2012 August 3

The Master Resource Report  2012-08-03

So are U.S. reserves up or down?

What a week this was for news on oil and gas reserves in the U.S. The EIA came out with it new report on U.S. Crude Oil, Natural Gas, and Natural Gas Liquids Proved Reserves and a long list of U.S. oil and gas producers reported second quarter results and reserves.

First off the EIA was just popping it buttons to report that “Proved reserves of U.S. oil and natural gas in 2010 rose by the highest amounts ever recorded since the U.S. Energy Information Administration (EIA) began publishing proved reserves estimates in 1977.”

Now fast forward to this week from 2010 and nearly every U.S. oil and gas producer reporting announced billion dollar write downs of natural gas reserves and huge cuts in capital spending. BHP for example just took a $2.84 billion write down against shale gas assets they bought just 18 months ago. Apparently the EIA is running way behind (budget cuts???) the reality facing the natural gas world and shale gas in particular.

The problem is so far this year natural gas prices have averaged under $3 and briefly fell below $2 while back in 2010 they were well above $4. Price plays a huge part in determining when a resource in the ground can be considered a reserve. There is more in this week’s report but for a starting point this is what the EIA had to say about the impact of price this week.

“It is important to note that the average natural gas price used in estimating proved reserves for 2010 does not reflect the more recent and prolonged downward trend in natural gas prices. For the 2011 reporting period, the average natural gas price fell more than 5 percent to $4.15 per MMBtu, reflecting the dual impact of continued increases in domestic production (due largely to shale gas development) and significantly rising inventories. This held particularly true during the second half of 2011, when the daily Henry Hub spot price dipped below $4.00 per MMBtu, averaging $3.17 per MMBtu in December and finishing the year at $2.98 per MMBtu. It can be expected, therefore, that price-driven negative revisions will affect overall natural gas proved reserves additions in 2011.”

The information on price of course will not make it in the news and blog reporting over the next week. The headlines will more likely read like this; “EIA reports proved reserves of U.S. oil and natural gas in 2010 rose by the highest amounts ever recorded…!!” Is it any wonder why the public is so confused about energy?

It should be noted here that this same problem is now ripping its way through the natural gas liquids (NGLs) market. It is also beginning to show its ugly head in unconventional tight oil plays as well.

Gas rig count down again

Baker Hughes released its rig count data today and to no ones surprise the number of rigs drilling for natural gas was down again. 498 rigs were drilling for gas, down 7 from last week and 385 from last year. The rig count for oil was up 13 in the U.S.

In North America which includes Canadian drillers the total fell 29 between oil and gas. Canadian oil focused drilling took the biggest hit falling 33 with gas slipping 2.

Where is all that new oil?

The graphic below (click the graphic or here for link to original) shows where the oil of tomorrow is today. It should be noted that U.S. tight oil and deep water Gulf of Mexico are not included.

Click image for link to original

Does natural gas kill diesel for trucks?

My friend Derik Andreoli wrote a very interesting analysis for Logistics Management on some of the risk to be considered when looking at making the shift away from diesel. As Derik makes clear below the motivation could be very high for even a small cut in fuel costs. The hard part will be determining if it is the right thing to do.

“The average truck consumes roughly 11,000 gallons of diesel per year. Consequently, even minor shifts in fuel prices have a significant impact on operating costs. For instance, when applied to a fleet of 100 trucks, a price drop of 25 cents per gallon generates annual savings exceeding a quarter of a million dollars.”

Taking Derik’s comments together with the information posted last week on CNG vs LNG should make it clear a large transition to natural gas in the trucking industry may take longer than the optimists are predicting.