Greenpeace on coal exports to China
Greenpeace released a report that attempts to make an economic case (in addition to an environmental case) against the export of U.S. coal to China. “The Myth of China’s Endless Coal Demand: A missing market for US Exports”
The basic premise of the report is summed up in the first paragraph of the report summary.
Two major points need to be kept in mind when reading this report which is recommended.
First the focus on China even though U.S. exports to Europe and the rest of Asia are many times larger was a mistake. The exclusion of India from the report in particular was a major error since it is on a path to greatly increase its coal imports during the decade ahead.
The other error was the view that coal’s percentage contribution to power generation would continue implying less coal consumption. “A rapid expansion in hydroelectricity, wind, and solar has pushed down coal’s share of energy production from 85% to 73%, and this trend will continue.”
While it is true that coals relative contribution to power generation has declined in percentage terms in absolute tonnage it has increased dramatically. To illustrate this consider this excerpt from the EIA release in January of this year.
Coal consumption in China grew more than 9% in 2011, continuing its upward trend for the 12th consecutive year, according to newly released international data. China’s coal use grew by 325 million tons in 2011, accounting for 87% of the 374 million ton global increase in coal use. Of the 2.9 billion tons of global coal demand growth since 2000, China accounted for 2.3 billion tons (82%). China now accounts for 47% of global coal consumption—almost as much as the entire rest of the world combined.
Given the scale of consumption mentioned in the EIA excerpt whether the U.S. exports coal to China or not won’t change the picture at all. What happens in China is what matters. It is up to China to shift from coal burning on this scale. Whether the U.S. exports them coal or not doesn’t really matter.
The report is worth reading but do so with a critical eye and an awareness of its objective of making the case against coal exports from the U.S. west coast.
Statoil CFO interview on Bloomberg
[Comments on U.S. LNG exports at 5:30 in the video]
Exxon’s view of the future
It shouldn’t be a surprise that this is Exxon’s view, but it shouldn’t be discounted out of hand either. It does make it clear how hard it will be to get off of oil over the next couple of decades even if the exact numbers and relationships prove wrong.
Rig count drops further
Baker Hughes reported today that the number of rigs drilling for natural gas fell 13 to 407.
Note: Clients and advisors at Ravenna Capital Management currently hold positions in Exxon and do not hold positions in Statoil.
Discount prices on shale
In July of 2012 Chesapeake Energy valued its stake in the Mississippi Lime formation in the $8,000 per acre range. However this week China Petrochemical (subsidiary of Sinopec Group) managed to get some garage sale prices from Chesapeake cutting a deal that valued the property down two thirds from Chesapeake’s July figures.
According to a Bloomberg report “Chesapeake is selling some of its most-promising Mississippi Lime acreage…”
Maybe even more important than the land deal is the knowledge and technology that will be inevitably transferred to the Chinese company. This may prove to be the real cost of the irresponsible management of the U.S. second largest natural gas producers.
Shell bails on plans to drill in the arctic this summer
Shell oil, which has made a large commitment to the arctic region north of Alaska, announced a major step back this week by abandoning its activities in the area for 2013, according to the Financial Times. Shell had high hopes for its arctic projects based on estimates of the arctic resources.
The USGS has said the arctic region holds about 20% of the yet-to-be-discovered oil and gas resources in the world. How do they know 20% of something that is yet-to-be-discovered? Should unicorns be classified as yet-to-be-discovered?
There may be plenty of yet-to-be-discovered oil and gas in the arctic but it is not going to be easy to discover or extract. Given Shell’s arctic program has already run up a $4.5 billion bill it has at least discovered that it is going to be expensive oil and gas. This is just one more example of the increasing cost in capital, labor, material resources and energy extracting this vital liquid.
Note: Currently clients and advisors at Ravenna Capital Management do not hold positions in Chesapeake Energy or Sinopec. They do hold positions in Shell.
Japan is an energy desert
Bloomberg reported that Japan will be appealing to the U.S. this week to open up to LNG exports.
Japanese Prime Minister Shinzo Abe will ask U.S. President Barack Obama to allow shale gas exports as the world’s third-largest economy grapples with soaring energy costs after 2011’s nuclear disaster closed reactors.
The request will be made at a meeting tomorrow between Abe and Obama in Washington, said three Japanese officials, who declined to be identified because the information isn’t public. The bill for importing liquefied natural gas, combined with a weaker yen, prompted Japan to post a record trade deficit in January of 1.63 trillion yen ($17.4 billion), the Finance Ministry said yesterday.
