Saturday, October 29, 2011

Terry City Council dealing with growth problems

The Terry City Council met in special night session at the Terry Town Hall on October 27, 2011 to enact an emergency zoning ordinance. It would have prohibited the construction of any new trailer courts, campgrounds, work camps, hotels, motels, or other multi-unit housing complexes, within the Town of Terry and up to 1 mile beyond the corporate boundaries of the town to take effect immediately after passing for an initial period of 6 months with possible extensions for up to 2 1/2 years. Dire consequences, associated with any sudden influx of transient oil workers into the small town of Terry, were outlined in a handout given out to the attendees prior to the meeting.

Terry Town Council - Ron Kiosse, Mayor from right to left around the table from him are Lynn Strassheim, City Clerk, Becky Convery, City Attorney, Josh Helmuth, Tom Pisk, Clinton Rakes and Rolane Christofferson, City Council Members

The meeting was attended by an overflow crowd of about 85 residents, who were allowed to voice their opinions prior to the council taking the ordinance under consideration for their final vote, with most of them indicating opposition to the ordinance. Local Terry resident Steve Phipps, who consults with oil companies in the Bakken oil field, made one of the most eloquent comments defending the hard working people in the oil and pipeline industry. His remarks included the drug screen requirements in the pre-hiring process of any workers as well as ongoing random drug and alcohol testing being conducted by the companies working in the industry. One infraction of the rules, including being found under the influence of alcohol or drugs, may be cause for immediate termination and removal from any facility housing the individual involved.

Many other excellent points were made for and some against passing this ordinance by town’s people well as ranchers and farmers in Prairie County. But the one predominating theme during the hearing was the dampening effect it might have on attracting new people and businesses to move to the small town of Terry, which has a currently population count of 602 per the US census. This ordinance also would have sent a clear message to the oil companies they would not be wanted in Terry and their workers and corporate people would, if given the choice, avoid doing business in the town.

After hearing the comments against the ordinance during the public hearing Becky Convery recommended to the City Council she’d be allowed her to rework the onerously written ordinance. She said she could make it more palatable to any new residents as well as prospective businesses and make it conform with upcoming any growth and zoning studies once the committees complete their work.

Becky offered to take out the most of the offensive and confusing language. Instead of calling it an "emergency zoning ordinance" it would be re-titled an "urgent zoning ordinance". Exceptions could be made on a case to case basis for companies and persons inquiring to move their businesses or establish multi-unit homes in Terry. She agreed to take the word, "transients", which is usually referred to as being "homeless", out of any language in the proposed ordinance.

In addition Becky Convery advised the council during their discussions any previous actions dealing zoning issues, including previous ones limiting keeping horses and chickens on any property within the Terry city limits, cannot be enforced until a zoning and a growth plan first is first adopted by the Terry City Council.

About the Author - Bob van der Valk lives in Terry, Montana and is a Petroleum Industry Analyst with over 50 years of experience. He has been quoted by the news media as well as government entities and be contacted at: or (406) 853-4251.

Thursday, October 27, 2011

How do you feel about having a man-camp in or near Terry?

The Terry Tribune is conducting a poll to register your opinion about a proposed emergency interim zoning ordinance by the City Council of the Town of Terry at:

This ordinance will prohibit the construction of any new trailer courts, camp grounds, work camps, hotels, motels or other multi-unit housing within the town of Terry and up to a one-mile radius of Terry's town limits. If passed it will be effective for an initial period of 6 months and, after another public hearing, can be extended for up to one year. This ordinance specifically addresses concerns we would have with problems associated with an influx of a large number of transient workers.


How do you feel about having a man-camp in or near Terry?

1. No, it would bring too many transients and increase crime in our town.

2. No, it would cause too much strain on our water, sewage services and other infrastructures.

3. Yes, businesses and Terry as a whole would benefit from the increase of people it would bring.

4. Yes, but the man-camps shouldn't neighbor our residential area of town.

Please pass this email along to anyone concerned with this issue and either register your opinion with the Terry Tribune on-line poll or respond to my email with your vote. You may also include your view points in your email responses, which I will present to the Terry City Council at the public hearing being held at 7 pm tonight, Thursday, October 27, 2011 at Terry Town Hall.

Your neighbor,

Bob van der Valk
508 S. Washington Ave.
Terry, Montana 59349

Thursday, August 25, 2011

Terry’s Badlands Café Celebrates 2-Year Anniversary

It's been two years since they opened their doors in Terry, Montana, and to celebrate the Badlands Café and Scoop Shoppe is hoping you will drop by for a day of giveaways this coming Saturday, September 3rd between 11 am and 3 pm.

You might know their story already, the duo of Arline and Inger Koppenhaver – one born and raised in Montana the other, her daughter-in-law from California – who celebrated the grand opening of their café back on September 5, 2009.

In the above picture from the left Jerry is holding 6-week old Samuel standing along with Paul, Inger, Nathan, Emily, Kayla, Arline Koppenhaver, Bob and Tammy van der Valk at the grand opening of the Badlands Café and Scoop Shoppe in 2009.

