OilVoice Magazine | September 2012

The answer to the oil dilemma? Natural gas.

China's energy future sets more challenges for oil

Edition Six – September 2012

1 OilVoice Magazine | SEPTEMBER 2012

Issue 6 – September 2012

OilVoice Acorn House 381 Midsummer Blvd Milton Keynes MK9 3HP Tel: +44 208 123 2237 Email: [email protected] Skype: oilvoicetalk Editor James Allen Email: [email protected] Sales Gabby Kotosoba Email: [email protected] Manager, Technical Director Adam Marmaras Email: [email protected]

Social Network

Facebook

Twitter

Google+

Linked In

Read on your iPad You can open PDF documents, such as a PDF attached to an email, with iBooks.

Adam Marmaras

Manager, Technical Director

Welcome to the 6th edition of the

OilVoice magazine.

August is typically a slow month for the

industry, and that is normally reflected

on the website. We receive less press

releases and jobs to the site as

everyone enjoys the summer break.

So credit must be given to our

contributing authors who, despite the

allure of a sandy beach, still managed

to write the industry's best oil and gas

content.

We have some great advertising

opportunities in the magazine. Our

readership grows month on month,

and we're confident that the magazine

is an ideal place to reach people who

work in the industry. If you'd like to

discuss the options, then please get in

touch with our newest recruit Gabby,

at [email protected], or phone +44

208 123 2237.

Enjoy the magazine, and be sure to

send copies to your friends in the

industry.

Adam Marmaras

Manager, Technical Director

OilVoice

mailto:[email protected]



https://www.facebook.com/oilvoice

http://www.twitter.com/oilvoice

https://plus.google.com/118419367014120616513/

http://www.linkedin.com/groups/OilVoice-3162868



Contents

Featured Authors

Biographies of this months featured authors 4

Euro-zone debt crisis: It's impact on the oil and gas industry

by Sophia Garfield 6

The answer to the oil dilemma? Natural gas.

by Robert Kientz 7

The answer to the oil dilemma? Natural gas - Part 2

by Robert Kientz 16

The coming unholy alliance in natural gas

by Wolf Richter 21

What goes up, must go up forever?

by Saj Karsan 23

How a U.S. oil refinery got saved - and a supply shut-down averted

by Keith Schaefer 27

Recently added companies

The latest companies added to the OilVoice database 33

China's energy future sets more challenges for oil

by Andrew MacKillop 34

What happened to all the excitement?

by Larry Wall 37

Natural gas is pushing coal over the cliff

by Wolf Richter 40

Shale growth in other nations: How realistic is it?

by Gary Hunt 42

Waterfloods: The next big profit phase of the shale oil revolution

by Keith Schaefer 44


High gasoline prices and politics are a volatile mix

by Gary Hunt 48

An optimistic energy/GDP forecast to 2050

by Gail Tverberg 52

Natural gas and the brutal dethroning of king coal

by Wolf Richter 62


Featured Authors

Andrew MacKillop

OilVoice Contributor

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

Keith Schaefer

Oil & Gas Investments Bulletin

Keith Schaefer, editor and publisher of the Oil & Gas Investments Bulletin.

Sophia Garfield

Debt Consolidation Care

Sophia Garfield is a writer associated with various financial communities. She loves to write on financial articles. She has covered topics like Global financial situations, credit card debt, insurance, financial law, Debt consolidation, etc.

Gail Tverberg

Our Finite World

Gail Tverber has an M. S. from the University of Illinois, Chicago in Mathematics, and is a Fellow of the Casualty Actuarial Society and a member of the American Academy of Actuaries.

Robert Kientz

Drop Shadow

Robert has been an investor for many years and has 7 years experience working as a corporate auditor and has 13 years corporate working experience.

Larry Wall

HubPages

Larry Wall is a long-time observer of the oil and gas industry as a result of his 16 years newspaper reporter career.

http://oilandgas-investments.com/

http://www.debtconsolidationcare.com/debt-settlement.html

http://ourfiniteworld.com/

http://www.thedropshadow.com/

http://larrywall.hubpages.com/


Gary Hunt

TCLabz

Gary Hunt is President, Tech&Creative Labs, a disruptive innovation business collaboration of software, data and advanced analytics technology companies working together to integrate their products to meet the changing needs of the energy vertical.

Saj Karsan

Barel Karsan

Saj Karsan founded an investment and research firm that is based on the principles of value investing. He has an MBA from the Richard Ivey School of Business, has completed all three CFA exams, and has an engineering degree from McGill University.

Wolf Richter

Testosterone Pit

Wolf Richter has over twenty years of C-level operations and finance experience, including turnaround situations and start-ups. He went to school and worked for two decades in Texas and Oklahoma, with an interlude in France, and then headed east to New York City, Brussels, Tokyo, and finally San Francisco, where he currently lives.

Jobs

The OilVoice Jobs board is fast becoming the place candidates look for their next move in the industry. Featuring adverts from top draw recruiters, CV upload capability, and an easy application process. New jobs are appearing every day, so be sure to bookmark it.

Advertise

OilVoice traffic numbers continue to climb and climb. If you'd like to reach a global audience of oil and gas professionals then it's easy to run an advert with us. We have solutions for every budget, so get in touch with us to discuss how we can help promote your business now.

Noticeboard

Take advantage of our free to use Noticeboard. Post your events, training courses and company press releases today.

Free Membership

Over the past ten years we've grown to 29653 members (let's call it 30,000). If you're not a member then you should start now, it only takes a second. Then you'll be free to post job adverts, events and press releases.

http://www.tclabz.com/

http://www.barelkarsan.com/

http://www.testosteronepit.com/

http://www.oilvoice.com/jobs/


http://www.oilvoice.com/nb/

http://www.oilvoice.com/nb/oil-events.aspx

http://www.oilvoice.com/nb/oil-trainingcourses.aspx

http://www.oilvoice.com/nb/howtoadd.aspx

http://www.oilvoice.com/nb/howtoadd.aspx

http://www.oilvoice.com/open/join.aspx


Euro-zone debt crisis:

It's impact on the oil

and gas industry

Written by Sophia Garfield from Debt Consolidation Care

The oil and gas industry plays an important role in the world economy. This industry

comprises of international and self-regulating oil and gas producers and refiners, gasoline

service locations, and natural gas pipeline organizations; it has experienced years of strong

influence in Washington. Since the 1990 election, individuals and political agencies

associated with gas and oil companies have contributed $238.7 million to applicants and

parties; 75 percent of this has been allotted to Republicans.

In the last quarter of 2011, crude oil prices continued to be explosive in spite of the partial

supply from Libya and advanced OPEC production; this should have lowered price instability

correlated with the fear of a supply deficiency. The OPEC Reference Basket continued to be

unstable, varying in a range between $98-114/b. This instability was mainly a result of the

effect of Europe’s debt crisis on market response and uncertainties that probable corruption

effects could badly weaken economic development in Europe and the rest of the world.

Lately, these bearish financial apprehensions have been counterbalanced by growing

geopolitical insecurities as well as civil turbulence in some developing nations, enhancing

the risk payment in the market.

Undeniably, the Euro-zone debt crisis has been an important challenge for the world

economy and is expected to remain so for at least a few months in 2012. Although Euro-

zone directors have made a continuous attempt to deal with the sovereign debt crisis, capital

markets have not yet gained from the solutions offered to tackle the crisis. The value of euro

dropped to its lowest level against the US dollar in a time span of 16 months and weighed

against the yen even arrived at an 11-year low. Towards the second half of 2011, the Euro-

zone debt crisis has had a substantial impact on the international economy through compact

global trade, execution of stern measures, and a rising credit crisis with cross effects on the

worldwide banking system.

The very old inverse connection between the euro exchange rate or US dollar and the value

of oil has declined lately. Consequently, the potency in the US currency has had diminutive

effect on crude oil prices. However, it is uncertain if this decoupling will continue. With the

increasing impetus in the US economy together with the weaker stance for the Euro-zone,

the value of euro is not expected to experience resurgence against the dollar, unless there is

any instant solution to the debt crisis. Besides, there is still some other risk that the Euro-

zone market may even contract in 2012. This is obvious in the waning trend in Euro-zone

PMI in the previous six months to less than 50, the point detaching expansion from

contraction. According to the government’s statistics office, even the most powerful economy

http://www.oilvoice.com/description/Debt_Consolidation_Care/084c9d68.aspx


in the Euro-zone, Germany, is exhibiting marks of weakness, with GDP falling by 0.25% in

the concluding part of 2011. On the whole, this involves a drop in regional and worldwide

trade and thus would give rise to a further decline in the demand for oil. According to a

recent study, exports to the EU from China (a chief trading associate) have dropped

drastically.

Author Bio: Sophia Garfield is a financial writer, associated with Debt Consolidation Care

community. She loves to write articles on financial situations, bankruptcy, Tax debt relief,

Debt crisis and related topics.

View more quality content from

Debt Consolidation Care

The answer to the oil

dilemma? Natural gas.

Written by Robert Kientz from Drop Shadow

Natural gas is making a big comeback. I don’t mean the price yet, but the use of it as a vital

fuel in the economy. Natural gas is right now the only fuel we have that can be used as a

substitute for oil in transportation energy. Hydrogen is but a dream and electric cars are

failing because they lack the features people are used to in gas engines. Those options are

still on the table, but they are future options and not in the here and now. Natural gas will be

the complementary transportation energy to oil of the now and near future until a we find a

better technology that doesn’t require enormous trade-offs to implement.

Natural gas in the US is so cheap it has become a substitute for coal in grid power. And coal

is still really cheap. The advances in fracking gas have increased supplies and production

rates of gas to the point that it is the cheapest and cleanest of the fossil fuels, which came at

the right time. As I wrote in Beyond Thunderdome, oil is getting harder to drill and therefore

more expensive. We have enough left for the short term, but it is high time we identify

serious alternatives if we don’t want to go back to driving horse and buggies.

The CIA estimates we have over 6 quadrillion cubic feet of proved natural gas reserves

worldwide. Quoted:

http://www.debtconsolidationcare.com/

http://www.oilvoice.com/description/Debt_Consolidation_Care/084c9d68.aspx

http://www.oilvoice.com/description/Drop_Shadow/181cd544.aspx

http://www.thedropshadow.com/?p=3777

https://www.cia.gov/library/publications/the-world-factbook/rankorder/2179rank.html


Proved reserves are those quantities of natural gas, which, by analysis of geological and

engineering data, can be estimated with a high degree of confidence to be commercially

recoverable from a given date forward, from known reservoirs and under current economic

conditions.

A quadrillion is a lot of something. The number is hard to imagine even in the era of trillion

this and that. A quadrillion is still a 1000 times a trillion. Here is a quadrillion dollars on

pallets stacked against the tallest building in the world, Burj Dubai. Now think of every dollar

bill as a cubic foot of natural gas, and the resource image gets several iterations larger.

Natural gas is in abundance at the moment, and it may help address our most pressing

current energy dilemma, transportation fuel. We are lucky and should count our blessings

here. If we didn’t have this cheap and clean fuel, our entire life quality paradigm would

change much more quickly than it already is.

Natural gas reserves are distributed fairly well globally with some denser concentrations in

Russia and the middle east.


world.bymap.org

The US has quite a large store by itself. See the following chart provided by the Energy

Information Administration in their Annual Energy Outlook presentation.

BP has done the work for us on global gas demand and supply. Thanks BP!

http://www.bp.com/liveassets/bp_internet/globalbp/globalbp_uk_english/reports_and_publications/statistical_energy_review_2011/STAGING/local_assets/pdf/statistical_review_of_world_energy_full_report_2011.pdf


As we can see, production keeps up with demand quite nicely without a huge spike in the

price. There was a short term demand spike in natural gas a few years ago, but production

ramped so fast that the spike is now a trough.

