The death of America’s shale revolutionary; a Saudi Prince’s panicked twittering over oil; a long-awaited victory for the EPA; the latest prognosis from the Energy Information Administration; and much more from our premium newsletter this week …
This week, Texas billionaire George P. Mitchell—the pioneer of shale-drilling that transformed the global oil market—passed away at the age of 94. It was Mitchell who, in the 1990s, started employing horizontal drilling techniques and hydraulic fracturing to get gas out of rock that no one thought was penetrable. This was the Barnett Shale, and this was the start of a revolution that would completely change global oil and gas.
As the US shale revolution continues on, with its founder passing away, we watch the curious developments in Saudi Arabia, which US analysts have for some time been describing as “scared” of the implications of a US oil and gas boom. So we take you to the land of Twitter, where this is all being played out right now in the most public platform out there.
Last weekend, Saudi Prince Alwaleed bin Talal decided to make use of a company in which he owns shares—Twitter—and chime in on this debate to everyone’s surprise. He warned his fellow Saudis that Riyadh wasn’t taking the US “energy revolution” seriously enough. The Prince was responding specifically to comments make two months earlier by Saudi Arabia’s petroleum and resources minister, Ali al-Naimi, who had argued that the US oil and gas boom would stabilize global markets and that there was nothing to fear.
The Prince’s take is that the US shale revolution is an “inevitable threat” to Saudi Arabia, and that as it stands, the Kingdom will have a hard time meeting its 15 million barrels/day production goals. And his thinking is in line somewhat with OPEC, which has already forecast a drop in global demand of 300,000 bpd by 2014. The Prince also used Twitter to lobby for increased Saudi investment in renewable energy.
So what does it all mean? Well, it’s not unprecedented in Saudi Arabia—these royal tiffs aired publicly. What it certainly means is that Saudi Arabia’s royalty is divided on the issue and the Prince is hoping to capitalize on this divide by stepping in to the fray via Twitter and publicly contradicting the oil chief.
Kingdom politics aside, though, the Prince is right to some extent. Saudi production is down thanks to reduced demand from the West, though Asian demand continues to help fill in this gap.
In the world of US policy, it’s been an interesting few years for the Environmental Protection Agency (EPA), which has taken a few beatings, and bounced back a few times. This week, a federal appeals court upheld the EPA’s controversial 2008 standards for ozone pollution, which were being challenged both by industry and environmentalists. Industry said the rules were too strict, while environmentalists said they were too lax. But the US Court of Appeals rendered its verdict unanimously.
At the same time, the US Energy Information Administration (EIA) has released its 2013 International Energy Outlook, forecasting that natural gas will be the fastest-growing fossil fuel over the next three decades as global natural gas consumption increases by 1.7% annually. The report also predicts that renewable energy and nuclear power will increase 2.5% each annually through 2040—though fossil fuels will continue to supply almost 80% of world energy use. (Incidentally, the report also projects greater growth in coal use).
This weeks especial report is from the Inside Investor section of Premium and in it legendary energy trader Dan Dicker looks at the growing trend in energy MLP spinoffs and how investors can play this for profit. He has two recommendations on IPS’s to look out for. The Full Report is Below the Introduction.
We have a great letter lined up for our premium subscribers and I urge you to consider our 30 day free trial offer. You have absolutely nothing to lose as you get 30 days completely free (over 30 research reports), full access to our archives, and if at the end you don’t feel the publication is for you can just cancel (without any hoops to jump through.) If you are interested in learning more we have a new page describing the service in more detail. Click here
Before we get onto the various sections in today’s premium letter I wanted to mention that this week’s Intelligence notes are not to be missed – if you are looking for an inside look at the current political situation inside Iran and why we see things changing here very quickly then you need to read this week’s report (Due to the sensitive nature of the information we will not be posting the report in the archive either – so this is your only chance to read it.) More on the Intel Notes below
Inside Opportunities takes a look at power ships and Russia’s plans for a floating nuclear power plant.
The Report covers:
Feasibility and costs of floating nuclear power plants (we don’t like it)
• Why there will always be a market for power ships
• Examples of power ships currently in operation
• A look at the market leaders and why we like power ships for investors
• + much more
Intelligence Notes – DO NOT MISS this week’s Intel Notes – we have two reports this week that due to their sensitive information will not be appearing in our archive.
