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Edition Ten – January 2012

Why Malthus got his forecast wrong The one chart about oil's future everyone should see The Montana Bakken oil play: 'Great news for a great play'


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OilVoice Magazine | JANUARY 2013

Adam Marmaras Chief Executive Officer Issue 10 – January 2013 OilVoice Acorn House 381 Midsummer Blvd Milton Keynes MK9 3HP Tel: +44 208 123 2237 Email: press@oilvoice.com Skype: oilvoicetalk Editor James Allen Email: james@oilvoice.com Chief Executive Officer Adam Marmaras Email: adam@oilvoice.com Social Network Facebook Twitter Google+ Linked In Read on your iPad You can open PDF documents, such as a PDF attached to an email, with iBooks.

Welcome to the 10th edition of the OilVoice magazine, the first for 2013. 2012 was a year of innovation for the site. We launched this magazine, completely overhauled the jobs board, and improved our newsletters. But we can never sit still, and have plenty of exciting plans for 2013. Be sure to keep a regular eye on the site. December is usually a quiet month for the industry, and I was worried that the January issue might be a little 'light'. But I've been happily proven wrong and this month we have great articles like Why Malthus got his forecast wrong, The one chart about oil's future everyone should see and The Montana Bakken oil play: 'Great news for a great play'. What are your plans for 2013? If it involves reaching more people in the industry, then there is no better place to advertise than on our site and this magazine. Take a look at our media pack for our reasonable rates. Have a great 2013!

Adam Marmaras CEO OilVoice


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OilVoice Magazine | JANUARY 2013

Contents Featured Authors Biographies of this months featured authors

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Why Malthus got his forecast wrong by Gail Tverberg

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Will artificially high oil prices last much longer? by Andrew McKillop

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The one chart about oil's future everyone should see by Kurt Cobb

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Recent Company Profiles The most recent companies added to the OilVoice directory

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The Montana Bakken oil play: 'Great news for a great play' by Keith Schaefer

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The global anti-fracking movement: What it wants, how it operates and what's next by Jonathan Wood

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Why world coal consumption keeps rising; What economists missed by Gail Tverberg

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AIM Oil & Gas - 2013 likely to kick off takeover activity by Richard Jennings

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Argentina and protectionism: Shooting itself in the foot by Richard Ethrington

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Venezuela: Six more years of decline under Chavez by Richard Ethrington

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Featured Authors Andrew MacKillop OilVoice Contributor Andrew MacKillop is an energy and natural resource sector professional with over 30 years experience in more than 12 countries.

Jonathan Wood Control Risks Jonathan Wood leads Control Risks’s strategic analysis practice, which provides analysis and consultancy on global business risks to oil and gas operating companies, service companies, shipping companies, and investment community.

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.

Gail Tverberg Our Finite World Gail Tverber 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.

Richard Jennings Spreadbet Magazine Richard’s background is from within the traditional fund management environment and he has been an active spread better for over 15 years now, making almost 7 figures from his trading during this period. Qualified as a Chartered Financial Analyst, and with a thorough understanding of technical analysis, derivatives and economic issues, he provides the bedrock to the blog content.


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Richard Etherington Finding Petroleum Richard Etherington, 24, works as a freelance journalist. Richard, a BA Hons Political Science graduate, is also a fully trained sub-editor and reporter. He is a former equities reporter and columnist, who specialised in small cap drilling and mining companies – during which time he built up an impressive portfolio of industry contacts.

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


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Why Malthus got his forecast wrong Written by Gail Tverberg from Our Finite World Most of us have heard that Thomas Malthus made a forecast in 1798 that the world would run short of food, and that great famine would result. But most of us don’t understand why he was wrong. This issue is relevant today, as we grapple with the issues of world hunger and of oil consumption that is not growing as rapidly as consumers would like–certainly it is not keeping oil prices down to historic levels. What Malthus Didn’t Anticipate Malthus was writing immediately before fossil fuel use started to ramp up.

Figure 1. World Energy Consumption by Source, Based on Vaclav Smil estimates from Energy Transitions: History, Requirements and Prospects and together with BP Statistical Data on 1965 and subsequent

The availability of coal allowed more and better metal products (such as metal plows, barbed wire fences, and trains for long distance transport). These and other inventions allowed the number of farmers to decrease at the same time the amount of food produced (per farmer and in total) rose. On a per capita basis, energy consumption rose (Figure 2) allowing farmers and others more efficient ways of growing crops and manufacturing goods. Figure 2. Per capita world energy consumption, calculated by dividing world energy consumption (based on Vaclav Smil estimates from Energy Transitions: History, Requirements and Prospects together with BP Statistical Data for 1965 and subsequent) by population estimates, based on Angus Maddison data.


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If it hadn’t been for the fossil fuel ramp up, starting first with coal, Malthus might in fact have been right. As it was, population was able to ramp up quickly after the addition of fossil fuels.

Figure 3. World Population, based on Angus Maddison estimates, interpolated where necessary.

A person can see that there was a particularly steep rise in population, right after World War II, in the 1950s and 1960s (Figure 3). This is when oil consumption mushroomed (Figure 2, above), and when oil enabled better transport of crops to market, use of tractors and other farm equipment, and medical advances such as antibiotics. It is likely that increased consumer and business debt following World War II (Figure 4) also played a role in the post-World War II ramp up.

Figure 4. US Debt excluding Federal Debt as Ratio to GDP, based on Z1 Debt data of the Federal Reserve and GDP from the US Bureau of Economic Analysis.

The reason I say that debt likely played a role in this ramp is because at the end of World War II, people were, on average, pretty poor. The United States had recently been through the Depression. Many were soldiers coming back from war, without jobs. Without a ramp up in factory work and related employment, many would be unemployed. A ramp up in debt fixed several problems at once: 

Allowed low-paid workers funds to buy new products, such as cars, that used

oil Allowed entrepreneurs funds to set up factories

 

Allowed pipelines to be built, and other support for ramped up oil extraction Provided jobs for many coming home from the war effort


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The debt ramp up, and the resulting increase in oil production, raised living standards. Figure 2 shows that the increase in per capita energy consumption was far greater in the 1950 to 1970 period when oil production was ramped up than in the coal ramp-up between 1840 and 1920. The long coal ramp-up period does not appear to have been accompanied by such a big ramp-up in debt. Tentative Conclusion A tentative conclusion might be that as long as we can keep ramping up availability of energy products and debt, Malthus’s views are not very relevant. Of course, things aren’t looking as benign today. World oil production has been close to flat since about 2005 (Figure 5). Figure 5. World crude oil production (including condensate) based primarily on US Energy Information Administration data, with trend lines fitted by the author.

The world has been able to increase production of other fuels to compensate so far. Unfortunately, the big increase is in coal (Figures 1 and 2). This mostly relates to growth in the economies of Asian countries, which are large users of coal. The cost of oil has more than tripled in the last ten years. The higher cost of oil is a problem, because it leads to recession, unemployment, and governmental debt problems in oil-importing countries. See my posts High-Priced Fuel Syndrome, Understanding Our Oil-Related Fiscal Cliff, and The Close Tie Between Energy Consumption, Employment, and Recession. Continued increase in debt now seems to be running into limits. Federal government debt is in the news every day, and non-government debt seems to be contracting relative to GDP, based on Figure 4. Looking Ahead I am not sure that we can conclude that we are headed for catastrophe the day after tomorrow, but the graphs give a person reason to pause to think about the situation. The reason I write posts is to try to pull together the big picture. If we only look at the latest new item forecasting huge increases in tight oil production or talking about 200 years of natural gas, it is easy to reach the conclusion that all of our problems are past. If we look at the big picture, they clearly are not. Debt problems are closely related to high oil prices in recent years. Debt problems


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are today’s issue, and they are not being considered in the huge oil and gas forecasts we see everywhere. The new tight oil and the new shale gas resources likely will need to be financed by increasing amounts of debt, so there is a direct connection with debt. There is also an indirect connection, through governmental debt problems, higher taxes, and the likely resulting recession (leading to lower oil prices, perhaps too low to sustain the high cost of extraction). Also, it is interesting that the supposedly huge increases in US oil supply don’t really translate to any discernible bump in world oil supply in Figure 5. We know that the world is finite, and that in some way, at some point in the future, easily extractable supplies of many types of resources will run short. We also know that pollution (at least the way humans define pollution) can be expected to become an increasing problem, as an increasing number of humans inhabit the earth, and as we pull increasingly “dilute” resources from the ground. Based on earth’s long-term history, and on the experience of other finite systems, it is clear that at some point, perhaps hundreds or thousands of years from now, the earth will cycle to a new state–a new climate with different dominant species. It may turn out that these new species are plants, rather than animals. The new dominant species will likely ones that can benefit from our waste. Humans would of course like to push this possibility back as long as we can. At this point, my goal is to pull together a view of the big picture, in a way that other analysts usually miss. The picture may not be pretty, but we at least need to understand what the issues are. Is the shift in the cycle very close at hand? If so, what should our response be?

