Future strategy to survive discovering 1 out of every 20 bbls of oil we now use.

[Cardboard]

"I worked on a T2 tanker out of Jebel Ali during Desert Storm but wouldn't want to do it now."

 

Back then people had a brain it seems.

 

The news over the last few weeks is unbeliveable. This is the second attack with last time being 4 tankers. There was also a drone attack with bombs over a Saudi pipeline facility by the Houthis. They also claimed to have hit an airport with a cruise missile yesterday.

 

Deadline by rebels in Nigeria has also passed or on May 31 and who knows what will happen over there? They have threatened to shutdown the entire production and they did a lot of damage in recent past.

 

Where is the risk premium? Who is insuring these tankers? Should be obvious by now that the 5th Fleet is unable to fully protect them.

 

The world seems to be taking a lot of comfort in these new barrels coming from West Texas. However, they are too light and cannot be processed into fuels without being mixed with heavier grades. You can look up the differentials and see for yourself that there is a surplus of this grade and a deficit of medium and heavier grades. Already companies must be having a deep look at expanding such production considering that such oil is no longer selling at a premium as it used to but, a severe discount.

 

Feels like sleep walking into a major crisis while stocks as such CrowdStrike skyrocket on IPO day while posting terrible results: tiny revenues vs market cap and major losses.

 

It is not just oil. It is copper, uranium, agricultural commodities, lumber, pulp. Feels like that the commodities market is now the bond vigilante pricing in the next 5 recessions while the party is still going for unprofitable, concept companies.

 

Cardboard

[drzola]

Oil Tanker Insurance is always overrated it appears maybe?

 

across the delivered value of a tanker transit at less than a couple of dollars per barrel of oil.

 

The following sections explain the dynamics of the tanker insurance market:

The Basics

War Risk Insurance

History in the Persian Gulf

Implications for the Strait of Hormuz

 

The Basics

 

Oil tankers, specifically Very Large Crude Carriers (VLCC), are some of the largest and most expensive ships in the world. As such, a variety of mechanisms are used to insure oil tankers: hull insurance, cargo insurance, liability coverage (protection and indemnity), and war risk insurance. Oil tanker insurance rates are based on tangible factors such as deadweight tonnage (dwt) and the overall value of the ship itself, as well as what sort of coverage a tanker on a particular voyage needs.

 

The tangible aspects of oil tanker insurance are relatively uniform across ships of equal size and tonnage. Other coverage, such as liability and war risk factors, are more variable and dynamic, as they change based on the geographical location/route of the ship.

 

Lloyd's of London provides a market where ship charters find underwriters who will provide them insurance for a fee. Alternatively, some groups of ship owners band together to self-insure through P&I (Protection and Indemnity) Clubs. P&I Clubs pool their insurance risks and avoid fees. Today, most tankers are insured through P&I Clubs. For example, 13 P&I clubs currently insure upwards of 95 percent of the world's ocean-going tankers, measured by tonnage.

 

War risks are generally excluded from hull and P&I policies and therefore must be purchased in addition to P&I (liability) coverage.[ii] As a result, if a tanker's hull or machinery were damaged in a designated "additional premium area" (areas designated for additional war risk rates), a war risk policy rather than the baseline P&I coverage would pay the claim.

 

War Risk Insurance

 

Very loosely defined, a "˜War Risk Premium' is meant to cover any intentional damage to hull, cargo or persons. For the most part, every policy includes some nominal war risk coverage, based on trading routes and patterns. When the risk profile of a vessel is extremely low, such as for tankers that trade explicitly in low-risk areas like the Western Hemisphere, the premium can be as low as 0.001 percent of the market value of the vessel.

 

War risk premiums become pricier when ships enter designated conflict areas. Each year, insurance underwriters (those granting the insurance) reassess global risk to identify what areas to consider high risk areas. For any given year, there might be 15-20 "additional premium" areas that will require tanker charter companies to pay additional fees for war risk coverage on top of the basic war risk premium paid at the beginning of the insurance year. These "additional premium" areas may be designated in any number of ways, specifying particular countries, ports or even regions.

 

Charter companies are required to notify insurance underwriters in advance of the ship movement into a conflict area. The underwriter then offers war risk insurance for an additional charge. The policy lasts for a finite period of time, usually between 48 hours and seven days. At the end of the 48 hour to seven day window, the charter must renew insurance coverage if still operating within the conflict area.

 

The size of the additional premium depends on the level of risk perceived by the insurance underwriter. At times, these additional premiums can reach upwards of ten percent of the market value of the vessel. For example, the territorial waters of Somalia are one of the most expensive additional premium areas in 2008, with underwriters charging approximately two percent of market value of the vessel for a seven-day policy. For a $100 million vessel at port in Somalia for 20 days, a ship charter would be forced to pay six million dollars in additional war risk premiums.