And now for another pretty chart by the EIA showing that US production is humming right

along as well.


The argument is clear: Natural gas is our best current alternative transportation fuel. But how

much of an impact can natural gas make in the this energy space?

We have to start with some assumptions to answer this question. One, that my hypothesis

about thorium is correct and cheaper, cleaner grid energy is on the way in a relatively short

time frame (5-7 years), meaning coal and natural gas eventually get edged out as primary

grid power. We have to also assume, for the next few paragraphs, that there are no

infrastructure and conversion costs to natural gas switchover in cars and trucks. We’ll get to

those costs in a bit, but for now I want to ignore them to give the best case scenario for

natural gas adoption as a transportation fuel source.

At current global oil usage and growth rates over the last 25 years (1.6% growth annually),

we double our use of fuels every 45 years. That doesn’t seem significant at first until you

realize we have already been through the first couple of doubling periods and are advancing

on another.

Note that while some economies in the emerging world are increasing rate of fuel usage

faster, at the end of the day, the global needle hasn’t moved much the last couple of

decades.

So how long can natural gas last? We have to figure out how much oil is used for

transportation, and then compare that with what our Gasoline Gallons Equivalent (GGE)

available in natural gas.

Here is a chart showing the typical breakdown in US crude oil products for every barrel of oil

produced.



https://en.wikipedia.org/wiki/Gasoline_gallon_equivalent


About 72% is used in diesel

and gas products for cars and

trucks. We’ll ignore jet fuel for

now as the conversion of jets

to natural gas is not

immediately likely.

We know the world uses about

88 million barrels of oil a day,

so about 63 million barrels per

day are for car and truck

transportation uses. Each

barrel has 42 gallons, so we

come up with 2.6 billion gallons

of gasoline/diesel per day or

roughly 960 billion gallons of gasoline/diesel per year.

The GGE of natural gas for 1 gallon of

gasoline is 126.7 cubic feet. Given that

we have 6.5 quadrillion cubic feet of

gas reserves, that equates to 51 trillion

(GGE) (6.5 quadrillion / 126.7 GGE ).

With 51 trillion GGE, the world could

transport itself at current usage, plus

current usage growth of 1.6% per year,

for 250 years. That’s quite a reservoir

of energy we can draw from. I think this

is what changes the debate on oil as

our primary source of energy.

Now back to costs. Popular Mechanics

estimated that a gas station would

spend about $750,000 on conversion

costs to a natural gas system. We have about 130,000 gas stations in the US. So, it would

cost around $97 billion to convert every station. Of course, the costs would be spread out

over a number of years, or even a decade.

How much does it cost to convert a vehicle? People have done it for about $1000

themselves for a 2-gallon unit allowing 50 miles per fill-up. For about $1600, a person can

convert to a 5.5 gallon system that would more than take care of daily driving needs for the

vast majority of people. Installed professionally, $2500 would be the tops anyone would pay

to convert their car to a gasoline / natural gas hybrid.

It has also been reported that prices are much cheaper in third world countries who have

higher rates of natural gas cars already on the road, meaning costs fall pretty quickly as

more units are installed and more mechanics know how to install them.

https://en.wikipedia.org/wiki/Petroleum_product

https://en.wikipedia.org/wiki/Petroleum_product

https://en.wikipedia.org/wiki/Gasoline_gallon_equivalent

http://www.popularmechanics.com/cars/how-to/maintenance/should-you-convert-your-car-to-natural-gas

http://www.popularmechanics.com/cars/how-to/maintenance/should-you-convert-your-car-to-natural-gas

http://www.youtube.com/watch?v=QYP2ZRwq9EE


The average savings of natural gas per GGE, based upon gasoline and natural gas pump

rates, is currently sitting at around $1.00 or so per gallon. Depending on the system and

options used to install the conversion, payoff could be between 2-4 years on a car getting

25mpg at 15,000 miles per year. I could think of worse investments.

The world has over 1 billion cars, according to the Huffington Post. Assuming all cars have

to be converted using a $1500 system, that is a price tag of about $1.5 trillion for the entire

world’s fleet.

New CNG cars cost anywhere from $3500 to $5000 more than their gas counterparts, but

given economies of scale, that number should come done substantially given a large move

to CNG vehicles.

Then we have the infrastructure. Natural gas pipelines are not cheap. But, 64% of the

world’s pipelines are already for natural gas compared with 17% for oil. The US has an

extensive pipeline network.

Natural gas pipeline construction costs are about $60k per inch mile, according to the

Intrastate Natural Gas Association of America (INGAA).

At current rates, between 1000 and 1500 miles of new pipe are expected to be built between

in the US and Canada now and 2030, given current rates. At least $160 billion in pipeline

expenditures are expected annually until 2030 including the arctic pipelines needed.

If the nation converts it’s fleet of cars and trucks, this can be expected to increase

significantly. Pipelines are by far the safest way to transport natural gas, through trucking it

around regionally shouldn’t be ruled out.

The INGAA estimates current pipeline costs in three scenarios.

It is impossible to tell what the total pipeline expenditures would be for a conversion process

of the world’s fleet of cars over to natural gas from oil, but it would conservatively be in the

hundreds of billions of dollars.

If we just estimate a $2 trillion total, all-in cost of oil to NG conversion, we are probably in the

right ballpark. If we compare that to the $1.2

trillion the US alone has spent on wars in the

Middle East, then about 60% of that world

conversion cost could have been paid for

already. We would have been well on our way.

The numbers are big, but so are the payoffs.

Natural gas is cleaner and very abundant. We

have enough oil to get us through a transition to

natural gas, or looked at another way, we have

two fuels to use for transportation for the

foreseeable future. That is not a bad situation

http://www.huffingtonpost.ca/2011/08/23/car-population_n_934291.html

http://online.wsj.com/article/SB10001424052702304192704577406431047638416.html

http://www.penspen.com/Downloads/Papers/Documents/OilandGasPipelines.pdf

http://www.penspen.com/Downloads/Papers/Documents/OilandGasPipelines.pdf

http://www.ingaa.org/File.aspx?id=10509


to be in, and it is certainly not as apocalyptic as many analysts make it out to be.

If our anticipated grid solutions in thorium nuclear work out, we will have plenty of safer and

cheaper energy options for us and a few succeeding generations to use.


Drop Shadow



The answer to the oil

dilemma? Natural gas -

Part 2

Written by Robert Kientz from Drop Shadow

This is Part 2 of 2 of the natural gas energy series titled ‘The Answer to the Oil

Dilemma? Natural Gas’. Please see Part 1 for the macroeconomic analysis of

Natural Gas as a growing global transportation energy solution. This part

concentrates on investment opportunities in this sector based upon the analysis.

The US, dubbed the Saudi Arabia of natural gas, has surpluses that are expected to

be exported to Asia and Europe. While competing countries are coming online by the

end of the decade, including China and Australia, the US is positioned as the first

mover position in this market which has offered strong pricing advantages for those

who can export the gas. This is done by liquefying it at -270 degrees, compressing

the gas to 1/600th of normal volume and making it economic to ship by tanker. The

companies that can liquefy the gas, ship and regasify it will benefit until gas

production evens out across the globe in the next 10-20 years.

Countries like Japan and South Korea have historically relied on all imported gas.

Japan has increased imports 12% in the first four months after the Tsunami.

Germany, expected to turn down its nuclear reactors by 2015, will become a major

LNG importer. China is expected to increase natural gas consumption 4-fold by 2030

in an effort to reduce reliance on coal. The country has five LNG terminals and is

building six more to accept LNG imports. India is also looking to increase imports.

US companies will be best positioned to fill those import gaps in the next decade.

The US currently has one liquefaction facility and shipbuilders are building LNG

FSRU’s as fast as possible to transport and regasify those inventories onsite at

various demand locations.

In addition, as oil gets more expensive, infrastructure build outs in the US geared

toward natural gas transportation will be a booming industry. Several companies are

positioning themselves to take advantage of this industry shift.




What is the best way to capitalize on the growing market in natural gas? Several

opportunities have presented themselves to the market based upon the factors just

outlined.

Chicago Bridge and Iron (CBI) provides engineering and fabrication services to the

midstream energy and natural resource industries worldwide, which includes LNG

liquefaction and regasification facilities and gas processing plants. CBI recently

acquired Shaw Group, which builds downstream facilities that utilize gas. In addition,

Shaw Group builds nuclear power plants, and will benefit from renewed nuclear

growth sector as well. CBI is now well positioned as one of the largest energy

construction and engineering contract firms in the world.

While some analysts were not bullish on the Shaw acquisition for $3 billion, the facts

are the combined companies have a $28 billion backlog in orders and should be well

positioned to finance the acquisition while growing earnings 10% in the first year

according to company estimates.

Cheniere (LNG) owns and is developing 3 LNG terminals along the US Gulf Coast.

They have additionally been granted rights to the largest US gas liquefaction plant.

The plant cost them $5 billion in financing, $1.5 billion of which was contributed by

Blackstone. The plant will position Cheniere as a leader in LNG exporting. The

company owns long term, 20 year contracts which guarantee them income from

buyers regardless if the plant is actually used, so financing the build out is already in

place.

Their weakness is current financials. They will need additional funding between

20013 and 2014 to remain solvent, partly due to decreasing demand for receiving

terminals in the US which is ripe in shale gas. If they can survive the next few years,

the Sabine Pass liquefaction facility will offer strong revenue growth moving forward.

Chart Industries (GTLS) specializes in providing equipment for natural gas market,

and operates in three segments: Energy and Chemicals, Distribution and Storage,

and Biomedical. The company is based out of Ohio and has international facilities in

Australia, China, Germany, the UK, and Czech Republic.

Chart Industries will be a big factor in the LNG tank business if natural gas fuel

expansion occurs in the US. Note that while the US only has 120,000 natural gas

http://seekingalpha.com/symbol/cbi

http://seekingalpha.com/symbol/lng

http://seekingalpha.com/symbol/gtls


vehicles, the world count is up to 14 million. The biggest near term growth have been

from companies transporting large volumes of natural gas.

Chart Industries will benefit from more LNG infrastructure stateside but may also

suffer from competition from Chesapeake, Shell, and Cheniere. Also note that

expansion has come at a cost of shrinking margins. The stock is priced high on

expectations of earnings growth, but may be due for a slight correction.

Clean Energy Fuels (CLNE) is a leading developer and operator of natural gas

fueling stations in the US. Like Chart Industries, CLNE is a story stock benefiting

from the coming natural gas conversion in the US. Clean Energy gets investment

from gas producers looking to capitalize on increased natural gas transportation

usage, including $450 million from Chesapeake to build 150 gas stations by 2013.

The US lacks fueling stations nationwide to benefit from a conversion, but the rising

cost of oil and lack of alternatives is driving future investments in this sector.

Revenues are growing but the company is yet to record a profit. They will have name

recognition as natural gas consumption rises and may turn out to be a takeover

target from one of the larger gasoline station companies. Financials are solid but

investors want to see a profit from this company soon. Perhaps the 2013 station

build out will help them reach that goal.

Westport Innovations (WPRT) is a global leader in natural gas engines. The

company has made the most headway in heavy duty engines, including a JV with

Cummins. They also have alliances with CAT, GM, Volvo, Ford, Peterbuilt, Daimler

Trucks, Canadian National Railways, and Navistar. They have purchased AFV and

Emer to boost their natural gas technologies.