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Health, Safety, Environment and Risk Management RPS Energy is a global multi-disciplinary consultancy, providing integrated technical, commercial and project management support services in the fields of geoscience, engineering and HS&E.

Contact James Blanchard T +44 (0) 20 7280 3200 E BlanchardJ@rpsgroup.com

rpsgroup.com/energy


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OilVoice Magazine | JANUARY 2013

Will artificially high oil prices last much longer? Written by Andrew McKillop from OilVoice TALKING UP OIL - AND OIL PRICES Every single year since the year 2000, using IEA data, the role of oil in world energy has fallen. From more than 38% of world energy in 2000 to 33% in 2011. Also using IEA data, oil supplied about 53% of world energy in 1973. The decline of oil is written in stone, and one simple, straight reason is that oil is overpriced. That is the simple "fundamentals based" bottom line but the global economy, political policy and corporate decisions, and media notions about Black Oil are stubborn when it comes to accepting and recognizing change. Two simple examples of how far oil energy prices have gotten out of line with non-oil energy prices is shown by US natural gas an coal prices: gas prices are now around $20 per barrel of oil equivalent, and coal prices are as low as $2.50 per barrel of oil equivalent - Nymex and ICE prices for WTI and Brent in late December 2012 are around $89 and $108 per barrel. These stubbornly high, unrealistic price levels for oil have had surprising, and unsurprising impacts in the energy sector, worldwide. Again in the US but soon to be followed worldwide, shale gas output now followed by shale oil output are growing fast - with an already inevitable impact on US natural gas prices. Wrting in 'Wall Street Journal' in late December, Citigroup's Ed Morse (formerly Lehman Bros' chief energy analyst) wrote: "The United States has become the fastest-growing oil and gas producer in the world, and it is likely to remain so for the rest of this decade and into the 2020s". He continued: "Add to this output the steadily growing Canadian production and a likely reversal of Mexico's recent production decline, and theoretically total oil production from the three countries could rise by 11.2 million barrels per day by 2020, to 26.6 million barrels per day from around 15.4 million per day at the end of 2011". What would this do for global oil prices, noting that with China, the US is the world's biggest importer of oil? HIGH OIL PRICES Ed Morse, like Daniel Yergin and plenty of other oil boomers, that is "unconventional


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oil" boomers, steer clear of what price level is needed, let alone non-oil and nonfossil energy policies, climate policies, economic and industrial policies, environment policies and other scene changers, to keep shale oil output growing. One figure bandied around is $50 to $60 per barrel. Plenty of energy analysts place the bar higher, as high as $70 per barrel for the price level below which shale oil output growth runs out of steam - or rather water and hydraulic fracking fluids and the constant need to "Drill baby, drill!". Canadian tarsands production and financial performance for operating companies through 2008-2009 gives some support to the higher-placed, operating breakeven price level. Certainly for the moment and for some while ahead the jury is out to lunch on this one. Contrarians can and do argue that oil prices have plenty of upside potential, despite Goldman Sachs officially backing off from its late 2011 forecast that the "right price" for Brent and WTI in 2012 would be $130 and $125 per barrel. Retreating some, but not a lot, the supposed "current analyst consensus" right price would be let us and them say - $100 for Brent and maybe $80 for WTI. These figures are at least 20% above anything corresponding with fundamentals, but never mind! We are talking about the real energy world where high oil prices are a critical prop to a shaky pyramid of global energy investment spending, which totals at least $500 billion-ayear. With the spinoff and derived spending, this number can easily be doubled. Taking $1 trillion a year as a handy figure we find this is light years away from hoped-for and projected global energy spending, as projected and forecast by the IEA, US EIA and other agencies, who have no problems talking $1.5 trillion a year, and more. In turn the bottom line is very simple: without "stubbornly high" oil prices this spending cannot happen, will not happen. Doubters can for example check any failing and unconvincing publicity campaign for all-electric sedan cars produced by Renault, Nissan, GM, BYD, Tesla, Reva, Fisker or other hopefuls: these are always a lot more consumer-friendly when or if oil prices hit $200 a barrel. With oil at $100 a barrel, who wants a $35 000 all electric sedan car with a realworld range of maybe 60 miles? OIL PRICES SPEEDING OIL'S DECLINE US domestic shale oil can be and is presented as the ultimate gamechanger for world energy, or US energy at least and given a highly positive spin but oil still has a sticky, black image for public opinion. Supplies and prices are unpredictable even when supplies are growing and prices are rather slowly falling! Environmentalist antioil campaigning, over the decades, has educated consumers on the not-obligatory role of oil as an energy source and better uses for it, as a raw material for petrochemicals. The perverse energy economics of the real world has high-priced oil dragging up all other energy prices, not the reverse of this paradigm. A rather large number of corporate and governmental players are highly satisfied with this: if oil price are artificially high, the energy price pyramid can go on growing, spinning off tax revenues and profits and the banker-broker-trader clique can play their daily routine of adding a little, trimming a little. The result is an unreal energy economic structure and system, at least as unreal as the towering fiscal cliffs and government spending deficits in almost all OECD countries, and emerging economies, needing tax gouging


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and austerity to resolve. Since at latest 2008 the figures leap out from the statistics of major energy agencies like the IEA. Oil's role in global energy is surely and certainly compressible. At present it is not possible to give hard-edged numbers to the rate of decline or the "equilibrium level", but below 25% of global energy is a probable or likely role for oil in world energy by 2020. At this level, why should we pay $100/bbl? This analysis and rationale can only grow and develop. Oil is overpriced but we do not exactly know how much its price should fall, or when and how its price should fall. As a Christmas message for stressed consumers this could be nice news - if they still use a car! By Andrew McKillop

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The one chart about oil's future everyone should see Written by Kurt Cobb from Resource Insights When people read about a long-term forecast of world oil supply--say, out to 2030-they often believe that the forecasters are merely incorporating our knowledge of existing fields and figuring out how much oil can be extracted from them over the forecast period. Nothing could be further from the truth. Much of the forecast supply has not yet been discovered or has no demonstrated technology which can extract or produce it economically. In other words, such forecasts are merely guesses based on the slimmest of evidence. Perhaps the best ever illustration of this comes from a 2009 presentation made by Glen Sweetnam, a U.S. Energy Information Administration (EIA) official. The EIA is the statistical arm of the U.S. Department of Energy. The following chart from that


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presentation will upend any notion that we know exactly where all the oil we need to meet expected demand will come from.

The chart shows that by 2030 world output of oil and other liquid fuels from current fields is expected to drop to 43 million barrels per day (mbpd), some 62 million barrels below projected demand of 105 mbpd. (Though prepared in 2009, the chart takes into account known projects expected to be producing by 2012.) This drop is consistent with the observed decline in the worldwide rate of production from existing fields of about 4 percent per year. Certainly, there will be more projects identified in the 18 years ahead. And, many people will say that we already have a large new resource of tight oil (often mistakenly referred to as shale oil) which can be extracted through hydraulic fracturing or fracking. But even if the optimists are correct--and there can be no guarantee that they will be--this source of oil will only add 3 to 4 million barrels of daily production. What Sweetnam's chart tells us is that we must find and bring into production the equivalent of five new Saudi Arabias between now and 2030 in order to meet expected demand even if the volume of tight oil reaches its maximum projected output. (The Saudis currently produce about 11.7 mbpd of oil and other liquids.) Because Sweetnam's chart is for total worldwide "liquid fuel supply," it's worth noting that in recent years something called natural gas plant liquids (NGPLs) have been included in world oil supply based on the assumption that these hydrocarbons are 100 percent interchangeable with oil. NGPLs are components of natural gas other than methane such as ethane,propane, butane, and pentane, and their production grew recently with the natural gas drilling boom in the United States. Only a small portion of NGPLs can directly substitute for oil, and ramping up production of that portion independently is impossible since it is mixed in the methane. But oil proper--defined as crude oil including lease condensate--continues to trace out a plateau in production that began in 2005.This makes the oil situation all the more concerning. It is true that rising and ultimately record high oil prices in the last decade have prompted oil companies to increase capital expenditures including those for exploration and drilling to their highest level ever. But, the vast effort