While they came from different backgrounds, they have more in common than just their last names. They shared the inkling of an idea for a 50’s themed, family oriented, specialty cafe with many menu items that feature made from scratch items, a variety of unique ice cream flavors and tempting blended drinks plus a full espresso bar all located in the boutique town of Terry, Montana.

"We opened the restaurant during a really tough economy," says Inger.

"Of course our goal was to provide good food and service, but we wanted to do it with great prices as well and we have tried really hard to be able to accomplish our mission."

Arline recalls some of the feedback she received from friends and family when she told them about her plans to open a family restaurant.

"Some close friends threw up some alert flags letting us know that running a café takes lots of time and energy," she says.

"We have discovered that it's never easy in this business, but our hearts are warmed by the fun that we have with our local customers and those who stop in on their way to various vacation destinations. It has been two years and we are even more excited and ready to continue to serve great food to our local patrons and travelers in Eastern Montana."

In honor of their two year anniversary, Arline and Inger are asking you to make Prairie County your vacation destination for Labor Day Weekend to help celebrate their 2- year anniversary on Saturday, September 3rd. Sunday, September 4th is the date for the Fallon Harvest Festival, which annually draws large crowds to its traditional all day and evening Harvest Fest Fun. Plus, Terry is the home of Evelyn Cameron, Pioneer Photographer, and also hosts many delightful specialty shops that will satisfy the most discriminating shopper.

The café will be giving away free regular birthday cake ice cream cones while supplies last as well as featuring an “Off the Menu Surprise Special” on Saturday, September 3rd.

They will also have four big giveaways throughout the 11 a.m. – 3 p.m. day. Fill out a survey and enter it for a chance to win at 12, 1, 2, and 3! Biggest giveaway is a $25 gift Certificate!

Reaching 200 Facebook fans at: by Friday, September 2nd, will add another grand prize to be given away. They encourage you to become a fan of their page and pass along the information to others.

Labor Day weekend just might be a really great time for your family and friends to visit Prairie County, Montana. Please find out more at: and click on “The 100 Top Things To Do In Terry, Montana” button for more ideas to help make your weekend trip to Terry the best vacation of the summer!.

Sunday, May 22, 2011

Belly flopping into a sea of gasoline

Belly flopping into a sea of gasoline

The market bounced back from steep lows last Friday putting crude oil prices back on track up to the $100 a barrel mark . Crude oil managed a strong rebound even as the US dollar showed strength. June WTI traded as low as $95.99 and bounced back $3.50 to expire at the $99.49 a barrel level gaining $1.05 a barrel. The $96 a barrel was reached at one point as the US dollar rose with big money investors worried about the outlook for global growth and the financial health of countries in Europe. The crisis was abetted by the recent arrest and subsequent resignation of Dominique Strauss-Kahn, the head of the International Monetary Fund.
The euro fell against the dollar as wariness about disagreements on how to tackle Greece’s debt and ahead of a Spanish regional election caused investors to cut back on the euro before the weekend.

The dollar, which often moves inversely to commodities because oil and other raw materials are priced in the US currency, rose around 0.6 per cent against a basket of currencies.
WTI crude oil futures for June, which were due to expire later on Friday, were trading around $96.40 per barrel, down $2.04 by 1400 GMT, after hitting an intra-day high of $99.60 with Brent crude oil for July dropping $2.12 to $109.30. Crude oil prices have declined 15 % from April 29 through May 20, 2011.

This week began with crude prices still battered and bruised from double-digit losses sustained the week prior. The chart above this article shows the trend between Brent and WTI crude oil prices from February 5 through May 16, 2011.

Meanwhile gasoline prices at the pump remained at their lofty heights and oil companies are acting as of nothing is happening. Gasoline is a refined product of crude oil with retail gasoline and crude oil prices tend to move in tandem in the up market.

Domestic crude oil inventories are at all time highs and concerns of potential refinery disruptions in the Mississippi Delta region receded as fast as the drop in water level. Gasoline pump prices were temporarily buoyed even while crude oil prices kept going ever lower. The Mississippi Delta area is home to 11 oil refineries with a combined refining capacity of 2.461 million barrels of gasoline per day, which is 13.1 percent of total U.S. refining capacity. Weather-related disruptions caused by floods or hurricanes could have a serious impact for gasoline prices across the country.

Motorists should finally see the price of gasoline drop at the pump barring any other unforeseen market moving developments in the next several weeks. The relief will be felt just in time as prices will ease heading into the Memorial Day travel weekend with the average price for gasoline in the US heading down towards the $3.50 per gallon mark.

It may be short lived with the summer driving season and threats of hurricanes affecting the Gulf Coast refineries. Belly flopping into the sea of gasoline will make the water splash over the sides of the pool but things get back to normal pretty quickly afterwards.

Friday, May 6, 2011

The Bin Laden Effect on the Oil and Gasoline Market

ExxonMobil's map showing areas of the US with boutique gasoline summer blend requirements.

