California’s Monterey Shale has much less oil than previously thought.
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30/05/2014
 

Shale Ups and Downs

 
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Greetings from London.

As the US Energy Information Administration (EIA) notes this week that US net natural gas imports fell 14% last year on record production, a report from Bloomberg suggests that the US shale industry is suffering from enormous debt, while revenues continue to disappoint.

On Wednesday, the EIA said total imports in 2013 fell to 1,311 billion cubic feet, the lowest level since 1989, with dry natural gas production rising 1% to 24,282 billion cubic feet. At the same time, however, the debt among shale oil and gas companies has nearly doubled over the last four years, according to Bloomberg.

Revenues have expanded at a miniscule 5.6% during that time period, dangerously outpaced by debt. “Debt hit $163.6 billion in the first quarter, according to company records compiled by Bloomberg on 61
exploration and production companies that target oil and natural gas trapped in deep underground layers of rock. And companies including Forest Oil Corp. (FST),Goodrich Petroleum Corp. (GDP) and Quicksilver Resources Inc. (KWK) racked up interest expense of more than 20 percent.”

Bloomberg’s take on this is that the shale industry is ripe for a shakeout, and as a result,
massive investment into liquefied natural gas (LNG) terminals might look a bit out of place.

In the meantime, evidence is mounting that the US shale industry is becoming an increasingly polarized one, from state to state. As Oilprice.com’s
Daniel Graeber reports this week, two bills working their way through state legislatures show a divided house that skews the EIA’s perception of future natural gas production.  The stories unfolding in Illinois and California, for instance, are wildly different.

While Illinois is trying to skirt new legislative drafts to avoid delays that are bad for business, California is considering applying the brakes to the state’s impressive shale progress.

At the same time, the proposed Keystone XL pipeline is coming under greater scrutiny after reports of significant
construction defects in the southern leg of the pipeline. The defects include bad welds, dented pipe and damaged pipeline coating. This news has led to some more rigorous journalistic endeavor to drudge up some additional safety requirements for the pipeline’s construction at the bottom of the January environmental impact statement.

One of the new requirements is for pipeline operator TransCanada to hire a third-party contractor chosen by the US federal Pipeline and Hazardous Materials Safety Administration to monitor and report on construction. Another is a requirement for TransCanada to adopt a quality management program.

So the bigger picture for shale may be an impressive one, but it serves one well to remember that bigger pictures are the compilation of many smaller pictures that don’t necessarily tell the same story.

This weeks report (below) is from our Intel Notes in Premium and gives an overview of what’s happening and is likely to happen in the energy world over the coming weeks. For those of you currently employed in the energy sector or actively investing you must read this report. (Our premium subscribers find this report essential for keeping up with and ahead of the happenings in the energy sector. Get this report and others for free for the next 4 weeks with a 30 day free trial to premium –
Click here.)

Premium Subscribers are enjoying a great letter this week as Dan Dicker investigates why domestic E&P plays are looking like a good place for investors to be. Martin Tillier looks at an energy services company that could be about to shoot up in price. We also have detailed reports on the companies to avoid following news this week on the Monterey formation.

Start a 30 day free trial to Oilprice Premium and receive all these reports for free and for the next 4 weeks –
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That’s it from us this week. I hope you have a great weekend and enjoy the report below.

Kind regards,

James Stafford
Editor, Oilprice.com

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Global Energy Advisory – 30th May 2014

Discovery/Development

•    The US federal government’s Energy Information Administration estimates that the amount of oil potentially recoverable from California’s Monterey Shale using existing fracking technology is much less than previously thought. The EIA estimates that around 600 million barrels of oil can be extracted from the formation, down from the earlier estimate of 13.7 billion barrels of recoverable oil.

