American Shale Oil In High Demand

The narrative a while back was that the world would face a shortage of heavy crude because sanctions on Iran and Venezuela had reduced production and exports. Some also implied that shale oil would fill up U.S. storage because American refiners were designed to process the heavy, high sulfur crudes from Venezuela, Saudi Arabia, and the like.

But the light, sweet crude is in high demand for export, and that appetite is likely to continue to grow with the implementation of IMO 2020 around the corner, going into effect January 1st. Freight rates from the U.S. Gulf to Europe have surged to record highs.

Equinor ASA and Unipec, the trading arm of China's top refiner Sinopec, have provisionally chartered Aframax tankers for $60,700 per day, an increase of almost 30 percent in a week, a new record high, according to shipbroker Poten & Partners. Aframax tankers are the “workhorse” of the U.S.-Europe oil trade, which has risen more than 60 percent in 2019 compared to 2018.

The EPIC pipeline began service in August. It has the capacity to deliver 400,000 b/d from the Permian Basin to terminals on the Gulf Coast. The new Cactus II pipeline system also started shipping crude oil in August. It has the capacity to deliver 670,000 b/d of crude oil from the Permian.

And the Gray Oak pipeline began service in November and will be capable of delivering 900,000 b/d at capacity. This new takeaway capacity will effectively reduce the production breakeven costs of substantial Permian crude oil because the pipeline charges are significantly lower than trucking costs.

This should provide stimulus to shale oil production growth, which had slowed due to takeaway pipeline capacity constraints.

Exports Rising
U.S. crude oil exports averaged 3.412 million barrels per day for the weeks ending December 13, 2019. Crude oil exports were 33 percent higher than the same weeks last year. But in the year-to-date, exports are over 50 percent higher.

Exports of crude oil and petroleum products have surged to almost 9 million barrels per day. This makes the United States the largest petroleum exporting country in the world.

Net oil imports have recently dropped below zero, making the U.S. a net oil exporter for the first time in modern history. As a result, the U.S. economy is no longer vulnerable overall to a spike in oil prices, though such a development would hurt consumers while helping domestic oil producers.

The U.S. balance of payments and trade would not be adversely impacted. This is a positive tailwind for the value of the U.S. dollar.

It also has political and defense spending implications. For example, following the attacks on Saudi Arabia in September, President Trump did not put the U.S. military at risk to defend KSA. He also did not counter-attack Iran on behalf of Saudi Arabia. The Crown Prince of Saudi Arabia reportedly began talks with Iran to defuse the situation, something the Kingdom did not have to try when the U.S. felt obligated to protect its oil supply for economic reasons.

Conclusions
The U.S. shale revolution is being re-booted by the opening up of new pipes in the second half of 2019. Given strong foreign demand and lower effective breakeven costs, a new surge may be in the works. Market observers who saw growth slowing may be in for a wake-up call over the coming six months when the new economic conditions take hold.

Check back to see my next post!

Best,
Robert Boslego
INO.com Contributor - Energies

If You’re Thinking About Investing in Oil Stocks...Read This First

By Justin Spittler

Is it safe to buy oil stocks yet? If you’ve been reading the Dispatch, you know the price of oil has plunged more than 70% since June 2014. Thanks to a massive surge in production, oil hit its lowest price since 2003 earlier this year. New extraction methods like fracking made the production surge possible. Last year, global oil production hit an all time high. Since then, companies have been pumping far more oil than the world consumes.

America’s largest oil companies lost $67 billion last year..…
Falling profits caused oil stocks to plunge. The SPDR S&P Oil & Gas Exploration & Production ETF (XOP), a fund that tracks major U.S. oil producers, has dropped 72% over the past two years. The VanEck Vectors Oil Services ETF (OIH), which tracks major oil services companies, has fallen 57% since 2014. Oil services companies sell “picks and shovels” to oil producers. However, oil stocks have showed signs of bottoming out in the past few months. XOP is up 57% since January, while OIH is up 45% in the same period.

Oil companies have cut spending to the bone..…
They’ve abandoned ambitious projects. They’ve cut back on buying new machinery and equipment. Some have even stopped paying dividends. For many companies, spending less wasn’t enough. Global oil companies have laid off more than 250,000 workers since 2014. Companies have also sold parts of their business to raise cash.

In March, Royal Dutch Shell (RDS.A) announced plans to sell $30 billion worth of assets. Shell is the third biggest oil company on the planet. According to Oilprice, Shell’s huge sale could include oil pipelines in the United States. In April, Marathon Oil (MRO), one of the largest U.S. shale oil producers, said it plans to sell about $1 billion worth of assets. Both companies have no choice but to get leaner. Shell’s profits plummeted 80% last year. Marathon lost $2.2 billion in 2015. It was the biggest annual loss in the company’s history.

Many companies have sold oil assets in North Dakota..…
As you may know, North Dakota was ground zero of America’s shale oil boom. From 2009 to 2014, the state’s oil production surged 554%. It became the country’s second biggest oil producing state after Texas.
North Dakota’s booming oil economy attracted more than 80,000 workers. It became the fastest-growing state in the country. Then, oil prices plunged.

North Dakota’s oil production has fallen 10% over the last 18 months..…
And it’s likely to keep falling. According to The Wall Street Journal, more than 2,000 oil wells in North Dakota haven’t pumped a drop of oil in over a year. That’s the highest number of idle wells in over a decade. Many oil companies in North Dakota are burning through cash right now. They’re under distress, and they’re selling assets at deep discounts to pay the bills.

Last week, The Wall Street Journal reported that this has attracted opportunistic investors:

The vultures are descending on North Dakota…
Hundreds of wells have changed hands or are in the process of being sold, state figures show, to a grab bag of fortune seekers ranging from industry experts to first-time wildcatters. They are picking up properties as more established producers scale back or shed assets to pay creditors.

According to The Wall Street Journal, some of these opportunistic investors are Wall Street veterans:

Houston-based Lime Rock Resources, founded by a former Goldman Sachs Group Inc. banker and an oil-industry veteran, bought more than 340 North Dakota wells from Occidental Petroleum Corp. in November. The firm says it has at least $1.6 billion in private-equity money to invest, a portion of which it has spent on the Bakken. In another pairing of Wall Street and oil-patch veterans, NP Resources LLC bought 53 wells from Whiting Petroleum Corp. in December and is looking for more Bakken acreage.

This is a prime example of "crisis investing." Regular readers are familiar with this strategy. As you’ve probably heard us say, crisis investing is one of the world’s most powerful wealth building secrets. In short, crisis investing involves going against the crowd to buy beaten down assets that have been left for dead. You can often use this strategy to buy a dollar’s worth of assets for pennies. The good news is that you don’t need to step foot in North Dakota to crisis invest in the oil market. Anyone with a brokerage account can turn the oil crash into a money making opportunity.

As we said earlier, many oil stocks are showing signs of bottoming..…
Lots of big oil companies, like Devon Energy Corporation (DVN) and Continental Resources, Inc (CLR), are up 50% or more off their lows. That’s because oil prices have jumped 89% since January. Last week, oil prices closed above $50 for the first time since July. These big swings are typical for oil. Like most commodities, oil is cyclical, meaning it goes through big booms and busts.

It’s impossible to know for sure if oil prices have bottomed. Time will tell if oil’s recent jump is the start of new bull market. But we do know that many oil stocks are trading at their best prices in years. And because the world still runs on oil, it’s smart to go “bargain hunting” for great oil stocks today.

If you're buying oil stocks, stick to the elite companies..…
We look for a companies that can 1) make money at low oil prices. We also like companies with 2) healthy margins 3) plenty of cash and 4) little debt. In March, Nick Giambruno, editor of Crisis Investing, recommended an oil company that checks all of these boxes. It has a rock solid balance sheet…some of the industry’s highest profit margins…and “trophy assets” in America’s richest oil fields. Most importantly, it can make money at as low as $35 oil.

