The price to kill unconventional oil

11:47 PM Reporter: Baris Sanli 0 Responses

The oil prices have seen the biggest decline in years. There are lots of analyses and discussions to reachto the undercurrents. But one important element of energy markets is,you shall not stuck to the present but to speculate on the future developments and position yourself accordingly.

Oil prices themselves can not be modelled for long time. IEA’s projections are the witnesses. They do not model oil prices but simply assume the pathway to the future. The human mind can not gather all dynamics to pursue a forecast for oil prices. They are basically –due to our incapacity- random walk for now.

Take the brent price for example… Who do you think can guess the prices better? A trader or a monkey. If you choose  traders, as I have done before, you are dead wrong. Until July very very few predicted the prices will go down, all majors predicting high prices. Why? Let’s look at forecasting the best portfolio for investment.

When it comes to select the portfolios for investment, economist Burton Malkiel claims “a blind folded monkey throwing darts at a newspaper’s financial pages could select a portfolio that would do just as well as one carefully selected by experts”(1) in his “A Random Walk Down Wall Street”. Oil prices are not very different. A monkey can do better. Even if you reject to make a calculation and just spell the price of today, theoretically you will be more succesful than the best predictor.

Or from another perspective, prices are created by the interaction of so many events , Chaos theory’s famous butterfly-stormexample is well suited for the oil prices. But neverthless we can extremely simplify everything and try to find our way out of this mess..

Let’s focus on unconventional oil. We can easily assume that prices are not predictable. Because there is a two way interaction, prices create or destroy oil production and oil production deflates or inflates  prices.But it doesn’t end there. The level and duration of prices are extremely important.

If the prices stay low for a limited period of time, consumers do not relax and scrap the efficiency gains from the “high price era”. But if this limited time prolongs, the consumers skip the lessons from the wild era of oil price peaks and go back to driving SUVs. And here is the proof from November 2014.

According to Bloomberg, US car sales increase 4.6% in November 2014. Toyota Prius sales were down 14%. Car sales up 1.2%. SUVs and crossover utility vehicles rose 12%.Despite being more efficient than 4 years agos, SUVs are heavyweights of oil consumption.

This latest statistics shows that oil prices can not stay low for so long. Assuming that China and EU, US will not fall into recession.

If prices can not stay low for so long, what is the balancing price? So far, below 80 $ for brent is a positive sign for demand increase. The statistics confirm that. People got used to 100$s and anything around 80$s is a flag for more consumption. It is like drinking water after eating lemon.

But prices are still decreasing as of December 2014? Yes because the dynamics are also distorted by some other behavioral factors. The battle for the market share!

Kingdom of Saudi Arabia(KSA)’s price discounts  to US and Asian markets are an indication of such a war. It is not economics but sentiments.. KSA feels threatened by the long term (not short term) structural changes in the market. It has the guts to lower the prices to preserve its position in its major markets for the endless battle to kill shale oil.

But what is the price level to kill shale oil?


EIA’s director Adam Sieminski has an excellent answer for such discussions. The price vs production graph for US unconventional oil explains it all. It says “above 70$, more will come”. Between 50 and 60$, there are few reasons to be bullish.

KSA can practically drop the prices to 30$ and even 20$ for a limited period of time. But the production may not stop there. To understand why, we need to clarify terminology.

According to Professor Paul Stevens from Chatham house, we have to make a distinction between break-even and shut in prices:

  • “Break-even price: what investors consider when deciding whether to invest in new production capacity”
  • “Shut-in price: what existing operators consider will cover variable costs if not, will stop production from existing wells.”

Let me clarify the logic behind these terms. Assume that you opened a restaurant and spent 50000$s for decoration, construction, marketing etc..  To survive you assumed a 1000$ turnover everyday. On Monday, Tuesday and Wednesday, the turnover was terrible and you hardly made 700$. Everyday, you have to spent 500$ for meat, vegetables etc and workers. 1000$ is your break-even price, 500$ is your shut-in price.

You simply do not shut down your restaurant because of the short term results. But if you can not even earn 400-500$s, that’s the trouble. Even if you make less than 1000$, you may continue the operation for another 3 months with improvements. With less than 500$, dead in a matter of weeks.

Oil wells are alike. Once you made the investment, break-even price is not enough to kill your investment. Actually the killer price is much much lower than break-even price, it is the shut-in price. Your bank can reorganize your payments for some time, but 2 weeks of non payment to workers may stop your operation.

Prof Stevens claims, the shut-in price for shale is below 40$s. As he claims this is debatable…

Can 40$s kill shale oil? It depends on the duration of low prices. 6 months – 1 year with prices below 40$? No…

No it should be long enough to persuade consumer that prices will stay low for a long time and he should increase his consumption. Practically, if anyone with a Prius changes his mind for a Hummer, that is a sign. And this will ignite another cycle of demand growth to fuel prices.

