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Archive for the ‘Oil’ Category

Oil_2

Roll out the barrel, we’ll have a barrel of fun…

Around April 20 there were headlines about oil “going negative.” However, it’s easy to read too much into the headlines: no gas station was going to pay consumers to fill up their tanks.

What really happened was that the NYMEX West Texas Intermediate (WTI) May (then the prompt month) futures contract went down to negative $37.63 per barrel. That’s the first time that the WTI contract had ever gone into negative territory, so it was an extraordinary event by any standard. Still, only the May contract went negative; contracts for later months, June, July, etc., were still positive.

Several factors came together to push the May WTI futures contract price below zero, chief among which was the precipitous drop in demand for oil due to the coronavirus pandemic. Energy-intensive economies around the world ground to a halt. Car and truck traffic fell off sharply, as did air traffic. The decline in oil use meant that refineries cut back on output, and therefore purchased less. As if that were not enough, shortly before the coronavirus lockdowns hit full force, Saudi Arabia and Russia failed to agree on oil production quotas. That started an oil price war that flooded the international market with a huge oversupply of crude oil. Oil storage facilities around the globe started to reach maximum capacity. That’s important for the NYMEX WTI contract because it’s physically settled, meaning that if you hold a buy (long) contract that’s still open (i.e., not offset by a sell (short) contract), you have to take physical delivery of the huge quantity of petroleum represented by that contract. By way of comparison, the Brent futures contract, the other oil benchmark, didn’t follow WTI into negative territory; unlike the physically-settled WTI futures contract, the Brent is cash-settled against the Brent index price. Storing oil costs money. The oil supply glut meant that traders holding May WTI contracts had to settle out at a negative price because the commodity had become a liability rather than an asset.

Historically, oil prices have always been subject to big ups and downs. Back in July 2008, Brent crude traded at $147.27/bbl. By December 2008, that price had fallen to $30.28/bbl. Petroleum price stability is the exception, not the rule.

Generally speaking, demand and supply in the oil market are relatively inelastic, meaning that a price increase doesn’t immediately translate into a decrease in consumption because oil is difficult to replace quickly as a fuel or industrial commodity. Likewise, if oil prices fall, supply doesn’t immediately fall far enough to bring prices back up. The marginal cost of continuing to run existing oil wells (as opposed to the very high cost of bringing a new oil field into production), and the cost of plugging a well and then reopening it in the near term, mean that oil supply will not fall off radically when there’s a price drop. Oil supply and demand changes do have effects over the medium- and long-term, though. For example, back in the 1970s oil price shocks resulted in much higher prices to consumers, but prices did go back down. But those price shocks caused a shift away from oil as a generating fuel for electricity over the long term, as natural gas and nuclear power became favored generation types.

The history of oil prices is largely a history of attempts by oil producers to control the price by controlling supply. The most recent of these attempts was the failed negotiations between Russia and Saudi Arabia regarding output reductions in order to maintain price levels. Over the past twenty to twenty-five years, Saudi Arabia, with the largest readily accessible oil reserves, has played the role of swing producer. In the early 20th century, Rockefeller’s Standard Oil played that role. A swing producer can turn the oil spigot on or off to keep prices stable. And price stability is key because it helps to ensure a consistent long-term demand. If demand starts to rise quickly, the swing producer will provide additional supply. If demand starts to fall, it will cut back. But the swing producer (say, Saudi Arabia) is not the only seller in the market, and as the swing producer tries to exercise countervailing price pressure to maintain price stability, its competitors will step in to capture marginal sales on the way up or down. Being a swing producer is very expensive proposition, and the allure of capturing marginal sales while the swing producer bears the cost is one of the reasons why cohesion is so elusive for cartels like OPEC.

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Oil at $34.54

Nymex Crude Futures 12/21/2015 about 12:30 pm

Nymex Crude Futures 12/21/2015 about 12:30 pm

The chart says it all, but NYMEX WTI Crude hit $34.54 around noon today.

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BP Deepwater Horizon, 2010

BP Deepwater Horizon, 2010

AP reports that federal prosecutors have dropped manslaughter charges arising from the 2010 Gulf of Mexico rig explosion that killed 11 workers and unleashed the nation’s worst offshore oil spill. The federal government also pressed criminal charges against four BP employees.

