Essay: Maintaining Optimism In A Challenging Environment
An essay to assist both Alaska citizens and our thousands of readers abroad in understanding the critical circumstances now confronting the 49th state.
America invented the term, “Keep a stiff upper lip”, exactly two hundred years ago in a book entitled, "Massachusetts Spy". The Brits adopted the term and now oil producers throughout the world are repeating it to stay calm in the face of what may be a prolonged period of low oil prices.
We will first sympathize with Alberta’s new Premier, one of the best and brightest elected officials in North America. Jim Prentice (NGP Photo) inherited a southern neighbor whose president is guided more by political debts to environmental extremists than the public interest.
Prentice also entered office just as oil prices began to plummet, putting his Province in a similar but much less severe fiscal crisis than Alaska faces (See box, lower left).
Alaska's situation is more critical than Alberta's, because its budget is over 90% dependent on its declining oil production vs. Alberta's 10% dependency on oil sands royalties. Note in the link above the decisive steps Premier Prentice is considering. With a much more dire fiscal challenge, will Alaska undertake decisive measures this legislative session, as Alberta seems to be doing, or will Alaska fund deficits with the remaining state savings?
Note to: Elected Officials
We hope there is not one elected official in Alaska (i.e. Governor, Mayor, Assembly or Council or School Board member) who has had a conversation at home with a significant other, like this:
"Honey, you know the situation is dire. We have had deficit budgets for some time now. But with 50% lower oil prices, we'll burn through the savings in a couple years. And still, we have almost a $10 billion unfunded PERS/TERS liability. (Though if worst comes to worst a bankruptcy court would order the permanent fund to keep our state pensions whole, I think). Hopefully, we'll see another boom in discoveries or in prices...but if not, we have to make plans. So I'm thinking we just stay in office through 2017, keep a low profile, then make our move. Are you O.K. with that?"
Surely no elected official would swear an oath of office and decide to do nothing requiring courage or sacrifice to confront the fiscal shortfalls -- like cut capital projects, operational spending, even matching government programs and even entitlement programs.
We realize that these challenges are not fun for politicians.
But we hope we elected statesmen and not politicians, for the latter care too much about pleasing constituencies and guaranteeing reelection.
Statesmen will be willing to be vilified and defeated in order to make decisions that best serve the public interest.
So now, we suggest that all those who wanted to serve and are serving will meet their moments of truth in short order.
Will they take the easy road and keep all beneficiaries of state spending whole -- subsidized by remaining savings, then split...?
Or, will they lay it all on the line for their fellow citizens knowing that their 'thanks' may well be the disdain of thousands of constituents who wanted and did not receive money transfers from government.
We truly do sympathize, Honorable Elected Officials...just as we sympathize and respect military veterans who have served their country and been willing to give it all for the rest of us.
Thank you, in advance, for your service.
Exacerbating President Obama’s delay and perhaps an ultimate blockade of TransCanada Corporation's Keystone XL oil pipeline --designed to move stranded oil sands oil in Northern Alberta to America’s gulf coast -- is a second negative development. Environmental groups and utility interests in Quebec are trying to block the converting of an old gas pipeline into an oil pipeline, through which TransCanada could ship Alberta’s oil to European markets (See our commentary).
Then we have TransCanada’s effort (i.e. along with that of dozens of companies and governments) for a half century to move stranded Arctic gas from Alaska and the McKenzie Delta to Midwestern markets via a number of projects. We could certainly sympathize with TransCanada shareholders and those paying tariffs on its existing pipelines, for they have been sporting stiff upper lips for a long time.
Surging oil and gas shale technology less than a decade ago, evolved into a true energy revolution. The extended and expanded reach of shale production on mostly private lands touched almost everyone. Consumers have experienced lower prices for gas fired electricity, home heating and gasoline. Manufacturers depending on low cost energy began expanding North American operations. Investors launched several dozen American and Canadian LNG export projects. Job growth has been phenomenal. European energy markets began to envision a day when Russian producers could not control their destinies through price and supply manipulation. Finally, Asian markets used to paying premium prices for imported LNG began to see a softening of consumer prices.
The Canadian provincial and federal governments were supporting energy development in spite of significant environmental activism. Oil prices supported the relatively expensive production of Northern Alberta bitumen.
In the US, the last few years saw production on private land cause economic rejuvenation in many pro-energy states, in spite of Federal government support of environment activism aimed at killing projects on both private and public lands. Ironically, the Administration has gone on to claim credit for the economic improvements, even as it intensifies EPA opposition to energy specifically and job development generally.
As economic cycles would have it, all is not well in the world. The shale revolution was not just good for consumers; it was GREAT. So great that with supply increasing oil & gas prices began to retreat along with commodity values. That, in turn, has brought many shale operational revenues beneath or close to the cost of production. Combined with Canada’s inability to export necessary volumes of Alberta oil, North America’s two great economies are now facing giant economic challenges.
Federal, provincial, state and local governments throughout the US and Canada are now engaged in cutting or plans to cut government services in response to the diminishing production of energy wealth.
* * *
Alaska may be facing the single greatest economic challenge in the free world for many reasons that, together, compose a perfect storm of economic hurdles, including:
- With its operating government budget over 90% dependent on oil income, along with over a third of its entire economy, Alaska is the most dependent of North America's state or provincial governments on oil revenue— now down by 50% over the last few months.
