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?
