OilVoice Magazine | September 2013

Edition Eighteen – September 2013

Big oil struggles in Q2 2013 Of boiling frogs and oil prices Can Saudi Arabia pump enough oil?

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Adam Marmaras Chief Executive Officer Issue 18 – September 2013 OilVoice Acorn House 381 Midsummer Blvd Milton Keynes MK9 3HP Tel: +44 208 123 2237 Email: [email protected] Skype: oilvoicetalk Editor James Allen Email: [email protected] Director of Sales Terry O'Donnell Email: [email protected] Chief Executive Officer Adam Marmaras Email: [email protected] Social Network Facebook Twitter Google+ Linked In Read on your iPad
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Welcome to the 18th edition of the
OilVoice Magazine. This month we feature an exclusive interview with Hon. Simon Bridges New Zealand Minister of Energy and Resources. He discloses his Governments plans on making New Zealand a new 'hot spot' for oil and gas. Our usual roster of regular authors also contribute to the magazine this month. Articles to look out for are Big oil struggles in Q2 2013, Of boiling frogs and oil prices and Can Saudi Arabia pump enough oil?. You may have noticed the 'jobs board' on OilVoice becoming more prominent over the past 12 months. We're investing heavily in the behind the scenes technology that will deliver first class services to Recruiters and Job Hunters. Be sure to take a look. Thanks for reading Adam Marmaras CEO OilVoice

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Contents
Featured Authors Biographies of this months featured authors Stumbling blocks to figuring out the real oil limits story by Gail Tverberg Big oil struggles in Q2 2013 by Mark Young & Hannah Mumby Recent Company Profiles The most recent companies added to the OilVoice directory Soc Gen forecasts "Syrian World War" oil price spike by Andrew McKillop Interview with Hon. Simon Bridges - New Zealand Minister of Energy and Resources by Simon Bridges Insight: UK shale gas and oil - who is watching? by David Bamford Of boiling frogs and oil prices by Kurt Cobb Can oil play super-commodity like 2008? by Andrew McKillop Can Saudi Arabia pump enough oil? by Andrew McKillop Canada's LNG export facilities: Hurdles and challenges by Keith Schaefer Oil limits reduce GDP growth; Unwinding QE a problem by Gail Tverberg

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Featured Authors
Andrew McKillop AMK CONSULT
Andrew MacKillop is an energy and natural resource sector professional with over 30 years’ experience in more than 12 countries.

Gail Tverberg Our Finite World
Gail the Actuary’s real name is Gail Tverberg. She has an M. S. from the University of Illinois, Chicago in Mathematics, and is a Fellow of the Casualty Actuarial Society and a Member of the American Academy of Actuaries.

Kurt Cobb Resource Insights
Kurt Cobb is an author, speaker, and columnist focusing on energy and the environment. He is a regular contributor to the Energy Voices section of The Christian Science Monitor and author of the peak-oil-themed novel Prelude. In addition, he writes columns for the Paris-based science news site Scitizen, and his work has been featured on Energy Bulletin, The Oil Drum, OilPrice.com, Econ Matters, Peak Oil Review, 321energy, Common Dreams, Le Monde Diplomatique, and many other sites.

David Bamford Finding Petroleum
David Bamford is 63. He is a non-executive director at Tullow Oil plc and has various roles with Parkmead Group plc, PARAS Ltd and New Eyes Exploration Ltd, and runs his own consultancy.

Keith Schaefer Oil & Gas Investments Bulletin
Keith Schaefer, editor and publisher of the Oil & Gas Investments Bulletin.

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Mark Young Evaluate Energy
Evaluate Energy is a leading provider of efficient data solutions for oil & gas company analysis. Services include annual and quarterly financial data, M&A, worldwide E&P assets, Refinery and LNG databases and an emerging US/Canadian Shale Gas & Liquids offering.

Simon Bridges Simon Bridges Website
In the current National-led Government, Simon is Minister of Energy and Resources, Minister of Labour, and Associate Minister for Climate Change Issues.

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Stumbling blocks to figuring out the real oil limits story
Written by Gail Tverberg from Our Finite World The story of oil limits is one that crosses many disciplines. It is not an easy one to understand. Most of those who are writing about peak oil come from hard sciences such as geology, chemistry, and engineering. The following are several stumbling blocks to figuring out the full story that I have encountered. Needless to say, not all of those writing about peak oil have been tripped up by these issues, but it makes it difficult to understand the “real” story. The stumbling blocks I see are the following: 1. The quantity of oil supply available is primarily a financial issue. The issue that peak oil people are criticized for missing is the fact that if oil prices are high, it can enable higher-cost sources of production–at least until these higher-cost sources of production prove to be too expensive for potential consumers to buy. Thus, high price can extend oil production for longer than would seem possible, based on historical patterns. As a result, forecasts based on past patterns are likely to be inaccurate. There is a flip side of this as well that economist have missed. If oil prices are low (for example, $20 barrel), the economy is likely to be very different from what it is when oil prices are high (near $100 barrel, as they are now). When oil prices are low, it is likely that oil production can be expanded rapidly, if desired, because it takes little effort to extract an additional barrel of oil. In such an atmosphere, it is easy to add jobs, because new technology, such as cars and air conditioners made and transported using such oil, is affordable. Growth in debt makes considerable “sense” as well, because additional debt enables more oil use. It is likely that this debt can be repaid, even with fairly high interest rates, given the favorable jobs situation and growing economy. With high oil prices, there is a constant uphill battle against high oil prices that rubs off onto other areas of the economy. Businesses tend not to be too much affected, because they can fix their problem with high oil prices by (a) raising the prices of the finished goods they sell (thereby reducing demand for their goods, leading to a cutback in production and thus jobs) or (b) saving on costs by outsourcing production to a lower-cost country (also cutting US jobs), or (c) increased automation (also cutting US jobs).

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The ones that tend to be most affected by high oil prices are wage-earners, who find that their chances of obtaining high-paying jobs are lower, and governments, who find it increasingly difficult to collect enough taxes from wage-earners to pay for all of the promised benefits. 2. The higher cost of oil extraction in the future doesn’t necessarily mean that the price consumers can afford to pay will rise. In peak oil groups, I often hear the statement, “When oil prices rise, . . .” as if rising oil prices are a given. Businesses may be afford to pay more, but individuals and governments are finding themselves in increasingly poor financial condition. Quantitative easing isn’t getting money back to individuals and governments– instead, it is inflating the price of assets–a temporary benefit until asset price bubbles break, as they have in the past, or interest rates rise. The limit on oil supply is what I would call an affordability limit. Young people who don’t have jobs can’t afford to buy cars. If young people graduate from college with a huge amount of educational loans, they can’t afford to buy houses either. Within the US, Europe, and Japan, we seem to have already hit the affordability limit on the amount of oil we are consuming. Economic growth is low, as oil consumption declines.

Figure 1. Oil consumption based on BP’s 2013 Statistical Review of World Energy.

The risk, as I see it, is that the price consumers can afford to pay will drop below the cost of extraction. It is this drop in oil price that will cause supply to fall. If the drop in price is very great, we could see a very rapid decline in oil production, especially in countries with a high cost of production, such as the US and Canada. Some oil exporters may find themselves in difficulty, because they are no longer able to collect the tax revenue they were depending upon. This could lead to uprisings in the Middle East and possibly lower oil production in affected countries. I should point out that it is not just the peak oil community that seems to think rising oil prices can continue indefinitely. Economists and those forecasting climate change seem to share this view. If oil and other fossil fuel prices can rise indefinitely, then a very large share of fossil fuels in the ground can be extracted. 3. There is widespread confusion about what M. King Hubbert really said about the shape of the decline curve. M. King Hubbert is known for showing images of world oil supply which seem to

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show that oil supply will rise and then fall in a symmetric pattern. In other words, if it took 50 years for oil production to rise from level A to level B, it should also take 50 years from oil production to fall from level B back to level A. This relatively slow downslope gives comfort to many people concerned about peak oil because they believe that the slow downward path in oil production will be helpful in mitigation strategies. In fact, if we look at Hubbert’s papers, we discover that Hubbert only made his forecast of a symmetric downslope in the context of another energy source fully replacing oil or fossil fuels, even before the start of the decline. For example, looking at his 1956 paper, Nuclear Energy and the Fossil Fuels, we see nuclear taking over before the fossil fuel decline:

Figure 2. Figure from Hubbert’s 1956 paper, Nuclear Energy and the Fossil Fuels.

