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Peak Investment = Peak Oil

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Peak Investment = Peak Oil

Unread postby Pops » Wed 15 Jan 2014, 08:01:58

Here is a thread on the idea that higher costs of new oil production and limited ability of consumers to pay that higher cost will lead to falling oil company profits (both IOC and NOC) and investment and eventually falling production, i.e.: Peak Oil.

Here is an post which seems unrelated to PO but has a direct bearing on oil co investment:

Federal Reserve: Deepwater Horizon Oil Spill Is What Scares Us About Banks In Physical Commodities
The Federal Reserve took a potential step Tuesday to limit big banks’ activities in physical commodities, publicly outlining concerns with bank investments in ventures that can lead to deadly oil spills, pipeline ruptures and natural gas explosions.

The expected move comes after months of criticism by U.S. lawmakers that large banks’ recent expansion into businesses such as oil fields and tankers, metals warehouses, and chemical pipelines poses risks to the U.S. economy and financial system. Industrial companies, such as MillerCoors, and lawmakers, including Sen. Sherrod Brown (D-Ohio), also have raised concerns about possible manipulation of key commodities markets, which may boost banks' profit while leading to higher costs for households and manufacturers.

In its request for public comment, the Fed appeared skeptical of the benefits of banks' involvement in physical commodities. The Fed pointed out several environmental disasters that resulted from physical commodities activities, such as the Deepwater Horizon oil spill in the Gulf of Mexico and the 2010 explosion of a power plant in Middletown, Conn., that killed six people. BP alone had recognized $42.2 billion in losses as of last year as a result of the oil spill, the Fed said. Having banks involved in physical commodities puts them at risk of similar catastrophes, the Fed suggested, which could lead to a big bank’s failure.


Read the whole post at HP
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Re: Peak Investment = Peak Oil

Unread postby ROCKMAN » Wed 15 Jan 2014, 09:10:15

Pops – An interesting point but perhaps a tad exaggerated. In 39 years I’ve not see a single bank lose money from a dry hole let alone an oil field catastrophe...OTHER than not getting a loan paid back. IOW I’ve never seen a bank hold a “working interest” position in any oil field activity. A WI owner is someone liable for any cost over runs as well as any price tag from a catastrophe. Even if a bank owned a major stock position in an oil company that’s gets slaughtered by a major accident their loss would be limited to their stock equity. But that’s no different than a bank investing in a house building or real estate company. How much money did the banking segment lose from such investments when the real estate market crashed a few years ago? How many hundreds of $millions did public employee unions lose during that bust? Why would the feds be more worried about banks losing money by investing in commodities more than losing money by investing in an electric car maker or any other business? But there has been some chatter about rules that don’t allow banks to be investors in any other businesses other than just making them loans. IOW a bank would be allowed to only be a bank…not a combo bank and investment company.

So the major risk for the bank is not getting the loan repaid…which has been the common risk for a bank since the beginning of time. But banks do more than loan money…sometimes they invest in companies. That could certainly lead to big loses especially when they start using derivatives and other highly leveraged vehicles. But what’s interesting is that I don’t see any concern about other businesses outside of the oil patch that take on risky WI positions. These would be the insurance and utility companies. In my earliest days in the 70’s I had dealt with drilling joint ventures that had both such entities participate as WI partners that were fully liable for any accidents. Use the Macondo blow out as an example: those were all oil patch companies that were on the hook. But what if US Life or State farm were a 10% WI partner? They would have been liable for their share. What if the CA utility PG&E had been liable for 20% of the tens of $billions in Macondo damages? In the late 70’s boom I had 4 different east coast public utilities take WI positions in my drilling program.

I have no idea as to how many utility and insurance companies are involved as WI partners in drilling ventures these days. Such activities are seldom advertised by those companies. When I worked in those JV’s with a variety of insurance and utilities the rule was to not talk about it to anyone outside the JV.

