Saturday, January 31, 2015

Oil surges 8 percent as U.S. rig count plunges, shorts scramble

A pumpjack brings oil to the surface in the Monterey Shale, California, April 29, 2013. REUTERS/Lucy Nicholson

By Barani Krishnan

(Reuters) - Oil prices roared back from six-year lows on Friday, rocketing more than 8 percent as a record weekly decline in U.S. oil drilling fueled a frenzy of short-covering.

In a rally that may spur speculation that a seven-month price collapse has ended, global benchmark Brent crude shot up to more than $53 per barrel, its highest in more than three weeks in its biggest one-day gain since 2009.

The late-session surge was primed by Baker Hughes data showing the number of rigs drilling for oil in the United States fell by 94 - or 7 percent - this week. Earlier gains were fueled by reports of Islamic State militants striking at Kurdish forces southwest of the oil-rich city of Kirkuk.

Brent LCOc1 settled up $3.86 at $52.99 a barrel, after running to as high as $53.08.

U.S. CLc1 oil futures finished up $3.71 at $48.24, soaring by nearly $3 in a final frenzied hour and ending a two-week stretch of relatively steady prices, the longest break since a seven-month rout kicked off last summer. On Thursday prices had touched a six-year low under $44 a barrel.

Poised for a bounce many thought was overdue, short traders raced to cover their positions on fears that the rout, sparked by massive U.S. shale crude supplies, was nearing its end.

"The rig count drop was a lot more than people expected and it really got the market going," said Phil Flynn, analyst at Price Futures Group in Chicago.

According to Baker Hughes, the decline in oil drilling rigs was the most since it began keeping records in 1987. With drillers having idled about 24 percent of their oil drilling rigs since the summer, some traders may be betting that an anticipated slowdown in U.S. oil production is nearer than expected.


Some are not convinced that the sell-off in oil is over. The rout began in June when Brent peaked at over $115 a barrel and accelerated in November after OPEC refused to cut its production.

"There was a lot of short-covering before the month end from people wanting to take profit from the $40-odd lows, so it's not surprising that we rallied," said Tariq Zahir, managing member at Tyche Capital Advisors in Laurel Hollow in New York. But it will take a while for production to respond to lower drilling.

"This doesn't change the fundamental outlook in oil. We are still about 2 million barrels oversupplied."

Production from OPEC, or the Organization of the Petroleum Exporting Countries, rose in January to 30.37 million barrels per day (bpd), a Reuters poll showed, a sign that key members of the group were resolute about defending their market share.

A Reuters poll shows oil prices may post only a mild recovery in the second half of the year, with prices still averaging less in 2015 than during the global financial crisis. OILPOLL

Joseph Posillico, senior vice president of energy futures at Jefferies in New York, also warned of a short-term, short-covering rally that could be quickly reversed.

"This is just the market being the market and we could give these all back in the next few sessions."

(Additional reporting by Ron Bousso in London and Henning Gloystein in Singapore; Editing by Jason Neely, John Stonestreet, Bernadette Baum, Gunna Dickson and Lisa Shumaker)

Big Oil needs to go on a diet now that the $100 a barrel party is over

High oil prices gave the oil industry several bad habits, including runaway spending, poor planning, and engineering mistakes. Now that oil prices have declined, the industry needs to change its ways, quickly.

Energy companies will need to do more than just cut costs and renegotiate service contracts to remain afloat at $40 a barrel oil—they need to quit being so darn sloppy.

A decade of strong oil prices made Big Oil rich and fat, which has led to waste across the industry. This not only translated into runaway spending at the corporate level—including everything from executive jets to overly-generous pay packages—it also led to poor planning and greater engineering mistakes on the field. The energy companies could hide their bungling when oil was at $100 a barrel, but with prices where they are today, there is nowhere to hide.

This week saw the first earnings reports from energy companies since oil prices collapsed. As expected, Big Oil didn’t fare well in the fourth quarter of 2014. Royal Dutch Shell and ConocoPhillips COP 0.25% both reported a 57% drop in earnings compared with the same time last year, when oil prices were much higher. Chevron CVX -0.46% , which reported its earnings on Friday morning, announced a 30% decrease in net income during the quarter. Its strong chemical earnings helped offset the decline in oil. ExxonMobil XOM -0.18% , which will report on Monday, isn’t expected to fare much better.

Pretty much all the oil companies announced cuts to their 2015 capital plans to adjust to lower oil prices. Shell said it would defer or cancel about 40 projects worldwide, knocking about $15 billion off their capital spending plan over the next three years. ConocoPhillips announced cuts of around $2 billion for its 2015 spending plan, which is on top of the $2.5 billion in cuts the company announced last year, equating to a 30% decrease in overall projected spending to $11.5 billion. Meanwhile, Chevron announced Friday morning it would cut capital spending for the year by 13% to $35 billion.

Cutting costs makes sense given the rapid drop in oil prices, but how this drop will affect these companies’ operations will depend on several factors. For example, it doesn’t (or shouldn’t) translate to simply cutting projects, as Shell outlined. Instead, it should also reflect the cost savings all of Big Oil should reap after renegotiating oilfield service contracts with drilling partners, such as Schlumberger, Halliburton, and Baker Hughes. These contractors, which basically do Big Oil’s dirty work, like physically drilling and maintaining oil wells, still have agreements with Big Oil based on $100 oil, not $40. Big Oil will renegotiate those contracts to reflect the realities of today’s market, with giants like ExxonMobil squeezing the hardest.