Hubbert’s 1976 paper talks about solar energy being the substitute, instead of nuclear. In Hubbert’s 1962 paper, Energy Resources – A Report to the Committee on Natural Resources, Hubbert writes about the possibility of having so much cheap energy that it would be possible to essentially reverse combustion–combine lots of energy, plus carbon dioxide and water, to produce new types of fuel plus water. If we could do this, we could solve many of the world’s problems–fix our high CO2 levels, produce lots of fuel for our current vehicles, and even desalinate water, without fossil fuels. Clearly the situation today is very different from what Hubbert was envisioning. Neither nuclear or solar energy is providing a sufficient substitute for our current economy to continue as in the past, without fossil fuels. We have a huge number of cars, tractors and trucks that would need to be converted to another energy source, if we were to move away from oil. If there is not a perfect substitute for oil or fossil fuels, the situation is vastly different from what Hubbert pictured. If oil supply drops (perhaps in response to a drop in oil prices), the world economy must quickly adjust to a lower energy supply, disrupting systems of every type. The drop-off in oil as well as other fossil fuels is likely to be much faster than the symmetric Hubbert curve would suggest. I wrote about this issue in my post, Will the decline in world oil supply be fast or slow? 4. We do have an estimate of the shape of the downslope when there is not a perfect substitute the resource with limits. There are many historical examples of societies that found a way to greatly increase

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food supply (for example, by clearing land for new fields, or by learning to use irrigation). Peter Turchin and Sergey Nefedof researched the details underlying eight agrarian societies of this type, documenting their findings in the book Secular Cycles. These researchers found that at first population was able to increase, because of the greater ability to grow food. Population typically increased for well over 100 years, as population gradually expanded to match the new capacity for growing food. At some point, the economies analyzed entered a period of stagflation, during which wages of the common worker stagnated, because an early limit had been reached. Population had reached the level the new resources could comfortably support. After that point, growth slowed. New babies were born, but additional area for crops was not being added. Adding more farmers didn’t increase output by very much. Debt also increased during the stagflation period. The chart below is my estimate of the general pattern of population growth found by Turchin and Nefedov, in the years following the addition of the new capability to grow food.

Figure 3. Shape of typical Secular Cycle, based on Secular Cycles by Peter Turkin and Sergey Nefedov. (Figure by Gail Tverberg)

Eventually, a crisis period hit. One major issue was a continuing need to pay for government programs had been added during the growth and stagflation periods. With the stagnating wages of workers, it became increasingly difficult to collect enough taxes to pay for all of these programs. Debt repayment also became a problem. Food prices tended to spike and became quite variable. Governments became increasingly susceptible to collapse, either because of outside forces or internal overthrow. Population was reduced through a combination of factors –more wars and a weakened population becoming more susceptible to epidemics. It seems to me that our current situation is somewhat analogous to what has occurred in these secular cycles. The world began using fossil fuels in significant quantity about 1800, and reached the stagflation phase in the early 1970s, when US oil production began to decline. We are now encountering the classic symptom of resources not rising as fast as population–namely, wages of the common workers stagnating. Fossil fuel prices tend to spike and be quite variable. Government financial problems we are seeing today sound very similar to what past civilizations experienced, when they hit resource limits. We don’t know that our current civilization will follow the same shape of downslope as earlier civilizations that hit limits, because our economy is not an agrarian economy. We are now dealing with a globalized civilization that depends on international trade. Jobs are much more specialized than the past. But unless there

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is a miraculous growth in cheap energy supply that can fix our problems with young workers not finding good-paying jobs, there seems to be a good chance we are headed in the same general direction. 5. High Energy Return on Energy Invested (EROI) is a necessary but not sufficient condition for an energy source to be a suitable substitute for oil. We are dealing with a complicated financial system, but EROI is a one-dimensional measure. It can tell us what won’t work, but it can’t tell us what will work. Any substitute for oil (for example, a transition to battery-operated cars) needs to be considered in the context of what the total cost will be of a transition to a new system, the timing of these costs, and who will pay these costs. It is important to consider what impact these costs will have on those who already are at greatest risk–namely, individuals who are having difficulty earning adequate wages, and governments that are finding it increasingly difficult to pay benefits that have been promised in the past. If individuals are being asked to pay higher costs, this will reduce discretionary income to be used for other purposes. If a government is already stressed, adding energy related stresses may “push it over the edge,” making it impossible to collect enough taxes for all of the promised programs. 6. It is easy to be influenced by the fact that everyone likes a happy ending. People coming from a peak oil perspective often accuse the main street media of putting forth a “happily ever after” version of the oil story. But I think there is a temptation of the peak oil community to put together its own “happily ever after” story. The main street media version says that the economy can continue to grow, and we can continue to drive cars and go to our current jobs, despite a need to change to different kind of fuel supply. The peak oil version of the story often seems to say, “If we conserve, and learn to be happy with less, there won’t be too much of a problem.” Some seem to suggest that hoarding solar panels for our own use can be helpful. Others seem to believe that society as a whole can be transformed by adding more solar and wind power to our current electrical system. The difficulty with adding a new energy source in quantity is that we don’t have any such energy source that can truly act as a cheap substitute for oil. If solar PV or wind, or some other new energy source were truly a good substitute for fossil fuels, such a fuel would be exceedingly cheap and could be used with today’s vehicles. Governments could improve their financial condition by taxing this new energy resource heavily. It would be obvious to everyone that by adding much more of this miraculous new fuel, we could add many more good-paying jobs, especially for our young workers. Unfortunately, I cannot see that we have found a good oil substitute. Instead, quantitative easing is temporarily hiding financial problems of governments and individuals by forcing interest rates to be very low. This makes cars and homes more

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affordable, and keeps the amount of interest paid by the federal government very low. We know that these artificially low interest rates are temporary, though. Once they “go away,” tax rates will need to rise, and asset prices (stock prices, bond prices, and home prices) will drop. Oil prices may very well decline below the cost of production. We will again be at risk of heading down the “Crisis” slope shown in Figure 3.

View more quality content from Our Finite World

Big oil struggles in Q2 2013
Written by Mark Young & Hannah Mumby from Evaluate Energy Q2 2013 has proved to be a difficult quarter for the world's major oil & gas companies. BP, Chevron (CVX), ExxonMobil (XOM), Royal Dutch Shell (RDS) and Total (TOT) have all experienced a testing time, as despite some positives in certain areas, results have generally been disappointing across the board. Evaluate Energy has examined the various reasons for this in both the upstream and downstream sectors, following some in-depth analysis of the latest data. Upstream Oil production levels from this peer group as a whole have fallen remarkably this quarter. The combined performance of these 5 companies is shown on the next page.

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BP's fall in quarterly production is the main reason the graph has fallen so sharply. This is the first quarter of results without production from TNK-BP, following its $55 billion deal that saw Rosneft take over the entity, and consequently BP's production fell by around 786,000 barrels per day (bbl/d) from Q1. Following the sale, BP has invested heavily into Rosneft, but may have to wait for large scale future projects between the two to start producing (e.g. Arctic joint venture plans) before reaping significant rewards. Even if BP hadn't sold TNK to Rosneft, it is clear the general trend would have been continuing downwards anyway. A quick look at the reported upstream earnings for each company shows how much of an impact this fall in production and the widely reported drop in the companies' realised liquids prices have had.

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Again, the general trend is down, but on this reported, unadjusted* basis, BP and Total seem to have performed better in their respective upstream segments compared to last year. However, when the various special items are removed in Q2 2013, this is not the case; Total's adjusted* upstream performance is in fact 9% worse. This decrease is caused by a fall in prices; Total's realised oil price is down from $101.60 in Q2 2012 to $96.60 in Q2 2013, and its gas price fell from $7.10 to $6.62. The French giant actually reported a rise in total oil and gas production this quarter compared with Q2 last year - the first time this has happened in three years but these lower commodity prices have dragged earnings down. For BP, Q2 2012 reported, non-adjusted figures are held back by a $1.5 billion impairment related to its US Shale assets and the suspension of the Liberty project in Alaska. If these effects are excluded, on an adjusted basis, BP's upstream performance also declines, year on year. For Royal Dutch Shell, the picture is the opposite way around. Shell has seen a large drop in reported earnings, which is chiefly due to $2.2 billion impairments in its US Shale sector, where over 80% of the company's production is natural gas. If these impairments are removed, and we consider performance on an adjusted basis, outgoing CEO Peter Vossen seems to be leaving a steady ship for his 2014 replacement, Ben van Beurden, as on this adjusted basis, Shell has actually improved on second quarter upstream performance a year ago.

Downstream Chevron's and ExxonMobil's difficulties are not limited to setbacks experienced in the E&P segment. In the refining segment, Q2 2013 has also proved that being one of the super majors does not mean you are impervious to market pressures and the toughening up of environmental legislation.

The European contingent have improved performance, all showing increased adjusted earnings in Q2 2013, but Chevron and ExxonMobil have both come out of

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the quarter with a huge fall in downstream profits compared with Q2 2012. ExxonMobil's 70% fall in profits shown here does not take into account the $5.3 billion gain achieved by restructuring its Japanese refining and marketing business in June last year, which would clearly exacerbate the situation further. This trend can be seen across the entire US refining industry. Stricter environmental regulations and higher tariffs in the country have affected everybody's margins significantly. Using the Evaluate Energy database, we can expand the group to include the other major US refiners - HollyFrontier (HFC), Marathon Petroleum Corp (MPC), Phillips 66 (PSX), Tesoro Corp (TSO) and Valero Energy (VLO) - who all show a decline in adjusted earnings from Q2 last year.

This report was created using the Evaluate Energy database. Evaluate Energy provides efficient data solutions for oil and gas company benchmarking analysis. Our clients have access to 20+ years of historic oil and gas financial and operating database, extensive M&A, Refinery and E&P assets databases and emerging shale and unconventional offerings. NOTES *Adjusted Earnings Definition: Earnings of each business segment, excluding the effects of all non-recurring, special items. Please note that companies report their segmental earnings on many different bases: 1) Some companies report segmental earnings pre-tax (on the grounds that it is very difficult to allocate tax between segments), while others report post-tax; 2) Some companies report pre-interest (on the grounds that it is difficult to allocate net interest payments to each business segment) and others report post-interest; 3) Most companies report their segmental earnings before deducting SG&A because it is hard to allocate these general expenses to separate business segments. As a result of these differences, it is sometimes not possible to make direct comparisons between companies at the segmental level.

