oilvoice magazine | september 2013

7/30/2019 OilVoice Magazine | September 2013

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Big oil struggles in Q2 2013

Of boiling frogs and oil prices

Can Saudi Arabia pump enough oil?

Edition Eighteen September 2013


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1 OilVoice Magazine | SEPTEMBER 2013

Issue 18 September 2013

OilVoiceAcorn House381 Midsummer BlvdMilton KeynesMK9 3HP

Tel: +44 208 123 2237Email:[email protected]: oilvoicetalk

EditorJames AllenEmail:[email protected]

Director of SalesTerry O'DonnellEmail:[email protected]

Chief Executive OfficerAdam Marmaras

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Adam Marmaras

Chief Executive Officer

Welcome to the 18th edition of theOilVoice Magazine.

This month we feature anexclusiveinterviewwith Hon. Simon Bridges -New Zealand Minister of Energy andResources. He discloses hisGovernments plans on making NewZealand a new 'hot spot' for oil and

gas.

Our usual roster of regular authorsalso contribute to the magazine thismonth. Articles to look out for are Bigoil struggles in Q2 2013, Of boilingfrogs and oil prices and Can SaudiArabia pump enough oil?.

You may have noticed the 'jobs board'on OilVoice becoming more prominent

over the past 12 months. We'reinvesting heavily in the behind thescenes technology that will deliver firstclass services toRecruitersandJobHunters. Be sure to take a look.

Thanks for reading

Adam Marmaras

CEO

OilVoice
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Contents

Featured Authors

Biographies of this months featured authors 3Stumbling blocks to figuring out the real oil limits storyby Gail Tverberg 5

Big oil struggles in Q2 2013by Mark Young & Hannah Mumby 10

Recent Company ProfilesThe most recent companies added to the OilVoice directory 15

Soc Gen forecasts "Syrian World War" oil price spike

by Andrew McKillop 16

Interview with Hon. Simon Bridges - New Zealand Minister of Energyand Resourcesby Simon Bridges

20

Insight: UK shale gas and oil - who is watching?by David Bamford 23

Of boiling frogs and oil pricesby Kurt Cobb 25

Can oil play super-commodity like 2008?

by Andrew McKillop 28Can Saudi Arabia pump enough oil?by Andrew McKillop 31

Canada's LNG export facilities: Hurdles and challengesby Keith Schaefer 35

Oil limits reduce GDP growth; Unwinding QE a problemby Gail Tverberg 38


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Featured Authors

Andrew McKillop

AMK CONSULT

Andrew MacKillop is an energy and natural resource sector professional withover 30 years experience in more than 12 countries.

Gail Tverberg

Our Finite World

Gail the Actuarys real name is Gail Tverberg. She has an M. S. from theUniversity of Illinois, Chicago in Mathematics, and is a Fellow of the Casualty

Actuarial Society and a Member of the American Academy of Actuaries.

Kurt Cobb

Resource Insights

Kurt Cobb is an author, speaker, and columnist focusing on energy and theenvironment. He is a regular contributor to the Energy Voices section of The

Christian Science Monitor and author of the peak-oil-themed novel Prelude. Inaddition, he writes columns for the Paris-based science news site Scitizen,and his work has been featured on Energy Bulletin, The Oil Drum,OilPrice.com, Econ Matters, Peak Oil Review, 321energy, Common Dreams,Le Monde Diplomatique, and many other sites.

David Bamford

Finding Petroleum

David Bamford is 63. He is a non-executive director at Tullow Oil plc and hasvarious roles with Parkmead Group plc, PARAS Ltd and New EyesExploration Ltd, and runs his own consultancy.

Keith Schaefer

Oil & Gas Investments Bulletin

Keith Schaefer, editor and publisher of the Oil & Gas Investments Bulletin.
http://www.oilvoice.com/description/AMK_CONSULT/82b50237.aspxhttp://www.oilvoice.com/description/AMK_CONSULT/82b50237.aspxhttp://ourfiniteworld.com/http://ourfiniteworld.com/http://c/Users/content/Documents/Magazine/January%202013/resourceinsights.blogspot.co.ukhttp://c/Users/content/Documents/Magazine/January%202013/resourceinsights.blogspot.co.ukhttp://www.findingpetroleum.com/http://www.findingpetroleum.com/http://oilandgas-investments.com/http://oilandgas-investments.com/http://oilandgas-investments.com/http://www.findingpetroleum.com/http://c/Users/content/Documents/Magazine/January%202013/resourceinsights.blogspot.co.ukhttp://ourfiniteworld.com/http://www.oilvoice.com/description/AMK_CONSULT/82b50237.aspx


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Mark Young

Evaluate Energy

Evaluate Energy is a leading provider of efficient data solutions for oil & gascompany analysis. Services include annual and quarterly financial data, M&A,worldwide E&P assets, Refinery and LNG databases and an emergingUS/Canadian Shale Gas & Liquids offering.

Simon Bridges

Simon Bridges Website

In the current National-led Government, Simon is Minister of Energy andResources, Minister of Labour, and Associate Minister for Climate Change

Issues.
http://www.evaluateenergy.com/http://www.evaluateenergy.com/http://www.simonbridges.co.nz/http://www.simonbridges.co.nz/http://www.lunarsafari.co.uk/http://www.simonbridges.co.nz/http://www.evaluateenergy.com/


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Stumbling blocks tofiguring out the real oillimits story

Written by Gail Tverberg fromOur Finite World

The story of oil limits is one that crosses many disciplines. It is not an easy one tounderstand. Most of those who are writing about peak oil come from hard sciencessuch as geology, chemistry, and engineering. The following are several stumbling

blocks to figuring out the full story that I have encountered. Needless to say, not allof those writing about peak oil have been tripped up by these issues, but it makes itdifficult to understand the real story.

The stumbling blocks I see are the following:

1. The quantity of oil supply available is primarily a financial issue.

The issue that peak oil people are criticized for missing is the fact that if oil prices arehigh, it can enable higher-cost sources of productionat least until these higher-costsources of production prove to be too expensive for potential consumers to buy.

Thus, high price can extend oil production for longer than would seem possible,based on historical patterns. As a result, forecasts based on past patterns are likelyto be inaccurate.

There is a flip side of this as well that economist have missed. If oil prices are low(for example, $20 barrel), the economy is likely to be very different from what it iswhen oil prices are high (near $100 barrel, as they are now).

When oil prices are low, it is likely that oil production can be expanded rapidly, ifdesired, because it takes little effort to extract an additional barrel of oil. In such anatmosphere, it is easy to add jobs, because new technology, such as cars and airconditioners made and transported using such oil, is affordable. Growth in debtmakes considerable sense as well, because additional debt enables more oil use. Itis likely that this debt can be repaid, even with fairly high interest rates, given thefavorable jobs situation and growing economy.

With high oil prices, there is a constant uphill battle against high oil prices that rubsoff onto other areas of the economy. Businesses tend not to be too much affected,because they can fix their problem with high oil prices by (a) raising the prices of thefinished goods they sell (thereby reducing demand for their goods, leading to acutback in production and thus jobs) or (b) saving on costs by outsourcing production

to a lower-cost country (also cutting US jobs), or (c) increased automation (alsocutting US jobs).
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The ones that tend to be most affected by high oil prices are wage-earners, who findthat their chances of obtaining high-paying jobs are lower, and governments, whofind it increasingly difficult to collect enough taxes from wage-earners to pay for all ofthe promised benefits.

2. The higher cost of oil extraction in the future doesnt necessarily mean thatthe price consumers can afford to pay will rise.

In peak oil groups, I often hear the statement, When oil prices rise, . . . as if risingoil prices are a given. Businesses may be afford to pay more, but individuals andgovernments are finding themselves in increasingly poor financial condition.Quantitative easingisnt getting money back to individuals and governmentsinstead, it is inflating the price of assetsa temporary benefit until asset price bubblesbreak, asthey have in the past, or interest rates rise.