The Justice Department’s decision to drop manslaughter charges against two BP rig supervisors makes it increasingly likely that nobody will spend a day behind bars for any crime associated with the deadly disaster.

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Putin - exasperated

Yes Vlad, oil prices are all the way down there.

About this time last year, the Sparkspread pointed out that Vladimir Putin had overlooked Energy Rule Numero Uno when he re-annexed Crimea to Russia sixty years after Khruschev gave it back to Ukraine. That rule is that energy is all about infrastructure. So, before you invade a country with the ultimate goal of ruling it (and therefore, of necessity, administering it in one fashion or another), you should make sure you understand the target territory’s energy infrastructure.

This is something Putin notably forgot to do. Crimea has four power plants that aggregate to a rather puny 327MW in nameplate capacity, but demand in Crimea ranges from 850MW to 1250MW in winter, depending on the severity of the season.

The math is easy. More than 80% of Crimea’s commodity electricity supply is under the control of Kiev, and Kiev, being the capital of Ukraine, takes a rather dim view of Volodya’s revanchism.

The maps are pretty easy too. The little Isthmus of Perekop, which connects Crimea to Ukraine, is a chokepoint with two main transmission lines that supply the Crimean peninsula.

Crimea-electricity--638x539

Electric transmission lines into Crimea

Wait… Did we say that Kiev controls the electricity supply? Not so fast. Over the past week or so, saboteurs have blown up power lines in southern Ukraine, which have plunged Russian-annexed Crimea into an energy crisis. About 2 million Crimeans are now relying on emergency generators. This proves the point the Sparkspread made last November: Crimea depends almost entirely on Ukraine for energy.

And that’s not Putin’s only headache. Under Russian law, using drafted Russian soldiers outside the borders of Russia requires the soldiers’ consent. (Of course, “Russian law,” along with “moderate rebel” and “limited nuclear war,” enters the language as one of the 21st Century’s new oxymorons.) The fighting in Ukraine produced about 2000 dead and 3200 wounded Russian soldiers. Hmmm… How to explain that? Injured in training? That’s a tough sell. That many dead and disabled soldiers in a war of choice presents a fundamental question of political sustainability of the conflict at home, even if home is a totalitarian state. Vlad might give a call to Dubbaya if he has any doubts.

Oil prices stayed low. U.S. and European sanctions started to affect the Russian economy. Just as von Schrotter described Prussia as an army with a country, Russia can be imagined as an army with oil fields and natural gas reserves. But under sanctions, drilling for new reserves and maintaining the production equipment on existing fields became far more difficult. Putin’s oil oligarchs and their apparatchiks have had their hands full trying to maintain Russian oil production in both quantity and quality.

Vladimir had to weigh the costs and benefits of his Crimean campaign. Better to cut his losses on Crimea, leaving matters to the resident separatists, and focus on a new adventure.

Like Syria, maybe.

This past February, Putin and Peroshenko, Ukraine’s president, inked the Minsk II accord, which at least implemented a cease-fire, more or less. Peroshenko had to recognize his country’s loss of certain territory in Ukraine to pro-Russian separatists, and the deal allowed Putin to pull the Russian army out without too much loss of face. Putin’s proxy war through Russian-leaning separatists continued in full swing, of course, but since the Russian pull-out the separatists’ battles have not yielded any significant territorial gains beyond what was already obtained through Minsk II.

Kiev is not in control of rebuilding the transmission lines in Ukraine. Ethnic Tatars, whose parents and grandparents were forcibly deported by Stalin at the end of WWII, and Ukrainian nationalists have blocked repair teams. So far, authorities in Kiev have not tried to force the issue.

Putin is now accusing Ukraine of “torturing” Crimeans with the power cuts. Russia has responded by cutting coal deliveries to Ukraine. Coal sales are one thing, but he hasn’t shut off natural gas yet. Russia needs the natural gas revenues as much as it ever did, but escalation is always possible. But if Putin presses too hard on Ukraine, he’ll just unite Ukrainians against him politically.

As the winter sets in, this should provide some great political theater.

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The Huff Po reports that New York will ban fracking until further notice.

