Energy & Commodities

America’s Unexpected Wealth

Posted by Keith Schaefer: Oil & Gas Investments Bulletin

on Monday, 11 February 2013 13:34

Condensate Part I  explained what this hot new commodity is; Part II outlined the bullish case for Canadian condensate demand, and in this third and final article on condensate, I review American efforts to move their glut of condensate north.

Condensate is making uneconomic gas wells profitable for producers in the shale basins of northern BC and Alberta, and creating some great investment opportunities for informed investors.
 

The reason condensate is king in Canada is that oil sands producers need piles of this light oil to dilute their heavy bitumen for transport, and Canadian production can’t keep up with demand. 
 
How long can this party last? Shale oil and gas basins in the United States are churning out condensate, where demand is very limited. A glut is developing.
 
That glut is needed up north, so infrastructure players are busy planning, permitting, and building pipelines to move America’s piles of condensate to the Canadian oil sands producers that need it. Once that happens, will condensate’s Canadian price premium evaporate?  
 
It’s an important question, as strong condensate prices are the only leg many Canadian gas producers have to stand on right now.
 
America’s Unexpected Condensate Wealth

The Shale Revolution has transformed America’s energy scene. After decades of decline, US oil production is again on the rise. The turnaround has been even more dramatic on the natural gas front: shale wealth has transformed the country from an importer to an exporter and pushed prices to historic lows.

 
Condensate production is an unexpected sideshow of the shale phenomenon – but it is starting to steal some of the limelight because shale wells are producing just so much of it. 
 
Take the Eagle Ford shale basin, which stretches across much of south and east Texas. The basin’s tight sedimentary rocks contain a range of hydrocarbons: wells on the southeastern flank generally produce dry gas, wells in the middle produce gas, natural gas liquids (NGLs), and condensate, and wells to the northwest generate oil and condensate.

Eagle Ford producers drilled their wells looking for oil or gas. Condensate was an unexpected bonus – but it now makes up as much as 40% of the hydrocarbons produced from the formation.  

 
Forecasters predict that total Eagle Ford oil output will reach 500,000 to 800,000 barrels per day (bpd) by 2020. A large number of those barrels – somewhere between 250,000 and 400,000 bpd – will be condensate. Compare that to 2011, when condensate production from the formation averaged 130,000 barrels per day. 
 
It means condensate production from Eagle Ford will likely grow by 150% in less than a decade. And Eagle Ford is just one of a slew of shale basins being drilled and fracked apace in the United States to produce oil, natural gas, NGLs, and condensate.
 
It sounds great, right? Not only are shale basins producing the natural gas and crude oil expected, they are also churning out piles of condensate, a hydrocarbon mixture so light you could often pour it straight into your tractor. Condensate must be making US shale producers happy, right?
 
Wrong. 
 
Condensate and US Refineries – A Poor Match

Since it is produced alongside oil and since it is in fact oil, producers lump condensate with oil when reporting production volumes. As a result, it seems like US oil production is shooting through the roof. But while domestic output is certainly rising, lumping condensate in with crude is misleading because not every hydrocarbon molecule is created equal – especially through the eyes of a refinery.

 
Half of America’s refineries lie along the Gulf Coast. With the ability to process 8 million barrels of crude oil every day, this industrial complex truly sets the tone for oil pricing across the country. And guess what? Gulf Coast refineries don’t like condensate. 
 
————————————

What Is This “Freak of Nature” Gas Play?

In short, it has the best economics of any pure gas play I’ve ever seen in my life.

And in this new briefing, I take you through, point by point, why I think this one natural gas stock, a pure play on gas, could be the single best trade in the sector – junior, intermediate or senior.

Keep reading here to learn more…

————————————-
Refineries are picky beasts, each one only able to process crudes within a particular API range. The Gulf Coast army of refineries used to love light oil, but over the last 25 years the world burned through many of its high-quality deposits of light crude. That forced producers to shift towards heavier and sourer crudes.
 
