What This Global "Texas Standoff" Means for Oil Price

Source: Kent Moors, Oil & Energy Investor  (5/25/12)

"The rising tension between Tehran, on the one hand, and Washington and Brussels, on the other, is still the single most serious geopolitical element impacting the global oil market today."

It's Iran again.

Actually, it has never stopped being about Iran, ever since the West passed heavy sanctions and the European Union decided to end all Iranian crude oil imports beginning July 1.

I know I keep going back to this issue, but it's for one very simple reason.

The rising tension between Tehran, on the one hand, and Washington and Brussels, on the other, is still the single most serious geopolitical element impacting the global oil market today.

And now the matter is finally reaching a head.

This afternoon I'll be on Fox Business to talk with journalist Ashley Webster about the Iranian crisis.

But I thought I would fill you in beforehand.

Here's the gist of what I will be telling Fox this afternoon.

Even After Two Days of Meetings

Two days of meetings have just concluded in Baghdad, between Iran and the six major powers (the five permanent members of the UN Security Council, plus Germany). There was some spin applied in the rhetoric before and after the meetings, but the conclusion is strikingly clear.

Absolutely nothing was accomplished.

The next set of talks is scheduled to take place in Moscow on June 18 and 19, but time is running out.

Iran is now looking at losing one-quarter of its monthly oil exports, with no alternative markets for that oil in sight. That's right—the Chinese have decided against becoming the "importer of last resort" for Iran. And their primary shipping insurers have knuckled under before the sanctions and are no longer covering Iranian crude consignments.

The sanctions have also made it difficult—on purpose—for Tehran to access international banking networks to exchange currency from the sales it does make. That means it costs Iran more to use indirect, and often shadowy, ways of moving money, squeezing even further the profits from sales.

Rather important for a nation whose national budget is dependent upon oil sales for 90% of its revenue. . .

Yet as we approach July 1, the imminent problems are not all on Iran's side.

The EU is Going to Feel the Effects, Too

Eleven EU countries import oil from Iran each month.

For most of them, the transition to other suppliers is a possibility to make up the difference—especially imports from Libya, where oil has come back on line quicker than anticipated.

However, for the three European countries most affected, the situation is quite different. Unfortunately, these three nations are also the three southern-tier EU members (at least for the moment) with the most acute financial problems.

Greece has been importing at least 30% of its oil from Iran monthly; Spain 14%, and Italy 13%.

Saudi Arabia has agreed to make up the volume difference, but only through the first delivery cycle, and without guaranteeing any pricing floor. The EU still has not worked out how it will compensate for deliveries past that, should the embargo last for any length of time.

So what's going to happen?

Iran believes Europe will have to blink first in this ongoing game of diplomatic "chicken." Tehran has a single objective in these talks: play for time.

And, oh yes, stronger sanctions are working their ways through the halls of the U.S. Congress, assuring that the situation for a recalcitrant Iran will only become worse.

Meanwhile, the effect on global oil prices will only become more acute as the embargo kicks in.

Oil may be trading at around $91/barrel (WTI) right now.

But that's temporary.

The only reason we have not seen this rise in prices taking shape earlier is because of the current European sideshows following the French and Greek elections. The Continental angst has created ripples of demand concerns on both sides of the Atlantic, promoting a short-term (and emotionally led) retreat in oil prices.

The pricing reversal in the other direction will follow in lock-step with the collapse in the talks between Iran and the global powers.

Already, my Moscow oil contacts are concluding that nothing of consequence will take place there next month, either. Actually, some think the embargo may even help increase Russian imports to Europe.

Brussels, however, certainly does not want to become more dependent upon Russian oil, since it is already dealing with the problem of being overly reliant on Russian natural gas.

So, what is the likelihood that those talks will collapse? If I were handicapping that eventuality, I would currently put that collapse as a 90% probability. Why? Because both sides have put down demands that the other cannot meet.

During the initial April meeting in Istanbul, the Iranian delegation required that the West suspend their sanctions before Tehran would discuss its nuclear program. While the Vienna-based International Atomic Energy Agency (IAEA) is holding out some hope for a renewed round of inspections, we have been down that road many times before. It is a non-starter. The West will not agree to freeze the sanctions first.

