Oil Boom Causes Logistics Problems

[Tex]

Texas oil production is expanding very rapidly in south Texas and west Texas. The south Texas production was several years in the making and the pipelines grew quickly enough to accomodate it. The strength of the west Texas new production exceed anything the industry anticipated and the Midland-Odessa area is awash in crude with no easy way to ship it.

www.bloomberg.com/news/2012-12-04/texas-oils-plummet-most-in-two-weeks-on-limited-pipeline-space.html

[Robin Hood]

We have the same shit going on up here in my area... they are drilling like gangbusters here... we tons of gas too... we are drowning in crude.

[Chicago Jake]

Sounds like an enviable sort of problem. Like someone complaining that their dick is too big.

[Tex]

There's worse problems you could have and this one is fixable

[Robin Hood]

For us it isn't just the crude and gas that are jammed up, with all the new windfarms going in around here, they don't have the powergrid to ship the electricity around very well, they are currently working on like 4 or 5 new high tension wires going all over the place. It is kinda cool to watch them putting these things up. They actually build the towers on the ground then put them together in large sections. They use helicopters to string the wire... it is cool as hell to watch, but I sure wouldn't want to be that poor asshole hanging off the runner on that chopper.

[Tex]

I read yesterday that the Texas grid is getting 9% of it's power from wind these days. I also read that it is not viable without the federal tax credit.

[Robin Hood]

Speaking of logistical issues... this looks like another one kicking off...
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Test wells on the Cline show the shale contains 3.6 million barrels of recoverable oil per square mile, about 300 billion barrels of recoverable oil for the entire shale.

Until recently, the Eagle Ford Shale was considered to be the richest shale play in Texas. The Eagle Ford Shale covers Webb, Dimmit, Lavaca, McMullen, Karnes, DeWitt and Gonzales counties in the southern portion of the state.

Recent advances in horizontal drilling have opened up the possibility of drilling in areas like the Cline.

The Cline’s depth is equivalent to 10 Eagle Ford Shales stacked on top of each other.

Pete Stark, an independent analyst from Englewood, Co., and regarded by the industry as an expert on global oil and gas resources, said, “We haven’t seen billion-barrel numbers onshore since Prudhoe Bay, Alaska, in the ’70s.”

[Tex]

I have seen reserve numbers on the Eagle Ford as high as 80 billion bbls and the initial numbers on the Cline but would caution that reserve numbers at this stage of the game are shaky at best. The two extremes seem to be the high when the geologists start taking flush initial production and multiplying it times half the state and the low when D&M or some of the smaller reservoir engineering firms have to attest to a number for the oil company financial statements. It does appear, that at the least, the US will no longer have to import oil after 3 or 4 years and that we could become a net exporter after that. It would be nice to be able to see the tankers arriving in Houston empty and leaving loaded again.

[Merlot Joe]

With all of this oil, gas, and power, will prices go down?

[Robin Hood]

Dec 8, 2012 19:28:23 GMT -6 Merlot Joe said:

With all of this oil, gas, and power, will prices go down?

Gasoline Prices:
Short Term... No.
Long Term... Maybe.

Here is why I think things will stay fairly stagnant for the time being. First, logistically yes we are drowning in crude oil here in Texas, however there is no easy way to get it to market, current pipeline capacity is at max. Also, with no new refineries, there is no way to process all this new oil into gasoline, contrary to popular belief oil price doesn't affect the price at the pump all that much. Prices for gasoline are based more on how much can be refined and brought to market. Simple rules of supply and demand.

Things that would bring down the prices substantially, more refineries, not just one or two would do it, you would have to build a dozen or more before you might see any kind of significant price drops. Pipelines, we need more... end of story. In my area here in the panhandle they are busy building 3-4 new small pipelines to move oil locally, but what is needed is stuff like the Keystone Pipeline. With this administrations stance on oil... I would be VERY surprised if any new refineries or major pipelines are built or started in the next 4 years.

Natural Gas:
Yes, we have already seen a significant drop in natural gas prices domestically. However overseas prices are still quite high. Once again, infrastructure is needed to transport this overseas, specifically LNG processing plants... currently there is ONE plant designed to IMPORT LNG in the US (Exxon, they have applied for a license to convert the plant, but once again with the sitting POTUS, I highly doubt they will get it.) and ONE license to build a new export facility for LNG (Excelerate Energy, great stock to buy BTW, it is poised for explosive growth in the next 5-10 years)

Electricity:
Current supply is just keeping up with demand, lots of new infrastructure being built, but I think electric prices will stay pretty stable.

Feel free to chime in here Tex.

