THE BLOOD BATH CONTINUES IN THE U.S. MAJOR OIL INDUSTRY

Guest Post by SRSrocco

This post does not necessarily reflect the views of Dennis Coyne or Ron Patterson.

The carnage continues in the U.S. major oil industry as they sink further and further in the RED. The top three U.S. oil companies, whose profits were once the envy of the energy sector, are now forced to borrow money to pay dividends or capital expenditures. The financial situation at ExxonMobil, Chevron and ConocoPhillips has become so dreadful, their total long-term debt surged 25% in just the past year.

Unfortunately, the majority of financial analysts at CNBC, Bloomberg or Fox Business have no clue just how bad the situation will become for the United States as its energy sector continues to disintegrate. While the Federal Government could step in and bail out BIG OIL with printed money, they cannot print barrels of oil.

Watch closely as the Thermodynamic Oil Collapse will start to pick up speed over the next five years.

According to the most recently released financial reports, the top three U.S. oil companies combined net income was the worst ever. The results can be seen in the chart below:

In 2011, ExxonMobil, Chevron and Conocophillips enjoyed a combined $80.4 billion in net income profits. ExxonMobil recorded the highest net income of the group by posting a$41.1 billion gain, followed by Chevron at $26.9 billion, while ConocoPhillips came in third at$12.4 billion.

However, the rapidly falling oil price, since the latter part of 2014, totally gutted the profits at these top oil producers. In just five short years, ExxonMobil’s net income declined to $7.8 billion, Chevron reported its first$460 million loss while ConocoPhillips shaved another $3.6 billion off its bottom line in 2016. Thus, the combined net income of these three oil companies in 2016 totaled$3.7 billion versus $80.4 billion in 2011. Even though these three oil companies posted a combined net income profit of$3.7 billion last year, their financial situation is much worse when we dig a little deeper. We must remember, net income does not include capital expenditures (CAPEX) or dividend payouts. If we look at these oil companies Free Cash Flow, they have been losing money for the past two years:

Their combined free cash flow fell from a healthy $46.3 billion in 2011 to a negative$8.7 billion in 2015 and a negative $7.3 billion in 2016. Now, their free cash flow would have been much worse in 2016 if theses companies didn’t reduce their CAPEX spending by nearly a whopping$20 billion. I don’t have a chart to show their capital expenditures, but here are some of the annual figures:

Top 3 U.S. Oil Companies Total CAPEX Spending:

2013 = $87.2 billion 2014 =$85.4 billion
2015 = $66.0 billion 2016 =$46.6 billion

The combined CAPEX spending from these three oil companies fell 29% in 2016 versus 2015 and 46% since 2013.  Basically, ExxonMobil, Chevron and ConocoPhillips have cut their combined CAPEX spending in half in the past three years.  This is bad news for either building or at least maintaining oil production in the future.

NOTE: Free Cash Flow is calculated by subtracting CAPEX spending from the company’s operating cash or profits.

Even though these companies slashed nearly $20 billion in CAPEX spending in 2016, they still suffered a negative free cash flow of$7.3 billion. However, this does not include dividend payouts to their shareholders. Not only did these companies pay a total of $46.6 billion in CAPEX in 2016, they also forked out an additional$21.4 billion in shareholder dividends. Dividend payouts do not come out of thin air.. they must come from cash from operations.

If we include dividend payouts, this would be the net result on these companies Free Cash Flow:

Here we can see that the large dividend payouts by these three oil companies impacted their bottom line much worse than the figures shown in the Free Cash Flow chart above. Thus, the free cash flow minus dividend payouts provides us evidence that these oil companies have been seriously in the RED since 2013, not just the past two years displayed in the Free Cash Flow chart.

As we can see, the group’s free cash flow minus dividends was a negative $32.8 billion in 2015 and a negative$29 billion last year. Of course, these three companies may have sold some financial investments or assets to reduce these negative values, but a company can’t stay in business for long by selling assets that it would need to use to produce oil in the future.

So, what has falling free cash flow and dividends done to ExxonMobil, Chevron and ConocoPhillips long-term debt? You guessed it… it skyrocketed:

When these three companies still enjoyed positive free cash flow in 2011 and 2012, after paying CAPEX and dividends, their long-term debt did not increase. However, as their operating profits really started to decline, the debt on their balance sheets increased significantly. As we can see, the combined long-term debt in these three companies balance sheets ballooned from $40.8 billion in 2012 to$95.7 billion in 2016.

Basically, these three companies combined long-term debt has doubled in just the past three years. This is bad news as the situation in the energy markets continues to disintegrate. Zerohedge published this article, Goldman Stunned By Collapse In Gasoline Demand: “This Would Require A US Recession” which stated the following:

So yes, both gasoline stocks and supply remains at extremely high levels, but what set off alarm bells is not supply, but demand: the EIA last week reported that the 4-week average of gasoline supplied – or implied gasoline demand – in the United States was 8.2 million barrels per day, the lowest since February 2012. And, as Reuters adds, U.S. refiners are now facing the prospects of weakening gasoline demand for the first time in five years.

Unfortunately, the massive amount of debt overhanging the U.S. economy has put a lot of leverage on the public’s ability to continue purchasing consumer goods and services. While the market has become clever at selling cars for example, by first offering lower interest rates and extended loan payouts, it is now resorting to leasing vehicles at ultra low monthly payment plans… just to get rid of them. Leasing automobiles at monthly rates that are uneconomic for the auto industry in the long run, only allows the GREATEST FINANCIAL PONZI SCHEME to continue a little longer.

When we start to add up all the data, the U.S. economy is getting ready to hit a BRICK WALL. Furthermore, the situation at the top three U.S. oil companies will only get worse going forward. As ExxonMobil, Chevron and ConocoPhillips continue to bleed to death, watch for U.S. oil production to fall precipitously in the future.

Yes, it is true that U.S. oil production has increased over the past several months due to the DRILLING RIG HAMSTERS doing their thing by taking good investment money and producing more crappy low quality oil. However, this isn’t something to cheer about. Rather, I call this…. turning GOLD into LEAD.

Some readers send me information of the growing drilling rig count and oil production in the Permian field in Texas. Yes, that is where the activity has moved to. Why? Well, it is one of the last fields that can produce oil similar to the Bakken and Eagle Ford.

That being said, I would refrain from believing that this bump up in U.S. oil production will SAVE THE DAY. Why? Because it is being done on the back of a massively indebted energy sector which has been able to continue drilling by using rigs that have seen their rental rates cut in half, or more, due to the implosion of the drilling rig industry in 2015 and 2016.

The evidence provided in this article showing the continued financial disintegration at these top three oil companies suggests that the U.S. energy sector is in serious trouble. We must remember, the top oil companies are supposed to be the most profitable. However, if we take a look at what is taking place in the top shale oil and gas producers, the situation is even more dire. I have republished this chart from a previous article showing that the shale oil and gas industry hasn’t really made a profit since 2009:

While some of the companies made free cash flow profits in various years, as an industry, these oil and gas producers have been in the RED since the U.S. Shale Energy Industry really took off in 2009. So, the notion that rising oil production from increased drilling rig activity is going to change the SEA OF RED taking place in the entire U.S. energy sector, suggests individuals or the market has gone completely insane.

As I have stated before, Americans continue to suffer from an increasing amount of BRAIN DAMAGE. Now, I am not just talking about the typical JOE BAG of DONUTS, as they at least have an excuse due to the propaganda put out by the Mainstream media. However, I am really surprised that “supposedly” intelligent individuals continue to either believe in U.S. energy independence or the more silly “Abiotic oil” theory that the Earth has a CREAMY NOUGAT CENTER of oil… that will refill all the oil fields in the world. (James Howard Kunstler gets the credit for that wonderful term).

While I realize the “Abiotic Oil Theory” is complete HOGWASH, many individuals still believe it is true. This theory has been propagated by a few Russian scientists and engineers, but I can assure you the bulk of the Russian oil industry is not drilling down to ultra deep depths to get their oil. I will be publishing an article shortly as a rebuttal to a recent newsletter post titled, How I came to Realize I was Wrong About Peak Oil – F. William Engdahl. Unfortunately, Mr. Engdahl has failed to look at the real evidence, instead has fallen HOOK, LINE and SINKER by faulty information and lousy conspiracy theories.

The number of individuals who fail to believe in PEAK OIL will diminish greatly as the Thermodynamic Oil Collapse picks up speed over the next five years. During this time, it would be prudent to own physical precious metals rather than highly inflated debt-based paper assets or real estate.

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201 Responses to THE BLOOD BATH CONTINUES IN THE U.S. MAJOR OIL INDUSTRY

1. Dennis Coyne says:

Hi Steve,

Rune Likvern has made some very good arguments for why the Thermodynamic Oil Collapse does not hold up under scrutiny.

One central point in the Hill Group’s argument is that oil cannot be produced if it is an “energy carrier” such that no net energy is produced.

First it is far from the case that oil is close to producing close to zero net energy, at least in Norway which is a fairly high cost producer (relative to Russia or Saudi Arabia) as Rune Likvern has argued persuasively.

Let us assume for a moment that there are some places such as LTO producers or oil sands producers where the net energy of the “petroleum production system” is close to zero. Why would that prevent the oil from being produced, as long as oil prices are high enough to make such production profitable?

Hill argues that the consumer decides on their purchase of fuel based on its “net energy”, not true, and if it were how does the customer distinguish the gasoline produced from oil sands from the oil produced in Saudi Arabia?

Let us assume further that all oil at some point in the future has a net energy of zero. Again, as long as the economy has other sources of energy besides oil (natural gas, coal, nuclear, wind, solar, hydro, etc) the oil can still be produced as an “energy carrier” and sold at a profit as long as the revenue from oil sales is higher than the cost to produce the oil. You do understand, I am sure, that electricity is produced and sold at a profit even though it is an “energy carrier”. There is no reason that this could not be the case for oil as well.

The “entropy” analysis of the Hill group might apply if oil were the only energy source for the World economy, but in 2012 oil provided about 33% or so of the World’s primary energy, so there certainly are other primary energy sources. Some of the energy used as an input to the petroleum production system comes from other sectors such as coal, nuclear, or hydro. An analysis of the entire energy system would be needed to do the analysis properly. Bottom line, the price of oil is determined by supply and demand not by Hill’s thermodynamic analysis.

• Paulo says:

