Sunday, January 18, 2015

frack patch and tar sands cutbacks continue, weekly rig count down another 74, et al

there was no one fracking patch story that stood out as the most newsworthy this week, although there were a number of stories indicating a continuing pullback by oil field operators...probably the most notable of those was the announcement by Schlumberger, the world’s largest oilfield-services company, that it will cut 9,000 jobs, which is roughly 8% of their worldwide workforce...their biggest competitor, Halliburton, also announced it intended payroll cuts in Houston, but it didn't specify how many would be laid the tar sands, Shell started the week by announcing that they'd be cutting up to 300 jobs at their Athabasca Oil Sands Project's mining operations, but the big job cut there didnt come till midweek, when Suncor, the single largest tar-sands producer (formed from the merger of Sunoco & Petro Canada), announced that they’d be cutting 1000 jobs from their tar sands mining projects, and reducing capital spending on their MacKay River oilsands project in northeastern Alberta and their White Rose development off Newfoundland by $1 billion... their announcement followed one on Monday by Canadian Natural Resources, their largest domestic competitor, that they would slash their 2015 budget by 28%...and Laricina Energy, operating in the Canadian tar sands on $1.3 billion in equity financing and $150 million in four-year notes, is now unable to get further financing, is in default on its notes, and warns that “may result in the inability for the Company to operate as a going concern.” ..among US operators, Helmerich & Payne, a giant contract drilling services provider in Texas, reported their idle rig count had increased from 15 to 26 in over the past month, and expected another 40 to 50 of their rigs to become idle over the next 30 days ..elsewhere, Shell has scrapped plans for a $6.5 billion petrochemicals project with Qatar Petroleum, citing 'the current economic climate prevailing in the energy industry.” a research note, Goldman Sachs estimated that up to $2 trillion in investments, including $930 billion in shale developments, are at risk of being scrapped due to low oil prices, which they expect to trade at $41 a barrel over the next 3 months...

the most visible evidence of a pullback continues to be from the weekly rig count, published Friday by Baker Hughes...they reported that as of the week ending January 16th, 1,676 oil and gas drilling rigs were operating in the US, a drop of 74 from the 1750 rigs operating on January 9th, the largest one week drop in 6 years...oil rigs fell by 55 to 1366, while gas rigs were down 19 to 310...the total of 1,676 is 101 less than last year's 1777 rigs, leaving us with the lowest number of rigs operating since October 2012...Canadian rigs increased by 74 to 440, apparently as some are still being restarted after their holiday shutdown, while the Canadian count was still 125 less than a year ago...the international rig count was at 1313, down 11 from the last count and down 22 from a year earlier...and speaking of international rigs, one chart of interest that i came across in a Zero Hedge article about how the Saudis, the Emirates, and Kuwait were increasing their production is included below...oil rig counts since 1997 for both Saudi Arabia and the US are included, with the Saudis in green and the US in red, and with the blue box highlighting this year's changes...note that there are two scales, such that both counts can be included on one graph; the Saudi count shows they're now up to 115 rigs, from roughly 80 at the beginning of the year. the US oil rig count, as of January 9, was down to 1421, as it's fallen since's a few takeaways: the Saudis are able to maintain production equivalent to that of the US with only 8% of the rigs we're using and hence that much less capital expenditure...and second, notice that the Saudis started increasing their rig count early in 2014...that certainly suggests that they planned their strategic attack on high-priced North American oil production well in advance of the OPEC Thanksgiving meeting..

Saudi vs US rig count:

January 2015 Saudi vs US rig count

the Wall Street Journal carried a story suggesting that because the production of oil had increased by 2.2% in December despite the dropping rig count, the industry was somehow getting more out of each well despite the $50 dollar oil prices...let's remember that the oil rig count was at it's highest in the 3 months just before Thanksgiving, before OPEC announced its intent to lower prices, and that the real drop in the rig count didn't take hold until the 2nd week in it's only logical that those wells that were being drilled in the fall just began to come into production in November, and likely reached their peak production during December....since wells already extant will likely keep producing, the declining rig count of the past month will not likely show up as a decrease in production for another 3 months, when the number of new wells producing at their peak is reduced, and the effects of rapid depletion of shale patch wells kick in...that the US produced 9.19mm barrels/day last week - the most since records began in 1983, only means that the oil glut will continue for quite some time, keeping prices depressed, until such time as it eventually drives the marginal producers out of business...

oil prices covered a wide range over the week before closing not too far from where they started, while prices for natural gas collapsed to $2.79 mmBTU on Monday only to rise the rest of the week and end at $3.08 mmBTU, up from $2.95 mmBTU last Friday, after trading as high as $3.30 on Wednesday...US oil prices first fell to $46.07 a barrel on a forecast from Goldman Sachs of $40 oil, and then fell to $44.13 before recovering to close at $45.89 Tuesday; they then fell back to 45.00 on Wednesday before bouncing back as high as 49.58, before closing at $48.62...they then spiked to $51.20 on Thursday when the Swiss let the franc float free from the euro, but fell from there to close at $46.26..rising again on Friday, they closed the week at $48.48, up 12 cents from last Friday's $48.36...we did have one occasion midweek where world oil prices actually fell below US prices for the first time in a year and a half, probably an indication that oil traders are anticipating the new US oil exports policy to level the markets worldwide...just to clarify terms, you'll often see in articles below quoting oil prices for WTI or Brent; WTI is "West Texas Intermediate", the benchmark for US oil at Cushing OK, which is what we're referring to when we quote US prices...Brent is a North Sea oil grade which serves as a world benchmark price, and other world oil grades will usually sell at a set discount or markup from the Brent price...the chart below shows the historical difference between US prices and world oil prices since March of 2013; the black line tracks the price of WTI, while the red line tracks the price of Brent, with oil prices in dollars shown on the left margin….the blue line superimposed over the two is the difference in price, as show on the right margin, which you can see briefly fell below zero midweek

Brent – WTI spread:

January 16 2015 Brent WTI prices and spread

up until the boom in shale exploitation, US oil prices were usually slightly higher than Brent, but after the exploitation of the Bakken and other central US shale fields, a glut of oil developed at the Cushing terminal, and US oil prices gradually fell to as much as $23 lower than alleviate that glut of oil in the central US, the flow of the Seaway pipeline, which had previously brought imported oil from Houston to Cushing, was reversed in 2012, so that central US oil could be refined on the coast and then exported; in addition to that, just less than a year ago, the southern leg of the Keystone pipeline began pumping Cushing oil to Gulf Coast a result, US oil companies were able to export $56,509 million worth of fuel oil and $58,278 million of other petroleum products in the 11 months ending November 2014, the most recent data available...if world oil prices should once again fall below US prices, US Gulf Coast refiners may once again prefer to import crude to refine it for export to Europe and elsewhere, rather than deal with the vagaries of US fracked oil or Canadian dilbit...


Ohio Quakes Linked To Fracking - Geologists from the University of Miami report that hydraulic fracturing, or fracking, caused 77 small earthquakes in northeastern Ohio, an area that is normally geologically quiet. Their study, published online on Jan. 5 by the Bulletin of the Seismological Society of America, said energy companies caused the quakes in March 2014 as a result of fracking into an underground area near Youngstown, Ohio, that contained a previously unknown geological fault.  Seismic data determined that the earthquakes ranged in magnitude from 1.0 to 3.0 on the widely used Richter scale between March 4 and March 12, according to Robert Skoumal and Michael Brudzinski, geology professors at Miami, and graduate student Brian Currie. They said the earthquake measuring 3.0 on the Richter scale, which occurred on March 10, was large enough to be felt by people on the surface in the vicinity of Poland Township, a few miles southeast of Youngstown. The researchers matched the dates of the earthquakes with records of fracking activity in the area kept by the Ohio Department of Natural Resources. The two coincided. But Skoumal said there was no way for the energy companies to know that their activities might be hazardous. “These earthquakes near Poland Township occurred in … a very old layer of rock where there are likely to be many pre-existing faults,” he said. “This activity did not create a new fault, rather it activated one that we didn’t know about prior to the seismic activity.”

Study ties 77 Ohio earthquakes to two fracking wells - A new study links nearly 80 earthquakes that occurred in Mahoning County in March 2014 to nearby fracking operations. In the study, published online this week in the Bulletin of the Seismological Society of America, the researchers say that the earthquakes were caused when companies fracked into a previously unknown fault. The result, they say, included a magnitude 3.0 earthquake on March 10 that was strong enough that people in and around Poland Township felt the tremors. After the March earthquakes, the state suspended fracking operations at the two wells, which are operated by Hilcorp, a Texas-based energy company. This study is the second in six months to link fracking along previously unmapped fault lines to earthquakes. In October, researchers released a study showing that fracking triggered hundreds of small earthquakes on a previously unmapped fault in Harrison County in 2013. A process that disposes of fracking wastewater also has triggered earthquakes in Ohio. The water, sand and chemicals that come up with oil and gas often are injected into disposal wells across the state. In September, the state suspended operations at two injection wells near Warren, in northeastern Ohio, after earthquakes rattled the areas around the wells. ODNR started working on new permits for injection wells last year after concluding that 12 earthquakes that occurred near Youngstown in 2013 were caused by injection wells.

Tioga County 'a cautionary tale' about fracking busts -  — The sand trucks barely rumble along the quaint main street in this town in northern Pennsylvania anymore. Three years ago, it was difficult to have a conversation with someone walking next to you, the roar of traffic was so constant. Driving, it could take an hour to get from one end of town to another. But the trucks also came with business: Mining companies had started drilling wells all over the rolling hills surrounding Wellsboro, extracting the precious natural gas that lay beneath. Hydraulic fracturing (“fracking” for short) brought a bonanza to the town the likes of which it hadn't seen even in the heydays of lumber and coal. With 800 wells drilled over five years, royalties paid to landowners for their mineral rights flowed through the community, helping people buy new farm equipment and donate to local charities. New tax revenues poured into local government coffers that never had much to begin with. But like all booms, it only lasted while the money was good. Natural gas prices hit a high of $13.42 per million BTU in October 2005, stayed high for three years, then started falling - fast - bottoming out at $1.95 in April 2012, and stood at $3.48 last month. Without enough profit to justify further investment, most of the activity vaporized. Shell Oil, which had bought up most of the leases in Tioga County, went from a dozen drilling rigs to one. Businesses that had been gearing up for years of sustained growth were left hanging. “With really no warning at all, the bottom fell out of that,” says Jim Weaver, the Tioga County planner, who advises the county's commissioners on land use decisions. “In hindsight, looking at boom and bust cycles that have gone on forever, we should've known that. But when the dollar's dangling in front of you and you're chasing the carrot, before you know it you're out on a limb, and the limb gets sawed off.”

Marcellus Shale Coalition opposes O&G having to report pollution releases -- The Marcellus Shale Coalition is still opposed to including the oil and gas extraction industry on the list of industries that disclose the release of pollutants. Last Wednesday, PennFuture and eight other environmental advocacy groups and organizations sued the Environmental Protection Agency (EPA) in efforts to placing reporting requirements on the oil and gas industry. The group is specifically wanting the industry to make emissions disclosures to the Toxics Release Inventory, a public database that keeps records of certain emissions from facilities in specific areas.However, the coalition is still objecting to the industry being added to the report.  According to the coalition, wells and related facilities, like compression stations, do not emit enough pollutants to meet the EPA standards for having to report.  This is the reason why the EPA did not include the oil and gas industry to begin with, states the coalition. In 2012, the groups filing the lawsuit asked the EPA to broaden the reporting requirements.  At the time, the agency responded saying it would consider it, but never pursued anything more.

Scientists Discover Two New Pollutants In Fracking Waste -- The primary waste product created by oil and gas drilling contains two types of potentially hazardous contaminants that have never before been associated with the industry, research published in the peer-reviewed journal Environmental Science & Technology on Wednesday revealed. Duke University geochemistry professor Avner Vengosh and his team of scientists found that wastewater produced by both conventional and unconventional oil drillers contains high volumes of ammonium and iodide — chemicals that, when dissolved in water or mixed with other pollutants, can encourage the formation of toxins like carcinogenic disinfection byproducts and have negative impacts on aquatic life.  That’s a problem, the study said, because oil and gas industry wastewater is often discharged or spilled into streams and rivers that eventually flow into drinking water systems.

New Toxic Chemicals Found in Frack Waste  -- That treatment plants can’t treat. Coming to a trout stream near you . . .  Unexpected toxic chemicals are surfacing with fracking fluid at drilling sites in Pennsylvania and West Virginia, researchers say. Treatment plants, never designed to handle the mess, are sending the pollutants straight to the region’s waterways. Researchers find alarming levels of ammonium and iodide in fracking wastewater released into Pennsylvania and West Virginia streams.  Two hazardous chemicals never before known as oil and gas industry pollutants – ammonium and iodide – are being dumped and spilled into Pennsylvania and West Virginia waterways from the booming energy operations of the Marcellus shale, a new study shows. Treatment plants were never designed to handle these contaminants. The toxic substances, which can have a devastating impact on fish, ecosystems, and potentially, human health, are extracted from geological formations along with natural gas and oil during both hydraulic fracturing and conventional drilling operations, said Duke University scientists in a study published today in the journal Environmental Science & Technology.

Environmental concerns raised as oil companies take fresh look at fracking in Kentucky - There's been little heat so far in Kentucky over hydraulic fracturing, or fracking, a technique of drilling for oil and natural gas that has caused division elsewhere in the country, but now the controversy has gushed up here.The potential to develop a vast underground shale layer that curves from the northeastern part of the state through Central Kentucky has sparked increased interest among oil and gas companies within the last 18 months.Companies signed hundreds of additional oil and gas leases with landowners in 2014, according to local officials. Much of the interest has been in Lawrence, Johnson and Magoffin counties, which are no strangers to significant oil and gas exploration. But leasing agents also have approached landowners in places with little history of oil production, including southern Madison County and northern Rockcastle County, spooking some residents.Industry engineers say fracking is a proven, safe technology. However, some landowners have refused leases over concerns about the potential for industrial development and heavy truck traffic in their rural area, and about spills or leaks that could damage springs and streams.Some people in the area have organized in hopes of persuading neighbors not to let energy companies drill for oil and gas under their land.The object of the interest among oil and gas companies is an ancient geologic layer called the Rogersville shale.It lies in a basin called the Rome Trough, which in Kentucky curves southwest from Lawrence County through parts of Central Kentucky and on into the southern part of the state.

