Thursday, 30 April 2015

Hey, East Coast, Western Canadians want their winters back

By: Doug Firby, Editor-in-Chief, Troy Media

Article originally published in the March 2015 edition of The Roughneck Magazine.


Excuse us westerners, central Canada. We’re as confused about the weather as you must be.

It’s hard for us to understand just what you’re going through because, well, we’re not. At the time of year when we’re usually bundled up in our Canada Goose parkas, plugging in our cars and wondering what we’re doing in this god-forsaken place, we are instead pondering whether it’s already time to think about taking off our snow tires.

Our ski hills are going though the worst winter in at least a decade. Some, including Mount Washington on Vancouver Island and Castle Mountain in southern Alberta, have actually given up the fight and closed for the season. Evens some of those that have stayed open are full of slush and mud.

Then we talk to friends and relatives in Ontario and hear stories about -40 wind chills, snow storms and other frigid cruelties not normally visited on central Canada. And, how about that East Coast?

The world, quite simply, has turned upside down. Our backyard rinks are nothing but distant brown memories; our highways are eerily bare and frost-free.

Some people shake all this weirdness off as just one of those years, but you’ll forgive us westerners for wondering whether any of this has something to do with global warming. Officially, the diagnosis is that the weather is affected by unusual behaviour of the polar jet stream. A report by the U.K. Met Office called the behaviour a “persistent pattern of perturbations.”

This year, according to the Met Office, the jet has been unusually far north in the Pacific, bringing warm weather all the way up to Alaska. Across the Atlantic, it has been unusually far south, and about one-third faster than normal. Britain alone has experienced 30 intense storms in the past three months.

It’s happened before, but the big debate is over what’s causing the jet stream to act up. Climate scientists tell us it’s a sign of things to come. Climatologist Jennifer Francis of Rutgers University, for example, recently told the annual meeting of the American Association for the Advancement of Science in Chicago that the changes in the jet stream have been caused by warming temperatures in the Arctic. Kinda like a more believable version of The Day After Tomorrow.

“Weather patterns are changing,” Francis said. “We can expect more of the same.”

I won’t kid you – there are people in the West who welcome this trend. A couple solid weeks of -30 will put you into that frame of mind. They’re the people who would normally be booking flights to Phoenix right about now. This year? Why bother?

But I’m not one of them. Cold, dark and snowy winters can try your spirit, for sure, but it’s a big part of what we think of when we think of Western Canada. And there is absolutely nothing that can compare with a sunny, frosty cross-country ski trip through the dry, powdery snow in Rocky Mountain valleys.

Much as this balmy weather has been a welcome break, westerners miss their authentic winters. And we want them back. If this is the face of real climate change, then we’re ready to trade in our 4X4’s right now and start driving Nissan LEAFs.

And we hope for your sake, Ontario, that the planet gets back to normal soon. Bitter cold isn't your thing. It's ours.

Tuesday, 28 April 2015

From Passive Endorsement to Active Engagement

CAPP and industry aim to turn up the volume by inspiring supporters to stand up for Canada's oil and gas industry. 


By: Clara Stanfield 

Originally posted in CAPP's April 2015 issue of their Context Magazine. Original article can be found here: http://www.capp.ca/context 

If you've ever stood in line for your morning coffee, listening to people behind you criticize the energy industry, and debated whether or not to say something, Jeff Gaulin says you're not alone. 

Gaulin, vice-president of communications at CAPP, understands the strong social forces working against supporters of Canada's oil and gas industry to speak up publically. "It's a three-to-one ratio of those willing to to speak out against the industry to those willing to speak up for it," he says. "And we really need to change that."

Those numbers are a bit surprising when you consider that among the general population, polls typically show broad support for the industry -- routinely 40 per cent support versus 25 per cent opposition. 

"We want to connect Canadians to our industry in a way they haven't been connected before. It's about personalizing and humanizing the industry."

At the heart of the issue is the fact that environmental NGO's have dominated the public discourse on energy with very successful, emotionally appealing campaigns that have created an "us versus them" dynamic, where "us" is on the side of the good guys and "them" is... well not. 

How did it get like this? Gaulin thinks one reason may be the nature of the business itself. "We've been a remote industry," he says. "Physically, in the sense that the oil sands just where they are, and few get to actually see them.

