The Canadian Problem
The Canadian oil producers are trying to find a way to close the huge gap between what they get paid for their oil and the global price of this critical commodity.
According to an article in the Financial Times the gap between Western Canadian Select and comparable benchmarks now stands at more than $20 per barrel.
Western Canada Select, the regional benchmark for low quality, viscous heavy oil, is trading at extreme discounts to other regional blends. It is selling for $63 a barrel this week compared with $86 for similar heavy, sour crude from Mexico and $94.50 against West Texas Intermediate, the US oil benchmark.
Compared to the Brent benchmark the gap is even wider at nearly $45 per barrel. There is even a nearly $10 per barrel discount to the North Dakota Sweet crude price as noted last week on this web page.
The loss to the Canadian producers and Canadian economy is huge. With over 2 million barrels of exports a day the $20 per barrel discount results in more than $40 million per day or over $1 billion per month in lost revenue.
This is simply too much money that is being lost to logistic constraints and geography. It will find its way to the market. The question is whether it will be by pipeline, train or mule train. Ok maybe not mule train.
Last Week’s Thought For The Day?
Last week I asked if producers in the Bakken were selling their precious oil too cheaply at the $71 price.
Here is a comment I received from Tom:
I think this question should be asked much more broadly, about every fossil resource…. Why do we, as a society, rush to use any such resource quickly when we know scarcity will make it more valuable in the future?
Jeremy Grantham would probably point out that this is one of the biggest flaws in capitalism as it operates today. Hard to quantify externalities and environmental cost are ignored in the short-term calculations of returns and the need for cash flow to service debt.
No Report Next Week – Thanksgiving Holiday
The North Dakota Department of Mineral Resources released data today reflecting activity thru September. As expected the state’s oil production hit a new all-time record of 931,940 barrels per day in September continuing its climb towards 1 million. This was up 20,754 over the August level but was 16,518 less than the additions seen in August and 33,121 below the July additions (based on updated data released this week which does not match the numbers given in the Director Cut today.).
The report emphasized that 93% of the production came from the Bakken and Three Forks even though that only represents 61% of the producing wells in the state.
The number of wells waiting on completion increased by 90 to about 520 according to the report. Drilling crews were drilling 1.5 wells for every well completed in September which is a major shift from August when completions far outstripped new drilling.
One item of interest is the price for sweet crude produced in North Dakota. It has now fallen by over $22/barrel since August according to the report. The current price of $71.25/barrel has North Dakota crude at about a $22/barrel discount to WTI and a $37/barrel discount to Brent. It will be interesting to watch how far the price can slip before capital expenditures are adjusted.
August: Sweet Crude Price = $93.97/barrel
September: Sweet Crude Price = $92.96/barrel
October: Sweet Crude Price = $85.16/barrel
Current November: Sweet Crude Price = $71.25/barrel
(all-time high was $136.29 7/3/2008)
It is also interesting to note that the average daily production reported for August in the new data was revised down from last month’s report. This further emphasizes why short-term trends need to viewed with caution.
A thought for the day: What would that oil priced at only $71.25/barrel today be worth in say five or six years? Are they selling a valuable asset too cheaply in the rush for cash flow???
Next week’s MRR will have a more complete review of the North Dakota data.
MidAmerican goes big on wind
MidAmerican Energy, a unit of Berkshire Hathaway is planning on build new wind capacity in Iowa with a capacity of over 1 gigawatt of power generation. The fact sheet below gives some information on the scale of these current state of the art wind turbines.
Click image for larger view.
MidAmerican said it has installed 1,267 wind turbines in Iowa since 2004. When the new projects are complete, the company said about 39 percent of its generation portfolio will come from wind resources.
MidAmerican’s ability to raise capital may make it unique amongst many of its peers as is mentioned in the MRR this week. It seems to help to have a deep pocketed member in the corporate family.
Baker Hughes well count
The Baker Hughes well count released today indicated that their estimate for new wells in the Eagle Ford and Permian basins in Texas total over 3,350. That is a lot of holes in the Texas countryside. Equally amazing is that total land wells drilled in the US in the third quarter is estimated at 9,175 or over 36,000 wells annually. This is worth pondering a bit when considering the scale of the oil and gas extraction business in the US. Also keep in mind this doesn’t even consider the pipelines, refineries, rail transport and other infrastructure surrounding the oil and gas industry this nation depends on.
Note: Clients and advisers at Ravenna Capital Management currently hold positions in Berkshire Hathaway.
There will be no report next week – November 1st.
Since I will be presenting at the Geological Society of America Annual Meeting in Denver next week there will not be a report on November 1st. I am looking forward to all of the opportunities that this great meeting will provide for fresh ideas and different insights into unconventional energy extraction.
Study: US now top global liquids producer
According to New York based PIRA Energy Group the US is now the world’s top petroleum liquids producer at 12.1 million barrels per day. So what?
Upstream reported “The US total includes 7.4 million bpd of crude oil and condensate, 2.5 bpd of natural gas liquids, 1 million bpd of biofuels and 1.3 million bpd of “refinery gain”, a measure of “sophisticated high conversion capabilities”, according to PIRA’s analysis.”
Wait a minute refinery gains are now a form of production? Biofuels are petroleum? NGLs are as good as crude?
There is no doubt that US crude and condensate production have increased tremendously and stand as a testament to good old fashion American engineering but including the 4.8 million barrels of non-crude in the total is more than a little bit of a stretch.
Refinery gains are an expansion in volume not energy content and in fact on a net basis require energy input to accomplish. Since the rest of the world doesn’t consider “refinery gains” this should be ignored, think in terms of energy content.
In the case of biofuels without all the natural gas (fertilizer), diesel (farm equip. & transport of biomass) and other petrochemical inputs like pesticides it wouldn’t be possible. As many have noted it is questionable whether there is even a net energy gain, especially in the case of corn based ethanol.
The NGLs like propane and ethane play a part but not in the all-important markets of liquid fuels like diesel and gasoline.
Finally if we are such leaders in global production why are we still importing 6.5 million barrels of crude per day? This issue was covered in the October 4 issue of the MRR.
So even if we take this on face the US still depends on the global export market for just under half of the crude it consumes. Apparently the study didn’t bother to cover the other half of the story. Importantly it was the half where the US is still the world’s Largest Liquids Consumer.
Note: There will be no Master Resource Report published on November 1, 2013