In response, US refineries invested billions in upgrades to be able to process these more complicated crudes. In fact, from 2005 to 2009 the US refining industry spent $47.6 billion on heavy oil upgrades.
 
Then came the Shale Revolution. Fracking technology is the engine for America’s drive for increased energy independence.  Suddenly producers were pumping good quality oil from shale basins across the continent.

The refineries can handle shale oil. They cannot, however, handle much condensate. 

 
The only way to feed condensate into these medium and heavy oil refineries is to mix the light oil with a heavier crude, to produce a mid-weight blend. But even that is not ideal, because it turns out a mixture of heavy oil and condensate does not produce the same products as a straight crude of similar weight. 
 
Specifically, a mixture of light condensate and heavy crude produces lots of very light products, such as naphtha, and little to none of the heavier and more valuable distillates used to make diesel and jet fuel. 
 
So, since a crude-condensate blend produces less valuable products than a straight crude of the same average weight, refiners discount the price they’re willing to pay for blends.
 
The unexpected surge in condensate production has collided head-on with low demand from US refineries, resulting in poor pricing. In general, Gulf Coast crude marketers have been paying about $15 per barrel less for condensate than for the light crude it is produced alongside.
 
Since it is cheaper than crude, refineries are buying some condensate and mixing it with heavier crudes for processing. The products are worth less but input costs are also lower, so it works out ok for refiners’ bottom lines. 
 
It does not, however, work out well for producers. Shale producers invest millions of dollars into each multi-stage frac well. They don’t want to sell half their production at a discount – they want buyers who are willing to pay top dollar for all this light, sweet condensate. 
 
Those buyers, as we learned last week, are north of the 49th parallel.
 
Getting Condensate to Canada**
 
Canada needs condensate. US producers are flooded with the stuff and want to sell it to Canadian oil sands operators. The challenge is moving it. 
 
The only pipeline currently moving condensate from the US into Canada is Enbridge’s Southern Lights line, which runs from Illinois to Edmonton. It can move 180,000 barrels per day, which can more than handle the 110,000 bpd of condensate being imported now and Enbridge is proposing an expansion. 
 
rainbow pipeline
 
The hard part, the bottleneck, is getting it to Patoka, where it can enter Southern Lights. Patoka, it turns out, is not particularly close to the biggest condensate-producing shale in the US, which is the Eagle Ford basin in Texas.
 
There are ways. For example, Plains All American is using the Louisiana port of St James as a staging post to route Eagle Ford condensate into the Capline pipeline for shipment to Patoka. 
 
Others are using existing gathering networks to move condensate to Corpus Christi on the Texas Gulf Coast, where it is loaded onto barges and transported to St James. Magellan Midstream Partners and Copano Energy are taking this one step further, extending one of Copano’s pipes by 140 miles to Corpus Christi. That line should soon be moving 100,000 barrels of condensate a day.
 
KINDER MORGAN’S PLANS**
 
Kinder Morgan is also working to establish itself as an Eagle Ford condensate shipper. Kinder is building a condensate pipeline that can move 300,000 bpd from the shale basin to the Houston area, which is already being used to capacity.

From Houston, the condensate from Kinder’s line moves through the company’s Explorer pipeline to Hammond, Illinois. 
 

That’s progress, but Canada is still hundreds of kilometers away. To connect its system to Canada, Kinder has two plans:
 
1. Extend Explorer to connect with Enbridge’s Southern Lights—one ends and another starts in Illinois.  That link  should be in service by early 2014. 
 
2. The other is to connect Explorer to the Cochin pipeline. Cochin moves propane 1,900 miles west to east—from Alberta to Ontario—through the US, crossing the border in North Dakota and skirting south of the Great Lakes before re-entering Canada in Windsor. 
 
Propane volumes have been declining, so Kinder is proposing to reverse and expand part of Cochin—from east to west—to move 95,000 bpd of condensate from Illinois to Alberta.
 