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represented by those expenditures has failed to boost true crude oil production definitively above the current bumpy plateau. Some will point to vast deposits of so-called oil shale in the American West and suggest that production from these can fill the gap in the coming years. But right now commercial production of oil from this source is exactly zero. And, current reserves are also exactly zero since reserves are defined as those underground resources that can be produced profitably at today's prices from known fields using existing technology. (For a more detailed discussion, see my recent piece on unconventional oil resources.) Perhaps most important is that Sweetnam's chart shows not how much oil we must discover, but the rate of flow we must achieve from any discoveries in order to match supply with projected consumption. Huge discoveries mean little if we cannot extract the oil profitably and at rates that are commensurate with our desired rate of consumption. With conventional oil in decline since 2006 according to the International Energy Agency, a consortium of 28 mostly importing nations, we will now be forced to rely increasingly on sources of unconventional oil such as the tar sands of Canada and the heavy oil of Venezuela, both of which are difficult and costly to extract and refine. So far the flows of unconventional oil have only just offset declines in the rate of production of the cheap, easy-to-get, free-flowing conventional oil which has powered modern civilization to date. The global economy is entirely dependent on continuous flows of energy and raw materials. Oil is absolutely central because it provides one-third of the world's energy and more than 80 percent of its transportation fuel. Unless oil production rises from here, global economic growth will eventually stall (if it hasn't already). With the EIA projecting oil production from oil shale of 140,000 barrels per day by 2030, we should not expect to close Sweetnam's deficit of 62 mbpd from this source. Even if the EIA is too pessimistic on oil production from oil shale by a factor of 10, such production would barely put a dent in the anticipated supply gap by 2030. It should be apparent that energy policy around the world is essentially based on the idea that Sweetnam's gap will be filled in time and comfortably. And yet, there can be no assurance of this. In fact, the ongoing plateau in the rate of world oil production in the face of record high prices ought to give us pause. If seven years of very high prices can only marginally move the rate of production of all liquids (which includes crude oil, natural gas plant liquids, biofuels, and refinery processing gains) up about 3.15 percent and if crude oil proper can only stay flat during the same period, how can we expect that the next seven years and the next seven after that will be filled with nothing but good news on supply? If the answer to this question is that technology will unlock new resources and overcome the declines in existing fields, keep this is mind. If that technology is not on the shelf and ready to deploy today, it will make almost no difference in the 18 years between now and 2030. For those who point to hydraulic fracturing as a recent technological breakthrough, they need to do a little research. Hydraulic fracturing was first used in 1947. More than 30 years later in the early 1980s, building on government research, George Mitchell and his company Mitchell Energy and


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Development began pursuing natural gas in deep shale deposits. It took Mitchell 20 years of experimentation, government help and government incentives to perfect the type of hydraulic fracturing which is now used to release both natural gas and oil from deep shales. It took another 10 years for his methods to be widely deployed by the oil and gas industry. So, here's the timeline on hydraulic fracturing. It took 60 years from the time the technique was first deployed until it was refined and widely adopted by the industry for the specific purpose of extracting natural gas and oil from deep shale deposits. Don't look for any new miracle technologies to make a significant difference in oil production between now and 2030 unless they are already in the field performing their magic today and have not yet been widely adopted. The effects of hydraulic fracturing on oil production are already in evidence. And, while the technique has allowed us to recover oil from previously inaccessible deposits, it has not allowed us to grow oil supplies worldwide as declines in production elsewhere have offset increases in production of oil from shale deposits (properly called tight oil). With high oil prices and the hottest new technique unable to move the needle on worldwide production of crude oil, we should look at Glen Sweetnam's chart with considerable concern. We should ask ourselves whether it is wise to base energy policy on the fantasies of industry and government forecasters. Perhaps we should focus instead on the trends and data we can verify and prepare ourselves and our economies for a world that may not have the copious amounts of oil that the industry is promising.

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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! Bering Exploration

Tamaska Oil & Gas

Natural Energy Resources

Oil & Gas

Bering Exploration look to generate industryleading shareholder value and returns by developing and executing their distinctive business strategies that are focused exclusively on exploring for and producing natural energy resources in the continental United States.

It is the Company's aim to maximize returns on funds invested. The Company will undertake investments that it sees as being able to generate significant commercial returns through strategic investments and acquisitions in the oil and gas sector, with an initial focus on North America.

Bering Exploration's OilVoice profile

Tamaska Oil & Gas’ OilVoice profile

Titan Energy Ltd.

Parallel Resource Partners, LLC

Oil & Gas Western Australian-based Titan Energy Ltd is a global oil and gas explorer with growing interests in Australia and the United States. Titan Energy's OilVoice profile

Petron Energy II, Inc. Oil & Gas Petron Energy II, Inc. is a Dallas-based, oil and gas exploration and production company. Petron Energy II, Inc.'s OilVoice profile

CWC Well Services Corp. Servicing

CWC Well Services Corp. is a premier well servicing company operating in the Western Canadian Sedimentary Basin with a complementary suite of oilfield services including service rigs, coil tubing, snubbing, and well testing. The Company's operational locations are in Grande Prairie, Red Deer, Lloydminster, Provost, Brooks, Alberta and Weyburn, Saskatchewan. CWC Well Services Corp.'s OilVoice profile

Oil & Gas Parallel Resource Partners, LLC utilizes its unique capabilities to invest in distress driven opportunities in the North American upstream oil and gas sector. Parallel Resource Partners, LLC (“Parallel”) is registered as an investment adviser with the SEC. Registration with the SEC as an investment adviser does not imply that Parallel or any principals or other persons associated with Parallel possess a particular level of skill or training in the investment advisory or any other business. Parallel Resource Partners' OilVoice profile

Teine Energy Oil & Gas Teine Energy Ltd. is a private Canadian oil and gas exploration and development company. Teine's focus is to find and develop high netback, large hydrocarbon in place properties within the Western Canadian Sedimentary Basin. Teine is one of the largest land owners in Central West Saskatchewan and is one of the most active drillers in the Saskatchewan Viking play. Teine Energy's OilVoice profile


Finding Opportunities in Southern Africa Reviewing the potential oil and gas industry in Southern Africa London, 09 Jan 2013 North Africa - are there any big fields still hiding? Will there be an 'exploration Spring?' to follow the political one? London, 12 Feb 2013 The next generation of exploration technologies Back to the future, returning to the onshore! London, 07 Mar 2013 Finding big oil fields offshore East Africa ..if there are any to be found! London, 09 Apr 2013 Finding big oil & gas fields in South East Asia The Politics may overwhelm the Geoscience! London, 14 May 2013


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The Montana Bakken oil play: 'Great news for a great play' Written by Keith Schaefer from Oil & Gas Investments Bulletin Activity in the huge Bakken field is going home. Home is Montana, where the Bakken was originally discovered. Drilling equipment and crews are moving back across the border from North Dakota—where the Bakken Boom has been the Biggest—boosting Montana’s rig count to 22 from just eight at this time last year. Montana’s Department of Natural Resources and Conservation issued a record 356 oil drilling permits in the first ten months of the year, easily beating the previous record of 313 set in 2005.

Note the declining rig count in North Dakota (blue line) contrasted with the rising count in Montana (red line). Thanks to the Federal Reserve Bank of Minneapolis for the figure. In October a Texas company paid $13.5 million for 75,000 acres of oil and gas leases, one of the largest federal lease acquisitions by a single company in Montana in recent years. Several other companies, including Bakken leader Continental, are working to expand the boundaries of the state’s most productive Bakken field, known as Elm Coulee. Investors often forget that the first successful horizontal well drilled into the Bakken was drilled into the Elm Coulee field in Montana, drilled by Lyco Energy Corp in


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2000. There were earlier wells, even horizontal ones, but this 2000 Lyco well is widely cited as the first successful one. (For more, check out this a cool timeline of the Bakken here: http://www.undeerc.org/bakken/pdfs/BakkenTimeline2.pdf) But geology doesn’t pay attention to state lines… and even though the Bakken boom started with a few good wells in Montana, attention shifted next door after operators decided the geology in North Dakota offered more potential. There is still an immense amount of oil in the Bakken, which means investors can still find ways to profit from this fantastic formation. But instead of coming late to the North Dakota Bakken party, where six years of profits have left slim pickings, a more savvy choice might be to check out the new scene next door.