For their part, the U.S. and the EU have laid down three non-negotiable requirements before they will annul the embargo and the sanctions. These require that Iran to:

1. end all purification of uranium (both to the 20% and 3% levels);
2. move all uranium currently purified out of the country; and
3. open up the super-secret and heavily fortified underground installation at Fordo near the sacred city of Qom to full international access.

Iran will never agree to the last two; probably not to the first one either.

Absent the rise of another Neville Chamberlain and another Munich-like appeasement, we have a Texas standoff here.

And that assures increasing tensions, rising volatility in prices and a very interesting summer in the oil markets.

Kent Moors
Oil & Energy Investor

Marcellus Shale Job Program Turns Unskilled Into Shale Workers

PITTSBURGH--Professor Byron Kohut helps hundreds of low-income adults land coveted jobs in the booming shale-gas industry in Pennsylvania. But only the tough need apply, he said.

"If they are not physically capable of working outside, in bad weather, dangerous conditions, I scare them out of drilling," said Kohut, who coordinates a natural-gas job-training course at Westmoreland County Community College, about 40 miles southwest of Pittsburgh. "It's not easy work," Kohut said, adding that people with backgrounds in agriculture, construction and mechanics have a better shot at getting in.

The community college's course, part of a workforce-development program funded by a $4.6 million federal grant, prepares residents in Pennsylvania and neighboring states to compete for the torrent of jobs being generated by natural-gas companies tapping the prolific Marcellus Shale. The multi-state program, called ShaleNET, is trying to fix a mismatch between the rising number of jobs emerging with the shale-gas business in Pennsylvania, Ohio, West Virginia and New York, and the many unemployed, or low-paid, workers who can't be hired by the shale industry due to their lack of basic skills.

Labor demand in the Marcellus Shale, a deeply buried layer of tight rock containing vast amounts of natural gas, has continued to grow despite recent rock-bottom prices for the commodity, in part because the area's highly productive wells, and their proximity to huge markets in the Northeast, allow drilling there to remain profitable.

Almost half of the 400 people needed to drill a single well do jobs that don't require four-year college degrees, including general labor, heavy-equipment operators, and truck drivers. In about four weeks of training, the ShareNET program turns young farmers, construction workers, veterans and carpenters, among others, into certified gas-field workers who know the basics about drilling and controlling a well.

The program's standards are high because, otherwise, students wouldn't be able to compete with more-experienced workers coming from Texas and Louisiana who have a long relationship with the energy industry, said Laura Fisher, senior vice president at Allegheny Conference on Community Development, a non-profit organization that created ShaleNET. The non-profit entity has a long list of applicants, but there are only a few dozen spots available.

While the shale-gas industry has already helped the Pittsburgh region's March unemployment rate of 7.1% to best the nationwide rate of 8.4%, many of the higher-paid occupations--such as tool pushers or pump operators--were going to the newcomers from out of state, Fisher said. Many companies preferred the out-of-state workers because they already knew the basics about safety and were accustomed to working the 12-hour-per-day shifts that are common in the drilling industry, Fisher said.

The ShaleNET program, which has graduated 250 students, along with new industry-community partnerships, is helping to increase the rate of local hires. About 180 students have been hired by 56 companies. The program has also helped about 1,000 people to find jobs in the shale industry through its website or through various partnership it has with federal job-placement agencies, Kohut said. In addition, 13 community colleges, one university and six vocational high schools in the region are starting the same training program.

Labor demand in the Marcellus Shale area is expected to continue to surge in coming years, said Sue Mukherjee, director of the Pennsylvania Department of Labor and Industry's Center for Workforce Information and Analysis.

For instance, jobs for drill operators are expected to grow 84.9% to 2,674 this year from 1,446 in 2010. This compares to 2.6% estimated growth for all type of jobs state-wide in the same period, Mukherjee said.

Mark Madonna, a 24-year-old who until last year worked in construction, was hired in February by Falcon Drilling, a service provider based in Indiana, Pa. He is now a rig ground worker.

Madonna, a single father who didn't attend college, said the training provided by Westmoreland County Community College was "extremely vital" in his getting his new job.

