Flourless Chocolate Cake

An important white paper was released yesterday by E&W Strategies LLC that alleges that “[t]he establishment of the Renewable Fuel Standard (“RFS”), which was enacted for valid public policy reasons, provided the unintended framework for a new and persistent area of fraud.”

Sounds like there were not enough cooks in RFS kitchen

A full copy of the report entitled, “White Paper Addressing Fraud in the Renewable Fuels Market and Regulatory Approaches to Reducing this Risk in the Future,” can be found here.  The report is further discussed in an Oil and Gas Journal (“OGJ”) article entitled, “RINs program within RFS created opportunities for fraud, report says.”

The author of the report, which was commissioned by Valero Energy Corp., is E&W Strategies President, Doug Parker, who was a special agent in the Environmental Protection Agency’s (“EPA”) nationwide Criminal Investigation Division for 24 years, according to the OGJ and as discussed detail in the report.

According to the report, which was the result of a review centered on compliance within the RFS and the analysis of vulnerabilities of the RFS to criminal conduct, “[s]tructural vulnerabilities in the regulations, limited agency oversight, and a lack of market transparency within the RFS made this program a ripe target for massive fraud and illicit gain.”

The Renewable Identification Numbers (“RIN”) market was intended to create and promote an efficient trading market that encourages the use of renewable fuels through a system of tradeable compliance credits in connection with RFS goals; but like any form of “currency” system, it requires strict oversight or it will be ripe for deception.

However, as discussed in the OGJ article, not only did the EPA lack the resources to properly oversee the RIN market, but the report mentions that “the RFS is not a traditional regulatory program in that it is market based, and the EPA, unlike agencies such as the Securities and Exchange Commission (“SEC”) does not maintain significant staff expertise in the oversight of financial markets.”

  • As a result, the report calls the RFS program “a program susceptible to large scale fraud.”

Exactly how large is “large scale fraud?” The report provides that “[f]rom 2010 to the present, with moderate overall increases in renewable fuels integration, the RINs market has increased from less than $1 billion to in the range of $15 billion today – creating an exceptional new market opportunity for those seeking illegal profits.”

The lack of oversight of the RFS and RIN market discussed in the report is surprising, but deception caused by lack of oversight is not.  Left unchecked, understaffed and up to our own devices, there is no telling what is really going on in the kitchen.

Much like when I am alone in my kitchen, the “flourless” chocolate cake recipe that I found a few years ago and am often asked to share, actually requires a few tablespoons of flour – without the oversight of someone with a gluten allergy or the supervision of someone who is on a very strict diet, I generally consider that my recipe is in fact not “flourless” as unimportant.

But “flourless” chocolate cake and the significant fraud going on in the RFS program are two VERY different things…

  • The key difference is that I generally warn people eating my “flourless” chocolate cake that there is a *little* bit of flour inside, and people eating a piece of chocolate cake know that they are not eating a rich and decadent slice of cake to be more healthy. No one gets hurt.  Not to mention that including a only few tablespoons of flour in a cake is generally not regarded as criminal conduct (in most circumstances).
  • The RFS is a different story…as the report aptly points out, the public has been largely unaware of the extent of the “large scale fraud” that had been occurring, taxpayers and consumers are getting hurt, criminal conduct is thriving and the policy principles that the program seeks to advance – energy security and greenhouse gas reduction – are substantially undermined.

The good news is that there are solutions for the RFS fraud problems proposed in the report – oversight and transparency are the critical recommended ingredients.

We need more cooks in the RFS kitchen

 

Piggy Bank

EY recently released its 2016 US Oil and Gas Reserves Study, the full text of which can be found here.

The 32-page study provides in its overview that it is “a compilation and analysis of certain oil and gas reserve disclosure information as reported by publicly traded companies in their annual reports filed with the Securities and Exchange Commission (SEC).”

The study “presents the US exploration and production results for the five year period from 2011 to 2015 for the largest 50 companies based on 2015 end-of-year oil and gas reserve estimates.”

  • What is the main conclusion from this important analysis? You may have guessed it – the results show that the piggy banks are running a little low as a result of the downturn in oil prices.

Supply that exceeded demand contributed to low price environment that Oil & Gas 360 reports “made its mark on US exploration and production companies during 2015 with significant declines in revenues, capital expenditures and reserves.”