"But we've been intellectually remote too," Gaulin adds. "We operate with an engineering mindset, and for too long we've had the idea that the facts will set us free; that people would look at facts and realize that we're doing a good job, that we're acting responsibly. But people don't always make their decisions on facts alone. They rely on values and feelings. This is a social issue."

This appeal to values and emotion, he says, has made the anti-oil and gas movement very successful. "They are very good at mobilizing the public around a social issue, and that is our simple, yet difficult task -- to mobilize Canadians around this issue in a different way, starting with our own people."

Deryck Spooner agrees: "Whether supporting an environmental message or an industry message, the strategy and tactics are the same." Spooner is senior director for external mobilization for the American Petroleum Institute (API). He's seen both sides of the debate, having worked previously on campaigns for the Nature Conservancy. Spooners adds, "What we need to keep in mind is many of the organizations opposing pipeline and infrastructure projects are not true environmental groups like the Nature Conservancy. Some are extremists who will use any tactic to try and stop industry, including spreading misinformation to capture the emotions of the public." The challenge for for industry, says Spooner, is to not only counter this with facts -- but far more critically, to get the facts to and inspire action among the people the public trusts. 

Trust Begins at Home


"We work in an industry that many people love to hate," says Justin Reti, senior communications advisor with the internal communications team at Cenovus Energy. "It's not easy to declare your support for it."

Cenovus, known for its external efforts to change the public dialogue, launched an internal initiative starting in October, 2013. "On the internal front we looked for ways to help our staff and give them the information and tools they needed to start positive energy conversations," says Reti. 

The company took a multi-pronged approach with (among many other things) wearable pride in the form of "I <3 Oil" t-shirts, toques, and ear-warming headbands; a "Speak Up" package with tips, examples and industry facts all designed to encourage (or support) conversations with friends and family; and an update to the company's social media guidelines designed to encourage greater participation in online discussions debates. 

Cenovus' effort to nurture personal engagement among employees aligns with a model of engagement Gaulin foresees for the entire industry. 

"It's one thing for industry to try and sway people through television commercials and news media sound bites of CEO's talking about company sustainability initiatives. Unfortunately, that only takes us so far," says Gaulin. 

It's a question of trust. "Who are the most trusted sources of information for most people?" he asks. "It's friends, family, neighbours -- these are the people we believe the most. So this conversation has to start with within our industry, within CAPP, and our member companies and outward from there." 

Spooner's experiences with API and the Nature Conservancy support this approach. "People need to be able to have a conversation with individuals they trust who can alleviate their concerns. That can only happen if a company gets on the ground, reaches out to, educates and mobilizes local leaders and citizens to support the project. This is especially critical now that those opposing the industry are increasingly engaging in local, grassroots campaigns." 

Spooner adds, "A personal conversation will always trump a piece of mail, and information from a trusted friend or leader will always trump information from a stranger. We have to build allies that can deliver a personal local message."

The Importance of Social Cover


Reti says Cenovus employees embraced the company's approach, and that had a spillover effect to the wider community. "What we saw was the more our staff wore the t-shirts, the more external requests we got for them. When we put the toques out, they went quickly!"

Which is great, but the idea is not simply to have people wear a cool shirt. It is more about how wearing a cool shirt might start a conversation, and while Reti has seen that happen, he acknowledges that not everyone is up to it right away, and that's okay. 

"Based on their individual comfort level, people could use these things how they wanted," says Reti. If it was just wearing the t-shirt, that's fine. Or wearing the t-shirt while giving a speech, that's fine too. "The idea was simply to give staff a way to show their pride in their company and their industry and arm them with a variety of tools to help them do that."

Gaulin agrees that people need to move at their own pace and comfort level. "We're not asking people to take to the streets," he says. "But we do hope that people who support this industry will start to feel more comfortable about expressing their support. For that to happen more consistently, we need to provide social cover: that is: we need to make it socially acceptable to speak up."

You can point to almost any social movement to see how social cover works -- seatbelts, smoking, impaired driving and yes, even the anti-oil and gas campaign. Most of these movements started small, with a motivated and vocal core group of individuals facing a larger social unwillingness or indifference to change. But as the group talked, provided evidence to support the validity of their position and appealed to people's emotional ideals and community values, this gave legitimacy for others to speak up. 