Frack Loophole Closes Itself as Napalm Clusterfracker Goes Bankrupt - The New York Frack Babies thought they were going to make an end run around the proposed generic guidelines by fracking themselves with gelled LPG (ie. Napalm) instead of water. But the contractor they were negotiating with, Gasfrac, just filed for bankruptcy – along with hundreds of other oil field service providers. Plus there was that thing about their liability coverage – they kept blowing people up. So they ran out of pizzas. Imagine that. Imagine what a partially collapsed salt cavern of this stuff would do . . .  Gasfrac Energy Services Inc. has filed for protection from creditors after the struggling drilling company failed to find a buyer or attract new customers as oil and gas markets sputter. Gasfrac, known for its unique waterless rock fracturing technology, said on Friday it filed for court protection under the Companies’ Creditors Arrangement Act. The move comes two months after it hired financial advisers to seek out strategic options, including a sale. The company said in a statement that it is unable to meet its financial obligations due to negative operating results, limited access to new capital, the slowdown in the energy industry and the absence of a buyer for its assets. The stock was halted on on the Toronto Stock Exchange Friday. It last traded at 27.5 cents, down from $1.99 in May, “The corporation was unable to restructure its affairs in an adequate manner, and after careful consideration of all other available alternatives, the board of directors … determined that it was in the best interests of the corporation and all of its stakeholders to file for an application for creditor protection under the CCAA,” it said.

Controversial Gas Storage Facility in Finger Lakes One Step Closer -- The Crestwood facility would connect to the existing TEPPCO Liquid Petroleum Gas interstate pipeline. The facility would ship LPG by pipeline, by truck via Routes 14 and 14A, and by rail via the existing Norfolk & Southern Railroad. As proposed, the project involves construction of a new rail and truck LPG transfer facility, which “would be capable of operation on a 24-hour basis, 365-days a year.” Construction would also include “surface work consisting of truck and rail loading terminals, LPG storage tanks, offices and other distribution facilities, and storm water control structures.” The proposed facility, which has been under review for five years, has become highly controversial in the Finger Lakes. The draft permit conditions were released by the DEC less than a week after Governor Cuomo’s re-election. Organizations like Gas Free Seneca point to a risk analysis by Rob Mackenzie, MD, which found that, “under the proposal in question the likelihood of an LPG disaster of serious or extremely serious consequence within the county in the next twenty-five years is greater than 40 percent.” Mackenzie’s analysis, which was apparently requested by the Schuyler County Legislature, pointed to the possibility of a truck or rail accident in which LPG was released into the surrounding environment. The bigger risk, said Mackenzie, was a structural collapse or other problem within the caverns themselves. Between 1972 and 2012, “there have been 18 serious or extremely serious incidents in salt cavern storage facilities,” he said. “Nine of the salt cavern incidents were accompanied by large fires and/or eight explosions. Six involved loss of life or serious injury. In eight cases evacuation of between 30 and 2000 residents was required,” reported MacKenzie. “The likelihood of a serious, very serious, or catastrophic incident [in the formations themselves] over twenty-five years is 35 percent,”

Gas storage on Seneca Lake: all burden, no benefit  -- In support of its plans to expand gas storage in the salt caverns adjacent to Seneca Lake, the deepest lake in New York state and the longest of the Finger Lakes, Texas-based oil and gas company Crestwood-Midstream is circulating the claim that the increase in storage capacity will benefit Finger Lakers by helping control propane costs. More storage of butane, propane, and methane is supposed to protect us from shortages and price hikes. It's time to debunk this myth because the bottom line is that Crestwood's plan to expand storage is about their drive to find markets for fracked gases, not keeping prices low for Finger Lakers. The propane is not for us. We are just supposed to hold it -- and bear all the environmental consequences -- until Crestwood finds buyers willing to pay a high enough price. A Texas company makes the money, and New York's efforts to develop renewable energy is shoved onto back burners, propane burners. The spike in propane prices last winter is offered as evidence of the urgent need for more storage -- even though the Crestwood plan goes back nearly five years (having been brought forward by Inergy, a company with which Crestwood merged). If the price hike last year was related to a lack of storage, then one explanation for the currentdrop in propane prices this year could be because storage has increased. But it hasn't. Crestwood's development plans have been on hold pending more thorough inquiry into hazards associated with storing LPGs next to the drinking water of 100,000 people. The price drop in propane has nothing to do with storage. It's about markets. There is a glut of propane and butane, and the oil and gas companies are looking for customers to buy it.   According to a 2013 industry analysis,"the propane market has been grappling with an over supply situation since Spring 2012." Propane inventories were pushed into "the stratosphere" and increased even further the following year.

Insurgents On The Front Line Of America’s Fracking War -  In audio recordings of a 2012 oil and gas industry conference in Houston obtained by CNBC, Matt Carmichael, manager of external affairs for Anadarko Petroleum, advised attendees to read Rumsfeld’s Rules (Donald Rumsfeld’s guide to life and war), and to download the Army’s counter-insurgency manual. In a separate recording from the same conference, Matt Pitzarella, director of communications for the gas exploration firm Range Resources, bragged that his company employed several former Army psychological operations specialists, noting that they had been “very helpful” in Pennsylvania. It hasn’t hurt the industry either that it’s been given a royal welcome by lawmakers, who have cut the Department of Environmental Protection’sbudget by 40 percent since 2009. A 2012 executive order from Pennsylvania Governor Tom Corbett has compelled the Department to approve drilling permits “as expeditiously as possible,” which they have done by the thousands. A 2012 law passed by the state legislature allows drillers to keep the chemicals used in the fracking process secret. Under a medical provision in the measure, doctors treating patients can see the list of chemicals, but only after signing a nondisclosure agreement. Frustrated with the lack of will to police fracking they have encountered locally, many of the insurgents in Pennsylvania’s fracking war have turned their attention to halting the transmission of the gas, targeting a slew of new federally regulated infrastructure projects aimed at getting methane pulled from the ground in their backyards over to markets on the Eastern seaboard and abroad.

Fracked Gas, Coming Through —Fighting these constant attempts to increase fossil fuel infrastructure capacity may feel like whack-a-mole, but clearly from a climate change perspective, every new pipeline is a disaster. That’s why there has been so much effort put into halting the major Keystone XL pipeline that would carry Canadian tar sands oil through the United States to export. The Constitution pipeline might be smaller, running from northern Pennsylvania to Schoharie county, where it would connect into existing pipelines, but it bears many similarities to KXL: It would create precious few permanent jobs; its supporters try to talk about our need for access to fuel, but it seems clearly designed to allow access to export markets; its approval would set back the necessary transition to a lower-carbon-footprint energy infrastructure immensely by making exploiting some of the last remaining fossil fuels easier; and the environmental costs would be high. Some courageous land owners are trying to stand up and say no under incredible pressure.

Idea for gas terminal off East Coast rankles fracking foes - — All that would peek above the ocean waves off New York and New Jersey would be two small buoys tethered to underwater pipes. But they’re already casting a large shadow, with potential effects on the economy of the New York metropolitan area, the marine environment, and even America’s future as a net importer or exporter of energy. Liberty Natural Gas wants to build a deep-water port in federal waters 19 miles off Jones Beach, New York, and 29 miles off Long Branch, New Jersey. Its stated purpose is to bring additional natural gas into the New York area during times of peak demand, thereby lowering home-heating prices. Business and labor groups support the plan, which was first proposed in 2008 and is projected to generate 800 construction jobs. But environmentalists, fishing groups and some elected officials say it is a dangerous, unnecessary project, given that America is awash in large supplies of domestically produced natural gas, much of which is produced in the Marcellus Shale formation just west of New York. A public hearing on the proposal last week drew more than 1,000 people, many of whom said they fear the project, dubbed Port Ambrose, is really a Trojan horse designed to be switched to an export facility once it is built, to facilitate the sale of gas produced by hydraulic fracturing, better known as fracking, to overseas markets. “It seeks to bring us liquefied natural gas: a dirty, foreign, expensive fossil fuel that will be a target for terrorism, and threaten fisheries, clean ocean jobs and tourism,” said Cindy Zipf, executive director of Clean Ocean Action. Jim Lovgren, who runs the Fishermens’ Dock Cooperative in Point Pleasant Beach, called the proposal “an attempt to turn the ocean waters off New Jersey to Louisiana North. If this project is approved, the oil companies will line up seeking to build their own ports and start exporting the huge Marcellus gas reserves” that are currently being developed using fracking.

Lincoln Trail digs in for new fracking program -- Lincoln Trail College this month announced the Robinson based community college would launch a petroleum drilling technology degree program. The program is set to officially welcome students in the fall of 2015. College administrators explained the program’s launch is vital to the area, citing horizontal fracking technology will soon make its way to the already oil-rich Southern Illinois area. “We didn’t want to be left behind, so we petitioned to the state to bring this program back we called it petroleum drilling.” Lincoln Trail College President, Kathyrn Harris, explained that the first big oil boom, and subsequent need for oil education, took over the college about 35 years ago. At that time, Harris explained, the college swelled with students looking to get into the industry. However, the original oil processing degree slowly was dissolved after qualified graduates “saturated the market.” Now, with a change in technology and the original oil boomers looking to retire, the college refocused its efforts to cater to a new wave of oil staffers. “The idea is that many of the people who are working in the oil fields right now are at retirement age because they were our students 30 years ago and they’re ready to get out, so they need a new work force,” said Harris.

Adventures in Mapmaking: Mapping a Fracking Boom in North Dakota - US oil production has been booming the past few years, due in large part to North Dakota’s Bakken formation, a rock layer tapped through fracking. Each well travels down about two miles, then turns horizontally and snakes through the rock formation for another two miles. There were 8,406 of these Bakken wells, as of North Dakota’s latest count. If you lined them all up—including their vertical and horizontal parts—they’d loop all the way around the Earth. As a journalist digging into the long-term potential for shale oil, I wanted to create a map showing the extent of this drilling boom to help me look for trends. In this post, I’ll explain how I did that, but first I want to say why this matters. If there is a lot less oil and natural gas available at affordable prices, this could be good news or bad news, depending on your values, and how the country reacts. On the other hand, if our estimates and forecasts for oil and gas are too optimistic, we could wind up in a bind, dependent on fossil fuels that are significantly more expensive than we’d expected. In a recent feature for Nature, “The Fracking Fallacy,” I reported on differing forecasts for the future of shale gas. If the US continues to try to extract natural gas as fast as possible, and also to export as much as possible, this could lead to much higher energy prices that would likely have a large impact on the economy. As one researcher I spoke with put, we could be “setting ourselves up for a major fiasco.”

North Dakota Admits Half Its Shale Regions Below Breakeven - While talking heads and TV personalities reassure the investing public that low oil prices are "unambiguously awesome" for everyone, it seems the cracks in this narrative are starting to show. From falling wages, surging job cuts, plunging rig counts, and crashing capex, it's becoming a lot harder to 'pretend' that everything's fine. One wonders, when the companies themselves are slashing workweeks and cutting rig counts, when will 'investors' believe... perhaps now that Lynn Helms, Director of the North Dakota Department of Mineral Resources explains to the House Appropriations Committee that at least half of its shale regions are already below breakeven. From a 12 page presentation... The following shale regions are below breakevens (at which new drilling would cease)...(table)

Boom's End? Saudis Sock It to North Dakota - Only a few weeks ago--it feels like eternities now--we talked about how the Saudi Arabian government convinced other OPEC nations not to lower their cartel's output in response to falling oil prices. Rather than take their collective foot off the pedal of production, it signaled that it would be steady going as far as output was concerned. The result has been a further fall in oil prices. In the space of less than half a year, they are down over 50%. Although it's still early going, some of Saudi Arabia's intended targets--US shale produeers--are feeling the pinch. In particular, producers in marginal sites are in trouble given their higher operating expenses in extracting oil and gas. That is, not enough is extracted there to make up for what it costs to perform hydraulic fracturing at current market prices. Anecdotally, the number of oil rigs operating in these sites in North Dakota--second after Texas in terms of shale production--is noticeably decliningOnly five oil rigs were drilling in Divide County this week, down from 12 last August, according to state data. While those only account for a handful of the more than 162 rigs still drilling in North Dakota, the drop has been much steeper than elsewhere in the state and could signal trouble across the No. 2 U.S. oil producer behind Texas if prices continue to slide.  A "Coming Soon" sign still marks the spot on a patch of fallow farmland just outside of Crosby, the county seat, where a 200-person "man camp" to house oil workers was set to be built. Late last fall, Timberline Construction Group, an Alabama-based contractor, put the project on hold after an oil company pulled out of a housing contract. In downtown Crosby, restaurants and bars report fewer rig workers, and foot traffic has noticeably slowed. Two businesses have been put up for sale.

EDITORIAL: Attack sex trafficking across all state lines - A special investigative television report on sex trafficking in North Dakota ’s Bakken oil region and the Midwest Sunday wrapped up Forum News Service’s multi-media investigative project. The Trafficked TV special report can be found along along with all the series’ content at This TV special report is a must-see piece of excellent reporting. It further probes and exposes the phenomenon of sex trafficking in young girls in a part of the country where such criminal activity was unheard of just a few years ago. Investigative reporting can only do so much. The examination of shocking facts, disturbing trends, and societal failings revealed in articles by reporters Amy Dalrymple and Katherine Lymn will have been worth the effort only if action is taken to halt the abuse and kidnapping of girls as young as 14 years in the lucrative sex trade in North Dakota and the Midwest Law enforcement and other agencies are doing a lot. Make no mistake about it. Their work has made a difference. But much more needs to be done to counter organized, sophisticated criminal enterprises.

Brine spills into creek north of Williston - The North Dakota Department of Health has reported that an unspecified amount of material used in the hydraulic fracturing production process was released into a creek in Williams County. The Department of Health was notified of the spill by Summit Midstream. The produced salt water known as brine was released approximately 15 miles north of Williston from a disposal line. The spill has impacted nearby waters in Blacktail Creek which is located downstream from Blacktail Lake. Currently, an environmental contractor for the responsible party is on the location working on the cleanup and remediation process. Personnel from the North Dakota Department of Health and the North Dakota Oil and Gas Division have also responded to the scene. The Environmental Protection Agency says that produced brine water may contain toxic metals and radioactive waste. These substances can be extremely damaging to the environment and public health if released onto the surface.

Utah Oil Boomtown Hostile to Midwife’s Concern Over Skyrocketing Infant Deaths  - When a polluting industry creates jobs and economic activity, especially in the very poor areas where these industries often land, there’s a tendency of citizens to want to deny any impact on its health or environment. Such a clash of interests has reached a sad impasse in a Utah oil boom town where some citizens are scapegoating a midwife who is raising questions about a spate of infant deaths. A heartbreaking story in the Los Angeles Times tells about 20-year midwife Donna Young, who noticed what she thought was an exceptional number of gravestones for infants at the local cemetery in Vernal, Utah.  She wondered if there could be a connection to the oil industry, which underpins the area’s economy and provides about half the town’s annual budget. A state investigation is underway, but in the meantime, area residents—even mothers of some of the deceased infants—are already angrily denying the connection and demonizing Young for asking questions, reports the L.A. Times. She’s gotten threatening calls, been attacked on local talk radio and online, and even found rat poison in the animal feed on her ranch, exposing the fear, anger and denial some people feel when fossil fuel industries are the linchpin of an economy. As Vernal’s Mayor Sonya Norton aptly told the paper, “People get very protective of what we have here. If you challenge our livelihood, it’s considered personal. Without oil, this town would be a couple of storefronts and a gas station.”