Very good point Dennis; the energy carrier aspect of expensive oil. A simple example. We heat our home, shops, etc with wood. I have a woodlot. I use a chainsaw to cut down and buck logs. I don’t care if the gas for my saw and tractor is 25/gallon. I wouldn’t like it, but it sure beats a sweede saw and a wheelbarrow. About 5 gallons of gas is what I use to get the wood to heat our place for the entire year. Plus, we don’t stint. Our house is warm and comfortable. I also take exception to the last paragraph of Steve’s article. I am referring to real estate. There is real estate and there is real estate. Its value is all relative to the times and owner. I have a home site on a salmon producing river as well as an additonal 16 acres across the road. The acreage supplies all our firewood, fruit, and has a large overflow garden area for crops that take up a lot of room. Plus, if my kids get in a pickle they could move a mobile onto the site or build a home and still have their own life and privacy. We are also picking up a small rental which will provide extra cash income while increasing our home site to over an acre, plus adding another 150′ of riverfront to what we already have. Seems like a far better investment than precious metals if you ask me. Furthermore, if times are tough we can give our tenents a break on the rent as a way to foster community, (which is already quite strong). You can’t put a price on strong community. I will never be able to take a piece of gold down to the store for staples. But the value of a good neighbour is limitless. regards • Duncan Idaho says: No issues if you are using 2 liters a month in a scooter. A F150? Big issues. I have been living on 20 acres, a mature orchard, horses, llamas, chickens, donkey and mules. Lots of inputs for fertilization. Not a issue for the chain saws, log splinters, etc. But I was not close to being survivable. Fats (I had olives and walnuts) and calories (potatoes worked) were challenging. I’m now living in Mexico. Wish I had a steelhead River close. • Oldfarmermac says: Horses are useless except as draft animals, or maybe transportation in a few cases. If you aren’t working them, get rid of them and get a couple of cows. • Oldfarmermac says: Was it West Texas or one of his sidekicks that used to say he could care less WHERE oil came from originally, that all that mattered to him as an oil man was finding it when he went looking for it? 😉 So far as I can remember, no body has ever found any significant amount of oil anywhere that can’t be better explained by the usual and accepted theory of the formation of oil. This is not to say that maybe a few times somebody has found an indication that there might be oil present in places you wouldn’t expect to find it on the basis of the conventional theory. It’s s not hard to imagine that trace amounts of oil could be formed by abiotic means, or that trace amounts of oil could be produced from minor accumulations of biotic materials that happen by some means to get buried deep enough to be cooked into oil . How such materials would get buried deep enough is a question I’m not able to answer, but that doesn’t prove it couldn’t happen. I’m ready to believe in abiotic oil when somebody finds an oil field that cannot be explained on any other basis, but I’m not holding my breath waiting. Nor am I checking my news feeds every day expecting to read about scientists coming back from an expedition with a real living and breathing abominable snowman . 😉 • George Kaplan says: I had trouble following the logic – one line seems to be that investors continue to put money into oil companies because they (the investors) believe in abiotic oil. I’m pretty sure that is wholly incorrect. I don’t get why the recent uptick in USA production (much of which was due to GoM projects that had been started several years ago, not just from shale drilling) has got anything really to do with the losses of the companies highlighted. Is the suggestion that without that uptick investors would have suddenly realised that all the oil companies are going down the toilet? I’m pretty sure that’s wrong as well. LTO is still a relatively small part of ExxonMobil and Chevrons portfolio (note if you look only at the upstream parts of those companies the losses actually have been worse than shown, they were saved by downstream profits). The losses are because of over investment leading to a supply glut. There has been almost no impact from falling global demand. The over investment was in all sections not just in LTO. LTO stands out because the supply can be seen to clearly increase over the past few years, but it had not much more impact than oil sands (also showing a clear increase) or in fill drilling in Russia and Opec ME, which just acted to stop decline, and therefore doesn’t stand out so much. That ETP thing gets thrown in but, apart from being wrong in many different ways, doesn’t seem to be linked to any of the other observations or conclusions. I like the charts though. • Oldfarmermac says: “I don’t get why the recent uptick in USA production (much of which was due to GoM projects that had been started several years ago, not just from shale drilling) has got anything really to do with the losses of the companies highlighted” It’s my impression that a lot of oil analysts believe that the proverbial straw that broke the oil market camel’s back is the couple of million barrels or more a day brought to market over a relatively short time frame by the tight oil guys. The price certainly crashed due to ” over production” because nobody is willing to pay a penny more than he has to for his oil. But blaming the crash on shale oil in particular doesn’t really make any sense, because there were other oil producers besides the shale guys producing new barrels as well. • Rune Likvern says: Dennis, thanks for posting this. A few comments first of all I advise people to have a look at ExxonMobil’s press release re Q4-16 , 2016 results. http://cdn.exxonmobil.com/~/media/global/files/earnings/2016/news_release_earnings_4q16.pdf Negative cash flow does not automatically translate into unprofitably if CAPEX is a big portion of it. There are no doubts that oil companies have taken on more debts, but it would be more helpful if debts were presented on a specific basis that is of debt per barrel of oil (or oil equivalent) of reserves. So far I cannot see the author has made any real attempts to explain the thermodynamic oil collapse. • SRSrocco says: Rune, Good to see you woke up from the DEAD. Haven’t seen you posting much. Glad to know I am able to get you out of BED once in a while. Anyhow…. I would imagine we can use any financial metric to show how profitable or unprofitable a company is by relating it to this or that metric, but in the end… the figures speak for themselves. The U.S. Major Oil Industry is in big trouble. Hell, the majority of the economy and financial system is one big BUBBLE looking for a PIN. Regardless, ExxonMobil and the rest of the U.S. energy sector is in serious trouble. While ExxonMobil only has 29 billion in long term debt, their total liabilities are 169 billion. There’s lots of garbage hidden in these companies that most investors tend to overlook. steve • Rune Likvern says: Steve, Honestly, I tried very hard to read your article, but fell asleep at least 4 times while doing so. Yes, there are good metrics and poor metrics, but just showing a picture of growth in interest bearing debts may be deceptive and makes it hard to compare companies against each other. That is why breaking it down to a specific level allows for better ranking of the companies and also serve as an illustration of how severe the debt (or all liabilities) are. Standardized measure of discounted future net cash flows may also be a better one. Why cherry pick data? ExxonMobil’s (SEC10-K filing for 2015) show total liabilities are 160 Billion, and their total assets were 337 Billion. The question below should play right into your expertises; How much will gold prices be affected from the ETP model given recent developments whereby Iran and Russia (will others follow?) now accepts Yuan for oil and the Yuan is convertible into gold? • Nathanael says: With 4.15 billion shares outstanding, and a book value of 177 billion, ExxonMobil would be worth about 42/share. However, that’s too high. Most of the “assets” are actually worthless; writing off all the oil fields will make the book value drop a lot. And the liabilities are understated, since there are a lot of unlisted environmental liabilities. Book value evaluation is appropriate once the company stops making profits and stops being a going concern — it’s the value of the carcass of the company after it goes bankrupt. I believe this is actually the appropriate valuation model in the 15-year timeframe. In fact the chemicals business will still be profitable and worth more than book value, but damn, it’s small compared to the mostly-worthless upstream and refining. • Caelan MacIntyre says: Rune, perhaps you and Steve could co-write, via email correspondence, a marvelous article for POB and/or your own sites. • Rune Likvern says: Caelan, Seriously, I think Steve does a great job and from his writings (we have never met face to face) he is the kind of guy that if he came to my neck of the woods and contacted me and proposed to go out and grab a beer, I would attend in a New York minute. In many ways, to split the work load among several informed people is a great way to try to move this important debate further. One thing is to read income and financial statements, but I have also experienced it is very helpful to drill deeper into the data and also apply alternative (and relevant) metrics to better visualize/explain/dissect the data. • SRSrocco says: Caelan, Actually, I was thinking the exact same thing that RUNE stated in his comment. If I met him at a bar, I would imagine we would enjoy a good couple of beers. That being said, we do have a big DIFFERENCE of opinion on The Hills Group ETP Oil Model and what is taking place at ExxonMobil and in the rest of the U.S. oil and gas industry. While I don’t have any experience in the oil and gas industry, I do receive emails and speak on the phone with highly experienced, well connected, high up the chain individuals in the oil and gas industry. I am repeating this from a comment I made on the PeakOil.com site, but it is worth repeating: For example, one who retried some years ago stated, that ExxonMobil realized the GAME WAS UP, which is why they decided to spend 260 billion on share buy backs since 1997. The majority took place since 2005. Matter-a-fact, since 2005, ExxonMobil spent 220 billion on share repurchases versus 245 billion on CAPEX-Capital Expenditures. And for all that CAPEX that ExxonMobil spent, their Natural Gas Net Proved Developed and Undeveloped Reserves are the same since 2004… 60 Tcf. Even though ExxonMobil has increased its liquid oil reserves from 12.5 billion barrels in 2004 to 14.7 billion barrels at the end of 2015, most of that is that crappy oil sands garbage in Canada. Lastly, ExxonMobil warned about this late last year: Exxon Mobil Corp. warned that it may be forced to eliminate almost 20% of its future oil and gas prospects, yielding to the sharp decline in global energy prices. Under investigation by the U.S. Securities and Exchange Commission and New York state over its accounting practices—and the impact of future climate change regulations on its business—Exxon on Friday disclosed that some 4.6 billion barrels of oil in its reserves, primarily in Canada, may be too expensive to tap. http://peakoil.com/business/exxon-warns-on-reserves-as-it-posts-lower-profit —————————————- So, even though Rune and I disagree, I respect the living hell out of the guy and the excellent work he does on his site, Fractional Flow. I just believe, from the evidence I see, that the U.S. oil and gas industry is in BIG TROUBLE. I give it 5-7 years, and then there will be no debate on how horrible the energy situation will have become in the U.S. and abroad. steve • Rune Likvern says: Steve, thanks! I will here focus on 2 of the topics Steve and I are very much aligned; 1) The growth in DEBT is fueling a bubble (private, public also bond market) thanks to low interest rates will at some point in time meet reality, but from here there are lots of scenarios that could play out and none of them have a good outcome. Key actors to watch are the central banks (and what they accept on their growing balance sheets). As opposed to the global energy system (which is physical and with slow response times), the financial system is virtual, meaning changes happens very fast affecting the physical system. For years I have described it like this; the energy system has, as long there was growth in affordable energy, the energy system was driven by the financial system (growth in debt was used to grow energy consumption). We are now transitioning into something I will describe as the energy system shaping the premises of the financial system. The thing is, this is now playing out in real time (for several countries), but it took some time (discussions, trial and error etc) to connect all the dots. What I observe is that there is an increasing number of financial specialists that are worried and these are not only speaking for their sick mother. These have one common ground, something will give, but no one is able to predict exactly what the trigger event will be, its cascading effects and not least exactly when. The thing is what few recognizes and understands is that what actually runs our complex economies is energy, not money. Money is a marker for energy. Money/financials allocates energy consumption. Has this allocation been working properly in a true capitalistic sense? 2) The sorry state of the oil (energy companies in general) companies financials and also their prospects to grow production given their discovery portfolios. From what I have seen many companies will not be able to fully pay down their debt with oil prices at 50/b and this is not including other liabilities. This is why I focus on specific debt, meaning/bbl of oil in the ground the proved reserves shall retire. To me this is the easy part as through the years (and in cooperation with a lot of other smart people around the globe) we found easy ways to dissect the income and balance statements of the companies in such a way that we developed an understanding of what metrics/parameters to keep track of over time and so far these (simple) metrics has proven to be very reliable and with good predictive powers. No need for fancy PowerPoints or fluffy rhetoric. This is also an iterative process with several filters. • Jeff says: Rune, Just of curiosity. Are you familiar with the work of Steven Kopits (perhaps know him)? A couple of years back he talked quite a lot about the difference between demand driven and supply constrained forecasting. https://www.youtube.com/watch?v=dLCsMRr7hAg It seems to me that the two of you had similarities in your views. However, Steve was more optimistic on the possibility for economies to accommodate higher prices. I think he has slightly shifted his opinion nowadays to the pro-fracking camp. At least when he speaks in public. • Rune Likvern says: Jeff, I am familiar with some (perhaps a lot of) Kopits’ work. The tough one is to try to predict the relative movements of demand and supply (like supply overhang and supply deficit). To me supply appears to be well understood in the near term (3-5 years) period. The tough one is DEMAND as I sense this is poorly understood, and this appear to be well related to changes in total debt. We have had decades with growth in demand and GDP that coincided with growth in total debt and for countries in deleveraging demand comes down while it keeps growing where debt is growing. Then there are those that point out that pricing ratio (Gold to Oil ratio) became unhinged after 1971 and that there are now indications that this ratio is starting to reestablish itself since oil also is being priced and traded in Yuan and Yuan is convertible into gold. • Jeff says: Rune, thank you! Always interesting to hear your opinion, I learn a lot. Gold is interesting too but very difficult going forward. Most of the gold ever mined is in someone’s possession (vault, jewellery). Higher prices usually increase recycling. Approx. 1/3 of the supply comes from recycling and the rest is virgin. The situation for mining has similarities with oil. Not much new deposits are discovered these days, the discovering cost/ounce has increased and ore grades are trending downwards. There is a non-linear relation between ore grade and extraction cost (in as well as energy input).

It appears we reached global peak gold last year or will reach it within the next couple of years. Currently price discovery takes place at the paper market, i.e. the physical market lags the paper market. Going forward, it will be interesting to see what will happen with prices and extracted volumes.

• Nathanael says:

Money is psychology. I’ve called it a “shared delusion”, but “social construct” would probably be more accurate. It’s worth what other people think it’s worth.

There was a big demonetization event in 2008 when “good as money” money-market funds suddenly weren’t money any more. It causes MASSIVE dislocation.

If there are banks or shadow banks heavily invested in oil & gas stocks, then when it is realized that the oil & gas stocks are worthless, there will be bank runs (as there were in 2008 when the housing bubble popped). the bank runs cause demonetization; the disappearance of non-government “good as money” assets. The only government option is to produce huge amounts of government money to make up the difference, counteract the overnight shrinkage in the money supply The government DOES have a choice about who to give that new government money to; they don’t HAVE to give it to the crooks the way they did in 2008.

• notanoilman says:

Steve,

For those of us not in the know, would you explain what a share buy back is, what it does for a company like Exxon, why they do it. It would help understand its importance.

TIA

NAOM

• George Kaplan says:

(Not Steve but … ) The company uses income to buy their own shares which they then void (rather than, say, investing in new projects or increasing dividends); the remaining shares then gain in value as they each own a slightly larger portion of the company assets.

• notanoilman says:

Would this mean that the share price would appear to be rising to investors, to make the markets image look better?

NAOM

• George Kaplan says:

It would increase, or in a falling market maintain, share price. I don’t know that they would do it for image purposes. A public company’s main, maybe only, responsibility is to look after the share holders (of course within the laws of the land), and boosting share price does that. The problem is it is very short term, but that is how things have evolved to be over the last couple of decades as everything has become financialised.

• Nathanael says:

It’s been documented that most companies do share buybacks when the stock price is high and then reissue when the stock price is low. The stockholders would have done better to get dividends.

But yeah, buybacks goose the stock price in the short term.

• George Kaplan says:

Some might do, but not ExonMobil, and I think not other IOCs who have been doing the same thing. And some shares do not pay dividends, they are for ‘growth’ and security, I don’t know what the percentage in ExxonMobil is for these. They have eased of on the buy backs recently, I guess as their debt has grown, but they were using a high percentage of profits when prices were high.

• AlexS says:

“Exxon on Friday disclosed that some 4.6 billion barrels of oil in its reserves, primarily in Canada, may be too expensive to tap.”

… expensive to tap at $43 per barrel, which was the average WTI price in 2016, but not at$60.

• Boomer II says:

Exxon’s Profit Miss Shows No One Immune From Market Ravages – Bloomberg: “Exxon also expects to follow through with most of the 4.6 billion-barrel reserves reduction it warned investors about in October because depressed prices made some fields unprofitable to drill, Vice President Jeff Woodbury said during a webcast on Tuesday. The disclosure will occur within the next two weeks, he said.”

• Boomer II says:

Imperial writes down oil sands reserves – The Globe and Mail: “It points to dim prospects for future expansions at Imperial’s massive Kearl project and similar developments should prices remain low, despite efforts by producers to claw back costs in a bid to weather a slump that has dogged markets for more than two years.

‘It’s stuff that would require them to build a brand-new mine more or less to get after it,’ Raymond James analyst Chris Cox said by phone. ‘That’s not something they’ll do at the current prevailing oil price.'”

Exxon owns 70% of Imperial.

• Boomer II says:

Another from January 31, 2017.

Exxon boosts capital budget but takes $2 billion charge from XTO deal | Reuters: “After conducting an annual asset review, Exxon said the value of some reserves in North America’s Rocky Mountain region should be lowered due to weak performance and its own tepid outlook on the potential for future commodity price rises. Exxon declined to provide its internal forecast for oil and gas prices. Exxon will report estimates for the value of its proved reserves in February. The$2 billion impairment charge likely will reduce the value of the proved reserves.”

• AlexS says:

Boomer II,

Oil industry is cyclical. When oil prices fall, oil companies write down part of their reserves. When oil prices rise, these reserves may be revalued.

You are right, oil prices are not rising fast enough, and most oil majors have a cautious outlook for the oil market.
Therefore, it will time (several years) before high-cost projects may be developed profitably, and the value of high-cost reserves may be increased.

• Boomer II says:

“Oil industry is cyclical. When oil prices fall, oil companies write down part of their reserves. When oil prices rise, these reserves may be revalued.”

“Therefore, it will time (several years) before high-cost projects may be developed profitably, and the value of high-cost reserves may be increased.”

But this forum is mostly about how it is no longer business as usual in the oil industry.

People here tend to believe that both peak supply and peak demand will happen in the near or intermediate future.

So we are looking at what companies are doing, what they are saying, and what they aren’t saying.

If companies no longer see a profitable future ahead, they might not come out and say that in so many words. But they might be taking actions to get as much money out as they can without triggering a collapse.

• Boomer II says:

This isn’t part of a cyclical oil business, is it?

Exxon Concedes It May Need to Declare Lower Value for Oil in Ground – The New York Times: “Exxon Mobil’s dividend payments continue to exceed profits, which means the company is borrowing and selling assets to finance its payments to shareholders. At the same time, cuts in capital spending are hurting the company’s ability to maintain production.”

• Boomer II says:

Here’s another article (January 30, 2017) which suggests Exxon’s production isn’t cyclical.

The ExxonMobil (XOM) that Rex Tillerson left behind is doubling down on oil at a time of massive uncertainty for fossil fuels — Quartz: “… consider two facts about Exxon. The first is that, despite its advantageous resource base, it has missed its own production target almost every year since 2001 (see chart below from Wolfe Research). In 2001, Exxon said it would be producing more than 5 million barrels of oil a day by 2009; instead the number was about 4 million. In 2009, the company said its 2015 production would be about 4.5 million barrels a day; again, it was around 4 million. And so on. Exxon’s production has remained almost flat for the entire 15-year period.”

• Oldfarmermac says:

Hi Rune,

You ask “why cherry pick the data?” which is a killer of a good question, in most respects.

But in at least one respect, cherry picking data is a very useful thing to do. I have had the privilege of a few long conversations with a man who used to work in the intelligence field, and he say’s that cherry picking the data that indicates a problem is what you do FIRST when your’re looking for thieves,robbers, murderers, spies, whistle blowers, and coverups of corruption of various sorts.

If you find enough of it, you pretty well know you have a reason to REALLY start digging to see if you have
identified the source of your problem, or uncovered a scam.

So SRSrocco is justified because he is building a case that the oil companies are putting one over on the public by concealing or glossing over the true facts in respect to their actual financial state of health.

How many other really big companies are paying dividends with borrowed money for instance ? There are lies that can be prosecuted in court, and lies that can’t, for lack of evidence or on account of various technicalities.

Let us suppose for a minute that a politician has a foundation that is getting tons of money in donations, but denies that pay for play is the name of the game. Then all at once, the donations crash and burn because the politician loses an election. Nobody can prove some of donations were made in exchange in hopes of favorable treatment later, or that actual promises of such treatment were made.

People inclined to trust the politician will take the politician’s word that everything is on the up and up.
People who don’t , won’t.

So, tell me, how else could SRSrocco prove his argument, except by emphasizing the facts that support it?

How can any of us, who are not experts in a given field, know early on that maybe it’s time to GET OUT of that field before we lose our investment in it, except by looking hard at such arguments as SRSrocco is making?

I probably know a hell of a lot more about the oil industry than 999 out of every 1000 randomly selected men and women with money in the stock market, simply because I am a long time regular here in this forum. But if I had money to put into the stock market, I wouldn’t have the first REAL clue about how to select which company or companies I should buy.

I’m not questioning your expertise, because I recognize that I have no REAL expertise at all when it comes to the oil industry, and no standing to question you.

But answer me this. If you were looking to invest your own money in any industry that is showing the same indications of potentially catastrophic problems a few years down the road, WOULD YOU?

By indications, I mean lots of smaller players going bankrupt, borrowing money to pay dividends, constant stock buybacks, severely curtailed capital investment, obvious potential for disruptive technologies to cut sharply into demand for the product, etc?

