Saudis declare war on frackers; US oil prices crash to $65 / barrel

the most important news of the year with regards to new horizontally fracked wells, tar sands exploitation, ultra-deepwater drilling projects and arctic exploitation came early Thursday morning when OPEC concluded their scheduled semi-annual meeting with a decision to keep their oil output quotas unchanged, rather than cut back in the face of a global oil surplus.... Saudi Arabia's oil minister Ali al-Naimi specifically argued that OPEC members must tolerate depressed prices for the time being to combat our shale oil boom, telling the other oil producers that a cutback in output and higher prices would just allow US oil producers to grab a larger share of the market...the reaction in the US oil markets was immediate; oil prices dropped a dollar and a half in the first few minutes after the announcement, and were down $6 dollars a barrel by the end of the day...by mid-morning on Friday, prices for US crude were down another $2 dollars to $68 a barrel, where they appeared to steady, only to weaken again at the end of the day and end the week near $65, down from as high as $78 a barrel the week before....worldwide prices followed a similar pattern, with the benchmark world price ending the week near $69 a barrel, and with Western Canada Select, the Alberta tar sands benchmark, trading at $48.40 a barrel, the lowest in the world....

as we've discussed several times in general terms, complex & energy intensive methods of oil extraction such as fracking become uneconomical with prices at these levels...we've often cited a widely quoted "break even price" for horizontally fracked wells averaging around $80 a barrel, but averages conceal as much as they reveal; ie, some wells in the Bakken shale have produced oil with costs below $40 a barrel, while a percentage of marginal wells in that area have costs exceeding $90 for each barrel of oil they produce....with the falling prices, there has been considerably more analysis into the financial costs of projects in various oil fields, including tables and graphs, and since the modus operandi of my own links blogging omits the graphics, it seems it would be most useful to include a couple of them here, so you all can get an idea what's in play and what's at stake...

first, from a Reuters survey of oil analysts and consultants, we have a short table showing us the average break-even price of producing an additional barrel of oil or oil equivalent by geographic region:

we can see here that producing oil in the arctic is most expensive, and certainly prohibitively at current oil prices...EU biofuels are also cost prohibitive, but they’re probably subsidized, a policy that may not be too smart environmentally if a lot of that cost is in energy….this table shows the cost of extraction from oil sands at $89 to $96 a barrel, which is not much different than the $85 to $105 we quoted from a Canadian source two weeks ago, which makes new projects there a capital sinkhole, with current Alberta prices below $50 a barrel…and remember again, these are broad averages; other sources put the cost of the three most expensive Shell and Conono Phillips tar sands projects at over $150 a barrel…similarly, although deepwater oil wells may have an average cost under $60 a barrel, current projects under study off the coasts of Brazil, Nigeria, and Cote d’Ivoire are all expected to cost more than $120 a barrel…

we also see here that average costs of US shale oil plays are listed at between $70 and $77 a barrel, a bit less than the widely quoted $80…but with the present oil glut, they’re up against middle east producers who can bring oil out of the ground for as little as $10 a barrel…similarly, their is no indication that Russian producers, with costs below $21 a barrel, will slow production any time soon, with Russia’s ongoing budget problems..

so to further break down those domestic shale costs, we have a graphic below from Zero Hedge showing selected shale oil breakeven prices for individual projects, apparently sourced from a Barclays’ analysis of Wood Mackenzie data…the circles on the graphic represent the average costs for producing oil in various US fields, accounting just for the cost of extraction, & not including other costs such as interest, corporate overhead and the like, nor any environmental remediation....note that in the lower footnote, the Barclays researchers note that producers would need a 25% to 30% return at these prices to earn 10% on a given project if full cycle accounting were applied…two lines are drawn; one at $80 a barrel, such that those more expensive projects are above that line, and one at $70, close to prices we’ve seen this week…from the left, we see the Eagle Ford Karnes Trough producing oil at $50 a barrel, with core Utica shale wells producing at $55, running all the way to some projects on the right such as Bone Spring and Eddy County with half cycle costs over $100 a barrel…note that prices for selected Bakken fields are labeled A through E, somewhat difficult to read in this viewing (you can click on the graphic for a large view)….what’s pretty clear from this is that at $70 a barrel just for costs of drilling, much of the US shale industry is not economically viable at today’s oil prices…

the major Ohio fracking related story involves House Bill 490, a wide ranging environmental and agricultural bill which Kathy Hanratty already alerted you to as to how it would affect Lake Erie earlier this week when she sent the link to "Tea Party-Controlled Legislature Pushes ‘Industry-Driven’ Great Lakes Water Withdrawal Bill" ...what's really going on with that bill, once you pull back the pretentious facade of helping Ohio jobs & industry, is that it's an attempt by the lame duck session of the legislature to roll back the few environmental protections in Ohio law, decriminalize polluters, and make it more difficult to get information about the chemicals used by Ohio frackers; you'll see in a Cleveland Plain Dealer article below that even the industry friendly ODNR is upset, that the bill is exactly the opposite of the kind of transparency they have advocated....House Bill 490 has already passed the House and is now before a Senate committee...

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GasFrac's president sees golden opportunity in waterless fracking in Ohio - Oil and gas companies want waterless fracking because it could work better than water fracking. Residents want waterless fracking because it saves millions of gallons of water and cuts down on transportation needed to truck used water away. Add that to a failure of Ohio's oil and gas companies to economically drill for oil in the northern and western part of the state's Utica shale play, and Canadian company GasFrac Energy Services Inc. sees a golden opportunity, its president told me.  GasFrac has begun testing its first waterless fracking well in Tuscarawas County, as I reported last week.  "We think there's a lot of work in Ohio and a lot of potential there," said GasFrac president Jason Munro.  Munro couldn't confirm that Houston-based EnerVest subsidiary EV Energy Partners LP is the company working with the GasFrac on the test oil well, but its executives have made public comments alluding to the partnership. It's one of the worst-keep secrets in the industry, one which EV executive chairman John Walker said could be its most valuable asset in the Utica.  GasFrac's technique uses gelled propane instead of water in hydraulic fracturing. Munro said the technique could work in natural gas formations, but oil is the target. Drillers have had a hard time economically drilling for oil in Ohio; the process isn't the same for extracting natural gas.

Anti-fracking groups want permits revoked at 23 Ohio sites - Two environmental groups have filed suit against Gov. John Kasich and the Ohio Department of Natural Resources, seeking to revoke permits that have been granted to 23 facilities that store, handle, process or recycle hydraulic fracturing — or “fracking” — wastes. Seven of those facilities are in the Tuscarawas Valley. The lawsuit was filed Wednesday in Franklin County by the Fresh Water Accountability Project and Food & Water Watch. The two groups say the facilities were approved by ODNR “chief’s orders,” bypassing the official rule-making process required to permit such facilities. The suit asks the court to revoke all chief’s orders issued to date as “being fatally unlawful.” In a press release, the two environmental groups said, “Before approving these type of fracking waste facilities, ODNR must adhere to the formal rule making process, which includes a public comment period. No rules have been made available to the public, yet ODNR has already approved several of these facilities.” ODNR spokeswoman Bethany McCorkle said her agency does not comment on pending litigation.

Bill alters reporting of fracking chemicals in Ohio - The way companies report the fracking chemicals they use in Ohio could change under a bill moving through the Statehouse. Environmental activists say the legislation would make it more difficult for firefighters and people who live near fracking sites to get information about what chemicals they could be exposed to during an emergency, such as an explosion or spill. But the Ohio Department of Natural Resources, which oversees drilling in Ohio, says the provision would lead to greater transparency. The agency asked a state representative to add the provision to the bill. “We are concerned,” said Melanie Houston, the director of water policy and environmental health at the Ohio Environmental Council, an advocacy group. “The local (emergency responders) will have to go through ODNR and their database to get the information, and we’re worried. Will they have it when they need it in the event of an emergency? Basically, we think the law should stay as it is.” The provision is part of House Bill 490, legislation that deals with environmental and agricultural issues, oil and gas drilling and telecommunications. The bill passed the House of Representatives 73-20 on Wednesday; it now moves to the Senate. The bill would change how Ohio deals with the federal Emergency Planning and Community Right-to-Know Act, enacted almost 30 years ago to keep residents and emergency responders informed about the hazardous chemicals in their backyards. Congress passed the act in 1986, in direct response to a 1984 chemical leak in Bhopal, India, that killed more than 1,700 people.

Ohio activists oppose disclosure provisions of HB 490 - On Wednesday, the Ohio House of Representatives passed House Bill 490 and now the state is poised to go backwards when it comes to protecting communities and first responders. A coalition of first responders, community members, health professionals, scientists and environmental advocates including The Ohio Ecological Food and Farm Association, the Buckeye Forest Council, the Center for Health and Environmental Justice, Ohio Citizen Action, the Ohio Environmental Council, Progress Ohio, the Ohio Organizing Collaborative, Communities United for Responsible Energy (CURE), and the Mahoning Valley Organizing Collaborative is joining together to call for the Ohio Senate to stop this dangerous provision from becoming law. Silverio Caggiano, a 31-year veteran of the Youngtown Fire Department and member of several haz-mat task forces has a message for the governor and the Ohio Senate. He says working under two sets of laws have caused confusion for first responders and put communities at risk. He calls for the Senate and Governor John Kasich to “throw off this veil of secrecy and abide by the Emergency Planning and Community Right to Know Act.” “End this confusion of having industry working under two sets of laws- one for frackers and one for everyone else,” Caggiano says. “There is an old saying in the fire service. Fire codes / laws are written with the blood of the victims and firefighters. Is that what it will take before we do what is right?”

Environmentalists fear bill would weaken Ohio fracking oversight: An environmental group is calling on Attorney General Mike DeWine to provide support for the governor’s effort to penalize law breakers, saying a new bill would cripple state enforcement against fracking polluters. An Ohio Senate committee this week began hearings on House Bill 490, hearing testimony from top Kasich administration officials urging the Senate to restore provisions to the law to properly penalize violators of Ohio’s fracking regulations. Changes by the state Legislature to Gov. John Kasich’s original proposal, coupled with further roll backs of current law, may leave fewer tools and weaker penalties for fracking-law violations, opponents say. On Friday, the Ohio Environmental Council sent a letter to DeWine — the state’s chief law-enforcement officer — urging his office to weigh in on the debate to reduce the fracking enforcement.“The governor’s plan would have brought the hard hammer of justice against the most flagrant violators of human health and safety laws,” said Trent Dougherty, legal affairs director of Ohio Environmental Council. “The amended bill replaces that hammer with a tattered white flag.”According to OEC’s letter to DeWine, the group fears that the future of the state’s enforcement capabilities will be jeopardized. “The attorney general must act swiftly to make certain that the Legislature restores strong penalties to stop flagrant or repeat polluters dead in their tracks, and to ensure protection of health and safety,” Dougherty added.

Controversial fracking chemical bill the opposite of what ODNR sought -- Proposed changes to Ohio's fracking chemical reporting law are drawing concerns from first responders and environmental activists, but Department of Natural Resources officials said they didn't ask for the changes. A wide-ranging environmental and agricultural bill passed by the House last week would change the way oil and gas companies report chemicals used in hydraulic fracturing, a process in which sand, water and chemicals are injected underground to break up the earth and allow oil and gas to escape.  ODNR spokeswoman Bethany McCorkle said the department requested a law change allowing it to establish an online database for this information, which could be accessed 24/7 by first responders, emergency planners and the public. "This would be cutting-edge to have the information on a database anyone could have," McCorkle said. "This is very transparent." But a provision added last week to House Bill 490 appears to block the public and neighboring first responders and emergency planners from the database. Environmental activists said the bill would hurt first responders' ability to do their jobs while giving more power to ODNR. "No other chemical-intensive industry in the state gets a pass like this," Melissa English, development director for Ohio Citizen Action, said in a statement. "First responders and the public have a right to know about potential chemical hazards in their midst."

