese Characteristics". These are the broad strokes that started and guided the Chinese down their current path.

What might this third plenum of the 18th CC bring?

The lists are long with many suggestions and imperatives. The mood seems to place a fair bit of urgency on these reforms with the expectations that the plenum will prove to be a bit of a let down. Some examples (here, here, here).

China: A place like no other

Chinese Comparisons:

Any speculation on the future direction of an economy will be fraught with oversimplifications, unrealistic assumptions and perhaps, straight up guesses. But when it comes to China we’re really grasping at straws. Here’s why.

The sheer magnitude: It’s hard to grasp quite how many people live in China. Here’s a quote from James Fallows' excellent book, ChinaAirborne (quoting Thomas P.M. Barnett):

“The United States and China have about the same geographic area, although China’s mountainous and desert expanses mean that it has significantly less arable land. But China’s population is about four times larger then America’s. To match the challenge of human scale that confronts China, the United States would have to bring in every person from Mexico, more then 110 million in all, plus the 200 million people in Brazil. Then it would also need the entire population of Cuba, and the rest of the Caribbean nations, plus Canada, Colombia, and every other country in North and South America. After doing all that, it would be up to around one billion people. IF it then also added the entire population of Nigeria, some 155 million, and every person from the hyper-crowded islands of Japan, 125 million more, it would have as many people as China – almost.”

Typical Environmental Opposition

This post is inspired by this article that popped up on my news feed from the Vancouver Observer today:

‘Pipeline or rail, the oil will flow’ say Alberta oil industry and Canada’s petro-government:

Now, I don't mean "typical" in the derogatory sense, but I just wanted to highlight a few items in the article and kick some thoughts around because it is pretty consistent with the discussions that I've been having on the subject.

I've found that most discussions start with the transportation of oil. With opposition typically being the risk of leaks and the pipeline's physical imposition on some natural setting. Sort of a NIMBYish type of argument. However, I often find that when pushed for specifics and consistency, these discussions tend to regress back to the simple belief that the oil sands should not be developed.

Alberta Pipeline Overview

With Albertan refining capacity at less then 500,000 bopd and production averaging around 2.8 million bopd in 2012  the need for export capacity is obvious. The Canadian Association of Petroleum Producers (CAPP) is projecting that supply from Western Canada will increase to 4.85 million bopd in 2020 (from about 3.4 million bopd currently) and 6.7 million by 2030. With current pipeline take away capacity around 3.67 million bopd we will need to find other means of getting our oil to market. Currently, the rail by oil capacity is picking up, but for this post we'll focus on pipelines.

Drowning in Oil...

I don't really get articles like this. I've certainly seen alot worse, but my two main points of contention are: (1) OPEC has some reason to worry and (2) we are awash in oil. Now maybe I'm oversimplifying and misrepresenting the intent of the article, but I keep reading items that seem to assume, or at the very least imply these two items and again, I just don't really get it.

Offshore Drilling

This picture of Shell's Perdido spar is from this article on worldoil's website and was built at a cost of $3 Billion Dollars. It's expected to produce up to 100,000 bopd and 20 million cubic ft of natural gas per day with a projected lifespan of 20 years.

The following story describes the events leading up to the find that the structure pictured to the left will be producing. The scale of the project is impressive, the quantity of output is massive, and the size of the gamble and the stones that it must have taken to make that call are hard for me to imagine.

Here's hoping that the Chinese keep consuming more oil!

China doesn’t consume enough oil. In fact, we should all hope that China can continue to increase their consumption of all natural resources; oil included. Those are a couple of sentences you probably won’t read to often these days. And this isn't just my Albertan self-interest talking. Hear me out.

That sentiment begs the question: what is ‘enough’ oil? While I’m not sure if we can actually determine an optimal level of oil for an economy without assuming away far too much information, oil consumption and economic performance are highly correlated. Thus, my belief that China doesn't consume enough oil is simply an observation that China is still an extremely poor country. A fact that we don't hear enough. My hope that China can maintain their growing consumption, is that it would necessitate China maintaining their current economic trajectory. It boils down to to me hoping that poor people become less poor. That's a pretty easy bandwagon to jump on!

How equivalent is a barrel of oil equivalent?

I had always glanced over the term Barrel of Oil Equivalent (BOE), and just assumed that it was, well... the same thing (essentially) as a barrel of oil. But what exactly is it? I'm also going to touch on Oil being called Oil that kind of isn't really Oil.