The problem as this report has indicated before is that once natural gas prices in the U.S. stabilize above production cost they will lose their currently illusionary price advantage on the global LNG market. It is also questionable if the U.S. will be able to generate the volumes of export LNG that the proponents envision and Japan’s leader think they can acquire.
After reading the Post Carbon Institute report and Nature Commentary covered in this week’s report the logic behind Japan’s LNG request becomes questionable. But when you live on an energy starved island what are your options? Japan may have moved into permanent trade deficits with a weakening currency and escalating energy import costs.
Jeff Brown on net exports
Jeff Brown (aka westexas on The Oil Drum) is the developer of the Export Land Model (ELM) that emphasizes the importance of available global net exports over global production as an indicator of where the world is headed. This week he posted an extensive commentary on the ASPO-USA web site covering not only general net exports but a new concept he calls “The Export Capacity Index (ECI).
Jeff starts right out by asking a simple question. Where was the supply response to the second doubling of the price of oil from 2005 to 2011 when Brent crude went from $55/b to over $111? He points out that when the price doubled between 2002 ($25/b) and 2005 ($55/b) global crude and condensate production climbed from 76.2 million barrels per day to 73.8. During the second doubling to 2011 production only moved up from 73.8 million barrels per day to 74.1 despite covering 6 years versus the first doubling taking only 3 years.
From that starting point Jeff delves into his Export Land Model and his new conceptual idea of Export Capacity Index. This is interesting stuff from geoscientist in Texas whose day job is finding and producing oil and whose passion is pondering what is ahead for all us.
Don’t bet on a China shale gas boom
Bloomberg reported that China’s highly anticipated boom in shale gas production will most likely fall far short of the country’s 80 billion cubic meters by 2020. Analysts surveyed by Bloomberg put the likely level at 18 billion cubic meters.
The lack of shale enthusiasm was evident in December at the government’s latest and biggest auction of blocks of land containing natural gas trapped in shale rock strata. Coal miners and provincial government investment firms with no experience of shale drilling were among winning bidders. The bids by the big two gas producers and China National Offshore Oil Corp., the largest offshore oil producer, failed.
VW and Audi push for mileage
The Green Car Congress web page this week reported on new cars from Volkswagen its Audi subsidiary.
Volkswagen has confirmed that its XL1 Super Efficient Vehicle, featuring fuel consumption of 0.9 l/100 km (approx. 261 mpg US), will go into limited production at the company’s Osnabrück factory in Germany. The plug-in diesel-electric hybrid, which Volkswagen will showcase at the Geneva show, can cover a distance of up to 50 km (31 miles) in all-electric mode. [Good article with photos and specs.]
While the VW pushes the limits the Audi A3 in true performance car style provides more punch for the driver.
Audi will showcase the A3 e-tron plug-in hybrid at the 2013 Geneva Motor Show. The Audi A3 e-tron delivers 150 kW (204 hp) of system power and 350 nm (258 lb-ft) of system torque; projected fuel consumption is 1.5 liters per 100 km (157 mpg US), according to the ECE standard for plug-in hybrid automobiles. This corresponds to CO2 emissions of 35 grams per km (56 g/mile).
The A3 e-tron accelerates from 0 to 100 km/h (62 mph) in 7.6 seconds, and has a top speed of 222 km/h (138 mph). In electric mode, the Audi A3 e-tron reaches a top speed of 130 km/h (81 mph) and has a maximum range of 50 km (31 miles).
These two cars hit at the sweet spot of around 30-40 miles all electric range that covers nearly 90% of the driving done by U.S. households. Yet unlike the pure electric vehicle they have the ability to go further on the internal combustion if needed and protect against one of the EV’s biggest hurdle, “range anxiety”.
Both of these vehicles exemplify the very stiff competition that pure electric vehicles face in the near term from hybrid conventional internal combustion engine cars.
It is vehicles like this that have the ability to bring U.S. liquid fuel consumption down by 3 million barrels per day over the next decade if consumers adopt them along with similar vehicles from other manufacturers in large volumes.
However as recent history has shown declining U.S. fuel consumption since the peak in the middle of the previous decade has not resulted in lower fuel prices. It is very possible that household spending on fuel could remain flat or rise even as consumption in absolute gallons declines.