Ohio's new fracking solid waste disposal rules explained - Ohio’s budget bill for this year and next included changes in state regulations for handling solid waste from fracking. The Ohio EPA, and departments of Natural Resources and Health, who jointly enforce those, sent a letter to landfills about the new requirements.    But, Lea Harper of theOhio Freshwater Accountability Project says, like in the old days of strip mining, nobody is responsible for future costs of remediating environmental damage. “Tax payers are paying for stream cleanup into perpetuity. This is another thing that is going to be very expensive. You know, they’re talking the economic benefits and the windfall tax revenues, but what about the long term costs?" In a statement the agencies wrote that the new rules arise from strengthened Ohio laws that ensure oil and gas waste substances are properly managed.

Protect Your Town From Fracking’s Collateral Damage  -- While New York’s highest court has upheld a town’s right to prohibit fracking within its borders, fracking threats still loom—regardless of whether a community has enacted a ban or moratorium on this activity.All communities, with bans or otherwise, will feel the impact of fracking-related activities nearby. Air and water pollution know no jurisdictional boundaries, and the build-up of natural gas infrastructure (i.e., pipelines, compressor stations, storage facilities and export terminals) will create hazards across municipal, county and state lines. Collateral damage includes:

• Waste disposal – wastewater disposal, landfills, brine spreading on roads
• Infrastructure for transporting and storing gas – pipelines, compressor stations, export facilities, underground storage, CNG facilities
• Air pollution – methane, ozone and other toxic substances

Links to slides and other materials used at the November 15th, 2014 Conference. Links to additional resources.

First-Ever Footage of Aging Tar Sands Pipelines Beneath Great Lakes » This past July, National Wildlife Federation (NWF) conducted a diving expedition to obtain footage ofaging oil pipelines strung across one of the most sensitive locations in the Great Lakes, and possibly the world: the Straits of Mackinac. Footage of these pipelines has never been released to the public until now. The Straits of Mackinac pipelines, owned by Enbridge Energy, are 60-years-old and considered one of the greatest threats to the Great Lakes because of their age, location and the hazardous products they transport—including tar sands derived oil. For nearly two years, NWF has been pressing pipeline regulators and Enbridge to release information about the integrity of these pipelines, including inspection videos showing how the pipelines cross the Straits of Mackinac. These requests have gone largely unanswered from both Enbridge and the Pipeline Hazards Safety Administration (PHMSA), who regulates pipeline operations. Because Enbridge hastily moved forward with plans to increase pressure on the aging pipelines, and has bypassed critical environmental permitting for changes in operation, NWF decided we needed to obtain our own:  The footage shows pipelines suspended over the lakebed, some original supports broken away—indicating the presence of corrosion—and some sections of the suspended pipelines covered in large piles of unknown debris. This visual is evidence that our decision makers need to step in and demand a release of information from Enbridge and PHMSA.

Maryland Governor Is Officially Ready To Allow Fracking In The State -- Maryland’s outgoing Democratic Gov. Martin O’Malley announced on Tuesday that he will soon release proposed regulations for fracking — regulations that when finalized will officially allow natural gas drilling in the western part of the state.  The historically environmentally-friendly governor said the regulations when issued would be strict, going above and beyond to restrict drilling in certain locations and including strong protections from drinking-water contamination and air pollution. “We’re committed to ensuring that Marylanders have access to the economic opportunities associated with fracking, while also putting the most complete practices into place to ensure the highest level of protection for Maryland residents.” O’Malley said in a statement to the Baltimore Sun.  Even if the regulations proposed by O’Malley are incredibly strict, the governor’s term expires in January, which leaves them open to the state’s incoming governor, Republican Larry Hogan. As the Washington Post noted on Tuesday, Hogan could make major changes to the regulations, or scrap them altogether once he takes office. The Washington Post reported in October that the incoming governor has lauded natural gas as a potential “boon to Maryland’s economy,” but did not expand on how he felt about the fracking process itself, which injects high-pressure streams of water, sand, and chemicals underground to crack open shale rock. In an interview with the Baltimore Sun, Hogan said he would “want to make sure that [fracking] is done in an environmentally sensitive way, and that we take every precaution possible,” but also cited Maryland residents who need jobs.

Boulder County commissioners formally extend oil, gas moratorium to July 2018 - Boulder County commissioners have officially extended the county's temporary moratorium on accepting new oil and gas development applications until July 1, 2018. On Tuesday morning, Commissioners Deb Gardner and Elise Jones adopted a resolution that follows the 3 ½ -year moratorium-continuation decision they and Commissioner Cindy Domenico made on Nov. 13. Boulder County's moratorium, which applies to new applications for drilling and operating oil and gas wells in unincorporated parts of the county, originally was imposed in February 2012. It has been extended several times since then and had been set to expire Jan. 1. The moratorium applies to all new oil and gas development, and not just the practice of using hydraulic fracturing to free up deep underground deposits. Domenico did not attend Tuesday's meeting, and Jones and Gardner did not discuss the extension further before approving the resolution. The latest moratorium-extension resolution contains a provision requiring that any oil and gas operators — including those already having producing wells in the county — to notify emergency dispatchers and the Land Use Department in the event of any spill or release that "threatens or has the potential to impact the waters of the state."

'Monster' Fracking Wells Guzzle Water in Drought-Stricken Regions » The fracking industry likes to minimize the sector’s bottomless thirst for often-scarce water resources, saying it takes about 2-4 million gallons of water to frack the average well, an amount the American Petroleum Institute describes as “the equivalent of three to six Olympic swimming pools.” That’s close to the figure cited by the U.S. Environmental Protection Agency (EPA) as well. But a new report released by Environmental Working Group (EWG) located 261 “monster” wells that consumed between 10 and 25 million gallons of water to drill each well. Among the conclusions EWG teased out of data reported by the industry itself and posted at fracfocus.org is that between April 2010 and December 2013, these 261 wells consumed 3.3 billions of water between them, a average of 12.7 million gallons each. And 14 of the wells topped 20 million gallons each. “It’s far more relevant to compare those figures to basic human needs for water, rather than to swimming pools or golf courses,” said EWG’s report. “The 3.3 billion gallons consumed by the monster wells was almost twice as much water as is needed each year by the people of Atascosa County,Texas, in the heart of the Eagle Ford shale formation, one of the most intensively drilled gas and oil fields in the country.” And proving that everything really is bigger in Texas, that’s where most of these monster wells were located, hosting 149 of them. Between them they consumed 1.8 billion gallons of water. The largest was located in Harrison County on the east Texas border, where in March 2013, Sabine Oil & Gas LLC drilled a well using more than 24.8 million gallons of water.  And Texas also had what EWG described as the “dubious distinction” of using more fresh water in fracking, consuming 21 million gallons in 2011 alone.  Pennsylvania had the second largest number of these monster wells with 39 located in that fracking-boom state atop the Marcellus shale formation. It was followed by Colorado (30, including 8 of the 15 biggest water consumers), Oklahoma (24), North Dakota (11), Louisiana and Mississippi (3 each) and Michigan (2).

Fracking can trigger earthquakes, scientists conclude — Evidence is growing that fracking for oil and gas is causing earthquakes that shake the heartland.  States such as Oklahoma, Texas, Kansas and Ohio are being hit by earthquakes that appear linked to oil and gas activity. While the quakes are far more often tied to disposal of drilling waste, scientists also increasingly have started pointing to the fracking process itself.“Certainly I think there may be more of this that has gone on than we previously recognized,” Oklahoma Geological Survey seismologist Austin Holland told colleagues last week.In addition to what Holland has seen in Oklahoma, a new study in the journal Seismological Research Letters concludes that fracking caused a series of earthquakes in Ohio a year ago. That follows reports of fracking leading to earthquakes in Canada and across the Atlantic in the United Kingdom.Before 2008 Oklahoma averaged just one earthquake greater than magnitude 3.0 a year. So far this year there have been 430 of them, Holland said.Scientists have linked earthquakes in Oklahoma to drilling waste injection. Shale drilling produces large amounts of wastewater, which then is often pumped deep underground as a way to dispose of it without contaminating fresh water. Injection raises the underground pressure and can effectively lubricate fault lines, weakening them and causing earthquakes, according to the U.S Geological Survey.USGS senior science adviser Bill Leith, speaking at an earthquake forum last week held by the U.S. Energy Association, said communities need to be worried about earthquakes from drilling waste injection. But quakes from fracking itself are rare, Leith said.

Real Fracking Frackquakes Hit Dallas!  -- Not just a little shake from a disposal well – but honest-to-god frackquakes from a fracked shale gas well.  Felt right here in Big D.  The birthplace of fracking and the hometown of the frackers. Imagine that.

• Four Earthquakes in Three Days for Irving -NBC 5 Dallas-Fort Worth‎ – Four earthquakes centered in Irving have shaken parts of North Texas since late Saturday.
• For the third day in a row, an earthquake shakes Irving - Dallas Morning News‎ – 1 day ago
• Another earthquake hits Irving  - WFAA‎ –

Four earthquakes centered in Irving have shaken parts of North Texas since late Saturday. Saturday night’s magnitude 3.3 quake happened at 9:15 p.m. just northeast of the old Texas Stadium site and was felt by hundreds of North Texans. The NBCDFW Facebook Fan page received more than 1,300 comments about it.  Saturday’s quake fractured a two-inch water line beneath Portales Lane in Irving, just south off Texas 183 near MacArthur Boulevard, sending water rushing down the private road.

19 US Shale Areas That Are Suddenly Endangered, "The Shale Revolution Doesn't Work At $80" -- Despite the constant blather that lower oil prices are "unequivocally good" for America, we suspect companies working and people living these 19 Shale regions will have a different perspective... Drilling for oil in 19 shale regions loses money at $75 a barrel, according to calculations by Bloomberg New Energy Finance. Those areas pumped about 413,000 barrels a day, according to the latest data available from Drillinginfo Inc. and company presentations. “Everybody is trying to put a very happy spin on their ability to weather $80 oil, but a lot of that is just smoke,” said Daniel Dicker, president of MercBloc Wealth Management Solutions with 25 years’ experience trading crude on the New York Mercantile Exchange. “The shale revolution doesn’t work at $80, period.”Source: Bloomberg

Where Oil and Politics Mix - The mood was giddy. Halliburton served barbecued crawfish from Louisiana. A commemorative firearms dealer hawked a “one-million barrel” shotgun emblazoned with the slogan “Oil Can!” Mrs. North Dakota, in banner and crown, posed for pictures. The Texas Flying Legends performed an airshow backlit by a leaping flare of burning gas. And Gov. Jack Dalrymple was the featured guest. Tioga, population 3,000, welcomed North Dakota’s first well in 1951, more than a half-century before hydraulic fracturing liberated the “tight oil” trapped in the Bakken shale formation. So it was fitting that Tioga ring in the daily production milestone that had ushered the Bakken into the rarefied company of historic oil fields worldwide.But Tioga also claims another record: what is considered the largest on-land oil spill in recent American history. And only Brenda Jorgenson, 61, who attended “to hear what does not get said,” mentioned that one, sotto voce.The million-barrel bash was devoid of protesters save for Ms. Jorgenson, a tall, slender grandmother who has two wells at her driveway’s end and three jars in her refrigerator containing blackened water that she said came from her faucet during the fracking process. She did not, however, utter a contrary word.“I’m not that brave (or stupid) to protest among that,” she said in an email afterward. “I’ve said it before: we’re outgunned, outnumbered and out-suited.”

The Downside of the Boom - There had been an accident at the Skurupey 1-9H oil well. “Oh, my gosh, the gold is blowing,” she said he told her.  It was the 11th blowout since 2006 at a North Dakota well operated by Continental Resources, the most prolific producer in the booming Bakken oil patch. Spewing some 173,250 gallons of potential pollutants, the eruption, undisclosed at the time, was serious enough to bring the Oklahoma-based company’s chairman and chief executive, Harold G. Hamm, to the remote scene.It was not the first or most catastrophic blowout visited by Mr. Hamm, a sharecropper’s son who became the wealthiest oilman in America and energy adviser to Mitt Romney during the 2012 presidential campaign. Two years earlier, a towering derrick in Golden Valley County had erupted into flames and toppled, leaving three workers badly burned. “I was a human torch,” said the driller, Andrew J. Rohr.Blowouts represent the riskiest failure in the oil business. Yet, despite these serious injuries and some 115,000 gallons spilled in those first 10 blowouts, the North Dakota Industrial Commission, which regulates the drilling and production of oil and gas, did not penalize Continental until the 11th.The commission — the governor, attorney general and agriculture commissioner — imposed a $75,000 penalty. Earlier this year, though, the commission, as it often does, suspended 90 percent of the fine, settling for $7,500 after Continental blamed “an irresponsible supervisor” — just as it had blamed Mr. Rohr and his crew, contract workers, for the blowout that left them traumatized.