Natural Gas described in terms of Barrel of Oil Equivalent:

Consider that the equivalency is often cited on a BTU basis where 5,800 cubic feet of natural gas is equivalent to 1 barrel of oil. Now consider that as of today, Henry Hub is $3.58 (per 1000 cubic feet). WTI is at $107.24. In energy equivalence terms Natural Gas is going for $20.76 and Oil for $107.24.

This distinction should draw an even closer look when considering non-conventional plays with significant gas production, since high initial production and rapidly decreasing production levels are typical. The well economics are such that the current spot price basically determines the Net Present Value (NPV) since the combination of discounting and the very high decline rates often render future production inconsequential in determining the profitability of the upfront costs.

Oil that isn't really oil, but is kind of like oil (condensates in this case):

Up until the divergence in price between Natural Gas and Oil, Natural Gas Liquids would often be reported simply as oil production, similar to condensates now. Of course, to my limited understanding, condensates are significantly more like oil in the sense that NGLs are derived off lease, where as condensates take liquid form at surface temperature and pressure (I'll have a post on this stuff later). Currently, condensates seem to be priced close enough to oil to render a breakout of the two production levels unwarranted. However...

In this article on the Motley Fool Peter Horn discusses a comment made by EOG's Chairman and CEO Mark Pappa in which he hints at a possible softening in the condensate market (relevant to the Eagle Ford tight oil play in Texas). Horn also attached the following figure from EOG's latest slide deck:


The key point here, assuming accuracy, is that acreage beyond EOG's is dominated by condensates. If a similar push was made to break out condensate production (as occurred for NGL) from oil production. I wonder what impact this would have on market sentiment. I'll have another post soon discussing tight oil production, the impact it is currently having and speculate about the impact it will have going forward. Calling Eagleford's condensate, condensate, rather then oil would certainly change a few headlines.

That's not necessarily a bad thing. As a freemarketeer at heart I don't subscribe to the doomsday scnerios that seem to pop up at the end of many Peak Oil (or climate change, or Quantitative Easing, etc., etc.) discussion. Solutions will figure themselves out. According to this Blatts summary of an ESAI study (paywalled):

But in the announcement of its release, ESAI says its estimate is that the output of NGLs — which it defines as  NGLs/LPGs, ethane, condensate and naphtha — will hit 29.7 million b/d in 2023. Taking out ethane, which ESAI does not classify as a liquid, supply of those categories will be 26.2 million b/d out of total supply just over 100 million b/d.

If we're going to satisfy the growing appetite for energy with fossil fuels, we're going to need all the liquids we can get. These lesser sources will be crucial.

Libya's Production Collapse

We're effectively seeing a shuttering of the Libyan oil industry. The end game remains to be seen. But it will be interesting to see how quickly, and by how much the other OPEC countries can ramp up production to offset this supply loss. According to the EIA Libya had averaged exports of 1.3 million bopd in 2012. With Reuters reporting expected current exports of 80,000 bopd equating to the removal of over 1.2 million bopd from the market (For reference: According to NDIC data the Bakken averaged production of 756,985 bopd).  Here is the latest. 


Libya Oil Output Drops to 150,000 bopd, Exports at 80,000 bopd (Rigzone):

TRIPOLI, Sept 4 (Reuters) – Libya's oil production has fallen further to around 150,000 barrels per day (bpd), lower than last week's official estimate of around 250,000 bpd, as protesters continue to cripple the sector, an National Oil Corp official said on Wednesday.

(Reuters) - The global oil market is well balanced and top exporter Saudi Arabia ready to supply whatever volume of crude is needed to meet demand, Saudi Oil Minister Ali al-Naimi said on Thursday.

"Our (OPEC) production last month was almost the same as a month before, only 100,000 barrels a day shortage. There is no effect whatsoever...we won't see a crisis."Saudi Arabia pumped a record 10.19 million barrels per day in August, an industry source told Reuters.

Libya still a bigger risk to oil than Syria: Credit Suisse (CNBC)

Brent crude futures surged to a six-month high on Tuesday, reflecting fears that punitive air strikes against Bashar Al-Assad's government may be days away after the regime allegedly used chemical weapons last week in an attack on a Damascus suburb.Syria was a secondary factor behind oil's surge yesterday, which Credit Suisse saw as chiefly driven by "the likely prolonged absence of more than 1.0 million barrels per day of Libyan oil exports."

