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There Is Just Too Much Oil Sloshing Around The World Right Now

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By EconMatters

EIA Report
The weekly EIA report came out today and one of the noteworthy data points was the Cushing, Oklahoma storage numbers. Already at a record, Cushing added another 1.8 million barrels to storage sending total Cushing stocks to 51.9 million barrels of oil in storage facilities at the energy hub.
There has been 6.3 million barrels of oil added to Cushing during the last 6 weeks. To put these build numbers into perspective, Cushing oil inventories stood at 28.3 million barrels for this time a year ago, which is a build of 23.6 million barrels in a year.

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Seaway Pipeline Expansion

The Seaway pipeline was recently expanded to 400,000 barrels per day from 100,000 barrels per day, and many analysts have predicted that this would solve the Cushing oil glut. But it is looking more and more that what the Seaway pipeline offers is a cheaper mode of delivery out of Cushing, and the real benefit is one of logistical optionality for transportation.
Further Reading – Keystone XL Pipeline: Economics, Idealism and Politics

However, it is shaping up due to the sheer size of these build in inventories at Cushing that the Seaway pipeline is not a magic solution for the supply and demand fundamentals at play in the oil industry in the United States, there is just more US production, than there is US infrastructure in place to deal with the trending upturn in this production.

Oil is Fungible
In short, the US and global oil model isn`t set up for the United States to be producing more than 7 million barrels of oil per day. Even if the Seaway pipeline could send 4 million barrels of oil out of Cushing, it wouldn`t make a difference because Oil is fungible, so without major cuts somewhere else in the global supply chain, then you’re going to have supply andstorage builds somewhere in the supply chain.

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Saudi Arabia can only cut back production so much
The Saudi`s have already cut back production to fifteen month lows, how long is that going to continue as they need oil revenue just like everyone else? So Cushing is just a reflection and end point for the delivery of increasing US production, which ultimately is building more than there is demand from refiners for producing products, even with an increase in exporting of gasoline and other petroleum products.

Cushing never was landlocked
This should have been apparent to analysts as rail has been delivering Oil to refiners during this domestic boom, and so are barges taking oil out of Cushing, so large amounts of oil are getting to refiners. Some of it before it even gets to Cushing, and some after with the Seaway pipeline, and barges out of Cushing; and with the spread in 2012 of as much as 25 dollars, there were major incentives to get US oil to refiners in a myriad of ways.

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Cushing builds reflective of bigger problem
Yet we have almost doubled Cushing`s inventories in a year. This points to a much bigger problem with analysts missing entirely, thinking this was just a Cushing log jam problem. This is seeing the trees, and missing the overall forest, Cushing is just a reflection of the bigger problem, there is just too damn much oil sloshing around the world right now with nowhere to go.

Further Reading – Cushion 50 Million, Boom & Bust Cycles, U.S. Debt & Recession
You see this in stories about Nigerian crude for February delivery being unsold and stuck on cargo ships because there are no buyers with the increase in US domestic production. Iraq is producing more oil, and they need the revenue so expect more oil coming out of Iraq for the next decade with each year producing more than the previous.

The world is producing more oil than is consumed each day
The world global supply chain is producing more oil than the world needs every day, and this means storage has to build somewhere, and whether it is Cushing, or Nigeria, or China it has to be stored somewhere.

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In the US, Cushing has expanded storage facilities the past couple of years, and has been a default place to send the extra oil. But even Cushing is rapidly reaching capacity limits, and even if on the margin the Seaway pipeline takes out more oil, refiners can only handle so much more before they become the bottleneck in the equation.
Further Reading – Oil and Gas Markets End 2012 With Swollen Inventory Levels

US Refineries not easy to build
Remember, refiners are not easy to build, and the US has only relatively recently ramped up domestic production, so even with substantial increases in fuel exports, there just are not enough US refineries to handle the increase in US oil production. In short, the oil model of the last decade was not set up with the US being a major producer. The US production increases is throwing the global supply models a major curve ball.

Therefore, the only way that Cushing inventories are going to go down substantially is if more US refineries are built, and that could take three to four years, if they are built at all given the regulatory and financial hurdles that have prevented progress in this area over the last decade.

Unintended Consequences
The bottom line is that the Seaway pipeline is no cure for what ails Cushing inventory builds. For what ails Cushing is the fact that nobody thought about the unintended consequences of a boom in US oil production due to high prices for the past decade.

The global economy has slowed down from the peak in 2007, but prices have remained high, this resulted in increased production projects globally, and the rise in US production just sent the supply levels over the edge.

