Edition Fifty Five October 2016

One Hundred Years of Natural Gas? Not At These Prices

Victoria bans fracking, but leaves questions over gas supply
Energy in a world of uncertainty

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One Hundred Years of

Natural Gas? Not At
These Prices
Written by Art Berman from The Petroleum Truth Report

One hundred years of natural gas? Not at these prices.

U.S. gas production is declining and shale gas output is down almost 2.5 Bcf per
day. Production is decreasing while consumption and exports are both increasing.
EIA data indicates a supply deficit by the end of 2016.
Henry Hub spot prices have doubled since early March. Will companies show
discipline to preserve higher prices?
Not a chance. They will drill more wells if investors continue to provide capital. This,
however, will probably be too little too late to stop the decline in gas production that
is already underway.
Real Gas Prices Have Never Been Lower
In February 2016, I wrote that an increase in natural gas prices was inevitable and in
April, I wrote that prices would double. Now, spot prices have doubled from $1.49 on
March 4 to $2.97 per mmBtu on August 29 (Figure 1).
Still, real natural gas prices (in July 2016 dollars) have never been lower. Average
prices so far this year are just $2.20 per mmBtu. That's the lowest annual price in
since 2000 and it is lower than any monthly price except April 2012.

Figure 1. Real natural gas prices have never been lower than in 2016. Henry Hub
natural gas prices are in CPI-Adjusted July 2016 dollars. Source: EIA, U.S. Bureau
of Labor Statistics and Labyrinth Consulting Services.
Prices have increased because total dry gas production has declined 1.6 Bcf per day
(Bcfd) from its peak of 75.29 Bcfd in February. Shale gas production has declined
2.4 Bcfd from its peak of 44.17 Bcfd (Figure 2).

Figure 2. Total natural gas and shale gas production have declined since February
2016. Source: EIA August 2016 STEO, EIA Natural Gas Weekly Update and
Labyrinth Consulting Services, Inc.

Figure 3. Shale gas production has declined 2.4 billion cubic feet per day since
February 2016. Source: EIA Natural Gas Weekly Update and Labyrinth Consulting
Services, inc.

All shale gas plays have declined including the Marcellus which is down -0.64 Bcfd
(Table 1). Even the relatively new Utica play has declined -0.12 Bcfd. The legacy
plays have declined the most: Haynesville, -3.77 Bcfd; Barnett, -1.91 Bcfd; and
Fayetteville, -0.92 Bcfd. No new horizontal wells have been drilled in either the
Barnett or Fayetteville since early 2016.

Table 1. Shale gas play declines from maximum production. Source: EIA Natural
Gas Weekly Update and Labyrinth Consulting Services, Inc.
Shale gas plays were supposed to provide 100 years of supply but there never was
100 years of gas.
It was a story told to promote the erroneous idea that the U.S. had so much gas that
it could afford to squander and export this valuable natural resource. It is true that
some of the production decline from shale gas plays is because the plays are not
commercial at current prices.
But whose fault is that? Conscious over-production reduced the price below the
marginal cost so promoting increased consumption and export became the only
ways to increase price.
The U.S. government has been a great ally of the shale gas companies. The SEC
changed reserve reporting rules in 2010 making it easier for companies to book
reserves and borrow against them. EPA air pollution regulations since 2011 have led
to the closing of dozens of coal-fired power plantsin favor of increased dependency
on natural gas for electric power thus increasing demand. The U.S. Department of
Energy has granted almost blanket approval to applications for LNG (liquefied
natural gas) and pipeline export in recent years also increasing demand. And in
2011, the U.S. Department of State under Hillary Clinton created the Bureau of
Energy Resources, a 63-person group to promote shale gas export and the spread
of fracking technology around the world.
Meanwhile, E&P companies destroyed billions of dollars in shareholder value. They
did this by knowingly producing gas into a non-commercial market and then, diluting
shareholders by issuing more stock to fund more drilling and production.
Comparative Inventories Tell The Story
Natural gas storage is at near-record levels for this time of year. This surplus
distracts from the likelihood of a supply deficit by the end of 2016 suggested by EIA
STEO data (Figure 4).

Figure 4. Natural gas supply should go into deficit by January 2017. Source: EIA
September 2016 STEO and Labyrinth Consulting Services, Inc.
Periods of production growth led to lower prices and lower gas-directed rig counts.
Flat production led to supply deficits that resulted in higher prices and more drilling.
During the last deficit in 2013 and 2014, spot prices averaged $4.06 per mmBtu. The
ensuing low prices have resulted in less drilling and flat production.
It is, therefore, reasonable that the increase in gas prices since March 2016 will
result in more supply but how high might gas prices go before that happens?
Comparative inventories are the best indicators of price trends. Comparative
inventory is the difference between current storage volumes and the 5-year average
of storage levels for the same week. Figure 5 shows that there is an excellent
negative correlation between comparative inventory and spot gas prices.