The reports look into the following Geopolitical situations:
Iran-Iraq-Syria Pipeline Must Tempt Europe
One of the main reasons for the conflict in Syria - Could this pipeline be the answer to the Gazprom plague in Europe? (see the full report for details)
Iran—Watch for an Opening
Washington now sees an opening in relations with Iran – is their optimism justified? (see the full report for details) – Will not be in the archives due to sensitive information
As Sudan-South Sudan Oil Battle Re-Ignites, South Sudan Risks Political Instability
More problems with Sudan-South Sudan – who is to blame here – or are the problems beyond both governments control? (see the full report for details)
Lebanon’s Oil & Gas Future Should Weather Syria Storm
What impact will the EU’s ban on Hezbollah’s military wing have on the country’s oil & gas ambitions? Is the gradual worstening of the security situation something investors should be concerned about? (see the full report for details) – Will not be in the archives due to sensitive information
We also have Inside Markets with our in house rocket scientist Jim Hyerczyk who gives his forecasts for the oil markets in the coming weeks. Jim has been spot on with his forecasts and traders who have been following his advice have made great returns.
That’s it from us this week – I hope you enjoy Dan’s report and have a great weekend.
Several media outlets have recently carried a story about a prominent Saudi prince warning that Saudi Arabia is increasingly vulnerable to competition from the US shale revolution, as a result of fracking in tight/shale plays.
I would turn the question around and ask why is Saudi Arabia not a threat to fracking?
Note that as annual Brent crude oil prices doubled from $25 in 2002 to $55 in 2005, Saudi net oil exports increased from 7.1 mbpd in 2002 to 9.1 mbpd in 2005 (million barrels per day, total petroleum liquids + other liquids, EIA).
The Saudi Oil Minister, in early 2004, explicitly stated that the then ongoing large increase in Saudi net oil exports was an attempt to bring oil prices in line with the then stated goal of maintaining a $22 to $28 oil price band. In any case, at the 2002 to 2005 rate of increase in Saudi net oil exports, their net oil exports would have been over 16 mbpd in 2012, as annual Brent crude oil prices more than doubled again, from $55 in 2005 to $112 in 2012, with one year over year decline in oil prices, in 2009.
However, in contrast to the 2002 to 2005 Saudi response to a doubling in the price of oil, the Saudis have shown seven straight years of annual net exports below the 2005 rate of 9.1 mbpd, with Saudi net oil exports ranging between 7.6 and 8.7 mbpd for 2006 to 2012 inclusive, as annual oil prices doubled again.
If the Saudis have virtually infinite oil reserves, and their public pronouncements continually suggest that they have the “capacity” to produce well in excess of 12 mbpd almost indefinitely, why are they allowing high oil prices to encourage alternative sources of oil production, e.g., the very expensive and very high decline rate shale plays in the US?
While it’s certainly at least possible that the Saudis abandoned their traditional swing producer role, and decided to encourage, starting in 2006, higher oil prices, and thus encourage alternative sources of oil, by cutting their net oil exports, it’s also at least possible, as Matt Simmons suggested in 2005, that Saudi oil fields are finite after all.
I realize that this is a controversial assertion--that Saudi Arabian oil fields are not infinite--but it’s a possibility that is at least worth considering.
At the 2005 to 2012 rate of decline in the ratio of Saudi liquids production to liquids consumption, I estimate that Saudi Arabia, like many other former net oil exporters, e.g., Indonesia, could be approaching zero net oil exports in less than 30 years. This would imply that Saudi Arabia may have shipped about half of their post-2005 Cumulative Net Exports of oil by the end of 2017.
In fact, an examination of 2005 to 2012 data indicate that a majority of the Top 33 net oil exporters in the world in 2005 are already headed toward the point in time when they would become members of AFPEC--the Association of Former Petroleum Exporting Countries.
While currently increasing US crude oil production is very helpful, it is very likely that we will continue to show the post-1970 "Undulating Decline" pattern that we have seen in US crude oil production (currently US crude oil production is about 25% below our 1970 peak rate), as new sources of oil come on line, and then inevitably peak and decline.
The very slow increase in global crude oil production since 2005, combined with a material post-2005 decline in Global net oil exports, have provided considerable incentives for US oil companies to make money in tight/shale plays. But I think that the assertion by many in the Cornucopian camp that shale plays will result in a virtually infinite rate of increase in global crude oil production is wildly unrealistic.
We are still facing high--and increasing--overall decline rates from existing oil wells in the US. At a 10%/year overall decline rate, which in my opinion is conservative, the US oil industry, in order to just maintain the 2013 crude oil production rate, would have to put online the productive equivalent of the current production from every oil field in the United States of America over the next 10 years, from the Gulf of Mexico to the Eagle Ford, to the Permian Basin, to the Bakken to Alaska. Or, at a 10%/year decline rate from existing wells, we would need the current productive equivalent of 10 Bakken Plays over the next 10 years, just to maintain current production.
On the natural gas side, a recent Citi Research report (estimating a 24%/year decline rate in US natural gas production from existing wells), implies that the industry has to replace virtually 100% of current US gas production in four years, just to maintain a dry natural gas production rate of 66 BCF/day. Or, at a 24%/year decline rate, we would need the productive equivalent of the peak production rate of 30 Barnett Shale Plays over the next 10 years, just to maintain current production.
For more information on global net exports of oil, following is a link to a recent article on the topic: