Masters Of War

Come you masters of war You that build all the guns You that build the death planes You that build all the bombs You that hide behind walls You that hide behind desks I just want you to know I can see through your masks. You that never done nothin' But build to destroy You play with my world Like it's your little toy You put a gun in my hand And you hide from my eyes And you turn and run farther When the fast bullets fly. Like Judas of old You lie and deceive A world war can be won You want me to believe But I see through your eyes And I see through your brain Like I see through the water That runs down my drain. You fasten all the triggers For the others to fire Then you set back and watch When the death count gets higher You hide in your mansion' As young people's blood Flows out of their bodies And is buried in the mud. You've thrown the worst fear That can ever be hurled Fear to bring children Into the world For threatening my baby Unborn and unnamed You ain't worth the blood That runs in your veins. How much do I know To talk out of turn You might say that I'm young You might say I'm unlearned But there's one thing I know Though I'm younger than you That even Jesus would never Forgive what you do. Let me ask you one question Is your money that good Will it buy you forgiveness Do you think that it could I think you will find When your death takes its toll All the money you made Will never buy back your soul. And I hope that you die And your death'll come soon I will follow your casket In the pale afternoon And I'll watch while you're lowered Down to your deathbed And I'll stand over your grave 'Til I'm sure that you're dead.------- Bob Dylan 1963

Sunday, October 4, 2015

the ‘States First’ earthquake primer, even lower natural gas prices, US oil & gas glut still growing, et al

there was quite a bit of news coverage this week on the release of a 150 page "earthquake primer" by Ohio and 12 other fracking states which was supposedly issued to offer guidance to regulators on how to handle earthquakes caused by fracking or wastewater injection wells...the report was the final output of a working group on induced seismicity that was formed by said states in late March of 2014, just about the same time the Ohio Department of Natural Resources discovered that earthquakes that struck Poland Township were caused by a fracking operation with 7 laterals at the same depth at the same time and location as the earthquake, and this working group was in fact co-chaired by ODNR Oil & Gas Chief Rick Simmers, who was responsible for shutting down that Hillcorp Poland operation, and who issued new Ohio seismic drilling guidelines at that time...

no doubt there's a lot of useful information in the report (148 pp pdf), since it includes contributions from experts from universities, industry, federal agencies, and NGOs, but we want to caution against seeing this as being the beginning of any positive action against such fracking induced quakes, which is what many of the news headlines on the report implied....to start with, the participants in the group include the same oil & gas regulators from Texas, Oklahoma, and other states who have long & deep ties to the energy industry and who've been on the forefront of the attempts to sweep the fracking / earthquake relationship under the rug...furthermore, the report was released by "States First Initiative", a lobby organization formed against federal regulation of the industry...indeed, in their fact sheet they make it clear that their Seismicity Primer is an informational document, and its not intended to offer or recommended rules or regulations...so it seems like this is just an effort by industry friendly regulators to get out in front of the fracking earthquake issue and head off any regulations by appearing that they have the situation under control...

The Week in Oil and Gas: Storage Glut Growing

the near term contract price for natural gas fell by nearly 10% this week, apparently due to a change in the near term weather forecast....the contract for natural gas for November exchange at the Henry Hub in Louisiana had closed up at $2.672 per mmBTU on Monday on a weekend forecast that temperatures in the Midwest and Northeast would be normal or below normal, but they fell midweek as forecasts were revised to show above-normal temperatures for large parts of the country over the first two weeks of October...the weekly natural gas in storage report on Thursday showed inventories in underground storage rose by 98 billion cubic feet as of September 25th to 3,538 billion cubic feet, putting stockpiles 4.5% higher than the 5 year average for the 4th week of September, and although that was what traders had been expecting, prices continued to fall anyway, to close Thursday at $2.433 per mmBTU, before finally steadying on Friday to close the week at $2.451 per mmBTU...meanwhile, oil prices stayed in a narrow range near $45 a barrel, close to where they've been since August....so you can get a visual perspective of the gas price change, we'll include below a one year chart of the near term contract price for natural gas, which is probably a better indicator of the likelihood of drilling in our region than is the price of oil...