Figure 5. Comparative inventories are the best indicators of price trends. Source:
EIA and Labyrinth Consulting Services, Inc.
That is because the U.S. gas market is a disequilibrium system in which production
and consumption are never in balance. During the months of winter heating,
consumption greatly exceeds production. Withdrawals from storage provide the
portion of supply that remains unmet by production. Once winter is over, production
exceeds consumption. Additions to storage restore that portion of supply needed for
the next winter heating season.
Gas traders compare the current year's evolving inventory level with that of previous
years to determine if storage will be adequate to meet winter demand. If the rate of
inventory buildup is judged to be ahead of expected winter demand, the price of
futures contracts decreases. If that rate is deemed questionable to meet winter
demand, the price of those contracts increases. Producer response to price signals
is typically delayed until a price trend emerges to justify increased or decreased
drilling. The potential for over-shoot and under-shoot is great.
Comparative inventory is, therefore, the best measure of the disequilibrium in the
seasonal supply chain. It effectively removes the seasonal effects of energy use and
plant maintenance that sometimes confuse the interpretation of absolute inventory
levels.

Figure 6 shows that the fall in comparative inventories since May 2016 has been
significant compared to both the 5-year average and to 2015 inventory levels.

Figure 6. Comparative Inventories (CI) have fallen sharply since May 2016. Source:
EIA and Labyrinth Consulting Services, Inc.

Despite falling comparative inventory, prices commonly decrease in the late summer
based on probable inventory levels needed to meet winter consumption. Although
that may be happening now, I believe that higher prices will prevail by the end of
2016.
A simplified cross-plot of comparative inventory and spot prices suggests a range of
likely year-end prices between $3.00 to $3.75 with a most-likely case of of
approximately $3.35 per mmBtu (Figure 7).

Figure 7. Simplified 2014-present comparative inventory vs. spot price cross-plot

suggests a $3.00 - $3.75 price range for year-end 2016. Source: EIA and Labyrinth
Consulting Services, Inc.
Shale Gas Company Performance Is Weak
What will happen if gas prices increase to approximately $3.35 per mmBtu in the
next several months? Operators with access to capital will probably add rigs and
increase production. That is the correct response to market price signals in a market
that believes company claims that they are making money at current gas prices.
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IEA-EIA Oil-Glut Bomb

Written by Art Berman from The Petroleum Truth Report
IEA and EIA dropped an oil-glut bomb this month. Their September monthly reports
indicate that the world continues to have a glut of oil with little hope of a balanced
market in the near future.

IEA's Oil Market Report focused on weakening demand growth for oil.Their quarterly
data shows that year-over-year demand growth has decreased consistently from 2.3
mmb/day in the third quarter of 2015 to 1.4 mmb/day for the second quarter of 2016
(Figure 1). The forecast for the third quarter is only 1.2 mmb/day.

Figure 1. IEA world liquids demand growth is decreasing. Source: IEA OMR
September 2016 and Labyrinth Consulting Services, Inc.

IEA downgraded its forecast for 2016 to an average of 1.3 mmb/day annual demand
growth and only 1.2 mmb/day for 2017.

EIA monthly data from the September STEO (Short Term Energy Outlook) shows
that world oil-consumption growth has declined from more than 4% in late 2015 and
early 2016 to 2.1% in August 2016 (Figure 2).

Figure 2. EIA Consumption Growth is Decreasing With Increasing Oil Prices. Source:
EIA September 2016 STEO and Labyrinth Consulting Services, Inc.

EIA data indicates that maximum consumption growth as a percentage occurred

when oil prices were falling into the low-$30 range and that it has weakened as
prices increased into the mid- to upper-$40 range. This suggests the global economy
is too weak to support oil prices in the current range.

10

The world production surplus increased in August because production increased and
consumption decreased. The over-supply rose to +0.97 million barrels of liquids per
day from near-market balance (+0.12 million barrels per day) in June (Figure 3).

Figure 3. EIA World Liquids Production Surplus: +0.97 Million Barrels Per Day.
Source: EIA September STEO and Labyrinth Consulting Services, Inc.
READ MORE ON FORBES

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11

Victoria bans fracking,

but leaves questions
over gas supply
Written by Samantha Hepburn from The Conversation
The Victorian government has announced it will permanently ban unconventional
gas, often produced through the controversial process of hydraulic fracturing or
'fracking'. Legislation to implement the ban will be introduced this year.

This ban follows a 2015 report on unconventional gas. Following extensive review,
committee members were split over whether to implement a full ban or extend the
moratorium on onshore gas development by five years.

The ban announced by the government won't apply to offshore gas. The government
will also legislate to extend a moratorium on onshore conventional gas until 2020.
Any future decision to approve onshore conventional gas exploration and production
will be subject to review by an expert panel.

So will the ban make a difference?

Where did the ban come from?

The moratorium has been in place since 2012. It applies to all types of onshore gas
(tight, shale, coal seam and conventional gas) and to any approval for fracking,
exploration drilling activities and the use of chemicals us in fracking.

Last year the Victorian government examined the ban and consulted farmers and
other landholders, environment and community groups, the gas industry, gas market
analysts, hydrogeologists, manufacturers, tourism operators, local governments and
the general public.

12

The final report was the product of more than 1,600 submissions over a six-month
period, as well as the findings of the Victorian Auditor-General Report on
Unconventional Gas.

The rationale for the ban comes from two core factors. The first is the significant
degree of community concern about the social and environmental impacts of
onshore unconventional gas, particularly those associated with hydraulic fracturing.