BACKGROUND – WHY THE BAKKEN MOVED TO NORTH DAKOTA The Bakken is a 200,000-square mile rock unit within the even larger Williston Basin, an ancient inland sea that reaches from southern Saskatchewan to North Dakota and eastern Montana. The Bakken therefore touches four states and provinces, and in the early days of the Bakken boom – way back in 2006 – drilling was fairly evenly split between North Dakota and Montana. So why did North Dakotans get all the fun? Because of geology. The Bakken is generally divided into three stacked layers—Upper, Middle and Lower. The upper and lower layers are organic-rich black shales that gave birth to the formation’s oil. The industry calls those layers “source rocks”. The middle layer is made up of more porous rocks—which also means more holes and less pressure in those rocks—so the oil seeped away from those higher pressure, denser layers, looking to a more porous resting place. The industry calls that the reservoir. And the oil is stuck there in the middle Bakken reservoir.


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That’s why the Middle Bakken generates the best production volumes…and the Middle Bakken is thickest in North Dakota. In the early days of the Bakken boom, a couple high-volume wells tapped into the Middle Bakken drew almost all of the attention to North Dakota. ----“NO OIL LEFT BEHIND” Did you know that today’s primary oil recovery methods can leave up to 90% of a formation’s oil trapped in the ground? The industry calls this “stranded oil.” For oil producers, it can mean millions of dollars left on the table. Fortunately for them there’s now a technology that can actually produce all this stranded oil… quickly and effectively, with no environmental footprint. In fact it is proven to extend the field life – the lifeblood – of oil fields throughout the world… including today’s massive new shale formations. (This company’s patented technology is being used successfully by clients on 3 continents.) What’s more – with over 200,000 wells in the world that could (and should) use this technology, it could mean an absolute windfall for investors. Click here to get caught up on the whole story. ----Those few gushing wells in North Dakota sparked a land grab there. Then, because North Dakota requires mineral lease holders to explore their acreages within three years, companies with ground in North Dakota had to spend their money there. And so North Dakota became the Bakken boom ground, with a rig count that climbed from 25 in 2005 to 213 in mid-2012. Meanwhile Montana was largely forgotten, even though the heart of the formation extends across state lines. BAKKEN MOVING HOME TO MONTANA NOW Now that is starting to change. In recent months, the Montana Bakken has started to steal some of the spotlight. Helping the move is new data showing that geology may be less of an obstacle in Montana than originally thought. Remember, North Dakota produced those gushing Bakken wells because the primary reservoir layer, the Middle Bakken, is thickest within its portion of the Bakken. In Montana the middle layer is thinner, pinched by the Upper and Lower Bakken layers, and geologists thought a thin Middle Bakken would translate into poor recoveries and flow rates.


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But recently, several explorers have had success with wells that targeted the Upper Bakken. The wells don’t have the big initial flow rates as in North Dakota, but they declined more slowly and had a better oil-to-gas ratios (98% oil) than normal, Middle Bakken wells. The result is making geologists rethink the potential of the Upper Bakken – and therefore the potential of the entire Montana Bakken. A productive Upper Bakken is particularly significant in Elm Coulee, the bestproducing part of the Montana Bakken to date. In this area the Middle Bakken becomes very thin, pinched out by a broad Upper Bakken. The result is a world-class source rock – remember that the organic-rich Upper Bakken is the source rock for the formation’s oil – with no nearby reservoir. That means all the oil has remained in place. Colorado School of Mines professor Steve Sonnenberg pushed the potential of the Upper Bakken in a recent article, saying these results from the Upper Bakken represent “great news for a great play.” Jim Halverson, a geologist with the Montana Board of Oil and Gas, is cautiously optimistic about the potential for a Montana Bakken boom. “We’ve got lots of rigs, there’s lots of stuff going on right now,” he said in an interview. “And we’ve got a fair amount of development that’s targeting the upper shale.” However, Halverson is not letting himself get carried away with dreams of a major Montana Bakken boom. “Here in Montana we’re going to have the western edge of the Bakken,” he said. “That edge is going to be economic. We will have good wells, then less good wells, then wells that are uneconomic – the price of oil is going to be critical.” That being said, Halverson also spoke to the possibility that drills might hit into something unexpected – and exciting. Sometimes drills “…find things you weren’t looking for, so just getting more wells drilled here is a good thing. Maybe a year from now we’ll all be doing something we never thought we were going to be doing.”

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The global antifracking movement: What it wants, how it operates and what's next Written by Jonathan Wood from Control Risks Unconventional natural gas is often described as game-changing and transformative, a revolution heralding a golden age of cheap, plentiful energy for a resourceconstrained world. But only if it makes it out of the ground. As shown by local bans in the US and Canada, national moratoriums in France and Bulgaria, and tighter regulation in Australia and the UK, the global anti-fracking movement has mounted an effective campaign against the extraction of unconventional gas through hydraulic fracturing. Meanwhile, the oil and gas industry has largely failed to appreciate social and political risks, and has repeatedly been caught off guard by the sophistication, speed and influence of anti-fracking activists. What the anti-fracking movement wants The anti-fracking movement wants four main things. First, it wants a better deal in terms of economic opportunity, taxation, and compensation. Moves by some local governments to extract 'impact fees' fall into this camp. Second, anti-fracking activists want further study of the environmental, economic and health and safety impacts of intensive unconventional gas development, partly to inform regulatory and tax policies but also as a stalling tactic to impede the industry's expansion. Third, some strongly opposed to the industry - whether on water quality or climate protection grounds - want moratoriums and outright bans on drilling activity. Finally, and most commonly, the anti-fracking movement wants tighter regulation of


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unconventional gas development. From Pennsylvania to Poland, oil and gas regulation is being updated to address issues raised by hydraulic fracturing and increase environmental controls. How the anti-fracking movement operates The movement's grassroots foundation is reflected in the hundreds of communitybased anti-fracking groups that have emerged worldwide. Environmental groups have played a key role in subsequently organising and professionalising grassroots activists, especially in North America and Western Europe. The anti-fracking movement is particularly adept at organising online campaigns through social media. The extensive use of free or low-cost online platforms such as Wordpress and Facebook has both facilitated grassroots participation and increased organisational efficiency. Online communications also enable a further pillar of the anti-fracking movement: global networking. This occurs through peer-to-peer activist networks, international environmental NGO campaigns, and shared ideological and political frameworks. Some activists and groups also believe direct action against the industry is necessary. Direct action is intended to draw media attention to the anti-fracking movement, motivate the anti-fracking opposition, and physically disrupt operations. Project site blockades, in particular, have emerged as a favoured low-cost, highimpact tactic. What's next for the anti-fracking movement 2012 is likely to set the high-water mark for the anti-fracking movement. Regulatory reviews concluded in key battlegrounds have set the tone for stricter long-term management of the unconventional gas industry, technological innovations are reducing environmental impacts, and the anti-fracking movement itself is grappling with the consequences of its successes. How will the movement adapt? First, it will seek out new geographies outside North America and Europe where unconventional gas development is just beginning. The movement may be able to tap into existing indigenous rights, labour, water and environmental concerns in Argentina, India, Mexico and Ukraine, to name a few prospective countries. The anti-fracking movement has also started to engage a wider set of policy issues related to energy and the environment. Partly, this is a natural outcome of its close organisational and ideological links to the climate change movement. But it also reflects a perceived need to maintain momentum and block attempts to roll back regulation of the industry. Finally, parts of the movement could radicalise in response to both internal fragmentation and the spread of the industry. As with the conventional oil and gas, coal, nuclear, timber and other sectors, this could make unconventional oil and gas a target of more radical direct action.


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How should the industry respond? Parts of the anti-fracking movement will never be reconciled to fossil fuel extraction, whether through hydraulic fracturing or conventional drilling. But the industry can take steps to offset social and political opposition, both now and in the future. First and foremost, the industry needs to acknowledge the legitimacy of local grievances. Movements towards greater transparency and voluntary disclosure, however grudging, are a positive step in this direction. Second, the industry needs a broad-spectrum political and social engagement strategy. This means laying stable - even if expensive - groundwork with local communities, especially in terms of mechanisms to register and redress grievances. Third, the industry needs to continue to make good faith efforts to reduce adverse impacts in terms of water pollution, health and safety, noise, erosion, road damage and so on. Finally, the industry should create more winners by widely distributing the direct benefits of gas development. For most communities, this means procuring as much as possible locally, providing jobs and training to local workers, paying required taxes, and - crucially - making long-term investments that deliver a sustained economic boost.

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Why world coal consumption keeps rising; What economists missed Written by Gail Tverberg from Our Finite World A primary reason why coal consumption is rising is because of increased international trade, starting when the World Trade Organization was formed in 1995, and greatly ramping up when China was added in December 2001. Figure 1 shows world fossil fuel extraction for the three fossil fuels. A person can see a sharp “bend” in the coal line, immediately after China was added to the World Trade Organization. China’s data also shows a sharp increase in coal use at that time. Figure 1. World fossil fuel supply based on world production data from BP’s 2012 Statistical Review of World Energy.