The oil market turned around this week and spot market gasoline and diesel prices in turn went back down the week of May 1, 2011. This goes against the grain of what usually happens when American Petroleum Industry (API) and Department of Energy (DOE) inventory reports show draws for both gasoline and diesel.

The average price for unleaded gasoline in the US is $3.982 per gallon on Wednesday and may touch $4 by this Friday. But the demand for gasoline is down with numbers from March showing a steep decline showing the effects of the ever increasing gasoline prices. The AAA Fuel Gauge report on May 4, 2011 showed the following gasoline prices:

Current Avg.
Yesterday Avg.
Week Ago Avg.
Month Ago Avg.
Year Ago Avg.

Highest Recorded Average Price:
Regular Unl.

The national price for unleaded regular gasoline may peek at $4 per gallon with California currently at $4.265 and the State of Washington at $4.018 staying about the same by the end of this week.

The news of Osama Bin Laden's death on the night of Sunday, May 1st gave the country great relief and a chance to celebrate in spite of our economical situation. The dollar stayed weak but prices for both West Texas Intermediate and Brent crude oil went down, which caused wholesale gasoline prices to go down 20 cents per gallon since Monday.

The world woke up Monday morning with a new attitude and oil traders took heed by turning bearish. Last week’s Commodity Futures Trading Commission (CFTC) report showed paper traders with record longs in the market, a position which bets on oil prices continuing increase.

Money managers increased their net length by 2.8%, setting an all-time high when you look at both futures and option positions. However, this report was prepared before this weekend’s big events in Asia and North Africa.U.S. gasoline consumption fell last week and maintained a deficit to year-ago levels. SpendingPulse report showed demand for gasoline decreased by about 93,000 barrels per day (b/d), or 1%, to an average of 9.157 million b/d for the week ending April 29. Compared to the same calendar week in 2010, demand last week was 0.6% lower and the week's demand was 1.2% lower compared to a year ago, it was the second week in a row in which the year-over-year gasoline demand shrank.

US motorists have been told speculators, unrest in the Middle East and North Africa, natural disasters, a weak US dollar and world demand were the causes for the march towards the seeming inevitability of seeing $5 per gallon gasoline at the pump. However, this march towards a never before reached milestone seems to have been broken for the time being.

However, the US Environmental Protection Agency (EPA) and the California Air Resources Board (CARB) set standards for gasoline creating areas in the country with boutique gasoline requirements. That is the main reason for the huge price differentials in parts of the country other than federal and state taxes. The following ExxonMobil map shows areas of the US affected by these oxy fuel or RFG compliance requirements for gasoline:

The worst area of the country to be hit by these requirements is Chicago with gasoline in the Windy City currently the most expensive in the nation at $4.467 per gallon. They perhaps will hit the $4.50 per gallon mark by the end of this week but then prices will come crashing down.

Fair warning the adage: "Gasoline prices shoot up like rocket, drift down like a feather" will apply as major oil companies slow down passing the lower cost for crude oil along to their branded retail station accounts. The independent non-branded station prices will be the ones reacting quick to their new found advantage by lowering their pump prices.

Sunday, May 1, 2011

Busting the myth about oil company profits

What can we do to stop commodity speculators from causing the rapid hike in gasoline prices? Arrest them, put them in jail, and try them before a jury before we hang them?

Early last week, President Obama started that ball rolling by telling US Attorney General Eric Holder to stop oil market fraud. Eric Holder promptly announced he was appointing a “working group” focused on rooting out the cases of fraud in the oil markets that might affect gasoline prices. This might work in any other business but the petroleum industry is not going to be simple to control.

Later in the week ExxonMobil reported their 1st quarter profits went up a whopping 69 percent to $10.7 billion from the same quarter a year ago. This ignited a firestorm almost immediately raising the ire of politicians and activists alike, who accused the oil industry of profiteering while Americans pay nearly $4 a gallon for gasoline.

Instead of being good news it was reported as bad news on the front page of major newspapers and became the lead off story on most of the TV and radio news broadcasts.

On the other hand Apple, which showed a 95% increase in net profits in their quarter from $3 billion to $6 billion, had Steve Jobs proudly announce those results in his April 20, 2011 news conference.

No one screamed “Off with their heads!” about Apple’s profits, so why all the brouhaha about ExxonMobil and the other oil company’s profits? Surely they are both stalwart organizations making the capitalistic system work for their shareholders, expecting to receive a fair return on monies invested in those companies. They should be allowed to make a profit with products everyone either wants or needs and you can charge for them according to what the market will bear.

ExxonMobil sent out Ken Cohen, their Vice President of Public and Government Affairs, to face skeptic reporters at a news conference on April 28, 2011. He launched a preemptive public relations strike to blunt expected criticism from politicians and the public about of seeing gasoline pump prices increase along with ExxonMobil’s profits.