So what are the top 5 highlights from the 2016 US Oil and Gas Reserves Study?

  1. Capital expenditures 41% lower in 2015 than in 2014 (totaling $117.5 billion in 2015)
  2. Oil production was 10% higher in 2015 than 2014 (2.4 billion barrels in 2015)
  3. End-of-year oil reserves were 12% lower than in 2014 at 24.1 billion barrels
  4. In the “Revenues and Results of Operations” category, revenues were down significantly from 2014 to 2015 (totaling $129.8 billion in 2015) and net losses of $112 billion were recognized
  5. End-of-year gas reserves were 21% lower than in 2014.

Wyoming Cowboy's Practice Sept 2016

Last week, I spent a few days in the “Gem City” – Laramie, Wyoming. I learned quite a bit during my time there, including these little tidbits, some relevant to the oil and gas industry, and some not:

  • Laramie was named for French trapper, Jacques LaRamie, who disappeared in the mountains in the early 1800s.
  • The Wyoming Oil and Gas Conservation Commission (“WOGCC”) issued its September 2016 Supervisor’s Report – which can be found here.  Takeaways from the WOGCC September 2016 Supervisor’s Report are as follows:
  1. The number of applications for permit to drill (“APD”) in Wyoming have significantly increased!
  2. There were 588 APDs received in July and a whooping 866 received in August.
  3. Wyoming’s rig count is up 5 from last month to a total of 13.
  4. In the month of August, the WOGCC plugged 174 orphan wells. We previously discussed Wyoming’s orphan well issue here.
  • According to the Denver Business Journal, a Denver-based oil and gas company with its principal assets in Sheridan and Campbell counties in Wyoming, Battalion Resources LLC, filed for Chapter 11 bankruptcy last week and reportedly carried $83 million in debt while only bringing in $8.4 million in revenue in 2015 from the sale of natural gas.
  • The Wyoming Cowboys beat the tar out of the UC Davis Aggies, winning 45 to 22. Welcome to 7,220 feet!  Go Pokes!
  • Six word stories are having a resurgence, some say due to Twitter, and they are some of the most powerful things I have ever seen. A famous six word story is by Ernest Hemingway is said to be, “For sale: baby shoes. Never worn.”  I heard this for the first time last week and was blown away by its power.  It is remarkable what can be said in only six words.

Laramie is a wonderful town…Here is my attempt at a six word story to summarize my time in Laramie last week:

Gem City Sparkles on the Plains.

Laramie view

 

Dirt Road

 

 

 

 

 

 

Peter F. Drucker famously said, “Trying to predict the future is like trying to drive down a country road at night with no lights – while looking out the back window.”

With that in mind, this morning, the U.S. Energy Information Administration (“EIA”) released its Short-Term Energy Outlook (nicknamed “STEO”).  The full report predicting the future of energy, complete with charts and graphs, can be found here.

So what are the EIA’s main take-away points when predicting the future of energy?

Oil:

  • While Brent crude oil spot prices averaged $46 per barrel in August, the forecasts show the prices to average only $43 per barrel for 2016.  The EIA predicts Brent crude oil prices to get better in 2017 – forecasting an average of $52 per barrel in 2017.
  • The oil price rollercoaster is predicted to continue to be a bumpy ride – as the current STEO states that “[t]he current values of futures and options contracts suggest high uncertainty in the price outlook.”
  • Global petroleum and other liquid fuels inventory builds are expected to slow in 2016, while global petroleum and other liquid fuel consumption is estimated to continue to increase – with China and India in the spotlight on consumption growth.

Natural Gas:

  • The mild winter last year “left inventories at record-high levels.”
  • Current natural gas stock levels remain substantially higher than previous average levels.
  • The U.S. is expected to become a net exporter of natural gas beginning in the second quarter of 2017.

Coal:

  • In 2016, U.S. coal production is expected to decrease by 18%, “which would be the largest annual decline in terms of both tons and percentage based on data going back to 1949.”
  • In 2017, total U.S. coal production is expected to see a bump primarily in the Appalachian and interior regions due to the “advantage of lower transportation costs and higher heat content per ton” – with a 4% increase expected

Renewables:

  • The EIA “expects total renewables used in the electric power sector to increase by 9.5% in 2016 and 5.8% in 2017.”