Bakken: Ripple effects - North Dakota is beginning to see the effects of a depressed crude oil market, and in at least one rather unexpected way. Oil production growth in the state set a record in September increasing by more than 52,000 barrels per day from the previous month according to data released by the Department of Mineral Resources, DMR, on Nov. 14. That would normally be viewed as positive news all the way around, but the reason for the growth is not because drilling and production are expanding, but instead, amid falling oil prices, operators are playing it safe and shifting focus back to the most productive Bakken core where wells simply have higher yields and better returns (see sidebar). The effects of low prices don’t stop there. North Dakota is also seeing a number of drill rigs simply fall off the rosters. In a Nov. 14 monthly press conference, DMR Director Lynn Helms said the state’s current rig count is down “pretty dramatically,” standing at 186 on Nov. 14. That is five fewer than at the end of October and nine fewer than at the end of September. Helms said many operators are scaling back drilling plans and letting some of the less efficient drill rigs go as contracts expire. “They had intended to increase rig count going into next year - almost all of them had budgeted for some fairly significant increases and were indicating that our rig count might go to 200 or maybe a little bit beyond that. They have dropped those plans at this point and plan to hold - at least the big double-digit drillers - plan hold at their rig count,” Helms said. “And they have alternate budgets that they could approve that actually reduce that,” Not only do low crude oil prices force operators to adjust, the Office of the Tax Commissioner as well as the Legislature must adjust also as lower prices mean lower revenues and lower revenues can mean tax adjustments. For calendar year 2014, that tax incentive trigger price is $52.06 per barrel, and if WTI falls and remains below that price for five consecutive months, oil extraction tax incentives kick in.

Bakken Volatility Tests Face More Challenges - WSJ: Regulators set to decide on crude-by-rail shipping rules are relying on testing methods that may understate the explosive risk of the crude, according to a growing chorus of industry and Canadian officials. The tests’ accuracy is central to addressing the safety of growing crude-by-rail shipments across the continent: whether Bakken crude contains potentially dangerous levels of dissolved gases. Several trains carrying Bakken crude have exploded after derailing, including a fiery accident last year that killed 47 people in a small town in Quebec. The North Dakota Industrial Commission is expected to rule Thursday on what steps, if any, producers must take to strip volatile gases out of crude oil before loading it into railroad tank cars. The regulator’s decision will be based, at least in part, on the testimony of a half-dozen oil executives who urged the state to consider the conclusions of a study by the North Dakota Petroleum Council, a lobbying group for energy producers. That study found Bakken crude was no more volatile than other so-called light crudes commonplace in Texas and elsewhere. But that finding may reflect a problem with the methodology, which could have allowed flammable gases, or light ends, to escape in the process of collecting and handling the crude samples. This means that tests aimed at determining how explosive crude is within a tank car might be significantly underestimating the risk of combustion.

Oil trains are disasters-in-waiting - The knee-jerk reaction in Minnesota and elsewhere to the spate of North American crude oil disasters — beefing up emergency capabilities — is predictable, but dead wrong. The glum, vivid consensus from fire chiefs and emergency managers is that derailments of 100-tanker oil trains are “way beyond our current capabilities.”  Following long-standing, prudent U.S. Transportation Department guidance, fire chiefs testified that “even if we had an infinite amount of foam” they can only do defensive firefighting, pulling back at least one-half mile and letting the explosions and fires happen. Minnesota, as a crude-by-rail corridor facing huge risks and no benefits, should be loudly demanding to see the railroads’ hidden documents, forcing the railroads to prove that they have selected the “safest and most secure” routes for all their highest risk hazmat cargoes, as a 2007 federal law requires. In the recent, sobering documents from the ongoing federal rule-making on high-hazard flammable trains, the Transportation Department concedes that routing trains to avoid urban areas could improve safety and security, but says it has seen only “modest” railroad hazmat rerouting.The DOT documents say it is “impossible to know” whether the railroads have prioritized safety in their routing decisions. Each railroad makes secret decisions based on 27 routing factors, which each can weight as they will, with no federal guidance. No federal oversight body has reported on whether such decisions are protecting a single U.S. city, major water reservoir or Native American land.

Gov’t Data Sharpens Focus on Crude-Oil Train Routes - -- A ProPublica analysis of federal government data adds new details to what’s known about the routes taken by trains carrying crude oil. Local governments are often unaware of the potential dangers they face.Much of North Dakota's oil is being transported by rail, rather than through pipelines, which are the safest way to move crude. Tank carloads of crude are up 50 percent this year from last. Using rail networks has saved the oil and gas industry the time and capital it takes to build new pipelines, but the trade-off is greater risk: Researchers estimates that trains are three and a half times as likely as pipelines to suffer safety lapses. Indeed, since 2012, when petroleum crude oil first began moving by rail in large quantities, there have been eight major accidents involving trains carrying crude in North America. In the worst of these incidents, in July, 2013, a train derailed at Lac-Mégantic, Quebec and exploded, killing 47 and burning down a quarter of the town. Six months later, another crude-bearing train derailed and exploded in Casselton, North Dakota, prompting the evacuation of most of the town's 2,300 residents. See our interactive map of the crude-oil train data.  In those and other cases, local emergency responders were overwhelmed by the conflagrations resulting from these accidents. Residents often had no idea that such a dangerous cargo, and in such volume, was being transported through their towns. Out of the disasters came a scramble for information. News outlets around the country began reporting the history of problems associated with the DOT-111 railroad tank cars carrying virtually all of the crude. Local officials, environmental groups, and concerned citizens began to ask what routes these trains were taking and whether the towns in their paths were ready should an accident occur.

Diverse group opposes oil plans The latest group to go public with its opposition to new oil terminals in Washington is a diverse group including firefighters, physicians and neighborhood association leaders.  In a letter to Gov. Jay Inslee on Friday, the coalition urged the governor to stop the proposed oil terminals in Vancouver and Grays Harbor and prevent the expansion of oil refineries in Anacortes.  "We are asking you to follow through on your commitment to a clean energy future and a robust sustainable economy by denying their permitting and construction," the letter to Inslee reads.  Geoff Simpson, a firefighter with the Kent Fire Department, said the letter was a result of meeting with a variety of people from those in the Projected emissions could include nitrogen dioxide, sulfur dioxide, arsenic, cadmium, hexavalent chromium, benzene and diesel engine particulate.  LaBrant said environmental concerns, such as impacts from a spill, drown out a lot of other pressing issues facing opponents of the proposed oil-by-rail terminal in Vancouver. At the end of the letter, the group requested to meet with the governor. "The governor's long-standing concern about the safety of the growth of crude by rail activity in Washington is well known," Jaime Smith, the governor's spokeswoman, wrote in an email on Friday.  Inslee has called on the federal government to lower the speed limit for trains carrying crude oil and accelerate the replacing of outdated cars.  The governor is also expected to unveil draft legislation for the 2015 session aimed at improving safety conditions and the state's ability to respond to spills.

Drilling Slowdown on Sub-$80 Oil Creeps Into Biggest U.S. Fields -- The slowdown in the U.S. oil-drilling boom spread to two of the nation’s largest fields this week. The Permian Basin of Texas and New Mexico, the country’s biggest oil play, lost four rigs targeting crude, dropping to 558, Baker Hughes Inc. (BHI) said on its website today. Those in North Dakota’s Williston Basin, the third-largest and home to the Bakken shale formation, slid to the lowest level since August, according to the Houston-based field services company’s website. It was the first time in four weeks that oil rigs dropped in the Williston. Oil prices have tumbled 29 percent from this year’s peak, pausing a surge in drilling in U.S. shale plays that has propelled domestic crude production to the most in three decades and brought retail gasoline prices below $3 a gallon for the first time since 2010. Drillers from Apache Corp. (APA) to Hess Corp. (HES) have announced plans to cut their rig counts in some North American oil fields as crude futures trade under $80 a barrel. “Prices in the lower $70s over a period of six months would slow” U.S. oil production, Daniel Yergin, a Pulitzer Prize-winning oil historian and vice chairman IHS Inc. (IHS), said at a conference in New York. “People have leased rigs. They have rented them for the year and so forth. But you’d start to see an impact.”  Nineteen shale regions in the U.S. are no longer profitable with oil at $75 a barrel, data compiled by Bloomberg New Energy Finance show. Those areas, including parts of the Eaglebine and Eagle Ford in Texas, pumped about 413,000 barrels a day, according to the latest data available from Drillinginfo Inc. and company presentations.

The problem with fracking - Slumping oil prices are wrecking life for drillers around the world, particularly high-cost producers now struggling to make a profit ... like the U.S. American oil from shale, which comes out of the ground through fracking, is pricey to extract. On top of that, sources of oil become mere trickles within a year or two. The notion of oil wells tailing off and aging isn’t new. In the late 1950s, a Hollywood celebrity famously joked that actors are “about as short-lived as an oil well and twice as pretty.” For the new so-called "shale wells," production falls like a stone in the first year. “Let’s say you produce 500 barrels in the first month of production,” says James Burkhard, head of oil market research for IHS Energy. “Twelve months later you could be producing around 250 barrels. So a decline rate of about 50 percent. In a conventional well, the decline rate is much less steep.” Oil from shale is not a pool of liquid, but rather small amounts trapped in tight rock. That requires drillers to fracture, or "frac," the shale rock to release the oil. Quickly, though, output slows and pressure falls. And the driller has to drill and frac again, in a new spot. That’s expensive — in many places, each well costs $8 million.

Frackin’ Bakken Bust. Why Shale Oil Is Imploding. - That low rumble you hear to the west is the sound of the Bakken Shale Oil Bust. Bomb Trains and all.  First shale gas went from fracking boom to fracking bust. Now it’s shale oil’s turn to get fracked. Below about $75 a barrel, most US shale oil becomes unprofitable on a fully burdened basis. And oil is now at $70 bbl. That dog no hunt.  Look on the sunny side – the frackers will have to shut in those shale oil wells - and stop lighting the heavens with gas flares. And fewer neighborhoods will get torched by Shale Oil Terror Trains. As shale oil production is shut in, gas supplies from those fields will drop, which should boost natural gas prices a bit near the oil fields. Note, this recent drop is being billed in the popular press as a conspiracy by OPEC or the Russians, (or Green Billionaires ?) when the simple fact is that oil prices “revert to the mean” cost of production, which is a function of the world average cost of production. And the world average cost is about $40 Bbl. So the market is always at risk of playing the limbo down to that floor price – which is about half the cost of production of most US shale oil fields. No new conspiracy theory needed. The shale oil bust was not only predictable, but was in fact predicted, by Art Berman, Deborah Lawrence, and others.  The lowest cost oil or gas producers in the world will not give up market share to higher cost North American shale oil or gas. That is what is already happening on the international gas market – where US LNG exports cannot compete against Russian orMideast gas pipelines - over which real wars are being fought. Not just commodity price wars.

Who Will Wind Up Holding the Bag in the Shale Gas Bubble? -- Yves Smith  -- We've been writing off and on about how the sudden fall in gas prices has been expected to put a lot of shale gas development on hold. In fact, quite a few analysts believe that one of the big Saudi aims in refusing to support oil prices was to dent the prospects for competitive energy sources, not just renewables like wind and hydro power, but shale gas. Even though OilPrice reported that US rig count had indeed fallen as oil prices plunged, John Dizard at the Financial Times (hat tip Scott) gives a more intriguing piece of the puzzle: the degree to which production is still chugging along despite it being uneconomical. The oil majors have been criticized for levering up to continue developing when it is cash-flow negative; they are presumably betting that prices will be much higher in short order. But the same thing is happening further down the food chain, among players that don't begin to have the deep pockets of the industry behemoths: many of them are still in "drill baby, drill" mode.

