Projected Alaska North Slope Oil Production at Risk Beyond 2025 if Oil Prices Drop Sharply

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Oil production on Alaska's North Slope, which has been declining since 1988 when average annual production peaked at 2.0 million barrels per day, is transported to market through the TransAlaska Pipeline System (TAPS). Because TAPS needs to maintain throughput above a minimum threshold level to remain operational, its projected lifetime depends on continued investment in North Slope oil production that itself depends on future oil prices. In the Annual Energy Outlook 2012 low oil price case, North Slope production would cease and TAPS would be decommissioned, which could occur as early as 2026.

The 48 inch diameter, 800-mile long TAPS crude oil pipeline transports North Slope crude oil south to the Valdez Marine Terminal, where the oil is then shipped by tankers to West Coast refineries. TAPS is currently the only means for transporting North Slope crude oil to refineries and the petroleum consumption markets they serve.



Low flow rates on crude oil pipelines can cause operational issues, particularly in the frigid Arctic. On June 15, 2011, the TAPS operator, Alyeska Pipeline Service Company, released the TAPS Low Flow Impact Study that identified the following problems that might occur as North Slope oil production progressively declines below 600,000 bbl/d, thereby resulting in declining TAPS throughput:

* Potential water dropout from the crude oil, which could cause pipeline corrosion

* Potential ice formation in the pipe if the oil temperature were to drop below freezing

* Potential wax precipitation and deposition

* Potential displacement of the buried pipeline due to soil freezing and thawing, as pipeline operating temperatures decline

Other potential operational issues at low flow rates include: sludge drop-out, reduced ability to remove wax, reduction in pipeline leak detection efficiency, pipeline shutdown and restart, and the running of pipeline pigs that both clean and check pipeline integrity.

The severity of potential TAPS operational problems is expected to increase as throughput declines; the onset of TAPS low flow problems could begin around 550,000 bbl/d, absent any mitigation. As the types and severity of problems multiplies, the investment required to mitigate those problems is expected to increase significantly. Because of the many and diverse operational problems expected to occur below 350,000 bbl/d, considerable investment might be required to keep the pipeline operational below this throughput level.

Analysis of Alaskan production in the Annual Energy Outlook 2012 (AEO2012) assumed that the North Slope oil fields would be shutdown, plugged, and abandoned and TAPS would be decommissioned, when two conditions were simultaneously satisfied: 1) TAPS throughput was at or below 350,000 bbl/d and 2) total North Slope oil production revenues were at or below $5.0 billion per year. These conditions are satisfied only in the AEO2012 low oil price case, when North Slope oil production is shutdown and TAPS is decommissioned in 2026.

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ONG Crude Oil, Natural Gas and Gold Weekly Technical Outlook for Saturday Sept. 15th

Well, it's Saturday and that means it's time to check in with the staff at Oil N Gold and get their call on crude for this week......

Crude oil's rally finally resumed last week and breached 100 psychological level before closing at 99.06. Near term outlook stays bullish as long as 94.08 support holds. Current rise is expected to continue higher. However, as noted before, rise from 77.28 is viewed as the fourth leg inside the triangle pattern from 114.83. Hence, we'll be cautious on topping between 100 and 110. Meanwhile, break of 92.94 will indicate reversal and bring decline back to 55 days EMA and below.

In the bigger picture, price actions from 114.83 are viewed either a three wave consolidation pattern that's completed at 77.28, or a five wave triangle pattern that's still unfolding. In any case, break of 110.55 resistance will strongly suggest that whole rebound from 33.29 has resumed for above 114.83. While another fall could be seen before an eventual upside breakout, downside should be contained above 77.28 support.

In the long term picture, crude oil is in a long term consolidation pattern from 147.27, with first wave completed at 33.2. The corrective structure of the rise from 33.2 indicates that it's second wave of the consolidation pattern. While it could make another high above 114.83, we'd anticipate strong resistance ahead of 147.24 to bring reversal for the third leg of the consolidation pattern.

Nymex Crude Oil Continuous Contract 4 Hour, Daily, Weekly and Monthly Charts

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Natural gas jumped to as high as 3.070 last week and the development firstly suggests that fall from 3.277 has completed at 2.575. More importantly, the corrective three wave structure of the fall argues that natural gas hasn't topped yet. Further rally is mildly in favor this week and break of 3.070 will target a test on 3.277 resistance. Meanwhile, break of 2.888 resistance turned support will mix up the near term outlook and turn focus back to 2.575. In the bigger picture, the failure to sustain above 3.255 support turned resistance didn't confirm medium term trend reversal. That is, whole decline from 6.108 could still extend and a break below 2.168 will pave the way to a new low below 1.902. Nonetheless, again, sustained break of 3.255 will confirm trend reversal and a test on 4.983 key resistance level should at least be seen.