The limit on oil supply is what I would call an affordability limit. Young people who

dont have jobs cant afford to buy cars. If young people graduate from college with ahuge amount of educational loans, they cant afford to buy houses either. Within theUS, Europe, and Japan, we seem to have already hit the affordability limit on theamount of oil we are consuming. Economic growth is low, as oil consumptiondeclines.

The risk, as I see it, is that the price consumers can afford to pay will drop below thecost of extraction. It is this drop in oil price that will cause supply to fall. If the drop inprice is very great, we could see a very rapid decline in oil production, especially incountries with a high cost of production, such as the US and Canada. Some oilexporters may find themselves in difficulty, because they are no longer able to collect

the tax revenue they were depending upon. This could lead to uprisings in the MiddleEast and possibly lower oil production in affected countries.

I should point out that it is not just the peak oil community that seems to think risingoil prices can continue indefinitely. Economists and those forecasting climate changeseem to share this view. If oil and other fossil fuel prices can rise indefinitely, then avery large share of fossil fuels in the ground can be extracted.

3. There is widespread confusion about what M. King Hubbert really said aboutthe shape of the decline curve.

M. King Hubbert is known for showing images of world oil supply which seem to

Figure 1. Oil consumptionbased on BPs 2013 StatisticalReview of World Energy.
http://en.wikipedia.org/wiki/Quantitative_easinghttp://en.wikipedia.org/wiki/Quantitative_easinghttp://www.forbes.com/sites/jamesgruber/2013/06/22/sound-of-bubbles-bursting/http://www.forbes.com/sites/jamesgruber/2013/06/22/sound-of-bubbles-bursting/http://www.forbes.com/sites/jamesgruber/2013/06/22/sound-of-bubbles-bursting/http://www.forbes.com/sites/jamesgruber/2013/06/22/sound-of-bubbles-bursting/http://en.wikipedia.org/wiki/Tulip_maniahttp://en.wikipedia.org/wiki/Tulip_maniahttp://en.wikipedia.org/wiki/Tulip_maniahttp://en.wikipedia.org/wiki/Tulip_maniahttp://www.forbes.com/sites/jamesgruber/2013/06/22/sound-of-bubbles-bursting/http://www.forbes.com/sites/jamesgruber/2013/06/22/sound-of-bubbles-bursting/http://en.wikipedia.org/wiki/Quantitative_easing


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show that oil supply will rise and then fall in a symmetric pattern. In other words, if ittook 50 years for oil production to rise from level A to level B, it should also take 50years from oil production to fall from level B back to level A. This relatively slowdownslope gives comfort to many people concerned about peak oil because theybelieve that the slow downward path in oil production will be helpful in mitigation

strategies.

In fact, if we look at Hubberts papers, we discover that Hubbert only made hisforecast of a symmetric downslope in the context of another energy source fullyreplacing oil or fossil fuels, even before the start of the decline. For example, lookingat his 1956 paper,Nuclear Energy and the Fossil Fuels, we see nuclear taking overbefore the fossil fuel decline:

Hubberts1976paper talks about solar energy being the substitute, instead ofnuclear. In Hubberts 1962 paper,Energy Resources A Report to the Committee

on Natural Resources, Hubbert writes about the possibility of having so much cheapenergy that it would be possible to essentially reverse combustioncombine lots ofenergy, plus carbon dioxide and water, to produce new types of fuel plus water. If wecould do this, we could solve many of the worlds problemsfix our high CO2 levels,produce lots of fuel for our current vehicles, and even desalinate water, without fossilfuels.

Clearly the situation today is very different from what Hubbert was envisioning.Neither nuclear or solar energy is providing a sufficient substitute for our currenteconomy to continue as in the past, without fossil fuels. We have a huge number ofcars, tractors and trucks that would need to be converted to another energy source,

if we were to move away from oil.

If there is not a perfect substitute for oil or fossil fuels, the situation is vastly differentfrom what Hubbert pictured. If oil supply drops (perhaps in response to a drop in oilprices), the world economy must quickly adjust to a lower energy supply, disruptingsystems of every type. The drop-off in oil as well as other fossil fuels is likely to bemuch faster than the symmetric Hubbert curve would suggest. I wrote about thisissue in my post,Will the decline in world oil supply be fast or slow?

4. We do have an estimate of the shape of the downslope when there is not aperfect substitute the resource with limits.

There are many historical examples of societies that found a way to greatly increase

Figure 2. Figure fromHubberts 1956 paper,NuclearEnergy and the Fossil Fuels.
http://www.hubbertpeak.com/hubbert/1956/1956.pdfhttp://www.hubbertpeak.com/hubbert/1956/1956.pdfhttp://www.hubbertpeak.com/hubbert/1956/1956.pdfhttp://www.hubbertpeak.com/hubbert/wwf1976/http://www.hubbertpeak.com/hubbert/wwf1976/http://www.hubbertpeak.com/hubbert/wwf1976/http://www.hubbertpeak.com/hubbert/EnergyResources.pdfhttp://www.hubbertpeak.com/hubbert/EnergyResources.pdfhttp://www.hubbertpeak.com/hubbert/EnergyResources.pdfhttp://www.hubbertpeak.com/hubbert/EnergyResources.pdfhttp://www.hubbertpeak.com/hubbert/EnergyResources.pdfhttp://www.hubbertpeak.com/hubbert/EnergyResources.pdfhttp://ourfiniteworld.com/2011/04/11/steep-oil-decline-or-slow-oil-decline-expanded-thoughts/http://ourfiniteworld.com/2011/04/11/steep-oil-decline-or-slow-oil-decline-expanded-thoughts/http://ourfiniteworld.com/2011/04/11/steep-oil-decline-or-slow-oil-decline-expanded-thoughts/http://www.hubbertpeak.com/hubbert/1956/1956.pdfhttp://www.hubbertpeak.com/hubbert/1956/1956.pdfhttp://www.hubbertpeak.com/hubbert/1956/1956.pdfhttp://www.hubbertpeak.com/hubbert/1956/1956.pdfhttp://www.hubbertpeak.com/hubbert/1956/1956.pdfhttp://www.hubbertpeak.com/hubbert/1956/1956.pdfhttp://ourfiniteworld.com/2011/04/11/steep-oil-decline-or-slow-oil-decline-expanded-thoughts/http://www.hubbertpeak.com/hubbert/EnergyResources.pdfhttp://www.hubbertpeak.com/hubbert/EnergyResources.pdfhttp://www.hubbertpeak.com/hubbert/wwf1976/http://www.hubbertpeak.com/hubbert/1956/1956.pdf


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food supply (for example, by clearing land for new fields, or by learning to useirrigation). Peter Turchin and Sergey Nefedof researched the details underlying eightagrarian societies of this type, documenting their findings in the bookSecular Cycles.

These researchers found that at first population was able to increase, because of the

greater ability to grow food. Population typically increased for well over 100 years, aspopulation gradually expanded to match the new capacity for growing food.

At some point, the economies analyzed entered a period of stagflation, during whichwages of the common worker stagnated, because an early limit had been reached.Population had reached the level the new resources could comfortably support. Afterthat point, growth slowed. New babies were born, but additional area for crops wasnot being added. Adding more farmers didnt increase output by very much. Debtalso increased during the stagflation period. The chart below is my estimate of thegeneral pattern of population growth found by Turchin and Nefedov, in the yearsfollowing the addition of the new capability to grow food.

Eventually, a crisis period hit. One major issue was a continuing need to pay forgovernment programs had been added during the growth and stagflation periods.With the stagnating wages of workers, it became increasingly difficult to collectenough taxes to pay for all of these programs. Debt repayment also became aproblem. Food prices tended to spike and became quite variable. Governmentsbecame increasingly susceptible to collapse, either because of outside forces orinternal overthrow. Population was reduced through a combination of factorsmorewars and a weakened population becoming more susceptible to epidemics.

