October 20, 2020

U.S. seizes on Venezuelan weakness to regain Caribbean energy foothold

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150410101200-myths-on-oil-prices-780x439By James Stafford From Oil Price

The collapse of oil prices is opening up a new diplomatic opportunity for the United States in the western hemisphere.

The U.S. has a spotty and turbulent history intervening in Latin America and the , but outside of drug interdiction, the western hemisphere has largely taken a backseat when it comes to foreign policy during the Obama administration.

But the oil bust is offering another entree for the U.S. in the region. That is because there is a power vacuum with the erosion of the Venezuelan economy. Well-endowed Venezuela has the largest reserves of oil in the world, and has used its oil to create a political bloc of ideologically aligned nations, mostly in the Caribbean and Central America. Through its program dubbed Petrocaribe, Venezuela sells oil to friendly nations at reduced prices or by offering near-free financing. Countries can pay back the Venezuelan government at interest rates below 1 percent over periods as long as 25 years.

150312135054-oil-price-since-july-780x439Petrocaribe did allow Venezuela to expand its influence in the region. Venezuela built alliances with the anti-U.S. governments of Cuba and Nicaragua, but also increased its influence in smaller Caribbean nations that needed energy assistance, such as Jamaica, Grenada, Haiti, and others. Many of these island nations have little, if any, indigenous sources of energy and imported fossil fuels sap their governments of much needed cash.

However, now with oil prices half of what they were a year ago, oil revenues for Venezuela are drying up. That had the government of President Nicolas Maduro facing near-certain default in the coming years. In order to stay afloat, Maduro has slashed shipments of low-cost oil to Petrocaribe nations by about half since 2012. Easing aid to its friends will help Venezuela avoid default by saving it billions of dollars per year.

That will come at the expense of the beneficiaries of Petrocaribe. Venezuela is trying to get several countries including the Dominican Republic and Jamaica to pay back debt owed from the program, no doubt causing economic hardship for them.

Stuck in a bind, many Caribbean nations are facing uncertain economic times without the support of the chavista government. With Venezuela stepping back, the United States senses an opportunity.
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A newfound push in the Caribbean is based on the notion that support from PetroCaribe is falling apart. “If Petrocaribe were to fall due to events in Venezuela, we could end up with a serious humanitarian crisis in our region,” U.S. Secretary of State John Kerry said in early March.

In January, Vice President Joe Biden headed up a Caribbean Energy Security Summit. The event in Washington DC was attended by Caribbean leaders, and the objective was to find sustainable sources of energy for the region. Details remain a bit vague, but the U.S., through USAID, will support the rollout of renewable energy and energy efficiency. Clean energy is the headline objective, but the U.S. is also advocating for greater use of natural gas to replace diesel imports. The U.S. would stand to benefit by finding more customers for its natural gas exports, with new LNG export terminals now under construction.

U.S. President Barack Obama pressed the case further on a visit to Jamaica on April 8.

The diplomatic offensive is certainly aimed at providing energy alternatives to struggling island nations. But it is also an attempt to pry the Caribbean away from Venezuela and back towards the United States. Not only has the U.S. referred to the humanitarian crisis brewing because of a weakening Venezuela, but the Obama administration also declared Venezuela a “threat to national security” on March 9. The U.S. placed sanctions on top Venezuelan officials, a bungled move that only provided credibility to Maduro’s claim that the U.S. is out to get him.

The collapse of oil prices has aroused the attention of the U.S. government in the region after years of neglect. A détente with Cuba, an energy security initiative in the Caribbean, and sanctions on Venezuela can all be seen as an attempt to bring the hemisphere back under the umbrella of Uncle Sam.

For more on this story and video go to: http://oilprice.com/Energy/Energy-General/U.S.-Seizes-On-Venezuelan-Weakness-To-Regain-Caribbean-Energy-Foothold.html

Top 12 media myths on oil prices

By Dan Doyle for Oilprice.com From CNN

The story behind oil’s plunge

The upstream oil and gas industry is not a black hole. There’s no mystery wrapped in an enigma here.

There are a lot of meetings with engineers, chemists and geologists. There’s a constantly evolving learning curve. And then there’s all the regulations and compliance. But all-in-all it’s pretty straight forward, that is, until the media gets a hold of it. That’s when it becomes complicated.