- Alaska is the U.S. producing area most dependent on high prices. High oil prices help compensate for some of the highest oil taxes, the harshest climate, the highest labor costs, its remoteness and distance to the markets and the additional cost liability of having to move its oil via an expensive, underused and ageing 800-mile pipeline to tidewater where it has to be loaded onto seagoing tankers capable of transporting it thousands of miles to markets. In stark contrast, its biggest competitors produce oil mostly at tidewater, mostly in temperate zones, mostly in lower labor cost areas, with lower logistical costs and cheaper transport to their market areas.
- Alaska’s nearly 40-year-old Trans Alaska Pipeline System (TAPS), has already moved the lion’s share of Prudhoe Bay oil. It once transported the greatest share of America's domestic production (i.e. But has now fallen behind North Dakota, Texas and California) at the rate of about 2.1 million barrels per day. That production rate has since sunk by over 70%.
- Governor Sara Palin’s (NGP Photo) administration succeeded, nearly a decade ago, in attaching high, progressive production taxes on Alaskan oil in spite of what was then a pattern of annual 5-7% declines in TAPS throughput. That economically suicidal action dried up new investment even though producers needed to hire more people and initiate more projects just to maintain the decades-old production and transportation facilities. Two years ago, the Legislature saw the error of Alaska’s shortsighted ways and passed SB 21, modifying the production tax. Talk quickly spread around the industry that new investment and exploration was now possible and being planned – hundreds of millions of dollars’ worth. Unfortunately, opponents of SB 21 and environmental groups undertook a voters initiative to repeal SB 21, inserting dark clouds of caution over the investment climate. After spending millions of dollars to combat the initiative Alaskan citizens and businesses defeated it last August. Still, investors are left with the nagging knowledge that in Alaska, “A Deal May Not Be A Deal”, since a few guys and gals with a volunteer lawyer and dozens of activist organization volunteers could initiate a new voters initiative at any time.
If Alaskan citizens and their leaders summon the faith, humility, wisdom, cooperation, sacrifice, initiative and diligence required by GREAT ACCOMPLISHMENT, the future can still be bright for this generation and those to follow.
This is where optimism is to be found.
One must add to this mix the fact that Alaska’s huge resource potential has been slowed or stopped at almost every turn by a hostile and overreaching federal administration whose cheerleaders are activist environmental groups that in the last 3 decades have implanted some three dozen anti-development campaign offices around Alaska.
- Alaska’s North Slope gas remains stranded. Several projects over the years – all involving TransCanada – have endeavored to free that energy wealth since the early 1970s. All of the projects have failed after having met the wrong end of unforeseen economic or technological forces. When natural gas prices exploded at the turn of the century, producers again began eyeing the economic feasibility of “monetizing Alaska North Slope gas”. After spending a hundred million dollars to update studies, they affirmed one of the critical requirements for investment to be, “fiscal certainty”. This meant that investors couldn’t justify building the largest construction project in history with the chance a “sovereign” state government could enact massive new taxes after a multi-billion dollar, high pressure gas pipe was buried into the frozen tundra. Then, just as feasibility was looking promising, came the Palin Progressive Production tax. Today, following the passage of SB 21, producers and the State of Alaska have dramatically changed the gas project. Because of shale, the gas is not needed in the Midwest. So now, with falling revenue and fading economic hopes, the state, producers and TransCanada are endeavoring to prove out the feasibility of an Alaska LNG export project …targeting Asia…just as gas prices are falling and over a dozen LNG projects (i.e. see map) throughout the US and Canada are mostly vying for the same markets.
- Alaska defends its high cost of government because of its enormous size (i.e. 20% the size of the entire US), its low population (i.e. less than a million), and logistical costs. But excuses don’t matter in a world of competition and excuses cannot erase the facts:
- Alaska spends more per capita than any other state.
- Alaska’s debt is larger per capita than that of any other state or the federal government.
- Its per capita education costs are the highest.
- Alaska government and citizens fund the most non-profit organizations per capita.
- Alaska’s anti-business legislators and activist groups normally seek higher taxes to meet the challenges rather than restrain government spending. The republicans locally, as nationally, are generally in support of a sustainable economy. But just as all democrats are not socialists, all republicans are not prudent guardians of other people’s money and often let spending/entitlement increases slide through in exchange for capital projects, constituent tax breaks, etc.
- Alaska’s legislative session is now beginning and the previous governor’s budget under consideration is now several billion dollars short. This requires a possible tapping into about $3 billion of nearly $10 billion in savings. Any second grader knows that’s not sustainable for long. But to make matters more interesting, rating agencies are noting that Alaska also has an unfunded liability to its retirement program of almost $10 billion. The obvious way to fund that deficiency is to tap Alaska’s $50 billion permanent fund. The permanent fund was created two decades after statehood to fund ‘rainy day’ budgets but has been traditionally used to pay citizens an annual allotment, last year approaching $2,000 for each man, woman and child. It has become sacred income to voters.
Last November Alaskans elected a new governor whose primary constituencies were rural Alaskans, democrats, and labor. So far, Governor Bill Walker (NGP Photo) has ordered a slowing of spending on capital projects but has not, at this writing, undertaken serious cuts to state government operations or entitlement programs. We'll hear more this week as he delivers separate state of the state and budget speeches.
Some hope, through stiff upper lips and gritted teeth that another boom of some sort will appear just in time to facilitate continued high state spending.
