The global demand center gets discounts

Pretty basic chart that shows Asia paying higher-than-European prices for Saudi light crude seven out of the last ten years (2000-2009), only to start receiving a steep discount in the second and third months of this year, suggesting that a worm has indeed turned.

Nothing weird or unexpected about this:  demand = power and being the global demand center = the biggest discount for bulk buying, made affordable to producers by economies by scale.

The stunningly sudden glut in natural gas

pic here

FT special on the gas industry.

Gist:  recession plus new shale supplies rebalance global supply and demand dynamic radically.

By the end of this year, Qatar will have completed one of the most ambitious industrial revolutions of past decades and in the process helped transform the international natural gas industry.

The small Gulf state this year expects to hit a natural gas export capacity of 77m tonnes a year, enough to supply all the needs of both China and Brazil.

Qatar has become the biggest trader of liquefied natural gas (LNG) in the world and a pioneer – together with the international oil companies it employs – in improving the process whereby natural gas is super cooled and turned into liquid so it can be put on tankers and transported to distant markets.

But the achievement comes at a time when halfway round the world a second, more recent natural gas revolution has also occurred, sending prices to record lows and forcing Qatar and other suppliers to adapt.

While Qatar was busy building its huge LNG complex of miles of winding pipes at Ras Laffan in the barren desert 80km north-east of the capital Doha, independent oil and gas companies in Texas were cracking the technology that would finally give them access to the gas trapped in the solid shale rock scattered across large parts of the US.

The process of breaking up the previously impervious rock, known as “fracking” in the industry, has unleashed a flurry of multibillion-dollar deals, including last year’s $41bn agreement by ExxonMobil to purchase XTO, the shale gas specialist.

European companies, such as BP of the UK, Norway’s Statoil and Total of France have joined the rush, each buying into the shale beds and the expertise ofChesapeake Energy, one of the US’s largest gas producers.

In terms of supply, the shale gas revolution has had a significant impact. In less than five years, the US has gone from seeking new sources of gas from overseas to being self sufficient.

In fact, for the first time in nearly a decade, the US has regained the position of being the world’s largest producer of natural gas. Its reserves life has grown from 30 years to a century.

No wonder energy companies are reluctant to make big infrastructure bets!

Much of Qatar's LNG was set to go to the US (now self-sufficient) and Europe (much less demand and investigating its own shale).  China becomes Qatar's biggest buyer in the short run, as a result, but it too is moving heaven and earth on what is considered to be perhaps the biggest shale gas deposit in the world (in its northwest).

Underlying dynamic:  everybody loves to talk about NOCs (national oil companies) owning the vast bulk of reserves and increasingly dominating the production of the same.  So what are classic Western energy firms to do?  They move into gas, and that creates its own system-changing dynamics.

Old theme of mine:  supply does not equal power.  NOCs can corner oil, and result will be demand shifts to other forms of energy and uses.

Now you get Russia's Gazprom rethinking its whole strategy, and Algeria, another big supplier, calling for a gas OPEC, which went nowhere. 

Globalization's great infrastructural buildout: China's grid

WSJ story by Shai Oster.  Pic is of smart-grid demo center in Yangzhou.

GE, Siemens and others all competing fiercely to gain footholds in "one of the world's biggest markets for advanced power transmission and distribution systems."

I remember talking to a GE exec in 2005 in Williamsburg:  he said GE would make the bulk of their future profits on electricity and water alone--in Asia.

At least $100B spent over next decade, comparable to what we're spending for upgrades to our currently, far too dumb grid.  China likewise expected to spend $60-80B per year on gear, but Chinese companies will dominate there, so the smart-grid operation niche is where it's at for the West.  

The BOP (bottom of the pyramid) logic is clear:  

GE says the size of China's expected demand also offers opportunities for economies of scale in smart-grid products.  Long term, that could make products exported to other countries cheaper to produce.  GE said it would expand research facilities it already has in Shanghai.

Right now, China's losses due to bad transmission are roughly tripled that in the West (8% compared to OECD average of 2.5%).

The shale gas buzz reaches new heights

Gideon Rachman, usually great, in the FT.

Notes that this year the US overtakes Russia as biggest gas producer in the world--first time in a decade that Russia's not #1. Stunning, when you think of it.