We will let you decide whether these energy predictions are going to be accurate…or if Peter Drucker was right and it is like driving down a dirt road at night with no lights on (hopefully at least looking out of the windshield, not the back window!).

Petition signaturesEarlier this month, we discussed the ballot proposals to restrict and severely limit oil and gas operations in Colorado – Initiative No. 75 and Initiative No. 78 – in detail. The full post “Signatures in on Petitions for Ballot Proposals to Restrict Oil and Gas Operations in Colorado” can be found here.

The big announcement of the day:

The Denver Business Journal (“DBJ”) reported this morning that the proposals failed to make the ballot – the article entitled, “Colorado Secretary of State says Anti-Oil and Gas Proposals Failed to Make Ballot” can be found here.

Why didn’t the proposals make it?

The proposals needed 98,492 signatures to make it on the ballot.  According to the DBJ, the Secretary of State’s office conducted a random sample of 5% the voter signatures to confirm validity – and a large number of signatures ended up getting rejected during the random sampling.

The DBJ article further reports that typically ballot campaigns gather at least 140,000 signatures to ensure that they can clear the number of signatures hurdle, but the supporters of the initiatives to restrict oil and gas development only gathered 107,232 signatures for Initiative No. 75 and 106,626 signatures for Initiative No. 78.

The conclusion:

The DBJ reported that the Secretary of State’s office “concluded that the initiatives received less than 80 percent of the total number of signatures to be on the ballot.”

 

Contango CoupleJPG

Over the past few weeks, I have heard oil and gas industry folks discussing “contango” and I am not embarrassed to admit that at one point I misheard one gentleman and thought he was asking me to dance…as in, asking me if I “can tango.”

To save you from finding yourself in this situation, here is a short primer on “contango,” not to be confused with a dance.

  • What is “contango”

According to Investopedia’s definition of contango, “Contango is a situation where the futures price of a commodity is above the expected future spot price.”  Explained in a different way, Investopedia says that, “Contango refers to a situation where the future spot price is below the current price, and people are willing to pay more for a commodity at some point in the future than the actual expected price of the commodity.”

Still a little confused and wishing you were actually asked to dance instead? Me too.

Investopedia’s “Breaking Down ‘Contango’” is a little more helpful – it says the following:

“When market is “in contango,” it describes a situation in which the delivery price of a particular futures contract has to converge downward to meet the futures price. A market that is in contango indicates that the forward or futures curve is upward sloping.”

Investopedia also gives us the following example of contango: “Assume an investor goes along with a futures contract at $100. The contract is due in one year. If the expected future spot price is $70, the market is in contango, and the futures price will have to fall (unless the future spot price changes) to converge with the expected future spot price.”

Clear as mud?  Here is a helpful video Contango: CNBC Explains.

  • Why are we talking about “contango”

Now that we know what “contango” is, why are people talking about it?  The word on the street is that the contango in the oil market is decreasing and according to media outlets such as Bloomberg, “the fading contango is the clearest sign of recovery.”  The recent article entitled, “Look Past OPEC Freeze Hype to Really Understand Oil’s Advance” discusses and explains the current narrowing of the oil contango in detail.

However, if it is one thing that the commodity market has taught us over the past two years it is that it is unpredictable…

Stay tuned for more on the contango in the oil market – In the meantime, dust off your dancing shoes and twirl around the dance floor, knowing what a contango is!

 

Rock Springs

It is no secret that now is a turbulent time for the coal industry in Wyoming and across the county.

My hometown was once synonymous with coal mining; in fact, my great-grandfather moved from working in the coal mines of Walsenburg, Colorado to Wyoming to work in the coal mines of Rock Springs.  To say coal mining was once robust in my home state would have been an understatement. At one time, there were said to be more than 130 coal mines operating in Sweetwater County, Wyoming.  Read the full essay on Rock Springs, Wyoming by Chris Propst on WyoHistory.org here.

We have all seen the recent headlines concerning bankruptcies, debates about self-bonding and coal mine remediation requirements and coal-reliant states diversifying their revenue sources in light of the downturn in the coal industry.  Slightly under the radar, however, another coal-related issue has been happening without too much publicity – the increased regulation of coal mine dust.

