A Tale of Two Economies...

[GRG55]

Re: Tax Me - I'm Canadian

This one fits your thread title perfectly ...

Vehicle sales roared ahead in the U.S. market in January, but went into reverse in Canada...

http://www.theglobeandmail.com/globe...rticle8104877/

Perhaps an indication that credit markets are starting to normalize in the USA? Few people pay cash to buy a vehicle...

[Polish_Silver]

oil numbers confusion

. . .

The figures in the last line below work out to $90,500 per flowing barrel. If they hit their targets for costs and production. Right now there's better reward/risk buying production than to develop projects like this. . . .

Are you saying $90k per flowing barrel is high? (barrel per day ?)

So if it costs $90k/barrel-day, you are better buying some already producing well, is that the idea?


So in round numbers, it takes $100k to get 1 barrel/day, and oil is about $100/barrel, so it would take 1000 days to recoup your initial cost, ignoring all other costs.

I'm trying to figure out what the number means. I never saw it analyzed like that before.

[GRG55]

Re: oil numbers confusion

Are you saying $90k per flowing barrel is high? (barrel per day ?)

So if it costs $90k/barrel-day, you are better buying some already producing well, is that the idea?


So in round numbers, it takes $100k to get 1 barrel/day, and oil is about $100/barrel, so it would take 1000 days to recoup your initial cost, ignoring all other costs.

I'm trying to figure out what the number means. I never saw it analyzed like that before.

It's one common measure used within the industry to assess the relative cost and value of oil and gas property assets and transactions.

When the cost of developing new production starts to exceed the cost of acquiring existing producing assets, it usually sparks a round of M&A activity in the oil patch...commonly known as "going drilling on Wall Street"...

[lakedaemonian]

Re: oil numbers confusion

It's one common measure used within the industry to assess the relative cost and value of oil and gas property assets and transactions.

When the cost of developing new production starts to exceed the cost of acquiring existing producing assets, it usually sparks a round of M&A activity in the oil patch...commonly known as "going drilling on Wall Street"...

A couple of quick questions GRG55:

All things being equal, is that 3 years/1000 days cost to purchase each barrel of production fairly stable?

And does it track somewhat with oil spot price or does it reflect industry long-term value consensus?

Are there any other simple industry standards or Pareto's Principal for how much you can spend to produce 1 barrel of oil?

I'm assuming that buying production of a barrel of oil in Canada could be worth a bit more to an investor than one in Venezuela at the moment.

Is the economy of scale of projects(average well producing approx 1/8-1/10 from 10 years ago) having much of an effect on this 3 year/1000 day basic formula?

Has the reserve life of the average well changed much?

We know the amount produced per well per day has crashed, but what is happening with the useful life of the well?

Is that still similar to 10-20 years ago, or are oil wells useful life likely to move in the direction of NG wells and boom/crash?

Cheers.....

[GRG55]

Re: Tax Me - I'm Canadian

OK - I'll put this one here. Lot's people around here are waiting to see what the Obama Administration will do with the upcoming Keystone Pipeline decision.

http://business.financialpost.com/20..._lsa=4442-842a

A rejection of Keystone may not be all that bad for Canada. It might force some sanity to return to the idiocy going on in the oil sands sector that the industry and the Alberta government have jointly allowed to prevail for far too many years...

Ottawa gives nod to west-to-east oil pipeline

Pipeline could benefit Irving refinery in Saint John

The Canadian Press

Posted: Feb 2, 2013 12:24 PM AT
Last Updated: Feb 2, 2013 12:48 PM

The federal government is firming up its support of two projects that would see oil from Alberta piped to Atlantic Canada.

Natural Resources Minister Joe Oliver said he gave a tentative nod to one proposal in a meeting with industry giant Irving Oil...

...TransCanada Corp. wants to convert an existing, underused natural gas line to bring oil from Western Canada to Quebec and New Brunswick.

It would be up to the National Energy Board to approve such projects, and TransCanada has not yet formally submitted the proposal for scrutiny.

Irving Oil owns a refinery in Saint John with a current capacity of about 300,000 barrels per day. If the conversion goes ahead, the pipeline could move upwards of one million barrels per day and benefit the Irving refinery.

Oliver said industry participants have built a solid business case for the proposal, and he supports it, so long as it passes the necessary regulatory hurdles...