So not only price but the persistance of this price will define partly the fate of shale oil. As the prices are not predictable, it has to persuade!

What ever it is, oil prices are not only a bunch of numbers, but numbers that turn the mills of economy and consumer behavior, a sign of health, a multi dimensional vector summed up in 2 or 3 digits. It is not only the level of digits that will kill shale oil but the other dimensions.

To persuade, the discounts shall continue, they had to persuade consumers and “traders”, if the recent move aims to kill shale. That is why prices may collapse in the short term, because it is race to the bottom as well as race to the nowhere for producers.










Living in a 392$/barrel world - Turkish oil market in 2011

10:14 AM Reporter: Baris Sanli 0 Responses
Turkish petroleum prices at the pump are as follows:
  • gasoline prices are 4.5 TL/liter (2.54 $/liter), (1.9 €/liter) (9.6 $/gallon)
  • diesel prices are 3.9 TL/Liter
  • 1 $ = 1.77 TL and 1 € = 2.37 (by the end of Feb 2011)
Practically 2.5$/liter is equivalent to 392 $ /barrel. So what are the implications of this high prices. According to Turkish Petroleum Organization ( report for 2011, there are several results.
First of all about prices; The price consists of 1/3 refinery price and 2/3 tax. Therefore a 35% increase in world oil prices is reflected as 13.9% increase at the pump...Below is the table for prices in TL.

The other result is a decreasing consumption of Gasoline and consumer demand towards cheaper and more efficient fuels.
In 2011, Turkish gasoline consumption dropped 5.4 % , this has three reasons
1. People are buying preferring smaller engine size (<1600 cc), due to taxes and expensive oil prices
2. People are chosing diesel cars over gasoline cars since diesel is cheaper, more energy dense (more km/liter) and efficient engine technology.
3. Gasoline cars in Turkey can be retrofitted with LPG units with a cost 600-700$... There are estimated to be a 2.5 million gasoline powered cars with LPG units(2011). Since LPG tax is lower

Therefore, if you buy a car, you hardly give up the car for fuel price reasons. But you try to minimize operating costs (diesel, LPG fuels) despite upfront costs (diesel cars cost more, LPG unit). That is to say, even a 400$/barrel world will not stop the car sales figures but shift the consumer choice for more expensive(in sales prices) but relatively less costly(fuels) to operate cars.

Daily official oil prices from EPDK ,
Daily Exchange Rates from Turkish Central Bank


Further Gazprom Discounts?

9:56 AM Reporter: Baris Sanli 0 Responses
"The representatives of "Gazprom" has recently stated that they could reduce by 7-10 per cent of the price of gas to EU countries"

" It is reported that representatives of the Russian gas monopoly at the meeting spoke about the ongoing negotiations to reduce the price of gas from companies such as RWE, Shell Energy Europe, E.ON, Eni, GWH Gashandel, Centrex, EGL, GasTerra, Dong and Polish PGNiG."

" In 2011 "Gazprom" has exported to Europe about 150 billion cubic meters of gas at an average price of 384 dollars per thousand cubic meters. According to experts of the company, this year the average price of gas will be about $ 415"


Turkmenistan's gas price to China and Gazprom

11:03 AM Reporter: Baris Sanli 0 Responses
As of 13 February 2012
Turkmenistan gas price to
  • China is : 192 $ / 1000 m3 (5.48 $/mmbtu)
  • Gazprom is: 240 $ / 1000 m3 (6.85 $/mmbtu
Prior to 2009. revenues from the sale of natural gas accounted for about 70% of the gross national product. In better times, in 2008. Turkmenistan Gazprom sold about 50 billion cubic meters. meters of natural gas valued at approximately $ 7 billion.
2010, volume of purchases fell to an annual 11 billion cubic meters
Gas exports to Iran is limited to 8 billion cubic meters., as reported


Iran's record gas consumption

9:30 AM Reporter: Baris Sanli 0 Responses
Iran's production: 554 million m3 (mcm/day)
28 out of 31 regions in Iran is experiencing freezing colds.
Iran's daily demand hit a record 551 million m3/day (mcm/day). claims a new record of 556 mcm/day
Iran also exports 30 mcm/day to Turkey.
Iran Turkmenistan pipeline capacity is 50 mcm/day.
Turkmenistan has cut natural gas to Iran from 20 to 10 mcm/day.



