New technology means a fast-pace output response to falling oil prices

New technology means a fast-pace output response to falling oil prices

Peter Tertzakian

Special to The Globe and Mail

Published Wednesday, Sep. 17 2014, 5:00 AM EDT

Last updated Wednesday, Sep. 17 2014, 5:00 AM EDT


When the economy slows down, wallets thin out and people have less money to spend. Drivers make fewer trips to the gas pumps. The demand for oil slackens quickly. The price of a barrel goes down. It’s not rocket science.

What about the other side of the oil market? If producers have less money to spend, does production decline swiftly too?

Historically, the output response to lower prices has been slow, much slower than consumer thrift. But that lagging reaction may be history. Because of science and innovation, the character of world oil production has radically changed. Since 2009, oil output has rocketed up in the United States and Canada, and not much elsewhere (see Figure 1). That’s not news. But what may be news is how vulnerable North America’s growth may be to the dropping oil price.

Non OPEC contributions to world oil supply

The price of a barrel of international light crude oil – measured by Brent – has hit its lowest level in more than two years. Discounted North American oil prices are softening sympathetically; inside the continent, crude prices are at least $5 to $10 cheaper than barrels labelled with Saudi, Nigerian and British flags. Some oil price analysts, feeding off slowing demand fundamentals in Europe and China combined with growing Libyan production, suggest that price could weaken more. And while we agree that lower prices are possible in the short term, we do not expect price markdowns to be long-lasting.

Here is why. For oil producers, a crude oil discount translates into less cash flow, less appeal to capital markets and therefore less spending power. Yet not all oil production is affected equally by less investment. The world’s 92 million barrels a day of oil production can be divided into four distinct types of production: Canadian oil sands; age-old onshore conventional wells; increasingly high-tech offshore production; and new-age hydraulically fractured tight oil.

Contrary to popular belief, oil will steadily flow from Canada’s oil sands, even with lower prices. Massive sunk costs, scale, and negligible decline rates mean that most existing operations in the region will keep producing, even if the oil price for West Texas intermediate were to reach $55 a barrel (U.S.) or below. The resilience of oil sands production was proven out during the financial crisis: Oil supply remained steady when the price of oil dropped to under $50 in the last few months of 2008.

Overwhelmingly, the bulk of the world’s output still comes from “conventional” vertically drilled onshore wells, combined with a growing wedge of supply from the larger scale and more technically challenging offshore projects. Historically, these production types have flowed reliably during low price episodes, and there has been a steady string of global megaprojects that have come online to offset legacy production declines.

But this landscape has changed. Producers from outside North America have been plagued with falling output, technical challenges, a lack of investment, outages due to civil war, corruption, sanctions or all of the above. New large megaprojects such as Kashagan or Brazil’s deep-water subsalt have been long delayed. Organization of Petroleum Exporting Countries production is increasingly prone to outages. Even assuming that new international developments come on line, once declines from the existing production base are factored in, the collective capacity expansion from outside North America is flat at best. Or looking through the lens from the other side, the reverse argument is that U.S. and Canadian hydraulically fractured light oil fields will mostly determine the industry’s free-market response to lower oil prices (OPEC may respond at some point, but that’s another story).

North America’s hydraulically-fractured, tight oil production follows a “just-in-time delivery” business model. When prices are robust, production can grow quickly, because each new well delivers very high initial production rates. However, high decline rates in these wells imply that output should fall off quickly when investment (drilling) is reined in. This downside hypothesis has never been tested, but if low prices were sustained, the economic experiment would be on.

Tight oil or shale oil exploitation is heavily dependent on the rapid recycling of cash flow and access to capital markets. Price weakness slashes unhedged cash flow. Price weakness also sours the appetite of capital markets to invest in oil companies. So production growth should moderate, or even retreat, with a low-price cash famine. This would, in effect, set a floor for the oil price. Depending on the rocks and the operator, the break-even price for North American tight oil varies widely. But we would expect that, notionally, the trigger price to start to witness an investment slowdown is about $85 a barrel for the West Texas intermediate benchmark (still about $10 under today’s price).

The just-in-time nature of North American tight oil, combined with the difficulties in adding new supply elsewhere, suggests that the world’s oil supply will quickly adjust to falling demand or surplus production. The lower prices go, the greater the probability they will rocket up again. But that’s not rocket science either.