Others believe that Alaska’s unparalleled rise in oil riches has come to an end and that serious, adult decisions must quickly be made.
Still others believe that Alaska’s 1959 Statehood Compact has been mortally wounded; they believe that federal regulation has so exacerbated the scenarios described above that only the most brilliant, persuasive, intelligent, savvy and charismatic leadership can now save the “Last Frontier” from federal hostility and its own tax and spend decisions.
So join us now in observing the tensions that will surely appear over the next four months of Alaska’s legislative session as, together, we witness leadership rising to the occasion, or not.
Meanwhile, keep a stiff upper lip!
Dave Harbour is Publisher of Northern Gas Pipelines. A former Chairman of the Regulatory Commission of Alaska, he also served as Chairman of the Gas Committee, Western Conference of Regulatory Utility Commissioners. Harbour is former Chairman of the Anchorage Chamber of Commerce and the Alaska Council on Economic Education. He has served in executive positions with three producing/pipeline companies and as a board member and officer of a number of non-profit corporations. His articles have appeared in hundreds of magazines, newspapers and on-line publications. He has delivered hundreds of speeches throughout North America and chaired oil and gas programs and conferences from Houston to Calgary, Edmonton, Anchorage and Inuvik. Contact the author.
Caution: We would urge our Arctic oriented readers to carefully follow this BSEE Arctic/General OCS Research Plan, for if contracts are given to organizations or professors that are predisposed to be agenda driven, the results may be less than scientific, less than objective. In short, one hopes we can avoid the situation wherein a Federal Administration sells leases, then does everything in its power to nullify action--at considerable expense to leaseholders and consumers. -dh
|But hold on.... Bradner has an update for this story.
Alaska Attorney General Craig Richards ... said in a Jan. 14 interview with the Journal that the current requirement keeps too much information from the public and that a new policy is being developed that will allow more open discussion of AK LNG issues in public while protecting certain private information
Alaska Journal of Commerce by Tim Bradner. The state’s political and resource communities are still buzzing about Gov. Bill Walker’s sudden firing Jan. 6 of three Alaska Gasline Development Corp. board members and his order that new board members not sign confidentiality pledges.
Apache Cuts This Week. WSJ by Lynn Cook. Apache Corp. is laying off as many as 250 employees this week in one of the first major workforce cuts at an American oil producer since crude prices began to plunge last summer.
|Washington Times. BP has announced it will cut an estimated 200 staff jobs and another 100 contracting jobs in light of falling oil prices.|
The Houston-based energy company, one of the biggest in the U.S., pumps oil and gas in places from Texas to Egypt and employs about 5,000 ...
(including Alaska, we might add. -dh)
Keystone XL Week's End Commentary
James R. Halloran
We have made it clear that our position is that Keystone XL will not be constructed, at least the five feet of pipeline that would cross the border. The basic weapon that will doom it is time. Its opponents will drag out the approval process until TransCanada gives up. The combination of litigation in multiple courts and dithering by Obama and his minions will drag out the process for years to come.
Much has been written about the Nebraska Supreme Court supposedly clearing the way for Obama acolytes to back into a four-corner stall. But according to Washington Analysis (below), Nebraska may be able to baby-sit the proposal for some additional time. Read the explanation below.
(Follow-up material coming....)
|Alaska budget and gasline Comments, ADN by Tim Bradner (NGP Photo).
I have sympathy for new Gov. Bill Walker walking into this. So far — with one exception — Walker’s actions have been quite reasoned. He prudently ordered a stop to unobligated spending on several high-profile state development projects and put off submitting a revised state budget until January to allow his team to develop a plan.
Note to readers and public service advertisers: the right hand column normally appearing here is being reconstructed. Thank you for your patience. -dh
Comment: 'Climate Change/Global Warming' Is Important To Energy Producers...and, transporters, refiners, distributors and consumers because when the government and its political allies use it as a foundational assumption for policy, the economy suffers upstream at the wealth producing level, all the way to consumers and defenders of national security. -dh
Washington Post by George Will. We know, because they often say so, that those who think catastrophic global warming is probable and perhaps imminent are exemplary empiricists. They say those who disagree with them are “climate change deniers” disrespectful of science.
Actually, however, something about which everyone can agree is that of course the climate is changing — it always is. And if climate Cassandras are as conscientious as they claim to be about weighing evidence, how do they accommodate historical evidence of enormously consequential episodes of climate change not produced by human activity? Read more....
Energy Guardian by Edward Felker. Sen. Lisa Murkowski (NGP Photo) of Alaska on Thursday laid out an ambitious vision for energy legislation she plans to pursue as the first Republican chair of the Energy and Natural Resources Committee since 2006, beyond the Keystone XL bill the panel approved mostly along party lines.
Her priorities include a measure by Sen. John Barrasso, R-Wyo., to speed up approvals of liquefied natural gas, which Murkowski said will get a hearing this month.
While consumers rejoice, low oil prices cause "crises" to those governments and economies that are highly dependent on a high price for the volatile oil & gas commodities they produce.
It may be instructive for decision makers in Alaska and Alberta, for example, to observe -- as they develop their own creative solutions -- ideas from abroad.