Industry support for the project is clear: when Kinder held an open season on its Cochin proposal, the company received binding commitments for 105% of the proposed capacity. US regulators approved the plan in October; Kinder is now awaiting word from Canadian regulators. If all goes according to plan, the reversed Cochin will start moving condensate from the Midwest into Canada by mid-2014.
 
Plans from Kinder and Plains All American alone will increase Eagle Ford condensate capacity to Alberta by 170,000 bpd by the middle of 2014. Other pipeline projects are also in the works. Not willing to wait, some US producers moving their condensate to Canada by rail. 
 
The upgrades are coming, and all signs indicate that every condensate pipe in the works will be filled to the brim almost from day one. Even without much dedicated infrastructure, condensate sales from the US to Canada have skyrocketed in recent years. Every estimate is different, but some analysts estimate that US condensate exports to Canada have grown 1,000% in the last two years alone.
 
CONCLUSION

Condensate capacity from the US to Canada should increase dramatically—but it is over a year away.  Oil and gas marketers in Alberta tell me oilsands production is rising fast enough to use a lot more condensate—but only time will tell if the market stays in balance, over-supplied, or under-supplied.

 
There’s a lot riding on this equation for Canadian natural gas producers—strong condensate pricing is the only thing between a lot of them and bankruptcy.

– Keith

 
**Much of this information was gleaned from Rusty Braziel’s blog at www.rbnenergy.com.  Rusty and his team put out a free daily blog that is full of GREAT information, though sometimes a bit technical for the retail investor.  I go there every day, and often read it.  Serious energy investors should bookmark it.  Registration is free – just go to: http://www.rbnenergy.com/signup

Real Estate: Condo Crunch

Posted by Canada Housing Price Charts

on Saturday, 9 February 2013 16:02

888626 orig
 
The chart above shows the average detached housing prices for Vancouver, Calgary, Edmonton, Toronto, Ottawa* and Montréal* In January 2013, Vancouver prices ticked down, Toronto prices ticked up and Alberta prices were mixed with condo prices heading south. Even in the most bullish Canadian markets of Calgary and Edmonton, condo prices dropped 7.9% M/M and 4% M/M (Scorecard). Meanwhile in Vancouver and Toronto, condo prices continued descending off their peaks down 12.4% and 8.8% from the highs.
Sales rebounded after the December Bi-Polar festivities were out of the way and inventory gushed back onto the market. Hopefully Realtors persuaded their Vendors to reduce prices on all the re-listings otherwise it’s doubtful that the sales momentum will lift all boats (Momentum Chart). 

The counter trend rally going on in Alberta is being stoked by thin supply (Scorecard) and fantastic Earnings; and Calgary has almost made it back up to its peak SFD price from 66 months ago (Plunge-O-Meter). Readers on this site who have voted (Sentiment Polling) are saying that 12 months out, Calgary may be able to defend its pricing model from the bears who are clearly sharpening their claws in Toronto and Vancouver. (*Ottawa are combined residential; Montreal are median not average).

 
7620485 orig
 
 
….for larger view & analysis go HERE
 

Click the play button below to hear Andrew Ruhland’s “3 Key Investment Themes” from his presentation at the 2013 World Outlook Financial Conference.

Loading the player …

Click here to find out more about Andrew Ruhland and the team at Integrated Wealth Management

Gold, Bonds & the Dollar – Short & Long-Term Implications

Posted by Przemyslaw Radomski: Sunshine Profits

on Saturday, 9 February 2013 0:35

In our previous essay we stepped back from the day-to-day price analysis in order to focus on the major event that happened recently on the silver market (the silver – JP Morgan manipulation lawsuit was dismissed) and today we would like to get back to the recent price moves, however, first, let’s discuss the current situation on the bond market.

A trend is a trend until it stops. Could this be the case for bonds? Is the bond bubble about to burst? And if so, what are the implications for precious metals?