View more quality content from Evaluate Energy

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Recent Company Profiles
The OilVoice database has a diverse selection of company profiles, covering new start-up companies through to multi-national groups. Each of these profiles feature key data that allows users to focus on specific information or a full company report that can be accessed online or printed and reviewed later. Start your search today! Wolf Petroleum
Oil & Gas Wolf Petroleum is a public company (ASX:WOF) with focus on oil and gas exploration, development and production in Mongolia. Wolf’s main objective is to increase its value and build a strong local presence in the growing Mongolian oil industry. Wolf seeks value growth through aggressive exploration, acquisition and growth strategy.
Wolf Petroleum's OilVoice profile

Raise Production
Technology Raise Production Inc. is the result of an amalgamation of technologies, products, services and expanded operational scope of the former Global Energy Services Ltd. and Stellarton Technologies Inc. The companies were brought together to provide a stronger comprehensive offering to our customers. An offering of products and services that will add to the positive economic impact of our customers' operations by maximizing their recoverable reserves and increasing net present values of those assets and daily cash flow from operations.
Raise Production's OilVoice profile

Petrus Resources
Acquisitions Petrus Resources Ltd. is a private energy company active in property exploitation, strategic acquisitions and risk-managed exploration in western Canada. The company has an extensive inventory of low risk oil and gas development assets in the Peace River and Rocky Mountain foothills areas of Alberta and an experienced management team with a long track record of shareholder value creation. Petrus is a return-driven company focused on delivering per share growth in production, reserves and asset value.
Petrus Resources' OilVoice profile

Blacksteel Energy
Oil & Gas Blacksteel is a junior oil and gas company involved in the exploration, exploitation, development and production of petroleum and natural gas resources. The Corporation has a 100% working interest in a four section petroleum and natural gas lease in the Del Bonita Area of Southern Alberta.
Blacksteel Energy’s OilVoice profile

Raven Resources Petroskandia
Oil & Gas Petroskandia is an independent Swedish oil and gas company with the main objective to explore and develop Oil and Gas opportunities in an economically, socially and environmentally responsible way, for the benefit of all stakeholders, including shareholders, employees, business partners, host and home governments as well as local communities.
Petroskandia's OilVoice profile

Oil & Gas NordAq Energy Inc. (NordAq) is an independent oil and gas company based in Anchorage, Alaska. The company was established by the present Board and management team in 2008 to explore, appraise and develop hydrocarbon reserves in the State of Alaska. Its portfolio includes prospects and resources in the Kenai Peninsula on the Cook Inlet and Smith Bay on the North Slope.
Raven Resources’ OilVoice profile

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OilVoice Magazine | SEPTEMBER 2013

Soc Gen forecasts "Syrian World War" oil price spike
Written by Andrew McKillop from AMK CONSULT FEEDING THE PRICE SPIKE Despite the Middle East and North Africa (MENA) region being the world's most food import dependent region - and needing to pay for food with oil exports - Societe Generale has been quick to beat the drum for a 'mega spike' of oil prices. Its by-line is the coming 'Syrian World War'. Michael Wittner at Soc Gen has produced a special 3-page note for high net worth clients, August 28, on the French bank's readout of what the 'limited punishment strike' against the al Assad regime might mean for the oil market. He believes there could be relatively durable 'spillover' from a Western air and water-based attack, but his report firstly said made it clear that Syria itself is not a real player in the oil market (see my article of July 14, 'Syria, Egypt And The Middle East Oil Price Risk Premium'). Wittner like others is constrained by reality to say the bank's concern, and the reason why it is buying oil futures and is bullish on the spike, is of 'spillover'. That is both political and economic contagion or contamination as insidious as, if slower-acting than chemical weapons. Syria's own very small and declining status as an oil producer and exporter 'is not the issue'. Wittner however believes in particular the main MENA regional focus of spillover contamination, raising oil prices, will be Iraq, forgetting the already powerful and real spiral of decline in Libyan oil output and exports (see my article of August 24, 'Libya Moving From Arab Spring To Arab Winter '). SocGen's Wittner, in only three pages produces an apocalyptic video game scenario easily comparable to the so-called 'Lehman Bros moment' of 2008 which, we can note, sent the price of Nymex crude from $130 per barrel to $39 per barrel in short order. The oil price shock was downside in royal fashion, and not at all to Royal tastes in the petrodollar-rich Gulf States currently financing their own Sunnite proxy war in Syria - with military support from the US, French and British. Wittner's scenarios of spillover from the 'Syrian World War' start with an initial stage sending Brent-grade oil to around $130, potentially followed by an upside scenario reaching $150 per barrel, this upside case needing a certain time for spillover effects to start affecting Iraq.

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WHAT GOES UP COMES DOWN Totally unlike gold where long-term global financial and monetary instability, as well as basic mining breakeven costs dictate a price of about $1500 per Troy ounce, oil faces no such factors - or headwinds other than geopolitical insecurity, especially in the MENA region. Longer-term average oil prices on an equilibrium basis are likely no higher than around $80 per barrel. Wittner's claim, and suspiciously precise forecast of Syrian war spillover effects in Iraq lead to a decline of 0.5 to 2 Mbd in Iraq's oil production, 'as disruption rises', but this forecast has to be set against the global macroeconomic impacts of massive geopolitical instability - and rising oil prices - leading to a sharp decline in oil demand. When this happens, as in 2008, oil prices will tank. Again unlike the oil price spike of 2007-2008, this time we are pricing-in the risk of military action by the US, France and UK, already and officially described as being punitive and 'not intended to overthrow Bashr al Assad'. One risk, of course, may be a rogue cruise missile slamming into al Assad's bunker! As we also know as of today (August 28) the talk from Washington, Paris and London is so tough that the option not to attack almost does not exist any longer. The coalition being assembled reportedly includes the US, the UK, France, Germany, Canada, Turkey, Israel, Saudi Arabia, Qatar, and Jordan. While Israel is glaringly present but never referred to, in 'government friendly' media, glaringly absent is Iraq. Why this country would specifically be first and hardest hit by 'spillover' is a question for Michael Wittner. To be sure the US, France and UK would be seen as very weak for not keeping their word if they backed off, but Vladimir Putin and Xi Jinping may help them do this. Alternatively, the 'punishment raid' may be toned down but still appear awesome with photoshop help on the grainy official newsreel footage after the 72-hour attack. Only if Iran can be drawn into play - as Wittner believes is possible - would we be facing a real Syrian World War. Also needed for the oil spike forecast by Wittner, the military action against Syria would have to move on from 'surgical' cruise missile strikes on military targets not directly related to chemical weapons complexes in Syria, to the establishment of a no-fly zone, as in Libya, designed to protect rebel forces and civilians. As we know and Security Council members Russia and China know - Libya's no-fly zone was 'liberally interpreted' by NATO to allow attacks on government ground forces, as well as massive bombing of government-held towns and cities. EXPORT OIL - IMPORT FOOD The US and its Western allies - but certainly not the Gulf State backers and paymasters of Syrian civil war - do not want to be involved in this broader civil war where most firepower, manpower and effective military opposition to the Syrian government regime is among hard-line 'Islamist' bands and fighting groups. Analysts

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say this decision is due to lessons learned in Iraq, Afghanistan, Yemen, and Libya. Presently, the question has no answer, but long before the answer time the oil price spike and collapse will almost certainly have played out. Syrian oil production and exports have fallen by about 85 percent since 2010, making it certain that whatever political arrangement follows the al Assad regime, if it falls, Syria will need to find a way to pay for food imports - and Syria, as it happens, is one of the least food import-dependent nations in the MENA. Conversely Iraq is heavily dependent on food imports, which have more than doubled as a percentage of total food supply, by value, since 2003. For Soc Gen's Wittner, what he calls the Sunni-Shia war in Syria has a direct parallel in Iraq, where a long-running proxy war opposes Shia Iran and the Sunni Gulf States, as well as internal domestic sectarian as well as organized crime syndicates' conflicts. Its northern oil export pipeline carrying Kirkuk grade oil to Ceyhan in Turkey has been repeatedly attacked for the last 3 months, reducing this export route's capacity from an average 0.35 Mbd to less than 0.2 Mbd. The 'big one' for Iraq is Basrah grade oil exported through the southern Basrah port complex to the Persian Gulf, presently running at over 2 Mbd. Wittner has to explain how - in the absence of Iran being drawn into the Syrian war, a likely hidden goal of Western, Israeli and Saudi policy - there will be a spread of Iraqi civil violence to the south. Wittner's argument is that also food importdependent Iran may choose to stir up such attacks, in order to hurt the economies of the Western countries by causing an oil price spike. One question is why hasn't Iran already done this, in the past? Wittner's note for Soc Gen hedge fund investors suggests that Saudi spare capacity, of he says 1.7 Mbd, will not be able to cover the Syrian war spillover effects that he forecasts in Iraq, making way for Brent grade oil hitting $150 per barrel. Wittner does however admit that the oil price surge will not last. He says 'several factors or mechanisms....would limit the duration of any price increase', among them global oil demand destruction which he says will become visible quickly, within a couple of months. At the spike-and-surge price level he forecasts, we can note, oil would be priced at considerably less (in real terms) than it was able to achieve in 2008.....with no chem weapons and only the toxic help of Goldman Sachs!