Secondly, the future economic benefits connected with unconventional gas

development did not appear, from the findings of the reports, to outweigh those risks.
Indeed, the final report found that it was unlikely that strong unconventional gas
reserves were present in large commercial and extractable qualities in Victoria's
brown coal fields.

On the other hand, any development would be highly likely to have a dramatic effect
on the region's agriculture and tourism sectors.
Can fracking be permanently banned?

The existing regulatory framework does not recognise any ban on onshore
unconventional gas. Indeed, the provisions in the Mineral Resources Sustainable
Development Act explicitly include exploration and mining licences for coal seam gas
projects.

However, these regulatory frameworks are being completely overhauled. It is clear

that the new provisions will introduce a permanent prohibition on unconventional
exploration and development in Victoria. The scope and nature of the ban will
depend upon the wording of these provisions.

Any law that is introduced cannot be overridden at the national level because the
ownership and management of all onshore minerals and hydrocarbons, including
gas, are vested in the state.

13

Pros and cons

The ban will end the strong environmental concerns that continue to exist around
unconventional gas production. It will also alleviate some of the emerging conflicts
over land allocation and water usage that have emerged between regional food,
tourism and energy sectors.

The ban will also ease climate concerns connected with the generation of energy
from fossil fuels. In Australia, fugitive emissions from coal mining, oil and gas
production account for approximately 8% of Australia's greenhouse gas emissions.

Gas extraction, whether conventional or unconventional, can result in significant

methane seepage. To date, very few baseline studies are available to compare
seepage from drilling and fracking with natural methane seepage.

The ban is likely, however, to have a negative impact on supply, which may affect
domestic gas pricing. This is particularly the case if the moratorium on onshore
conventional gas production continues and no policy is implemented requiring gas
producers to reserve a percentage of produced gas for domestic usage.

The 2015 Gas Market Report, released in March this year, showed that the nexus
between international gas prices and east coast LNG production for export, domestic
demand and domestic gas prices has become increasingly complex.

Theoretically, eastern Australia has enough reserves to supply the domestic and
export markets for the next 20 years. But if the market is divided into the north
(Queensland and Cooper Basin) and the south (Victoria and New South Wales)
there is unlikely to be enough reserves in the south to meet forecast demand,
particularly following the ban.

This will inevitably require the development of more gas reserves in other areas of
the south, or imports from the north. If international gas prices and demand support
more east coast LNG production, things will get worse as this supply will not be
available in the north.

14

Victoria will, however, continue to utilise gas exploration and production in offshore
gas wells in Bass Strait. There are 23 offshore platforms in the strait and ExxonMobil
has held these titles for many years.

The offshore gas wells have traditionally supplied most of Victoria's domestic gas
market. Consequently, if the ban did apply to offshore gas exploration and
production, it would have a profound effect on domestic gas supply.

Such a ban is, however, unlikely. First, it could not apply to offshore wells located
beyond the territorial sea because these come under Commonwealth jurisdiction.

Second, a ban could not be applied retrospectively. Hence it would not affect
established offshore title holders who have been supplying the domestic gas market
for many years.

Samantha Hepburn - Director of the Centre for Energy and Natural Resources Law,
Deakin Law School, Deakin University

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Despite claims to the

contrary, science says
fracking not causing
increased earthquakes
Written by Marita Noon from Energy Makes America Great

People in seven states, from South Dakota to Texas, were awakened Saturday
morning, September 3, by Oklahoma's most powerful earthquake in recorded history.
The 5.8 tremor was centered near Pawnee, OK. Several buildings sustained minor
damage and there were no serious injuries.

That we know.

What we don't know is what caused the quakebut that didn't stop the alarmist
headlines from quickly blaming it on 'fracking.'

Green Party candidate Dr. Jill Stein promptly tweeted: 'Fracking causes polluted
drinking water + earthquakes. The #GreenNewDeal comes with none of these side
effects, Oklahoma. #BanFracking'

A headline in Forbes stated: 'Thanks to fracking, earthquake hazards in parts of

Oklahoma now comparable to California.'

The Dallas Morning News proclaimed: 'Oklahoma shuts down fracking water wells
after quake rattles Dallas to Dakotas.'

NaturalNews.com questions: 'Was Oklahoma's recent record breaking earthquake

caused by fracking?'

16

A report from ABC claims: 'The increase of high-magnitude earthquakes in the

region has been tied to the surge in oil and gas operators' use of hydraulic fracturi ng,
or fracking...'

Citing a March 2016 report from the U.S. Geological Survey (USGS) on 'induced
earthquakes,' CNN says: 'The report found that oil and gas drilling activity,
particularly practices like hydraulic fracturing or fracking, is at issue. Saturday's
earthquake spurred state regulators in Oklahoma to order 37 disposal wells, which
are used by frackers, to shut down over a 725-square mile area.'

Despite these dramatic accusations, the science doesn't support them. The USGS
website clearly states: 'Fracking is NOT causing most of the induced earthquakes.'
An importantstudyfrom Stanford School of Earth, Energy & Environmental Sciences
on the Oklahoma earthquakes, which I wrote about last year, makes clear that they
are 'unrelated to hydraulic fracturing.'

