Saturday, December 3, 2016

GWPF Newsletter: New Shale Wars: OPEC vs US Frackers








Can the U.S. Become an Energy Superpower in 2017?

In this newsletter:

1) OPEC Cuts Output, US Shale Industry Rejoices
The American Interest, 30 November 2016

2) Shale Wars: Where Are Oil Prices Headed As Saudi Arabia Lets The Big Bet Play Out?
Forbes, 30 November 2016

3) Can the U.S. Become an Energy Superpower in 2017?
Bloomberg, 30 November 2016

4) Despite Climate Change Vow, China Pushes to Dig More Coal
The New York Times, 29 November 2016

5) Fake News:  China's Coal Peak Hail As Turning Point In Climate Change Battle

The Guardian 25 July 2016

6) Germany’s Conservative Party Considers Abolishing Renewable Energy Subsidies
Der Spiegel, 29 November 2016

7) Renewables Should No Longer Have Grid Priority, Says E.U. Energy Commissioner
Handelsblatt Global, 30 November 2016

8) Dutch Parties Ditch Paris Agreement Targets
NL Times, 29 November 2016

Full details:

1) OPEC Cuts Output, US Shale Industry Rejoices
The American Interest, 30 November 2016

For the first time in eight years, the Organization of the Petroleum Exporting Countries (OPEC) has agreed to collectively cut production, a delayed and somewhat desperate response to the precipitous drop in oil prices over the past 29 months. The FT reports:

The meeting is continuing as individual country allocations are hammered out, but sources said the main obstacles to the deal had been overcome. It will see the 13-member group reduce output by about 4.5 per cent, or 1.2m a barrels a day, with production targets for each member country. […]

Saudi Arabia is expected to shoulder the bulk of any production cuts along with its Gulf allies. In return, Iran is expected to freeze production at about 3.8m barrels a day, close to its current rate, according to third-party assessments used by Opec.

The cartel hopes that its actions will reduce the glut of crude that set off this price collapse in the first place and induce a market rebound, and we’re already seeing signs of recovery in trading today—Brent crude jumped more than 8 percent to top $50 per barrel, while WTI (the American oil benchmark) rose more than $3.50 to just under $49 per barrel.

But two big questions still need to be answered, the first of which is: Just how far will prices rebound on OPEC’s actions (and Russia’s potential cooperation)? This is critically important to the cartel’s petrostates, all of whom would like to see a return of those heady $100+ per barrel days. Many OPEC members are running fiscal deficits at current prices: Saudi Arabia needs crude to trade above $79 to stay in the black; Iran requires a breakeven price of $55; Algeria, Bahrain, the UAE, and Libya have fiscal breakeven prices of $87, $95, $71, and $195, respectively.

For more than two years, OPEC—led by the Saudis—has decided not to intervene to stop sliding prices, choosing instead to fight for a share of the crowded market. The fact that the cartel is now moving to act shows how important it is for these petrostates to fetch higher prices for their all-important exports, which brings us back to this first question: how much will this cut affect the market?

The answer to that largely depends on the second major unknown in this equation, namely the responsiveness of American shale. How quickly will U.S. frackers be able to adjust to rising prices by ramping up their own production? Analysts expected tight oil output to fall off a cliff when oil prices dropped below $75 per barrel two years ago, but shale producers surprised the world with their ability to cut costs and keep the crude flowing in a bearish market. As Reuters reports, American producers have grown lean and mean in recent years, forged in the crucible of bargain oil prices:

In shale fields from Texas to North Dakota, production costs have roughly halved since 2014, when Saudi Arabia signaled an output free-for-all in an attempt to drive higher-cost shale producers out of the market. Rather than killing the U.S. shale industry, the ensuing two-year price war made shale a stronger rival, even in the current low-price environment. […]

The breakeven cost per barrel, on average, to produce Bakken shale at the wellhead has fallen to $29.44 in 2016 from $59.03 in 2014, according to consultancy Rystad Energy. It added that in terms of wellhead prices, Bakken is the most competitive of major U.S. shale plays. Wood Mackenzie said technology advances should further reduce breakeven points. 