The following graph from the US Energy Information Agency (EIA) shows the results of what happens to oil company profits when crude oil prices increase:

Ken Cohen wrote an article entitled: "Gas prices and industry earnings: A few things to think about", which can be read it in full on the ExxonMobil Perspectives blog at

ExxonMobil does not own the patents to the iPhone or iPad franchise but they have something even better by being the largest company in an oligopoly made of oil companies producing a product we cannot do without . . . . . . fuel.

A few of the talking points used in Ken Cohen’s article need closer scrutiny and examination since they are now been repeated almost verbatim by pundits and analysts alike:

Point: We don’t own 95 percent of our station, and therefore we don’t set the price.
Counterpoint: The first part is correct; however the retail pricing manager for ExxonMobil checks the spot market regularly during the day and makes wholesale pricing decisions dependent on the area of the country. The methods used by ExxonMobil are rack and zone pricing giving them the ability charge whatever the market will bear. The competitive pricing data is gathered for them by third parties such as Oil Price Information Service and The Lundberg Survey. The latter is the most important one since Lundberg gathers Dealer Tank Wagon (DTW) prices for each locale in which ExxonMobil has retail operations. Rack pricing is used to set the wholesale prices for either branded or unbranded gasoline. The DTW prices are charged to those dealers who have branded supply contracts direct with ExxonMobil. These are not the prices posted on the pumps at the station and are the most secretive part of gasoline retailing. Zone pricing, or a Temporary Voluntary Allowance (TVA) method of pricing, controls almost 85% of all the branded-contracted gasoline sold in the US with the difference sold to unbranded non-contracted stations.

Point: Local stations are often owned by a businessman or businesswoman in your community, and they set their own prices based on local market conditions.
Counterpoint: The owner or dealer of a local station receives deliveries of gasoline with the new wholesale price set by the oil companies, and then adds a margin to the gallon of gasoline. They are contractually obligated with long term supply agreements to only buy from the “branded” supplier with whom they signed up.

Point: For every gallon of gasoline, diesel or finished products we manufactured and sold in the United States in the last three months of 2010, we earned a little more than 2 cents per gallon.
Counterpoint: Adding all the oil company profits together including their upstream, downstream and chemical divisions and then dividing that amount by the total gallons of fuel sold is somewhat misleading. Each one of those is separate profit centers and not the only products sold by the oil company.

Point: Crude oil is a commodity, and like all other commodities – such as corn, wheat or sugar – the price is determined by buyers and sellers in a global market.
Counterpoint: ExxonMobil is one of five “super major" vertically integrated oil companies in the US controlling the process of refining gasoline from the wellhead to the pump. Crude oil, the raw material from which gasoline is refined, is either purchased or obtained from company owned or controlled wells with prices set according to the gravity of the crude oil. ExxonMobil utilizes the Last In/First Out method of accounting and the last price at which crude oil was obtained establishes the posted price for crude oil delivered to their refinery gates.

Point: ExxonMobil owns less than 1 percent of the world’s oil reserves, and it produces less than 3 percent of the world’s daily oil supply.
Counterpoint: ExxonMobil is the largest oil company in the world and when the elephant in the jungle trumpets, the market listens. The throughput of their refineries and percentage of market share have a big influence on the other oil companies’ reaction on how they in turn price their products.

Point: Last year, our total taxes and duties to the US government topped $9.8 billion, which includes an income tax expense of $1.6 billion.
Counterpoint: This is a somewhat misleading statement since taxes and duties include tax credits allowed on payment to foreign governments. It is another subsidy, devised by the US State Department in the 1950s, which allows US based oil companies to reclassify the royalties they are charged by foreign governments as taxes. Those can then be deducted dollar-for-dollar from their domestic tax bill. That provision alone will cost the federal government $8.2 billion over the next decade, according to the Treasury Department. These are currently allowed to be reported as taxes paid to the US Government. The following opinion re-printed from the Harvard Law Review gives a more detailed explanation on how this works:

BP, ChevronTexaco, ConocoPhillips and Shell, the other four super-major oil companies, said their profits rose in the first quarter because of soaring crude prices and other factors.

Members of Congress and President Obama used the record setting earning reports to step up calls for the repeal of the $4 billion in annual depletion allowance tax breaks for oil producers. John Boehner, R-Oh, Speaker of the House, first seemed to want to go along with eliminating this tax break only for the large oil companies but then changed his mind.

Jeff Sheets, Chief Financial Officer of ConocoPhillips, said that while the industry's profits are higher, the margins are still slim compared to the amount of assets oil companies maintain, and profits haven't risen as fast as gasoline prices. “When critics focus only on the bottom-line number, they lose the scope of what's required to produce that profit," Sheets said
The industry further argues that ending tax breaks would cut investment in new oil and natural gas projects, cost new jobs and decrease oil and natural gas production.

Senate Majority Leader Harry Reid, D-Nev., said the Senate as early as next week could take up Obama's proposal to halt the tax breaks and President Obama said the $4 billion a year in oil subsidies would be spent on alternative energy investments.

Holding a commodity off the market and then selling it after the price goes up is only one form of speculation, and it’s not one that works very well in the oil market. Simply put when gasoline prices increase so do the profits at the oil companies.

