Energy Security

[AdamG]

In response to the disruption of Iranian supply, the New York Times reported this morning that the United States is increasing its dependence on oil from Saudi Arabia, the imports of which have increased by over 20 percent this year.

Oh yeah?

Saudi Aramco, Saudi Arabia’s national oil company and the largest in the world, has confirmed that is has been hit by a cyber attack that resulted in malware infecting user workstations, but did not affect other parts of its network.

http://earlywarn.blogspot.com/2012/0...ith-cyber.html

[Bill Moore]

No impact on production, so overall an ineffective attack, but none the less a sign of the times and various ways that activist groups can disrupt states and businesses. An Arab Youth hacking group took credit for this one, but of course it would be a viable tactic for Iran to make our sanctions more painful on those enforcing them.

[Rick M]

Sadad al Husseini is a knowledgeable veteran re oil, esp in Saudi Arabia.
He recently wrote a concise (842 words) response to Maugeri's report in PIW, which is behind a pay-wall.
TOD has re-posted it:
http://www.theoildrum.com/node/9411#more


al Husseini's credibility comes through very nicely in this video (7:22)... his English is perfect. The video which also gives you an opportunity to see what some of the main PO analysts have to say:
http://www.youtube.com/watch?v=0ccUPutDZMM

He hits two key points around the 6th minute:
- production of oil (ie. conventional petroleum) has been stuck since late 2004
- the increase in prices started back in 2002

[Bill Moore]

Contrary arguments from the investment community against the doom and gloom. Green energy stocks have crashed, while fossil fuels are making a come back, especially in the U.S. due to INCREASED production.

http://www.smartmoney.com/invest/str...od=sm_mag#tabs

The Return of Fossil Fuels
Enormous new oil and gas discoveries under American soil are having a game-changing impact on the entire economy. How to play the new energy boom.

[Rick M]

Optimism re. US oil supply is founded primarily on shale oil, which in turn is founded primarily on the ND Bakken (and Eagle Ford in Texas).

Rune Likvern is a veteran Norwegian oil & gas analyst who examined recent data on Bakken shale oil wells. Yesterday he posted this graph indicating that the average production for the first 12 months of Bakken wells has been declining:
http://www.theoildrum.com/files/Fig0...oductivity.PNG

Rune's info has sparked an ongoing debate today at The Oil Drum, where a veteran O&G supervisor ("Rockman") said:

Older Bakken horizontal wells did not have the production potential of newer wells. As you point out newer wells are longer and have more frac stages. Additionally I think it’s safe to assume they have improved the frac quality itself. So a new horizontal well should have a much better production profile than an older well.

Which is why it’s so freaking important for folks to look at Rune’s chart above so closely. It shows the productivity of the Bakken wells in discrete time frames. If I’m reading the chart correctly the new better improved (and more expensive) Bakken horizontal wells are not producing like wells drilled some years ago: they are not as good as the older wells. For example Bakken wells drilling during the summer of 2010 recovered about 110,000 bo during their first 12 months of life. Wells drilled December 2011 produced 90,000 bo their first 12 months. And wells drilled during July 2011 produced closer to 80,000 bo their first 12 months.

So as knowledge of the trend increased and companies drilled longer, more heavily frac’d and much more expensive wells the quality of the production decreased. Above I said the potential of new wells is greater…not the actual production. The simple explanation IMHO is that the better areas of the trend have been drilled and now operators are moving into less productive areas. And even though they are drilling wells that should produce better results than the early wells they are actually producing poorer results.

And this the path that every trend in the history of the oil patch has followed: the better acreage is drilled first. And even as the technology improves, the rocks don’t. We have to spend more money to produce less hydrocarbons. What shocks me a tad is to see how quickly it has shown up in the Bakken. About 30 years ago I was typically drilling 12,000’ wells to test potential conventional NG reservoirs that might cover 1,500 acres. In the last 3 years I‘ve been drilling 16,000’+ wells (that can cost 2X what a 12,000’ well costs) for potential NG reservoirs that cover 120 acres. But that transition happened over a 30 year period. The Bakken transition, if it continues to decline at the current rate, will be the most dramatic transition I’ve seen in my career.