 

History in the Persian Gulf

 

During the Tanker War, insurance companies quickly responded to the changing conditions in the Gulf.[iii] Many people speculated, especially in 1984, that the Strait of Hormuz would have to be closed because of rising insurance rates and losses. However, even at peak insurance rates, shipping traffic never ceased for an extended period of time.

 

At the brink of war in September 1980, underwriters overcautiously announced a 300 percent increase on cargo premiums for ships bound for Iran and Iraq, even though merchant vessels were not specifically targeted for attacks at that point. Both Iraq and Iran tried to spread fear and uncertainty in the market place by exaggerating the number and scale of attacks in the early 1980s. However, insurance rates tended to reflect the specific circumstances and targets in the region. For example, when Iraq began staging attacks on Iran's major oil terminal at Kharg island, eventually claiming the area as a maritime exclusion zone, insurance rates doubled for trips to that island. Insurers additionally bumped up rates following particularly successful attacks. After the attack on the Saudi tanker, Yanbu Pride, in May 1984, hull rates reached 7.5 percent for Kharg. Rates also increased for other risky areas.

 

When Iran and Iraq escalated attacks on shipping in 1981, the people in the energy industry were particularly concerned about the financial stability of the Lloyds of London marketplace, where insurance is traded between insurers and ship owners. Insurance companies had accrued an estimated $575 million dollars in losses by this time. Insurers struggled to develop a generalized risk profile for the region because attacks on shipping did not follow clear patterns.

 

Rates fluctuated substantially over the next several years, varying with the frequency and severity of attacks. For example, in January 1985 hull risk insurance rates were drastically reduced by half. Attacks were renewed later that year, causing hull rates to again double throughout May. On the whole, insurance claims reached a considerable two billion dollars by the end of the war, half of which fell on the Lloyd's market.

 

Strategic measures to reduce risk, such as re-flagging of tankers beginning in 1987, had a slow impact on insurance rates. The United States "re-flagged" a number of Kuwaiti tankers during the Tanker War, allowing the United States Navy to provide escorts within the Persian Gulf. Attacks on shipping declined throughout 1988, and insurance rates also began to fall and normalize.

 

The Gulf War provided a much-needed boost to insurance companies after the massive losses during the Tanker War. In August of 1990, insurers increased war risk rates to respond to the potential for another war in the Gulf. Rates rose to 0.025 percent for most Gulf ports, and rates quickly rose further in the Northern Arabian Gulf. As the risk of immediate war diminished in the last half of 1990, so too did cargo insurance rates, dropping from 0.5 to 0.0375 percent. Because the war never involved much damage to merchant shipping, these increased premiums turned into profits for insurance underwriters.

 

Immediately following the U.S. invasion of Iraq in 2003, rates for the area around Iraq peaked at 3.5 percent of the hull value, although subsequently they dropped steadily, back down to 0.25 percent by early 2004.[iv]

 

Implications for the Strait of Hormuz

 

There is little reason to believe that conflict in the Strait of Hormuz would result in prohibitively high insurance premiums that would significantly reduce traffic for any extended period of time. Although the cost of insurance for tankers certainly increased during the Tanker War, it never increased to the point where the price charged by underwriters for maximum war risk exposure translated to quantity of insurance purchased by charter equaling ZERO. In other words, from a microeconomic standpoint there have always existed people willing to accept and underwrite risk...for the right price.

 

In early 2008, only certain ports within the Persian Gulf are listed as "additional premium" areas. However, if conflict were to break out in the Strait, the entire Gulf would almost certainly require charters to purchase a war risk policy. Although the additional premium would be expensive, the contribution that incremental cost would make to the delivery price of oil would be quite small. For example, a relatively expensive war risk premium might be two percent of the market value of the vessel for seven days of coverage. Therefore, a $100 million VLCC might pay two million dollars in additional premium costs. When distributed over the two million barrels of oil a VLCC can carry, this amounts to a one dollar increase in the price per barrel.

 

Robert C. Seward, "The Role of Protection and Indemnity (P&I) Clubs," Tindall Riley (Britannia) Ltd. Online. Available: http://www.intertanko.com/pubupload/protection%20%20indemnity%20HK%202002.pdf. Accessed: March 5, 2008.

 

[ii] Interview with individuals from Thomas Miller War Risks Services Limited, London, U.K., February 20, 2008.

 

[iii] Data on insurance rates during the Tanker War all taken from Martin S. Navias and E.R. Hooton, Tanker Wars: the Assault on Merchant Shipping During the Iran-Iraq Conflict, 1980-1988 (London, New York: IB Tauris, 1996).

 

[sculpin]

Frontera (FEC - TSX) added to S&P TSX composite index

 

TORONTO, June 14, 2019 /CNW/ - As a result of the quarterly review, S&P Dow Jones Indices will make the following changes in the S&P/TSX Composite Index prior to the open of trading on Monday, June 24, 2019:

 

S&P/TSX COMPOSITE INDEX – June 24, 2019

 

ADDED

 

Frontera Energy Corporation (TSX:FEC)

 

Energy

Oil & Gas Exploration & Production

 

Cormark note on the potential impact...