Peter Tertzakian is chief energy economist at ARC Financial Corp. in Calgary and the author of two best-selling books, A Thousand Barrels a Second and The End of Energy Obesity.

DeBeers says finding new diamond deposits essential

The largest deposit in the world is in Saskatchewan’s Fort a la Corne district just west of Prince Albert – maybe look there?
DeBeers says finding new diamond deposits essential
Mathew Nyaungwa, Editor in Chief of the African Bureau, Rough&Polished
De Beers, the world’s largest diamond producer by value, said it is essential to search for fresh, large sources of kimberlite diamonds.
BusinessDay quoted the group’s head of exploration Charles Skinner as saying that there was a potential threat to the diamond market from synthetic diamonds if the supply of natural diamonds cannot keep up with demand.
He claimed there had been no discovery of a major kimberlite for about 30 years.
“The reason for the significant volume of diamonds produced in the period between 1970 to present is because of the feedstock from these significantly large diamond mines that were discovered in that period,” he said.
“There’s been massive depletion and it begs the question wh ere will diamonds come from in the future.”
Skinner said over 8,000 kimberlites had been found, but only 67 had enough diamonds to justify the economics of establishing a mine.
Of those mines, only seven were major mines like Jwaneng and Orapa in Botswana and Venetia in South Africa, producing 65 percent of global rough diamond production by value, he said.
Meanwhile, Tsodilo Resources president Mike de Wit said the size of kimberlites had dropped to an average of just 2ha from more than 30ha in the 1940s.
“It’s shameful that we’ve not been able to keep that level of discovery going on,” he said.
“The decline in rough diamonds is a reality and the life of mine for new projects is pretty short, 10 or 12 years. We see some new projects coming on stream but they won’t have the impact that a big mine would have.”
De Beers said recently that it was willing to spend money on diamond exploration in South Africa and Angola.

Saskatchewan’s population could top 1.5 million people by 2038


Released on September 17, 2014

Saskatchewan’s population could top 1.5 million people by 2038, according to a new report released today by Statistics Canada.
StatsCan issues its population projections every five years, outlining seven possible scenarios for population growth in Canada and the provinces.  Its projections for Saskatchewan range from the province having a population of anywhere from 1,174,000 people to 1,527,000 people by 2038.  The lower growth projections are based on population trends dating back to Saskatchewan’s zero-growth period of the 1990s and early 2000s, while the higher growth scenarios are based on Saskatchewan’s strong population growth trends in recent years.
Premier Brad Wall said he believes the strong growth scenarios are more likely, based on the experience in Saskatchewan in the past few years.
“Saskatchewan is strong and growing,” Wall said.  “These projections show we are expected to keep growing and that’s a good thing.  There are many challenges that come with growth, but I would rather deal with those than the challenges of decline our province was facing just a few short years ago.”
Wall noted that when Statistics Canada issued its population projections in 2005, four of the six scenarios saw Saskatchewan actually losing population over the next 25 years.  Even the most optimistic scenario at the time saw Saskatchewan growing to just 1,064,000 people by 2031.  Today, there are more than 1,120,000 people living in the province.
“Saskatchewan has now grown by more than 120,000 people in just the past seven years,” Wall said.  “Today, the least optimistic projection shows stronger growth than the most optimistic one just a decade ago.  Things have changed a lot in Saskatchewan.”
Wall said the government will continue working hard to keep Saskatchewan strong and meeting the challenges of growth.
For more information, contact:
Karen Hill Executive Council Regina Phone: 306-787-2127 Email: Cell: 306-529-9207