[Chicago Jake]

My guess is that if prices go down, it won't just be for the USA, it will be for everyone worldwide. After all, aren't the oil companies international companies? Selling on an international market? If we add US-sourced oil into the worldwide market, that just expands the supply for everyone. It's not like we pump and refine "our" oil for "us," and then sell what's left over. It's all one big milkshake, and everyone has a straw.

IMHO, of course; Tex, feel free to correct me.


Edited to add: Everything I know about the oil business, I learned from "There Will Be Blood."

[Tex]

I would say that the shortage in refining capacity has eased in the last several years. There hasn't been much in the way of new refineries, but several big existing refinineries have replaced cracking units with larger ones and added capacity that way. Total US oil consumption was fallen from about 20.8 million barrels of oil per day to a little over 18 MBOD since about 2005-2007 period. Some of this is due to the slowing economy and substituting natural gas for oil, but a good bit of it is due to conservation: better fuel economy, better insulated buildings, more efficient appliances, etc.

RH, you are correct that the "local pipelines" don't alleviate the local oil glut. These are called gathering lines and are generally just moving oil/gas from the wellhead to a pipeline tap.

There aren't, to my knowledge, any huge new pipelines on the books to transport oil from the Permian Basin to market, but there are a couple of pretty good sized workarounds. Magellan Midstream's Longhorn Pipeline, a 1950s era line which has been used as a product line to transport gasoline and diesel from Houston to Midland/Odessa via Austin, is being reversed and used as a crude line to transport crude from Midland/Odessa to the Houston refineries and pipeline connections. (That leaves a problem of how to get the gasoline/diesel delivered, but they will figure out something). Also Sunoco is piecing together a couple of lines to ship the crude from Midland/Odessa to Longview/Kilgore area, which is the main trans-shipment point from Texas to the Great Lakes and Northeast refineries. It is my understanding the crude will be shipped to a massive tank farm north of Kilgore and piped out on several different lines North and East as needed. That tank farm hasn't seen this much action since WW2 and just recently they were contemplating having to tear it down within a couple of years. Now it is being refurbished.

I was under the impression that a couple of gas export facilities were being built (actually converted from import to export) at Sabine Pass, Louisiana (exactly on the Texas line) and Freeport Texas (south of Houston). The market looks great ($3.60 natural gas here vs. $11-$16 in Europe). The risk, IMHO, is as follows:

Europe has gas shale potential too, if they would develop it. How much is anybody's guess but the prospects look decent. Now they are skittish about fracking (France has oulawed it), but that could ch-ch-change. Fracking has been common in Texas since the 1940s and it has surprised a lot of us here, that with all of the tricky procedures in the oilfield with the potential for problems, they have fixated on fracking, which here would be pretty far down our list of worries, but that's the perception and perceptions count for plenty. You wouldn't want to invest your fortune in expensive natural gas export facilities, which are capital intensive and have a long lead time, only to see the Europeans turn around and embrace fracking and hit some big production in Europe about the time your terminal went online.

The oil and gas markets - fuck if I know.

Oil:

China has surpassed the US in energy consumption and India will too in a few years. That and SE Asia is where the new demand is located. It has been long term steady growth. Short term the demand is very inelastic and the price moves markedly with very small ch-ch-changes in supply. This characteristic is what enabled the price to be controlled from 1935-72 by the Texas Railroad Commission and from 1973-2007 or so by OPEC. OPEC is now where Texas was in 1972 - the swing capacity (ability to flood or withhold from the market) isn't there anymore. We were derided in the 70s as eunuchs and worse by OPEC as our ability to control oil prices moved to their hands. The worm turns and the shoe may be back on the other foot.

Natural Gas:

Different market from oil altogether. It is a domestic market today with the exception of some exports to Mexico and Canada. We have enough for hundreds of years. It produces much less carbon than oil or coal and this is how we can grow our economy w/o increasing our carbon footprint (I remain an agnostic on the CO2 global warming theory but it is political reality so the soundness of the theory or not doesn't ch-ch-change the business landscape) by switching other fuels to gas and more fuel efficient methods. The market today is about $3.60 is about 15% of the inflation adjusted price for the late 1970s. I would expect the market to rise to the $4-5 level but not much above, at least not for very long. Today $4 is about the replacement price and above $4.50 new supplies come online fairly quickly. There will be weather related spikes and troughs.

Electric rates:

This is strictly a political question. The fosil fuel component of the rates is down substantially, but wind (much more expensive) and solar (much much more expensive) have increased as a percentage of the fuel mix, with the bottom line that rates have risen some most places. Many folks think electric cars are the answer to all of our pollution/carbon problems but keep n mind that electricity is a medium for, not a source of fuel. How that electricity is generated determines emissions, etc. Electric has certain advantages with the smart grids, etc. but it also has some big drawbacks. Predicting the advancement of the technology is way beyond my abilities.