OilVoice Magazine | January 2012

7/30/2019 OilVoice Magazine | January 2012

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Why Malthus got his forecast wrong

The one chart about oil's future everyone should see

The Montana Bakken oil play: 'Great news for a great play'

Edition Ten January 2012


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1 OilVoice Magazine | JANUARY 2013

Issue 10 January 2013

OilVoiceAcorn House381 Midsummer BlvdMilton KeynesMK9 3HP

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Editor

James AllenEmail:[email protected]

Chief Executive Officer

Adam MarmarasEmail:[email protected] Network

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Adam Marmaras

Chief Executive Officer

Welcome to the 10th edition of the

OilVoice magazine, the first for 2013.

2012 was a year of innovation for the

site. We launched this magazine,

completely overhauled the jobs board,

and improved our newsletters. But we

can never sit still, and have plenty of

exciting plans for 2013. Be sure to

keep a regular eye on the site.

December is usually a quiet month for

the industry, and I was worried that the

January issue might be a little 'light'.

But I've been happily proven wrong

and this month we have great articles

like Why Malthus got his forecast

wrong, The one chart about oil's future

everyone should seeand The

Montana Bakken oil play: 'Great news

for a great play'.

What are your plans for 2013? If it

involves reaching more people in the

industry, then there is no better place

to advertise than on our site and this

magazine. Take a look at ourmedia

for our reasonable rates.pack

Have a great 2013!

Adam Marmaras

CEO

OilVoice
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Contents

Featured Authors

Biographies of this months featured authors 3Why Malthus got his forecast wrongby Gail Tverberg 6

Will artificially high oil prices last much longer?by Andrew McKillop 11

The one chart about oil's future everyone should seeby Kurt Cobb 13

Recent Company ProfilesThe most recent companies added to the OilVoice directory 17

The Montana Bakken oil play: 'Great news for a great play'by Keith Schaefer 19

The global anti-fracking movement: What it wants, how it operates andwhat's nextby Jonathan Wood

23

Why world coal consumption keeps rising; What economists missedby Gail Tverberg 27

AIM Oil & Gas - 2013 likely to kick off takeover activityby Richard Jennings 33

Argentina and protectionism: Shooting itself in the footby Richard Ethrington 35

Venezuela: Six more years of decline under Chavezby Richard Ethrington 39


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Featured Authors

Andrew MacKillop

OilVoice Contributor

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

Jonathan Wood

Control Risks

Jonathan Wood leads Control Riskss strategic analysis practice, which

provides analysis and consultancy on global business risks to oil and gasoperating companies, service companies, shipping companies, andinvestment community.

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 TheChristian Science Monitor and author of the peak-oil-themed novel Prelude. In

addition, 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.

Gail Tverberg

Our Finite World

Gail Tverber has an M. S. from the University of Illinois, Chicago inMathematics, and is a Fellow of the Casualty Actuarial Society and a member

of the American Academy of Actuaries.

Richard Jennings

Spreadbet Magazine

Richards background is from within the traditional fund managementenvironment and he has been an active spread better for over 15 years now,making almost 7 figures from his trading during this period. Qualified as aChartered Financial Analyst, and with a thorough understanding of technicalanalysis, derivatives and economic issues, he provides the bedrock to the

blog content.
http://www.controlrisks.com/http://www.controlrisks.com/http://localhost/var/www/apps/conversion/tmp/scratch_6/resourceinsights.blogspot.co.ukhttp://localhost/var/www/apps/conversion/tmp/scratch_6/resourceinsights.blogspot.co.ukhttp://ourfiniteworld.com/http://ourfiniteworld.com/http://www.spreadbetmagazine.com/http://www.spreadbetmagazine.com/http://www.spreadbetmagazine.com/http://ourfiniteworld.com/http://localhost/var/www/apps/conversion/tmp/scratch_6/resourceinsights.blogspot.co.ukhttp://www.controlrisks.com/


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Richard Etherington

Finding Petroleum

Richard Etherington, 24, works as a freelance journalist. Richard, a BA HonsPolitical Science graduate, is also a fully trained sub-editor and reporter. He isa former equities reporter and columnist, who specialised in small cap drillingand mining companies during which time he built up an impressive portfolioof industry contacts.

Keith Schaefer

Oil & Gas Investments Bulletin

Keith Schaefer, editor and publisher of the Oil & Gas Investments Bulletin.
http://www.findingpetroleum.com/http://www.findingpetroleum.com/http://oilandgas-investments.com/http://oilandgas-investments.com/http://www.lunarsafari.com/http://www.lunarsafari.co.uk/http://oilandgas-investments.com/http://www.findingpetroleum.com/


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Why Malthus got hisforecast wrong

Written by Gail Tverberg fromOur Finite World

Most of us have heard thatThomas Malthus made a forecastin 1798 that the worldwould run short of food, and that great famine would result. But most of us dontunderstand why he was wrong. This issue is relevant today, as we grapple with theissues of world hunger and of oil consumption that is not growing as rapidly asconsumers would likecertainly it is not keeping oil prices down to historic levels.

What Malthus Didnt Anticipate

Malthus was writing immediately before fossil fuel use started to ramp up.

The availability of coal allowed more and better metal products (such as metal plows,barbed wire fences, and trains for long distance transport). These and otherinventions allowed the number of farmers to decrease at the same time the amountof food produced (per farmer and in total) rose. On a per capita basis, energyconsumption rose (Figure 2) allowing farmers and others more efficient ways ofgrowing crops and manufacturing goods.

Figure 1. World EnergyConsumption by Source, Based onVaclav Smil estimates from EnergyTransitions: History, Requirementsand Prospects and together with

BP Statistical Data on 1965 andsubsequent

Figure 2. Per capita world energyconsumption, calculated by dividingworld energy consumption (based onVaclav Smil estimates fromEnergyTransitions: History, Requirementsand Prospectstogether with BPStatistical Data for 1965 andsubsequent) by population estimates,based onAngus Maddison data.
http://www.oilvoice.com/description/Our_Finite_World/0ff628da.aspxhttp://www.oilvoice.com/description/Our_Finite_World/0ff628da.aspxhttp://www.oilvoice.com/description/Our_Finite_World/0ff628da.aspxhttp://en.wikipedia.org/wiki/An_Essay_on_the_Principle_of_Populationhttp://en.wikipedia.org/wiki/An_Essay_on_the_Principle_of_Populationhttp://en.wikipedia.org/wiki/An_Essay_on_the_Principle_of_Populationhttp://www.amazon.com/Energy-Transitions-History-Requirements-Prospects/dp/0313381771/ref=sr_1_3?s=books&ie=UTF8&qid=1335461865&sr=1-3http://www.amazon.com/Energy-Transitions-History-Requirements-Prospects/dp/0313381771/ref=sr_1_3?s=books&ie=UTF8&qid=1335461865&sr=1-3http://www.amazon.com/Energy-Transitions-History-Requirements-Prospects/dp/0313381771/ref=sr_1_3?s=books&ie=UTF8&qid=1335461865&sr=1-3http://www.amazon.com/Energy-Transitions-History-Requirements-Prospects/dp/0313381771/ref=sr_1_3?s=books&ie=UTF8&qid=1335461865&sr=1-3http://www.amazon.com/Energy-Transitions-History-Requirements-Prospects/dp/0313381771/ref=sr_1_3?s=books&ie=UTF8&qid=1335461865&sr=1-3http://www.ggdc.net/MADDISON/oriindex.htmhttp://www.ggdc.net/MADDISON/oriindex.htmhttp://www.ggdc.net/MADDISON/oriindex.htmhttp://www.ggdc.net/MADDISON/oriindex.htmhttp://www.amazon.com/Energy-Transitions-History-Requirements-Prospects/dp/0313381771/ref=sr_1_3?s=books&ie=UTF8&qid=1335461865&sr=1-3http://www.amazon.com/Energy-Transitions-History-Requirements-Prospects/dp/0313381771/ref=sr_1_3?s=books&ie=UTF8&qid=1335461865&sr=1-3http://www.amazon.com/Energy-Transitions-History-Requirements-Prospects/dp/0313381771/ref=sr_1_3?s=books&ie=UTF8&qid=1335461865&sr=1-3http://en.wikipedia.org/wiki/An_Essay_on_the_Principle_of_Populationhttp://www.oilvoice.com/description/Our_Finite_World/0ff628da.aspx