In the longer term picture, as long as 3.255 resistance holds, whole down trend from 13.694 (2008 high) is still in progress, so is that from 15.78 (2005 high). Another fall could be seen to 1999 low of 1.62 on resumption. But decisive break of 3.255 will now be an important sign of long term bottoming,

Nymex Natural Gas Continuous Contract 4 Hour, Daily, Weekly and Monthly Charts

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Gold's rally continued last week and reached as high as 1780.2 so far. Near term outlook remains bullish with focus on 1792.7/1804.4 resistance zone. Decisive break there will have larger bullish implication and would pave the way to 1923.7 historical high. Nonetheless, before that, rise from 1526.7 is viewed as a leg inside the medium term ranging pattern only. Below 1720 minor support will indicate reversal and turn near term outlook bearish.

In the bigger picture, price actions from 1923.7 high are viewed as a medium term consolidation pattern. There is no indication that such consolidation is finished, and more range trading could be seen. In any case, downside of any falling leg should be contained by 1478.3/1577.4 support zone and bring rebound. Meanwhile, break of 1792.7/1804.4 resistance zone will argue that the long term uptrend is possibly resuming for a new high above 1923.7.

In the long term picture, with 1478.3 support intact, there is no change in the long term bullish outlook in gold. While some more medium term consolidation cannot be ruled out, we'd anticipate an eventual break of 2000 psychological level in the long run

Comex Gold Continuous Contract 4 Hour, Daily, Weekly and Monthly Charts

What is the Gold and Oil Guys call this week?

CME Group Energy Market Recap for Friday Sept. 14th

October crude oil prices eclipsed the $100.00 level earlier in the session and registered its eight consecutive higher close. While crude oil closed in positive territory, it was $1.40 off its best level of the session.

Further weakness in the US dollar and a drastic improvement in risk taking sentiment inspired the gains in October crude oil. Gains were also seen in the product markets on the hopes that more US Fed quantitative easing could stimulate demand. It also seemed that more unrest in the Middle East region provided an added level of support for the crude oil complex.

Meanwhile, this morning's US reading on Consumer Prices showed their largest jump in three years, with 80% of the gains coming from higher gasoline prices. October crude oil ended the week with a gain of 2.6% and the highest close since May 7th.

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Working Natural Gas Storage Capacity Grows 3% Year over Year

EIA estimates that the demonstrated peak working gas capacity for underground storage in the lower 48 states rose 3%, or 136 billion cubic feet (Bcf), to 4,239 Bcf in 2012 compared with 2011. EIA's report compares data from April to April; since April 2012, EIA analysts said 7.5 Bcf has been added to working gas storage capacity cited in the report, and they estimated that another 32 Bcf could potentially be added by year end.

Demonstrated peak capacity is the aggregate peaks for a rolling five year period of what storage operators actually put in the ground. It differs from design, or engineered, capacity (a larger volume), which is what the nation's storage facilities could physically hold. The demonstrated peak volume is what typically is considered a proxy for full storage.




The report data are as of April in each year. Since April 2012, however, another 7.5 Bcf has been added to working gas storage capacity, and EIA analysts believe from anecdotal information that there is the potential for another 32 Bcf to be in operation by year-end.....Read the entire EIA article.

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Transocean Announces Agreements to Sell 38 Shallow Water Drilling Rigs to Shelf Drilling

This week Transocean (RIG) announced that the company has reached definitive agreements to sell 38 shallow water drilling rigs to Shelf Drilling International Holdings, Ltd. ("Shelf Drilling") for approximately $1.05 billion. The list of rigs to be acquired by Shelf Drilling in the transactions is provided as Appendix A. Shelf Drilling is a newly formed company sponsored equally by Castle Harlan, Inc., CHAMP Private Equity and Lime Rock Partners. 

The sales price includes approximately $855 million in cash, subject to working capital and other closing adjustments, and $195 million in seller financing. Seller financing will be in the form of preference shares issued by an affiliate of Shelf Drilling. As a component of the agreement, Transocean will provide various transition support services to Shelf Drilling for a period subsequent to the closing of the transactions. The transactions are expected to close in the fourth quarter of 2012, subject to certain conditions.

"This agreement marks an important milestone in our asset strategy to increase our focus on high-specification floaters and jack ups, improving our long-term competitiveness," said Steven L. Newman, President and Chief Executive Officer of Transocean Ltd.

