WILL NATURAL GAS EXPORTS HARM THE NATION

March 6, 2017 § 1 Comment

A scant ten years ago this would not have been a discussion item.  Import of liquefied natural gas (LNG) was a sure thing.  A number of plants were sanctioned, and some constructed, and then the shale gale swept them away.  A number of these are being reincarnated into LNG export plants.  How many ought to be sanctioned by the federal government, and how soon, is part of the debate.  This debate is brought on now because the Trump administration is seen as fossil fuel friendly and so a loosening of LNG export is anticipated by some.

lng tanker

Gas is a regional commodity.  LNG is the only means of long distance oceanic transport.  Within a continent, pipelines are the mode.  Consequently, export from the US would entail gas in pipelines to Canada and Mexico, and LNG to other countries.  The former is not contentious, especially if NAFTA survives.  Mexico, in particular, is anxious to obtain low cost gas from the US, while developing their oil resources to offset the steep drop in the production of their giant Cantrell field.  The shale gas producers in Texas are happy to oblige.

The argument against export is that it could cause prices to rise.  The price in the US is artificially low due to supply consistently outstripping demand.  Weather causes fluctuations, but the price is remarkably stable when compared to the pre-shale-gas years.  Stability is friendly to capital investment.  Furthermore, US prices continue to be half that in Europe and a third of that in Asia.  This gives US industry, especially in the petrochemicals sector, an advantage.  However, modest rises (under fifty percent or so) in price would not affect this advantage, especially if oil prices stabilize above USD 50 per barrel.  The connection to oil is somewhat artificial (the markets are quite different) in that LNG is pegged to the price of oil, and LNG price is largely deterministic of gas price in the respective continent, in part because it is the marginal cubic foot.

Natural gas production in the US was 78.6 billion cubic feet per day (bcfd) in 2015.  It somewhat exceeded demand, causing the price to remain depressed, under USD 3.  An LNG facility consumes around 1.5 to 2.0 bcfd.  Today only one, owned by Cheniere, is actually exporting.  The Cheniere CEO was removed last year because he was considered too aggressive in expansion plans to build LNG export facilities.

Is LNG a profitable business?

A profitable LNG export business needs accurate prediction of raw material cost and delivered LNG price, over long periods.  The latter, as noted earlier, requires prediction of the world oil price.  With shale oil driven impotence of the OPEC, that is harder to predict.  For the former, what one needs is long term supply contracts.  Right now is a great climate for that.  Most natural gas being produced today is known as wet gas: methane with high concentrations of natural gas liquids (NGL’s) such as propane and butane.  This trend is due to the fact that on a calorific basis the NGL’s have higher value than methane and so there is more profit in wet gas.  NGL pricing is pegged to some degree to oil price, so some of that advantage is less now than it was in 2014.  Nevertheless, it is there.  As a result, dry gas (little or no NGL’s) properties lie fallow.  A very large and prolific field with this characteristic is the Haynesville.  It is close to the ports of the Gulf of Mexico.  An LNG facility in or near Lake Charles, LA, will have little difficulty in obtaining a long term supply of dry gas on very favorable terms.  Keep in mind that LNG requires dry gas.  It has no use for the bigger molecules.  Dry gas wells currently shut in will likely agree to long term low pricing just to get going.  In other words, the climate is decent for an LNG exporter to grow.  There is still the uncertainty of oil price, but at least the raw material cost could be controlled.

The national imperative

The LNG supporters say there is plenty of gas, go for it.  The detractors point out that the increased consumption will cause a rise in prices, thus hurting the citizenry.  The truth, as always, is likely in between.  Strictly by the numbers today, seven LNG facilities would add around 12 bcfd to the consumption.  That is close to 15% of production today.  Would that move the needle on price, possibly some, but not a lot.  But to the extent that the smart money would contract with shut in dry gas producers, the actual impact on price would be small indeed.  There is the matter of gas reserves.  Do we have enough for a long time?  There is a truism in the oil and gas business:  proven reserves in any new prospect area, and shale gas certainly qualifies, always rise with increased development.  Part of the reason is that proven reserves cannot be posted unless are they economically recoverable.  Field development increases the probability of economic recovery.  Accordingly, any reserves numbers today for shale gas are almost certainly underestimated.