The officials said the potential health and environmental impacts are too great to allow fracking to proceed in the state at this time, and pointed to a dearth of studies regarding the long-term safety of hydraulic fracturing. The New York State Department of Environmental Conservation will issue a legally binding, supplemental environmental impact statement next year outlining its findings on the issue.

Read the story here:

Gov. Andrew Cuomo To Ban Fracking In New York State.

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Yes Vlad, oil prices are all the way down there.

Yes Vlad, oil prices are all the way down there.

The NYMEX light crude composite index hit $56.38 today and may go lower still. Vlad needs it above $100 to balance the Russian budget. Just as Prussia was said to be an army with a country, Russia is an oilfield with a country, and as oil sinks so goes the ruble:

 

The famous inverted hockey stick phenomenon.

The famous inverted hockey stick phenomenon.

Maybe that Crimea business wasn’t such a good idea after all.

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Baker-Hughes new breast cancer drill bit

Baker-Hughes new breast cancer drill bit

Salon reports that Baker-Hughes will be painting its fracking drill bits bright pink in support of the  Susan Komen Breast Cancer Foundation.

Fracking’s disgraceful, transparent new “pinkwashing” – Salon.com.

We’re certainly in favor of funding good causes to help fight disease, cancer, etc., and have no axe to grind (so to speak) with the Komen Foundation. But this has to be one of the most bass-ackward public relations ploys in a long time, quite apart from the fact that the connection between fracking and breast cancer is, to say the least, elusive.

Think about this for a minute. That drill bit will be on the end of a string of case hardened steel tubes forced down through layers of rock to a depth of around 10,000 feet. Then, it will be diverted from vertical to horizontal for another two to three miles. That’s about as far into the earth as Mount Everest is tall. If the intent of Baker Hughes and the Komen Foundation is to demonstrate breast cancer awareness to whatever lived during the Precambrian Period, then this is indeed a brilliant strategy.

I have just a few remaining questions.

After boring through 5 miles of rock, exactly how much pink paint will be left on that bit?

Does the fact that during every minute of its descent the bit will be befouled with drilling “mud” in any way detract from the message?

Suggestions to Baker Hughes: (1) Go back to cash donations and rent a couple of highway billboards, and (2) hire a new public relations firm.

 

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FERCBLOG reports that FERC has approved an LNG export facility for Dominion Cove, which is near Baltimore on Chesapeake Bay. Read the entry here:

FERC Approves Cove Point LNG – FERCblog.com.

That’s a good first step, and it puts the U.S. on the road to countering Czar Vladimir I if he again threatens to cut off natural gas supply to Ukraine or other European countries — but we’re not there yet.

As we’ve pointed out a few times on the Sparkspread, there’s a tremendous amount of natural gas that is being wasted every day in the U.S. In the Bakken, natural gas is treated as “associated gas,” or gas associated with petroleum extraction (read “waste gas”), even though it’s produced in quantities that rival the production in other fracking locales.

But there’s no gathering system in the vast expanse of the Bakken, and so the natural gas is flared at the wellhead. The cost/benefit calculation is easy: better CO2 than methane, which is much worse as a GHG. Estimates are that 100 million cubic feet of natural gas is being flared every day in the Bakken. That’s the equivalent of 10 NYMEX futures contracts, burned up with no benefit to anyone, every day.

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Flared Natural Gas in the Bakken

Flared Natural Gas in the Bakken

Today’s WSJ reports (once again) that North Dakota is flaring (meaning burning up at the wellhead) 30% of the natural gas that’s produced at its fracking sites, amounting to more than 10 bcf (billion cubic feet) per month. Dollar-wise, that works out to about $50,000,000 a month.

Imagine for a moment that the NYMEX natural gas futures contract was done on paper. Now imagine further that you walk onto the floor of the NYMEX and buy ten natural gas futures contracts. That’s 100 million cubic feet of natural gas. Now take all of those paper NYMEX contracts and use them to start the coals in your barbecue. That’s how profligate is the waste of energy in North Dakota.

The main reason for this is that there’s no gathering system (network of pipelines) in the remote areas of North Dakota. You can put Bakken crude oil in a tanker truck and drive it to a railhead, but that’s not feasible for natural gas. The lack of a gathering system conspired with very low prices for natural gas over the last few years to make flaring the only logical thing to do with the gas.