• Rune Likvern says:

OFM,
If a company doubles its debt, that would intuitively not be a good sign. But it does not put this into a context and may thus be deceptive.
Further, if all liabilities of a company shows a steady growth over some years, this may not tell the full story if the development in its equities over the same period is not presented.

By,
”But answer me this. If you were looking to invest your own money in any industry that is showing the same indications of potentially catastrophic problems a few years down the road, WOULD YOU?

I sense by the question above, you asks based on what should one invest (long term) and still keep the sleep at night?
I consider that one a tough one because I am not sure there now are a lot of long term “safe” paper investments around.

I would not have put money (long term) in any company before I had dissected their financial statements. Several companies are IMO presently considerably overpriced and that by itself may present opportunities of a different kind.

It may now be the question is “where will money placements” stand to lose the least?

OFM an after thought.
I am aware of several big oil companies that has maintained a high share price.

As one dug deeper into the data it was found that the fundamentals did not justify the “high” share price.
How could this be?

These companies paid dividends resulting in a yield of about 5%, which is decent these days.
Likely it is the dividend policies that supported the companies “high” share price.

It will be interesting to see how the share price fares as dividends are reduced or cut.

• Nathanael says:

” The U.S. Major Oil Industry is in big trouble.”

Not just the US. It would be wise to take a look at Shell and BP, which have the same problems. Total is actively trying to diversify out of oil!

I haven’t looked at Lukoil or the government-controlled oil companies; they might not be in quite such dire straits.

• Nathanael says:

I comment strictly on the financials here.

Negative cash flow does automatically translate into unprofitability *if the CAPEX is wasted*. That is, right now, what’s happening. The capex of the majors has been essentially wasted for years: they’ve spent money not finding oil, they’ve spent money finding oil which can’t be produced profitably,… they’ve blown huge amounts of money on exploration without even replacing their reserves. The minors are in even worse positions.

I do wish that this article had analyzed BP, Shell, Total, and Lukoil as well. BP and Shell are having the same problems as Exxon and Chevron. These are the rest of the largest non-government-owned oil companies in the world. (The government-owned ones have to be looked at differently, as they are not necessarily operated for profit or dividends.) I haven’t really looked into Lukoil’s books.

• Rune Likvern says:

Nathanel,
Just to make it clear, I also think (and have written about it) many oil companies are struggling and have been for some years and this is from reading their financial statements and I also believe some of the numbers are presented with a high gloss factor.

In my opinion, this is serious as the oil companies are also the experts to find and develop oil and natural gas fields and the collapse of the oil price and subsequent CAPEX reductions will at some point of time make itself felt.

I have for some time sensed we may be at or close to a point of what oil price the consumers can afford (sustain) may be lower than what the oil companies need to go after costlier oil and natural gas. As some put it; “Maybe all the oil we can afford is already behind pipe.”

We are limited to the numbers made public and from there we may derive other good metrics that may help describe the financial health of the oil companies.

Through the years, some of us has found some alternative (and simpler) metrics and so far they have proven to be very useful.

• Nathanael says:

Thanks. That’s a *really* good way to describe it: “Maybe all the oil we can afford is already behind pipe.” I’ll remember that one.

Personally, from my background in general financial analysis, the two really big metrics I’ve been watching lately: Dividends in excess of current earnings mean a company in decline. Borrowing money to pay the dividend means a company which is in unmanaged, uncontrolled decline. (Managed decline would involve liquidating assets to pay dividends, and *paying off* debt.)

• Caelan MacIntyre says:

A perpetually-low oil price would seem to beg the question if it would then be too late for any meaningful alternative energy (AE) buildout if it depended on higher oil prices.
Insofar as society might have an oil price ceiling it can afford, then perhaps it may also have a ‘meaningful AE buildout’ oil price floor, beneath which not much is going to happen?

… that if the market is perfectly competitive, the net price (price minus marginal extraction cost) must rise at a rate equal to the rate of interest. This is known as Hotelling’s rule. It is at the heart of the economics of natural resources.

• Caelan MacIntyre says:

…What are the interest rates doing? ZIRP? NIRP?

• Rune Likvern says:

I have a post in the pipeline (has been there for some time and actually is something we started to look at years ago) that looks at the relations of changes to total private and public debts and total energy consumption.

Short story:
Growth in debt => growth in energy consumption.
Deleveraging (reducing debt) => decline in energy consumption.
ZIRP, NIRP allows for growth in debt (balance sheet expansion).

Now what should we expect will happen to energy consumption if total debt is high and interest rates moves upwards?

• Caelan MacIntyre says:

“Now what should we expect will happen to energy consumption if total debt is high and interest rates moves upwards?” ~ Rune Likvern

A. Attempts at increasing energy consumption, with assorted repercussions, involving the usual, the not-so-usual, and the fake– as reported
B. Increasing ‘decoupling’ of the so-called economy by increasingly-dictatorial/authoritarian regimes
C. Increasing price decrees, subsidies and assorted lever-pulling for what the above deem important
D. Increasing debt bondage for the increasingly-shirtless/homeless peasantry
E. Increasing sashaying of wealth toward the upper echelons of the socioeconomic pyramid (Use of sashay word in this context inspired by Watcher)
F. Increasing social unrest and instability
G. Some of the above (Please list which below in space provided)
H. All of the above
I. None of the above (Please select this option only upon careful consideration)

• Nathanael says:

“Now what should we expect will happen to energy consumption if total debt is high and interest rates moves upwards?”

Defaults. Bankruptcy financing. The easy way to deleverage, without actually paying for it. This keeps the energy consumption going for a while longer. Already watching this in certain sectors (you know the ones I’m talking about). The question then becomes, how long will investors throw money down ratholes?

• Rune Likvern says:

Caelan,
Those are some interesting observations/thoughts that deserves to be explored further.
By AE I presume you mean wind, solar, etc. and clearly (in some areas) these competes with FF prices.
What I would like to know more about is to what extent these AE has been made competitive through subsidies (if any).
I have not looked at the financial statements for AE companies, but it would be interesting to see to what extent these have been funded by debts. AE will also face affordability issues.

• Caelan MacIntyre says:

Rune, yes, that’s what is meant by AE, and agreed, while of course keeping in mind that ‘the economy’ and ’empire’ and the logic underscoring them, as well as the metrics describing them, appear to be changing.

• T Smith says:

I was looking at one recently. Pattern Energy. It is set up like a MLP. The borrow money based on multi year purchase contracts with utilities. The contracts are used as collateral for non recourse loans. Electric utilities tend to be good credits, which facilitates the lending. The concept is to match the assets and liabilities, theoretically guaranteeing a profit. Naturally, these sorts of deals need leverage to work.

It appears to me that the tax credits are necessary to make the deals attractive. And in real life, things can go wrong. They had a turbine self destruct recently. And they also had a bad month when the wind refused to blow enough. These things weren’t big problems, but illustrate how things can go bad. But these are small companies and the yields reflect some risk.

I don’t see a problem with using some debt as long as it is not overly leveraged. All electric utilities use debt. My guess is that wind will be a problem if it becomes more than a relatively small fraction of total inputs. Baseload sorts of issues. Compared to that, debt seems like a minor issue. Although, once again, it seems like subsidies are the secret sauce to make the deals attractive.

• Nathanael says:

” perhaps it may also have a ‘meaningful AE buildout’ oil price floor, beneath which not much is going to happen?”
This is correct,Caelan, *and I’ve calculated that price floor*.

For oil, it’s about $20/bbl; below that electric cars have trouble competing. But oil can no longer be produced profitably at$20/bbl outside Saudi Arabia — so no worries on that account.

Remember solar, wind, etc. don’t compete directly with oil since nobody uses oil for electricity generation. Oil would have to be even cheaper ($10 IIRC) to be competitive for electricity generation. There is a *coal* price below which solar & wind deployment doesn’t happen, and that was a much more serious issue, but thankfully solar and wind development have gotten far enough that they’re finally cheaper than coal in most places (coal prices are regional). This is a big deal. • Nick G says: nobody uses oil for electricity generation I’d guesstimate that 5-10% of oil is used for electricity: directly by places like KSA, Hawaii, and Jamaica. Indirectly by many commercial and residential consumers in India, China, ME, etc., etc. Also, “house” power for lights and electronics in all vehicles. These uses can and are being replaced cost effectively by solar with the possible exception of passenger light vehicles, which tend to be garaged. The great mystery: why hasn’t KSA taken advantage of the fact that it is literally the “Saudi Arabia of solar power”? • Mike says: Thanks, Rune. I still stand by that statement, by the way. Demand is stalking the oil industry like a quiet cat set to pounce. If I may, you have led the way in the ability to see through the 10Q-K fluff of worldwide oil companies and into the heart of their financial status. From my standpoint, it has been far more than simply useful. It is a vital look into the future. With great respect, Mike • Rune Likvern says: Mike, thanks! It was in cooperation with other smart people over years we saw the need to drill deeper into the data and develop other relevant metrics that could assist in understanding what the data really meant, it was kind of a process to find a way to make data simple and stupid and at the same time easy for others to both understand and check. The thing is, the companies use different reporting formats and often the data is presented in such a way and with a happy spin that they create the premises for anyone looking at them, the short story is to use the same data, but look deeper into these and over some time. • Fred Magyar says: Negative cash flow does not automatically translate into unprofitably if CAPEX is a big portion of it. So what do you say then about the long term financial health of the oil majors if they are not spending their profits on CAPEX but instead are selling off assets to pay shareholder dividends?. Or is Steve Kopits living in an alternative fact universe? Remember his talk at Columbia back in 2014? https://www.youtube.com/watch?v=dLCsMRr7hAg CGEP: Global Oil Market Forecasting: Main Approaches & Key Drivers with Steven Kopits • T Smith says: I just took a look at XOM and it looks like an excellent company at the bottom of a cycle. They made a profit for the year, including a$2 billon non cash impairment. The impairment is simply recognizing that some of their ‘inventory’ of reserves isn’t economic at under $50 bbl. Reducing CapEx is what companies do in response to low prices. Its the only way to get higher prices. Their midstream, downstream, and chemicals businesses were all profitable. If prices stay under$50, then just buy cheap oil to feed into their downstream businesses.

Debt is a non issue. $30 billion is a small figure for a company this size. Obviously they need oil over$50 to make a decent return on capital. The stock is down from its 52 week high — 15-20% roughly.

• Ulenspiegel says:

And one may add that some of the Hill guys have problems to understand that primary energy is not the correct metrics when discussiong alternatives. They sell an incosistent accountant rule as physical reality.

2. Boomer II says:

Thanks for posting this.

Seems like the topic should be discussed more, by both those promoting more oil and gas development and those opposed.

Just as economics is pushing coal into decline, economics don’t really favor oil and gas either. The more production there is, the lower the price. But as production moves into more costly areas, the higher the cost of production. It’s a collision course.

I have hoped that the petroleum insiders in the Trump administration recognize this and are making plans to steer us away from this collision if they can.

• Boomer II says:

And a point I have been trying to make in some of my comments is that what companies tell investors (e.g., the future looks great, we’ll produce lots of oil) is not the same as what needs to be said to boost the price (e.g., oil is getting scarce and costs more to get out of the ground so the price will go up as supplies go down).

• Dennis Coyne says:

Hi Boomer II,

At some point oil output will not be able to increase regardless of price and the oil price will be high until consumers adjust by buying more efficient cars and businesses adjust by switching freight to rail and rail companies adjust by expanding rail, hybrid and EV trucks, and trucks on overhead wires on main roads will handle the trip from the rail terminal to the store, factory, or warehouse. The first step will be an expansion of EVs and public transportation (including Uber and Lyft). AVs may also reduce car ownership as Uber and Lyft may become quite cheap when the driver is eliminated. At that point personal car ownership in more densely populated places will be for the very wealthy only.

• Boomer II says:

Yes, I am expecting that which is why I am a peak oil believer. What surprises me are companies that produce, even at a loss. And political talk to increase production now, even though we don’t need it right now.

• Nathanael says:

It’s interesting, isn’t it? I think it has to do with psychological issues of self-identity. Coal barons think of themselves as “coal men” and will keep investing in coal long after it becomes incredibly unprofitable. Oil men think of themselves as “oil men” and will keep investing in oil long after it becomes incredibly unprofitable.

If they thought of themselves as *businessmen* they’d have a completely different attitude. Which is why I figure the investors are going to withdraw capital at some point; they don’t have emotional involvement in the black goo.

I believe that the EV transition is going to happen much, *much* faster than most people think. The car companies are finally taking it seriously, although — apart from Tesla and the Chinese — they’re all targeting 2019 or 2020 for mass production at the earliest. Still, by 2021 we should see visible massive shifts in the economy already.

• Mike says:

It always interests me when I visit POB how often people with absolutely no fundamental knowledge of the business of oil production always have the answers and their comments always lend themselves to some kind of EV, anti-oil, we need to get off the stuff ASAP, horse dookey. I thought there was another venue for that sort of stuff on POB. Oil men don’t keep investing in wells that are not profitable.

Corporate America does as it engages in shale oil manufacturing because it has the money from outside sources to do so. It is indeed woefully unprofitable, shale oil extraction, at this prolonged price range we are in, but it does not matter. The shale oil industry is trapped like goats in a pen; if it stops drilling wells it goes to slaughter. The shale oil industry has an addiction problem and lenders love keeping the shale oil industry hooked. Mr. Likvern points out that in 2016 lenders in the Bakken shale oil play alone made 2.5 billion dollars in interest income.

The only way this will end, and we can preserve our last remaining hydrocarbon resources in America, as lousy and expensive as unconventional shale oil is, is if interest rates go up and the available money goes down.

Or, the powers that be wake up and start to control the shale oil industry thru regulations. I have been a big proponent of this for many years; existing statutory laws exist in every producing state in the country for the conservation of hydrocarbon resources. States must simply re-institute rules that control the number of shale oil wells that can be drilled per acre of land and the distance those wells can be drilled from one another. In other words, the shale oil industry needs to be put on a short leash. It will reduce oil inventory, allow them to deleverage debt, and help re-balance supply/demand fundamentals. It would help keep our domestic oil industry healthy and better able to meet our future hydrocarbon resources.

As time goes on, and our needs increase, if they do, we can go back in and drill in between wells, and create more liberal well densities. At the moment this multi-pad, toe to toe 330 foot lateral thing is ridiculous. It is cost effective for the shale oil industry, so it thinks (its not!), but all it is doing is creating more oil inventory, adding to the national debt, and keeping the world oil market on edge. Boomer is right; at the moment we don’t need the stuff.

• shallow sand says:

Mike: I do not think it is just the interest income, but also the transactional fees that are earned as all this shale stuff keeps getting churned.

• Dennis Coyne says:

Hi Mike,

You are correct there is a Non-Petroleum Thread for discussions of EVs.

Sometimes when oil is discussed the conversation wanders to the possibility of an eventual peak.

Such a discussion is not necessarily anti-oil it is pro-reality. 🙂

From the perspective of someone who does know how oil is produced, do you expect there will be a peak in oil output?

What is the pro-oil solution for society to this predicament?

No horse dookey allowed. 🙂

• Mike says:

Dennis, you know exactly what I mean by anti-oil rhetoric; aren’t you kind of in that camp? Sure you are; I’ve read your comments on the other side. You’ve got the problem all sorted out; higher oil prices and everything will work out just as you have it modeled.

• Survivalist says:

Lol touché

• Dennis Coyne says:

Hi Mike,

I think it unlikely things will work out as I have modelled it.

So any analysis that assumes oil output will not increase forever is anti-oil?

If that is your yardstick, then yes I am anti-oil.

As are most of the people that participate in a peak oil discussion.

So by your non-answer to my question, either you believe oil will never peak so there is no problem which needs to be addressed, or you have some other solution you are unwilling to share.