CAPP and industry;s engagement strategy aims to start things rolling by providing tools and resources to help its strongest supporters -- for example, employees of member companies and the oil and gas supply chain, as well as members of the trade unions, chambers of commerce and passionate individuals who believe in Canada's oil and gas industry -- to start engaging publicly and to tell their own stories. 

Says Gaulin, "We want to connect Canadians to our industry in a way they haven't been connected before. It's about personalizing and humanizing the industry."

From Endorsement to Action


CAPP's engagement strategy is evolving. For now, Gaulin says, there's a range of little things people can start to do, from writing letters to editors, speaking to social clubs and networks, writing to MP's, maybe even speaking up in that coffee lineup. "All those little things add up," he says. 

Meanwhile, CAPP is building toward a full-blown grassroots outreach program that will begin to take shape in coming months. The goal will be to shift industry supporters from a mode of passive endorsement to active engagement. CAPP's manager of campaigns, Christina Pilarski identifies three key stages to this effort that are in the works: identification, recruitment, and activation. 

"We know the support is out there," Pilarski says. "We've made some good progress identifying that support. The next step is to build relationships with our supporters, and inspire them to become visible and vocal championships for industry."

Central to this relationship-building effort is getting supporters to sign up to the Canada's Energy Citizens Campaign (energycitizens.ca), a growing online community where members can share content, participate in social media conversations and disseminate information on events and other advocacy-style initiatives. CAPP will also launch a regionally targeted ad campaign in May that directly engages Canadians in support of the energy conversation. 

In parallel are planned recruitment drives in key communities involving speeches, social events, town halls and community cafes. CAPP staff, with the support of members, will be on the ground to provide the personal touch. 

"Planned mobilization initiatives include letter-writing campaigns, lawn signs, events and rallies," adds Brad Tennant, CAPP Alberta campaign advisor. "Supporters will be given the tools and resources to spread the word, including information pieces, and promotional material such as buttons, bumper stickers and t-shirts. We're even developing a 'campaign-in-a-box' toolkit for people willing to become champions for industry within their own local community."

The key, notes Pilarski, will be to foster "sustained engagement." "If we can create an environment where people feel like they're part of something larger and that they have an opportunity to make a difference, we should start to see real groundswell of visible support."

A Balanced Conversation


"I think it's important we are assertive and clear, but respectful," says CAPP president and CEO Tim McMillan. "That's what Canadians expect. Those who shout, intimidate and bully eventually lose effectiveness." Indeed, the 2015 Edelman Trust Barometer indicates that public trust in environmental NGO's wanes when they become more extreme. It's a lesson the oil and natural gas industry takes to heart as it emphasizes fostering balanced, honest, and solutions-orientated conversations. 

"We're not trying to build an army of radicals," notes Gaulin. "And it's not about dispensing with the work we've done before. There still needs to be an emphasis on energy literacy and communicating the facts on how we're a world class industry when it comes to responsible development. 

"We just need to shift the dial so that people can connect meaningfully, personally and emotionally with these facts."

Is it possible for the oil and natural gas industry to make this shift happen? Gaulin believes it is, but that it's going to take commitment, patience, and creativity. "We didn't get into this situation overnight and we won't get out of it overnight either," he says about the negative perceptions and misinformation that dominate many public discussions about Canada's oil and gas sector. 

"We've got a big hill to climb. What we're really about is fundamentally changing the way the industry connects with Canadians, and we have got to get this right so that public policy is supported," says Gaulin. 

"At CAPP, we're taking a systematic approach, starting with supporters," he adds. "We want those people to know three things: one -- you're not wrong, two -- you're not alone, and three -- you can play a role. Every small act counts." 


Monday, 20 April 2015

Natural Gas - Bridge Fuel or Fuel of the Future?

By: EnergyNow Media

Originally posted on April 13th, retrieved from: http://energynow.ca/shells-bet-on-gas-underscores-big-oils-push-to-replace-coal/

BP Plc coined the slogan “Beyond Petroleum.” The new industry mantra might be “Beyond Oil and Into Gas.” Oh, and while we’re at it, “Down With Coal.”

