From LOGA News, 25 March 2013

LAST WEEK BROUGHT a heartening breakthrough in the war over fracking: A handful of major green groups and big drillers agreed on environmental standards.

We’d forgive you for raising a skeptical eyebrow. Some in the industry have been claiming that fracking — which involves pumping fluid underground to extract natural gas from rock formations — needs no more rules. Some environmentalists, meanwhile, have been ringing the alarm so loudly that the practice seems too dangerous even to contemplate.

But the right path was never to let drillers continue without more oversight, nor was it to ban fracking. America’s natural gas boom is far too important an opportunity — economic and environmental — to ignore. But sound regulations are needed to ensure that it is not an ecological disaster. These new rules are a large step toward striking the right balance, and everyone involved deserves credit.

The Environmental Defense Fund, the Clean Air Task Force and some other green advocates joined with Chevron, Shell and other energy companies to create the Center for Sustainable Shale Development, an independent standard-setter that will certify when companies comply with its rules. The rule-writing process is ongoing, but the center’s initial offering is impressive, outpacing the government’s regulatory efforts and addressing many of the major environmental concerns.

The standards demand that drillers recycle as much fluid as possible and not discharge what’s left into waterways. Drillers would have to buttress their wells with casing and cement. They would have to disclose all the chemicals in the drilling fluid they use. The engines that operate rigs and transport material would have to meet high emissions standards. One critical rule would oblige firms to study the local environment before drilling and then strictly monitor it, including ground and surface water, after. This would discourage risk-taking and provide valuable data to help move the debate from emotion to evidence.

Perhaps most important are the center’s rules to prevent methane from escaping into the air during frack jobs. A big attraction of natural gas — which is mostly methane — is that it burns much cleaner than coal, producing about half the globe-warming carbon dioxide. But unburned methane is a much more potent greenhouse gas than carbon dioxide, so if some of it escapes from wells during extraction, that dulls the fuel’s environmental benefits. The new rules would have companies collect and sell all the methane that comes out of wells. They would also have to check the seals on their equipment regularly.

More rules are on the way. The center can’t require companies to comply with them. It can only audit those that voluntarily sign up. But there is plenty of value in that. The industry can hardly now claim that the rules are too onerous. Any small-town mayor or rural landowner thinking of allowing fracking can insist that companies be certified. State and federal policymakers, meanwhile, can look to the center’s standards as a guide as they write their own rules. That includes politicians in New York and Maryland who are still on the fence about whether and how fracking can be regulated effectively.

The center provides a model for environmental groups, too. They advance their cause much further when they accept that the country is fracking and push for sound regulation, instead of unrealistically insisting that all that natural gas stay in the ground.

 

Cheap Natural Gas Prices Give Hope to this U.S. Industry

From LOGA Daily News, 17 January 2103

While natural gas prices are up 50% from their 2011 lows below $2 per 1,000 cubic feet (million BTUs), they’re still cheap at just over $3.

Lower-priced natural gas has helped a number of industries, like chemicals and utilities, cut costs, as Money Morning Global Energy Strategist Dr. Kent Moors pointed out in his 2013 natural gas price outlook.

Now there’s another U.S. industry that hopes cheap natural gas can revive its flagging performance.

I’m talking about steel.

Troubled Times for U.S. Steel

The steel industry saw robust growth between 2004 and 2006 when global steel prices rose by more than 20% a year.

But since 2009, steel producers have been lucky to see any price increases at all due to chronic overcapacity in the industry.

According to the American Iron and Steel Institute, the U.S. steel industry capacity utilization rate is at 74%. Industry profit margins are particularly vulnerable any time this rate is below 80%.

Before the financial crisis in 2008, domestic capacity utilization in the steel industry was at a robust 91%, but the steel business has not seen a good earnings period since.

According to Bloomberg News, the country’s largest steel producer, United States Steel (NYSE: X), is forecast to post its fourth consecutive annual loss when it releases earnings Jan. 29. Bloomberg says steel producer Nucor Corp. (NYSE: NUE) will have $504 million in net income for 2012, less than one-third of what it was in 2008.

The industry remains in survival mode in much of the globe.

But a technology in steel production that takes advantage of cheap natural gas will start to play into the steel industry recovery. Here’s how.

Cheap Natural Gas Prices to the Rescue

Steel producers are using natural gas for direct-reduced-iron technology, or DRI.

DRI heats iron ore – the main ingredient in steel – to a temperature high enough to burn off the carbon and oxygen content but retain the iron.

This is instead of using coal-power blast furnaces to heat and thereby separate or “reduce” iron from the other minerals found in iron ore. According to the World Steel Association, this method accounts for 94% of global iron output.

Nucor says by using DRI iron can be produced for approximately $324 a ton. That is about $82 a ton, or 20%, less than using a conventional blast furnace to reduce iron.

DRI also makes smoother, stronger steel.