An interesting twist comes from the oil sector.  Shale oil, because it is very light (smaller molecules on average), has significant associated gas.  In 2015 the associated gas was estimated at about 4 bcfd.  With some recovery in the price of oil, one would expect this to be higher going forward.  In other words, oil production alone will add significant gas to the production figures.  This, taken together with a potential revitalization of the dry gas economy, can likely support an LNG export business in the vicinity of 15 bcfd without impacting the price of gas to the point of damaging the economy.

Vikram Rao

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Tempest in the Arctic Teapot

January 10, 2017 § 2 Comments

President Obama’s recent action to “permanently” ban new oil and gas leases in the US Arctic is being painted as heroic by the left and dastardly by the right.  In its actual effect, it is neither.  In the face of alternatives, investment in Arctic development is not advisable.  Royal Dutch Shell stubbed its toes badly in the Chukchi Sea, notably through operational missteps.  But that sort of thing is the nature of the game in the Arctic.  The risk/reward ratio is just too great, even counting just financial risk.  Environmental risk simply adds another dimension, especially to companies with serious sustainability goals.  Shell has announced a withdrawal from the Arctic, for the “foreseeable future”, after reportedly spending $7 billion.

arctic-bear

Certainly, an outgoing President doing anything “permanent” raises hackles.  But the rhetoric does not comport with the facts.  A statement was attributed to the industry: “…. today’s unilateral mandate could put America back on a path of energy dependence for decades to come, said Dan Naatz of the Independent Petroleum Association of America”.  A nationwide ban on hydraulic fracturing would do what he says.  But not banning Arctic drilling.  Shale gas has made the US chemical industry dominant because of access to the lowest cost natural gas in the world.  More than half of the $150 billion capital investment in chemicals production is from abroad.  Shale gas made us an exporter of liquefied natural gas (LNG) instead of an importer.  Shale oil has made OPEC essentially irrelevant to controlling the world price.  The US is now the (unwitting) swing producer.  The Saudi gambit to kill US shale oil, if in fact there was one, has failed.  So, yes, a ban on hydraulic fracturing could “put America back on a path of energy dependency”.  But not banning Arctic drilling.  They are not going to do it, even if allowed, because there are better pickings.

All offshore drilling in the US is down.  The number of rigs drilling is currently in the teens; these are the lowest numbers since 1990.  Offshore drilling, especially in deep water, requires long term assurance of oil pricing.  No oil will be saleable for at least 7 years.  Multiply that by two, at least, for the Arctic.  Shale oil, and the resultant inability of OPEC to control price, has made price forecasting extremely uncertain.  This is not the best investment climate for long horizon prospects such as the Arctic.  Add to that the environmental risk, and the likelihood of pursuit is slim.

By the time the Arctic promise, such as it may be (some estimates have 30% of world  resources to be in that area), is realized, oil substitution will be in full swing.  A small sampling comprises electric vehicles, diesel substitution by LNG, CNG or dimethyl ether (this last led by Volvo), gasoline supplemented with methanol (led by the Chinese), more efficient internal combustion engines; the list is long and certain, at least in principle.  In addition to this, innovation will drive down shale oil breakeven cost to under $30 per barrel, with the ability to weather any oil price tribulation.  This will happen to a moderate scale within 3 years. Shale oil does have environment risks, but in the opinion of this author, they are tractable, and on a vastly different scale than those from Arctic mishaps.  Shale oil will be the investment of choice.  Look no further than the explosion of drilling rigs in the Permian (shale oil) as rig counts deteriorate in deep water.

In the same release, the President also shut down lease sales in the Atlantic.  But, interestingly, the ban stops at roughly the Virginia border with North Carolina.  To my knowledge the early exploratory success had been off the coast of North Carolina.  No reasons were given, but this may well be a nod to industry.  My personal opinion is that, on a national basis, emphasis on shale oil makes more sense; catastrophic risks are lower and the jobs are more distributed.