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If it hadnt been for the fossil fuel ramp up, starting first with coal, Malthus might infact have been right. As it was, population was able to ramp up quickly after theaddition of fossil fuels.

A person can see that there was a particularly steep rise in population, right afterWorld War II, in the 1950s and 1960s (Figure 3). This is when oil consumptionmushroomed (Figure 2, above), and when oil enabled better transport of crops tomarket, use of tractors and other farm equipment, and medical advances such asantibiotics.

It is likely that increased consumer and business debt following World War II (Figure4) also played a role in the post-World War II ramp up.

The reason I say that debt likely played a role in this ramp is because at the end ofWorld War II, people were, on average, pretty poor. The United States had recentlybeen through the Depression. Many were soldiers coming back from war, withoutjobs. Without a ramp up in factory work and related employment, many would beunemployed. A ramp up in debt fixed several problems at once:

Allowed low-paid workers funds to buy new products, such as cars, that used

oil

Allowed entrepreneurs funds to set up factories

Allowed pipelines to be built, and other support for ramped up oil extraction

Provided jobs for many coming home from the war effort

Figure 3. World Population,based onAngus Maddisonestimates, interpolated wherenecessary.

Figure 4. US Debt excluding Federal

Debt as Ratio to GDP, based on Z1Debt data of the Federal Reserveand GDP from the US Bureau ofEconomic Analysis.
http://www.ggdc.net/MADDISON/oriindex.htmhttp://www.ggdc.net/MADDISON/oriindex.htmhttp://www.ggdc.net/MADDISON/oriindex.htmhttp://www.ggdc.net/MADDISON/oriindex.htmhttp://www.ggdc.net/MADDISON/oriindex.htmhttp://www.ggdc.net/MADDISON/oriindex.htm


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The debt ramp up, and the resulting increase in oil production, raised livingstandards. Figure 2 shows that the increase in per capita energy consumption wasfar greater in the 1950 to 1970 period when oil production was ramped up than in thecoal ramp-up between 1840 and 1920. The long coal ramp-up period does notappear to have been accompanied by such a big ramp-up in debt.

Tentative Conclusion

A tentative conclusion might be that as long as we can keep ramping up availabilityof energy products and debt, Malthuss views are not very relevant.

Of course, things arent looking as benign today. World oil production has been closeto flat since about 2005 (Figure 5).

The world has been able to increase production of other fuels to compensate so far.Unfortunately, the big increase is in coal (Figures 1 and 2). This mostly relates togrowth in the economies of Asian countries, which are large users of coal.

The cost of oil has more than tripled in the last ten years. The higher cost of oil is aproblem, because it leads to recession, unemployment, and governmental debtproblems in oil-importing countries. See my postsHigh-Priced Fuel Syndrome,Understanding Our Oil-Related Fiscal Cliff, andThe Close Tie Between EnergyConsumption, Employment, and Recession.

Continued increase in debt now seems to be running into limits. Federal governmentdebt is in the news every day, and non-government debt seems to be contracting

relative to GDP, based on Figure 4.

Looking Ahead

I am not sure that we can conclude that we are headed for catastrophe the day aftertomorrow, but the graphs give a person reason to pause to think about the situation.

The reason I write posts is to try to pull together the big picture. If we only look at thelatest new item forecasting huge increases in tight oil production or talking about 200years of natural gas, it is easy to reach the conclusion that all of our problems arepast. If we look at the big picture, they clearly are not.

Debt problems are closely related to high oil prices in recent years. Debt problems

Figure 5. World crude oil

production (includingcondensate) based primarilyon US Energy InformationAdministration data, with trendlines fitted by the author.
http://ourfiniteworld.com/2012/09/26/high-priced-fuel-syndrome/http://ourfiniteworld.com/2012/09/26/high-priced-fuel-syndrome/http://ourfiniteworld.com/2012/09/26/high-priced-fuel-syndrome/http://ourfiniteworld.com/2012/11/29/understanding-our-oil-related-fiscal-cliff/http://ourfiniteworld.com/2012/11/29/understanding-our-oil-related-fiscal-cliff/http://ourfiniteworld.com/2012/09/17/the-close-tie-between-energy-consumption-employment-and-recession/http://ourfiniteworld.com/2012/09/17/the-close-tie-between-energy-consumption-employment-and-recession/http://ourfiniteworld.com/2012/09/17/the-close-tie-between-energy-consumption-employment-and-recession/http://ourfiniteworld.com/2012/09/17/the-close-tie-between-energy-consumption-employment-and-recession/http://ourfiniteworld.com/2012/09/17/the-close-tie-between-energy-consumption-employment-and-recession/http://ourfiniteworld.com/2012/09/17/the-close-tie-between-energy-consumption-employment-and-recession/http://ourfiniteworld.com/2012/11/29/understanding-our-oil-related-fiscal-cliff/http://ourfiniteworld.com/2012/09/26/high-priced-fuel-syndrome/


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are todays issue, and they are not being considered in the huge oil and gasforecasts we see everywhere. The new tight oil and the new shale gas resourceslikely will need to be financed by increasing amounts of debt, so there is a directconnection with debt. There is also an indirect connection, through governmentaldebt problems, higher taxes, and the likely resulting recession (leading to lower oil

prices, perhaps too low to sustain the high cost of extraction).

Also, it is interesting that the supposedly huge increases in US oil supply dont reallytranslate to any discernible bump in world oil supply in Figure 5.

We know that the world is finite, and that in some way, at some point in the future,easily extractable supplies of many types of resources will run short. We also knowthat pollution (at least the way humans define pollution) can be expected to becomean increasing problem, as an increasing number of humans inhabit the earth, and aswe pull increasingly dilute resources from the ground.

Based on earths long-term history, and on the experience of other finite systems, itis clear that at some point, perhaps hundreds or thousands of years from now, theearth will cycle to a new statea new climate with different dominant species. It mayturn out that these new species are plants, rather than animals. The new dominantspecies will likely ones that can benefit from our waste. Humans would of course liketo push this possibility back as long as we can.