The Mine Safety and Health Administration (“MSHA”) revised standards on exposure to respirable coal mine dust back in 2014 – see the final rule here.  The rule was aimed at lowering the amount of permissible coal dust over a two year period.

  • Why Is This Important Right Now?

You guessed it – we are coming to the end of the two year period. The final phase of the rule began this month – on August 1, 2016.  The final phase of the rule lowers the respirable dust limit from 2.0 mg per cubic meter of air to 1.5 mg per cubic meter of air.

According to an article in The National Law Review entitled, Respirable Coal Dust Samples Prove New Dust Rule is Achievable, Mine Safety Agency Announces, “99 percent of the coal mine dust samples collected from April 1, 2016, through June 30, 2016, were in compliance with its coal mine dust standards requiring lower levels of dust.”

This is big news for the coal sector – not under the radar for the industry.

 

Rig

Back in April, we saw oil prices increase based on talks of a production freeze from Organization of the Petroleum Exporting Countries (“OPEC”). We discussed this in our posts “Good News: Oil Prices on the Rebound” – where prices increased 4%, and “Optimism in Oil Prices.”

As of this morning, WTI Crude was $48.10 per barrel and Brent Crude was $50.75 per barrel – according to Bloomberg Energy.  Crude is reportedly now up more than 20% since it settled below $40 a barrel on August 2.  And OPEC is scheduled to meet next month….and they are expected to renew talks of a production freeze.

Talk about déjà vu…which I recently learned is an expression derived from the French, meaning “already seen.”

The recent increase in oil prices is once again linked in part to news that OPEC and major producers and exporters “will probably revive talks on freezing output levels when they meet in Algeria next month,” according to CNBC article “US Crude Rises to 6-week high above $48 a barrel on talks of supply freeze.”

The CNBC article goes on to report, “[m]any OPEC members have been hurt badly by a collapse in oil prices over the past two years.  While some Gulf exporters have very low output costs, other producers such as Iran and Venezuela need oil prices above $100 to balance their budgets.”

The Wall Street Journal also reported today that the rise in oil prices were “on hopes that the world’s largest exporters would revisit a deal to freeze output.”

Interestingly, OPEC issued its’ Monthly Oil Market Report last week and the featured article was “Crude and Product Price Movements.” A full copy of the report can be found here.

Many are skeptical whether a production freeze will actually come to fruition this time around, after facing a dead end last time. Remember that in April, the officials from 18 oil-producing nations failed to reach a deal to freeze oil production while meeting in Qatar because all parties couldn’t agree to participate in the freeze.  A good refresher on what happened in April when OPEC members tried to get on the same page about a production freeze can be found in The New York Times article from April 17, 2016 entitled, “In Doha, Major Oil Exporters Fail to Agree on Production Freeze.”

We will keep you posted on next month’s OPEC meeting and the status of the talks on a potential production freeze…

 

Hummingbird Cake

There certain things we rely on in this life – things we consider absolute and reliable staples.

Sometimes, we try to use our staple items as an indicator for other things – as a sort of litmus test. We impose some kind of symbiotic relationship stemming from our staple concept and attempt to use that single factor to make a judgment about the future success or failure of something else.

For many, they rely on the U.S. rig count as an indicator of future production and the overall “health” of the oil and gas industry. According to Petropedia, the rig count is “an official listing of all of the oil and gas rigs that are operational at a certain location” and the tally “helps in collecting data that helps in analyzing several factors and indicating the status of drilling activities.” We previously discussed “The U.S. Rig Count – What it means in Layman’s Terms” here.

For me, baking is my staple and it is the outcome when baking a cake on a Sunday that has the ability to set the tone for my week. Case in point – the Hummingbird Cake.

  • Wait, Why Do We Rely on the Rig Count?

The answer is simple – because we always have. We have historically considered the rig count to be an indicator of production.

Some would say that with the volatility in oil prices over the past 2 years, the rig count alone is not much of an indicator of anything. In fact, we previously discussed this earlier in the spring in our post, North Dakota Stats: Reduced Rig Count Not Significantly Impacting Production. We opined that with the relatively drastic decline in the rig count in North Dakota, one would expect to see a more significant decline in production.