 



Frontera Energy Corp. (FEC-TSX)

Potential TSX Index Inclusion, Active NCIB and

Colombian Macro Tailwinds Present Opportunity

 

Event:

 

We are highlighting Frontera as a potential TSX Index inclusion candidate.

Impact:Positive

 

Commentary:

 

With Venezuelan oil production at decade lows and Colombian crude differentials

remaining very competitive, we recently upgraded Frontera Energy to a Buy after

the company topped Q1/19 estimates on pricing strength and cost improvements.

We believe that continued strength in the name through May could drive inclusion

into the TSX Composite Index in June and material new buying demand.

 

Frontera was recently added to the MSCI Canada Small Cap Index, driving ~0.35

MM shares of demand for a stock that has traded ~0.1 MM daily over the 90 days.

Third-party estimates suggest that if Frontera’s share price holds ~C$13.90

(VWAP) through the last two weeks of May (or possibly the last three trading days),

Frontera could be added to the S&P/TSX Composite Index on June 21st. Index

inclusion would see ~2.5-3.5 MM shares of incremental demand by index funds as

well as follow-on “shadow” demand from “closet indexers”.

 

We also note that the company’s NCIB (July expiry) was increased from ~3.5 MM

shares to 5.0 MM shares with ~2.3 MM shares still to be repurchased over the next

two months. With material free cash flow and D/EBITDA below 1.0x we expect

Frontera to be aggressive in repurchasing the full 5.0 MM shares near term.

With 2.3 MM shares under the NCIB, potentially 3.5 MM shares of Index demand

(not including shadow indexing) and the company’s largest holder (Catalyst

Capital) restricted from selling during the NCIB, we estimate the potential for ~5.8

MM shares of structural demand through mid-June or ~9% of the company’s

outstanding float. Again, with daily liquidity of 0.1 MM shares (90-day ADV), this

demand would drive shares materially higher. Management is also considering a

Substantial Issuer Bid for later in the year (in which we would expect Catalyst to

participate) that could provide additional liquidity for shareholders.

 

A $0.125 quarterly dividend is expected for shareholders of record on July 3rd

(should Brent hold above $60.00/B) and a ~0.6 MM short interest should also

support the stock approaching a potential index inclusion.

 

Investment Conclusion:

 

While there is time before a potential index inclusion, we believe investors buying

early (through month-end) could be rewarded with material structural buying and

liquidity in mid-June. We reiterate our Buy rating and C$19.00 target (2.8x 2019

EV/EBITDA) on Frontera.

[awindenberger]

I just spent some time catching up on this thread over the last 6 months. Its amazing to me the value we are seeing in O&G equities as a whole right now, and the solution is so obvious to everyone aside from the c-suites: Stop increasing production and use your ops CF to buyback shares!

[sculpin]

I just spent some time catching up on this thread over the last 6 months. Its amazing to me the value we are seeing in O&G equities as a whole right now, and the solution is so obvious to everyone aside from the c-suites: Stop increasing production and use your ops CF to buyback shares!

 

+1 Definitely the way to go

[Uccmal]

I just spent some time catching up on this thread over the last 6 months. Its amazing to me the value we are seeing in O&G equities as a whole right now, and the solution is so obvious to everyone aside from the c-suites: Stop increasing production and use your ops CF to buyback shares!

 

+1 Definitely the way to go

 

Some are:  Whitecap retired 1 M shares in May. 

 

Their CFO bought 50000 sh.  a day or two ago which equals 10% of what he holds.  Thats $200,000, which isn’t chump change for a working man. 

 

He is the CFO so:

1) He thinks the numbers look really good, relative to the stock price.

2) Or he is an idiot.

In this case number 1) is more likely. 

[Joe689]

Iran takes out one of our drones in international waters.... 

 

Iran seems determined to taunt us into doing something.

 

I imagine Trump does not like to be taunted but election year is coming, and the politics of entering a conflict on the heels of him abandoning the treaty is not good.  Iran knows that. 

 

Problem is, they simply will not stop disrupting, and without intervention,  they will take oil price with them

[Cardboard]

WCP is one of my largest positions.

 

A concern of the market is that they would continue acquiring assets or bargains but, in the last conference call it was made clear that they had enough assets to grow organically and would continue to pay down debt and return capital to shareholders in this environment. They recently raised the dividend and as you mentioned continue to buy back shares.

 

Insiders purchases has been among the most active and broad amongst Canadian energy firms. BNE, SGY and YGR are others were there has been a fair bit of buying over the last 6-12 months.