Seismologists Disagree Over Texas Earthquake Swarm - - A swarm of recent earthquakes that has rattled residents in and around Irving, Texas, has sparked a disagreement among seismologists over how to determine whether fracking could be to blame.  On the one side, the seismologist for the regulatory agency overseeing the state's oil and gas industry said he sees no connection between the two.“There are no oil and gas disposal wells in Dallas County,” Craig Pearson, the seismologist for the Texas Railroad Commission, said in a statement. “And I see no linkage between oil and gas activity and these recent earthquakes in Irving.” But a geophysicist from the U.S. Geological Survey said an investigation must look at all possibilities. “It’s too early for us to say that we don’t see any connections yet,” said Robert Williams, a coordinator with the U.S. Geological Survey Earthquake Hazards Program in Golden, Colorado. “We don’t want to rule anything out at this point.” And an investigation into whether fracking could be responsible should look at wells over a greater area than the Railroad Commission would consider, Williams said. Recent studies have shown larger distances between wastewater disposal wells and the earthquakes associated with them, he said.

Could Fracking Cause a Major Earthquake? : Discovery News: Shortly before midnight on Aug. 23, 2011, residents of Trinidad, Colo. and surrounding communities were startled when the ground started shaking beneath them, knocking bricks and stones loose from buildings. Fortunately, no one was injured. As far as earthquakes go, the 5.3 event and the aftershocks that followed were relatively mild. Nevertheless, the Trinidad quake raised anxiety for another reason. The U.S. Geological Survey eventually concluded that it probably was a man-made quake, caused by the disposal of waste water produced by the oil and gas industry.  Similarly, scientists have linked disposal of oil-gas industry waste water to increased seismic activity in states ranging from Texas to Ohio. That's raised additional worries about one of the sources of that waste water -- fracking, the controversial process in which water, sand and chemicals are injected into the earth at high pressure to crack rock formations and reach deposits of natural gas and oil. While the fracking boom in recent years has provided an economic boost to the United States and increased its energy independence, some worry that there's a potentially catastrophic downside, if the process adds to the waste water that's lubricating earthquake faults.  And while most of the quakes linked to waste water injection wells have been small to moderate in intensity, some worry that one eventually could trigger a major quake that might seriously damage buildings and important infrastructure, and endanger people as well.

Oil States’ Budgets Face Crude Awakening - WSJ: Energy-producing U.S. states are paring budget forecasts and planning spending cuts amid a plunge in prices that is testing their reliance on revenue from the oil patch. From Texas to North Dakota, states that benefited from a surge in domestic oil production in recent years are now bracing for reduced collections of extraction levies known as severance taxes and royalties as prices fall and companies cut back on drilling. In turn, income- and sales-tax growth could slow as producers cut jobs. While most energy-rich states have amassed ample rainy-day funds in anticipation of the oil industry’s historic booms and busts, the falling prices have budget writers scrambling to adjust earlier fiscal projections that had assumed much higher crude-oil prices. In Texas, the country’s top oil producer, officials on Monday said the windfall from the recent oil-shale boom will carry over to the budget for the next two fiscal years. But they are expecting the gush of cash from oil production to slow down considerably, projecting a 14% drop in oil-related taxes to $5.7 billion in fiscal 2016 and 2017.The consequences are more severe in Alaska, where oil-industry taxes account for 89% of the state’s operating revenue, and budget problems loomed even before oil prices dropped. Alaska now has a $3.5 billion hole in its $6.1 billion budget, and Gov. Bill Walker has called on state agencies to reduce budgets by 5% to 8% for the coming fiscal year. The state expects to dip heavily into its $14 billion in reserves to bridge the gap, but officials acknowledge that is not a sustainable solution.

Oil Prices Will Slow the Texas Jobs Engine, Dallas Fed Says - Texas, which has been zipping past other states when it comes to job creation, is now set for a slowdown as declining oil prices reverberate through the energy-state’s economy, says the Federal Reserve Bank of Dallas. The bank is forecasting the state will add jobs at a rate between 2% and 2.5% in 2015, down from the 3.6% it’s estimating for 2014, according to its latest Texas economic outlook released Tuesday. That’s still 235,000 to 295,000 new jobs, more than most other states created last year. But with oil companies cutting back on drilling and announcing layoffs, the Dallas Fed says the overall Texas economy will likely take a bigger hit than the job market because workers in that sector are 4.6 times more productive than the state average. Texas also stands to shed thousands of jobs beyond the oil patch. Each of the 100,000 plus jobs created by the oil industry in Texas since the end of the recession supports 2.3 other jobs, said Dale Craymer, a former state budget planner and president at the Texas Taxpayers and Research Association, a business trade group. The plunging oil prices will likely put a dent on tax collections in Texas cities near the state’s most prolific oil-production areas as well, Fitch Ratings said in a note on Tuesday. Business for hotels, restaurants and shops in places like Midland, which sits atop the Permian Basin, and Cotulla, near the Eagle Ford Shale, will sag as oil companies stop drilling new wells, Fitch predicted. State officials already said Monday they’re expecting oil-related tax collections to sink by 14% in the next two fiscal years.

Oil fall could lead to capex collapse: DoubleLine's Gundlach (Reuters) - DoubleLine Capital's Jeffrey Gundlach said on Tuesday there is a possibility of a "true collapse" in U.S. capital expenditures and hiring if the price of oil stays at its current level. Gundlach, who correctly predicted government bond yields would plunge in 2014, said on his annual outlook webcast that 35 percent of Standard & Poor's capital expenditures comes from the energy sector and if oil remains around the $45-plus level or drops further, growth in capital expenditures could likely "fall to zero." Gundlach, the co-founder of Los Angeles-based DoubleLine, which oversees $64 billion in assets, noted that "all of the job growth in the (economic) recovery can be attributed to the shale renaissance." He added that if low oil prices remain, the U.S. could see a wave of bankruptcies from some leveraged energy companies. true Brent crude LCOc1 approached a near six-year low on Tuesday as the United Arab Emirates defended OPEC's decision not to cut output and traders wondered when a six-month price rout might end.

So Where Did All the Energy Debt Go? - A big puzzle, as oil prices have plunged and look unlikely to return to their former levels, is who is holding energy-related debt, particularly give the high level of issuance in 2014. Yet it is troublingly difficult to get hard information, a situation troublingly similar to the mortgage backed securities and CDO markets in 2008.   One issue under discussion is the energy debt concentration in CLOs. That has come into focus due to the amounts on bank balance sheets (numerous reports on Twitter indicate that the market froze last July) and that one of the provisions of Dodd-Frank gutting HR 37 that is now moving through Congress is to delay for two years a stipulation that would banks to sell most collateralized loan obligations held on their balance sheets. The reason for wanting CLOs out of banks is that they are actively traded vehicles, effectively mini hedge funds.   The reason for concern is the recent plunge in energy-related debt prices and their questionable prospects, and where that debt is sitting.   When the subprime mortgage market shut down, banks wound up eating a lot of their cooking.  If that has happened again, it could show up not only in CLOs but in other assets and exposures. And if not the banks, then who were the bagholders? This chart shows energy debt concentrations in top 40 CLOs. The maximum concentration is 15%, presumably set by section concentration limits.  Unfortunately, it doesn’t provide the dollar amount of those deals so we can’t determine what the dollar amount of that energy related exposure is.  And this is from a discussion of a recent JP Morgan investor call: High yield energy new issuance has doubled since 2008. It constitutes 16-20% of new issuance since 2011. JP Morgan’s projected default rates for US high yield energy: at $65 oil, 3.9% in 2015 and 20.5% in 2016. At $75 oil, 3.9% and 4.8%.  Those forecasts look to be in need of updating to show what would happen if oil prices remain at their current $50 (and below) level.

David Morgan: Oil Derivatives Explosion Double 2008 Sub-Prime Crisis -- David Morgan says the plunge in oil prices is not good news for big Wall Street banks. Morgan explains, “The amount of debt that is carried by the fracking industry at large is about double what the sub-prime was in the real estate fiasco in 2008.”“In summary, we’re looking at an explosion in potential that is greater than the sub-prime market of 2008 because, number one, oil and energy are the most important sectors out there.” “Number two, the derivative exposure is at least double what it was in 2008. Number three, the banking sector is really more fragile and we have less ability to weather the storm.” Morgan, who is also “a big-picture macroeconomist,” says oil derivatives could take down the system just like mortgage-backed securities back in the last financial meltdown.” “The Fed said the sub-prime crisis would be “contained.” It was not. So, could oil derivatives take down other derivatives in a daisy chain type of collapse? Morgan says, “Absolutely, there is no question about it. The main problem is the overleverage of the system as a whole.” “Warren Buffett calls derivatives weapons of financial mass destruction, which is a true statement. Secondly, look at how derivatives are interconnected. Derivatives can tie a financial instrument to another financial instrument or a financial derivative can be tied to an oil derivative.”

As Oil Prices Fall, Banks Serving the Energy Industry Brace for a Jolt -  Tumbling oil prices are dimming one of the few big bright spots that banks have enjoyed since the financial crisis.Banks have been lending hand over fist to companies in the nation’s energy industry, underwriting bonds, advising on mergers, even financing the building of homes for oil workers. All of this has provided a boon to banks that have been struggling to find more companies and consumers wanting to borrow.Yet with the price of crude oil falling below levels sufficient for some energy companies to service their huge debts, strains are being felt and defaults are likely. While it may take some time for the crunch in the oil industry to translate into losses, one thing already seems clear: The energy banking boom is over. This week, as many of the largest banks report their earnings for the final three months of 2014, investors will press the banks for answers on how a sudden slump in the once-roaring oil and gas industry may hurt their bottom lines. The expected slowdown comes as banks, both big and small, have finally dug out from the wreckage of the financial crisis and have been looking for new ways to bolster their revenues. When times are good, the capital-intensive oil business is a banker’s dream. From new wells dug in North Dakota and Texas to the oil patch of Alberta, oil producers have turned to Wall Street and local banks to help them sell billions of dollars in bonds, raise equity and arrange lines of credit. 

The Crash of 2015: Day 9 - With oil prices at about half what they were six months ago, the most vulnerable players in the oil business, the frackers who brought about the new American Oil Revolution, are imploding. If you think that’s just their end of the boat sinking, no worries here, think again. They are, or were, the last best hope of continuing the oil bonanza, and they’re done. As soon as that fact is so obvious that even Faux News has to admit it (this may take a few months), it will dawn on us all that the very same thing is happening to the deep water drillers, the Arctic drillers and the tar sands wringers.It would have happened at any oil price.  That’s the meaning of the Crash of 2015.  Here’s what’s happened, what’s happening and what’s about to happen.

  • WBH Energy files for bankruptcy protection. American Eagle Energy suspends all drilling  operations. US Steel to close two plants making steel pipe for oil drillers, laying off 750. Dallas Federal Reserve Bank sees job losses of 250,000 in eight states.
  • Resolute Energy, operating in Texas, Utah and Wyoming, has just borrowed $150 million from the “alternative” investment group Highbridge Capital at an effective interest rate (after fees, guarantees and other legerdemain) of as much as 25%.  It  would be bad enough if Resolute had to borrow to keep on drilling, but this loan was taken for the sole purpose of avoiding default on previous debt (which, if negotiated more than six months ago in the prevailing market, probably cost around six per cent).
  • Sanchez Energy, after having announced a reduction in its capital spending plans in November, announced a second cut that brings its capital budget down to half what it was expected to be. This was one of several such announcements from around the world as the oil companies try to preserve cash by not spending as much on developing new wells.
  • Laricina Energy, operating in the Canadian tar sands with $1.3 billion in equity financing (from stock sales) and $150 million in four-year notes, is in default on the notes and needs another $350 million to do what it’s doing. Next step: probably liquidation.

Money Dries Up for Oil and Gas, Layoffs Spread, Write-Offs Start - When money was growing on trees even for junk-rated companies, and when Wall Street still performed miracles for a fee, thanks to the greatest credit bubble in US history, oil and gas drillers grabbed this money channeled to them from investors and refilled the ever deeper holes fracking was drilling into their balance sheets. But the prices for crude oil, US natural gas, and natural gas liquids have all plunged. Revenues from unhedged production are down 40% or 50%, or more from just seven months ago. And when the hedges expire, the problem will get worse. The industry has been through this before. It knows what to do.  Layoffs are cascading through the oil and gas sector. On Tuesday, the Dallas Fed projected that in Texas alone, 140,000 jobs could be eliminated. Halliburton said that it was axing an undisclosed number of people in Houston. Suncor Energy, Canada’s largest oil producer, will dump 1,000 workers in its tar-sands projects. Helmerich & Payne is idling rigs and cutting jobs. Smaller companies are slashing projects and jobs at an even faster pace. And now Slumberger, the world’s biggest oilfield-services company, will cut 9,000 jobs.  It had had an earnings debacle. It announced that Q4 EPS grew by 11% year-over-year to $1.50, “excluding charges and credits.” In reality, its net income plunged 81% to $302 million, after $1.8 billion in write-offs that included its production assets in Texas.  Larger drillers outspent their cash flows from production by 112% and smaller to midsize drillers by a breathtaking 157%, Barclays estimated. But no problem. Wall Street was eager to supply the remaining juice, and the piles of debt on these companies’ balance sheets ballooned. Oil-field services companies, suppliers, steel companies, accommodation providers… they all benefited. Now the music has stopped. Suddenly, many of these companies are essentially locked out of the capital markets. They have to live within their means or go under.

New Documentary Proves Fracking = ZOMBIES -- Not just human zombies, but zombie dogs, zombie cats, zombie deer, and zombie trout. Even publicly-listed frack companies that are financial zombies. A new hard-hitting documentary is scheduled for its world premiere next month in Fracksylvania. Coming close on the heels of New Yorks’ DOH study, the documentary conclusive ties the increase in the number of teenage mutant ninja zombies to . . . you guessed it . . . fracking. Or so the trailer and promo material have led me to believe. And I’ll believe just about anything negative about fracking these days, even that it causes earthquakes for goodness sakes. “Zombie Killers: Elephant’s Graveyard,” a movie thriller whose executive producer is event center owner Jeff Trainer and which was shot in the Poconos last summer, has been given a commercial release date of Feb. 3.  And the event center will hold a premiere showing with several of the stars in attendance at 5 p.m. Feb. 21. The film, which stars “Titanic” alum Billy Zane, “E.T.: The Extra-Terrestrial” star Dee Wallace and “The O.C.” star Mischa Barton, is set for wide release on DVD and Blu-ray, according to a release from Anchor Bay Entertainment, which is distributing the film.