Cheap energy is the new cheap labour - FT.com: The price of oil keeps on falling; the shale gas boom has reduced the price of natural gas in the US to a third of that in France; Germany has appealed to Sweden for its support in expanding two coal mines; and the EU’s effort to switch to clean energy is troubled. For companies wondering where to locate, the world has turned upside down. Cheap energy is the new cheap labour. For two decades, the biggest driving force in industrial globalisation was the gap in the price of labour between the developed world and China. That induced many industries – textiles, electronics and others – to shift production from high-cost factories in the US and Europe to places where people would work for a fraction of the cost. Now, as the wage arbitrage between the north and south narrows, the energy gap is widening. Wage rates adjusted for productivity in China have risen to more than half the level in the US, according to Boston Consulting Group. Meanwhile, energy prices have been falling and the Opec oil-producing countries have failed to halt the decline. Some fortunate countries, especially the US, are gaining from both of these trends at once. Although cheap fuel theoretically helps every energy-dependent country, the gains are distributed unevenly. The big beneficiary, thanks to shale natural gas, is the US. Not only is it helped by companies bringing manufacturing home but it is also an oasis of cheap gas. That is luring energy-intensive industries such as chemicals, petrochemicals, aluminium and steel. Europe made the wrong bet. In the long run, making fossil fuels more expensive by subsidising renewables and charging for carbon emissions could bring the EU a steady supply of clean, cheap energy. At the moment, it is nullifying the benefits of lower energy prices and giving European companies an incentive to relocate.

“I Hate That Oil’s Dropping”: Why Mississippi Governor Phil Bryant Wants High Oil Prices for Fracking -Yves here. We posted yesterday on how, despite falling oil prices having a ricochet effect across the entire energy complex, so far shale oil well shutdowns didn't appear to be proceeding at the expected pace. John Dizard of the Financial Times attributed continuing cash-flow-negative exploration and development to continued access to super-cheap funding. He also noted that even when fracking operators were cut off from their money pipeline, a new wave of speculators was likely to sweep in and try bottom-fishing among distressed companies. That meant that normal market discipline would be circumvented, meaning production levels could remain at uneconomically high levels, keeping prices low. A second danger for the aspiring fracking-industrial complex is that prevailing production forecasts show the US having production well in excess of its domestic consumption levels in a few years. Production of needed export infrastructure would need to ramp up rapidly for so much shale output to be moved overseas. But not only are there "will the transport systems be in place" doubts, there's also a reason to question whether this investment will pay off. On current trajectories, fracking output peaks in 2020 and falls gradually over the next decade, and declines more rapidly after that. 12 to 15 years of decent utilization is very short for specialized facilities. Third, some readers, presented with the scenario above, said, basically, "No problem, production will focus on the lowest-cost areas like Marcellus." As the article below points out, there are parts of the country that have gotten a nice boost from the energy boomlet and will suffer if they aren't in the most competitive areas cost-wise. And their lenders are also at risk. Finally, current cost forecasts don't allow for the possibility of production delays or additions expenditures due to local protests and/or higher environmental standards put in place. Before you pooh-pooh the idea that anything might stand in the way of energy barons, consider the industry they are damaging: real estate, which is another powerful and politically connected industry. If fracking water contamination or fracking-induced earthquakes start affecting higher population density areas (suburbs, cities), we may have a Godzilla versus Mothra battle between competing elites in our future.

"I Hate That Oil's Dropping": Why Mississippi Governor Phil Bryant Wants High Oil Prices for Fracking - Steve Horn - Outgoing Interstate Oil and Gas Compact Commission (IOGCC) chairman Phil Bryant — Mississippi's Republican Governor — spoke to an audience of oil and gas industry executives and lobbyists, as well as state-level regulators.   At the industry-sponsored convening, which I attended on behalf of DeSmogBlog, it was hard to tell the difference between industry lobbyists and regulators. The more money pledged by corporations, the more lobbyists invited into IOGCC's meeting.  Perhaps this is why Bryant framed his presentation around “where we are headed as an industry,” even though officially a statesman and not an industrialist, before turning to his more stern remarks.  “I know it's a mixed blessing, but if you look at some of the pumps in Mississippi, gasoline is about $2.68 and people are amazed that it's below $3 per gallon,” he said.  “Of course the Tuscaloosa Marine Shale has a little problem with that, so as with most things in life, it's a give and take,” Bryant stated. “It's very good at one point and it's helping a lot of people, but on the other side there's a part of me that goes, 'Darn! I hate that oil's dropping, I hate that it's going down.' I don't say that out-loud, but just to those in this room.”  Tuscaloosa Marine Shale's “little problem” reflects a big problem the oil and gas industry faces — particularly smaller operators involved with hydraulic fracturing (“fracking”) — going forward.  That is, fracking is expensive and relies on a high global price of oil. A plummeting price of oil could portend the plummetting of many smaller oil and gas companies, particularly those of the sort operating in the Tuscaloosa Marine. A recent report published by energy investment firm Tudor, Pickering, Holt & Co., described Tuscaloosa Marine as the shale basin most likely to face severe impacts from the falling price of oil. The Tudor report said that drillers operating in the Tuscaloosa require oil to sell at $70-$90 per barrel for fracking to remain economically viable there.

Who’s Ready For $30 Oil? -- How low can and will oil prices go, and what will the effects of those prices be? I bet you’ll have a hard time finding even just two people who have the same opinion on that. Not that it’s merely a matter of opinion, mind you, there are a great number of real life factors that come into play. It’s not an easy game.  OPEC gets together next week, and it’s a cartel divided. Many if not most of its members are suffering some kind of losses at present prices, and the obvious choice seems to be to cut output in order to raise prices again. But that’s not easy either, because at lower prices they need more output, not less, to minimize the damage. Besides, if non-OPEC producers don’t cut their output, OPEC cuts may do very little to lift prices. There doesn’t seem to be much doubt that Saudi Arabia’s decision to cut its prices has played a major role in bringing down prices. The reason why it’s done that, however, is not so clear. Weakening the economic and political power of Russia, Venezuela and ISIS is a very obvious underlying reason. That the House of Fahd would engage in some sort of battle with US shale seems less likely; the Saudi rulers don’t fight the US that has protected them militarily for decades in the volatile region they’re in.  . We know that most large economies are not doing well at all, and we also know that their leaders and central bankers do whatever they can to make us think that pig was born with lipstick on. But perhaps we lose something in the translation, perhaps things are worse than we realize.  Martchev suggests that the impact on the price of oil of the economic slowdown in China could be far greater, in the recent past as well as going forward, than most wish to acknowledge. Since a lot of demand growth comes from China, as Europeans and Americans drive less miles per capita, a significant slowing of that growth demand could be a major factor in where oil prices go in 2015.

Gundlach: ‘Vicious cycle’ possible in oil, $70 is line in sand - CNBC - Bond guru Jeffrey Gundlach said Monday he expects the Federal Reserve to raise rates in 2015, but not on the strength of economic fundamentals. Speaking with CNBC's "Squawk Alley," the CEO and CIO of DoubleLine Capital said Fed policymakers may seek to raise rates because that is what is expected of them.  "The Fed should not be raising interest rates, and yet they don't want to be at zero. They're in a conundrum," he said. "They might raise rates just to see what happens."  Gundlach also predicted that oil prices will go even lower than they already have this year. Oil markets are in their "second part of the cycle" wherein prices will drop because producers are getting squeezed after oil settled below $80.  Production will see an increase "maybe on the sly" by countries that depend on oil revenue, he said, creating a "vicious cycle" for the commodity's price. He predicted that $70 is the "line in the sand" for West Texas Intermediate: Any drop below that level will lead to a significant fall in price, he said.  He also said an oil price around $75 would suggest that the consumer price index should probably be near zero—meaning that there is no inflation in the economy. At the time of the interview, WTI traded around $76.70.  

Brent Plunge To $60 If OPEC Fails To Cut, Junk Bond Rout, Default Cycle, "Profit Recession" To Follow -- While OPEC has been mostly irrelevant in the past 5 years as a result of Saudi Arabia's recurring cartel-busting moves, which have seen the oil exporter frequently align with the US instead of with its OPEC "peers", and thanks to central banks flooding the market with liquidity helping crude prices remain high regardless of where actual global spot or future demand was, this Thanksgiving traders will be periodically resurfacing from a Tryptophan coma and refreshing their favorite headline news service for updates from Vienna, where a failure by OPEC to implement a significant output cut could send oil prices could plunging to $60 a barrel according to Reuters citing "market players" say.

"It's Different This Time?" What Happened To US Oil Drillers During The Last Price War - History may not repeat but it rhymes so loud sometimes that Einstein would be rolling in his repetitively insane grave. As Bloomberg notes, the last time that U.S. oil drillers got caught up in a price war orchestrated by Saudi Arabia, it ended badly for the Americans."1986 was the big price collapse and the industry did not see it coming,” said Michael Lynch, president of Strategic Energy and Economic Research who has covered the oil sector for 37 years, "it put a lot of them out of business. You just don’t forget it. It’s part of the cultural memory." Think it can't happen again? Think again... consider how levered US Shale drillers are and just what Saudi has to gain from keeping their foot on the US neck... In 1986, the U.S. industry collapsed, triggering almost a quarter-century of production declines, and the Saudis regained their leading role in the world’s oil market.

The 2014 Oil Price Crash Explained -- Old hands will know that it is virtually impossible to forecast the oil price. The anomalous recent price stability of $110+/- 10 we believe reflects great skill on the part of Saudi Arabia balancing the market at a price high enough to keep Saudi Arabia solvent and low enough to keep the world economy afloat. While it may not be possible to predict the actions of the main players, it is easier to predict what the outcome may be of certain actions may be. A drop in demand for oil of only 1 million barrels per day can account for the fall in price from $110 to below $80 per barrel. The future price will be determined by demand, production capacity and OPEC production constraint. A further fall in demand of the order 1 Mbpd may see the price fall below $60. Conversely, at current demand, an OPEC production cut of the order 1 Mbpd may send the oil price back up towards $100. It seems that volatility has returned to the oil market.

Falling energy prices could cloud U.S. production boom: IEA - Falling global oil prices may be good for consumers but will pose new challenges for America’s producers, according to a new global energy survey by the International Energy Agency. On the heels of the U.S. and China’s joint announcement on climate change and clean energy cooperation, the World Energy Outlook 2014 outlined the sector’s role in climate change, the future of gas prices and the change in the world’s energy use through 2040, with shifts that could threaten the competitiveness of the booming U.S. energy sector. Much of the country’s fracking boom took place when oil prices topped $100 a barrel — more than $20 higher than today’s market prices.  The U.S. may have to take on even more debt in the future, said Fatih Birol, chief economist at IEA, and projects on the drawing board may never come to fruition. “If the [oil] prices continue to stay down, I would think that some of the companies may give a second look at their investment plans in North America, including the United States,” Mr. Birol said. The lower prices could also have a major impact on more unconventional — and expensive — moves to obtain oil, including projects to drill for oil in the Arctic and more challenging offshore sites. Mr. Birol warned of possible troubles ahead if oil prices continue to stay low for the next couple of years, which he predicts they could.

Oil price slide leaves energy bond investors facing zero returns - FT.com: Slumping oil prices have left investors holding lower-quality energy bonds facing zero returns for the year and a rising tide of distress. With US oil prices falling below $74 a barrel, attention has focused on the implications for the junk bond and leveraged loan markets. Massive investment by oil drillers and exploration companies in US energy and shale gas projects in recent years has been partly financed via cheap borrowing conditions across capital markets. Energy debt now accounts for 16 per cent of the US $1.3tn junk bond market, up from a share of 4 per cent a decade ago. The pronounced slide in oil prices from a high above $100 a barrel in June, has been accompanied by a significant slide in prices for energy debt and with nearly a third of issuance trading so poorly it currently qualifies as being classed as distressed, indicating a high likelihood of being restructured. Since the start of the year, the average yield for junk-rated energy debt has risen from 5.67 per cent to 7.31 per cent, while total returns for the year hover at 0.13 per cent. In contrast, the overall junk bond market has a total return for 2014 at 4.17 per cent, after a price loss of some 2 per cent. While the US default rate remains low, such a measure is backward looking and was also moribund in 2007 ahead of the financial crisis. Deutsche Bank credit analysts recently said that if oil drops to $60 a barrel it could be the catalyst that pushes some energy companies into trouble and sparks a rise in the US corporate default rate.