It seems to me that our current situation is somewhat analogous to what hasoccurred in these secular cycles. The world began using fossil fuels in significantquantity about 1800, and reached the stagflation phase in the early 1970s, when USoil production began to decline. We are now encountering the classic symptom ofresources not rising as fast as populationnamely, wages of the common workersstagnating. Fossil fuel prices tend to spike and be quite variable. Governmentfinancial problems we are seeing today sound very similar to what past civilizationsexperienced, when they hit resource limits.

We dont know that our current civilization will follow the same shape of downslopeas earlier civilizations that hit limits, because our economy is not an agrarian

economy. We are now dealing with a globalized civilization that depends oninternational trade. Jobs are much more specialized than the past. But unless there

Figure 3. Shape of typicalSecular Cycle, based onSecular Cycles by Peter Turkinand Sergey Nefedov. (Figureby Gail Tverberg)
http://www.amazon.com/Secular-Cycles-Peter-Turchin/dp/0691136963http://www.amazon.com/Secular-Cycles-Peter-Turchin/dp/0691136963http://www.amazon.com/Secular-Cycles-Peter-Turchin/dp/0691136963http://www.amazon.com/Secular-Cycles-Peter-Turchin/dp/0691136963


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is a miraculous growth in cheap energy supply that can fix our problems with youngworkers not finding good-paying jobs, there seems to be a good chance we areheaded in the same general direction.

5. HighEnergy Return on Energy Invested(EROI) is a necessary but not

sufficient condition for an energy source to be a suitable substitute for oil.

We are dealing with a complicated financial system, but EROI is a one-dimensionalmeasure. It can tell us what wont work, but it cant tell us what will work.

Any substitute for oil (for example, a transition to battery-operated cars) needs to beconsidered in the context of what the total cost will be of a transition to a newsystem, the timing of these costs, and who will pay these costs. It is important toconsider what impact these costs will have on those who already are at greatestrisknamely, individuals who are having difficulty earning adequate wages, andgovernments that are finding it increasingly difficult to pay benefits that have been

promised in the past. If individuals are being asked to pay higher costs, this willreduce discretionary income to be used for other purposes. If a government isalready stressed, adding energy related stresses may push it over the edge,making it impossible to collect enough taxes for all of the promised programs.

6. It is easy to be influenced by the fact that everyone likes a happy ending.

People coming from a peak oil perspective often accuse the main street media ofputting forth a happily ever after version of the oil story. But I think there is atemptation of the peak oil community to put together its own happily ever afterstory.

The main street media version says that the economy can continue to grow, and wecan continue to drive cars and go to our current jobs, despite a need to change todifferent kind of fuel supply.

The peak oil version of the story often seems to say, If we conserve, and learn to behappy with less, there wont be too much of a problem. Some seem to suggest thathoarding solar panels for our own use can be helpful. Others seem to believe thatsociety as a whole can be transformed by adding more solar and wind power to ourcurrent electrical system.

The difficulty with adding a new energy source in quantity is that we dont have anysuch energy source that can truly act as a cheap substitute for oil. If solar PV orwind, or some other new energy source were truly a good substitute for fossil fuels,such a fuel would be exceedingly cheap and could be used with todays vehicles.Governments could improve their financial condition by taxing this new energyresource heavily. It would be obvious to everyone that by adding much more of thismiraculous new fuel, we could add many more good-paying jobs, especially for ouryoung workers.

Unfortunately, I cannot see that we have found a good oil substitute. Instead,

quantitative easing is temporarily hiding financial problems of governments andindividuals by forcing interest rates to be very low. This makes cars and homes more
http://en.wikipedia.org/wiki/Energy_returned_on_energy_investedhttp://en.wikipedia.org/wiki/Energy_returned_on_energy_investedhttp://en.wikipedia.org/wiki/Energy_returned_on_energy_investedhttp://en.wikipedia.org/wiki/Energy_returned_on_energy_invested


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affordable, and keeps the amount of interest paid by the federal government verylow. We know that these artificially low interest rates are temporary, though. Oncethey go away, tax rates will need to rise, and asset prices (stock prices, bondprices, and home prices) will drop. Oil prices may very well decline below the cost ofproduction. We will again be at risk of heading down the Crisis slope shown in

Figure 3.

View more quality content fromOur Finite World

Big oil struggles in Q22013

Written by Mark Young & Hannah Mumby fromEvaluate Energy

Q2 2013 has proved to be a difficult quarter for the world's major oil & gascompanies. BP, Chevron (CVX), ExxonMobil (XOM), Royal Dutch Shell (RDS) andTotal (TOT) have all experienced a testing time, as despite some positives in certainareas, results have generally been disappointing across the board. Evaluate Energyhas examined the various reasons for this in both the upstream and downstreamsectors, following some in-depth analysis of the latest data.

Upstream

Oil production levels from this peer group as a whole have fallen remarkably thisquarter. The combined performance of these 5 companies is shown on the nextpage.
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BP's fall in quarterly production is the main reason the graph has fallen so sharply.This is the first quarter of results without production from TNK-BP, following its $55billion deal that saw Rosneft take over the entity, and consequently BP's production

fell by around 786,000 barrels per day (bbl/d) from Q1. Following the sale, BP hasinvested heavily into Rosneft, but may have to wait for large scale future projectsbetween the two to start producing (e.g. Arctic joint venture plans) before reapingsignificant rewards. Even if BP hadn't sold TNK to Rosneft, it is clear the generaltrend would have been continuing downwards anyway.

A quick look at the reported upstream earnings for each company shows how muchof an impact this fall in production and the widely reported drop in the companies'realised liquids prices have had.


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Again, the general trend is down, but on this reported, unadjusted* basis, BP andTotal seem to have performed better in their respective upstream segmentscompared to last year. However, when the various special items are removed in Q22013, this is not the case; Total's adjusted* upstream performance is in fact 9%worse. This decrease is caused by a fall in prices; Total's realised oil price is down

from $101.60 in Q2 2012 to $96.60 in Q2 2013, and its gas price fell from $7.10 to$6.62. The French giant actually reported a rise in total oil and gas production thisquarter compared with Q2 last year - the first time this has happened in three years -but these lower commodity prices have dragged earnings down. For BP, Q2 2012reported, non-adjusted figures are held back by a $1.5 billion impairment related toits US Shale assets and the suspension of the Liberty project in Alaska. If theseeffects are excluded, on an adjusted basis, BP's upstream performance alsodeclines, year on year.

For Royal Dutch Shell, the picture is theopposite way around. Shell has seen a

large drop in reported earnings, which ischiefly due to $2.2 billion impairments inits US Shale sector, where over 80% ofthe company's production is natural gas.If these impairments are removed, andwe consider performance on anadjusted basis, outgoing CEO PeterVossen seems to be leaving a steadyship for his 2014 replacement, Ben van Beurden, as on this adjusted basis, Shell hasactually improved on second quarter upstream performance a year ago.

Downstream

Chevron's and ExxonMobil's difficulties are not limited to setbacks experienced in theE&P segment. In the refining segment, Q2 2013 has also proved that being one ofthe super majors does not mean you are impervious to market pressures and thetoughening up of environmental legislation.

The European contingent have improved performance, all showing increasedadjusted earnings in Q2 2013, but Chevron and ExxonMobil have both come out of


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the quarter with a huge fall in downstream profits compared with Q2 2012.ExxonMobil's 70% fall in profits shown here does not take into account the $5.3billion gain achieved by restructuring its Japanese refining and marketing business inJune last year, which would clearly exacerbate the situation further. This trend canbe seen across the entire US refining industry. Stricter environmental regulations

and higher tariffs in the country have affected everybody's margins significantly.Using the Evaluate Energy database, we can expand the group to include the othermajor US refiners - HollyFrontier (HFC), Marathon Petroleum Corp (MPC), Phillips66 (PSX), Tesoro Corp (TSO) and Valero Energy (VLO) - who all show a decline inadjusted earnings from Q2 last year.

