Cutting-Edge Frackers

Fracking in the U.S. is here to stay, affirms Keith Schaefer, editor of the Oil & Gas Investments Bulletin. North American business is dependent on cheap energy, and even energy utilities are switching from coal to natural gas. Although environmental concerns remain, the industry has incentive to do the right thing, says Schaefer. In this exclusive interview with The Energy Report, Schaefer profiles service companies that are using cutting-edge technology to make fracking safer, greener and cheaper.

The Energy Report: Keith, considering that natural gas prices are still near all-time lows, can you still argue that fracking has improved North American energy markets?

Keith Schaefer: In just a few short years, fracking grew the supply of natural gas way ahead of demand. The price of natural gas fell from $8–9/thousand cubic feet (Mcf) to $2/Mcf! Natural gas is the low-hanging fruit for the energy sector and for consumers. Cheapened feedstock provides a huge boom for American business.

TER: Have fracked oil prices kept pace with falling natural gas prices?

KS: It has not declined by the same degree, but it has lowered the cost of North American oil. West Texas Intermediate (WTI) used to be the major benchmark for oil around the world. Now, WTI is only a benchmark for a small area of the United States and Canada. In addition, the flood of supply coming out of new shale oil wells in North Dakota and Texas is overwhelming the refinery complex in the Gulf Coast, which is about 50% of North America's refinery capacity.

TER: Is there a glut of gasoline? Prices for consumers are certainly high.

KS: That's a great question. The short answer is no. But the long-term answer is yes. People are saying, OK, how come gas prices at the pump are so high when we've got all this oil? What's going on? Here is how the game works: the refineries are moving their production flows to produce the least amount of driving gasoline possible, and the most amount of other refined products, like home heating oil fuel, diesel, kerosene and jet fuel. These are products they can export, in which case they get to use the Brent prices, which are 15% higher than WTI prices. These refineries generally operate on skinny-to-average margins, so 15 points is huge for them. That is why the price of retail gasoline for driving is 50% higher than it was in 2008.

Let me give you an example. I'm in Vancouver. We sell gas by the liter, not the gallon. Back in 2008, we had an uncanny relationship where if oil was $100 a barrel (bbl), gasoline was $1 a liter (L) at the pump. If it was $110/bbl, it was $1.10/L. If it was $1.35/L in Vancouver, oil was $135/bbl. Now, gasoline is $1.35/L, but oil is only $96/bbl. Why? Because the refineries are producing the least amount of gasoline, and the most amount of other refined products.

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TER: Does fracking lower oil production costs?

KS: As a rule of thumb, the cost of production for most shale plays in North America is $40–45/bbl, which is not that much different from costs using conventional methods. It is above-ground logistics that cause lower prices for fracked oil. We don't have enough pipelines to efficiently transport the fracked oil to the refineries. Consequently, supply backs up at the hubs, creating big discounts. For example, in late June, Canadian oil and Bakken oil were at huge discounts, almost $20/bbl to WTI. Because of pipeline disruptions and refinery downtime, Canadian producers were receiving under $70/bbl for their oil. But only 2½ months later, the logistics are running smoothly and Bakken oil is now selling at only a $3/bbl discount to WTI.

TER: Why do we see regional price differentials at the pump?

KS: Logistics. Here is an example. Recently, BP Plc's (BP:NYSE; BP:LSE) Cherry Point refinery, which is just south of the Canadian border, went down. The next day, gas prices jumped $0.30 per gallon from Seattle to San Diego.

It's not like we have no new refining capacity. Even though no new refineries have been built since '76 in the U.S., refineries have been expanding. Oil & Gas Investments Bulletin writes on oil and natural gas markets. His newsletter outlines which TSX-listed energy companies have the ability to grow and bring shareholders prosperity. Keith has a degree in journalism and has worked for several dailies in Canada but has spent the last 15 years assisting public resource companies in raising exploration and expansion capital.

DISCLOSURE:
1) Peter Byrne of The Energy Report conducted this interview. He personally and/or his family own shares of the following companies mentioned in this interview: None.

2) The following companies mentioned in the interview are sponsors of The Energy Report: Royal Dutch Shell Plc.

3) Keith Schaefer: I personally and/or my family own shares of the following companies mentioned in this interview: GasFrac Energy Services Inc., Poseidon Concepts Corp., Raging River Exploration Inc., Renegade Petroleum Ltd., Ridgeline Energy Services Inc. and ZaZa Energy Corp. I personally and/or my family am paid by the following companies mentioned in this interview: None. I was not paid by Streetwise Reports for participating in this story.

Written By: The Energy Report