...Another proposal would see Enbridge Inc. expand capacity on some pipes in the Great Lakes region and reverse the flow of another line between Montreal and southern Ontario – the so-called Line 9 pipeline that currently brings imported oil to a refinery in Sarnia, Ont...

[Fiat Currency]

Re: Tax Me - I'm Canadian

Ottawa gives nod to west-to-east oil pipeline

Pipeline could benefit Irving refinery in Saint John

...

Yep. Although that one's pretty much been a "done deal" for a while. As I'm sure you know, it's much easier to do those things when utilizing existing infrastructure and rights of way. I still won't be surprised if somebody in Quebec comes up with the bright idea of proposing a "transit tax" for oil that flows under their land.

Let's see how the new projects fair. Keystone, Railway lines to Alaska, pipelines through BC, pipeline/rail line to Churchill etc.

[GRG55]

Re: oil numbers confusion

A couple of quick questions GRG55:

A "couple" of questions?

All things being equal, is that 3 years/1000 days cost to purchase each barrel of production fairly stable?

And does it track somewhat with oil spot price or does it reflect industry long-term value consensus?

First all other things are never equal. It's the relative cost of investing to develop against buying existing reserves and production that counts...the absolute price and payouts depend on many factors including commodity prices, commodity price trends, government propensity to raise royalties and taxes (very high right now), capital market sentiment (reflected in the blather that comes from investment bankers), the latest corporate fad (reflected in the nonsense emitted by management consultants) and so forth.

Are there any other simple industry standards or Pareto's Principal for how much you can spend to produce 1 barrel of oil?

Not that I am aware of. Like every industry there's whole series of benchmarks that are used to track comparative performance, but nobody makes a decision to spend millions, tens of millions or billions of dollars using those.

I'm assuming that buying production of a barrel of oil in Canada could be worth a bit more to an investor than one in Venezuela at the moment.

Political risk usually factors into the pricing of assets. But it's only one factor.

Is the economy of scale of projects(average well producing approx 1/8-1/10 from 10 years ago) having much of an effect on this 3 year/1000 day basic formula?

As above the 3 yr/1000 day measure is meaningless on an absolute basis. There is at present a wide disconnect, from historical ratios, between the price of the commodity and the price of the companies that hold it in the form of reserves in the ground. If one believes the hype about USA "energy self sufficiency", Canadian "dirty oil", environmental risks of modern pipelines (as opposed to the 40 and 50 year old pipelines already crossing the same territory) then one shouldn't consider investing in Canadian oil assets. If one has a PCO view, then one might reconsider...you pays your money and you takes your chances

Has the reserve life of the average well changed much?

The reserve life is reserves over current production rate. Roughly half the wells are greater than the average and the other half are less than the average...same as it's always been

We know the amount produced per well per day has crashed, but what is happening with the useful life of the well?

This is probably the question you really wanted to ask above, instead of the one to which I gave the flippant answer. Wells are like children. An offshore well in the Gulf of Mexico will behave completely differently from a shale oil well in North Dakota...so there's no way to make a generality. The production per well statistics reflect the reality of maturing basins all over the world. In every single oil province, including the Middle East, the pattern is the same, and quite logical. The biggest and easiest to develop reservoirs (of which there are few) are exploited first, followed by the next best reservoirs on the quality pyramid (there are more of these) and then, over time, the most difficult, most expensive, and generally less productive reservoirs (shale, heavy oil, deeper & more sour oils, sub-salt deepwater offshore), of which there are many more, are developed last.

There is truth to the observation that resource exploitation technology advances are opening up the ability to tap the more difficult sources. But there is also truth to the observation that technology gets developed when it is needed, and not before.

Pundits lamenting the decline in the quality of the oil reservoirs being exploited today compared to the "glorious past", and then ranting that the higher F&D cost per barrel is some sort of terrible disaster that should cause all of us to stay in bed and pull the covers over our head (I regard J.H. Kunstler as one example) aren't doing anybody any great service.

By definition global production of oil and global consumption of oil will balance (as I have posted before, we can't burn "virtual barrels"). One can debate how "Cheap" should be defined in the term Peak Cheap Oil. I think the important thing to realize is that the ability to steadily increase global production is limited - but let's remember that production constraint isn't the only reason global oil production has been flat since 2005. Demand destruction in the aftermath of the financial crisis played a huge role also. If regulators and politicians don't get too crazy, the price mechanism will force the low value consumption off the table. If, as seems likely, subsidies and other "energy management policies" become even more rampant than today (that's my expectation), then petroleum prices will be even more volatile than we have seen to date.