He tried for nine months to apply directly to companies he knew were hiring, but nobody took him seriously until he was admitted to the course. Madonna, like most of his classmates, received a job offer from Falcon Drilling the day after he graduated. "I love physical labor, I love machinery and I love to be working outdoors," Madonna said. "I'm not afraid to work."

His new job pays $12.56 per hour, about the same as he was making when he was building counter tops and cabinets. But the big difference, he said, is that his take-home pay will jump, thanks to overtime, and, in a few months, can almost triple if he gets promoted.

Kohut, who has a doctorate in education, said many of his former students are making significantly more money than he does. The average annual income of a roughneck--a member of the oil rig in charge of handling pipelines and maintaining the rig--is $100,000. That includes overtime, daily stipends and room and board.

"It's a dangerous job, but it pays well," Kohut said.

Copyright (c) 2012 Dow Jones & Company, Inc.

Wastewater Market to Grow as Hydraulic Fracturing Activity Grows Globally

(This article is part 2 of a 3-part series on Fracking Water Treatment.)

The global market for water treatment is expected to reach $9 billion in 2020 as hydraulic fracturing activity increases outside the United States, according to a recent report by Boston-based Lux Research.

The expansion will spur technological innovation and new ways of thinking about water disposal and reuse. However, the field is quickly becoming overcrowded, creating significant risk for new entrants.

Hydraulic fracturing – or fracking – requires between 25,000 to 140,000 barrels of water per well and produces toxin-laced brine that can be over six times as salty as seawater.

The growth in hydraulic fracturing has inspired "a bumper crop of new water treatment startups vying to treat the highly challenging flowback water," said Brent Giles, Lux analyst and lead author of the report "Risk and Reward in the Frack Water Market."

"Fracking represents a significant water treatment challenge – hydrocarbons, heavy metals, scalants, microbes and salts in produced and flowback water from shale gas wells represent a water treatment challenge on par with the most difficult industrial wastewaters," Giles said in a statement.

While the opportunity is large, only a few companies are really positioned to profit, Giles noted.

"Meanwhile, nearly every start-up we talk to is going after frack water, regardless of their technology, and many of them are going to come to grief," Giles commented.

GasFrac, which uses high-pressure propane instead of high-pressure water to fracture gas wells, is posed to disrupt the industry, Lux found in its rankings of key companies on its Innovation Grid based on Technical Value and Business Execution. The technology, which GasFrac has licensed from Chevron, is being tested by oil and gas companies that include Shell, Blackbrush, Husky and Chevron.

"With 300 employees, revenues of $300 million, and $50 million on hand, the profitable company outstrips every water start-up in our lineup, positioned in the 'Dominant' quadrant and earning a 'Strong Positive' Lu Take," said Lux.

Lux found that the companies Ecosphere and Aquamost lead in oxidation technologies to treat wastewater.

Ecosphere was found to be strong in both technical value and business execution, reaching the Dominant quadrant of Lux's Innovation Grid. AquaMost, an early-stage startup, uses catalyzed UV to achieve many of the same results, but also removes metals, and is ranked as high potential on the grid with strong technical value.

WaterTectonics -- which uses high-energy electrocoagulation technology to address heavy metals, biological matter, and hydrocarbons, but leaves salt in place -- meaning is restricted in usage to areas where salt levels are moderate. WaterTectonics reached the dominant quadrant in Lux's ranking due to its long-term alliance with Halliburton.

Water, Energy 'Inexorably Interlinked'

(This article is part 2 of a 2-part series on Fracking Water Treatment.)

Water and energy are inexorably interlinked, with increasing energy demands on water impacting the world's ability to meet its energy needs, said Deloitte consultants Dr. Joseph Stanislaw and William Sarni in a recent whitepaper "No water, no energy. No energy, no water".

In parallel, the need for more and more water in agricultural, industrial and domestic uses requires more energy.

"A constraint in either resource limits the other, and this nexus of supply and demand poses substantial risks for virtually every government and every type of business," said Stanislaw and Sarni.

"While many companies have strategies for human resources, marketing, risk management, etc., very few have energy strategies and water strategies, and even less have integrated energy-water strategies," Stanislaw and Sarni noted.

The competition for energy and fresh water is becoming increasingly acute, with the U.S. Energy Information Administration estimating world energy demand to grow by 53 percent between 2008 and 2035, and many countries extracting groundwater faster than it can be replenished.