China and many other Asian countries had not previously industrialized. The advent of international trade gave them opportunities to make and sell goods below the cost of other countries. In order to do this, they needed fuel, however. The fuel the West had used when it industrialized was coal. Coal had many advantages for a newly industrialized countries: it often can be extracted without advanced technology; it is relatively cheap to extract; and it is often available locally. It can be used to make many of the basic items used by industrialized countries, including steel, concrete, and electricity. The industrialization of Asian countries was pushed along by many forces. Companies in the West were eager to have a way to make goods cheaper. Buyers were happy with lower prices. Even the Kyoto Protocol tended to push international trade along. This document made it clear that countries signing the document wouldn’t be in the market for coal. From the point of the developing countries, this would help hold coal prices down (at least in the export market). It also likely meant a better long-term supply of coal for developing countries. The Kyoto Protocol offered no penalties for exporting products made with coal, so it put countries that used coal


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to make products for export in a better competitive position. This was especially the case if Kyoto Protocol countries used carbon taxes to make their own products higher priced. Apart from the international trade /industrialization issue, there is another issue that is helping to keep coal consumption rising. It is the fact that oil supply is in short supply and high priced, and this means that economies of countries that disproportionately use a lot of oil in their economies are at a competitive disadvantage. Countries coming “late to the party” are in a good position to develop their economies using little oil and much coal, and thus keep overall energy costs down. This approach gives the developing countries a competitive advantage over the developed countries. Let’s look at a few graphs. In terms of oil leverage (total energy consumed /oil energy consumed), China and India come out way ahead of several other selected country groups. They do this with their heavy use of coal. Figure 2. Ratio of total energy consumed to oil (including biofuels) consumed, based on BP’s 2012 Statistical Review of World Energy.

Based on Figure 3, below, the GDP of countries with a lot of coal in their mix seems to grow more quickly than other countries. Figure 3. 2009-2011 Average Real GDP % Growth, Based on USDA International Macroeconomic Data Sets. World GDP reflects 2005$ weighting.

In recent years, oil has been the most expensive of fossil fuels. Thus, a country that uses mostly oil will, on average, have higher energy costs than a country that can dilute out its oil use with the use of cheaper fuels. Figure 4 below shows average oil, natural gas, and coal prices for some representative categories of these fuels.


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Figure 4. Price per barrel of oil equivalent, based on World Bank data for the period Jan.Nov. 2012. All prices have been converted to a barrel of oil equivalent basis.

Among the types of fuels shown, oil is the highest-priced. The coal price is much lower, especially if it is locally produced. If it is transported long-distance, the cost of transport will add to its price. Natural gas prices vary around the world, but tend to be between coal and oil prices.1 It is not possible to know exactly what the average fuel price of each country group shown on Figure 2 and 3 is, but we can make a rough approximation using the average prices shown in Figure 4. Such an approximation is shown in Figure 5. Figure 5. Rough estimate of average cost per barrel of oil equivalent for the various countries and groups shown, based on distribution of fuels used, from BP Statistical Review of World Energy, and prices from Figure 4.

A person can see from Figure 5 that the average cost of fossil fuel energy is higher for the countries at the top of the chart, and lower for those near the bottom of the chart. There are various adjustments that might be made, such as adding the effect of carbon taxes on fossil fuel to the costs for European countries, and adjusting for the low value of the Euro recently. Both of these would tend to raise the average cost of fossil fuels for European countries. Also, the world average fuel cost is probably overstated in Figure 5. In my list of country groups analyzed, I purposely excluded major oil exporters, such as Saudi Arabia, since these can be expected to behave differently than other countries. Quite a few of these exporters can afford to subsidize oil costs for their own people and for manufacturing within their countries, because their actual oil extraction costs are lower than the world oil price. If we were to adjust for this, the world average fuel price in Figure 5 would probably be reduced. The Figure 5 averages include only fossil fuels (coal, oil, and natural gas), and exclude other fuels such as nuclear, hydroelectric, wind, and solar PV. Fossil fuels represent 92%-93% of energy supply in China and India, based on BP Statistical Review of World Energy data. In Europe, fossil fuels represent 79% of total fuels; in


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the US and Japan, they represent 86% to 87% of the total. A Look at How Fuel Consumption Is Actually Changing Oil consumption is decreasing in the countries with relatively slow GDP growth, and increasing in India and China: Figure 6. Percentage growth in oil consumption between 2006 and 2011, based on BP’s 2012 Statistical Review of World Energy.

I would interpret this to mean that as the weaker economies (which tend to use a higher proportion of oil in their energy mix) are priced out of the market, more of the oil is going to the countries that can leverage its use better. Unfortunately, a barrel of oil saved by Europe, the US, or Japan, means another barrel that can stay on the world market and be used by China, India, and other developing countries with better leveraging. A barrel used in the developed world would “only” be leveraged up by other fuels by roughly a factor of 2.0 to 2.75, and some of this leveraging would be hydroelectric or nuclear electric, which is fairly benign from a carbon dioxide point of view. If that same barrel of oil is instead used by China, it can be leveraged up by a factor of 5.7. Thus a barrel of oil saved by the developed world can be transferred to China and used to greater positive effect, from the point of view of producing cheap consumer products and a greater negative impact, from the point of view of CO2 impact. What did Economists Miss? Unfortunately, the list is rather long. 1. The most basic issue economist missed is that energy is required to make goods and services. If production of a product is transferred to another country, that country will need energy supplies–probably cheap, easy to extract, energy supplies–to make that product. It doesn’t make much sense to look at fossil fuel consumption, stopping at a country’s own borders. If we want products to be made in an environmentally sound way, and we want our own citizens to be employed, we need to make them at home, and figure out a better way of counting CO2 production. 2. World oil supply is constrained. This means that even with additional demand, oil supply can’t rise very much. Additional demand doesn’t do much more than raise price. A reduction of demand, within a range, simply reduces price, without really reducing production. Beyond a point, a reduction in demand does temporarily reduce


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both price and production, as it did in 2008. But demand is likely to quickly bounce back, leading to another price spike, and further constrained supply. Standard economic models seem to assume this situation can’t exist. 3. In a situation of constrained oil supply, if a country reduces its oil consumption, it doesn’t mean that more oil will be left in the ground. Instead, the oil saved goes back on the world oil market (perhaps at a slightly lower price) and is bought by someone else who can make better use of it. 4. The mix of types of energy used by a country changes very gradually over time, because it is very difficult to substitute one kind of fuel for another without significant investment (for example, modifying cars to use natural gas and building pipelines for the natural gas). In general, for the short term, the mix is fixed. For example, in Figure 7 below, the world oil leverage remained constant in the period prior to 2000. It then gradually increased, as oil prices rose. There was no big change when the 2008-2009 recession hit. A drop in oil consumption tended to lead to a drop in electricity consumption as well, and a drop in fuel use of all kinds. Figure 7. World oil price (Brent) in 2011$ from BP’s 2012 Statistical Review of World Energy and Leverage based on ratio of total fuel consumption to oil consumption from the same report.

I have written about this issue in my post, How Is an Oil Shortage Like a Missing Cup of Flour? In that post, I pointed out that to the extent proportions are fixed by built infrastructure, if there is a shortage (or excessively high price) of one necessary input (oil in the case of the economy; flour in the case of a batch of cookies), it is necessary to make a smaller batch. In the case of an economy, a smaller batch looks like a recession, with lower oil use, lower electricity use, and lower employment. This same pattern of all three types of fuel use dropping simultaneously can also be seen when viewing recent changes in world oil, coal, and natural gas supply, in Figure 1 at the top of this post. 5. If an economy such as China is not growing as fast as it might otherwise grow because of constrained oil supply, the availability of additional oil on the market because of the Developed Countries cutting back in their use may help China’s economy grow. In fact, China is likely to be able to use the additional oil (as for truck transport) to make it possible to make more goods using coal. Thus, the savings in oil may theoretically lead to increase in coal consumption, on a world basis. 6. The statement is often made that once oil prices rise high enough, renewables will become competitive. This statement is made with blinders on, in a world market for


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goods and services. What matters in a world market is the lowest total cost of production. Most renewables aren’t even oil substitutes; they are coal or natural gas substitutes, and these are cheaper. Anything that raises the average energy cost of a country relative to other countries makes it less competitive. When a country less competitive, it tends to use less oil. The extra oil tends to go to a more competitive country, and may help raise coal usage. Obviously wages make a difference, too, but a country that uses cheap fuels can pay their workers less, and still provide an acceptable standard of living. 7. There are two ways of reducing fossil fuel use that might be effective, but probably would not be well received. One is to cut back on international trade, perhaps by reintroducing taxes on trade. This would reduce fossil fuel usage, because many goods cannot be made without imported raw materials from elsewhere. Another method that would work is to tax (or forbid) fossil fuel extraction in your own country. This would make your country poorer, and less able to buy imports (such as oil and gas) on the world market. 8. I talked about what seems to be the effect of China’s competition on US jobs in another post. It would have been good if economists had foreseen this kind of impact before wholeheartedly endorsing the expansion of world trade. 9. It has recently been pointed out to me by a reader that the way China’s economy works, businesses can earn a lower rate of return than Western countries, and still provide an acceptable profit level, given the way Chinese government interacts with businesses. This gives China another competitive advantage, besides low fuel prices and low wages. See Rise of the FerroDollar. Note: [1] In the United States, natural gas prices are currently below the cost of production for many producers because of oversupply. This is not a sustainable situation; one possibility is that some natural gas producers will leave the market, US natural gas supply will drop with fewer producers, and US prices will rise.