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OilVoice Magazine | SEPTEMBER 2013

Interview with Hon. Simon Bridges - New Zealand Minister of Energy and Resources
Written by Simon Bridges from OilVoice OilVoice interviews Energy and Resources Minister Simon Bridges. In the current National-led Government, Simon is Minister of Energy and Resources, Minister of Labour, and Associate Minister for Climate Change Issues. OilVoice: Good morning, Minister. We'd like to thank you for taking the time to answer some questions for us today. Simon: No problem, it's great to be speaking with you. OilVoice: Speaking at the Advantage NZ: 2013 Petroleum Conference you said Block Offer 2013 is putting New Zealand on the 'international stage'. How would you compare New Zealand's offshore exploration with say the North Sea or the Gulf of Mexico? Simon: To be fair, we're not in the same league as the North Sea or the Gulf of Mexico. Just 200 offshore wells have been drilled in New Zealand to date. But we're a frontier country with a lot of unexplored potential - particularly in deep water, which technological advances are opening up. The New Zealand Government's new approach to offshore blocks is bringing us in line with key jurisdictions around the world. Instead of designating specific offshore permit blocks, we have identified certain prospective areas and overlaid a mesh of smaller blocks, each graticule approximately 250 square kilometres in size. Companies will be able to bid for one or more of these smaller blocks in a release area (and may bid for a combination of adjacent blocks) up to pre-determined limits. A mixture of exploration, appraisal, and frontier acreage is included within the release areas to appeal to a diverse range of operators, and promote a stable path to oil and gas production. OilVoice: You also mentioned that you want to make sure that the development of New Zealand's oil and gas resources is done 'efficiently, safely and in an environmentally responsible way', what steps have been taken to ensure this? Simon: We are very conscious of New Zealand's reputation internationally, and the need to protect our environment. Yes, we want to pursue economic opportunities, to

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lift growth and create jobs, but not any cost. Oil, gas and minerals are an important contributor to the New Zealand economy and we know there is potential for this to grow. The recent changes to the Crown Minerals Act regime strengthen regulatory agencies' coordination on health, safety and environmental matters, and ensure regulatory efforts are proactive, co-ordinated and focus on operations that have the highest technical and geological complexity. The revised regime introduces a two-tiered permitting regime to provide a more effective and efficient process for companies. Both tiers are subject to the same health and safety and environmental regulations. And the regime complements other government initiatives to improve environmental protection - a new law to enable the comprehensive environmental management of activities in New Zealand's Exclusive Economic Zone (EEZ) for the first time, and the creation in 2011 of a stand-alone Environmental Protection Authority to enable stronger and better coordinated central government leadership on environmental regulation. OilVoice: Additional changes have been planned to the Crown Minerals Bill, which will aim to stop protestors from carrying out dangerous acts, damaging and interfering with legitimate business interests with ships. What sort of penalties can they expect to face? Do you think this is a large enough deterrent? Simon: I'm confident we've put the right measures in place. Protest action can impose significant costs on companies carrying out legitimate activities under permits and create very serious health and safety risks. The new law covers dangerous protests that interfere with or damage oil exploration vessels. It also makes it an offence for people to breach a 'non-interference zone' (NIZ) established around a structure or ship. Fines range up to $100,000 for groups or $50,000 for individuals for the first offence and a fine of up to $10,000 for breaching the NIZ. This move covers a gap in the existing legal framework and it provides clear expectations and penalties. OilVoice: You mentioned in a recent interview that New Zealand's Exclusive Economic Zone, the fourth-largest in the world, is 'very underexplored'. Roughly how much of it has yet to be explored, and how much potential does the area have in terms of major oil finds? Simon: The numbers really speak for themselves in terms of illustrating the potential. New Zealand's greater Extended Continental Shelf covers more than 6,000,000 km². Within that, approximately 1,200,000 km² of sedimentary basins have been mapped. Further research and industry activity show there is at least 800,000 km² of known prospective basins with working petroleum systems, yet all the production in New Zealand to date has come from an area of less than 10,000 km². Although the Taranaki Basin is New Zealand's premier oil and gas exploration

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region, the Great South Basin, Canterbury, Reinga-Northland, East Coast and the deep water possibilities of New Zealand's petroleum acreage have attracted significant interest as emerging basins of petroleum potential. Since the mid-2000's, New Zealand Petroleum & Minerals has undertaken concerted data acquisition. Together with advances in deep-water drilling and production technology, the focus is shifting further offshore - where the biggest discoveries are anticipated. International companies currently hold licences to parts of four frontier offshore basins: Great South, Canterbury, Pegasus and Deepwater Taranaki. OilVoice: The industry continues to expand on new technologies, providing diverse opportunities for producing 'unconventional' oil and gas in many parts of the world. How is New Zealand embracing new technologies? Simon: New Zealand wants to partner with companies that have the most advanced technologies. There is wide variation on the definition of 'unconventional' oil and gas around the world. We have a number of permit holders who are looking for petroleum resources that may not have been the case a few years ago. Tag's geotechnical work in the East Coast of New Zealand has identified a number of multi-target, conventional and tight oil prospects at depths between 250 and 2000 meters and has identified widespread prospects there. Recent field and subsurface core studies have confirmed these world-class source rocks are not only rich in Total Organic Carbon, they are also heavily fractured in many locations, which is one key factor in successful tight oil production. OilVoice: And finally, what do you think the next 25 years holds for oil exploration in New Zealand? Simon: New Zealand's Prime Minister John Key has said this could be a 'gamechanger' for New Zealand. I agree. The resource sector - managed responsibly and safely - offers a very significant opportunity for growth. The total tax and royalty take from petroleum was $800 million in 2011/12. National GDP would increase on average by $2.1 million for each year of a 30-year development of a new petroleum basin. From an oil and gas perspective New Zealand truly is a land of opportunity. We have the world's fourth largest Exclusive Economic Zone with some exciting geology across 18 basins. The demand for - and exploration of - oil and gas has never been greater. And New Zealand has never been a better place to explore, particularly as we have clarified the rules and expectations that apply. OilVoice: Thank you for taking the time to answer our questions, Simon. I'm sure our readers will enjoy hearing what you have to say.

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Insight: UK shale gas and oil - who is watching?
Written by David Bamford from Finding Petroleum Professor Andrew Hopkins’ insights, described in Karl Jeffrey’s article from yesterday, can be summarised as: The important features of a safety case regime are that it must have: 1. a risk/hazard framework, 2. workforce involvement, 3. a requirement to make the case to a regulator, 4. an engaged regulator, and 5. a requirement of duty of care. Let’s just consider one aspect of this for the UK onshore, namely the regulations and the regulator. The November 2011 EU Commission commissioned report that concluded shale gas exploration is currently well regulated in Europe is usually cited as evidence that more regulation is not need but this legal review was based on four countries only – Poland, Sweden, Germany and France. Specifically in the UK, in response to input from consultations, learned societies, and the industry, the Secretary of State for Energy & Climate Change issued a Written Ministerial Statement which concluded that: “Having carefully reviewed the evidence with the aid of independent experts, and with the aid of an authoritative review of the scientific and engineering evidence on shale gas extraction conducted by the Royal Academy of Engineering and the Royal Society, I have concluded that appropriate controls are available to mitigate the risks of undesirable seismic activity. Those new controls will be required by my Department for all future shale gas wells. On that basis, I am in principle prepared to consent to new fracking proposals for shale gas, where all other necessary permissions and consents are in place.” and that it was a requirement that any case be made to the regulator. So what activity will need to be regulated? The BGS, in a recent geological survey, intimated that there is 1,300 trillion cubic feet of shale gas in place under Bowland and that it alone could keep the country

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self- sufficient for decades. And then of course there’s the resource under the Weald... Let’s be really pessimistic and assume that only 2.5-5% of this GIIP can be produced so say somewhere in the range 25 – 60Tcf. And as far as I can tell, there seems to be some sort of consensus that a typical reservoir penetration, with ‘best technology’ applied, will do well to produce 5Bcf, meaning every Tcf will require say 200 such penetrations to produce it. This implies 5000-12000 reservoir penetrations will be required to produce the gas reserves I mentioned at the beginning of this short paragraph, perhaps drilled at the rate of a few hundred per year over 2 – 4 decades. Note that I have focussed on ‘reservoir penetrations’ here – presumably these will lie in the domain of the Health and Safety Executive (HSE) who is presumably (going to be) charged with applying regulations concerning subsurface issues – well integrity, groundwater protection, avoidance of seismicity (although perhaps that’s DECC’s job?) and so on. There is a completely different question as to who regulates the surface expression of all this activity – the significantly smaller number of drilling pads (“the size of a cricket pitch” to quote David Cameron) – presumably this is where the Environment Agency comes in with help from HSE? I have been digging around the various HSE and .gov websites; there is some information there but I’m afraid I can’t find a single thing that convinces me that the human resources actually exist, or are planned for, that will enable regulations to be applied, safety cases to be received, in short……evidence for the existence of an ‘engaged regulator’……given the enormous number of well operations that are about to be undertaken. If the regulator is not adequately resourced and, therefore, engaged, on top of the real risks is added the risk that regulation just becomes a mutual ‘box ticking’ exercise.

