Shale gas revolution triggers FDI boom for US

FT front-page story on shale gas boom in US already identifiably responsible for additional $90b foreign direct investment flow into US.

Subtitles are telling:

• Investments drive US industrial renaissance
• European companies fear growing divide

Industries that benefit from cheap feedstocks are being targeted, and European counterparts fear they will be at systematic disadvantage in any industry that is fuel-intensive.

Yes, some of these same industries in US argue now for no LNG exports, lest the advantage slip away.  But most energy experts say we can export at will and probably raise the MMBTU price by maybe only one dollar.  We are now about 8-10$ cheaper than LNG prices in Europe and about $15 less than what Asians (mostly the Japanese) are paying.

So yeah, we can have our cake and eat it too.

Forever? 

No, but arguably for a solid generation's time.

So much for "peak oil" determining all.

WSJ front-pager on "global gas push" mirrors Wikistrat sim scenario

Per the recent Wikistrat simulation, "North America's Energy Export Boom," we had a scenario called "Fit of Peaks" in which the US "got it right" (fracking revolution) but much of the rest of the world had a hard time cashing in similarly.

The WSJ front-pager, entitled "Global Gas Push Stalls: Firms Hit Hurdles Trying to Replicate U.S. Success Abroad" fits that model nicely.

Key finding:

Among the reasons for the glacial pace are government ownership of mineral rights, environmental concerns and a lack of infrastructure to drill and transport gas and oil. In addition, much less is known about the geology in most foreign countries than in the U.S., where drilling activity has been going on for more than a century.

The upshot:  the U.S. and Canada could remain the main countries to reap the economic advantages of shale development for some time.

The serious advantage: the gas and ethane glut lures petrochem and fertilizer companies to NorthAm to take advantage of the cost differential - "a huge change after years of shifting production abroad."

Bottom line:  about a decade head-start for NorthAm.

I speak this morning in Houston at a board meeting of a national offshore industries association member company.  This emerging strategic reality is coming to dominate my career right now.

Getting Arctic hydrocarbons will be a lot harder than anticipated

FT special report on Canadian energy that highlights the difficulties of accessing Arctic oil and gas and bringing it economically to market.

First is the sheer remoteness.  Then there's the extremely hostile environment.  Even with the ice-clearing in the summer, the genuine window for exploitation is still measured in weeks.  Everything you use must be special built, platforms with extreme reliability.

And the fields in question need to be big - really big - to cover the high costs.  

In short, only the majors and supermajors should apply, because only they will have the "financial firepower."

This is all before governments issue ever stringent safety requirements to protect the environment, a bar that rises with each Deepwater Horizon.

Finally, there's how you get it to market, with the big choice being between fixed pipelines and ice-class shuttle tankers.  Neither is cheap.

Just a bit of cold water thrown on the anticipated "bonanza."

I note it with interest as I write the final report (while traveling most of the week) for Wikistrat's recent "How the Arctic Was Won" simulation.

Fracking confronts the reality of limited water resources

WSJ piece noting that all this hydralic fracturing (fracking) is coming up against local water limits.  Already, US fracking uses water on par with the city of Chicago or Houston.

So the industry jumps into figuring out how to reuse the water multiple times by cleaning it up (not enough for drinking but enough to reuse).  Already in PA the percentage use of recycled water is up to 17% this year, jumping from 13% last year.

This is a huge issue, because we're looking at 1 million more fracking wells globally by 2035, according to Schlumberger (oilfield services co.).  The issue is expressed both in unwanted externalities (enviro risks/damage) and cost within the industry (acquiring and disposing).

Something to keep an eye on, as the industry competes with Mother Nature (climate change), agriculture and urbanization globally.

Culprit #2 for U.S. coal industry: China's economic slowdown

From a WSJ front-page story.

The U.S. coal industry wants you to believe its slowdown is caused by Washington's "meddlesome regulations," but as I noted earlier, the big killer is the cheap price of U.S. natural gas, which is displacing domestic use of coal for electricity generation big-time (25% down in a recent quarter).

