The Coal Industry May Never Recover From The Pandemic

[Jan van Eck + 7,558]

On 6/28/2020 at 3:39 PM, Gerry Maddoux said:

What a crock of disinformation this forum has become!

That strikes me as a little bit harsh.  Just saying.....

[Jan van Eck + 7,558]

36 minutes ago, D Coyne said:

the flat Earth crowd think climate change is a Marxist conspiracy. 

You mean it isn't?

[D Coyne + 305]

On 6/24/2020 at 3:10 PM, ronwagn said:

I think you are forgetting about methane hydrates and biogas which are a larger potential resource than all conventional land based natural gas. I should also mention natural gas vents in the ocean which are a potential source and end up in our atmosphere. But, as I said, all safe sources of energy could and should be used. 

How much natural gas has been produced profitably (no government subsidies) from methane hydrates?  How about biogas?

Just because a resource exists, does not mean it will ever be profitable to produce.  The same rule applies to Kerogen resources and much of the coal resource in the World where seams are too thin or the resource is too deep for it ever to make economic sense.  If it cannot be produced profitably, it should not be produced.

[Jan van Eck + 7,558]

On 6/27/2020 at 4:14 PM, NickW said:

when I drive to my holiday home the visual impact offends me for the 20 seconds they are in view...........

That is likely true for some sites.  However, I invite you to ponder Wolfe Island, Canada, where there are 86 machines, each roughly 2.2 MW, crowded into the western end of a quite island.  It has become a mess, and the landscape is pretty much wrecked:

The local view is overwhelmed by the giant machines.  Personally, I find them unpleasant, but I would agree that that is in the eye of the beholder.  They do provide some royalty income, b ut also discourage tourists that previously stayed on the island:

These things are not an unalloyed blessing.  This particular site has better wind than others, hence the popularity in putting up 86 machines under a PPA, which basically makes them PURPA Machines.  And the consumer pays a premium for the electricity.  Considering how much run-of-river hydro there is in Ontario, I consider these machines to be a poor choice. 

[Dan Clemmensen + 1,011]

10 minutes ago, D Coyne said:

Keep in mind that the tight oil industry as a whole has racked up over 300 billion in cumulative debt so far (this is a very conservative estimate, the actual total is likely 50% higher), so it is not a profitable venture to date.  At $65/bo it might be able to be profitable, but is unclear there will be adequate World demand to sustain that price.  Bottom line  the total tight oil resource extracted in the US will be on the order of 50 to 90 Gb total (about 17 Gb of cumulative tight oil output to date), with about 30 Gb to 70 Gb remaining, if oil prices rise to $65/bo or higher and remain at that level until 2040.  Note that the US input to refineries each year is about 6 Gb per year, so 60 Gb would last for 10 years if it was the only input to US refineries (which in fact can only handle about 1.8 Gb per year, at that rate the tight oil resource might last for 33 years (assuming constant rate of use at 1.8 Gb per year) if none of the tight oil was exported.  Currently we export tight oil at the rate of about 1 Gb per year.

It does not matter what prior investor lost. It only matters what new investors think they can gain. It is reasonable to assume that the earlier loses would teach the market something, but there is not much evidence that it actually works that way. They drilled and pumped in the Permian at record rates throughout 2019 with prices in the mid-$50's. 2020 is of course totally weird. What happens in 2021 remains to be seen. Until the storage overhang is depleted and the actual demand stabilizes, we are more or less guessing.

I'll trust your numbers on LTO refinery demand in the US, but those assume that US refineries will not change much, and that's far too bold a prediction for me. The current refineries were built based on the supplies available to them in the late 1990s. Both the supply mix and the demand mix have changed and and are likely to change more, and some crazy investors may see an opportunity.

[Jan van Eck + 7,558]

On 6/24/2020 at 5:39 PM, NickW said:

Why would even the most extreme global warming believer avoid buying a coastal property? They can just sell in 20 years to a climate change denier. 