At this point, my goal is to pull together a view of the big picture, in a way that otheranalysts usually miss. The picture may not be pretty, but we at least need tounderstand what the issues are. Is the shift in the cycle very close at hand? If so,what should our response be?

View more quality content fromOur Finite World
http://www.oilvoice.com/description/Our_Finite_World/0ff628da.aspxhttp://www.oilvoice.com/description/Our_Finite_World/0ff628da.aspxhttp://www.oilvoice.com/description/Our_Finite_World/0ff628da.aspx


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Will artificially high oilprices last muchlonger?

Written by Andrew McKillop fromOilVoice

TALKING UP OIL - AND OIL PRICES

Every single year since the year 2000, using IEA data, the role of oil in world energy

has fallen. From more than 38% of world energy in 2000 to 33% in 2011. Also usingIEA data, oil supplied about 53% of world energy in 1973. The decline of oil is writtenin stone, and one simple, straight reason is that oil is overpriced.

That is the simple "fundamentals based" bottom line but the global economy, politicalpolicy and corporate decisions, and media notions about Black Oil are stubbornwhen it comes to accepting and recognizing change. Two simple examples of howfar oil energy prices have gotten out of line with non-oil energy prices is shown byUS natural gas an coal prices: gas prices are now around $20 per barrel of oilequivalent, and coal prices are as low as $2.50 per barrel of oil equivalent - Nymexand ICE prices for WTI and Brent in late December 2012 are around $89 and $108

per barrel.

These stubbornly high, unrealistic price levels for oil have had surprising, andunsurprising impacts in the energy sector, worldwide. Again in the US but soon to befollowed worldwide, shale gas output now followed by shale oil output are growingfast - with an already inevitable impact on US natural gas prices. Wrting in 'WallStreet Journal' in late December, Citigroup's Ed Morse (formerly Lehman Bros' chiefenergy analyst) wrote: "The United States has become the fastest-growing oil andgas producer in the world, and it is likely to remain so for the rest of this decade andinto the 2020s".

He continued: "Add to this output the steadily growing Canadian production and alikely reversal of Mexico's recent production decline, and theoretically total oilproduction from the three countries could rise by 11.2 million barrels per day by2020, to 26.6 million barrels per day from around 15.4 million per day at the end of2011".

What would this do for global oil prices, noting that with China, the US is the world'sbiggest importer of oil?

HIGH OIL PRICES

Ed Morse, like Daniel Yergin and plenty of other oil boomers, that is "unconventional
http://www.oilvoice.com/description/OilVoice/d99ac92e.aspxhttp://www.oilvoice.com/description/OilVoice/d99ac92e.aspxhttp://www.oilvoice.com/description/OilVoice/d99ac92e.aspxhttp://www.oilvoice.com/description/OilVoice/d99ac92e.aspx


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oil" boomers, steer clear of what price level is needed, let alone non-oil and non-fossil energy policies, climate policies, economic and industrial policies, environmentpolicies and other scene changers, to keep shale oil output growing. One figurebandied around is $50 to $60 per barrel. Plenty of energy analysts place the barhigher, as high as $70 per barrel for the price level below which shale oil output

growth runs out of steam - or rather water and hydraulic fracking fluids and theconstant need to "Drill baby, drill!". Canadian tarsands production and financialperformance for operating companies through 2008-2009 gives some support to thehigher-placed, operating breakeven price level.

Certainly for the moment and for some while ahead the jury is out to lunch on thisone. Contrarians can and do argue that oil prices have plenty of upside potential,despite Goldman Sachs officially backing off from its late 2011 forecast that the "rightprice" for Brent and WTI in 2012 would be $130 and $125 per barrel. Retreatingsome, but not a lot, the supposed "current analyst consensus" right price would be -let us and them say - $100 for Brent and maybe $80 for WTI. These figures are at

least 20% above anything corresponding with fundamentals, but never mind! We aretalking about the real energy world where high oil prices are a critical prop to a shakypyramid of global energy investment spending, which totals at least $500 billion-a-year. With the spinoff and derived spending, this number can easily be doubled.

Taking $1 trillion a year as a handy figure we find this is light years away fromhoped-for and projected global energy spending, as projected and forecast by theIEA, US EIA and other agencies, who have no problems talking $1.5 trillion a year,and more. In turn the bottom line is very simple: without "stubbornly high" oil pricesthis spending cannot happen, will not happen. Doubters can for example check anyfailing and unconvincing publicity campaign for all-electric sedan cars produced byRenault, Nissan, GM, BYD, Tesla, Reva, Fisker or other hopefuls: these are alwaysa lot more consumer-friendly when or if oil prices hit $200 a barrel. With oil at $100 abarrel, who wants a $35 000 all electric sedan car with a realworld range of maybe60 miles?

OIL PRICES SPEEDING OIL'S DECLINE

US domestic shale oil can be and is presented as the ultimate gamechanger forworld energy, or US energy at least and given a highly positive spin but oil still has asticky, black image for public opinion. Supplies and prices are unpredictable even

when supplies are growing and prices are rather slowly falling! Environmentalist anti-oil campaigning, over the decades, has educated consumers on the not-obligatoryrole of oil as an energy source and better uses for it, as a raw material forpetrochemicals.

The perverse energy economics of the real world has high-priced oil dragging up allother energy prices, not the reverse of this paradigm. A rather large number ofcorporate and governmental players are highly satisfied with this: if oil price areartificially high, the energy price pyramid can go on growing, spinning off taxrevenues and profits and the banker-broker-trader clique can play their daily routineof adding a little, trimming a little. The result is an unreal energy economic structure

and system, at least as unreal as the towering fiscal cliffs and government spendingdeficits in almost all OECD countries, and emerging economies, needing tax gouging


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and austerity to resolve.

Since at latest 2008 the figures leap out from the statistics of major energy agencieslike the IEA. Oil's role in global energy is surely and certainly compressible. Atpresent it is not possible to give hard-edged numbers to the rate of decline or the

"equilibrium level", but below 25% of global energy is a probable or likely role for oilin world energy by 2020. At this level, why should we pay $100/bbl?

This analysis and rationale can only grow and develop. Oil is overpriced but we donot exactly know how much its price should fall, or when and how its price shouldfall. As a Christmas message for stressed consumers this could be nice news - ifthey still use a car!

By Andrew McKillop

View more quality content fromOilVoice

The one chart aboutoil's future everyoneshould see

Written by Kurt Cobb fromResource Insights

When people read about a long-term forecast of world oil supply--say, out to 2030--they often believe that the forecasters are merely incorporating our knowledge ofexisting fields and figuring out how much oil can be extracted from them over theforecast period. Nothing could be further from the truth. Much of the forecast supplyhas not yet been discovered or has no demonstrated technology which can extractor produce it economically. In other words, such forecasts are merely guesses basedon the slimmest of evidence.