Culprit #2 is the Chinese economic slowdown, which is really the culprit, along with Europe's problems, for the slowdown in general global economic activity.

Pretty amazing times, when you think about it.  Remember when the U.S. economy was all you needed for a global expansion?

Charts of the day: the US "oil recovery"

Alas, our inevitable "Mad Max" future a bit . . . modified.

From a WSJ interview with Daniel Yergin.

Production up (25% since 2008), drilling way up (didn't Obama and the Dems sabotage all that?), and imports falling.  US demand relatively flat - like Europe's, so the rising production means a substantial drop in import share.  Was 60% in 2005, now 42%, and expected to be roughly a third by 2035 (though I think it happens MUCH earlier).

Of course, now we'll never have to fight a war overseas . . .

Where is the world is Wikistrat?

A graphic listing most - but not all - of the sims conducted by Wikistrat this year.  The point is to display the breadth and the volume.  Be impressed, because you should be.

Wikistrat's sims aren't a year in the planning.  Client names the subject and we're off and running in days.  Why? All Wikistrat needs is a framework and then we turn the analysts loose on the scenarios.  The company don't spend countless man-hours narrowing down the range of possibilities so that 95% of the uncertainty and surprise is drained from the exercise by the time we actually start it.  Wikistrat can customize the structure to your concerns and then it brings the masses in to run with that structure and take it places you - the client - hadn't considered.

That approach allows for a huge mapping of possibilities.  You want to find the needle in the haystack?  Well, Wikistrat can run through that hay awfully damn quick.

Spend a minute and see if you can guess the four sims that were my ideas . . .

{music}

First one was China as Africa's de facto World Bank.  I'm pretty sure that was based on a WSJ headline noting that tipping point.  It ended up positing a lot of interesting intersection points between the US and China on the continent. Sim ended up generating both a report and a briefing by me.

Second one was the North American Energy Export Boom.  There was a time when Wikistrat asked me what I'd most like to explore in terms of near-term uncertainty in the system, and the whole fracking thing just jumped out at me:  Which way does it go?  Does it work out big-time for the US and - ultimately - the world?  Or does it get aborted like nuclear power for enviro reasons?  That was a very strong sim in terms of output, and all that material (final report and my brief) still tracks incredibly well with headlines.  All we did is simply systematize all those possibilities, organizing them into four major trajectories (usual X-Y approach). But the upshot was, anybody who goes through that stuff now has the capacity to process all the headlines to come.

Third one was the China slowdown sim.  That one's been in my mind since I wrote the piece for Esquire back in the fall of 2010 (it came out in the Jan '11 issue).  The idea came to me in the summer of 2010 and it took a while to sell it to the magazine, but it looks fairly prescient today, doesn't it?  Anyway, a very solid sim that ran down all manner of possibilities, and I really loved the quartet of scenarios we came up with (which drew comparisons to historical risers).  Great report and probably the strongest brief I've yet done for WS.

Fourth one was "when China's carrier entered the Gulf."  Wikistrat asked me to generate a host of possible sims way back when, and that was one of them. Just a simple logical progression argument, with the trick being imagining all the possibilities when that inevitability unfolds.  Hence the sim, which turned out great, along with a solid report.  And this one was only a "mini-sim" by WS standards:  just a brainstorming drill on scenarios with a quick follow-up on policy options.  Mostly junior analysts, but the output was as good as anything I've seen from the National Intelligence Council - seriously.

Two on the list I didn't really have anything to do with: NATO and Pakistan.  First one was driven by a client's curiousity.  Second one is just a natural "what if?"  Both turned out quite nicely.