Michelle Applebaum, managing partner at consultancy Steel Market Intelligence, told Bloomberg “That technology has been around for 30 years, but for 29 years gas prices in the U.S. were so high that the technology was not economical. This is how steel will be built in the future.”

If Applebaum is correct, good news lies ahead for the domestic steel industry.

There are five plants in the works that would substitute natural gas for coal to reduce iron.

Nucor is building a plant in Louisiana, which it plans to start-up in mid-2013. In addition, Austrian steelmaker Voestalpine AG said last month it may build a $660 million mill here in the United States to take advantage of cheap natural gas. India’s Essar Global is also eyeing such a plant in Minnesota and Australia’s Bluescope Steel and Cargill plan one in Ohio.

Looks like thanks to low natural gas prices, a new day is dawning for the U.S. steel industry.

 

What Would Happen To The Current Fracking Activity And Subsequent Booms Generated If Oil $/bbl Were To Drop?

From LOGA News 9 January 2013

This is a much more complicated question than it seems:

1) Most oil/gas wells are fracked, even if they’re not in shale basins. Shale gas and shale oil* can only be liberated with extensive fracking, but regular non-shale wells have been fracked to improve production rates for over fifty years now. An oil price decline will never eliminate fracking even if it makes shale oil wells uneconomical to drill. It will just reduce the amount of fracking.

*Shale oil here refers to tight oil plays like Bakken, not kerogen shale. I think this is the more popular usage now.

2) Most of the shale fracking over the last decade has been for gas wells. The price of natural gas fell dramatically in the US because of the recent production glut. In fact, between Nov 2011 and Nov 2012, the number of rigs drilling for gas in the US decreased by 50% because the economics stopped being favorable. (Those rigs switched to other types of fields, either conventional oil or oil shale plays like Bakken.) Fracking activity has recently been more strongly tied to the price of natural gas than the price of oil.

3) Each basin, operator, and individual well has a different economic value assigned to fracking. As oil prices drop, a few low-value projects will immediately become uneconomical. As prices drop further, more projects stop being worthwhile. There is a lot of diversity in the oil & gas business, so oil production has a very smooth supply curve — each dollar of price reduction will reduce long-term supply by a small amount. Colorado kerogen shale might be economical at $120-200/bbl. Oil shales seem to phase out around the $65-90/bbl range, oil sands cost about $45-80/bbl, deepwater stops being worth it around $35-60/bbl, and Saudi Arabia‘s Ghawar field will keep pumping until oil hits $15/bbl. That’s a vast oversimplification but perhaps it’s what the question asker is looking for.

Note that these prices are for new projects — cost to keep an existing field producing is much lower. Estimates vary wildly because actual prices per well vary wildly. Here’s some sources with break-even point estimates:

4) Most oil wells produce associated gas, so the economics of a particular well depend on both the price of natural gas and the price of oil. With gas prices as low as they are today, projects can experience a negative wellhead gas price — it literally costs more to get the unavoidable associated gas into a pipeline than it sells for. (It’s usually illegal to just flare it off these days. Exceptions are often made for remote areas like Alaska or North Dakota where the air pollution has less impact.) So gas production can sometimes be a net drain on an oil shale well, thereby increasing the required oil price for the project.

5) Gas is usually sold by production quota contracts, so many operators are locked in to producing a certain amount of gas no matter what the price is. These companies are forced to keep drilling to meet production quotas long after they stop making money by doing so. So fracking will continue for a while after it becomes uneconomical.

All that said, fracking activity will certainly decline with lower oil/gas prices. But there’s no price point where fracking stops happening

 

 

 

AMOSS TRADING SERVICES + 5333 RIVER ROAD + NEWS ORLEANS, LA 70123-5252 + P: 504.733.0080 + F: 504.733.0081

Centralizer Manufacturing and Just In Time Delivery

January 7, 2013

ATS manufactures a variety of sizes and types of centralizers for our clients on a proprietary basis. Although centralizers range in price based largely on the base material (mild steel, ADI, aluminum, synthetics) and type (solid or bow-type) they are basically like pennies: Some are bright, some are dull, but you need at least 100 of them to do anything. We never share designs or share samples of our client’s proprietary centralizers. Although we deliver centralizers at the most competitive prices and our third party testing procedures during production ensure that the centralizers meet or exceed client’s specifications, there often remains an issue of order quantity.

Many of our clients prefer to order large quantities on a regular basis maximizing economies of scale while others will order smaller quantities trading some economy for convenience. Large quantity orders present issues with holding inventory and cash flow. Small quantity orders requires multiple orders over time, exposes the client to price fluctuations, and timing issues. One way ATS has solved both issues that for its clients is managing production levels and delivering their products on a Just in Time basis (JIT) as follows:

1. After ATS and your company sign a NDA, we develop appropriate quotes on your centralizers.

2. If the quotes are attractive, ATS and your company can agree upon an amount to be purchased over a specific period of time (purchasing period), such as a year, and an estimated draw against that quantity on a monthly or some other basis.