Perhaps the best ever illustration of this comes froma 2009 presentationmade by

Glen Sweetnam, a U.S. Energy Information Administration (EIA) official. The EIA isthe statistical arm of the U.S. Department of Energy. The following chart from that
http://www.oilvoice.com/description/OilVoice/d99ac92e.aspxhttp://www.oilvoice.com/description/OilVoice/d99ac92e.aspxhttp://www.oilvoice.com/description/Resource_Insights/a99eb502.aspxhttp://www.oilvoice.com/description/Resource_Insights/a99eb502.aspxhttp://www.oilvoice.com/description/Resource_Insights/a99eb502.aspxhttp://www.eia.gov/conference/2009/session3/Sweetnam.pdfhttp://www.eia.gov/conference/2009/session3/Sweetnam.pdfhttp://www.eia.gov/conference/2009/session3/Sweetnam.pdfhttp://www.eia.gov/conference/2009/session3/Sweetnam.pdfhttp://www.oilvoice.com/description/Resource_Insights/a99eb502.aspxhttp://www.oilvoice.com/description/OilVoice/d99ac92e.aspx


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presentation will upend any notion that we know exactly where all the oil we need tomeet expected demand will come from.

The chart shows that by 2030 world output of oil and other liquid fuels from currentfields is expected to drop to 43 million barrels per day (mbpd), some 62 millionbarrels below projected demand of 105 mbpd. (Though prepared in 2009, the charttakes into account known projects expected to be producing by 2012.) This drop isconsistent with the observed decline in the worldwide rate of production from existingfields of about 4 percent per year. Certainly, there will be more projects identified in

the 18 years ahead. And, many people will say that we already have a large newresource oftight oil(often mistakenly referred to as shale oil) which can be extractedthrough hydraulic fracturing or fracking. But even if the optimists are correct--andthere can be no guarantee that they will be--this source of oil will only add 3 to 4million barrels of daily production. What Sweetnam's chart tells us is that we mustfind and bring into production the equivalent of five new Saudi Arabias between nowand 2030 in order to meet expected demand even if the volume of tight oil reachesits maximum projected output. (The Saudis currently produce about 11.7 mbpd of oiland other liquids.)

Because Sweetnam's chart is for total worldwide "liquid fuel supply," it's worth noting

that in recent years something called natural gas plant liquids (NGPLs) have beenincluded in world oil supply based on the assumption that these hydrocarbons are100 percent interchangeable with oil. NGPLs are components of natural gas otherthan methane such asethane,propane,butane, andpentane, and their productiongrew recently with the natural gas drilling boom in the United States.Only a smallportion of NGPLs can directly substitute for oil, and ramping up production of thatportion independently is impossible since it is mixed in the methane.

But oil proper--defined ascrude oil including lease condensate--continues to traceouta plateau in production that began in 2005.This makes the oil situation all themore concerning. It is true that rising and ultimately record high oil prices in the last

decade have prompted oil companiesto increase capital expenditures includingthose for exploration and drilling to their highest level ever. But, the vast effort
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represented by those expenditures has failed to boost true crude oil productiondefinitively above the current bumpy plateau.

Some will point to vast deposits of so-called oil shale in the American West andsuggest that production from these can fill the gap in the coming years. But right now

commercial production of oil from this source is exactly zero. And, current reservesare also exactly zero since reserves are defined as those underground resourcesthat can be produced profitably at today's prices from known fields using existingtechnology. (For a more detailed discussion, seemy recent pieceon unconventionaloil resources.)

Perhaps most important is that Sweetnam's chart shows not how much oil we mustdiscover, but the rate of flow we must achieve from any discoveries in order to matchsupply with projected consumption. Huge discoveries mean little if we cannot extractthe oil profitably and at rates that are commensurate with our desired rate ofconsumption.With conventional oil in decline since 2006 according to the

International Energy Agency, a consortium of 28 mostly importing nations, we willnow be forced to rely increasingly on sources of unconventional oil such as the tarsands of Canada and the heavy oil of Venezuela, both of which are difficult andcostly to extract and refine. So far the flows of unconventional oil have only justoffset declines in the rate of production of the cheap, easy-to-get, free-flowingconventional oil which has powered modern civilization to date.

The global economy is entirely dependent on continuous flows of energy and rawmaterials. Oil is absolutely central because it provides one-third of the world's energyand more than 80 percent of its transportation fuel. Unless oil production rises fromhere, global economic growth will eventually stall (if it hasn't already).

Withthe EIA projecting oil production from oil shale of 140,000 barrels per day by2030, we should not expect to close Sweetnam's deficit of 62 mbpd from this source.Even if the EIA is too pessimistic on oil production from oil shale by a factor of 10,such production would barely put a dent in the anticipated supply gap by 2030.

It should be apparent that energy policy around the world is essentially based on theidea that Sweetnam's gap will be filled in time and comfortably. And yet, there can beno assurance of this. In fact, the ongoing plateau in the rate of world oil production inthe face of record high prices ought to give us pause.If seven years of very high

prices can only marginally move the rate of production of all liquids (which includescrude oil, natural gas plant liquids, biofuels, and refinery processing gains) up about3.15 percentandif crude oil proper can only stay flat during the same period, howcan we expect that the next seven years and the next seven after that will be filledwith nothing but good news on supply?

If the answer to this question is that technology will unlock new resources andovercome the declines in existing fields, keep this is mind. If that technology is not onthe shelf and ready to deploy today, it will make almost no difference in the 18 yearsbetween now and 2030. For those who point to hydraulic fracturing as a recenttechnological breakthrough, they need to do a little research.Hydraulic fracturing

was first used in 1947.More than 30 years later in the early 1980s,building ongovernment research, George Mitchell and his company Mitchell Energy and
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Development began pursuing natural gas in deep shale deposits.It took Mitchell 20years of experimentation, government help and government incentives to perfect thetype of hydraulic fracturing which is now used to release both natural gas and oilfrom deep shales. It took another 10 years for his methods to be widely deployed bythe oil and gas industry.

So, here's the timeline on hydraulic fracturing. It took 60 years from the time thetechnique was first deployed until it was refined and widely adopted by the industryfor the specific purpose of extracting natural gas and oil from deep shale deposits.Don't look for any new miracle technologies to make a significant difference in oilproduction between now and 2030 unless they are already in the field performingtheir magic today and have not yet been widely adopted.

The effects of hydraulic fracturing on oil production are already in evidence. And,while the technique has allowed us to recover oil from previously inaccessibledeposits, it has not allowed us to grow oil supplies worldwide as declines in

production elsewhere have offset increases in production of oil from shale deposits(properly called tight oil).

With high oil prices and the hottest new technique unable to move the needle onworldwide production of crude oil, we should look at Glen Sweetnam's chart withconsiderable concern. We should ask ourselves whether it is wise to base energypolicy on the fantasies of industry and government forecasters. Perhaps we shouldfocus instead on the trends and data we can verify and prepare ourselves and oureconomies for a world that may not have the copious amounts of oil that the industryis promising.

View more quality content fromResource Insights
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Recent Company Profiles

The OilVoice database has a diverse selection of company profiles, covering new

start-up companies through to multi-national groups. Each of these profiles featurekey data that allows users to focus on specific information or a full company reportthat can be accessed online or printed and reviewed later.Start your search today!

Bering ExplorationNatural Energy Resources

Bering Exploration look to generate industry-leading shareholder value and returns bydeveloping and executing their distinctivebusiness strategies that are focused

exclusively on exploring for and producingnatural energy resources in the continentalUnited States.

Bering Exploration's OilVoice profile

Titan Energy Ltd.Oil & Gas

Western Australian-based Titan Energy Ltd isa global oil and gas explorer with growinginterests in Australia and the United States.

