Home » Posts tagged 'Warren Buffett'
Tag Archives: Warren Buffett
Tank cars offload crude, likely from the North Dakota Bakken formation. Photo by Roy Luck. Creative Commons licensed.
One of Canada’s top energy analysts has warned investors and geologists that “the shale revolution” will not meet conventional expectations as a so-called game-changer in energy production.
Speaking at the Denver meeting of the Geological Society of America and later at Queen’s University and an energy conference in Toronto, David Hughes challenged the assumptions of industry cheerleaders by spelling out startling depletion rates for high-cost unconventional shale and tight oil wells.
“The shale revolution has been a game-changer in that it has temporarily reversed a terminal decline in supplies from conventional sources,” said Hughes in both talks given in late October and early November. “Long-term sustainability is questionable and environmental impacts are a major concern.”
The geoscientist, who now lives on Cortes Island, has studied energy resources in Canada for four decades, including 32 years with the Geological Survey of Canada as a coal and natural gas specialist.
After reviewing data from unconventional oil wells, Hughes found that these difficult and high-cost operations deplete so rapidly that between 47 to 61 per cent of oil from plays like the Bakken, the first major tight oil play developed, is recovered within the first four years.
Hughes noted that the Bakken and Texas’ Eagle Ford plays, which currently produce two-thirds of U.S. tight oil and are supposed to take the country into energy independence territory, will actually peak in production by 2016 or 2017.
Incredibly, most tight oil wells, such as in North Dakota’s booming oilfields, will become “stripper wells” (producing less than 10 barrels a day) and be ready for abandonment within 11 to 24 years.
Shale no panacea
Shale gas wells follow a similar decline profile. In Louisiana’s Haynesville play and Pennsylvania’s contentious Marcellus fields, producing wells decline by as much as 66 per cent after the first year.
More than 3,500 wells have been drilled in the Haynesville play, which in 2012 was the top-producing shale gas play in the U.S., yet production is falling owing to the 47 per cent yearly field decline rate. The current price of gas is not high enough to justify the 600-plus wells needed annually to offset the steep field decline (each well costs between $8 to $10 million).
Data from Drilling Info/HPDI.
“The shale revolution has provided a temporary respite from declining oil and gas production, but should not be viewed as a panacea for increasing energy consumption… rather it should be used as an opportunity to create the infrastructure needed for a lower energy throughput to maximize long-term energy security,” warned Hughes.
Hughes also told investors that they can no longer ignore the real and high-cost environmental issues associated with hydraulic fracturing, including high water consumption; groundwater contamination; methane leakage; land fragmentation; air pollution and property devaluation.
“There has been a great deal of pushback by many in the general public, and in state and national governments, to environmental issues surrounding hydraulic fracturing,” he said.
Quebec, Labrador and Newfoundland have declared moratoriums on the technology of high-volume horizontal hydraulic fracturing. In addition, Canada’s largest private sector union representing a high percentage of energy works hascalled for a national moratorium.
Although the number of gas-producing wells in Western Canada has reached an all-time high of 230,000 wells, actual gas production has been in decline since 2006.
Hughes also noted that the quality of shale oil and gas plays varies greatly. A few are prolific because they have sweet spots, he said. These special zones are targeted first and lead to an early rise in production followed by a decline, often within five years or less.
As a result, 88 per cent of shale gas production comes from just six of 30 plays, while 70 per cent of all tight oil production comes from two of 21 plays: North Dakota’s Bakken and Texas’ Eagle Ford.
Bad omens for BC
Rapid depletion rates, high capital costs and low market prices do not bode well for British Columbia’s much-hyped plans to export shale gas to Asian markets via a liquefied natural gas (LNG) system that currently does not exist.
“In terms of B.C., the well depletion will be similar. All of the fields outside of the Horn River and Montney plays are in decline,” Hughes told The Tyee in an interview.
“The province would have to nearly quadruple gas production just to satisfy the demands of five LNG terminals.” As many as 12 terminals have been proposed for B.C. “It’s a huge scaling problem.”
The government of Premier Christy Clark has championed LNG development as the province’s new economic miracle by subsidizing geoscience, roads and water for shale gas companies.
It has also lowered royalties. Income from shale gas peaked in the province in 2006 at more than $2 billion and has since fallen to less than $400 million, excluding government subsidies.