Here is what the Ecuador’s Vice President Jorge Glas said yesterday in a Radio announcement about that country's dependence on falling oil prices (See our earlier story re: Ecuador - Pebble Project, Alaska). “We have already faced similar situations, as have many countries throughout Latin America. We have a technical government that is prepared to face this crisis." According to a recent posting of a Tiempo Story, "The Ecuadorian government is taking a number of steps to address the economic repercussions of the dramatic decline in oil prices. One such measure has been the revocation of the 5% increase in public sector wages which was scheduled for 2015. There have also been a number of proposals to cut the state budget by as much as $1.4 million. Ecuador’s Minister of Finance Fausto Herrera recently reported that the government will cut its capital expenditures by over $800 million, in addition to a $580 million cut from the budgets of current projects. With regards to the latter, there will be a direct cut of $200 million, while the remaining $380 million will be saved by optimizing spending."
On Friday, the Nebraska Supreme Court upheld the pipeline’s route through Nebraska while the U.S. House of Representatives voted to approve the project following Senate Energy Committee action. Prior to the release of the Nebraska Supreme Court decision, Michael Whatley (NGP Photo) of the Consumer Energy Alliance (CEA) appeared on Omaha’s KMTV to preview what to expect from the courts and what implications a decision would have. Following the decision, CEA issued a statement and spoke to several networks, including Nebraska Public Radio. Later on Friday, CEA issued a statement of support following the House’s vote to approve the project by a strong bipartisan majority, which was picked up on Omaha’s WOWT. (Note: We have long associated ourselves with CEA and other NGOs advocating reasonable, 'all-of-the-above' energy development policies and projects for North America. In fact, we believe that together such groups represent the common-sense, public interest 'sweet spot' creating the best blend of economic development, environmental conservation, job creation, and consumer benefits. -dh)
KTUU Television. (See story left column) The agencies in charge of six "mega projects'" that were put on hold in December by Gov. Bill Walker submitted reports this week outlining the operating costs and potential consequences if work is delayed or stopped permanently. The projects include the Ambler Mining District, the Juneau Access Road, the Susitna-Watana Hydro Project, the Knik Arm Bridge;, the Alaska Stand Alone Pipeline; and the Kodiak Launch Complex.
SIGNS OF THE TIMES, fron Schwab: Tpday, Tranocean, Ltd. (RIG) fell 2.30% to a new 52 week low of $15.72. During the last 52 weeks, RIG's price has ranged from $48.53 on January 10, 2014 to today's low of $15.72. Additionally, over the last 12 months, RIG has decreased 67.59% while its peers in the Oil & Gas Drilling industry decreased 47.73%.
TODAY'S ENERGY IN DEPTH ENERGY LINKS:
HF: New York, California and the perils of ignoring science. San Jose Mercury News,EID’s Dave Quast. Recent developments in the debate over hydraulic fracturing (fracking), however, show that these two states have fundamentally opposite approaches to leadership from Democratic governors. Gov. Andrew Cuomo of New York didn't lead, but rather followed when his Health Commissioner announced that the state would continue its ban on fracking. This despite the fact that the state's Department of Health couldn't find evidence that fracking is harmful.
The debate about fracturing must be based on sound science. Times Record News, column. Hydraulic fracturing has been accused by environmental groups of everything from polluting water supplies to contaminating the air to causing cancer to inducing earthquakes. Dr. Dan Hill, head and professor and Noble Chair of the Harold Vance Department of Petroleum Engineering at Texas A&M University, wrote a column that appeared in the Bryan/College Station Eagle on Dec. 30 that warned consumers “to keep an eye out for claims masquerading as ‘science.’”
The Myth of the Carbon Investment ‘Bubble’. Wall Street Journal, op-ed. Buzzwords about “stranded” and unburnable assets are making some investors anxious. The carbon-bubble movement is also putting pressure on endowments, foundations and pension funds to divest fossil-fuel equity holdings. Yet is the carbon-based investment risk real or is it part of a cry for action on climate change? Look closely and financial-market realities deflate the carbon-bubble theory.
U.S. Drivers Start 2015 With Cheapest Gas in Six Years. Bloomberg. Drivers paid an average of $2.2021 a gallon for regular gasoline at U.S. pumps last week, the lowest level for this time of year since 2009, according to Lundberg Survey Inc. U.S. oil output rose to 9.13 million barrels a day in the week ended Jan. 2, after reaching 9.14 million Dec. 12, the highest level in weekly Energy Information Administration data dating back to 1983. U.S. production has increased 66 percent in five years as companies have used horizontal drilling and hydraulic fracturing to tap into hydrocarbon-rich layers of underground shale rock.
NY shale ban to have little impact on national supply. Associated Press. New York's recent decision to ban fracking is hardly seen as a big loss for the nation's production of natural gas. That's because scientists say New York's available reserves of natural gas in the sprawling Marcellus Shale are minuscule compared to what can be extracted in other states. Penn State University geologist Terry Engelder estimates that the entire Marcellus Shale region has 127 trillion cubic feet of commercially viable shale gas reserves, mostly in Pennsylvania and West Virginia.
Saudi prince: $100-a-barrel oil 'never' again. USA Today, Q&A. Saudi billionaire businessman Prince Alwaleed bin Talal told me we will not see $100-a-barrel oil again. The plunge in oil prices has been one of the biggest stories of the year. And while cheap gasoline is good for consumers, the negative impact of a 50 percent decline in oil has been wide and deep, especially for major oil producers such as Saudi Arabia and Russia.