That is clearly not an end of the world scenario like the one envisioned by many with the onset of a global peaking of liquid fossil fuels. However it will be different. But remember different is not always worse. It may help the U.S. to bring back some of the quality of life it sacrificed in its rush to the auto centric life since World War II.
This is the interview with Ed Morse, Citigroup Head of Commodities Research on the study they just released.
EIA posted a supplement on U.S. oil production outlook
The EIA posted a supplement to its recently released Short-Term Energy Outlook to explain the key drivers behind the increase in its outlook for increasing U.S. oil production.
“U.S. crude oil output is forecast to rise 815,000 bbl/d this year to 7.25 million barrels per day, according to the February 2013 STEO. U.S. daily oil production is expected to rise by another 570,000 bbl/d in 2014 to 7.82 million barrels per day, the highest annual average level since 1988. Most of the U.S. production growth over the next two years will come from drilling in tight rock formations located in North Dakota and Texas. This paper explains the underpinnings of EIA’s short‐term forecast for crude oil production.”
This excerpt for example gives some interesting insight in how soon the well productivity will begin to decline in the Eagle Ford and Williston Basin. By 2014 producers will already be moving off the high productivity sweet spots. Is this really what the U.S. is going to build energy independence on?
“The IP rate of a Western Gulf Basin well is forecast to be 290 bbl/d in 2013. The IP rate declines to 269 bbl/d in 2014, as some of the Eagle Ford sweet spots are completely drilled and producers move into areas with lower well productivity.”
The Supplement also goes into a good discussion of the infrastructure capacity constraints of the current and anticipated pipeline developments.
As far as Alaska goes they are sticking with the trend, downward. The forecast is a further 10% decline over the next two years.
“EIA estimated that Alaska oil production was 526,000 bbl/d in 2012. With the exception of the initiation of production at the Point Thomson condensate field in 2014 at 10,000 bbl/d, no new oil projects are expected to begin operations in 2013 and 2014. Overall, Alaska oil production is projected to decline in both 2013 and 2014, with continuing declines in production from existing wells. EIA projects that production will average 504,000 bbl/d in 2013 and 474,000 bbl/d in 2014.”
It might be worth remembering that it was Alaska’s production that briefly provided a turn up in U.S. crude oil production back in the 1980’s. Given the fundamental finite nature of crude oil is there any reason to believe this latest turn up will play any differently in the future?
Happy 125th Birthday to my favorite newspaper
The Financial Times February 13, 1888
China could import nearly all U.S. crude oil production
According to a Bloomberg report China imported nearly as much crude oil per day in January as the U.S. produces. China bought 24.87 million metric tons of crude more than it exported last month, according to figures released on the website of the Beijing-based General Administration of Customs today. That’s equivalent to 5.88 million barrels a day, the most since May, data compiled by Bloomberg show.
With China importing nearly 6 million barrels per day and with the U.S. producing over 6 million barrels per day the two are close to being in balance. Essentially China is now importing nearly as much oil every day as the world’s third largest producer extracts.
So can the U.S. raise production faster than China raises demand? While this not an issue to focus on it does provide some perspective about just how much oil China imports and whether all the hype about Saudi America really does change the game much. It also helps explain why the Brent benchmark today is trading at $118/b
Speaking of price – Energy price junkies have a new place to visit
The EIA has added a daily price report to its Today In Energy page. The page reports the usual suspect like WTI or Brent but it also includes such favorites as the 3:2:1 crack spread and spark spread. Where else is it this easy to get the price of a ton of coal on the Nymex and the price of natural gas in New England.
Oil sneaks higher
The price of a barrel of oil continues to sneak higher and no one seems to be noticing. Brent today is approaching $117/b and WTI is touching $98/b. Tapis in Malaysia is nearly up to $120/b while the Opec basket price moves above $112/b
Given the historic relationship between both WTI and Brent prices and the acquisition cost U.S. refineries are now paying above $100 per barrel again.
Where are all those voices from just a few months ago predicting that U.S. crude oil was on a one way trip to $50 per barrel?
For some thoughts on why the price is climbing consider what Mark Lewis, Managing Director of Commodities Research with Deutsche Bank told CNBC earlier this week. (Note: The Brent price on the opening screen was only $114/b)
Only in China
Only in a political system like the one in China could a position like this be taken. The government has placed a cap on imported oil at 61% of demand in by the end of the current five-year plan in 2015 according to a report by Platts.