Like the “vultures” that descended on North Dakota, Nick used the oil meltdown as an opportunity to buy this world class oil company at a huge discount. He bought the stock just weeks after it hit a three year low. Since then, the stock has gained 10%. But Nick says it could go much higher. After all, it’s still down 30% since June 2014. You can access the name of this stock with a subscription to Crisis Investing, which you can learn more about right here.

By clicking this link, you’ll also hear about the biggest crisis on Nick’s radar. Every American needs to prepare for this coming crisis. By the end of this video, you’ll know how to protect yourself AND make money in its aftermath. Click here to watch this free video.

Chart of the Day

The oil surplus is shrinking..…
Today’s chart shows the price of oil going back to the start of 2014. As we said earlier, the price of oil has nearly doubled since January. But you can see that it’s still about half of what it was two years ago.
Oil prices are still low for a couple reasons. One, the global economy is slowing. As Dispatch readers know, the U.S., Europe, Japan, and China are all growing at their slowest rates in decades.

Secondly, the world still has too much oil. According to the Financial Times, oil companies are producing 800,000 more barrels of oil a day than the world consumes. In February, the global surplus stood at about 1.5 million barrels a day. The surplus has come down because oil companies are pumping less oil. But that’s not the only reason the global oil surplus has shrunk. On Monday, Bloomberg Business said the industry has also been hit by major “disruptions”:

Outages also have taken their toll on supply, with global disruptions reaching an average 3.6 million barrels a day last month, the most since the Energy Information Administration began tracking them in 2011. Fires that began early May in Alberta took out an average 800,000 barrels of Canadian supply last month, while Nigerian crude output dropped to the lowest in 27 years as militants increased attacks on pipelines in the Niger River delta.

The article If You’re Thinking About Investing in Oil Stocks, Read This was originally published at caseyresearch.com.

Get our latest FREE eBook "Understanding Options"....Just Click Here!

Will Your Favorite Oil Company Go Bankrupt?

By Justin Spittler

Oil companies are getting desperate. If you’ve been reading the Dispatch, you know oil is in a horrible bear market. The price of oil has crashed 69% since June 2014. Last month, oil hit its lowest price since 2003.

The world has too much oil..…
For years, many folks thought the world was running out of oil. The price of oil soared more than 1,200% from 1998 to 2008. The “Peak Oil” crowd saw this as proof that oil production was in terminal decline. They were very wrong. “Peak Oil” believers failed to understand that high prices would create huge incentives to develop new ways to produce oil. Oil companies developed new methods like “fracking” to unlock billions of barrels of oil that were once impossible to reach. U.S. oil production has nearly doubled over the last decade. Last year, it hit its highest level since the 1970s. World oil production levels are also near record highs.

The world isn’t consuming oil fast enough..…
The global economy produces about 1.7 million more barrels a day than it needs. With U.S. oil reserves at their highest level since the Great Depression, companies are running out of places to store the extra oil. To deal with the surplus, companies have started storing oil on tankers floating at sea and in empty railcars. Other companies are selling barrels at huge discounts just to get rid of them.

Low oil prices have hammered major oil companies..…
The world’s five biggest oil companies—Exxon (XOM), Chevron (CVX), Total S.A. (TOT), BP (BP), and Royal Dutch Shell (RDS.A)—have fallen an average 34% since June 2014. Oil services companies, which supply “picks and shovels” to the oil industry, have crashed, too. Schlumberger (SLB), the world’s largest oil services company, has plunged 36% since 2014. Halliburton (HAL), the world’s second biggest, has plunged 53%.

Oil companies have cut spending to the bone..…
Companies have walked away from billion dollar projects. They’ve sold pieces of their businesses. As Dispatch readers know, some have even cut their prized dividends. The industry has laid off more than 250,000 workers since oil prices peaked. Last year, oil and gas companies cut spending by 22%. Reuters reports that the industry could cut spending another 12% this year.

On Thursday, Halliburton laid off 5,000 workers..…
It’s now laid off 29,000 workers, more than a quarter of its workforce, since 2014. Like most companies in the oil business, Halliburton is struggling. Its sales have fallen four straight quarters. Last year, the company lost $671 million, its first annual loss since 2004. The latest round of layoffs suggests Halliburton doesn’t expect business to pick up anytime soon.

The oil market is cyclical..…
It goes through big booms and busts. Right now, it’s going through its worst bust in decades. Eventually, the oil market will boom again. After all, the world needs oil. Companies that survive this bust should deliver huge gains during the next boom. If you can buy great oil companies near the bottom, you could set yourself up for huge gains when the next boom comes. So…is this the bottom?

According to The Wall Street Journal, one third of U.S. oil producers could go bankrupt this year. To be profitable, many companies would need the price of oil to get back up $50. With oil at $32.84 a barrel on Friday, those companies are in trouble. We expect a wave of bankruptcies to rip across the oil industry. This would likely trigger another leg down in oil stocks. So we’re not ready to buy oil stocks yet.

Instead, we recommend “stalking” your favorite oil companies..…
Nick Giambruno, editor of Crisis Investing, just added a world-class oil company to his watch list.
If you don’t know Nick, his specialty is buying beaten-down assets during a crisis. Most investors run away from crisis. But if you can keep your head and buy when everyone else is panicking, you can often pick up a dollar’s worth of assets for a dime or less.

Shale oil stocks are in crisis today. Even the largest shale companies have been obliterated. Major shale oil producer Apache (APA) has plunged 51% since June 2014. Anadarko (APC), another larger shale company, has plummeted 65%. Shale oil is more expensive to extract than conventional oil. And at today’s prices, most shale oil projects can’t make money.

Many shale companies borrowed too much money during oil’s boom times. Now that oil is in a bust, they can’t generate the cash flow to pay back their debts. Last month, investment bank Oppenheimer & Co. Inc. warned that half of all U.S. shale oil producers could go bankrupt before oil prices recover. To survive, these companies would need the price of oil to more than double.

Nick has found a shale company unaffected by these problems. It’s a world-class shale oil company that has virtually no risk of going bankrupt. However, its stock has gotten extremely cheap along with all other shale oil stocks. Nick says this company has “trophy assets in the major U.S. shale basins. It has a solid balance sheet.

And, unlike many of its peers, it didn’t over leverage itself during the last boom.” The company also has the industry’s highest profit margins. Nick plans to buy this company at once in a generation prices. He will tell Crisis Investing readers when it’s time to pull the trigger.

In the meantime, Nick is investing in Cuba..…
As you may know, the U.S. has had a trade embargo against Cuba since 1962. The embargo bans all trade, making it illegal for Americans to invest in Cuba. But that could soon change. About a year ago, Cuba and the U.S. announced they were working to repair diplomatic and economic relations. In August, the two countries reopened their embassies in each other’s capitals. President Obama is going to Cuba next month. He will be the first sitting president to visit Cuba since Calvin Coolidge in 1928.

Nick thinks the embargo could soon “become a page in the history books”..…
The end of the embargo will create the “potential for enormous profits,” as Nick explained in Crisis Investing.

When the embargo goes away, American tourism to Cuba will explode. The International Monetary Fund estimates there could be up to 10 million visits from Americans every year as soon as the embargo comes down.

Today, it’s still illegal to invest in Cuba. But Nick has a “back door” way to profit from the opening up of Cuba’s economy. Nick’s investment in Cuba legally trades on the NASDAQ stock exchange. It should deliver huge gains when the embargo is lifted…which may happen very soon. You can get in on Nick’s Cuba investment by signing up for Crisis Investing. You’ll also learn about the world class shale oil company on Nick’s watch list. Click here to begin your risk-free trial.

Chart of the Day

Shale oil stocks have been decimated. Today’s chart shows the performance of the Market Vectors Unconventional Oil & Gas ETF (FRAK). This fund tracks 50 companies involved in the shale oil and gas industries. FRAK has crashed 65% since June 2014. Last month, it hit an all-time low. As we mentioned, most shale oil companies simply can’t make money right now.