•    Italy’s Eni has confirmed gas discoveries in the Area 4 block in northern Mozambique’s Rovuma Basin. Eni started drilling the Agulha-2 test welI in February this year, estimating reserves at 85 trillion cubic feet. Eni has a 50% interest in Area 4, along with China National Petroleum Corp. (20%), Portugal’s Galp Energia (10%), Mozambique state-run Empresa Nacional de Hidrocarbonetos (10%) and Korea Gas (10%). Norway’s Statoil and US-based Anadarko are also operating in Rovuma, where some 180 trillion cubic feet of gas in total has been discovered so far.

•    Brazil’s state-run Petrobras has confirmed an ultra-deepwater presalt discovery made a year ago in the Santos basin, testing carbonate reservoirs with good permeability. The confirmation is for the discovery in Block BM-S-50 (Sagitario) offshore Brazil, some 194 kilometers from Sao Paulo, in 1,871 meters of water. Petrobras said it had reached a total depth of 7,110 meters. Petrobras holds a 60% interest in the well, along with BG E&P Brasil and Repsol Sinopec Brasil, each holding 20%.

•    Italian Eni and Korean Kogas are preparing to begin exploration in three blocks offshore Cyprus, with exploration expected to last for up to 18 months. Cyprus has proven reserves of up to 6 trillion cubic feet of natural gas, and expects to find up to 5 trillion cubic feet in addition to this. The implications of successful exploration in Cyprus would mean the construction of an LNG terminal for exports to Western European markets. French Total is also expected to begin exploration in the second half of 2015.

Regulatory Alerts

The government of Tanzania has allowed the formation of the Tanzania Oil and Gas Corporation PLC as a platform for Tanzanians to own natural gas and oil resources by allowing them to enter into joint ventures with foreign firms looking to tap into gas discoveries that have so far reached 45 trillion cubic feet. The initiative was the work of intensive lobbying by media mogul Reginald Mengi, who heads the Tanzania Private Sector Foundation (TPSF). According to Mengi, Tanzanians may now own up to five shares in joint venture companies. The move comes as Tanzanian businessman Moto Mabanga has filed a petition with the High Court over his interest in three gas blocks offshore Tanzania Mabanga claims he was forced out of his interests by Ophir Energy PLC, Ophir Services PT Limited and British Gas Tanzania. He is claiming $7.5 million for compensation for his interests in blocks one, three and four.

The US State of Minnesota has imposed a safety fee on railroads, signing into law last week a measure that will have railroad and oil pipeline companies foot part of the bill for safety training and emergency preparedness programs. Under the new measure, the state can collect up to $2.5 million annually from railroad and oil pipeline companies until 1 July 2017. The funds will be used to prepare for potential derailments, spills and other industry-related incidents.

Auction Updates

•    Nova Scotia’s offshore regulator is putting four deepwater parcels up for auction, with bidding closing on 30 October. The parcels are on the eastern Scotian Slope, some 300 kilometers southwest of Cape Breton, with water depths up to 4.1 kilometers. The parcels have both oil and gas potential.

•    Egypt has extended its deadline for new exploration bids from May to July. Nearly two dozen licenses will be put up for auction. The extension is likely due to the country’s tense elections, for which voting took place last weekend, coupled with growing investor reluctance due to instability and insecurity.

•    On 27 May, the US federal government auctioned off more than 100,000 acres of land across southern Utah. The Bureau of Land Management received $2.8 million for the oil and gas leases, but only earned minimum bids. The auction included 93 parcels in southeastern and central Utah, mostly in San Juan, Sanpete and Sevier counties.

•    Tanzania’s latest, fourth round of bidding has netted five bids for only four of the eight oil and gas blocks up for auction, including seven deep-sea offshore blocks and one block in Lake Tanganyika. Among the five bidders were China’s CNOOC, Russian Gazprom, Statoil and ExxonMobil. The license round closed on 15 May and it remains unclear when the winning bids will be announced. The winning bidders will have to abide by new production-sharing agreement (PSA) terms that offer tougher conditions for development in Tanzania.  