Lower taxes boost income growth in Saskatchewan

Lower taxes boost income growth in Saskatchewan
By Bruce Johnstone
The Leader-Post
September 15, 2014
Chart below added to story from Brad Wall’s Facebook page Sept 16, 2014
Income Sept 2014
REGINA — Incomes in Saskatchewan are growing more quickly than in most other provinces, thanks largely to lower income taxes, according to the latest report from Sask Trends Monitor, a Regina-based monthly statistical newsletter.
“In 2012, gross income for the average Saskatchewan tax filer increased more quickly than inflation for the tenth year in a row,” Sask Trends Monitor said.
“Higher employment earnings bolstered by more income from investments were the reason. Saskatchewan’s tax rate is lower than in most other provinces so
much of the income growth has translated into higher after-tax incomes.”
Based on data derived from personal income returns, Saskatchewan taxfilers saw their average income increase by 2.7 per cent annually from 2002 to 2012 — second-highest next to Newfoundland and Labrador at 2.9 per cent and ahead of Alberta at 2.1 per cent, the report said.
The average gross income per Saskatchewan taxfiler in 2012 (the most recent year for which data was available) was $45,400, good for second place among the provinces, behind Alberta at $57,100 and ahead of Ontario at $44,800. The Canadian average was $43,900 in 2012.
“The average (Saskatchewan) income overtook the B.C. average in 2009 and the Ontario average in 2012 to reach second place after Alberta.”
Doug Elliott, publisher of Sask Trends Monitor, said he wasn’t surprised by Saskatchewan’s strong income growth during the 2002-2012 period, but was surprised by the reasons for the above-average increases in income.
“The effective tax rates are an odd (thing),’’ Elliott said. “As your income goes up, your taxes go are supposed to go up, but ours haven’t really,” Elliott said.
While the average taxfiler in Saskatchewan paid more taxes in 2012 ($7,500) than 2002 ($5,700), the average income tax paid as a percentage of average gross income actually declined slightly to 16.3 per cent in 2012 from 16.5 per cent in 2002.
“This is mainly because the provincial income tax rate of 5.9 per cent is below the rates in most other provinces,” the report said. The Canadian average provincial income tax rate is 6.3 per cent, ranging from a low of 4.3 per cent in B.C. and a high of 8.2 per cent in Quebec.
“So I think (Premier Brad) Wall can take some credit for the fact that, in spite of the rapid growth in incomes, our actual taxes haven’t increased all that much.” In fact, Saskatchewan has the fifth lowest effective income tax rates among the provinces.
Investment income almost doubled from $1,500 in 2002 to close to $3,000 in 2012, also helping to boost incomes, the report said.
© Copyright (c) The Regina Leader-Post

INFOGRAPHIC: Visualizing the changing landscape in nuclear power #uranium

INFOGRAPHIC: Visualizing the changing landscape in nuclear power

Visual Capitalist | September 16, 2014

There’s been talk about a coming potential uranium bull market for awhile now, but here is a different look at the nuclear picture. The below visualization shows every nuclear reactor in the world by country and breaks down their timeline including construction, commercial power generation, and decommissioning. In addition, planned reactors for the future are also shown for each country.

This data visualization makes it clear where the future of nuclear is. Former nuclear stalwarts such as France, Germany, and the UK all have aging reactors with no new plants planned. Meanwhile, China and Russia do not seem to be afraid of leaning heavily on nuclear energy in the near future. In China alone, 28 or 49 reactors are under construction and there are an additional 35 planned for the future. This is despite nuclear only accounting for 2% of Chinese energy supply in 2012.

Also of note is Japan, which once relied on 29% of its energy coming from nuclear before the Fukushima accident in 2011. In recent years, Japan has cut nuclear out of their grid, although some reactors are still technically operational. To make up the difference, they have imported more natural gas and oil.

Original graphic from: Popular Science

Uralkali: No plans to bring back Russia-Belarus potash pact #potash

Uralkali: No plans to bring back Russia-Belarus potash pact

September 16, 2014 


In July last year Uralkali CEO Vladislav Baumgertner blasted the global potash market wide open sending stock prices in the sector tumbling and projects back to the drawing board.

Baumgertner’s breakup of the Belarus-Russia potash bloc – which cost him his job and some jail time – was supposed to move potash from a clubby system of tightly controlled global supply and set prices to an open market where volume and cost-based pricing is key.

Baumgertner forecast at the time the price of potash would fall 25% to below $300 a tonne in short order.

The price did tank, but not by as much as feared and recently potash prices have been creeping back up.

At the same time global shipments of the soil nutrient rebounded significantly this year.

Expectations was that Russia and Belarus would eventually patch things up and the potash potentates could go back to business as usual.

But Baumgertner’s successor at Uralkali Dmitry Osipov on Tuesday in an interview with the Wall Street Journal poured cold water on the idea saying “there have been no talks since April and none are planned”:

“Under what conditions should we build this new marketing vehicle? Where should be the headquarters; what should be the proportion; what should be the aim; what should be the goal? There are no answers to these questions.”
The improvement in volumes and pricing have also made recreating the Belaruskali-Uralkali (BPC) marketing operation less pressing.