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AIM Oil & Gas - 2013 likely to kick off takeover activity Written by Richard Jennings from Spreadbet Magazine This year has been mixed for some sectors of the equity arena, even though at the headline level the likes of the S&P 500 are actually substantially higher YTD. The first few months were great for the bulls but then everything turned negative as economic fears in China, Europe and even the U.S. weighed on investors’ minds, and prompted them to search out safe havens as detailed in our bond bubble blog here - http://www.spreadbetmagazine.com/blog/bonds-bubble-over-for-now.html. SBM has been searching for value inside the market in recent months and looking for the most undervalued assets which may be able to deliver a hefty return into 2013. One of the sectors we have alighted upon aside from Japan, China and the Mining arena is the Oil & Gas sector. Our magazine issues in February and September looked deeply into the Falkland Islands stocks prospects and and also some undervalued gems that we think have positive risk:reward potential within the AIM Oil & Gas sector. It is now time to take another look at this battered sector and try to assess the path it will follow next year… The Financial Meltdown In May 2008, the AIM Oil & Gas sector was hovering around 6,100. Yup, that’s no error - 6,100! It was valued at almost two times what it currently is. In just a few months between May 2008 and March 2009, the sector lost three-quarters of its value and traded below 1,600 for some time. With a financial crisis threatening the whole world economy, demand for oil was significantly cut and thus oil prices came down from a high above $140 to hover around $40. In such an environment there was no hiding for illiquid, high risk AIM Oil & Gas plays and many stocks were truly decimated. With the recovery of the U.S. economy, the oil sector also recovered and the AIM Oil & Gas index hit 5,500 at the beginning of last year but suddenly dropped again in the mess that was 2011 in geo-political terms. Conflicts in the MENA region and the earthquake in Japan did push oil prices up for a while but the debt ceiling debacle in the U.S. and consequent downgrade in the credit rating of the country led to a massive selloff in equities in August and similar declines in commodities. As a result, from 5,500 registered in the opening months of 2011, the AIM Oil & Gas sector retreated 38% and closed the year at 3,419. Unfortunately, 2012 has not been much better than 2011 for the sector. Again, it


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started with some strength rising to 5,000 in February but then dropped again and currently trades around 3,342, a drop of 2.25% YTD.

China’s economic slowdown, the U.S. economy growing at less than desired by the Fed, several downgrades to the World’s growth prospects, the Japan-China crisis, European sovereign yields rising…these are just some of the reasons why oil has struggled to rise this year. Brent crude managed to rise 2% so far but its Light Sweet counterpart is down 10% - an opportunity we have touched upon previously with regards to the oil spread widening and offering an opportunity in the mid $20’s differential range to short Brent and buy Nymex. The AIM Oil Companies With the oil price off its peak, the actual costs of exploring and drilling still have become more expensive for the smaller companies that make up the the AIM sector. This is putting lethal pressure on some of those companies as they try to raise cash in an increasingly difficult environment and, as is illustrated so aptly in the case of the Falkland Islands stocks. At $200 a barrel, hell I would even try and dig in my own backyard and try my luck but with the current oil price being under pressure, some projects may in fact need to be abandoned given the exploration costs. This is likely however to kick of a spate of farm-ins or takeovers - the real question is choosing those companies where they are not, excuse the pun, literally “over a barrel” and need to give the assets away at the detriment of current shareholders - this in fact is the questions hanging over what are extremely undervalued companies like BOR, XEL & BLVN. Management know the stock is worth more but they don’t have the muscle to raise cash on attractive terms, hence the discounts languish… Adding to the pressure from current moribund oil prices and some drilling disappointments, we must also consider the effects of the debt crunch. At a time when banks are deleveraging just where can these small companies get the funds they need? That’s a question many Oily CEO’s would love to see answered and as they have been out to their & their shareholders cost in recent months. Sentiment is battered down and it will take some time to recover. The Future With the fiscal cliff problem currently remaining on the table, oil prices will likely continue to go sideways for the near terms. If there is a resolution however in the very near future then get set for an explosive Christmas rally. We suspect that this type of “risk-on” catalyst is required in order to pull the AIM oilies off their oversold floors and historically the days over the Xmas period have delivered some exceptional returns to stock holders in these companies. At current prices, and as has been referred to many times by us here at SBM, a lot of


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the AIM Oil & Gas sector are prime takeover targets. The next year will see improved economic conditions in Europe and the U.S. and the fiscal cliff will (hopefully) be a distant memory. With renewed momentum in the global recovery, oil prices will kick in, and so most likely will oil share prices. For now we leave you with some data from the AIM Oil & Gas Sector for you to take a look. Don’t forget to also take a look at our picks in the September edition of our Magazine (http://issuu.com/spreadbetmagazine/ docs/spreadbet-magazine-v8_generic p. 35). During 2013 we think Ithaca, Bowleven, Xcite, Gulfsands and Borders & Southern will most lilkely attract predatory attention.

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Argentina and protectionism: Shooting itself in the foot Written by Richard Ethrington from Finding Petroleum President Cristina Fernandez de Kirchner's administration simply cannot help itself. And if Buenos Aires continues to meddle in the oil industry in the manner to which it has become accustom over recent months then nobody else will be willing to help it


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either. First came the expropriation of former state oil company YPF back in April 2012. The government made the decision to re-nationalise the industry giant in an attempt to arrest the South American nation's deteriorating energy trade balance. The finger of blame had long been pointing at Spanish major Repsol, the majority stakeholder in YPF for over a decade, for what Buenos Aires perceived to be a sustained lack of investment in the sector that as a consequence had turned the nation from net exporter to net importer. To the contrary, the evidence suggests that such claims were ill founded, however. Indeed, under Repsol's control, YPF invested a record US$3.2 billion in 2011 and had planned to increase that figure in 2012. What is more only two months earlier, Repsol YPF had upped its estimate for the shale oil and gas it found in Argentina to nearly 23 billion barrels, which would be enough to double the country's output in a decade. But the Spanish company said it would cost US$25 billion a year to develop, and in the process rubbed Fernandez up the wrong way by warning that Argentina would need to overhaul its energy policy to attract the necessary investment to implement such a programme. Reluctant to be dictated to - or be willing to let the facts get in the way of a good expropriation - Buenos Aires sanctioned the grab of YPF from Repsol's hands. The move, which was met by popular nationalist support at the time, served to score Fernandez a few cheap political points in the process too. So with YPF now re-nationalised, the plan for the government was simple: reverse falling oil and gas production levels in proven reserves by getting YPF back on its feet. An announcement from Buenos Aires that that the company would be investing US$3.5 billion into the energy sector before the end of 2012, and US$7 billion per year from 2013 to 2017 in an attempt to boost production by as much as 35% came soon after. This would be financed by cash from the company's revenue stream, debt issues and strategic partnerships with overseas players. One problem with this plan, however, was that all three of these cash sources remain subject to a number of conditions, and unfavourable ones at that. YPF's average profit of US$1.5 billion per annum represents nothing more than a drop in the ocean for the level of investment required; Argentina's creditworthiness is being hurt by the government's rising determination to protect scarce dollar reserves; and a growing number of overseas firms will be thinking twice about investing in the country after the way YPF was unfairly extracted from Repsol. Beyond protectionism, additional challenges for foreign companies looking to operate in the South American nation include artificial oil and gas prices, currency controls and import restrictions. What is more, such a basket of headwinds would likely serve to prevent the very sort of high-tech exploration and production companies that Argentina is attempting to attract from going about their normal business - at least in a profitable way anyway. Fear not, the Argentine government has one overseas player in the form of US oil group Chevron that it can rely on for investment though, right? Well that certainly appeared to be the case until the Argentine courts decided to thrown the country into the middle of a bitter dispute between the firm and the government of Ecuador. In solidarity with its South American ally, an Argentine judge ordered that Chevron's assets, which total around US$19bn in Argentina alone, be frozen until the firm pays damages to Ecuador for environmental damages caused by Texaco (which was