October 3 2015 natural gas contract price

the graph above shows the benchmark contract price for natural gas based on the price per mmBTU at Henry Hub, Louisiana daily over the past year....(note gas is also sometimes quoted in mcf = thousand cubic feet = 1.028 x mmBTU = million BTU)...even though natural gas prices were not affected by the OPEC driven global glut like oil prices, they've been down similarly, largely due to North American overproduction...two years ago, it was widely believed that the breakeven price for shale gas in Pennsylvania was over $4 mmBTU, and that those that continued to produce below that price were surviving by selling liquid bi-products...it's obvious from that graph that gas producers have continued to produce a surplus even as gas prices fluctuated between $2.80 and $3.20 mmBTU most of this year, although as we pointed out, most of them lost money doing so in the 2nd quarter..

this is not the first time natural gas prices have crashed to this level...in 2005, before fracking became widespread, US spot prices for gas fluctuated in the $10 to $15 mmBTU range, but after more than 1000 gas rigs began to produce a glut of gas they fell below $5 mmBTU in 2009 and ultimately crashed below $2 mmBTU after the mild winter of 2012, at which time fracking has its first major shakeout and the number of working natural gas rigs was cut in half...we'd suggest there are signs a similar shakeout may be underway now, and that at these prices, some operators don't even want  to produce from some already producing wells...recall that in August, Chesapeake Energy, the operator of more than half of Ohio's wells, announced announced that they were putting their Ohio natural gas production on hold until such time as the Ohio Pipeline Energy Network is completed, when they'd be able to ship it to the Gulf coast for exports....a week ago, Stone Energy, a Marcellus producer, shut in their West Virginia natural gas production...so it's clear that natural gas prices have reached a level where the producers of it don't even want to sell what they can easily produce, and a lot are holding what they have off the market...so it's unlikely that any new exploration not already contracted for will go forward if prices remain near these levels...

while natural gas will soon be seeing the time of year when it's being withdrawn from storage for use in heating, the opposite is true of oil, as refineries are slowing down at the end of the driving season, while crude output remains largely unchanged....but while an increase in oil inventories was to be expect, the near 4.0 million barrel increase from last week in this week's report was more than anyone expected...US stocks of crude oil in storage, not counting the government's Strategic Petroleum Reserve, rose to 457,924,000 barrels as of September 25th, from 453,969,000 barrels as of September 18th...that was the largest one week jump in oil inventories since the week ending April 17th, and left us with 28.4% more oil in storage than we had in the 4th week of September a year ago...that was also the most oil we ever had stored in late September in the 80 years of EIA record keeping, which had never seen more than 400 million barrels stored before this year...moreover, our end of week supply of gasoline in storage rose almost as much, from 218,756,000 barrel last week to 222,010,000 this week, and those supplies are now very near the upper limit of the average range...in addition, the weekly Petroleum Status Report (62 pp pdf) indicates that propane/ propylene inventories rose 1.7 million barrels last week and are also well above the upper limit of their average range, while distillate fuel inventories decreased by 0.3 million barrels last week, but are still in the middle of the average range for this time of year...thus we have not only a glut of crude oil, but are developing a glut of refined products as well...

the bulk of the increase in crude inventories came not from new production but from additional imports of crude oil, which were up by 378,000 barrels per day to 7,554,000 barrels per day in the week ending September 25th...that was 3.7% higher than the same week last year, but our 4 week average of imports was still at 7.3 million barrels per day, 1.7% below the same four-week period last year...our field production of crude was down a bit, from 9,136,000 barrels per day for the week ending September 18th to 9,096,000 barrels per day during the week ending September 25th, after it was up slightly last week...that's now about 5.3% below the modern weekly record production of 9,610,000 barrels per day that was set in the first week of June this year, and only 2.9% above our production rate of 8,837,000 barrels per day in the 4th week of September a year ago...we should point out though, that as we cover the weekly stats provided by the EIA, the EIA also releases monthly oil production data that is considered revised and hence more accurate, which showed oil output for July at 9,358,000 barrels per day in the latest report, up 1% from 9,264,000 barrels per day in June, and 7% ahead of a year earlier...