Will The Keystone XL Ever Be Built?
James R. Halloran, Independent Energy Analyst
Most of the readers know we deal with trends, not forecasts. We have only made three forecasts that involved “a rate and a date” in fifteen years; our record is 2-1, and would be perfect if natural gas had moved $0.10 higher in 2013. However, we have gone out on a bit of a limb with two forecasts recently. The first one is well known:The Keystone XL Pipeline, at least the five feet that crosses the US/Canadian border, will not get built. Ignore the headlines coming out of the Beltway these days; they are just smoke and puffery. Save the time otherwise spent on that topic for something more rewarding. Our position is stated here:
With Overwhelming Citizen Support, Keystone XL Can Be Approved
Don't underestimate the effectiveness of Alberta Premier Jim Prentice who is intent on lobbying Washington!
Our esteemed friend, reader and energy expert, Jim Halloran, has presented a logical view of the future of Keystone, assuming the President believes he can get away with continuing to block the future of that pipeline / lifeline (Yes, it could be an economic lifeline to tens of thousands who need good jobs).
President Obama will deliver the 2015 State of the Union Address on Tuesday, January 20, 2015. He will likely try to tout economic improvements which are more due to the oil and gas shale phenomenon (on mostly private property), than on his leadership.
The Consumer Energy Alliance urges its members -- as we urge our readers -- to call U.S. House of Representatives Members TODAY in support of H.R. 3, “The Keystone XL Pipeline Act.” The bill will give congressional approval of the Alberta-to-Texas, crude oil Keystone XL pipeline that has been under review for more than six years. The U.S. House of Representatives is expected to vote on the legislation TODAY, January 9, 2015.
Yesterday, the Consumer Energy Alliance (CEA) sent a letter to House Leadership expressing support for the legislation. Please refer to CEA’s letter for assistance in helping to draft your own letter to members of the House of Representatives. Also, refer to BuildKXLNow.org, for more information.
You might also be interested in the Senate's action on Keystone yesterday. Scroll down to the 1-8-15 page for the video review of Senator Lisa Murkowski's Energy Committee Business Meeting.
With a lot of bipartisan support from Congress, the President will find it harder to continue blocking Keystone XL.
We may not be able to change his mind, but a strong show of support could certainly put pressure on democrat candidates for 2016 elections to urge White House approval.
And if, even then, we fail, we would at least have done our best.
Thank you for your column, Jim; truly, it is a wake up call of what is likely to happen absent overwhelming citizen action! -dh
“Will the northern portion of the XL project get built any time soon?” The answer, in our opinion, is decidedly NO.
The environmental lobby (in England this amorphous set of interest groups is referred to as the “Green Blob”) has drawn a line in the sand to keep this pipeline from ever seeing the light of day. Fighting XL has become a Line of Business for many of them, with its own ongoing fund-raising group. They have a great playbook ready to go, to tie XL up with litigation and the aid of various government agency rules. The game is to tie it up as long as it takes to defeat it. This effort reinforces future “lines of business” when the Green Blob decides to take a stand. It is highly likely they can tie it up for a further seven years or so, by which time the market will have found ways to deal around its absence.
But we also believe Obama will never approve it, part of his “legacy” (most would call it narcissistic petulance). He would not have time to do so, anyway, between golf games, schmoozing with billionaires, and screwing up foreign policy. But even if he were to approve it, the Greens would then take over in court, and it will not get built.
The second forecast is known by fewer people, but I have a record of it with certain people (Nick and John, you are the source for the truth). I went on record in early December that the Energy sector of the market, as represented by the XLE, would hit its cycle bottom on December 15, 2014. There is an historical reason for the date, which I will share later if this works out. So far, the forecast is holding. The second part of the forecast is to be overweight energy in 2015. Looking back on the markets over the years, energy has occasionally finished last among the sectors, but it has never done it two years in a row. That does not mean it bolted to the head of the pack the following year, but it made out well in the trailing year, except for 1998-99 (the Dot-com Era). After that exception, it took off for several years in row.
Energy was last in 2014 even before crude oil tanked in the fourth quarter; cutting the price in half was just the cherry on the sundae. See the chart below for commodity behavior.
(Graph is being reformatted for insertion here....)
Attached is a note from Sanford Bernstein about the market rebounds for the Energy sector over the years. Take a look at Exhibit 2, which shows that it has been a long time since Energy has been this small a relative component of the market (below 10%). As a bet on a rebound, it has a least good set of odds in its favor.
What does this mean for oil prices? That is a subject for other notes. But on “follow the money” basis, we like the possibility that enough trends have spotted by observers that they will form a decent recovery over the next 18-24 months (the market is generally about nine months ahead of an actual recovery in business operations).
The Bottom Line: We do not know where oil (and natural gas) will bottom out. But we suspect that the market is telling us the seeds of a shake out of the weak is underway, which will help a decent rebound.
The flows into Energy are getting ahead of the price increase; see the note below.
Investors betting oil will rebound from the lowest prices in 5 1/2-years poured the most money in more than four years into funds that track crude.
The four biggest oil exchange-traded products listed in the U.S. received a combined $1.23 billion in December, the most since May 2010, according to data compiled by Bloomberg. Another $109.9 million was added this month through Jan. 5.
