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Answering Some Questions from Readers

by | published October 5th, 2012

It has been some time since I’ve had a chance to answer a few questions from the many you’ve sent in. Let’s not waste any time this afternoon and get right to them.

Tom H. writes:

When the euro collapses (only willpower is holding it up, logic died months ago!), oil usage will drop off a cliff. It may be balanced by new users in the other growing economies, but their markets overseas will be minimal.

A: Well, Tom I am not as pessimistic as you are on the euro front. There will be several years here of weakness and instability, but the real key is whether the political will remains to support the continental currency.

The European Central Bank has now fashioned the bond structure; it remains for the governments to structure the fiscal policies to support the ECB. That will take some time, but it will happen.

What we are likely to see in the interim is a euro trading in a rather narrow range of $1.20 to $1.35. That will actually provide a floor to oil pricing. Demand is another matter. Here, the Western European picture remains restrained.

However, the broader global picture is not. That market is not “minimal;” it is actually expanding rather quickly. The non-North American, non-European sector is driving the oil market and will not be slowing anytime soon.

McKinsey & Company issued a report this week warning that the expansion is now expected to accelerate, with the worldwide supply surplus in danger of disappearing by 2016.

That will certainly send prices higher.

Okay, who’s up next?

Enthusisceptic sends along this question:

What about North American natural gas and exporting it from 2014 on?

Vehicles in many countries are powered by natural gas because gasoline is too expensive. The search for shale gas resources in Poland and other parts of Europe has disappointed.

Can this mean that gas from North America can become viable sooner?

A: The prospects for exporting liquefied natural gas (LNG) are one of the primary movers in further development of shale basins in North America. Even Russian giant Gazprom (no fan of shale gas) has acknowledged that the U.S. will probably comprise at least 9% of the global LNG market supply by 2020, from zero currently.

Shale gas resources in Poland are still expected to be a factor, despite early drilling disappointments. And the U.S. Geological Survey’s report indicated significant reserves worldwide. Now that does not mean they are profitable or extractable with current technology and infrastructure, but this is not┬áthe “flash in the pan” initially projected by detractors.

The advantage for the U.S. in all of this is two-fold. First, we are rapidly developing both the resource base and the production/transport infrastructure to exploit this new market. And, with the completion of the widening and deepening of the Panama Canal completing in 2014, it will be profitable to export LNG from the Gulf coast to Asia as well as Europe.

Second, primarily vehicles are not necessarily driving this move. The transition of fuel options from gasoline to LNG and compressed natural gas (CNG) will add to the demand, but it is the use of natural gas in electricity generation internationally that has been adding to the LNG market and will do so in the decades ahead.

In all of this, American and Canadian LNG exports will benefit first because North America is further along than others are. Yes, the Russians are exporting from Sakhalin, North Africa is already in the trade, and mega projects like Gorgon in Australia will be coming on line. But the projected rise in demand is dwarfing supply.

Another factor to keep in mind is how the rising LNG trade will alter local markets globally. Gas pricing is now dependent upon pipeline volume and direction. That makes pricing points out of locations where the most pipelines intersect. Henry Hub in the U.S. and Baumgarten in Austria are ready examples.

However, LNG will provide a genuine opportunity to set up a number of spot markets worldwide where the pricing of imports will effectively undercut longer-term, take-or-pay, oil-pegged transport contracts. The effect here will be to provide a more flexible market pricing mechanism, thereby improving a number of economic development opportunities.

And that leads me to the final question for today.

Eric T. writes:

Should the global economy stabilize… how will Russia’s indexing gas to oil play out in the expensive regulated natural gas market?

Gazprom is not sitting on their hands, but building out twice as fast their enormous pipelines….

A: You’re right, Eric.

Gazprom is not sitting on their hands (although they do occasionally sit on the hands of others). Russian authorities have recognized for some time that their traditional way of exporting natural gas to Europe is under pressure. They had expected to export large volumes to North America by mid-decade, but that is now not going to happen because of the shale gas revolution.

The traditional way of pricing Russian gas exports has three components. First, these are long-term fixed contracts, usually for 20 years or more. Second, they include take-or-pay provisions. This means that an end-user would contract for a specific volume of deliveries and most actually take a specific amount of the contracted amount monthly (say 70%) or pay as if they had.

Finally, the cost of the gas is calculated quarterly according to a formula based on the price of crude oil and a basket of oil products. As the price of oil rises, so does the price of the contracted gas.