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OilVoice Magazine | SEPTEMBER 2013

Of boiling frogs and oil prices
Written by Kurt Cobb from Resource Insights Many readers will know about the claim that a frog plopped into boiling water will hop right back out if it can, while one put into cold water which is then slowly heated will remain until it is cooked. The claim is wrong, but the story is quite useful in understanding some human behavior. Gradually changing circumstances are typically more difficult for humans to detect and react to than circumstances that are changing rapidly. Such is the case with oil prices. The velocity with which oil prices rose in 2007 and 2008 transfixed the public and policymakers. The price vaulted from $60 a barrel on the first trading day of 2007 to above $147 on July 11, 2008, the (so far) all-time high. At the time many believed that oil production might be reaching a limit that would never be breached, a possibility with dire implications for a society deriving more than a third of its energy from oil and dependent on the substance as a basis for myriad products such as plastics, pharmaceuticals, herbicides, pesticides, lubricants, heating fuel, fabrics, paints, solvents, and asphalt, just to name a few. When oil prices then plunged as a result of a crashing economy, no one knew what to expect except those of us who had been following the supply picture carefully. That supply picture suggested rapidly recovering prices as the economy rebounded. As it turned out, the spot price rose from just under $34 per barrel on December 26, 2008 to $126 on April 28, 2011. Again, the spectre of limits hung over the market and the public. Now, the strange thing is that the worldwide average daily price hit records in both 2011 and 2012 if we go by the Brent price which has come to represent the true world price. And, we may be headed for another record this year. But the rise has been so incremental from $111.26 in 2011 to $111.63 in 2012 that it can hardly be called a rise. Like the proverbial frog in gradually warming water, the public has become used to high oil prices and so doesn't often think about what they imply-namely, continued constrained supply despite all the distracting and misleading histrionics from the industry claiming that we've entered a new era of abundance. Oil's persistently high price is, of course, an embarrassing and decisive indicator that the claim is nonsense. So far this year, the daily Brent crude price through July 30 has averaged $107.43. Will it rise enough from here to top 2012's average? We cannot know. But the fact that oil prices have remained in or near record territory for two years running no longer elicits alarm from the public, the industry or policymakers. High prices have

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become the new normal. This is the ever so slightly warming water in which we froghumans are sitting while no longer noticing the change (or remembering how unnerving it was as prices rose rapidly to this level). It's worth remembering that the current average price for the year remains well above the average daily price for all of 2008, the year that stunned the world with the highest oil price ever. The 2008 average was only $96.94, again using Brent crude prices as a proxy for world prices. Like the frog, for us humans it is the velocity of price changes which grabs our attention, not the persistent high price. The reason for the high price is clear. Demand remains robust, especially in Asia, and supply remains constrained. As I pointed out last week, supply has only advanced a paltry 2.7 percent in seven years vs. about a 1.5 percent increase on average EVERY YEAR prior to that (from the early 1990s onward) for crude including lease condensate (which is the proper definition of oil). We have come to accept high-priced oil, and we will probably accept it until the next crisis causes prices to bolt quickly upward getting our attention again. As Nassim Nicholas Taleb, the former hedge fund manager, self-styled philosopher of risk, and author of The Black Swan tells us, the longer a system appears stable, the greater the disruption will be when stability breaks down. Oil prices have been on average at their highest ever for the past two years and may reach a record again this year. But they have also essentially been stable because the change in the average daily price has been so slight. Watch out for what comes next after that stability evaporates.

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Can oil play supercommodity like 2008?
Written by Andrew McKillop from AMK CONSULT TIME WAS Due to the recession, global oil demand in 2008 went down as global supply rose. Prices rose, also. Using US EIA data, global oil consumption decreased from 86.66 million barrels per day (Mbd) in the fourth quarter of 2007 to 86.34 Mbd in the first quarter of 2008. Between Q1 2008 and Q2 2008 global demand fell again, to 85.73 Mbd. Between Q1 2008 and Q2 2008 prices for WTI grade oil on the US Nymex market increased sharply from $89.91 per barrel at the start of Q1 to $110.21 per barrel at the end of Q2, a growth of 22.6%. Overall therefore, demand fell and supply rose and prices rose. A lot. For the US EIA a major part of this sharp increase was attributed to what it called 'volatility' in Venezuela and Nigeria, but it also noted an influx of investment money into commodities markets. At the time, investors were stampeding out of the falling real estate and stock markets, and among the commodities they bought gold and especially oil. This equities market exit-bubble soon spread to other commodities. Investor funds swamped wheat, soy, vegetable oils, other food commodities and precious metals other than gold. One major impact was a world food price bubble starting in Q1 2008, driving up food prices dramatically in countries heavily dependent on imported foods. Food riots were commonplace in many less-developed countries. Until Q1 2008, Daniel Yergin of the CERA consulting company did not believe there was any supply problem for oil, and claimed its price would soon retreat to 'normal', but in May 2008 he amended that position to predict that oil would reach $150 during 2008, 'due to tightness of supply'. This reversal of opinion was significant because CERA provides price forecasts for many official bodies. TIME IS On August 1, 2013 Nymex prices for WTI hit $107.90 a barrel in early trading. The most-cited catalyst was continuing concern on the removal from office of Egypt's democratically elected President, Mohamed Moursi. Commodities traders worried that the Suez Canal could be closed if unrest spread. (see my July 14 article/ http://preview.tinyurl.com/p8byeyc see also the following by Brandon Smith http://preview.tinyurl.com/qhdush5)

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Other supporting rationales included the unlikelihood of the US Fed starting to taper down, due to a 'worrying absence of inflation pressure' in the US economy. Another was the Libyan situation. Bloomberg reported that: "Libya, holder of Africa's biggest crude reserves, has closed all oil terminals except Zawiya amid labor protests, according to Oil Minister Abdulbari Al-Arusi. Zawiya, capable of handling 300,000 barrels a day is operating, while the largest port, Es Sider, and others including Ras Lanuf, Marsa Brega and Hrega are shut, the minister said'. Probable loss of export supply will be around 0.325 Mbd, he said. Iraq's surging production may come under downward pressure if Sunni insurgents target its northern pipeline, and technical problems are curbing output in the south. Among other frequently-cited upbeat items aiding oil's rise we have China news, where despite the signs of further slowdown reported by HSBC, the country's official purchasing manager's index came in higher than expected on Thursday August 1. This upbeat news was bolstered in Europe where a survey showed eurozone manufacturing returned to growth in July. Lending further support, US oil inventories at the Cushing, Oklahoma, delivery basing point for the Nymex crude contract fell for a fifth straight week, TWIP data showed on Wednesday, although overall stocks increased. Since May 2008, the U.S. Commodity Futures Trading Commission has increased its surveillance of oil and other commodities' trading most recently in June 2013 concerning complaints of bogus bids and offers in the West Texas Intermediate crude-oil market, a practice known as 'spoofing'. This is an illegal practice involving bids or offers that are entered with the intent of canceling them before the trade is executed, to either drive up or drive down oil prices on Nymex energy-futures contracts. FUNDAMENTALS WIN, FINALLY Remy Wagman, president of RJM Energy and at the time a 14-year Nymex veteran noted in a September 2010 interview with 'Alberta Oil' that the Nymex oil market attracts 'gambling junkies'. He added: 'But if you're completely a gambling junkie, it's not an industry to work in for you. You have to know when to stop'. In 2008 the stop was $147 a barrel on July 11. Despite the highly-listened to oil forecaster Yergin claiming in May 2008 that he had had a change of outlook, and that henceforth (in early 2008) there would be oil shortage - in the face of US EIA oil demand data showing a continuing fall as the recession intensified - the stark evidence of declining oil demand finally took its toll. From the day-averages of around US$140 to $145 attained in July 2008, oil prices collapsed to reach $30.28 a barrel on December 23, 2008, a fall of over 79% from the peak. This was the lowest day-traded price for WTI oil since the financial crisis started in late 2007. To be sure, this peak-trough range of $147 - $30 shows such fantastic volatility that obviously both ends are extreme and unreal. To use an often cited term in the recent trial in New York of the former Goldman Sachs employee and financial algorithm expert Fabrice Tourre, this was 'surreal' finance and trading, with intent to defraud.

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The US Securities and Exchange Commission accused Tourre of intentionally misleading participants in a complex mortgage-linked security named Abacus that earned in excess of one billion dollars for the Paulson & Co. hedge fund. Tourre was found guilty by a jury in Manhattan on six of seven counts. Goldman Sachs, this year not 2008, has a studiedly neutral-to-negative outlook for oil prices, recently abandoning its 'arb trade', or arbitrage trading advisory and customer services for the Brent-WTI arbitrage or premium. On February 8, 2013 this premium had reached $22.70 a barrel in favour of Brent, but is now close to $1 to $3 a barrel and has traded close to zero in recent weeks. Goldman abandoned this trade when the premium fell to $5 a barrel. In 2008, Goldman Sachs had a dramatically oil-positive corporate stance. When oil prices spiked to $147 a barrel, the biggest corporate casualty was oil pipeline giant Semgroup Holdings, a firm with $14 billion in sales based in Oklahoma. It had racked up $2.4 billion in trading losses betting that oil prices would go down, on advice from Goldman Sachs which Goldman contests to this day, including $290 million of losses from personal accounts managed by its then CEO Thomas Kivisto. With the credit crunch eliminating any hope of meeting a $500 million margin call, Semgroup Holdings filed for bankruptcy on July 22, 2008. Forbes magazine on March 26, 2009 noted that 'Numerous people familiar with the events insist that Citibank, Merrill Lynch and especially Goldman Sachs had knowledge about Semgroup's trading positions from their vetting of an ill-fated $1.5 billion private placement deal last spring'. It went on to say: 'What's known for sure is that Goldman Sachs, through J. Aron & Co., its commodities trading arm, was in prime position to use such data - and profited handsomely from Semgroup's fall. The J. Aron group was Semgroup's biggest counterparty, trading both physical oil flowing through pipelines and paper oil, in the form of options and futures'. Semgroup had been advised by Goldman that oil prices would fall, it claimed, but through late Spring and early Summer 2008 all they did was rise, sometimes by extremes of $5-a-day.