It’s as though we are getting reports from the mysteries of the deep ocean or life in the great galaxies beyond. There is so much hyperbole and unsupported guesswork that investors don’t have a chance. So, in a small effort to set the record straight, let’s see if we can’t dispel some of the misinformation.

Misperception #1: Goldman Sachs knows what is going on. This is incorrect. Goldman Sachs should not be quoted extensively. They are notoriously wrong when forecasting tops and bottoms. What they are good at is jumping on the band wagon and stoking fires.

Their forecasting always seems to be done through a rear view mirror and their calls for peaks and troughs are always overdone. Back in July 2014 when WTI crude oil was peaking, they were calling for more, even as the dollar was showing signs of strength (and we know what happened there) and as oil inventories were beginning to wash up over our ankles. And then when we are forming a bottom in January and retesting it in March, they were calling for a deeper bottom.

And then there was 2008. Remember the calls for $150 and $200 oil from Goldman and Morgan Stanley? That was right before we went to $40 and then some. (To be fair, Ed Morse from Citi called the top but he overshot the bottom. We’re not going into the $20s).

Misperception #2: The “non-productive rigs” are the first to go. This statement is a little baffling because all drilling rigs are productive, some are just more efficient. Helmerich & Payne’s Flex 4 and Flex 5 rigs are state of the art. But these rigs are stacking up just as fast as the less efficient rigs that require more man hours but are not as expensive to contract.

Have a drive past H&P’s Odessa yard. It’s stocked full of these Flex 4s. Rigs are enormous which makes them costly to move around. You’re not going to bring in a dozen or so tractor trailers and a few cranes for a rig move back to Texas or Oklahoma, and hire the same sized fleet to bring in the newest generation rig. The closer truth is that the ones that are running in particular areas—that have not been let go—will continue running in those areas. And what the oil companies are going to do is put pricing pressure on their driller for not having supplied the cat’s ass in the first place.

Misperception #3: Supply keeps coming on because of innovations in fracking. Yes, fracking has gotten much better in shale formations but the real advances are already baked in. What has been occurring over the last 24 months or so is that more sand is being run per stage and stage intervals are more densely packed. Other than some new chemistry and a few software updates, that is the bulk of it. There really is no smoking gun between well completions in July 2014 when oil was at $100 and now — 9 months later — when oil has been cut in half.
oil price since july

Misperception #4: Fracking has not gotten exponentially more efficient resulting in outsized cost reductions. Yes and no, but more “no” than “yes.” The 600 lb gorilla in the room is competition. Fracking has gotten competitive, damned competitive. Five years ago fleet sizes were smaller and there were nowhere near as many players. But then came the boom and service companies did what they do best. They overbuilt. They were also cheered on by cheap and plentiful money because everyone, especially bankers and private equity, wanted in on this one. To get an idea of just how competitive the shale landscape has become, a stage in a 2012 Marcellus well fetched almost twice the same stage today. There have been multiple improvements in both design and implementation, but the heavy lifting on cheaper frack pricing has been competition.

Misperception #5: The Baker Hughes rig count has become irrelevant. Incorrect. The Baker Hughes rig count is always relevant. Remember, this was the weekly number that allowed us to hold a bottom at $43 in March. But because supply didn’t immediately go lockstep with the falling count, analysts lost patience. They are now theorizing that rigs are so “productive” that the count no longer carries the weight that it once did.

That’s a tough position to take. We were at 1,600 rigs drilling for oil in October and we’re now at 800. There is some truth that E&Ps are now favoring sweet spots but that won’t make up for the 50% collapse in the count. Shale extraction resembles an industrial process more than it does wildcatting. There aren’t many dry holes with shale. Microseismic advances have put an end to that as have data rooms stuffed full of old well logs that chart the potential of shales. Thus, most shale wells drilled today have a much better chance of being economic than step out and exploratory wells of the past.