The entire discussion is here:
http://www.theoildrum.com/node/9474#comments_top

[Ulenspiegel]

Originally Posted by Bill Moore

Contrary arguments from the investment community against the doom and gloom. Green energy stocks have crashed, while fossil fuels are making a come back, especially in the U.S. due to INCREASED production.

http://www.smartmoney.com/invest/str...od=sm_mag#tabs

1) To correlate stock values with actual performance and long-term perspective of a company is dangerous :-)

2) Investment guy have no problem with creating a hype, making then their money and letting other pay for the damage/losses.

3) Hard data on production tells a different story, esp when production costs are discussed: Production of cheap oil decreases and OTOH domestic consumption of the producers and global demand increases.

4) The models used by economists for cude production and prices were piss poor in the past, the better models were developed after the productions has stalled and are still not what a scientist would call robust models. :-)

5) Increased production in the USA and Canada replaces imports at a very high price level. There is no chance that the prices for crude will go down in the medium term without a recession.

6) Energy required for production: You need a lot of energy ro extract the unconventional stuff, so your decision basically is, do you sell the natural gas or do you use it to get more crude? The picture drawn by many economists like "The USA can sell NG and produce large amounts of shale oil etc." will not work in reality.

[Fuchs]

Originally Posted by Bill Moore

Contrary arguments from the investment community against the doom and gloom. Green energy stocks have crashed, while fossil fuels are making a come back, especially in the U.S. due to INCREASED production.

http://www.smartmoney.com/invest/str...od=sm_mag#tabs

Green energy stocks have crashed in Germany because the Chinese state subsidised its green energy (mostly photovoltaic) industry greatly. There are now surplus output capacities and the Chinese are beating us in terms of price/Watt (they focused on this more than on photovoltaic efficiency).

The green energy sector is experiencing a boom, and it's utterly irrelevant what Wall Street or Deutsche Brse say about it.




(I saw a newer graphic; the story continued with exponential growth in 2011.)

The Americans are losing this market race badly and are falling behind (even more so than the Germans), but that doesn't mean that green energy is in trouble globally.

[Bill Moore]

Fuchs,

I'm only aware of this through painful experience, but several Chinese solar company stocks have collapsed also. That doesn't refute what you're stating, and I agree the U.S. currently is competitive and will be positioned badly when they bounce back. I jumped too quickly into solar and wind without doing the normal level of research, so I deserved to get burnt, but green energy is still problematic. I think there are some emerging opportunities in green energy, but I don't think alternative forms of energy will be profitable for awhile. Profitable now are technologies that increase the efficiency of legacy carbon based energy sources.

[Firn]

I wonder how the turnover in the housing sector will affect the energy consumption of especially northern/central European economies. In the last decades houses have been increasingly better insulated with more efficient heating. Even when we discount energy production with solar&geothermal power the replacement of far more inefficient units should have a big impact on the energy consumption.

Maybe there is an interesting paper out there.

[Fuchs]

Bill, profitability and economic activity (or growth thereof) are different pairs of shoes.

My standard example which I offer to people who expect huge profits from growth market are airlines; huge growth sustained for decades, but many of them including big ones are barely able to avoid bankruptcy, if at all.

[Bill Moore]

Posted by Fuchs

My standard example which I offer to people who expect huge profits from growth market are airlines; huge growth sustained for decades, but many of them including big ones are barely able to avoid bankruptcy, if at all.

Excellent point, and one I haven't really considered. Obviously I need to do more studying in this field.

[Fuchs]

This is not meant as a guide to make money or other economic advice, but if I was looking for profitable businesses or sectors, I'd -among other things- look at their relative position in the chain of added value.

