The threat to high oil prices are cars that run on compressed natural gas (CNG), and not Hannah Montana 4 ever. ;-). <priceless> Increased oil production in the Bakken or Western Canada tends to drive down the wellhead sales price in those hubs and has little effect on the price of Brent or Dubai oil. Western Canada and Bakken oil prices have dropped to $68 / bbl with Brent over $100 /bbl. The same decline may be occurring in condensate (liquid gas) pricing, which has allowed gas producers to make a profit, even if they sell the associated dry gas at a loss. US shale oil has to be profitable for US shale oil production to increase by 600%.
2012 year end, reserve write down in US shale gas are going to be brutal. When $5 / mmcf hedges expire, the new $2.81 / mmcf hedges will be brutal to natural gas producer balance sheets. At some point, when long term trends develop in switching more energy over to natural gas, I'm all in as an investor. The profit margins currently favor oil production even in places like the Bakken and Western Canada where a barrel of oil has a wellhead sales price of under $70 / bbl compared to a barrel of Brent, Louisiana, or Dubai oil selling for $100 / barrel. Even the wellhead sales prices for liquid gas have been dropping. Western Canadian companies were producing the liquid gas profitably and could afford to give away the dry gas, or sell it at a loss.
The reserve value write downs in natural gas producers are going to be brutal in the 2012 reserves reports. The expiration of $4 -$6 mcf hedges will also expire and new hedges in the $2.80 mcf are at or below break even for most natural gas producers. There may be some play in natural gas prices if you bet gas prices will increase before current hedges expire. My guess is that the market hasn't fully discounted the natural gas reserve write down that are coming in 2012. After the write down in asset value from declining prices occurs in Q1 2013, then as share prices plunge, that might be the time to begin investing in the future of natural gas.
Golar LNG (GLNG) is worth a look. GLNG looks rich to me, but until the natural gas reserve write downs in 2012 occur or some game changing natural gas technology occurs, GLNG (LNG) is the only aspect of the natural gas industry in North America that looks appealing to me.
my notes on Hannah Montana....
The world population is 7 billion and the US population is 313 million. The other 6.7 billion people will use more oil even if the US begins to use less or produce more. The US produced 5.5 mmbopd in 1950 and about 10 mmbopd in 1970. Today's 8.5 mmbopd is in the middle. The US consumes 19 mmbopd.
The US needs to double oil production from its all time production peak in 1970 to become self-sufficent for oil.
The slight increase in Bakken oil production from say 500k bopd to 1 mmbopd, has caused the wellhead sales price in the Bakken to decrease to $68 / bbl with Brent/Dubai/ Louisiana trading close to $100 / bbl. $68 / bbl is fairly close to the all-in break even costs on Western Canada / Bakken oil production.
The US has 4.4% of the world population and consumers about 22% of the world oil. Per peron, the US consumers 10 times more oil than China, and 23 times more oil than India. The US standard of living is neutral to increasing slightly, with US GDP growth equal to US population growth. China GDP is growing at 8% and the rest of Asia about 6% growth in GDP. Any increase in the Asian or Middle East standard of living or population will require more cars in the future. The other 6.7 billion people, outside the US, will be the ones adding new cars and new drivers.
United States Daily Oil Consumption – 19 million barrels
United States Population – 313 million
United States Barrels per Person Per Day - .06
China Daily Oil Consumption – 8.3 million barrels
China Population – 1.33 billion
China Barrels per Person Per Day - .006
India Daily Oil Consumption – 3.1 million barrels
India Population – 1.18 billion
India Barrels per Person Per Day - .0026
I was talking to a gentleman at a party who had turned $1 MM in 1980 ish into $200 MM today investing in oil stocks. Hes worried about his $200 MM because some prominent newsletter wrote US shale oil is the next US shale gas. US shale oil production is posed to increase by 600 %. I said, not anytime soon will US shale oil increase by 600%. He posed the same question some analyst are predicting that in the next 50 years US type shale oil production will increase from 1 mmbop to 6 mmbopd, (=600%) and that bring the US fairly close to oil self sufficiency, assuming if US oil demand declines or remains in the 20 mmbopd range over the next 50 years.
The margin oil costs to produce oil are rising. The all-in break even costs on the deep water projects like the 1 billion Jubilee oil field in Angola are $68 / bbl, similar to the Bakken $68 /bbl break even.
The Saudi Arabia is the only country that can flood the market with oil and upset supply and demand. History says the Saudi's support reasonable oil prices. Ghawar is estimated to produce over 5 million barrels of oil a day 6% of global production. Ghawar began production in 1950, and what happens to the world oil supply if oil production at Ghawar begins to decline, like Cantrell the giant oil field in Mexico where oil production declined from 3 mmbopd to 650k bopd a 68% decline, in the past three years. Ghawar and Cantrell are the two largest oil fields in the world that have been producing since the 1950's which is very old for an oil field. Bakken production from oil wells declines 65% in the first 12 months.
In 1950 Ghawar was developed when oil prices were $1.50 / barrel and Cantrell developed when oil was $3 - $4 / bbl. I'd guess today's ultra deep, giant oil fields that Petrobras discovered in the Santos and Campos basin of Brazil will require $115 - $125 / barrel to break even. Early development costs are significantly over-budget on these Santos and Campos oil fields. Petrobras after discovering many billions of barrels of oil off-shore Brazil, is trading under $20, which is where the stock traded in 2006. The market doesn't believe, these ultra deep billion barrel oil fields, Brazil will be profitable anytime soon, even with $100 //bbl Brent/Dubia. |