The President took a step that to some degree cements his environmental legacy.  But the actual effect is likely minor because the risk/reward economics of Arctic development, especially when compared to alternative investments, make them unlikely to be pursued even if permitted.

Vikram Rao

 

 

TRANSFORMING TRANSPORTATION

September 12, 2016 § Leave a comment

The September 3 issue of the Economist has a lead story entitled Uberworld.  The piece dwells on the fortunes of Uber to an inordinate degree, but underlines some important trends in transportation.  All of these, provided they materialize, point to a world with drastically reduced car ownership.

autonomous-vehicles1

The first trend, private cars for hire in competition with taxis, is credited to Uber.  In fact, the first company to accomplish that was Sidecar, a San Francisco startup.  The Sidecar model was a peer to peer concept.  The app allowed riders to search for a driver heading in the direction they sought to go.  All financial transactions were only through the app.  Drivers were vetted by Sidecar and rated by riders.  A rider could reject a driver.  Sound familiar?  Sure, exactly the way Uber operates, at least on those points.  Sidecar’s misfortune was to come into being just a year ahead of competition, with no real barrier to entry.  No, not Uber, Lyft, which preceded Uber.  These two refined the business model to where the drivers were not on their way to anywhere at all; they were waiting to be called.  Not exactly peer to peer.

Today, Sidecar is gone, Lyft has 20% share and Uber has 80%.  What happened?  I have in other writings remarked that innovation in business models may be as (or more) important as technical innovation.  This one is a poster child for that sentiment.  Sidecar reputedly spent their investor money on technical innovation.  Lyft and Uber on market share expansion.  Uber came in a bit later and has swamped Lyft to date.  The price paid, of course, is negative profits on a USD 70 billion valuation.   Think Amazon, whose quarterly profit has been small to negative over the last 20 years since inception.

Aside from expansion, Uber has continued to innovate on offerings.  The latest is ride sharing for a price in the vicinity of half that of the conventional hire.  Starting to sound more like Sidecar.  This last may be the tip of the proverbial iceberg of improved asset utilization.  Especially with this twist, there is the promise of a cost per mile well below that of car ownership.  This increasingly begs the question: why own?

The second big trend, still at the toddler stage, if not infancy, is autonomous vehicles.  The promise is of a high degree of safety (the Tesla mortal crash notwithstanding).  But unlike the alternative taxi model of Uber and others, this one may run into problems with local regulations.  Furthermore, one of the hallmarks of the Uber business model has been the asset light concept.  Self-driving cars may require asset ownership, by some entity, if not Uber or Lyft.  But eschewing this avenue would not be wise.  Remember, there is no real barrier to entry other than sheer size and name recognition, which certainly count, especially the last.  Uber has almost become a verb, as did Google and Xerox.  But autonomous vehicles will be lower cost per mile, so Uber and wannabe’s cannot ignore it.  But the folks threatened by improved asset utilization (that shudder you feel: auto manufacturers) have taken notice.  GM has a USD 500 million investment in Lyft and hired the CTO and twenty employees of Sidecar.  An OECD study of Lisbon found that with large scale uptake of shared autonomous vehicles, the total number of cars required would drop by 80%.  But overall car-miles would increase by 6%.  The number of parking lots would fall drastically.  These may well become green space.  Sort of the reverse of the Joni Mitchell lyric from 1970: They paved paradise and put up a parking lot.  Autonomous vehicles are not yet here, and yet multiple players are jostling for pole position in secondary markets such as ride sharing.  Can you spell disruptive?

Vikram Rao

REACHING THE SUMMIT REQUIRES A BASE CAMP

August 16, 2016 § 2 Comments

Mountain climbers know this well, especially when major peaks are the objective.  The base camp for the Everest climb (summit at 29000 feet) from the south side is at about 18000 feet.  The principal purpose is acclimatization: to the depleted oxygen, the terrain and the team.  The preparation is both mental and physical.  It is essential for success.  The Director (essentially the President) of the Indian Institute of Technology at Gandhi Nagar (IITGN) decided to institute a base camp for the entire entering class, based loosely on his previous successful venture at IIT Kanpur.  They refer to it as the Foundation Program.  The purposes are much the same as for assaulting difficult peaks.  I chanced to visit in early August, spoke to four students in the program, and here is my take.