Iraq's Electricity Problems

3:37 PM Reporter: Baris Sanli 0 Responses
As of December 2011, the output of electricity sector in Iraq averages more than 8,500 MW, while the demand is typically more than 14,000 MW

There is a growing problem of electricity shortage in Iraq. If you check the Brooking's index for Iraq, you will see "Average hours of electricity/day" progress.
But the story does not start here.... It was chronic for such a long time
In February of last year(2011)'s popular demonstrations took place in Baghdad and the various provinces demanding better services in the forefront of electricity and asked Prime Minister Nuri al-Maliki's Hundred Days give him a chance to address these problems, most notably the electricity (average hours served) and the electricity crisis has aggravated rather than lessened.
According to Darel Hayat:
that the rate of the highest level of production of electricity for any month in the history of the Ministry of Electricity of Iraq was about 5,500 MW and that was in August (August 2011) ,When you add electricity imported by Iraq from outside its system (Iran and commercial stations in Kurdistan and commercial vessels in the Shatt al-Arab) the rate of supply of electricity in August 2011 is about 7900 MW which is also higher by about 26 percent than it was in ent of what it was in the same month of 2010 (4800 MW)
Iraq seems to depended on imports of electricity to a very large extent
Currently it is worse but will be worse by Summer of 2012, Mubasher claims:
Problems are:
1. Transmission sistem is old and needs rehab
2. Technical flaws in distribution network
3. Power plants to be built

It is expected that the Iraqi demand will hit 16000 MW, not even this capacity with imports will be enough...
Mubasher also claims the supply and demand is unmatched by 10000 MW.
Iraq needs a capacity of 18000 MW and you see lots of new contracts signed in the news



Effects of Cold Weather for Gas Supplies in Europe and Middle East

11:02 AM Reporter: Baris Sanli 0 Responses
According to
Turkmenistan has cut gas to Iran from 20 million m3 to 10 million m3. Even to 6 million m3
Iran-Turkmenistan pipeline capacity 50 million m3 (mcm)
Iran reduced gas to Turkey to 30 million m3(?)
Kommersant claims Gazprom has not fulfilled its duties to Europe
%10 incomplete delivery to Europe
Gazprom" for the first time recognizes that fail to meet the peak load
With Nordstream Gazprom's export capacity hit 210 bcm(billion cubic meters), but article claims it can not export 180 bcm
Poland, Slovakia, Austria, Hungary, Bulgaria, Romania, Greece and Italy. The most serious deficiency - in Austria (30%), Italy (24%) and Poland (8%)
Turkey is supplied more than 8 mcm/day than contracted(?),
Poland received 38 mcm/day instead of 40 mcm/day
Italy claims short supply of 10-20 mcm/day (95.7 mcm/day received instead of 108.3)

Cold weather
Reduced imports from Turkmenistan (from 40 bcm to 10 bcm)
Ukraine is claimed to be taking more than contracted (150-170 mcm/day instead of 130 mcm)


Turkey's record Natural Gas and Electricity consumption

10:27 AM Reporter: Baris Sanli 0 Responses
According to TEİAŞ, Turkish electricity system produced a record
  • 35446.1 MWe (Momentarily) - 16th Jan
  • 34971 MWe (hourly average) - 16 th Jan
  • 0.71 TWh maximum daily consumption in 12th Jan 2012
The previous record and alltime high maximum peak production happened on
28th July 2011 - 36112.4 MWe at 14:30 local time

Sabah newspaper also claims, maximum daily consumption has occured as
- 180 million m3 /day
- 170 million m3/day

This is due to extreme cold affecting Anatolia and Tracia...


Energy Security question from a Russian Perspective

3:45 PM Reporter: Baris Sanli 0 Responses has a comprehensive review of "Energy Security Question from a Russian Perspective"

Here are some of the parts:

"Already, in some regions of Russia there is a shortage of natural gas."
"An even greater threat will be a reduction in export volumes of fuel, when and if it coincides with a decrease in world prices for oil and gas"
"Change of average world oil prices at $ 1 per barrel will result in additional lost revenue or budget of the Russian Federation in the amount of 55-58 billion rubles (1.8 billion $)"

"Federal budget for 2012 with an estimated deficit of 1.5% of GDP is calculated based on the average price of Urals crude at $ 100 per barrel. Deficit budget in 2012 is possible at 117 dollars per barrel"

"Average distance delivery of raw materials is more than 3000 km (from Libya - 600 km, Norway - a thousand km) "

"The main contradiction: for the development of new oil production of the Arctic Region is required to invest a minimum of 70-120 billion dollars at partial guarantee of success"

This part is especially important since it lists a bunch of possible disturbances to Russian energy security question:

"The situation is exacerbated by the fact that in recent years formed the world market for gas:
  • liquefied natural gas (LNG) has been actively competes with the natural gas,
  • in Europe served the Norwegian North Sea gas,
  • the U.S. actively developing shale gas deposits.
  • European natural gas consumption has decreased while because of competition from LNG.
  • The gas pricing is increasingly moving away from contract prices to spot, as a result of this purchase price of Russian gas is reduced."