Titan Energy's OilVoice profile

Petron Energy II, Inc.Oil & Gas

Petron Energy II, Inc. is a Dallas-based, oiland gas exploration and production company.

Petron Energy II, Inc.'s OilVoice profile

CWC Well Services

Corp.Servicing

CWC Well Services Corp. is a premierwell servicing company operating in theWestern Canadian Sedimentary Basinwith a complementary suite of oilfieldservices including service rigs, coil tubing,snubbing, and well testing. TheCompany's operational locations are inGrande Prairie, Red Deer, Lloydminster,Provost, Brooks, Alberta and Weyburn,

Saskatchewan.CWC Well Services Corp.'s OilVoice profile

Tamaska Oil & GasOil & Gas

It is the Company's aim to maximize returns onfunds invested. The Company will undertakeinvestments that it sees as being able togenerate significant commercial returns

through strategic investments and acquisitionsin the oil and gas sector, with an initial focuson North America.

Tamaska Oil & Gas OilVoice profile

Parallel ResourcePartners, LLCOil & Gas

Parallel Resource Partners, LLC utilizes itsunique capabilities to invest in distress drivenopportunities in the North American upstreamoil and gas sector. Parallel Resource Partners,LLC (Parallel) is registered as an investmentadviser with the SEC. Registration with theSEC as an investment adviser does not implythat Parallel or any principals or other personsassociated with Parallel possess a particularlevel of skill or training in the investmentadvisory or any other business.

Parallel Resource Partners' OilVoice profile

Teine EnergyOil & Gas

Teine Energy Ltd. is a private Canadian oiland gas exploration and developmentcompany. Teine's focus is to find and develophigh netback, large hydrocarbon in placeproperties within the Western CanadianSedimentary Basin. Teine is one of the largestland owners in Central West Saskatchewanand is one of the most active drillers in theSaskatchewan Viking play.

Teine Energy's OilVoice profile
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Finding Opportunities in Southern Africa

North Africa - are there any big fields still hiding?

The next generation of exploration technologies

Finding big oil fields offshore East Africa

Finding big oil & gas fields in South East Asia

Reviewing the potential oil and gas industry in Southern AfricaLondon, 09 Jan 2013

Will there be an 'exploration Spring?' to follow the political one?London, 12 Feb 2013

Back to the future, returning to the onshore!London, 07 Mar 2013

..if there are any to be found!London, 09 Apr 2013

The Politics may overwhelm the Geoscience!London, 14 May 2013


20/46


The Montana Bakkenoil play: 'Great newsfor a great play'

Written by Keith Schaefer fromOil & Gas Investments Bulletin

Activity in the huge Bakken field is going home.

Home is Montana, where the Bakken was originally discovered.

Drilling equipment and crews are moving back across the border from NorthDakotawhere the Bakken Boom has been the Biggestboosting Montanas rigcount to 22 from just eight at this time last year. Montanas Department of NaturalResources and Conservation issued a record 356 oil drilling permits in the first tenmonths of the year, easily beating the previous record of 313 set in 2005.

Note the declining rig count in North Dakota (blue line) contrasted with the risingcount in Montana (red line).Thanks to the Federal Reserve Bank of Minneapolis for the figure.

In October a Texas company paid $13.5 million for 75,000 acres of oil and gasleases, one of the largest federal lease acquisitions by a single company in Montanain recent years. Several other companies, including Bakken leader Continental, areworking to expand the boundaries of the states most productive Bakken field, knownas Elm Coulee.

Investors often forget that the first successful horizontal well drilled into the Bakkenwas drilled into the Elm Coulee field in Montana, drilled by Lyco Energy Corp in
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2000. There were earlier wells, even horizontal ones, but this 2000 Lyco well iswidely cited as the first successful one. (For more, check out this a cool timeline ofthe Bakken here:http://www.undeerc.org/bakken/pdfs/BakkenTimeline2.pdf)

But geology doesnt pay attention to state lines and even though the Bakken boom

started with a few good wells in Montana, attention shifted next door after operatorsdecided the geology in North Dakota offered more potential.

There is still an immense amount of oil in the Bakken, which means investors canstill find ways to profit from this fantastic formation. But instead of coming late to theNorth Dakota Bakken party, where six years of profits have left slim pickings, a moresavvy choice might be to check out the new scene next door.

BACKGROUND WHY THE BAKKEN MOVED TO NORTH DAKOTA

The Bakken is a 200,000-square mile rock unit within the even larger Williston Basin,an ancient inland sea that reaches from southern Saskatchewan to North Dakotaand eastern Montana. The Bakken therefore touches four states and provinces, andin the early days of the Bakken boom way back in 2006 drilling was fairly evenlysplit between North Dakota and Montana.

So why did North Dakotans get all the fun? Because of geology.

The Bakken is generally divided into three stacked layersUpper, Middle andLower. The upper and lower layers are organic-rich black shales that gave birth tothe formations oil. The industry calls those layers source rocks. The middle layer ismade up of more porous rockswhich also means more holes and less pressure inthose rocksso the oil seeped away from those higher pressure, denser layers,looking to a more porous resting place. The industry calls that the reservoir. And the

oil is stuck there in the middle Bakken reservoir.
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Thats why the Middle Bakken generates the best production volumesand theMiddle Bakken is thickest in North Dakota. In the early days of the Bakken boom, acouple high-volume wells tapped into the Middle Bakken drew almost all of theattention to North Dakota.

-----

NO OIL LEFT BEHIND Did you know that todays primary oil recovery methods canleave up to 90% of a formations oil trapped in the ground?

The industry calls this stranded oil. For oil producers, it can mean millions of dollarsleft on the table.

Fortunately for them theres now a technology that can actually produce all thisstranded oil quickly and effectively, with no environmental footprint.

In fact it is proven to extend the field life the lifeblood of oil fields throughout theworld including todays massive new shale formations. (This companys patentedtechnology is being used successfully by clients on 3 continents.)

Whats more with over 200,000 wells in the world that could (and should) use thistechnology, it could mean an absolute windfall for investors.

Click hereto get caught up on the whole story.

-----

Those few gushing wells in North Dakota sparked a land grab there. Then, becauseNorth Dakota requires mineral lease holders to explore their acreages within threeyears, companies with ground in North Dakota had to spend their money there.

And so North Dakota became the Bakken boom ground, with a rig count that climbedfrom 25 in 2005 to 213 in mid-2012. Meanwhile Montana was largely forgotten, eventhough the heart of the formation extends across state lines.

BAKKEN MOVING HOME TO MONTANA NOW

Now that is starting to change. In recent months, the Montana Bakken has started tosteal some of the spotlight.

Helping the move is new data showing that geology may be less of an obstacle inMontana than originally thought.

Remember, North Dakota produced those gushing Bakken wells because theprimary reservoir layer, the Middle Bakken, is thickest within its portion of theBakken.

In Montana the middle layer is thinner, pinched by the Upper and Lower Bakken

layers, and geologists thought a thin Middle Bakken would translate into poorrecoveries and flow rates.
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But recently, several explorers have had success with wells that targeted the UpperBakken. The wells dont have the big initial flow rates as in North Dakota, but theydeclined more slowly and had a better oil-to-gas ratios (98% oil) than normal, MiddleBakken wells. The result is making geologists rethink the potential of the UpperBakken and therefore the potential of the entire Montana Bakken.