A quick quiz: can anyone name the other WI partners that are on the hook for the Macondo blow out…without looking it up online? Does anyone know which insurance company once considered taking a WI in the BP well? Don’t ask me…can’t say. It’s good to remember that when you see a story that the XYZ Company is drilling a well, including out in the DW GOM, the vast majority of wells are drilled by a partnership of companies. The XYZ Company is the operator of that well but they may actually own only 30% of it with the balance owned by other companies. Companies you probably wouldn’t know about until there were a major accident.
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Re: Peak Investment = Peak Oil

Unread postby Tanada » Wed 15 Jan 2014, 09:17:48

I dunno but this sure sounds like pulling the plug on future oil investments by financial institutions too me. The key question is, are the Fed banks following the existing trend or causing it? If the lack of investment so far was because this move was discussed in the back room for a while before being implemented then the driver to lower investment is the Fed policy. If the Fed is just following the lead of the market that puts things in a far different light, Fed policy can be changed any time they want but if the Market has decided not to invest then a changed policy won't make much of a difference.

I think we are back to the Subsidy vs Taxation issue under the guise of Policy. This stated policy will drive investment out of the Oil field into something else. It isn't as focused as a Subsidy or a Tax but the effect is the same for the oil producers.
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Re: Peak Investment = Peak Oil

Unread postby RobertInget » Wed 15 Jan 2014, 09:59:03

Sitting in front of a couple of screens in Southern Oregon, I felt certain
BP was a gonner, post Macondo. How provincial!
"Beyond Petroleum" self insured not because it was so confident in its
abysmal safety record but because insurance underwriting was/is "prohibitively" expensive. Why of course potential liability is almost always spread between partners, contractors, even suppliers.

Dirty old oil sands production is often cited as one of the world's major polluters. (Coal of course is a far greater AGW contributor). However,
apart from transportation accidents, oil sands, coal burning pollution
has been established, scientifically quantified. There should be no surprises as to historical damage to human health and general environmental damage. Smokers with 'skin in the game' all know Cigarettes will shorten their own life. Major multinational Oil Company
officials take almost no risk compared to your smoking sister-in-law.

Privately funded insurance underwriters have their own
fortunes at stake.
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Re: Peak Investment = Peak Oil

Unread postby ROCKMAN » Wed 15 Jan 2014, 14:20:50

T - What confuses me sometimes is the use of the phrase "oil patch investments". Is that the monies being spent by the companies drilling the wells, the monies being loaned by the banks to the companies to drill those wells or monies private non-industry companies/individuals are paying to drill a portion of those wells?

I’ll speak to just what I know best: the Eagle Ford Shale. Very little (almost none really) of what is being spent to drill those wells is coming from individuals or companies outside the oil patch. Almost all of those outside investments are in the form of stock purchases. And unless it involves an IPO none of those monies go to the companies…it all goes to the previous stock owner. Almost all the money being spent to drill EFS wells is either coming from company cash flows or bank loans. One might call a bank loan an investment but I don’t: the best a banker can expect is to get the principal and interest on the loan…no upside. In the oil patch we do have what we’ll call “mezzanine bankers” that get a cut of the upside but they aren’t really banks but investment companies. They do fund some of the activity.

My company suffered a horrible decrease in capex expenditures during 2013. A year ago my owner chewed us out and was considering shutting the company down. We had gone from participating in over $400 million in NG drilling the first 3 years to $zero drilling for NG by the end of 2012. But it wasn’t for lack of capex…had hundreds of $millions available in the family’s accounts…didn’t need to borrow a penny. Never have and never will. Our drilling investments dropped because we couldn’t find enough prospects that met our ROR requirements once NG prices had collapsed. Fortunately a year ago we got into two oil exploration JV’s that had been shooting 3d seismic last year. We’ll start drilling both in the next few months. If the plays work well we’ll be spending a lot of capex the next few years. If not, we won’t and the Rockman may be out on the street looking for a new gig. Might have to become a shale whore after all. LOL.

But I have seen more than a few companies that were willing to borrow huge sums from the banks or raise it by selling bonds in order to fund operations that had little chance of financial success. So why? Because it kept those paychecks coming in every month to the managers. And if they got really lucky the new capex infusion might bump the stock up allowing them to cash out their options before the stock turned to sh*t.