Consider Royal Dutch Shell Plc’s recent $70 billion acquisition of BG Group Plc — clearly a huge bet that natural gas will prove to be its cash cow of the future.

The petroleum industry’s move toward gas is hardly new — the hydraulic fracturing shale revolution is in its second decade, after all. Still, Shell’s move is an emphatic confirmation that some among the Big Oil family firmly believe gas will play a growing role in meeting the energy demand of emerging countries such as China and India that are trying to move away from dirtier coal.

“Gas will likely overtake coal as the world’s second fuel by the late 2020s,” said Jonathan Stern, head of the natural gas program at the Oxford Institute for Energy Studies.

Gas is emerging as a preferred fuel around the world because it’s cleaner to burn than coal and oil, prompting the International Energy Agency to say in 2011 that the world was entering into the “golden age of gas.” In a highly symbolic move, China announced last month it would convert the last of four major coal-fired power plants around Beijing to gas next year.

Last September, in a petroleum industry meeting timed to a United Nations session on global warming, some of the world’s leading producers got up to argue that gas gave them a huge advantage over coal in the climate-change battle, according to the website Responding to Climate Change.

“One of our most important contributions is producing natural gas and replacing coal in electricity production,” said Helge Lund, then chief executive officer of Statoil ASA, citing figures that switching from coal to gas could halve global emissions.

FAST GROWING


Until recently, coal was the world’s fastest-growing major energy source, averaging a 5 percent annual rate. The Paris- based IEA forecast the rate would slow down to 1 percent from 2012 to 2020, and decelerate further to 0.3 percent in the 2020s as China and other emerging countries battle pollution.

Shell CEO Ben van Beurden said in February that “a shift from coal to natural gas” was needed to battle climate change. “When burnt for power, gas produces half the CO2 coal does,” he told an industry audience.

For Shell, this is the second gas-focused deal in so many years. In early 2014, it bought the liquefied natural gas business of Spain’s Repsol SA for $4.1 billion. The Anglo-Dutch group is not alone betting on gas: Chevron Corp., BP, Total SA and Exxon Mobil Corp. are spending heavily on the fuel.

GAS FOCUSED


Trevor Sikorski, head of natural gas, coal and carbon for consultant Energy Aspects Ltd., said companies were “starting to recognize” a trend in emerging markets in favor of gas and against coal. “This deal potentially kicks off acquisitions of other gas-focused companies the size of BG or maybe smaller,” he said. Among the potential candidates, analysts are looking at Woodside Petroleum Ltd. and Santos Ltd. of Australia, U.S.-based Devon Energy Corp. and Noble Energy Inc., among others.

The bet on gas has been extremely profitable so far for Shell. The company reported underlying earnings of $10.4 billion in 2014 from gas, up 470 percent in five years.

But it has its risk, nonetheless. First, LNG prices have dropped about a quarter from the torrid levels reached after Japan bought large quantities of the fuel following the 2011 nuclear crisis of Fukushima. The price drop will hurt profits.

COAL PRICES


At the same time, coal prices have fallen to levels not seen since the global financial crisis, providing cost-sensitive countries, including India, a strong reason to keep buying. BP CEO Bob Dudley last June warned that with coal prices falling, the commodity was “extending its competitive edge in power generation” over gas.

Second, the shift from coal into gas depends in a great part on climate change negotiations of uncertain outcome.

And third, analysts worry that energy companies would struggle to keep construction costs under control, jeopardizing the future of the LNG sector.

If Big Oil is successful in its push toward gas at the expense of coal, those most at risk will likely be global mining groups including Glencore Plc, Anglo American Plc and Rio Tinto Group with billions of dollars in coal deposits in South Africa, Australia and Colombia.


Tuesday, 14 April 2015

Public Confidence - External Mobilization - Comments from CAPP

CAPP Speaker Series featuring Deryck Spooner - April 1, 2015 

Below is an opening speech from CAPP's VP of Communications, Jeff Gaulin. The entire speaker series featuring Deryck Spooner, can be found here: https://www.youtube.com/watch?v=9GuIxc0aVLE 

My name is Jeff Gaulin. I am the Vice President of Communications at CAPP, and it is my pleasure to welcome you today to our first speakers’ series of 2015.