The article Will Your Favorite Oil Company Go Bankrupt? was originally published at caseyresearch.com.

Get our latest FREE eBook "Understanding Options"....Just Click Here!

This Unique Oil Stock is Offering A Huge Dividend Yield

By Justin Spittler

One of Casey Research's biggest calls this year is paying off.....…
In early August, E.B. Tucker, editor of The Casey Report, told subscribers how to profit from the world’s oversupply of oil. If you read financial newspapers for more than a week, you’ll notice that global oil production is near record highs. Last year, global oil output reached its highest level in at least twenty five years, according to the U.S. Energy Information Administration (EIA).

High oil prices were a big reason for the surge in production. Between 2011 and mid 2014, the price of oil hovered around $90/barrel. But oil peaked at $106 last June, and it’s been falling ever since. Today, a barrel of oil goes for about $45. Even though the price of oil has been cut in half, global oil production is still near all time highs. The Organization of the Petroleum Exporting Countries (OPEC), a cartel of 12 oil producing nations, is still pumping a record amount of oil. And it plans to increase production next year. In the U.S., oil supplies are still about 100 million barrels above their five year average.

E.B. explains why some countries have no choice but to keep pumping oil.....

Oil is the foundation of many countries’ economies. Take Venezuela, for example. Venezuela produces over 2.5 million barrels per day (BPD) of oil. Oil exports make up half of the country’s economic output. The country is so dependent on oil that cutting production would be economic suicide. This is happening across the globe. Giant state run oil companies continue to pump because it’s the only way for these countries to make money. This is why global oil production has not fallen even though the price of oil has been cut in half. In many areas, production has actually increased.

The extra oil has weighed on oil prices......
Weak oil prices have hammered virtually all oil companies…including the biggest oil companies on the planet. Profits for ExxonMobil (XOM), the largest U.S. oil company, fell 52% during the second quarter due to weak oil prices. Its stock is now down 24% since oil peaked last summer. Chevron (CVX), America’s second biggest oil company, earned its lowest profit in twelve years during the second quarter. Its stock price is down 34% since last summer’s peak. The entire industry is struggling. XOP, an ETF that holds the largest oil explorers and producers, has dropped 52% over the same period.

But oil tanker companies are making more money than they have in seven years...…
Unlike oil producers, oil tanker companies don’t need high oil prices to make big profits. That’s because they make money based on how much oil they move. Their revenues aren’t directly tied to the price of oil.
On Monday, Bloomberg Business explained why oil tankers are making the most money they’ve made in years. The world’s biggest crude oil tankers earned more than $100,000 a day for the first time since 2008. Ships hauling two million barrel cargoes of Saudi Arabian crude to Japan, a benchmark route, earned $104,256 a day, a level last seen in July 2008, according to data on Friday from the Baltic Exchange in London. The rate was a 13 percent gain from Thursday.

Casey Research’s favorite oil tanker company is cashing in on higher shipping rates...…
On August 13, E.B. Tucker told readers of The Casey Report about a company called Euronav (EURN).
According to E.B., Euronav is the best oil tanker company in the world. The company has one of the newest and largest fleets on the planet. Euronav’s sales more than doubled during the first half of the year.

The company’s EBITDA (earnings before taxes, interest, and accounting charges) quadrupled. And because Euronav’s policy is to pay out at least 80% of its profits as dividends, the company doubled its dividend payment last quarter.

Investors who acted on E.B.’s recommendation have already pocketed a 5% quarterly dividend. Based on its last two dividends, Euronav is paying an annualized yield of 12%. That’s not bad considering 10 Treasuries pay just 2.07% right now. Euronav’s stock is up big too. It has gained 15% in the past month alone...while the S&P just gained 1%.

E.B. thinks Euronav is just getting started.....

Euronav’s stock price has rocketed in recent weeks, but it’s going to go much higher. Euronav is a great business and the economics of shipping oil are improving. The market hasn’t fully caught on to how good things are in the industry right now. Shipping rates are ripping higher, but the supply of ships can’t keep up with demand. The largest supertankers can carry 2 million barrels of oil at a time. They measure three football fields long. These ships take years to build and cost about $100 million each. Shipping rates should stay high as the world works through this huge oil glut.

It’s a great time to own shipping companies. And Euronav is the best of the bunch. Euronav has shot up since E.B. recommended it, but the buying window hasn’t closed. In fact, Euronav is still below E.B.’s “buy under” price of $17.50. You can learn more about Euronav by taking The Casey Report for a risk free spin today. You’ll also learn about E.B.’s other top investment ideas, including a unique way to profit from the “digital revolution” in money. Click here to get started.

The article This Unique Oil Stock is Offering A Huge Dividend Yield was originally published at caseyresearch.com.

Get our latest FREE eBook "Understanding Options"....Just Click Here!

Bears Run For Cover!

From our trading partner Phil Flynn....

Ultra bears are starting to change their tune on oil as weak Chinese manufacturing data and strong manufacturing data in Germany both point to better demand. China's demand may rise as the Chinese government will be forced to act swiftly to reach their growth target and should soon add stimulus increasing oil demand. Factory activity in China fell to 49.2, according to HSBC, a number that should force the Chinese government's hand.

In Germany, we are already seeing the QE impact on oil demand. The Purchasing Managers Index for the manufacturing and services industries across the region rose to a much stronger than expected 54.1 ked by a 0.4 percent expansion in Germany. Germany is the beneficiary of being the strongest economy in the Eurozone at a time when the ECB central bank has launched unprecedented stimulus. On top of that you see the U.K. inflation rate come in at the lowest rate in history. The inflation rate fell below zero for the first time in history and all of a sudden this QE madness is likely to continue.

Get our latest FREE eBook "Understanding Options"....Just Click Here!

Now one might think that might be bearish as the dollar might continue its historic upward move as the rate differential outlook could cause continued safe haven buying. But now it seems that the Fed may be influenced into not rating rates quickly as the dollar strength is causing more problems. We saw in the FOMC that Fed Chair Janet Yellen warned that the Fed will not be impatient in raising rates. The Fed's Stanley Fischer suggested that the Fed will be data, and perhaps dollar dependent on raising rates and warned that there would not be a "smooth upward path" for interest rates hikes.

Oil bears are also counting on another big inventory increase. Yet data from Genscape, the private forecaster, is suggesting that the build might be much less than the 4 million barrel builds that is being bandied about. Genscape reports that the increase of less than 2 million barrels are around 1.6 million. That should reduce fears of storage over flowing. In fact the Energy Information Administration reported that although inventory levels at Cushing are at their record high, storage utilization (inventories as a percent of working storage capacity) are not at record levels. Capacity utilization at Cushing is now 77%, a large increase from a recent low of 27% in October 2014. However, utilization reached 91% in March 2011, soon after EIA began surveying storage capacity twice a year, starting in September 2010."

See Phil on the Fox Business Network and follow him on Twitter @energyphilflynn!

See what our Gold and Oil traders are trading everyday, and it's free....Just Click Here!

Total War over the Petrodollar

By Marin Katusa, Chief Energy Investment Strategist

The conspiracy theories surrounding the death of Total SA’s chief executive, Christophe de Margerie, started the second the news broke of his death. Under mysterious circumstances in Moscow, his private jet collided with a snowplow just after midnight. De Margerie was the CEO of Total, France’s largest oil company.

He’d just attended a private meeting with Russian Prime Minister Medvedev, at a time when the West’s relationship with Russia is fraught, to say the least.

One has better odds of being struck by lightning at an airport then a snow plow, or any other ground support vehicles hitting a plane and killing all inside the plane, in my opinion. And I say that as someone who’s familiar with airports, having worked at Vancouver International Airport when I was in university; I was the one who would bring the plane into its parking bay.

If it weren’t for those short odds, a snowplow on the runway with an allegedly drunk driver would be the perfect crime. But who would benefit from his death?