Oil price fall starts to weigh on banks - FT.com: Banks including Barclays and Wells Fargo are facing potentially heavy losses on an $850m loan made to two oil and gas companies, in a sign of how the dramatic slide in the price of oil is beginning to reverberate through the wider economy. Details of the loan emerged as delegates of Opec, the oil producers’ cartel, gathered in Vienna to address the growing glut in the supply of oil.  Several Opec members have been calling for a production cut to shore up prices, but Saudi Arabia, Opec’s leader and largest producer, signalled that while there was a consensus among the cartel’s Gulf members they would not clarify if that meant a push for a big change in the group’s output targets. Repercussions from the decline in the price of crude, which has dropped 30 per cent since June, are spreading beyond the energy sector, hitting currencies, national budgets and energy company shares. The price slide is having a serious impact on oil producers that rely on revenues from crude exports to balance their budgets. The Russian rouble has lost 27 per cent of its value since mid-June, when crude began to fall, while the Norwegian krone is down 12 per cent and on Wednesday the Nigerian naira touched a record low.

At OPEC Meeting, Saudi Arabia Stares Down Texas and North Dakota - For the first time in a long time, the ability to determine the price of oil no longer clearly resides with OPEC. Instead, it’s increasingly U.S. producers at the controls. This shift has big geopolitical implications, affecting everything from Iran’s nuclear program to the fight against ISIS. And it helps explain why most OPEC members come to the meeting having spent the past few weeks talking about the need for cuts. Venezuela and Ecuador want to “protect prices.” Libya’s wants a cut of 500,000barrels a day. Iran may propose an overall cut of up to 1 million barrels a day, although “under no circumstance” is it willing to cut itself. Sanctions have taken more than a million barrels of Iran’s production offline since 2012. Its oil minister has vowed that Iran will not cut its production “even by one barrel.” Russia won’t be in the room. But as the world’s top oil producer, it wants cuts, too. Over the weekend, Russia and Saudi Arabia agreed to cooperate on oil prices. And Russia is reportedly considering joining OPEC in production cuts next year—that is, if the cuts happen at all. As of Tuesday morning, Nov. 25, traders were starting to bet that whatever cuts OPEC does make on Thursday will be limited at best. Brent oil prices tumbled on midmorning news that a meeting of Venezuela, Mexico, Saudi Arabia, and Russiafailed to produce an agreement to coordinate a cut.

OPEC heading for no output cut despite oil price plunge - "The GCC reached a consensus," Saudi Arabian Oil MinisterAli al-Naimi told reporters, referring to the Gulf Cooperation Council which includes Saudi Arabia, Kuwait, Qatar and the United Arab Emirates. "We are very confident that OPEC will have a unified position." "The power of convincing will prevail tomorrow ... I am confident that OPEC is capable of taking a very unified position," Naimi added. A Gulf OPEC delegate told Reuters the GCC had reached a consensus not to cut oil output. Three OPEC delegates separately told Reuters they believed OPEC was unlikely to take any action when the 12-member organisation meets on Thursday after Russia said it would not cut output in tandem. The OPEC meeting will be one of its most crucial in recent years, with oil having tumbled to below $78 a barrel due to the U.S. shale boom and slower economic growth in China and Europe. Cutting output unilaterally would effectively mean for OPEC, which accounts for a third of global oil output, a further loss of market share to North American shale oil producers. If OPEC decided against cutting and rolled over existing output levels on Thursday, that would effectively mean a price war that the Saudis and other Gulf producers could withstand due to their large foreign-exchange reserves. Other members, such as Venezuela or Iran, would find it much more difficult.

OPEC Fails to Take Action to Ease Glut as Crude Plunges - OPEC took no action to ease a global oil-supply glut, resisting calls from Venezuela that the group needs to stem the rout in prices. Futures slumped the most in more than three years. The group maintained its collective production ceiling of 30 million barrels a day, Ali Al-Naimi, Saudi Arabia’s oil minister, said yesterday after the 12 nations met in Vienna. Brent crude dropped as much as 8.4 percent in London, extending this year’s decline to 34 percent. Oil tumbled into a bear market this year as the U.S. pumped the most in more than three decades and conflict in the Middle East and Ukraine failed to disrupt supply. While OPEC’s 30-million-barrel limit has been in place since 2012, the group actually produced almost 1 million barrels more last month, data compiled by Bloomberg show. “OPEC has chosen to abdicate its role as a swing producer, leaving it to the market to decide what the oil price should be,” Harry Tchilinguirian, head of commodity markets at BNP Paribas SA in London, said yesterday by phone. “It wouldn’t be surprising if Brent starts testing $70.” Brent, a global benchmark, is poised for the biggest annual decline since 2008 on the ICE Futures Europe exchange in London. Futures fell the most since May 2011 and traded down $5.17 to $72.58 a barrel yesterday.

Oil Prices Collapse After OPEC Keeps Oil Production Unchanged - Live Conference Feed - But, but, but... all the clever talking heads said they wil have to cut...WTI ($70 handle) and Brent Crude (under $75 for first time sicne Sept 2010) are collapsing... as will US Shale oil company stocks and bonds (and thus all of high yield credit) tomorrow. The Saudis are "very happy" with the decision, Venzuela 'stormed out, red faced, furious.' Commentary from various OPEC members appears focused on the need for non-OPEC (cough US Shale cough) nations to "share the burden" and cut production (just as the Saudis warned yesterday).

WTI Crude Crashes Below $70 For First Time Since June 2010 -- (6 graphs) Houston, we have a problem... Lowest since June 2010... At $70/barrel, the US Shale industry "does not work"... And don't expect help from the Saudis... "Why should Saudi Arabia cut? The U.S. is a big producer too now. Should they cut?" * * * And the Russian Ruble is in freefall:

WTI Crude Oil Falls Below $70 -- From the WSJ: OPEC Leaves Production Target Unchanged The Organization of the Petroleum Exporting Countries said its 12 members, who collectively pump around one-third of the world’s oil, would comply with its current production ceiling of 30 million barrels a day. That would involve a supply cut of around 300,000 barrels a day based on the cartel’s output in October, according to the group’s own data....The oil producer group’s decision led to a further sharp selloff in major global oil benchmarks, with U.S. markets closed for the Thanksgiving holiday. Brent crude fell about 6% to below $73, a four-year low, while the West Texas Intermediate benchmark was down 3.2% to $71.36 a barrel.  This graph shows WTI and Brent spot oil prices from the EIA. (Prices today added).According to Bloomberg, WTI has fallen over 4% today to $69.40 per barrel, and Brent to $72.97. Prices are off over 35% from the peak for the year, and if this price decline holds, there should be further declines in gasoline prices over the next couple of weeks.  Gasoline futures are down about 10 cents per gallon.Below is a graph from Gasbuddy.com for nationwide gasoline prices. Nationally prices are around $2.80 per gallon (down about 45 cents from a year ago).  If you click on "show crude oil prices", the graph displays oil prices for WTI, not Brent; gasoline prices in most of the U.S. are impacted more by Brent prices.

Brent, WTI Slump to 4-Year Low as OPEC Keeps Quota Steady - Brent crude futures slumped to the lowest level in more than four years after OPEC refrained from cutting production limits. West Texas Intermediate slid below $70 for the first time since 2010. Futures tumbled 6.7 percent in London, the steepest one-day decline in more than three years, after Saudi Oil Minister Ali Al-Naimi said the group maintained its collective ceiling of 30 million barrels a day. The 12 member organization will abide by its target as it seeks a “fair” oil price, Secretary-General Abdalla El-Badri said in Vienna. Crude collapsed into a bear market last month amid the highest U.S. output in three decades, slower demand growth and speculation OPEC’s biggest members were more interested in preserving market share than propping up prices. The outcome of today’s meeting was anticipated by 58 percent of respondents in a Bloomberg Intelligence survey this week. WTI for January delivery dropped $4.64, or 6.3 percent, to $69.05 a barrel in electronic trading on the New York Mercantile Exchange, the least since May 2010. Prices have decreased 30 percent this year. Gasoline futures tumbled 5.6 percent to the lowest since September 2010. Floor trading was closed today because of the U.S. Thanksgiving holiday.  The Organization of Petroleum Exporting Countries, producer of 40 percent of world supplies, pumped 30.97 million barrels a day of oil in October, exceeding its collective target for a fifth month, data compiled by Bloomberg show. The group estimates the world will need 29.2 million barrels a day of its crude next year, according to a report on Nov. 12.

Crude Plunges Following OPEC Decision to Not Cut Production - For five consecutive months OPEC produced over its alleged quota. Nonetheless, and in spite of falling prices and pleas from Venezuela to restrict production, OPEC decided to take no action. In the wake of the news, West Texas Intermediate plunged nearly 7% and Brent fell over 8%. Please consider OPEC Fails to Take Action to Ease Glut as Crude Plunges. OPEC took no action to ease a global oil-supply glut, resisting calls from Venezuela that the group needs to stem the rout in prices. Futures slumped the most in more than three years.The group maintained its collective production ceiling of 30 million barrels a day, Ali Al-Naimi, Saudi Arabia’s oil minister, said yesterday after the 12 nations met in Vienna. Brent crude dropped as much as 8.4 percent in London, extending this year’s decline to 34 percent. Canada’s producers big and small will have to tighten their belts to prepare for declining profits.  “This is a pretty big shock,” said Justin Bouchard, an analyst at Desjardins Securities Inc. in Calgary. “There’s no question there’s going to be a slowdown. Even the big guys will have to look at their capital spending plans.”Western Canada Select, the Canadian benchmark, has lost more than a third of its value since June, in step with declines for West Texas Intermediate and the international gauge Brent. WCS traded yesterday at $55.94 a barrel, the lowest in the world.

OPEC Decision Is "Major Strike Against The American Market", Russian Tycoon Says -- As we warned yesterday, the last time that U.S. oil drillers got caught up in a price war orchestrated by Saudi Arabia, it ended badly for the Americans. OPEC's decision not to cut production, and Nigeria's comments on the need for burden-sharing among non-OPEC members, ensures a crash in the US shale industry according to Leonid Fedun (Russia's Lukoil board member). The Russian finance minister's comments that oil at $80 in coming years is moderately optimistic and as Fedun ominously warns, this is a "major strike against the American market." Isolated, much? As Bloomberg reports, OPEC policy on crude production will ensure a crash in the U.S. shale industry, a Russian oil tycoon said.  The Organization of Petroleum Exporting Countries kept output targets unchanged at a meeting in Vienna today even after this year’s slump in the oil price caused by surging supply from U.S shale fields. American producers risk becoming victims of their own success. At today’s prices of just over $70 a barrel, drilling is close to becoming unprofitable for some explorers, Leonid Fedun, vice president and board member at OAO Lukoil, said in an interview in London. “In 2016, when OPEC completes this objective of cleaning up the American marginal market, the oil price will start growing again,” said Fedun, who’s made a fortune of more than $4 billion in the oil business, according to data compiled by Bloomberg. “The shale boom is on a par with the dot-com boom. The strong players will remain, the weak ones will vanish.”

US shale boom is same as dotcom bubble, says Russian oil executive -  Vice-president of Lukoil, Russia’s second-largest oil producer, says many companies will simply ‘vanish’  The rise of US shale is similar to the dotcom boom of the late Nineties and will cause many companies to fail, one of Russia’s top oil executives has warned.  Leonid Fedun, vice-president of Lukoil, Russia’s second-largest oil producer, believes that with the price of Brent crude and WTI at multi-year lows, fracking companies will struggle to make fracking profitable.  These fears were given extra weight on Thursday after Opec’s members agreed to leave oil production quotas unchanged, sending oil prices plummeting.  Some believe Opec, which controls the majority of the world’s oil output, is threatened by the emergence of US shale and is trying to force many American drilling companies out of business.  “In 2016, when Opec completes this objective of cleaning up the American marginal market, the oil price will start growing again,” Mr Fedun told Bloomberg.  He said the current oil market was similar to the rise of the technology sector more than a decade ago that saw companies’ stock prices surge before collapsing several years later.  “The shale boom is on a par with the dotcom boom. The strong players will remain, the weak ones will vanish,” added Mr Fedun, who is worth around $4bn.