The company beat Q2 earnings and revenues estimates. They may not be profitable

for two more years, but expectations of profits are forthcoming in 2015. One current

weakness is that 35% of their business is in a tight Asian market, which has been

reducing margins. They need the US and other Western markets to boost margins

and lead the company to profits. So, this company hitches its fortunes to the same

natural gas domestic growth model as the likes of Clean Energy and Chart

Industries.

Teekay LNG Partners (TGP) is one of the largest tanker companies in the word.

They have 25 LNG carriers to add to their 11 conventional oil tankers.

http://seekingalpha.com/symbol/clne

http://seekingalpha.com/symbol/wprt

http://seekingalpha.com/symbol/tgp


The oil tankers are currently in oversupply to the market, and margins are falling.

The glut is not expected to be alleviated soon. However, Teekay’s revenues are

bolstered by a strong LNG fleet. Teekay has contracted for 6 additional LNG tankers

from AP Moller Maersk, which has been financed mostly by their JV partner.

Most of the tanker fleet is on long term contract, but two current LNG tankers come

off soon and will benefit from higher current rates in the market than what the

previous contracts had been worth.

The company is dependent on the debt markets currently, and has high current

liabilities. However, they also have a steady stream of income and should increase

LNG margins a bit in the future. Most likely there will be some share dilution here

and dividends may need to be cut back to cover short term obligations. Right now,

the dividend is very healthy at 6.7%.

Golar LNG (GLNG) operates exclusively in the LNG tanker market so they have no

downside exposure to oil shipping. They have 13 tankers operating with 13 more on

order. 2 of their current fleet operate in the spot market and benefit from high

shipping day rates.

Golar’s revenues come mostly from three companies, BG Group, Shell, and

Pertamina. Golar focuses both on LNG tankers and FSRU’s, which offers the ability

to regasify transported gas on site. Golar expects its current and future FSRU’s offer

an advantage in a market looking for fuel transportation and regasification from US

exports. The number of importing countries has doubled since 2005, and 50% of all

new LNG import markets have chosen FSRU’s over land facilities according to

company statistics.

Like many of the natural gas companies engaged in build out phases, Golar has a

short term cash crunch which will need to be financed and may put pressure on

profits and share price near term. In addition, the company faces pressures in

currency conversions and floating interest rates that may reduce margins in the wake

of current global economic conditions.

Overseas Shipholding Group (OSG) receives most of its revenues from crude oil

transport versus LNG, and is facing weak demand and overcapacity issues in the

crude oil transportation market. The company is highly leveraged and has been

http://seekingalpha.com/symbol/glng

http://seekingalpha.com/symbol/osg


drawing from a credit facility to increase cash on hand.

The company appeared to overbuild the oil fleet despite capacity issues, and

continued to issue strong dividends while facing 2 straight years of losses. They

finally suspended the dividend, but still need to prune their fleet and shed excess

debt to recover. Current management does not appear to be embracing an

aggressive fleet realignment strategy, however, and investors should beware this

stock even given the cheap current share price.

Gaslog (GLOG) is an international operator of 10 LNG carriers with 8 more on the

way. Most of the new fleet has already been contracted and demand should drive

profits in the future. Gaslog’s fleet will be 1.9 average years old upon arrival of the

new vessels which is the youngest in the industry and will be among the most

efficient to operate.

The company has a large finance payment due in Q1 of 2014 but should be able to

refinance given current assets. 2012 profits are expected to be weak due to staffing

increases for the coming new fleet. Profits are expected to rise in 2013 and 2014.

An earnings call is scheduled for August 21 which may impact the stock short term.

But this story is a medium term play. Once the company gets past its current

financing challenges, annual earnings growth is full speed ahead.


Drop Shadow

http://seekingalpha.com/symbol/glog



The coming unholy

alliance in natural gas

Written by Wolf Richter from Testosterone Pit

Natural gas traded at $3.22 per million Btu (MMBtu) at the Henry Hub on Monday (30th

July), a seven-month high, and a jump of 69% from its April low. Breathtaking when you

think that a few months ago, the doom-and-gloomers, who'd been right for a very long time,

were predicting chillingly that the price would hit zero by the fall, when storage would be full

and excess production would have to be flared. But the pains for the industry are far from

over.

Natural gas spot prices can spike locally due to transportation constrains and demand

conditions. Earlier this year, while Japan paid $17/MMBtu, New York $12/MMBtu, and

Boston $9/MMBtu, prices at the Henry Hub, which is in southern Louisiana, marched

towards their decade low and dropped below $2/MMBtu [for that phenomenon, read.... The

Natural Gas Massacre And The Price Spike].

Conversely, there are regions in the US where natural gas prices lag behind those at the

Henry Hub. A salient example is the daily spot price at the Tennessee Gas Pipeline (TGP)

Zone 4 Marcellus, a hub that serves part of the vast Marcellus formation that extends across

much of Virginia, Ohio, Pennsylvania, and New York.

Drilling by horizontal fracking has been phenomenally successful in this shale formation. In

Pennsylvania, production of dry natural gas in June has doubled over last year, reaching 5.7

billion cubic feet per day-9% of overall US production. But it outstripped the take-away

pipeline capacity, despite new pipelines that entered service in 2011 and added 1.5 Bcf/d in

capacity. As a consequence, according to Bentek Energy, over 1,000 natural gas wells in

northern Pennsylvania are not yet producing natural gas because of pipeline constraints.

With production outrunning pipeline capacity and creating a local glut, spot prices have

separated from those at the Henry Hub. At the TGP Zone 4 Marcellus, starting in May, prices

fluctuated widely and dipped below $1/MMBtu even has prices at the Henry Hub had started

http://www.oilvoice.com/description/Testosterone_Pit/2b123b1c.aspx

http://www.testosteronepit.com/home/2012/7/17/the-natural-gas-massacre-and-the-price-spike.html


http://www.eia.gov/todayinenergy/detail.cfm?id=7210



their track towards $3 MMBtu.

Producers in that region are

hurting even more than

elsewhere. The 1,000 wells that

have been drilled but aren't

producing and cash-flowing yet

are a drag on the companies that

own them. And wells that are

producing have had to sell their unhedged production at a discount to already depressed

prices that remain below the cost of production in most of the nation. So the natural gas

massacre hits northern Pennsylvania with even greater violence.

Rig count is a good indicator of

the health of the drilling industry,

and also of the direction of

future production-though there is

a considerable lag between the

number of rigs drilling for gas

and actual production of gas.

And the rig-count is beginning to

be worrisome. At 505 rigs as of

July 27, the count is down 46%

from October last year, and hit

the lowest level since July 1999.

Somewhere between 700 and 900 rigs might be required to maintain current production

levels, given the sharp decline rates of horizontally fracked wells (up to 90% over the first 12

to 18 months). These wells will then have to be refracked, or new wells will have to be drilled

to make up for the declines-at an additional cost. An eternal rat race. But the hard-hit

industry is stepping away from drilling for dry natural gas; drilling at today's prices is still a

losing proposition. Those that can have switched to drilling for oil and natural-gas liquids

(priced similar to oil), which are profitable. Of the natural gas rigs in operation-fewer and

fewer every week-an increasing number are focused on plays that contain more liquids and

less dry natural gas. It's how producers hope to survive.

Turmoil and financial stresses may further reduce drilling activities-though it seems

unthinkable that the rig count could fall even further! Record demand is eating up the

http://investor.shareholder.com/bhi/rig_counts/rc_index.cfm?showpage=na


remnants of the glut. Supply appears to be leveling off and will eventually follow the rig count

down. If that happens during heating season, when seasonal demand skyrockets, it will be

an unholy alliance. We have seen violent spikes before. And we will see them again. It's the

nature of the business.

In the great natural gas shakeout, less efficient or poorly capitalized producers may get

wiped out. It's capitalism's creative destruction. But the price of natural gas has been below

the cost of production for so long that the damage is now huge. Read.... Natural Gas: Where

Endless Money Went to Die.


Testosterone Pit

What goes up, must go

up forever?

Written by Saj Karsan from Barel Karsan

There appears to be a prevailing market belief that commodity prices can only rise in the

long-term, despite short-term fluctuations. Inelastic demand from developed countries and

unremitting demand growth from emerging markets are the most commonly cited reasons for

this. As a result, investors are putting companies in this space on a pedestal, taking recent

earnings growth of such firms for granted. Value investors must be careful not to get caught

up in this game of rising commodity prices leading to rising earnings expectations; it can

result in portfolio disaster.

One commodity in particular that well-represents the general consensus of that of

commodity bulls is the oil market. Demand for oil is indeed inelastic in the short-term; one

cannot design a more fuel-efficient car overnight, and nor does one upgrade his car

overnight in response to a change in the price of oil. But over the long-term, the market for

http://www.testosteronepit.com/home/2012/6/20/natural-gas-where-endless-money-went-to-die.html



http://www.oilvoice.com/description/Barel_Karsan/93d90c51.aspx

http://www.investopedia.com/terms/e/inelastic.asp


oil is like any other market in that it responds to price signals.

To see this in action, consider US oil imports over the last several years:

In the chart above, it is clear that oil consumers react to high oil prices, it just takes them

time. In both the early 80's, and in the last five years or so, high oil prices resulted in down-

trending consumption in the ensuing years. Though it may be argued that part of the reason

for the fall in consumption is thanks to the recession, it is worth noting that US GDP today is

around 50% higher than it was in the mid to late 1990's, which was the last time the US was

importing so little oil according to the chart.

Of course, making up for this demand are emerging markets like China and India, where

economic growth is strong. Despite this, however, global "proved" oil reserves are actually

increasing despite these draw-downs.

But what happens if these emerging markets have not conquered the business cycle? If

growth slows or a recession is experienced in these economic behemoths, expect there to

be a lot of oil for sale without a lot of takers.

Furthermore, as oil prices currently remain high, a number of new technologies are about to

make it possible to consume less oil without lowering our cushy living standards. For

example, hybrids and electric vehicles continue to improve in fuel efficiency and price. Since

transportation fuels make up more than 70% of oil consumption, expect technology changes

in this space to meaningfully reduce oil consumption in the coming years.

Though I am clearly a long-term bear on oil, the end result of all this may very well be that oil

(and other commodity) prices will continue to rise as they have over the last decade. But

http://www.bp.com/liveassets/bp_internet/globalbp/globalbp_uk_english/reports_and_publications/statistical_energy_review_2011/STAGING/local_assets/pdf/oil_section_2011.pdf

http://www.bp.com/liveassets/bp_internet/globalbp/globalbp_uk_english/reports_and_publications/statistical_energy_review_2011/STAGING/local_assets/pdf/oil_section_2011.pdf

http://www.theglobeandmail.com/globe-drive/green-driving/news-and-notes/mitsubishi-slashes-price-extends-range-of-i-miev-electric-car/article2088325/


hopefully it is clear that whether this will happen or not is not clear at all. The future is

uncertain, and considering the cyclical nature of this industry, it would be very dangerous to

extrapolate the last ten years into the future.

For example, can you really predict what an oil services firm will earn five or ten years from

now with any reasonable standard of deviation? Probably not. But if you pay 10 times

earnings for such a company, you are implicitly saying that you can.

Commodity prices are volatile and difficult to predict over the next week, let alone over the

next few years. As such, it is best for investors to stay away. Why place a bet when the odds

are uncertain? Place your bets when the odds are in your favour.


Barel Karsan

http://www.barelkarsan.com/2008/10/stock-ideas.html

http://www.oilvoice.com/description/Barel_Karsan/93d90c51.aspx

Doing more with dataKuala Lumpur, October 24-25, 2012

Finding Petroleum / Digital Energy Journal is running 2 one day conferences in Kuala Lumpur, Malaysia, on October 24 and 25 on doing more with drilling and subsurface data.