Opinion: How fracking changes everything. — Forget, for the moment, whether you think fracking is an energy godsend or an endtimes disaster. Just consider how it’s everywhere. In the long run, fracking will impact our lives far more than four of its fellow inductees into the Merriam-Webster dictionary this past year: Hashtags, selfies, tweeps, and turduckens all have their place in society. But none touch everyone’s lives like fracking will, and already has. The coal industry readily admits that it’s being undercut by low natural gas prices. A growing boneyard of shuttered coal-fired power plants, and rushed plans to salvage the U.S. coal industry by creating export markets to Asia are a direct impact of the fracking boom, and a domestic oversupply of oil and natural gas.   Nuclear power is on the ropes as well. The December shutdown of the Vermont Yankee nuke plant followed other closures in Wisconsin, California and Florida. Judgment day is nearing for nukes in Ohio, Illinois, and New York where cheap natural gas has made nuclear power too costly. And the oil and gas industry’s fracking windfall is even claiming victims in the oil and gas industry. Citing the collapse in oil prices, energy giants Royal Dutch Shell and Suncor both announced layoffs and cutbacks in tarsands production this week.

Shale oil and gasoline prices -- Only a few years ago, many observers expected a steadily growing global shortage of crude oil. This shortage did not materialise in part because of the rapidly growing production of shale oil in the US. The production of shale oil (also referred to as tight oil) exploits technological advances in drilling. It involves horizontal drilling and the hydraulic fracturing (or fracking) of underground rock formations containing deposits of crude oil that are trapped within the rock. This process is used to extract crude oil that would have been impossible to release by conventional drilling methods designed for extracting oil from permeable rock formations. Shale oil production relies on the availability of suitable drilling rigs and skilled labour, which is one of the reasons why the US shale oil boom so far has been difficult to replicate in other countries. US shale oil production has grown from about 0.4 million barrels a day in 2007 to more than 4 million barrels a day in 2014. This expansion was stimulated by the high price of crude oil after 2003, which made the application of these new drilling technologies cost competitive. The expansion of US shale oil production soon captured the imagination of policymakers and industry analysts. By 2012, the International Energy Agency projected that the US would become the world’s leading crude oil producer, overtaking Saudi Arabia by the mid-2020s and evolving into a net oil exporter by 2030 (International Energy Agency 2012). Pundits envisioned the US becoming independent of oil imports, net oil exports financing the US non-oil trade deficit, and consumers enjoying an era of cheap gasoline with a resulting rebirth of US manufacturing. My recent research, however, suggests that these visions remain far removed from reality (Kilian 2014).

This Is Just the Beginning of the Great American Oil Bust  “This is going to be a painful period of time,” explained Texas Governor Rick Perry.  His speech to a conservative forum on Friday in Austin made one thing clear: for Texas, the largest oil-producing state in the nation, the oil bust won’t be easy, even if seen from the perennially optimistic point of view of a politician. It won’t be easy for any oil-producing state – or the country. A few days ago, Helmerich & Payne, announced that it would idle 50 more drilling rigs in February, after having already idled 11 rigs. Each rig accounts for about 100 jobs. This will cut its shale drilling activities by 20%. The other two large drillers, Nabors Industries and Patterson-UTI Energy are on a similar program. All three combined are “likely to cut approximately 15,000 jobs out of the 50,000 people they currently employ,”  “They all know they’re staring down a cliff, they just don’t know how far it goes yet,” , according to FuelFix. This year, spending on oil and gas drilling could plunge by $58 billion – or 30% – from last year’s $196 billion, based on a survey of 225 companies in the sector. Barclays conducted the survey over the past four weeks, and the price of oil has continued to drop since, and companies will adjust to the new realities. Small to midsized drillers are making even deeper cuts in drilling to stem the cash outflow. For example, Houston-based Halcón Resources cut its 2015 budget to a range of $375 million to $425 million, down 55% to 60% from its 2014 budget of $950 million. These companies are just trying to hang on. Shares closed at $1.59 on Friday, down 87% from their $12 peak in February 2012, and down 79% from June 2014.

The Shale Crash of 2015 --  Remember the Housing Market Crash of 2008 ? That put the country into the worst recession since the Great Depression. Standby for The Shale Crash of 2015. Wherein the shale drilling and service companies and their lenders, particularly some oil patch regional banks and junk bond financiers get royally fracked. Tumbling oil prices are dimming one of the few big bright spots that banks have enjoyed since the financial crisis.  Banks have been lending hand over fist to companies in the nation’s energy industry, underwriting bonds, advising on mergers, even financing the building of homes for oil workers. All of this has provided a boon to banks that have been struggling to find more companies and consumers wanting to borrow. Yet with the price of crude oil falling below levels sufficient for some energy companies to service their huge debts, strains are being felt and defaults are likely. While it may take some time for the crunch in the oil industry to translate into losses, one thing already seems clear: The energy banking boom is over.

America’s Shale Boom is Not Dead: Folks are comparing today's U.S. oil market to a run of the mill Ponzi scheme, shell game or bond bubble. But when you crunch the numbers, all of those fear-mongering terms don't make sense in the context of today's oil market. Sure, there are a lot of derivative contracts involved in the oil market. Heck, it seems like you can't make a turkey sandwich without a derivative contract these days. But those derivatives aren't a black plague set to take down the whole U.S. shale industry. Far from it, in fact. You see, the key to a good "scheme" is that it's built on false money flows and lies. Today I'll show you why we won't see widespread, Ponzi-like collapse in the oil market. Fact is, the U.S. has a lot of economic oil to go around. There's no "great lie" found at the heart of America's shale boom. And many of the well-run players in this space will never get close to default - let alone spark a 2008-type meltdown. It's time to spread the good word: the shale boom ain't dead. Simply put, the mainstream media and the folks that joined the "we hate the shale boom" bandwagon, still have the story wrong. America's oil boom is real. Underneath domestic soil sits a massive supply of oil and gas - decades worth of supply. I've been to North Dakota's oil rigs. I've seen the boom in South Texas, Pennsylvania, Oklahoma and Colorado...

Shale War Full Frontal -- Despite Saudi prince bin Talal's explanations of the imbalances between supply and demand being the prime driver of lower oil prices, we thought a look at just where that over-supply is coming from might provide some context into the 'shale oil war'. As the following chart shows, since the start of 2014, rig counts in Saudi Arabia, Kuwait, and UAE have surged (just as they did in the mid-2000s). As of this week, US rig counts are now at 14 month lows as it appears clear that the core OPEC producers are intent on drowning the shale oil industry in excess supply.  And as T.Boone Pickens noted previously, the last time this happened (massive oversupply from Saudis), the US rig count was more than halved (from what then was an unprecedented surge)... And as T.Boone Pickens noted previously, the last time this happened (massive oversupply from Saudis), the US rig count was more than halved (from what then was an unprecedented surge)...

OPEC Wants to “Crush U.S. Shale” » Just how low can the oil price go? What was unthinkable even a few months ago is now becoming distinctly probable, even likely. As analysts dissect the ramifications for the oil industry of $40 a barrel, oil traders are now thinking that the price of crude will halve that to a staggering $20 a barrel. Prices have not been that low for 20 years. Just a few weeks ago, traders believed that the oil price would bottom out at around $40 a barrel, but two weeks into January and we have reached that level already. If the price of oil drops to $20 per barrel there will be carnage in the upstream unconventional oil industry in North America. This is looking increasingly likely. As The Australian Business Review reports this morning “the number of contracts or options to sell U.S. crude at $US20 in June has jumped from close to zero at the beginning of the year to 13 million barrels of oil.” The next few months could be some of the most defining ones in the whole of the hydrocarbon era. If that sounds like hyperbole, think again. The Telegraph reports that the Arab states of OPEC are preparing to “crush U.S. shale,” in their strategy to counter the shale gas revolution headon.

The Scariest Chart For America's Shale Industry -- Back in early November, when we posted "If WTI Drops To $60, It Will "Trigger A Broader HY Market Default Cycle", it was greeted with the usual allegations of conspiracy theorism, tin-foil hattery and pretty much everything else, except rebutting facts.  Two months later, it was none other than Goldman which threw in the towel on its call from July 28 of 2014 when it said that "the long-awaited global recovery appears to be getting on track, lifting commodity demand" and scrambled to explain overnight that nothing short of a mass default wave within the shale space will end the ongoing collapse in prices, which are driven not by supply/demand fundamentals but by ZIRP, and a generation of junk bond BTFDers, who can't wait to invest in the latest 10%, 15%, 20% or higher "yielding" opportunity (ignoring that the issuer may default before even one coupon is paid). In other words, those bond holders who wish to blame someone for the collapsing prices of junk bonds, feel free to address them to Ben Bernanke and his successor, who have enabled insolvent companies to live long beyond their viable lifecycle thanks to a zero cost of capital and a generation of traders who no longer know risk.   This is how Goldman's Currie tongue-in-cheekly explained this dilemma:  [U]nlike physical stress, how low prices need to go is dependent upon the producer’s view of the future and the persistence of the current low price environment. The lower and more persistent the producer views the future pricing outlook, the quicker the restructuring. Given the optimistic nature of the oil drilling business, producer views are unlikely to change until the environment becomes extremely hostile with prices low enough such that survival becomes questionable.

Shale Debt Matters Most to Stock Investors as Oil Plunges - U.S. shale drillers may tout how much oil they have in the ground or how cheaply they can get it out. For stock investors, what matters most is debt. The worst performers among U.S. oil producers in a Bloomberg index owe about 5.7 times more than they earn, before certain deductions, compared with 1.7 times for companies that have taken less of a hit. Operations, such as where the companies drill or how much oil versus gas they pump, matter less. “With oil prices below $50 and approaching $40, we’re in survivor mode,” Steven Rees, who helps oversee about $1 trillion as global head of equity strategy at JPMorgan Private Bank, said via phone. “The companies with the higher degrees of leverage have underperformed, and you don’t want to own those because there’s a fair amount of uncertainty as to whether they can repay that debt.” The biggest drop in oil prices since 2008 has spared few energy companies. The Bloomberg Intelligence North America Independent Exploration & Production Index, which includes 57 U.S. companies in the analysis as well as 17 Canadian ones, lost 53 percent since crude peaked in June, wiping out $346 billion in market value. The most-indebted producers suffered most, suggesting investors are concerned with their ability to pay back borrowers and fund future drilling. Because shale wells deplete more quickly than conventional wells, producers need to keep drilling to maintain output. That takes debt. The companies in the index owe a combined $247.1 billion, an 85 percent increase from three years ago. Including some overseas assets, total production rose 60 percent to 13.3 million barrels a day in that time, data show.

How much fracking is happening in the Gulf of Mexico? - We don’t know nearly enough about the fracking that’s already going on in the U.S. — that’s the point of two lawsuits filed this past week by environmental advocates against the federal government. In the first suit, an environmental group is suing the feds to get more information about hydraulic fracturing happening off U.S. coastlines, an increasingly common practice that hasn’t yet sparked the same public debate that fracking on land has. In the second, a coalition of nine groups is suing the EPA to force companies to release information about toxic chemicals used in the fracking process. Fracking allows drillers to get at hard-to-reach oilfields that weren’t readily accessible before, especially offshore. Many underwater areas that were considered tapped out are now looking potentially profitable once again. The Gulf of Mexico appears especially lucrative — Heather Smith wrote recently for Grist that drillers are viewing it as a “giant, underwater piggybank.” But, as this gold rush begins, environmentalists are pointing out that we know very little about the risks involved with projects like these. And, in the past, when we’ve lacked knowledge about the dangers of risky offshore drilling operations, bad things have happened. (See: Deepwater Horizon.) Thus the lawsuit, filed by the Center for Biological Diversity. By compelling the Bureau of Ocean Energy Management and the Bureau of Safety and Environmental Enforcement to disclose permits, documents, and emails related to the approval of drilling operations, the Center hopes to learn the extent of the practice.

Pope Francis Says No to Fracking -- We’ve been busy lately providing news on all the great ways Pope Francis is working to create a healthy, sustainable planet. In July 2014, Pope Francis called destruction of nature a modern sin. In November 2014, Pope Francis said“unbridled consumerism” is destroying our planet and we are “stewards, not masters” of the Earth. In December 2014, he said he will increase his call this year to address climate change. And, last week we announced that Pope Francis is opening his Vatican farm to the public.  Now, we learn from Nicolás Fedor Sulcic that Pope Francis is supportive of the anti-fracking movement. Watch this interview by Fernando Solanas where he met with Pope Francis soon after finishing a film about fracking in Argentina.

As Frac Sand Mining Expands, Community Activists Face Off Against Companies  -- Wisconsin acts as the heart of the industry, with sands mined in the state making up 75 percent of the US market.  Estimates of total sand mined in 2014 are expected to be 30 percent higher than 2013 totals. Six years ago, when Popple first learned about proposals to open frac sand mining facilities in Chippiwa County, there were only four sites in Wisconsin. Today, 140 have been developed, with handfuls more in the works. Wisconsin alone is expected to soon mine 50 million tons of frac sands each year, equivalent to 9,000 semi-truck loads. These days, Popple tells Truthout, there are "piles of dust" on railroad tracks, which makes its way into local communities when trains go past. The air is thick with it in the boiling hot summers.  Popple and others are worried about the impact all that dust is having on their lives. And without strong oversight from the Wisconsin Department of Natural Resources (DNR), they have little way of knowing. The DNR doesn't require companies to monitor levels of airborne crystalline silica dust, a byproduct of mining and a known carcinogen. Heavy exposure can scar tissue and lead to chronic pulmonary problems, heart problems, kidney disease and autoimmune disorders. Research led by Dr. Crispin Pierce of the University of Wisconsin at Eau Claire shows that crystalline silica levels at the state's frac sand operations are higher than workplace standards set by the federal Occupational Safety and Health Administration (OSHA). Researchers from the University of Iowa are now measuring crystalline silica dust in Wisconsin communities near frac sand sites to better understand whether widespread exposure is also occurring.

