Hannity is an idiot

The damn fool chants it daily and hourly like a mystical incantation, that he imagines (wrongly) we have more energy resources than Russia does. Western Siberia is the largest hydrocarbon province on earth, a hundred times bigger than puny U.S. reserves. Fracturing shale for oil is scraping the bottom of the barrel, $7 million per horizontal well that declines in a matter of months, unprofitable if oil sinks under $60 a barrel. Russia drills cheap straight holes to unleash oil gushers profitable at $25 a barrel. Western Siberia also has 16,000 trillion cubic meters of natural gas reserves, the world's largest thermal energy endowment, enough to heat and power Europe 200 years. United States is an energy midget, fracking shale gas to make steam and keep the lights on in East Coast cities and suburbs another 25 years maybe. Without Canadian tar sands and a flood of Mexican, Arabian, and Brent spot market crude, our refined products — gasoline, diesel, fuel oil, plastics, jet fuel — would run dry in a week or two.

 

Quit dreaming about America exporting energy or imaginary energy independence before the CDC lockdown sank our entire economy in 2020, killing marginal frackers. Read the EIA data. The last time America was energy independent was World War II. After the war we explored and developed Ghawar in Saudi Arabia, CIA installed Pahlavi and seized Iranian oil, Shell made big discoveries in Africa, and BP drilled the North Sea. U.S. oil & gas reserves declined 25% and we had to look offshore in Prudhoe Bay and the Gulf of Mexico, much more expensive to produce, supertankers from Valdez, jack-up rigs, and offshore floating installations and undersea pipelines. Shale fracking is a wild west gunslinger sideshow that wouldn't exist without $100 billion in junk bond finance and Fed plunge protection for lenders.

 

We could power Europe? An utterly fake fantasy. And now Hannity calls for "Exports at warp speed!" Hah. It takes ten years to explore, map, build a drilling & separation floater and connect subsea iron to commence oil and gas production in a new deepwater play. Forget about fracking thinner shales.

 

Here's a basin map of North America. Barnett, Michigan, and Signal Hill are depleted. Gulf of Mexico continental shelf has been drilled to death. Haynesville and Marcellus gas reserves are declining. If we had any sense, we'd burn abundant U.S. coal to make electricity. Totally idiotic to waste or export our annual 20 tcf of natural gas production piped from dinky U.S. resources equal to 0.004% of proved Russian gas reserves. I know why Hannity went stupid. Third party engineers certified imaginary shale reserves (for a six figure fee) so frackers could peddle 6% junk bonds and penny stock to hedge fund managers who flipped the junk to greater fools. Exxon, Reliance, CNOOC, Total, Statoil, Shell, Mitsui, and BHP took the bait and booked imaginary reserves to shore up their balance sheets.

 

For those of you who are unconvinced that the Marcellus Shale is nearing depletion, I'll attach another map. No doubt about its authenticity, nine years ago. The wet area (extra profit from liquids) and super rich area were drilled to death. Another big play in northeast Pennsylvania pitted Chesapeake versus Anadarko plus three debt leveraged "minnows" racing to frack gas into a new network of pipelines and gathering equipment. I assure you that the Marcellus has been 40% depleted and burned by utilities in Pennsylvania, New Jersey, New York, Connecticut, Massachusetts, Maine, Maryland, Delaware, and a taxpayer funded LNG port. Might last another decade or two, depending on labor shortages, rig rates, junk bond rates, and OTC trades. East Coast winter peak demand is met by imports from Wyoming and Colorado, driving up prices nationally, stressing Rust Belt utilities and big commercial gas users in Ohio, Indiana, and Illinois. More electric vehicles implies more base power. We need to burn more coal.

 

Oh, god, the stupidity has gone contagious — Kilmeade, Moore, and Graham calling for U.S. oil and gas exports to supply Europe. I suppose it's symmetrical foot stamping as a national neurosis, whether airhead Democrat or angry Republican. Penny ante minnows love $100 bbl oil, will hustle to drill more shale on existing leases, a 10% increase of LNG exports in ten months or so, too little too late. I expect Putin to shut off Soviet-era pipes and freeze Poland, Germany, and Denmark tomorrow morning.

 

SUNDAY 3/6 — some sort of grand booby prize goes to Bill Cunningham, who exclaimed that Western Europe has oodles of oil and natural gas, they don't need to buy anything from Russia, and it's simply perverse insouciance that stops Western Europe from drilling its own oil and natural gas. This is what happens when radio talkers imagine that they know petroleum geology. Germany has no oil or natural gas, zero. France has a junk play in the Paris Basin that isn't worth drilling. Holland's Groningen field is nearing depletion. Britain drilled the North Sea to death, a dribble of rump production that forces them to import gas from Holland and Norway. What Germany and Poland have in abundance is coal, which hundreds of well fed IPCC bureaucrats and a psychotic teenage girl urged Europe to forsake.