While the exact cause of the September 3 quake is still undetermined, geologists
close to the research do not believe it is fracking related. (Realize 5.5 El Reno
earthquake, centered near the western edge of Oklahoma City, in 1952 was from
natural causes.) At a September 8 meeting on Seismicity in Oklahoma, according to
Rex Buchanan, Interim director of the Kansas Geological Survey: 'There was
relatively little conversation about fracking and far more conversation about
wastewater.'

William Ellsworth, Professor (Research) of Geophysics at Stanford University, told

me that while no specific information about this direct case is available: 'I don't have
any information that would allow me to rule out fracking. However, it is extremely
unlikely. Fracking occurs for a few days at most, if at all, when the well is being
finished. Wastewater injection goes on continuously for years and years.'

The error in the reporting occurs, I believe, because people don't generally
understand the difference between drilling and hydraulic fracturing, and produced
water and flowback water, and, therefore, merge them all into one package.

17

Yes, it does appear that the increase in induced, or human-caused, earthquakes

may be the result of oil-and-gas development, yet totally banning fracking, as Stein
and Hillary Clinton support, would not diminish the tremors.

First, not every oil or gas well is drilled using hydraulic fracturing. As Ellsworth
mentioned, fracking is a part of the process used on some wells. However, much of
the drilling done in the part of Oklahoma where the seismic activity first occurred is
conventional and doesn't involve frackingwhich provided a premise for the
Stanford researchers' study.

When a well uses the hydraulic fracturing enhanced recovery technology, millions of
gallons of water, plus sand and chemicals, are pumped into the well at high pressure
to crack the rock and release the resource. When the oil or gas comes up from deep
underground, the liquids injected come back to the surface too. This is called
flowback water. That water is separated from the oil and/or gas and may be reused,
recycled (as I wrote about in December), or disposed of in deep wells known as
injection wellswhich are believed to be the source of the induced seismic activity.

'Ha!' you may think, 'See, it is connected to fracking.' This brings the discussion to
produced waterwhich is different from flowback water.

This type of wastewater is produced at nearly every oil and gas extraction well
whether or not it is fracked. The water, oil, and gas are all 'remnants of ancient seas
that heat, pressure and time transformed,' explains Scott Tinker, Texas' state
geologist and director of the University of Texas at Austin's Bureau of Economic
Geology. He continues: 'Although the water is natural, it can be several orders of
magnitude more saline than seawater and is often laced with naturally occurring
radioactive material. It is toxic to plants and animals, so operators bury it deep
underground to protect drinking-water supplies closer to the surface.' In Oklahoma,
the wastewater is often injected into the Arbuckle formation.

While the hydraulic fracturing process is typically only a few days, the produced
water can be brought to the surface with the oil and/or gas for years. With the
increased oil and gas extraction in the past several yearsbefore the 2014 bust, the

18

volumes of wastewater also soared. In parts of Oklahoma, ten barrels of wastewater

are produced with every barrel of oil.Scientific American reports that some of those
high-volume injection wells 'absorbed more than 300,000 barrels of water per
month.'

The authors of the Stanford study were 'able to review data about the amount of
wastewater injected at the wells as well as the total amount of hydraulic fracturing
happening in each study area, they were able to conclude that the bulk of the
injected water was produced water generated using conventional oil extraction
techniques, not during hydraulic fracturing,'writes Ker Than for Stanford. Professor
Mark Zoback, lead author of the study states: 'We know that some of the produced
water came from wells that were hydraulically fractured, but in the three areas of
most seismicity, over 95 percent of the wastewater disposal is produced water, not
hydraulic flowback water.' Ellsworth agrees. Last year, he told the Associated Press:
'The controversial method of hydraulic fracturing or fracking, even though that may
be used in the drilling, is not physically causing the shakes.'

So, if banning fracking won't stop the shaking, what will? The geologists contacted
for this coverage agree that more work is needed. While the quakes seem to be
connected to the wastewater injection wells, there are thousands of such wells
where no discernable seismic activity has occurred. Oklahoma has been putting new
restrictions on some of its thousands of disposal wells for more than a year to curb
seismic activity and that, combined with reduced drilling activity due to low prices,
has reduced the rate of the tremors. In Texas, when the volumes of wastewater
being injected into the vicinity of that state's earthquakes were reduced, the
earthquakes died down as well. Other mitigation strategies are being explored.

Jeremy Boak, director, Oklahoma Geological Survey, told me: 'The Oklahoma
Geological Survey is on record as concluding that the rise from 1-2 M3.0+
earthquakes per year to 579 (2014), 907 (2015) and the current 482 (to date in 2016)
are largely driven by increased fluid pressure in faults in the basement driven largely
by injection of water co-produced with oil and gas and disposed of in the Arbuckle
Group, which sits on top of basement. Both the increase and the current decreasing
rate appear to be in response to changes in the rate of injection. There are natural

19

earthquakes in Oklahoma, but the current numbers dwarf the inferred background
rate.'

Interestingly, most of the aforementioned reports that link fracking and earthquakes,
ultimately acknowledge that it is the wastewater disposal, not the actual hydraulic
fracturing, that is associated with the increased seismic activitybut, they generally
fail to separate the different types of wastewater and, therefore, make the dramatic
claims about fracking.