Saturday, April 23, 2011

B of A New Oil Price Target Suggests $4.25 Gasoline in the US by Memorial Day

While living in The Hague, Holland as a young boy I often wondered what was on the other side of that vast expanse of water known as the North Sea. How could I have known about the vast crude oil reserves lying underneath the angry waters of the North Sea and its eventual exploration by the countries surrounding it?

Economic zones in the North Sea

Brent geese would fly over my province of South Holland much like Canadian geese fly over Montana on their way south. I now live in Terry, Montana, which is a long distance from Holland and the North Sea, but the word "Brent" once again has once again become part of my every day vocabulary while discussing the reasons for the fuel price increases.

The word Brent was originally derived from the naming policy of Shell UK Exploration and Production, operating on behalf of ExxonMobil and Royal Dutch Shell, which names all of its fields after birds. In the case of their North Sea operations the field was called Brent Goose, which was later shortened by the market to Brent encompassing similar type crude oils being produced in the area.

Brent Crude, Brent Sweet Light Crude, Oseberg, Ekofisk, and Forties are all part of the Brent crude oil sourced from the North Sea and traded on the Intercontinental Exchange in London (ICE). The Brent crude oil marker is also known as Brent Blend, London Brent and Brent Petroleum and is used to price two thirds of the world's internationally traded crude oil supplies.

Why has the Brent crude oil benchmark price become so important to consumers of gasoline and diesel? The answer: It just recently replaced the New York Mercantile Exchange (Nymex) West Texas Intermediate (WTI) as the reference price for other “crude oil baskets” such as OPEC, Dubai, Russian and even Alaska North Slope crude oils.

The problem lies with the US Commodity Futures Trading Commission (CFTC) not having the power to regulate commodity transactions on the ICE. The big money is being moved into Brent and ICE thereby bypassing the Nymex and putting the WTI crude oil secondary to Brent. Even the Alaska North Slope crude oil posting is now tracking the Brent crude oil posting.

Bank of America Merrill Lynch recently increased its forecast for benchmark Brent crude for 2011 to $122 a barrel, and said that Brent could “briefly” surge above $140 a barrel in the second quarter of 2011. For WTI crude oil, the bank forecasted an average of $101 a barrel for this year, up from $87.

Bank of America also forecasted a 30 percent chance the price of Brent crude oil would reach $160 per barrel in 2011 with global demand for oil increasing and Libya supplying about 1 million barrels per day less than it did before the NATO coalition bombing started on March 19, 2011.

Each dollar differential in the price a barrel of crude oil represents 2.4 cents per gallon change for gasoline and diesel. When the price reaches the $140 level, it will add another 40 cent per gallon to today’s $3.856 per gallon national average price for unleaded gasoline per AAA Daily Fuel Gauge Report. That means $4.25 per gallon for regular gasoline by the end of May, which is right at the beginning of the summer driving season.

The average gasoline price in the US could reach $4.75 per gallon if the Brent crude oil reaches the predicted $160 a barrel sometime this year.

Crude oil prices now are determined not so much by supply and demand but by financial markets like the Nymex and ICE. Most oil is traded using derivative financial instruments that are not based on the physical exchange of crude oil (wet barrels in the trade) between seller and buyer. In the 1990's, physical transactions accounted for about 30 percent of oil traded, but they now number less than 1 percent of contracts traded on the various exchanges.

Crude oil prices soared to new highs in 2005 when U.S. pension funds were permitted to invest their members’ retirement monies in oil futures. The US Congress convened a special hearing in 2008 after prices soared to $147 a barrel for WTI crude oil to consider the influence that speculation has on crude oil prices. Analysts calculated for each $100 million pumped into the oil market the price per barrel was pushed up by 1.6 percent.

In effect, oil has become a speculative commodity whose price is determined by how investors anticipate its value will increase or decrease at a given point in the future.
No sooner had Bank of America Merrill Lynch given its “bullish” prediction than the commodities market rallied and the price of Brent oil surpassed $120 per barrel. Nonetheless, do analysts have at least some idea of an upper limit to prices?

The two dominant theories of the 1970's and 1980's held that oil prices were limited by the prices for alternative energy sources to crude oil or, by contrast, that the price ceiling was determined by the purchasing power of oil consumers who are also unable to reduce demand. This is just partly true today.

In the end, the main “energy resource” of the past 40 years was not oil but energy efficiency, and consumers’ ability to save money by reducing consumption and using alternative energy sources as prices increased.

Saturday, April 9, 2011

Keystone Pipeline: 'Just Say No' Could Mean $7 a Gallon at the Pump

U.S. Imports of crude oil by country

Route of the proposed Keystone XL pipeline

Consumer studies by researchers at Harvard’s Belfer Center for Science and International Affairs suggested a year ago that in order for the Obama administration to meet their target to cut greenhouse gas emissions, Americans will soon be spending $7 per gallon. That day may now come sooner than most Americans think.