Grab a 2-liter bottle of cola, shake it up and watch the bubbles. That’ll give you a rough idea of how the Bakken crude comes out of the ground, mixed with natural gas in much the same way as CO2 is dissolved in soda. Open the bottle (or drill the well), and the whole thing schpritzes over the top, just like the “gushers” Hollywood uses to depict oil drilling. For the Bakken operators, the natural gas is “associated” gas, a euphemism for “we have to get rid of this stuff somehow.”

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Crude oil leaving the Bakken

Crude oil leaving the Bakken.

On Wednesday, April 9, 2014, the Federal Railroad Administration, a division of the U.S. Department of Transportation, announced that it would issue a proposed rule requiring two-person train crews on crude oil trains and establishing minimum crew size standards. The FRA also said it is moving forward with rules on train securement (i.e., putting on the brakes on unattended trains) and on the movement of hazardous materials.

Speaking of hazmat, the crude oil coming out of the Bakken in North Dakota has a high content of hydrogen sulfide, or H2S, a colorless gas that’s poisonous, corrosive to metals, flammable and highly explosive. Mixed with water, it forms hydrosulfuric acid. You’ve dealt with it already if you’ve refilled the cells in your car battery. If you overfill it and get some of the backwash on your jeans, it’ll eat right through them – and that’s the weak stuff. The H2S in the Bakken crude puts it closer to dynamite on the explosivity scale.

The FRA’s new regulations are in response to accidents such as last year’s tragedy in Lac Megantic, Quebec. A Montreal, Main & Atlantic Railway train with five locomotives was hauling 72 tanker cars of Bakken crude to a refinery in New Brunswick. The engineer on that train was alone, which was not against regulations. When the train stopped on an incline outside Lac Megantic that night, he applied the manual brakes on ten of the 72 freight cars and shut off four of the five locomotives, leaving one running to supply pressure to the main air brakes (i.e., not the manual brakes). The engineer then left for a local hotel to get a night’s rest, leaving the train unattended.

Unfortunately there was a bad piston in the engine left running, which started a fire. The fire department was called, and their first step was to halt the flow of fuel to the fire: they turned off the engine that the engineer had purposefully left running an hour or two earlier. They didn’t know that that engine was needed to supply power to the air brakes, and when they left, they didn’t turn it back on. Without the air brakes, the manual brakes alone couldn’t hold the train on that incline, and it started to roll towards Lac Megantic.

Had there been two engineers on the train, with one of them staying aboard the running locomotive, 47 people in Lac Megantic might still be alive today.

The Association of American Railroads, the rail industry’s trade association, opposes the FRA’s proposed rule. AAR’s President, Mr. Edward R. Hamberger, said the proposed rule was unnecessary because:

“all Class 1 freight railroads already operate crude-oil trains with two-person crews….If a regulation is proposed, then the least that can be expected is that a federal agency should back it up with grounded data that justifies the recommend rule. To date, nothing but rhetoric and empty pronouncements have been offered to validate their claims.”

This wonderful example of corporate-speak deserves some parsing, especially because he’s  poo-pooing another supposedly misguided effort of bumbling bureaucrats to fix something the railroads consider unbroken. Apparently Lac Megantic doesn’t qualify as “grounded data”; that and the other Bakken crude oil train explosions don’t fuel fires; they merely fuel rhetoric and empty pronouncements.

Mr. Hamberger didn’t elaborate on what a “Class 1″ railroad is. Perhaps he didn’t want to because the Montreal, Maine and Atlantic is a Class 2 railroad.

Center of Lac Megantic, Quebec, on fire after runaway crude oil train derailment

Center of Lac Megantic, Quebec, on fire after runaway crude oil train derailment.

Thus, the Association American of Railroads, the trade group for the industry that’s shipping liquid dynamite along the backyards and through more than a few downtowns of North America, believes the 47 persons consigned to the flames in Lac Megantic hadn’t the right to expect anything better because their town lies along the path of a Class 2 railroad. That’s just T.S., Eliot, as they used to say in Queens. Mr. Hamberger doesn’t mind if a crude oil train explosion turns you into a hamburger, so long as it’s not a Class 1 railroad.

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