The Democratic Peace Theory Challenged sim is another one I did not design, and I will admit that, at first blush, I didn't much care for the subject.  I was brought in to work the design and shaped it somewhat, but I truly had low expectations.  In truth, those were exceeded by a long shot.  The material needed more shaping than usual, because the sim had a theoretical bent, but what I ended up with at the end in the final report was . . . to my surprise . . . quite strong - I mean, present at a poli sci/IR conference strong (or walk into any command and brief strong).  It easily could have veered into all sorts of panic mongering, but instead it organized a universe of possibilities very neatly.  I was really proud of the overall effort, and it reminded me not to get too judgmental going into sims.

The Syria sim I didn't design, nor did I oversee its operation.  That Wikistrat left to junior versions of myself.  I was brought in at the end to shape the first draft of the report, and, while I moved things around plenty, the material held up very nicely to my critical eye, which is encouraging.  If Wikistrat is going to handle all the volume coming down the pike (contractual relationships are piling up at a daunting rate), then the Chief Analyst position needs to be like that of any traditional RAND-like player:  that person needs to be able to shape things a bit at the start and then at the end, but mid-range staff need to be able to herd all those cats and the resulting material. So that one felt like a nice maturation of the process, because, like with any successful start-up, the real challenge isn't marketing but execution.

This graphic, for some sad reason, skips the headlining sim of the year to date:  When Israel Strikes Iran.  That one I had a lot of fun with, giving it my years-in-the-testing phased approach (initial conditions, trigger, unfolding, peak, glide path, exit, new normal).  That approach goes back to my Y2K work and later after-action on the Station Nightclub fire disaster in Rhode Island (done for the local United Way to provide lessons learned on how well the organization responded). That was the most structurally ambitious Wikistrat sim to date and it - unsurprisingly - produced the best material by far. I'd put that final report and brief up against anything the best elements of the US national security establishment could produce . . . naturally at about 20 times the cost and five times the duration of effort.

The graphic also doesn't include the most recent sims.  I just finished a final report on The Globally Crystalizing Climate Change Event (one of mine), and, despite the great time projection, I was pleasantly surprised at how well the material holds up in the report.  I thought the analysts did a great job there.

Based on that fine crowd performance, Wikistrat pushes the community even harder in the just-wrapping-up sim entitled When World Population Peaks.  This one was truly challenging, but my point in designing the sim was almost to purposefully "test out" analysts in the manner of a language-skills oral exam, meaning I wanted something almost too hard for most analysts so as to press both them and the supervising analysts on how they handled it.  Think of it like a NASA sim where Control is trying to crash the lunar module.  That was a bit stressful, I think, for a lot of the community who participated, but - to me - it was like a nasty cross-country workout (I am assistant coaching my kid's team again for the 8th year in a row and I'm on my third kid) early in the season:  bit of a bitch mentally and physically, but it'll pay off down the road.

Yes, Wikistrat does take all its sims - even the training ones - very seriously.  If you're not growing then you're dying - simple as that.  Start-ups have to have that survival-of-the-fittest mentality and we're talking about a small firm that's come out of nowhere (okay, Israel) in just three years.

So, a nice overview of the year, and it's an impressive body of work.  Would you believe me if I told you that all of it was accomplished within a timeframe and with a far smaller budget that one of those bloated wargames that Booz Allen runs for the Pentagon?

Well, if you did, then you'd know why Wikistrat is going to succeed in this cutthroat business.

With the challenges of deepness and complex geology, China has no choice on shale gas but to seek foreign help

FT story on how "China opens shale gas exploration to foreign joint ventures."

It's described as a "milestone policy change that will allow foreign energy companies to play a greater role in developing China's rich potential reserves of shale gas."

China has all the same ambitions as the US: reduce dependency on foriegn sources of coal and oil, plus simply move "down" the hydrocarbon chain to less CO2 emissions.

The irony:  to escape one form of foreign dependence is to invite another.

Interview on global economy at Gold Forum in Denver last week

Yeah, right. It's Washington regulations that are screwing "clean coal."

We all see the commercials:  Washington is killing clean coal with its regulations!

Complete and utter bullshit.

The gas glut is killing coal, displacing it for up to a quarter of US electrical production across the latest full quarter.