 

The world driven by algos and bots continues to sleep walk straight into an energy crisis. U.S. production has actually declined in recent weeks and also contrarily to popular belief price received is nowhere near WTI for most of Texas production. Only the Eagle Ford receives something close to WTI and is likely due to how close they are to seaborne oil or world pricing.

 

If you go to Oilprice.com (https://oilprice.com/oil-price-charts), you will find out that Texas production was getting from $38.01 to $51.66 (Eagle Ford) yesterday.

 

IMO, the reason for that is an over-abundance of ultra light oil or condensates and this has gotten worst as they have drilled more into the Western part of the Permian. Also look at the latest EIA report. Propane inventories are up 37.7% year over year and Other oils (lots of NGL's) up 11.9%. These two categories were up 3.9 million barrels in the last week alone. That is a clear indication of production turning to the gassy side.

 

It is true that they are facing shipping constraints in the Permian creating a discount but, it is clear also that what they produce is in oversupply. As a result the U.S. exports 3 million barrels/day to keep things stable while they still import over 7 million barrels daily. Why would you export anything if you are a net importer of over 4 million barrels/day?

 

The past has also showed us that sub $50 U.S. shale is unprofitable and contracts fast. That is where we are right now despite WTI now just above $55 on Iran shutting down a U.S. drone today. Just imagine what would happen if we were to lose 1 million barrels/day of the right oil or proper gravity and sulfur content. It could be Libya (in the midst of a civil war), Nigeria (where rebels have threatened to shut down oil production) and now pretty much anywhere around the Straight of Hormuz.

 

Where is the premium to attract production and keep things in line if anything goes offline? In the meantime the S&P and unprofitable ventures are at new highs... I recall $12 oil and the Internet bubble. The decade after was really different.

 

Cardboard

[Joe689]

WCP is one of my largest positions.

 

A concern of the market is that they would continue acquiring assets or bargains but, in the last conference call it was made clear that they had enough assets to grow organically and would continue to pay down debt and return capital to shareholders in this environment. They recently raised the dividend and as you mentioned continue to buy back shares.

 

What did you make of that huge volume day earlier in the week?  12M shares.  Only down a little and $4 held very strong.  Came off to me that they might be getting ready to purchase something.  They are very shareholder friendly, and think major shareholders have a real say at the table.  Therefore, if they were going to make a large purchase, it would be run by the largest shareholders.  Maybe one or two did not like it, and but others fully support, and lots of shares changed hands.  Just speculation.  Very high volume day on no news. 

 

 

 

 

Where is the premium to attract production and keep things in line if anything goes offline? In the meantime the S&P and unprofitable ventures are at new highs... I recall $12 oil and the Internet bubble. The decade after was really different.

 

Combine that with the mentality that we do not need oil anymore.  I agree that the next decade should be a good wake up call for these young generations.  Not sure what the wake up call will look like but it will have a lot to do with energy, growth, debt and interest rates.  Look at gold.... Faith in the fiat money is dropping with the fear of the printing presses coming back on.  Commodities are the true scarce supply.

 

[bizaro86]

 

A concern of the market is that they would continue acquiring assets or bargains but, in the last conference call it was made clear that they had enough assets to grow organically and would continue to pay down debt and return capital to shareholders in this environment.

 

It seems to me that making acquisitions might be a better use of cash in the current environment. Nice assets have been selling at low prices, and the drilling inventory will still be there to drill next year.

[Joe689]

I also think that even if they were on the prowl, they would not publicly say that.  They would say, "hey, we are perfectly happy buying back shares".    If they are homing in on an asset they want to play coy

[SharperDingaan]

If you're in the WCSB and production constrained; buybacks and associated debt retirement are the pretty obvious way to go.

While the peoples rail fleet has begun arriving, Line 3 is still at least 1 year away, and the TCP at least 4. Protests aren't going to be going away.

 

OPEC is on record as needing (for 2019 budget purposes) WTI at between USD 60-70.

Given current ME tensions, and US/China discussions, it's hard to see how todays < USD 60 pricing is not temporary. 

Most would also expect the discount on heavy crude to continue falling as well.

 

It's also hard to see Alberta's new rail fleet transporting anything but WCS (or heavier) south.

And most would also have expected Jason to have negotiated an industry M&A stand-still, for access to that rail take-away capacity.

 

We're also holders of WCP.

 

SD

 

[Cardboard]

"What did you make of that huge volume day earlier in the week?"

 

Not much at all. This is typical of fund managers getting out of a position in large volume after a long decline in the share price.

 

Everyone knows (well, the ones connected to brokers) that a large position is being offered and some is sold as it comes down. So most wait, volume is weak. Then in 1, 2 or 3 days large crosses occur and the position is completely liquidated often at the low as we have just seen.

 

Regarding acquisitions I think that they are saying the truth. They are already in 5 basins with plenty of potential so anything that they do should be bolt-on. Furthermore, the CFO just bought 50,000 shares at $4 as mentioned by Uccmal so any material dealing or transaction going on is off the table.