There is no legitimate model for 800 rigs growing U.S. production past 8.9 million barrels per day in the Lower 48. And because its shale, and because shale is “tight”, drilling must continue at a breakneck pace to grow production. Analysts looking for a more ‘spot on’ number should start following the activity of fuel distributors who run nonstop between depots and frack jobs. Watch their sales for a more immediate indication of future production.
myths on oil prices

Misperception #6: We are running out of storage space for crude. We’re not. We’re going to be OK. Volumes have increased, especially at the oft mentioned Cushing, but Cushing accounts for only about 10% of US storage. Other storage areas are up but nowhere near as much. The reason is that physical traders like to park their inventory close to market and Cushing gives them that proximity. Also, Cushing is not a dead end. There are large pipelines that connect it to the Gulf Coast where storage is more plentiful and not nearly as full. Additionally, large inventory draws will be coming shortly with the advent of warmer weather.

Misperception #7: Shale wells have a productive life of only a few years. The truth on this one is slowly being sorted out and commentators are finally getting it right. Shale lacks permeability. Which means it’s very “tight”. It requires a frack job to free up the oil and gas trapped in its pore space. Fracking creates and sustains permeability and permeability is the pathway to the wellbore.

Like any tight formation, oil and gas production is front loaded, meaning that most production will come right after stimulation. This results in excellent up front results but production tails off quickly, maybe even falling as much as 75% in year one and settling into something less for the next 10 or 20 years. This is called the tail and the tail is profitable, but only if the flush pays for most of the well.

Related: GE stock up 8% on sale of GE Capital Unit for $26.5 billion

Misperception #8: You can turn shale on and off. That’s wrong. Shale takes time like any other industrial activity. Slowing down its progress is a bit like stopping a supertanker. You can do it, but you need a lot of room. Most drillers require contracts and breaking them can be painful. Sand can pile up at rail sidings and result in demurrages. Layoffs can take time. Regulatory penalties may force an operator into activity whether he wants activity or not.

All this takes time to work out. And then there’s always the stronger balance sheets that will drill regardless of price or that will drill and create a “fracklog” which is a newly minted MBA speak for a backlog of wells to frack. There is no switch you can flip.

Misperception #9: Oil is inversely related to the dollar. It is. This was a head fake. It’s not a misperception. Match the DXY to Brent and WTI over the last 12 months. It’s a perfect divergence. You want to bet on oil, then bet on the Euro.

Misperception #10: OPEC is done. Maybe, but the Gulf Cooperation Council is not. Collectively, the 4 GCC members pump more than half of all OPEC production. They also have very low lifting costs and enormous cash reserves. Additionally, they have stamina and are going to maintain OPECs position of no cuts. There’s a long history of Russia or Venezuela filling reduced quotas. This time around the GCC is not going to let that happen. If Russia concedes there may be a cut in June. But it is looking unlikely even if they do. Look for Saudi Arabia to pick up market share.

Misperception #11: American shale producers are the new swing producers. No, their banks are.

Misperception #12: A deal with Iran will lower prices. Sort of. It will take Iran a year or two to add anything meaningful to our 93 million barrels a day global market but the fear of a nuclear Iran will create enough tension to offset the supply addition. Worries over a nuclear Iran, whether real or perceived, will create enough fear in the markets to more than counter balance the additional million barrels a day of supply that may come on.

In short, oil prices will increase as weekly EIA production numbers begin posting declines as we saw last week. Demand will increase. Inventories will start getting eaten into by midyear. Europe will contribute as will Asia and the Middle East. A shrinking Chinese market is still growing at 7% a year, and that market is much bigger now than when it was posting 10% yearly growth five years ago.

Rich Kinder was right in calling the bottom in the low 40s and John Hofmeiser (former President of Shell Oil) and T. Boone Pickens are probably pretty close to being right with their call of $80 as the top in the next year or so. A solid $65 to $70 by year end is the more reasonable number and is just enough to hold off development of some offshore projects, oil sands work and a good amount of the non-core shale plays.

A stronger dollar will also do its work here as will a Saudi Arabia hell bent on market share. There will be less and less for shorts to hold onto and very few will want to be stuck on the same side of the trade as the big investment banks.

Dan Doyle is president of Reliance Well Services, a hydraulic fracturing company based in Pennsylvania. He wrote this piece for www.Oilprice.com

For more on this story and video go to: http://money.cnn.com/2015/04/10/investing/oil-prices-12-media-myths/

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