And so, while OPEC—and in particular Saudi Arabia—bites the bullet and concedes to these production cuts, producers around the world stand to benefit from a bump in prices. Here in the U.S., this should mean a corresponding rise in output as more plays become profitable. That would work to offset the clamp on global supply OPEC is trying to accomplish, and therefore blunt the effect of this cut while simultaneously helping American producers gain a greater share of the global market.

This is why Riyadh has been so loathe to agree to a cut. The extent to which U.S. shale firms are able to capitalize on rising prices will determine how successful this reluctant change in the petro-states’ tactics will be.

2) Shale Wars: Where Are Oil Prices Headed As Saudi Arabia Lets The Big Bet Play Out?
Forbes, 30 November 2016
Mark P Mills

So far it has cost Saudi Arabia something like $200 billion to undertake one of the most expensive experiments of all time. The Saudi government has been draining its massive $2 trillion sovereign wealth fund to cover revenues lost from the petroleum price collapse over the past couple of years.


Image result for shale wars GWPF

What we’re witnessing is a two-part test. The first question is how much damage low oil prices will have caused America’s shale industry. Then the second and far more critical part of the test: as oil prices rise, will the shale industry limp or roar back? If it roars back, high oil prices are history. Odds are now that in 2017 we will witness — along with the oil princes of Arabia — the outcome. However it goes, the economic and geopolitical implications are enormous. And the outcome has more to do with technology than with politics.

But before delving into all that, some underlying realities: This is no small battle. Oil is the world’s biggest traded commodity, bigger than all the minerals and metals combined, bigger than agriculture. And despite decades of hype, hope and subsidies, petroleum fuels 95% of the machines used to move all people and all goods for all purposes, trade included. The world today uses more oil than at any other time in history and every forecast — including a recent lamentation about this reality from the International Energy Agency — predicts demand will increase for the usefully foreseeable future. And of deep geopolitical relevance, of the world’s five economic regions that account for 75% of global GDP—Europe, China, India, Japan and North America—four of them will see rising dependency on petroleum imports. North America, especially the United States, is the outlier with exactly the reverse trend.

As for the Saudi experiment, it distills to answering a basic question: Was the astonishing growth in American shale oil production a one-time artifact of the-then high oil price and new ‘discoveries’, i.e., a bubble, or was it the sign of a permanent secular shift in petroleum technology? If the first answer is correct, those who hope for, or need, a world in which oil is expensive will take comfort. That camp includes the oil producing oligopolies and kleptocracies around the world as well as many Western governments, some businesses and green lobbies that are betting on alternatives to oil (from biofuels to batteries) that can only compete at high prices.

The first part of the experiment, to see how many of America’s new shale producers could survive a financial drubbing, began in 2014. Oil started its collapse from a $105 a barrel peak in that summer triggered by the fact that American shale producers added more oil to world markets in a shorter time than at any time in history, creating a several million barrel per day over-supply. In the oil-trading world, getting wrong the over- or under-supply by just one million barrels per day can rock markets. Then late in 2014 with prices down 40% — a decline that represented a $400 billion annual loss for OPEC, Saudi Arabia increased its oil production by nearly one million barrels per day to drive prices even lower — rather than try to shore up prices by cutting output. Prices went into free-fall, bottoming out briefly just below $30 at the beginning of 2016.

This big gamble by the Saudis makes sense considering that, unlike the traditional oil business, the shale hydrocarbon industry is so new, barely a decade old, and there is no history to go on for predicting price-response behavior. And because the shale ecosystem is made up of thousands of small and mid-sized enterprises, the biggest of which are a fraction of the size of the super-majors, there is no easy way to get “into the heads” of the operators to predict behavior, unlike the long history of generally predictable responses from big-company executives.

The results of the first part of the experiment are now known. Over the 30 months of declining prices the number of shale drilling rigs in operation collapsed nearly four-fold, and about one-third of the companies in the shale business went bankrupt or became seriously financially distressed. And shale oil production did decline; but so far only about 12% off the 2015 peak. Meanwhile, even during the glut-induced financial storm, shale technology just kept getting better. Average productivity – the amount of oil produced per rig — was up 20% last year alone while drilling costs stayed flat or declined slightly.