 

Regarding major deals, they have no reason to play bluff. It is not like all asset prices in the WCSB will suddenly go up because WCP may be looking to buy 10,000 boe/d.

 

I don't see any major deal occuring in the WCSB until companies such as WCP trade at $60,000 per flowing. Equity market is shut, companies are being punished hard for carrying debt and there is just not a lot of intrinsic value to be gained by buying assets at $30,000 - $40,000 per flowing when you trade at similar levels. I also doubt that quality assets in Saskatchewan where there are no mandated cuts for example would go for such low multiples. CPG is holding on to theirs for now.

 

Cardboard

[Cardboard]

Regarding TMX, this is the man to listen to:

 

https://www.bnnbloomberg.ca/feds-energy-policies-fuelling-western-separatism-seymour-schulich-1.1272956

 

This will and needs to happen. Canada is about to fall apart. Both main parties now recognize the urgency and logic. I was actually shocked to hear Turdeau's arguments on Tuesday afternoon. Almost like a lightning rod had struck him...

 

If we had that level of support in the U.S. from both parties both Keystone XL and Line 3 would already be up and running.

 

On top of that, B.C. is about to get its own problems real soon with forestry falling off a cliff. Major closure going on. Once the economy over there inevitably turns, power stealers Horgan and Weaver will be kicked out and the opposition will only be a few willing to break the law.

 

Cardboard

[sculpin]

Flynn... Constant droning on about weakening demand by the conflicted IEA, mainstream media etc to lower oil prices then we get EIA saying gasoline demand all time record....

 

Low interest rates will only feed U.S. oil demand, demand that is already showing signs of expanding. The EIA reported that implied U.S. gasoline demand hit 9.928 million b/d, the highest that figure has ever been recorded since the EIA began tracking it in 1991. A break in the gas price and a break in the bad weather helped fuel the gains. You can also credit record low unemployment as a driver for drivers. The prior record was set in the week ended August 24, 2018, when product supplied reached 9.899 million b/d.

 

Overall demand was also great making oil traders ask, what slowdown? The EIA reported total products supplied (demand) over the last four-week period averaged 20.7 million barrels per day, up by 1.8% from the same period last year. Over the past four weeks, motor gasoline product supplied averaged 9.7 million barrels per day, up by 2.0% from the same period last year. Distillate fuel product supplied averaged 4.0 million barrels per day over the past four weeks, up by 0.3% from the same period last year. Jet fuel product supplied was up 5.1% compared with the same four-week period last year. This will improve with low rates.

 

Low rates will also help the building sector. Already lumber has been screaming and many petroleum-based housing materials will also get a boost. Businesses that have been wary about the trade war will start to invest because this low rate environment is going to be too tempting to sit on your hands and let your competitor get a jump on you.

[SharperDingaan]

Apparently a US strike was in progress last night, and aborted only at the last moment (aircraft were already in the air).

Most folks would assume that the clock is now ticking down, and that the price of WTI will be rising in the near future.

 

https://www.bloomberg.com/news/articles/2019-06-21/trump-approved-air-strikes-on-iran-then-pulled-back-nyt-says

 

"The U.S. military strike against Iran called off by President Donald Trump was intended to target three sites related to the missile launch that shot down a U.S. drone, according to two administration officials. National Security Advisor John Bolton was pushing for the strike. Trump changed his mind based on some additional information on Iranian decision making, one of the officials said. Iran was not given any warning of possible retaliation."

 

https://ca.reuters.com/article/topNews/idCAKCN1TL07P-OCATP

 

“In his message, Trump said he was against any war with Iran and wanted to talk to Tehran about various issues,” one of the officials told Reuters, speaking on condition of anonymity.

 

“He gave a short period of time to get our response but Iran’s immediate response was that it is up to Supreme Leader (Ayatollah Ali) Khamenei to decide about this issue,” the source said.A second Iranian official said: “We made it clear that the leader is against any talks, but the message will be conveyed to him to make a decision. “However, we told the Omani official that any attack against Iran will have regional and international consequences.”

 

SD

 

[Spekulatius]

If you're in the WCSB and production constrained; buybacks and associated debt retirement are the pretty obvious way to go.

While the peoples rail fleet has begun arriving, Line 3 is still at least 1 year away, and the TCP at least 4. Protests aren't going to be going away.

 

OPEC is on record as needing (for 2019 budget purposes) WTI at between USD 60-70.

Given current ME tensions, and US/China discussions, it's hard to see how todays < USD 60 pricing is not temporary. 

Most would also expect the discount on heavy crude to continue falling as well.

 

It's also hard to see Alberta's new rail fleet transporting anything but WCS (or heavier) south.

And most would also have expected Jason to have negotiated an industry M&A stand-still, for access to that rail take-away capacity.

 

We're also holders of WCP.