Source 'Forbes' magazine 26 March 2009

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CAN IT HAPPEN AGAIN? The chances of 'another 2008' certainly exist - theoretically - for example due to financial industry hubris or 'exuberance', as well the industry's proven tendency to mislead and defraud. Since oil, like any other commodity including gold is a physical commodity, there are however final limits set by supply and demand. Also, major 2008-versus-2013 differences abound. To date in 2013 there is no sign of an accompanying and comforting price-gouging process operating in agrocommodities, in fact the reverse. Several major food commodities are at remarkably low prices, today. As we know, gold has suffered a 'severe correction'. Gold price manipulation - downwards - is a daily reality on the paper gold market, while physical gold demand is very strong. The oil market of today is however very similar to 2008 in that paper oil, that is futures and options contract trading is completely dominated by a Select Few major bankers, brokers and traders. For this 'community' supply and demand are only details. Physical oil supply is ample, or more than sufficient for current global demand, but this can be ignored during the 'window of opportunity' for price gouging that the Select Few create and exploit. As in 2008 therefore, the oil price ramp of 2013 is a paper oil phenomenon and can run to heights that common mortals will find preposterous. The main difference is that this time the 'oil price bubble' is nearly alone among the commodities. The so-called Supercycle has been mauled, broken apart and compartmented, leaving only oil as the easiest picking for manipulation.

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Can Saudi Arabia pump enough oil?
Written by Andrew McKillop from AMK CONSULT PREVENTING OIL SHOCK - OR CAUSING IT One of Wikileaks' most celebrated revelations, in 2011, was a confidential mail from

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a US diplomat in KSA (Kingdom of Saudi Arabia) stating that he had been convinced by a Saudi oil expert named Sadad al-Husseini using data from as far back as 2005 that the nation's oil reserves are overstated by nearly 40%. The diplomat was certain that KSA could not 'keep a lid on oil prices'. To be sure, there was no need to consult Wikileaks or the State Dept to hear that for at least a decade Matthew Simmons, author of books including Twilight in the Desert: The Coming Saudi Oil Shock published in 2005 has worked the theme of Saudi exaggeration or lying about its oil reserves. Simmons main argument was that over and above the political uncertainty of reliance on Middle Eastern oil, the reserve decline rates for conventional or first-generation oil in the region should raise our awareness of the physical unreliability of Middle East oil. Due to the huge dominance of KSA in Middle East oil and Arab world politics, this firstly concerns the Kingdom before it concerns the rest of the region. One certain and sure problem is that since the 1980s, sparked by the Iran-Iraq war, Arab OPEC producers in the heavily Saudi-dominated OAPEC organization started regular, usually large and sometimes huge 'reserve revisions'. KSA's own recoverable oil reserves depending on what date, as well as what source inside the Kingdom provides the data could range from 250 - 350 billion barrels (250-350 Gb). More bizarre, the reserve number never declines - it only grows despite KSA producing roughly 3.65 Gb-a-year, about 10 million barrels-a-day (Mbd). As reported by the Financial Times June 11, KSA is presently producing 'nearly 9.7 Mbd'. After the 1980s OAPEC round of reserve revisions, only upwards, nearly all other OPEC nations did the same, joined by most major non-OPEC exporters. Consequently there is no 'true' unambiguous number for world oil reserves. UNABLE TO PREVENT PRICE RISES - OR UNWILLING? What is important to note is that the Saudi oil decline 'analysis' can be applied almost word-for-word to joint-No 1 or close No 2 world oil producer Russia. This only underlines that anything concerning world oil and oil prices concerns the Dominant Pair, producing a combined total of about 25% of world total oil output. In Russia's case, even more than KSA, the role of conventional oil reserves versus 'assisted recovery' tapping secondary or tertiary reserves utilising steam-assist, water flood, chemicals, compressed gases and other means to enhance and increase recovery from 'tight' source rocks or declining conventional reserves is a constantly moving frontier. This makes the definition of Russia's recoverable oil reserves at least as variable as for KSA but in both cases, and anywhere else in the world - notably US, Canadian and Venezuelan shale oil extraction - higher oil prices expand the recoverable reserves, and lower prices do the opposite. The 2011-vintage Wikileaks revelation has resurfaced as the oil price has soared in recent weeks to well above $100 a barrel, with the main media-friendly explanations being a very slight recovery of global oil demand and above all tensions in the Middle East and Arab North Africa. With totally predictable timing, KSA has announced it will either maintain highest-possible production, or increase it. For as long as this does not prevent oil prices rising, KSA will 'almost regrettably' enjoy especially large

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windfall revenue gains. Russia ditto. Comparison of the dominant pair can start with their ultra-different oil production trends (source: Gregor Macdonald)

As the charts show, Saudi production is 'managed' but Russian production is much less compressible, explaining the meaning of the key price setting term: 'reserve or spare capacity'. Also, the Saudi chart shows the limits of its wide 'discretionary output' capability. The key major difference between KSA and Russia is therefore simple - KSA can 'open the tap' provided it has previously cutback output - making the Swing Producer role of KSA one of the most basic, fundamental oil price-setting factors. Consequently, news and views, opinions and spin on the subject of KSA's production intentions and policies are a must-item for oil market brokers and traders. What we find, possibly not surprisingly, is a permanent shroud of intrigue on these intentions and policies. Reported regularly in all global business media, Ali al-Naimi, oil minister of KSA has since 2007 said the Kingdom has identified projects to increase oil production capacity to 15 Mbd, but since early 2013 Mr Naimi says production capacity will not be increased beyond the current theoretical maximum of 12.5 Mbd 'in the next 30 years'. As AFP and other agencies reported from Riyadh, July 28, Saudi billionaire prince Alwaleed bin Talal, a nephew of King Abdullah has warned that global demand for the kingdom's oil is clearly dropping, urging revenue diversification and investment in nuclear and solar energy to cover domestic and local energy consumption. See also my article: http://beforeitsnews.com/energy/2013/07/saudi-royal-sounds-alarm-on-fracking2450748.html AND WHAT ABOUT OIL DEMAND? The OPEC Secretariat - heavily influenced by Saudi views - reported in its monthly report for June that it anticipated 'higher demand in absolute terms, primarily due to the structural change in the seasonal pattern', during the second half of the year, also adding: 'The expected global economic recovery in the second half of this year could also add more barrels to seasonally higher global consumption'. Scarcely designed to lend credibility to its oil demand growth forecast it placed at 0.8 Mbd to June 2014, this featured the Secretariat's belief that the summer driving season demand peak would not continue to shrink. It also said: 'Growing use of air conditioning in the summer, particularly in the developing countries, has also pushed

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(forecast) third quarter demand higher'. Surprisingly or not, the OECD's IEA energy watchdog agency regularly produces reports forecasting imminent increase in global oil demand, very similar to the Secretariat, noting that an 0.8 Mbd increase on current world total demand of about 89.75 Mbd (32.75 Gb per year) would represent an 0.89% increase. One major problem for both the IEA and the OPEC Secretariat, and a plus for Prince Alwaleed is that global oil demand is structurally shrinking - and new oil reserves and resources are available. Overpriced oil, unsurprisingly, encourages conservation and substitution including output from new, previously too-expensive oil sources. To be sure, global oil demand - except during sequences such as 2008-2009 and 2009-2010 - now rarely changes at a year average rate above 1%. The potential for multi-year zero demand growth is high, signaled by Prince Alwaleed's claim in his six-page letter to his uncle the King and oil minister al-Naimi that world oil demand may attain perfect zero growth by 2015. Risk is supply-side and the deepening intensity of what was Arab Spring but is moving towards Arab Civil War certainly opens the door to supply cutoff risk. Even as US shale oil output has surged, KSA's discretionary or spare capacity has proven crucial in meeting supply shortages. It raised output during the 2011 civil war in Libya, and in 2012 raised production to a 30-year high slightly above 10 Mbd as US-led sanctions reduced exports from Iran. Saudi action, and posturing in Egypt have the potential for unintended political consequences and the crisis-atmosphere has seeped into Riyadh think tanks and policy parlors. One result is further tightening by Saudi Aramco on the sale of its crude, ensuring only end-users obtain it to restrict their ability to resell barrels, another may be a permanent cap on KSA's maximum capacity. Overall and due to the total opacity of oil market trading - shown by increasing action by regulators in Europe and the US to rein in abuses - oil prices effectively tell us little or nothing about fundamentals and everything about speculation. Middle East supply risk is however rising, making it likely KSA will keep output at high or very high rates - while 'regretting' the high prices that the political risk premium adds to oil. Leaving the last word to al-Naimi, his 'preferred market equilibrium price' which has disappeared from all speeches, interviews and comments he gives for over 9 months, was $75 a barrel. At that price level Prince Alwaleed's so-called pessimism is likely unfounded but above it, KSA will go on losing demand volume if not revenues.