First some background.  The Indian Institutes of Technology are elite engineering institutions.  The incoming students represent the top 2% of high schoolers, at least as determined by the entrance exam.  A presumption of academic preparedness is valid.  Why, then, a base camp?  In the US, some top economics departments have non-mandatory mathematics base camps for incoming PhD students.  This is intended to brush up on higher mathematics prior to diving into the program.  Most of the entering class has been out in the work force in some fashion, so this is likely targeting them.  The IITGN program is certainly not about academic preparedness in this classic sense.  My chat with the four students sheds some light.

Two young women (YW) and two young men (YM), unsurprisingly all evincing smarts.  What surprised was the self-awareness and the ability to express their feelings.  Not common for engineers, especially the latter facility; then, again, they were not yet engineers.  They had all been plucked out of the Foundation Program, with no notice (I asked for this within hours of the meeting) and presumably volunteered for it.  As it turned out, they all loved the Program.  So, relieving the tedium was not the reason.

https://i2.wp.com/www.mount-everest.net/images/2-everest-base-camp.jpg

Base camp with Mount Everest in background

I ended the conversation with a question along the following lines: “What was the one singular experience that was the most valuable take away?”  YW 1 said it was the sports.  Responsive to my query she stated that she had no opportunity or inclination in the past.  She was amazed she loved it, especially volleyball.  This from a petite frame topping 5 feet only in platforms.  American readers will ask what the big deal is.  The big deal is that, in my view, many of this cohort have immense pressure to do well in the entrance exam (don’t forget the two percenter population).  In some families it may be all consuming (not suggesting that is necessarily the case for this young woman).  This leaves little room for much else.  One function of the Program is clearly to provide this exposure to well roundedness; they really scored with this one.  YW 1 was up first, with no prep time for the question.  The response was prompt and decisive.  This was not a shallow impression.

YW 2 was up next.  She had discovered that she could speak in public, and that she was good at it and enjoyed it.  Some aspect of the program allowed this discovery; I did not probe the exact detail because it did not matter for what I was trying to achieve.  Hers was almost a sense of wonderment at this newfound capability, nay power (“I can dance!” Leo Sayer in Ten Tall Glasses).  This too was a big score for the Program.  Few traits are more correlated with success in engineering endeavors than the ability to communicate effectively.  Early discovery of one’s proclivity in this space could be decisive in choices even in the formal education.  An almost trivial example is volunteering to be the spokesperson in the reporting out of group projects.  YW 2 as well was firm and decisive.  You are getting a feel for my earlier statement regarding self-awareness and clarity of expression.

YM 1 could not have been more different.  His moment of discovery was the informal interaction with seniors (upper class persons) in a variety of settings giving him considerable exposure without the hazards of “ragging”.  Upon being asked, he expressed the value as being represented in advancing his own ambition to be the student body president.  I also got the impression that the socializing with the entering class played a part in what I described as developing a constituency, a characterization that he did not dispute.  I suspect Bill Clinton was similarly single-minded at that stage in his life.  The upper class participation appears to be a facet of peer to peer learning.

YM 2 enjoyed the collaborative atmosphere and the empowerment that went with it.  He described the formation of teams to create a variety of program elements such as logos.  Despite the highly competitive cohort, the interaction was very congenial and produced results.  Again, the time did not permit a lot of detail.  But one could safely assume that teamwork of this type would provide exposure to both unlike and like people.  My own IIT experience fifty years prior was more conventional.  As a result, my closer friends were either dormitory neighbors or members of extra-curricular activity.  Only one was from my engineering discipline, and he too was a neighbor.  I have observed the same with my sons in US colleges: lasting friends are from the freshman class and most usually from the same sources as mine had been.  This program allows for a broader and more informed selection.  This could be especially important for the young women, who are in a minority, only 10% in this class.