Anyone following the financial press can see that analysts are rumbling that bond prices will fall when interest rates rise and that it will happen sooner than later. And we generally agree – you can’t lower interest rates below zero (who knows, maybe the Fed will surprise us calling that an unconventional but necessary move?) and since they are practically there, the ceiling is very close to the current bond valuations. The reason that bonds beat stocks over the past two decades is that interest rates have plunged making attractive the fixed income that bonds promise to pay. But the situation might as well change in the following years.

“Investors should be alert to the long-term inflationary thrust of such check writing” by the Fed, said Bill Gross, who runs the world’s largest bond fund, in his January investment outlook. “While they are not likely to breathe fire in 2013, the inflationary dragons lurk in the ‘out’ years towards which long-term bond yields are measured.”

Nearly 40% of the 32 investment strategists and money managers surveyed recently by CNNMoney think that interest rates will begin to rise in 2013, and another 30% say the shift will begin in 2014.

That would be even sooner than the Federal Reserve’s projections. The central bank doesn’t expect to raise the federal funds rate, the key interest rate that influences overall interest rates, until some time in 2015. The Fed said that it will keep its stimulus policies in place until the unemployment rate falls to 6.5%, which it doesn’t think will happen before then. But whether that takes place this year or next, or in 2015, one doesn’t want to be stuck with major investments in bonds when it happens.

Waves come and go. The current bull market in bonds must end at some time in the future, sooner or later, not until inflation or interest rates rise. So far, the economy remains sluggish, real unemployment is high and inflation is minimal. But, sooner or later, investors will experience either a loss of money, or at best meager returns. If inflation eats away the value of bonds, those who hold gold in their portfolios may be able to compensate.

Let’s see how gold is performing this week. Let’s begin with the analysis of the US Dollar Index as it will likely have a major impact on the price of yellow metal in the coming months. We will start with the long-term chart (charts courtesy by http://stockcharts.com.)

radomski february82013 1

No significant changes are seen this week and the long-term trend for the USD Index remains down. Thursday’s rally did not take the index level above the long-term resistance line, so the outlook here from the long-term perspective remains bearish.

radomski february82013 2

In the medium-tern USD Index chart, virtually nothing changed this week, although a move to the upside was seen on Wednesday-Thursday’s. The head-and-shoulders pattern is still not completed. A breakdown here below the neck level of the above-mentioned pattern – is quite probable and will likely lead to much bigger moves to the downside. These subsequent declines could stretch out for a period of weeks or even months.

radomski february82013 3

In the short-term USD Index chart, a rally above the medium-term declining resistance line based on the July-August and late-November highs last year was seen this week. As the beginning of the dashed line is at the Nov 2012 top (the one that created the medium-term support line) and the Jan 2013 high (the one that formed after prices tried breaking above the declining resistance line), it might be the case that this line represents the “how far too far can the index move and still go back down”. It’s simply our guesstimate based on two facts: each of the previous breakouts failed and the rally stopped right at the dashed line, thus confirming at least some significance thereof.

We still believe the next move seen here will be to the downside. With a cyclical turning point a bit more than a week away, sideways trading in the coming days will likely be quickly followed by a period of declines which could then trigger a rally in the precious metals sector.

At this point, let’s have a look what’s currently going on in the gold market.

radomski february82013 4

Larger Image HERE

In the long-term gold chart the situation remains bullish. Gold prices consolidated after breaking out and the yellow metal is technically ready for a big rally. Comments made in our essay on the price of gold in February 2013 remain up-to-date:

The bottom was very likely formed here a few weeks ago when gold prices dipped below the 300-day moving average, which is a very important long-term technical development. Prices now appear to be simply consolidating a bit, which is also in tune with the historical patterns – the rally didn’t always start in a volatile way after the final bottom was reached below the 300-day MA – but it happened eventually many times and on each occasion the rally was worth waiting for.

On a short-term note, it is encouraging that gold did not decline much even though the dollar rallied quite sharply on Thursday.