De Margerie was one of the few business leaders who spoke out against the isolation of Russia. On this last trip to Moscow, he railed against sanctions and the obstacles to Russian companies obtaining credit.
He was also an outspoken supporter of Russia’s position in natural gas pricing and transportation disputes with Ukraine, telling Reuters in an interview in July that Europe should not cut its dependence on Russian gas but rather focus on making the supplies more secure.

But what could have made de Margerie a total liability is Total’s involvement in plans to build a plant to liquefy natural gas on the Yamal Peninsula of Russia in partnership with Novatek. Its most ambitious project in Russia to date, it would facilitate the shipping of 800 million barrels of oil equivalent of LNG to China via the Arctic.

Compounding this sin, Total had just announced that it’s seeking financing for a gas project in Russia in spite of the current sanctions against Russia. It planned to finance its share in the $27 billion Yamal project using euros, yuan, Russian rubles, and any other currency but US dollars.

Did this direct threat to the petrodollar make this “true friend of Russia”—as Putin called de Margerie—some very powerful and dangerous enemies amongst the power that be, whether in the French government, the EU, or the US?

In my book The Colder War, one chapter deals with “mysterious deaths” and how they are linked to being on the wrong side of the political equation. Whether it’s going against Putin or against the petrodollar, there are many who have fallen on both sides.

If Total doesn’t close the $27 billion financing it needs to move forward with the Yamal LNG project then we’ll know someone stepped in to prevent an attack on the petrodollar.  The CEO of Total, before his death and his CFO were both strong supporters of Total raising the $27 billion in non U.S. dollars and moving the project forward with the Russians.  But, this could all change if the financing does not complete.

How many other Western executives who dare to help Russia bypass sanctions—and turn it into an energy powerhouse—will die under suspicious circumstances?

Marin Katusa, is author of The Colder War, manager of multiple global energy-exploration hedge funds, and co-founder of Copper Mountain Mining Corporation. Click here to get a copy of his must-read new book, The Colder War. Inside, you’ll discover exactly how Putin is taking over the energy sector, how far ahead he is, and how alarming it is that no one in the US or Europe has even entered the race.

The article Total War over the Petrodollar was originally published at casey research

Get our latest FREE eBook "Understanding Options"....Just Click Here!

Growing Oil and Natural Gas Production Continues to Reshape the U.S. Energy Economy

The Annual Energy Outlook 2014 reference case was released today by the U.S. Energy Information Administration (EIA) presents updated projections for U.S. energy markets through 2040.

"EIA's updated Reference case shows that advanced technologies for crude oil and natural gas production are continuing to increase domestic supply and reshape the U.S. energy economy as well as expand the potential for U.S. natural gas exports," said EIA Administrator Adam Sieminski. "Growing domestic hydrocarbon production is also reducing our net dependence on imported oil and benefiting the U.S. economy as natural-gas-intensive industries boost their output," said Mr. Sieminski.

Some key findings:

Domestic production of oil and natural gas continues to grow. Domestic crude oil production increases sharply in the AEO2014 Reference case, with annual growth averaging 0.8 million barrels per day (MMbbl/d) through 2016, when domestic production comes close to the historical high of 9.6 MMbbl/d achieved in 1970 (Figure 1). While domestic crude oil production is projected to level off and then slowly decline after 2020 in the Reference case, natural gas production grows steadily, with a 56% increase between 2012 and 2040, when production reaches 37.6 trillion cubic feet (Tcf). The full AEO2014 report, to be released this spring, will also consider alternative resource and technology scenarios, some with significantly higher long-term oil production than the Reference case.

Low natural gas prices boost natural gas-intensive industries. Industrial shipments grow at a 3.0% annual rate over the first 10 years of the projection and then slow to a 1.6% annual growth over the balance of the projection. Bulk chemicals and metals-based durables account for much of the increased growth in industrial shipments. Industrial shipments of bulk chemicals, which benefit from an increased supply of natural gas liquids, grow by 3.4% per year from 2012 to 2025, although the competitive advantage in bulk chemicals diminishes in the long term. Industrial natural gas consumption is projected to grow by 22% between 2012 and 2025.

Higher natural gas production also supports increased exports of both pipeline and liquefied natural gas (LNG). In addition to increases in domestic consumption in the industrial and electric power sectors, U.S. exports of natural gas also increase in the AEO2014 Reference case (Figure 2). U.S. exports of LNG increase to 3.5 Tcf before 2030 and remain at that level through 2040. Pipeline exports of U.S. natural gas to Mexico grow by 6% per year, from 0.6 Tcf in 2012 to 3.1 Tcf in 2040, and pipeline exports to Canada grow by 1.2% per year, from 1.0 Tcf in 2012 to 1.4 Tcf in 2040. Over the same period, U.S. pipeline imports from Canada fall by 30%, from 3.0 Tcf in 2012 to 2.1 Tcf in 2040, as more U.S. demand is met by domestic production.

Car and light trucks energy use declines sharply, reflecting slow growth in travel and accelerated vehicle efficiency improvements. AEO2014 includes a new, detailed demographic profile of driving behavior by age and gender as well as new lower population growth rates based on updated Census projections. As a result, annual increases in vehicles miles traveled (VMT) in light-duty vehicles (LDV) average 0.9% from 2012 to 2040, compared to 1.2% per year over the same period in AEO2013. The rising fuel economy of LDVs more than offsets the modest growth in VMT, resulting in a 25% decline in LDV energy consumption decline between 2012 and 2040 in the AEO2014 Reference case.

Natural gas overtakes coal to provide the largest share of U.S. electric power generation. Projected low prices for natural gas make it a very attractive fuel for new generating capacity. In some areas, natural-gas-fired generation replaces power formerly supplied by coal and nuclear plants. In 2040, natural gas accounts for 35% of total electricity generation, while coal accounts for 32% (Figure 3). Generation from renewable fuels, unlike coal and nuclear power, is higher in the AEO2014 Reference case than in AEO2013. Electric power generation from renewables is bolstered by legislation enacted at the beginning of 2013 extending tax credits for generation from wind and other renewable technologies.

Other AEO2014 Reference case highlights:

• The Brent crude oil spot price declines from $112 per barrel (bbl) (in 2012 dollars) in 2012 to $92/bbl in 2017. After 2017, the Brent spot oil price increases, reaching $141/bbl in 2040 due to growing demand that requires the development of more costly resources. World liquids consumption grows from 89 MMbbl/d in 2012 to 117 MMbbl/d in 2040, driven by growing demand in China, India, Brazil, and other developing economies.

• Total U.S. primary energy consumption grows by just 12% between 2012 and 2040. The fossil fuel share of total primary energy demand falls from 82% of total U.S. energy consumption in 2012 to 80% in 2040 as consumption of petroleum-based liquid fuels falls, largely as a result of slower growth in LDV VMT and increased vehicle efficiency.

• Energy use per 2005 dollar of gross domestic product (GDP) declines by 43% from 2012 to 2040 in AEO2014 as a result of continued growth in services as a share of the overall economy, rising energy prices, and existing policies that promote energy efficiency. Energy use per capita declines by 8% from 2012 through 2040 as a result of improving energy efficiency and changes in the way energy is used in the U.S. economy.

• With domestic crude oil production rising to 9.5 MMbbl/d in 2016, the net import share of U.S. petroleum and other liquids supply will fall to about 25%. With a decline in domestic crude oil production after 2019 in the AEO2014 Reference case, the import share of total petroleum and other liquids supply will grow to 32% in 2040, still lower than the 2040 level of 37% in the AEO2013 Reference case.

• Total U.S. energy-related CO2 emissions remain below their 2005 level (6 billion metric tons) through 2040, when they reach 5.6 billion metric tons. CO2 emissions per 2005 dollar of GDP decline more rapidly than energy use per dollar, to 56% below their 2005 level in 2040, as lower-carbon fuels account for a growing share of total energy use.

Get our "Gold and Crude Oil Trade Ideas"

Will Russia Lose Its Oily Grip on Europe?