Derived solely from the feedback of these students, and deliberately without a study of the actual program, I conclude the following.  The IITGN Foundation Program is truly a base camp for the assault to come of what most consider the pinnacle of engineering learning.  These students will be better prepared than those at other IIT’s; of this I have little doubt.  Emulators need to consider the fact that this class size is small, about 180; some other IIT’s have 800.  The Program intrudes well into the school year.  This is feasible only in dedicated institutions, and even so, faculty will take considerable persuasion.  Could Everest be scaled without a base camp?  Most likely yes.  But, the probability of success with minimum damage is immensely greater with one.  All engineering institutes would be well served to study and emulate the IITGN innovation.  In Prof. Ross Bassett’s work MIT is credited with being highly influential in the formation and content of the IIT’s.  Their adoption of a version of this program would be fair turnabout.

Vikram Rao

 

 

CIRCULAR REASONING

May 17, 2016 § 2 Comments

The journal Nature recently had an entire section devoted to the Circular Economy. It is a concept that is gaining currency, largely through the efforts of the Ellen MacArthur Foundation. In brief, it stands for a society with a minimum of waste. The grand vision is to decouple economic growth from resource consumption. If this seems like a tall order, it is. But that does not mean we ought not to set such an aspirational goal.

 

circular economy schematic
When society is premised upon the continuum of take-make-use-refuse, then truly economic growth comes with the use of more resources. It begins with the resource in the ground, be it the metal for objects, gypsum for wall boards or petroleum for fuel or plastics. Energy, mostly derived from non-renewable fossil fuel, is used to make things. The produced goods are used, sometimes consumed and usually discarded as waste after the use.
The circular economy seeks to minimize waste at each of the steps. Manufacturing today discards up to 90% of the raw material. Certainly, additive manufacturing (3D printing) will help where it can. But the design step before that is just as important. Most anything can be designed for repair, refurbish and re-use in general, or not. This underlines a key tenet of the concept. It is very much not only about recycling. Recycling is often very energy inefficient, while it does conserve hard resources such as metals. Besides, recycling requires the step of aggregation, and this is often uneconomic.
The most successful model of recycling that I am aware of is that of lead from automotive batteries. The system made it happen. Folks were essentially given a discount on the new battery for returning the old one rather than discarding it. In states and provinces that do it, glass bottles have a deposit returned. One could argue whether the 5 cents drives behavior or not. But the principle is one worth emulating. A power drill returned for refurbish and subsequent sale, ought to have a value set on the return. But it would in the first place have been designed for economical refurbish. This underlines a key element of the circular economy: emphasis on repair, re-furbish and re-use in place of buying new. Expenditure on resources would be replaced with expenditure on labor. That means jobs.
Plastics ought to be an area of emphasis. The vast bulk of them are derived from natural gas or oil. The US discards 35 million tons per year and either recycles or combusts only 14.3%. They almost symbolize the use and discard concept and are the poster children for economic growth being proportional to resource consumption. An estimated 100 million tons of the stuff is floating around in the oceans. Part of the problem is the variety of plastic formulations used and not necessarily sorted. Only two, PET (polyethylene terephthalate) and high density polyethylene are routinely recycled. The research emphasis has been on recycling, although those attempting to reduce the energy to recycle arguably are playing to the circular economy tune (one startup in the Triangle area).
In the end it may not only be about technology. Business model change could drive behavior. If we went to more of a lease economy than buy and sell, the leasing entity would be advantaged by the equipment being maintainable and by it simply lasting longer. If they are also the manufacturers, they are positioned to design to achieve that result. Modern sensing and communication techniques would give them early warning for preventive maintenance. Similarly, sharing versus owning could play a part. The Airbnb model could be broadened to short term rentals of underused capital such as chain saws and party coolers (I know of a startup doing just that). Sophistication in data analytics, credit management and communications allows this sort of thing to be done cheaply. Who would have imagined five years ago that singers being paid $0.007 per Spotify play would seriously displace purchased (plastic) $20 CD’s? Most artists, other than Taylor Swift, seem to see it as a net positive.