This report was created using the Evaluate Energy database. Evaluate Energyprovides efficient data solutions for oil and gas company benchmarking analysis. Ourclients have access to 20+ years of historic oil and gas financial and operatingdatabase, extensive M&A, Refinery and E&P assets databases and emerging shale

and unconventional offerings.

NOTES

*Adjusted Earnings Definition: Earnings of each business segment, excluding theeffects of all non-recurring, special items.

Please note that companies report their segmental earnings on many differentbases: 1) Some companies report segmental earnings pre-tax (on the grounds that itis very difficult to allocate tax between segments), while others report post-tax; 2)Some companies report pre-interest (on the grounds that it is difficult to allocate netinterest payments to each business segment) and others report post-interest; 3)Most companies report their segmental earnings before deducting SG&A because itis hard to allocate these general expenses to separate business segments. As aresult of these differences, it is sometimes not possible to make direct comparisonsbetween companies at the segmental level.

View more quality content fromEvaluate Energy
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Raise Production's OilVoice profile

Blacksteel EnergyOil & Gas

Blacksteel is a junior oil and gas companyinvolved in the exploration, exploitation,development and production of petroleum andnatural gas resources. The Corporation has a100% working interest in a four sectionpetroleum and natural gas lease in the DelBonita Area of Southern Alberta.

Blacksteel Energys OilVoice profile

Raven ResourcesOil & Gas

NordAq Energy Inc. (NordAq) is anindependent oil and gas company based in

Anchorage, Alaska. The company wasestablished by the present Board andmanagement team in 2008 to explore,appraise and develop hydrocarbon reserves inthe State of Alaska. Its portfolio includesprospects and resources in the KenaiPeninsula on the Cook Inlet and Smith Bay onthe North Slope.

Raven Resources OilVoice profile
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17/47


Soc Gen forecasts"Syrian World War" oilprice spike

Written by Andrew McKillop fromAMK CONSULT

FEEDING THE PRICE SPIKE

Despite the Middle East and North Africa (MENA) region being the world's most food

import dependent region - and needing to pay for food with oil exports - SocieteGenerale has been quick to beat the drum for a 'mega spike' of oil prices. Its by-lineis the coming 'Syrian World War'.

Michael Wittner at Soc Gen has produced a special 3-page note for high net worthclients, August 28, on the French bank's readout of what the 'limited punishmentstrike' against the al Assad regime might mean for the oil market. He believes therecould be relatively durable 'spillover' from a Western air and water-based attack, buthis report firstly said made it clear that Syria itself is not a real player in the oil market(see my article of July 14, 'Syria, Egypt And The Middle East Oil Price RiskPremium').

Wittner like others is constrained by reality to say the bank's concern, and the reasonwhy it is buying oil futures and is bullish on the spike, is of 'spillover'. That is bothpolitical and economic contagion or contamination as insidious as, if slower-actingthan chemical weapons. Syria's own very small and declining status as an oilproducer and exporter 'is not the issue'. Wittner however believes in particular themain MENA regional focus of spillover contamination, raising oil prices, will be Iraq,forgetting the already powerful and real spiral of decline in Libyan oil output andexports (see my article of August 24, 'Libya Moving From Arab Spring To ArabWinter ').

SocGen's Wittner, in only three pages produces an apocalyptic video game scenarioeasily comparable to the so-called 'Lehman Bros moment' of 2008 which, we cannote, sent the price of Nymex crude from $130 per barrel to $39 per barrel in shortorder. The oil price shock was downside in royal fashion, and not at all to Royaltastes in the petrodollar-rich Gulf States currently financing their own Sunnite proxywar in Syria - with military support from the US, French and British.

Wittner's scenarios of spillover from the 'Syrian World War' start with an initial stagesending Brent-grade oil to around $130, potentially followed by an upside scenarioreaching $150 per barrel, this upside case needing a certain time for spillover effects

to start affecting Iraq.
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WHAT GOES UP COMES DOWN

Totally unlike gold where long-term global financial and monetary instability, as wellas basic mining breakeven costs dictate a price of about $1500 per Troy ounce, oilfaces no such factors - or headwinds other than geopolitical insecurity, especially in

the MENA region. Longer-term average oil prices on an equilibrium basis are likelyno higher than around $80 per barrel.

Wittner's claim, and suspiciously precise forecast of Syrian war spillover effects inIraq lead to a decline of 0.5 to 2 Mbd in Iraq's oil production, 'as disruption rises', butthis forecast has to be set against the global macroeconomic impacts of massivegeopolitical instability - and rising oil prices - leading to a sharp decline in oildemand. When this happens, as in 2008, oil prices will tank.

Again unlike the oil price spike of 2007-2008, this time we are pricing-in the risk ofmilitary action by the US, France and UK, already and officially described as being

punitive and 'not intended to overthrow Bashr al Assad'. One risk, of course, may bea rogue cruise missile slamming into al Assad's bunker!

As we also know as of today (August 28) the talk from Washington, Paris andLondon is so tough that the option not to attack almost does not exist any longer.The coalition being assembled reportedly includes the US, the UK, France,Germany, Canada, Turkey, Israel, Saudi Arabia, Qatar, and Jordan. While Israel isglaringly present but never referred to, in 'government friendly' media, glaringlyabsent is Iraq.

Why this country would specifically be first and hardest hit by 'spillover' is a questionfor Michael Wittner.

To be sure the US, France and UK would be seen as very weak for not keeping theirword if they backed off, but Vladimir Putin and Xi Jinping may help them do this.Alternatively, the 'punishment raid' may be toned down but still appear awesome withphotoshop help on the grainy official newsreel footage after the 72-hour attack. Onlyif Iran can be drawn into play - as Wittner believes is possible - would we be facing areal Syrian World War.

Also needed for the oil spike forecast by Wittner, the military action against Syria

would have to move on from 'surgical' cruise missile strikes on military targets notdirectly related to chemical weapons complexes in Syria, to the establishment of ano-fly zone, as in Libya, designed to protect rebel forces and civilians. As we know -and Security Council members Russia and China know - Libya's no-fly zone was'liberally interpreted' by NATO to allow attacks on government ground forces, as wellas massive bombing of government-held towns and cities.

EXPORT OIL - IMPORT FOOD

The US and its Western allies - but certainly not the Gulf State backers andpaymasters of Syrian civil war - do not want to be involved in this broader civil war

where most firepower, manpower and effective military opposition to the Syriangovernment regime is among hard-line 'Islamist' bands and fighting groups. Analysts


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say this decision is due to lessons learned in Iraq, Afghanistan, Yemen, and Libya.

Presently, the question has no answer, but long before the answer time the oil pricespike and collapse will almost certainly have played out. Syrian oil production andexports have fallen by about 85 percent since 2010, making it certain that whatever

political arrangement follows the al Assad regime, if it falls, Syria will need to find away to pay for food imports - and Syria, as it happens, is one of the least foodimport-dependent nations in the MENA.

Conversely Iraq is heavily dependent on food imports, which have more thandoubled as a percentage of total food supply, by value, since 2003.

For Soc Gen's Wittner, what he calls the Sunni-Shia war in Syria has a direct parallelin Iraq, where a long-running proxy war opposes Shia Iran and the Sunni GulfStates, as well as internal domestic sectarian as well as organized crime syndicates'conflicts. Its northern oil export pipeline carrying Kirkuk grade oil to Ceyhan in Turkey

has been repeatedly attacked for the last 3 months, reducing this export route'scapacity from an average 0.35 Mbd to less than 0.2 Mbd.

The 'big one' for Iraq is Basrah grade oil exported through the southern Basrah portcomplex to the Persian Gulf, presently running at over 2 Mbd.