These 2 events will present the most exciting new technology to help manage and work with all aspects of data in the upstream all and gas industry.

The conferences are for people who want to learn about new ideas and new technologies to make their data work harder, to improve efficiency and safety of drilling, ability to find new reservoirs and extend existing ones, and maximise production.

The event is scheduled to co-incide with the Energistics National Data Repositories conference in KL on October 21-24.

Attendance is free - register now to secure your place.

Reserve your place now at FindingPetroleum.com

October 24 - Doing more with with drilling data

October 25 am - Doing more with subsurface data

October 25 pm - Getting data tools implemented faster

The aim is

(i) to make it easier for people working in KL oil and gas companies and service companies to find out more about the latest new technology to help manage data, and

(ii) to provide technology companies attending the National Data Repositories event with a chance to meet a local audience during the same trip.

The events will be free to attend.

For days 1 and 2, we will look for financial contributions from speakers - in the range 14600 MYR / USD 4760 / GBP 3000 for a morning slot and MYR 9750 / USD 3200 / GBP 2000 for an afternoon slot.

Sponsorship opportunities are also available.

For enquiries about sponsorship and speaking please contact our sales manager John Finder on +44 208 150 5292, e-mail [email protected]


How a U.S. oil refinery

got saved - and a

supply shut-down

averted

Written by Keith Schaefer from Oil & Gas Investments Bulletin

These guys got it done.

In a few short months, they saved hundreds of jobs, increased industry profits, created some

energy security for the US east coast, and set the stage to improve the environment through

reduced air emissions.

They are the epitomy, the poster child, of how business, labour and government can and

should work together to create solutions in the North American oil patch.

Who are 'these guys?' They are the United Steelworkers of America, Pennsylvania Governor

Tom Corbett's team, Sunoco senior management, and management from the Carlyle Group,

a large private equity firm.

What they did was save 850 direct, high-paying jobs at the Sunoco refinery in Philadelphia.

But even more important, if this 330,000-barrel-a-day refinery closed, there was a serious

supply issue for drivers on the east coast-and the industry.

They are a textbook lesson that certainly the polarized Canadian stakeholders should be

reviewing in issues like the Northern Gateway oil pipeline from Alberta to the Canadian west

coast.

And if the American stakeholders around the Keystone pipeline could work together like this,

there would be environmental and economic security-and commerce would flow.

What's surprising to me is that this monumental feat of consensus got only one day of media

attention in the US. I interviewed several people involved in the negotiations to get a sense

of the attitudes, the friction points, and the lessons that this issue brought to the oil patch.

http://www.oilvoice.com/description/Oil_Gas_Investments_Bulletin/226802cf.aspx


Here's how it got done:

Last September when Sunoco and ConocoPhillips announced they would each be closing

their Pennsylvania refineries, it seemed like a dark day for energy in the Northeast.

The facilities - Philadelphia and Marcus Hook for Sunoco, Trainer for ConocoPhillips - not

only kept the region supplied with the fuel it needed… but they accounted for hundreds of

direct jobs. The closure of these three refineries would have led to increased unemployment

figures and rising fuel prices.

September 2011 to July 2012

When the United Steelworkers (USW) heard of Sunoco's announcement to shutter the

refineries if buyers couldn't be found, they sprang into action. Letters were written to

politicians and officials to call attention to the situation. After all, it could cause a huge

negative impact on the region.

By October, Democratic House Leader Nancy Pelosi had mentioned the closure of the

refineries at a White House briefing. But the USW didn't let the issue fade away and kept up

its tireless campaign to raise awareness among the country's top decision makers. In

January, Gene Sperling, President Obama's top economic advisor, was involved in the

process.

The end of February saw a report from the U.S. Energy Information Administration come out

that confirmed many people's fears:

The Northeast's fuel situation would be in dire straights if the refineries were to be shuttered.

In March, Sperling organized a conference call with newly promoted Sunoco chief executive

officer Brian P. MacDonald, who had previously been the company's chief financial officer.

As it turns out, that call was a major turning point in keeping the Philadelphia refinery-with its

330,000-barrel-a-day output and its 850 direct jobs-open, according to The Philadelphia

Inquirer. During that call The Carlyle Group was identified as a possible buyer for the facility.

In addition, the government gave assurances to MacDonald it would do whatever possible to

allow a deal to get done.

David M. Marchick, Carlyle's managing director for external affairs, touched on a point that


would be echoed by all sides in the matter when he told The Inquirer, 'This is a rare example

of federal, state and local officials, business and labor, Republicans and Democrats, all

coming together for one common purpose.'

In April, Sunoco announced that it had established an exclusive sales negotiation agreement

with Carlyle, and by July the two companies said they would form a joint venture called

Philadelphia Energy Solutions, which would keep the plant open. Just days after, USW

ratified their contract with a near unanimous vote.

And so, the Philadelphia refinery was saved.

How the Labor Union Saved a Shut-Down

The news of the refineries closing last fall went largely unnoticed by the national media, but it

was obviously big news to the USW. And they worked hard to get it on the political agenda-

including a candlelight vigil at Pennsylvania Governor Tom Corbett's mansion.

Lynn Hancock, a USW spokesperson, says that if not for the union, the plant would have

been shut down.

'If these facilities had been non-union you wouldn't have seen this kind of campaign. They

probably would've been shut down by now,' she said.

Bringing together the stakeholders and the government was an important step, but that didn't

guarantee that a deal would get done.

Hancock said that she knew Carlyle was serious about its offer when they wanted to talk to

the union.

'When I heard that they were going to meet with the local union, 10-1, leaders I knew that

this was moving and there's a good chance it was going to result in a sale,' she said.

And when Carlyle and the union did meet to talk about the workers' contract, both sides

worked together to get something done. Ultimately, a three-year contract was negotiated that

gave the union a 2.5% raise the first year and a 3% raise in years two and three.

In exchange, the union would give up its defined-benefit pension plan for a 401(k) and allow

some union jobs to be performed by contractors.


These negotiations are another example of the cooperative theme that permeated the whole

campaign and talks about keeping the facilities open. Hancock emphasized what can be

done when business and labor get together:

'It shows that a lot can be accomplished when business works together with its unions.

Instead of seeing them as adversaries they should see them as helpmates in improving

things and in making businesses stronger,' Hancock's spokesperson reported.

Private Industry's Part

When Brian MacDonald became the CEO of Sunoco in March of this year, it marked a

turning point in the process. Hancock said that MacDonald's involvement was vital in getting

a deal done.

After his meeting with Sperling, MacDonald left a message for Carlyle Managing Director

Rodney S. Cohen, who had previously helped save a refinery in Kansas. Having someone

with previous experience was likely a big plus in the deal.

After several weeks of negotiations a deal was struck to create a joint venture that would see

Sunoco get a one-third, non-controlling stake in the venture, and Carlyle would get control of

the 1,400-acre facility. In addition, Carlyle will receive $25 million in state funds to match its

$200 million investment in upgrades to the plant.

MacDonald said that the joint partnership was an example of across-the-board cooperation.

'This partnership is a great example of what can happen when motivated people think

creatively to solve pressing problems,' he said. 'The private sector, government and labor all

played important roles in getting this done. This is the best possible outcome for everyone

involved: existing jobs will be saved, new jobs will be created and new business

opportunities will be given the chance to develop.'

Still, some key technical concerns remained in order for the partnership to succeed. One of

the key questions was:

Where would oil come from for the refinery?

Typically refineries in the area have relied on expensive, imported Brent crude. But Carlyle's

investment will open the door for the light shale oil from North Dakota-the Bakken formation-


to be shipped in.

Carlyle officials said that plans are in place to connect the facility to the west through a high-

speed train unloading facility, which could reportedly handle 140,000 barrels a day.

The Pennsylvania Department of Transportation will reportedly be contributing about $10

million to the effort to extend the rail lines. Dennis Buterbaugh, a spokesman with the

Pennsylvania DOT, said that more details will emerge in the coming weeks once Carlyle's

application comes through.

The Bakken won't be the only play that will be a part of this venture, as the Marcellus shale

will also be involved. Carlyle said that it plans to use natural gas from the formation to power

the refinery, and also said it would explore the possibility of liquid natural gas at the plant.

Government's Part

Many prominent politicians including Governor Corbett, U.S. Representative Bob Brady and

Philadelphia Mayor Michael Nutter were involved. What was impressive about their efforts is

that no one took the opportunity to try to get a political 'win.'

Corbett, a Republican, decided that even if this project would be good for the Democratic

White House in the upcoming election, he would not let so many of his constituents lose their

jobs.

'Obviously, if you take it from a political perspective, this is important to the White House.

They're going to be able to count this in an election year… Working together and getting this

done was a lot better than seeing this facility shut down,' he said.

Support from these high-level lawmakers was an important factor in the refinery being saved

but there was also a great deal of behind-the-scenes effort from local officials and

government employees-like Mike Krancer.

Krancer is the secretary of Pennsylvania's Department of Environmental Protection (DEP),

part of a team put together by the governor in December to evaluate what could be done to

save the refinery.

Krancer said his job was to make sure all the stakeholders knew the government was here

to solve problems, not create barriers.


Once Carlyle was identified as a potential buyer, he said it was important they had

confidence in the government to help them through any air permitting issues.

Krancer and key members of his team had spent a large part of their career in the private

sector. He said that he knew what it is like to work with stubborn government officials who

have no interest in solving problems. By bringing a 'can-do' attitude to the table, Krancer

helped give Carlyle the confidence it needed to make the investment.

One of the technical keys that made this deal viable for Carlyle, Krancer said, was bringing

in Bakken crude, which is lower in sulfur than many other crudes. This light oil leads to lower

emissions, so it was a win-win for both the environment and economics.

Another state agency that was on Governor Corbett's task force was the Department of

Community & Economic Development.

Steven Kratz, the department's press secretary, said that one of the keys for the

government's success in this situation was that it was extremely active, but not visible. This

allowed strong bipartisan cooperation within the government.

Kratz said that the project was a 'terrific example of … coordination within state government'

and a 'great example of all levels of government working together.'

While the deal is not yet finalized (that is expected to happen in the third quarter), the

example of the Philadelphia refinery should be held up as what can happen when the private

sector, labor and government put their heads together to solve energy problems.





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 feature

key data that allows users to focus on specific information or a full company report

that can be accessed online or printed and reviewed later. Start your search today!

Big Sky Petroleum Oil

Big Sky Petroleum Corporation (TSXV: BSP) focuses on a concentrated portfolio of resource assets located in the Montana portion of the “Alberta Basin”.

Visit Big Sky Petroleums' OilVoice profile

Canadian Energy Exploration Oil & Gas

Canadian Energy Exploration Inc. is a conventionally-focused oil-based company seeking to add internally-driven drilling locations to bolster a focused acquisition program.

Visit Canadian Energy's OilVoice profile

Petro One Energy Oil & Gas

Petro One Energy Corp. engages in the acquisition, discovery, exploration, and development of oil and gas properties in Canada.

Visit Petro One Energy's OilVoice profile

QGOG Oil & Gas

Queiroz Galvão Perfurações S/A was established on April 1980 when the second worldwide oil crisis was taking place, and facing the following challenges: following Brazil’s activity growth and expanding on services rendering industry for oil and gas drilling.

Visit QGOG's OilVoice profile

Canadian Phoenix Resources Oil & Gas

Canadian Phoenix Resources Corp. is a publicly-traded junior oil and gas exploration, development and production company with operations in Western Canada.

Visit Canadian Phoenix’s OilVoice profile

Instinct Energy Oil, Gas, Power and Coal

Instinct Energy Limited (Instinct) is an Australian company focussing on Coal Bed Methane (CBM), unconventional gas and coal exploration.