Boak emphasized: 'There are places where there are documented cases of
earthquakes on individual faults occurring very near and during hydraulic fracturing
operations, including one published case in Oklahoma. These are generally small
earthquakes, although some larger ones (M4.0+) have occurred in British Columbia.
Therefore, it is technically very important to maintain the distinction between
injection-induced and hydraulic fracturing-induced earthquakes, or we may take the
wrong action to solve the problem. Should the OGS and Oklahoma Corporation
Commission (OCC) staff find further Oklahoma examples of such earthquakes, the
OCC will take action. The current issue of injection-induced seismicity must take
precedence.'

When you hear supposedly solid sources blaming hydraulic fracturing for
earthquakes, remember the facts don't support the accusations. Fracking isn't
causing Oklahoma's increased earthquakes.

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20

Energy in a world of
uncertainty
Written by Mike Schwartz from Eka

Political, environmental, international, and economic: the fast-moving macro factors

that affect the oil and gas industry have created more volatility - and more data
points that must be analyzed to make sense of it all. As Michael Schwartz at EKA
explains, it's not just political operatives that have to understand the polls.

The 2016 presidential election is entering its final weeks, and soon the stump
speeches, Twitterstorms, debates and pseudo-scandals will all be in the rearview
mirror.

But for international energy markets, uncertainty continues. The new president is
going to have a major impact on the U.S.'s energy future - and with it the oil and gas
industry. But that assumes they can work effectively with a newly elected, deeply
partisan, and gridlocked Congress - which is by no means guaranteed.
Short-term vs long-term change

As it does every four years, the political melodrama emphasizes unpredictability and
change. But once the hoopla is done and inauguration balls are over, other policy
shifts and changes in America's economy - and the uncertainty they produce - come
back into focus.

So while pundits and pollsters have been polishing their mathematical models and
pronouncing on the latest from the horse race, professional future-gazers in the oil
and gas business have been looking at many more factors. One example is the
Federal Reserve. The effect of any rise in interest rates could reverberate
immediately throughout the dollar-dominated industry.

21

On the domestic front, oil and gas producers also need to understand the emerging
competitive landscape as the energy mix changes. As Hillary Clinton infamously
made clear in West Virginia, America's coal industry is facing a different future. With
less fanfare, renewable energy has been establishing a strong but disruptive foothold
in the U.S. To counter this, new technologies have boosted oil and gas operators by
making LNG and unconventional oil and gas economically viable.
Uncertainty on all sides

On the international front, the agenda of whomever takes over the oval office is likely
to be dominated by the geopolitics of the Middle East, Russia and China - whose
economic slowdown has already had an impact on energy and commodity prices.

Saudi Arabia's recently appointed oil minister, Khalid Al-Falih has made it clear that
the Kingdom's oil glut is over, while expressing his firm conviction that the oil market
will grow in absolute terms in the next two decades. But that still leaves new tensions
between Sunni Saudi and Shiite Iran. How these tensions play out, and how Saudi
Arabia responds to Iranian oil coming back into world markets, is still a matter of
educated speculation.

Further north, Russia's oil and gas industry has certainly taken a hit from low oil
prices. But its vast gas supplies and willingness to deploy them for strategic
advantage in Europe are another area of uncertainty. Meanwhile, Venezuela, with its
large oil reserves, continues to experience a rolling series of political, economic and
humanitarian crises.

Perhaps the biggest unknown of all, however, is climate change and the impact of
attempts to mitigate it. Resolutions made at the 2015 United Nations Climate
Change Conference (COP 21) in Paris have brought international agreement on
tackling climate change closer than ever before. And now that both the U.S. and
China have signed up, the likelihood of it having an impact on the oil and gas
industry seem greatly increased. But the non-binding commitments and lack of
enforcement mechanisms mean that long-term success is by no means guaranteed.

22

Volatility at top speed

Uncertainty is something that oil buyers, sellers, and heavy consumers have learned
to live with. This has always been a volatile and fluctuating market. And the costs of
being on the wrong side of a position can be both devastating and wide reaching.

But the pace of change is accelerating dramatically. The volume of data produced by
and about any given event has increased exponentially, as has the velocity at which
it is disseminated. The time between an event taking place and its impact being felt
is vanishingly small.

Oil and gas businesses need to be on top of these macro factors, while also
assessing and understanding information coming in from global supply chains,
logistics and transport operations, global currency fluctuations, and the micro-data
transmitted from newly connected equipment and sensors. According to the 2016
Upstream Oil and Gas Digital Technology Trends Survey, sponsored by Accenture
and Microsoft, 'Digital investment today is focused on mobility and the Internet of
Things (IoT) - with analytics and IoT predicted to lead the way over the next 3-5
years.' That's alongside the constant assessment of risks associated with markets
and prices, credit and counterparties, and international regulation.

All of this has become too much for non-specialist tools to handle. To manage in
today's environment, an industry-specific analytics solution, like Eka's Commodity
Analytics Cloud, that has commodity-specific algorithms, and which that can merge
data from multiple systems and analyze huge amounts of information while
instantaneously turning into actionable insights is necessary.

23

Data, visibility and technology

Anyone in this market needs an accurate picture of the world's economic, political
and demographic shifts. It is essential to know the potential meaning of the U.S.
president being refused a red carpet in China, or personally insulted by his
counterpart in the Philippines. They need a view on Brexit, political tensions in West
Africa - and the impact of weather or piracy on traditional shipping routes.

They also need to make sense of that picture. Above all they need to make timely,
informed, evidence-based decisions. Advanced data management and analytical
capability, such as that provided by Eka's next-generation ETRM software, are the
tools around which any oil and gas trading or buying strategy must be built. Without
them, firms will be stuck in the slow lane: and by the time they react to the latest
economic or political data, the new president will be running for a second term.

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More Montney assets

hit market in wake of
Seven Generations'
Cdn$1.9bn deal
Written by Eoin Coyne from CanOils
Two Canadian producers are seeking to capitalize on the enduring pulling power of
the Montney play by putting assets up for sale, according to CanOils' newest report
focused on M&A activity in August.

24

RMP Energy Inc. (TSX:RMP) and Chinook Energy Inc. (TSX:CKE) have healthy
balance sheets and a good inventory of development assets. Both have extensive
holdings in the Montney shale. They form the bedrock of the total 12,700 boe/d of
publicly disclosed Canadian assets put up for sale in August 2016. The listings follow
the recent Cdn$1.9 billion acquisition by Seven Generations Energy Ltd.'s (TSX:VII)
of predominantly Montney assets from Paramount Resources Ltd (TSX:POU), which
showed Montney assets can still attract strong interest for high value deals.
RMP Energy Inc.

The largest Canadian asset listing in August involved RMP Energy initiating a
strategic alternatives process, retaining Scotia Waterous and FirstEnergy Capital
Corp. The majority of RMP's production is derived from the Ante Creek and
Waskahigan fields. RMP produces 8,425 boe/d (43% liquids) based on Q2 2016
production figures. The company owns 24.6 million boe of 1P reserves (36% liquids).

Active RMP Energy Inc. wells as of July 31, 2016

Source: CanOils Monthly M&A Review, August 2016

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Chinook Energy Inc.

Chinook Energy Inc. has also initiated a strategic alternatives review and has
retained Peters & Co. as its exclusive financial advisor. Chinook is predominantly
Montney-focused with 2,890 boe/d of production during Q2 2016 and 12.9 million
boe (16% liquids) of 1P reserves. Chinook said it is open to expanding its core
operations via acquisitions or by establishing a new core of operations. They will also
entertain a merger, sale or JV with a well-capitalized entity to help develop existing
assets.
Also this month...

Away from the Montney, August saw Virginia Hills Oil Corp. (TSX-V:VHO) initiate its
own strategic review process, while Grant Thornton, in its role as receiver for
RedWater Energy Corp., retained CB Securities to advise in the sale of a portion of
RedWater's assets.

Full details on all of these assets up for sale, as well as a detailed look into all of
August's biggest M&A stories, can be found in CanOils' latest monthly M&A review.

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The US And China:

Saudi Arabia's Big
Picture Oil Strategy
Written by John Richardson from ICIS

THE above chart should tell you a great deal of what you need to know about Saudi
Aramco's interest in buying the LyondellBasell Industries (LBI) refinery that's located
in the Houston Ship Canal in the US:

Between January 2007 and October of this year, the Eagle Ford shale-oil field
in Texas will have seen the efficiency of oil output from reach of its rigs
increase by 2,700%

The Bakken field in North Dakota is meanwhile set to see its oil output per rig
jump by 730%.

The Permian basin, which is again in Texas, will see a 710% improvement
with the Permian Basin offering a lot of potential for further innovation.

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These efficiency improvements have of course dramatically reduced production

costs. For example, US shale oil company Pioneer Natural Resources reduced its
Q2 2016 production costs to just $2.25/bbl - $12.25/bbl.

And any sensible analysis of the macroeconomic trends will tell you that this
innovation will go on and on and on, as the US shale oil industry is a vital for source
of growth for the US economy.

Aramco - and with it of course the Saudi Arabian government that owns Aramco has been very well aware of all these dynamics for several years now. So it just
doesn't add up to suggest that the Saudi market share strategy in oil markets has
ever been about driving the US shale oil industry out of business, as the Kingdom
has long understood that this is impossible.
Winning the New Volume Game

The strategy is instead a recognition that we are in a world where oil will remain very,
very cheap compared with its recent history. If we can get rid of our tendency
to anchor our analysis in to only studying recent price history, we will get closer to
good oil-price forecasting. Why not $26/bbl as a future long term average price?

The LBI purchase would help Aramco secure volumes in these three ways:
1. The US is now importing only 1.3m bbl/day of Saudi crude compared with
$1.8bn in 2003, and securing this refinery will help to partially reverse this
trend.
2. The LBI refinery is capable of processing heavy, sour crude. Aramco is
unable to sell its heavy sour crude to many refineries in Europe and Asia
because they are only configured to handle light, sweet grades of oil.
3. Aramco would increase its Gulf Coast refining capacity by 50%, and in so
doing of course gain a bigger share in local gasoline, diesel and kerosene etc.
markets.