230,000 People Told Not To Drink Their Water After Diesel Fuel Spill In Canada --The 230,000 residents of Longueuil, a city just outside of Montreal, Canada, have been told that their tap water is unsafe to drink following a diesel fuel spill that leaked into the water supply.  According to media reports, 7,400 gallons of diesel fuel spilled from a city-owned wastewater treatment center in Longueuil, apparently due to equipment failure. Canada’s CBC News reported that the spilled diesel made its way into the sewers from a generator, eventually flowing into the river that supplies drinking water to the city.  The city told its residents on Wednesday morning not to drink their tap water, but then told residents later that afternoon that the water was safe to drink, according to a report from Global News. Then, after reports that residents could still smell diesel in their water, the city on Thursday again put a “do not drink” advisory in place. The city of Longueuil’s press release says the spill is unlikely to cause “any adverse health effects,” and according to Montérégie Public Health, the smell and taste of the diesel-contaminated water would be the biggest issue. Symptoms like diarrhea and vomiting could happen if people ingest the water, but average healthy adults should be safe, according to a CBC report.

Keystone Pipeline’s Nebraska Path Cleared; Congress Votes - The Keystone XL pipeline faces one less hurdle after Nebraska’s highest court cleared its path through the state, sending the matter back to Washington. The pipeline would funnel crude from Alberta’s oil sands to a network junction in southeast Nebraska, for transport to Gulf Coast refineries. While the ruling is a victory for energy independence proponents, the project’s fate remains uncertain. It now returns to President Barack Obama, who had put off a decision citing the pending lawsuit. Today, the House of Representatives passed a bill that would force approval of the pipeline. Why Keystone CountsWhile four of the seven Nebraska Supreme Court judges held that they would block Keystone XL, five were needed to declare unconstitutional a law that allowed the governor to dictate its path. As a result, the route survived by default.

Senate Votes to Proceed on Keystone XL Pipeline Bill --After a short debate on the floor today, the Senate voted 63-32 to overcome a 60-vote threshold to begin debate on SB 1—the bill to approve the Keystone XL pipeline. This is the first time the Senate has been able to clear this key procedural hurdle, thanks to a now Republican-controlled Senate. Ten Democrats and one independent—Senator Angus King of Maine—voted with Republicans to move forward on the bill.  The debate wound up prior to the late-afternoon vote with an impassioned though factually shaky presentation by pipeline supporter John Hoeven of South Dakota, who used a map to emphasize his contention that shipping tar sands oil from Canada would help make the U.S. energy-independent. Indiana Senator Dan Coats also spoke in favor of, while Virginia Senator Tim Kaine, Washington Senator Maria Cantwell of Washington spoke in opposition to the pipeline.“Here we stand in what people still call the world’s greatest deliberative body, and the first bill that we are taking up is not infrastructure generally, not national energy policy, and not even national laws as they relate to our pipeline infrastructure,” said Schatz. “No, we are legislating about a specific pipeline which will move oil from Canada through the U.S. to be primarily exported from our southern border.” He added, “Our economy will do better and grow faster and be more resilient if we embrace the technologies at our fingerprints and end our reliance on fossil fuels. We have a chance to embrace the future here and our future in not in tar sands oil.”

Senate Advances Bill To Approve Keystone Pipeline Despite Obama's Veto Threat - The Senate advanced legislation Monday night to approve the Keystone XL pipeline, even though President Barack Obama has already said he would veto it.  The Senate voted 63-32 to clear a procedural hurdle and begin debate on the bill. Ten Democrats and one independent, Angus King (Maine), voted with every Republican to move the bill forward. Those Democrats included Sens. Michael Bennet (Colo.), Tom Carper (Del.), Bob Casey (Pa.), Joe Donnelly (Ind.), Heidi Heitkamp (N.D.), Joe Manchin (W.Va.), Claire McCaskill (Mo.), Jon Tester (Mont.), Tom Udall (N.M.) and Mark Warner (Va.). A final vote is expected later this week. Despite the strong vote, the Senate lacks the two-thirds majority vote needed to overcome a veto. The House passed the bill last week by a vote of 266 to 153 -- also shy of the 290 votes needed to clear a veto.  Congressional action on Keystone comes after the Nebraska Supreme Court cleared the way last week for the proposed pipeline's route through the state. The Obama administration had been waiting for the Nebraska ruling to render its own decision on the pipeline, which is still forthcoming.

For the Love of Carbon - Krugman -   It should come as no surprise that the very first move of the new Republican Senate is an attempt to push President Obama into approving the Keystone XL pipeline, which would carry oil from Canadian tar sands. After all, debts must be paid, and the oil and gas industry — which gave 87 percent of its 2014 campaign contributions to the G.O.P. — expects to be rewarded for its support. But why is this environmentally troubling project an urgent priority in a time of plunging world oil prices? Well, the party line, from people like Mitch McConnell, the new Senate majority leader, is that it’s all about jobs. And it’s true: Building Keystone XL could slightly increase U.S. employment.  For more than seven years ... the United States economy has suffered from inadequate demand. . In such an environment, anything that increases spending creates jobs. ... From the beginning, however, Republican leaders have held that we should slash public spending... And they’ve gotten their way... The evidence overwhelmingly indicates that this kind of fiscal austerity in a depressed economy is destructive...Needless to say, the guilty parties here will never admit that they were wrong. But if you look at their behavior closely, you see clear signs that they don’t really believe in their own doctrine.  Consider, for example, the case of military spending. When it comes to possible cuts in defense contracts, politicians suddenly begin talking about all the jobs that will be destroyed. This is the phenomenon former Representative Barney Frank dubbed “weaponized Keynesianism.”And the argument being made for Keystone XL is very similar; call it “carbonized Keynesianism.”  But government spending on roads, bridges and schools would do the same thing.

I too believe that Keystone XL could be environmentally damaging ... But that doesn't mean I'm necessarily against it.  We should be comparing the benefits of KXL against its costs. This means that we should not (1) be opposed to any project that is environmentally damaging and (2) ignore the jobs by calling them trivial, but treat them correctly in the analysis. In other words, jobs are costs unless an economy is having trouble generating jobs. Even if the economy is having trouble generating jobs you should only include about 50% of the income over a limited time period (e.g., the average duration of unemployment). With a 5.6% unemployment rate and more and more evidence that we may be going from recovery to expansion in the business cycle it is probably OK to ignore jobs but let's do the calculation just for completeness. If the jobs earn $50k annually (I got that number from Keystone) and unemployment duration is 6 months then the benefits from the jobs is about $525 million.  Just guessing, let's say that the annual chance of a major spill is 1%. That puts the expected environmental costs at something like $6 million (using replacement costs instead of willingness to pay to avoid a spill). Discounted in perpetuity at 5%, the present value of environmental costs is $120 million.  Pegging the net effect on the price of gasoline and carbon emissions at zero, the benefits of KXL range from zero to $525 million (depending on where we are in the business cycle) and the costs might be about $120 million. This is just a SWAG (or maybe just a WAG) but still, it is better thanKrugman's analysis.

Wild Card: Will Low Oil Prices Impact Obama's Decision on Keystone XL? - In the past five months, crude oil prices also have dropped to their lowest points since April 2009, arming Keystone opponents with a new argument. With benchmark Brent and WTI crude oil now selling for about $50 or so a barrel, they say Keystone XL flunks Obama's sole test for the pipeline, which he described in a June 2013 speech: that it "not significantly exacerbate the problem of carbon pollution." To understand that argument, it's important first to distinguish between new oil wells and wells that are already producing.  Keystone XL is and has always been not about existing tar sands production – which for the most part is locked in – but whether we enable the expansion of tar sands production, whether we build a major pipeline that will enable new tar sands production projects to move forward and be locked in for the future," says Anthony Swift, a staff attorney with the Natural Resources Defense Council. When it comes to developing the tar sands, most of the costs are upfront during the drilling phase; once a well is producing, operating it is pretty cheap. In Canada's tar sands in particular, extracting oil is especially expensive, meaning for companies to break even on any new wells there, they need not only a higher market price for oil but also minimal expenses. "Oil prices really have an impact on drilling rather than production, because the cost to get it out of the ground is pretty low," says Michael Webber, deputy director of The Energy Institute at the University of Texas-Austin. "You might not drill if it’s $50 a barrel, but you probably will produce – you’ve already sunk the money."

Is Keystone Still Viable Amid Low Oil Prices? -  While the political machinations of Keystone, with all the horse trading it inevitably entails, certainly make for some excellent headlines, an equally pressing question is whether the project is even viable with today’s oil prices, which dropped further on Monday to below $46 a barrel in North America.The rationale for Keystone was a way to bring together booming US oil production, and to a lesser extent, production from the oil sands in Northern Alberta, to Gulf Coast refineries that were facing declining imports from Mexico and Venezuela. The project was first proposed in 2008 and was supposed to begin carrying 830,000 barrels a day in 2012.  But the market didn’t wait for the pipeline to be built, and landlocked Canadian crude has found its way to Texas and Louisiana refineries by rail instead. Canadian oil exports by rail tripled to a record 182,000 barrels a day in the third quarter, according to Canada’s National Energy Board. The United States has also been importing Canadian oil like gangbusters, showing that the trade will happen with or without the pipeline extension (Keystone XL is an addition to the existing pipeline). Data from the US Energy Department showed US imports of Canadian crude reached a record 3.1 million barrels a day in September. So with some of the project’s goals already being met, in terms of increased production flowing from Canada to the US, the question has become, why is a pipeline needed anymore? And now, with the oil price down more than 50 percent since June, Canadian production is certain to fall, lessening demand for oil transportation and thus casting doubt on the economics of the project according to observers.

Shell to cut 5 to 10 percent of jobs at oil sands project (Reuters) - Royal Dutch Shell will cut between 5 and 10 percent of the just over 3,000 jobs at its Albian Sands mining project in northern Alberta, a company spokesman said on Friday, although he refrained from connecting the move to plunging oil prices. Spokesman Cameron Yost said the actual number of job reductions at the Canadian operation had not yet been finalized, adding it would be "well below" 10 percent. The cuts were announced to Shell employees on Thursday. true Yost said those affected will be considered for other positions within Shell's operations. "It's not layoffs in the traditional sense of the word," Yost said. "It's adjustments to the organizational structure." Albian Sands is the mining portion of Shell's Athabasca Oil Sands project near Fort McMurray, Alberta, which also includes the 255,000 barrel-per day Scotford upgrader. Last February, Shell halted work on its proposed 200,000 bpd Pierre River oil sands mine in Alberta, saying it was re-evaluating the timing of various asset developments. Asked whether the reductions were related to the halving of global oil prices in the past six months, Yost said: "Even if oil price had remained stable we would still be looking at these areas of our business."

Suncor Energy Slashes FY15 CapEx Budget By $1 Bln; To Cut 1,000 Jobs - Suncor Energy Inc. (SU.TO, SU) on Tuesday announced significant spending reductions to its 2015 budget in response to the current lower crude price environment. The cuts include a $1 billion decrease in the company's capital spending program, as well as sustainable operating expense reductions of $600 million to $800 million to be phased in over two years offsetting inflation and growth. Suncor is implementing a number of initiatives to achieve the cost reduction targets, including deferral of some capital projects that have not yet been sanctioned, such as MacKay River 2 and the White Rose Extension, as well as reductions to discretionary spending. Suncor also said it will reduce total workforce numbers in 2015 by about 1000 people, mainly through its contract workforce, in addition to reducing employee positions. There will also be an overall hiring freeze for roles that are not critical to operations and safety, the company said. Major projects in construction such as Fort Hills and Hebron will move forward as planned and take full advantage of the current economic environment. Suncor has issued an update to its 2015 guidance to reflect, among other items, reduced spending and lower pricing and related assumptions. Production guidance for 2015 has not changed.

Suncor Cuts Capex By $1 Billion, Fires 1000, Implements Hiring Freeze -- For all those who have forgotten that the I in the GDP equation stands for Investment, here is a reminder courtesy of the latest crude collapse victim, Suncor, which moments ago announced it is not only cutting its 2015 CapEx by $1 billion (as in I, directly and adversely impacting US GDP by the same amount) but that it would also cut "operating expenses" by up to $800 million, and, drumroll, implementing "a series of workforce initiatives that will reduce total workforce numbers in 2015 by approximately 1000 people, primarily through its contract workforce, in addition to reducing employee positions. There will also be an overall hiring freeze for roles that are not critical to operations and safety." Or as Joe LaVorgna and all the other mainstay CNBC "analysts" would call it, "unambiguously good."

The 2014 oil price slump: Seven key questions - Plunging oil prices affect everyone, albeit no two countries will experience it in the same way. In this column, the IMF’s Chief Economist Olivier Blanchard and Senior Economist Rabah Arezki examine the causes as well as the consequences for various groups of countries and for financial stability more broadly. The analysis has important implications for how policymakers should address the impact on their economies.   This column attempts to answer seven key questions about the oil price decline:

  1. What are the respective roles of demand and supply factors?
  2. How persistent is the supply shift likely to be?
  3. What are the effects likely to be on the global economy?
  4. What are likely to be the effects on oil importers?
  5. What are likely to be the effects on oil exporters?
  6. What are the financial implications?
  7. What should be the policy response of oil importers and exporters?

Too dirty for the USA - High-pollution fuels exported - Pollution linked to global warming keeps rising even though the world's two largest carbon polluters have pledged to combat climate change, with the US committing to deeper cuts and China saying its emissions will stop growing by 2030. It's a dangerous trajectory the US is stoking with record exports of dirty fuels, even as it reduces the pollution responsible for global warming at home. The carbon embedded in those exports helps the US meet its political goals by taking it off its pollution balance sheet. But it doesn't necessarily help the planet. That's because the US is sending more dirty fuel than ever to other parts of the world, where efforts to address the resulting pollution are just getting under way, if advancing at all. While the exported fuel has got cleaner, in the case of diesel, about 20 per cent of the exports are too dirty to burn in the US.

The Deep State Strategy: Burn Everyone Else's Oil First, Leave Ours In The Ground -- The point is that being able to produce one's own energy and food offers a kind of security that countries dependent on other nations for these essentials of survival can never enjoy.Since cheap oil will eventually become scarce for all the reasons listed here and elsewhere many times--depletion of easy-to-pump reserves, geopolitical instability, rising domestic consumption in oil-exporting nations and a contraction in capital available to replace declining production--it makes excellent sense to consume all the oil anyone is willing to sell for $40-$50/barrel and retain one's own reserves for the time when $100/barrel has become "cheap."m If we follow this logic, then we conclude that the U.S. Deep State is in favor of Saudi Arabia's strategy of forcing production cuts (and the resulting collapse of income) on its rivals and marginal producers for two profound reasons:

  • 1. The loss of income to rivals/enemies is a very cheap form of financial warfare that weakens their ability to maintain military forces, social welfare states and everything else currently being funded almost solely by oil export revenues
  • 2. The opportunity to consume everyone else's cheap oil while leaving more of the U.S. oil reserves safely in the ground for later use.