Oil Tanks After OPEC Fails to Cut Production; US Shale Oil Targeted? - Yves Smith  - After a testy meeting, OPEC agreed to maintain current production targets. The failure to support oil prices via reducing production led to a sharp fall in prices on Thursday, with West Texas Intermediate crude dropping by over 6% and Brent plunging over 8% before rebounding to finish the day 6.7% lower, at $72.55 a barrel. Many analysts believe that oil could continue its slide to $60 a barrel.  - The ripple effects hit currency markets and, of course, energy stocks. The Wall Street Journal emphasized the potential upside for the US economy, with lower energy prices giving consumers more money to spend elsewhere. Energy importing countries will also benefit. In keeping with our reaction to Saudi’s earlier decision to let oil prices slide, more and more commentators are seeing the OPEC refusal to support the market as at least in part designed to target the US shale gas industry. despite official denials. From the From the Financial Times: “I wouldn’t call it a price war, but it’s a very aggressive test for US shale,” : “This is becoming a battle of [who has] the deep pockets and survival of the fittest.”… Although some analysts had thought the cartel may surprise observers with an output cut, others argued that driving prices higher would only encourage US shale drillers and other high-cost producers. All the while, Opec would only continue to lose market share, they said. But it isn’t clear how many North American producers will blink first in this game of chicken. From the Journal:While some, including ConocoPhillips Co., have already announced plans to spend less in 2015, many more won’t unveil next year’s budget for several more weeks.  In Canada, industry officials said the slide in prices wouldn’t likely lead to immediate production costs. Suncor Energy Inc., Canada’s largest oil sands producer, still expects crude to recover to “the $90 to $100 range,”   In a separate story, the pink paper points out that this de facto price cut is shellacking prices of bonds issued by energy companies:Since the start of the year, the average yield for junk-rated energy debt has risen from 5.67 per cent to 7.31 per cent, while total returns for the year hover at 0.13 per cent. In contrast, the overall junk bond market has a total return for 2014 at 4.17 per cent, after a price loss of some 2 per cent.

Inside OPEC room, Naimi declares price war on U.S. shale oil (Reuters) - Saudi Arabia's oil minister told fellow OPEC members they must combat the U.S. shale oil boom, arguing against cutting crude output in order to depress prices and undermine the profitability of North American producers. Ali al-Naimi won the argument at Thursday's meeting, against the wishes of ministers from OPEC's poorer members such as Venezuela, Iran and Algeria which had wanted to cut production to reverse a rapid fall in oil prices. They were not prepared to offer big cuts themselves, and, choosing not to clash with the Saudis and their rich Gulf allies, ultimately yielded to Naimi's pressure. true "Naimi spoke about market share rivalry with the United States. And those who wanted a cut understood that there was no option to achieve it because the Saudis want a market share battle," said a source who was briefed by a non-Gulf OPEC minister after Thursday's meeting. Oil hit a fresh four-year low below $72 per barrel on Friday [O/R]. A boom in shale oil production and weaker growth in China and Europe have sent prices down by over a third since June.

Can Saudi Arabia Kill Off US Shale Producers? - Here is a little background to the international political economy of the ongoing OPEC meeting. As you would expect for a multi-billion dollar industry, the stakes are very, very high. What's more, with oil prices sliding as a result of slowing growth in the world economy, the showdown is becoming an n=2 fight. For OPEC, Saudi Arabia represents the "swing" producer as the largest entity and therefore the one with the most sway within the cartel. The bogeyman, of course, is the United States which has become the world's largest energy producer on the back of the shale / hydraulic fracturing revolution that has made previously inaccessible energy supplies accessible...at a price. The upshot of it all is that it's a highest-stakes game of chicken between Saudi Arabia--not really "OPEC"--and the US shale producers. The Saudi'sgambit is to not restrict OPEC production in the expectation that, at current price levels, many shale operators will become uneconomic--especially if prices remain as they are now for a protracted period:  The Saudis still enjoy some of the lowest production costs in the world, so they can sustain a much lower price and still not worry about financing themselves. That’s a luxury many OPEC members don’t have. Venezuela, Iran, Iraq, Libya, and even Russia all need oil prices higher than $100 a barrel to keep their deficits in check.  Right now the Saudis are a lot less worried about the budget deficits of their fellow oil exporters as they are about what’s happening in North Dakota and Texas. The biggest threat to the power the Saudis have wielded as the de-facto head of OPEC for the past 30 years isn’t cheap oil; it’s the 9 million barrels a day coming out of the U.S. The Saudis would much rather play a game of chicken with U.S. producers than bow to the wishes of Iran, which they’re in no hurry to accommodate given their disagreements over the Assad regime in Syria, not to mention Iran’s burgeoning alliance with Iraq.

Free Fall in Oil Price Underscores Shift Away From OPEC -  Since the economically crippling oil embargo of 1973, every American president has pledged to seek and achieve energy independence.That elusive goal may finally have arrived, at least for the foreseeable future, with the failure of Saudi Arabia and its 11 oil cartel partners in the Organization of the Petroleum Exporting Countries to agree to a production cut that would put a brake on plummeting crude prices.On Friday, the benchmark American price for crude oil continued the free fall that began on Thursday, closing at $66.15, its lowest price in more than four years.The inability or unwillingness of OPEC to act showed that the cartel was no longer the dominating producer whose decisions determine global supplies and prices. Suddenly, the United States — which is poised to surpass Saudi Arabia as the world’s top producer, possibly in a matter of months — is in that position, although the resiliency of that new command must still be tested. “This is a historic turning point,” said Daniel Yergin, the energy historian. “The defining force now in world oil today is the growth of U.S. production. The outcome of the OPEC meeting is a clear indication that the oil exporters now recognize that this is a new market.”

Lower oil prices and the U.S. economy -- For the last 4 years, the national average retail price of gasoline in the United States stayed within a range of $3.25-$4.00 a gallon. But that all changed this fall, with U.S. consumers now paying an average price of $2.82.  This usually is the time of year when gasoline prices tend to be at their lowest. But the current U.S. price of gasoline is exactly what we’d predict given the long-run relation between the price of gasoline and crude oil. There’s essentially no seasonal component in the price of crude. In other words, if crude stays at its current value (namely, Brent at $80), the lower price of gasoline is here to stay. The current price of gasoline is 80 cents/gallon below what it has averaged over the last 3 years. Last year Americans consumed 135 billion gallons of gasoline. That means that if prices stay where they are, consumers will have an extra $108 billion each year to spend on other things. And if the historical pattern holds, spend it they will.  Lower gasoline prices likely also contributed to the recent rise in consumer sentiment. Historically a 20% drop in energy prices would predict a 15-point rise in consumer sentiment. That relation weakened considerably as consumers got accustomed to the up-and-down yo-yo of prices in recent years. Nonetheless, consumer sentiment is now at the highest level it’s been since the Great Recession.  But another thing that’s changed is that much more of the oil we consume is now being produced right here at home. While lower prices are a boon for consumers, they pose a potential threat to producers, especially the higher-cost operators. Jim Brown reports that “the most recent companies to announce capex cuts are Exxon, Shell, Conoco, Continental Resources, Apache, Energy XXI and Hess.”  If there are employment cuts in places like Texas, Louisiana, and North Dakota, that would obviously offset some of the gains to consumers noted above, and ultimately undercut the major force keeping the price of crude low for the time being, that being the success of small U.S. oil producers.

Crude Carnage Continues After Close: WTI Now $65 Handle, Lowest Since 2009 -- Not 'off the lows' Big flush into WTI's close... And Brent under $70... first time since May 2010 To 5 year lows... Houston, we really have a problem... But it's priced in right? Charts: Bloomberg

OPEC might get the last laugh on oil — For most Americans, OPEC’s seeming impotence in the face of collapsing oil prices is a reason to rejoice. So enjoy the cheap gas, for now. But don’t get too euphoric. Even though collapsing oil prices promises near-term pain for many cartel members, the decision to stand pat looks like the smarter long-term strategy.  Veteran energy economist James Williams of WTRG Economics boils down the dilemma facing OPEC oil ministers as a question of whether to endure short-term pain for longer-term gain.  The debate, he said, comes down to this: “Am I willing to tolerate lower oil prices for a period, improve the world economy, and therefore increase customers and at the same time slow U.S. production growth, or do I want the money in my pocket today at the almost certainty of losing market share?” It would be wrong to assume that OPEC is toothless. Had the cartel agreed to make substantial cuts, and shown enough unity to make them stick, oil would be shooting back toward $100 a barrel, energy analysts say.   If oil pushed back toward $100 a barrel, OPEC would only see its market share continue to slide, Williams said. The shale revolution has seen U.S. oil production surge, growing at a clip of around 1 million barrels a day annually for the past several years. That’s roughly equal with demand growth. While analysts debate exactly where the pain point lies for U.S. shale producers, Williams emphasizes that production from shale wells declines rapidly, particularly compared to deep-sea and other types of production. That means a period of low prices should help ensure that OPEC maintains, or even increases, market share over the long run.

OPEC Presents: Q4 and Deflation - Thinking plummeting oil prices are good for the economy is a mistake. They instead, as I said only yesterday in The Price Of Oil Exposes The True State Of The Economy, point out how bad the global economy is doing. QE has been able to inflate stock prices way beyond anything remotely looking fundamental, but energy prices have now deflated instead of stocks. Something had to give at some point. Turns out, central banks weren’t able to inflate oil prices on top of everything else. Stocks and bonds are much easier to artificially inflate than commodities are.  The Fed and ECB and BOJ and PBoC may of course yet try to invest in oil, they’re easily crazy enough to try, but it will be too late even if they did. In that sense, one might argue that OPEC – or rather Saudi Arabia – has gifted us QE4, but the blessings of the ‘low oil price stimulus’ will of necessity be both mixed and short-lived. Because while the lower prices may free some money for consumers, not nearly all of the freed up ‘spending space’ will end up actually being spent. So in the end that’s a net loss as far as spending goes.  The ‘OPEC Q4′ may also keep some companies from going belly up for a while longer due to falling energy costs, but the flipside is many other companies will go bust because of the lower prices, first among them energy industry firms. And they are about to take some major hits as well. OPEC may have gifted us QE4, but it gave us another present at the same time: deflation in overdrive. You can’t force people to spend, not if you’re a government, not if you’re a central bank. And if you try regardless, chances are you wind up scaring people into even less spending. That’s the perfect picture of Japan right there. There’s no such thing as central bank omnipotence, and this is where that shows maybe more than anywhere else.

Alberta Producers With World’s Cheapest Oil Face Cascading Woes - Canada’s biggest energy producers now face the same prospects of shrinking budgets and declining profit as their smaller competitors with prices dropping for what’s already the world’s cheapest oil at $48.40. Energy companies including Suncor Energy Inc. and Canadian Natural Resources operate in one of the most expensive places on earth to produce oil. If crude prices continue sinking following OPEC’s decision yesterday not to cut its oil output target, Canada’s producers big and small will have to tighten their belts to prepare for declining profits. “This is a pretty big shock,” said Justin Bouchard, an analyst at Desjardins Securities Inc. in Calgary. “There’s no question there’s going to be a slowdown. Even the big guys will have to look at their capital spending plans.” Western Canada Select, the Canadian heavy-oil benchmark, has lost more than 40 percent of its value since June, roughly in line with declines for West Texas Intermediate and the international gauge Brent. WCS spot prices traded today at $48.40 a barrel, the lowest in the world. Profitability for all but the lowest-cost oil sands producers that use drilling and steam to coax bitumen from the ground will be squeezed, with WCS prices expected to trade around $54 a barrel next month,Patricia Mohr, an economist at Bank of Nova Scotia in Toronto, said today in a note.