A productive Upper Bakken is particularly significant in Elm Coulee, the best-producing part of the Montana Bakken to date. In this area the Middle Bakkenbecomes very thin, pinched out by a broad Upper Bakken. The result is a world-classsource rock remember that the organic-rich Upper Bakken is the source rock forthe formations oil with no nearby reservoir. That means all the oil has remained inplace.

Colorado School of Mines professor Steve Sonnenberg pushed the potential of theUpper Bakken in a recent article, saying these results from the Upper Bakkenrepresent great news for a great play.

Jim Halverson, a geologist with the Montana Board of Oil and Gas, is cautiouslyoptimistic about the potential for a Montana Bakken boom.

Weve got lots of rigs, theres lots of stuff going on right now, he said in aninterview. And weve got a fair amount of development thats targeting the uppershale.

However, Halverson is not letting himself get carried away with dreams of a majorMontana Bakken boom.

Here in Montana were going to have the western edge of the Bakken, he said.That edge is going to be economic. We will have good wells, then less good wells,then wells that are uneconomicthe price of oil is going to be critical.

That being said, Halverson also spoke to the possibility that drills might hit intosomething unexpectedand exciting. Sometimes drills find things you werentlooking for, so just getting more wells drilled here is a good thing. Maybe a year fromnow well all be doing something we never thought we were going to be doing.

View more quality content fromOil & Gas Investments Bulletin
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The global anti-fracking movement:

What it wants, how itoperates and what'snext

Written by Jonathan Wood fromControl Risks

Unconventional natural gas is often described as game-changing and transformative,a revolution heralding a golden age of cheap, plentiful energy for a resource-constrained world.

But only if it makes it out of the ground.

As shown by local bans in the US and Canada, national moratoriums in France andBulgaria, and tighter regulation in Australia and the UK, the global anti-frackingmovement has mounted an effective campaign against the extraction of

unconventional gas through hydraulic fracturing.

Meanwhile, the oil and gas industry has largely failed to appreciate social andpolitical risks, and has repeatedly been caught off guard by the sophistication, speedand influence of anti-fracking activists.

What the anti-fracking movement wants

The anti-fracking movement wants four main things.

First, it wants a better deal in terms of economic opportunity, taxation, andcompensation. Moves by some local governments to extract 'impact fees' fall intothis camp.

Second, anti-fracking activists want further study of the environmental, economic andhealth and safety impacts of intensive unconventional gas development, partly toinform regulatory and tax policies but also as a stalling tactic to impede the industry'sexpansion.

Third, some strongly opposed to the industry - whether on water quality or climateprotection grounds - want moratoriums and outright bans on drilling activity.

Finally, and most commonly, the anti-fracking movement wants tighter regulation of
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unconventional gas development. From Pennsylvania to Poland, oil and gasregulation is being updated to address issues raised by hydraulic fracturing andincrease environmental controls.

How the anti-fracking movement operates

The movement's grassroots foundation is reflected in the hundreds of community-based anti-fracking groups that have emerged worldwide. Environmental groupshave played a key role in subsequently organising and professionalising grassrootsactivists, especially in North America and Western Europe.

The anti-fracking movement is particularly adept at organising online campaignsthrough social media. The extensive use of free or low-cost online platforms such asWordpress and Facebook has both facilitated grassroots participation and increasedorganisational efficiency.

Online communications also enable a further pillar of the anti-fracking movement:global networking. This occurs through peer-to-peer activist networks, internationalenvironmental NGO campaigns, and shared ideological and political frameworks.

Some activists and groups also believe direct action against the industry isnecessary. Direct action is intended to draw media attention to the anti-frackingmovement, motivate the anti-fracking opposition, and physically disrupt operations.Project site blockades, in particular, have emerged as a favoured low-cost, high-impact tactic.

What's next for the anti-fracking movement

2012 is likely to set the high-water mark for the anti-fracking movement. Regulatoryreviews concluded in key battlegrounds have set the tone for stricter long-termmanagement of the unconventional gas industry, technological innovations arereducing environmental impacts, and the anti-fracking movement itself is grapplingwith the consequences of its successes. How will the movement adapt?

First, it will seek out new geographies outside North America and Europe whereunconventional gas development is just beginning. The movement may be able totap into existing indigenous rights, labour, water and environmental concerns in

Argentina, India, Mexico and Ukraine, to name a few prospective countries.

The anti-fracking movement has also started to engage a wider set of policy issuesrelated to energy and the environment. Partly, this is a natural outcome of its closeorganisational and ideological links to the climate change movement. But it alsoreflects a perceived need to maintain momentum and block attempts to roll backregulation of the industry.

Finally, parts of the movement could radicalise in response to both internalfragmentation and the spread of the industry. As with the conventional oil and gas,coal, nuclear, timber and other sectors, this could make unconventional oil and gas a

target of more radical direct action.


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How should the industry respond?

Parts of the anti-fracking movement will never be reconciled to fossil fuel extraction,whether through hydraulic fracturing or conventional drilling. But the industry cantake steps to offset social and political opposition, both now and in the future.

First and foremost, the industry needs to acknowledge the legitimacy of localgrievances. Movements towards greater transparency and voluntary disclosure,however grudging, are a positive step in this direction.

Second, the industry needs a broad-spectrum political and social engagementstrategy. This means laying stable - even if expensive - groundwork with localcommunities, especially in terms of mechanisms to register and redress grievances.

Third, the industry needs to continue to make good faith efforts to reduce adverseimpacts in terms of water pollution, health and safety, noise, erosion, road damage

and so on.

Finally, the industry should create more winners by widely distributing the directbenefits of gas development. For most communities, this means procuring as muchas possible locally, providing jobs and training to local workers, paying requiredtaxes, and - crucially - making long-term investments that deliver a sustainedeconomic boost.

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Why world coalconsumption keepsrising; Whateconomists missed

Written by Gail Tverberg fromOur Finite World

A primary reason why coal consumption is rising is because of increasedinternational trade, starting when the World Trade Organization was formed in 1995,and greatly ramping up when China was added in December 2001. Figure 1 showsworld fossil fuel extraction for the three fossil fuels. A person can see a sharp bendin the coal line, immediately after China was added to the World Trade Organization.Chinas data alsoshows a sharp increase in coal useat that time.

China and many other Asian countries had not previously industrialized. The adventof international trade gave them opportunities to make and sell goods below the costof other countries. In order to do this, they needed fuel, however. The fuel the Westhad used when it industrialized was coal. Coal had many advantages for a newly

industrialized countries: it often can be extracted without advanced technology; it isrelatively cheap to extract; and it is often available locally. It can be used to makemany of the basic items used by industrialized countries, including steel, concrete,and electricity.