Today CAPP is pleased to invite Deryck Spooner as our first speaker of the year. Deryck is the Senior Director for external mobilization for the American Petroleum Institute in Washington D.C.

Deryck will be sharing some of the examples in his case studies from his experiences in the United States, but as he will also emphasize - I feel that almost all of these strategies and tactics that he describes are universal in their application, they are equally applicable here in Canada. Now while some of the details on the political systems and the regulatory processes certainly differ between Canada and the United States - some might argue that there are cultural differences as well - the fundamental idea and the inherit power of mobilizing people at a grassroots level can be applied effectively here in Canada wherever you are, as long as you have an understanding of the political, demographic, and cultural landscape. That goes for both sides of the border.

Being local matters and understanding your audience is critical. I see that some of these kinds of strategies and tactics are used around the world, used very effectively by anti-fossil fuel opponents.  Indeed Deryck’s presence here comes at a very extremely timely moment as it coincides with our strategic shift at CAPP towards more targeted, grassroots, on the ground outreach and communications approach, a campaign approach to influence the public opinion, mobilizing support and influencing at the end of the day the public policy that supports the growth and continue development of our industry. 

In Canada the oil and gas industry gets broad support nationally, but let’s not behold in that, we get about 42% of Canadians that are generally in favor of oil and gas development, relative to about 25% opposition, that’s what this pie chart shows. So why does it feel some days that it feels opposite from that, why does it feel like we are losing. Well despite this advantage, nationally, it is what matters locally and it’s how people speak up, that is really critical. That is because of a different statistic, one that is when we look at what the percentage of opponents who are prepared to speak up verses our supporters, it’s almost a three to one margin. Three opponents are prepared every day when they get out of bed to talk against our industry without any prompting, for every single one Canadian who stands up for our industry.  So we are in a struggle where our supporters feel alone often, they feel isolated, they can feel ostracized, and some of them may even beginning to have their doubts.  When we look at building a traditional reputation, the traditional method is to use communications to increase awareness. It is what I’d call it a push strategy; push your way up the pyramid here. Build your level of awareness, the more people that are aware of you, the more they all understand you. The more they understand you, the more they tend like you, the more they tend like you the more they trust you. And if they trust you, they might speak up and be advocates for you. Our industry is not alone in finding a bit of a dichotomy here, we get people who like us or dislike us, regardless what they know about us. Some days the facts just don’t matter. While it is important that we increase the energy literacy and get the facts out there that won’t necessarily set us free at this time. So one of the things we are shifting towards is what I call a pull strategy. Starting at the top of the pyramid and trying use those people that are predisposed and already identified as supporters and using them, trusted friends, neighbours and colleagues to be voices and advocates in the hallways, in the homes, in the workplace to be able to pull people into the conversation for our industry.  So we are evolving away from public awareness per say, into more public advocacy. So that at the end of the day, Canadian’s know that they are not alone and they are not wrong, when they stand up and support Canada’s oil and gas industry. So we intend to change that dynamic using many of the strategies and tactics that you will hear from Deryck today and we hope that many of you in this room will join us on that journey.

So you can see on the next slide one of the things that we are doing is moving away from what I call a national campaign, because when you look at national numbers of support we have it, if you move to a national campaign, that’s not really where the pain is. We are taking a micro targeted, multiple regional approach to put our efforts in areas that will help to advance our industry causes. In Northern British Columbia or on the south coast along the greater Vancouver Regional District or Northern Alberta where our base of operations and support is; in Ontario, in the great areas around Toronto that helps supply the oil sands and the natural gas industry, as well as the corridor around Ottawa and ultimately at the end through the St. Lawrence seaway. We are taking a local approach in getting our industry message out and building our support, because the way we see it, all politics, just as all communications should be, is local. We are going to grab, because the public dialog around oil and gas in Canada is no longer national per say, it is at that very local level. And our opponents are very, very good at being local and using that local opposition as a pinch point in opposition. One of the things that Deryck will talk about is, you might be surprised to know that in Texas, what would be considered a bastion of support for oil and gas in the states, has seen some counties and some jurisdictions ban hydraulic fracturing. Why? Because at that very local level, few people can be very effective. So with that I would like to welcome Deryck to the stage and hand things over to him about how he has built the mobilization program in the States and what we can learn from it in Canada.