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acquired by Chevron in 2001) during its time operating in the county. Unsurprisingly, the firm has both denounced the Ecuadorean court's charges under the Inter-American Convention on the Execution of Preventive Measures as fraudulent, and the freezing of its assets by Argentina as without legal merit. Given the firm's strong presence in Argentina, producing around 26,000 barrels of crude and 4 million cubic feet of natural gas daily, Chevron already has all credentials to become a key investor in the YPF project over the coming years. However, recent events put that potential role, and even more directly the agreement made only months earlier between Chevron and YPF (the first with an overseas player since the firm's expropriation) to jointly develop the country's vast Vaca Muerta shale reserves, at risk. Argentina's proven shale reserves currently rank as the world's third largest, behind those in China and the US. What seemed like a worthwhile and calculated risk at the time is quickly turning sour for Chevron. In the long-term, the news is potentially more harmful to YPF, however, as it is highly unlikely that it will be able to exploit its shale resources alone. So with Chevron still in the dock in Argentine courts, where can the Fernandez administration go for help now? With its back edging ever close to the wall, the Argentine government saw no option but to turn to another traditional source of funds to bankroll YPF's ambitious investment plans; price hikes. The state looks set to grant approval to YPF to more than double the price of natural gas, with the increase in prices expected to begin before the end of the year. According to Deputy Economy Minister Axel Kicillof, the average price that producers get from the government could reach US$5.50 per million British thermal units (MMBtu) from the existing US$2.50MMBtu. Whether this policy will pass, however, remains to be seen.

View more quality content from Finding Petroleum


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Venezuela: Six more years of decline under Chavez Written by Richard Ethrington from Finding Petroleum Same, same and very little different. After Hugo Chavez's recent re-election victory in Venezuela the global oil industry knows only too well what to expect from his next six years in power. Chavez's October 7 2012 Presidential election victory over contender Henrique Capriles with more than 54% of the vote hailed a continuation of the strategy which has come to characterise the President's first fourteen years in office. Lead by the highly-politicised vehicle of state oil firm Petr贸leos de Venezuela (otherwise known as PDVSA), the Chavez administration is expected to continue cutting discounted supply deals with allies within its sphere of influence, pushing away potential investors by expropriating further oil fields and ultimately mortgaging away its future oil production for financing right now, much of which has thus-far been put towards the government's impressively ambitious social agenda. To-date, Chavez's agenda has failed to help the South American nation live up to its full potential. In fact, it has not even come close. Instead things have gone from bad to worse with the Venezuelan oil industry now experiencing (a) rapidly declining production levels, which have slumped by as much as 26% under Chavez's tenor; (b) falling operation standards, which have in turn caused a string of deadly accidents in recent years; and (c) stifled levels of inbound overseas investment at a time when it is becoming increasingly needed by the domestic oil industry. Chavez may have inked deals with the likes of Brazil's state producer Petrobras and Argentina's counterpart YPF in recent times, but his actions have scared off many a major international oil producer. Indeed, PDVSA's move to take over the oil fields in the Orinoco belt where many of the country's vast reserves are located, saw the likes of Exxon Mobil, Chevron and ConocoPhillips all pushed out of the way. While some international oilfield services firms such as Halliburton and Schlumberger have opted to continue operating in the country despite the risk of further intervention from Caracas, PDVSA has proven that its capacity to increase production on its own is quite limited. To be sure, Venezuelan production forecasts make for increasingly grim reading with the consensus seeing oil production levels falling well short of the government's 2012 year-end target of 3.5 million barrels per day (bpd). According to Venezuela's oil minister Rafael Ramirez, average output has ranged between 3 million and 3.1 million bpd so far this year. However, thanks to the country terminating the publishing of independently certified data back in March 2011, a more precise figure of the country's oil output remains elusive.


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But things could be so very different for the oil-rich South American nation. In fact, all the foundations are already in place for Venezuela to stem the rot and turn-around its ongoing decline in the OPEC rankings. First off, Venezuela is not only one of the largest producers in the world but it also boasts the biggest crude reserves in the world. In addition it is also the fourth biggest supplier of petroleum to the oil-hungry US market, behind only Canada, Mexico, and Saudi Arabia, with an 8.3% share. In 2011, Venezuela exported around 350 million barrels to the North American nation, which equates to around 40% of its total output - according to Energy Information Administration (EIA). Despite his incessant anti-American rhetoric, Chavez's most important business partner has long been the US. Instead of reinvesting the wealth from this profitable relationship, however, Chavez has instead chosen to put the money towards social measures and massive subsidy programmes, with oil being sold to Venezuela's neighbours at discounted prices. But this cannot go on forever. Bank of America has already forecast that Caracas will run out of off-budget fund deposits by the end of 2013 if oil prices keep steady, or sooner still if crude continues to decline. The once full coffers will soon be empty. And if not oil, then Venezuela appears to have no other way of filling them: EIA data shows that the industry brings in as much as 95% of the OPEC nation's revenue. While the outlook is certainly gloomy and warrants the raising of a few red flags, this is no doomsday forecast for the Venezuelan oil industry. In fact it is far from it. While the fears are growing that six more years of Chavez in power could potentially push production levels lower still, the country's long-term potential is undeniable. This view has only strengthened further since the country's active rig count rose to a record high of 373, providing the framework for a sustained increase in production levels over time. And investors around the world know this only too well. With global demand set to increase, thanks largely in part to a growing global population, and oil prices predicted to continue rising, interested parties are never going to be too far away - despite the catalogue of risks involved. In the meantime while a number of Western international oil companies opt to keep their distance and to wait on the sidelines until the business environment turns about-face, it looks likely that Venezuela will be forced to rely increasingly on investment from industry players in Asia, India and Russia to help boost production levels. Over time this could provide a shift in the orientation of Venezuela's key export destinations. To be sure, we may be seeing the start of a gradual transition in Venezuela as it attempts to arrest falling production figures and move itself away from a reliance on exports to the US market. But in the near-to-medium term, the future of Venezuela's oil industry looks almost certain to remain characterised by continued underinvestment - due to the preferential oil deals it is tied up in - that will only serve to mute the country's long-term production potential.

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OilVoice Magazine | JANUARY 2013

Previous long-term government, industry oil forecasts badly overestimated supply; why should we listen now? Written by Kurt Cobb from Resource Insights [I]f you're still operating under the assumption that the earth's petroleum--or at least the cheap stuff--is about to run out, you're not going to thrive in the new oil era. Technology is making it possible to find, produce, and refine oil so efficiently that its supply, at least for practical purposes, is basically unlimited. --Businessweek, December 14, 1998 The writer of the above sentences was reacting to oil prices hovering around $11 a barrel. He could not have known then that we were about to embark on a bull market that would take oil to its highest price ever--even adjusted for inflation--just 10 years later. And so, after oil's run, it's all the more astonishing that as Brent Crude--now the true worldwide benchmark price--stands above $100 a barrel, we are hearing a similar message about the future of oil both from official agencies and the oil industry. The reverence accorded each new forecast of future energy supplies from international and government agencies and from major oil companies seems to go far beyond that accorded to the oracle of Delphi in ancient Greece. That oracle's record may be lost in the mists of time, but we can check the record for these modern energy oracles. The U.S. Energy Information Administration (the statistical arm of the U.S. Department of Energy), the Paris-based International Energy Agency (a consortium of 28 countries), the National Intelligence Council (an advisory body to the U.S. Director of National Intelligence) and the oil giant ExxonMobil, all regularly release long-term forecasts for world energy supplies. The last three have released their latest forecasts this fall. The U.S. EIA updated its world projections in 2011. Looking back at forecasts made in the year 2000 by the U.S. EIA, the IEA, and the NIC, it becomes obvious that drawing an upward line on a chart does not make an oil forecast magically come true. All were considerably off the mark. ExxonMobil's