Furthermore, nobody ever planned or expected that the US would start producing with these numbers ever again. This has thrown the whole supply chain on its back, Cushing is just a reflection of this fact, there is more oil than the world needs right now, and the world definitely didn`t need an increase in US production.

Cushing builds still a problem
As a result you get Cushing, the manifestation of what happens when the unexpected happens before the oil models know what to do with the extra supply. You do not get the kind of builds at Cushing, with a new pipeline in existence for six months, a hefty spread, and rails transporting oil at unheard of levels, unless there is a much bigger problem than just increasing the Seaway pipeline by 300,000 barrels per day.

The Seaway Pipeline just steals business from Railroads & Barges
So Seaway doesn`t solve the Cushing problem as many have hoped. All Seaway does is maybe take some business from barges and railroads in the transportation of the product.

But the problem was much bigger than these people ever realized, because Cushing never represented a landlocked, logistics equation.

Cushing builds represents the fact that right now there is just too damn much oil that is being produced versus consumption needs for that oil. So it has to be stored somewhere, and Cushing is one of the places.

Too many chefs in the kitchen
The real problem is that nobody ever planned for the US to be producing 7 million barrels of oil every day and rising, there is just not enough demand in the world for this extra oil, so it has to be stored because everyone needs the money these days. And until prices drop substantially, no one is going to cut back producing this black gold.

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Scientists Aboard Iberian Coast Ocean Drilling Expedition Report Early Findings

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Mediterranean bottom currents and the sediment deposits they leave behind offer new insights into global climate change, the opening and closing of ocean circulation gateways and locations where hydrocarbon deposits may lie buried under the sea.

A team of 35 scientists from 14 countries recently returned from an expedition off the southwest coast of Iberia and the nearby Gulf of Cadiz. There the geologists collected core samples of sediments that contain a detailed record of the Mediterranean’s history. The scientists retrieved the samples by drilling into the ocean floor during an eight-week scientific expedition onboard the ship JOIDES Resolution.

The group–researchers participating in Integrated Ocean Drilling Program (IODP) Expedition 339: Mediterranean Outflow–is the first to retrieve sediment samples from deep below the seafloor in this region.

Much of the sediment in the cores is known as “contourite” because the currents that deposit it closely follow the contours of the ocean basin.

“The recovery of nearly four kilometers of contourite sediments deposited from deep underwater currents presents a superb opportunity to understand water flow from the Mediterranean Sea to the Atlantic Ocean,” says Jamie Allan, program director at the National Science Foundation (NSF), which co-funds IODP.

“Knowledge of this water flow is important for understanding Earth’s climate history in the last five million years.”

“We now have a much greater insight into the distinctive character of contourites, and have validated beyond doubt the existing paradigm for this type of sedimentation,” says Dorrik Stow of Heriot-Watt University in the United Kingdom and co-chief scientist for Expedition 339.

The world’s oceans are far from static. Large currents flow at various depths beneath the surface. These currents form a global conveyor belt that transfers heat energy and helps buffer Earth’s climate.

Critical gateways in the oceans affect circulation of these major currents.

The Strait of Gibraltar is one such gateway. It re-opened less than six million years ago.

Today, deep below the surface, there is a powerful cascade of Mediterranean water spilling out through the strait into the Atlantic Ocean.

Because this water is saltier than the Atlantic–and therefore heavier–it plunges more than 1,000 meters downslope, scouring the rocky seafloor, carving deep-sea canyons and building up mountains of mud on a little-known submarine landscape.

The sediments hold a record of climate change and tectonic activity that spans much of the past 5.3 million years.

The team found evidence for a “tectonic pulse” at the junction between the African and European tectonic plates, which is responsible for the rising and falling of key structures in and around the gateway.

This event also led to strong earthquakes and tsunamis that dumped large flows of debris and sand into the deep sea.

At four of the seven drill sites, there was also a major chunk of the geologic record missing from the sediment cores–evidence of a strong current that scoured the seafloor.

“We set out to understand how the Strait of Gibraltar acted first as a barrier and then a gateway over the past six million years,” says Javier Hernandez-Molina of the University of Vigo in Spain and co-chief scientist for Expedition 339. “We now have that understanding and a record of a deep, powerful Mediterranean outflow through the Gibraltar gateway.”

The first drill site, located on the west Portuguese margin, provided the most complete marine sediment record of climate change over the past 1.5 million years of Earth history.

The sediment cores cover at least four major ice ages and contain a new marine archive to compare against ice core records from Greenland and Antarctica, among other land-based records.

The team was surprised to find exactly the same climate signal in the mountains of contourite mud they drilled in the Gulf of Cádiz.