Wittner has to explain how - in the absence of Iran being drawn into the Syrian war,a likely hidden goal of Western, Israeli and Saudi policy - there will be a spread ofIraqi civil violence to the south. Wittner's argument is that also food import-dependent Iran may choose to stir up such attacks, in order to hurt the economies ofthe Western countries by causing an oil price spike. One question is why hasn't Iranalready done this, in the past?

Wittner's note for Soc Gen hedge fund investors suggests that Saudi spare capacity,of he says 1.7 Mbd, will not be able to cover the Syrian war spillover effects that heforecasts in Iraq, making way for Brent grade oil hitting $150 per barrel. Wittner doeshowever admit that the oil price surge will not last. He says 'several factors ormechanisms....would limit the duration of any price increase', among them global oildemand destruction which he says will become visible quickly, within a couple ofmonths.

At the spike-and-surge price level he forecasts, we can note, oil would be priced atconsiderably less (in real terms) than it was able to achieve in 2008.....with no chemweapons and only the toxic help of Goldman Sachs!

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20/47

Exploiting deep water fields....it's not as easy as explorers think!London, 19 Sep 2013

Exploring internationally for unconventional oil and gas.......finding the "sweet spots"

London, 02 Oct 2013

Applied Deepwater ExplorationOne day training courseLondon, 09 Oct 2013

Finding petroleum in the South Atlantic...if there's any left to find!London, 05 Nov 2013

New technologies for describing and monitoring reservoirsget to know your reservoir better!London, 26 Nov 2013


21/47


Interview with Hon.Simon Bridges - NewZealand Minister ofEnergy and Resources

Written by Simon Bridges fromOilVoice

OilVoice interviews Energy and Resources Minister Simon Bridges. In the currentNational-led Government, Simon is Minister of Energy and Resources, Minister ofLabour, and Associate Minister for Climate Change Issues.

OilVoice: Good morning, Minister. We'd like to thank you for taking the time toanswer some questions for us today.

Simon: No problem, it's great to be speaking with you.

OilVoice: Speaking at the Advantage NZ: 2013 Petroleum Conference you saidBlock Offer 2013 is putting New Zealand on the 'international stage'. How would you

compare New Zealand's offshore exploration with say the North Sea or the Gulf ofMexico?

Simon: To be fair, we're not in the same league as the North Sea or the Gulf ofMexico. Just 200 offshore wells have been drilled in New Zealand to date. But we'rea frontier country with a lot of unexplored potential - particularly in deep water, whichtechnological advances are opening up.

The New Zealand Government's new approach to offshore blocks is bringing us inline with key jurisdictions around the world. Instead of designating specific offshorepermit blocks, we have identified certain prospective areas and overlaid a mesh of

smaller blocks, each graticule approximately 250 square kilometres in size.Companies will be able to bid for one or more of these smaller blocks in a releasearea (and may bid for a combination of adjacent blocks) up to pre-determined limits.A mixture of exploration, appraisal, and frontier acreage is included within therelease areas to appeal to a diverse range of operators, and promote a stable pathto oil and gas production.

OilVoice: You also mentioned that you want to make sure that the development ofNew Zealand's oil and gas resources is done 'efficiently, safely and in anenvironmentally responsible way', what steps have been taken to ensure this?

Simon: We are very conscious of New Zealand's reputation internationally, and theneed to protect our environment. Yes, we want to pursue economic opportunities, to
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lift growth and create jobs, but not any cost.

Oil, gas and minerals are an important contributor to the New Zealand economy andwe know there is potential for this to grow. The recent changes to the CrownMinerals Act regime strengthen regulatory agencies' coordination on health, safety

and environmental matters, and ensure regulatory efforts are proactive, co-ordinatedand focus on operations that have the highest technical and geological complexity.

The revised regime introduces a two-tiered permitting regime to provide a moreeffective and efficient process for companies. Both tiers are subject to the samehealth and safety and environmental regulations.

And the regime complements other government initiatives to improve environmentalprotection - a new law to enable the comprehensive environmental management ofactivities in New Zealand's Exclusive Economic Zone (EEZ) for the first time, and thecreation in 2011 of a stand-alone Environmental Protection Authority to enable

stronger and better coordinated central government leadership on environmentalregulation.

OilVoice: Additional changes have been planned to the Crown Minerals Bill, whichwill aim to stop protestors from carrying out dangerous acts, damaging andinterfering with legitimate business interests with ships. What sort of penalties canthey expect to face? Do you think this is a large enough deterrent?

Simon: I'm confident we've put the right measures in place. Protest action canimpose significant costs on companies carrying out legitimate activities underpermits and create very serious health and safety risks.

The new law covers dangerous protests that interfere with or damage oil explorationvessels. It also makes it an offence for people to breach a 'non-interference zone'(NIZ) established around a structure or ship. Fines range up to $100,000 for groupsor $50,000 for individuals for the first offence and a fine of up to $10,000 forbreaching the NIZ.

This move covers a gap in the existing legal framework and it provides clearexpectations and penalties.

OilVoice: You mentioned in a recent interview that New Zealand's ExclusiveEconomic Zone, the fourth-largest in the world, is 'very underexplored'. Roughly howmuch of it has yet to be explored, and how much potential does the area have interms of major oil finds?

Simon: The numbers really speak for themselves in terms of illustrating thepotential. New Zealand's greater Extended Continental Shelf covers more than6,000,000 km. Within that, approximately 1,200,000 km of sedimentary basins havebeen mapped. Further research and industry activity show there is at least 800,000km of known prospective basins with working petroleum systems, yet all theproduction in New Zealand to date has come from an area of less than 10,000 km.

Although the Taranaki Basin is New Zealand's premier oil and gas exploration


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region, the Great South Basin, Canterbury, Reinga-Northland, East Coast and thedeep water possibilities of New Zealand's petroleum acreage have attractedsignificant interest as emerging basins of petroleum potential.

Since the mid-2000's, New Zealand Petroleum & Minerals has undertaken concerted

data acquisition. Together with advances in deep-water drilling and productiontechnology, the focus is shifting further offshore - where the biggest discoveries areanticipated.

International companies currently hold licences to parts of four frontier offshorebasins: Great South, Canterbury, Pegasus and Deepwater Taranaki.

OilVoice: The industry continues to expand on new technologies, providing diverseopportunities for producing 'unconventional' oil and gas in many parts of the world.How is New Zealand embracing new technologies?

Simon: New Zealand wants to partner with companies that have the most advancedtechnologies.

There is wide variation on the definition of 'unconventional' oil and gas around theworld. We have a number of permit holders who are looking for petroleum resourcesthat may not have been the case a few years ago.

Tag's geotechnical work in the East Coast of New Zealand has identified a numberof multi-target, conventional and tight oil prospects at depths between 250 and 2000meters and has identified widespread prospects there. Recent field and subsurfacecore studies have confirmed these world-class source rocks are not only rich in TotalOrganic Carbon, they are also heavily fractured in many locations, which is one keyfactor in successful tight oil production.

OilVoice:And finally, what do you think the next 25 years holds for oil exploration inNew Zealand?

Simon: New Zealand's Prime Minister John Key has said this could be a 'game-changer' for New Zealand. I agree. The resource sector - managed responsibly andsafely - offers a very significant opportunity for growth.

The total tax and royalty take from petroleum was $800 million in 2011/12. NationalGDP would increase on average by $2.1 million for each year of a 30-yeardevelopment of a new petroleum basin.

From an oil and gas perspective New Zealand truly is a land of opportunity. We havethe world's fourth largest Exclusive Economic Zone with some exciting geologyacross 18 basins. The demand for - and exploration of - oil and gas has never beengreater. And New Zealand has never been a better place to explore, particularly aswe have clarified the rules and expectations that apply.

OilVoice: Thank you for taking the time to answer our questions, Simon. I'm sure our

readers will enjoy hearing what you have to say.


24/47


Insight: UK shale gasand oil - who is

watching?