Investors are piling into oil ETFs even after West Texas Intermediate crude, the U.S. benchmark, tumbled the most since 2008 last year amid signs of rising supply and weak demand. Shares outstanding of the four funds surged to the highest since 2009.
“Commodity investors can be contrarian investors,” said Matt Hougan, president of San Francisco-based research firm ETF.com. “There are a lot of true believers in the commodity space. A lot of people are attached to the idea that oil’s natural price should be $100, not $50.”
The U.S. Oil Fund, the biggest oil ETF, attracted $629.9 million in December and $100.4 million so far this month. The fund, which follows WTI prices, added 1.8 percent to $18.369 yesterday on the New York Stock Exchange.
The number of U.S. Oil Fund shares on loan to short sellers was 3.93 million on Jan. 5, down from as high as 9.53 million last month, data compiled by Markit and Bloomberg show.
Money is pouring into oil ETFs even as commodity-linked index liquidations surged to a record $17 billion in the first 11 months of last year, Barclays Plc said in a report yesterday. Total commodity assets under management fell to $276 billion in November, the lowest since early 2010, according to the bank.
The four funds also include ProShares Ultra Bloomberg Crude Oil, iPath S&P GSCI Crude Oil Total Return Index ETN and PowerShares DB Oil Fund. They had 171.6 million shares outstanding as of Jan. 6, the highest since March 2009, according to exchange data compiled by Bloomberg.
WTI futures slid below $50 a barrel for the first time since April 2009 earlier this week. The benchmark, which tumbled 46 percent in 2014, climbed 39 cents, or 0.8 percent, to $49.04 in electronic trading on the New York Mercantile Exchange at 2:19 p.m. Singapore time.
Oil has slumped as U.S. production grew to the highest in more than three decades and the Organization of Petroleum Exporting Countries kept its output above quota for a seventh month in December. OPEC, which pumps about 40 percent of the world’s oil, decided to maintain its output target at 30 million barrels a day at a Nov. 27 meeting in Vienna.
The CBOE Crude Oil Volatility Index, which measures oil price fluctuations using options of the U.S. Oil Fund, dropped to 53.25 yesterday after reaching 57.67 on Jan. 5, the highest since October 2011.
Keystone XL Status Release From Senator Murkowski's Office Today:
Nebraska Supreme Court Decision Removes Last Excuse for Delay
WASHINGTON, D.C. – U.S. Sen. Lisa Murkowski, R-Alaska, today issued the following statement on the Nebraska Supreme Court ruling upholding the state’s approval of the current Keystone XL pipeline route through the state.
“Today’s court decision wipes out President Obama’s last excuse,” Murkowski said. “He’s had six years to approve a project that will increase U.S. energy supplies and create closer ties with our nearest ally and neighbor, and he’s refused to act. Regardless of whatever new excuse he may come up with, Congress is moving forward.”
Note: Please do not reply to this email. This mailbox is unattended.
For further information, please contact Robert Dillon.
Visit our website at http://www.energy.senate.gov/public/
11-7-14 Alaska Governor Acts On Gasline And Legislators React - President Makes Preemptive Attack On Keystone XL
ADN by Dermot Cole. Gov. Bill Walker (NGP Photo) took a major step toward revising the way the state is dealing with a proposed gas pipeline by removing three members of the Alaska Gasline Development Corp. board and instructing two commissioners not to sign a secrecy pledge proposed by the Parnell administration. (Comment: We do not know enough about all the circumstances to comment on the rightness or wrongness of the Governor's action or legislative reactions. We do observe that decision makers in a time of fiscal crisis would probably be well advised to bend over backwards to be cordial and considerate in their interactions. The fiscal challenge descending upon Alaska and her citizens will be difficult enough to confront with a united team and much harder to resolve successfully if we are divided. -dh)
Calgary Herald by Stephen Ewart.
Commentary: Preemption of Due Process and Erosion of the Rule of Law.
We have seen the current, Administration consistently erode the rule of law.
The EPA has acted to preemptively kill an Alaska mining project, on valid Alaska state leased ground, before the proponents filed for the first permit, on the basis of an EPA-imagined development scenario, before any public hearings, findings of fact or legal record could be assembled.
This is a horrible infringement on America's constitutional protection of due process and the rule of law which it protects.
The precedent the EPA is trying to establish could provide hostile federal agencies with a new tool for stopping state, municipal, agricultural, recreational, mining, commercial fishing, manufacturing, transportation, home building projects on federal, state, municipal or private land...anywhere, anytime.
Similarly, the Administration has sought, unsuccessfully, to block development in Alaska by proclaiming vast areas should be protected for certain species when the populations of those species are increasing (i.e. Steller Sea Lion, Polar Bear.)
In the case of Keystone, the President has blocked State Department approval of the project following valid, due processes which cleared the project.
Now, when the Congress seems poised to introduce Keystone enabling legislation, the President announces intent to veto any such legislation. This is more clear and present evidence of willful disdain for the spirit if not the precise definition of due process.
Through such action in the energy business, together with evidence in other federal jurisdictions (i.e. Overreaching Executive Orders, Justice Department-selective enforcement, IRS-targeting non-profits, State Department-Benghazi, etc.), one must conclude the country is dangerously close to losing constitutional freedom and the rule of law reputation for which it was once so well regarded.
Energy company shareholders are among the most affected by a dilution of due process when the rule of law is replaced by rule of men with political agendas.