David Mullen, President and Chief Executive Officer of Shelf Drilling, added, "This is an exciting opportunity with great potential. Our strategy will be to maintain an exclusive focus on shallow water drilling, leveraging decades of complementary industry experience of management, three leading investment firms, and our employees, to provide best in class drilling operations for our customers."

Related to the Shelf Drilling transactions, Transocean expects its third quarter 2012 results to include a non-cash charge related to impairment of the long-lived assets or goodwill allocable to these assets. As of June 30, 2012, the aggregate carrying amount of the long-lived assets included in the transactions was approximately $1.4 billion. The sales price includes approximately $200 million related to the net current assets associated with the transactions. Transocean's total aggregate consolidated goodwill as of June 30, 2012 was $3.1 billion, a portion of which is expected to be allocated to the assets included in the transactions.


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This Weeks EIA Short Term Outlook Highlights

• EIA expects U.S. total crude oil production to average 6.3 million barrels per day (bbl/d) in 2012, an increase of 0.7 million bbl/d from last year. Projected U.S. domestic crude oil production increases to 6.8 million bbl/d in 2013, the highest level of production since 1993

• World liquid fuels consumption grew by an estimated 1.0 million bbl/d in 2011. EIA expects consumption growth of 0.8 million bbl/d in 2012 and 1.0 million bb/d in 2013, with China, Russia, the Middle East, Brazil, and other countries outside of the Organization for Economic Cooperation and Development (OECD) accounting for most of the consumption growth. Although forecast liquid fuels consumption in the United States increases by 0.1 million bbl/d in 2013, total OECD liquid fuels consumption falls by 0.2 million bbd/d in 2013, led by declines in consumption in Europe and Japan.

• EIA expects non OPEC liquid fuels production to rise by 0.5 million bbl/d in 2012 and by a further 1.2 million bbl/d in 2013. The largest area of non-OPEC growth is North America, where production increases by 1.0 million bbl/d and 0.6 million bbl/d in 2012 and 2013, respectively, due to continued production growth from U.S. onshore shale and other tight oil formations and from Canadian oil sands. EIA expects that Kazakhstan will commence commercial production in the Kashagan field next year, increasing its total production by 160 thousand bbl/d in 2013. In Brazil, EIA projects output to rise by 200 thousand bbl/d in 2013, with increased output from its offshore, pre-salt oil fields. Forecast production also rises in Columbia, Russia, and China over the next two years, while production declines in Mexico and the North Sea.

• EIA expects that OPEC member countries will continue to produce more than 30 million bbl/d of crude oil over the next two years. Projected OPEC crude oil production increases by about 1.0 million bbl/d in 2012 and 0.1 million bbl/day 2013. The growth in OPEC supply is due in part to Iraq, where new infrastructure has enabled the country to increase production to the highest level since 1989. Following a disruption in early July, Libya restored oil production and exports to about 1.5 million bbl/d in August. OPEC non-crude oil liquids (condensates, natural gas liquids, and gas-to-liquids), which are not covered by OPEC's production quotas, averaged 5.3 million bbl/d in 2011. EIA forecasts that non-crude oil liquids will increase by 0.3 million bbl/d in 2012 and by 0.2 million bbl/d in 2013.

• EIA's forecast of Iranian crude oil production is unchanged from last month's Outlook, with forecast production falling by about 1 million bbl/d by the end of 2012 relative to an estimated output level of 3.6 million bbl/d at the end of 2011, and by an additional 0.2 million bbl/d in 2013.

• EIA estimates that OECD commercial liquid fuel inventories ended 2011 at 2.60 billion barrels, equivalent to 56 days of forward cover. OECD stocks at the end of August 2012 are estimated to be about 22 million barrels higher than at the end of 2011, but are projected to fall back to 2.60 billion barrels by the end of 2012. OECD commercial inventories increase to 2.65 billion barrels and 57 days of forward cover by the end of 2013.

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Pad Drilling and Rig Mobility Lead to More Efficient Drilling

Is it Time to Buy into Silver?

Developments in drilling methods and technology are leading to efficiency gains for oil and natural gas producers. For example, "pad" drilling techniques allow rig operators to drill groups of wells more efficiently, because improved rig mobility reduces the time it takes to move from one well location to the next, while reducing the overall surface footprint. A drilling pad is a location which houses the wellheads for a number of horizontally drilled wells. The benefit of a drilling pad is that operators can drill multiple wells in a shorter time than they might with just one well per site.

Moving a drilling rig between two well sites previously involved disassembling the rig and reassembling it at the new location ("rigging down" and "rigging up") even if the new location was only a few yards away. Today, a drilling pad may have five to ten wells, which are horizontally drilled in different directions, spaced fairly close together at the surface. Once one well is drilled, the fully constructed rig can be lifted and moved a few yards over to the next well location using hydraulic walking or skidding systems, as demonstrated by Range Resources.