The First Oil-Exporting Casualty Of The Crude Carnage: Venezuela -- What best shows that for Venezuela it is essentially game over, is that as the chart below shows, Venezuela’s international reserves declined $1.3 billion in the week after President Nicolas Maduro transfered $4 billion of Chinese loans to the central bank. In other words, the scrambling oil exporter was forced to burn one third of its Chinese bail-out loan to keep itself solvent. The country’s reserves dropped to $22.2 billion today, according to central bank data. As Bloomberg also notes, Maduro on Nov. 18 ordered the Chinese loan proceeds to be moved from an off-budget fund, so that they would show up in reserves and help boost investor confidence in an economy beset by the world’s highest inflation and widest budget deficit. The following day, Venezuelan bonds rose the most in six years in intraday trading. “If the plan was to calm the bondholders, then burning through a third of that money in five working days doesn’t do it in any way,” Henkel Garcia, director of Caracas-based consultancy Econometrica, said in a telephone interview.

Nigeria’s petrodollar exposure -- The consequences of Thursday’s non-Opec cut are understandably harshest for the oil cartel’s weakest members, such as Nigeria and Venezuela.  For Nigeria, lower prices are a particular problem, not only because it depends on petrodollar revenues for managing imports (amongst other things petroleum products themselves) but because of its dollar debt exposure to key trading intermediaries, whose business models depend on the ability to provide credit intermediation services to Nigerian businesses and banks.  So whilst the sovereign may indeed have little exposure to a petrodollar dearth, the same cannot be said for Nigeria’s private sector. Here’s a chart from Standard Chartered on Friday noting how much cross-border lending to Nigeria is going on, and how the dependence on foreign dollar loans seems to be growing as the oil price stagnates (the data doesn’t capture the recent sell-off):

The Price Of Oil Exposes The True State Of The Economy - We should be glad the price of oil has fallen the way it has (losing another 6% today as we write this). Not because it makes the gas in our cars a bit cheaper, that’s nothing compared to the other service the price slump provides. That is, it allows us to see how the economy is really doing, without the multilayered veil of propaganda, spin, fixed data and bailouts and handouts for the banking system. It shows us the huge extent to which consumer spending is falling, how much poorer people have become as stock markets set records. It also shows us how desperate producing nations have become, who have seen a third of their often principal source of revenue fall away in a few months’ time. Nigeria was first in line to devalue its currency, others will follow suit.  OPEC today decided not to cut production, but whatever decision they would have come to, nothing would have made one iota of difference. The fact that prices only started falling again after the decision was made public shows you how senseless financial markets have become, dumbed down by easy money for which no working neurons are required. OPEC has become a theater piece, and the real world out there is getting colder. Oil producing nations can’t afford to cut their output in some vague attempt, with very uncertain outcome, to raise prices. The only way to make up for their losses is to increase production when and where they can. And some can’t even do that. Saudi Arabia increased production in 1986 to bring down prices. All it has to do today to achieve the same thing is to not cut production. But the Saudi’s have lost a lot of clout, along with OPEC, it’s not 1986 anymore.  We are only now truly even just beginning to see how hard that crisis has already hit the Chinese export miracle, and its demand for resources, a major reason behind the oil crash. The US this year imported less oil from OPEC members than it has in 30 years, while Americans drive far less miles per capita and shale has its debt-financed temporary jump. Now, all oil producers, not just shale drillers, turn into Red Queens, trying ever harder just to make up for losses.

Claims about oil - “All told, roughly 2.6 million barrels a day of world crude oil production comes from projects with a breakeven price in excess of $80 a barrel,” the report said. World oil production was 93.2 million barrels a day in the third quarter. You will note, of course, that because of fixed costs and option value, a currently unprofitable project can remain up and running for a long time to come.  (As explained in the Cowen and Tabarrok Principles text.)  Here is a related point: At the same time, analysts have also noted that for many shale producers, a large chunk of production costs — acquiring acreage, contracting wells, etc. — have already been spent. As a result, the more important figure might be “half-cycle” production costs. which analysts at Citi last week pegged at between $37 to $45 a barrel. From William Watts, there is more here, including a discussion of which forms of fossil fuel energy are profitable at $80 a barrel.

Here Are The Breakeven Oil Prices For Every Drilling Project In The World -- Oil is getting slammed.   On Thursday, OPEC announced that it would not curb production to combat the decline in oil prices, which have been blamed in part on a global supply glut.   And now that oil prices have fallen more than 30% in just the last six or so months, everyone wants to know how low prices can go before oil projects start shutting down, particularly US shale projects.  In a note last week, Citi's Ed Morse highlighted this chart, showing that for most US shale plays, costs are below $80 a barrel.   Morse writes that if Brent price move towards $60 — they're currently around $72 — a "significant" amount of shale production would be challenged.  But Morse also highlighted this dizzying chart, listing the breakeven price for every international oil company project through 2020. (You can save it to your computer and zoom in for a closer look.)  Over the last few years, Morse writes that companies have been willing to consider projects if they can sell the project's oil for $90 a barrel.   And while the chart shows that almost every project that has been considered by companies to this point has required prices less than $90 to break-even, Morse writes that companies are canceling projects that require oil prices above $80 a barrel to break-even as the futures market has made hedging above that price a challenge.   And beyond the implications for the economic feasibility of projects right now, there are also implications for future global supply.   "We think the world has plenty of oil at $90 going forward," Morse writes, "but supply may be less adequate on a sustainable basis at prices much below $70...even though on a shorter-term basis, US shale production can continue to grow robustly even at lower prices." 

Breaking Even in a Low Oil Price Environment -  With the price of oil hitting levels not seen for more than four years, it's becoming an increasingly important issue for investors who are long on oil company shares, particularly given that some of the resource plays currently in vogue require prices that are far higher than conventional plays to provide a positive return on investment.  As you will see in this posting, this is particularly true for Canada's oil sands operators and companies operating in the American shale oil region.  In this posting, I will look at three different analyses that, in combination, give us some sense of the headwinds facing the oil industry.  Back in mid-2014, Reuters and Natixis published a brief article on the break-even price of producing an additional barrel of oil by geographic region, including both ethanol and biodiesel.  Here is a summary of their analysis:   The marginal cost of producing an additional barrel of oil from the Canadian oil sands is between $89 and $96 per barrel compared to $70 to $77 per barrel for U.S.-based shale oil. Here isanother analysis by the Carbon Tracker Initiative showing the break-even price for the top twenty largest oil projects in the world that require oil prices of more than $95 per barrel:  Note that the six projects that require the highest break-even oil price are all Canadian oil sands projects, both mining and in-situ.  At this point in time, one has to wonder if these high-cost options will be shelved until the price of oil retraces its decline.  From the same report by Carbon Tracker, we find these interesting graphics which show the proportions of high cost potential production for seven major oil companies: In the worst case situation, Conoco Phillips has a portfolio containing potential projects that require an oil price of at least $75 per barrel and 36 percent require a price of at least $95 per barrel.  In the case of Shell which has the largest potential production portfolio, 45 percent of their potential projects require a market price of $75 per barrel and 30 percent require at least $95 per barrel.  Let's now look at a graph from a monthly commodity report from Scotiabank back in February 2014 which shows the full cycle break-even costs (including a 9 percent after tax return on investment) for selected production regions in North America:The graph shows us that the weighted average of all breakeven costs for all projects is between $67 and $68 per barrel.  Among the fifty projects examined, Saskatchewan's Bakken resource play has the lowest break-even costs at $44.30 per barrel.  On the other hand, you'll note that the costs for new oil sands mining and upgrading projects is $100 per barrel, well above the break-even costs for existing oil sands production which comes in at between $60 and $65 per barrel. 

US oil imports from Opec at 30-year low - FT.com: US imports of crude oil from Opec nations are at their lowest level in almost 30 years, underlining the impact of the shale revolution on global trade flows. The lower dependence on imports from the cartel, which pumps a third of the world’s crude, comes amid advances in hydraulic fracturing that has propelled domestic US production to about 9m barrels a day – the highest level since the mid-1980s. In August, Opec’s share of US crude oil imports dropped to 40 per cent – accounting for 2.9m b/d – the lowest since May 1985, according to Financial Times analysis of US Department of Energy data. At its 1976 peak it stood at about 88 per cent. The decline in US appetite for foreign oil, alongside expanding eastern demand, has meant producers from the Middle East, west Africa and Latin America have turned towards Asia. But despite the shale boom reducing its oil-import dependency, the US remains the world’s second-largest net oil importer after China. The impact of the shale boom on Opec members has varied, with African countries such as Algeria and Libya being hit the hardest while Saudi Arabia and Venezuela have remained fairly strong. “It has been Africa that has been severely squeezed,” said Paul Horsnell, an analyst at Standard Chartered. Nigeria, which produces crude similar to the quality pumped out of North Dakota’s oilfields, has been the biggest victim of the US shale boom. Barrels stopped flowing altogether in July, having reached a 1979 peak of 1.37m b/d. August imports from Saudi Arabia – Opec’s largest producer – stood at just under 12 per cent of the total, at 894,000 b/d. Analysts say these heavier crude imports have since increased. At its peak, the Gulf nation made up a third of total US imports.

The countries punished by an Opec-fuelled oil price rout - Telegraph:  While a tumble in oil prices may provide a growth kick for the world as a whole, the crash is likely to put many governments on edge.  Brent crude, a major oil benchmark, has slid to around $71 a barrel, below levels several countries need to maintain a balanced budget.  Oil has slumped below budget breakeven levels for key Gulf nations, as well as Nigeria, Russia and Venezuela, according to Deutsche Bank calculations.  A marked increase in supply accompanied with falling global demand has seen the commodity’s price crumble in recent months.  Thursday's decision by the Organisation of Petroleum Exporting Countries (Opec) not to cut supply has seen oil slump further still.  The plunge took both Oman and Kuwait into territory in which Deutsche estimated their governments would not be able to balance the books.  Of Deutsche’s list - which also included Kuwait, Saudi Arabia and Bahrain - only Qatar and the UAE will be able to achieve a budget surplus at these levels. : "This immediate reaction is overdone, but there can be little remaining doubt that lower oil prices are here to stay."  The lower oil prices go, the more painful the situation is likely to be for these states. Some may have to find ways to adjust for a world in which oil revenues are permanently lower.

On the hypothetical eventuality of no more petrodollars | FT Alphaville: Imagine the US is near energy independent as far as crude imports are concerned. With that energy independence, the amount of dollars flowing out of the US and over to net energy producers (and traditional dollar reserve hoarders) such as Saudi Arabia, Russia and Mexico has come crashing down. So how would such a dollar-flow contraction affect the global economical and political balance? According to Citi’s credit team, it would likely affect things a lot. Especially so in the credit markets. Though, what’s really interesting … they believe the effects of a petrodollar shortage may already be showing up in credit markets. As they noted at the end of last week: As each day passes, it’s getting increasingly difficult to explain the underperformance of $ credit markets. The simple answer would seem to be that the steady leak wider in spreads is a result of heavy supply and low long-term yields. Yet there’s something lacking about that explanation. While this month’s calendar has been busy, it hasn’t been any busier than November 2012, a period when 30y yields were below 3%. To our minds then, the softness in credit appears just as likely to be the result of deterioration in demand as a case of too much supply. But who then has stopped buying? Remember, the $credit underperformance also comes in the context of a strong dollar, making it even more counter-logical. Which leads the analysts to introduce the oil price-decline theory of credit:  One somewhat novel theory is that sharply lower crude prices might have something to do with the change in the technicals. It seems plausible to us that lower crude prices have led to a slower rate of petrodollar accumulation by oil-exporting countries and less recycling of those funds back into global financial markets—amounting to a non-negligible retraction in liquidity.