So now you see power companies even going to the point of idling coal-fired stations (from the WSJ story):

Sammis is one of a growing number of coal-fired plants that were built to run 24 hours a day, seven days a week, but now may run only occassionally because of soft demand for electricity and competition from gas-fired plants that are cheaper to run and cleaner to operate.

Coal, says the piece, has been progressively losing out to shale gas for four years now. It's just gone super-critical over the last year.  Cheap gas now is half the cost of coal when it comes to generating electricity.

This is why America is going to be exporting our superior coal to Asia in coming years.

And that will be a good thing.

Chart of the day: Economist's listing of top 15 natural gas resources

On the unconvential (shale): the usual list that I work with, with the addition of Russia as #3 in world.  Most experts don't talk all that much about Russia because, with all their conventional gas, there's not a great need to exploit.

But the real kicker for me in the charts is the bottom right one, which is a stunner: by 2030 the projection that gas, coal and oil all converge in the high 20s as basically equal shares in world primary energy usage.  Several stories here:

• Gas displacing coal (not surprising)
• Long slow increase in nat gas production/use
• And then the true stunner of such a huge drop in oil (about 45% in 1970 to high 20s in 2030).

Fascinating stuff.

India's exploding energy requirements

Good article start, which, in true inverted pyramid fashion, gets all the work done right up front.

India is facing an energy crisis that is slowing economic growth in the world's largest democracy.

At stake is India's ability to bring electricity to 400 million rural residents—a third of the population—as well as keep the lights on at corporate office towers and provide enough fuel for 1.5 million new vehicles added to the roads each month.

Shortages of coal, oil and natural gas will require India to import increasing amounts of high-cost fossil fuels, say energy experts, risking inflation and putting the country in stepped-up competition with China, Japan and South Korea. Buying oil from Iran, one of India's biggest suppliers, is tougher because of U.S. and European sanctions aimed at curbing Tehran's nuclear ambitions.

With annual demand expected to more than double in the next two decades to the equivalent of six billion barrels of oil, the energy crunch threatens to knock India off its growth path. The national economy has already slowed amid paltry business investment and stalled reforms. It tallied just 5.3% growth in the quarter that ended March 31, the lowest level in almost a decade and well shy of the country's 9% goal.

With annual demand expected to more than double in the next two decades to the equivalent of six billion barrels of oil, the energy crunch threatens to knock India off its growth path. The national economy has already slowed amid paltry business investment and stalled reforms. It tallied just 5.3% growth in the quarter that ended March 31, the lowest level in almost a decade and well shy of the country's 9% goal.

The charts above lay out the problem:  Electricity growth is pretty much a proxy for GDP growth.  If you want to grow your economy fast, you have to grow your grid capacity similarly.  China is getting it done. India is not.

The oil imports stuff is pretty classic for the trajectory: roughly a 5-fold increase since just 2004.  I see this growing demand expressed in deals I'm structuring.

But the one that jumped out at me, per the recent Wikistrat sim on "North America's Energy Export Boom," was the coal shortfall now covered by imports.  Our sim was mostly about natural gas, of course, but the displacement effect in electricity generation means we have a lot of stranded coal capacity emerging here in the US - coal that could go abroad effectively because it's energy quotient is world class.  The story describes recently constructed coal-burning electricity-generation plants that are operating below capacity - or worse, are idled - for lack of coal.

I've seen industry estimates by US coal experts that say India will be a prime source of export growth over the next couple of decades.  This article makes clear the "why."

Chart of the day: US natural gas price versus Europe's versus Asia's

Found here.

Pretty compelling case for export, ja?

Chart of the day: Countdown to Mad Max . . . or not.

Cool image, mildly interactive at the WSJ site, that lists "years of minerals in reserve, at current production rates."

Story prompted by recent media coverage over proposals to mine asteroids, the basic argument being that the seabed reserves are vast and far easier to mine - assuming the continuing advance of technology (a very good bet). 

BHP Billiton, a giant in the extractive industry, says it feels there are "10,000 more years of minerals left for civilization" - a wonderfully expansive statement.  We can probably agree that the estimates on the left are too small and "10,000 years" is probably too optimistic.

My sense is that we won't run out of useable/manipulatable stuff here on Earth prior to taking to space in a big way, but yeah, we'll use that as a more practical driver than sheer exploration.  So eventually we'll reach a point where - cost-wise - it seems a better deal to go off-planet than continue going deeper in-planet.

In the meantime, industry execs will tell you that there is a "crustal abundance" layer in the Earth that has been truly explored and mined only to about the first half-mile. The entire "abundance" measures between 3 and 30 miles - on average around the planet.  So clearly we've got a ways to go - even on land.

Still, it's always good to learn how to ride a motorcycle, stock up on leather clothes and Spam cans, and expect the Armaggeddeon.  Heck, I know one religion that mandates it (at least the food part).

Time's Battleland: NATIONAL SECURITY Death to “Resource Wars”!

Nice Washington Post piece on Saturday about how the “center of gravity” in global oil exploration and production is shifting to the Western hemisphere.  No, the bulk of global conventional oil reserves still sits in the Persian Gulf, but the larger point is worth exploring: we no longer project global futures where East and West logically fight over Middle East energy reserves.  Those expected long-term dynamics are collapsing right now before our eyes.

Read the entire post at Time's Battleland blog.

The LNG export play

Nice FT story on what Shell is saying about natural gas in the US.  Current Henry Hub price has been hanging around $2.25-2.55, which is about 3-4 times cheaper than Europe MMBTU (millions British thermal units) and bizarrely cheaper than most Asian countries are being quoted right now (more like $14-15 and moving north for the summer to almost $20 - by some predictions).

Think about that for just a second.  Natural gas in the US at something like 1/8 the price in Asia.  How long do you think that lasts?  Why should it?

To me, that's a huge LNG (liquid natural gas) market waiting to be captured by US producers.  Selling LNG ain't like moving 100,000 metric tons of diesel or jet fuel or 2 million barrels of crude in one large tanker.  Those transactions are the equivalent of one-night stands and leave your money on the dresser.  Selling LNG is more like getting married: the buyer has to have a relationship with a regasification terminal nearby.  There must be pipes that connect the end-user to that LNG terminal (only so many in the world, but plenty being built).  If no regasification terminal, then buyer needs to rent himself a regas ship ($50m a year), park it somewhere, and then connect that by pipes to the end-user.  All very complex. 

Of course, the seller must have liquefaction facilities at ports, with pipelines connecting fields.  

America is piped up like crazy and adding more pipe all the time.  We're just getting our first for-export liquefaction facility set up in Louisiana by Cheniere, which is leading the effort here to gear up for export.

All very exciting stuff, as we could be exporting - within a few years - upwards of 1/4 of our production.  Then you factor in all the coal displaced in electricity generation, and we can be exporting that high-quality stuff to Asia along with the LNG -  a win-win on trade balance and energy security.

Back to the FT piece:  the currently depressed US prices are just too low, reflecting that we're running out of storage after a mild winter and a continued production boom.  Shell's prediction?  US NG prices will double by 2015.  Expect the petrochem industries to hawk that fear like crazy, but in truth, it's a reasonable rise to just $4-6 MMBTU.

[Shell, BTW, has done a lot of exploratory drilling on NG in China and says it thinks the reserves can be developed economically.]

Shell is also "examining plans to liquefy US gas for export - which would allow it to attract higher prices, particularly in Asia - transform it into clean-burning transport fuel through gas-to-liquids technology, and use it as a feedstock for petrochemicals."  That's a quick rundown of the range of economic opportunities - in addition to displacing coal in electricity.

All good stuff and an integral part of America's coming industrial renaissance.

To what extent China can copycat the fracking revolution in US

Big FT piece.