Written by David Bamford fromFinding Petroleum

Professor Andrew Hopkins insights, described in Karl Jeffreys article fromyesterday, can be summarised as:

The important features of a safety case regime are that it must have:

1. a risk/hazard framework,2. workforce involvement,3. a requirement to make the case to a regulator,4. an engaged regulator, and5. a requirement of duty of care.

Lets just consider one aspect of this for the UK onshore, namely the regulations andthe regulator.

The November 2011 EU Commissioncommissioned reportthat concluded shale gasexploration is currently well regulated in Europe is usually cited as evidence thatmore regulation is not need but this legal review was based on four countries onlyPoland, Sweden, Germany and France.

Specifically in the UK, in response to input from consultations, learned societies, andthe industry, the Secretary of State for Energy & Climate Change issued aWrittenMinisterial Statementwhich concluded that:

Having carefully reviewed the evidence with the aid of independent experts, andwith the aid of an authoritative review of the scientific and engineering evidence onshale gas extraction conducted by the Royal Academy of Engineering and the RoyalSociety, I have concluded that appropriate controls are available to mitigate the risksof undesirable seismic activity. Those new controls will be required by myDepartment for all future shale gas wells. On that basis, I am in principle prepared toconsent to new fracking proposals for shale gas, where all other necessarypermissions and consents are in place.and that it was a requirement that any case be made to the regulator.

So what activity will need to be regulated?

The BGS, in a recent geological survey, intimated that there is 1,300 trillion cubicfeet of shale gas in place under Bowland and that it alone could keep the country
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self- sufficient for decades. And then of course theres the resource under theWeald...

Lets be really pessimistic and assume that only 2.5-5% of this GIIP can be producedso say somewhere in the range 25 60Tcf. And as far as I can tell, there seems to

be some sort of consensus that a typical reservoir penetration, with best technologyapplied, will do well to produce 5Bcf, meaning every Tcf will require say 200 suchpenetrations to produce it. This implies 5000-12000 reservoir penetrations will berequired to produce the gas reserves I mentioned at the beginning of this shortparagraph, perhaps drilled at the rate of a few hundred per year over 2 4 decades.

Note that I have focussed on reservoir penetrations here presumably these will liein the domain of the Health and Safety Executive (HSE) who is presumably (going tobe) charged with applying regulations concerning subsurface issues well integrity,groundwater protection, avoidance of seismicity (although perhaps thats DECCsjob?) and so on.

There is a completely different question as to who regulates the surface expressionof all this activity the significantly smaller number of drilling pads(the size of acricket pitch to quote David Cameron) presumably this is where the EnvironmentAgency comes in with help from HSE?

I have been digging around the various HSE and .gov websites; there is someinformation therebut Im afraid I cant find a single thing that convinces me that thehuman resources actually exist, or are planned for, that will enable regulations to beapplied, safety cases to be received, in shortevidence for the existence of anengaged regulatorgiven the enormous number of well operations that are aboutto be undertaken.

If the regulator is not adequately resourced and, therefore, engaged, on top of thereal risks is added the risk that regulation just becomes a mutual box tickingexercise.

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26/47


Of boiling frogs and oilprices

Written by Kurt Cobb fromResource Insights

Many readers will know about the claim that a frog plopped into boiling water will hopright back out if it can, while one put into cold water which is then slowly heated willremain until it is cooked.The claim is wrong, but the story is quite useful inunderstanding some human behavior. Gradually changing circumstances aretypically more difficult for humans to detect and react to than circumstances that arechanging rapidly.

Such is the case with oil prices. The velocity with which oil prices rose in 2007 and2008 transfixed the public and policymakers. The price vaulted from $60 a barrel onthe first trading day of 2007 to above $147 on July 11, 2008, the (so far) all-timehigh.

At the time many believed that oil production might be reaching a limit that wouldnever be breached, a possibility with dire implications for a society deriving morethan a third of its energy from oil and dependent on the substance as a basis formyriad products such as plastics, pharmaceuticals, herbicides, pesticides, lubricants,heating fuel, fabrics, paints, solvents, and asphalt, just to name a few.

When oil prices then plunged as a result of a crashing economy, no one knew whatto expect except those of us who had been following the supply picture carefully.That supply picture suggested rapidly recovering prices as the economy rebounded.As it turned out,the spot price rose from just under $34 per barrel on December 26,2008 to $126 on April 28, 2011. Again, the spectre of limits hung over the marketand the public.

Now, the strange thing is that the worldwide average daily price hit records in both2011 and 2012 if we go by the Brent price which has come to represent the true

world price. And, we may be headed for another record this year. But the rise hasbeen so incremental from $111.26 in 2011 to $111.63 in 2012 that it can hardly becalled a rise. Like the proverbial frog in gradually warming water, the public hasbecome used to high oil prices and so doesn't often think about what they imply--namely, continued constrained supply despite all the distracting and misleadinghistrionics from the industry claiming that we've entered a new era of abundance.Oil's persistently high price is, of course, an embarrassing and decisive indicator thatthe claim is nonsense.

So far this year, the daily Brent crude price through July 30 has averaged $107.43.Will it rise enough from here to top 2012's average? We cannot know. But the fact

that oil prices have remained in or near record territory for two years running nolonger elicits alarm from the public, the industry or policymakers. High prices have
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become the new normal. This is the ever so slightly warming water in which we frog-humans are sitting while no longer noticing the change (or remembering howunnerving it was as prices rose rapidly to this level).

It's worth remembering that the current average price for the year remains well

above the average daily price for all of 2008, the year that stunned the world with thehighest oil price ever. The 2008 average was only $96.94, again using Brent crudeprices as a proxy for world prices.

Like the frog, for us humans it is the velocity of price changes which grabs ourattention, not the persistent high price. The reason for the high price is clear.Demand remains robust, especially in Asia, and supply remains constrained. As Ipointed out last week, supply has only advanceda paltry 2.7 percent in seven yearsvs. about a 1.5 percent increase on average EVERY YEAR prior to that (from theearly 1990s onward) for crude including lease condensate (which is the properdefinition of oil).

We have come to accept high-priced oil, and we will probably accept it until the nextcrisis causes prices to bolt quickly upward getting our attention again. AsNassimNicholas Taleb, the former hedge fund manager, self-styled philosopher of risk, andauthor ofThe Black Swantells us, the longer a system appears stable, the greaterthe disruption will be when stability breaks down.

Oil prices have been on average at their highest ever for the past two years and mayreach a record again this year. But they have also essentially been stable becausethe change in the average daily price has been so slight. Watch out for what comesnext after that stability evaporates.

View more quality content fromResource Insights
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Can oil play super-commodity like 2008?


TIME WAS

Due to the recession, global oil demand in 2008 went down as global supply rose.Prices rose, also. Using US EIA data, global oil consumption decreased from 86.66million barrels per day (Mbd) in the fourth quarter of 2007 to 86.34 Mbd in the firstquarter of 2008. Between Q1 2008 and Q2 2008 global demand fell again, to 85.73

Mbd.

Between Q1 2008 and Q2 2008 prices for WTI grade oil on the US Nymex marketincreased sharply from $89.91 per barrel at the start of Q1 to $110.21 per barrel atthe end of Q2, a growth of 22.6%. Overall therefore, demand fell and supply rose -and prices rose. A lot.

For the US EIA a major part of this sharp increase was attributed to what it called'volatility' in Venezuela and Nigeria, but it also noted an influx of investment moneyinto commodities markets. At the time, investors were stampeding out of the fallingreal estate and stock markets, and among the commodities they bought gold andespecially oil.

This equities market exit-bubble soon spread to other commodities. Investor fundsswamped wheat, soy, vegetable oils, other food commodities and precious metalsother than gold. One major impact was a world food price bubble starting in Q12008, driving up food prices dramatically in countries heavily dependent on importedfoods. Food riots were commonplace in many less-developed countries.

Until Q1 2008, Daniel Yergin of the CERA consulting company did not believe therewas any supply problem for oil, and claimed its price would soon retreat to 'normal',

but in May 2008 he amended that position to predict that oil would reach $150 during2008, 'due to tightness of supply'. This reversal of opinion was significant becauseCERA provides price forecasts for many official bodies.