It's always wise to remember the elected government is the ant riding on the Deep State elephant, grandly declaring it guides the great beast. It's also worth remembering that the Deep State is not monolithic; rather, it is a dynamic network of power-nodes, each with its own agenda and each jockeying for dominance on key issues within the Deep State.

We burn 2.7 million gallons a minute, so why’s oil so cheap?-- The world burns enough oil-derived fuels to drain an Olympic-sized swimming pool four times every minute. Global consumption has never been higher - and is rising. Yet the price of a barrel of oil has fallen by more than half over the past six months because the globe, experts say, is awash in oil. So, where did all this oil come from? The Earth has been accumulating oil and natural gas for about a billion years or so. Humans have been drilling and burning crude and gas in significant amounts for only the last 156 years, since the 1859 birth of the oil industry in Pennsylvania. So, even when oil prices spiked earlier this decade amid worries that oil supplies would soon run low, scientists and oil companies knew there was plenty available. It wasn't so much a question of how much oil and gas was left in the earth's crust, but whether we could figure out how to squeeze it out and make money doing so. "How much oil we have is an economic and technical question, not a geologic one," says Doug Duncan of the U.S. Geological Survey. "There's far more than we can extract economically using today's technology."

Over a barrel? Falling oil prices and the environment -- IS THE recent oil price crash good or bad for the environment? For years, environmentalists have been seeking carbon taxes and other measures to ratchet up oil prices to encourage us on to a clean-energy path. But some are now hailing the recent price crash as good for the environment, because it could fatally weaken big oil and its hold on the world's energy system. You could be forgiven for being confused.  What gives? Oil prices have more than halved since last June, to just under $50 for a barrel of Brent crude, the industry's global benchmark. This is likely to increase the amount of oil burned as fuel, both because people are less careful with stuff that is cheap and because low fuel prices will stimulate economic activity. The price crash will also discourage investment in alternative sources of energy such as renewables. The oil glut shows no signs of easing, as major producers such as Saudi Arabia and other OPEC nations are reluctant to pump less.  "High-priced oil dampens petroleum demand and makes oil alternatives more viable [whereas] lower oil prices reboot oil demand, leading to higher overall production and consumption," according to Deborah Gordon, an energy and climate analyst for Washington DC-based think tank the Carnegie Endowment for International Peace.  In the past decade of high oil prices, people in the US have been driving less, and more economically. Now, the argument goes, gas-guzzlers will be back.

An Endless Sea Of Energy - With crude oil prices in a strong corrective mode, energy depletion is understandably not on people’s minds these days. However, this is a scenario that many of us might have to deal with at some point in our lifetimes. Yes, the world currently has more than abundant supplies of crude oil. US tight oil production has been rising exponentially, accounting for the biggest share of global growth since 2009. This is by any measure an amazing technological and logistical achievement. OPEC has simply been incapable to accommodate the resurgence of the US as a major producer; and falling prices may actually prompt some of its members to sustain outputs, otherwise lost revenues will be even larger. We might be swimming in oil for now, but this should be no reason to become complacent. As an example, an important fact that is often overlooked is that tight oil exploration is a different animal, and relatively recent in terms of its significance. Each tight oil well has very steep decline rates – in many cases 90% within 5 to 7 years, much steeper than conventional wells. This means that to sustain (let alone increase) production many new wells need to be drilled each year. And at US$5-10 million cost per well, this is not cheap either. Here’s an interesting question: with all these massive production increases, when is crude oil production projected to peak in the US? In its annual energy outlook reports, the US Energy Information Agency (“EIA”) puts out estimates of future crude oil production taking into account the most recent reserve and production figures. Here’s when they believe production will peak according to their reference (baseline) scenario: 2019.

Schlumberger Cuts 9,000 Jobs - Here come the oil-related job cuts. In its fourth quarter earnings announcement on Thursday, oilfield services company Schlumberger announced that it will cut 9,000 jobs, or about 8% of its workforce. The company said the job cuts come, "In response to lower commodity pricing and anticipated lower exploration and production spending in 2015." Schlumberger is a provider of equipment and services to oil and gas companies, and over the last six months shares of the $100 billion company have declined more than 30% amid the crash in oil prices. In addition to announcing job cuts, Schlumberger reported earnings per share of $1.50, excluding special charges, on revenue of $12.6 billion. Earnings were up 11% over the prior year while revenue was a 6% increase. Following the news shares of Schlumberger were up about 1.5% in after hours trading on Thursday. The company also raised its dividend 25% and repurchased $1.1 billion worth of its own stock during the quarter, both efforts to reward shareholders that have stuck with the company amid the decline in oil prices and selling pressure faced by all companies in the energy sector. In the fourth quarter, Schlumberger also took a $472 million devaluation charge related to the decline in the value of the Venezuelan bolivar against the US dollar. And as Business Insider's Linette Lopez noted on Thursday, the bond market is worried about the situation in Venezuela. In a presentation on Tuesday, DoubleLine's Jeff Gundlach talked about the rapid decline in energy prices, and said that while the market is still making sense of the massive decline, the knock-on effects, like a reduction in capital investment and job cuts, will take a few quarters to really kick in.

Oil extends fall; Goldman Sachs cuts forecasts (Reuters) - Oil renewed its decline on Monday, dropping below $49 a barrel as Goldman Sachs slashed its short-term price forecasts and Gulf producers showed no signs of curbing output. Brent and U.S. crude are near their lowest since April 2009, having fallen for seven straight weeks on a growing supply glut. The February Brent contract was down $1.33 at $48.78 a barrel at 1220 GMT. U.S. crude oil for February was down $1.20 at $47.16 per barrel. true Analysts at Goldman Sachs cut their three-month forecasts for Brent to $42 a barrel from $80 and for the U.S. West Texas Intermediate contract to $41 from $70 a barrel. The bank cut its 2015 Brent forecast to $50.40 a barrel from $83.75 and U.S. crude to $47.15 a barrel from $73.75. Despite declining investments in U.S. shale oil, the main driver in the current supply glut, production will take longer to come down, Goldman said in a report. "To keep all capital sidelined and curtail investment in shale until the market has rebalanced, we believe prices need to stay lower for longer," the analysts said. Speaking to Reuters Global Oil Forum, Commerzbank analyst Carsten Fritsch said he expected output cuts to start impacting prices in the second half of 2015."At some point market participants will realize that a lot of oil will leave the market if prices stay low,"

Goldman Sees Need for $40 Oil as OPEC Cut Forecast Abandoned - Goldman Sachs said U.S. oil prices need to trade near $40 a barrel in the first half of this year to curb shale investments as it gave up on OPEC cutting output to balance the market. The bank reduced its forecasts for global benchmark crude prices, predicting inventories will increase over the first half of this year, according to an e-mailed report. Excess storage and tanker capacity suggests the market can run a surplus far longer than it has in the past, said Goldman analysts including Jeffrey Currie in New York. The U.S. is pumping oil at the fastest pace in more than three decades, helped by a shale boom that’s unlocked supplies from formations including the Eagle Ford in Texas and the Bakken in North Dakota. Prices slumped almost 50 percent last year as the Organization of Petroleum Exporting Countries resisted output cuts even amid a global surplus that Qatar estimates at 2 million barrels a day. Oil Prices“To keep all capital sidelined and curtail investment in shale until the market has re-balanced, we believe prices need to stay lower for longer,” Goldman said in the report. “The search for a new equilibrium in oil markets continues.” West Texas Intermediate, the U.S. marker crude, will trade at $41 a barrel and global benchmark Brent at $42 in three months, the bank said. It had previously forecast WTI at $70 and Brent at $80 for the first quarter.

Oil Producers Betting on Price Drop With OPEC Not Curbing Output - The oil industry was listening as OPEC talked down crude prices to a more than five-year low. Drillers, refiners and other merchants increased bets on lower prices to the most in three years in the week ended Jan. 6, government data show. Producers idled the most rigs since 1991, with some paying to break leases on drilling equipment. Companies are hedging more and drilling less amid concern that the biggest slump in prices since 2008 will continue. Oil dropped for a seventh week after officials from Saudi Arabia, the United Arab Emirates and Kuwait reiterated they won’t curb output to halt the decline. Oil Prices“Producers are desperately hedging their production in a drastically falling market,” Phil Flynn, a senior market analyst at the Price Futures Group in Chicago, said by phone Jan. 9. “They’re trying to lock in prices because they are convinced that the market will stay down for a while.” WTI slid $6.19, or 11 percent, to $47.93 a barrel on the New York Mercantile Exchange on Jan. 6, settling below $50 for the first time since April 2009. Futures for February delivery declined $1.53 to $46.83 in electronic trading at 8:09 a.m. local time.

Oil Prices Fall to Fresh Lows - WSJ: The global oil benchmark settled below $50 a barrel for the first time in nearly six years Monday after Goldman Sachs Group Inc. slashed its forecasts, saying lower prices are needed to reduce global supplies. The price rout weighed on other markets. Energy stocks fell, and copper slid to a five-year low. After dropping in half in 2014, Brent oil prices are already down 17% for the year, as robust global supply growth continues to outpace demand. The Organization of the Petroleum Exporting Countries chose not to lower its production quota in November, putting more pressure on non-OPEC producers such as the U.S. and Canada to cut back on output. Goldman Sachs and Société Générale sharply lowered their oil-price forecasts in reports released Sunday and Friday, respectively. Goldman called for the U.S. oil benchmark to average $40.50 a barrel and Brent to average $42 a barrel in the second quarter.  Traders said several U.S. refinery outages also pressured prices Monday on expectations that demand for crude oil could temporarily drop. Brent dropped $2.68, or 5.3%, to $47.43 a barrel on ICE Futures Europe, the lowest settlement since March 2009.  U.S. oil for February delivery settled down $2.29, or 4.7%, at $46.07 a barrel on the New York Mercantile Exchange, the lowest level since April 2009. The U.S. benchmark has fallen 14% so far this year.

Oil Extends Selloff on UAE Minister's Comments -- The oil market extended its selloff Tuesday, coming close to six-year lows, after the United Arab Emirates’ oil minister said the Organization of the Petroleum Exporting Countries would stand firm on its decision tokeep output unchanged. The market shrugged off strong data out of China and pushed below the $45 a barrel mark for the U.S. oil benchmark. The oil slide rattled financial markets and knocked currencies world-wide.  Brent crude for February delivery fell by around 3%, flirting with $46 a barrel on London’s ICE exchange. On the New York Mercantile Exchange, light, sweet crude futures traded at $44.92 a barrel, down more than a dollar from Monday’s settlement. “We are still very much sentiment-driven and the sentiment will continue to be negative as long as there is no change in production,” said Thina M. Saltvedt, senior oil analyst at Nordea Bank Norge. “Oil is still piling up.” Market participants estimate that the supply of crude is currently overshooting tepid demand for the commodity by as much as 2 million barrels a day. That mismatch has driven prices off a cliff since last summer, with Brent falling to its lowest levels since March 2009. The oil price lost around 5% on Monday alone.

Oil Drops Below $45; U.S. Stockpiles May Speed Collapse - Bloomberg: Oil extended losses to below $45 a barrel amid speculation that U.S. stockpiles will increase, exacerbating a global supply glut that’s driven prices to the lowest in more than 5 1/2 years. Futures fell as much as 4.1 percent in New York, declining for a third day. Crude inventories probably gained by 1.5 million barrels last week, a Bloomberg News survey showed before government data tomorrow. The United Arab Emirates, a member of the Organization of Petroleum Exporting Countries, will continue to expand output capacity, while shale drillers will probably be the first to curb production as prices fall, according to Energy Minister Suhail Al Mazrouei. Oil slumped almost 50 percent last year, the most since the 2008 financial crisis, as the U.S. pumped at the fastest rate in more than three decades and OPEC resisted calls to cut production. Goldman Sachs Group Inc. said crude needs to drop to $40 a barrel to “re-balance” the market, while Societe Generale SA also reduced its price forecasts.

The Price of Foreign Energy Fell 28.6%. Or Was It 44%? - The Labor Department on Wednesday said prices of imported goods coming into the U.S. in December plunged 2.5% from November and were down 5.5% from their year-ago level. The main drag was petroleum and related products. The price index for fuel imports plunged 15.1% from November and has tumbled 28.6% over the course of 2014.  While the drop is pretty steep—the biggest since 2008—it doesn’t compare with the freefall in oil prices traded on commodity markets.  According to Energy Information Administration data, the average spot price of West Texas Intermediate crude in December was down almost 40% from the year-ago average. The price drop for Brent crude, which captures oil traded on global exchanges, is about 44%. Is the Labor Department missing a huge chunk of deflation moving through the economy? Not really, says David Mead, the department’s sector chief for information and analysis of the International Price Program. First, there’s a difference in how each price is determined. Speculation and geopolitical events can affect the prices of contracts traded on the commodity exchanges. Mr. Mead says the Labor Department counts prices for actual transactions where the commodity is shipped from overseas and delivered into the U.S. Contracts signed earlier can also cause import prices to react with a lag to spot market prices. Mr. Mead thinks that accounts for a small part of the difference, but in times when spot prices are extremely volatile, it may take some time for contracted transaction prices to catch up. Second, when discussing headline and core import inflation, Labor focuses on prices of fuels and lubricants. Crude accounts for about three-quarters of the fuels category. Prices for the other quarter, items such as jet fuel, gasoline diesel and heating oil, don’t move as quickly as crude prices do.

Oil Surplus Grows Even as Prices Plummet - When the world gives you too much oil, drill for more.That seems to be the motto of some of the most prolific oil producers today. Iraq, Russia, Latin America, West Africa, the United States, Canada – all may increase production this year, and by more than just balancing out the reduced production in war-torn Libya. On top of this, expect even more oil on the market if Iran comes to terms with the West over its nuclear program and is freed of the constraints of sanctions.That’s the conclusion of Adam Longson, an oil analyst at Morgan Stanley writing in an e-mailed report on Jan. 5. All this new oil is flooding a market already awash because OPEC has refused to cut its production cap below 30 million barrels a day – and is even exceeding that level – and the United States is pumping oil, mostly from shale, faster than it has in 30 years. This has caused the average price of oil to plunge more than 50 percent, from about $115 in June 2014 to just over $50 today.This is creating an unmitigated bear market for oil, according to Morgan Stanley. “With the global oil market just passing peak runs and Libyan supply already at low levels, it’s hard to see much improvement in oil fundamentals near term,” its report said. “A number of worrying signs have already emerged, lifting the probability of our ‘bear’ case.”One more sign is that Iraq’s production is at its highest level in more than three decades, now that Baghdad has finally reached agreement with Kurdistan to allow it to export oil through Turkey. And just before the New Year there were reports that Russian oil output has hit post-Soviet records without any sign of abating.