Finally, we would like to share an observation that one of our subscribers shared with us along with our comments:

Q: I note in 2006-07 it took 76 weeks to make a new high for gold and in 2008 it took 78 weeks to make a new high in gold. We are now at week 74 in the gold cycle. Do you feel this is significant? I feel when it does move it will be to almost 1900 before a short- or medium-term correction. “When time is up, price will reverse. Time is more important than price.”–W. D. Gann (famous technical analyst.)

A: Yes, we feel this is significant and we expect to see a more volatile upswing in the coming weeks. We would like to add that the time factor may make this consolidation significant. Less than 40 years ago the correction took gold much lower – about half of the previous high – before the final rally in gold materialized. At this time we think that the prolonged consolidation might have been enough and gold doesn’t have to move even lower – the lack of a rally might have been enough to make people throw in the towel.

Summing up, the situation in gold did not change much this week in terms of price and it remains bullish for the medium- and long term.

To make sure that you are notified once the new features are implemented, and get immediate access to our free thoughts on the market, including information not available publicly, we urge you to sign up for our free gold & silver mailing list. Sign up today and you’ll also get free, 7-day access to the Premium Sections on our website, including valuable tools and charts dedicated to serious Precious Metals Investors and Traders along with our 14 best gold investment practices. It’s free and you may unsubscribe at any time.

Thank you for reading. Have a great and profitable week!

Przemyslaw Radomski, CFA

Founder, Editor-in-chief

Gold investment & Trading, Silver investment & Trading”Gold Investment & Trading Website – SunshineProfits.com

About Sunshine Profits

Sunshine Profits enables anyone to forecast market changes with a level of accuracy that was once only available to closed-door institutions. It provides free trial access to its best investment tools

 

How Fracking Differs from Conventional Oil Recovery

Posted by OilPrice.com

on Friday, 8 February 2013 20:45

Before there were refrigerators folks kept drinks cool by putting them into clay jars that had been soaked in water. The evaporation of the water from the clay cooled the container and its contents, which today includes wine bottles. On the other hand, for many years artisans have taken clay in a slightly different form, shaped it and baked it and provided the teacups which keep the liquid inside until we drink it.

Two different forms of the same basic geological material, with two different behaviors and uses. Why bring this up? Well there is a growing series of articles which continue to laud the volumes of oil and natural gas that the world can expect from the artificial fracturing of the layers of shale in which these hydrocarbons have been trapped for the past few million years. It has been suggested that there is no difference between this “unconventional” oil and the “conventional” oil that has been produced over the past century to power the global economy. And yet, despite the scientific detail which some of these critics discuss other issues, they seem unable to grasp the relatively simple geologic and temporal facts that make the reserves in such locations as the Marcellus Shale of Pennsylvania and the Bakken of North Dakota both unconventional and temporally transient. Let me therefore try again to explain why, despite the fact that the oil itself may be relatively similar, the recovery and economics of that oil are quite different from those involved in extracting conventional deposits.

But, before getting to that, let’s first look at the current situation in North Dakota, using the information from the Department of Mineral Resources (DMR). According to theJanuary Director’s Cut the rig count in the state has varied from 188 in October, through 186 in November, and 184 in December, to 181 at the time of the report. Why is this number important? Well, as I will explain in more detail later, the decline rate of an individual well in the region is very high, and thus the industry has to continue to drill wells at a rapid rate, just to replace the decline. (This is the “Red Queen” scenario that Rune Likvern has explained so well.) The DMR recognize this by showing the effect of several different scenarios as the number of rigs changes.

For example they project that 170 rigs will be able to drill around 2,000 wells a year. At that level, and with some assumptions about the productivity of individual wells that I am not going to address here, but which Rune discussed. I would, however, suggest that it is irrational to expect that new wells will continue to sustain existing first year levels as the wells move away from formation sweet spots. Yet, accepting their assumptions for now, DMR project that the 170 rigs will generate the following production from the state:

AE1385

……read more HERE

 

test-php-789