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OilVoice Magazine | SEPTEMBER 2013

Canada's LNG export facilities: Hurdles and challenges
Written by Keith Schaefer from Oil & Gas Investments Bulletin Three factors have the big LNG export proposals for Canada's west coast racing ahead at only a snail's pace: 1. Permits 2. Taxes 3. Offtake deals In this article I want to talk about permitting-but before that, remember that the first LNG proposal that will export BC and Alberta gas-the Douglas Channel project with Golar (GLNG-NASD) - is so small at 0.2 bcf/d that it doesn't need all this permitting. Very small projects like that don't need the big permits, just some small ones. This article is about the big LNG proposals, like Shell and Chevron and Petronas. So with that in mind…what is the permitting process for a proposed liquefied natural gas export facility? What are the biggest challenges? Step One: The National Energy Board (NEB) The first hurdle - an export license from the federal National Energy Board - tests whether the project is in Canada's economic best interests. LNG proponents apply to the NEB to ship certain volumes of LNG annually for a set number of years. To grant an export license the board must find that the proposal is in the public interest and that the energy commodity to be exported is surplus to Canada's energy needs. Here the 'best interest' question is only economic - the NEB is not charged with considering environmental impacts. Since the province - nay, the continent - is overflowing with natural gas and its export should generate all kinds of jobs and tax revenues, it's little surprise that the board has approved every single LNG export license so far. Three projects - Douglas Channel, Kitimat LNG, and LNG Canada - have already obtained NEB authorization. Three other applications are under review.

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Step Two: Environmental Approval The environmental assessment (EA) process is the longest and most complicated permitting step - and it carries the least certainty. To earn a green light projects have to meet the goals of environmental, economic, and social sustainability. To that end, the EA process examines each project for anything that could be environmentally, economically or socially bad, and what heritage and health effects that may occur over the project's entire life cycle. That means talking to A LOT of people… 1. Consulting with First Nations, 2. Completing in-depth technical studies on potential significant adverse effects, 3. Designing strategies to prevent or reduce those adverse effects, and then putting all the input and findings into a huge report that carries a recommendation to the Minister of the Environment and the Minister of Natural Gas on whether the project should be allowed - or not. There's a 'Pre-Application Phase,' where the Environmental Assessment Office (EAO) decides if the project does indeed need EA approval and, if it does, how the approval process should work. There is a lot of back-and-forth between the government and the company submitting the proposal-more technical data, engineering, proof of consultation, etc. Once the full 'Application Review Phase' starts, the EAO has 180 days to complete its review. That period includes a 45- to 60-day public comment period that includes open houses. The EAO writes up a draft report that it shares with the proponent, the working group, and with First Nations, adding in any input. The final report includes a recommendation from the executive director of the EAO on whether an EA certificate should be issued and a draft EA certificate. The draft certificate lists commitments the proponent made during the EA process to address concerns. It is not uncommon for an EA certificate to have more than 100 commitments - which are all legally binding if the certificate is signed. It then goes to the government and the ministers have 45 days to make a decision. They can issue the EA certificate with the commitments listed, refuse to issue a certificate, or require further study. Things have gotten easier on the EA front in recent years. In its recent budget the federal government handed almost all control of the EA process for energy projects to the provinces-before, they both did one. Sigh. It's a good move, but pipelines are still considered separate projects from the LNG facilities themselves, so that's another entire EA approval process.

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The First Nations Question First Nations support is vital. Earning support for a LNG facility might not be too hard. Pipelines are a different story - and every facility needs one. Anyone who wants to build a pipeline across northern BC likely has to consult with at least half a dozen First Nations, each with a different set of expectations and demands. If you can find common ground, deals between project proponents and affected First Nations take the form of Impacts and Benefit Agreements. There are lots of examples - but the biggest challenge is that there still is no clear definition of what constitutes sufficient consultation, mitigation, and benefits. A poorly defined end game, to say the least. Sometimes the road is smoother. The Haisla First Nation that occupies territory near Kitimat and at the head of the Douglas Channel is involved in three LNG proposals. The Haisla are viewing this as an opportunity: they believe the deals that will flow from these LNG projects could give their people the ability to simply buy the lands they believe are theirs, without a treaty (and negotiations have been going on for years, if not decades). More Permits After this, work cannot start on the liquefaction plant until the project earns a facility permit from the BC Oil and Gas Commission. Then there are five different Acts that a facility must comply with-after the big EA approval has been won. The process isn't any more arduous than in other places, though it is a new ballgame with rules being made up on the fly. But BC offers advantages to would-be LNG exporters over other locales. 1. The transport route from BC to Asia is only 9-10 days vs. 20-plus days for LNG ships out of the Gulf of Mexico. 2. LNG is 30% more efficient in the cold weather of northwest BC vs. tropical areas. 3. Canadian gas fields have liquids like ethane and butane, which add value by increasing the fuel's energy density. A lot of US LNG has to add this in. That's great for would-be exporters…but on the flip side, the flood of interest raises some big picture questions for British Columbians and for the regulators charged with developing this brand new industry. How many natural gas pipelines should be built across northern BC? Is a fleet of independent facilities the best approach, or should proponents be required to rationalize some of their infrastructure? How should the operations be powered? How much should they be taxed?

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We are going to find out all these answers in the next two years.

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Oil limits reduce GDP growth; Unwinding QE a problem
Written by Gail Tverberg from Our Finite World We know the world economic pattern we have been used to in years past–world population grows, resource usage grows (including energy resources), and debt increases. The economy grows fast enough that paying an interest rate a little higher than the inflation rate “works” for both lenders and borrowers. Borrowers are able to handle the required interest rate, because their wages are rising fast enough to buy homes and cars at prevailing interest rates. Unemployment is not too much of a problem because jobs grow with population and resource usage. Governments do fairly well, too, because they can tax the growing wages of the population sufficiently to get enough taxes to pay the benefits they have promised to constituents. This model “works” fairly well, as long as the economy is growing fast enough– population continues to grow and resource extraction continues to grow as planned. In a finite world, we know that this model cannot work forever. At some point, we can expect to start reaching limits. What do these limits look like? I would argue that in the case of resource extraction, these limits look like increasingly high cost of extraction. We need to extract resources from increasingly deep locations, in increasingly out-of-the way places, using increasingly more energy intensive techniques. For a while, improved technology is sufficient to keep costs down, but eventually the cost of extraction begins to rise. Some of the rising cost may even be taxes, because the country where the extraction is located needs higher taxes to keep a growing population

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properly fed and housed, so they do not rebel and disrupt production. When the cost of extraction begins to rise, it is as if we are pouring more manpower and more resources of many types (steel, fracking fluid, jet fuel, electricity, diesel fuel) into a deep pit, never to be used again. When we put more resources in, we get the same amount of resource out, or even less than in the past. If we want to continue to increase the amount we extract, we have to further increase the quantity of resources used in extraction. I have referred to this issue as the Investment Sinkhole problem. Obviously, if we put more manpower and other resources into this pit, we have less for other purposes. A recent example of resources hitting limits is oil. World oil prices started increasing about 2004 (Figure 1). Analysts say that these rising prices are related to rapidly increasing production costs. Oil company presidents say that we extracted the cheap to extract oil first, and most of it is now gone. Recent reports of major oil companies say profits are dropping, despite high oil prices. Figure 1. World crude oil production and Brent spot oil price, both based on EIA data.

Oil is an important commodity because it represents about 33% of the world’s energy supply. It is the world’s primary transportation fuel. It is a very important fuel in agriculture, operating farm equipment, transporting fertilizer, running diesel irrigation pumps, making herbicides and pesticides, and transporting goods to market. Therefore, if oil prices rise, food prices are likely to rise well. In fact, since nearly all goods are transported, an oil price rise affects nearly all goods and quite a few services. There are really two issues when the cost of oil extraction rises: 1. If the sales price of oil rises, to what extent will this increase adversely affect the economic growth oil importing economies? Rising oil prices mean that the salaries of workers do not go as far, so they must cut back on discretionary goods. Profits of companies will also fall, because it is hard to raise prices of goods, without reducing the quantity sold. In my view, the run-up in oil prices since 2004 explains pretty much all of the “Great Recession’s” impact on oil importing economies. See my article Oil Supply Limits and the Continuing Financial Crisis. In the next section, I show evidence that oil price increases have had a very adverse impact on GDP growth of oil importers. 2. While the cost of oil extraction is expected to continue to rise, can thesales price of oil really increase to match this higher extraction cost? If oil price can’t rise

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because of affordability issues (low salary growth, low growth in debt, or cutbacks in government transfer payments), then there is likely to be a crisis of a different kind. Oil exporters will find that oil prices are not high enough to cover their costs, and will cut back drilling to what is profitable. In fact, countries that are producing oil mostly for themselves, such as the US, are also likely to see their oil production drop, because prices will not be high enough to justify new investment. In such a situation, both oil importers and oil exporters are much worse off, because most of our systems are dependent on oil, and less oil will be available. The Federal Reserve now is discussing the possibility of stopping quantitative easing. If this is done, I expect it will have a very adverse economic effect: long-term interest rates will rise and asset prices are likely to fall. If commodity prices fall as well, then we could find ourselves in the scenario outlined in the preceding paragraph, in which oil prices drop lower than the cost of production for many producers. Relationship between Oil Consumption Growth and GDP Growth If we look at a history of growth in energy consumption and world economic growth, it is clear that energy growth, and for that matter oil growth, tend to move together. Figure 2. Growth in world GDP, compared to growth in world of oil consumption and energy consumption, based on 3 year averages. Data from BP 2013 Statistical Review of World Energy and USDA compilation of World Real GDP.