On the other hand, local spot markets would provide gas readily available for immediate delivery, usually undercutting the price commanded by the long-term contracts. The existence of LNG consignments entering the European market via the new Rotterdam Gate terminal has already obliged Gazprom to alter contract pricing.

So why is Russia building huge (and expensive) pipelines anyway? All parties involved acknowledge that the forward demand for the importing of natural gas into Europe will probably require all trading options currently on the table – LNG, Nord Stream and South Stream (the Russian projects), new pipeline systems for the Shah Deniz and other Caspian/Iraqi production, as well as renewed production from North Africa. The availability of domestic shale gas may delay that somewhat, but that is looking like a longer-impact proposition.

Gazprom will need to revise its pricing structure in view of the new competition realities, but Russia is also positioning itself to participate as a provider in the expanding LNG traffic. There is also the push east to China, where new Russian pipelines for traditional deliveries and LNG from both Sakhalin and proposed facilities in the Russian Far East will figure in satisfying a rapidly expanding Asia-Pacific regional market.

Remember, I really appreciate the emails and questions. Be sure to leave a question or comment in the section below, and we’ll take the best ones in the weeks ahead.

Please Note: Kent cannot respond to your comments and questions directly. But he can address them in future alerts... so keep an eye on your inbox. If you have a question about your subscription, please email us directly at customerservice@oilandenergyinvestor.com

  1. ANTONY SELIUS
    October 5th, 2012 at 13:45 | #1

    would like to know how uranium fits into the energy picture . Thank you

  2. philip goldman
    October 5th, 2012 at 13:46 | #2

    Where does SILVER/GOLD go from here?

  3. Hugh Farquharson
    October 5th, 2012 at 14:08 | #3

    The thorium story seems to have gone quiet. Are any new developments likely?

  4. Bruce
    October 5th, 2012 at 14:27 | #4

    Dr Moors,
    Could you tell me your analysis of Dragon Oil, operations currently in Turkmenistan (DRAGF)? Bought shares about three years ago and have some good profits available,but for some reason it is one stock I have held onto.Do you have any opinion on it having anymore upside? I thought the company had plans for a pipeline to China, but haven’t heard or read any more new information on that. If that’s off the table, maybe I should sell.
    Thank You,
    Bruce Milburn

  5. Sergio Arias
    October 5th, 2012 at 14:29 | #5

    It is my understanding that we are currently at 98% of hauling capacity worldwide with the number of vessels (ships) capable of transporting LNG.

    If the above statement is correct, lets consider the following facts:

    (a) There are not many shipyards capable of building these complex monsters;(b) they cannot be built overnight; (c) there are order backlogs at those shipyards; (d) John Deere Co decided to take the plunge at the deep end (moving to gas engines); (e) most probably their competition will follow the same path.

    Top that with new untested technology of gas fueled powerplants for the above ships being built, and for any new container ships, ferries, tug and pleasure boats.

    My Question: Could it happen that production and delivery of gas (the supply) will not match this much demand? Even if it were a temporary issue, who would benefit and who would suffer the consequences?

  6. Tom Manz
    October 5th, 2012 at 15:02 | #6

    The refiners have had a large run-up in stock prices. Do you see that holding?…cyclical?? Thanks, tom

  7. Norman Van Arsdale
    October 5th, 2012 at 15:05 | #7

    While the price of natural gas was depressed many electricity generators switched from coal to ng. As we now see a change in the direction of ng, at what price will generators find it beneficial to switch back to coal.

  8. Georges Kaufman
    October 5th, 2012 at 15:11 | #8

    why are oil/gas companies still flaring gas ? Why hasn’t someone developed a cargo-container sized portable compressor and storage vessel that could be easily filled at the source and shipped ?

  9. ELIZABETH MILLINER
    October 5th, 2012 at 15:32 | #9

    How close is BAHAMAS PETROLEUM CO. PLC to producing and becoming
    profitable???

  10. enthusceptic
    October 5th, 2012 at 17:31 | #10

    It feels really great for me – and Mr Eric T. I suppose – to get an answer from Dr M. himself! Thank you!
    Could my questions really get very good answers that can benefit many? To me this shows that questions are more powerful than political/ideological statements. Oops, there is an election soon…
    Please let me just comment that plentiful, cheap energy will be an enormous driver of the world economy, benefiting both developed and developing countries.