There’s a variety of reason capex increases and decreases over time in the oil patch. Not always easy to figure out the root cause because there may be a number of contributing factors. Some obvious and some not.
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Re: Peak Investment = Peak Oil

Unread postby copious.abundance » Wed 15 Jan 2014, 14:58:24

ROCKMAN wrote:Might have to become a shale whore after all. LOL.

Image
Stuff for doomers to contemplate:
http://peakoil.com/forums/post1190117.html#p1190117
http://peakoil.com/forums/post1193930.html#p1193930
http://peakoil.com/forums/post1206767.html#p1206767
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Re: Peak Investment = Peak Oil

Unread postby Pops » Wed 15 Jan 2014, 16:46:39

The point of this particular story is that relaxing the rules in '03 (and further back under Clinton) allowed commercial banks to play in the commodities markets and as we have seen, in housing in particular, gambling by commercial banks is not a sound policy. Not sure what consolation there is in "only" losing loan principal, LOL

This is just part of the ongoing narrative that investment in E&P is falling off - which has become my hobby horse of late - the larger point of the thread.

Investing in oil production has always been risky and after the rules were relaxed in '03 allowing commercial banks in there was a lot more money floating around I'm assuming. Fast forward to today and the Fed is getting ready to put the kiabosh on lots of the commercial bank gambling, including in such things as leasing oil storage tanks. The brainy quants at the banks do a deal that actually causes them to lose money on that deal but make a killing on some derivative or other when they make the markets move a touch.

Another article along the same lines
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Re: Peak Investment = Peak Oil

Unread postby ROCKMAN » Wed 15 Jan 2014, 17:11:09

Pops - "...including in such things as leasing oil storage tanks." And that's my point: maybe I'm just not aware of it but I've yet to see one commercial bank directly invest in any part of the infrastructure. Loan monies to companies that do for sure. And suffer the risk of non-payment of such loans if they fail. But how much money did banks lose making home loans compared to how much they lost lending monies to companies in some commodity business? How many banks and S&L's went under because oil futures fell compared to folks who walked away from the mortgages?

And if the folks who posted this story didn’t want me to sound the BS alarm they should have thought twice about posting a picture of the Macondo blow out as the lead nor should they have warned about the potential to commercial banks from such an event putting them out of business. Foolish hype IMHO. Writing a story about poor investment decision by bankers in one thing. Warning of a potential disaster for such banks as a result of another such catastrophe is another. They mixed the apples with the oranges…not me. LOL.
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Re: Peak Investment = Peak Oil

Unread postby Pops » Wed 15 Jan 2014, 17:22:02

ROCKMAN wrote:And if the folks who posted this story didn’t want me to sound the BS alarm . . .

Actually everyone posted this story.
I guess the Federal Reserve should have consulted with you before they came out with a press release, now they are gonna have to back down because you called BS, LOL.

http://federalreserve.gov/newsevents/pr ... 40114a.htm

Press Release

Release Date: January 14, 2014

For immediate release
The Federal Reserve Board on Tuesday sought comment to help inform its consideration of physical commodity activities conducted by financial holding companies, including current authorizations of these activities and the appropriateness of further restrictions.

The Board is considering whether additional restrictions would help ensure that physical commodities activities authorized for financial holding companies are conducted in a safe and sound manner and do not pose a threat to financial stability. The Board, in an advance notice of proposed rulemaking, addresses commodity activities conducted under different sections of the Bank Holding Company Act, including section 4(k) complementary authority, section 4(o) grandfathered authority, as well as merchant banking authority.

The topics covered by the advance notice include:

the nature of risks that physical commodity activities could pose to the safety and soundness of financial holding companies and to financial stability more broadly;
the potential conflicts of interest and other adverse effects of engagement by financial holding companies in physical commodity activities;
and the potential risks and benefits of imposing additional capital requirements or other restrictions on the commodity activities of financial holding companies.
Comments are welcome through March 15, 2014. After reviewing the comments, the Board will consider what further action, including a rulemaking, is warranted. Comments on a proposal would also be considered before a final rule would be issued.

For media inquiries, call 202-452-2955.