 

Cunningham can't even do arithmetic. At the peak of Trump's "energy independence" we produced 14 million barrels of oil per day and consumed 20 million barrels a day. Natural gas is not oil. Two thirds of U.S. natgas production comes from deepwater straight holes in the Gulf of Mexico and declining legacy wells onshore. Fracking shale was a losing proposition, $100 billion upside down. Russia is a super low cost conventional producer (no fracking) and has half of all known natural gas reserves on earth.

 

Back to dipshit bartender-in-chief Hannity. He thinks it's as easy as Biden giving U.S. oil & gas production a green light and wrongly mentions ANWR in Alaska. The National Petroleum Reserve is a frozen marsh hundreds of miles from the wildlife refuge. Any new drilling program will take years to ramp up.

 

Worse, there's a skilled manpower problem. Majors dismissed geologists, seismic interpreters, and petrophysicists, to trim payrolls and health insurance costs. Shale frackers have no idea how to explore for oil. Halting Federal deepwater leases killed tens of billions of investment. Money doesn't sit on the sidelines, praying that Democrats will come to their senses. Bottom line on U.S. conventional oil & gas exploration — fewer scientific staff, no deepwater U.S. exploration, no financial partners.

 

Not talking about shale. Whatever frackers can eke from thinner shale is irrelevant, a little more oil, a little more natural gas to pretend that taxpayer subsidized LNG liquefaction is good for America.

 

Not talking about an XL pipeline to import more Canadian bitumen that has to be diluted with volatile natural gas liquids to make "dilbit" that will flow through a pipe. There are two U.S. refiners converting tar into 70% crude oil and 30% solid waste. A mountain of toxic debris is piled up near the Marathon upgrader in Detroit. If Marathon doesn't want more EPA trouble, Canadian syncrude pioneer Suncor could re-jigger a Houston refinery that formerly cracked heavy sour from Venezuela. Maduro has a big tar sand deposit. It could be scooped up to supply PDVSA's U.S. Citgo stations. Instruments and pumps at Orinoco oil wells stolen from Conoco were looted by Chavez goons. Lukoil is working on repairs.

 

Biden begging Saudi Arabia is the worst joke of all. An "export land model" correctly predicted Saudis would retain more gas domestically to make electricity and desalinate sea water. OPEC is exporting most of their oil to China and India and limiting new production. I worry about competence and political stability in Iraq, Algeria, Nigeria, and Mexico. Remember I mentioned that Germany has no oil or natural gas? They used to import oil from Libya's Sirte Basin. ConocoPhillips engineers and project managers had to flee for their lives. We showed Conoco where to drill in Libya, how deep and what to expect, did the same thing for Maersk in deepwater Angola and Nippon Oil in the Coral Sea. 

 

Why should Mom & Pop geology and geophysics consultants exist and make beaucoup bucks working for major international oil companies? Because corporate people are corporate people, incapable of getting rock velocity models right, scared to interpret seismic horizons and tie them to distant legacy wells. We evaluated oil prospects in the Falkland Islands, Australia, East Timor, South Africa, Louisiana, Ghana, and an idiotic play in Bulgaria. Our reputation was excellent, 50 drilling picks, no dry holes.

 

So, I want to impress upon you the truth about oil exploration. Deepwater is extremely difficult to get right, a mile or two of water and another mile of rock before you get to a potential reservoir play. BP's Thunder Horse field cost $5 billion to explore, drill, and produce, which made sense financially, although it didn't lift as much as they hoped it would from precise directional drilling, a project that they inherited from Amoco geoscientists after BP acquired Amoco, "retiring" highly talented Amoco staff. That's what happens in oil patch consolidation, the best people are booted out. Texaco is gone. Phillips Petroleum is gone. Prudhoe pioneer Arco is gone. Mobil is gone. Sun quit drilling and sold a refinery. Formerly expert explorers like Hess, Noble, and El Paso are floundering, trying to farm out goofy plays to Shell.