One example that shows the opposite of profitability, a business model that was good enough to survive but not good enough to pay more than bills:

I once calculated a business plan for a company that was modelled after another company. The other, existing, company had agreed to provide me internal data. Their reasoning was that the market needed more marketeers to widen demand and needed more companies in business to assure customers of security of supply. an additional competitor was more of a gift than a problem in this sector.
So I calculated and calculated and the result was no substantial profit under realistic assumptions. That turned out to be correct for the existing company.
Here's why:
The companies of that sector processed a single raw material. Their suppliers (farmers) were able to choose freely whether they want to supply this raw material or instead grow something else. The customers for the processed stuff on the other hand were free to choose freely between it and multiple synthetic substitutes.
These processing businesses were in a sandwich; zero market power against suppliers and zero market power against customers. Their only hope of profit laid in their skill at misleading their business partners about how much was left to squeeze out of themselves.

The opposite - a company with superior relative market power against suppliers AND customers - is almost inevitably a gold mine.

[Dayuhan]

Many alternative energy stocks were run up to absurd speculative levels during the oil price surge in 2007-2008. In most cases the "values" of these shares were totally disconnected from any fundamentals and were not sustainable. What followed was less a "collapse" than a return to realistic valuations.

There's certainly a future in alternative/renewable energy, but many of the companies in the field have a minimal track record and it's still way too early to determine what direction that future will take and which companies will be the main beneficiaries. Unless you have some serious technical expertise it's a sector to be cautious with: lots of hype flying around and you need to be able to sort the hype from the reality.

Chinese stocks... don't get me started. There may be some good companies there, but given the standard of reporting it will be difficult to find them.

[Bill Moore]

Dayuhan,

I generally stay away from the Tulip mania stocks and the ones I bought had moderate PE ratings (25 or less, which is low for a high tech company). Their value was reduced significantly due to the proliferation of competitors and the rising cost of raw materials. To be competitive they had to sell at lower prices (supply and demand), and combined with the rising costs of basic materials that means less profit, or maybe even a loss so they can keep the doors open. Add to that the global financial downturn which equates to fewer businesses and individuals buying solar it isn't hard to see what the drove the prices down. It will eventually sort itself out and the winners may turn out to be big winners in the long run.

As for China they have a couple of superb companies, but not more than a couple, but don't underestimate their ability to steal great ideas and technologies from the U.S. and Europe and market them at a cheaper price!

[Dayuhan]

Problem with trying to assess things like P/E ratios on Chinese stocks, especially with smaller companies, is that you have no idea whether the reported figures have any basis in reality. The accounting can be sloppy at best and fraudulent at worst. It's a serious minefield and one worth staying well away from unless you're willing to do a whole lot of digging into situations where accurate information may be very difficult to find.

[Rick M]

Over the past few years we've had several studies & articles posted here re. Saudi export decline.

This article from yesterday's Gulf News reviews some of those previous studies and offers a balanced, reasonable view of what may lie ahead:
http://gulfnews.com/business/opinion...abia-1.1082656

[Ulenspiegel]

The simple solution for Saudi Arabia and Asianand African countries with a high percentage of their electricity produced with oil and used during daytime for running ACs:

PV is cheap in these countries and makes economically sens with crude at 65 USD. At the moment Saudi Arabia losses 30 USD per barrel they burn.

[Fuchs]

Originally Posted by Ulenspiegel

(...) with crude at 65 USD. At the moment Saudi Arabia losses 30 USD per barrel they burn.

This doesn't seem to fit.
You seem to forget to include opportunity costs into how much they lose.

[Firn]

Without having the numbers it is difficult to make an educated guess, but I think one can say that the internal oil prices do not cause the forces of the market to create a lot of photovoltaics, even if the conditions for them might be close to ideal.

[Ulenspiegel]

Originally Posted by Fuchs

This doesn't seem to fit.
You seem to forget to include opportunity costs into how much they lose.

will provide some data later