Visit Instinct Energy's OilVoice profile

Stag Energy Electricity and Gas

Stag Energy is an independent UK based energy company involved in the development and management of innovative projects in the rapidly evolving electricity and gas sectors.

Visit Stag Energy's OilVoice profile

Gulf United Energy Oil & Gas

Gulf United Energy Inc. is an oil and gas exploration and production company with a unique portfolio of potential large-reserve projects in central Colombia and offshore Peru. Based in Houston, Texas, Gulf United Energy is led by a veteran professional management team with significant experience in South America.

Visit Gulf United Energy's OilVoice profile

http://www.oilvoice.com/directory/

http://www.oilvoice.com/Description/dd766c33.aspx

http://www.oilvoice.com/Description/44fbc886.aspx

http://www.oilvoice.com/Description/Petro_One_Energy_Corp/580091f3.aspx

http://www.oilvoice.com/Description/QGOG/293092d5.aspx

http://www.oilvoice.com/Description/Canadian_Phoenix_Resources_Corp/bd309488.aspx

http://www.oilvoice.com/Description/Instinct_Energy/af83c9ce.aspx

http://www.oilvoice.com/Description/Stag_Energy/0e4ba3ee.aspx

http://www.oilvoice.com/Description/Gulf_United_Energy/2907e9d9.aspx


China's energy future

sets more challenges

for oil

Written by Andrew MacKillop from OilVoice

From July 2012 onward, mounting news releases and data on China's energy-economy

presents a picture of energy transition, happening in the real world, here and now. Some of

the changes are predictable - but others are not.

We get the impression that China's energy-economy is moving towards a "clean energy"

future, but this has now moved into faster than planned acceleration, generating highly

complex outlooks for oil and oil price forecasting, in a global energy scene that is also

changing fast.

In August, the State Council announced that China may spend as much as 2.37 trillion yuan

(about US$ 373 billion) on projects for conserving energy and reducing emissions in the

less-than-four year period to December 2015. This comes on top of previous energy

economy and green energy plans and programs set for the 2005-2015 period. The

cumulative impact is therefore higher than this already-large new program might itself alone

imply.

One predictable result on Asian stock markets was a surge in share values of cleantech,

green energy and environmental protection companies. The more complex follow-on for

share values in this equities grouping, outside Asia, also testifies to the multiple pathways

that China's changing energy future will take, on a global level.

DECLINING ENERGY INTENSITY

One clear target in the new plan announced is that by 2015, China will reduce the amount of

energy it uses to produce every unit of gross domestic product by 16% compared with 2010

energy intensity levels. This would theoretically generate annual energy savings of about

670 million tons coal equivalent energy (based on 8000 kWh thermal energy per standard

ton of coal). This however also implies continued high levels of economic output, and growth

of output in China's manufacturing and heavy industries, which is a long way from certain. If

the economy moves faster to higher value added activities and output, China's energy

http://www.oilvoice.com/description/OilVoice/d99ac92e.aspx


intensity reduction from the new plan may surpass 16% by 2015.

China is raising energy efficiency and improve environmental conditions through several

policy levers especially including a now-rapid reduction in the growth of output by energy-

intensive heavier industries, and the increasingly probable decline of total output from

heavier industries by about 2015. In the three decades of expansion through 1982-2012

China's economy has grown more than 90-fold, featuring the heavy industries and lower

value added manufacturing.

China's government has previously announced energy-focus State plans and projects where

cutting the amount of carbon it emits per unit of economic output by up to 45%, by 2020,

from 2005 levels were the high-ground targets, enabling us to scenarize a reduction in total

energy demand growth for the world's second biggest economy that can have far reaching

global impacts. For oil and coal this is especially significant due to China being the world's

undisputed No 1 coal consumer, and until 2010 having the fastest growing rate of oil import

demand within the G20 countries. Through 1999-2009, China's rate of oil consumption

growth averaged about 9.4% per year, but even by 2009 the annual rate had fallen to nearly

one-half the 10-year average rate.

ENIVRONMENT - AND ECONOMY

The new energy saving and green energy promoting plan and programs of China address

several issues, including attempts to bolster China from the effects of a global economic

slowdown. They also respond to public outrage over a surge in urban pollution leading to

several municipalities, including Beijing, introducing car ownership growth limits for new

urban development set on fixed limits for the maximum number of cars per unit area. For

non-thermal and electric cars, these new limits will not apply, in an incentivizing process

similar to but stronger than reduced taxes and charges for urban electric car ownership in

many western cities.

The real and basic problem, over and above and separate from the now controversial real

degree of linkage between CO2 emissions and global warming, if there really is global

warming, is "everyday pollution" especially in urban areas. Also important, economists

including those at the International Monetary Fund have recommended spending on

environmental protection as a way to support growth as the European debt crisis, and the

USA's slow economic growth saps overseas demand for China's exports.

The role of environmental spending to bolster the domestic economy and generate a new

type of sustainable economic activity is recognized. This adds another strand to the


development of cleantech, green energy and environmental protection, where China's global

role is now preponderant. To be sure China's Asian rivals India, Japan and South Korea are

pursuing a similar track, for similar reasons including their intention to cut oil import demand

growth where it is still growing, and increase its rate of annual reduction, where it is already

falling.

The environmental protection industry is now one of the few areas where good growth

potentials in China, and other countries are attractive to governments seeking to bolster

investment and spending, to prevent or trim the downturn in economic activity. Market

analyst reasoning is that share values in the sector will do well in an emerging scenario

where most "classic industries" are slowing down.

The role of global economic trends, cutting overseas demand for industrial exports, and

already-operating but perhaps surprisingly successful national action for reducing energy

intensity is especially shown by China's electricity demand trends. Surprise data announced

by the China Electricity Council in July showed that power demand in the 12 months July

2011-July 2012 had "flat lined", that is showed zero growth.

http://dallasfed.org/research/eclett/2012/el1208.cfm

Industrial electricity consumption is a classic "proxy" for industrial output, making many

foreign observers think that two trends are now operating. Firstly, China is moving away from

heavier-type industrial and manufacturing activity at a fast pace; secondly the State's ability

to create a mechanism to control total energy consumption has advanced faster than even

its architects hoped: Liu Tienan, vice chairman of the National Development and Reform

Commission has written that this is the final goal of his Commission (writing in the Qiushi

Magazine, in July 2012).

At the same time, staying with electricity, China's push to develop renewable energy resulted

in clean energy generation rising by 31% to 106.8 billion kWh in July from a year earlier,

according to the State Electricity Regulatory Commission. Here agai however, the pace of

change may produce surprising results. This massive annual growth may in fact be a "high-

water mark", due to many factors, including the industrial slowdown and shift away from

energy-intensive industry, in China. As in Germany, the second-biggest country in the race

to develop clean energy, worldwide, energy-economic bottlenecks and pinch points are

making for slower growth rates of clean energy output, which are intensified by an economic

context where demand growth for electricity, and other energy, may fall to very low levels

near zero growth, for some while ahead.


The challenging context for corporate planners and strategists and government deciders

may result in shorter-term contraction of energy company investment plans and

programmes, in a new and uncertain, complex global framework. At this time, one of the few

fundamentals supporting high oil prices is slow output growth, or declining oil output by a

large range of companies, from the "historic oil majors" to the NOCs of several countries.

China's rapidly changing energy scene underlines the rate of change and the high-ground

potential of decline in total energy demand without a corresponding and similar decline in

economic output. Other environment-related sectors, especially food and food processing,

will also be among the likely winners, due to system-wide analysis of all energy and resource

inputs highlighting where total energy demand, and total environment impacts are presently

highest.

Written by Andrew MacKillop


OilVoice

What happened to all

the excitement?

Written by Larry Wall from Larry Wall

It was not that long ago we were hearing stories about the polar ice cap melting, ocean

levels rising, the possible extinction of the polar bear and then nothing.

As most know, there is a lot of oil and gas activity in the arctic and Polar Regions. It is rather

odd that planned activities by Shell Oil Co. are being scaled back, according to a July 28,

2012 article in the "Houston Post," The article added, "Shell is scaling back plans to drill up

to five wells in Arctic waters this summer amid a series of setbacks, including stubborn sea

ice clinging to Alaska's shores and delays in construction of an emergency oil spill

containment barge.'

http://www.oilvoice.com/description/OilVoice/d99ac92e.aspx

http://www.oilvoice.com/description/Larry_Wall/022e4e4f.aspx


The story adds, 'In the past five years, ice has encroached over the planned drill sites as

early as Nov. 1, but this summer. The slow melt of multi-year ice at the season's start means

the water is colder and is a signal it could return even earlier.'

It was not that long ago that we were hearing about the polar ice cap melting, the polar bears

being at risk and all sorts of bad things. Even so, someone kept sending ice-breaking ships

through the area of gather this data.

In its Feb. 8, 2012 edition, The "U.S. News and World Report" had a story that said, among

other things, about 30 percent less ice is melting than was previously predicted. Amazing,

someone had an incorrect estimate that many people just had to believe.

Meanwhile, scientists are studying core samples taken from the polar regions and are finding

that they have been warming and cooling trends for at least one million years and probably

much longer. It is conceded that greenhouse gases have some impact, but the question

remains how much of an impact. Furthermore, the polar bears are a threatened species,

which is less serious than being an endangered species. Global warming is cited as one of

the causes for the decrease in the Polar Bear population, but hunting and poaching are also

major issues. Loss of sea ice is another problem. However, there appears, at least based on

the difficulties Shell Oil is encountering an increasing accumulation of sea ice in some areas.

No one wants the Polar Bear to become extinct. Nevertheless, a reaction to a situation that

is governed by panic will not be successful.

Furthermore, the late Dr. Roy Dokka of Louisiana State University did extensive studies

showing that Louisiana was, in fact, sinking because of subsidence and the fact the

Mississippi River was collecting large amounts of sediments that once went into the

wetlands, but because of levees being built, were just stopping at the mount of the river

causing a gradual sinking impact.

The point of all of this is that the world is not going to end tomorrow because of oil and gas

activities. Evidence is disputing the impact of oil and gas in the Polar Regions and the

coastal issues in Louisiana. Evidence is also being produced that supports the claiming that

hydro fractionation or fracking as it is commonly known is not posing any serious health

impacts and are not damaging underground drinking-water supplies.

What we have learned is that there much more oil and gas to be found in the United States

and in other areas. The question that remains is who is going to take advantage of this

knowledge and state developing these resources?


The alternative-fuel supporters have less evidence today than they did a year ago about the

danger of oil and gas exploration and production, since more experts are agreeing that

fracking is safe. Furthermore, none of the alternative-fuel supporters or those just opposed

to the use of oil and gas have come up with anything that can be used as a building block for

our civilization. Solar and wind power, along with electric cars and other similar devices only

provide a small percentage of our total energy demand.

The ability to take any of those resources and make the products that come from a barrel of

oil has been addressed, much less resolved.

Finally, the push, regarding motor vehicles, has got to come to a consensus on several

issues. First, what is going to be the alternative-fuel source of choice? It is just not going to

be practical to have cars and truck running on a variety of fuel sources that may not be

interchangeable, i.e., allowing motor vehicles to use any fuel source that might be available.

There are some relatively minor issues to be addressed. At one time, railroads decided their

own track width, thus making it impossible for one train to use the tracks of another

company. Congress passed a law setting a standard for the width between the rails on train

tracks. If we are going to have cars that we charge up at home, we are going to need a

standard plug and receptacle system. Granted, that is a minor point, but no one wants to

spend money if they decide to buy one electric car one year and then buy a different brand

as a second car the following year.