The potential is vast:  less coal burned for electricity and less oil use once hybrids go mainstream (just drove another Prius on recent trip and I gotta say, it rides just fine).

The thing is, everybody who needs it most (US, EU, China) are now all finding large to huge deposits.

Rachman wonders, is this the real reason Russia warms up? Other reasons:  Obama's reset on missile defense in Europe, and Medvedev's emergence.

Good news in bad times, says Rachmen.

Amen.

The Rooseveltian phase in China

Guardian story by way of WPR's Media Roundup.

Makes me think of TR's initial stuff and then the huge infrastructure push with FDR, this Hoover Dam-like monstrosity planned for Tibet--the biggest dam in human history (38 gigawatt).  Will save tons of CO2, but will likewise change the environmental landscape big time.

But China feels compelled to network and integrate its western provinces--its great inland bridge to the larger energy and mineral resources in Central  and Southwest Asia.

And frankly, tightening the grip makes sense politically, whereas landlocked states do not.

The key for China:  making all this integration seem like a connectivity bonanza that allows economic development, networking toward the richer and better connected coasts, but also allows for increasing political self-rule--less unitary and more federal.  

That's the only way you make economic development work over such a large terrain.

Almost 30 dams are currently planned or being built along this crucial Tibetan river (Bahmaputra).

Iran's oil production decline: oh mighty sanctions!

FT front-pager, but the facts underwhelm.  When Ahmadinejad became president in 2005, Iran was producing 4.2mbd (million barrels per day).  Now it's down to 3.8 or 3.9, which definitely costs them billions, but as a percentage drop, we're talking only 10% max.  Frankly, I would expect that level of drop anyway because of Iran's wariness on using foreign technology in the first place--a bad habit of NOCs (national oil companies) everywhere. I wonder what PEMEX's drop in production has been the last five years in Mexico.  Subtract PEMEX's percentage drop from Iran's and you might get a clearer sense of the delta caused by the sanctions.

Iran's bigger is also much like Mexico's or Saudi Arabia's:  the domestic use of oil is growing faster than the production, narrowing the margin for export.  The effect of sanctions, I would imagine, pales in comparison, even as it exacerbates the situation.

But back to Bremmer's good point in his book:  state capitalism prioritizes the state over economic efficiency, so this is simply viewed as  the cost of doing politics.

Oil is too fungible for effective sanctioning--to wit, Iran's thriving oil trade with West

None of the tougher sanctions proposed for Iran, says this WSJ front-pager, will target its oil sales, which account for 1/2 of government revenue.  The market is so fungible and international and sensitive, that doing so would likely push gas up a $1 here in the States, even though we don't import any Iranian oil--openly.

As a result, no big trick to buy resold Iranian oil, a la the chart above.

"Everyone buys from the Iranians—governments, states, other companies," says Mark Ware, a spokesman for Vitol Group, an energy-trading company that continues to deal in Iranian crude and is one of the few companies willing to talk about it. "It's not subject to any legislation."

This is the reality of a sophisticated global market:  all demand affects all production affects all prices.

Another sign of China's growing dependency of PG energy

Recently we hear that the Saudis now send more oil to China than to the U.S.  Now we discover that China will become Qatar's top gas buyer, if a new deal passes.  

Doesn't get much more symbolic than that.

Current dealmaking by Qatar also foresees big uptick in exports of gas to India.  Both deals will counter depressed demand from US and Europe.

Chart of the day: Mismatch on importance of deepwater rigs & lack of disaster plans for same

Classic but sad tale:  Look at the incredible rise in deepwater oil production in the Gulf since the early-mid-1990s.  Just taking 1995 as a base year still gets you a 9-fold increase, meaning deepwater Gulf oil pumping has rapidly become a critical asset of our overall oil production.

And yet the piece declares:

A huge jolt convulsed an oil rig in the Gulf of Mexico. The pipe down to the well on the ocean floor, more than a mile below, snapped in two. Workers battled a toxic spill.

That was 2003—seven years before last month's Deepwater Horizon disaster, which killed 11 people and sent crude spewing into the sea. And in 2004, managers of BP PLC, the oil giant involved in both incidents, warned in a trade journal that the company wasn't prepared for the long-term, round-the-clock task of dealing with a deep-sea spill.

It still isn't, as Deepwater Horizon demonstrates and as BP's chief executive, Tony Hayward said recently. It's "probably true" that BP didn't do enough planning in advance of the disaster, Mr. Hayward said. There are some capabilities, he said, "that we could have available to deploy instantly, rather than creating as we go." 

It's a problem that spans the industry ...

The connectivity extended, the regulators apparently didn't bother keeping pace with new rules, not mandating preparation for disaster recovery at these depths.

And so, like so often happens in history, the new rules wait on the right disaster to trigger their emergence.

The Gulf blowout makes Canadian oil sands look more acceptable

The gist from NYT story:

Oil sands are now getting more scrutiny as the Obama administration reviews a Canadian company’s request to build a new 2,000-mile underground pipeline that would run from Alberta to the Texas Gulf Coast and would significantly increase America’s access to the oil. In making the decision, due this fall, federal officials are weighing the environmental concerns against the need to secure a reliable supply of oil to help satisfy the nation’s insatiable thirst.

The gulf accident adds yet another layer of complexity. Regulators and Congress are weighing new limits on drilling off the coastline after the Deepwater Horizon catastrophe, increasing the pressure to rely more heavily on Canada’s oil sands. At the same time, political consciousness of the risks has grown.

Canadian oil sands are expected to become America’s top source of imported oil this year, surpassing conventional Canadian oil imports and roughly equaling the combined imports from Saudi Arabia and Kuwait, according to IHS Cambridge Energy Research Associates, a consulting firm.

In a new report, it projects that oil sands production could make up as much as 36 percent of United States oil imports by 2030.

I recently was harassed, congenially enough, by an older guy from the investment world (after a talk) who was convinced the US imported 19mbd and that 9-10 came from Saudi Arabia alone, therefore the PG was THE source of US oil.  I run into such ill-informed notions all the time, when the truth is the PG ranks after Africa after LATAM after NORTHAM after the US (or 5th place overall).

The Chinese have announced more investments in the Canadian sands fields, making you wonder if the US isn't eager to lock down a certain amount of access while the getting is good--and the enviro damage is "over there."

What happens to any Obama energy policy after the Gulf blowout/spill?

The Economist worries less about Obama's political standing post-disaster (hard to see how minds will be changed about him) than that of any prospective energy policy.  Before the disaster, "America was inching fitfully towards a coherent energy policy." Obama was in a giving mood: renewable energy subsidies, offshore drilling and more nukes. Now everything sees at risk or certainly on hold, and with the elections getting closer, the window for serious efforts may be gone in a matter of weeks.  

Now, Obama's energy policy seems boiled down to reforming the oil regulatory structure within the USG.  The big innovation? Splitting it in two so the guys who collect government royalties aren't the same guys enforcing safety.

In the end, the Deepwater Horizon may serve as a similar turning point as Katrina did for Bush--the divider between when Bush seemed to get his way on most things and when all that stopped suddenly.

Of course, the resulting hypocrisy on this will be magnificent: people will complain about waging wars in the Gulf (Persian, that is) because we're "addicted to oil" (a truly goofy description, if ever there was one) but likewise condemn any offshore drilling. But that's only par for the course.

Six of the world's 10 largest oil discoveries in the last couple of years have been in deep water, so the challenge isn't going away. Deepwater accounts for half our offshore production and one-quarter of our total oil production.

We will either pursue it or not, but others certainly will.

The BP disaster in perspective

NASA image by way of ABC News.  Nansen Saleir op-ed in WSJ.  Saleri is president and CEO of Quantum Reservoir Impact in Houston, so an oil man.

Why didn't the oil industry anticipate such a big disaster, asks Saleri.  

The answer may partially lie in the extraordinary safety record of offshore U.S. drilling over the last four decades. The last significant mishap in U.S. waters dates back to 1969, the year of the first lunar landing. A blowout on Union Oil's Platform A, six miles offshore from Santa Barbara, Calif., spilled an estimated 80,000 to 100,000 barrels of crude oil over a period of 10 days. This resulted in considerable environmental damage and loss of wildlife, including 10,000 birds. The ensuing chain of technical and procedural improvements in safety practices worked pretty well. The end result was an infinitesimal spill rate over several decades which in turn led many, including BP, to consider a blowout an inconceivable event.

His solution-process going forward strikes me as solid:

So what now? What is needed is a scientific, thorough and apolitical investigation headed possibly by the National Academy of Sciences and drawing in experts from the oil and gas industry as well as the government agencies involved. The investigation must also evaluate the entire post-accident response effort led by BP in cooperation with local, state and federal agencies.

Some questions that must be diligently probed by investigators are:

1) Why did the blowout preventers—the massive valve assemblies designed to stop an uncontrolled flow—fail? And what are their reliability statistics?

2) Were the redundant safety systems truly redundant? It seems obvious they weren't, but this has to be verified.

3) How well trained was the crew?

4) Were the safety systems and contingency plans in place commensurate with the immense values of the total assets at risk—human, material and environmental?

5) Did operational and cost-cutting practices compromise safety?

What escalated the April 20 incident from a tragic accident to a catastrophe was not the blowout itself but the ensuing inferno that sunk the $650 million BP platform. Without the fire, the oil well leak could have probably been brought under control within a week. Thus it is critical to determine what future designs could best enhance survivability of giant offshore structures even under blowout conditions. Are there lessons to be learned from the airline industry, which has engineered significant reductions in post-crash fires during the last decade?

So treat it like the Challenger disaster, which Saleri notes didn't end the US space program.

The Gulf provides about 1/3rd of US domestic production.

Chart of the day: How much shale gas is there (over here)?

WSJ has a big spread on natural gas recently.

The chart that caught my eye (besides the nice graphic on "tapping the gas--click to enlarge) is the comparison of known global reserves of conventional natural gas and the estimates of shales in North America alone.

Historically, we've not really looked for gas, instead contenting ourselves with whatever we found when looking for oil.  This "associated" gas (as in, associated with oil) is the lighter stuff that typically sits on top of the oil deposit.  When you see that image of gas being burned 24-7 at an oil field, that's just the oil company saying, I'm not interested in the gas, just the oil, so I burn off the former.

Point being, when you only view the world of natural gas in terms of associated gas, then you're left--unsurprisingly--believing that all the gas you can access is already controlled by the same states that control the remaining, easily-access oil--meaning the Middle East and Eurasia, which dominate the know gas reserves to the tune of something like 4,500 trillion cubic feet.

For comparison's sake, the world currently burns about 115-120 tcf now, but that volume is naturally expected to rise quite a bit in the future.  We use almost 25 tcf a year.

Well, when you say shale gas is accessible at a reasonable cost (to include enviro impact), then all of sudden North America has an additional reserve (710 tcf)  thats' more than twice its known conventional reserves (309 tcf).  

What level of technology and cost is required to tap more of that vast total resource endownment?  To be determined, as usual, by the market.

Jaffe's bold analysis sums up the potential for new rules:

I have been studying the energy markets for 30 years, and I am convinced that shale gas will revolutionize the industry—and change the world—in the coming decades. It will prevent the rise of any new cartels. It will alter geopolitics. And it will slow the transition to renewable energy.

To understand why, you have to consider that even before the shale discoveries, natural gas was destined to play a big role in our future. As environmental concerns have grown, nations have leaned more heavily on the fuel, which gives off just half the carbon dioxide of coal. But the rise of gas power seemed likely to doom the world's consumers to a repeat of OPEC, with gas producers like Russia, Iran and Venezuela coming together in a cartel and dictating terms to the rest of the world.

The advent of abundant, low-cost gas will throw all that out the window—so long as the recent drilling catastrophe doesn't curtail offshore oil and gas activity and push up the price of oil and eventually other forms of energy. Not only will the shale discoveries prevent a cartel from forming, but the petro-states will lose lots of the muscle they now have in world affairs, as customers over time cut them loose and turn to cheap fuel produced closer to home.

The shale boom also is likely to upend the economics of renewable energy. It may be a lot harder to persuade people to adopt green power that needs heavy subsidies when there's a cheap, plentiful fuel out there that's a lot cleaner than coal, even if gas isn't as politically popular as wind or solar.

But that's not the end of the story: I also believe this offers a tremendous new longer-term opportunity for alternative fuels. Since there's no longer an urgent need to make them competitive immediately through subsidies, since we can use natural gas now, we can pour that money into R&D—so renewables will be ready to compete without lots of help when shale supplies run low, decades from now.

To be sure, plenty of people (including Russian Prime Minister Vladimir Putin and many Wall Street energy analysts) aren't convinced that shale gas has the potential to be such a game changer. Their arguments revolve around two main points: that shale-gas exploration is too expensive and that it carries environmental risks.

I'd argue they are wrong on both counts.

Definitely a story to clip. 

(click to enlarge)

First offshore wind farm approved by Fed

Found here

WAPO story:

Ending a nearly decade-long political battle over installing wind turbines in the waters just off Cape Cod, the federal government approved the first offshore wind farm in the United States on Wednesday, a move that could pave the way for significant offshore wind development elsewhere in the nation.

In approving the Cape Wind project, a group of 130 modern windmills in Nantucket Sound that would start generating electricity by the end of 2012, Interior Secretary Ken Salazar said he would "strike the right balance" between energy development and protecting the area. Some opponents of the project said it would endanger the habitat for seabirds; others decried the visual impact of the turbines, as close as five miles from shore.

Cape Wind President Jim Gordon said the "tragedy" of the oil spill in the Gulf of Mexico underscores the problems with traditional energy development.

"It gives the nation pause to reflect on, really, what are our energy choices, and how are we going to live with them?" Gordon told reporters. "Every energy project has some impact. This was never about a choice between Cape Wind or nothing."

Shows you how anybody can cite the Gulf oil spill in their favor.

Of course, the either-or nature of most debates makes little sense.  My argument:  go alternative wherever you can, as every bit helps.

Personally, I love driving by all the windfarms in NW Indiana on my way to Chicago.  I think they're quite beautiful.  They also make me feel like I've actually arrived in a future I imagined as a kid.  And having lived right along the coast in question for many years, I wouldn't have any problem seeing them go in there either.  In fact, I think it would cool as hell to take a boat out there and check them out up close.

NIMBYs will always fight such things, but if you want to lead on such technology, you actually have to employ it.  Unless we want to cede the entire offshore windfarm industry and its technology, we've got to play in this way.

Chart of the day: China's per $ GDP of electricity usage

Now, we know from history that advanced economies are able to generate one percent of growth in GDP while increasing their energy usage less than one percent (an energy elasticity below 1.0).  Undeveloped economies tend to do it the other way around (taking more than an additional one percent of energy consumption to generate that one percent growth in GDP).  Rising economies are somewhere in between.

This chart measures something similar:  how many kilowatt hours are expended in the generation of a dollar of GDP.

No surprise:  Old Core economies (UK, Japan, US) use the least and New Core ones (Indonesia, Brazil, India) use substantially more.  Presumably, if the chart showed underdeveloped Gap economies, they'd all be clustered at the top, and yet, you'd have to wonder if some of them wouldn't beat China's jump-out-at-you number that's more than double India's (which is almost double America's number).

The giveaway?  Notice how low the taxes are on electricity in China and India, meaning the governments keep it cheap and--thus--consumers treat it as an inexpensive resource.

Two takeaways for me:  1) China is paying too high a price (as is the world WRT CO2 emissions) for its growth; and 2) America could do a lot better too, possibly through higher taxation or other incentives.

Oh yeah, there will be some new rules in the Gulf of Mexico

Realize I'm behind the curve on this one in terms of latest developments (last week saw me focused on setting up this new site), but I like the map and the WSJ illustration so much that I felt the need to capture.

Plus, whenever there's a crisis like this, I usually clip anything until somebody mentions new rules or regs, which will most definitely result.

If the Times Square bomber was great timing for Obama on Iran and Af-Pak (not to mention the fact that the attack was prevented by those always wily New Yorkers), then the timing here is an absolute bad, given Obama's recent commitment to drilling offshore.  With predictions being that the eventual accumulated spill will overtake Valdez '89, the accident definitely perturbs the system all right.

But no, I don't see a moratorium on drilling in the Gulf.  Mississippi's governor Haley Barbour was quickly trying to kill that notion, as were the smarter Gulf coast senators (Sessions from AL was particularly goofy in this manner, declaring on TV that the US should bankrupt BP if that's what it takes).  The region's just too important to our domestic production.

So we wait and see about those new rules . . ..