By Marin Katusa, Chief Energy Investment Strategist

Vladimir Putin is on a roll. Ever since the Russian president-turned-prime-minister-turned-president got into office 13 years ago, he's been deftly maneuvering Russia back into the ranks of global heavyweights. These days, he's averting cruise missiles from Syria before breakfast.


For a strategy to return Russia to superpower status, Putin had to look no farther than his own doctoral thesis, Mineral Natural Resources in the Development Strategy for the Russian Economy.

To say that Russia is rich in natural resources would be an understatement. In 2009, the former heart of the Soviet Union surpassed Saudi Arabia as the world's top oil producer—largely because Putin put reviving Russia's aging, neglected oil industry at the top of his priorities list.

The chart below shows proven oil reserves from the pre-Putin era to now. In just 16 years, they have risen by more than 30 billion barrels—which may still be too low, because it's not yet clear how much of the 90-odd billion barrels of undiscovered oil in the Arctic is actually recoverable. And in addition to new discoveries, the rising price of oil has made many formerly uneconomical deposits worth a second look.

As a result, about half of the more than 10 million barrels of oil per day (bopd) that Russia produces are exported… only to return as cash and, increasingly, a fistful of clout.

With Putin's monster deposits being the closest and most conveniently accessible,  many European nations rely heavily on oil and gas imports from Russia and the former Soviet states:

In a world where "he who has the energy wields the power," Russia's European customers find themselves in a very uncomfortable situation. How fragile their position is became clear in January 2009, when Putin, enraged over a price and debt dispute with Ukraine, shut off the natural-gas spigot, leaving customers in 18  European countries literally out in the cold.

Now the Russian vise grip on Europe is about to tighten even more as new energy markets are opening up to Moscow.

In January of this year, Russia's pipeline company, Transneft, completed the $25 billion, 4,700-kilometer-long East Siberia-Pacific Ocean (ESPO) pipeline, and in June, Putin signed one of the world's biggest oil deals ever.

For the next 25 years, Rosneft, Russia's state-controlled oil company, will deliver about 300,000 barrels per day to China—raising Russian oil exports to the Chinese by 75%. Besides China, the pipeline is also conveniently located for Japan, South Korea, and even the US West Coast.

This advantageous situation allows Putin to play hardball with Europe: If its customers there don't ante up what Moscow wants in price or pound of flesh, its income from ESPO customers could enable the country to twist the EU's taps closed.

It comes as no surprise that Europe is desperately trying to find a reasonably priced replacement for Russian oil. And in the very near future, it might just get its wish.

Hidden deep below Central European soil may be one of the largest oil deposits in the world, comparable in size to the legendary Bakken formation in North America. I call it the "next Bakken."
The full extent of this oil colossus is still unknown, but the final result could be one for the record books.  And a small company with 2 million acres of land in the "next Bakken" is hard at work to prove up the reserves and make itself and its shareholders rich in the process.

This is not a stab in the dark; there's no doubt that the oil is there. In the past, 93 million barrels of oil have been produced on the land the company owns now. But thanks to the company's state-of-the-art technology, management expects to be able to unlock many more millions or billions of barrels of to date inaccessible or uneconomical oil.

In fact, all of management is invested heavily in the company, which is always a good sign—one of its directors, for example, owns more than 1.2 million shares.

(By the way, the country where this deposit is located is forced to import more than 700,000 barrels of oil per day from Russia, a balance of power that could shift dramatically with this new windfall—so chances are good that the government will enthusiastically support the new oil production.)

Since our initial recommendation, Casey Energy Report subscribers already made gains of up to 66.4% from this company—but this is not a one-hit wonder whose fame fades as fast as it started. If the deposit indeed has what we think it does in recoverable reserves, the company could generate exceptional profits for years on end.

You can get my comprehensive special report "The Next Bakken… and the Small Company Best Positioned to Take Advantage" free if you try the Casey Energy Report today, for 3 months, with full money-back guarantee. Click here for more details on the "Next Bakken."

The Next Bakken?

Just a few days ago, a hastily assembled team including Chief Energy Investment Strategist Marin Katusa and Casey Research Managing Director David Galland were preparing to fly to a secret location. A location where a small oil company is about to drill the first oil well into what appears to be a massive new oil bonanza.

But at the last minute, the oil company's lawyers canceled the trip and imposed a total communication blackout. They did so out of concern that regulators would think having the Casey Research team on site gave Casey Energy Report subscribers an unfair advantage.

While disappointed that the site visit was canceled, the Casey energy team has already extensively researched the company and are now free to tell their subscribers about it.

And that's why I'm writing to you today: the Casey energy analysts believe this company may have as much or even more potential than those companies that made billions in the now legendary Bakken formation.

To put that assertion into perspective, let me tell you a little bit about the Bakken. In case you're unfamiliar with it, it's a monster oil and gas deposit covering almost 15,000 square miles across North Dakota, Montana, and Alberta, Canada.

The latest US Geological Survey estimates that the Bakken contains upwards of 7.4 billion barrels of recoverable oil - and that is considered on the low end of the range. An executive of a company deeply involved in the Bakken recently estimated that the basin will ultimately yield 20 billion barrels.

And those who discovered the Bakken's tremendous potential ahead of the crowd are now very well off indeed....When It Rains, It Pours... Cash

Until 2005, the Bakken had been largely written off as uneconomic. Then leapfrogging advances in horizontal drilling technologies changed everything, triggering a land rush that made multimillionaires out of landowners and explorers.

Take Harold Hamm, for example. The founder and CEO of Continental Resources (CRL), Hamm, as Forbes magazine puts it, "is responsible for cracking the code of the Bakken."

In 2007, the same year that Continental was listed on the NYSE, the company was the first to complete lateral, multi-stage drilling over 1,280 acres in North Dakota.

One year later, Hamm was the first to demonstrate that the Three Forks formation, which was initially believed to be part of the Bakken, was a separate reservoir and might hold more oil than the Bakken itself.

The rest, as they say, is history. Hamm is now worth $11.3 billion, which makes him the 90th richest person on the planet.

But it's not just the wildcatters themselves that rake in the big money: Early bird investors in Continental Resources made gains of up to 459% within 14 months after the company's NYSE listing. And those who held on were looking at gains of 549% when CRL's stock peaked in February 2012.

In other words, had you trusted in Hamm's genius when he started out drilling in the Bakken, an investment of just $10,000 would have turned into $64,900 for you.

There's no question about it: The use of new technologies to unlock the Bakken, the Eagle Ford Shale, and other huge oil deposits previously considered uneconomic has been a game changer for North American energy supplies.

And you could be the beneficiary of the next Bakken-type windfall....The Next Bakken - But Even Better?

As I said before, the Casey energy analysts believe that the small company they've uncovered could be the next Continental Resources, sitting on unimaginable riches.

Over the last year this little company has quietly assembled a 2-million-acre concession in a region whose geological conditions for the production of oil and gas are actually far more promising than those in the Bakken.

And about one week from now, these resources could finally be proven to be in place. You can imagine what that could do to the company's share price.

The company's top executives appear to have a similar vision: Many of them have personally invested millions of dollars to fund the company and its current drill program.

In July, one director of the company, who is also the CEO of a major Canadian oil player, bought 200,000 shares at the market – bringing his holdings of the company's stock to a total of 1,235,237 shares.

I think his optimism is well placed, considering that the company's management includes seasoned Bakken veterans who not only recognize the potential of the "new Bakken," but also have the skills to get the oil out of the ground.

If the initial well now being drilled meets management's expectations, this small-cap company will be on the fast track for explosive shareholder returns, potentially for years on end. Be There When the Truth Is Unveiled - for a Chance at Staggering Returns

Best of all, so far only a handful of research firms have been paying attention to this virtually unknown company. Therefore, we are uniquely positioned to take advantage of the news released once the well data have been compiled.

In fact, within minutes of the company breaking the silence imposed by its lawyers, Casey’s analysts will be standing by to share their on the spot analysis with subscribers to the Casey Energy Report....even if it's the middle of the night.