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oldest forecast available online dates back to 2006. It, too, has proved wide of the mark. First, let's see by how much each forecast missed. Reports issued in the year 2000 by the U.S. EIA and the IEA contained similar projections. The U.S. EIA forecast that total world liquid fuel supplies would reach 93.2 million barrels per day (mbpd) in 2010. The IEA forecast 95.8 mbpd. Though the NIC report did not provide an explicit forecast for 2010, the implied forecast was around 92 mbpd. All those numbers include not only crude oil and lease condensate which constitute the proper definition of oil, but also natural gas plant liquids (only a fraction of which can be substituted for oil) and refinery processing gain (which is the result of applying energy to break oil into its components, causing the final volume to expand). We can now check those numbers. Actual total worldwide liquid fuel production for 2010 was 87.1 mbpd. All three groups overestimated production by a considerable margin. This helps to explain the colossal miss on prices. The U.S. EIA report included a price projection for crude oil of about $28 a barrel for 2010 (adjusted for inflation). The actual average price for oil traded on the New York Mercantile Exchange in 2010 was $79.61. The 2000 IEA report forecast an inflation-adjusted price for oil in 2010 only 25 cents higher than the U.S. EIA forecast. The NIC report did not provide an explicit price forecast for oil, but did say this: "Meeting the increase in demand for energy will pose neither a major supply challenge nor lead to substantial price increases in real terms." All three groups failed to anticipate the plateau in worldwide crude production that began in 2005. All failed to gauge properly the pace of growth in oil demand in Asia, particularly China and India, which put upward pressure on prices. Of course, it's easy to pick apart long-term forecasts when the actual data become available. But, the point here is not that the forecasts were wrong, but that they were all wrong in the same direction, namely, overestimating actual production. Taking an average of all three would still have resulted in a substantial overestimate. That's a serious concern because the forecasts provided by these groups are used worldwide for government and corporate planning and policy purposes. They are extremely influential. And, yet experience should have taught us by now that long-term energy forecasts by anyone--even people whose job it is to study energy markets and supplies--are a poor guide to policy and planning. There is a basic asymmetry in the effects of energy supply forecasts. If an oil production forecast promises a business-as-usual future (i.e., continually growing production) as all three forecasts mentioned above did and that forecast turns out to be too low, the mistake is benign for most people. Extra supply means lower prices and therefore more money available for other things. If, however, such a forecast turns out to be too high, the consequences can be severe because the global system we now have is acutely sensitive to changes in the price and supply of energy, especially oil. We have seen just how sensitive it can be as we've watch oil prices reach historic highs in the last decade and remain high. Negative supply surprises have the potential to undermine the very stability of our global system, and the only way to prevent that is to prepare for scenarios that these official reports refuse to contemplate. Now keep in mind that the comparisons made here between forecast and actual


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production and prices are for a 10-year period. The latest U.S. EIA and IEA world forecasts extend out 23 years to 2035. The newest NIC forecast purports to know the state of the world in 2030. The accuracy of any forecast deteriorates rapidly the further it goes into the future, and these forecasts go out about twice as far. We are taking many more times the risk if we rely on them. This is because energy transitions can take up to 50 years. Waiting until the last minute to begin the inevitable transition away from fossil fuels could cause terrible discontinuity and possibly disaster. Imagine how different government energy policy and corporate planning would have been had all three forecasting groups predicted in 2000 that oil prices would rise above $100 a barrel by late in the decade. Imagine if all three groups had predicted a plateau in the worldwide rate of production of crude oil proper (defined as crude oil including lease condensate) starting in 2005. Imagine further if all three groups had predicted that global net exports of petroleum liquids--the petroleum fuels available for import by such importers as the United States, China, India, Japan and most of Europe--were going to decline consistently starting in 2006, leading to intense competition for supplies among importing nations. There were voices warning that such things might happen. But the entrenched institutional prejudices in all three groups prevented them from contemplating these outcomes. So deep are those prejudices that none of the three seems yet to have picked up on the issue of shrinking global net exports even though it is now clear in the data. Of course, it is safer to be wrong when the vast majority are wrong with you. That way you can say, "Nobody could have seen it coming." As the realities of constrained worldwide oil supply have become apparent, all three groups have gradually lowered their long-term oil supply forecasts. But, all three continue to believe that supply will be there to match projected demand, a dubious assumption given the experience of the last decade. It's true that forecasts can miss by being too pessimistic as well. None of the three groups foresaw the shale gas phenomenon back in 2000. It was assumed that North America would be importing a considerable amount of liquefied natural gas (LNG) by now as domestic supplies declined. Having missed the rise in gas production, it is possible that all three groups are now simply following the trend and projecting it forward with little skepticism--much as they did for oil in 2000. One thing they all seem to be missing is that production of large amounts of shale gas will depend on much higher prices as drillers move from the easy-to-get gas-which is currently flooding the North American market at prices that are below the cost of production--to the difficult-to-get gas that will flow at slower rates and be much more costly to extract. They also seem to be missing the fact that high decline rates for such wells mean that rig counts and infrastructure will have to expand almost geometrically to keep supplies growing. That expansion will hit a wall at some point when the price of natural gas rises to reflect this reality and forces some consumers to cut back on natural gas use. Already U.S. natural gas production has been essentially flat since December 2011 as prices have vaulted from multiyear lows. This comes after years of persistent growth in supplies from the low seen after Hurricane Katrina in 2005.


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Because ExxonMobil has recently released its 2013 Outlook for Energy with projections to 2040, I had hoped to find the company's report from 2000. The oldest I could find came in the form of a slide show from 2006. Even at this late date, ExxonMobil's forecast was predicting consistent, uninterrupted growth in the worldwide production of crude oil proper and assuming that North America would need considerable LNG imports in the coming decade. The report shows that the conventional wisdom remained intact well into the period when underlying events made them no longer tenable. ExxonMobil's latest report, not surprisingly, concludes that fossil fuels will continue to provide the bulk of the world's energy well into the future and that there will be plenty of them. With the media repeating what will inevitably turn out to be a flawed forecast, they are forgetting to point out the obvious. The company has an interest in convincing consumers and shareholders that oil and natural gas will be the dominant fuels of this century--which is all the more reason to be skeptical about the company's projections. When the U.S. EIA, the IEA and the NIC made their long-term forecasts in 2000, supposed game-changing technology was going to make it possible to extract oil in the Arctic and in deepwater "at improbably low costs." The NIC even prophesied that natural gas from methane hydrates, essentially methane trapped inside ice crystals in the deep ocean, would become an increasing part of the natural gas supply. No commercial production of methane from methane hydrates has so far taken place. And, with regard to oil, even though prices have risen from an average $30.26 in 2000 to an average of $94.60 this year on the New York Mercantile Exchange, we are told again by all three groups that a new miracle technology called hydraulic fracturing is going to make future oil supplies plentiful. (By the way, that technology is 60 years old.) Given their record on such pronouncements, we would be wise to be cautious. Long-term forecasts are inherently unreliable. In the case of the U.S. EIA, the agency does provide three forecasts based on various price assumptions. But price is not the only variable, and among those forecasts, even the most conservative in 2000 was still too optimistic about supplies and wildly wrong about prices. At the very least, all long-term forecasts should have wide error bands around them. Those error bands would aid us in understanding the risks. No one can know the future. So, we are left with evaluating scenarios that help define the risks we face. When it comes to policy, it is not the benign energy supply scenario which should guide us, but the most severe because it has the potential to undermine the very stability of global society. It may be for political reasons that statisticians who plot the data for such projections choose to leave out the error bands which they know ought to be there. If policymakers and planners understood just how big the uncertainty about future fossil fuel supplies is, they might panic. But, they might also do something else; they might quickly wean society off finite fossil fuels wherever possible in favor of energy sources such as wind and solar which won't be running out any time in the next few billion years. And, they might also require deep reductions in energy use starting now to guard against the day when fossil fuels


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decline. It comes down to whether it is wise to continue with a system of energy, the stability of which is entirely dependent on highly uncertain long-term forecasts for fossil fuel supplies. I repeat: History tells us that it can take up to 50 years to complete an energy transition. Previous transitions gradually moved us to new fuels having increasing energy densities--wood to coal, coal to oil and natural gas, oil and natural gas to uranium. But coal, oil, natural gas and uranium are all finite, and we will someday--perhaps very soon in the case of oil--find that their supply cannot grow any more and will even begin to decline. When long-term forecasts promise energy that is both cheap and plentiful as the U.S. EIA, the IEA, and the NIC reports did in 2000, governments, businesses and individuals do little to prepare for scarcity. Wouldn't it be wiser to build an energy system which would free us from the inherently risky and unreliable racket of longterm forecasts? Wouldn't it be wiser to build an energy system that is forecast-proof because the energy that powers it is constantly renewed?

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OilVoice Magazine | January 2013