 

I wrote a long three-part article for Seeking Alpha in 2009, because the SEC changed its rules concerning "proved reserves," allowing frackers and third party hired guns to play deuces wild. I also warned about the Brazilian national oil company Petrobras, before its NYSE share price nosedived 60%. Investors were grateful, and I won 25,000 followers who read every word I posted — until I made a three magnitude error reading a Harold Hamm 10K because it claimed preposterous proved reserves. A year later, I was vindicated. Blue sky exaggeration is common. It cost Aubrey McClendon his life and cost Chesapeake's stakeholders 75% of McClendon's fantasy shale upside. BHP had to write off its $15 billion acquisition of Floyd Wilson's money losing Petrohawk. It cost BHP chief executive Marius Kloppers his job.

 

The very best thing our government can do is revert to impartial umpire, letting Shell, BP, Statoil, Exxon, Chevron, Anadarko, Conoco, and Marathon bid for frontier deepwater blocks. License more coal-fired power plants and liquid thorium reactors. It is intensely stupid to rely on shale, solar, or wind turbines. Let Alaska decide what to do with their onshore potential. Small, nimble entrepreneurs are better in wildcat drilling. If they have a big discovery, the majors will pony up big money to produce it.

 

The White House press secretary smirked that 9000 state leases were permitted and remain undrilled, without naming a basin, permit holders, or prospectivity. Major oil companies are not minnows hungry for shallow shale or braided channel sands that aren't worth drilling. When majors bid for a deepwater block, it was already illuminated by 3-D seismic shot by Fugro or TGS over a known petroleum system. Majors explore for billions of barrels and spend billions to explore a geologically validated prospect.

 

Lighten up on Europe. They don't have any choice about Russian gas. It would take several years to build port facilities to offload LNG, doubling their cost of gas, assuming that sufficient LNG cargoes might be supplied by Qatar, Papua New Guinea, Algeria, or Azerbaijan, which is unlikely. 95% of LNG shipments are long term contracted and delivered to Japan, South Korea, China, Singapore, and India.

 

SUNDAY 3/20 — Oh brother, here we go again. Bill Cunningham exclaimed that freeing the U.S. oil & gas industry would push down the cost of oil to $20 a barrel and we'd bankrupt Russia and Saudi Arabia! When the price of oil crashed to $20 in the 1980s, there was a wave of bankruptcies, mass layoffs, and consolidation. Exxon merged with Mobil, Chevron absorbed near-bankrupt Texaco, and BP acquired Amoco and Arco which were fabulously successful explorers until the bottom fell out. Frackers in North Dakota need $70 bbl to break even, Permian Basin $60, assuming that they don't have a labor shortage. Big rig drivers hauling water drive too fast, live in mancamps, quit after a couple months. Cunningham talks like a czar — expecting U.S. companies to produce oil & natural gas at a loss. Retail gasoline prices are higher in California because they have to import Brent spot delivered by supertankers, and the fuel taxes, Kern County taxes, and refinery taxes are enormous. Oregon and Washington refused to permit offshore exploration because it's scary! It could trigger a tsunami! There could be an oil spill!

 

Bernie Sanders made a remark that I'd like to note and speak about. He said that the oil and gas industry has been supported by socialism (tax breaks? accounting rules?) for 100 years. The crowd cheered. It's a slander that oil and gas companies are greedy monsters. The Green New Deal advanced by Sanders and other commies proposes to kill Big Oil and forbid use of all petroleum products, all internal combustion engines, all so-called "fossil fuels."

 

Let's begin with that last notion, that petroleum is derived from fossils, which is a misleading conception of what oil actually is. Tens of millions of years ago, erosion deposited sand and silt in low spots called "basins." Fine silt settled under chunkier, lighter sand. Over tens of millions of years, layer after layer of sand, silt, and rock fragments were multiplied by erosion, rivers, and tectonic pressures that lifted the Rocky Mountains higher and changed the continent by compression. Sea level rose and fell repeatedly throughout Earth's geologic history. In most parts of the world where oil would be discovered, the source of that oil was silt that became shale under terrific heat and pressure of burial under thousands of feet of sand and rock. Organic shale molecules began to ooze buoyant oil that became trapped in porous sandstones. Keep in mind that we're talking about tens of millions of years. Some "kerogens" expressed natural gas later under far greater pressure or higher heat from igneous hot spots.

 

It took a very long time to contrive a system of pipes and compressors to gather gaseous methane that could be stored, distributed, and used in street lighting and household illumination in the Gilded Age. Methane was generated by rotting organic matter near the surface, along with peat moss, coals, and puddles of light oil that leaked from deep "conventional" sandstone reservoirs that were cracked by subsidence, folding, and igneous hot spots. Early oil and gas plays were obvious and shallow.