According to a Bloomberg article this morning entitled, Private Explorers Lead U.S. Rig Count to Longest Rally in Years, Baker Hughes Inc. is reporting that “[t]he total U.S. rig count has climbed 19 percent since bottoming out at the end of May.”

The currently reported number of rotary rigs in the U.S, as of August 12, 2016, was reported to be 481. When compared to the low point in May of 404, the next question becomes does this recent increase in rig count correspond with a projected increase in production?

  • Is the Increase in the Rig Count Expected to Increase Production?

Not yet.

The U.S. Energy Information Administration (“EIA”) released its Drilling Productivity Report today.  A full copy of the EIA’s report can be found hereAccording to the EIA, “[t]he Drilling Productivity Report uses recent data on the total number of drilling rigs in operation along with estimates of drilling productivity and estimated changes in production from existing oil and natural gas wells to provide estimated changes in oil and natural gas production for seven key regions.”  In general, the Drilling Productivity Report appears to be projecting decrease in oil production by region, from August to September this year.

  • What is the Take-Away?

In this volatile and unusual price environment, no one factor can truly be relied on to predict future production, industry highs and lows, or industry recovery. There are too many factors at play internationally to be able to pin analysis on the rig count alone.

Luckily for me, things are much less volatile and unpredictable in my kitchen and the quality of my Hummingbird Cake, an unusual cake made with oil instead of butter that contains more fruit than flour, is still a reliable indicator of how my week will go.  The classic recipe filled with bananas, pineapple and spices, first submitted by Mrs. L.H. Wiggins in 1978, became one of the most requested recipes of Southern Living Magazine and it is still a staple for my life.

“Because we always have relied on this” may not work with rig counts anymore and may only work in the kitchen…

 

paper boat

Earlier this summer, the 102-year-old shipping route – the Panama Canal, expanded to add a third lane to accommodate larger ships – including the big tankers that transport liquefied natural gas (LNG).

As a result of this estimated $5.25 billion upgrade, LNG exports from the U.S. are now poised to increase by sea.

  • Is this expansion a big deal?  Yes!

According to the Wall Street Journal (WSJ), the expansion of the Panama Canal is “poised to capitalize on the surge in U.S. natural-gas output and the interest in new export markets including Japan, South Korea, India and China.”  According to predictions by Oscar Bazán, the Panama Canal’s executive vice president for planning and business development, featured in “The Panama Canal Expands” article in the WSJ, LNG exports are expected to increase – “By 2020, Mr. Bazán said he expects liquid natural gas to be one of the main products transported through the canal.”

In fact, Bloomberg Markets explained in “A New Trade Route for Natural Gas Opens in Panama,” that “[w]hen the Panama Canal’s expanded locks slide open in late June, perhaps no one was happier than executives in the U.S. shale industry.  With the goal of making the U.S. a global powerhouse for natural gas exports, these frackers have their sights on Asia. Now they have a more direct route that could significantly benefit their bottom line.”

The article goes on to report that “[f]or gas companies reeling from the recent collapse in prices, which in March reached the lowest level since 1998, the drop in time and shipping costs will provide a much-needed lift.”

  • How will this expansion increase LNG exports?   By making it quicker, cheaper and much easier to get LNG to other markets.

 

The Bloomberg Markets article details HOW the expansion can boost LNG exports as follows:

“The canal’s deeper channels can accommodate the kind of football-field-size tankers that transport liquefied natural gas (LNG), shaving 11 days and one-third the cost of the typical round trip to Asia.”

The route through the Panama Canal also provides a competitive option for gas companies shipping from the U.S. Gulf to Asia when compared to going through the Suez Canal or around Africa’s Cape of Good Hope.

  • When will LNG exports increase? The timing is difficult to pinpoint, but…

Only a week after the locks opened, the Panama Canal Authority reportedly announced its first booking for an LNG carrier.  In fact, the U.S. Department of Energy has predicted 550 tankers could be crossing each year by 2021.

We look forward to seeing the economic impacts of this potential increase in LNG exports by sea. The “ripple effect on the economy” of the canal’s expansion predicted by Forbes’ article, “Panama Canal Expansion: A Potential Supply-Chain Game-Changer” will be welcome.