The industrialization of Asian countries was pushed along by many forces.Companies in the West were eager to have a way to make goods cheaper. Buyerswere happy with lower prices. Even theKyoto Protocoltended to push internationaltrade along. This document made it clear that countries signing the documentwouldnt be in the market for coal. From the point of the developing countries, thiswould help hold coal prices down (at least in the export market). It also likely meant abetter long-term supply of coal for developing countries. The Kyoto Protocol offeredno penalties for exporting products made with coal, so it put countries that used coal

Figure 1. World fossil fuel supplybased on world production datafrom BPs 2012 Statistical Reviewof World Energy.
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to make products for export in a better competitive position. This was especially thecase if Kyoto Protocol countries used carbon taxes to make their own productshigher priced.

Apart from the international trade /industrialization issue, there is another issue that

is helping to keep coal consumption rising. It is the fact that oil supply is in shortsupply and high priced, and this means that economies of countries thatdisproportionately use a lot of oil in their economies are at a competitivedisadvantage. Countries coming late to the party are in a good position to developtheir economies using little oil and much coal, and thus keep overall energy costsdown. This approach gives the developing countries a competitive advantage overthe developed countries.

Lets look at a few graphs. In terms of oil leverage (total energy consumed /oilenergy consumed), China and India come out way ahead of several other selectedcountry groups. They do this with their heavy use of coal.

Based on Figure 3, below, the GDP of countries with a lot of coal in their mix seemsto grow more quickly than other countries.

In recent years, oil has been the most expensive of fossil fuels. Thus, a country thatuses mostly oil will, on average, have higher energy costs than a country that candilute out its oil use with the use of cheaper fuels.

Figure 4 below shows average oil, natural gas, and coal prices for some

representative categories of these fuels.

Figure 2. Ratio of total energyconsumed to oil (includingbiofuels) consumed, based onBPs 2012 Statistical Reviewof World Energy.

Figure 3. 2009-2011 AverageReal GDP % Growth, BasedonUSDA InternationalMacroeconomic Data Sets.World GDP reflects 2005$

weighting.
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Among the types of fuels shown, oil is the highest-priced. The coal price is muchlower, especially if it is locally produced. If it is transported long-distance, the cost oftransport will add to its price. Natural gas prices vary around the world, but tend to bebetween coal and oil prices.1 It is not possible to know exactly what the average fuel

price of each country group shown on Figure 2 and 3 is, but we can make a roughapproximation using the average prices shown in Figure 4. Such an approximation isshown in Figure 5.

A person can see from Figure 5 that the average cost of fossil fuel energy is higherfor the countries at the top of the chart, and lower for those near the bottom of thechart. There are various adjustments that might be made, such as adding the effectof carbon taxes on fossil fuel to the costs for European countries, and adjusting forthe low value of the Euro recently. Both of these would tend to raise the average costof fossil fuels for European countries.

Also, the world average fuel cost is probably overstated in Figure 5. In my list ofcountry groups analyzed, I purposely excluded major oil exporters, such as SaudiArabia, since these can be expected to behave differently than other countries. Quitea few of these exporters can afford to subsidize oil costs for their own people and formanufacturing within their countries, because their actual oil extraction costs arelower than the world oil price. If we were to adjust for this, the world average fuelprice in Figure 5 would probably be reduced.

The Figure 5 averages include only fossil fuels (coal, oil, and natural gas), andexclude other fuels such as nuclear, hydroelectric, wind, and solar PV. Fossil fuels

represent 92%-93% of energy supply in China and India, based onBP StatisticalReview of World Energydata. In Europe, fossil fuels represent 79% of total fuels; in

Figure 4. Price per barrel ofoil equivalent, based onWorldBank datafor the period Jan.-Nov. 2012. All prices have

been converted to a barrel ofoil equivalent basis.

Figure 5. Rough estimate ofaverage cost per barrel of oilequivalent for the variouscountries and groups shown,based on distribution of fuelsused, from BP Statistical

Review of World Energy, andprices from Figure 4.
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the US and Japan, they represent 86% to 87% of the total.

A Look at How Fuel Consumption Is Actually Changing

Oil consumption is decreasing in the countries with relatively slow GDP growth, and

increasing in India and China:

I would interpret this to mean that as the weaker economies (which tend to use ahigher proportion of oil in their energy mix) are priced out of the market, more of theoil is going to the countries that can leverage its use better. Unfortunately, a barrel ofoil saved by Europe, the US, or Japan, means another barrel that can stay on theworld market and be used by China, India, and other developing countries with betterleveraging.

A barrel used in the developed world would only be leveraged up by other fuels byroughly a factor of 2.0 to 2.75, and some of this leveraging would be hydroelectric ornuclear electric, which is fairly benign from a carbon dioxide point of view. If thatsame barrel of oil is instead used by China, it can be leveraged up by a factor of 5.7.Thus a barrel of oil saved by the developed world can be transferred to China andused to greater positive effect, from the point of view of producing cheap consumerproducts and a greater negative impact, from the point of view of CO2 impact.

What did Economists Miss?

Unfortunately, the list is rather long.

1. The most basic issue economist missed is that energy is required to make goodsand services. If production of a product is transferred to another country, that countrywill need energy suppliesprobably cheap, easy to extract, energy suppliesto makethat product. It doesnt make much sense to look at fossil fuel consumption, stoppingat a countrys own borders. If we want products to be made in an environmentallysound way, and we want our own citizens to be employed, we need to make them athome, and figure out a better way of counting CO2 production.

2. World oil supply is constrained. This means that even with additional demand, oilsupply cant rise very much. Additional demand doesnt do much more than raise

price. A reduction of demand, within a range, simply reduces price, without reallyreducing production. Beyond a point, a reduction in demand does temporarily reduce

Figure 6. Percentage growthin oil consumption between2006 and 2011, based onBPs 2012 Statistical Reviewof World Energy.


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both price and production, as it did in 2008. But demand is likely to quickly bounceback, leading to another price spike, and further constrained supply. Standardeconomic models seem to assume this situation cant exist.

3. In a situation of constrained oil supply, if a country reduces its oil consumption, it

doesnt mean that more oil will be left in the ground. Instead, the oil saved goes backon the world oil market (perhaps at a slightly lower price) and is bought by someoneelse who can make better use of it.

4. The mix of types of energy used by a country changes very gradually over time,because it is very difficult to substitute one kind of fuel for another without significantinvestment (for example, modifying cars to use natural gas and building pipelines forthe natural gas). In general, for the short term, the mix is fixed. For example, inFigure 7 below, the world oil leverage remained constant in the period prior to 2000.It then gradually increased, as oil prices rose. There was no big change when the2008-2009 recession hit. A drop in oil consumption tended to lead to a drop in

electricity consumption as well, and a drop in fuel use of all kinds.

I have written about this issue in my post,How Is an Oil Shortage Like a Missing Cupof Flour?In that post, I pointed out that to the extent proportions are fixed by builtinfrastructure, if there is a shortage (or excessively high price) of one necessaryinput (oil in the case of the economy; flour in the case of a batch of cookies), it isnecessary to make a smaller batch. In the case of an economy, a smaller batchlooks like a recession, with lower oil use, lower electricity use, and loweremployment. This same pattern of all three types of fuel use dropping simultaneouslycan also be seen when viewing recent changes in world oil, coal, and natural gassupply, in Figure 1 at the top of this post.