Note that the “natural gas” solution is a very temporary fix as natural gas will peak by 2030, maybe 2040 at the latest. Not much point in spending a lot of money developing natural gas infrastructure for transportation as it will be scarce before long. Biofuels are an environmental disaster.

I am just looking for potential solutions to the peak oil problem.

If there is a scarcity of oil wouldn’t you expect oil prices to rise? Historically that is usually the case.

• Ves says:

“I am just looking for potential solutions to the peak oil problem.”

Hi Dennis,
The “problem” always has to have a “solution”.
If there is no “solution” then we do not have a “problem” in the first place. 🙂
If there is a scarcity of oil “solution” is to use oil more efficiently.

• Dennis Coyne says:

Hi Ves,

Just because a problem does not have a solution does not mean it is not a problem.

I agree using oil and other fossil fuels more efficiently is one solution, the other is to develop other forms of energy.

Generally if fossil fuels become scarce their prices will rise and both greater efficiency and more substitution will occur. Over the long term (20 years or longer) demand for fossil fuels might fall below supply and then fossil fuel prices will fall.

• Ves says:

Hi Dennis,

Not at all. It is very simple. If there is no solution it is not a problem. If I go outside and it is a very warm day I try to cool down, and if it is cold day I try to warm up. Not problem at all.

If you are anticipating oil scarcity why don’t start building trains and bus system? Who is preventing that? Why don’t localize economy and tear down Walmart type of economy that relies on Chinese slave wages? Chinese are moving up the food chain and globalisation is finished. There is $1 trillion sold and unpaid gasoline cars in America and 60.000 drilled and unpaid shale wells and who is exactly going to pay for those and when? And you want to build electrical transportation system with couple of EV cars per family in driveway on top of this existing debt? Somebody has to pay for that. • Dennis Coyne says: Hi Ves The scenario I devised has roughly 2 billion cars for about 8 billion people. It is quite possible the number will be lower. Perhaps there will be no vehicles owned by individuals in the future. In general fewer may be better, but I don’t rule the World, individuals will make choices. Perhaps everything will work out fine. I think it more likely that will be the case if the world recognises fossil fuel depletion. Even then though there may be solutions to fossil fuel scarcity, a more likely outcome is a severe economic downturn imo. As far as someone paying for EVs they replace ICEV charging stations are not a big deal an the money is better spent than drilling unprofitable wells and the carbon pollution that goes with those. Electricity can be provided with very little fossil fuel. Just a matter of building enough wind solar hydro and nuclear. • Ves says: Hi Dennis, As I predicted on this forum 1-2 years ago it looks very likely that high speed train renaissance could come to US faster than anyone have anticipated: Nippon Sharyo, of which Central Japan Railway Company holds 50.1% and makes trains, including the high-speed Shinkansen trainsets., soared 18% on Friday , after Abe-Trump meeting. • Paul Helvik says: Nippon Sharyo would have a tough hill to climb, since they have made themselves a laughingstock within the US rail market. A few years ago, they got a contract to design and build a new generation of bi-level rail cars for Amtrak. Years and millions of dollars later, though, they still have yet to turn out a single car, as they have been unable to engineer a prototype that didn’t spectacularly fail US safety standards. They have so completely messed up the car order through incompetence that I doubt they would be able to find many US partners wanting to work with them at present. • islandboy says: Mike, I agree with you 100% and IIRC I have on previous occasions asked why the authorities having jurisdiction do not restrict drilling permits when it is fairly obvious that the markets could be heading in the direction of a glut? I remember one discussion in which I drew a analogy between the oil markets and an un-damped physical (or electrical) oscillating system. My view is that restricting drilling could have the same effect as critically damping a physical or electrical oscillation (the green line in the graphic below). The problem right now, as I see it, is that the current POTUS and his administration seem intent on doing anything and everything in their power to remove any regulations that might get in the way of people who want to make money! • Nathanael says: “Oil men don’t keep investing in wells that are not profitable. ” Two words: Aubrey McClendon. In other words, oh yes they do keep investing in wells that aren’t profitable. Consider Exxon’s purchase of XTO, followed by massive writedowns. That was unprofitable investment. They delude themselves into believing that the wells will be profitable by various means, of course. Oil prices will rise! Oil demand will go up! We’ll discover great new cheap fields! Renewables will never be cheap! But these all have the signs of self-delusion. After a while, you’re right, the delusional guys will be wiped out and we’ll be left with pure scam artists who are trying to make money on pump-and-dump scams; people who know the wells aren’t profitable but are attempting to cash out on the investors. There’s evidence that this is already happening. “Corporate America does as it engages in shale oil manufacturing because it has the money from outside sources to do so.” Isn’t that exactly what we’re talking about here? I think we don’t disagree. ” It is indeed woefully unprofitable, shale oil extraction, at this prolonged price range we are in, but it does not matter. The shale oil industry is trapped like goats in a pen; if it stops drilling wells it goes to slaughter. ” But why are the *individuals* doing this? They could always quit and go do something else, something profitable. Very few of them have made personal guarantees of the corporate debts. I think it’s psychology — “oilmen” aren’t willing to just drop the shale industry and go into, say, the geothermal industry or the water supply industry. They have a bizarre emotional attachment to the oil business. • Oldfarmermac says: Governments don’t generally make business like decisions in operating businesses, or providing goods and services to citizens. It’s more important to politicians and bureaucrats to preserve the appearance, and the substance , of normal times , to the extent possible, as long as possible. With a little luck, politicians and bureaucrats can retire , or move on to another position out of the line of fire, before the shit hits the fan. And as far as the owners and managers of independent companies are concerned, well, managers salaries depend on continued operation , and lots of owners are eternal optimists ready to double down in hopes of getting out of the red into the deep black. There’s a lot of money to be made buying up working businesses cheap during hard times when the market turns. IF it turns. • Dennis Coyne says: Hi Boomer, Oil and gas companies have to adjust their output based on market prices, just like every other company. A big problem is that the time from decision to drill and output is delayed so this is difficult. That was why the RRC was needed from 1935 to 1970 and OPEC from 1985 to 2014 to try to give the market some stability. If prices remain low, output will decrease, OPEC will need to regulate the market for their to be any stability. In fact it would be better if the US and Russia and China and Norway joined OPEC, it could be renamed OPPC (Organization of Petroleum Producing Countries). • Boomer II says: “That was why the RRC was needed from 1935 to 1970 and OPEC from 1985 to 2014 to try to give the market some stability. If prices remain low, output will decrease, OPEC will need to regulate the market for their to be any stability. In fact it would be better if the US and Russia and China and Norway joined OPEC, it could be renamed OPPC (Organization of Petroleum Producing Countries).” Since I consider oil a scarce resource, anything that would discourage its waste would be good, I think. If that would take all of the oil producing countries working together to control production, that would be a good thing. And if, in the process, oil got considerably more expensive, that would make energy efficiency and renewable energy that much more attractive. 3. shallow sand says: Dennis. Could you move my post regarding PXD to here? I’d like to see if anyone out there can explain what is going on with PXD’s lack of proved undeveloped reserves in their SEC reserve report, while at the same time in investor press release they are targeting annual production growth from new wells in excess of 15%, with a goal of 1 million BOEPD by 2026. • Dennis Coyne says: Hi Shallow sand, I could do it, but I will just copy and paste, which you could do just as easily. I will let you take care of it. 🙂 • shallow sand says: No biggie. It is too specific and technical for most anyway. Only some of us who own production or have worked in the industry understand how screwy this is anyway. I’ll drop it. • Synapsid says: DC, Please move the piece. It fits here. • Dennis Coyne says: Hi Synapsid, How about if you do it. Just cut and paste. I agree it is relevant. I would just like others to take the time to repost, if they believe it is a good idea. • shallow sand says: Syn: In a nutshell, PXD predicts tremendous growth from now to 2026 but their reserve estimates indicate quite the opposite. Either the wells are uneconomic, or they are intentionally sandbagging PUD for some other reason. • They probably carry reserves to be developed as probable, so they don’t have to book as proved. Some companies like to keep booked reserves low if they use units of production depreciation, this in turn creates a “loss” because depreciation goes up. But after they take the loss and prices go up their return on capital employed goes way up as well. So it’s like taking chemotherapy and losing your hair, everybody knows you are sick, but later you grow your hair back and can say you are in great health. I have seen this type of maneuver, and as a consultant I have suggested to a company to tone down their reserves (I thought they were pushing the limits), and to stop booking some costs as CAPEX when they could be called OPEX. This sort of makes them look uglier for a while, but they come out looking prettier later. Plus the books are much more solid. • shallow sand says: Fernando: Maybe you could look at PXD’s info and give us your take? It seems to be either and extreme case of understating proved undeveloped reserves or a case of planning to drill mostly uneconomic wells that cannot be booked. I do not have the industry background you and a few others here do, so that is why I am seeking input. • Dennis Coyne says: Shallow Sand posted this on an earlier thread and asked me to repost: Speaking of the Permian Basin, we have been discussing Pioneer Natural Resources’ earnings release, 2017 forecast and 10 year forecast. PXD hasn’t released the 2016 10K, but they do mention proved reserve numbers, and only 7% of proved is undeveloped. About 50 million BOE, which, using PXD’s reported type curve, is only about 40 wells. However, in 2017 they are planning on drilling and completing around 280 wells. They further state they have “pins on the map” for all 2017-2019 wells. Finally, they are predicting 1 million BOEPD company wide by 2026. It is true PUDs can only be booked if they will be put on production within 5 years. However, why would PXD only book about 40 or so PUD wells when they say over 800 locations for 2017-2019 have been identified? The only thing I can think of is only 40 or so out of all of these planned wells are economic at 2016 SEC oil and natural gas prices. For those PE’s and others in the industry, why would PUD be so low for a company predicting tremendous production growth from new wells, besides they are uneconomic, and therefore cannot be booked? PXD has stated their LOE is under$2 per BOE on their Spraberry Wolfcamp horizontal wells and F & D costs for these wells are a tad bit over $9 per BOE. They claim to be competitve cost wise with KSA, Kuwait and UAE. 2016 PV10 is$4.2 billion, up a billion from 2015, despite lower SEC oil and gas prices. Of course, once reserves go PDP, F & D costs are no longer included, so very possible they added over 200 MBOE of PDP, even if none of those 2016 wells will ever payout.

$4.2 million PV10.$32 billion market cap. Very interesting stuff.

4. Euan Mearns says:

Global Energy Graphed is progressing. We have now graphed the whole of the IEA OMR oil production statistics. BP Gas and Coal by continent / region for both production and consumption (oil is on its way). And the BH rig counts for N America and Rest of World.

If you don’t like graphs then don’t hit any of these links 😉 The easiest way to navigate is through the primary nested links on the menu bar.

• Nathanael says:

Nice graphs. You’re missing the most important graph, though, which is non-fossil electricity production.

• Euan Mearns says:

Its on its way.

• Nathanael says:

Thanks!

5. “While I realize the “Abiotic Oil Theory” is complete HOGWASH, many individuals still believe it is true. “

It gets worse:

“The Southern Poverty Law Center acquired a membership directory for the Council of National Policy, an ultra-secret conservative group, and Donald Trump’s campaign manager Kellyanne Conway and his campaign CEO Steve Bannon were listed as members. The directory is for 2014 and indicates that Conway was a member of the executive committee that year and Bannon was listed as a regular member. Neither official responded to a request for comment from The Daily Beast.
The secretive organization was described as wanting to be the conservative version of the Council on Foreign Relations and it is home to a number of individuals with fringe beliefs, including World Net Daily writer Jerome Corsi

Remember that Jerome Corsi wrote an entire book promoting the idea of abiotic oil — if you can believe it, the book was called “The Great Oil Conspiracy: How the U.S. Government Hid the Nazi Discovery of Abiotic Oil from the American People”

The current administration is completely nuts.

• Maybe now you understand why I criticize the USA political system like I do.

• Fernando, I am glad you are finally showing support for the progressive wing of the American political system after backing the neocons for so long.

• Duncan Idaho says:

I agree Fernando, it is nuts.

Maybe we need a Franco or Batista to clean things up?

• Survivalist says:

Or a Pinochet. That’d Make America Great Again™

• Eulenspiegel says:

Hey, that’s a good one.

The “the Nazi Discovery of Abiotic Oil” – they hid it very well – they even grounded their planes and tanks in the last year of the war due to lack of fuel to not reveal they a had unlimited source of oil…

“If it’s a black plane, it’s british, if it’s a white plane, it’s US and if its no plane, it’s Luftwaffe” was a joke in the last year. And all to cover the secret of abiotic oil ;).

People come to very confused ideas.

• Greenbub says:

“If it’s a black plane, it’s british, if it’s a white plane, it’s US and if its no plane, it’s Luftwaffe”

Never heard that one, thanks.

6. likbez says:

Dennis,

“Let us assume for a moment that there are some places such as LTO producers or oil sands producers where the net energy of the “petroleum production system” is close to zero. Why would that prevent the oil from being produced, as long as oil prices are high enough to make such production profitable?”

That means subsidies. But where are the sources of those subsidies ? They are in those oil sources which have high EROEI. So implicitly Russia and KAS are subsidizing the US shale production due to neoliberal global financial system based on dollar, because those countries put large part of the income from their oil sales into US treasuries.

My feeling is that Wall Street (and by extension US intelligence agencies, which historically were closely connected — look at the career of Allen Dulles) and oil production are very interconnected.

That’s probably why we have such a long period of low oil prices.

Those “free market” supply-demand arguments that have currency here, probably should be augmented with the brute force considerations. In other words, this is at least partially a racket, which is based of the US (and its allies) hegemonic world power and first of all military power.

Russia is definitely unhappy with this situation, and that’s why in 2011-2012 the USA attempted to stage a color revolution in this country.

As Roman saying coined it “Vae victis!” ‘Woe to the vanquished!’

https://en.wikipedia.org/wiki/Battle_of_the_Allia

== quote ==
Famine began to afflict both armies. The Gauls were also affected by pestilence. They were on low ground between the hills, which had been scorched by the fires and there was malaria. Many of them died because of disease and the heat. They started piling the dead bodies and burning them instead of burying them. They started negotiations with the Romans and called on then to surrender due to the famine. They also hinted that they could be bought off. The Roman leaders, who were waiting for Camillus to arrive with an army from Veii, refused. Eventually, the starving soldiers called for a surrender or an agreement on a ransom on the best terms they could. Quintus Sulpicius and Brennus, the leader of the Senones, held talks. They agreed on a ransom of 1000 lbs. of gold. The Senones cheated, using heavier weights to weigh the gold. When the Romans protested, “Brennus tossed his sword on the scale, uttering words intolerable to the Roman ears, ‘Woe to the vanquished!’” [37]

• Survivalist says:

I’m no expert on the matter but from what I understand about Canadian oil sands they’re basically burning natural gas to make heat/steam and electricity and using that to mine/refine bitumen into gasoline. I don’t know what the EROI is but it’s probably the lowest in the world. Nonetheless, natural gas doesn’t go in my car or run the farm equipment, but burning natural gas to power the mning/refining of bitumen seems to fill my tank. Now if Canada runs out of natural gas one day I suppose they could run some nuclear to produce heat/steam and electricity to power the mining and refining of bitumen to crude oil products. I don’t see why they need a subsidy. As long as they can turn a profit they’re good. It seems to me that cheap natural gas and expensive oil is the cornerstone of Canadian oil sands extraction.

• Eulenspiegel says:

You could run your car directly on natural gas, it’s not that complicated.

There are refit sets on the market – most engines can burn nat gas without problems.

Here in Germany some people drive with Natgas because of taxes:
http://esso-pleinfeld.de/gastankstelle.html

You drive to the station, fill your tank and go your way – as easy as gasoline or diesel.

• Oldfarmermac says:

It’s neither cheap nor easy to convert a car to run on natural gas in the USA, but it’s doable in other countries with less in the way of regulatory issues.