I have written often that reasonable atmospheric carbon dioxide targets can only be achieved by simply using less energy for the same utility. The circular economy concept is certainly in that song book.
Vikram Rao

ADVANCING FROM THIRD TO FIRST

March 13, 2016 § 1 Comment

In most pursuits and especially baseball and personal relationships the concept of advancing from third to first would decidedly not be a good idea, and oxymoronic to boot. But there are settings in which this would be contrarian thinking at worst. The third here is not a base, it is a world. Sure, the more genteel term is developing countries. Transfer of technology has always been seen as a one way street, from the first world to the third.

08 Apr 2010, Algeria --- Traditional house with a solar panel in the Sahara Desert, Algeria, North Africa, Africa --- Image by © Michael Runkel/Robert Harding World Imagery/Corbis

08 Apr 2010, Algeria — Traditional house with a solar panel in the Sahara Desert, Algeria

When we seek to improve the lot of the over one billion with no electricity access, our tendency is to solve this in a first world way. This entails massive power plants in excess of a gigawatt with transmission lines everywhere, never mind the up to 40% losses on the way. This reminds me that folks who consider windmills to be visual pollution somehow do not have the same fervor in objecting to high tension lines cutting ugly swaths through forests.
Central plants inevitably are fueled by coal or natural gas, and more the former in the developing world. This in turn causes the west to complain that with all due diligence there, the developing world would progressively add to the carbon loading. Two distinct areas could avoid this trap of having to choose between lifting people out of poverty and climate change mitigation. One is distributed renewable power (with an assist from microgrids) and the other is energy efficiency.
The two most technologically and economically advanced renewable energy sources are wind and solar. Both of these are inherently distributed in nature. A single windmill of the most modern sort puts out about 1 megawatt. Even smaller units are feasible. An Alaskan village, and here we are talking first world, will need at the most a few of these. On price it is competing with diesel based power, with the diesel transported only once a year (due to short duration of water borne transport) at high cost. The ancillary benefit of fewer emissions are clearly a plus. An Indian or African village may well make do with just one, and smaller at that. A development to watch in this space is vertical axis turbines. They are much more bird friendly and eminently more deployable into interior areas than the large sails which have bridge clearance issues.
Solar is by far the best suited technology for the developing world, which by and large tends to be blessed with high incident radiation. Since solar power is generated in DC form, we would be advantaged if we stayed with DC all the way to usage. In a village setting the primary uses are lights, fans and cell phone chargers. With LED’s becoming more ubiquitous, all these devices can be DC operated. The good news is that fans running on DC are between 40 and 75% more efficient than those on AC. The same applies to compressors for refrigeration. The not so good news is that DC operated fans and compressors are not yet mass produced to get the cost down. LED’s are getting there and cell phone chargers are already there.

If somehow DC operated devices became the norm, the net effect on energy consumption would be highly material. A key enabler would be microgrids. In this situation this would be a DC grid. Edison famously lost that battle, and appropriately so for long distance transmission. But for a limited scope a DC grid would not suffer any material disadvantages. Importantly, conversion efficiency losses would be avoided. As it stands we convert the solar power from DC to AC, put it on the microgrid, deliver it to the homes and convert back to DC for use in LED’s and chargers. Each of the two steps has high single digit percentage losses, possibly more for older devices.
The notional thought is that villages ought to be powered using renewable sources and operate efficient devices. In time this could be the norm, thus reducing the need for large fossil fuel powered plants in developing nations. The ever improving economies of these countries will certainly add to the urban and industrial energy needs. The decarbonizing of these will need separate attention, although energy efficiency would also play here. While inevitably adding to the carbon burden of the earth, these nations could lead the way to a world that uses renewables effectively. The features of the settings of a pressing need and more expensive alternatives will allow widespread deployment. This in turn will bring costs down over time, especially of energy efficient devices such as DC fans and compressors. These advances would now be transferred to the first world, at first in isolated areas such as Alaskan villages and the Australian outback. This is the essence of the premise stated at the outset: advancing from third to first.
Vikram Rao