Because these muds were deposited much faster than the sediments at the Portuguese margin site, the record from these cores could prove to yield even richer, more detailed climate information.

“Cracking the climate code will be more difficult for contourites because they receive a mixed assortment of sediment from varying sources,” Hernandez-Molina says.

“But the potential story that unfolds may be even more significant. The oceans and climate are inextricably linked. It seems there is an irrepressible signal of this nexus in contourite sediments.”

The team also found more sand among the contourite sediments than expected.

The scientists found this sand filling the contourite channels, deposited as thick layers within mountains of mud, and in a single, vast sand sheet that spreads out nearly 100 kilometers from the Gibraltar gateway.

All testify to the strength, velocity and duration of the Mediterranean bottom currents. The finding could affect future oil and gas exploration, the researchers believe.

“The thickness, extent and properties of these sands make them an ideal target in places where they are buried deeply enough to allow for the trapping of hydrocarbons,” Stow explains.

The sands are deposited in a different manner in channels and terraces cut by bottom currents; in contrast, typical reservoirs form in sediments deposited by downslope “turbidity” currents.

“The sand is especially clean and well-sorted, and therefore very porous and permeable,” says Stow. “Our findings could herald a significant shift in future exploration targets.”

IODP is an international research program dedicated to advancing scientific understanding of the Earth through drilling, coring, and monitoring the subseafloor.

IODP is supported by two lead agencies: the U.S. National Science Foundation and Japan’s Ministry of Education, Culture, Sports, Science, and Technology. Additional program support comes from the European Consortium for Ocean Research Drilling, the Australia-New Zealand IODP Consortium, India’s Ministry of Earth Sciences, the People’s Republic of China (Ministry of Science and Technology), and the Korea Institute of Geoscience and Mineral Resources.

The JOIDES Resolution is a scientific research vessel managed by the U.S. Implementing Organization of IODP (USIO). Texas A&M University, Lamont-Doherty Earth Observatory of Columbia University, and the Consortium for Ocean Leadership comprise the USIO.

Related articles

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USA: The Bedford Report Releases Equity Research on BP and ATP Oil & Gas

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The recovery for oil and gas drilling operations in the Gulf of Mexico remains slow this year. A study by Quest Offshore Resources shows that the number of active rigs in the Gulf is currently 37 percent less than before last year’s Deepwater Horizon disaster due to slow permitting and steep regulation.

Recent measures taken by the Obama Administration look to boost activity in the Gulf region. However the Administration’s plan falls far short of what the oil industry and its Congressional supporters demanded. The Bedford Report, a company that “provides Equity Reports that provide investors with short term and long-term growth opportunities, value, and strong potential returns”, examines the outlook for companies in the Oil and Gas sector and provides equity research on BP PLC and ATP Oil & Gas Corporation.

Last month the Obama Administration announced its proposed five year plan for offshore drilling, calling for opening new areas in the Gulf of Mexico and Alaska but bars development along the East and West Coasts. “It will have an emphasis in the Gulf of Mexico,” Interior Secretary Ken Salazar said. “We see robust oil and gas development in the Gulf of Mexico.”

Besides the Gulf and the Alaska leases, the proposal includes a small portion in the eastern Gulf about 150 miles off the Florida coast. The rest of the eastern Gulf is off limits due to a congressional moratorium.

Last month BP announced that it received approval from the US Coast Guard’s on-scene coordinator for its shoreline cleanup operation plan roughly 18 months after the Deepwater Horizon accident in the Gulf of Mexico. Under the plan approved by the Coast Guard, BP will end active cleanup operations and focus on restoring the areas damaged by last year’s oil disaster. In October US regulators approved a plan by BP to resume offshore oil exploration in the Gulf of Mexico.

ATP Oil & Gas Corporation engages in the acquisition, development, and production of oil and natural gas properties in the Gulf of Mexico, the United Kingdom, and the Dutch sectors of the North Sea. Earlier this month the company announced that it sold its deep-rights interest in one of its Telemark Hub properties in the Gulf of Mexico. “ATP is eager to encourage exploration into deeper horizons at ATP’s Telemark Hub and in close proximity to ATP’s existing infrastructure, the ATP Titan,” said president Leland Tate.

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Chesapeake: Report Finds No Major Influence from Gas Well Drilling on Drinking Water (USA)

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The Center for Rural Pennsylvania on Tuesday released the findings of a study it conducted on the impact of Marcellus Shale drilling on drinking water supplies.

The research was sponsored by a grant from the center, which is a legislative agency of the Pennsylvania General Assembly.