Oil and natural gas are our primary fuel sources. We are not running out. Thus, it is time for

the supporters of alternative fuels to come together with a unified approach that recognizes

the importance of oil as a building block and determines the best uses for other fuels while

ensuring those fuels are compatible with our current and anticipated lifestyles.

(Larry Wall is a long-time observer of the oil and gas industry as a result of his 16 years

newspaper reporter career and his 22 years as Director of Public Affairs for the Louisiana

Mid-Continent Oil and Gas Association. Additional columns by Mr. Wall may be found at

http://larrywall.hubpages.com)


Larry Wall

http://larrywall.hubpages.com/

http://www.oilvoice.com/description/Larry_Wall/022e4e4f.aspx


Natural gas is pushing

coal over the cliff


Natural gas may well be the most mispriced commodity these days. Its price has been below

the cost of production for so long that the industry is suffering serious consequences with

billions of dollars in losses—dollied up as “non-cash accounting charges” as to be ignored by

“analysts.” The more leveraged players are trying to keep their chin above water by selling

priced assets.

There has been a mad scramble to abandon drilling for dry natural gas, and what little drilling

still takes place is focused on wells that also produce oil or gaseous liquids. Countless wells

have already been drilled and could produce but have not been brought on line due to

pipeline constraints or local prices that have collapsed [read...The Coming Unholy Alliance in

Natural Gas].

And yet, even that mayhem hasn’t been enough to push the price above the cost of

production. But production is now finally tapering off from record highs on a week-to-week

basis, though it’s still above last year’s level. Storage levels are high for this time of the year,

but are rapidly regressing towards the mean due to soaring demand, driven by the hottest

July on record and power generators that have switched from coal to gas due to price. But

this is just noise as natural gas continues its relentless conquest.

It started in the 1990s when highly efficient natural gas combined-cycle (NGCC) turbines

arrived on the scene. For the first time, gas was able to compete with coal on cost. By 2000,

there was a building boom of NGCC plants underway that, over the next ten years, nearly

doubled the natural gas-fired generating capacity. And every one of these plants helped

natural gas gain ground on coal.

And during the first six months of 2012, 165 power generators came on line with a total

capacity of 8,098 megawatts (MW), but only one was a coal-fired plant. At 800 MW, it’s less

than 10% of total capacity added. The remaining 90% were gas-fired generators and

renewables, including solar and landfill gas, which tend to be small—hence the large number

of generators.


http://www.testosteronepit.com/home/2012/7/30/the-coming-unholy-alliance-in-natural-gas.html

http://www.testosteronepit.com/home/2012/7/30/the-coming-unholy-alliance-in-natural-gas.html

http://www.eia.gov/analysis/studies/fuelelasticities/pdf/eia-fuelelasticities.pdf



Coal plants are shut down at a stunning pace. In 2012, a total of 9 gigawatts (GW) of coal-

fired capacity will be retired, the largest one-year exodus in the history of the US! In 2015, a

new record: 10 GW. Between 2012 and 2016, 175 coal-fired generators with a total capacity

of 27 GW will get axed—8.5% of the total coal-fired capacity.

Each wave is comprised of the oldest and most inefficient units. At the same time, the few

coal-fired generators coming on line are much more efficient and burn significantly less coal

than the capacity they’re replacing. A double whammy for coal demand.

The reason: cost. More precisely, variable operating cost, an important factor in deciding

which power generators to operate to satisfy a given demand. Generators with the lowest

variable operating costs are dispatched first. Older inefficient coal plants are more expensive

to operate than new coal plants—and more expensive than NGCC plants, even if the price of

natural gas were higher. But there are other costs as well, such as complying with the

Mercury and Air Toxics Standards. Smaller, older, inefficient units are not worth upgrading.

And natural gas, being a cleaner-burning fuel, doesn’t have these issues.

Coal-fired plants are geezers: they were built during the halcyon days of King Coal before

1980. Back in 2010, 73% of the capacity was over 30 years old, while most gas-fired

capacity was less than 10 years old.

Coal is a commodity whose demand in the US is being strangled powerplant by powerplant,

and at an accelerating rate. Even a surge in the price of natural gas—and there will be one—

will only fiddle with the numbers at the margins. A dire situation for coal. Read... Natural Gas

And The Brutal Dethroning of King Coal.

And in another hemisphere, there is a country that is

desperately trying to stave off a collapse by imposing ever

more bizarre trade barriers and capital restrictions.

Read....Argentina: Creeping State Control, by stilettos-on-

the-ground economist Bianca Fernet.


Testosterone Pit


http://www.eia.gov/energy_in_brief/age_of_elec_gen.cfm

http://www.testosteronepit.com/home/2012/8/15/natural-gas-and-the-brutal-dethroning-of-king-coal.html

http://www.testosteronepit.com/home/2012/8/15/natural-gas-and-the-brutal-dethroning-of-king-coal.html

http://www.testosteronepit.com/home/2012/8/20/argentina-creeping-state-control.html

http://www.testosteronepit.com/home/2012/8/20/argentina-creeping-state-control.html



Shale growth in other

nations: How realistic

is it?

Written by Gary Hunt from TCLabz

American leadership in developing horizontal drilling and hydraulic fracturing used in shale

oil and gas plays is spreading around the world making it possible to extract previously

uneconomic oil and natural gas resources from shale. These resources are often called

unconventional because the horizontal drilling and fracking are newer techniques than the

conventional methods of drilling vertical wells down into large pools of hydrocarbons.

While we think of these technologies as 'new' in fact they have been commonly in use in the

US oil fields for more than 20 years. What changed was the price of oil and gas that made

their use more attractive.

http://www.oilvoice.com/description/TCLabz/d912f0e5.aspx


A little more than five years ago we saw natural gas prices at near record levels above $13

per MMBTU and the US was expected to be a major importer of liquefied natural gas (LNG)

from some of the same volatile places in the world that supply imported oil. Those high

prices started an unconventional revolution applying these new technologies to domestic US

shales.

Today we are awash in natural gas and our entire energy strategy is being turned on its

head by the prospect of abundant supply and low-very low-prices. The market forces that

created this boom are at work today correcting the market excess as more E&P companies

shift their drilling from natural gas to oil and natural gas liquids attracted to their higher

prices. We also expect to see some of this excess natural gas turned into LNG and exported

to global markets which are have higher prices.

But more than 96% of America's domestic energy growth from shale has taken place on

private lands beyond the onerous regulatory reach of the Federal Government where

property owners have mineral resource rights on their land.

The pace of shale development in other nations will have less to do with technology than

with the legal status and tradition of private property and mineral rights.

The other challenges nations will face in developing their own shale resources include

logistics, technology access and the balance of energy infrastructure necessary to support

such development. US EIA and the IEA have both done studies on the shale potential

around the world so check those sources for better technical information.

As we have seen in our own domestic energy growth from shale here in the US the logistics

of getting the extracted oil and gas to market from its remote location can be a big problem.

The Bakken shale in North Dakota for example has grown substantially but the bottleneck

has been a lack of pipeline and storage capacity for the product produced. This will be

equally true or worse in China and other emerging markets lacking in infrastructure

development or starting from scratch.

Why Keystone XL Pipeline Matters

Here in the US the recent controversy over the Keystone XL pipeline was a byproduct of the

process of rationalizing energy infrastructure to take shale development growth into account.

The Keystone XL pipeline extension was designed in part to bring additional pipeline

capacity to Bakken so its production growth could be transported to the gulf coast for


storage, refining and export. To achieve that transport involves building additional pipeline

capacity and reversing the direction of some pipeline flows to reflect the new shale reality-

that is more oil is now moving from North to South bringing product from North Dakota to

Texas and Louisiana rather than from the Gulf of Mexico North through the US Midwest

markets.

For China and other nations to take full advantage of their own shale potential will also

require addressing the logistics to make that development possible as well as modifying its

energy infrastructure of pipelines, storage, refining and export capabilities to satisfy its

needs.


TCLabz

Waterfloods: The next

big profit phase of the

shale oil revolution

Written by Keith Schaefer from Oil & Gas Investments Bulletin

The cheapest and most profitable oil North America has ever seen is now 'flooding' into the

market, as producers once again use old technology to create a wave of new profits.

Producers are using 'waterfloods'-pushing water into underground formations to flush a large

amount of oil out to nearby producing wells-to increase production and profits. It's the next

big money-making phase of the Shale Revolution.




Waterflooding has been around for 70 years or more, but the Big Question over the last five

years has been-can you do it effectively with tight oil?

The answer is a Big Yes, and waterflood potential has become so important that institutional

investors now see them as major share price catalysts for junior producers-and track them

closely.

Waterfloods start 1-2 years after drilling the well, in a time window producers call 'secondary

recovery.' (Drilling is primary recovery.) Waterfloods are cheap to try and cheap to run (with

most operations costing just $5-10 per barrel!), and now the industry is seeing that they are

sometimes doubling reserves from a well.

'Secondary recovery is where you really make all your money in this industry,' says Dan

Toews, VP Finance and CFO of Pinecrest Energy (PRY-TSX.V).

Pinecrest is very vocal about their waterflood potential. They say they can double the

amount of oil they recover (called the Recovery Factor, or RF) from a well-at less than

$15/barrel-half the price of primary recovery costs, which are over $30/barrel.

'Everyone is trying to find a new resource play,' says Toews. 'First you find a resource, and

then you drill it like crazy. But the second stage is to go in for your secondary recovery,

through waterflooding of some kind if possible.'


To date, Pinecrest isn't yet flowing even one barrel of waterflooded oil-so their powerpoint

slide is just projections. Toews and his team expect to be waterflooding all of their operations

by the end of this quarter. But analysts are already seeing the waterfloods as a share price

catalyst.

'Just about every investor and institution we talk to wants to know the status with our

waterfloods,' says Toews. 'The buyside (fund managers= buyside, brokerage firms=sell side-

ed.) is very savvy on waterfloods. Once we apply the method, this is what has the potential

to shoot up our share prices.'

Realistically, the effects can be seen within 2-3 months, but it's best to give them a year-or

more-of operations before judging their impact. Waterfloods can last up to 20 years or more.

Another Canadian oil junior, Raging River Exploration (RRX-TSX), also explains the

waterflood potential in their powerpoint. They expect to be swimming in 1 million EXTRA

recoverable barrels of oil per square mile, courtesy of waterfloods-at an even cheaper cost

of $5-10 barrel, vs $30 barrel for the first 600,000 barrels.

Raging River is developing the Viking formation in SW Saskatchewan-a large, tight oil play

that since the 1950s has had an improved outlook from 2 billion barrels of oil to an estimated

6 billion barrels of oil in place, all thanks to horizontal drilling.

Raging River expects waterflooding to increase its RF from 8% from primary recovery

methods (drilling vertical and horizontal wells) using 16 wells/section, to 16-20%. The simple

math says that will increase the number of barrels recovered from 480 million at 8% to 1.25

billion at 20% RF.

If Raging River-or any producer-can show a steady RF for over a year, I would suggest to

investors those barrels will be worth $10-$15 each-creating huge value to shareholders on a

buyout.

Some Viking waterfloods have even seen results as high as 30% RF.

'A small change of recovery over a large oil field is significant and adds a tremendous

amount of value,' says Scott Saxberg, President and CEO of Crescent Point Energy (CPG -

TSX), arguably seen as the industry leader in the waterflooding revival.

'A lot of these unconventional plays (tight oil) are in high decline. By implementing


waterfloods, we can lower the declines in the field, and increase reserves. There's huge

value to that.'