If the coastal real estate of the rich is ever considered threatened, then Goldman Sachs will float yet another securitized mortgage-backed security bond to raise the capital to build diversion dams on the Congo and Mississippi, and send the waters out into the deserts, thus diverting water that would otherwise equal sea level rises.  Labor is cheap in the Congo.  For a few hundred billion you could do all the big rivers, probably toss the Ganges in there for good measure.  Hey, for Goldman Sachs, that is child's play, they can do that before lunch.  Plus make a nice arbitrage commission as the lead underwriter; put that extra coin into the manager bonus pool. 

[Jan van Eck + 7,558]

6 minutes ago, Dan Clemmensen said:

Until the storage overhang is depleted

Nah.  Tanks are cheap; those guys will just go build more tank farms, pick up charges for storage.  The storage may be worth more than the oil, who knows.  Never underestimate the ingenuity of the oil patch guys. 

[Ward Smith + 6,615]

On 6/20/2020 at 9:25 PM, Physics Prof. said:

I'm an astrophysics prof

pleased to meet you, I'm Kermit the frog

[Dan Clemmensen + 1,011]

4 minutes ago, Jan van Eck said:

Nah.  Tanks are cheap; those guys will just go build more tank farms, pick up charges for storage.  The storage may be worth more than the oil, who knows.  Never underestimate the ingenuity of the oil patch guys. 

I was referring to "floating storage" i.e., VLCCs sitting at anchor. They have not all been emptied yet and the lease costs are not cheap.

[Jan van Eck + 7,558]

1 minute ago, Dan Clemmensen said:

I was referring to "floating storage" i.e., VLCCs sitting at anchor. They have not all been emptied yet and the lease costs are not cheap.

That little stunt has been an expensive exercise for whomever was behind it.  To the extent that it was Saudi oil intended for their own refinery in Port Arthur, Texas, they will continue to use it (and re-supply it from their own oil, not from US stock), so whatever they do with the gasoline, hey, that is up to them.  My guess is that they can get a decent price for the gasoline in non-US markets. Cheers.

[Dan Clemmensen + 1,011]

28 minutes ago, Jan van Eck said:

That little stunt has been an expensive exercise for whomever was behind it.  To the extent that it was Saudi oil intended for their own refinery in Port Arthur, Texas, they will continue to use it (and re-supply it from their own oil, not from US stock), so whatever they do with the gasoline, hey, that is up to them.  My guess is that they can get a decent price for the gasoline in non-US markets. Cheers.

Covid-19 was behind it. More crude was being produced than was being consumed and the traders needed somewhere to put their oil. That's why the price went negative. the system has not yet completely recovered.

[Jan van Eck + 7,558]

57 minutes ago, Dan Clemmensen said:

Covid-19 was behind it. More crude was being produced than was being consumed and the traders needed somewhere to put their oil. 

That does not seem to be the conventional wisdom.  "Traders" trade paper assets, not purchase physical barrels.  The physical barrels were apparently being furnished directly from and by the govt of Saudi Arabia.  The suggestion is that it was a crass attempt to crash the US oil price structure for spot purchases, with low-priced oil ready for delivery on the Gulf Coast.  That would back LTO up into Cushing, causing purchase and storage problems on the spot market.  Remember that most oil is traded on long-term contracts, so those are unaffected by swings in the trader pricing. 

[D Coyne + 305]

16 hours ago, Jan van Eck said:

You mean it isn't?

That is funny.  To be clear, I imagine you are intelligent enough to know the correct answer.  Sadly many are not.

[D Coyne + 305]

15 hours ago, Dan Clemmensen said:

It does not matter what prior investor lost. It only matters what new investors think they can gain. It is reasonable to assume that the earlier loses would teach the market something, but there is not much evidence that it actually works that way. They drilled and pumped in the Permian at record rates throughout 2019 with prices in the mid-$50's. 2020 is of course totally weird. What happens in 2021 remains to be seen. Until the storage overhang is depleted and the actual demand stabilizes, we are more or less guessing.

I'll trust your numbers on LTO refinery demand in the US, but those assume that US refineries will not change much, and that's far too bold a prediction for me. The current refineries were built based on the supplies available to them in the late 1990s. Both the supply mix and the demand mix have changed and and are likely to change more, and some crazy investors may see an opportunity.