And it gets to be a LOT cheaper if a lot of people do it, meaning economies of scale come into play.

I’m willing to entertain the idea that at some point we will be able to buy brand new cars that are dual fuel or even triple fuel, gasoline, ethanol, natural gas.

It’s practical and economic now to set up stationary engines to run on gas if you can get the gas at a decent price, which means having it piped to your location. It’s hard to guess how long it might take for enough service stations to start selling natural gas to make it practical to convert a car or buy one set up for gas already in the USA. It’s the same old chicken and egg issue that bugs the electric car biz, no charger, no car, no car, no charger.

Maybe somebody that knows a lot about industrial chemistry will have something to say about how much it would cost to boost propane production substantially. The chemistry is simple enough, but I haven’t got a clue about the cost of doing it on an industrial scale.

But propane is a far more satisfactory fuel than methane, because it is can be compressed and held as a liquid at ambient temperatures, and in stored in ordinary steel pressure tanks.

It’s a long way from being as cheap or convenient as gasoline, but LP gas is a hell of a lot easier to deal with in mobile equipment than methane, probably by a factor of five, for a wild ass guess.

Standardized propane tanks are already in use all over the place, and large ones could be kept at service stations, and exchanged for empties, the same way it was once proposed to swap batteries in electric cars. This would be expensive in terms of labor and hauling the tanks from centralized locations to stores and back for refilling, but it could probably be done at least in and around cities.A tank big enough to run a compact car a hundred miles or so is small and light enough enough that a reasonably strong woman could swap out her own, just like getting self service gas. Two such tanks could easily fit in the trunk of any car with a trunk , no problem.

• scrub puller says:

Yair . . .

So Propane is not available at service stations in the US?

It’s common here you just pull in and fill up with a hose like filling with gasoline . . . most vehicles retain the gasoline tank and run dual fuel, even diesels.

All our forklifts for use in the prawn freezers (back in the seventies) ran on LPG and the tanks were just swapped out, very simple.

Cheers.

• Oldfarmermac says:

Hi Scrub,

It’s been years since I traveled much, but to the best of my knowledge , buying propane at retail to be dispensed into your own tank or vehicle is almost unheard of in the USA, but there are some businesses that refuel their own vehicles from their own large onsite propane tanks.This works like a charm if the vehicle can run all day on one fill up and it can be refilled before or after the day’s work.

There are tons of places that you can swap out empty small tanks for full ones, including convenience stores, sporting goods stores, farm supply stores, service stations, big box stores, etc. The problem with this is that buying propane this way it costs two or three times as much as an equivalent amount of gasoline. So we use it for the back yard grill, barby to you.

Industrial installations here that make use of forklifts usually have a large onsite propane tank that they use to refuel their forklifts so they can be taken into enclosed structures. Propane is cheaper than batteries, and swapping out small on board forklift tanks takes only a couple of minutes, so the forklift can be kept in near continuous service rather than sitting for hours at a charging station.

For those who might not know, propane burns clean enough that you can run an ice engine on it inside buildings that have lots of windows and doors, or forced ventilation. Gasoline and diesel are too nasty and stinky so propane is the default when electric forklifts are uneconomic.

• Survivalist says:

Yes, but as it is I, and many others, run our vehicles on petroleum and the Canadian oil sands seems to be a viable business that uses the energy from natural gas to power the mining of bitumen and the refining of semisynthetic crude.
My point is that energy from something besides oil seems to be powering the production of oil at a very low EROI and there seems to be money in doing it if the price of oil is high and the price of natural gas is not prohibitively high. This fact seems to undermine much of the Etp models claims. And your suggestion that subsidies are needed.

• Ulenspiegel says:

“That means subsidies. ”

You should have written energetical subsidies. But why should this be an issue? As long as the other energy is cheap an available, in future it may be green electricity, a energetical subsidy is not bad. In extremo we are talking about syn-fule from CO2, water and green energy.

The Hill approach is not convincing because they assume implicitly that only oil can deliver the subsidy.

• likbez says:

The problem here is that the “other energy” (other then natural gas) is not readily available.

Because this “energy loss” transformation of bitumen into gasoline rely of cheap natural gas and is sustainable only as long as natural gas is cheap.

The end of cheap natural gas means the end (or more correctly severe shrinking of scale) of Canadian oil sands.

• Oldfarmermac says:

There is reason to believe that the oil sands producers can run their operations by burning their own product, right on site, and if the oil supply situation gets to be critical, it will be politically possible for them to do so, in spite of the CO2 issue.

And if there is any place in the world where a nuke could be built and run safely and with minimal environmental impact, it should be at an oil sands mine. Some nuke juice could be used on site, with the excess sent off site on a transmission line built right alongside the highway to and from the mine, or along pipeline right of ways.

And all the heat energy that is normally dumped into the atmosphere thru cooling towers could be used to heat the bitumen making it easy to get it to the surface.

• Survivalist says:

My suspicion is that burning bitumen to power the mining and refining of bitumen would be so low an EROI that it could not sustain its own maintenance needs. Just a WAG.

• Oldfarmermac says:

So long as gas stays cheap, burning some of the bitumen to run the mining processes won’t happen, because the gas is apparently so cheap it costs less than mining enough bitumen to run the entire show.

I don’t know how the numbers play out in terms of money, but according to various sources I have read, sorry I didn’t keep the links, it will take about a third of the quantity mined to process the other two thirds into the usual heavy oil or syncrude end product.

This might work out ok if the price of the product is high enough, because the value of the bitumen in the ground is pretty close to zero, or, putting it differently, the value of bitumen is almost entirely determined by the cost of mining it. If it costs ten bucks a barrel to get it to the surface, it’s worth only a tiny bit more than the ten bucks it cost to mine it.

• Survivalist says:

Regarding Canada’s natural gas to power the bitumen extraction business. I suppose we don’t have to wait for Canada to run out of natural gas because perhaps as soon as when it shifts from NatGas exporter to NatGas importer the energy input costs might upset the bitumen extraction plan.
There was once talk of a nuke plant up around Peace River Alberta. Didn’t get far due to anti nuke NIMBY sentiments.
Anybody with ideas on when Canada’s natural gas ‘runs out’, so to speak, or dwindles to the point it can’t power bitumen extraction ops due to costs?

• Synapsid says:

Survivalist,

I can’t give you a date for running out but I can point you to a couple of things that will help determine it.

One is that NG from the Marcellus (and Utica?) is being imported into eastern Canada from the US and it’s replacing Alberta NG there, leaving more for use in the Alberta oil sands. Another is that there are two large units being developed, the Duvernay (Alberta) and the Montney (Alberta and BC, the BC part having the NG) that have dry-NG windows and can be tapped for use in the oil sands; by Canadian standards they are sort of nearby. There’s another, the Horn River, north of the Montney, that has been proposed as a source of NG to be piped to the BC coast for export as LNG (I don’t recall the status of that project), but it might eventually be used for Alberta (that’s just a guess.)

I’d ask rockdoc (rockdoc123, I think) at PeakOil.com. I expect you’d have to register. There’s still some material at that site worth looking at though it doesn’t always seem that way, and he’s an excellent source.

• Think of oil produced using SAGD and an upgrader as a synthetic product, manufactured using inputs which are converted into outputs the buyer wants. As long as the inputs are cheap enough the product is profitable.

So the key to extra heavy oil production is cheap natural gas, or cheap fusion and solar power. I mention these two because Venezuela’s extra heavy oil sits in a reservoir that’s much warmer than usual. This warmth comes from radioactive decay in basement rocks located under the reservoir sands, and from the sun, which happens to keep the surface pretty warm.

• Survivalist says:

Reminds me a bit about hearing that 10 calories of FF energy go into producing 1 calorie of food energy. Food is an energy sink. But it sure beats eating oil. Profitable too. No subsidy needed.

• Nathanael says:

Good way to think about it: a synthetic product.

The key point is that oil has already been driven out of most of its retail markets by superior cheaper alternatives, and is now being driven out of ground transportation. It’s still the only viably energy-dense alternative for large aircraft, but that’s very niche. For everything else, it’s actually *not* a preferred energy storage medium.

This is in contrast to food, which is a preferred energy storage medium because we don’t know how to directly convert electricity into bodily NAD+ or ATP.

• Dennis Coyne says:

Hi Likbez.

I disagree that it implies subsidies. What is implied is that when oil is scarce, the price of oil will increase and more of the expensive oil will be profitable to produce. Eventually the high oil price will lead to greater efficiency in the use of oil (as measured by real World GDP per barrel of oil consumed) and also some substitution of natural gas, and electricity for oil in the transportation sector and after 10 to 20 years demand for oil might fall below the supply of oil and lead to lower prices.

My main point is that the supply of oil depends on profits, not on net energy or exergy of the oil produced. Profits will depend on revenue minus costs and revenue will be determined by the oil price which is a function of both supply and demand for oil.

• likbez says:

There is strong evidence that the US economy can survive only oil prices below $100 per barrel without sliding into recession. Some researchers put this magic “perma-stagnation” oil price as low as$60 per barrel. I think understanding of this fact is partially behind this prolonged “oil price crush”.

So it might well be that we do not have the freedom of “arbitrary” oil prices in the US economy. and in worst case scenario we have oil prices already close to the celling, unless the economy is restructured.

That’s why your line of thinking about this problem might be wrong. In other words, this is a very serious situation for the USA. “The long emergency” as James Howard Kunstler aptly called it (not that I agree with his line of thinking or endorse his book).

Meanwhile the US is wasting time and money on the wars of neoliberal expansion, which partially is “brut force” way of securing privileged access to remaining oil deposits. Around 5 trillion was spent so far, or 167 millions of Toyota Priuses at $30K per car, or half of the US passenger fleet (there were 260 million registered passenger vehicles in the United States in 2014) So instead on concentrating on this fundamental problem that nation is facing, the USA is just “waiving dead chicken” with the military force. If we add the possibility of Seneca cliff that situation might be even worse then I described. The nation does need radically cut the amount of oil spend on personal transportation. Using all ways for this that are technologically feasible. Because this is the lowest hanging fruit. But very little was done in this direction on both federal and state levels. Meanwhile we expanded the fleet of SUVs for personal transportation — this is now the most popular “form factor” for personal car, which overtook sedans. Growth of the fleet of hybrid cars is unacceptably slow (over 4 million units sold through April 2016; Japan, a much smaller and compact nation, sold 5 millions). Even such a symbolic act as switching of all personal government cars to hybrids was not done by Obama administration, which preferred only talk about the problem and opened spigot for shale junk bond. The only their “real” achievement was “Iran deal” which probably was instrumental in crashing oil prices. Which probably helped Obama much more than it helped the USA economy as whole, but we should not inspect the teeth of the horse that was given as a gift, as old saying goes. Also attempts to lessen huge traffic jams in large cities like NY and SF are feeble, despite the fact that the technology is available both to reroute the cars and to optimize traffic lights. Converting existing roads network into “one way” network is almost unheard outside the city center, even when two more or less adequate parallel roads exists with the short distance of each other. Variation of the number of lines each way is practiced very rarely, in some city centers and selected bridges. Green wave for traffic using Wifi connections between traffic lights and cameras is in a very rudimentary stage. The only progress that I noticed is that more and more traffic lights at night autodetect the presence of the car on the intersection and switch to green light if there is no traffic in the “main” direction. • Dennis Coyne says: Hi Likbez, What happened from 2011 to 2014? No recession, simply excess oil supply so oil prices decreased. The World economy grew at about 3% per year over that period. The evidence of$100/b oil causing a recession is not very strong at all.

7. Survivalist says:

I’d like to ask the commenters here about Colombia. It seems to me that much of Colombia has been out of bounds for quite some time due to civil war. Now perhaps with peace between gov and FARC/ELN there is hope that seismic crews and drilling crews can be sent out with some hope they’ll return with results and not end up being held for ransom.
Does anybody here have any info/views/opinions? Any links to good articles? What potential does the unexplored geology there hold?

• George Kaplan says:

Try this:

http://www.ieee.es/Galerias/fichero/OtrasPublicaciones/Internacional/2016/EIA_Colombia_29jun2016.pdf

They actually had a lot of activity and big increase in production over the last ten years. They now have one of the highest decline rates and (I think) the lowest R/P value on any significant producer. The oil industry there is pretty old, from memory it was where Colin Campbell worked early in his carrier so there has been o good amount of prospecting. I don’t know there is much left to look for on land. Most recent talk has been of offshore but not much success yet, I think Anadarko have some leases, (maybe Hess, Occidental and Chevron too but wouldn’t swear to it). In 2015 they exported about 65% of the oil but that will be falling quickly now.

The rebels mostly used to blow up an export pipeline that was difficult to defend, and hence disrupted production. I don’t remember many issues with prospecting or drilling crews.

Don’t know much about natural gas – I think they are about neutral in import/export, but there was once talk of exporting to Brazil.

• I’m very familiar with Colombia. The increase in production came from the Rubiales trend and the Castilla fields. These were heavy oil fields we knew about for years, which became more commercial during the price run up after 1999.

The FARC areas are not going to yield anything significant. There’s some potential, but it’s all fairly high risk

• Lightsout says:

ln the Putumayo Basin, in the south of Colombia. There has been some progress with the drilling and production programme in Platanillo, having successfully drilled 15 wells, three sidetracks and one infill well.

The OBA interconnector pipeline connects production from the Platanillo field under the Putumayo River into the Victor Hugo Ruales pipeline infrastructure in Ecuador. The pipeline is now operational and has increased production capacity constraints.

• Duncan Idaho says:

Probably the US’s last client state in SA.
If the FARC problem is over, the rape and scrape will be on.
I spent quite a bit of time there in the 70’s, and loved it.
Fernando is much more knowledgeable, and there is probably not much in FARC regions.

I’m living in Mexico now, and things are getting interesting.

• Survivalist says:

Perhaps you would consider posting in the non-oil thread your synopsis of where Mexico is heading and how it’s going to go about getting there. I’m not optimistic regarding Mexico’s future prospects.

• Synapsid says:

Duncan Idaho,

I second Survivalist’s request.

• Duncan Idaho says:

Were we not speaking of Colombia’s oil potential, after FARC territory is available?
Political realities are not separate from geological access.

• notanoilman says:

The feedback I am getting is business is about 30%+ down on this time last year, around here. Can’t speak for the rest of MX.

NAOM

8. daniel says:

IEA numbers out today. One jumped out to me: OECD stocks fell 800,000 bpd in Q4/2016. This is before any OPEC cuts.
Am I the only one who thinks this is worrying? OPEC was pumping flat out at that point and we still were in a deficit?

• Jeff says:

Strange graph though. Where did the oil go? http://www.iea.org/newsroom/news/2017/february/omr-the-first-cut-is-the-deepest.html
It looks like a stock build up of ~500,000 bpd in Q4/2016 but OECD inventories are down 800,000 bpd in the same period. Some of it is probably China but where did the rest of the 1.3 mbd go? tankers?

EDIT: Found it now. According to IEA: “OECD total oil stocks fell nearly 800 kb/d in 4Q16, the largest fall in three years.End-December inventories were below 3 000 mb for the first time since December 2015. Stocks continued to build in China and other emerging economies and volumes of oil at sea also increased”
the figure on OECD total stocks is interesting: https://www.iea.org/oilmarketreport/omrpublic/

9. What’s going on in the Bakken? The rig count has dropped by 5 since Monday.

• George Kaplan says:

I think mid 30s is the base load for the main players including XTO, CRL, Whiting, Burlington etc. There were a few one off rigs added over Xmas from smaller companies, and they were drilling outside the core, including a couple of disposal wells. They’ve gone. I don’t know if some of that was to do with retaining leases, or looking good for end of year results. There may also be an impact from waiting for the new pipeline.