I think this makes alot more sense to me. In a previous post I wondered about a premium that would price in the risk of a widening conflict in Syria. I posited that any material impact on global markets would require Iran not only injecting themselves in the conflict, but also throwing a hail marry at the Strait of Hormuz. The CNBC article above mentions the oil terminus of the 1 million bopd Baku-Tbilisi-Ceyhan pipeline in Ceyhan that runs 50 miles from the Syrian border as being a logical target of reprisal. But when it comes to impacting markets, the dominating factor must now be the real drop in Libya over the hypothetical impact of Syria.  

As far as future impact is concerned, we might just get a glimpse at the vaunted Saudi 'spare capacity'. If Libyan production remains at these levels for significant amount of time, the strategy and ability of the Saudi's to turn on the taps may be revealed.

How Much Oil Is Really There?

If you've ever wondered why the price of oil is so high, or why people like myself are even interested in the scarcity question when we see 2013 stories about the Wolfcamp play, or the oil in Coober Pedy, or like last year's Bazhenov shale oil play in Eastern Siberia you aren't alone. The logic would go, Saudi Arabia produces lots of oil, here are three plays with comparable amounts of oil as Saudi Arabia, therefore, we'll soon have three sources of production comparable to Saudi Arabia.

While this could be the jump off point to a number of different issues on why oil is not oil is not oil, I'm going to talk about some resource classification terms that get thrown around in the media without much dissection. When I'm unsure I usually refer back to this Society of Petroleum Engineers (SPE) document.

Oil Initially In Place (OIIP): OIIP, sometimes referred to as "total resources" or Petroleum Initially In Place (PIIP) is used to describe the total amount of oil in a reservoir. Since recovery rate varies with the viscosity of the oil (how the oil flows), permeability of the rocks (is the oil able to flow), and the drive rate (naturally or unnaturally occurring pressure that forces the oil towards the well) this number can mean next to nothing without knowing more about the geology and the type of oil to be produced.

Reserves: This is an important metric. Reserves basically entail how much of this oil we'll get to market. This should include: development over a reasonable time frame, feasible economics under reasonable assumptions, the ability to get the oil to market is reasonable, and the ability to develop the reserve from a legal perspective are adequately evaluated. Reserves are further classified into Proven Developed Producing (PDP) and Proven Undeveloped (PUD) holdings to signify what portion of the reserve has actually been produced.

Resources: Broken into contingent and prospective resources, the first refers to oil that can reasonably be expect to get to market at some point but can't right now, while the second can be reasonably assumed from other information about the trend to exist, but have yet to be discovered. There are a number of sub categories for resources but the important point is, this oil will not be getting to market as things currently stand.

Unrecoverable: This is the portion of OIIP that does not meet the previous classification standards. This is the stuff that we can't really plan around. Some portion of it may become producible as economics and/or technical circumstances change, but some may never be recovered due to physical/chemical constraints.

Estimated Ultimate Recovery (EUR): This term is also generally used to describe the cumulative total of produced oil, reserves and resources. Although I find this term to be pretty vague. Like an economics model we need to know what assumptions are required to get this number. For example an EUR without discussion of price assumptions shouldn't be taken too seriously. Of course, predicting the price of oil to generate these assumptions is a crapshoot as well.

A key point is that besides OIIP these numbers are not static (OIIP estimates can change, but the actual OIIP number in theory should be static). This illustration describes where these classifications sit in the development process.

My point more simply is this: google is your friend. If you're blown away by a new oil play, find the source that the news stories are quoting and dig through the terminology and assumptions. It might help illuminate whether or not we actually have a 'game changer' on our hands.

As basic as my knowledge is on this topic, it's often enough to read through most news stories. Is it the next big find? Maybe. But I won't get to excited until investment begins to match the hype. And I'll probably remain a skeptic until the oil starts flowing.

China in Central Asia

President Xi just ended his swing through Central Asia in Krygystan where he reached a credit agreement worth over $3 Billion for energy projects, with the 225km Krygystan-China gas pipeline (to deliver gas originating in Turkmenistan) named specifically.

His trip included stops in Turkmenistan where gas deals were struck that will see Krygstan increase exports to China from the current level of around 25 billion cubic meters (BCM) to (what appears to be) around 40 bcm over the next few years and increasing to as much as 65 bcm per year by 2020 as Xi was on hand to inaugurate the world's second-largest gas field.

In between Krygystan and Turkmenistan was a stop in Kazakhstan where Xi discussed CNPC's acquisition of a stake in the Kashgan Oilfield. Which just started production and is expected to produce upwards of 180,000 bpd in the first production stage and increasing to a 370,000 bpd in the second phase.

The Chinese acquisition of energy resources will be an on going thread of this blog. Buying up reserves in ground through exploration and acquisition is interesting, but with active downstream operations as well, and through joint ventures with oil producing countries that lack the ability and capital (how about it Canada?) to refine their product, China is starting to lock product up from ground to market. This might prove interesting in a supply constrained world. Plenty more to come on this.

Supply Side: Global Oil Production

This post is meant to be a highlevel look at who is currently producing oil and will sketch out some areas that I will explore in this blog going forward.

Looking at April 2013 total liquids production data we can see that the US actually was the leading producer at over 12MM bpd. The Saudi Arabia (KSA) and Russia rounded out the top three. These have been the big three since oil took on it’s central importance in the 20^th century. The key trends to notice are the American upswing and the steady European Decline. We’ll have plenty of time to explore some production possibilities for all the major players.

An interesting comparison is this April 2013 graph of Crude and Condensate production (C+C). 

In this graph we actually see that Russia is producing at the highest C+C level with KSA, Africa both coming in at a higher production level then the US. I will have a post on terminology and the other liquids that create the large gap between C+C and Total Liquids.

To reprint this graph from a previous post I want to again stress the importance of the undulating plateau that we’ve been on for C+C since 2005 around the 75MM bpd mark; despite the price incentives. This is the stuff that matters, crude oil is what we’ve built our society and economies upon. A decline in its production may not necessarily result in a decline in overall liquids, but it would bring a sense of urgency to the POD analysis.

I will post on the different types of liquids that cause the diverging gap between C+C and Total Liquids production.

Exploring the following areas will be my area of interest for what I deem the supply side of the POD:

1. American Production: What impact will the 'unconventional resources' have on future production?

2. Saudi Arabia and Russia: Guessing at the health of their existing conventional resources and their potential for new sources of production.

3. Decline Rates: How are the new sources of oil production impacting the overall decline rate of producing sources? How will Enhanced Oil Recovery (EOR) methods, used to increase recovery rate and even prolong the plateau phase of a field ultimately impact the eventual decline rate?

4. Africa: What is the potential for new conventional resources on this continent? Exploration has been constrained more by political risk concerns then the lack of potential. Assuming, (and hoping!) that Africa can collectively stabilize and develop in the coming future, what is the potential for the world to gain some new conventional production from this region?

5. Pricing: How will these different scenarios impact pricing, and how will pricing impact these different scenarios.
6. Megaprojects: the importance of Giant Oilfields that are currently producing. 

The Demand Side

Peak Oil is usually discussed in the context of a supply or production limit. This is certainly an important element of the Peak Oil Dynamic (as I have defined the term) that I’m interested in. However, the demand for and consumption of oil is just as important.

This post is meant to be a highlevel look at who is currently consuming the oil and will sketch out some areas that will likely drive the content of this blog going forward.



I’ve aggregated consumption in African and European countries. In the following time series, the most interesting trends would be the apparent peaking of American and European consumption and the steady and rapid growth in Chinese consumption. These are the gross numbers that are usually discussed (particularly when discussing the rise of China), but a lot of context is lost on these numbers.

My contention is that aggregate consumption can be discussed in three main groups: (1) those who have long consumed as much as oil they'd like, (2) those who are transitioning to a phase where they can consume as much oil as they'd like, and (3) those who are effectively consuming no oil.

For ease of discussion, I will probably use Europe and America as a proxy for (1), China for (2), and India/Africa for (3)

Some of the context that gets lost when discussing aggregate numbers is captured when the we look at per capita consumption. The gap in population adjusted consumption between the big consumers is startling.







My interest is not to make any claims about a right level of consumption or to make any qualitative judgment on consumption habits; but simply to judge how consumption habits might evolve and the resulting impact on the POD. Combining an analysis on what countries "might want to consume" will focus more on per capita, or per unit of GDP type of numbers. The aggregate supply and demand numbers bring about the POD where we consider physical limits and market implications.

Speculating on the following questions will be my areas of interest on what I deem the demand side of the POD:

1. At what level might we expect Chinese consumption to plateau?

2. At what level might we expect western consumption to fall to?

3. What are the price implications of the preceding questions?

4. What are the implications on the future growth potential of India and Africa?

5. At what price will a paradigm shift away from oil occur?