TIME IS

On August 1, 2013 Nymex prices for WTI hit $107.90 a barrel in early trading. Themost-cited catalyst was continuing concern on the removal from office of Egypt'sdemocratically elected President, Mohamed Moursi. Commodities traders worriedthat the Suez Canal could be closed if unrest spread.

(see my July 14 article/ http://preview.tinyurl.com/p8byeyc see also the following byBrandon Smith http://preview.tinyurl.com/qhdush5)
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Other supporting rationales included the unlikelihood of the US Fed starting to taperdown, due to a 'worrying absence of inflation pressure' in the US economy. Anotherwas the Libyan situation. Bloomberg reported that: "Libya, holder of Africa's biggestcrude reserves, has closed all oil terminals except Zawiya amid labor protests,

according to Oil Minister Abdulbari Al-Arusi. Zawiya, capable of handling 300,000barrels a day is operating, while the largest port, Es Sider, and others including RasLanuf, Marsa Brega and Hrega are shut, the minister said'. Probable loss of exportsupply will be around 0.325 Mbd, he said. Iraq's surging production may come underdownward pressure if Sunni insurgents target its northern pipeline, and technicalproblems are curbing output in the south.

Among other frequently-cited upbeat items aiding oil's rise we have China news,where despite the signs of further slowdown reported by HSBC, the country's officialpurchasing manager's index came in higher than expected on Thursday August 1.This upbeat news was bolstered in Europe where a survey showed eurozone

manufacturing returned to growth in July. Lending further support, US oil inventoriesat the Cushing, Oklahoma, delivery basing point for the Nymex crude contract fell fora fifth straight week, TWIP data showed on Wednesday, although overall stocksincreased.

Since May 2008, the U.S. Commodity Futures Trading Commission has increased itssurveillance of oil and other commodities' trading most recently in June 2013concerning complaints of bogus bids and offers in the West Texas Intermediatecrude-oil market, a practice known as 'spoofing'. This is an illegal practice involvingbids or offers that are entered with the intent of canceling them before the trade isexecuted, to either drive up or drive down oil prices on Nymex energy-futurescontracts.

FUNDAMENTALS WIN, FINALLY

Remy Wagman, president of RJM Energy and at the time a 14-year Nymex veterannoted in a September 2010 interview with 'Alberta Oil' that the Nymex oil marketattracts 'gambling junkies'. He added: 'But if you're completely a gambling junkie, it'snot an industry to work in for you. You have to know when to stop'. In 2008 the stopwas $147 a barrel on July 11. Despite the highly-listened to oil forecaster Yerginclaiming in May 2008 that he had had a change of outlook, and that henceforth (in

early 2008) there would be oil shortage - in the face of US EIA oil demand datashowing a continuing fall as the recession intensified - the stark evidence of decliningoil demand finally took its toll.

From the day-averages of around US$140 to $145 attained in July 2008, oil pricescollapsed to reach $30.28 a barrel on December 23, 2008, a fall of over 79% fromthe peak. This was the lowest day-traded price for WTI oil since the financial crisisstarted in late 2007.

To be sure, this peak-trough range of $147 - $30 shows such fantastic volatility thatobviously both ends are extreme and unreal. To use an often cited term in the recent

trial in New York of the former Goldman Sachs employee and financial algorithmexpert Fabrice Tourre, this was 'surreal' finance and trading, with intent to defraud.


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The US Securities and Exchange Commission accused Tourre of intentionallymisleading participants in a complex mortgage-linked security named Abacus thatearned in excess of one billion dollars for the Paulson & Co. hedge fund. Tourre wasfound guilty by a jury in Manhattan on six of seven counts.

Goldman Sachs, this year not 2008, has a studiedly neutral-to-negative outlook foroil prices, recently abandoning its 'arb trade', or arbitrage trading advisory andcustomer services for the Brent-WTI arbitrage or premium. On February 8, 2013 thispremium had reached $22.70 a barrel in favour of Brent, but is now close to $1 to $3a barrel and has traded close to zero in recent weeks. Goldman abandoned thistrade when the premium fell to $5 a barrel.

In 2008, Goldman Sachs had a dramatically oil-positive corporate stance. When oilprices spiked to $147 a barrel, the biggest corporate casualty was oil pipeline giantSemgroup Holdings, a firm with $14 billion in sales based in Oklahoma. It had rackedup $2.4 billion in trading losses betting that oil prices would go down, on advice from

Goldman Sachs which Goldman contests to this day, including $290 million of lossesfrom personal accounts managed by its then CEO Thomas Kivisto. With the creditcrunch eliminating any hope of meeting a $500 million margin call, SemgroupHoldings filed for bankruptcy on July 22, 2008.

Forbes magazine on March 26, 2009 noted that 'Numerous people familiar with theevents insist that Citibank, Merrill Lynch and especially Goldman Sachs hadknowledge about Semgroup's trading positions from their vetting of an ill-fated $1.5billion private placement deal last spring'. It went on to say: 'What's known for sure isthat Goldman Sachs, through J. Aron & Co., its commodities trading arm, was inprime position to use such data - and profited handsomely from Semgroup's fall. TheJ. Aron group was Semgroup's biggest counterparty, trading both physical oil flowingthrough pipelines and paper oil, in the form of options and futures'.

Semgroup had been advised by Goldman that oil prices would fall, it claimed, butthrough late Spring and early Summer 2008 all they did was rise, sometimes byextremes of $5-a-day.

Source 'Forbes' magazine 26 March 2009


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CAN IT HAPPEN AGAIN?

The chances of 'another 2008' certainly exist - theoretically - for example due tofinancial industry hubris or 'exuberance', as well the industry's proven tendency tomislead and defraud. Since oil, like any other commodity including gold is a physical

commodity, there are however final limits set by supply and demand.

Also, major 2008-versus-2013 differences abound. To date in 2013 there is no signof an accompanying and comforting price-gouging process operating inagrocommodities, in fact the reverse. Several major food commodities are atremarkably low prices, today. As we know, gold has suffered a 'severe correction'.Gold price manipulation - downwards - is a daily reality on the paper gold market,while physical gold demand is very strong.

The oil market of today is however very similar to 2008 in that paper oil, that isfutures and options contract trading is completely dominated by a Select Few major

bankers, brokers and traders. For this 'community' supply and demand are onlydetails. Physical oil supply is ample, or more than sufficient for current globaldemand, but this can be ignored during the 'window of opportunity' for price gougingthat the Select Few create and exploit. As in 2008 therefore, the oil price ramp of2013 is a paper oil phenomenon and can run to heights that common mortals willfind preposterous.

The main difference is that this time the 'oil price bubble' is nearly alone among thecommodities. The so-called Supercycle has been mauled, broken apart andcompartmented, leaving only oil as the easiest picking for manipulation.


Can Saudi Arabiapump enough oil?


PREVENTING OIL SHOCK - OR CAUSING IT

One of Wikileaks' most celebrated revelations, in 2011, was a confidential mail from
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a US diplomat in KSA (Kingdom of Saudi Arabia) stating that he had been convincedby a Saudi oil expert named Sadad al-Husseini using data from as far back as 2005that the nation's oil reserves are overstated by nearly 40%. The diplomat was certainthat KSA could not 'keep a lid on oil prices'.

To be sure, there was no need to consult Wikileaks or the State Dept to hear that -for at least a decade Matthew Simmons, author of books including Twilight in theDesert: The Coming Saudi Oil Shock published in 2005 has worked the theme ofSaudi exaggeration or lying about its oil reserves. Simmons main argument was thatover and above the political uncertainty of reliance on Middle Eastern oil, the reservedecline rates for conventional or first-generation oil in the region should raise ourawareness of the physical unreliability of Middle East oil. Due to the huge dominanceof KSA in Middle East oil and Arab world politics, this firstly concerns the Kingdombefore it concerns the rest of the region.