Data: BC Ministry of Finance, Economic and Financial Review and Budget 2013.
The Business Council of British Columbia whose executive council includes representatives from Encana and Kinder Morgan, supports accelerated LNG development on the grounds that global markets will likely not need the gas in the future: “Overall, there is sufficient evidence in the marketplace to suggest that, if the current LNG contract window closes before B.C. is able to secure final investment decisions, there would be potentially lengthy delays before B.C. and Western Canadian natural gas would have another LNG export opportunity.”
Hughes told investors that the shale gas revolution follows a predictable life cycle.
A land-leasing frenzy follows discovery. Then comes a drilling boom, necessitated by lease requirements, which locates, targets and depletes the sweet spots. Gas production grows rapidly and is maintained “despite potentially uneconomic full cycle costs.” (Production provides cash flow even though the well may not have been economic in its own right).
After five years, fields such as the Haynesville reach middle age. At that point geology takes over from technology, and it takes progressively more wells to offset field declines as drilling moves out of sweet spots to lower quality areas.
‘It’s all in the red’
Due to depressed natural gas prices, the shale gas industry has written down billions of dollars worth of assets and refocused drilling on more lucrative liquid rich formations. Other companies have lobbied strongly for government subsidies for LNG exports.
Rex Tillerson, CEO of Exxon Mobil, a multi-billion dollar shale gas investor,exclaimed last year that the industry was making no money: “It’s all in the red,” he said.
Royal Dutch Shell has written down $2 billion in shale assets and even put its Texas Eagle Ford properties up for sale. Meanwhile, one of its senior executives has complained that the industry has “over fracked and over drilled.”
Encana, one of the largest holders of shale gas real estate in B.C., has sold off many assets and laid off 20 per cent of its workforce due to poor investments in uneconomic shale gas plays.
The company pioneered the transformation of landscapes across the West, with industrial clusters of wells combining horizontal drilling with multistage hydraulic fracturing. The 10-year-old mining technique blasts large volumes of water, sand and toxic chemicals into dense rock formations up to two miles underground.
Hughes, head of Global Sustainability Research Inc., will be one of the experts addressing the Transatlantic Energy Forum in Washington, D.C. on Monday. The forum brings together energy and climate change experts from both sides of the Atlantic Ocean.
Tick, tick, tick. The countdown to another rail accident is already on. A 90-car derailment last week in Alabama is only the latest in a series of train wrecks unfolding across North America. The next one, as promised by a dangerous combination of lax regulations and booming traffic, is just around the bend.
Fracking may be paving the way towards energy independence for North America, but that doesn’t mean Big Oil has the infrastructure in place to move all that new oil around the continent. Whether British Columbians on the Pacific coast or Nebraskans in the corn belt, the public doesn’t want new pipelines running through their backyards.
Rail, of course, has come to the rescue, regaining a prominence for the oil industry that it hasn’t enjoyed since early last century. The number of barrels being moved by rail has soared on both sides of the border. The extra traffic has certainly been a boon for the bottom line of railways. Investors in rail stocks, though, would be wise to take a long look at whether the good times will keep rolling.
At first blush, the immediate prospects certainly appear bright enough. In North Dakota, home of the prolific Bakken light oil play, workers are scurrying to build as many as 20 terminals that will eventually allow more than half-a-million barrels a day to move by rail. In Canada, rail shipments have nearly tripled since the beginning of the year to 175,000 barrels a day. What’s more, moving oil-by-rail in this country may still be in the early innings.
Plans are afoot to build three rail-loading terminals in western Canada with a combined capacity of 350,000 barrels a day. Exxon, meanwhile, is also musing about building its own rail terminal in Edmonton to handle production from its massive Kearl oil sands project. All together, the planned construction of new terminals could mean as much as 900,000 barrels of oil are moved by rail in Canada in the coming years. That volume, as might be expected, roughly equals the capacity of the proposed Keystone XL pipeline.
While the rail terminals will be new, the tanker cars doing the hauling will not. Much of the oil moved around the U.S. and Canada is shipped via an aging tanker model known as the DOT-111. These cars, the subject of repeated warnings from the U.S. National Transportation Safety Board, have a thin metal skin that’s easily punctured in the event of a derailment.