China, we are told, has enough shale gas to cover its needs for 200 years.  It currently has no commercial production but wants to reach 60B cubic meters by 2020. A number of big Chinese and foreign energy firms are currently exploring China, with Sinopec running the big Tarim basin that is routinely described as the biggest in the world.

Dozens of exploratory wells have, so far, yielded mixed results.  The geology is just not the same as the US - more complex, so serious additional innovation will be required.  China's reserves are deeply buried and feature more clay, which is far harder to break up to release the gas.

China also lacks the US's existing pipeline network and trained personnel.

To overcome the stiffness of its three primary national energy companies, China has allowed foreign companies in and plans to liberalize prices on oil so its own companies will invest more.

Then there's the Chinese investment in US firms over here, a development that's been met with far less resistance than when CNOOC tried to buy Unocal seven years ago.  CNOOC plopped a solid $2b into Chesapeake Energy to access some of this technology.

This will be one follow-on to the US fracking revolution worth watching closely.

How fast King Coal gets fracked

Fascinating to watch all the "they're trying to kill clean coal" commercials on TV that target some politician, the Obama administration or so on (evil regulators).  In truth, what's killing King Coal right now is the uber-cheap price of gas in the US.  

Citing a WSJ story, the millions BTU price of natural gas in the US is about half of what it was just a year ago, and that previous price was at least half of the average global price - which is rising in most places given the lack of LNG and the difficulty in buying it for most emerging market players.

So, amidst that crazy glut in the US, made all the more worse by the mild winter that did not much draw down US natural gas stocks, and we're seeing stunning drops in the US use of coal to generate electricity. It fell by almost one-fifth (!) in the fourth quarter of last year, and we're expecting first quarter news any day now.

But as I've noted before, the answer for coal is exports.  The energy value of our coal is significantly higher than that found just about anywhere else, so if new market export relationships can be built, we can displace a lot of less-valuable coal from other sources.

My prediction is that America becomes a huge and important coal source for both India and China.  Just give it enough market change.

What got me tuned in on all this?  Wikistrat's recent simulation on the "North American Energy Export Boom."

Chart of the Day: Different listing of shale gas reserves globally

Previous one I had found (and used in brief) said:

1. China 36.1 trillion cubic meters
2. US 24.4
3. Argentina 21.9
4. Mexico 19.3
5. South Africa (didn't write down because not in Pac)
6. Australia 11.2
7. Canada 11.0

Here's an old post that has similar 1-5 ranking expressed in tcf (like below), and the weird thing is, it agrees exactly with the FT numbers for China, Argentina, Mexico and South Africa but puts the US at 862.

This one, in bit FT full-pager says:

1. China 1,275 tcf
2. Argentina 774
3. Mexico 681
4. South Africa 485
5. US 482
6. Australia 396
7. Canada 388

Big difference is US ranking/estimate.

Second one says EIA, as in U.S. Energy Information Agency, so I guess you gotta go with that one.  

Or is this just weird mistake by FT?

No mistake.  After some quick Googling it turns out the EIA said 862tcf a year ago and says 482tcf now, reducing its estimate of recoverable shale gas by 42%!

Betcha some industry experts refute that!

Will have to see where that number goes over time.

The coming American industrial renaissance

WSJ piece on Dow Chemical building . . .

. . .  a multi-billion-dollar plant to convert natural gas into the building blocks of plastic in this coastal city [Freeport TX, just south of Houston], becoming thelatest chemical maker to capitalize on abundant gas supplies that are helping spur a renaissance in U.S. manufacturing.

This is all wonderful news, but it doesn't stop up from still exporting a significant portion of our now severely glutted natural gas supplies to improve our trade deficit and empower our extractive industry further to take its revolutionary fracking techniques global.

Natural-gas futures closed Wednesday at $1.95 per million British thermal units, down 55% from a year ago and the lowest price in 10 years.

This is killing futher exploration and production in the U.S.

Why do we allow this glut to remain bottled up in the U.S.?  This crazy-ass notion of "energy independence."