Dan,

There is little evidence that many refineries are being retooled to handle the light tight oil, there is only so far they can blend this with heavier crude and maintain the proper output mix.  If you simply look at US exports of crude (pretty much 99% is tight oil) you will see it has been around 3 Mb/d while tight oil maxed out at an annual rate of about 8 Mb/d (2019) so far.

Eventually investors stop the flow of cash to tight oil producers, especially as many of the less well run companies will go under.

These companies cannot continue losing money forever, they are not high tech growth stories like Amazon or Tesla.

For some insight from a successful oil man who has produced oil profitably for 40 years or so see

https://www.oilystuffblog.com/single-post/2020/06/23/Why-Are-There-ANY-Rigs-Running-In-the-Permian-Basin-

My analysis of the breakeven WTI oil price needed for an average Permian basin oil well is about $60/bo.  This assumes an average full cycle well cost of $10.5 million and an annual discount rate of 10%, the discounted cash flow from all streams (oil, natural gas and NGL) over the life of the well is equal to the well cost at the breakeven price (in constant 2020$).

At prices below $60/bo these companies just burn cash.  Smart investors would keep this in mind.  Eventually they will learn. 

They may be shirtless before that happens.

 

[Dan Clemmensen + 1,011]

54 minutes ago, D Coyne said:

My analysis of the breakeven WTI oil price needed for an average Permian basin oil well is about $60/bo.  This assumes an average full cycle well cost of $10.5 million and an annual discount rate of 10%, the discounted cash flow from all streams (oil, natural gas and NGL) over the life of the well is equal to the well cost at the breakeven price (in constant 2020$).

At prices below $60/bo these companies just burn cash.  Smart investors would keep this in mind.  Eventually they will learn. 

They may be shirtless before that happens.

 

I believe your number but not your conclusion. No rational investor would touch this. However, this is effectively the same reasoning that we have seen published repeatedly since at least 2012, and investors still show up and dump money into the rathole. I note that on average people who play the horses lose and have been doing so for centuries. But the race tracks are still open. This is because individual gamblers are convinced that they are much smarter than the average gambler.

[Dan Clemmensen + 1,011]

1 hour ago, D Coyne said:

 

There is little evidence that many refineries are being retooled to handle the light tight oil, there is only so far they can blend this with heavier crude and maintain the proper output mix.  If you simply look at US exports of crude (pretty much 99% is tight oil) you will see it has been around 3 Mb/d while tight oil maxed out at an annual rate of about 8 Mb/d (2019) so far.

 

I have zero knowledge of the details, but all of that export LTO is being converted into product somewhere, and I assume this product is marketable. I thought this was being done in relatively low cost simple refineries, e.g. chinese "teapots". I further assumed that such refineries could be built in the US. What economic drivers prevent this?

[D Coyne + 305]

51 minutes ago, Dan Clemmensen said:

I believe your number but not your conclusion. No rational investor would touch this. However, this is effectively the same reasoning that we have seen published repeatedly since at least 2012, and investors still show up and dump money into the rathole. I note that on average people who play the horses lose and have been doing so for centuries. But the race tracks are still open. This is because individual gamblers are convinced that they are much smarter than the average gambler.

Dan,

Perhaps you are correct, generally I make the simplifying assumption that investors are rational, maybe that is a bad assumption.  Note that in 2012 tight oil was essentially like a start up and not expected to immediately be profitable and Brent oil prices were north of $100/bo and remained so until July 2014, by mid 2014 many tight oil companies had become cash flow positive, though there was still quite a bit of debt.  Basically anybody buying the stock of these companies or the bonds are placing a very long odds bet at oil prices less than $60/bo.  If oil prices rise to $100/bo, the bet might pay out, but its a 10:1 odds bet or worse, in my opinion.  Personally I am not a gambler and it is not a game that most individuals play with many millions of dollars.

[D Coyne + 305]

56 minutes ago, Dan Clemmensen said:

I have zero knowledge of the details, but all of that export LTO is being converted into product somewhere, and I assume this product is marketable. I thought this was being done in relatively low cost simple refineries, e.g. chinese "teapots". I further assumed that such refineries could be built in the US. What economic drivers prevent this?