The lesson from the first half of the experiment is thus clear: a price drubbing achieved only modest production declines and did nothing to slow and arguably accelerated the radical technology gains in the cost-effectiveness of shale drilling. Put another way; the Saudis have seen that the amount of money needed to add more American supply keeps shrinking and is moving monthly closer to the Middle East’s vaunted low-cost advantage. At the current tech-driven growth rate, output per rig will double every 3.5 years. That kind of progress is normally seen in Silicon Valley. For consumers it’s exciting, but not so much for shale’s competitors.

Now comes part two of the experiment. As prices creep back up — an inevitability as world demand keeps growing while global investments in production have everywhere pulled back in the face of low prices — just how quickly will American shale production rise this time? We know the answer: fast. We’re about to find out just how fast. While the number of rigs put into operation rose more this past month than at any time since the 2014 pre-price collapse, given how much more productive today’s rig are, it won’t take much of a rig count rise to produce world-shaking results.

Given what we know from very recent history it’s reasonable to think that the shale industry today could grow again at least as fast as it did from its inception circa 2005 when shale companies went on to more than double U.S. production in a handful of years. And that happened using technology that was literally half as good as what exists now, and with operators who then had to learn-on-the-fly to use techniques for which there was no prior experience. That industrial ecosystem now has fantastically better technology, deep experience, and a pre-built infrastructure. One might pay attention to what shale pioneer Harold Hamm, Continental Resources founder and CEO, said earlier this year about U.S. oil production: “We’ve doubled it. We can double it again.”

Full post

3) Can the U.S. Become an Energy Superpower in 2017?
Bloomberg, 30 November 2016
By Dave Merrill and Christine Buurma

For decades, America depended on the world for energy. Today, it’s becoming a global supplier of oil and natural gas in its own right. This year, for the first time ever, the U.S. started turning gas from prolific shale formations into liquefied natural gas (LNG) and sending it overseas. In 2017, the country may be exporting more of the heating fuel than it imports for the first year since the 1950s.

Refurbished pipelines and terminals will come online next year to help unleash the U.S. shale gas boom into the world. But risks still loom. It remains costly to ship U.S. gas to major consumers in Europe and Asia, and President-elect Donald Trump’s trade priorities could make U.S. LNG more expensive than supplies from other producers around the world.

Caught off guard by the shale boom
Just a decade ago, gas supplies from conventional wells were drying up. Major energy companies such as Exxon Mobil Corp., BP Plc and Chevron Corp. were planning to spend billions on gas import terminals to offset the decline. The technique known as hydraulic fracturing, or fracking, changed everything for gas drillers, allowing them to pull the fuel out of layers of shale rock and touching off the U.S. shale revolution.
 



Creating a modern pipeline system
America's frackers are pulling 18 billion cubic feet of gas per day from the Marcellus shale formation in the eastern U.S., more than any other domestic shale deposit. But the U.S. pipeline system was designed only to move gas from the Gulf Coast to cities in the Northeast—not the reverse.
 



In order to get the gas to the Gulf Coast, where export terminals are being built to send the fuel overseas, pipelines are being re-engineered to flow south. Thousands of miles of bidirectional pipelines are slated to be online in 2017.
 



Opening the spigot
Among other sources, Cheniere Energy Inc. has contracts with several bidirectional pipelines to receive fracked gas from Marcellus. Cheniere won approval from U.S. regulators to export LNG in 2010, years ahead of competitors. Cheniere’s Sabine Pass terminal is currently the only operational export terminal in the lower 48 states. That’s about to change, though, as four more terminals are forecast to become operational by 2018 and at least a dozen more have been approved or are pending certification.




Boosting U.S. shale gas exports
About 40 shipments of LNG have been exported from Cheniere’s Sabine Pass terminal in Louisiana, which began operations in February. Most of the cargoes have been delivered to South America and Mexico. Once all five terminals are fully operational, U.S. energy producers would have the capacity to export 10 billion cubic feet of LNG daily, up from about 1 billion in 2016.
 