Shipments could jump as much as 7% this year to 58 million tonnes according to Scotiabank while Osipov sees deliveries reaching as much as 60 million tonnes, boosted by strong sales in North America, record fertilizer application in Brazil and a modest pick-up in demand from palm oil growers in Malaysia and Indonesia.

Producer inventories across North America fell 18% below the five-year average in June, but robust sales from North America did not stop Uralkali regaining 23% global market-share in the first half of 2014, up from 17% a year ago.

Uralkali recently signed a deal with Brazil at $380 a tonne which compares to a spot price of $310 per tonne in July from the Vancouver port.

However, broad-based price increases may await negotiation of a new contract price with China for early 2015.

China’s sovereign-wealth fund took a 12.5% stake in Uralkali September last year.

This could make price negotiations between China and Canpotex – the North American marketing and distribution arm of the big three producers Potashcorp, Agrium and Mosaic – more difficult.

Nevertheless a 10% hike on today’s $305 CFR China price — setting a new higher floor – is widely expected.

TransCanada sees itself in oil train business regardless of Keystone: CEO

TransCanada sees itself in oil train business regardless of Keystone: CEO
Patrick Rucker
Published Tuesday, Sep. 16 2014, 4:03 PM EDT
Last updated Tuesday, Sep. 16 2014, 4:07 PM EDT
Pipeline operator TransCanada Corp. is likely to haul Canadian oil sands crude by rail whether or not its embattled Keystone XL pipeline project is finally approved by Washington, the company’s chief executive said on Tuesday.
TransCanada is in its sixth year of waiting for the United States to approve or reject its plan for a 2,700 km cross-border pipeline that could carry at least 730,000 barrels a day of oil sands from Western Canada to Texas refineries.
In those years, Alberta oil sands output has climbed and producers have grown more desperate to find ways to bring fuel to market.
That glut might drive demand for both pipelines and additional oil train capacity, TransCanada Chief Executive Russ Girling said during a visit to Washington.
“I do believe we will have a rail facility,” Girling told reporters. “I don’t know the exact size. But I do think there will be one.”
The company is contemplating a “rail bridge” from the oil sands to a crude oil hub in either Cushing, Oklahoma, or Steele City, Nebraska, where its pipelines can be tapped.
“We have options on land. We have done our engineering on both locations. That work is all done,” Girling said after a meeting with U.S. Senator John Hoeven, Republican of North Dakota.
“My gut feeling would be (we) will probably be in that business,” Girling said.

Saskatoon high-priced land deals rise

16 Sep 2014
The StarPhoenix
High-priced land deals rise
Costs mirror Saskatoon’s growth
The average price of rural land in the Saskatoon vicinity has increased by as much as 165 per cent in the past seven years.
“The primary reason for the rise in price is that developers are securing a majority share in areas that will allow them to design and service new subdivisions over the next year or so,” says Tom McClocklin, president and managing director of Colliers International Saskatchewan.
Colliers International has compiled a report that shows “speculators and developers alike have been positioning themselves throughout the rural municipality to ensure they make short- or longterm investments that capitalize on the unprecedented growth Saskatchewan has experienced over the past decade.”
The report said land that has an extended holding period between 10 and 20 years commands sale prices between $10,000 and $20,000 an acre. Sales in this category include potential industrial developments or other commercial developments that have exposure to traffic and ease of access.
“Since 2007, there have been approximately 700 land sales over 10 acres in size in the Rural Municipality of Corman Park,” the report said.
Municipalities around Regina reported about 380 transactions in the same period.
The peak for Saskatoon was in 2007 with 190 deals of more than 10 acres while Regina’s peak was in 2011 with 104 transactions.
The highest prices were paid on lands that were annexed by the city or expected to become part of the city in the near future, the report said.
Land earmarked for residential development in the next five to 10 years had prices in the $20,000-$35,000 an acre range, with a few going as high as $50,000 an acre.
In both the Saskatoon and Regina areas, the overall value of rural land has increased by 150 to 165 per cent in the last seven years.
“There has been tremendous amount of activity over that time,” McClocklin said. “The more certainty there is to development and the sooner it (will be developed) then the higher the price.”
The City of Saskatoon has been the biggest buyer in the RM of Corman Park, having bought more than 3,700 acres for a total value of $44 million. Dream Realty Corp. (formerly Dundee) has acquired more than 2,000 acres for a total of $36 million.
Colliers’ research analyst Duncan Mayer said most of Dream’s acquisitions have in the new Holmwood subdivision that will accommodate 74,000 people and two million square feet of commercial space.
The report said most of the city’s purchases are for future residential subdivisions in the West (Kensington) the Northeast (Evergreen/ Ridge), along with future industrial developments located due north of Saskatoon.
And the bedroom communities around Saskatoon and Regina have also seen a rise in the number and prices of land acquisitions.
“Land surrounding the City of Warman, for example, has transacted on average for $25,000 an acre,” the report said.
That kind of activity is a far car from a decade or so ago when the few sales that occurred were centred around land devoted to agriculture.
For example, McClocklin said about a dozen years ago Colliers helped sell land just outside the city (now within the city) for a family from Vancouver who had held it for more than 40 years.
“They sold it for the same price that they bought it for,” McClocklin said, “and they were happy to get their money back.”
Lately, the number of sales in the Saskatoon area has been tapering off. Mayer said some of that has to do with the uncertainty of what is next for Saskatoon and the surrounding communities.
Corman Park, Saskatoon, Warman, Martensville and Osler are currently looking at development plans to best determine growth over the next 20-50 years.
The report said whatever is decided will greatly affect land prices and the number of transactions.
“It places a lot of uncertainty in the local market so you are not seeing as many transactions,” Mayer said.