Crescent Point started waterflooding its properties five years ago when multi-stage fracking

(MSF) was new on the scene. Now they have five years of knowledge that the method

works, and that they can use it across all of their fields.

'We recognized right away to implement a strategy to increase the recovery factor on a multi

billion barrel pool,' says Saxberg. 'If you change even 1%, that ends up being huge.'

'Waterflooding is the next step past in-fill drilling (ie. drilling more holes in less space to

increase ultimate recovery). It takes a lot of time to accrue knowledge and data on how to

properly implement it. The sooner you start, the better data you have.'

According to Saxberg, waterflooding is more than just a cheap way to float balance sheets.

Over the course of Crescent Point's five-year waterflooding program, they've developed

hundreds of different combinations of waterflooding techniques coupled with fracking

techniques, well spacing and plenty of other factors.

'Water flooding is basic, in that you pump water into the ground,' says Saxberg. 'So to

enhance that, you have to look at what type of patterns are in your reservoir. Now these are

unconventional tight reservoirs, so the question was, can they actually be water flooded?'

Again, the Big Answer is Yes, and management teams are now using the promise of

waterfloods as a cheap way to float their balance sheets earlier in a resource play. But

Saxberg says waterfloods are truly more long-term value.

'They are a long term day-after-day technical grind and process. So it's not the same as

drilling a well and seeing 100bbls/day. It's a lot of ups and downs and a lot of long term

view.'

There's only one negative here that I see-how will all that cheap oil affect North American

pricing, when the continent is already swimming in the stuff?

In the short term, the pro-forma economics of waterfloods are making a splash with both

management teams and the market.


But medium term and beyond, it will create a quandary for juniors-the easy money comes

after huge capital spending.



High gasoline prices

and politics are a

volatile mix

Written by Gary Hunt from TCLabz

Nothing infuriates Americans more than volatile, spiking gasoline prices. Often the causes

given for gasoline price hikes seem contrived. Iran and Israel trade harsh words in press

reports and before the ink is even dry of the page oil prices tick up. Word of a fire at an oil

refinery is enough to send prices shooting up as high as the flames on the cracker -and just

as fast.

Those price spikes never seem to come down nearly as fast as they shoot up. Politicians are

quick to blame oil companies for gouging customers, speculators for manipulating markets,

traders for withholding supply.

The truth about gasoline price volatility is both a little more complicated and yet quite simple.

The factors that seem to have the most impact on gasoline prices include:

Global Oil Swing Productive Capacity. While the world has plenty of oil overall,

prices are set by the amount of excess capacity at the daily margins. That is how

much oil is left over when all the contracts for delivery are met. How much oil is

available if something goes wrong? If some refinery shuts down? If some pipeline




bursts? If some war breaks out? This marginal oil quantity has traditionally been

controlled by Saudi Arabia's ability to ratchet up or ratchet down the amount of oil

pumped each day. This control over swing productive capacity is what gives OPEC

its market power and drives the rest of us crazy.

The Refinery Business Model. The oil refining business is a hard way to make a

living. These plants are enormously complicated. They require skilled precision to

keep them operating at optimal performance and many things can-and do go wrong.

Yet it is almost impossible to build new refineries in the US today because of the

environmental regulation, high capital costs and the NIMBY pressures in every

potential location. We live close the edge of full refining capacity, yet refining margins

are very thin because the costs of operation are so high.

Boutique Fuels Mandates Create Monopoly Markets. A recent fire at the Chevron

refinery near my home in the San Francisco Bay area adversely affected the supply

of the blends of gasoline used in many of the Western States. A pipeline rupture in

the Midwest reduced the supply of oil to refineries serving Chicago. While do these

incidents have such a major impact on gasoline supply and price? Because the

environment restrictions on fuels has created a system of boutique fuel blends that

are virtual monopolies in many markets. The gasoline produced in the Richmond

Chevron refinery is specifically designed for the Western market and no other

gasoline products can be shipped in from other states to make up for a supply

shortfall when a fire or other supply chain problem happens. So having reasonable

gasoline prices requires that virtually EVERYTHING must work perfectly in the

gasoline production supply chain-or else.

It does not have to be this way, but Congress passes laws without the slightest regard to

how they will be implemented or enforced in practice. Congress takes credit for Clean Air but

allows bureaucrats to impose regulations that have costs or impacts far beyond what the law

intended. This happens because our environmental laws are written to ignore the cost while

taking credit for the benefits. Our laws allow Federal agencies to set their own standards for

measuring benefits. They are not subject to any burden of proof. The laws allow comment

periods on rulemaking proposals but the bureaucrats do not have to accept the comments.

The system is one-sided and so are the costs!

A more balanced and reasonable approach to environmental regulation would require

Congress to approve major rulemakings by a Federal agency so it cannot avoid the

accountability for imposing the costs. Existing regulations should be subject to sunset

provisions and forced to be reconsidered regularly to reflect changes in technology and other

factors. New laws requiring regulations should not go into effect until the final rules to


implement the law are approved by Congress. Just as environmental advocates can sue in

Federal Court to enforce environmental laws, those subjected to them should be able to sue

over the reasonableness of the impacts of the law and rules to force the government to own

its burden of proving that the benefits outweigh the costs and do not constitute an

unreasonable taking of private property for which just compensation is required.

These changes in our regulatory regime won't get more refineries built, but they would inject

some common sense into the regulatory process and force the Federal agencies that dream

up all these rules that the benefits are worth the cost and the practical application of

proposed rules is reasonable and in the public interest.


TCLabz


rpsgroup.com/energy

Health, Safety, Environment and Risk Management

RPS Energy is a global multi-disciplinary consultancy, providing integrated technical, commercial and project management support services in the fields of geoscience, engineering and HS&E.

ContactJames Blanchard T +44 (0) 20 7280 3200 E [email protected]


An optimistic

energy/GDP forecast to

2050

Written by Gail Tverberg from Our Finite World

We talk about the possibility of reducing fossil fuel use by 80% by 2050 and ramping up

renewables at the same time, to help prevent climate change. If we did this, what would such

a change mean for GDP, based on historical Energy and GDP relationships back to 1820?

Back in March, I showed you this graph in my post, World Energy Consumption since 1820

in Charts.

Graphically, what an 80% reduction in fossil fuels would mean is shown in Figure 2, below. I

have also assumed that non-fossil fuels (some combination of wind, solar, geothermal,

biofuels, nuclear, and hydro) could be ramped up by 72%, so that total energy consumption

“only” decreases by 50%.

We can use actual historical population amounts plus the UN’s forecast of population growth

to 2050 to convert these amounts to per capita energy equivalents, shown in Figure 3,

Figure 1. World Energy Consumption by

Source, Based on Vaclav Smil estimates from

Energy Transitions: History, Requirements

and Prospects and together with BP Statistical

Data on 1965 and subsequent. The biofuel

category also includes wind, solar, and other

new renewables.

Figure 2. Forecast of world energy

consumption, assuming fossil fuel consumption

decreases by 80% by 2050, and non fossil fuels

increase so that total fuel consumption

decreases by “only” 50%. Amounts before black

line are actual; amounts after black lines are

forecast in this scenario.

http://www.oilvoice.com/Description/Our_Finite_World/0ff628da.aspx

http://ourfiniteworld.com/2012/03/12/world-energy-consumption-since-1820-in-charts/

http://ourfiniteworld.com/2012/03/12/world-energy-consumption-since-1820-in-charts/

http://esa.un.org/wpp/Excel-Data/population.htm

http://esa.un.org/wpp/Excel-Data/population.htm


below.

In Figure 3, we see that per capita energy use has historically risen, or at least not declined.

You may have heard about recent declines in energy consumption in Europe and the US,

but these declines have been more than offset by increases in energy consumption in China,

India, and the rest of the “developing” world.

With the assumptions chosen, the world per capita energy consumption in 2050 is about

equal to the world per capita energy consumption in 1905.

I applied regression analysis to create what I would consider a best-case estimate of future

GDP if a decrease in energy supply of the magnitude shown were to take place. The reason

I consider it a best-case scenario is because it assumes that the patterns we saw on the up-

slope will continue on the down-slope. For example, it assumes that financial systems will

continue to operate as today, international trade will continue as in the past, and that there

will not be major problems with overthrown governments or interruptions to electrical power.

It also assumes that we will continue to transition to a service economy, and that there will

be continued growth in energy efficiency.

Based on the regression analysis:

World economic growth would average a negative 0.59% per year between now and

2050, meaning that the world would be more or less in perpetual recession between

now and 2050. Given past relationships, this would be especially the case for Europe

and the United States.

Per capita GDP would drop by 42% for the world between 2010 and 2050, on

average. The decrease would likely be greater in higher income countries, such as

the United States and Europe, because a more equitable sharing of resources

between rich and poor nations would be needed, if the poor nations are to have

enough of the basics.

Figure 3. Forecast of per capita energy

consumption, using the energy estimates in

Figure 2 divided by world population

estimates by the UN. Amounts before the

black line are actual; after the black line are

estimates.


I personally think a voluntary worldwide reduction in fossil fuels is very unlikely, partly

because voluntary changes of this sort are virtually impossible to achieve, and partly

because I think we are headed toward a near-term financial crash, which is largely the result

of high oil prices causing recession in oil importers (like the PIIGS).

The reason I am looking at this scenario is two-fold:

(1) Many people are talking about voluntary reduction of fossil fuels and ramping up

renewables, so looking at a best case scenario (that is, major systems hold together and

energy efficiency growth continues) for this plan is useful, and

(2) If we encounter a financial crash in the near term, I expect that one result will be at least

a 50% reduction in energy consumption by 2050 because of financial and trade difficulties,

so this scenario in some ways gives an “upper bound” regarding the outcome of such a

financial crash.

Close Connection Between Energy Growth, Population Growth, and Economic Growth

Historical estimates of energy consumption, population, and GDP are available for many

years. These estimates are not available for every year, but we have estimates for them for

several dates going back through history. Here, I am relying primarily on population and

GDP estimates of Angus Maddison, and energy estimates of Vaclav Smil, supplemented by

more recent data (mostly for 2008 to 2010) by BP, the EIA, and USDA Economic Research

Service.

If we compute average annual growth rates for various historical periods, we get the

following indications:

We can see from Figure 4 that energy growth and GDP growth seem to move in the same

direction at the same time. Regression analysis (Figure 5, below) shows that they are highly

correlated, with an r squared of 0.74.

Figure 4. Average annual growth rates

during selected periods, selected based on

data availability, for population growth,

energy growth, and real GDP growth.

http://www.ggdc.net/MADDISON/oriindex.htm


http://www.vaclavsmil.com/energy-transitions-history-requirements-prospects/


Energy in some form is needed if movement is to take place, or if substances are to be

heated. Since actions of these types are prerequisites for the kinds of activities that give rise

to economic growth, it would seem as though the direction of causation would primarily be:

- Energy growth gives rise to economic growth.

Rather than the reverse.

I used the regression equation in Figure 5 to compute how much yearly economic growth

can be expected between 2010 and 2050, if energy consumption drops by 50%.

(Calculation: On average, the decline is expected to be (50% ^(1/40)-1) = -1.72%. Plugging

this value into the regression formula shown gives -0.59% per year, which is in the range of

recession.) In the period 1820 to 2010, there has never been a data point this low, so it is not

clear whether the regression line really makes sense applied to decreases in this manner.

In some sense, the difference between -1.72% and -0.59% per year (equal to 1.13%) is the

amount of gain in GDP that can be expected from increased energy efficiency and a

continued switch to a service economy. While arguments can be made that we will redouble

our efforts toward greater efficiency if we have less fuel, any transition to more fuel-efficient

vehicles, or more efficient electricity generation, has a cost involved, and uses fuel, so may

be less common, rather than more common in the future.

