Tuesday night, Kodiak Oil & Gas Corp. reported fourth
quarter 2011 and full year 2011 financial results. It was not the results that interested me; it was what they
said. Kodiak, in a paragraph about
future expectations, described our energy policy without calling out the
foibles.
I quote from the financial statement, “During the past month the
quoted prices for oil coming out of the Williston Basin on pipeline (typically
quoted at Clearbrook, Minn. and Guernsey, Wyo.) were substantially less than
prices quoted for West Texas Intermediate. The increase in the
differential was primarily the result of significant amounts of crude oil from
Canada which was competing for capacity on existing pipeline infrastructure,
the down-time associated with scheduled maintenance at refineries and the
expanded volumes produced in North Dakota in late 2011 and early 2012 as
weather conditions were mild. North Dakota is currently producing approximately
535,000 barrels of oil per day.”
First, they addressed a pipeline issue. They received an oil price
substantially lower than prices quoted for West Texas Intermediate (actually
there are two points to address here). The increase in the differential (WTI quoted price less
the price quoted for oil coming out of the Williston basin on pipeline,
adjusted for delivery point) was primarily the result of significant amounts of
crude from Canada, which was competing for capacity on existing pipeline
infrastructure. With production
continuing to increase in Canada from oil sands production and North Dakota
shale oil production, there is a pipeline capacity shortage at the current
time. While the Keystone XL will
not address the capacity issue today, ceteris paribus, it will tomorrow. Clearly, we do not have enough
pipelines configured to address the shortage in that part of the country. The second point, is that WTI is quoted
at Cushing, OK. This is the
delivery point and pricing point for WTI crude. There are storage terminals there, but definitely not
enough. When the storage reaches
capacity, there is no place to put the benchmark crude, so it is priced lower
and redirected through the pipeline system. This benchmark has been compared to and priced against Brent
crude from the North Sea, further exacerbating the pricing of crude in the US
and ancillary hedging. This second
differential is being addressed by reversing the flow of crude from Cushing, OK
to another pipeline system, by building a spur. The President and environmentalists are fighting this.
Second, the company addressed the downtime associated with
scheduled maintenance at refineries.
While this is a normal, seasonal downtime maintenance (typically
maintenance is done twice a year – the first is to switch the refinery’s
ability to produce winter heating oil to summer gasoline; the second occurs in
the fall to switch to winter heating oil from summer gasoline), it is a bit
early due to the warm winter weather.
In September 2011, ConocoPhillips shut down its
refinery in Trainer, PA and Sunoco’s Marcus Hook, PA refinery was shutdown in
December 2011. These refineries
shutdowns have contributed to the some tightness in the refining market. While the general public complains
about gasoline prices, they don’t think twice about paying roughly the same
price for a gallon of bottled water.
The number of jobs required to bring that gallon of gasoline to us is
multiples that of jobs provided by bringing the water to us. Yet, the general public does not fight
to prevent a refinery shutdown.
Without the refineries, gasoline prices would be much higher. We can not have a choice of no
refineries and low gasoline prices.
The general public wants to close refineries in general.
Third, the expanded crude oil volumes from North Dakota to
535,000 barrels of crude oil production per day contributed to the lower quoted
prices out of the Williston Basin.
Thanks to new and enhanced drilling techniques of horizontal drilling
and hydrofracing, production of oil and natural gas has increased substantially
in the US. Reserves of both have
been added as well. For instance,
natural gas reserves in the Lower 48 States have increased from 184,106 billion
cubic feet in 2004 to 263,408 billion cubic feet in 2009, according to the EIA
latest data. That is a 43%
increase in reserves in 5 years because of these technologies. North Dakota’s oil production has
increased from 98,000 barrels of crude oil per day in 2005 to 310,000 barrels
per day in 2010 in a 5-year period, or an increase of 216%. That further increased to 535,000
barrels per day by January 2012. Yet,
the general public and environmentalists want to stop these practices, along
with the many high paying jobs.
What is clear to me, is that the US has no clear understanding
of jobs, costs, substitutes, supply and demand of all aspects of energy. Our government, as well as the EU,
found that by putting into place oil sanctions against Iran with the hope of
reducing oil revenues, Iran’s life blood, that, we would force them to the
negotiating table. So far this has
not happened, instead crude oil prices have rising rapidly along with gasoline
prices. This type of diplomacy was
ill conceived and is creating as much hurt to the US and EU citizens, an
unintended consequence, as it is to the Iranians. To add more incompetence to this diplomatic folly, is notion
of releasing oil from the Strategic Petroleum Reserves (SPR). This is bad politics and
economics. What if we released oil
from the SPR during the summer driving season (seasonally the highest price of
gasoline during the year) to reduce the price of gasoline going into elections,
and then Iran did something crazy like attack Israel or sink ships in the
Strait of Hormuz to bloc oil shipments?
We will have released oil for political purposes and not fundamental
purposes. If the above scenario happenes, the price of gasoline will easily move
above $5.00 per gallon. Then
what? How was that 2% payroll tax
savings used now?