while our supply of oil was thus up due to the increase in imports, the demand for it fell, as refinery inputs of crude oil fell below 16 million per day for the first time since April, as refineries used just 15,962,000 barrels per day during the week ending September 25th, down from 16,203,000 barrels per day in last week's report...refinery utilization was even weaker, as the refinery utilization rate fell to 89.8%, down from 93.1% of capacity just two weeks ago, and the first time that refinery capacity utilization had dropped below 90% since March...even so, gasoline production still increased over last week, averaging about 9.7 million barrels per day, as output of distillates and other products were down slightly...

Latest Rig Counts

meanwhile, according to Baker Hughes, this week saw the largest reduction of drilling rigs since April 17th, and the largest drop in oil rigs since the week before that...there were 29 fewer rigs operating in the 50 states in the week ending October 2nd than the week before, with total oil rigs down by 26 to 614, net gas rigs down by 2 to 195, while the single miscellaneous rig started last week also shut down...3 rigs that had been working in offshore waters were among those shut down this week; two from the Gulf of Mexico and a widely opposed Shell oil rig in Alaska...that left 30 rigs still in operation offshore; 29 in the Gulf and one off the shore of California, down from a total of 61 a year earlier...two rigs that had been operating on inland lakes were also idled, leaving just 3 on inland waters, down from 11 a year earlier...

horizontal drillers again saw the largest reduction, as the net count for that type of rig was down 20 to 609, and down from the 1341 horizontal rigs that were operating in the same week last year...active vertical rigs were also reduced, from 123 to 117, now well down from the 372 vertical rigs that were drilling a year ago...and directional rigs fell also, down by 3 to 86, also down from the 211 directional rigs that were deployed last year at this time...

the most active shale basin, the Permian basin of west Texas, saw the largest reduction of rigs, as the count there was down by 5 to 245, which was also down from 556 rigs a year earlier...three more basins saw reductions of 3 rigs each; the Eagle Ford of southeast Texas was down to 82, and down from 210 in the same week last year; the Niobrara Chalk of northeast Colorado and southeast Wyoming was down to 26, and down from 64 rigs a year ago, and Oklahoma's Cana Woodford, which was down to 37 and down from 42 a year earlier, thus marking the first time rigs in that basin fell below their year ago level...also in Oklahoma, the Ardmore Woodford saw 2 rigs idled, leaving 2, down from 4 last week and 4 a year ago...2 rigs were also stacked in the Marcellus, which now has 47, down from 82 in the first week of October last year...1 rig was also pulled from the Williston, leaving 66, down from 198 last year, while 1 rig was added in the Fayetteville of Arkansas, which now has 4, still down from 9 last year, and 1 rig was added in Ohio's Utica, which is back up to 21, but still down from the year ago 43...

the state totals appear to have followed the basin totals fairly closely this week...Oklahoma, down 8 rigs to 97 and down from 212 a year ago, saw the largest drop; they were followed by Texas, down 6 to 357, which was down from last year's 895...both Louisiana and New Mexico had 4 fewer rigs to deal with, with Louisiana down to 66 from last year's 113, and New Mexico down to 46 from last year's 99...3 rigs were idled in both Colorado and Pennsylvania, with the former down to 30 from 76 a year ago, and the latter down to 30 from 57 a year ago..although Alaska saw a reduction of two rigs, they still had 11 remaining, which was up from 9 last year, leaving them with the dubious distinction of being the only state to see a year over year rig count increase..two states saw reductions of 1 rig each: California, which at 13 was down from 46 a year earlier, and North Dakota, whose 65 rigs was down from last October 2nd's 189 rigs...rigs seeing an increase of 1 rig included Arkansas, up to 4 this week but down from 12 a year ago, Kansas, which was up to 10 but down from last year's 24, West Virginia, which was up to 18 this week but down from 30 a year ago, and last but not least Ohio, which was up to 20 rigs this week but down from 20 in the first week of October a year ago...rig counts in all other states remained unchanged from last week...


(Note: more related news links here)

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