Railways themselves don’t own the tanker cars, they just hitch their locomotives to a train of leased cars and away they go. The shale oil boom has been great for third-party vendors such as Procor Ltd. in Canada and Union Tank Car in the U.S. As an aside, both outfits are owned by Berkshire Hathaway, Warren Buffett’s holding company, which is seeing big bets on rail pay off, such as buying Burlington Northern Sante Fe in 2010.
Rail companies are busy leasing as many tanker cars as they can, even as questions are still being asked about the recent derailments in Alberta and Alabama. Thanks to booming oil traffic, though, railway profits are up. At CN, third-quarter earnings beat expectations, setting the stage for a stock split. According to chief executive Claude Mongeau, CN sees oil playing an even bigger role in the future. Not to be outdone by its rival, CP Rail has moved 45 million barrels of oil on 65,000 carloads through the third quarter and expects to haul upwards of 90,000 carloads by year-end.
In all the excitement over rising share prices and short-term profits, shareholders shouldn’t lose sight of the potential liabilities, both on the balance sheet and in the real world. As more oil gets moved around North America, more accidents will surely follow. We can only hope none of them are on the tragic scale of Lac-Megantic. At the moment, regulators are scrambling to wrap their arms around the boom in rail traffic, but they’ll eventually catch up. Any new pipelines, too, would similarly take the bloom off the rose for railways. Oil-by-rail may be pushing rail stocks higher for now, but the risks are becoming clearer with every new accident.
Former Fed Quantitative Easer Confesses; Apologizes: “I Can Only Say: I’m Sorry, America” | Zero Hedge
By Andrew Huszar, also posted at the WSJ. Mr. Huszar, a senior fellow at Rutgers Business School, is a former Morgan Stanley managing director. In 2009-10, he managed the Federal Reserve’s $1.25 trillion agency mortgage-backed security purchase program.
Confessions of a Quantitative Easer
We went on a bond-buying spree that was supposed to help Main Street. Instead, it was a feast for Wall Street.
I can only say: I’m sorry, America. As a former Federal Reserve official, I was responsible for executing the centerpiece program of the Fed’s first plunge into the bond-buying experiment known as quantitative easing. The central bank continues to spin QE as a tool for helping Main Street. But I’ve come to recognize the program for what it really is: the greatest backdoor Wall Street bailout of all time.
Five years ago this month, on Black Friday, the Fed launched an unprecedented shopping spree. By that point in the financial crisis, Congress had already passed legislation, the Troubled Asset Relief Program, to halt the U.S. banking system’s free fall. Beyond Wall Street, though, the economic pain was still soaring. In the last three months of 2008 alone, almost two million Americans would lose their jobs.
The Fed said it wanted to help—through a new program of massive bond purchases. There were secondary goals, but Chairman Ben Bernanke made clear that the Fed’s central motivation was to “affect credit conditions for households and businesses”: to drive down the cost of credit so that more Americans hurting from the tanking economy could use it to weather the downturn. For this reason, he originally called the initiative “credit easing.”
My part of the story began a few months later. Having been at the Fed for seven years, until early 2008, I was working on Wall Street in spring 2009 when I got an unexpected phone call. Would I come back to work on the Fed’s trading floor? The job: managing what was at the heart of QE’s bond-buying spree—a wild attempt to buy $1.25 trillion in mortgage bonds in 12 months. Incredibly, the Fed was calling to ask if I wanted to quarterback the largest economic stimulus in U.S. history.
This was a dream job, but I hesitated. And it wasn’t just nervousness about taking on such responsibility. I had left the Fed out of frustration, having witnessed the institution deferring more and more to Wall Street. Independence is at the heart of any central bank’s credibility, and I had come to believe that the Fed’s independence was eroding. Senior Fed officials, though, were publicly acknowledging mistakes and several of those officials emphasized to me how committed they were to a major Wall Street revamp. I could also see that they desperately needed reinforcements. I took a leap of faith.
In its almost 100-year history, the Fed had never bought one mortgage bond. Now my program was buying so many each day through active, unscripted trading that we constantly risked driving bond prices too high and crashing global confidence in key financial markets. We were working feverishly to preserve the impression that the Fed knew what it was doing.
It wasn’t long before my old doubts resurfaced. Despite the Fed’s rhetoric, my program wasn’t helping to make credit any more accessible for the average American. The banks were only issuing fewer and fewer loans. More insidiously, whatever credit they were extending wasn’t getting much cheaper. QE may have been driving down the wholesale cost for banks to make loans, but Wall Street was pocketing most of the extra cash.