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Re: Peak Investment = Peak Oil

Unread postby SeaGypsy » Wed 15 Jan 2014, 17:57:44

Getting to the rub- what are we looking for here?- Doesn't it boil down to the vulnerability of expensive oil developments to demand destruction based price collapse? The industry needs sustained and rising prices to meet investor expectations- whoever they may be. A sustained price collapse under about $80 BBL would be a serious disaster for the industry, one can only guess this base figure has to go up over time.

One area of substantial risk to demand is the many consumer nations with Government price setting, for oil derivatives & electric. The phasing out of subsidies in many of these nations has triggered substantial consumer price rises and subsequent protests, civil action. Just as most people don't really grok the enormity of peak oil, very few in these regulated markets understand that their controllers have zero control over what must be paid on international commodities markets.

At some point in the future the 2007-09 cycle has to repeat (price explosion/ demand destruction/ price collapse. A quick return to 'new normal' (Profitability for new oil) is absolutely necessary to sustain futures markets and investment in new oil. Failure of sufficient price rebound must lead to failure for new development, narrowing of supply and eventually total control of supply by the last remaining suppliers without new oil.

Perhaps this is why the US is investing so heavily in KSA, Iraq, and now Iran. Despite the new mythical Saudi America, TPTB can see the writing on the wall. He who controls the biggest (low cost)/ high EROEI) supply points ends up controlling the world.
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Re: Peak Investment = Peak Oil

Unread postby Pops » Wed 15 Jan 2014, 18:52:38

SeaGypsy wrote:Getting to the rub- what are we looking for here?- Doesn't it boil down to the vulnerability of expensive oil developments to demand destruction based price collapse?

But the price hasn't collapsed, yet investment is off. NOCs and IOCs seem to be pulling back because the cost is too high and the reward too low - and consumers seem to be saying "we can't pay more."

That isn't in the future, that's now.

Although I did see in the NDIC "Directors Cut" that oil prices in ND are $71.25 a barrel right now.


What I'm looking for in this thread is evidence of falling investment in exploration and production.
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Re: Peak Investment = Peak Oil

Unread postby MD » Wed 15 Jan 2014, 20:31:08

It's hard to find concrete evidence at the company by company level, because of their tendency to obfuscate.

Globally though, energy investments are clearly having a problem with diminishing returns. I would call it EROEI but that would bring the shrieking shills out of their corners.

:lol:
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Re: Peak Investment = Peak Oil

Unread postby sparky » Wed 15 Jan 2014, 21:06:05

.
"I would call it EROEI" .....so would I :)
or maybe BROBI , bucks return on bucks invested ,
the global investment numbers touted by the IEA to develop new production are very ,very large
all of it to replace cheap conventional with so so or so hard production
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Re: Peak Investment = Peak Oil

Unread postby Ibon » Wed 15 Jan 2014, 21:36:51

Pops wrote:
SeaGypsy wrote:Getting to the rub- what are we looking for here?- Doesn't it boil down to the vulnerability of expensive oil developments to demand destruction based price collapse?

But the price hasn't collapsed, yet investment is off. NOCs and IOCs seem to be pulling back because the cost is too high and the reward too low - and consumers seem to be saying "we can't pay more."

That isn't in the future, that's now.
.


This is related to how elastic the consumer is in cutting back non essential consumption of gasoline. It was early presumed to be more inelastic. Non discretionary driving around still makes up a huge amount of transportation. And poor planning as well. As consumers hit the upper limit of what they can spend on fuel this acts as a great educator on how you use it.
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Re: Peak Investment = Peak Oil

Unread postby rockdoc123 » Wed 15 Jan 2014, 22:29:37

What I'm looking for in this thread is evidence of falling investment in exploration and production.


I pointed out something on another thread that is pertinent here. Investment in the oil and gas industry is invariably more related to what the market sentiment is versus what commodity price is nor how well a particular oil company is doing. This is particularly apparent amongst the smaller companies who do not have enough internal cashflow to allow them to self finance growth. I know of many companies that are now sitting in cash poor situations, having spent all of their capital on projects that were successful but the market is not rewarding them which limits how much money is available to reinvest for growth.