 

From those profitable and puzzling phenomena, the science of petroleum geology emerged as a special branch of long established traditional geology, which held wildly inaccurate hypotheses about the earth's geological history that were revised by a commercially urgent empirical quest to understand and exploit oil basins. Like other U.S. engineering projects — gold and silver mines, blasting tunnels, digging canals — Scottish experts in drilling and rock science were involved, and whatever we learned about producing oil quickly became a topic of fascination in Scotland. Throughout the history of oil production worldwide, Scottish engineers were at the forefront of petroleum exploration, and Britain was the first nation to convert its warships from coal-fired boilers to oil burning turbines, a profound naval advantage in many ways. No more time consuming stops for "coaling." More endurance and maneuverability. Discovery of crude oil in what at the time was called Persia became a strategic British monopoly, later known as British Petroleum (BP) that was organized by Winston Churchill, a youthful, visionary First Lord of the Navy before World War One. Aircraft and mechanized transport were likewise important military priorities. You can see where history took us, in terms of oil exploration and fractional distillation of useful products like gasoline, aviation fuel, and diesel for a German engine design that improved the power of heavy equipment like tanks and railroad engines. Within a single generation, oil became a vital resource. We used it to launch tens of thousands of American ships, planes, tanks and trucks.

 

America prevailed against our WWII enemies, because we were the world's largest producer of oil at the time. Germany had none. Japan had none. They had to conquer foreign lands to grab liquid energy from Romania and the Dutch East Indies. It is a settled matter of history that World War II was fought over oil, and we won because we were oil rich — huge conventional fields in Texas, Oklahoma, and Southern California, most of which, by the way, were exhausted and abandoned by the early 1970s. All oilfields are depleted by production, 4 or 5% per year despite perimeter water flood or gas injection wells.

 

That brings us to Bernie's slander about tax rules that allegedly subsidize oil exploration and production. All U.S. oil companies are engaged in free market competition. They often lose money in exploration, both historically and currently, despite greater knowledge of petroleum science and engineering in the modern context. Drilling is not cheap and never has been. Depletion is a dead certainty from the instant you begin to produce a discovery. There are overheads, royalties, and massive capital investment in the oil industry, whether you find a productive zone or drill nothing but dry holes. Even among the best oil companies the return on investment is small, nothing like triple digit growth of Google or Facebook.

 

When the price of oil crashed to $20 in the 1980s, there was a wave of layoffs and consolidation. Exxon merged with Mobil, Chevron absorbed near-bankrupt Texaco, and BP acquired Amoco and Arco which were fabulously successful explorers until the bottom fell out.

 

Here are the rules that all oil companies operate under. They haven't changed since 1948. Profits are taxable. If they're drilling on Federal land or in deepwater GOM, they bid for licenses and pay royalties for every barrel produced. If it's state land, they pay state royalties. On private land they bid leases per acre and pay production royalties to the land owner. Very few acres are owned by oil companies in fee simple, like the property used for a headquarters building in Houston or a refinery in Los Angeles, in which case it's subject to city and school district taxes, construction codes and elaborate safety and emission regulations. The oil industry is one of the most heavily regulated commercial activities, every well, every rig hand, every mile of pipeline, every refinery, every tank truck and retailer.

 

No oil company operating in the United States is "subsidized." Consider the U.S. oil and gas industry accounting rules explained by James Vitalone, CFA, at Investopedia. It's complicated and tedious to grasp, but what it amounts to is transparency under SEC and FASB rules. Publicly traded oil companies file quarterly reports under SEC rules. Forget about valuation. Look at the profit and loss rules:

 

"Companies involved in the exploration and development of crude oil and natural gas have the option of choosing between two accounting approaches — the 'successful efforts' method and the 'full cost' method. The accounting method that a company chooses affects how its net income and cash flow numbers are reported. The successful efforts (SE) method allows a company to capitalize only those expenses associated with successfully locating new oil and natural gas reserves. For unsuccessful ('dry hole') results, the associated operating costs are immediately charged against revenues for that period. The alternative approach, known as the full cost (FC) method, allows all operating costs relating to locating new oil and gas reserves — regardless of the outcome — to be capitalized. Exploration costs capitalized under either method are recorded on the balance sheet as part of long-term assets. This is because like the lathes, presses, and other machinery used by a manufacturing concern, oil and natural gas reserves are considered productive assets for an oil and gas company. FASB 'Generally Accepted Accounting Principles' (GAAP) require that the costs to acquire those assets be charged against revenues as the assets are used.

 

"The SEC allows companies to use the Full Cost method. In general, SE and FC methods differ in their approach to treating costs associated with unsuccessful discovery of new oil or natural gas reserves. Regardless of the method it chooses to follow, an oil and gas company engaged in the exploration, development and production of new oil or natural gas reserves will incur costs that are identified as belonging to one of four categories — acquisition costs, exploration costs, development costs, and production costs.