Oil near six-year low; Brent trades at par to U.S. crude  (Reuters) - Oil tumbled 5 percent to near six-year lows before recovering ground on Tuesday, and Brent briefly traded at par to U.S. crude for the first time in three months as some traders moved to take advantage of ample storage space in the United States. Traders were searching to store the glut of oil, which has knocked prices down 60 percent in the last six months. So far this week, Brent has lost 7 percent and U.S. crude 5 percent. Brent LCOc1 settled down 84 cents at $46.59 a barrel, after falling to $45.19, its lowest since March 2009. true U.S. crude CLc1 closed down 18 cents at $45.89, after hitting an April 2009 low of $44.20. Oil tumbled earlier after big OPEC producer United Arab Emirates defended the group's decision not to cut output to boost prices. Losses were pared by a flurry of short-covering toward the close, as players moved to cash in on profitable short positions, traders said. The arbitrage between Brent and U.S. crude traded at parity for the first time since October, with both markets touching $46 a barrel at one point. Traders said the benchmarks converged as limited storage on land for Brent forced traders to look for storage in the Cushing, Oklahoma, delivery point for U.S. crude.

US rig count plunges by 74 to 1,676 - Oilfield services company Baker Hughes Inc. says the number of rigs exploring for oil and natural gas in the U.S. tumbled by 74 this week to 1,676. The Houston firm said Friday in its weekly report 1,366 rigs were exploring for oil and 310 for gas. A year ago 1,777 rigs were active. Of the major oil- and gas-producing states, Texas' count dove by 44, North Dakota dropped six, Oklahoma fell five, California and Wyoming each lost four and New Mexico declined by three. Arkansas, Kansas and West Virginia were down two each and Colorado, Louisiana and Utah were off one apiece. Ohio gained one rig. Alaska and Pennsylvania were unchanged. The U.S. rig count peaked at 4,530 in 1981 and bottomed at 488 in 1999.

U.S. rig count slides again, hits lowest total since October 2010: U.S. rig count slides again, hits lowest total since October 2010 The U.S. drilling rig count plunged 74 units, all on land, to settle at 1,676 rigs working in the latest week for the lowest total since Oct. 2010, Baker Hughes (NYSE:BHI) says in its weekly report. The count has now fallen for seven straight weeks as it has lost 244 units, and the U.S. now has 101 fewer rigs than during the same week a year ago. Most of the losses came in Texas, where the count fell 44 units to 766 to bring the state’s total to its lowest since Mar. 2011; North Dakota gave up just six units to 156. Canada added 74 rigs, but still has 125 fewer rigs compared with this week a year ago

U.S. rig count sees biggest drop in six years: — More than 40,000 upstream oil and gas jobs in Texas could be lost as energy sector activity here continues to slow, said Karr Ingham, the economist who compiles the monthly Texas Petro Index tracking the industry’s economic indicators. The latest data point that spells trouble for the industry: data released Friday indicating that that the number of rigs operating in the U.S. was down 74 this week, the rig count’s biggest one-week decline in more than six years. “We’re now at the point where there’s likely to be some damage inflected on the Texas economy,” Ingham said. “I’d sure be fine if I was dead wrong, but a turnaround in drilling activity is not on the horizon at this point. Ingham said the industry suffered 40,000 upstream job losses in Texas when crude oil prices fell as low as $35 per barrel during the 2008-2009 downturn. The last time the rig count fell as dramatically as it did this week was in January 2009, when it fell by 98. This time, Ingham said, the job losses might even be bigger because the drop in oil prices could be more prolonged. Texas, which has more rigs operating than any other state, also saw more rigs put down than any state in this week’s report. The state’s rig count was down by 44 to 766 rigs in this week’s report. Last year’s Texas rig count peaked at 906, but Ingham said that figure could eventually fall in half. The impact, he said, could mean more than 200,000 job losses for the state, when positions indirectly connected to the industry are included.

Oil rebound on horizon as oil companies start to turn off the taps, IEA says - The international body that monitors the world's energy supply says it can see a rebound in oil prices in the not too distant future. Crude oil prices have dropped like a stone since the summer, off by about 60 per cent over that time frame. The main reason for the decline is that the U.S. mainland has ramped up production, as new technology allowed previously unattainable shale oil to be collected and sold. U.S. shale players rushed to market when oil was above $100 a barrel and energy self sufficiency was a stated aim in Washington D.C.  But it hasn't quite worked out as planned. All that new supply flooded the market, and pushed down prices as the world realized there is currently far more oil being pumped out every day than is needed to meet current demand. The Organization of the Petroleum Exporting Countries, an oil cartel of oil-producing nations primarily in the Middle East and Africa and led by Saudi Arabia, is believed to be in a stand-off with the U.S. shale producers, and seems willing to ride out cheap prices for as long as it takes to push them out of business. An International Energy Agency report Friday shows the first tentative signs that the strategy may work. "The oil selloff has cut expectations of 2015 non-OPEC supply growth by 350,000 barrels per day since last month to 950,000 barrels per day," the IEA said. "Effects on North American supply are so far limited to [95,000 barrels per day and 80,000 barrels per day] to the Canadian and U.S. forecasts, respectively."

A New Ceiling for Oil Prices - Anatole Kaletsky - – If one number determines the fate of the world economy, it is the price of a barrel of oil. Every global recession since 1970 has been preceded by at least a doubling of the oil price, and every time the oil price has fallen by half and stayed down for six months or so, a major acceleration of global growth has followed. Having fallen from $100 to $50, the oil price is now hovering at exactly this critical level. So should we expect $50 to be the floor or the ceiling of the new trading range for oil? Most analysts still see $50 as a floor – or even a springboard, because positioning in the futures market suggests expectations of a fairly quick rebound to $70 or $80. But economics and history suggest that today’s price should be viewed as a probable ceiling for a much lower trading range, which may stretch all the way down toward $20. To see why, first consider the ideological irony at the heart of today’s energy economics. The oil market has always been marked by a struggle between monopoly and competition. But what most Western commentators refuse to acknowledge is that the champion of competition nowadays is Saudi Arabia, while the freedom-loving oilmen of Texas are praying for OPEC to reassert its monopoly power.   Now let’s turn to history. From 1974 to 1985, the US benchmark oil price fluctuated between $50 and $120 in today’s money. From 1986 to 2004, it ranged from $20 to $50 Finally, from 2005 until 2014, oil again traded in the 1974-1985 range of roughly $50 to $120, apart from two very brief spikes during the 2008-09 financial crisis. In other words, the trading range of the past ten years was similar to that of OPEC’s first decade, whereas the 19 years from 1986 to 2004 represented a totally different regime. It seems plausible that the difference between these two regimes can be explained by the breakdown of OPEC power in 1985, owing to North Sea and Alaskan oil development, causing a shift from monopolistic to competitive pricing. This period ended in 2005, when surging Chinese demand temporarily created a global oil shortage, allowing OPEC’s price “discipline” to be restored.

The casualties of cheap oil -- Oil prices have fallen to below $50 a barrel, down from a high of $115 in the past year. American drivers and consumers are cheering at cheaper prices, but the news isn’t great for everyone. The price drop is squeezing profits at oil and gas producers, forcing them to shut down wells and lay off employees from the North Sea to North Dakota. Schlumberger, the world’s biggest oilfield services provider, said Thursday that it is cutting 9,000 jobs, or about seven percent of its workforce. The contraction is creating knock-on effects throughout the economy -- for example, reducing loan growth at banks in energy-producing states. The oil and gas industry generated around 15 percent of Wells Fargo’s investment banking fee revenue last year, and around 12 percent for Citigroup, according to data from Dealogic. As long as oil remains below $50 a barrel, the majority of the world’s oil projects will struggle to break even. The chart below, created by Ed Morse and team at Citi Research, shows the break-even cost – the price that a barrel of oil needs to cost for the project to remain profitable – of the major oil projects expected to be online in 2020. The break-even costs for the major oil exporting countries and U.S. shale plays are noted at the left.

America’s Going to Lose the Oil Price War - The financial debacle that has befallen Russia as the price of Brent crude dropped 50 percent in the last four months has overshadowed the one that potentially awaits the U.S. shale industry in 2015. It's time to heed it, because Saudi Arabia and other major Middle Eastern oil producers are unlikely to blink and cut output, and the price is now approaching a level where U.S. production will begin shutting down.   Representatives of the leading members of the Organization of Petroleum Exporting countries have been saying for weeks they would not pump less oil  no matter how low its price goes. Saudi Arabian Oil Minister Ali Al-Naimi has said even $20 per barrel wouldn't trigger a change of heart. Initial reactions in the U.S. were confident: U.S. oil producers were resilient enough; they would keep producing even at very low sale prices because the marginal cost of pumping from existing wells was even lowerOPEC would lose because its members' social safety nets depends on the oil price; and anyway, OPEC was dead.  That optimism was reminiscent of the cavalier Russian reaction at the beginning of the price slide: In October, Russian President Vladimir Putin said "none of the serious players" was interested in an oil price below $80. This complacency has taken Russia to the brink: On Friday, Fitch downgraded its credit rating to a notch above junk, and it'll probably go lower as the ruble continues to devalue in line with the oil slump.  It's generally a bad idea to act cocky in a price war. By definition, everybody is going to get hurt, and any victory can only be relative. The winner is he who can take the most pain. My tentative bet so far is on the Saudis -- and, though it might seem counterintuitive, the Russians.  For now, the only sign that U.S. crude oil production may shrink is the falling number of operational oil rigs in the U.S. It was down to 1750 last week, 61 less than the week before and four less than a year ago. Oil output, however, is still at a record level. In the week that ended on Jan. 2, when the number of rigs also dropped, it reached 9.13 million barrels a day, a 44-year high. Oil companies are only stopping production at their worst wells, which only produce a few barrels a day -- at current prices, those wells aren’t worth the lease payments on the equipment.  Since nobody is cutting production, the price keeps going down; today, Brent was at $48.27 per barrel and trends are still heading downward.

Jim Chanos: Days of drilling for cheap oil over: Jim Chanos, head of the world's largest short-selling hedge fund, told CNBC on Friday he's been short major oil companies for a couple years because the North American shale explosion has been "uneconomic for drillers." "The fracking and shale revolution was propelling us to be the largest oil producer in a way that I thought was uneconomic and still is uneconomic for the drillers. But it was going to be enough supply to really disrupt the markets," he said. Big oil companies like Exxon Mobil and Royal Dutch Shell are finding their business models challenged, he added, "because the days of finding cheap oil is over." The founder of Kynikos Associates, with $3 billion in assets under management, has been betting against the economic situation in China for some time now. "We came across China because of our work in the mining sector in 2009."

Could terrorists destroy oil facilities to drive up price? -- It would be a mistake for energy analysts to look at the market and assume that states with a stake in energy prices will play by the rules, or that terrorists won’t target the industry.  Much of the world’s oil is transported by ship, and many of these ships pass through just a few choke points. Perhaps 20% of the world’s oil demand transits through the Strait of Hormuz which, at its narrowest, is just 24 miles wide. On occasion, Iran’s Islamic Revolutionary Guard Corps threatens to close the waterway, although this is more bluster than reality. Not only would the United States Navy overpower their Iranian counterparts in a matter of hours, but because the Iranians also rely on the Strait to export their own product, any closure would be self-defeating for a cash-crunched regime. That said, given the looming transition in Oman, the southern shore of the Strait remains a wildcard. Should any tanker strike a mine or suffer any other damage in the Strait, insurance on tankers would skyrocket and psychology alone would drive up the price of oil. The Suez Canal is another choke point also in peril. Approximately 5% of the world’s oil transits the canal. Gen. Abdel Fatah el-Sisi and the Egyptian government understand just how important the Suez is as a cash cow and take its protection seriously. That said, Egypt has been unable to defeat an Al Qaeda-affiliated insurgency in the Sinai, and it would take only one successful strike on a ship mid-canal to paralyze traffic for weeks and cripple Egypt’s economy. And let’s not forget the Bab al-Mandab, the 20-mile choke point between Yemen and Djibouti. Yemen is also facing an Al Qaeda-led insurgency, and the ghost of the USS Cole looms over the region.

Oil Companies Pump More U.S. Crude, Drill Fewer Wells -- The oil industry is at a crossroads. Figures in the Federal Reserve’s December industrial production report show oil and gas extraction surged last month, rising 2.8% from November. But the same companies that are pumping more crude out of the ground are drilling fewer wells. Drilling activity sank 1.9%, the third consecutive monthly drop.  The mismatch in activity follows a crash in oil prices. Crude has lost more than half of its value since the summer amid booming U.S. production and weak global demand. Global Brent crude contracts traded below $50 a barrel on Friday. “The continued rise in oil output suggests the marginal cost of production is below $50, so if OPEC wants to hurt U.S. shale  output it will have to drive prices down further,” . “Exploration activity is plummeting, but that’s not the same thing.”  The oil cartel in November decided to maintain its output rather than slashing global supplies to buoy prices.  So far, the effect on extraction in the U.S. has been muted.  The Energy Information Administration this week forecast total U.S. crude oil production would average 9.3 million barrels per day this year and 9.5 million barrels in 2016, the second-highest annual average level of production in U.S. history. Production averaged an estimated 9.2 million barrels per day in December, the EIA said.  But the impact on exploration and drilling is already becoming apparent. Schlumberger Ltd., the world’s biggest oilfield services  company, on Thursday said it laid off 9,000 workers late last year, reducing global head count 7%. Smaller service companies are making similar moves across the U.S. while producers slash capital budgets.

US oil production to rise - US oil production will increase both this year and next despite the 60 per cent slide in oil prices since mid-June and an Opec policy designed to rein in the North American shale boom, the US government said. The forecast came as a leading Opec producer said the cartel was sticking to its strategy of maintaining output and testing the mettle of high-cost producers around the world. The US Energy Department said output would rise by 600,000 barrels a day this year to 9.3m b/d and by 200,000 b/d to 9.5m b/d in 2016. The projected increase for this year is slightly lower than a previous a forecast in December, reflecting the pressure of lower crude prices on the US oil industry. “Many oil companies have cut back on their exploration drilling in response to falling crude prices and will concentrate their drilling activities in established areas that already have productive wells,” the department said. The combination of technologies such as horizontal drilling and hydraulic fracturing, or “fracking”, has unlocked America’s vast shale resources and propelled US production to around 9m b/d. The official estimates suggest the US shale industry has proved more resilient in the face of collapsing oil prices than initially feared. Although production will slow, officials said output next year will be at its highest level since 1970. However some analysts are less optimistic, predicting a major pullback in investment which will lead to production declines by the end of this year. The slide in oil prices accelerated in November last year after Opec, the producers’ cartel, which pumps a third of the world’s oil, decided to keep output steady at 30m b/d, rather than cut its production to shore up prices. Speaking at an energy conference in Abu Dhabi, Suhail bin Mohammed al-Mazroui, the oil minister for the United Arab Emirates — a leading Gulf producer — said the cartel would not change its strategy.

