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.