"There Will Be Blood": Petrodollar Death Means A Liquidity And Oil-Exporting Crisis On Deck -- Two years ago, in hushed tones at first, then ever louder, the financial world began discussing that which shall never be discussed in polite company - the end of the system that according to many has framed and facilitated the US Dollar's reserve currency status: the Petrodollar, or the world in which oil export countries would recycle the dollars they received in exchange for their oil exports, by purchasing more USD-denominated assets, boosting the financial strength of the reserve currency, leading to even higher asset prices and even more USD-denominated purchases, and so forth, in a virtuous (especially if one held US-denominated assets and printed US currency) loop.  The main thrust for this shift away from the USD, if primarily in the non-mainstream media, was that with Russia and China, as well as the rest of the BRIC nations, increasingly seeking to distance themselves from the US-led, "developed world" status quo spearheaded by the IMF, global trade would increasingly take place through bilateral arrangements which bypass the (Petro)dollar entirely. And sure enough, this has certainly been taking place, as first Russia and China, together with Iran, and ever more developing nations, have transacted among each other, bypassing the USD entirely, instead engaging in bilateral trade arrangements, leading to, among other thing, such discussions as, in today's FT, why China's Renminbi offshore market has gone from nothing to billions in a short space of time.

Oil-price decline: the bank-exit liquidity theory - We’re all about unexpected consequences of “liquidity illusion-syndrome” these days, so it was exciting to discover a liquidity-focused assertion from Citi’s Edward Morse and team on Monday about the recent oil price decline, one that ties together a few ideas about how commodity markets relate to bank intermediation. As a reminder, we have postulated that much of the decline is less related to sudden spot imbalances as it is to the curve’s “definancialisation”. The connection Citi has now made is between the commodity sell-off and regulatory burdens placed on banks’ commodity operations. It adds to a discussion developed in an April paper by David Bicchetti and Nicolas Maystre, which questioned whether the recent correlation reversal in commodities was indeed connected to the closure of banks’ commodity departments. Here’s Citi’s comment:  A second theory of commodity futures argues that futures prices are derived from expected future spot prices plus or minus a risk premium.  This view is partially predicated on a balance between hedgers, who are naturally long the commodity (like producers), and those who are naturally short (like refiners or airlines or trucking companies). It also involves liquidity provided by speculators or investors. This view of futures prices is more difficult to prove for statistical reasons, and has therefore been somewhat controversial in academic literature. As a result, we argue long-dated prices will often be more anchored to expectations about future spot prices than to strict arbitrage relationships with the current spot price. Variations in risk premia and financial flows, and currency effects are unavoidable. The recent exit of some banks from the back of the curve has impacted liquidity and thus may have magnified the impact of financial flows on prices over the last year.

The Worst Case If The Oil Slump Continues: "A Profit Recession" - With hopes high, at least among corner offices of the majors, that this week's OPEC meeting will somehow manage to slow down the biggest plunge in crude prices since Lehman, it will take much more than mere talk and hollow promises to offset the recent cartel-busting actions of Saudi Arabia. So in a worst case scenario where supply remains unchanged even as global energy demand continues to decline sharply due to the ongoing global slowdown what is the worst case scenario that could happen - aside from the mass energy HY defaults discussed previously - should the price of a barrel of oil continue to correlate the change in 2014 global GDP estimated? Here are some thoughts from Deutsche Bank.

OilPrice Mid-Week Intelligence Report: Halliburton and Saudi Arabia Playing Risky Games - As takeovers go, this one’s a doozy. While not in the upper stratosphere of corporate acquisitions at just $35 billion, Halliburton’s buying of Baker Hughes is nevertheless one of the bigger business stories of the year. Coming as it did as oil markets awaited news on OPEC cutting production and with the future of the Keystone XL pipeline still up in the air, it was a busy start to the week at OilPrice. On Monday morning, Halliburton announced it had made a successful bid for Baker Hughes, worth $35 billion in cash and stock. The merger of the second and third largest oil services companies in the world is aimed at taking on the behemoth that is Schlumberger NV. The joint revenue of Halliburton and Baker Hughes for 2013 was near $52 billion, outstripping Schlumberger NV’s $45.3 billion. If the deal goes through, this will be a shot in the arm for an oil services sector that has been in the doldrums due to oil prices dropping by a third worldwide since June. Halliburton CEO Dave Lesar gave an obvious breakdown of the deal to Reuters, saying it would allow the new entity “to be more resilient, and able to offer a wider suite of products globally.” But that is a pretty big if. Markets seemed to initially react warmly to the deal, with Halliburton’s shares rising by 2 percent after the Wall Street Journal initially broke the news. However, as details of the deal became clear, investors seemed to get spooked at what they perceived to be significant anti-trust problems. After talks between the two giants were disclosed on Friday, a note by FBR Capital Markets stated that the proposed merger would be dominant in North America, which could spur protracted (antitrust) scrutiny; and likely elicit howls of protest from customers everywhere, potentially requiring concessions to more than one national anti-trust authority.”

US "Secret" Deal With Saudis Backfires After Oil Minister Says US Should Cut First - Who could have seen this coming? With oil prices holding at 4-year lows, heavily pressuring around half of US shale production economics, the "secret" US deal (see here and here) with Saudi Arabia to crush Russia via oil over-supply in a slumping demand world appears to be backfiring rapidly for John Kerry and his strategery team. Capable of withstanding considerably lower prices for longer, Saudi Arabia's oil minister Ali al-Naimi proclaimed"no one should cut production and the market will stabilize itself," adding rather ominously (for the US economy and HY default rates), "Why should Saudi Arabia cut? The U.S. is a big producer too now. Should they cut?" With prices expected to drop to $60 on no cut, maybe the "unequivocally good" news for the US economy from lower oil prices should be rethunk.

90 Pipeline Spills You Probably Haven’t Heard About -- Watch as Tyson Slocum, director of Public Citizen‘s Energy Program, joins Thom Hartmann on The Big Picture to discuss the more than 90 pipeline spills that have occurred in Alberta, Canada, in October alone, releasing more than 625,000 liters of “toxic crap.”  Slocum and Hartmann talk about the Keystone XL and the many other pipelines in the works, including the Energy East pipeline, and the huge impact the extraction and burning of tar sands oil will have on the climate if these pipelines are built.

Seadrill Plunges on Dividend Suspension as Rig Market Sours - Seadrill Ltd. (SDRL) fell the most in six years after the offshore driller controlled by billionaire John Fredriksen suspended dividends as the slump in oil prices weakens demand for rigs. Seadrill, which hadn’t frozen or cut dividends in six years, dropped as much as 19 percent in Oslo trading, the most since November 2008. The stock was down 17 percent to 118.3 kroner at 3:58 p.m., the lowest since July 2010. “The decision to suspend the dividend has been a difficult decision for the board,” Fredriksen, chairman of Bermuda-based Seadrill, said in a statement. “However, taking into consideration the significant deterioration in the broader offshore drilling and financing markets over the past quarter, the board believes this is the right course of action.” The plunge in crude prices since June is blowing through the oil-services industry as clients peg back spending on finding and developing fields. Transocean Ltd. (RIG), one of Seadrill’s largest competitors, earlier this month wrote down the value of its fleet by $2.76 billion. Halliburton Co. (HAL), the second-biggest oil-service company, is buying the third-largest, Baker Hughes Inc. (BHI)

Oil industry risks trillions of 'stranded assets' on US-China climate deal - Brazil's Petrobras is the most indebted company in the world, a perfect barometer of the crisis enveloping the global oil and fossil nexus on multiple fronts at once. PwC has refused to sign off on the books of this state-controlled behemoth, now under sweeping police probes for alleged graft, and rapidly crashing from hero to zero in the Brazilian press. The state oil company says funding from the capital markets has dried up, at least until auditors send a "comfort letter". The stock price has dropped 87pc from the peak. Debt has jumped by $25bn in less than a year to $170bn, reaching 5.3 times earnings (EBITDA).  Part of the debt is a gamble on ultra-deepwater projects so far out into the Atlantic that helicopters supplying the rigs must be refuelled in flight. The wells drill seven thousand feet through layers of salt, blind to seismic imaging.  The Carbon Tracker Initiative says the break-even price for these fields is likely to be $120 a barrel. It is much the same story - for different reasons - in the Arctic 'High North', off-shore West Africa, and the Alberta tar sands. The major oil companies are committing $1.1 trillion to projects that require prices of at least $95 to make a profit.  The International Energy Agency (IEA) says fossil fuel companies have spent $7.6 trillion on exploration and production since 2005, yet output from conventional oil fields has nevertheless fallen. No big project has come on stream over the last three years with a break-even cost below $80 a barrel. "The oil majors could not even generate free cash flow when oil prices were averaging $100 ," said Mark Lewis from Kepler Cheuvreux. They have picked the low-hanging fruit. New fields are ever less hospitable. Upstream costs have tripled since 2000.

Russia puts losses from sanctions, cheaper oil at up to $140 billion per year (Reuters) - Lower oil prices and Western financial sanctions imposed over the Ukraine crisis will cost Russia around $130-140 billion a year - equivalent to around 7 percent of its economy - Finance Minister Anton Siluanov said on Monday. His comments are the latest acknowledgement by Russian policymakers that sanctions restricting borrowing abroad by major Russian companies are imposing heavy economic costs. But in Siluanov's view, the fall in oil prices is the bigger worry. "We're losing around $40 billion a year because of geopolitical sanctions, and about $90 billion to $100 billion from oil prices falling by 30 percent," he told a news conference. true "The main issue that affects the budget and economy and financial system, this is the price of oil and the fall in monetary flows from the sale of energy resources." Official forecasts suggest Russia's gross domestic product is likely to be around $1.9-2.0 trillion this year, at average exchange rates. Siluanov's estimate of the cost of lower oil prices is in line with analysts' rule of thumb that each $1 fall in the oil price lops around $3 billion off export earnings. The oil price has slumped from nearly $115 per barrel in June to around $80 now. Oil and gas account for around two-thirds of Russia's exports, making the balance of payments highly vulnerable to oil price falls.

Russian Official Says Oil Slump and Sanctions Cost $140 Billion a Year -- Russia’s Finance Minister said the combined cost of western sanctions and the recent fall in world oil prices to Russia’s economy this year would be a massive $140 billion. “We will lose around $40 billion a year because of sanctions, and around $90-100 billion a year, if we assume a 30% drop in the price of oil,” Anton Siluanov told a conference in Moscow Monday, according to news agency reports.Siluanov’s comments go against the grain of bravado from President Vladimir Putin and foreign minister Sergey Lavrov, both of whom have repeatedly tried to play down the impact of U.S. and E.U. sanctions in the wake of Russia’s annexation of Crimea and its sponsoring of an armed rebellion in the eastern provinces of Ukraine.They are, however, consistent with Siluanov’s own earlier warnings about the need for Russia to tighten its belt and make big cutbacks in the light of the new economic reality. Siluanov has already warned that the big increase in defense spending earmarked for the next three years is unaffordable.“If you’re talking about the consequences of geopolitics, they are, of course, substantial,” Siluanov said. “But it’s not as critical for the exchange rate and even for the budget as the oil price.”Siluanov’s comments come on the eve of a crucial meeting of oil ministers from the Organization of Petroleum Exporting Countries in Vienna, which will focus on the alarming slide in oil prices since the summer. In a weekend interview with ITAR-TASS, Putin insinuated that the U.S. and Saudi Arabia had conspired to drive up global supply well beyond actual levels of demand, in order to weaken the Russian economy. Somewhat confusingly, he later added that “maybe the Saudis want to ‘kill off’ their competitors” in the U.S. shale oil sector.”

Why Russia Is Over a Barrel on Oil Prices -  Russian Energy Minister Alexander Novak says Moscow is considering a possible cutback in oil production to help end the drop in prices, but there appears to be little it can do without harming its own energy sector.  “The issue [of production cuts] requires careful consideration,” Novak told reporters in Moscow. “But on the whole, this question is being discussed, but there are no final decisions on it.”  He said the issue was thorny because Russia doesn’t have the technology to manipulate its supplies quickly. Besides, he said, the country’s budget relies heavily on income from oil exports. Russia can’t balance its budget unless the average price of oil is about $100 a barrel. Even that price may be too low. Some analysts say oil should sell at up to $115 a barrel to allow Russia to balance its budget because spending has risen dramatically for social programs and the military. Further, US and European Union sanctions on Russia’s financial as well as oil sectors have left the government short of cash. Russia doesn’t have the technology, the infrastructure or even the climate to control the price of oil, according to Valery Nesterov, an analyst with Russia’s Sberbank CIB. He told Reuters that it can’t simply halt production at some fields because they’ll “just freeze if you stop them.” And Russia lacks the modern equipment needed to prevent that.