From the trenches, several other Fed managers also began voicing the concern that QE wasn’t working as planned. Our warnings fell on deaf ears. In the past, Fed leaders—even if they ultimately erred—would have worried obsessively about the costs versus the benefits of any major initiative. Now the only obsession seemed to be with the newest survey of financial-market expectations or the latest in-person feedback from Wall Street’s leading bankers and hedge-fund managers. Sorry, U.S. taxpayer.
Trading for the first round of QE ended on March 31, 2010. The final results confirmed that, while there had been only trivial relief for Main Street, the U.S. central bank’s bond purchases had been an absolute coup for Wall Street. The banks hadn’t just benefited from the lower cost of making loans. They’d also enjoyed huge capital gains on the rising values of their securities holdings and fat commissions from brokering most of the Fed’s QE transactions. Wall Street had experienced its most profitable year ever in 2009, and 2010 was starting off in much the same way.
You’d think the Fed would have finally stopped to question the wisdom of QE. Think again. Only a few months later—after a 14% drop in the U.S. stock market and renewed weakening in the banking sector—the Fed announced a new round of bond buying: QE2. Germany’s finance minister, Wolfgang Schäuble, immediately called the decision “clueless.”
That was when I realized the Fed had lost any remaining ability to think independently from Wall Street. Demoralized, I returned to the private sector.
Where are we today? The Fed keeps buying roughly $85 billion in bonds a month, chronically delaying so much as a minor QE taper. Over five years, its bond purchases have come to more than $4 trillion. Amazingly, in a supposedly free-market nation, QE has become the largest financial-markets intervention by any government in world history.
And the impact? Even by the Fed’s sunniest calculations, aggressive QE over five years has generated only a few percentage points of U.S. growth. By contrast, experts outside the Fed, such as Mohammed El Erian at the Pimco investment firm, suggest that the Fed may have created and spent over $4 trillion for a total return of as little as 0.25% of GDP (i.e., a mere $40 billion bump in U.S. economic output). Both of those estimates indicate that QE isn’t really working.
Unless you’re Wall Street. Having racked up hundreds of billions of dollars in opaque Fed subsidies, U.S. banks have seen their collective stock price triple since March 2009. The biggest ones have only become more of a cartel: 0.2% of them now control more than 70% of the U.S. bank assets.
As for the rest of America, good luck. Because QE was relentlessly pumping money into the financial markets during the past five years, it killed the urgency for Washington to confront a real crisis: that of a structurally unsound U.S. economy. Yes, those financial markets have rallied spectacularly, breathing much-needed life back into 401(k)s, but for how long? Experts like Larry Fink at the BlackRock investment firm are suggesting that conditions are again “bubble-like.” Meanwhile, the country remains overly dependent on Wall Street to drive economic growth.
Even when acknowledging QE’s shortcomings, Chairman Bernanke argues that some action by the Fed is better than none (a position that his likely successor, Fed Vice Chairwoman Janet Yellen, also embraces). The implication is that the Fed is dutifully compensating for the rest of Washington’s dysfunction. But the Fed is at the center of that dysfunction. Case in point: It has allowed QE to become Wall Street’s new “too big to fail” policy.
When Bubbles Fail: Albert Edwards Explains What Happens When The Fed Can No Longer Contain The Fury Of The “99%” | Zero Hedge
- The Credit Bubble Is Not Only Back, It Is 94% Bigger Than In 2007 (zerohedge.com)
- Is Global Real Estate Still in a Bubble? (ritholtz.com)
- The Consequences Of QE For The Long-Term (etfdailynews.com)
- Fed’s Williams Says to Spot Bubbles Throw Out Idea Investors Are Rational (blogs.wsj.com)
- Is China an ‘Enormous Tail-Risk’? (ritholtz.com)
- Why Interest Rates Will Explode Again (etfdailynews.com)
- Paul Krugman: This Age of Bubbles (economistsview.typepad.com)
- Gold Shortage Creating Massive Problems For Bullion Banks (jsmineset.com)
- Unprecedented Events in Gold/silver, Physical Shortages & More (sgtreport.com)
- Eric Sprott: Physical Gold Shortage Now Reaching Extremes! (socioecohistory.wordpress.com)
- Backwardation, negative GOFO and the gold price (therealasset.co.uk)