3. From the first production run, samples would be tested by ATS and the samples with the test results would be given to your company for approval and/or additional testing. Upon approval, the production run would commence. Subsequent testing routines are agreed upon between the client and ATS.

4. ATS would maintain production levels to meet or exceed the delivery schedules and deliver them as needed or requested over the agreed upon period. There would one delivered price for the purchasing period. After agreeing on a price and delivery schedule, the first delivery would take approximately 75 days, depending on quantity, which includes making the mold(s), sample approval, and ocean transit.

5. ATS manages production in concert and communication with you after the first production run. ATS has multiple containers leaving weekly and has the flexibility to include less than container loads (LCL) as well as full container loads of your centralizers to meet your needs.

6. If your company needs to reduce the quantity or extend the purchasing period this can be managed between ATS and you.

7. For purchasing period quantity increases, it takes time to increase production and deliver. ATS works closely with its clients maintaining inventories and production to accommodate increases.

8. Communication is always key to making JIT successful.

ATS stands ready to supply centralizers in order quantities to best fit your company’s circumstances. For information on quotes, quantities, and how we can help manage your inventories, please contact us at sales@amosstrading.com

 

AMOSS TRADING SERVICES + 5333 RIVER ROAD + NEWS ORLEANS, LA 70123-5252 + P: 504.733.0080 + F: 504.733.0081

Plan for U.S. natural gas exports brings talk of economic boon, fears of failure

Not long ago, the U.S. was facing the prospect of spending billions to import pricey natural gas from overseas to heat our homes, fuel electrical generation and run our city buses. The industry was furiously building terminals to handle what was sure to be enormous ship traffic from places like Qatar and the United Arab Emirates.

Now — as a result of the ‘fracking’ revolution — the federal government is considering 15 applications to build huge facilities to liquefy natural gas from U.S. shale deposits and send it overseas.

The ability to tap natural gas from unconventional sources has quickly made the U.S. one of the world’s leading producers. But success has a downside. The price of gas domestically is near historic lows. In some places, companies are pulling back exploration because it just doesn’t pay.

That’s why the industry is anxious to open up the export market; in particular, countries that don’t have free trade agreements with the U.S. In many of them, the price is 3-5 times what we are now paying at home.

“What’s good for the goose is good for the gander.”

- Jack Gerard, president and CEO of the American Petroleum Institute

The battle over exports has created some interesting bedfellows.

The Obama White House is on the same page as the oil and gas industry after a study commissioned by the Energy Department found exporting gas would be a boon for the economy.

The industry couldn’t be happier about the findings. Bill Cooper, of the Center for Liquefied Natural Gas, told Fox News, “What we’re talking about is selling a valuable resource that we have in abundance that we can provide to other countries at a cost that brings valuable investments back into the United States – money into the United States that grows our economy.”

At the same time, an unusual alliance has emerged in opposition to exports. It includes Democratic Sen. Ron Wyden, Rep. Ed Markey (D-Mass.), the Sierra Club and Dow Chemical, which uses huge amounts of natural gas as feedstock and fuel for its factories.

The environmental arguments are what you would expect – that exports would increase the amount of fracking and production of greenhouse gases. But Wyden, Markey and Dow agree on a different point: Exports would raise the price of natural gas domestically, potentially hurting the U.S. economy and jeopardizing jobs.

Andrew Liveris, Dow’s CEO, argues the DOE report is flawed because it didn’t take into account the increased use of natural gas by industry in the U.S.

In a statement, Liveris said, “The report offers the baffling conclusion that the U.S. would be better off using its domestic natural gas advantage to fuel growth and jobs in other regions versus strengthening the U.S. economy through manufacturing and benefitting consumers with lower energy costs.”

Part of the sales pitch on fracking is that the U.S. could experience a renaissance in manufacturing fueled by cheap energy costs. Some industries who bought into the hype now feel like the oil and gas sector wants to pull the rug out from underneath them.

Gas producers insist any price rise would be minimal, adding how is it fair for Dow to protect its right to export its products, while limiting oil and gas from selling there abroad?

“What’s good for the goose is good for the gander,” says Jack Gerard, president and CEO of the American Petroleum Institute. “If the chemical industry wants the free market to work, so they can produce product and export it, we should apply the same standard to the natural gas and oil industry.”

The current domestic price of natural gas is about $3.40 per million British Thermal Unit (MMBTU). According to the DOE report, exports could raise that cost by as much as $1.11 over the next five years.

The gas industry, currently suffering from too much of a good thing, sees dollar signs in the lucrative export market. Domestic manufacturers, like Dow, argue there is much more value to the economy from exporting finished goods than from shipping an important natural resource overseas.

So far, only one export terminal has been approved. Cheniere Energy is expanding an existing import terminal at Sabine Pass, La., to include a plant to liquefy natural gas for export