U.S. exporters have ample supply, customers may be harder to find
It’s less clear who will purchase all this U.S. gas. And energy companies are asking for permission to send even more abroad. The Department of Energy is reviewing more than two dozen applications from companies seeking to export up to 36 billion cubic feet a day, or nearly half of U.S. production, to countries that don't have trade agreements with the U.S. While markets in South America are poised to absorb some of this supply, increased competition abroad could make it tough for U.S. gas to compete farther from home.




Worldwide glut
Price is another concern. Although U.S. gas at the benchmark Henry Hub in Louisiana dropped to historic lows earlier this year, transportation costs make it cheaper for buyers in Japan and South Korea to import the fuel from Australia and Qatar. A Trump administration also threatens to put an end to U.S. involvement in the North American Free Trade Agreement, a step that could make U.S. exports to Mexico costlier. Without another gas price drop, future markets for U.S. LNG may be limited.

The shale revolution has undoubtedly put America on a path to becoming a global gas powerhouse. The ability to find more buyers as U.S. capacity increases at a competitive price will dictate how dominant the U.S. will become as an energy power in 2017 and beyond.

Full post

4) Despite Climate Change Vow, China Pushes to Dig More Coal
The New York Times, 29 November 2016
Keith Bradshernov

JINCHENG, China — America’s uncertain stance toward global warming under the coming administration of Donald J. Trump has given China a leading role in the fight against climate change. It has called on the United States to recognize established science and to work with other countries to reduce dependence on dirty fuels like coal and oil.

But there is a problem: Even as it does so, China is scrambling to mine and burn more coal.

A lack of stockpiles and worries about electricity blackouts are spurring Chinese officials to reverse curbs that once helped reduce coal production. Mines are reopening. Miners are being lured back with fatter paychecks.

China’s response to coal scarcity shows how hard it will be to wean the country off coal. That makes it harder for China and the world to meet emissions targets, as Chinese coal is the world’s largest single source of carbon emissions from human activities.

Among China watchers, the turnabout also has contributed to questions about the fate of China’s current crop of economic planners. [...]

Coal still produces almost three-quarters of China’s electricity, despite ambitious hydroelectric dam projects and the world’s largest program to install solar panels and build wind turbines. Coal use in China also produces more emissions than all the oil, coal and gas consumed in the United States.

“I get a kick out of people in the West who think China is decarbonizing, because I see no sign of it whatsoever,” said Brock Silvers, a Shanghai banker who has previously served on the boards of two Chinese coal companies.

Troubled by pollution and worries about rising sea levels, China moved in recent months to rein in coal. Coal production dropped 3 percent last year — a result of that effort, but also a sign of slowing economic growth as well as a gradual shift in the Chinese economy toward American-style consumer spending and away from exports and heavy manufacturing.

That prompted the International Energy Agency to offer an optimistic reassessment this autumn: Chinese coal use peaked in 2013 and would now decline.

China’s reversal now is prompting skepticism. “There is still a peak coming,” said Xizhou Zhou, the head of Asia and Pacific gas and power analysis at IHS Energy, a global consulting group. “It’s still going to increase.”

IHS Energy forecasts that Chinese coal demand will not peak until 2026.

Full story

see also: 
China's New Coal Boom: 'Growing Panic' About Green Energy Policies 


Image result for China coal mines output


5) Fake News:  China's Coal Peak Hail As Turning Point In Climate Change Battle

The Guardian 25 July 2016
Damian Carrington

The global battle against climate change has passed a historic turning point with China’s huge coal burning finally having peaked, according to senior economists.

They say the moment may well be a significant milestone in the course of the Anthropocene, the current era in which human activity dominates the world’s environment.

China is the world’s biggest polluter and more than tripled its coal burning from 2000 to 2013, emitting billions of tonnes of climate-warming carbon dioxide. But its coal consumption peaked in 2014, much earlier than expected, and then began falling.

The economists argue in a new paper on Monday that this can now be seen as permanent trend, not a blip, due to major shifts in the Chinese economy and a crackdown on pollution.