 

SD

 

Arnt you concerned about Line 5? looks like it may get shut down. Another nail in the coffin for Canadian crude. FWIW, I sold my ENB position, as risks are way above my comfort zone. Time for the Canadians to come up with their one solution. I don’t think relying on the big brother south is going to work out unfortunately.

[SharperDingaan]

Most WCSB egress is old pipeline (50 yrs+) approaching (or beyond) end-of-life; we expect additional constriction, rather than outright closure. In the near term we expect that rail will just offset some of that net capacity reduction, until Line 3 comes back on-stream at full capacity.

 

Currently, the optimists claim Alberta's 'curtailment' will be done by 2019 year-end; we think they are mistaken.

We just find it hard to see how curtailment doesn't remain until 2020 year-end, and see it as a strong positive; simply because a firm at its production cap will now be incentivized to cut back on drilling (maintain only), pay down debt, and buyback its own shares. Industry focuses on both bringing Line-5 on-line, and constructing the TCP (maintain employment); and the financial health of all WCSB firms at their production caps - materially improves. Minimal M&A activity.

 

But we're the heretic .... and clearly know nothing about how the industry works!

Not a problem - we'll just be the rich one ;)

 

SD

 

 

 

 

 

 

[Spekulatius]

I hope you are correct. I am not sure I can predict the future though. I think there is a real risk that the Line 3 is going to be in court limbo for a long time and Line 5 will get shut down without repayment. it’s a shame, but that s what it may come down to. When I have no way to handicap the risk, I am not playing.

 

ENB used to be a huge position (15% for me is rather large) when I played the odds and ends of the EEQ and SEP simplification. I made some money there and it’s payed good dividend, but maybe wasn’t worth the “brain damage”. I can buy WMB yielding 5.7% right now without all that baggage, so why play?

[tombgrt]

Prolonged curtailment is especially good for the microcaps like Gear that produce below the 10,000 b/day treshold and thus aren't even impacted on their production. Of course enough pipeline capacity would be better but this curtailment is much preferred to the extreme discounts we've seen last year. Valuations remain insane as it has become more clear than ever before that for now, $45-50 wti truly is as low as shale can go if they want to see any future production growth, even if majors would take over completely. Not to mention access to capital is drying up completely. No one else able to fill the gap in the next few years. In the end all companies will need a stable period of stronger pricing to increase valuations however. In the meantime I also hope they focus on deleveraging and share buybacks where possible.

[Spekulatius]

Prolonged curtailment is especially good for the microcaps like Gear that produce below the 10,000 b/day treshold and thus aren't even impacted on their production. Of course enough pipeline capacity would be better but this curtailment is much preferred to the extreme discounts we've seen last year. Valuations remain insane as it has become more clear than ever before that for now, $45-50 wti truly is as low as shale can go if they want to see any future production growth, even if majors would take over completely. Not to mention access to capital is drying up completely. No one else able to fill the gap in the next few years. In the end all companies will need a stable period of stronger pricing to increase valuations however. In the meantime I also hope they focus on deleveraging and share buybacks where possible.

 

The cost floor for shale depends on the progress in drilling productivity, which had been quite impressive. I think it is well, possible that the cost floor moves down further over time, as productively improvements outrun cost creep.

[bizaro86]

They're also fighting geology as well as cost creep over time though, moving out of the sweet spots into lower quality reservoir.

[SharperDingaan]

https://oilprice.com/Latest-Energy-News/World-News/IEA-Ready-To-Act-If-Middle-East-Tension-Threatens-Oil-Supply.html

"The International Energy Agency (IEA) is very worried about the growing tension in the Middle East and stands ready to act in case of physical disruption to oil supply ....  In case of physical disruption, we are ready to act in an appropriate way,”

 

https://oilprice.com/Energy/Crude-Oil/Trump-We-Wont-Protect-Foreign-Oil-Tankers-For-Free.html

“China gets 91% of its Oil from the Straight, Japan 62%, & many other countries likewise. So why are we protecting the shipping lanes for other countries (many years) for zero compensation,” President Trump tweeted on Monday. 

 

https://ca.reuters.com/article/topNews/idCAKCN1TP13D-OCATP

“Generally, when you target a head of state you’re not turning back. That is when you believe all options are at an end,” Smith told Reuters.

 

https://ca.reuters.com/article/topNews/idCAKCN1TQ0V5-OCATP

“Imposing useless sanctions on Iran’s Supreme Leader and the commander of Iran’s diplomacy is the permanent closure of the path of diplomacy,” Iranian Foreign Ministry spokesman Abbas Mousavi said on Twitter.

 

Rouhani, a pragmatist who won two elections on promises to open Iran up to the world, described the U.S. moves as desperate and called the White House “mentally retarded” - an insult Iranian officials have used in the past about Trump but a departure from Rouhani’s own comparatively measured tone.