The Opinion page of the Sunday April 3, 2011 edition of the New York Times (NYT) carried an editorial against approving the TransCanada Keystone XL pipeline, which was scheduled to transport crude oil from the Athabasca Oil Sands in northeastern Alberta, Canada to refineries in Illinois, Oklahoma, and to the lucrative U.S. Gulf Coast by the end of 2012.

The NYT editorial is in line with the Obama Administration agenda, but will ultimately be bad for fuel consumers by hitting them where it hurts; right in their wallets, while benefiting alternative energy producers with better economics.

The following chart above this article was obtained from the EIA website shows the top 15 countries of petroleum imports of the U.S. where Canada ranks number one with increasing volume from 2010 into 2011.

This increase in imports shows the importance and U.S. reliance on Canada--the friendly neighbor to the north--to replace the more volatile crude oil supplies from countries in the MENA (Middle East and North Africa) region. Imports of petroleum products from Canada for the period from August 2010 to January 2011:

Aug-10 Sep-10 Oct-10 Nov-10 Dec-10 Jan-11

76,988 74,251 72,698 75,313 84,092 87,619

The Keystone XL pipeline, an expansion project that would raise the line's capacity by 500,000 barrels of crude per day, has already been approved by various state agencies in the U.S. through which it runs.

Two major obstacles to receive the necessary rights of way were eventually overcome with, at times, heavy negotiations. The first obstacle was the local crude oil producers obtaining ramp access into this pipeline for crude oil currently being hauled by rail car and trucks to refineries for processing into gasoline and other fuels. The second one was meeting with constituents in each of the areas being affected with their concerns not only about the interruption of their daily lives, with a massive construction project, but also by ongoing operational problems with the pipeline after it is completed.

The current administration’s Department of Energy now says the pipeline will have a minimal effect on prices since there is already sufficient pipeline capacity to double United States imports from Canada. They are thereby affirming President Obama’s campaign promise of making the U.S. less reliant or needing additional imports of crude oil.

The proposed Keystone XL pipeline will cut across the Bakken and Three Forks oil shale fields from Saskatchewan into Eastern Montana, through South Dakota, Nebraska and Kansas ending up at the major crude oil terminal hub of Cushing, Oklahoma. North Dakota, Montana and other state governors became involved early on in the approval process and addressed local environmental and right of way concerns.

TransCanada executives met with various private and public officials and hammered out agreements to have local oil producers gain access to this much needed pipeline to make the shipping of crude oil more economical for US domestic oil producers. In some cases, due to the lack of takeaway capacity, crude oil is being sold at $10 a barrel discount off the WTI crude oil posting, which is one of the main reasons Wyoming, Montana and North Dakota currently have some of the lowest prices for gasoline and diesel fuel in the US.

The Keystone XL would greatly improve the transportation logistic issues in the Bakken and Three Forks oil shale basins. None of the states involved have put up additional major objections.

Early this year, Secretary of State Hillary Rodham Clinton initially came out, after the State Department report was issued, and said she was “inclined” to support the project. However, after criticism from environmental and alternative energy groups she called for additional environmental impact studies to be reviewed.

President Obama, in his April 2, 2011 Saturday morning radio address, said that even if we used every last drop of all the oil the U.S. has, it wouldn’t be enough to meet the long-term energy needs. So, real energy security can only come from energy efficiency and investing in cleaner fuels and greater efficiency.

The folly involved in President Obama’s approach comes from the fact that only $7 gasoline prices will ultimately justify the cost for those alternative energy projects. Meanwhile, they are supported by the taxpayers in the form of subsidies to the ethanol, solar and wind machinery manufacturers.

The Canadian government has been a staunch supporter of the Keystone XL pipeline project, and perhaps has an even greener approach to their environment and clean air issues than does the US.

The U.S. is now being boxed in from all sides on the energy front. Concerns about the future of nuclear energy, the instability of governments in oil producing countries in MENA, have all contributed to crude oil prices spiking to their highest level since September 28, 2008. What stands in the way of any major decisions to make the US energy secure are politicians not willing to make tough decisions in an orderly and efficient manner.

Meanwhile, the environmental organizations have been trying to block the Keystone XL pipeline at every turn even threatening court actions to stop the start of the construction. The State Department and the White House will have to make the final decision on Keystone XL, since it crosses the Canada-U.S. border.

But it probably will be the end of 2013 at the earliest to having any of the crude being shipped in the proposed pipeline, even if the approval is received from the Department of State by July 1, 2011. By then, there’s a good possibility that gasoline prices would be reaching a record high and the discontent from consumers will be at a fever’s pitch.

Monday, March 14, 2011

Japan Earthquake Could Test U.S. with $5 Gasoline Prices

The fallout on the fuel market will be severe following the 9.0 Japanese earthquake on Friday, March 11. 2011, since Japan will have to supplement their nuclear energy power production with coal, natural gas and oil-fired power plants.

Information is short and hard to obtain about the status of the nuclear power plants in Japan. Not being a nuclear physicist it is hard to sort the facts from the hysteria but going on past history we are being fed pap by official press officials of the Japanese government about the real situation in dealing with this cataclysmic event. These same officials withheld vital information after the 1995 Kobe earthquake, which killed more than 6,000 people.