At times of perceived "plenty", as we have today in North America, the price of assets will be depressed and it will be cheaper to buy existing production than to develop new production (the only reason we still see so much shale drilling going on is because Wall Street and managements still think their company will be the one to buck the market valuations and command a stock market premium). In time the best cure for low prices is...low prices. Wait for it

Is that still similar to 10-20 years ago, or are oil wells useful life likely to move in the direction of NG wells and boom/crash?

Generally the only thing that drives the "useful life" of a petroleum well is the marginal cost of operating it compared to the well-head netback being received for the production. As long as it's still profitable the well will stay in production. Price swings have more to do with wells being shut-down and turned back on than any other factor.

[lektrode]

Re: oil numbers confusion

fascinating discussion ld/GRG
once again, we (me in particular) learn more around here about the economics of different industries in a few pgphs, than in my prev 35years of reading the wsj...

[lakedaemonian]

Re: oil numbers confusion

Your post

Once again....cheers for the enlightening post!

[GRG55]

Re: A Tale of Two Economies...

Seems whether underground in the coal mines, or up high in the executive suite, apparently talent is in short supply and companies are forced to import it or steal it from rivals...

Labour dispute reveals China’s rush to tap B.C. coal boom

VANCOUVER — The Globe and Mail
Published Saturday, Nov. 10 2012, 8:00 AM EST
Last updated Saturday, Nov. 10 2012, 8:59 AM EST

In recent weeks, the town of Tumbler Ridge has been in the spotlight as the destination for temporary foreign workers headed to jobs at a coal project nearby.

On Thursday, the federal government announced a review of the program through which those Chinese workers were hired, throwing a wrench into plans to bring up to 200 people to the Murray River project...


...B.C. has 10 active coal mines and another 20 in various stages of exploration and development. Several of those proposed projects, including Murray River, are backed by Chinese interests.

“The last couple of years have really seen the demand turned on,” Coal Association of Canada president Ann Marie Hann said. Fast-growing Asian economies and flooding in Australia that disrupted coal shipments have helped drive the trend, she added...

...Most of the coal produced in B.C. is metallurgical (coking) coal used in making steel, although the province does produce some thermal coal, which is used in electricity plants. Coal exports have surged in the past decade; last year, revenue climbed to $5.2-billion from $3.4-billion in 2010, and accounted for more than 50 per cent of provincial mining revenues of $9.9-billion...

Chinese miners sent home in B.C. workers dispute

HD Mining says it has also delayed plans to bring more miners from China

CBC News

Posted: Jan 28, 2013 7:31 PM PT

Last Updated: Jan 29, 2013 6:32 AM PT

The company that brought miners from China to work on a B.C. coal project says it is sending some of the workers back home and is not bringing any more to Canada for the time being due to court delays.

Two unions are challenging the government's decision to allow HD Mining to bring about 200 Chinese miners to work in northern B.C., rather than hire Canadians...

...HD Mining is a partnership between China-based Huiyong Holding Group, which owns a 55 per cent stake, and Canadian Dehua International Mines Group Inc.

The company has argued that it can’t find enough Canadian workers to do the mining jobs at the project, near Tumbler Ridge, B.C...

...The chair of HD Mining, Penngui Yan, said in the release that the company has invested $15 million and remains committed to the mine project, “but we need to be able to rely on the Canadian legal system ... In the absence of being able to find Canadians qualified and interested to do this work, we need to know we can rely on the two-year temporary foreign worker authorizations we received.”

And then there's the iconic Canadian Pacific Railway, which seems to have decided that the only executive talent to run a railway in Canada resides within the former taxpayer-owned Canadian National Railway (now CN), as they pick them off one-by-one...

CP Rail lures Creel from rival CN, names him COO

February 4, 2013 10:03 AM

CALGARY - Canadian Pacific has hired the former executive vice-president and chief operating officer of rival Canadian National Railway Company, naming him president and chief operating officer of CP.

The appointment of Keith Creel is effective as of Tuesday. Hunter Harrison, the former CN chief executive who made the move to CP Rail last year, will remain the company’s CEO...

[GRG55]

Re: A Tale of Two Economies...