The price increase is not having the same impact here as in Texas. Maybe it’s entering the run down phase. The permitting is going to be interesting over the next months. There was a fall in December, then a bit of recovery I think. The EIA had a resource study which I can’t find now, but I think it indicated by far the majority of remaining resources would be in Three Forks, which is hardly being drilled at all at the moment. Maybe there aren’t many places left in the Bakkem.

• AlexS says:

Ron,

According to Baker Hughes, oil rig count in the Bakken remained unchanged for 3 weeks at 37 units

• George Kaplan says:

This might be of interest, written by poster here ‘Alex K’. He posted it recently on the Feb 5 petroleum post; maybe some people look back at previous posts, I rarely do unless I see and click on a recent post link. It references this blog.

“Contemplations over the sinking Bakken”

http://en.angi.ru/news/553-Contemplations%20over%20the%20sinking%20Bakken/

10. Boomer II says:

I saw this yesterday.

Wall Street Pouring Money Back Into Oil And Gas | OilPrice.com: “More signs of optimism abound. Wall Street is pouring the most money into oil and gas companies in the U.S. since at least 2000, according to Bloomberg. In January alone, drillers and oilfield service companies raised $6.64 billion in 13 different equity offerings. ‘The mood is absolutely different,’ Trey Stolz, an analyst at the investment banking firm Coker & Palmer Inc., told Bloomberg. ‘Go back to a year ago and the knife was still falling. But today, it feels much, much better.'” So when is the next crash and which investors will be holding the bag? The sellers and the financiers don’t need to worry so much when they can get their money out in the beginning and find “suckers” to buy this stuff. • Nathanael says: Next crash is probably somewhere between 2021 and 2025 and I have no idea who’s left holding the bag. Probably pension funds and endowments. 🙁 11. Duncan Idaho says: Two workers were taken to a local hospital and another is unaccounted for after an explosion and fire on Thursday at a Phillips 66 pipeline station in a small town in southern Louisiana, parish officials said. http://www.reuters.com/article/us-pipeline-fire-phillips-louisiana-idUSKBN15P0FG?feedType=RSS&feedName=domesticNews 12. Ves says: Steve, Oil industry, and particularly Shale & Oil Sands part, lives in hope for the last 3 years. And that is not reality, because hope means dream. Unless someone’s live in reality, here and now, they are dreaming. They are dead weight, and tomorrow which will fulfill all their hopes is never to come. Shale and Oil Sands are mostly North American origin of production with 5-6 mbd. where we have the most consumption per capita in the entire world. For the past eight years we were fed the constant stream of stories of mythical economic “recovery” and all the wealth created in this period from the bankers and economist. And as a result of all that illusory “wealth” retail sector was able to sell goods to consumers with empty wallets and maxed credit cards only by smashing prices to the bone – leaving almost nothing for the profit. Imagine the state of economy without this extra unconventional 5-6 mbd and$50 per barrel as a consequence.

• Boomer II says:

“Imagine the state of economy without this extra unconventional 5-6 mbd and $50 per barrel as a consequence.” I continue to be surprised at how well the stock market is doing. I see nothing on the horizon, either nationally or globally, to suggest economies or companies will grow stronger. True, world population continues to grow and that creates a form of economic growth. But I think we’re more likely to see declining incomes and consumption per capita than increased consumption and growth. • Nathanael says: One of the reasons the stock market is going up is stupidly simple: (1) There are more ultra-rich people. They can’t consume more so they have to invest their money. (2) There are fewer listed stock market investments. More and more companies stay permanently private or go private. This creates high demand for listed stocks and low supply. Actual profits may be crap, but they’re better than money market, and where else are you gonna invest? Remember that 3% was considered a good rate of return for decades running in the 19th century… • Boomer II says: A lot of what the wealthy do with their money is just trading back and forth amongst themselves. Art, real estate, stocks. It’s only worth something because other rich people will buy it. It’s mostly an illusion of wealth. • Oldfarmermac says: Farm land and timber land have both historically proven out as excellent investments, and will continue to do quite well, compared to other possible investments, because the population is growing and the supply of both land types is shrinking. But you have to be in for the long term, and know what you’re doing , or you’re just gambling. I know this line of investing, and how well you can do at it, and what the downside risks are , etc, but I wouldn’t have a clue if I had to pick an oil stock. Getting in and out of any sort of land deal is a slow and expensive process, and you can’t count on getting out in a hurry, and anybody that does it needs some real professional grade advice unless he is well grounded in the farm and real estate businesses. Wood will be ever more valuable as time passes as an industrial feed stock and as a fuel, and nearly all the feedstocks( excepting packaging and wild fish, etc) that are used in naked ape chow factories originate on farms. • Boomer II says: That’s what I would be buying if I were wealthy – lots of land. And I would hold on to it or donate to a land trust. 13. Mark says: Steve – you actually believe that oil is ‘fossil’ based, and that it comes from dinosaurs ? Your article has at least as much fiction in it, as the fake news from CNN. I suggest you stick to precious metals, and stop bloviating about a topic that makes you look like a total fool. Also the fact that you cited another blowhard, and fraud, named Cuntzler, just puts the exclamation point on the total lack of credibility. I guarantee you, oil ‘discoveries’ will keep getting larger, and more frequent over the coming decades. Why do you think that oil price barely holds over$50 ? This after how many years of going down now ? Production cuts by OPEC are a total farce, and have been for years. There is so much oil still ready and able to be produced, extracted, shipped, they don’t know what to do with it all. Peak oil, and the notion of EROI is total bunk. FERC funded studies at GRI showed since the ’70’s, 80’s, and 90’s, we’d be going out hundreds of years before any concern about oil or gas extraction costs, or availability. Also your cherry picking of information and excluding a lot of important context surrounding the oil majors financials, is such a gross distortion, that I’m surprised they don’t sue you silly. They probably don’t bother though, bc you are a peon that is so far off the mark, its not even worth commenting on.

• Steve – you actually believe that oil is ‘fossil’ based, and that it comes from dinosaurs ?

Mark, you are obviously a fucking idiot. Yes, oil is ‘fossil’ based but it does not come from dinosaurs. All oil is aquatic, it comes from algae. And I am sure Steve knows that. Only idiots believe oil is abiotic. I would suggest you stick to something you know something about, like comic or coloring books.

• islandboy says:

Ron, surely you recognize the work of a member of Team Koch, another “thoughtful” post, brought you with the kind support of the happy billionaires! I’m am not willing to believe people are actually so misguided by choice but, your first sentence could be right.

• Islandboy, no, I don’t believe it. Team Koch would never be so stupid as to hire such an idiot. They are devious but not stupid.

• islandboy says:

I dunno. Sometimes I think there might be an attempt afoot to cloud the discussion and make it seem that this is a site populated by the lunatic fringe, so discrediting everybody and everything found at this site. Maybe I’m overthinking but, I sometimes wonder if some of these posts are really coming from honest to goodness klutzes, as opposed to people who know better but are just pushing our buttons.

• I think the “dinosaur” connection comes from dumb plankton such as Mark not understanding what a Dinoflagellate is.

• robert wilson says:
• Fred Magyar says:

LOL! Dinoflagellates were sexually deviant T-Rexes that were into S&M…

• Survivalist says:

If you think the earth is 5000 years old and that dinosaur bones are a hoax you’re likely to believe all kinds of crazy shit to avoid accepting reality. Also I believe that the only pleasure SOME conservative trolls get is in trying to offend people. They know their ideas are going extinct. Their only joy in life is how many folks can they try to piss off.

• Lloyd says:

Hi Ron.
The point of this … this…thing… is to give an “alternate explanation”, a fiction that is easily digestible by the uneducated and uninformed. No facts, no references, merely the assurances of the author.

However, to produce propaganda that ‘oil ‘discoveries’ will keep getting larger,’ you have to know that they are, in fact, getting smaller.

It’s the big lie.

Not Kochian, but Trumpian.

-Lloyd

14. islandboy says:

Tullow Finds ‘Live’ Oil Offshore Jamaica

Oil and gas company Tullow Oil disclosed this week that it found ‘live oil’ off the coast of Jamaica in its latest search.

The company has since extending its 2D seismic mapping by hundreds of kilometres to determine the full scope of the find.

“In Jamaica, following the completion of a drop core and seep study in the Walton Morant blocks that identified a live oil seep, Tullow will acquire a further 680 kilometres of 2D seismic data before considering the acquisition of a 3D seismic,” said Tullow in its annual report released on Wednesday.

A Jamaican engineer who worked on oil rigs off the coast of Gabon told the Financial Gleaner that live oil seeps are evidence of oil flowing to the surface, which provide the first indication of petroleum systems in the basins surveyed. Requests for comment from Petroleum Corporation of Jamaica (PCJ) and Tullow Oil were unanswered up to press time.

What does this mean? As I have said before, I have to defer to the oil guys when it comes down to the technical details. While I suppose a significant oil find would be a good thing, I am pretty sure my island would very quickly develop the Dutch disease. I have no confidence that the local politicians would be able to exercise any restraint.

15. Seppo Korpela says:

The report by the Hills Group claims to rely on thermodynamics arguments to predict oil’s price-volume trajectory going forward. If does not stand up to scrutiny.

Thermodynamic analysis of engineering systems is typically based on the first law of thermodynamics together with mass balances.
The second law of thermodynamics introduces the entropy as a thermodynamic property and the related concepts of reversible processes and reversible heat transfer.
Irreversibilities in real processes are taken into account by assigning a value of experimentally determined efficiency to equipment such as pumps, compressors and turbines and
this way the reversible processes are related to the actual ones.

A relatively recent development has been to develop a systematic use of an exergy balance to examine where in a complex energy system irreversibilities
take place. Exergy is defined as the maximum theoretical work that can be obtained from a system and its environment as the system comes to equilibrium
with its environment. By combining the first and second laws of thermodynamics an exergy balance can be written down.

Rudimentary exergy analysis can be found in the 1941 book Thermodynamics by Joseph Keenan. It was called availability analysis at that time. The most systematic development
of the exergy analysis is in the textbook Fundamentals of Engineering Thermodynamics by M. Moran, H. Shapiro, D. Boettner and M. Bailey, 7th ed. John Wiley, 2011.

Although the entropy balance equation can be used (although typically only for steady state systems) to determine the entropy production, to carry it out requires that sufficient number of
thermodynamic properties and interactions are known at the system boundaries. Since such a calculation needs to be carried out after the thermodynamic analysis has been completed,
it is seldom carried out in engineering practice because the knowledge of the same properties allows the efficiency of the machine or system be determined.

The advocates of exergy accounting claim that knowing where the exergy destruction takes place in a system is a good way of allocating development money to improve it.
This kind of analysis has not taken hold in industry either, simply because, manufacturer, say of turbines know that the irreversibilities are quantified by measuring the efficiency
of the turbine, and they direct their efforts toward understanding how the blades of the turbine can be shaped in order to reduce the irreversibilities. Such a task is based on aerodynamic
calculations. Compressors and pump are by the nature of the flow through them machines with lower efficiency and their improvement requires again experts with fluid dynamic knowledge to
improve them. Similarly improving the heat transfer in a heat exchanger is carried out by making improvements in the heat exchanger surfaces and reducing pressure losses.
If these improve the heat transfer, the entropy production is reduced. Here the expertise of a heat transfer specialist rather than a thermodynamicists is needed.

One interesting application of exergy analysis is to calculate the second law efficiency. A high second law efficiency means that the source of energy is well matched with the application.
Thus heating shower water with a thermal solar heater is a good match as unfocused solar energy raises the water temperature high enough to serve as shower water, but not nearly so high as to create superheated steam to power a steam turbine. Thus the most important insight to be obtained is to match the source of energy to the application, and once this insight is internalized, calculation of the second law efficiency adds only marginally to understanding. For this reason it is seldom used in industry. To be sure, optimization of a system’s second law efficiency is still worth while, but using other metrics this can be done with topics based on heat transfer, fluid dynamics, stress analysis and the like.

Where thermodynamic analysis is helpful is in seeing how a thermodynamic efficiency of a system such as a coal or nuclear power plant can be improved by increasing the maximum steam temperature of the plant in which the turbine is but one component. This requires that blades are made of materials that withstand the stresses generated at these temperatures. Such developments have increased the maximum temperature of these power plants to about 1000 F, but further improvements have now stalled over the last half a century. For gas fired power plants combustion temperature is higher and and turbine designers implement both cooling technology for the blades and use high temperature materials, that today are made of single crystals, that withstand the hot combustion gases. Interestingly exergy analysis shows that most of the exergy
destruction takes place in the combustion of the fuel, but there is not much one can do to reduce this destruction. For this reason a naive application of exergy analysis may lead the poor allocation of development funds.

The report by the Hills Group proposes to use the second law of thermodynamics as the starting point. The unsteady entropy balance for a control volume with one exit and no inlet is given as