The White House warned Tuesday that U.S. President Barack Obama would veto a new Congressional bill to have the Keystone XL pipeline built arguing there is a well-established process to review the controversial cross-border project.
Almost seven years after filing its application for a 830,000 barrel a day oil pipeline, TransCanada chief executive Russ Girling expressed exasperation over the latest setback.
“The review process for Keystone XL has been anything but well-established. We are well over the six-year mark reviewing the final phase of Keystone with seemingly no end in sight,” Girling said in a statement after... (More here)
Canadian Press/Global News. Alberta’s premier remains hopeful about the Keystone XL pipeline despite word that U.S. President Barack Obama may veto the project. Prentice says he will travel to Washington within the next month to let people know that Keystone is in the best interests of Canadians and Americans alike.
Jim Prentice (NGP Photo) says there is broad public and political support in the United States for the pipeline that would carry Alberta bitumen to the U.S. Gulf Coast.
Globe & Mail. Quebec’s energy regulator is giving the thumbs-up to TransCanada Corp.’s Energy East pipeline, calling the plan “desirable.”
The $12-billion pipeline between Alberta and New Brunswick aims to connect western crude with eastern refineries and new markets across the Atlantic.
TODAY'S Energy In Depth News Links:
Weds., January 7, 2015
- EID-National: API’s State of American Energy address and report underscore bright future ahead – if policy-makers do their job (1/6)
- EID-Illinois: Unlike New York, Illinois is helping its economically challenged regions by moving forward with shale (1/6)
- Guest post from BakerHostetler: Cuomo’s decision on HF doesn’t appear to be based on science – or the law (1/6)
API chief focuses on oil exports, KXL in annual address. E&E News (subs. req’d). Throughout his remarks, Gerard touched many times on the need to move forward in approving construction of the Keystone XL pipeline from Canada. Describing that approval as "low-hanging fruit," he expressed disappointment at news that the White House said it would likely veto a KXL approval bill introduced yesterday by Sens. John Hoeven (R-N.D.) and Joe Manchin (D-W.Va.). "The American public is frustrated and confused by this indecision," Gerard said. "They say to themselves, 'Wait a minute, there's 42,000 jobs here and we can't make a simple decision?' So, longer-term, I believe Keystone is ultimately going to get done."
Democrats must respect the power of oil and gas. Houston Chronicle, op-ed. Oil and gas is no longer a game reserved for Texas wildcatters. Shale can be found easily in blue states and red states, and politicians all along the aisle should have trouble finding bad news in fracking's gifts of job growth, affordable fuel and strength abroad.
Industry benefits from transparency about HF fluids. The Oklahoman, op-ed. Baker Hughes, an energy firm in Houston, is about to make history. It just pledged to disclose the chemical makeup of its hydraulic fracturing fluid. Fracking fluids are safe. And the public deserves to know what goes into them. That’s why I firmly support fracking disclosure laws.
Oil prices will recover, but market could behave chaotically. Houston Chronicle. In a balanced market, however, the oil industry simply cannot produce all of oil the world needs for $50 a barrel or less. That's the good news for Houston, but the bad news is that companies will be under intense pressure to produce oil as cheaply as possible because, since November's OPEC meeting, the world lacks a regulator, or swing producer, to stabilize the market. If left to its own devices, the invisible hand of the market will be stirring a pot of chaos in 2015.
U.S. oil production will be falling by end of 2015. Reuters, column. In the short term, U.S. oil production is set to continue rising because there is still a backlog of wells waiting for fracturing crews and completion after the record drilling during the first ten months of 2014. In North Dakota, for example, there were around 650 wells waiting on completion services at the end of October 2014 because drillers had outpaced completion crews, according to the state's Department of Mineral Resources.
Low oil prices leave U.S. shale players cautious. UPI. Energy companies working in U.S. shale basins announced plans to trim capital programs for 2015 because of the steep decline in oil prices. The price for West Texas Intermediate crude oil, the U.S. benchmark, dipped below the $50 mark for the first time in more than five years Monday. Globally, oil prices have lost half of their value since mid-June 2014, forcing major oil and gas companies to cut back on spending for this year.
Anti-Cuadrilla group's leaflet misleading, says watchdog. The Independent. In a setback for the anti-fracking lobby, the Advertising Standards Authority (ASA) found that sections of the leaflet from the Residents Action On Fylde Fracking (Raff) protest group misinterpreted scientific data around shale gas extraction and exaggerated the size and scale of planned fracking operations in the region.
Junior explorer pulls plug on Ukraine. UPI. The economic climate in Ukraine is no longer conducive to continue investing in shale natural gas opportunities, producer JKX Oil & Gas said Wednesday. "The board of JKX has decided that the combination of Ukrainian Government-imposed restrictions on selling its gas to industrial clients and the punitive rate of gas production tax requires the company to suspend its planned 2015 capital investment program in Ukraine until the economic parameters for investment improve," it said in a statement.
Protests Hit Southern Algeria Over Shale. Associated Press. Protests in Algeria's remote and sparsely populated south over efforts to exploit the country's vast shale gas reserves spread to the regional capital Tuesday, the state news agency reported.
New report calls for better oversight of injection wells. Bakersfield Californian. In a report with strong implications for Kern County's oil industry, an environmental activist group called Tuesday for changing the process for exempting aquifers from federal groundwater protections. An oil industry trade group, the California Independent Petroleum Association, was dismissive of the report, noting there is no evidence of waste being injected into drinking water supplies.
