Oct

FuelWatch by Max Braun – Oct 2011

2011-10-01 15:30

The diesel prices in Gauteng hit R10 a litre for the first time on November 2nd this year. A 27,5% increase since January and still another month to go. The outlook for oil and fuel prices in the medium term is likely to remain uncertain and volatile. On the one hand, shaky economic recovery in the US and EU will be the order of the day in spite of the German led massive bail out for Greece and other EU members announced as I write.

Stubborn resistance to all efforts to end unemployment levels in the US seems to be spooking an uptick in reviving the housing market and car sales. Ongoing political brinkmanship to block President Obama’s chances of re-election next year protracts the dilemma. The lack of strong leadership and Greece’s lack of discipline along with China signalling slowing demand for commodities led the International Energy Agency (IEA) and other respected industry analysts to lower their forecasts for crude oil demand during 2012.

On the other hand, volatile currency movements – a vital factor for South Africa when it comes to the price we pay for oil , rising world wide food costs, slowing car sales in the US and EU discourages spending and investment. Along with the uncertainties flowing from the Arab Spring and Middle East fall out, these problems need to be resolved before we can hope to see less volatility. The outlook for the fuel price? My guess is that fuel cost creep goes on for at least most of 2012 – and possibly beyond.

Positive expectations for gas (natural and shale) have been top of many minds for many months. Huge gas discoveries and claims for massive reserves have lifted expectations to possibly unrealistic heights. Some see gas as holding the solution to energy security and independence; it’s cheaper than oil and reduces emissions. This is true for countries that have easy access to abundant gas and is particularly true for the US where claims for yet to be retrieved shale gas and oil sands are being described in trillions of cubic feet (Tcf) , predictions of virtually unlimited availability at a much better price than drilling for oil. Some believe the bullish support for gas holds the potential to dampen investment in oil exploration and extraction and investment in refining capacity. If this is so, it could be short-sighted.

Looking deeper into the latest ongoing discussions around shale gas in the US reveals diverse opinions and a lack of consensus as to how much shale gas and oil sands actually exists and can be retrieved. Opposing opinions based on differing research projects undertaken by internationally respected establishments differ by as much as 80% when comparing current and previous best guesses and previous probable estimates of identifiable reserves.

The debate has been raging on for months, confusing stakeholders and investors who ponder whether the predicted pricing for shale gas will be achievable and sufficient to cover the cost of pumping and refining and provide a decent return. Based on reports from industry experts, hydraulic fracking (or just fracking) is not the problem. Like other exploration technologies, fracking techniques are expected to improve and become more reliable and predictable. The dilemma for investors is about the expected life of shale gas wells. Do they have sufficient life and productivity to recover the cost of establishing the wells?

Among the more contentious matters arising out of recent revelations is the action taken by the US Securities Exchange Commission (SEC) to subpoena three companies for gross over-estimations of the output of specific wells. The added confusion and uncertainties flowing from this is being reflected in a reduction in drilling as investors hesitate or pull back pending more clarity on these controversial issues.

There are any number of reports, investigations, comments and opinions expressing the pros and cons of shale gas and fracking. If you are interested in gaining a better understanding of what is going on in the oil and gas industries. look at “Musings from the Oil Patch’ a brilliant newsletter written by Allen Brooks, managing director at PPHB Energy Investment Bankers in Houston, Texas (www.pphb.com).

Also see the following FuelWatch articles in this issue:

Biofuels Update , the DOE announces a guide to mandatory blending ahead of the final strategy for renewable fuels. Question are being asked about the viability of shale gas wells.

Cleaner Fuels , The roadmap to cleaner fuels is still struggling to get out the starting blocks. How much longer before the major stakeholders bite the bullet?

Carbon Tax , Treasury is said to be on track for implementation in 2012. Even the suspected first bite looks expensive and yet another addition to transport cost creep.

Out the Spout , The amazing Bio-bike turns a big poof into less smelly and cleaner air. What volcanoes contribute to the worldwide carbon foot print.

Managing Fuel Usage – A basic guide to stopping fuel pilferage and getting more kilometres from the litres you pay for.

Tips , A marriage of ideas between a bank and an oil major sees the launch of the first local fuel chip card. Like credit cards, the chip ensures much better protection over fuel theft without losing out on card flexibility.

Trends and Graphics , The diesel price breaks the R10 a litre barrier for the first time as the November price reaches nearly 28 per cent more than it was in January. Interlinks covering 200 000 kilometres a year now spend nearly R1 200 000 a year on fuel or 45% of operating costs excluding overheads and tolls.fw-costs

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