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Oil and Gas Roundup — Dec. 12

December 12, 2014
TOPICS: In the news
The real reason Saudi Arabia can afford a price war against U.S. shale

Much time is being spent discussing the attempt by OPEC producers, especially Saudi Arabia, to drive higher-cost US shale drillers out of the oil game. The theory is that because OPEC cartel members can drill at dirt-cheap prices, they can inflict despair on the lightly defended shale patch. In the end, US drillers will have wave the white flag and shut down.

The trouble with that theory is that OPEC actually has higher costs, by a wide margin.
The difference boils down to definitions. When you are talking about how much it costs, say, the Oklahoma-based company Continental Resources to drill in North Dakota, it’s roughly $40-$50 a barrel, judging by average outlays. That takes into account all the costs strictly associated with drilling, and suggests how much Continental probably has to earn in order to break even.

Things become more complicated when you turn to Saudi Aramco and its production at, say, the supergiant Ghawar oilfield. Western experts say that Saudi production costs average $10-$20 a barrel, give or take a few dollars either way. Of course, there are no hard public numbers when it comes to most Saudi oil data, only estimates from industry experts.

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IEA releases Oil Market Report for December

The IEA Oil Market Report (OMR) for December cut the outlook for 2015 global oil demand growth by 230 000 barrels per day (230 kb/d) to 0.9 million barrels per day (mb/d) on lower expectations for the Former Soviet Union and other oil‐exporting countries.

The monthly report told subscribers that a strong dollar and the lifting of subsidies have so far limited supportive price effects on demand, which is now seen reaching 93.3 mb/d next year, from 92.4 mb/d in 2014.

Global production fell by 340 kb/d in November to 94.1 mb/d on lower OPEC supplies. Annual gains of 2.1 mb/d were split evenly between OPEC and non‐OPEC producers. Surging US light tight oil supply looks set to push total non‐OPEC output to record growth of 1.9 mb/d for 2014, but the pace is expected to slow to 1.3 mb/d for next year.

OPEC crude supply declined by 315 kb/d in November to 30.32 mb/d after Libya’s recovery stumbled, but it stood 765 kb/d than in November 2013. The "call on OPEC crude and stock change" for 2015 was revised down by 300 kb/d to 28.9 mb/d. The "call" is expected to decline seasonally by 1.2 mb/d from this quarter to the first quarter of 2015.

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U.S. needs more data before ending crude export ban, House panel told

Much more environmental impact information is needed before the US can reasonably remove crude oil export limits, a witness told a House Energy and Commerce Committee subcommittee during a Dec. 11 hearing examining energy policies enacted nearly 40 years ago.

“We just don’t know enough about these light, tight oils that are coming out of North America,” said Deborah Gordon, who directs the Carnegie Endowment for International Peace’s Energy and Climate Program. “Our refineries are set to handle heavier crudes. We’re setting ourselves up to be a refiner of heavier in greenhouse gases oils while exporting lighter grades.”

More information is readily available about Organization of Petroleum Exporting Countries members’ crudes than about what’s being produced domestically from the Bakken and Eagle Ford tight shale formations, she told the Energy and Power Subcommittee.

“The bottom line is that oils are changing,” Gordon said. “A more complex set of hydrocarbons is replacing crude oil. We know precious little about these new resources. The nation needs better information about the composition of these new oils.”

She said one reason there’s relatively less information about new North American light crudes is “they’re the new kid on the block.” She said, “In order to get information on oil, you do an assay, but everyone does this differently. Having consistent information is a problem.”

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U.S. refineries boost oil use to record as prices plunge

Refiners in the U.S. used the most oil ever last week, taking advantage of crude prices tumbling to a five-year low.

Plants processed 16.6 million barrels a day of crude in the week ended Dec. 5, the most in Energy Information Administration data going back to 1989. The rise occurred as futures tumbled to the lowest in more than five years after the Organization of Petroleum Exporting Countries decided Nov. 27 to maintain output levels and as U.S. production climbed to the highest level in three decades.

The access to cheaper domestic crude and natural gas has enabled U.S. refiners to increase operating rates to above 95 percent for the first time since 2005, increasing gasoline supply and driving down prices at the pump to the lowest level in more than four years. Refineries have used more crude in each of the past six weeks as seasonal turnarounds wound down.

“Prices are going down and production is going to continue rising,” said Tom Finlon, Jupiter, Florida-based director of Energy Analytics Group LLC. “The crude needs to be processed into fuels consumers use and the refiners are in that business. They’re ready after performing seasonal maintenance.”

Gasoline supplies rose 8.2 million barrels to 216.8 million in the week ended Dec. 5, the biggest gain since the week ended Sept. 21, 2001. Inventories of distillate fuel, a category that includes diesel and heating oil, climbed 5.58 million to 121.8 million, the biggest increase since January.

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