5 things to know as the Colorado legislative session begins. Associated Press. Colorado lawmakers begin the 2015 session on Wednesday. Here's a weekly look at what's coming up: Fracking - Another big debate involves whether any new regulations are needed over hydraulic fracturing, or fracking. Gov. John Hickenlooper assembled a task force to look at how to settle land-use clashes among homeowners, local governments, and the energy industry. The task force's charge is to give lawmakers recommendations, but whether anything happens remains to be seen.
Windsor braces for industry slowdown. The Coloradoan. While many Northern Colorado residents are enjoying the country’s falling gas prices, Windsor officials say the anticipated slowdown in tax revenue from oil and gas companies will hamper them this year. Those companies will likely scale back their operations around Windsor, Town Manager Kelly Arnold said during a work session Monday. Fracking activity in the area may not pick back up until 2016.
What new fines would have meant in Windsor spill. The Coloradoan. An oil and gas operator who spilled 7,500 gallons into the Poudre River last year would have faced 15 times the financial penalty under a new fine structure passed this week. The Colorado Oil and Gas Conservation Commission approved a maximum penalty of $15,000 a day for "the most egregious violations" in a Monday hearing — up from a previous maximum fine of $1,000 per day.
Oil price plunge imperils La. jobs — but when? The Advertiser. In Louisiana, initial claims for unemployment insurance in mining — many oil and gas jobs are recorded as mining — totaled 227 in December, higher than in any previous month but not much higher than claims recorded in January 2014. Guarisco said oil and gas employment appeared to remain robust in December, as many oil and gas jobs must be done no matter the price per barrel.
Denton anti-HF activists to make appearances in St. Tammany Parish. Times-Picayune. Two people whose efforts helped enact a ban on fracking in Denton, Texas, will be in St. Tammany Parish this weekend for a party and a symposium about hydraulic fracturing. The citizens group Tammany Together is putting on the events.
Penn students jump into the shale fray with a new technology. NPR. One of the pressing questions regarding fracking is whether or not the chemicals used to help pry the gas from tight rock formations like the Marcellus Shale leaks or migrates to drinking water supplies. Imagine if you could determine whether fracking caused ground water contamination using a thin strip of single carbon atoms. That’s what two seniors studying at both the University of Pennsylvania’s Wharton school and its bioengineering department, are trying to do. Teddy Guenin and Ashwin Amurther are finalists for a $5000 prize through the University.
Analyst predicts gasoline rebound despite oil's plunge. Tribune-Review. Gasoline prices likely will rebound over the next few months and rise above $3 per gallon by May, despite the continuing drop in global oil prices, a national analyst predicted Tuesday. Oil prices driving much of the pump price dropped by half because of increased supply from shale producers, tepid global demand and a decision by exporters such as those in the OPEC cartel to push prices down by maintaining production.
US Forest Service accepting comments on Va. pipeline path. Associated Press. Friday's the deadline to comment on a proposed natural gas pipeline whose route includes the George Washington National Forest. The multi-billion-dollar pipeline is proposed by Dominion Resources and other energy companies. It would run from West Virginia, through Virginia and into North Carolina. The proposed $5 billion, 550-mile pipeline would transport natural gas collected through hydraulic fracturing, or fracking, from Pennsylvania, Ohio and West Virginia.
Shale is proving beneficial. The Star Democrat, LTE. In her guest comment, “Fracking may prove to be harmful to public’s health,” Rebecca Rehr presents the potential hazards of hydraulic fracturing without balancing them with the benefits. Of course there are health and environmental hazards to extracting oil and gas from tight shale and other rock formations. However, horizontal drilling and fracking have dramatically increased U.S. production of oil and gas, leading to benefits both here and globally.
Natural Gas Price Plummets, But Tax Still a Wolf Priority. Philadelphia Magazine. States that depend on energy resources to power their economies and budgets are tightening their belts as the prices of oil and natural gas fall, but that won’t — and maybe shouldn’t — stand in the way of a new fracking tax in Pennsylvania, officials say.
Natural-gas home-heating rates low for January. Cleveland Plain Dealer. Cold January weather has arrived, but rates for natural gas have fallen. Both Dominion East Ohio and Columbia Gas of Ohio are posting standard rates that are lower than those in December and lower than year-ago January prices.
Small earthquakes in Mahoning County. Akron Beacon Journal. Shawn Bennett, of the Ohio Oil and Gas Association, said, “There is no reason for hysteria” regarding the new report. Ohio is working closely with researchers in other states on how “best to mitigate such events from happening in the future,” he said. NOTE: Houston Chronicle/Fuel Fixalso reports.
4 mild earthquakes startle North Texas; no damage reported. Express-News. Four small earthquakes have rattled North Texas hours apart. No damage was reported from Tuesday temblors. The U.S. Geological Service plotted the epicenters of the four quakes to northeast Irving, a Dallas suburb. At least two could be felt throughout the Dallas-Fort Worth area.
Low gas prices means job losses. KENS5. The output of the Eagle Ford Shale, recently slipped for the first time in more than a year. The state reports production at the shale dropped by about 2,000 barrels in December. A local economics professor from UTSA said cheap gas prices could mean job losses since a significant part of the economy is driven by oil and gas production.
Other references "A Deal Is A Deal", etc.: