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?

Syrian Implications

A couple of thoughts on the potential impact that an escalation in Syria might have as it relates to the POD:

Syria itself poses little systemic risk, or is even likely to have a marginal impact on the global economy. However, events are playing themselves out in a sensitive area of the world, with a cast of major players. Events could conceivably escalate into an event with global implications.

At this time, its difficult for me to spin a story where countries like China and Russia involve themselves directly in this conflict. My feeling is that the US will proceed with targeted military strikes regardless of how congress votes or what the UN investigators reveal. The content of the investigation will determine how much latitude these dissenting countries will allow themselves in their condemnation. However, I don’t see this dissent taking the form of anything beyond political posturing at this time.

With the major players out of the way, this leaves Syria’s longstanding ally Iran as the sole actor with the clout and capability to undertake actions that would exert influence on events outside of the region.

Here is how I imagine such a scenario playing out:

The US proceed to launch targeted strikes in Syria, Hezbollah or some faction of the Syrian government launches retaliatory strikes significant enough to provoke in-country intervention with the stated goal of regime change. The Iranian regime worries that they will be next. A fully military response ensues. Recognizing their limitations, the Iranian regime falls back on their proximity to, and the importance of the Hormuz Straights in order to inflict as much damage as possible on the west.

Possible? Sure. Plausible? I don’t see it. First, I honestly believe that American strikes will be limited to the responding directly to the alleged use of chemical weapons. Second, the Iranian regime is in a precarious situation. Such events would surely bring about the end of the regime. There would simply be too many parties, with too much at stake to allow such events to transpire. Despite lots of rhetoric to the contrary, this regime has never acted in the crazy and irrational manner that might warrant a pre-mature escalation of this crisis.

Barring actions that would lead them to worry for the continuity of their regime, I have a tough time spinning a plausible scenario that would see them escalate the crisis into the wider region.

Thus leaving as a best guess:  as tragic as this crisis is, the impact on energy markets and global markets will likely be of a transient nature (with risk premium's globally on oil), and the long term impact will be non-existent.

As far as the potential impact for us in Canada. The only real downside might be for the eastern refineries that will be facing a risk premium, for some period of time, on the brent priced crude they rely on. While I don't see any long lasting impact on the horizon, I would expect markets to keep a small premium for the time being. For Albertans selling into WTI markets I don't see any upside unless a long-lasting spread between WTI and Brent (both will likely see some risk premium but WTI's should dissipate quickly) increases the probability of getting more oil to the West Coast (via the Kinder Morgan expansion or Enbrdige's Northern Gateway) or hastens the development of the Energy East Pipeline.