This trend will likely continue as the global population is expected to grow by approximately one billion people between 2010 and 2025, with economic development in emerging markets anticipated to catapult 3 billion people into the middle class. By 2030, two out of every three people likely will live in an area of high water stress, and the substantial shortfall between water supply and demand could reach as high as 40 percent.

The effects of climate change also are exerting pressure on the fulcrum of the energy/water relationship.

"The popular consensus regarding freshwater is that when supplies dwindle, we can make or find more of it," said Stanislaw and Sarni. "The reality is that the amount of fresh and accessible water is static, and demands on this finite resource are increasing."

One of the biggest demands on U.S. water supply is the hydraulic fracturing business, said Stanislaw, noting that oil and gas companies are now having to take into account the cost of water into their business and economic models.

However, the increasing demand on water supply was an issue even before the recent shale boom.

"It's only now that people are beginning to focus on it, and realizing they have to make water a part of their social and business calculations," Stanislaw told Rigzone.

This cost is prompting companies to seek out ways to improve the efficiency of water usage through technology to manage water sourcing, enhance treatment processes and safety store and transport water.

Water is also heavily utilized in renewable and other energy resources. The utility sector is heavily water dependent, with most thermal power generation facilities needing significant amounts of water for cooling process, regarding of whether solar, uranium, coal or natural gas are used as the base fuels.

Additionally, water is required to clean and process coal, and the biofuels industry depends on vast amounts of water, Stanislaw and Sarni said.

Reducing water consumption in traditional energy production as well as moving to energy sources that are inherently less water-intensive will be key to managing water resources, Stanislaw and Sarni said.

Some renewable energy options, including wind power and solar photovoltaics (PVs), have smaller water footprints, which gives them an advantage that could trump cost per megawatt in areas experiencing water shortages, including the desert Southwest and New England, said Stanislaw.

"Southern California, Arizona and New Mexico are well suited for rooftop PV projects," said Stanislaw.

California homeowners can get tax deductions when they install up to 7 kilowatts of solar PV equipment on their rooftops.

"It's very easy and very beneficial in that large scale systems aren't needed," said Stanislaw.

The desert southwest has lots of space for large scale solar systems and the transmission infrastructure to move electricity to urban areas.

The northeastern United States is also experiencing a shortage of water due to a serious drought over the past few years, but lacks the transmission grid that is seen in the southwest. Potential does exist for wind power generation in the mountains in Maine, and a potential wind project offshore Maine could offer a solution.

While construction on the Cape Wind project proposed for construction, offshore Massachusetts has been slowed for a decade by opposition from Nantucket residents who say the project will raise power prices and cause aesthetic pollution. Offshore wind capacity proposed for Maine would be located more than 10 miles out from Maine's coast, and stands a better chance of actually being constructed, Stanislaw said.

While technology will play a critical role in reducing water usage and improving efficiency, the public and private sectors also need to establish a water stewardship strategy for addressing the water side of the energy/water equation, Stanislaw and Sarni said, including the assessment of how water usage and potential scarcity can impact internal operations, supply chain business partners, and other stakeholders in the watershed.

Back to Part 1: Ecosphere Offers Chemical-Free Water Treatment for Hydraulic Fracturing

Ecosphere Offers Chemical-Free Water Treatment for Hydraulic Fracturing

(This article is part 1 of a 2-part series on Fracking Water Treatment.)

The hydraulic fracturing process, which unlocked the United States' unconventional resource potential, has also placed new demands on the nation's water supply and created the need for water treatment solutions.

Stuart, Florida-based Ecosphere Technologies, a diversified water engineering, technology licensing and environmental services company, saw potential for its Ozonix water treatment solution in the oil and gas industry as it was searching for a new market for its product in 2008.

"We sought to enter an industry that had the appetite for the type of technology that Ecosphere provided and that had few barriers for entry," said Ecosphere Chairman and CEO Charles Vinick in a recent interview with Rigzone.

The appetite for water in the United States has grown considerably as oil and gas producers hydraulic fracture wells from the Marcellus and other shale plays. As the amount of hydraulic fracturing has increased, concerns also have been raised by government agencies, environmental groups and local citizens over the amount of water used in the process and the impact of the chemicals used in hydraulic fracturing on drinking water supplies.