Friday, 10 April 2015

Top 12 Media Myths on Oil Prices

By Dan Doyle for Oilprice.com, originally published on April 8th. 

Dan Doyle is President of Reliance Well Services, a hydraulic fracturing company based in Pennsylvania.

The upstream oil and gas industry is not a black hole. There’s no mystery wrapped in an enigma here.
There are a lot of meetings with engineers, chemists and geologists. There’s a constantly evolving learning curve. And then there’s all the regulations and compliance. But all-in-all it’s pretty straight forward, that is, until the media gets a hold of it. That’s when it becomes complicated. It’s as though we are getting reports from the mysteries of the deep ocean or life in the great galaxies beyond. There is so much hyperbole and unsupported guesswork that investors don’t have a chance. So, in a small effort to set the record straight, let’s see if we can’t dispel some of the misinformation.

Misperception #1: Goldman Sachs knows what is going on. This is incorrect. Goldman Sachs should not be quoted extensively. They are notoriously wrong when forecasting tops and bottoms. What they are good at is jumping on the band wagon and stoking fires. Their forecasting always seems to be done through a rear view mirror and their calls for peaks and troughs are always overdone. Back in July 2014 when WTI was peaking, they were calling for more, even as the dollar was showing signs of strength (and we know what happened there) and as oil inventories were beginning to wash up over our ankles. And then when we are forming a bottom in January and retesting it in March, they were calling for a deeper bottom. And then there was 2008. Remember the calls for $150 and $200 oil from Goldman and Morgan Stanley? That was right before we went to $40 and then some. (To be fair, Ed Morse from Citi called the top but he overshot the bottom. We’re not going into the 20s).

Misperception #2: The “non-productive rigs” are the first to go. This statement is a little baffling because all drilling rigs are productive, some are just more efficient. H&P’s Flex 4 and Flex 5 rigs are state of the art. But these rigs are stacking up just as fast as the less efficient rigs that require more man hours but are not as expensive to contract. Have a drive past H&P’s Odessa yard. It’s stocked full of these Flex 4s. Rigs are enormous which makes them costly to move around. You’re not going to bring in a dozen or so tractor trailers and a few cranes for a rig move back to Texas or Oklahoma, and hire the same sized fleet to bring in the newest generation rig. The closer truth is that the ones that are running in particular areas—that have not been let go—will continue running in those areas. And what the oil companies are going to do is put pricing pressure on their driller for not having supplied the cat’s ass in the first place.

Misperception #3: Supply keeps coming on because of innovations in fracking. Yes, fracking has gotten much better in shale formations but the real advances are already baked in. What has been occurring over the last 24 months or so is that more sand is being run per stage and stage intervals are more densely packed. Other than some new chemistry and a few software updates, that is the bulk of it. There really is no smoking gun between well completions in July 2014 when oil was at $100 and now--9 months later--when oil has been cut in half.

Misperception #4: Fracking has not gotten exponentially more efficient resulting in outsized cost reductions. Yes and no, but more “no” than “yes.” The 600 lb gorilla in the room is competition. Fracking has gotten competitive, damned competitive. Five years ago fleet sizes were smaller and there were nowhere near as many players. But then came the boom and service companies did what they do best. They overbuilt. They were also cheered on by cheap and plentiful money because everyone, especially bankers and private equity, wanted in on this one. To get an idea of just how competitive the shale landscape has become, a stage in a 2012 Marcellus well fetched almost twice the same stage today. There have been multiple improvements in both design and implementation, but the heavy lifting on cheaper frack pricing has been competition.

Misperception #5: The Baker Hughes rig count has become irrelevant. Incorrect. The Baker Hughes rig count is always relevant. Remember, this was the weekly number that allowed us to hold a bottom at $43 in March. But because supply didn’t immediately go lockstep with the falling count, analysts lost patience. They are now theorizing that rigs are so “productive” that the count no longer carries the weight that it once did. That’s a tough position to take. We were at 1,600 rigs drilling for oil in October and we’re now at 800. There is some truth that E&Ps are now favoring sweet spots but that won’t make up for the 50% collapse in the count. Shale extraction resembles an industrial process more than it does wildcatting. There aren’t many dry holes with shale. Microseismic advances have put an end to that as have data rooms stuffed full of old well logs that chart the potential of shales. Thus, most shale wells drilled today have a much better chance of being economic than step out and exploratory wells of the past. There is no legitimate model for 800 rigs growing US production past 8.9 mm BOPD in the Lower 48. And because its shale, and because shale is “tight”, drilling must continue at a breakneck pace to grow production. Analysts looking for a more ‘spot on’ number should start following the activity of fuel distributors who run nonstop between depots and frack jobs. Watch their sales for a more immediate indication of future production.

