2012 December 21

The Master Resource Report  2012-12-21

Best Wishes for the Holidays and the New Year.

Citigroup announces the Death of Peak Oil

Bloomberg quoted Citigroup’s global head of commodities research Ed Morse this week as saying “Peak oil is dead”.

“The shale oil revolution is a new, new thing,” said Francisco Blanch, the head of commodities research for Bank of America Merrill Lynch in New York. “It has come out of nowhere in the last year and a half.”

This is a bit surprising since The Master Resource Report first covered the Bakken play in early 2008 and the Eagle Ford play in early 2009. I guess Merrill Lynch and Bank of America had their mind on some other “new, new things” back then.

Based on these expert views it can be concluded that the supply of oil is infinite and that there is apparently no economic price limit on that supply.

This is not a new view for Ed Morse or any number of other investment bank and industry folks. What is new though is the use of the new supply surge in the U.S. and Canada (driven by higher prices) to promote and justify the establishment of exports of U.S. crude production. Currently only exports from Alaska are allowed.

This follows on the heels of a push to allow the export of large volumes of natural gas from the U.S. based on the forever abundant and cheap “Game Changing” shale gas revolution.

The question that is not being asked is whether this is just a short-term push by the industry to reshape U.S. oil policy rather than a true long-term forecast of production. Is this really more about politics than oil flow rates?

It is hard to justify all the effort and ink being expended debunking future limits on liquids fuels unless there are some very serious financial and commercial reasons. They aren’t working this hard to kill off the concept of Peak Oil (a better term is Peak Economic Oil) for just philosophical reasons or Christmas party chatter.

I suggest everyone hang on to these quotes being produced today about cheap abundant supplies of oil and natural gas in the U.S. They should make for some interesting reading in a couple of years.

Could oil see a replay of a natural gas mistake?

One of the financial components of oil and gas drilling is the ability to hedge future production, locking in a price for that production. One of the results of this during the natural gas boom that grew out of shale exploitation was E&P companies were able to continue drilling and producing even though the economics were clearly wrong. Drilling new wells to hold leases was supported by cash flow from hedged production. However as those hedges came off the realities of the natural gas market began to take hold and rigs moved off to greener pastures resulting in the natural gas rig count falling 50% year-over-year.

Now a similar tale may be beginning to unfold in the tight oil plays as exemplified by this excerpt from the above mentioned Bloomberg article. “While Morse says U.S. producers break even with prices of about $72 to $75 a barrel, and will keep drilling new shale wells at $60 because they’ve already hedged future output…” These hedges will allow them to produce below their breakeven price (note this is not make a profit price) making drilling even less profitable in a fashion similar to natural gas experienced.

The oil and natural gas markets are enough different so this will not play out exactly the same for tight oil as it has for shale gas. However it should not be forgotten this is an industry noted for not learning from past mistakes. How bad could it get? Just look at last week’s web posting on the price the Canadian’s were getting for their tar sands production in a glutted and logistically constrained market.

How important would it be if the U.S. did produce more oil than Saudi Arabia?

The EIA made a very good point this week in its “This Week In Petroleum” report when addressing the implications of such an event.

“While both U.S. and Saudi production trends are closely watched by market analysts, any future crossing of production paths is more likely to fall into the category of an interesting factoid rather than a watershed event.”

Let’s hope our nation’s policy makers understand it as a “factoid rather than a watershed event” and respond accordingly.