Since its establishment over a decade ago, Ecosphere has been focused on identifying an environmental challenge facing industrial use of water and inventing and patenting a new technology to respond to that challenge.

These challenges have included inventing a 3-dimensional way to strip paint from ships developed by Ecosphere; the company sold the rights to this intellectual property in 2007 and retains those rights for other applications of paint stripping, such as cars and planes or physical objects such as water towers.

The company also has been involved in providing clean drinking water in disaster responses, as when it provided drinking water for residents in a Mississippi town following Hurricane Katrina in 2005. Ecosphere has provided cost-effective wastewater treatment solutions for a range of industrial, commercial and municipal industries.

The Ozonix Process

The company's Ozonix process can be used to treat water at the front end of the fracking process, eliminating bacteria, biofilms and the food source for microorganisms without the use of biocides.

Biocides have traditionally been used to kill bacteria in fracking fluids prior to the fluids being pumped downhole. This process is done to reduce bacteria that can sour a well, cause corrosion and potentially make the well unusable, said Robbie Cathey, CEO of Arkansas-based Ecosphere Energy Services.

Instead of using liquid chemicals, Ecosphere uses an ozone-based system accompanied by cavitation. Ozone, an oxidant, can easily break down cell walls to destroy bacteria, Cathey said.

The Ozonix process is a single process that runs the water through four zones. Inside the machine, it's four steps, but for operators, it's just one step at a flow rate of 80 barrels per minute or approximately 3,360 gallons per minute.

• In the first zone of the process, ozone, a powerful oxidizing agent, is combined with hydrodynamic cavitation to destroy highly-resistant microorganisms and oxidizes pollutants through the use of high intensity turbulence, sheer and fluid pressure fluctuations. Significant amounts of micro bubbles that implode and release energy are generated through a proprietary mixing process, and hydroxyl radicals are produced with an oxidation potential higher than chlorine.

• In the second zone, the Ozonix process oxidizes iron sulfides and magnesium sulfates by ozone forming iron oxides and magnesium oxides, destroying the environment and food sources upon which bacteria depend for survival.

• In the third zone, acoustic cavitation destroys complex and biorefractory chemicals present in water through the use of sound waves, causing micro bubble collapse. Ultra-sonic transducers generate localized high concentrations of oxidizing species, coupled with higher magnitudes of localized temperatures, pressures and the formation of transient supercritical water to destroy microorganisms. The use of multiple transducers gives a uniform cavitational activity distribution throughout the Ozonix process and increases the extent of degradation/disinfection.

• In the last zone, electrochemical oxidation mineralizes non-biodegradable organic matter and eliminates nitrogen specific in the water. As organic matter is decomposed, electrodes produce hydrogen and residual chlorine which further aids in the oxidation of pollutants and improves water disinfection.

"Ecosphere's advanced oxidation process is very efficient at killing bacteria," said Cathey, adding that Ozonix is cost competitive with traditional chemical treatment.

"Combining ozone with hydrodynamic cavitation, acoustic cavitation and electro-oxidation increases the mass transfer rate of ozone appreciably, five times and substantially above," said Cathey. "Each of these processes increases the mass transfer rate of ozone, meaning less ozone can be used for increased disinfection of the water to the point where we are actually sterilizing it."

More Than 1 Billion Gallons of Water Treated Since 2008

The Ozonix technology has been used by Ecosphere and its licensee, Hydrozonix, to treat more than one billion gallons of water on approximately 500 oil and gas wells since 2008, said Vinick in a March 28 statement.

The Ozonix process is deployed in individual units that are capable of processing a certain number of barrels of water per minute. Ecosphere has deployed 33 Ozonix units to date that are servicing major oil and gas operators conducting hydraulic fracturing around the United States.

The technology can process up to 120 barrels per minute and can be scaled up or down to meet the producer's operations, which can have a larger footprint in areas such as Texas but smaller footprints in plays such as the Marcellus due to multi-pad operations or mountainous terrain.

The company is on track to deliver two Ozonix EF80 units, which are capable of processing up to 80 barrels per minute, to Hydrozonix every quarter, the company reported in its earnings update on May 7.