One certain and sure problem is that since the 1980s, sparked by the Iran-Iraq war,

Arab OPEC producers in the heavily Saudi-dominated OAPEC organization startedregular, usually large and sometimes huge 'reserve revisions'. KSA's ownrecoverable oil reserves depending on what date, as well as what source inside theKingdom provides the data could range from 250 - 350 billion barrels (250-350 Gb).More bizarre, the reserve number never declines - it only grows despite KSAproducing roughly 3.65 Gb-a-year, about 10 million barrels-a-day (Mbd). As reportedby the Financial Times June 11, KSA is presently producing 'nearly 9.7 Mbd'.

After the 1980s OAPEC round of reserve revisions, only upwards, nearly all otherOPEC nations did the same, joined by most major non-OPEC exporters.Consequently there is no 'true' unambiguous number for world oil reserves.

UNABLE TO PREVENT PRICE RISES - OR UNWILLING?

What is important to note is that the Saudi oil decline 'analysis' can be applied almostword-for-word to joint-No 1 or close No 2 world oil producer Russia. This onlyunderlines that anything concerning world oil and oil prices concerns the DominantPair, producing a combined total of about 25% of world total oil output.

In Russia's case, even more than KSA, the role of conventional oil reserves versus'assisted recovery' tapping secondary or tertiary reserves utilising steam-assist,

water flood, chemicals, compressed gases and other means to enhance andincrease recovery from 'tight' source rocks or declining conventional reserves is aconstantly moving frontier. This makes the definition of Russia's recoverable oilreserves at least as variable as for KSA but in both cases, and anywhere else in theworld - notably US, Canadian and Venezuelan shale oil extraction - higher oil pricesexpand the recoverable reserves, and lower prices do the opposite.

The 2011-vintage Wikileaks revelation has resurfaced as the oil price has soared inrecent weeks to well above $100 a barrel, with the main media-friendly explanationsbeing a very slight recovery of global oil demand and above all tensions in the MiddleEast and Arab North Africa. With totally predictable timing, KSA has announced it will

either maintain highest-possible production, or increase it. For as long as this doesnot prevent oil prices rising, KSA will 'almost regrettably' enjoy especially large


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windfall revenue gains. Russia ditto. Comparison of the dominant pair can start withtheir ultra-different oil production trends (source: Gregor Macdonald)

As the charts show, Saudi production is 'managed' but Russian production is muchless compressible, explaining the meaning of the key price setting term: 'reserve orspare capacity'. Also, the Saudi chart shows the limits of its wide 'discretionaryoutput' capability. The key major difference between KSA and Russia is thereforesimple - KSA can 'open the tap' provided it has previously cutback output - makingthe Swing Producer role of KSA one of the most basic, fundamental oil price-settingfactors.

Consequently, news and views, opinions and spin on the subject of KSA's productionintentions and policies are a must-item for oil market brokers and traders. What we

find, possibly not surprisingly, is a permanent shroud of intrigue on these intentionsand policies. Reported regularly in all global business media, Ali al-Naimi, oil ministerof KSA has since 2007 said the Kingdom has identified projects to increase oilproduction capacity to 15 Mbd, but since early 2013 Mr Naimi says productioncapacity will not be increased beyond the current theoretical maximum of 12.5 Mbd'in the next 30 years'. As AFP and other agencies reported from Riyadh, July 28,Saudi billionaire prince Alwaleed bin Talal, a nephew of King Abdullah has warnedthat global demand for the kingdom's oil is clearly dropping, urging revenuediversification and investment in nuclear and solar energy to cover domestic andlocal energy consumption. See also my article:http://beforeitsnews.com/energy/2013/07/saudi-royal-sounds-alarm-on-fracking-

2450748.html

AND WHAT ABOUT OIL DEMAND?

The OPEC Secretariat - heavily influenced by Saudi views - reported in its monthlyreport for June that it anticipated 'higher demand in absolute terms, primarily due tothe structural change in the seasonal pattern', during the second half of the year,also adding: 'The expected global economic recovery in the second half of this yearcould also add more barrels to seasonally higher global consumption'. Scarcelydesigned to lend credibility to its oil demand growth forecast it placed at 0.8 Mbd toJune 2014, this featured the Secretariat's belief that the summer driving season

demand peak would not continue to shrink. It also said: 'Growing use of airconditioning in the summer, particularly in the developing countries, has also pushed


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(forecast) third quarter demand higher'.

Surprisingly or not, the OECD's IEA energy watchdog agency regularly producesreports forecasting imminent increase in global oil demand, very similar to theSecretariat, noting that an 0.8 Mbd increase on current world total demand of about

89.75 Mbd (32.75 Gb per year) would represent an 0.89% increase. One majorproblem for both the IEA and the OPEC Secretariat, and a plus for Prince Alwaleedis that global oil demand is structurally shrinking - and new oil reserves andresources are available. Overpriced oil, unsurprisingly, encourages conservation andsubstitution including output from new, previously too-expensive oil sources.

To be sure, global oil demand - except during sequences such as 2008-2009 and2009-2010 - now rarely changes at a year average rate above 1%. The potential formulti-year zero demand growth is high, signaled by Prince Alwaleed's claim in hissix-page letter to his uncle the King and oil minister al-Naimi that world oil demandmay attain perfect zero growth by 2015. Risk is supply-side and the deepening

intensity of what was Arab Spring but is moving towards Arab Civil War certainlyopens the door to supply cutoff risk.

Even as US shale oil output has surged, KSA's discretionary or spare capacity hasproven crucial in meeting supply shortages. It raised output during the 2011 civil warin Libya, and in 2012 raised production to a 30-year high slightly above 10 Mbd asUS-led sanctions reduced exports from Iran. Saudi action, and posturing in Egypthave the potential for unintended political consequences and the crisis-atmospherehas seeped into Riyadh think tanks and policy parlors. One result is further tighteningby Saudi Aramco on the sale of its crude, ensuring only end-users obtain it to restricttheir ability to resell barrels, another may be a permanent cap on KSA's maximumcapacity.

Overall and due to the total opacity of oil market trading - shown by increasing actionby regulators in Europe and the US to rein in abuses - oil prices effectively tell uslittle or nothing about fundamentals and everything about speculation. Middle Eastsupply risk is however rising, making it likely KSA will keep output at high or veryhigh rates - while 'regretting' the high prices that the political risk premium adds to oil.Leaving the last word to al-Naimi, his 'preferred market equilibrium price' which hasdisappeared from all speeches, interviews and comments he gives for over 9months, was $75 a barrel. At that price level Prince Alwaleed's so-called pessimism

is likely unfounded but above it, KSA will go on losing demand volume if notrevenues.

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Canada's LNG exportfacilities: Hurdles andchallenges

Written by Keith SchaeferfromOil & Gas Investments Bulletin

Three factors have the big LNG export proposals for Canada's west coast racingahead at only a snail's pace:

1. Permits2. Taxes3. Offtake deals

In this article I want to talk about permitting-but before that, remember that the firstLNG proposal that will export BC and Alberta gas-the Douglas Channel project withGolar (GLNG-NASD) - is so small at 0.2 bcf/d that it doesn't need all this permitting.

Very small projects like that don't need the big permits, just some small ones. Thisarticle is about the big LNG proposals, like Shell and Chevron and Petronas.

So with that in mindwhat is the permitting process for a proposed liquefied naturalgas export facility? What are the biggest challenges?

Step One: The National Energy Board (NEB)

The first hurdle - an export license from the federal National Energy Board - testswhether the project is in Canada's economic best interests.

LNG proponents apply to the NEB to ship certain volumes of LNG annually for a setnumber of years. To grant an export license the board must find that the proposal isin the public interest and that the energy commodity to be exported is surplus toCanada's energy needs.

Here the 'best interest' question is only economic - the NEB is not charged withconsidering environment