To be fair, though, I have to remind you that this is a speculation, not a slam dunk investment. Drilling is always a risky business, so we have to keep our enthusiasm in check until the first well is completed and the initial flow data are logged.

If, however, the initial well test confirms that the company is sitting on the "next Bakken," the investment returns from its 2 million acre concession should be nothing less than spectacular. And the odds for that happening are excellent. Be Ready: Initial Drilling Results Are Expected on or Around Monday, September 16

Until the company has completed its flow tests and made a public announcement, Casey can't share any details about the company, or even the country where the next potential Bakken is located.

But once the company issues its own press release, everyone who is an active subscriber to the Casey Energy Report will receive our alert with an up-to-the-minute analysis and specific recommendation on how to invest.

In addition, to ensure that Energy Report readers get the full picture of this exciting new play, the Casey Energy team is now preparing a comprehensive report about the "next Bakken" and the small-cap company already supremely positioned to profit from it.

While no one can say exactly when the drill will reach the pay zone and the subsequent well flow test will be completed, the last estimate provided by the company before the lawyers instituted the communications blackout was mid September.

Based on Casey’s own analysis of the processes involved, they anticipate the company will be ready to release news on or about Monday, September 16. Of course, due to the nature of any drill program, this is only an estimate.

Regardless, once the testing is completed and the company issues its public press release, Casey Energy Report subscribers will immediately receive an Alert with our analysis - and their special report on the next Bakken.

Of course, it would be massively unfair (and poor business ethics) to release this information to non paying subscribers.

Not to worry, though. If you subscribe today, you can still participate in the earliest phase of what could become a flood of investment into the "next Bakken." Make a Bundle or Pay Nothing for Your Subscription

How much does it cost to get in on what could be the next Bakken? Thousands of subscribers to the Casey Energy Report pay $248 per quarter, an amount that may seem high to some.

However, that they were prepared to send an executive team to the secret well site - involving international flights and almost 11 hours in a car - should make it clear just how much potential we believe this investment has for our subscribers. If they're right, the potential returns will make the cost of your subscription pale by comparison.

But what if they're wrong, and the first well is a bust? What then?

It's simple: thanks to Casey’s 3-month, no-questions-asked, 100% money-back guarantee, if you don't make a bundle off this exciting new play within the first three months of your subscription, simply drop them an email and they'll promptly return every penny you paid.

It's a completely straightforward proposition that works entirely in your favor.

Of course, they're pretty confident you won't cancel your subscription.

Because they believe that they are about to make a lot of money on this stock, and that it will continue to provide exceptional returns for years (or until it is taken over by a larger company hungry for the 2-million-acre concession it has assembled on the next Bakken – and if that happens, it'll be just as good for us).

In a May 2010 interview broadcast on Business News Network, Chief Investment Strategist Marin Katusa spoke about Africa Oil, another early Casey energy pick. In that interview, he said, "This stock has a realistic potential to give you 10 to 15, even 20, times your money."

He was right: Africa Oil handed early investors a profit of over 1,200%.

In a recent email, Marin wrote, "Since that interview on Africa Oil, I have never made a similar forecast about a company, but I have no reservations saying that this new company easily has as much or more potential."

You do not want to miss out on this opportunity.

Getting in on the ground floor is as simple and easy as clicking here to sign up for the Casey Energy Report now.

Remember, Casey’s ironclad 100% money back guarantee means you've got nothing to lose to give the Casey Energy Report a try. With the drill turning and their energy team hard at work preparing its comprehensive report on the "next Bakken," now is definitely the time to act.

Sincerely,

Ray @ The Crude Oil Trader

P.S. It's important to highlight that members of the Casey Research team own shares in investment funds that have invested capital in this firm back from the time it was just an idea. That the company appears to have made good use of its capital to build its position on this potentially huge new oil play is all to the good and the only reason we are bringing this stock to the attention of our readers. To avoid a conflict of interest, Casey’s corporate policies (correctly) require them to provide advance notice to subscribers before they sell, which we don't see happening until the company has unlocked its full potential and its shares are trading at many multiples of where they are now.

If you, too, want to join in on this early stage play, be sure to sign up today - or at the latest before Monday, September 16. And don't forget: you either make a bundle or you simply cancel within 3 months for your money back. Even after three months, you can still cancel anytime and receive a prorated refund.

Don't miss this rare opportunity to get in on the ground floor.

Here again is the secure link to join Casey Energy Report.

EIA: By 2040 world energy consumption will rise by 56%

From Robin Dupre at Rigzone.com......

World energy consumption will rise 56 percent in the next three decades, driven by growth in the developing world, noted The Energy Information Administration (EIA) in its International Energy Outlook 2013 report Thursday. China and India’s rising prosperity is a major factor in the outlook for global energy demand, noted EIA Administrator Adam Sieminski in a press conference call.

“These two countries combined account for half the world’s total increase in energy use through 2040. This will have a profound effect on the development of world energy markets.” Energy demand will increase to 820 quadrillion British thermal units (Btu) in 2040, up from 524 quadrillion Btus. By 2040, China’s energy use will double the United States’, according to EIA estimates.

One quadrillion Btu is equal to 172 million barrels of crude oil.

Additionally, renewable energy and nuclear power are the fastest growing source of energy consumption with each increasing by 2.5 percent per year. But fossil fuels, including oil, natural gas and coal will continue to supply almost 80 percent of the world’s energy through 2040, noted Sieminski.

Natural gas is the fastest growing fossil fuel in EIA’s outlook, and will continue to dominate the landscape, increasing by 1.7 percent per year. Swelling supplies of tight gas, shale gas and coalbed methane support growth in projected worldwide gas use with non OECD Europe/Eurasia, Middle East and the United States accounting for the largest increases in natural gas production.

The explosion in supply from unconventional sources will underpin growth of natural gas demand, while high oil prices will encourage countries to focus on liquid fuels “when feasible”, the report stated.

The EIA’s July short term energy outlook projected benchmark Brent crude to average $105 a barrel in 2013 and $100 in 2014.The report projects that prices will increase long term with the world oil price reaching $106 a barrel in 2020 and $163 in 2040 in the Reference case.

With more than 10 years of journalism experience, Robin Dupre specializes in the offshore sector of the oil and gas industry. Email Robin at rdupre@rigzone.com.

Get our FREE Trading Webinars Today!

OPEC Becoming a "Non Player" as North America Brings Energy Profits Home

Things have changed quite a bit in the last couple of years. Gone are the days of being glued to the TV waiting for news coming out of OPEC and it's effect on U.S. oil and gas prices. Now our days are filled with thoughts of "how do we profit on the oil and natural gas plays in North America". And we don't have to look no further than shale plays, energy service companies and offshore oil drilling opportunities in the U.S. or so says Byron King of Agora Financial LLC.

In this interview with The Energy Report, King discusses how dwindling exports to the U.S. from Latin America, Africa and the Middle East are shifting the supply and demand equation across the world. King also names companies in the service space with solid prospects for investors.

The Energy Report: Byron, welcome. You recently attended the Platts Conference in London, which addressed shifting energy trade patterns in light of growing U.S. export prospects and dwindling exports from South America and Africa. Has OPEC's role diminished?

Byron King: The short answer is yes. OPEC is struggling right now. The Middle East, the West African producers and Venezuela are struggling. The West African players and Venezuela have seen exports to the U.S. decline dramatically. In countries like Algeria, oil exports to the U.S. are essentially zero, while Nigeria's exports to the U.S. are way down. The oil these countries export tends to be the lighter, sweeter crude, which happens to be the product that is increasing in production in the U.S. through fracking.

The east-to-west trade pattern for oil imports to the U.S. has essentially gone away. This does not mean that the oil goes away. It means these countries have to find new markets for their oil which they are doing, in India and the Far East. But that disrupts trade patterns as well. Imports from the Middle East to the U.S. are falling as well. These barrels tend to be the heavier, sourer crude that U.S. refineries are geared to process.