We are now hearing and seeing different versions between watching the live feeds on T.V. and Twitter as events enfold and the reports from official press reports. Under the circumstances that may be understandable as the government does not want to cause a panic. But do we believe them or our lying eyes?

Japan is the third largest country in the world in terms of nuclear energy production, following France, and the U.S. which is in first place (see table above). The country gets about 30% of its power from nuclear sources. Reportedly, 11 nuclear reactors and 21 thermal power plants where shut down after the earthquake, and BBC News put the reduction in output at Japan's nuclear power generators at anything from 25% to 50%.

On top of the loss in the power generation capacity, the Wall Street Journal reported that about 1.2 million barrels per day refining capacity in Japan is also shut down after the earthquake disaster. With this much capacity off line, Japan needs to secure alternative means of generating power and petroleum products as well.

Meanwhile, diesel fuel and coal are readily available. Cargoes of diesel fuel can be shipped almost immediately from the U.S. West Coast refineries to meet up with this new found Japanese demand.

The following graph shows the world refining capacity and how much North America and Far East Asia use crude oil for fuel production:

More refineries will have to be brought into production with economics justifying their running at full capacity. It may not cause crude oil to spike up, but it will most likely test whether consumers are going to be willing to pay $5 per gallon for gasoline and diesel fuel in the U.S.

San Antonio-based refiner Valero Energy Corp. (VLO) closed their 235,000 barrels per day located on the island of Aruba in the Caribbean in July 2009, after the plant had been losing tens of millions of dollars a month.

Valero re-started their refinery near the end of 2010 because of improving economic conditions. Valero has since completed refinery wide maintenance at the plant and is ready to go at full capacity. It will be “just in time” to make up the anticipated shortfall in middle distillate demand expecting to increase after the powerful 9.0 earthquake in Japan.

Closer to Japan, one of China’s largest refineries, Sinopec, recently suspended refining operations in Maoming due to high crude oil prices. The 270,000 barrels a day plant stopped delivering fuel and petroleum products in March 2011, because the Chinese government establishes the price for fuels delivered to the market by their local refineries.

Those fuel prices are equivalent to crude oil prices at $85 a barrel versus today’s Brent ICE posting of $113 a barrel. The difference in the allowed fixed price for fuels and the cost of crude oil leaves privately owned refineries with a negative crack spread.

PetroChina Co Ltd, which is Asia’s largest oil and gas company, has been having similar difficulties. It has been losing money in their oil refining segment resulting from an increase in crude oil prices due to the unrest in North Africa and the Middle East.

Diesel fuel prices on the U.S. West Coast are already amongst the highest in the country, and will be impacted by the March 11th earthquake in Japan. The bulk of the price action will likely fall on diesel fuel, but crude oil could be affected as well.

In the end it will not be about the price of Brent or West Texas Intermediate (WTI) crude oil but refineries being geared up to keep up with new found demand from Japan for their fuel products.

About the author - Bob van der Valk is a Petroleum Industry Analyst with over 50 years of experience in the petroleum, gasoline and lubricants industry. He has been often quoted by news media, most recently by Los Angeles Times, and his opinions solicited by government entities, in addition to his daily business of managing large scale supply and marketing operations.

Saturday, March 5, 2011

Breaking up with OPEC

We are in the middle of world events that may result in the eventual break-up of the 'Organization of the Petroleum Exporting Countries' (OPEC), which is an intergovernmental organization of twelve developing countries, made up of Algeria, Angola, Ecuador, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, the United Arab Emirates, and Venezuela. OPEC is considered a cartel and all of their members are controlled by either Muslim or military dictator style governments.

The start of the break up may have been on September 10, 2008, when the Saudis walked out of OPEC negotiating session in Vienna where the organization voted to reduce production. Although Saudi Arabian OPEC delegates officially endorsed the new quotas, they stated anonymously that they would not observe them. One of their delegates was quoted as saying “Saudi Arabia will meet the market’s demand. We will see what the market requires and we will not leave a customer without oil. The policy has not changed.”The U.S. imports crude oil from other countries. OPEC is not even in the top five of countries from which we directly receive shipment of that precious commodity. Here is how they rank per the latest report from the EIA:December 2010 Import Highlights: Released February 25, 2011Monthly data on the origins of crude oil imports in December 2010 has been released and it shows that four countries exported more than 1 million barrels per day to the United States. The top five exporting countries accounted for 72 percent of United States crude oil imports in December while the top ten sources accounted for approximately 88 percent of all U.S. crude oil imports. The top five sources of US crude oil imports for December were Canada (2,1 million barrels per day), Mexico (1,2 million barrels per day), Saudi Arabia (1.1 million barrels per day), Nigeria (1 million barrels per day, and Venezuela (825,000 barrels per day). The rest of the top ten sources, in order, were Iraq (336,000 barrels per day), Angola (307,000 barrels per day), Brazil (271,000 barrels per day), Algeria (262,000 barrels per day), and Colombia (220,000 barrels per day). Total crude oil imports averaged 8,631,000 barrels per day in December, which is an increase of 23,000 barrels per day from November 2010.Canada remained the largest exporter of total petroleum in December, exporting 2.7 million barrels per day to the United States, which is an increase from last month (2.5 million thousand barrels per day). The second largest exporter of total petroleum was Mexico with 1.4 million barrels per day.