The issue of whether we can really continue transitioning to a service economy when much

less fuel in total is available is also debatable. If people are poorer, they will cut back on

discretionary items. Many goods are necessities: food, clothing, basic transportation.

Services tend to be more optional–getting one’s hair cut more frequently, attending

additional years at a university, or sending grandma to an Assisted Living Center. So the

direction for the future may be toward a mix that includes fewer, rather than more, services,

so will be more energy intensive. Thus, the 1.13% “gain” in GDP due to greater efficiency

and greater use of “services” rather than “goods” may shrink or disappear altogether.

Figure 5. Regression analysis of average

annual percent change in world energy vs

world GDP, with world energy percent

change the independent variable.


The time periods in the Figure 5 regression analysis are of different lengths, with the early

periods much longer than the later ones. The effect of this is to give much greater weight to

recent periods than to older periods. Also, the big savings in energy change relative to GDP

change seems to come in the 1980 to 1990 and 1990 to 2000 periods, when we were

aggressively moving into a service economy and were working hard to reduce oil

consumption. If we exclude those time periods (Figure 6, below), the regression analysis

shows a better fit (r squared = .82).

If we use the regression line in Figure 6 to estimate what the average annual growth rate

would be with energy consumption contracting by -1.72% per year (on average) between

2010 and 2050, the corresponding average GDP change (on an inflation adjusted basis)

would be contraction of -1.07% per year, rather than contraction of -0.59% per year, figured

based on the regression analysis shown in Figure 5. Thus, the world economy would even to

a greater extent be in “recession territory” between now and 2050.

Population Growth Estimates

In my calculation in the introduction, I used the UN’s projection of population of 9.3 billion

people by 2050 worldwide, or an increase of 36.2% between 2010 and 2050, in reaching the

estimated 42% decline in world per capita GDP by 2050. (Calculation: Forty years of GDP

“growth” averaging minus 0.59% per year would produce total world GDP in 2050 of 79.0%

of that in 2010. Per capita GDP is then (.790/ 1.362=.580) times 2010′s per capita income. I

described this above as a 42% decline in per capita GDP, since (.580 – 1.000 = 42%).)

Population growth doesn’t look to be very great in Figure 4, since it shows annual averages,

but we can see from Figure 7 (below) what a huge difference it really makes. Population now

is almost seven times as large as in 1820.

Figure 6. Regression analysis of average

annual percent change in world energy vs

world GDP excluding the periods 1980 to 1990

and 1990 to 2000, with world energy percent

change the independent variable.


Since we have historical data, it is possible to calculate an estimate based on regression

analysis of the expected population change between 2010 and 2050. If we look at population

increases compared to energy growth by period (Figure 8), population growth is moderately

correlated with energy growth, with an r squared of 0.55.

One of the issues in forecasting population using regression analysis is that in the period

since 1820, we don’t have any examples of negative energy growth for long enough periods

that they actually appear in the averages used in this analysis. Even if this model fit very well

(which it doesn’t), it still wouldn’t necessarily be predictive during periods of energy

contraction. Using the regression equation shown in Figure 8, population growth would still

be positive with an annual contraction of energy of 1.72% per year, but just barely. The

indicated population growth rate would slow to 0.09% per year, or total growth of 3.8% over

the 40 year period, bringing world population to 7.1 billion in 2050.

Energy per Capita

While I did not use Energy per Capita in this forecast, we can look at historical growth rates

in Energy per Capita, compared to growth rates in total energy consumed by society. Here,

we get a surprisingly stable relationship:

Figure 7. World Population, based

on Angus Maddison estimates,

interpolated where necessary.

Figure 8. Regression analysis of

population growth compared to

energy growth, based on annual

averages, with energy growth the

independent variable.



Figure 10 shows the corresponding regression analysis, with the highest correlation we have

seen, an r squared equal to .87.

It is interesting to note that this regression line seems to indicate that with flat (0.0% growth)

in total energy, energy per capita would decrease by -0.59% per year. This seems to occur

because population growth more than offsets efficiency growth, as women continue to give

birth to more babies than required to survive to adulthood.

Can We Really Hold On to the Industrial Age, with Virtually No Fossil Fuel Use?

This is one of the big questions. “Renewable energy” was given the name it was, partly as a

marketing tool. Nearly all of it is very dependent on the fossil fuel system. For example, wind

turbines and solar PV panels require fossil fuels for their manufacture, transport, and

maintenance. Even nuclear energy requires fossil fuels for its maintenance, and for

decommissioning old power plants, as well as for mining, transporting, and processing

uranium. Electric cars require fossil fuel inputs as well.

The renewable energy that is not fossil fuel dependent (mostly wood and other biomass that

can be burned), is in danger of being used at faster than a sustainable rate, if fossil fuels are

not available. There are few energy possibilities that are less fossil fuel dependent, such as

Figure 9. Comparison of average

growth in total world energy

consumed with the average

amount consumed per person,

for periods since 1820.

Figure 10. Regression analysis

comparing total average increase

in world energy with average

increase in energy per capita,

with average increase in world

energy the independent variable.


solar thermal (hot water bottles left in the sun to warm) and biofuels made in small quantities

for local use. Better insulation is also a possibility. But it is doubtful these solutions can make

up for the huge loss of fossil fuels.

We can talk about rationing fuel, but in practice, rationing is extremely difficult, once the

amount of fuel becomes very low. How does one ration lubricating oil? Inputs for making

medicines? To keep business processes working together, each part of every supply chain

must have the fuel it needs. Even repairmen must have the fuel needed to get to work, for

example. Trying to set up a rationing system that handles all of these issues would be nearly

impossible.

GDP and Population History Back to 1 AD

Angus Maddison, in the same data set that I used back to 1820, also gives an estimate of

population and GDP back to 1 AD. If we look at a history of average annual growth rates in

world GDP (inflation adjusted) and in population growth, this is the pattern we see:

Figure 11 shows that the use of fossil fuels since 1820 has allowed GDP to rise faster than

population, for pretty much the first time. Prior to 1820, the vast majority of world GDP

growth was absorbed by population growth.

If we compare the later time periods to the earlier ones, Figure 11 shows a pattern of

increasing growth rates for both population and GDP. We know that in the 1000 to 1500 and

1500 to 1820 time periods, early energy sources (peat moss, water power, wind power,

animal labor) became more widespread. These changes no doubt contributed to the rising



growth rates. The biggest change, however, came with the addition of fossil fuels, in the

period after 1820.

Looking back, the question seems to become: How many people can the world support, at

what standard of living, with a given quantity of fuel? If our per capita energy consumption

drops to the level it was in 1905, can we realistically expect to have robust international

trade, and will other systems hold together? While it is easy to make estimates that make the

transition sound easy, when a person looks at the historical data, making the transition to

using less fuel looks quite difficult, even in a best-case scenario. One thing is clear: It is very

difficult to keep up with rising world population.


Our Finite World

http://www.oilvoice.com/description/Our_Finite_World/0ff628da.aspx


Natural gas and the

brutal dethroning of

king coal


It’s been tough for natural gas drillers. The boom in horizontal drilling and hydraulic fracturing

that gave access to enormous gas-rich shale formations around the nation led to record

production. Prices crashed. Drilling activity collapsed: rig count, down 45% from last year, hit

the lowest level since July 1999. Producers are writing down their natural gas assets by the

billions of dollars. Some will get wiped out. The price of natural gas has been below

production costs for years, and the damage is now huge [read.... Natural Gas: Where

Endless Money Went to Die].

On the other side, power generators have switched from coal to natural gas—with

devastating impact on king coal. Coal has long been the dominant fuel for power generation.

But April 2012, for the first time in the history of EIA data, power generation from coal-fired

and natural gas-fired plants reached parity, each contributing 32% to total electricity

generation.

The large fluctuations are a function, in part, of the seasonality of overall power demand. In

April, demand was low due to mild

spring weather. The price of natural gas

dropped to a 10-year low, and power

companies laughed all the way to the

bank. In May, power production started

to rise as air conditioners got cranked

up—a trend that will hold for the

summer.

But the graph shows something far

more important: a narrowing of the gap

between coal and gas-fired power

generation. It’s not just the low price of

natural gas that did it—but a new power generation technology and yes, the usual suspect,


http://investor.shareholder.com/bhi/rig_counts/rc_index.cfm?showpage=na




Congress.

Gas turbines are an old technology. Most of the energy is wasted as exhaust heat. They’re

inefficient, compared to coal-fired steam turbines. But they have an advantage: they can be

brought on line quickly to cover peak loads. So coal and gas have been used in parallel: coal

to produce low-cost base power and gas to produce more expensive peak power during

periods of high demand (daytime, summer).

Gas didn't pose a threat to king coal ... until the arrival in the 1990s of the natural gas

combined-cycle (NGCC) turbine: like the classic turbine, it drives a generator, but instead of

blowing the “waste” heat out the exhaust, it uses the energy to generate steam that, as in a

coal plant, drives a steam turbine that powers another generator. Like their old-fashioned

brethren, NGCC plants can be brought on line quickly, but when used for base power, their

efficiency can exceed 60%—much higher than that of a coal plant.

A game changer. With natural gas prices as low as they’ve been over the past years,

operating costs for power generators have plunged. It doesn’t hurt that NGCC plants have

lower capital costs than coal plants—$600 to $700 per kW versus $1,400 to $2,000 kW—

relatively short construction times, and environmental benefits. The long-term shift to natural

gas looks like this:

(The data is annual, not monthly; so 2012, with data through April, isn’t comparable to the

first graph.)

The gray areas in the graph indicate periods of extraordinary changes. Low oil prices in the

1960s caused and uptick in use of petroleum for power generation ... until the two oil shocks

http://climatetechwiki.org/technology/ngcc


in the 1970s knocked it into a long decline towards the inconsequential.

The winner of the oil shocks was coal, producing at its peak in the late 1980s nearly 80% of

all power: truly king coal. And it was Congress that did it! In 1978, in reaction to the oil price

shocks, it passed the Powerplant and Industrial Fuels Act (PIFUA) that clamped down on the

construction of oil and gas-fired plants and promoted the construction of coal plants. But by

1990, a new world had dawned: PIFUA was buried, natural gas markets were deregulated,

and power generators were freer to substitute one fuel for another, based on economic

considerations.

Just then, the efficient NGCC plants arrived on the scene! Result: a phenomenal ascent of

natural gas in power generation, not only for peak power but also for base power, led by a

construction boom of NGCC plants. Between 2000 and 2010, natural gas generating

capacity jumped by 96%:

The loser was coal. An ugly slide that accelerated over the last few years. Higher natural gas

prices—a certainty, given that they’re currently below production costs—will have some

impact on the speed of the progression of natural gas. In the short term, power generators

switch between fuels to take advantage of lower costs here and there. But as more gas-fired

plants have come on line, and as the oldest, most inefficient coal plants are being retired, the

shift to natural gas has become structural—pushing up demand inexorably.

http://www.eia.gov/analysis/studies/fuelelasticities/pdf/eia-fuelelasticities.pdf


Alas, the price of natural gas doesn’t flow like a tranquil river but has violent ups and downs

with sporadic and vicious spikes. Read.... The Coming Spike In The Price Of Natural Gas.

And here is a harbinger of other things to come: California Sales Tax Revenues Nosedive By

33.5%, by hard-hitting Chriss Street.


Testosterone Pit


http://www.testosteronepit.com/home/2012/8/15/california-sales-tax-revenues-nosedive-by-335.html

http://www.testosteronepit.com/home/2012/8/15/california-sales-tax-revenues-nosedive-by-335.html