“I think it is a real turning point,” said Lord Nicholas Stern, an eminent climate economist at the London School of Economics, who wrote the analysis with colleagues from Tsinghua University in Beijing. “I think historians really will see [the coal peak of] 2014 as a very important event in the history of the climate and economy of the world.”

Full joke

6) Germany’s Conservative Party Considers Abolishing Renewable Energy Subsidies
Der Spiegel, 29 November 2016
Stefan Schultz

In the run-up to next year’s general elections, Germany’s Christian Democrats (CDU) are considering a rapid end to subsides for renewable energies. Wind, solar and biogas plants would in future have to financially “stand on their own feet,” according to a draft discussion paper by the Federal Committee for Finance, Economy and Energy, seen by the German magazine Der SPIEGEL.
 



“We will develop a concept of how to get out of renewable energy (EEG) funding by the end of the next election period,” says the paper which includes initial proposals for the CDU’s election manifesto.

Joachim Pfeiffer, the chairman of the Federal Committee of Finance, Economics and Energy, confirmed the CDU’s consideration. “Subsidies have to be unlasting,” said the Christian Democrat MP. In his opinion, the Energiewende would be jeopardised by the “sprawling support of renewable energy, not by its roll-back”.

A CDU source said that it was still far from clear whether the party would actually go into the election campaign with the demand of abolishing subsidies for renewable energy.

The CDU paper calls for the “long-term financing of renewable energy via so-called emissions trading”. This scheme regulates the need for businesses to purchase certificates in return for their CO2 emissions. The scheme is intended to provide an incentive to reduce CO2 emissions into the atmosphere.

Thomas Bareiss, the chairman of the Federal Committee on Energy, explained the thinking behind the draft proposal. “The costs for renewable energy are sinking rapidly; on the other hand the cost of the carbon certificates will increase rapidly in coming years as a result of our high reduction targets,” said the CDU MP. As a result, renewable energy is “automatically competitive” from their point of view.

Full story

7) Renewables Should No Longer Have Grid Priority, Says E.U. Energy Commissioner
Handelsblatt Global, 30 November 2016

Renewable energy should no longer have top priority in Europe’s electricity grid, the E.U. energy commissioner told Handelsblatt in an exclusive interview.

Miguel Arias Canete said renewable energy should have the right of way over other forms of energy only when the electricity grid is maxed out.

“But when it comes to simply feeding in electricity under normal market conditions, energy from already existing plants and small projects, such as solar panels and private homes, should have priority,” Mr. Canete said.

E.U. member states should also be allowed to build energy reserves from coal and gas plants under certain conditions, Mr. Canete said. These reserve power plants would be limited to emitting 550 grams of carbon dioxide per kilowatt hour to comply with climate standards.

Full post

8) Dutch Parties Ditch Paris Agreement Targets
NL Times, 29 November 2016
Janene Pieters

Not a single political party in the Netherlands managed to go far enough in their election promises on the environment to reach the climate target set in the Paris Agreement, the Volkskrant reports based on its own analysis of the election campaigns of the Dutch parties. Even where programs embrace the Paris targets, their intentions fall short, according to the newspaper.

The Paris Agreement states that global warning must be limited to a maximum of 2 degrees Celsius, but also that all countries must do their best to limit climate change to 1.5 degrees. According to the Volkskrant, some parties added the 2 degrees goal to their campaigns. A few even mention the 1.5 degrees goal, but no measures to put that goal within reach.

The Netherlands’ environmental assessment agency PBL calculated that to meet the 2 degrees target, greenhouse gas emissions need to be reduced by 96 percent in 2050 and should already be down 40 percent by 2030. To limit global warming to 1.5 degrees, the Netherlands needs to reduce its emissions to 47 percent in 2030 and by more than 100 percent in 2050. With the government’s current policy, emissions will be reduced by around 12 percent in 2030, according to the newspaper.

Full story

The London-based Global Warming Policy Forum is a world leading think tank on global warming policy issues. The GWPF newsletter is prepared by Director Dr Benny Peiser - for more information, please visit the website at www.thegwpf.com.

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