Video – Uralkali CEO on economic sanctions and potash markets #potash

Uralkali to Seek Price Increase From China


Sept. 15 (Bloomberg) — OAO Uralkali Chief Executive Officer Dmitry Osipov talks about the outlook for potash production, growth strategy and the impact of Russia trade sanctions on business. He speaks with Erik Schatzker and Olivia Sterns on Bloomberg Television’s “Market Makers.” (Source: Bloomberg)

China Bans Low-Grade Coal, Cuts Wind Power Price

September 16, 2014, 4:56 A.M. ET

China Bans Low-Grade Coal, Cuts Wind Power Price

By Shuli Ren


Choking in smog, China is trying hard to move away from dirty coal and into clean energy.

Beijing announced on Monday that, starting next year, it would ban the burning of coal with ash content of more than 16% or sulphur content of more than 1% in its populous eastern cities. This is good news for iron ore, a cleaner substitute to coal for steel making. Australian iron ore miners BHP Billiton (BHP), Rio Tinto (RIO) and Fortescue Metals (FSUMF) rose 0.3%, 0.2% and 1% respectively after spot iron ore price jumped 3.9% today. Not surprisingly, Hong Kong listed Yanzhou Coal (1171.HK/YZC) fell 1.5%.

Separately, Beijing also said it would lower the tariff for wind power. South China Morning Post reported:

The National Development and Reform Commission has proposed to cut each of the current regional benchmark per kilowatt-hour tariffs of 51 fen, 54 fen and 58 fen by four fen, and the 61-fen benchmark by two fen, China Business News reported. The average cut is 6.4 per cent.

The long-expected proposed tariff cut, the first since Beijing set regional subsidised wind power prices in 2009, is aimed to reflect lower wind turbine costs and relieve the financial pressure on the government and consumers that have to bear the costs of rising consumption of clean energy.

This is not good news for Chinese wind power companies, however. Deutsche Bank did some analysis:

By assuming 1) weighted avg. wind tariff lowered from Rmb0.59/kWh to Rmb0.56/kWh for new projects post 1H15 2) new projects having 5.5% effective generation contribution in the 1st year 3) 2,000 utilization hrs for FY15/16, Longyuan, Huaneng Renewables and Huadian Fuxin’s FY15E/16E earnings may be affected by -0.14%/-2.25%, -0.33%/-5.36% and -0.14%/-2.1%, respectively. Earnings impact are lower for Longyuan and Huadian Fuxin because Longyuan has the largest wind capacity base and Huadian Fuxin has lowest contribution from wind (34% in 2013) out of total capacity.

Huaneng Renewables (0958.HK), whose earnings would be most affected according to Deutsche, fell 1.8% today.

Also today, the vice chairman of Aluminum Corp. of China is being investigated for corruption. Its Hong Kong listed subsidiary (2600.HK/ACH) fell 2.9%.

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