Another entry from the "Owe Canada" file.

Debt deleveraging? What debt deleveraging???

Canadian consumer debt hits new high

Tuesday, February 05, 2013 11:02 AM EST | Updated: Tuesday, February 05, 2013 11:11 AM EST

Consumer debt in Canada has hit an all-time high, according to a new report from credit-monitoring firm TransUnion.

The average debt hit $27,485 at the end of 2012, a 6% increase from 2011. Debt rose at its fastest pace since 2009, TransUnion said...

...Every province saw its average consumer debt rise, except for British Columbia, where it went down 0.09%. Debt shot up by 11.20% in Alberta, 9.39% in Quebec and 9.04% in P.E.I.

Credit card debt in Canada rose 0.12% from last year, lines of credit rose 2.64%, instalment loan debt increased 6.71% and automobile debt rose 8.93%...

[Fiat Currency]

Re: A Tale of Two Economies...

Debt deleveraging? What debt deleveraging???

Well, perhaps they're just following their "leaders" ...

Ontario worse than California: Province faces crisis due to 78% jump in spending

Ontario faces crisis due to 78% jump in spending

‘I do not want Ontario to become like California,” Ontario Finance Minister Dwight Duncan once proclaimed. And it’s not hard to understand why — California is a fiscal nightmare. It has the lowest bond rating in the United States and its own treasurer, Bill Lockyer, referred to the state budget as “a fiscal train wreck.”

Yet, despite all that is said about California’s finances in the media and financial markets, Ontario is in much worse shape.

Back in 2002-03, the fiscal year before the governing Liberals took office, Ontario’s net debt (assets minus liabilities) stood at $132.6-billion. In the ensuing decade, the province’s debt ballooned by almost 78% to $235.6-billion (2011-12). Most worrying, however, is that if Ontario continues on its current path (status quo in terms of spending and revenues), its debt will balloon to over $550-billion (66% of GDP) by the end of the decade (2019-20).

As the nearby table highlights, Ontario is decidedly worse than California on every measure of debt. For example, despite the fact that California’s population and economy are almost three times that of Ontario, Ontario’s total debt is 64.4% larger than *California.

On a per-person basis, Ontario’s bonded debt (the concept of net debt is not used in U.S. public accounting) currently stands at nearly $18,000, over four-and-a-half times that of Californiaat $3,800. As a share of the economy, Ontario’s debt (38.6%) is more than five times that of the Golden State (7.7% of GDP). This is a stunning difference in the burden of debt, particularly given the attention and concern focused on California compared with Ontario.

While the two jurisdictions face similar average interest rates for their debt, the large difference in the stock of the debt means equally large differences in interest costs. Specifically, Ontario spends almost double what California does on interest costs in dollar terms and a little over three times what California spends as a share of the revenues collected, 8.9% compared to 2.8% of revenues. This is money that could have been spent on health care, education, public safety.

Thankfully, the Liberal government of Ontario, which just selected a new leader, Kathleen Wynne, has a real opportunity to break with past policies and fundamentally deal with its skyrocketing public debt.

There are two principal barriers holding back genuine efforts at tackling the province’s fiscal problems. The first is a basic misunderstanding of the province’s deficits and debt. More specifically, there is a view that Ontario’s deficits and mounting debt are a result of a lack of revenues. The data here tell a very different story.

In 2002-03, Ontario collected $74.9-billion in revenues and spent $65.1-billion on programs. Some $9.7-billion was spent on interest costs, which resulted in a balanced budget.

Revenues grew to $104.1-billion in 2007-08 (prior to the recession) before decreasing in 2008-09 and 2009-10. This year (2012-13), revenues are expected to be $112.2-billion, some $8-billion higher than the pre-recession high. All told, revenues have grown by 49.8% since 2002-03.

The problem is that provincial program spending has increased by 77.8% from 2002-03 to 2012-13. Simply put, Ontario has had a spending problem over the last decade, not a revenue problem.

The second barrier to dealing with the province’s deficits and debt is apathy. Ontarians are either unaware or uninterested in the province’s indebtedness. We should not be surprised by politicians and bureaucrats ignoring policy issues and the risks associated with them when the citizens of the province don’t seem concerned.

Take, for example, The Globe and Mail editorial the day after Wynne’s victory, which started with the headline “Premier-designate Kathleen Wynne must practise saying no.” If only it were that simple. “Saying no” would have been good advice back in 2002-03; now the new premier must boldly and quickly strike at the root of the problem: unsustainable increases in health care, education and most other government spending.