Misperception #6: We are running out of storage space for crude. We’re not. We’re going to be OK. Volumes have increased, especially at the oft mentioned Cushing, but Cushing accounts for only about 10% of US storage. Other storage areas are up but nowhere near as much. The reason is that physical traders like to park their inventory close to market and Cushing gives them that proximity. Also, Cushing is not a dead end. There are large pipelines that connect it to the Gulf Coast where storage is more plentiful and not nearly as full. Additionally, large inventory draws will be coming shortly with the advent of warmer weather.

Misperception #7: Shale wells have a productive life of only a few years. The truth on this one is slowly being sorted out and commentators are finally getting it right. Shale lacks permeability. Which means it’s very “tight”. It requires a frack job to free up the oil and gas trapped in its pore space. Fracking creates and sustains permeability and permeability is the pathway to the wellbore. Like any tight formation, oil and gas production is front loaded, meaning that most production will come right after stimulation. This results in excellent up front results but production tails off quickly, maybe even falling as much as 75% in year one and settling into something less for the next 10 or 20 years. This is called the tail and the tail is profitable, but only if the flush pays for most of the well.

Misperception #8: You can turn shale on and off. That’s wrong. Shale takes time like any other industrial activity. Slowing down its progress is a bit like stopping a supertanker. You can do it, but you need a lot of room. Most drillers require contracts and breaking them can be painful. Sand can pile up at rail sidings and result in demurrages. Layoffs can take time. Regulatory penalties may force an operator into activity whether he wants activity or not. All this takes time to work out. And then there’s always the stronger balance sheets that will drill regardless of price or that will drill and create a “fracklog” which is a newly minted MBA speak for a backlog of wells to frack. There is no switch you can flip.

Misperception #9: Oil is inversely related to the dollar. It is. This was a head fake. It’s not a misperception. Match the DXY to Brent and WTI over the last 12 months. It’s a perfect divergence. You want to bet on oil, then bet on the Euro.

Misperception #10: OPEC is done. Maybe, but the Gulf Cooperation Council is not. Collectively, the 4 GCC members pump more than half of all OPEC production. They also have very low lifting costs and enormous cash reserves. Additionally, they have stamina and are going to maintain OPECs position of no cuts. There’s a long history of Russia or Venezuela filling reduced quotas. This time around the GCC is not going to let that happen. If Russia concedes there may be a cut in June. But it is looking unlikely even if they do. Look for Saudi Arabia to pick up market share.

Misperception #11: American shale producers are the new swing producers. No, their banks are.

Misperception #12: A deal with Iran will lower prices. Sort of. It will take Iran a year or two to add anything meaningful to our 93 MMBOPD global market but the fear of a nuclear Iran will create enough tension to offset the supply addition. Worries over a nuclear Iran, whether real or perceived, will create enough fear in the markets to more than counter balance the additional million barrels a day of supply that may come on.

In short, oil prices will increase as weekly EIA production numbers begin posting declines as we saw last week. Demand will increase. Inventories will start getting eaten into by midyear. Europe will contribute as will Asia and the Middle East. A shrinking Chinese market is still growing at 7% a year, and that market is much bigger now than when it was posting 10% yearly growth five years ago. Rich Kinder was right in calling the bottom in the low 40s and John Hofmeiser (former President of Shell Oil) and T. Boone Pickens are probably pretty close to being right with their call of $80 as the top in the next year or so. A solid $65 to $70 by year end is the more reasonable number and is just enough to hold off development of some offshore projects, oil sands work and a good amount of the non-core shale plays. A stronger dollar will also do its work here as will a Saudi Arabia hell bent on market share. There will be less and less for shorts to hold onto and very few will want to be stuck on the same side of the trade as the big investment banks.