 
Source: U.S. Energy Information Administration, reproduced with permission from Statoil.
Note: Three-dimensional representation of oil or natural gas development of a large underground area, from four drilling pads 

In the picture above, each of the four drilling pads hosts six horizontal wells. Pad drilling allows producers to target a significant area of underground resources while minimizing impact on the surface. Concentrating the wellheads also helps the producer reduce costs associated with managing the resources above-ground and moving the production to market.

Bentek Energy, LLC analysis shows that drilling operators are achieving efficiency gains in the well-drilling process. In June 2012, operators in the Eagle Ford shale formation averaged about 19 days to drill a horizontal well, down from an average of 23 days in 2011. Reducing the time it takes to drill wells can save oil and gas producers a significant amount of money. In the North Dakota section of the Bakken formation, the increase in drilling rigs in the area has begun to slow, but production levels continue to reach record highs each month.

Recent studies by the University of Pittsburgh and Rigzone, as well as analysis of financial reports from E&P companies Abraxas, EQT, and El Paso, show that drilling costs alone are only a portion of the total drilling and completion expenses that producers face. EIA analysis of average Bakken, Eagle Ford, and Marcellus well-related expenses finds that total costs per horizontal well can vary between approximately $6.5 million and $9 million. The cost of completing and hydraulic fracturing typically exceeds the cost of drilling the well.



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ConocoPhillips Looking to Enter China Natural Gas Shale

Is it Time to Buy into Silver?

ConocoPhillips is looking into expanding its China operations to include shale gas, a company executive said Tuesday.

A move by ConocoPhillips [ticker COP] would help China, a country with no commercial shale gas production in 2011, along on its ambitious target to produce 229.5 billion cubic feet a year of shale gas by 2015. ConocoPhillips, which currently holds stakes in Chinese offshore drilling projects, is "looking into expanding into shale" in the country, Mark Nelson, ConocoPhillips's vice president of commercial and sustainable development, told Dow Jones Newswires.

Mr. Nelson spoke on the sidelines of the U.S.- China Oil & Gas Industry Forum in San Antonio, where Chinese government officials and energy executives met with their U.S. counterparts to discuss....Read the entire Rigzone article.

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Is it Time to Buy into Silver? SLV

The price of silver reached a 5 month high this past week as investor interest seems to have been rekindled in both gold and silver as belief in financial markets increases that the latest round of monetary easing from the Federal Reserve, QE3 , will soon be on its way. Many investors had largely stayed away from silver in recent months after some had got caught up in its volatility. Silver had touched a 30 year high in April 2011 before plunging 35 percent in a few short weeks.

Now the volatility is back, but on the upside, as prices have climbed more than 20 percent in less than a month. The gains have outpaced that of gold which rose roughly 10 percent during the same time frame. Importantly for investors, the ratio between the two precious metals has moved about 10 percent in silver’s favor since mid August. This is the first time silver has outperformed gold since the start of 2012.

For non futures investors, the two precious metals can easily be tracked through the use of exchange traded funds (ETFs). The most liquid ETFs for the two precious metals are the iShares Silver Trust (SLV) and the SPDR Gold Shares (GLD) respectively.

You can take a look at my long term outlook analysis from last week here "Gold Standard to be Reinstated Through the Back Door"

Some may wonder why has silver outperformed gold in the past several weeks? The answer goes deeper than just confidence that QE3 is coming soon, but it is still rather a simple one. The sharp rally in silver was fueled largely by short covering. That is, some investors (hedge funds, etc.) had made rather large bets that silver would continue falling and were caught off guard by its recent rise. According to data from the Commodities Futures Trading Commission, the silver market during the week of August 27-31 saw the largest amount of short covering since May 2011. At the same time. Bloomberg reported that hedge funds were the least bullish on silver in almost four years.

It is unknown for how long silver will outperform gold. But even some long term fundamental investors such as legendary commodities investor Jim Rogers has said that he believes silver right now is a better investment than gold. He points to the fact that historically gold has been worth about 12 to 15 times what silver is worth, but that recently it has been worth roughly 50 times silver’s value. Silver is also the only major commodity not to have reached a new all time high in the decade long commodity bull market and is still cheaper than it was 32 years ago.

So it may be worth a look. But since silver is so volatile, wait for a downward spike before initiating or adding to a long position.

If you would like to get my weekly analysis on precious metals
and the board market join my free newsletter at www.TheGold&OilGuy.com

Chris Vermeulen


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