In fact, agencies such as the International Energy Agency use projected GDP growth in estimating future demand for energy products, including oil. Energy supplies don’t grow quite as rapidly as GDP, partly because of efficiency gains, and partly because the world economy is becoming more service oriented. In general, new services don’t require as much energy as new manufacturing. Growth in oil usage would also be expected to mirror GDP growth, but at a slightly lower rate of increase than growth of energy use in general. This is the case because oil is the most expensive of the major energy products. Consequently, there is a strong incentive to switch to cheaper energy products or to increase efficiency. Effect of High Oil Prices on GDP of Oil Importers If we look at the data, it is striking how handicapping high oil prices are to oilimporting countries (Figure 3). Consumption by countries that have historically been the biggest importers of oil, (US, EU-27, and Japan) started dropping about same time oil prices were started to rise.

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Figure 3. Oil consumption by part of the world, based on BP’s 2013 Statistical Review of World Energy.

At least part of the reason for this drop is because oil is an expensive energy product. With the run-up in prices, goods made using oil products became increasingly high cost to make and transport. With these higher costs, goods became less affordable to the country’s own citizens as well as less competitive in the world marketplace. During the same period, annual growth in inflation adjusted (“real”) GDP for the EU, US, and Japan combined dropped significantly below the rest of the world (Figure 4, below).

Figure 4. Annual percent change in Real GDP by part of the world, based data of the USDA.

In fact, if we look at groupings of countries as shown in Figures 5 – 7, we can see a dose-related response, with countries deriving the highest percentages of their energy consumption from oil having the poorest economic results. Figure 5 shows the percentage of energy consumption coming from oil in 2004, for several country groupings. (2004 is about the time that the oil price run-up started.) Figure 5 indicates the PIIGS1 and Japan had the highest percentage of their energy supply from oil, and China had the lowest percentage. The US, the EU-27 minus PIIGS, and India were in between.

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Figure 5. Percent energy consumption from oil in 2004, for selected countries and country groups, based on BP 2013 Statistical Review of World Energy. (EU – PIIGS means “EU27 minus PIIGS’)

We can also look at economic growth for the same groups of countries. The countries with the lowest proportion of oil use, and thus least affected by the run-up in oil costs since 2004, have had the greatest GDP growth in the 2005 to 2011 period. In fact, the GDP growth percentages for the period 2005-2011 (shown in Figure 6 below) follow exactly the reverse pattern shown in Figure 4.

Figure 6. Percent growth in real GDP between 2005 and 2011, based on USDA GDP data in 2005 US$.

In Figure 6, part of the high growth in India and China relates to increased globalization. Countries around the world compete on wage and benefit levels as well as on the price of energy. China and India have lower wages than the developed countries, so could increase their share of manufacturing for this reason as well. More liberal treatment of pollution control may also be a factor in their increases. Not too surprisingly, growth in oil usage follows the pattern of economic growth (Figure 7, below).

Figure 7. Percent consumption growth between 2004 and 2011, based on BP’s 2013 Statistical Review of World Energy.

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It should be noted, too, that for the PIIGS, it is not just one large country with a high percentage of oil consumption in 2004 that is dominating the group result in Figure 5. Allof the PIIGS had high oil consumption percentages in 2004: Greece, 62%; Portugal, 61%; Ireland, 61%; Spain, 52%; Italy, 49%. In fact, the country with the worst problems (Greece) had the highest oil consumption percentage in 2004. I might also mention that economist James Hamilton found that 10 out of 11 United States recessions since World War II were associated with oil price spikes of 25% or more. What Goes Wrong in the Expected Model, When Oil Prices Remain High? In the first paragraph of this post, I outlined an expected model of how the world might operate, if economic growth remains high. Slower economic growth would be expected, if resource limits start having an impact on economic growth. What happens if oil prices remain high? I think the answers is fairly different for businesses, compared to consumers. Businesses can mostly shake off the impact of higher oil prices, by cutting back on the amount produced (and thus cutting the number employed), or by shipping production to a lower cost part of the world (again cutting back the number of US workers employed), but workers don’t have the benefit of making changes of these types. They can drop out of the workforce and apply for government benefits, but this does not really fix their lack of jobs, and the low growth in wages for those who do have jobs. Because wages of workers are still adversely affected, even years after an oil price rise, and because the cost of goods now reflects the higher price of oil, consumers continue to find that their budgets are stretched. Some can afford to purchase a higher-mileage automobile, but most cannot–their budgets are still stretched, and some have dropped out of the work-force completely. The government can try to cover up this situation with artificially low interest rates for homes and cars, and with higher transfer payments using deficit spending. Unfortunately, the government programs don’t really fix the underlying problem, namely a lower percentage of the population with jobs, and wages of those with jobs not rebounding by much. Because there is no real fix for the underlying problem, the economy doesn’t really bounce back. Quantitative Easing, and the Unwinding of Quantitative Easing One way the government hides our current financial problems is with quantitative easing (QE). QE lowers longer-term interest rates, such as those that affect the price of mortgages. QE also lowers the interest rate the government pays on its own debt, helping to government to have closer to a balanced budget. The lower interest rates tend to increase stock market prices, and to raise prices of homes2 and farms, because investors seek investments that provide better yields than the absurdly low rates available on bonds. This doesn’t really fix the underlying problem, either. The government can also try to induce banks to lend more money out, but if buyers don’t have high-paying jobs, it becomes increasingly difficult to actually get the money available for lending into the hands of potential buyers. Waiting for several

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years doesn’t really fix the situation either–the accumulated deficit just gets worse, and the bubbles blown by QE become larger. None of this fixes the underlying problem of high oil prices. If the government tries to back off from QE, we will see longer term interest rates rise. This will make mortgage rates rise, and cut back on the number of buyers of homes. Rising interest rates are likely to bring back the problem of falling home prices, and reduce the number of new homes built. Car sales may also fall, as interest rates on loans for new cars rise. The suddenly higher interest rates are likely to make the stock market fall, because with higher yields, bonds will become more attractive investments in comparison to stocks. As interest rates rise, the value of bonds can be expected to drop as well, because this is the way bonds are priced–the higher the available interest rate, the lower the resale price of the bond. The declining values of stocks and bonds, and for that matter, houses, is likely to be a problem for citizens, because they will realize that their savings are worth less. The “wealth effect” will work backwards. People will realize that they are poorer than they were before, and spend less. The decline in the value of stocks and bonds is likely to be a problem for banks, pension plans, and insurers–and for that matter, any kind of institution holding large amounts of stocks and bonds. The exact impact will depend on the accounting rules for the particular institution. If market value is used for stocks and bonds, institutions holding them will show large capital losses, perhaps putting them below regulatory limits. Part of the capital losses may be covered up by special accounting rules, such as allowing bonds to be valued at amortized cost rather than market value. But there may still be an adverse impact on capital, possibly putting some institutions below regulatory limits. Also, if an institution needs to sell a bond or stock that is valued on its balance sheet for more than it is really worth, it will incur a loss. The removal of QE will also mean that the interest rates the government pays on its own debt will rise. This is will push up needed tax rates, putting further pressure on the consumer. With lower asset values and higher tax rates, debt defaults are likely to become more of a problem again. Banks may cut back in lending as well, especially if their capital ratios fall too low. The Effect on Oil Prices With values of most investments dropping lower and tax rates rising, my concern is that the sales price of oil will drop lower, causing a severe cutback in world oil production. This issue is really one of affordability of oil. Economists would call this inadequate “demand” for oil. Of course, people will still need to eat food and need oil for commuting, but this doesn’t come into economists’ definition of demand–demand is only how much people canafford, not what they need.

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So we really are in a quandary. If oil prices stay high, recessionary effects can expect to continue for oil importers. In addition, China, India, and other developing countries are increasingly becoming oil importers, so they themselves can increasingly expect to be affected by high oil prices. Furthermore, these same countries find demand for their manufactured goods is reduced because of economic problems of the Eurozone, Japan, and possibly the US. If oil prices drop, they will be too low for oil companies to make new high-cost investments. A drop in oil production will take place gradually, as existing wells continue to produce, but new ones are not added. The impact of this lower oil production may be quite severe. The collapse of the Former Soviet Union in 1991 seems to have been caused by too low oil prices, as I showed in How Oil Exporters Reach Financial Collapse. I also talked about the low price issue in Low Oil Prices Lead to Economic Peak Oil. All countries are likely to be affected by this drop in production–importers because the lack of availability of oil for import, and exporters because of the lack of revenue from oil exports. Even if we sail through our current set of problems, we can count on meeting them again in a few years, because the cost of oil extraction can be expected to keep increasing. If oil prices rise again, oil importers are likely to see a large increase in unemployment, and a squeeze on profit margins of businesses. Banks may again fail. Government will face a new round of problems, similar to those in 2008, or even worse, without having fixed their previous set of problems. Notes: [1] Acronym for Portugal, Italy, Ireland, Greece, and Spain, the countries in Europe with the most financial problems in the past few years. [2] Many of the buyers for houses are institutional investors, planning to rent the houses out.

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