Dan,

A refinery is a 30 year investment, it is a risk because the tight oil may not last that long, that is my guess for why these have not been built in the US.  If the US export ban on crude oil (which was in pace from 1975 to 2015) were reimposed by the Federal government, perhaps refineries for tight oil would be built, or existing refineries would be reworked to handle more of the LTO, that is a business decision by refiners.  

Paper below (from before the export ban was lifted) discusses the amount LTO that can be absorbed at various price levels relative to Brent.

https://www.mckinsey.com/~/media/mckinsey/dotcom/client_service/oil and gas/pdfs/797317 implications of light tight oil growth.pdf

Based on the analysis the refineries can handle about 5.5 Mb/d with a 2-3 dollar per barrel discount of LTO below Brent crude.

 

[Gerry Maddoux + 3,627]

1 hour ago, Dan Clemmensen said:

I have zero knowledge of the details, but all of that export LTO is being converted into product somewhere, and I assume this product is marketable. I thought this was being done in relatively low cost simple refineries, e.g. chinese "teapots". I further assumed that such refineries could be built in the US. What economic drivers prevent this?

Dan, there is no Chinese "teapot" that will handle much anything except coal--and there are literally thousands of these all over China. The refinery to handle LTO is a very sophisticated junkyard that cost about $3B. That's the reason everyone is sticking with the old refineries that handle a certain weight and sulfur content of oil: heavy sour has to be added to the LTO feedstock. 

That said, we are rapidly getting into a jam in this country. What with the political and philosophical mood, pipelines are coming under pressure, quite a bit of LTO is shut off from production, and yet no new sources are being exploited. Lots of gas, not so much new oil. 

Not only that but Mr. Biden has sworn that if elected he will ban fracking. If there is a clean sweep of the Senate and the House and the Executive, then he can likely do that. And we as a nation would immediately be hostage to OPEC once again. All of that would, of course, hasten the development of renewables, which is fine, but transition is still a very long process. 

That means $100 oil. 

And I'm not sure we'll even have LTO to beat about the ears any longer. We may have to run the experiment what the country--the U.S.--will do when put once again into the supplicant position. Might work fine. Might not. 

[Jan van Eck + 7,558]

3 hours ago, Gerry Maddoux said:

We may have to run the experiment what the country--the U.S.--will do when put once again into the supplicant position. Might work fine. Might not. 

Probably won't  [work fine].   

There is an old psychologist maxim:  "dependency fosters rage."   The suppliers of years past  (and potential suppliers of the future) are not the Norways of the world.  They tend to be 2nd-world and 3rd-world places, and they bear a deep sense of shame at being backward.  They rage against the West and the USA in particular.  Once the USA becomes a supplicant, what do you think, logically, is going to be the result?  Well, you can extrapolate from what would happen if rage were the motivator for reaction. 

[Jan van Eck + 7,558]

20 hours ago, Dan Clemmensen said:

done in relatively low cost simple refineries, e.g. chinese "teapots". I further assumed that such refineries could be built in the US. What economic drivers prevent this?

Refineries do not get built in prosperous democracies because of lawyers, and because of entrenched government bureaucrats. 

In the USA, if you were so reckless as to attempt to build a refinery, the neighbors would start suing you.  The environmentalists will start suing you and vandalizing your plants and machinery and torching your executives' homes.  The bureaucrats will demand vast studies to ensure your plans comply with the Enviropnmental Protection Act ["EPA"] and whatever else they dream up.  You are looking at ten years after you acquire the land before the first spadeful of earth gets turned.  Nobody, and I mean nobody, is ever going to build another new refinery in either Canada or the USA.  All done.

Refineries, smelters, steel plants, rubber plants and tire manufacturing, all that heavy stuff is only going to be done in 3rd-world countries.  It is not the "cheap labor" that faux-economists like to talk about.  It is the lawyers. 

Edited July 8, 2020 by Jan van Eck
typing error

[Richard D + 86]

On 6/20/2020 at 6:53 PM, Dan Clemmensen said:

I did not say (here) that the CO2 is a problem, although I think it is. I said that the PR guys talk about it because it makes the greenies happy that it is being reduced.  I did not mention the sulfur because I had forgotten about the scrubber retrofit problem. The utilities might have eked out a few more years on their coal dinosaurs if they did not need to retrofit scrubbers, but those old plants were already operating at lower and lower capacity because burning coal was more expensive than burning gas. They use the retrofit problem as an excuse so they can blame the government for the lost jobs, while they quietly take their increased profits to the bank.