  11. October 5th, 2012 at 18:36 | #11

    Dr. Moors, With all the misinformation about fracking, What are your thoughts about CHMR (Chimera)? Are they on to something or is it all hype?

  12. Peter Schelker
    October 5th, 2012 at 19:25 | #12

    When u say walk away from the mkt b4 its too late do u mean
    sell stocks from the US shale cos like XOM DVN RRC etc ??

  13. Jeff Hilovsky
    October 5th, 2012 at 19:46 | #13

    Kent

    When oil was $147/barrel gas prices were approx $3.80/gallon, and now the price is around $90/barrel yet the price at the pump remains the same. How is that possible?

    Jeff Hilovsky

  14. October 6th, 2012 at 03:44 | #14

    I am listening to all sides of these discussions regarding oil & gas prices, but noone has even mentioned about the furure of electric cars & the french cars & buses that are running on compressed air for 130 klm for 1 euro, the big cites like Paris & many others are going to start running buses next year, & this will catch on eventualy around the world ok it will take a few years but when other countries can see the the benifits of these vehicles & not only cheaper to operate but there is a bonus as well no diesel or petrol fumes,& just recently a Peruvian Blind Engineer has come up with a way to take a car engine @ make it run a large ship, now there,s an idea, so all this panic buying of crude in my mind will be a non-existent product in 20 yrs or so, yes we will still use crude but in a much smaler amount & that will be for the people that still love to hear the roar of an engine & the style of the vehicle perhaps, panic over everyone it is already happening the demise of crude. Grinling K Gibbons

  15. enthusceptic
    October 6th, 2012 at 08:39 | #15

    -and of course we can profit enormously from up- mid- and downstream oil and gas companies, shipping, emerging markets and much more.

  16. October 6th, 2012 at 09:31 | #16

    lets take a position that everyone is correct and the shift is to lng.
    How many ships are presently moving oil that will be replaced by ships that are moving LNG. US, CND and AUSTRALIA and others will have to ship alot of LNG…..to ASIA & JAPAN for example. Who is the leader in this area of shipping and who will be the looser. These are the mid stream suppliers like pipelines. Have some teekay LNG Partners LP (tpg) but they only have 50 ships. There is alot of LNG going to be moved. Who is positioned the best and who looses out.

  17. Gerry haller
    October 6th, 2012 at 11:16 | #17

    question: With all of the fear about Fracking damaging water supplies, what will be the future for companies like GASFRAC and, is GASFRAC a real solution to the water pollution fears as posited recently on the front page of the New York Times? thanks!

  18. william campbell
    October 6th, 2012 at 12:25 | #18

    question:
    Could you comment on the various costs associated with compressing natural gas to CNG and then to LNG? How much will it cost to transport LNG from the USA to Europe or Asia?

  19. Michael Upper
    October 6th, 2012 at 15:47 | #19

    Are the major producers of shale oil and gas aggressively seeking cleaner, less polluting ways of fracturing? There is still a lot of concern by citizens in states where these technologies are being used and I am afraid that America’s potential production could be hampered.

    Thanks, Michael Upper

  20. October 7th, 2012 at 05:50 | #20

    Do you believe it to be IMPOSSIBLE to burn coal “cleanly” and competitively(assuming significant rationalization in NG pricing over the next two or three years) for electric generation?

    Seems to me we are somewhat glibly writing off an extremely efficient source of energy for relatively few sites of electric generation–granted, coal is not the fuel for heating, manufacturing, peakers, small generating facilities, etc.; but seems viable for a limited number of large facilitues.

  21. enthusceptic
    October 8th, 2012 at 17:24 | #21

    Again I want to give a comment to the answer from Dr. M to my questions: Maybe the greatest amount of ng won’t be used for powering vehicles, but affordable transport is extremely important for developing the economy anywhere. You in the US still feel too rich to consider it? Maybe powerful interests are keeping you US people ignorant? You do drive a lot…
    I also have wondered why ng is still being flared. Mr Kaufman asks a very good question!

  22. Billy Wright
    October 26th, 2012 at 11:34 | #22

    It is my understanding that the addition of beryllium to uranium by
    IBC Advanced Alloys (IAALF) reduces the melt down problem and also
    the storage problem for the spent fuel is reduced greatly. Why am
    I not hearing this shouted from the house tops?

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