2012 December 14

The Master Resource Report  2012-12-14

Over a $50 discount to Brent – Really?

Brent is selling for triple digits while Canadian tar sands streams are selling for discounts near $50 to Brent. According to tar sands producer Cenovus (12/11/2012) Western Canadian Select and Cold Lake Blend streams are selling for $330 and $313 respectively (Canadian $/m3). This works out to about $52/b for Western Canadian Select and $50/b for Cold Lake Blend.

In a sign of the situation in the tar sands Canadian Oil Sands’ announced spending will be cut by $1.3 billion or 11% in 2013.

In addition Suncor’s CEO recently indicated new production in North Dakota is hurting the economics of tar sands production. Reuters reported last week that the “company has pushed back plans to construct the Fort Hills oil sands project, and said on Monday it and partner Total SA will decide by the end of the first quarter whether to go ahead with a multibllion-dollar upgrading plant known as Voyageur.”

Current prices clearly have them thinking twice about moving forward with large capital expenditures.

Oil price prediction

No I have not given up on my Prime Directive to never predict price. Bank of America Merrill Lynch on the other hand is fearless and is predicting WTI could drop to $50 per barrel. They also seem to somehow think that the U.S. will disconnect itself from the global crude market. I guess this is what happens when your office is on top floor of a very tall building in a low oxygen environment.

“While the rest of the world will continue to fight for scarce molecules of oil and gas, North America’s energy supplies are surging. Onshore oil supply growth is running at twice the rate that natural gas did at the peak, and we see a risk of WTI crude oil prices temporarily dropping to $50/bbl over the next 24 months to force a slowdown in output.”

WTI pricing is impacted by the same logistical issues that confront the Canadian tar sand producers. They cannot get their product to the global market. In addition both have made capital commitments to production that are now flooding the regional market with supply just like that being experienced in the natural gas market in North America. Until producers get a rational capital spending plan and the transport capacity improves WTI will continue to sell at a discount to the seaborne market reflected by Brent. But $50/b…Hmmmm?

There is one other possible scenario for $50 per barrel WTI, a deep recession. Remember December 2008 oil WTI fell to the low $30/b. If that happens there will be plenty of folks in North Dakota who will wish they had never heard of “hydraulic fracturing” because operations there will come to a screeching halt. Capital spending in the tight oil plays of North Dakota will come under the same stress being experienced further north right now in the Canadian tar sands and the shale gas plays in the U.S.

Let’s hope Bank of America Merrill Lynch is as accurate with this oil price prediction as it usually is. Then we will never see that $50 price.

All petroleum liquids are not oil.

This report and others have been questioning the shift to the confusion caused by reporting all liquids and barrels of oil equivalent (BOE) for some time. Now a major investment firm has finally confronted this point in a report titled “All that is liquids is not oil, and cars can’t run on ethane.” The report was put out by Bob Brackett at Bernstein Research.

There is the possibility of NGL substitution for some petroleum uses; the decline in naphtha input for petrochemical production is the most obvious example. But it’s limited, according to Bernstein. “(About) 70% of NGLs have zero ability to directly compete with crude oil/gasoline in the transportation sector,” the report said. “These NGLs could indirectly compete with crude via other end uses, but assuming one incremental barrel of total liquids production directly displaces one barrel of US crude imports is a fallacy, in our view.”

For major oil companies that are shifting reserves from crude oil to natural gas BOE it is a convenient way to cover their declining crude oil reserves. For the rest of us we need gasoline and diesel, not ethane and butane.

An upbeat view on oil and gas supplies

Every now and then everyone should consider the other side of a story so here is one with a different perspective on the future supply of oil and gas.

“New technology means Britain and the U.S. could tap undreamed reserves of gas and oil.”

Natural gas rig count

According to this week’s rotary rig count released by Baker Hughes the number of rigs drilling for natural gas is now down 49% from a year ago at 416. The shale gas “game changer” so far is keeping the rigs idle. Too bad the companies didn’t pay more attention to the drilling frenzy a couple of years ago. It would have saved everyone a lot of pain.