Demand factors in the collapse of oil prices - The price of oil passed another milestone last week, falling below $50 a barrel, a level that I had not expected to see again in my lifetime. Price of crude oil (West Texas Intermediate, dollars per barrel). Source: FRED.It’s interesting that we crossed another milestone last week, with the yield on 10-year Treasury bonds falling below 2%. That, too, is something I had not expected to see. Nominal interest rate on 10-year Treasury bonds. Source: FRED.And these two striking developments are surely related. I attribute sinking yields to ongoing weakening of the global economy, particularly Europe. And slower growth of world GDP means slower growth in the demand for oil. Other indicators of an economic slowdown outside the United States are falling prices of other commodities and a strengthening dollar. A month ago I provided some simple analysis of the connection between these developments in the form of a regression of the weekly change in the natural logarithm of the price of WTI on the weekly log changes in dollar price of copper and trade-weighted value of the dollar along with the weekly change in the yield on 10-year Treasuries. Here again are the results of that regression when estimated from April 2007 to June 2014: Last month I used that regression to ask how much of the decline in oil prices  could be predicted statistically by the changes in copper prices, bond yields and value of the dollar. That is, of the $55 drop in the price of oil since the start of July, about $24, or 44%, seems attributable to broader demand factors rather than anything specific happening to the oil market. That’s almost the same percentage as when I performed the calculation using data that we had available a month ago.

A capital contango, and why oil storage economics may be dead -  by Izabella Kaminska -- $80 oil, $70 oil, $60 oil, $50 oil and counting… If you suspect the structure of the oil market has fundamentally changed, you may be on to something. There was a time when all you needed to balance oversupply in the oil market was the ability, and the will, to store oil when no-one else wanted to. That ability, undoubtedly, was linked to capital access. For a bank, it meant being able to pass the cost of storing surplus stock over to commodity-oriented passive investors and institutions happy to fund the exposure. For a trading intermediary, that generally meant having good relations with a bank which could provide the capital and financing to store oil, something the bank would do (for a fee) because of its ability to access institutional capital markets and its reluctance to physically store oil itself. On the flip-side, if a shortage of oil appeared in the market, there was a time when all it took to balance the market was a release of stored supply by trading companies, oil companies and/or national producers. . For oil companies of all sorts this was thus a time to leverage up and go drilling, but only if they could be assured that the high prices that make such efforts worthwhile would be sustained. Now, because filling an oil supply void could take up to a decade of prospecting, development and organisation, prices had to be pretty hight to make that situation worthwhile. To get around the spot price volatility and overshoot problem, Simmons recommended the industry move to long-term pricing contracts instead. But now, shale’s faster “time to build” factor changes the risk paradigm completely. In short, because the industry can bring new supply to market relatively quickly, we go from a spare capacity model, to a just-in-time model instead.The key consequence of that fact: the market no longer needs so great a risk premium embedded into the spot price, because supply can be delivered to the market as and when needed, without too much concern of a system-chocking shortage ever happening.

Oil Collapse of 1986 Shows Rebound Could Be Years Away - Bloomberg: The last time excess supply caused a plunge in oil, it took almost five years for prices to recover. The CHART OF THE DAY shows how West Texas Intermediate, the U.S. oil benchmark, tumbled 69 percent from $31.82 a barrel in November 1985 to $9.75 in April 1986 when Saudi Arabia, tiring of cutting output to support prices, flooded the market. Prices didn’t claw back the losses until 1990. Oil has dropped 57 percent since June and OPEC members say they’re willing to let prices sink further. Surging prices in the 1970s led to the development of the North Sea and Alaska oil fields. OPEC members also increased capacity, leaving the Saudis to trim output when demand softened. In the 1980s, Saudi Arabia “was tired of the other members cheating and just opened the spigots,”  After the plunge in prices “the Saudis lost their nerve and they resumed the role of swing producer. If they hadn’t lost their nerve, we wouldn’t be seeing the shale oil boom today and North Sea production would be substantially lower because investment would have been less,” he said.

Was the 2008 oil price an anomaly?  - A theory we have proposed in the past is that 2008 amounted to a self-squeezing effect brought on by overly tight monetary policy during the 2004-2007 period, which suddenly made it much more lucrative to hold value in cash-form rather than in zero-yielding commodity-form. In other words, because interest rates were raised to levels above the natural rate in the economy, the industry was provided with a huge and sudden incentive to destock buffer reserves that were usually kept for the purposes of managing volatility and to transform them into more liquid cash instead. This in turn led to a shortage of supply at the margin driving prices to the necessary levels to compensate the private sector for taking a punt on new investment and/or for holding stock in reserve for the purposes of volatility management. In an ironic twist, if the theory checks out, it could mean that monetary policy which was designed to stifle inflationary forces was inadvertently the cause of the transitory inflationary effects we all experienced during that period.  Think of it, perhaps, as Alan Greenspan transferring a giant dividend payment to anyone prepared to transform their own illiquid commodity-money into much more liquid and better-yielding dollar cash. An industry rush for dollar liquidity which ended up competing for liquidity with other industries and foreign governments, and thus effectively ended up transferring value from the real economy over to commodity producers. None of these factors would have been helped by the general shortage of safe assets in the system at that point. All this, meanwhile, whilst sending a signal to the markets that screamed “more investment in commodities now!” — a fact that incentivised more capital to be transferred from the consumption economy and over to the production of commodities, constraining demand in the process.

A view on oil, courtesy of the subprime securitisation sector -- The drop in oil prices – with WTI now drifting down towards $46 a barrel – has been nothing short of stunning. On that note, here’s an interesting thought from Chris Flanagan, head of US mortgages and other structured finance research at Bank of America Merrill Lynch. When this securitisation veteran sees the fall in oil prices he thinks of one thing – the ABX index. The ABX was the mother of all synthetic subprime credit indices.  Consisting of baskets of credit default swaps tied to subprime mortgages, it allowed investors to go long — or short — the market without actually having to hold onto physical bonds. As you might imagine the ABX index took a rather deep dive starting around the middle of 2007, taking almost two years to bottom out in early 2009 and only beginning to recover after the US undertook some extraordinary policy intervention. Fast forward to today, and here’s what the ABX looks like against the price of oil: The point is not that oil-related investments are the new subprime, but merely that price action in oil is looking rather disorderly – even against the wild swings of the ABX that became notorious during the run-up to the financial crisis. Particularly remarkable, as Mr Flanagan points out, is that the fall in oil prices has been far more precipitous and more monotonic than the drop in the ABX price back in 2007. To wit, oil has slipped from about $107 in June of last year to its current low – a 55 per cent fall. Over the same period in 2007, the ABX dropped from par to 70 – a decline of about 30 per cent. It wasn’t until 2008 that it slipped to 55.

Puerto Rico approves 68 percent oil tax increase - (AP) — Puerto Rico's governor signed a law Thursday that will increase the excise tax on a barrel of crude oil by 68 percent to help generate funds and sell an anticipated $2.9 billion in bonds. Gov. Alejandro Garcia Padilla said he plans to file additional legislation to slightly amend the new law and help the government access financial markets. Garcia called a special session on the issue late last year and legislators passed the measure. He had until Saturday to sign it. The tax per barrel would increase from $9.25 to $15.50 and generate about $178 million a year.

Oil’s slump could upend $2 trillion in investments: Goldman - —The global oil sector is getting increasingly squeezed by the slump in oil prices and future investments worth trillions of dollars are at risk of being scrapped unless the industry succeeds in consolidating and cutting costs, according to analysts at Goldman Sachs. In a research note published Monday morning, the analysts lowered their long-term estimates on Brent oil to $70 a barrel from $90 a barrel—a level so low that several oil companies will struggle to make money. In fact, Goldman Sachs found in its Top 400 analysis of the world’s largest new oil-and-gas fields, that pre-sanctioned projects will be “uneconomic” at $70 a barrel. Such developments, are those where a final investment decision hasn't been taken yet, represent some 20 million barrels of oil a day. In dollar terms, this means that around $2 trillion worth of future investments are at risk, unless the industry figures out a way to adapt to oil’s new world order through mergers or by taking an ax to budgets. This also includes shale developments, where investments for $930 billion are in jeopardy, according to the report. Over the past several months the industry has been wrestling with oil prices that have cratered by more than 50% since peaking last June. So what does the oil industry have to do? Goldman Sachs calls for two key changes in the industry to make these developments profitable and avoid cancellation of the projects: cost-cutting and consolidation.

What is the oil crash going to do to Canada? - Unlike most rich countries, Canada is a net oil exporter. According to the US Energy Information Administration, Canada’s net exports of petroleum have more than doubled since 2005 to about 1.7 million barrels per day: Any reduction in the oil price directly reduces the incomes of producers, which in turn gets passed on to the home-builders, restaurateurs, and grocers who depend on the roughnecks for their sales — unless the oilmen are somehow able to “make it up on volume.” That’s not practical for Canada, however, because the market price is currently far below the cost of production. According to Lane and the EIA, the price of a barrel of West Texas Intermediate needs to be at least between $60 and $65 for existing oil sands investments to be profitable. At pixel time, WTI is still below $50 a barrel. Some producers argue that their existing investments can produce oil at a cost of just $30-$35 a barrel because it is easy to extract the resource once the enormous upfront expenses have been paid. (Lane thinks this “mid-cycle breakeven cost” is closer to $50.) And unlike shale, new investment isn’t required to maintain existing production levels, so Canadian producers may not cut their output as much as their US competitors in response to lower prices. That said, more Canadian investment dollars are spent on “mining and oil and gas extraction” than any other sector except housing. Put another way, about 30 per cent of Canadian business investment is directly exposed to oil prices. In the heart of the oil patch, that number is closer to60 per cent. (For comparison, the equivalent figure in the US is about 13 per cent.) These new investments may have a long life, but Lane estimates they won’t be profitable if WTI is below $100 per barrel:

$50 Oil Kills Bonanza Dream Making Greenlanders Millionaires - Greenland, an island that may be sitting on trillions of dollars of oil, has had to acknowledge that its dream of tapping into that wealth looks increasingly far-fetched. Back when oil was headed for $150 a barrel, Greenlanders girded for a production boom after inviting in some of the world’s biggest explorers, including Chevron Corp. and Exxon Mobil Corp. (XOM) Now, with Brent crude dipping below $50 last week, Deputy Prime Minister Andreas Uldum says Greenland’s hope of growing rich quickly on fossil fuels was “naïve.” “I myself believed back when I was first elected” to parliament in 2009 “that billions from oil and minerals would start flowing to us the next year or the year after that,” he said in an interview in Copenhagen. “However, that’s just not the reality. I don’t know any politician in Greenland today who won’t admit to having fueled the hysteria.” Oil PricesThe nation of about 56,000 had imagined its oil and mineral production would turn every citizen into a millionaire. Instead, Greenland continues to rely on an annual 3.68 billion-krone ($586 million) subsidy from Denmark to stay afloat, a sum that’s equivalent to almost half its gross domestic product. Talk of severing ties from its former colonial master has also faded as Greenlanders see little prospect of achieving economic independence anytime soon.

£2 billion of North Sea oil projects at risk - Plummeting oil prices are putting at risk £2 billion of projects in the North Sea, according to an expert analysis published today as a survey found more than two-thirds of workers in the industry are worried about the impact. Wood Mackenzie, the global energy consultancy firm, said there were only 23 “exploration” oil wells in the North Sea last year, a sharp fall compared to the previous ten-year average of 81. But the firm’s annual review of the industry said the price, which dipped below $48 per barrel yesterday, would inevitably bring further budget cuts with spending on exploration “on top of the list”. Even if the price recovered to $60 per barrel, it said 95 per cent of the projects awaiting the go-ahead would achieve less than a 15 per cent return on the required investment. The report was published as a survey of around 400 oil workers found 68 per cent are worried about the impact of low prices on the long-term development of offshore projects. Around four in ten are concerned about their job prospects, according to the poll by industry website Rigzone, while only nine per cent said the independence referendum had had a positive impact compared to 36 per cent who described it as “negative”.

Shell scraps $6.5bn Qatar project due to oil price rout - Royal Dutch Shell has scrapped plans for a $6.5bn petrochemicals project with Qatar Petroleum, citing “the current economic climate prevailing in the energy industry”, the oil major said on Wednesday. The Al Karaana project, an 80:20 joint venture between Qatar Petroleum and Shell, would have produced 2m tonnes a year of petrochemicals products, largely intended for Asian markets. The decision not to proceed — a significant move following the halving of oil prices since last summer — was taken “after a careful and thorough evaluation of commercial quotations” from engineering, procurement and construction bidders, Shell said. These showed “high capital costs rendering it commercially unfeasible, particularly in the current economic climate prevailing in the energy industry.” Crude oil prices have plunged by more than 50 per cent since mid-June, creating winners and losers. Those who have suffered include producers and governments, whereas some companies stand to benefit from a fall in energy costs. This has encouraged analysts to liken the potential boost for the global economy to a huge programme of “quantitative easing”. For oil companies, the falling price has triggered industry-wide scrutiny of capital spending, with the so-called majors — the biggest groups with upstream and downstream operations — expected to cut billions of dollars from exploration and development projects in the coming year, deferring and even axing programmes. 

China Buying Up Latin American (And Russian) Oil - As the world’s number one energy consumer China is enjoying the low prices while they last. Never one to settle however, China is finding still more ways to take advantage of the dire straits gripping several oil producers. China’s slowdown is real – preliminary data suggests 2014 will mark the weakest GDP growth in 24 years – but the country still has plenty of money to play with that is taking it places the World Bank and the International Monetary Fund (IMF) wouldn’t dare. Their reward? More oil of course. With tough conditions and greater access to raw commodities, China looks to turn the high risk into equal or greater returns. In Russia, much has been made of the deepening energy ties with its neighbor to the south. With western financing no closer to a return and a hesitancy to dig deeper into its foreign exchange reserves, Russia turned to China for a bailout. China has obliged, agreeing to finance state-owned Rosneft’s debt in addition to opening a $24 billion currency swap program, which could expand further. For its part, China gains access to Russia’s tightly held upstream sector – in the form of the giant Vankor field – and fulfills its needs downstream with favorable long-term oil and gas deals. Further loans and infrastructure investments are likely moving forward – one of China’s biggest debt-rating agencies Dagong believes Russian debt is a safer investment than US government debt.infrastructure investments.

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