The oil and gas industry has always been driven by "risk on" / "risk off" levers. In late 2010 we went into a "risk on" situation where the money was chasing investments, that lasted only 6 months and since then we have been in "risk off" mode. Most investment houses are only interested in pursuing the stories of a very few companies.

So companies can see opportunities that may actually be lower risk, they may want to grow aggressively but they can't do that without capital. If they are servicing debt and have significant G&A demands then any capital they are generating from early production is eaten up quickly. If there is no one willing to invest then there is not going to be more activity by that company unless or until there is consolidation.

This is more about microeconomics than it is about macroeconomics
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Re: Peak Investment = Peak Oil

Unread postby Pops » Thu 16 Jan 2014, 07:09:51

Thanks doc. And the smaller companies are where the only real growth is today. This all plays into the "land rush" aspect of the LTO boom in my mind and what happens when the churn slows and the chickens come home.

There were lots of stories out there on the topic this last year and we really haven't paid enough attention.

Shale Grab in U.S. Stalls as Falling Values Repel Buyers
Oil companies are hitting the brakes on a U.S. shale land grab that produced an abundance of cheap natural gas -- and troubles for the industry.

The spending slowdown by international companies including BHP Billiton Ltd. (BHP) and Royal Dutch Shell Plc (RDSA) comes amid a series of write-downs of oil and gas shale assets, caused by plunging prices and disappointing wells. The companies are turning instead to developing current projects, unable to justify buying more property while fields bought during the 2009-2012 flurry remain below their purchase price, according to analysts.

The deal-making slump, which may last for years, threatens to slow oil and gas production growth as companies that built up debt during the rush for shale acreage can’t depend on asset sales to fund drilling programs. The decline has pushed acquisitions of North American energy assets in the first-half of the year to the lowest since 2004.
...

Firms depending on asset sales to help finance drilling may not have enough money to pay for higher oil and gas production, said Eric Nuttall, who oversees C$70 million ($68 million) at Sprott Asset Management LP in Toronto. That could slow output growth, especially as companies try to avoid taking on more debt.
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Re: Peak Investment = Peak Oil

Unread postby Babumai » Thu 16 Jan 2014, 08:12:32

Some of the banks had moved into owning storage and other assets to help facilitate trading.

This article is almost a decade old, perhaps it got bigger

http://online.wsj.com/news/articles/SB1 ... 8745967570


United Airlines, fighting intense financial pressure, decided in late 2003 it needed a better way to get fuel to its planes. To get that job done, it went to an unusual place: Morgan Stanley.

Now, employees of the bank scour the world for jet fuel for the airline. They charter barges, lease pipelines and schedule tanker trucks, delivering more than a billion gallons a year to United's hubs. They even send inspectors to make sure no one tampers with the stuff.

What's a white-shoe investment bank doing selling oil? The answer unfolds in Purchase, N.Y., where an army of its commodities traders sit before flickering screens on a vast, domed trading floor staffed 24 hours a day. At the former site of Texaco's headquarters, Morgan Stanley veterans Neal Shear and John Shapiro run one of the most profitable energy-trading operations in the world.

But they don't just trade futures, a common way of betting electronically on commodities that involves buying and selling contracts for future delivery. Morgan Stanley also handles real barrels of oil and generates actual megawatts of power.

The reason is twofold. Having access to barges and storage tanks and pipelines gives the bank additional options, to move or store commodities, that most energy traders don't pursue. And by having its finger on the pulse of the business, it hopes to get a more subtle feel for the market, a crucial asset to a trader.

"Being in the physical business tells us when markets are oversupplied or undersupplied," says Mr. Shapiro. "We're right there seeing terminals filling up and emptying. Or we're there saying 'I need 500,000 barrels' when someone else says 'I don't have it.' "


...

In electricity, trader Simon Greenshields oversaw Morgan Stanley's construction of power plants in Georgia, Alabama and Nevada in the 1990s. When utilities need extra power during peak demand, Morgan Stanley traders sell them some. Those tend to be times when prices are higher.