Six units are deployed by Hydrozonix, and the remaining units are operated by Ecosphere Energy Services. Units deployed by Hydrozonix are operating in the Eagle Ford and Permian Basin plays in Texas and in New Mexico, said Cathey.

O&G Companies Seeking Cost-Effective, Environmentally Friendly Solution

Ecosphere's customers include Southwestern Energy, which is using Ecosphere's technology to treat wells in the Fayetteville play in Arkansas, and Newfield Exploration, which is using the water treatment technology for its Woodford shale assets in Oklahoma. Ecosphere's technology is being used to treat water at up to 120 barrels a minute in the Fayetteville, said Vinick.

"Recycling is the trend driving interest from a cost standpoint and an environmental standpoint," said Cathey about the interest by oil and gas companies in new ways to treat produced water. "Companies also are looking for cost-effective solutions and ways to reuse as much produced water as possible in an effort to minimize the need for fresh water."

As produced water is reused, the need for and difficulty in treating water grows as the level of bacteria and heavy metals present in the water grows.

"Three or four years ago, most operations were using strictly fresh water from ponds, streams, which have fairly low levels of bacteria," said Cathey.

Besides the environmental and cost benefits, companies do not need to transport or store chemicals, helping eliminate heavy traffic and damage to roads leading to drilling sites, and a reduction in carbon dioxide emissions.

"Ozonix reduces costs in two ways by reducing the cost of sourcing fresh water and reducing the cost of disposal for produced and flowback water," said Cathey. "Some customers have reduced the amount of disposal by over 90 percent."

Using the Ozonix process also can reduce the need for deep well injection, which some studies have speculated may cause earthquakes due to the saturation of potential fault lines.

Besides Newfield and Southwestern, Ecosphere has worked with several mid-major and independent companies.

"We've found that folks like Southwestern Energy are very innovative companies that are willing to try new technologies and realize the cost benefits of using Ozonix," said Cathey.

The company in late March announced a letter of commitment with the Blackfeet Nation for Ecosphere Energy Services and Hydrozonix to be the exclusive provider of water treatment services to oil and gas companies targeting the Bakken shale play on the 1.5 million acre Blackfeet reservation in north-central Montana.

Newfield, Rosetta Resources and Anschutz Exploration have all secured mineral rights from the Blackfeet Tribe and are actively drilling vertical and horizontal wells to target plays in the Southern Alberta Basin, including the Bakken, Three Forks, Nisku and Lodgepole formation.

Besides the U.S. onshore exploration and production market, Cathey said Ecosphere feels that the company's technology is applicable for the offshore market. After being laser focused on onshore oil and gas since 2008, the company is in the early stages of growing its technology for use in other energy applications.

"We feel this technology is very applicable to power plants and other industrial applications in which large volumes of water are used. The need to recycle water tends to be an issue in many areas of energy, including power," Cathey noted.

Ecosphere and its majority-owned subsidiary Ecosphere Energy Services were also awarded Frost & Sullivan's 2012 North American Product Leadership Award in Disinfection Equipment for Shale Oil and Gas Wastewater Treatment.

Growing Water Demand Illustrates Need for Water Treatment, Recycling

The need for treating produced and flowback water without harsh chemicals will become more critical as water demand grows worldwide not only for consumption in industry, but as the global population grows and citizens in emerging economies seek the quality of life seen in developed nations like the United States.

While water shortages are being reported in emerging economies such as Africa, water supply issues have been seen in the United States, including the drought that affected Texas last year. The drought, coupled with the demand placed on water supply by the oil and gas industry and other stakeholders such as cattle growers, illustrated how critical an issue water supply has become.

"It's not a new problem, but more of an acute problem as more people place more demands on resources," said Vinick, who joined Ecosphere in 2006 as a director through his 25-year friendships with the family of Jacques Costeau, and has served in executive positions in organizations established by Jacques or his son, Jean-Michel Cousteau, who serves as a director on Ecosphere's board.

These recycling efforts include grey and clear water systems in homes in which water from dishwashers, showers and other appliances can be reused to water lawns or treated for drinking water, depending on the types of soaps used and the right separation systems, Vinick noted.

Continue to Part 2: Water, Energy 'Inexorably Interlinked'