As the U.S. imports less oil, our balance of trade gets better. The recent strengthening of the dollar has a lot to do with importing less oil. Strengthening the dollar decreases gold and silver prices, so there is some monetary blowback from the good news out of the oil patch. Strengthening the dollar increases the broad stock market for the non resource, non commodity and non-energy plays. There's an astonishing dynamic at work.

TER: When it comes to countries like Venezuela, part of the reason for the decrease in exports is because it has not invested its profits in infrastructure.

BK: Good point. In Venezuela, the government has taken so much money out of the oil industry to use for social spending, military spending and government overhead that the sustaining capital is not there. Even with Hugo Chavez's death and new leadership in Venezuela, it will require years of sustained and increased investment to get Venezuela's output up. After 10 years of dramatically bad underinvestment, the infrastructure is worn out. It will take a lot of time, money and some seriously hard political decisions to redeploy capital inside a country like Venezuela.

TER: If OPEC can no longer control the price of oil through supply because it does not have as much control of supply, what is keeping it from flooding the market with oil to get more revenue?

BK: That would work both ways. If OPEC floods the market with more oil, it will drive the price of oil down. Then OPEC nations would get fewer dollars for each barrel. All of that extra output, if sold at a lower price, might still yield less money, which is not a good thing if you are an oil exporter and need the funds.

"The east-to-west trade pattern for oil imports to the U.S. has essentially gone away."

The big swing producer is still Saudi Arabia. Saudi has spare capacity, but I suspect not as much as it wants people to believe. It gets back to that idea of peak oil. We've discussed it before, and yes, I know fracking is changing the game to some extent. But you still need to keep all the books about peak oil on your shelf. Fracking is what happens on the back side of the peak oil curve, when you need barrels, are willing to pay high prices and throw lots of capital and labor at the problem.

A country like Saudi Arabia could increase its output, but not for long and not in a heavily sustainable way. It would damage its oil fields. Beyond that, the trick for OPEC is going to be getting several countries to agree to cut output to make up for the extra output from North America, in the hope of keeping prices where they are right now.

Brent crude which is what the posting is for much of the OPEC contracts is about $103/barrel ($103/bbl). If OPEC wants to keep that number or not let it fall too much further it has to cut output, not increase output. That is a very difficult and politically charged issue within OPEC. The Middle Eastern countries can afford a minor amount of financial turmoil right now. The other OPEC countries absolutely cannot afford financial problems stemming from low oil prices.

TER: Is there informal price control going on in the shale oil fields? As the price of natural gas has dropped, the oil rig count has dropped and once the price goes up, those oil rigs could start up again. Could there be an OPEC of North America?

BK: I do not see an organized North American OPEC because there are too many companies in the mix. Too many people have a bite at the apple for anybody to control things. It is more like a tangle of accidental circumstances driving production levels. We are seeing a slight drop in the oil rig count in the U.S. right now. Part of that has to do with the natural gas cutback, but part also has to do with the efficiency of the fracking model. Fracking can be energy inefficient, but also can be industrially efficient.

Five years ago and earlier, the idea of drilling wells was to look for oil fields. You were drilling into specific regions enriched with hydrocarbons that could flow into a well under reservoir energy or with just modest amounts of pumping or pressurization.

Today, with fracking, you are not really looking at oil fields. You are drilling into an entire formation. You are drilling into a large-scale resource and introducing energy into a formation to break up the rock and get the oil or natural gas out. To do that successfully is much more a manufacturing model than the traditional oil drilling model. This is why you see drilling pads that have room for 10 or 12 wells. You drill the wells directionally outward.

In western Pennsylvania I have seen some of the drilling maps for companies like Range Resources Corp. (RRC:NYSE). These companies have very efficient ways of corkscrewing pipe into the sweet spots of the formations with multistage fracks. They are draining the formations very efficiently. You see fewer rigs because each rig is being used in a manufacturing type of process, as opposed to the olden days when drilling was similar to craftwork.

Modern drilling and fracking, at least in North America, is much more of an assembly line process. Companies are using the same drill pits over and over again. They are using the same drilling mud and the same fracking water. Much of the same equipment gets used multiple times on several different wells. In the olden days, each well was its own special unique construction. Of course, every oil or gas well is different, and the results depend on how you drill it.

TER: Which companies are doing this the best and are they actually making money?

BK: Five years ago, people would talk about how this well made money or how that well does not make money anymore. That's harder to do today. The economics of the current fracking world are still up in the air.

The jury is out on many of these fracking plays. Companies are drilling a lot of wells and they are expensive. They are fracking the wells and that is very expensive. At a recent conference, a gentleman from Halliburton Co. (HAL:NYSE) said up to 50% of the different fracking stages on wells do not work. They either fail at the beginning or soon after they go into production due to many reasons geotechnical failure; equipment failure; blockages in the holes, in the pipe, in the perforations; things like that. Once a company has put the steel in the ground, done its fracking and inserted its equipment, it is very difficult to get down there and fix what is broken.

"North American shale oil plays have had an extensive ripple effect through the U.S. economy."

Right now natural gas prices are so low that if a company is drilling for dry gas, it is almost a given that it is not making any money. If the company is drilling for wet gas and is producing, the gas helps pay for the investment. When you get into some of the oil plays in the Bakken formation in North Dakota, or the Eagle Ford down in Texas, you are starting to get a mid continent price or even better for the gas plus associated oil or liquids. When I say mid-continent, I mean West Texas Intermediate; the WTI price as opposed to the Brent price.

Regarding the pricing structure within North America, the oil sands coming out of Alberta are selling at the low end of the market scale. If West Texas Intermediate is about $90/bbl, the Canadian sand oil might be $60/bbl. That is a one third differential. Is that because the quality is so different? Not necessarily. The oil sand product quality is slightly lower than the WTI, but it is not a one-third difference in terms of molecules or energy content or refinability. The difference is in stranded infrastructure. The cheaper oil is geographically stranded up in the frozen north of Canada, and you have to get it out through pipelines and railcars. You cannot get it over the Rocky Mountains to the Pacific Coast. There are only a few places for that oil to go, so it comes south. In its first stop across the U.S. border, in North Dakota, it competes with the Bakken plays.

The great mover of mid-continent oil today is the North American rail system the tanker cars. Back in the days of John D. Rockefeller, he could control oil markets with access to rails, rail shipping and tankers cars. Now you have to look at the cost of moving oil from mid-continent to another destination. If you are in North Dakota, you can move oil west to Washington or California, where there are refineries. Or you could move it to Chicago or farther east, to the refineries there. Or you could move it south, where you compete with imported oil at the Houston refineries. It is a very complex arrangement. And you must deal with the usual suspects BNSF Railway Company and Union Pacific the two biggies of hauling oil.

"The jury is out on many of these fracking plays."

We're seeing some truly astonishing developments here. Look at Delta Air Lines Inc. (DAL:NYSE), which spent $300 million buying the old Trainer refinery in Philadelphia. Actually, less than that when you take in the subsidy from the state of Pennsylvania. So now, Delta is importing oil from the Bakken to Trainer on railroad cars. Delta feeds its East Coast operations with jet fuel coming out of the Trainer refinery, including planes flying out of John F. Kennedy International Airport, which gives it a price advantage in the North Atlantic market. The price differential of just a few pennies a gallon on jet fuel is the difference between making or losing money on the North Atlantic routes.

Then, Delta can go to other airports where it operates, and beat up on the fuel supplier by threatening to bring in its own fuel. So Delta is extracting price concessions from vendors. It's sort of an old-fashioned "gas war," like when service stations used to see who could sell fuel the cheapest.

Mid-continent oil, mid-continent economics and transport by rail have completely altered the economics of other industries, including the rail and airline industries. North American shale oil plays have had an extensive ripple effect through the U.S. economy.

TER: Could building more pipelines to export facilities in the U.S. shrink those differentials?