Breaking up with OPEC may be pulled that off without the Western nations having to fire one shot. That old Neil Sedaka song "Breaking up is hard to do" comes to mind when you realize our love-hate relationship may finally lead to a divorce that will relieve the U.S. from our dependency on imports from countries that really don't like us except for our greenbacks. That leads to the reason for this article on why OPEC's existence may be in its final throes and is coming to an end. “Ummah” means unity among Muslims - One nation and one people. Many people have tried to bring Ummah to the Muslim nations. Mohammed was no sooner dead when the Sunni and Shi’a began to fight each other. Then along came the third sect, “Khariji”.

They said Allah would reveal who was to be the successor of Mohammed on the battlefield. They began to slaughter each other. This hatred and killing went on until the 20th Century with 1.5 million Muslims killed by other Muslims in wars between Sunni and Shi’a Muslims reliving the Battle of Karbala in the 8th Century. Why is it that the only way it appears to a Westerner that Muslims can be united is if they have a common enemy? Because it seems unless they have a common enemy they will kill each other. The invasion of Kuwait by Saddam Hussein – raping, burning, and pillaging the inhabitants in the name of reclaiming land that he claimed was rightfully theirs - brought the United States and England into the region to liberate Kuwait. This cycle continues even today with vast crude oil reserves being the main incentive for continued Western involvement. T.E. Lawrence said “Muslims will continue to kill other Muslims”. He was more famously known as “Lawrence of Arabia” and led England’s involvement in helping the Muslims fight the Turks in the early 20th Century. The English were eventually rewarded by completely losing control of the region, which had been strategic to their colonial interest. Since then Muslims have killed each other far more than the Americans, the British, the West, or the Israelis ever killed. The West or the Israelis have never done to Muslims what they have done to each other with half a million killed in the six-year war between Iran and Iraq alone in the 1980’s. The Bahrain and Yemen conflicts are continuing with Egypt, Morocco and now Libya prominently in the news. Disruptions have spread across the Middle East and North Africa. Libya’s 1.6 million barrel crude oil exports are almost entirely halted and renewed unrest in Oman, Iran and Iraq have rattled crude oil traders. An interruption of shipments from any of those countries would further tighten oil supplies, even as Saudi Arabia has rushed to fill the vacuum of Libyan supplies by pumping more oil from its fields. Oman, which is a normally stable Persian Gulf country, ruled by a family dynasty and the largest non-OPEC oil producer in the Middle East, is now in trouble as well. Refiners around the world have been hoping that Iraq, as violence ebbed, would again become a major oil producer, with production stabilizing at 2.3 million barrels a day. But rebels bombed the country’s largest refinery, reducing the refinery’s capacity to refine petroleum products by 75,000 barrels a day. This was on top of a terrorist attack on a pipeline leading to a second refinery north of Baghdad. Saudi Arabia has a total production capacity of 12.5 million barrels a day, and currently produces nine million barrels after increasing its output by several hundred thousand since the beginning of 2011. Saudi Arabia said they are ready to pump what it takes to fill any supply gap, but much of its 3.5 million barrel excess capacity contains sour crudes, which does not easily replace the Libyan sweet crude European refineries in particular desire to produce diesel Donald Trump recently announced his intentions to explore running for President and responded to speculation that the turmoil in Egypt and other countries in the Middle East could push oil prices to as high as $200 a barrel.He said: “It also could go the other way. Frankly, the Middle East is a tinderbox. It’s going to explode. OPEC will probably be destroyed if it explodes, and oil prices could go the other way.“I understand economics. You break up what would normally be an illegal monopoly, OPEC, and break it up very strongly. The Middle East is exploding, and I’m saying that could have a positive impact on oil prices.“If you look at oil right now, it’s soon going to be $100 a barrel. Far too high. It’s set by OPEC. I think OPEC would explode with the Middle East and that wouldn’t be the worst thing in the world.”“I think it’s unfair. I think it’s illegal,” he declared. “If you have a store and I have a store and we collude and set prices, we go to jail”.“Here you have 12 men, in this case all men, they sit around a table and they set the price of oil.”“Abu Dhabi, which has plenty of oil, just went to all natural gas for transportation because they want to sell us the oil at exorbitant prices. When you tell me about Obama and what he’s doing in the Middle East, I don’t think he’s doing anything in the Middle East.” Donald Trump may just be correct that the current revolts and conflicts in the Middle East and North Africa will cause an upheaval in the world oil markets enough to bring about the end of OPEC.

We will have to change from humming that Neil Sedaka song to learning the lyrics to “O Canada” and “Himno Nacional Mexicano”.