 

https://oilprice.com/Geopolitics/Middle-East/Expert-Chances-Of-US-Iran-War-Are-At-Least-50.html

“We have to remember Iran is a regional superpower. U.S. says ‘I’ll put you in a box, please die.’ They (Iran) are not going to stay in a box and just die,” Fesharaki told CNBC. “They will strike back one way or the other; I think chances of tensions becoming bigger is very, very high in the near future,” the expert noted.

 

 

Hard to see how this ends well ....

 

The IEA clearly expects something to happen, and is prepared to temporarily release (significant?) reserves if required.

 

According to Trump, China either pays the 'protection fee' (invests in the ME 'peace plan'?)... or risks an 'event'. No possibility of course, that China could use its own naval assets to 'protect' those tankers (for less cost, and the opportunity to make new friends 'with benefits'), the same as US naval assets 'protect' the rest of the ME. Or that Iran might grant China a Naval Base, the same as the US Naval Bases in Bahrain and the UAE.

 

As China and Japan are highly likely to be Irans biggest customers at present, most would think that Iran isn't about to bite the hand that feeds it. So were one of their cargoes to have an 'incident' .... it's probably not going to be done by a rational party. Then add to it that Trump is rapidly runing out of time against the impeachment clock.

 

Charming.

 

 

SD

 

[sculpin]

https://economics21.org/inconvenient-realities-new-energy-economy

 

Inconvenient Energy Realities

 

Mark P. Mills

JULY 1, 2019 ENERGY

 

The math behind “The New Energy Economy: An Exercise in Magical Thinking”

 

A week doesn’t pass without a mayor, governor, policymaker or pundit joining the rush to demand, or predict, an energy future that is entirely based on wind/solar and batteries, freed from the “burden” of the hydrocarbons that have fueled societies for centuries. Regardless of one’s opinion about whether, or why, an energy “transformation” is called for, the physics and economics of energy combined with scale realities make it clear that there is no possibility of anything resembling a radically “new energy economy” in the foreseeable future. Bill Gates has said that when it comes to understanding energy realities “we need to bring math to the problem.”

 

He’s right. So, in my recent Manhattan Institute report, “The New Energy Economy: An Exercise in Magical Thinking,” I did just that.

 

Herein, then, is a summary of some of bottom-line realities from the underlying math. (See the full report for explanations, documentation and citations.)

 

Realities About the Scale of Energy Demand

 

1. Hydrocarbons supply over 80% of world energy: If all that were in the form of oil, the barrels would line up from Washington, D.C., to Los Angeles, and that entire line would grow by the height of the Washington Monument every week.

 

2. The small two percentage-point decline in the hydrocarbon share of world energy use entailed over $2 trillion in cumulative global spending on alternatives over that period; solar and wind today supply less than 2% of the global energy.

 

3. When the world’s four billion poor people increase energy use to just one-third of Europe’s per capita level, global demand rises by an amount equal to twice America’s total consumption.

 

4. A 100x growth in the number of electric vehicles to 400 million on the roads by 2040 would displace 5% of global oil demand.

 

5. Renewable energy would have to expand 90-fold to replace global hydrocarbons in two decades. It took a half-century for global petroleum production to expand “only” 10-fold.

 

6. Replacing U.S. hydrocarbon-based electric generation over the next 30 years would require a construction program building out the grid at a rate 14-fold greater than any time in history.

 

7. Eliminating hydrocarbons to make U.S. electricity (impossible soon, infeasible for decades) would leave untouched 70% of U.S. hydrocarbons use—America uses 16% of world energy.

 

8. Efficiency increases energy demand by making products & services cheaper: since 1990, global energy efficiency improved 33%, the economy grew 80% and global energy use is up 40%.

 

9. Efficiency increases energy demand: Since 1995, aviation fuel use/passenger-mile is down 70%, air traffic rose more than 10-fold, and global aviation fuel use rose over 50%.

 

10. Efficiency increases energy demand: since 1995, energy used per byte is down about 10,000-fold, but global data traffic rose about a million-fold; global electricity used for computing soared.

 

11. Since 1995, total world energy use rose by 50%, an amount equal to adding two entire United States’ worth of demand.

 

12. For security and reliability, an average of two months of national demand for hydrocarbons are in storage at any time. Today, barely two hours of national electricity demand can be stored in all utility-scale batteries plus all batteries in one million electric cars in America.

 

13. Batteries produced annually by the Tesla Gigafactory (world’s biggest battery factory) can store three minutes worth of annual U.S. electric demand.

 

14. To make enough batteries to store two-day’s worth of U.S. electricity demand would require 1,000 years of production by the Gigafactory (world’s biggest battery factory).

 

15. Every $1 billion in aircraft produced leads to some $5 billion in aviation fuel consumed over two decades to operate them. Global spending on new jets is more than $50 billion a year—and rising.

 

16. Every $1 billion spent on datacenters leads to $7 billion in electricity consumed over two decades. Global spending on datatcenters is more than $100 billion a year—and rising.

