2013 January 11

The Master Resource Report  2013-01-11

Total halts shale gas investment in the U.S.

The French oil company Total made a very clear statement about what it will take to make dry gas production in the U.S. work and it is not $3.25 per MMbtu.

“Our investment in Texas shows a serious loss which, of course, does not question Total’s results or development,” he said. The Total chief said the company had invested in Texas on the basis of gas at more than $6 per British thermal unit, but that “today we are at $3.2 (per btu). It does not work”.

For those who are trying to get a handle on where gas price will need to be to support an abundant supply that “more than $6” level Total used might be a good starting point. Getting there of course may prove to be a very rough road.

Clearly shale gas development has proven to be a “game changer” for Total. They have decided to quit playing that game for now.

U.S. gasoline demand falls further

In its weekly report of U.S. gasoline product supplied the EIA estimate fell to 8.01 million barrels per day. The last time the U.S. saw consumption this low during the first week in January was in 2001 when it was 7.8 million barrels per day.

The graph below (EIA data) shows that until the economy hit the wall in 2007-08 demand was resisting the price increases seen since 2004. It is clear now that consumption is responding to both price and the slow economy. If those two conditions persist and average mileage continues to improve it seems unlikely that the consumption peaks of 2006-07 will be seen again. The surprise for many will come when the price of gasoline does not follow consumption’s downward slope back to those same early 2000’s levels.

Click image for larger view

The net result could be no relief for the economy from the drag of fuel costs. “…. Americans were expected to spend a record amount on gasoline in 2012 after spending $490 billion in 2011 – that figure itself about $100 billion more than in 2010. Last’s year tally is expected to come in around $500 billion.” Half a trillion dollars is a lot of money even by today’s standards.

Jeff Rubin asks – “How Big is Canada’s Oil Subsidy to the US?”

To put it simple it is huge and as Jeff points out it does not go to U.S. consumers.

“Do the math on some 2 million barrels a day of heavily discounted oil exports and suddenly you’re talking about an enormous wealth transfer from Canadian oil producers to American refineries. (Note, the subsidy is pocketed by US refiners, not motorists, who don’t see the Canadian discount when filling up at the pumps.) What if Canadian oil was getting world prices? At the current Brent-Western Canadian Select spread of roughly $50 a barrel, you’re in the neighbourhood of $100 million a day. That equates to foregone revenues of more than $35 billion over the course of a year.” [See crude prices on page one of this week’s report for examples of this price spread.]

Note: Currently clients and advisers at Ravenna Capital Management currently hold positions in Total.