5. If an economy such as China is not growing as fast as it might otherwise growbecause of constrained oil supply, the availability of additional oil on the marketbecause of the Developed Countries cutting back in their use may help Chinaseconomy grow. In fact, China is likely to be able to use the additional oil (as for trucktransport) to make it possible to make more goods using coal. Thus, the savings inoil may theoretically lead to increase in coal consumption, on a world basis.

6. The statement is often made that once oil prices rise high enough, renewables willbecome competitive. This statement is made with blinders on, in a world market for

Figure 7. World oil price(Brent) in 2011$ from BPs2012 Statistical Review ofWorld Energy and Leveragebased on ratio of total fuelconsumption to oilconsumption from the samereport.
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goods and services. What matters in a world market is the lowest total cost ofproduction. Most renewables arent even oil substitutes; they are coal or natural gassubstitutes, and these are cheaper. Anything that raises the average energy cost ofa country relative to other countries makes it less competitive. When a country lesscompetitive, it tends to use less oil. The extra oil tends to go to a more competitive

country, and may help raise coal usage. Obviously wages make a difference, too,but a country that uses cheap fuels can pay their workers less, and still provide anacceptable standard of living.

7. There are two ways of reducing fossil fuel use that might be effective, but probablywould not be well received. One is to cut back on international trade, perhaps byreintroducing taxes on trade. This would reduce fossil fuel usage, because manygoods cannot be made without imported raw materials from elsewhere. Anothermethod that would work is to tax (or forbid) fossil fuel extraction in your own country.This would make your country poorer, and less able to buy imports (such as oil andgas) on the world market.

8. I talked about what seems to be the effect ofChinas competition on US jobs inanother post. It would have been good if economists had foreseen this kind of impactbefore wholeheartedly endorsing the expansion of world trade.

9. It has recently been pointed out to me by a reader that the way Chinas economyworks, businesses can earn a lower rate of return than Western countries, and stillprovide an acceptable profit level, given the way Chinese government interacts withbusinesses. This gives China another competitive advantage, besides low fuel pricesand low wages. SeeRise of the FerroDollar.

Note:

[1] In the United States, natural gas prices are currently below the cost of productionfor many producers because of oversupply. This is not a sustainable situation; onepossibility is that some natural gas producers will leave the market, US natural gassupply will drop with fewer producers, and US prices will rise.

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AIM Oil & Gas - 2013likely to kick offtakeover activity

Written by Richard Jennings fromSpreadbet Magazine

This year has been mixed for some sectors of the equity arena, even though at theheadline level the likes of the S&P 500 are actually substantially higher YTD. Thefirst few months were great for the bulls but then everything turned negative as

economic fears in China, Europe and even the U.S. weighed on investors minds,and prompted them to search out safe havens as detailed in our bond bubble bloghere - http://www.spreadbetmagazine.com/blog/bonds-bubble-over-for-now.html.

SBM has been searching for value inside the market in recent months and lookingfor the most undervalued assets which may be able to deliver a hefty return into2013. One of the sectors we have alighted upon aside from Japan, China and theMining arena is the Oil & Gas sector. Our magazine issues in February andSeptember looked deeply into the Falkland Islands stocks prospects and and alsosome undervalued gems that we think have positive risk:reward potential within theAIM Oil & Gas sector. It is now time to take another look at this battered sector and

try to assess the path it will follow next year

The Financial Meltdown

In May 2008, the AIM Oil & Gas sector was hovering around 6,100. Yup, thats noerror - 6,100! It was valued at almost two times what it currently is. In just a fewmonths between May 2008 and March 2009, the sector lost three-quarters of itsvalue and traded below 1,600 for some time. With a financial crisis threatening thewhole world economy, demand for oil was significantly cut and thus oil prices camedown from a high above $140 to hover around $40. In such an environment therewas no hiding for illiquid, high risk AIM Oil & Gas plays and many stocks were trulydecimated.

With the recovery of the U.S. economy, the oil sector also recovered and the AIM Oil& Gas index hit 5,500 at the beginning of last year but suddenly dropped again in themess that was 2011 in geo-political terms. Conflicts in the MENA region and theearthquake in Japan did push oil prices up for a while but the debt ceiling debacle inthe U.S. and consequent downgrade in the credit rating of the country led to amassive selloff in equities in August and similar declines in commodities. As a result,from 5,500 registered in the opening months of 2011, the AIM Oil & Gas sectorretreated 38% and closed the year at 3,419.

Unfortunately, 2012 has not been much better than 2011 for the sector. Again, it
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started with some strength rising to5,000 in February but then droppedagain and currently trades around3,342, a drop of 2.25% YTD.

Chinas economic slowdown, theU.S. economy growing at less thandesired by the Fed, severaldowngrades to the Worlds growth

prospects, the Japan-China crisis, European sovereign yields risingthese are justsome of the reasons why oil has struggled to rise this year. Brent crude managed torise 2% so far but its Light Sweet counterpart is down 10% - an opportunity we havetouched upon previously with regards to the oil spread widening and offering anopportunity in the mid $20s differential range to short Brent and buy Nymex.

The AIM Oil Companies

With the oil price off its peak, the actual costs of exploring and drilling still havebecome more expensive for the smaller companies that make up the the AIM sector.This is putting lethal pressure on some of those companies as they try to raise cashin an increasingly difficult environment and, as is illustrated so aptly in the case ofthe Falkland Islands stocks. At $200 a barrel, hell I would even try and dig in my ownbackyard and try my luck but with the current oil price being under pressure, someprojects may in fact need to be abandoned given the exploration costs. This is likelyhowever to kick of a spate of farm-ins or takeovers - the real question is choosingthose companies where they are not, excuse the pun, literally over a barrel andneed to give the assets away at the detriment of current shareholders - this in fact isthe questions hanging over what are extremely undervalued companies like BOR,XEL & BLVN. Management know the stock is worth more but they dont have themuscle to raise cash on attractive terms, hence the discounts languish

Adding to the pressure from current moribund oil prices and some drillingdisappointments, we must also consider the effects of the debt crunch. At a timewhen banks are deleveraging just where can these small companies get the fundsthey need? Thats a question many Oily CEOs would love to see answered and as

they have been out to their & their shareholders cost in recent months. Sentiment isbattered down and it will take some time to recover.

The Future

With the fiscal cliff problem currently remaining on the table, oil prices will likelycontinue to go sideways for the near terms. If there is a resolution however in thevery near future then get set for an explosive Christmas rally. We suspect that thistype of risk-on catalyst is required in order to pull the AIM oilies off their oversoldfloors and historically the days over the Xmas period have delivered someexceptional returns to stock holders in these companies.

At current prices, and as has been referred to many times by us here at SBM, a lot of


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the AIM Oil & Gas sector are prime takeover targets. The next year will see improvedeconomic conditions in Europe and the U.S. and the fiscal cliff will (hopefully) be adistant memory. With renewed momentum in the global recovery, oil prices will kickin, and so most likely will oil share prices.

For now we leave you with some datafrom the AIM Oil & Gas Sector for youto take a look. Dont forget to alsotake a look at our picks in theSeptember edition of our Magazine(http://issuu.com/spreadbetmagazine/docs/spreadbet-magazine-v8_genericp. 35). During 2013 we think Ithaca,Bowleven, Xcite, Gulfsands andBorders & Southern will most lilkelyattract predatory attention.

Vie