Or consider how the folks at the Business News Network reacted to our study by claiming: “The reality is once the economy starts growing strongly again in Ontario, revenues will rise and expenditures on things like welfare will fall. It’s not really about cutting spending; it’s about resuming economic growth.”

This indifference is buttressed by the near complete lack of any serious response by the Ontario government to the much-heralded report by the province’s own Commission on the Reform of Ontario’s Public Services, which became known as the Drummond commission. The commission’s report should have been a call to arms for the government to act on reform. Instead, inaction has ensued.

The reality is that Ontario’s indebtedness is significantly worse than the poster-child for bad public finances, California. The inaction to date only delays the inevitable and deepens the breadth and depth of changes needed later. The new premier has an opportunity to set the province on a new, sustainable path. Let us hope she both understands and embraces the need for change.

[GRG55]

Re: A Tale of Two Economies...

Well, perhaps they're just following their "leaders" ...

The politicians we have are all pretty well worthless. They can't seem to avoid the trap of pro-cyclical spending that makes things worse by exaggerating the booms and busts. When the economy is strong, tax revenues are higher and they just spend, spend, spend. And every year the budgets increase over the previous year, because of course "revenues only go up". Sounds like the government equivalent of house prices. Actually, in Alberta the government also thinks that house prices "only go up" (see below).

Alberta is even more out of control than Ontario. These people are living in a world of complete fiction. A year ago, when the Alison Redford government brought out their 2012 budget I thought Opposition Leader Danielle Smith's quip was priceless:

EDMONTON, AB (February 9, 2012): Premier Alison Redford’s budget for 2012 relies on pipedream projections of sky high revenues and a red hot economy to bail them out of a financial train wreck, the Wildrose Caucus said today.

Alberta’s fifth straight deficit budget shows the Redford Government projecting a $3.1 billion cash shortfall despite record revenue projections including oil price of $100 a barrel. The Government plans to increase program spending by 7.6% – almost double the rate of inflation plus population growth.

“This is an Alison in Wonderland budget,” Wildrose Leader Danielle Smith said. “Ms. Redford’s revenue projections are nothing short of fiction and given the world debt crisis, incredibly irresponsible.”

Budget 2012’s unrealistically high revenue projections include:

• An overall 22.5% increase in revenues over the next 2 years

• A 40% increase in resource revenues over the next 2 years

• An increase of 6.5% in property values and property tax revenues to the budget

• A 9% increase in income tax revenues this year

• An 11% corporate tax revenue increase this year

• Projecting the average oil price at $105 next year and $108 the year after

• Projecting the natural gas price at $3.50 this year, $4.20 the year after, and $5.00 the year after that

Wildrose Finance Critic Rob Anderson said Premier Redford is being completely unrealistic in her projections and is risking the economic health of the province with her new budget.

“Alison Redford is putting Alberta’s economic health on the edge of a knife relying on outrageously optimistic projections,” Anderson said. “If oil were to dip to even $70 a barrel our provincial balance sheet would implode, our savings fund would completely evaporate, and we would be forced to take on unprecedented levels of debt.”

And of course, that's exactly what has happened...

[Polish_Silver]

California invades Alberta?

The politicians we have are all pretty well worthless. They can't seem to avoid the trap of pro-cyclical spending that makes things worse by exaggerating the booms and busts. When the economy is strong, tax revenues are higher and they just spend, spend, spend. And every year the budgets increase over the previous year, because of course "revenues only go up". Sounds like the government equivalent of house prices. Actually, in Alberta the government also thinks that house prices "only go up" (see below). .

I thought only the US had this problem. But can a democracy ever avoid it? Can you be elected on a platform of discipline and restraint?

[GRG55]

Re: California invades Alberta?

I thought only the US had this problem. But can a democracy ever avoid it? Can you be elected on a platform of discipline and restraint?

Not a chance. You have to get elected on a platform of providing more goodies. Then, on Day One in office you announce that after looking over the books it has become obvious that the previous government, which the voters wisely tossed out, were a bunch of no-good, unaccountable, corrupt and lazy spendthrifts that left the cupboard completely bare...and therefore Austerity must be imposed for the greater good of the City/State/Province/Nation/whatever...