GEOPOLITICS OF TODAY’S ENERGY LANDSCAPE

March 6, 2016 § 4 Comments

Meghan O’Sullivan delivered a fireside chat at the Sanford School at Duke on roughly this topic on March 3, 2016. She is on the faculty at the Kennedy School of Government at Harvard and is a former adviser to President George W Bush. Here I will report on some of her remarks but also put my personal spin and make a solid effort to distinguish between those. I have selected a few of her topics only, so this is not a comprehensive report by any means.

Oil_cartoon_12_09_2014_large

retrieved from hignnetworth.wordpress.com

Dr. O’Sullivan believes that a significant US interest/presence in the Middle East is warranted despite the increasing self-sufficiency in oil. As we have discussed in these pages for a couple of years, this country will have all its oil sourced from North America (US, Canada, Mexico) by 2025, or even by 2020. We had been on a trajectory of adding a million barrels per day (bpd) each year since 2011. At that pace 2020 was realistic. Well, we are no longer on that pace, not for the last year. Mid last year we were at a record high and have since reportedly dropped by about 0.5 MM bpd, possibly a bit more recently. Two takeaways. One is that the upward trajectory is gone for now. The other is that it could resume in weeks after prices are acceptable. The first to go on stream will be the 5000 plus “fracklog” wells. Acceptability will depend on the operator’s breakeven cost per barrel. In pretty short order the weak will perish and the strong will buy their assets (independents and private equity only; I still don’t think this a play for the majors).
Sustained prices below $30 per barrel could deal a mortal blow to shale oil; unlikely but not impossible. Absent that the North America self-sufficiency scenario will play out. In that situation why would the US need the same armed forces footprint in the Middle East? Certainly we would no longer need the current naval presence designed to protect traffic in the Strait of Hormuz. O’Sullivan agreed with that premise and expected we would share the load with others, possibly even China. She noted the cooperation of others in dealing with piracy. Speaking of China, she opined that our shale related energy strength has engendered a new found respect for the US. She felt this improved our chances for cooperation, especially in the Middle East, where China cedes to us a better understanding of the locale.
One other point. Shale gas will not be wounded, much less mortally. Gas is a regional commodity. LNG globalizes it some but adds $4-6 per MM BTU, making the landed price anywhere in the world more than double the price in the US. This sustained low cost position of the US has caused over $160 billion of investments in US chemicals, more than half of that from foreign sources. These investments commenced in 2011. Expect demand to rise within three years when the plants are fully functional. This will firm up prices sufficiently to reinvigorate a currently moribund shale gas production scenario.
Dr. O’Sullivan was asked about the curious bi-lateral Doha agreement between Saudi Arabia and Russia on holding production to January levels. She noted that January was a high water point for both and suggested this was an effort by the Saudis to isolate Iran. Iran’s production from the sanction month of January was low. So this agreement could be a tactic by the Saudis to make Iran the problem for continued low prices. Saudi intransigence on production (instead of cutting to prop up price, increasing production to drive out higher cost competition) is widely viewed as the cause of the price crash. Fingering mortal foe Iran would help. However, any attempt to prop up price is bound to embolden US shale interests. That part of the industry is in an “innovate or perish” mode. Cost per barrel is dropping steadily, at first by service company cost reductions and efficiency improvements. The real gains will be in improving net recoveries, currently at an anemic 5% of the oil in place. This will happen, the question is timing with respect to survival.
There was some discussion of the effect of consistently low oil prices on the health of the economy and on citizens. Dr. O’Sullivan’s view that the positive effect on the US has been less than expected, is shared by other experts. The principal cause is believed to be that the public is saving rather than spending the bounty. One net importer appears to have managed the situation very well and that is India. Modi’s government has cut subsidies and raised taxes on fuels in step with the oil price drop. What the treasury does with the windfall will determine the true impact of the low oil prices.
Vikram Rao