dS_cv/dt= Q^dot_j/T_j – m^dot_e s_e = \sigma^dot_cv

Next comes the assumption that at all times dS_cv/dt = m^dot s_e$. It is based on the observation that because at the end of oil production when the reservoir has been completely depleted the flow will stop and nothing much takes place, then both of these terms are zero. After cancelling these terms the entropy production is seen to be related to the heat transfer. But his assumption is clearly unjustified while the oil is being extracted and these two terms do not cancel each other. The neglect of the terms leads to an equation that omits the entropy production that is caused by the irreversibilities of the oil flow through the permeable reservoir rock. The incorrect canceling leads to the equation dot Q^dot_j/T_j = sigma^dot_cv or sigma^dot_cv= Q^dot_j/T_j and this can be cast in these two forms, depending which term is known and which is unknown. The report by Hills Group does not tell the reader which is a known quantity and which is to be calculated. In fact, there is no indication in the report how the heat transfer is calculated? In thinking about the heat transfer, for a control volume that includes the reservoir only, it appears that the heat interaction between the system and the surroundings is mainly caused by the geothermal gradient. That is, heat enters from the lower boundary and leaves across the upper boundary. This is a passive process. The fact that the oil and water in the reservoir have some average temperature in the geological setting only influences the viscosity of the fluids and thus how well they move through the reservoir, but from the energetic standpoint the sensible energy is not important. That is, there is no attempt made to extract this energy in a heat exchanger, nor is the high pressure used to extract energy in an expander. Rather the oil and water mixture flows through a set of throttling valves, in which the exergy is destroyed. If the entropy production were known independently, then this equation could be used to calculate the heat transfer, but the answer would be incorrect because entropy production is caused by both heat transfer and irreversible processes taking place inside the control volume. For the control volume consisting of the reservoir, entropy production takes place mainly in the pores of the permeable reservoir rock as the flow is forced out. This takes place by local viscous dissipation and although it can be calculated in principle, in practice such a calculation is nearly impossible to carry out from first principles. The entropy production rate for the system would then be calculated by integration of the local values over the entire reservoir. Next in the analysis is a calculation of E_Tp. It is defined as the total production energy, or the total work required to extract, process, and distribute a volumetric quantity (a gallon) of crude oil. The report offers the equation E_Tp = [(m_c C_c + m_o C_o ) (T_R-T_O)]/[m_c] as a way to calculate it. But this is the energy of the sensible part of the oil-water mixture above the reference temperature T_O. It does not include the chemical energy of the crude oil and the formula cannot be reconciled with the definition of E_Tp. The following equation also appears in the report E_Tp = integral_{t_1}^{t_2} T_0 \sigma^dot_cv dt \] Thus there are two equations to use for calculating E_Tp and there is no mention what the independent variables are and what is calculated using these equations. If the value of E_Tp is calculated this way then how is the previous equation used? The only unknowns are the reservoir temperature T_R and the oil-water ratio, if the total flow rate is determined from the depletion rate equation. The reservoir temperature can be measured, so the unknown seems to be the water oil ratio. However, the report makes use of an empirical equation for the oil/water ratio as a function of the percent depletion of the reservoir. Finally last equation can only be used to calculate the change in exergy, and this would necessitate a new symbol to be introduced for exergy, and this is not the same as energy. The report next presents calculation of the oil extraction trajectory that is based on Hubbert’s methodology. The calculations are in close agreement what others have found., with cumulative production 2357 Gb that is somewhat larger than what Campbell and Laherrere’s value 2123 Gb. It is now well known that the in the calculations based on logistic equation there is a slow drift to large values of the ultimate production as more data has been included in the calculations with the passing of the In the same section is also a discussion of the surface water cut as a function of the percent of oil extracted from a reservoir. The curve is then rotated in order to satisfy two criteria set by the authors. Now a rotation of a curve is a mathematical transformation and a curve cannot be arbitrarily rotated without destroying the underlying mathematical theory. Furthermore, the report states that E_Tp cannot exceed E_G, the crude oil’s specific exergy. The terminology is again used loosely applied to both energy and exergy. Returning to the calculation in Section 4.1 of the report for calculating$E_{Tp}$by the equation E_Tp = [(m_c C_c + m_o C_o ) (T_R-T_O)]/[m_c] The statement on top of page 19 suggests that the water cut is an input parameter, in which case the value of E_Tp depends only on the reservoir temperature. The reservoir temperature in turn is a function of the depth of the well, owing to the geothermal gradient. This would allow this equation to be used to calculate the sensible energy of oil-water mixture. But what purpose does this serve? The sensible heat of the crude oil is not used in any significant way. The crude oil cools as it enters the ground facilities and it cools further as it is transported in the pipelines. No power is generated from the sensible part of the crude oil’s energy. Only the chemical energy is valuable upon combustion. The rest of the report relates to how prices are linked to the energy delivered. There is no theory to predict how prices adjust to either temporary surplus or deficit. From what has been discussed above, the thermodynamic analysis is incorrect and therefore any calculations and graphs based on this analysis must also be unreliable. Readers have noted that the so called analysis predicts a peak in oil production during the 2017-2018 time frame and troubles by 2023. That this coincides with the time others have judged the difficulties to appear, seems to give the report a superficial credibility. If the authors have a better handle on how much energy is expended in oil production, they can form the EROIE ratio and it would constitute an independent check on the work of Hall and his coworkers on EROEI. Such an independent analysis would have some value • Rune Likvern says: Seppo, +1 000 000! I am (and many others) now awaiting Hills rebuttal to this. • Fred Magyar says: I am (and many others) now awaiting Hills rebuttal to this. What information I have managed to obtain about the Hills report without actually buying it, makes me agree with Seppo’s assesment. However, if some crock of horse shit peddling soothesayer, accidentally predicts the exact date of a massive earthquake in California, is that going to make it any less devastating?! So even if you think of the Hills group as your proverbial blind squirrel, they seem to have accidentally stumbled on a nut. Doesn’t validate their process but they do seem to be holding a real nut. Forget thermodynamics and EROEI calculations. The real issue is the graph that Steve posted which unless the consensus is that those numbers are completely fake, “Houston the Oil majors have a problem!” And my gut feeling is that it is going to get a lot worse. To explain why I think that, we’d have to take it over to the Non Petroleum based thread. I think Islandboy has already touched on some of it here. Jeff mentioned Steve Kopits and I also asked the same question about him up thread. Kopits seemed to be saying a few years back that the oil majors were not spending on CAPEX and were selling assets to pay dividends to their shareholders. Does anyone dispute that? • Rune Likvern says: From what I have seen it is generally accepted that EROEI for FF has been and will continue (lots of peer reviewed papers documenting this) to be in a downward trend. Then it is open for projections how fast this downward trend will develop and its consequences. What matters is net affordable energy that will be made available for societies. In the short term it is about flows, longer term; size and quality of remaining stocks. Selling assets to pay down dividends/buy back stocks is liquidation. Further up in this post Nathanel shared some great insights; ”Personally, from my background in general financial analysis, the two really big metrics I’ve been watching lately: Dividends in excess of current earnings mean a company in decline. Borrowing money to pay the dividend means a company which is in unmanaged, uncontrolled decline. (Managed decline would involve liquidating assets to pay dividends, and *paying off* debt.) “Look at what they do and not what they say.” Several big oil companies have used money for stock buy backs, but another trend I found interesting is also how they move into renewable (solar and wind). This should be an indicator about what these companies find profitable. Just to be clear, I think renewables are great, but we also need to recognize the dominant role of FF. • AlexS says: “The oil majors were not spending on CAPEX and were selling assets to pay dividends to their shareholders.” They are spending on capex (although they cut spending in 2015-16) and they are buying assets, not only selling. • Thermodynamics is useful for areas where it is useful. It’s not useful in other areas, which is what Seppo is saying. In those cases, you just have to do the detailed physics modeling. For something like Bakken, what is useful is applying the statistical mechanics models for diffusion. What the frackers are trying to do is herd the oil in one direction while it really wants to diffuse every which way. Both heat and disorder play into entropy. Diffusion is more of the disorder aspect. Like uranium in seawater, once the oil is completely dispersed in the medium, it makes it awfully tough to extract without lots of added energy. Physicists know when to apply thermodynamics and when to apply statistical mechanics. The Hills group is applying some sort of ju jitsu that I have not completely grokked yet. Dennis and Rune are also on the right track when they argue that humans will expend lots of energy just to get what they want into a convenient form. • Nathanael says: Dennis and Rune are absolutely on the right track when they say that humans will expend lots of energy just to get what they want into a convenient form. What is perhaps not obvious until you think about it is that *oil is inconvenient* for most purposes, as are all liquid fuels. Electricity is convenient. • Oldfarmermac says: May Sky Daddy strike me dead with a lightning bolt right here right now if I’m wrong about oil being a SUPREMELY convenient way to make my tractors and trucks go. As a matter of fact, oil is the ONLY way they can be made to go as a practical matter at this time, although they could be converted to run on propane or natural gas. Maybe in ten or twenty years, if I ‘m still around, I will be able to buy batteries or fuel cells that will serve to run my machinery. For now, and for some time to come, such batteries are only gleams in the eyes of entrepreneurs hoping to get as rich as the Koch brothers. It’s going to take batteries at LEAST ten times as good as the state of the art as manufactured today by companies such as Tesla or LG to make farm machinery go , and charging them up when they are needed at critical times of the year is going to mean building out the grid running out into the farm country boonies by a similar factor of five to ten, assuming that farming a couple of decades down the road remains about the same as it is today. As Ron has pointed out from day one, the death of peak oil has been greatly exaggerated,.The flip side of that observation is that the death of OIL ITSELF has been greatly exaggerated here and in most other forums populated with people with their heads and their hearts in the right place. If we really work at it, and the natural gas needed is really there, we can get almost entirely away from coal within a relatively short time, within a decade or two at the most, except we will still need a modest amount of coal as backup electrical generation fuel in places where gas must be shipped a very long way at very high expense. It’s going to take a long time to build enough wind and solar farms to do away with coal fired electricity in places where gas IS readily available , or can be made available by building new pipelines. It’s hard for me to imagine completely finishing up such a huge huge job in less than three or four decades, because there will be many more critical problems than there will be resources to solve them. This means that if we can do away with say ninety percent of coal consumption for half the money it would take to get to zero, we will probably have to settle for the ninety percent, and spend the other half of the resources on some other equally pressing problem or problems. Most of the little guys who farm have five hundred gallons of on site diesel storage, and the bigger boys have a LOT more. When you need it, you can’t WAIT for it. A gallon of diesel fuel is worth about thirty five to forty or so kWh. A man growing a few hundred acres of corn or beans needs at LEAST a hundred gallons a day on his peak need days, but he needs that much only a few weeks out of the year. That’s equivalent to about thirty five of Tesla’s top of the line automotive batteries. Those not yet for real super duper batteries are going to be sitting around forty eight weeks out of fifty two, used only lightly, and sometimes not at all for weeks on end, which means paying for them is going to be TOUGH. It’s not too likely that middle aged guys in the oil biz will have to find new careers before they qualify for their rocking chair money and socialized medicine aka Medicare. Old age will probably remove them from the labor force faster than lack of demand for oil removes the need for them, in my opinion at least. • Dennis Coyne says: Hi OFM, Not much of total oil supply is used on farms, maybe biodiesel or ethanol could replace petroleum. For trucks, the short haul can be done with batteries or overhead wires on main arteries, long haul trucking can be replaced with rail and rail can eventually be electrified as diesel becomes scarce and expensive. Yes it will take 20 or 30 years, as they say Rome was not built in a day. • Oldfarmermac says: Hi Dennis, As usual, I basically agree with what yqu have said, and in the past, I have often commented that it will be possible to produce enough liquid biofuels to meet the needs of farmers and to run truly essential vehicles such as ambulances, fire trucks, some cop cars, maintenance trucks for the electrical utilities, etc. If you are right about the supply of oil peaking now, or soon, and declining very gradually over the next couple of decades, my personal opinion is that with luck some countries can manage a successful transition that looks very much like the scenarios you favor, with electric cars and light trucks displacing ice personal vehicles, electrified and expanded rail, a lot of trucks running on overhead power lines, really energy efficient new construction, more mass transit, some changes in life style, etc. Some countries in my opinion are already too far gone, too many people, too short on essential resources, and lacking in anything that can be exported to import food and fuel. But if we run into a Seneca Cliff situation, even fairly rich countries may not have good enough leadership to convince the people to make the necessary sacrifices short and medium term to successfully transition to renewable energy. I question whether most people can be convinced the necessary sacrifices MUST be made once the crisis is at hand and I ‘m dead sure very few politicians are going to be willing to run on an austerity platform. So my guess is that if things go badly wrong, economically, whatever resources remain will be expended on short term crises of one kind or another. I don’t even PRETEND to know what will actually happen, because there are way to many variables involved. Experts are wrong about long term trends as often as they are right, so it seems to me, and when they ARE right, sometimes it takes a lot longer for a predicted event to happen , or a hoped for technology to be successfully commercialized on a large scale, etc. So I’m cautiously optimistic some of us, and some countries, will pull thru. If I were living in a big city depending on just in time deliveries, I would be making plans to move in within a few years at the longest, or at least have a place ready to move TO, where I would be reasonably sure of having fuel, food, water, and serviceable shelter all derived from local resources. • George Kaplan says: Spot on. All I’d add is that by my understanding, and is is difficult to follow what they are doing in a lot of places, the second equation for Etp (the simple algebraic energy balance) is, incorrectly, derived from the first one (the one with the entropy integral in it). The water cut and reservoir temperature are known, so this is just becomes definition of Etp. They then apply this value, incorrectly, to the processing of the oil after extraction, which as you say is not a function of sensible heat but rather chemical energy of combustion, which goes in the numerator for EROI calculation, and, I’d add, latent heat of vapourisation, which makes up a large part of the denominator. • farmboy says: Seppo If you have the courage and ambition to meet the dragon in his lair you can do that over at peakoil.com on the ETP Q&A thread. This has grown into a total of 175 pages and counting and gets split into a new thread every time it reaches 25 pages with no arguments yet presented as pursuasive as yours. I urge you to do it for those of us that want to know the truth. 16. George Kaplan says: I looked at Mexico production by area as below. The numbers in brackets show percentage year on year change for exit rate 2016 to 2017. Only the small area in northern offshore, which is not LMZ or Cantarell, is not declining. Even KMZ looks like it might be turning over. If it goes like Cantarell as Nitrogen and or water start hitting the producers then the will be a big acceleration, if not then the decline might flatten out as the other fields make up increasingly less of the mix. The plateau that KMZ achieved after N2 injection was started is now quite long for an offshore field. • Survivalist says: On the topic of Mexico: Do any of the commenters here feel optimistic about onshore shale oil and gas potential in Mexico? Might they, with higher oil prices and industry liberalization, replicate the American success and get a few million barrels a day on the market for several years? Might Colombia and Argentina also replicate USA shale productivity? Any informed opinions or WAGs on opportunities and constraints? • Duncan Idaho says: Argentina possibly. • AlexS says: “Do any of the commenters here feel optimistic about onshore shale oil and gas potential in Mexico” Pemex is optimistic about its production prospects, but I don’t think this includes any volumes from shale oil and gas. As far as I know, the Mexican part of the Eagle Ford is less prolific than the U.S. part, and is more gassy. Below are Pemex C+C production projections from its 5-year business plan 17. Heinrich Leopold says: SRSRocco, Thanks for your interesting post. In my view the US oil and gas industry plays a very important role for the US economy. As long as US oil and gas production is high, the USD stays strong through a lower current account deficit. The costs of a weak dollar (and lower US production) would be manifold higher (higher interest rates) than the current losses of the oil and gas industry. And the losses are made for private shareholders – who do not care as long as dividends stay the same. So, who cares? However, how long can companies sustain this torrid pace? My guess is the industry wants to sit out the cycle until any spare (net export) capacity is out of the market (see below chart). So, if OPEC does not have any surplus capacity left, the oil price will rise as then OPEC has no chance to increase oil production and anybody can produce as much as he wants. OPEC has cut its production, yet I have no doubt that they want to bring its spare capacity to the market. With the current cut OPEC has just bought time to do this at a higher price. But if the spare capacity is gone, even OPEC will have no interest in keeping prices stable. When worldwide spare capacity is gone, this is the time when we have the true oil peak. As a high USD slows down oil demand, it will take time until the last drop of spare capacity has gone, yet then it will be a dramatic rise of the oil price. • texas tea says: Heinrich Leopold you are a rare diamond among a pile of pea gravel in your analysis. As for the article, when the answer to every problem is to buy gold and silver I don’t give the author that much credit. While he admits he does not understand the oil and gas business, this article shows he also does not have any real historic context for his conclusions. • Heinrich Leopold says: texas tea, Thanks for your comments. The current situation is at least very interesting as we will soon see how much substance is behind the claims of the industry and OPEC. Saudi Arabia has probably not as much spare capacity as they claim as the current cut was probably not as much voluntarily as published. On the other side, the recent quarterly report fom ExxonMobil http://cdn.exxonmobil.com/~/media/Global/Files/Earnings/2016/news_supp_earnings_4q16_2.pdf reveals the Exxon had a five time higher loss on its US operations than in 4q2015, despite higher prices received. This is a hint that there are enormous cost pressures in US operations. So, the US industry has probably not so much time just to sit out the whole situation. In any case it is a fascinating poker game. 18. Doug Leighton says: Hi Steve, As follow-up to a comment by Rune up above, what do you make of recent statements (ZH, etc.) respecting China moving to a gold based currency? If true, this sounds like a truly earth shattering development (of course I know nothing whatsoever about financial stuff). Perhaps Watcher, or anyone knowledgeable, will chime in on this as well? I apologize if this is an inappropriate question on this thread but you are a gold guy……… • Doug Leighton says: For example, the Economic Policy Journal recently pointed out that Dr. Pippa Malmgren, the President and founder of Principalis Asset Management who worked in the White House as an adviser to Bush: “The most interesting piece of the puzzle is that the Chinese have emerged as the biggest buyers of gold, mainly off-market. They want the Yuan to emerge as a hard, gold-backed currency in a world where everyone else has chosen to inflate and devalue.” • HHH says: I don’t think a gold backed currency can be printed at will like fiat currencies. Governments and Central Banks like the ability to create unlimited amounts of currency at will. China does have currency controls and it’s hard to get money in and out of China. So to circumvent that Gold along with a long list of other stuff are used to get money in an out of China. • HHH says: China creates more currency. Or digital currency i guess we should say than the FED,ECB,BOJ,BOE combined! They would be the last country on earth to go to a gold backed currency. IMO • I don’t think a gold backed currency can be printed at will like fiat currencies. There is no such thing as a gold backed currency. Again, all currencies on earth are fiat currencies. From Forbes: All Money Is Fiat Money But insofar as we use the expression “fiat currency” to refer to currencies that have no “intrinsic value”, then all currencies are fiat currencies.) • Duncan Idaho says: I have friends who are having problems getting money out of China. (The reality a few months ago they couldn’t- and the wife is a well connected elite) • Fred Magyar says: Some how it never ceases to amaze me how people still think that any modern economy could in any way shape or form be tied to precious metals such as gold. That is a patently ridiculous idea! This is the 21st century and trying to cling to a 13th century printing press economy would be laughable if so many supposedly intelligent and globally savvy individuals weren’t still proposing it. I have on multiple occasions recommended Douglas Rushkoff’s book “Throwing Rocks at the Google Bus” it is available on Amazon or you can find his talk on Youtube. (full disclosure: I do not receive any financial gain for my recommendation!) Go check it out! There are currently well over 700 different crypto currencies based on blockchain technology in use around the world today and that number is expected to grow exponentially. Bitcoin being the most well known of these currencies… https://goo.gl/A9UKR2 “Some 90 per cent of bitcoin trading is taking place in China at the moment and if you compare the rise in value of bitcoin against the performance of the yuan against the US dollar, then you will see there is a clear correlation,” says IG Markets chief market strategist Chris Weston. “It suggests that people want to get money out of China and they are using this very unique and simple vessel in bitcoin to do that.” The funnelling of the yuan through bitcoin comes as the Chinese government and its regulators have in recent months moved to restrict the outflow of capital from their communist coffers over concerns it could destabilise the currency and economy. People need to start wrapping their heads around the fact that this is the 21st century and we have a digital global economy and the old rules no longer apply! It is necessary to understand the new world order and the massive disruptions coming down the pipeline (pun intended), in energy production, the economy at large, social change, etc… governments may try to delay this by propping up the quickly dying fossil fuel industry and saying they will bring back the good old days. Well it ain’t working and it won’t work. Not here in the US, nor China, Russia, India, the Middle East or anywhere on this planet, get over it. Trump may have won but the old world order is dead man walking! It is necessary to understand that we now live at the dawn of a new industrial era powered by clean energy and that this is a peer to peer digital economy where big data, artificial intelligence, robotics and things like distributed microgrids shared driverless vehicles will massively disrupt BAU. That disruption includes how wealth is created, how it is distributed and most importantly that the old OS on which we have been running the world is no longer adequate. Time for a major OS upgrade. Trump and the fossil fuel industry are trying to convince us that we need to go back to using DOS and polish up our old IBM XTs with a green phosphor cathode ray monitor for a glorious future. Well the Amazonian natives and the Bushmen in Africa already have solar panels, LED lighting and smartphones with 5G internet access… The genie is out of the bottle and it ain’t going back in! In closing, I apologize if my rant is deemed out of place in the “SO CALLED” petroleum thread, IMHO everything is connected even if a bunch of people still have their heads deeply stuck in the tar sands! And BTW, Ford just invested$1 Billion in self driving cars…