Funny thing about sulfur emissions: they have a fairly large immediate effect of reducing global warming, because they act to seed clouds which reflect sunlight. It's a very short-term effect because the SO2 drops out within a year, at which point the CO2 that was produced at the same time as the SO2 takes over and keeps warming. Thus, a dramatic reduction in SO2 (as in the US in the 1970's) causes a spike on global warming.

I absolutely agree that the US needs to keep producing oil in the Permian for exactly the reason you mention: true energy independence. But the Permian will eventually run dry, estimated to happen between 2025 and 2030. By that time we can hope that a combination of reduced demand (due to EVs) and increasing supply diversity will have broken the OPEC cartel.

The effect of sulfur dioxide cannot be distinguished from the effect of particulates. My guess is that the climate effect is small in the USA. The big problem could be in the Arctic Circle,where the largest point sulfur dioxide source in the world is the nickel smelter at Norilsk. Explorers have said that they can smell it in the air. Increase in cloud in Arctic regions will reduce the radiation of heat from the planet in the area where it should be at its maximum. 

[Richard D + 86]

On 6/25/2020 at 1:32 AM, markslawson said:

Glanced at the NAS report. The findings are far from surprising. Everyone can agree on about one degree since start of industrialisation and 1.5 over 250 years is probably right, so I'm not sure what it was hoping to achieve. The real trick is to extend the time line back to the Medieval Warm period or the Roman Warm period or even the back end of the Holocene and then try to see whether the current warming is unusual or faster than previous changes in climate. There are those who claim that it is but given the huge error bars on proxy measurements (as evident in the NAS report) and the very short period of modern measurements it is difficult to take such claims seriously. Then there is the argument that okay, the earth's climate has been generally cooling on a geological time scale (no argument on that point), however the recent warming attributed to humans in this scenario - goes against that trend. So the change might not be significant but it upsets things, or something. See NASA's James E Hansen  Paleoclimate Implications for Human-Made Climate Change Hansen argument is that "moderate" global warming will trigger feedbacks and so on.. I'm not sure I take that argument seriously but it is an interesting one.. 

The accurate measurement of climatic data only started with the advent of satellites. 50 years ago,a housemate of mine used to climb a water tower in the English city of Birmingham to note the instrument readings in the weather station atop the structure. It was a miserable job that many people may have shirked. The reading of sea water surface temperature consisted of a seaman throwing a canvas bucket over the side of the ship and measuring the temperature of that water with a thermometer.

[Dan Clemmensen + 1,011]

3 hours ago, Richard D said:

The effect of sulfur dioxide cannot be distinguished from the effect of particulates. My guess is that the climate effect is small in the USA. The big problem could be in the Arctic Circle,where the largest point sulfur dioxide source in the world is the nickel smelter at Norilsk. Explorers have said that they can smell it in the air. Increase in cloud in Arctic regions will reduce the radiation of heat from the planet in the area where it should be at its maximum. 

The two have the same cooling climate effect: they cause clouds. They are easy to distinguish using instruments, and they have different other additional effects. Specifically, sulfur dioxide causes "acid rain" that can acidify unbuffered lakes (bad) and help fertilize some sulfur-deficient fields (good). The effect in the US was large in the 1970s and is small today because we started requiring scrubbers. Winter arctic clouds probably warm the arctic. Summer arctic clouds probably cool the arctic.  As I understand it, sulfur dioxide has a relatively constant half-life before it is washed out, while particulates tend to vary by size.  Focus on regional effects is interesting for some things, but the problem with coal is global warming, where warming in any region ultimately affects everybody.

[Richard D + 86]

US patent 4397822 details a process for producing alumina from power station fly ash. Adding carbon to the process improves it. Would it be possible to produce this carbon-containing fly ash by reducing excess combustion air to zero? An energy intensive process,but one that might be justified on strategic considerations for the USA. Preliminary reduction of the fly ash silica can be carried out by alkali extraction. Much of the silica is present as reactive crystobalite. The conventional Bayer process for alumina from bauxite is only around 1% energy efficient.