The article went on to report “…foreign oil dependence will be an increase from 26% seen in 2000 and 57% in 2011, the government said in its 12th Five Year Plan (2011-2015) for energy development released late Wednesday. The country’s crude production capacity will still be 200 million mt/year (4 million b/d) in 2015, unchanged from 2010.”
The report also indicated that Chinese refining capacity will reach 12.5 million barrels per day in 2015 according to “the plan”. For some perspective the U.S. has about 17 million barrels per day of refining capacity. So China’s plan is to reach about 70% of the current U.S. capacity by 2015.
The real question is what happens if the Chinese economy needs to import more than 61% of demand to keep the wheels turning? Given that in 2011 the country was already importing 57% it seems likely that the only thing that will keep them from blowing through that 61% is an economic slowdown. Imports grew 6.8% in 2012 which puts them on a path to double in just over 10 years.
As a percentage of consumption China now has surpassed the U.S. It is only a matter of time and price before it will pass the U.S. in absolute import volumes.
Then there are China’s coal imports
Platts also reported that China’s coal imports jumped 58% year-over-year in 2012. “For the month of December 2012, China imported 12.98 million mt of thermal coal, up 62.25% from the 8 million mt imported in December 2011, data showed.”
The Platts article also indicated that the U.S. provided 4.24% of Chinese coal imports while Australia topped the tables at 38.18%.
While all eyes tend to be focused on China the real action in future coal imports will most likely be India. The IEA Medium-Term Coal Market Report 2012 put it this way. “Endowed with large coal reserves, a population of more than 1 billion, electricity shortages and the largest pocket of energy poverty in the world, India makes the perfect cocktail to boost coal consumption. Domestic industry’s performance will allow India to be the largest seaborne coal importer by 2017 with 204 mtce and the second-largest coal consumer, surpassing United States.”
From a climate perspective the IEA’s report paints a very grim picture for the years ahead.
“Even though coal demand growth is slowing, coal’s share of the global energy mix is still rising, and by 2017 coal will come close to surpassing oil as the world’s top energy source. The world will burn around 1.2 billion more tonnes of coal per year by 2017 compared with today. That’s more than the current annual coal consumption of the United States and Russia combined.
So there is plenty of good news for coal miners and exporters. It is also equally plentiful bad news for the rest of us.
BP World Energy Outlook 2030
Tight oil along with other unconventional supply will meet future demand according to BP’s World Energy Outlook 2030.
The Guardian, a UK paper put it this way. “Peak oil theories ‘increasingly groundless’, says BP chief. The US will be self-sufficient in energy by 2030…”
The article then went on to quote BP CEO Bob Dudley. “The outlook shows the degree to which once-accepted wisdom has been turned on its head. Fears over oil running out – to which BP has never subscribed – appear increasingly groundless. The US will not be increasingly dependent on energy imports, with energy set to reinvigorate its economy.” (It might just be a stretch to call “Peak Oil” an accepted wisdom.)
Here are the key points from the BP World Energy Outlook 2030 on tight oil and the global supply thru 2030.
- Tight oil will likely expand by 7.5 Mb/d by 2030 and account for nearly half of the 16.1 Mb/d of global supply growth. Non-OPEC supplies will expand by 8.5 Mb/d versus 7.6 Mb/d for OPEC as the group will likely see its market share drop until 2018 due to the surge in tight oil supplies before recovering to 42% by the forecasting period.
- By 2030, tight oil should reach 9% of global supplies. North America will continue to dominate output with limited growth elsewhere.
- Both Russia and China – with robust service sectors and expected additional fiscal incentives – are expected to develop their tight oil resources reaching 1.4 Mb/d and 0.5 Mb/d by 2030, respectively. South America will also increase output due to investment in countries like Colombia and Argentina.
- North America’s tight oil growth is expected to slow post-2020 due to today’s view of the resource base and the costs and drilling activity required to sustain output.
- The Americas will account for 65% of incremental supply growth to 2030 as tight oil (5.7 Mb/d), oil sands (2.7 Mb/d), and biofuels (1.8 Mb/d) drive growth. The US (4.5 Mb/d) leads regional increases and will surpass its previous record output reached in 1970.
- OPEC crude oil output will not return to the expected 2013 level of about 30 Mb/d until 2020 as non-OPEC supplies dominate global growth. From 2020-30, however, supplies will likely expand by 5.1 Mb/d as non-OPEC output growth fades.