 

Realities About Energy Economics

 

17. Over a 30-year period, $1 million worth of utility-scale solar or wind produces 40 million and 55 million kWh respectively: $1 million worth of shale well produces enough natural gas to generate 300 million kWh over 30 years.

 

18. It costs about the same to build one shale well or two wind turbines: the latter, combined, produces 0.7 barrels of oil (equivalent energy) per hour, the shale rig averages 10 barrels of oil per hour.

 

19. It costs less than $0.50 to store a barrel of oil, or its equivalent in natural gas, but it costs $200 to store the equivalent energy of a barrel of oil in batteries.

 

20. Cost models for wind and solar assume, respectively, 41% and 29% capacity factors (i.e., how often they produce electricity). Real-world data reveal as much as 10 percentage points less for both. That translates into $3 million less energy produced than assumed over a 20-year life of a 2-MW $3 million wind turbine.

 

21. In order to compensate for episodic wind/solar output, U.S. utilities are using oil- and gas-burning reciprocating engines (big cruise-ship-like diesels); three times as many have been added to the grid since 2000 as in the 50 years prior to that.

 

22. Wind-farm capacity factors have improving at about 0.7% per year; this small gain comes mainly from reducing the number of turbines per acre leading to 50% increase in average land used to produce a wind-kilowatt-hour.

 

23. Over 90% of America’s electricity, and 99% of the power used in transportation, comes from sources that can easily supply energy to the economy any time the market demands it.

 

24. Wind and solar machines produce energy an average of 25%–30% of the time, and only when nature permits. Conventional power plants can operate nearly continuously and are available when needed.

 

25. The shale revolution collapsed the prices of natural gas & coal, the two fuels that produce 70% of U.S. electricity. But electric rates haven’t gone down, rising instead 20% since 2008. Direct and indirect subsidies for solar and wind consumed those savings.

 

Energy Physics… Inconvenient Realities

 

26. Politicians and pundits like to invoke “moonshot” language. But transforming the energy economy is not like putting a few people on the moon a few times. It is like putting all of humanity on the moon—permanently.

 

27. The common cliché: an energy tech disruption will echo the digital tech disruption. But information-producing machines and energy-producing machines involve profoundly different physics; the cliché is sillier than comparing apples to bowling balls.

 

28. If solar power scaled like computer-tech, a single postage-stamp-size solar array would power the Empire State Building. That only happens in comic books.

 

29. If batteries scaled like digital tech, a battery the size of a book, costing three cents, could power a jetliner to Asia. That only happens in comic books.

 

30. If combustion engines scaled like computers, a car engine would shrink to the size of an ant and produce a thousand-fold more horsepower; actual ant-sized engines produce 100,000 times less power.

 

31. No digital-like 10x gains exist for solar tech. Physics limit for solar cells (the Shockley-Queisser limit) is a max conversion of about 33% of photons into electrons; commercial cells today are at 26%.

 

32. No digital-like 10x gains exist for wind tech. Physics limit for wind turbines (the Betz limit) is a max capture of 60% of energy in moving air; commercial turbines achieve 45%.

 

33. No digital-like 10x gains exist for batteries: maximum theoretical energy in a pound of oil is 1,500% greater than max theoretical energy in the best pound of battery chemicals.

 

34. About 60 pounds of batteries are needed to store the energy equivalent of one pound of hydrocarbons.

 

35. At least 100 pounds of materials are mined, moved and processed for every pound of battery fabricated.

 

36. Storing the energy equivalent of one barrel of oil, which weighs 300 pounds, requires 20,000 pounds of Tesla batteries ($200,000 worth).

 

37. Carrying the energy equivalent of the aviation fuel used by an aircraft flying to Asia would require $60 million worth of Tesla-type batteries weighing five times more than that aircraft.

 

38. It takes the energy-equivalent of 100 barrels of oil to fabricate a quantity of batteries that can store the energy equivalent of a single barrel of oil.

 

39. A battery-centric grid and car world means mining gigatons more of the earth to access lithium, copper, nickel, graphite, rare earths, cobalt, etc.—and using millions of tons of oil and coal both in mining and to fabricate metals and concrete.

 

40. China dominates global battery production with its grid 70% coal-fueled: EVs using Chinese batteries will create more carbon-dioxide than saved by replacing oil-burning engines.

 

41. One would no more use helicopters for regular trans-Atlantic travel—doable with elaborately expensive logistics—than employ a nuclear reactor to power a train or photovoltaic systems to power a nation.

 

Mark P. Mills is a senior fellow at the Manhattan Institute, a McCormick School of Engineering Faculty Fellow at Northwestern University, and author of Work in the Age of Robots, published by Encounter Books.

[DooDiligence]

Thanks.

 

Long VDE because I'm a crappy analyst & have no imagination.

 

Long CLB because I'm a crappy analyst & have a vivid imagination.

 

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