The Center for Rural Pennsylvania is a bipartisan, bicameral legislative agency that serves as a resource for rural policy within the Pennsylvania General Assembly, its website indicates.

According to the report, this research studied the water quality in private water wells in rural Pennsylvania before and after the drilling of nearby Marcellus Shale gas wells. It also documented “both the enforcement of existing regulations and the use of voluntary measures by homeowners to protect water supplies.”

In its introduction, the authors said they evaluated water sampled from 233 water wells near Marcellus gas wells in rural regions of Pennsylvania in 2010 and 2011.

Among these were treatment sites (water wells sampled before and after gas well drilling nearby) and control sites (water wells sampled though no well drilling occurred nearby),” the study indicated. “Phase 1 of the research focused on 48 private water wells located within about 2,500 feet of a nearby Marcellus well pad, and Phase 2 focused on an additional 185 private water wells located within about 5,000 feet of a Marcellus well pad.”

During that phase, the researchers collected both pre- and post-drilling water well samples and analyzed them for water quality at various analytical labs. During Phase 2, the researchers or homeowners collected only post-drilling water well samples, which were then analyzed.

The post-drilling analyses were compared with existing records of pre-drilling water quality, which had been previously analyzed at state-accredited labs, from these wells.

According to the study results, approximately 40 percent of the water wells failed at least one Safe Drinking Water Act water quality standard, most frequently for coliform bacteria, turbidity and manganese, before gas well drilling occurred,” the report indicated. “This existing pollution rate and the general characteristics of the water wells, such as depth and construction, in this study were similar to past studies of private water wells in Pennsylvania.”

The study’s pre-drilling results for dissolved methane showed its occurrence in about 20 percent of water wells—although levels were generally far below any advisory levels.

Despite an abundance of water testing, many private water well owners had difficulty identifying pre-existing water quality problems in their water supply,” the report indicted. “The lack of awareness of pre-drilling water quality problems suggests that water well owners would benefit from unbiased and consistent educational programs that explain and answer questions related to complex water test reports.”

In this study, statistical analyses of post-drilling versus pre-drilling water “did not suggest major influences from gas well drilling or hydrofracturing (fracking) on nearby water wells, when considering changes in potential pollutants that are most prominent in drilling waste fluids.”

When comparing dissolved methane concentrations in the 48 water wells that were sampled both before and after drilling, the research found no statistically significant increases in methane levels after drilling—and no significant correlation to distance from drilling.

However, the researchers suggest that more intensive research on the occurrence and sources of methane in water wells is needed,” the report indicated.

The report then cited the Pennsylvania Oil and Gas Act of 1984, which indicates that gas well operators are “presumed responsible” for pollution of water supplies within 1,000 feet of their gas well for six months after drilling is completed if no pre-drilling water samples were collected from the private water supply.

This has resulted in extensive industry-sponsored pre-drilling testing of most water supplies within 1,000 feet of Marcellus drilling operations,” the report states. “However, the research found a rapid drop-off in testing beyond this distance, which is driven by both the lack of presumed responsibility of the industry and also the cost of testing for homeowners.”

The authors of the study said their research suggests that a standardized list of minimum required testing parameters should be required across all pre-drilling surveys to eliminate confusion among between water supply owners and water professionals.

The study indicates that this standardized list should include bromide. The research found that bromide levels in some water wells increased after drilling and/or fracking. These increases may suggest more subtle impacts to groundwater and the need for more research.

Bromide increases appeared to be mostly related to the drilling process,” the study indicated.

Additionally, “a small number of water wells also appeared to be affected by disturbances due to drilling as evidenced by sediment and/or metals increases that were noticeable to the water supply owner and confirmed by water testing results.”

Increased bromide and sediment concentrations in water wells were observed within 3,000 feet of Marcellus gas well sites in this study, suggesting “that a 3,000 foot distance between the location of gas wells and nearby private water wells is a more reasonable distance for both presumed responsibility and certified mail notification related to Marcellus gas well drilling than the 1,000 feet that is currently required.”

On the regulatory side, “the research found that regulations requiring certified mail notification of water supply owners, chain-of-custody water sampling protocols, and the Pennsylvania Department of Environmental Protection’s investigation of water supply complaints were generally followed, with a few exceptions.

The study also concluded that “since voluntary stipulations were not frequently implemented by private water well owners” that more educational and financial resources should be made available to facilitate testing.

The authors were clear: “This research was limited to the study of relatively short-term changes that might occur in water wells near Marcellus gas well sites. Additional monitoring at these sites or other longer-term studies will be needed to provide a more thorough examination of potential water quality problems related to Marcellus gas well drilling.”

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