BK: More pipelines will shrink the differential, but pipelines take time. In the environmentalist political world we live in today, it takes years to do all the permitting, and pretty much nobody wants to have a pipeline running through the backyard. Existing pipelines are golden because they are already there. Maybe they can be expanded, the pumps improved; we can tweak them or put additives in the fluid to make the product move faster. There are all sorts of possibilities with existing pipelines.

For the pipelines that are not built yet, you have the whole NIMBY (Not In My Backyard) issue. The railroad lobby and the lobbies of companies that build railroad cars also do not want to see new pipelines because these companies are more than happy to ship oil on railcars, even though in terms of energy efficiency safety and spillage, rail is less efficient overall.

TER: Based on this reality, how are you investing in shale space or are you?

BK: Right now, I am investing in the shale space at the very fundamentals. It is a pick-and-shovel approach to investing. I focus on what I call the big three of the services companies Halliburton, Schlumberger Ltd. (SLB:NYSE) and Baker Hughes Inc. (BHI:NYSE)because these companies have people are out there in the fields with the trucks and equipment, doing the work and getting paid for it. Another company that I really like is Tenaris (TS:NYSE), one of the best makers of steel drill pipe. You could buy U.S. Steel Corp. (X:NYSE), for example, which is doing very well in tubular goods, but it is a big, integrated steel company with iron mines and coal mines. It owns railroads, and sells steel to the auto industry, the appliance industry and the construction industry. Tubular and oilfield goods are just a part of U.S. Steel. With a company like Tenaris, it is more of a pure play on the oilfield development.

TER: Are you are a fan of oil services companies at this point in time?

BK: Yes. In terms of a company that is actually out there doing the work, I have great admiration for Range Resources. Its share price seems bid up pretty high. In terms of the large caps, I am looking at global integrated players: BP Plc (BP:NYSE), Royal Dutch Shell Plc (RDS.A:NYSE), Statoil ASA (STO:NYSE) and Total S.A. (TOT:NYSE), the French company. They are big, global and pay nice dividends. Even BP, for all of its troubles, is still paying a respectable dividend.

TER: Those are companies that also have exposure to the offshore oil area. Is that a growth area?

BK: Offshore is booming. Some companies are very good at what they do, and when you look at the pick-and-shovel plays, that would be companies like Halliburton, Schlumberger and Baker Hughes, among others. Transocean Ltd. (RIG:NYSE), the big offshore drilling company, is making a nice comeback, as is Cameron International Corp. (CAM:NYSE), which is in wellhead machinery, blowout preventers and things like that. FMC Technologies (FTI:NYSE) is a fabulous subsea equipment builder, and Oceaneering International (OII:NYSE), which makes remote operating vehicles (ROVs), has done great the last couple of years and is still growing.

"Fracking is changing the game to some extent. But you still need to keep all of the books about peak oil on your shelf."

A couple of points about offshore. In the U.S. offshore space, in March and April 2010, right after the BP blowout, the U.S. government basically shut it down. The offshore space was utter road kill. By the second half of 2010, it was dead. It went from being a $20 billion ($20B)/year industry to about a $3B/year industry. Here we are, three years later, and the offshore industry in the U.S. is recovering. There is still growth.

If you look at the rest of the world's coastlines, you see an increasing amount of concessions, leasing and acreage whether it is in the Russian Arctic or the North Sea or off the coast of Africa. There are booming areas offshore of West Africa and East African plays, with companies like Anadarko Petroleum Corp. (APC:NYSE) and its huge natural gas discovery off of Mozambique. In the Far East, off of Australia, there is a whole liquefied natural gas (LNG) boom. Much of the Australia hydrocarbon story is in offshore LNG. These are huge plays involving great big companies, a lot of money, steel in the ground and lots of equipment that either floats on the water or sits on the seafloor. It is all good for the offshore space.

TER: Are there any particular projects that a BP or Shell is doing right now that you are excited about?

BK: Shell has a big play onshore in the U.S., part of the whole shale gale. Shell is a big global integrated explorer, but is backing away from the offshore East African plays because they are a little too expensive for the company's taste. Shell has made investments in West Africa, off of Gabon, and also in South Africa, in the Orange Basin. I think Shell envisions itself as a future key player in South Africa, which is good because South Africa is a big, industrially developed country with a large population and big markets. South Africa has ongoing social problems, but it needs energy. So if Shell is successful in offshore South Africa, there's a built-in market. Shell doesn't have to tanker oil in or pipe it in or somehow move it halfway across the world.

TER: In light of what happened with BP, are these offshore oil plays riskier, since one accident can shut everything down. Or are large companies like Shell diversified enough that it doesn't matter?

BK: I will never say that accidents do not matter. As we learned from the Gulf of Mexico, an offshore accident can be a company killer. BP literally went through a near-death experience. In the minds of some people, BP is still not out of the woods. The company has made settlement after settlement and it is still not done paying. It has divested itself of many attractive assets over the past couple of years to raise enough cash to pay settlements, fees and fines.

The good news about the aftermath of the accident is that, globally, there is a heightened sense of safety awareness in the oil industry. Companies have watched the BP issues very closely and learned every lesson they possibly can. All of the solid operators are hypersensitive and hypercautious toward offshore operations.

It all comes back to benefit some of the service players I mentioned earlier. The fact that many offshore drilling platforms had to upgrade blowout preventers to a much higher specification benefited the likes of Cameron and FMC Technologies. In the new environment, your subsea equipment must be built to a higher specification. So say thank you to FMC Technologies which will gladly build it to that higher spec and charge you a higher price.

The numbers of inspections that companies must do when they work at the surface of the ocean are enormous. If a company has to inspect every 48 hours, it needs more ROVs. Who makes ROVs? That would be Oceaneering. There are other opportunities in other spaces, such as dealing with existing offshore platforms, existing offshore pipelines and existing offshore rig populations. One company that has done very well in our portfolio in the last couple of years is Helix Energy Solutions Group Inc. (HLX:NYSE). It deals with offshore repairs and servicing issues, and offers decommissioning services.

Individuals who go into these kinds of investments want to become educated about them. We are in these investments with a long term, multiyear horizon because that is the investment cycle. From prospect to producing platform, these kinds of investments can take 1015 years to play out. It's like an oil company annuity for the well run oil service guys.

The good news is that there is long-term reward, because large volumes of oil come from offshore. When looking at the shale gale, on the best day of the year in the Eagle Ford or the Bakken onshore, a really good well can produce 1,000 barrels per day (1 Mbbl/d). Six months from now that well could produce 400 (400 bbl/d), and a year from now it might produce 200 bbl/d. The decline rates are really steep. On some of the offshore wells, we are talking 1520 Mbbl/d, which can be sustained for several years. The economics of a good well and a good play offshore are for the long term.

TER: It sounds like your advice is for people to do their homework and be in it for the long term.

BK: Yes. My newsletter, Outstanding Investments, talks about oil and oil investments all the time; subscribers receive my views over the long term. As an investor, you want to educate yourself about different companies in the space, what equipment is used in the space and what the processes are. You do not have to be a geologist or an engineer to invest, but you need to be willing to learn. There is an entire offshore vocabulary that you need to understand to appreciate the investment opportunities. You also need to be able to keep your sanity during times of tumult, when the rest of the market might be losing its grip. And you need to understand why you went into a certain investment in the first place and when it is time to get out.

TER: That is great advice. Thank you so much for taking the time to talk with me today.

BK: You are very welcome.

Byron King writes for Agora Financial's Daily Resource Hunter and also edits two newsletters: Energy Scarcity Investor and Outstanding Investments. He studied geology and graduated with honors from Harvard University, and holds advanced degrees from the University of Pittsburgh School of Law and the U.S. Naval War College. He has advised the U.S. Department of Defense on national energy policy.

Want to read more Energy Report interviews like this?

Sign up for his free e-newsletter, and you'll learn when new articles have been published.



The Bible for Commodity Traders....Get our free eBook now!