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The LBI deal would also help Aramco execute Saudi Arabia's Vision 2030. Vision
2030, which was announced in April, involves adding more value downstream of oil
through additional investments in both refining and petrochemicals.
Politics, though might get in the way of Aramco acquiring LBI's Houston refinery.
Vision 2030 and One Belt, One Road

But Aramco is of course not just focusing on the US as it tries to fulfil these national
strategic objectives. It has already invested in refinery capacity in Europe, Indonesia
and Japan - and it operates a joint venture refining and petrochemicals complex in
Fujian province in China.

China is particularly important for Saudi Arabia because China's oil demand is
expected to grow from 6m/bbl today to 13m bbl/day by 2035.

And from the perspective of China it needs Saudi crude because, unlike the US,
there is no realistic prospect of it becoming energy independent.

There is another important mutual interest: Saudi Arabia's Vision 2030 strategy and
China's One Belt, One Road initiative are both centred on creating new job
opportunities.

Whilst pointing out that tactically these two programmes are different, in an article on
its website Aramco writes that 'they are similar in that they both put forward
transformative yet achievable initiatives that capitalise on areas of national strength
for the benefit of their populations'.

Aramco adds that 160 Chinese companies are already working in Saudi Arabia,
including Sinopec at the Aramco/Sinopec joint venture Yasreef refinery in Yanbu.

'Vision 2030, coupled with the One Belt, One Road initiative, presents new
opportunities for China and Saudi Arabia to go beyond the current level of
collaboration and partnership and contribute even more to the development of the
two countries,' says Aramco.

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As for further Saudi investments in China, in January Aramco disclosed that it was in
discussion with CNPC and Sinopec to build refineries in China.

And at the end of August, Aramco chairman Khalid al-Falih said that talks with CNPC
for a refinery in Yunnan province were at an advanced stage, and that 'we hope to
reach an agreement this year'.

All of this is a further reminder that in the New Normal world, any good analyst needs
to spend most of her or his time focusing on the political and social issues.

Saudi Aramco In A
Low Oil Price World
Written by John Richardson from ICIS

NEWS of plans to list 5% of Saudi Aramco is obviously some four months old. There
is thus a danger that in the welter of other later events, the long term significance of
this decision ends up being overlooked. That would be a bad mistake in your
scenario planning.

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Funding from the IPO could be used for more refining and petrochemicals projects
over the next few years, with the recent announcement of a Aramco/SABIC project
perhaps fitting into this category.

The evolving Aramco story also serves asn important reminder that we are in a world
where social and political, as well as economic, factors will increasingly shape the oil
and petrochemicals businesses.

Building more refineries and petrochemicals plants, and then going even further
downstream into manufacturing finished goods, is partly about job creation. The
Saudi median age is just 26.4 compared with 37.6 in the United States and no less
than 40.4 in the UK.

Industrial diversification also seems to reflect the new oil-market realities. As I

quoted as the FT as saying as saying back in April:

Any move to proceed with a sell-off could indicate that Saudi Arabia is preparing for
a period of low crude oil prices that could last for years, requiring new sources of
income and investment.

In July there was the important announcement that Aramco and SABIC are working
on a $30bn oil-to-petrochemicals project, which would be located at Yanbu on the
kingdom's west coast. A joint feasibility study is underway with start-up scheduled for
2020.

If this project happens then funding may come from the Aramco IPO. The investment
would also dovetail with Saudi's wider Vision 2030 agenda, which centres on adding
more value to hydrocarbon reserves.

Analysts with a too-narrow view of the world will look at this project and conclude
that it makes no real cost-per-tonne of production sense to crack naphtha in Saudi
Arabia. They will say that it would instead make more sense to continue to put the
country's surplus naphtha on a ship and send it to Asia to crack, as you would then
be nearer the big petrochemicals end-users.

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But you need to ignore this very narrow logic by again recognising that we are in a
low oil-price world. Adding local value to naphtha could in the future therefore make
more sense than exporting the naphtha.

Crucially, also - as I said at the beginning - this is about generating jobs through
industrial diversification:

Ethane crackers only produce ethylene in commercial quantities, but in a

liquids cracker you end up with propylene, C4s and aromatics. You can thus
add more derivatives plants downstream of liquids cracking - and then a wider
range of employment-generating factories downstream of propylene, C4s etc.
-e.g. a factory that makes auto components from polypropylene.

There is anyway a lack of new ethane supply in Saudi. This leaves a choice of
either cracking naphtha or not building many more new petrochemicals plants
in the kingdom. (As an aside, SABIC is in parallel pursuing an ethane cracker
project in the US with ExxonMobil, where of course ethane is in abundant
supply).

Bringing Aramco and SABIC together in this way is a clear win/win, if the
project goes ahead. Aramco has the oil and refining strength and SABIC the
petrochemicals expertise.

Aramco may also work with more foreign investors in petrochemicals. It already has
its PetroRabigh joint venture with Sumitomo Chemical and the recently startedup Sadara joint venture with Dow Chemical

What might this man for global petrochemicals supply and demand balances? The
chart at the beginning of this post is just one example to get the debate going - our
global view on polypropylene in 2025. How might events in Saudi Arabia change this
particular outlook?

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The Aramco story is also of much more immediate relevance. It will help you put into
the right context all the noise around the informal OPEC meeting in Algeria on 26-28
September.Contradictory reports, almost every day, say an agreement by OPEC to
freeze production is either more or less likely.