• Boomer II says:

Since most of the world’s wealth only exists in computers, we don’t have to give the wealthy as much power as we do.

• Fred Magyar says:

Which is exactly what blockchain technology enabled peer to peer exchange of wealth does. It eliminates the parasitic middle men, shareholders and cuts deeply into the power to concentrate wealth by the very few. It makes it possible to democratize wealth creation and its distribution.

• Oldfarmermac says:

Hi Fred,

I understand the beauty of bit coin, but I have never been able to entirely understand why bitcoin is not subject to loss of faith so that one day, if you have some bit coins, nobody will be willing to accept them in exchange for real goods.

I’ve heard all the usual explanations, but when I encounter such a problem, I try to think like a child, asking questions adults overlook. Over the years, this strategy has enabled me to understand many things better.

What bothers me is not the loss of the internet so much as a loss of CONFIDENCE, although bitcoins would be worthless without the net, so far as I can see.

Now there is NO question at all in my mind that if the shit hits the fan hard and fast before I’m gone guys who have a five gallon bucket of shot gun shells and rifle and pistol ammo will have something that will be universally accepted in trade, and at a very high premium, in relation to what it cost in cash to set it aside.

A fifty five gallon drum of diesel, in the event of a catastrophic crash event that stops the delivery of diesel for six months will be beyond price. About the only thing I would trade away a barrel for would be food, or maybe certain medicines, which would also be unavailable henceforth. I would also trade for any conventional ( non hybrid) seed for various vegetable crops, since you can’t easily store them long term, and thus the only way to be sure of having them is to grow them every year. I’m not doing that, it’s just too much work, considering the low risk. I would be able to get SOME seed from neighbors, enough for a SEED GARDEN, lol, in exchange for plowing, etc.

I’m not actually specifically doing anything as preparation for a catastrophic crash, because I think the odds of such a crash within my remaining years are slim to VERY slim. But if it doesn’t cost any more, when I make a decision, I go the route that’s best considering a crash is possible. It’s actually cheaper and more convenient to have plenty of diesel on hand, so I keep plenty on hand, enough to farm on a subsistence basis for ten years, and still be able to swap five gallons occasionally for the services of a tough young man as a laborer for three months. If anybody doubts this exchange ratio, let him try to spade up a good sized meadow in a tough grass sod, and get it ready to plant corn or beans by hand. Five gallons will giterdone, plowing deep, plus a second pass with the disks , on two acres or more.

Virgin daughters will be free, and will show up on their own, lol.

People who worry about spare parts in the event of a truly catastrophic crash are worrying about the wrong problems. Spares will be a LONG term issue. The odds are ninety nine point nine or better that one or the other old tractor on this place will run without needing a repair requiring a spare part for at least two or three years, and there will be tractors sitting around all over for lack of fuel,etc.

• simon oaten says:

I guess if a Government is printing flat-out, then it makes sense to take as much cash as possible – and invest in real assets….

• Oldfarmermac says:

It would be a superb strategy to have a truly good friend or relative who understands the BIG PICTURE and has a good job and good credit to buy a farm, any farm that would serve the purpose as a homestead, with borrowed money, if you believe you see runaway inflation as being likely to dead sure. It would be easy to very easy to put your hands on money enough to pay off the loan and get the farm for peanuts, using money inflated by a factor of ten or more. And for a little while, the courts will force the lender to accept the near worthless cash.

The downside is that if you are wrong, well, your friend might be bankrupted, and you are going to owe him BIG TIME.

A number of men I know personally have put some heavy duty assets solely in the hands of their wives, so that if they go broke, their wives and kids are still ok , and they will still have a viable fall back position. Of course this involves having complete trust in your wife, but if you don’t , she shouldn’t be your wife anyway.

I wouldn’t advise anybody with substantial assets subject to seizure by a court to pursue this strategy on his own, but a person with good credit and few assets wouldn’t really be risking much more than his credit.

• Wake says:

I don’t know China well but as to Zero Hedge, it is occasionally interesting and informed on trading, although most of it is inflammatory doomerism (why I like it). Starting a few months ago it became much more overtly pro Russia as opposed to pro doom. I assume Putin has something on one of the Tylers, or possibly always did. I would consider it a Russian media outlet now.

China is trying to stem currency outflows more and more though whether that means gold would help I doubt.

• As follow-up to a comment by Rune up above, what do you make of recent statements (ZH, etc.) respecting China moving to a gold based currency?

Are you joking? China doesn’t have nearly enough gold to back the yuan with gold. They could not match the yuan 1,000 to 1 with gold.

The amount of money in circulation has grown by astronomical amounts in the last half century since the US went off the gold standard but the amount of of gold has hardly grown at all. No county on earth has enough gold to back their currency with gold. All currencies on earth are fiat currencies.

• HHH says:

Any country attempting to back their currency with gold would= instant death to their economy. Debt back currencies have to have an ever increasing amount of currency creation or they collapse. Never enough currency in circulation to pay all debts plus interest without an ever increasing amount of currency. Because the interest payment on the debt is never loaned into existence.

Debt can only expand in a fiat currency regime. That is why you’ll never see the national debt $20T shrink it has to expand or it collapses. China is no different. I has to expand debt or it collapses. Gold could only back a currency after complete collapse of an economy. There would have to be a complete reset and that’s just not going to happen at least not without every government and central bank in the world doing everything possible to prevent it and still failing. This is why PO is so important because debts require at least in most cases require the use of energy to retire them. Most individuals and companies require energy to fuel economic activity in order to pay debt. Unless like the government you can just continue to roll over old debt with new debt and just pay an interest payment. But soon as there is less energy to go around this all unravels. • Nathanael says: HHH: You’re slightly wrong about this, but for a subtle reason. You’ve *almost* got it so I’ll explain the extra bit. Government “debt” can be retired by monetizing it. Print enough hundred dollar bills (they print them at the Bureau of Engraving and Printing) and you can eliminate the “debt” immediately. (Nowadays there are of course electronic equivalents.) Government “debt” is really equal to the *money supply*. The payment of interest on government “debt” is simply a gift from the government to rich people. What you’re right about is that you always need an increasing amount of money in the economy. That is true. And it’s actually very important. The only way to have economic growth is to have more money sloshing around to support trade. Otherwise you get the Great Depression. Keynes explained this all in the General Theory of Employment, Interest, and Money. Think about it with this thought experiment. I have a house which needs painting and my friend is a painter who is out of work. But the house doesn’t get painted. Why? Because I have no “money” to pay the painter. If we generate some “money” — perhaps by me writing IOUs which are accepted by everyone in town because I am known to be a man of my word — stuff starts getting done. Even though the money is created out of thin air. Money is basically IOUs. There’s actually not a lot of difference between tradeable debt and money… So for economic growth, you always need to expand the money supply. If the government doesn’t expand it, private companies will have to expand it, but that is risky because it can cause sudden “demonetization” events — one happened in 2008 when “as good as money” money market funds suddenly *weren’t* as good as money. And those demonetization events cause the entire economy to freeze up as trade halts. Increasing the money supply faster than the real economic activity increases will cause inflation. Increasing it slower than the real economic activity will cause deflation, which is extremely dangerous, as it chokes off the economic activity. A certain amount of inflation is desirable; if the value of money stays constant or rises, people hoard it and then it doesn’t do its job of making trade happen. Inflation is a way to make the money be worth a little less every year so that people have an incentive to invest or spend it (causing trade to happen) rather than just hoarding all of it. Inflation also makes it easier to pay off private debts, which allows people trapped in debt slavery to get out of it and get back to the point where they can participate in the economy; though bankruptcy is much better for this. • HHH says: When a Central Bank monetizes government debt. They don’t cancel the debt. The actual bonds that were bought are not retired. I’ve heard this one before. Bond market doesn’t work that way. What your saying is if the FED hold bonds to maturity it cancels the debt. Basically your saying FED doesn’t take them bonds to the US treasury and redeem those bonds upon maturity. US treasury has to issues new bonds to cover the old bonds the FED bought upon maturity or the money supply shrinks. Those debts aren’t retired. They are just rolled over into a new loan. Soon as we get an energy deficit that can’t be overcome by increasing debt, the whole debt is money thing falls apart. There can be plenty of FF left and all the EV’s one could ever imagine but the debts backing these things won’t be payable. Well unless one believes money is the economy and energy isn’t needed to pay debt. • Nick G says: you always need an increasing amount of money in the economy The first sentence overstates things slightly. Increasing it slower than the real economic activity will cause deflation, which is extremely dangerous, as it chokes off the economic activity This is more accurate. Still…economic growth is possible with a stagnant money supply. Deflation is very inefficient as a way of adjusting money supply to economic activity, but it can be done. The history of the US in the 19th century illustrates this: there were indeed many bubbles and “panics”, but the overall rate of growth was still higher than the 20th century. Why emphasize this point? Because there is a myth that a credit and market based economy like our current one cannot be stable without growth. This seems related. • SatansBestFriend says: If I live in Australia, and I have gold backed USA dollars, how could I exchange my dollars for gold? I would have to wait for a shipment of gold from USA to Australia wouldn’t I? This would cause some global liquidity problems unless I am missing something In my case it would be a tiny nugget! Lol • Oldfarmermac says: China doesn’t necessarily have to REALLY back the yaun with gold to make out like a bandit. The FACT that China possesses the largest ( presumably ) gold stocks in the world is ample indication to a hell of a lot of people, in a hell of a lot of countries, that China is a super solid country, and that doing business with China will be safe at least as for as the value of the yaun is concerned. And China has ready cash enough to manipulate the price of gold, and to be ready any time the price is right to buy and increase the national stock, and to sell and put EVEN MORE dollars, euros, etc in Chinese hands when gold shoots up temporarily due to a stock market scare, etc. China will be able to sell just a modest amount of gold for a time , once the time comes to do so, to bolster faith in the yaun, which will be the name of the game, THEN, because people who will HAVE yuan in their possession will not be afraid to CONTINUE to have yuan. Ron is dead right in that no country can actually really and truly back it’s money with gold, over any substantial length of time, but China will probably be able to create the impression of real gold backing for a while, and that will be a priceless advantage for how ever long they can maintain the illusion. • Jeff says: Is it the People’s Bank of China or the people in China that hold the gold? 19. Ed says: In the past I have written that any fossil fuel which can’t be extracted at an energy profit will be left in the ground. I was wrong. Thank you to all the contributors of this thread for helping me change my view. Oil will continue to be extracted even if it is at an energy deficit, like filling in holes in our roads because we value it. What matters is that the system as a whole has an excess of energy and has the ability to channel it to activities we value most. Clearly the Majors will be bailed out by tax payer’s money (a claim to excess energy in the system) indefinitely because we value oil as a transport fuel. • JN2 says: AA batteries have an EROEI of about 1%. And cost about$120 per kWh. We still buy them by the billion…

20. Watcher says:

Odd this post didn’t appear til today. Maybe my computer has a cookies thing, but hmmm looked thus with more than one computer.

Gold. Somewhat meaningless.

If gold determined money supply, which supports GDP growth, then GDP growth would be dependent on mining disasters. The rate at which it is found underground would determine how many cars can be sold. Not to mention that the gold miners would suddenly be in control of the economy and likely would find a way to take advantage of that (of course Central Bankers are now and there’s no reason to believe that’s morally a superior configuration).

Nationalize the gold mines? Whose?

Gold could be put on a rocket and launched into the sun. That would be the ultimate departure from laissez faire economics. Explicit, non market based influence on economics (which isn’t particularly different from CBs whimsically QEing 25% of the US GDP over 6 yrs, but wrong is wrong).

Then there is the Goldfinger scenario of irradiating the gold basis for a currency to effectively destroy it, or at least access to it.

Just a bad idea in general and it’s not going to happen. The discussion’s real only merit is to refocus attention on money and how QE exposed the arbitrary nature of how it exists, thereby destroying its aura of underlying meaning. A gold basis is not much less arbitrary because of the miners’ discretion.

• Watcher says:

Why can’t I edit that? Clock nowhere near expired.

Anyway, nationalize the gold miners? Which? Those in Canada?

Nah, there’s no way to avoid handing total power from a bunch of CBs to a bunch of miners. So ain’t gonna happen.

21. Watcher says:

Assays.

From BP’s Assay page I looked at some fields labeled “condensate”.

First, Brent
API 37.5
Kerosene 14.37%
Gasoil 25.46%

NorthWest Shelf Condensate (offshore Australia)
API 63
Kerosene 18%
Gasoil 7%

Bontang Return Condensate (Indonesia)
API 77
Kerosene 0%
GasOil 0%

Tangguh Condensate (Indonesia)
API 45.6
Kerosene 17.1%
Gasoil 20.75%

Sharjah Condensate (UAE)
API 64.8
Kerosene 13.47%
Gasoil 1.41%

Algerian Condensate
API 68.6
Kerosene 18.25%
Gasoil 2.3%

The last two are interesting. Diesel and jetfuel content is very regional and NOT entirely correlated to API. More middle distillates in the higher API Algerian stuff than the UAE stuff. Counter intuitive.