 

"Much in the same way the financial results of a manufacturing company are impacted by depreciation expense for plant, property, and equipment, those for an oil and gas company are affected by periodic charges for depreciation, depletion and amortization (DD&A) of costs relating to expenditures for the acquisition, exploration and development of new reserves. They include the depreciation of certain long-lived operating equipment, depletion of costs relating to the acquisition of property or property mineral rights, and the amortization of tangible non-drilling costs incurred with developing the reserves."

 

Got it? No different than a manufacturing company. If they make profits, they pay taxes. Look at the results for BP in 2008. Tax Rate 38.6%, Net Margin 5.7%, Return on Assets 9.1%. Two years later, BP suffered the disaster of Deepwater Horizon, a multibillion dollar semisubmersible platform operated by BP that exploded, sank, and almost bankrupted the company when they lost control of an exploration well in deepwater Gulf of Mexico. The oil industry is extremely risky and riddled with danger.

 

If Bernie Sanders had argued that oil and gas are too dangerous to mess with, he'd still be wrong. There are seven million people employed in exploration and production by U.S. oil companies and "service companies" that provide contract workers and specialized services like underwater Remotely Operated Vehicles and wireline logs. Pipelines are built and operated by separate, equally complex businesses that are funded in billions of dollars, depreciated over multiple decades. There are tens of thousands of miles of pipelines in America, transporting crude oil, natural gas, and refined products. Consumers take it all for granted at gas stations and grumble about prices 30% inflated by Federal and state fuel taxes.

 

Oil companies pay billions in corporate taxes and squeak by on single digit margins, employing millions of people. The zero emission New Green Deal pushed by Sanders is a fatal folly. Without refined oil and natural gas, the United States would grind to a halt and starve to death. From farm to market and every other economic activity, our national fleet of cheap reliable transportation runs on oil — even the pricey lithium firetraps made by Tesla with tens of billions of Federal and California subsidies, because anything with wheels needs lubricants and energy, including the installation and maintenance of windmills and solar panels. If you think that utility crew vehicles to maintain the power grid 24/7 and big rigs climbing mountain passes are going to run on batteries, you're indulging a cartoon fantasy, like Sanders or Biden snarling about subsidies that U.S. oil companies never had. They are competitive enterprises that strive to stay in business, take huge financial risks, and pay heavy Federal and state taxes and royalties.

 

One final remark about fracking. Each horizontal lateral uses up to a million gallons of fresh water to force sand and chemicals into fractures with a high pressure pump after the casing is perforated with explosive bullets. The water is pumped out (contaminated with toxic and radioactive minerals that leached from the fractured shale) and gets injected a couple hundred feet under a potable aquifer 100 miles away. Frackers need big rig drivers to haul tens of millions of gallons of water to and from the drilling pads. Many of them work 12 hours a day, use meth, and carouse in dreary boom towns.

 

UPDATE 3/25 — Biden promised Western Europe he would deliver 150 bcf of LNG next winter (equal to 27 days of U.S. natural gas production.) Neither U.S. nor Europe has adequate port facilities to liquefy, regassify, or store that much. I don't know where Joe thinks new production and a fleet of LNG shipping will come from. Won't happen unless they press gang BP, Anadarko, Exxon, Mark West, Aker, GE, and Clough. Expect political wrangling, union negotiations, a sharp price hike at home, and inflationary deficit spending. They might have to commandeer a shipyard in Thailand to build LNG tankers and a steel mill in Germany to produce pipe and tanks. Maybe Eni has some in inventory. Probably take years to accomplish.

 

Gives creative destruction a whole new meaning.

 

Hey, Hannity! Pour me a Bacardi and Coke, no fruit. It's like talking to a tree stump who thinks there's something called an "energy sector" — confabulating major international oil companies that explore worldwide, chalk frackers in Greeley, declining Saudi reserves, rural LPG, open pit mining in Wyoming, rail locomotives, Korean shipyards, sulfur waste that totally despoiled Ft. McMurray, corn farmers in Nebraska, terabyte datasets, Chicago Bridge & Iron, power utilities, one-time-use plastics in hospitals, F-18 Super Hornets, soccer moms, and 80,000 independently owned U.S. fuel retailers.

 

Which is worse? Icy winter in Copenhagen 2009, laughing at shivering IPCC protestors, or icy winter in Glasgow with 400 private jets clogging up two airports, demanding that we ban all oil and gas?