Deals, Mergers & Acquisitions

•    Lithuania said earlier this week it was nearing the finish line in its first deal to purchase LNG from Norway’s Statoil to reduce pipeline imports from Gazprom. According to the Lithuania government, the commercial terms of the deal have been agreed, and the technical details are now being negotiated, with an eye to closing the deal next month and receiving first deliveries in January 2015. Earlier this month, Lithuania said it had successfully negotiated down the price of gas with Gazprom, ostensibly due to the country’s more aggressive pursuance of LNG from Norway.

•    Despite the looming potential of more sanctions on Russia, a subsidiary of London-listed Glencore commodity trading and mining has agreed to a new pre-payment deal with Russian oil and gas company Ruspetro, which operates in Siberia. The pre-payment is for nearly $22 million for 1,680 barrels a day of crude oil for one year.

•    In a $2.1 billion deal, a unit of Koch Industries Inc is preparing to acquire PetroLogistics LP. The deal includes the company’s debt and Koch’s takeover of a plant that converts US shale gas into the petrochemical propylene, which is used in the manufacture of plastics.

•    In a reverse privatization deal, Lithuanian state-owned firms have offered to acquire the minority stakes in the country’s gas utilities held by Russian Gazprom, among others.

Litigation & Compliance

According to our partners at
Southern Pulse, a group of lawyers have filed a class-action suit against Canadian mining firm Barrick Gold in the Ontario Superior Court of Justice. The lawsuit alleges that the company distorted the facts surrounding the Pascuna Lama open-pit mining project on the Chile-Argentina border by failing to disclose to investors the real environmental and economic challenges of the project. The suit claims that Barrick Gold gave investors inexact and fraudulent information about Chilean environment requirements for the development of the project, and invites anyone that invested between 7 May 2009 and 1 November 2013 to join the suit.

In a 25 May 2014 statement, the Maersk Group denied allegations of involvement in an embezzlement scheme with Brazil’s state-run Petrobras. Federal Police seized USB flash drives from the house of former Petrobras director Paulo Roberto Costa which indicate that he received $2.79 million in commissions for contracts between Maersk and Petrobras. Maersk claimed that a 1.25% commission is the standard rate for brokers assisting in external marketing and services.

Incident Alerts

Libya

Last weekend, Libya interim parliament approved a new government led by Prime Minister Ahmed Mitig (Maiteeq) in defiance of threats by renegade former General Khalifa Haftar, whose loyalists stormed parliament earlier last week and forcibly dissolved the Islamist-dominated parliament. Rebels occupying Libya’s oil ports refuse to recognize Mitig and are threatening to renege on a previously agreed deal to re-open the ports for exports. General Haftar appears to have won a fair amount of local support for his purported “coup” against Islamist lawmakers and “extremist forces”.  Over the weekend, there were a number of rallies across the country in support of Haftar, who has threatened to raid the parliament (again) and arrest its members if they confirm a new prime minister. On Tuesday, unidentified gunmen fired grenades as Mitig’s home in Tripoli, underscoring the political and security crisis unfolding on a level that could equal the violence of 2011. On Wednesday, 28 May, reports began surfacing of airstrikes over Benghazi, ordered by General Haftar, who had the previous week managed to win over the country’s air force commander. As the power struggle reaches a climax, the US State Department has recommended that all Americans leave the country immediately.

Egypt

We are still waiting for results from Egypt’s elections, for which voting has been extended another day due to extremely low voter turnout, though the leadership is blaming the situation on weather.

Ukraine

The situation in Ukraine remains extremely fluid. While the Ukrainian military has re-taken control of the eastern Donetsk airport from separatists, killing some 50 people in the process, and presidential elections lend some promise of future stability, from an energy standpoint what we are most concerned about is the appointment of the next energy minister, who must absolutely be a figure who has experience dealing with Russia and who understands the energy equation.
OP Tactical has a unique network on the ground in Ukraine for investors interested in reducing risk and planning for the future.
 
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