...
In the 1990s, he made a bold real-estate play along a grimy refinery row in coastal New Jersey near New York Harbor. The New York Mercantile Exchange, the country's main hub for trading oil futures, designates about two dozen sites there and in New York as places where exchange-traded oil can be delivered. Through leases, Mr. Refvik locked up a large chunk of the official storage space. He laid claim to tank farms -- clusters of giant metal storage drums. His team also leases a big storage terminal in New Haven, Conn.

Messrs. Shear and Shapiro worried, at first, that the expensive leases could be albatrosses. But the move has worked so well that traders elsewhere dubbed Mr. Refvik "King of New York Harbor," a nickname that also reflects his occasional tour of the waters with his yacht, Song of Norway. Meanwhile, Morgan Stanley also acquired large amounts of oil-storage capacity in other countries.
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Re: Peak Investment = Peak Oil

Unread postby ROCKMAN » Thu 16 Jan 2014, 10:12:06

Pops – So the Federal Reserve used the striking photo of the Macondo blow out to emphasize the risks to banks even though no bank was liable for any of the damage? Shame on them. Just like that sign outside that joint: “Cheap beer…topless women”. Then you go inside and find out the women aren’t cheap at all. LOL.

“But the price hasn't collapsed, yet investment is off. NOCs and IOCs seem to be pulling back because the cost is too high and the reward too low - and consumers seem to be saying "we can't pay more." You nailed that Pops. But this has been the dynamic that has driven oil/NG investments since the day Col Drake poked that first hole. Pick a price for oil/NG…any price…it doesn’t matter. At that price there are a finite number of well that he industry can justify drilling. As you know so well I was involved in $400 million of capex spending when NG prices were higher. But what if prices had collapsed and terminated that effort….how long would I keep drilling such prospects? In reality not very long. The higher NG process we used to justify those expenditures was just high enough to allow us to chase those few remaining deep NG prospects in S La that we targeted. Long ago I pointed out how fortunate my company was that so many other companies began chasing the unconventional plays. There weren’t enough conventional plays like I was chasing for us even when NG were higher. If the other companies had been chasing my prospects we probably would have only drilled 10% of what we did…maybe even less. My owner was constantly on our asses to find more prospects. And this was when NG prices were much higher than now.

Based upon current oil prices there are a finite number of prospects to drill be they in the shales or the DW off of La and Brazil. Or anywhere else. And they will be drilled as long as prices stay where they are. As those are developed there are fewer left to develop at that price. Fewer prospects to develop leads to lower capital spending. How it is today and how it has always been. Every time there’s been a jump in oil/NG prices there has been a period of time when the oil patched has chased those newly economic opportunities with a passion. But eventually that inventory gets used up. High oil/NG prices don’t create new reserves. They just allow us the economic incentive to develop what has always been there. And when they are gone they are gone. The US drilled up most of the $30 oil we had. And some day down the road we’ll drill up most of the $95 oil we have. And as that day approaches capital spending will naturally decline. Are seeing the beginning of that end today? Maybe…maybe not. Just like the date of PO it will be much easier to see in that rearview mirror.
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Re: Peak Investment = Peak Oil

Unread postby rockdoc123 » Thu 16 Jan 2014, 10:49:16

Pops
I think the point I was trying to make is that the level of investment of the smaller independants is not tied entirely to commodity price, opportunity or how well they are doing. There are many companies who have good assets, good skills and good economics at current prices but cannot execute the programs they would like to because there is no support in the market. In the past there seemed to be a closer match between commodity price and market support....this is not the case any longer, it seems to be a new paradigm. At least so in my 30+ years experience in the business.
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Oil giant Shell in profit warning

Unread postby dolanbaker » Fri 17 Jan 2014, 02:36:19

http://www.bbc.co.uk/news/business-25773409
Oil giant Royal Dutch Shell has issued a profit warning after it made less money than expected in the final quarter of 2013.

"Fourth quarter 2013 figures... are expected to be significantly lower than recent levels of profitability, considering current oil and gas prices and the downstream oil products industry environment," the company said in a statement.
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