- The US will likely surpass Russia and Saudi Arabia in 2013 as the largest liquids producer in the world (crude and biofuels) due to tight oil and biofuels growth, but also due to expected OPEC production cuts. Russia will likely pass Saudi Arabia for the second slot in 2013 and hold that until 2023. Saudi Arabia regains the top oil producer slot by 2027.
- The US, Saudi Arabia, and Russia will supply over a third of global liquids in our outlook.
The two graphs that follow are from the BP report. They give some scale to just how abundant BP thinks the unconventional supply will be and how important it will be in meeting global demand during the period.
After some further thought (I went for a two hour bike ride) I realize BP was making it very clear that future energy is going to be very expensive for a number of reasons. Unconventional oil production requires very large amounts of financial capital (money), human capital (labor) and natural capital (resources and environmental externalities). Whether it is tight oil in North Dakota, tar sands in Canada or deep water off the coast of Brazil this in not in the same capital consumption category as conventional oil extraction. The higher input requirements will come at the expense of other sectors of the economy as compete for capital and resources.
Given this elevated intensity of capital consumption (remember this is more than just money) it was not surprising to see very little mention of cost. However the report made it clear what they think oil prices will do. “In our outlook, demand growth slows and non-OPEC supplies rise – both as a result of high prices.” Due to the higher cost of these unconventional supplies prices will continue climb reducing demand predominately in OECD countries like the US.
So the conclusion seems simple from BP’s perspective. Supplies of oil will continue to increase thru the 2030 forecast period along with price. Therefore some consumers of oil today will be unable to consume any of the future supply since the price will be too high for them. Once the price is reached where consumers can no longer afford it they have entered the Peak Oil world. The mistake is to think we will all get there at the same time and that it will happen rapidly. James Kunstler titled his book “The Long Emergency”. More emphasis should be placed on the “Long” part of the story.
Note: BP’s forecast made no specific price predictions. Wise choice.
Note: Currently clients and advisors at Ravenna Capital Management do not hold positions in BP.
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.
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.
Five year anniversary of $100 a barrel oil
Five years ago this week on Wednesday, January 2, 2008 oil traded at $100 for the first time. The price had climbed from a low of $50 a barrel in 2007. This helped to begin taking the wind out of an over stretched economy that was about to embark on one of the biggest financial crisis in 80 years.
USA Today had this comment the morning after the $100 trade. “Oil prices have been in the high $90s for weeks, but the jump to the $100 mark Wednesday came as a reminder that fuel prices might have no ceiling.”
The price of oil had climbed from a low of $10 a barrel just ten years before. That is an annual compound growth rate of 25% per year and as everyone knows now it wasn’t going to stop at just $100 in 2008.
Equally amazing was it decline to nearly $30 a barrel by the end of 2008 in depth of the financial crisis. What a year it was.
The Guardian of the UK reminded its readers that adjusted for inflation oil was approaching its 1980 record. “The sharp increase in the price of crude on futures markets pushed it above the previous record of $99.21 a barrel reached in November and to within sight of its inflation-adjusted peak of $101.70 hit at the beginning of the Iran-Iraq war in 1980.”
Those of us who followed this more closely at the time remember that many experts dismissed the $100 trade as a fluke. The Washington Post pointed this out in a February 20, 2008 article that followed the first day oil closed trading above $100. “Yesterday was the third time the price of crude oil had poked through the $100 barrier, but it was the biggest move over that line. On Jan. 2, there was one trade for 1,000 barrels of crude oil, the standard-size lot traded on the Nymex. The trade was dismissed by many as a novelty or prank. On Jan. 3, however, 4,000 lots were traded above $100 a barrel, though the price eventually ended up below that mark.”
But the experts still had it wrong even as prices continued to climb. David Kirsch [Director of market intelligence for PFC Energy] and other analysts say, the bull market is ignoring important economic data that suggest oil’s price should fall, not rise. Four month later oil hit $147 a barrel. So much for “market intelligence”. Of course soon the world was to appear to be ending and oil would fall to levels equally as implausible as the $147 price was.
Now after that trip down memory lane you might like to try your hand at forecasting the price of oil for 2013 if you have not already done so. Just scroll down to last week’s posting below and complete the survey. The survey will remain open until next Wednesday, January 9th. The results will be in next week’s report.