You need to note that:

Saudi Arabia knows that even if it freezes or cuts production this will make no
long term difference to the prices because of a.) Increasing US shale-oil
efficiency and B.) We have gone beyond, or a close to going beyond, peak
demand growth for oil.

It thus makes more sense for Saudi to pump as much oil as it can whilst it can
rather than run the risk of leaving its most valuable national asset in the
ground for good. Other producers are likely to come around to the same
thinking, that's if they haven't already arrived at this place.

Even if somehow there is deal in Algeria to freeze output for short term reasons, I
wouldn't as a sign of a change in Saudi strategy. And what are the real chances of a
widespread, sustainable accord to freeze production? Very slim, I would argue.

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BP in the Bight: why

the planned oil spill
response is too slow to
protect the coast
Written by Andrew Hopkins from The Conversation

Australia's offshore petroleum industry regulator is set to rule next week whether to
grant oil giant BP's application to drill in the Great Australian Bight.

But BP's environmental plan, released last week, suggests that the company's
proposed plan for dealing with a blowout displays less urgency than would be
expected in some other parts of the world.

If a blowout does occur, BP proposes to cap it with a piece of equipment known as

a capping stack. These devices did not exist at the time of BP's Gulf of Mexico
blowout in 2010, when a capping strategy had to be developed on the run, which is
why it took 87 days to cap that well.

Since then, capping stacks have been designed, constructed and located
strategically around the world. For its proposed operations in the Bight, BP would
have access to a capping stack in Singapore. It would take up to 35 days to bring
this stack to the Bight and cap the well.

The company has rejected the suggestion that a capping stack be located locally. It
claims that the time needed to transport the device from Singapore to the Bight is not
a critical issue. In its earlier environmental plan, released last October, BP said that
capping a blowout would require significant preparatory work, by which time the
Singapore capping stack would have arrived.

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Yet the idea of spending more than a month to plug a flowing well hardly seems
compatible with avoiding major environmental damage. According to BP's own
estimate, oil from a spill in the Bight could reach the shore in as little as nine days.

A recent exercise in the Gulf of Mexico shows that a blowout could be capped in 15
days, using a locally available capping stack. In this respect, BP's estimate of the
time it would take to cap a blowout is a long way short of industry best practice.

Whether or not travel time from Singapore is the critical issue, it is worth noting that
there are five different capping stacks available for use in the Gulf of Mexico and
three for use in UK waters. The expectation is that these stacks could be on site
within 24-48 hours.

Note also that new rules imposed by the US regulator for drilling in the Arctic require
that a capping stack be located within 24 hours' travel time of the drill site. If the
Arctic justifies this level of protection, why not the Bight?
Drilling a relief well

Should the capping strategy fail for any reason, BP has a backup plan for stopping
the flow. This is to drill a relief well to intersect the blowout well below the sea floor
and 'kill' it by pumping it full of heavy fluid or cement.

The question this raises is: where would BP find a spare drilling rig to carry out this
operation? After the Montara blowout off Western Australia in 2009, a suitable drilling
rig was located near Singapore. But this rig would have been no use in the deep
water of the Bight.

Oil companies operating in Australian waters have a memorandum of understanding

among themselves to provide a suitable drilling rig in an emergency. Yet it remains
unclear how easy it would be for another company to release a rig quickly for this
purpose. As such, BP has assumed that it will take up to 149 days to acquire an
appropriate rig, drill a relief well and plug the blowout.

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The new Arctic regulations require that a relief rig be available nearby, to guarantee
that a relief well can be drilled before winter sea ice moves in. The situation in the
Bight is not as constrained by the seasons, but even so, 149 days seems an
unacceptably long time to plug a well.

The Gulf of Mexico blowout was stopped in 87 days, during which time it
inflicted damage worth at least A$40 billion. Who knows what the toll would have
been if it had lasted almost twice as long?
Protecting the shore

Finally, BP has various strategies for reducing the amount of oil reaching the
shoreline in the event of a spill. These include using dispersant chemicals, both
subsea, at the point of release, and on the sea surface. The company puts particular
emphasis on subsea dispersal, but recognises that this strategy would also be
subject to delay.

It estimates that subsea dispersal would begin within 10 days 'where that is
possible'. This can never be a fully effective way to prevent coastal pollution,
because BP's modelling suggests oil would begin arriving on the coast in less time
than this.

BP has also noted that traditional methods of containment and recovery of oil using
booms and skimmers 'are not expected to provide significant benefit' in the open
ocean.

What seems more likely in the event of a spill is that the company will find itself
fighting a last-ditch battle against the oil as it approaches sensitive parts of the
shoreline, and where this fails it will implement shoreline and oiled wildlife clean-up.

It is difficult to forecast any other scenario, given the time frames described in BP's
own documents. Its published response plan gives no guarantee that an oil spill in
the Bight would not reach the shoreline and damage the environment.

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Experience elsewhere in the world suggests that these timelines can be tightened.
The question for the regulator is whether BP has reduced the risk to a level that is 'as
low as reasonably practicable'.

It is by no means obvious that the answer is yes.

Andrew Hopkins is the author of Disastrous Decisions: The Human and

Organisational Causes of the Gulf of Mexico Blowout.

Andrew Hopkins - Emeritus Professor of Sociology, Australian National University

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