So far, project managers at major oil firms tell Fortune that while prices for some services, such as rentals for offshore drilling rigs, have fallen significantly in the last few months, overall service costs are down by only 10% to 15% from when oil was in the triple digits. It is safe to assume that those rates will fall rapidly in the next few months, probably not as much as the nearly 60% drop in oil prices from last summer, but far more than what we have seen so far. Much of the “cuts” in Big Oil’s capital plans will come from these savings, not by canceling projects or boosting efficiency. All these cuts won’t equal a commensurate decline in oil production, but they disregard a major issue in the oil complex—waste.

While exploration and production costs have become more complicated over the years, as geologies have deteriorated and competition for choice plays and for talent has surged, the industry is still spending more than it should to pull oil out of the ground. Credit Suisse analysts calculate that legitimate production complications have added only 40% to 50% to the overall cost of oil production in the last 15 years. But during that time, real production costs have tripled.

What accounts for the discrepancy? Waste.

Exxon and the rest of the oil majors can only blame the cost overruns on their service contractors so much. For the rest of the cost increases, they need to look within their own ranks. For the hundreds of thousands of people who work in the energy industry, this might seem shocking given their normally conservative nature.

Let’s focus on capital budgeting, as that is where the major oil companies seem so keen on cutting. IPA, a consultancy specializing in capital projects, analyzed over 1,400 energy projects led by a mix of 50 energy producers and found that the industry has some explaining to do. They calculated that the industry had “destroyed value versus initial expectations on 75% of all projects completed in the last decade” and that the total value lost, relative to what was initially assumed by the brilliant bean counters at headquarters, came in at a whopping 35%. Either the executives and engineers at the Big Oil companies can’t build a financial or production model to save their lives or there is a lot of waste in the system that needs to be addressed. It is probably a little bit of both.

A model is only as good as the data that’s in it. The production data comes from engineers, many of whom have decades of experience and some who have just graduated. Ed Merrow, who heads IPA, writes in his recent book that the industry is making poor decisions when funding new projects. Credit Suisse analysts say that this is “predominately a human process failure.”

But the biggest, and probably most disturbing, example of waste in the industry has to be engineering mistakes. Merrow says that engineering errors in the industry have “doubled in recent years,” wiping out billions of dollars in profits. The errors associated with the Deepwater Horizon oil spill in 2010 have cost BP $42 billion so far. And the pain continues. A judge ruled this month that the company may be on the hook for another $13 billion in fines on top of that amount.

Deepwater Horizon is an extreme example of a problem that should have been stamped out years ago. Advances in technology and all the extra money spent on new equipment and engineering talent should have reduced mistakes and accidents in the industry, not increased them. While oil production has admittedly become more complicated over the years, such as ultra-deep water drilling, it isn’t rocket science. The same engineering and safety principals that apply to ultra-deep water drilling apply to more commonly drilled shallow-water wells. We know the industry can mitigate errors if it wants to. How many super tanker spills has Exxon had following the disastrous Alaska Valdez incident back in 1989? Zero.

In addition to becoming mistake-prone, the industry has also run up costs due to a combination of unnecessary spending and conspicuous consumption. While Wall Street analysts and associates now sit in coach, energy employees all too often ride in first class, if they even fly commercial to begin with. Private plane use by energy companies is ubiquitous, not just for C-suite employees, but also for their subordinates. This makes sense when oil fields are located in the middle of nowhere, like western North Dakota or southern Chad, but it doesn’t pass muster when, say, flying between Moscow and Paris.

Travel is just one example of waste in the industry. Corporate structures also need to be reformed and relocated. Why do Chevron and Exxon maintain their respective headquarters in the expensive suburbs of San Francisco and Dallas when pretty much all their important operations and project managers are in Houston? It’s time to move. After all, Exxon just spent what must have been an ungodly chunk of change to build a brand new 385-acre operations center in the northern suburbs of Houston. The 20-building oil city will house some 10,000 employees when construction ends sometime this year.

At the center, there will be a 10,000-ton floating cube that appears to hover over one of the many plazas below. The campus will also have a 100,000-square-foot “Wellness Center” featuring a three-story glass atrium, cardio and strength training facilities and classes, a basketball court, personal training services, and healthy dining venues. It will also offer a “child development center” for children ages six weeks through pre-kindergarten, so all the moms and dads can save a trip to daycare.

Such extravagance is out of character for Exxon—or at least it used to be. Exxon’s efficiency is legendary, but all this spending, combined with lousy acquisitions, such as the $41 billion deal to buy XTO in 2009, has cost them that crown. Indeed, the company’s return on capital employed (ROACE), peaked in 2008 at 33% and has fallen ever since. In the last five years, Exxon’s ROACE has declined to 20%. Fadel Gheit, an oil analyst at Oppenheimer, estimates that if crude prices remain weak, Exxon’s ROACE could decline below 10% for the first time in over a decade. This could force the company to slash or suspend its generous share repurchase program. The same goes for its legendary dividend.

Exxon isn’t alone. All the major oil companies have wasted money in some form or another during the boom. But now is the time to correct those mistakes. Energy companies should be more discriminating in evaluating new prospects and they should cut down on the extravagant spending. Those that move quickly to address these issues will be the ones who come out of this oil slump in the best shape.

Friday, January 30, 2015

Exxon Adds Discrimination Protections for LGBT Workers

Key Speakers At 21st World Petroleum Congress
Getty Images

By Anna Driver

HOUSTON -- Exxon Mobil (XOM), the world's largest publicly traded oil company, has changed its U.S. employment policies to prohibit discrimination based on sexual orientation and gender identity as now required by federal law.

Exxon spokesman Alan Jeffers said Friday the company's board approved the policy change at a meeting on Wednesday and noted that the oil company "always updates its policies to comply with the laws where we work."

Investors had pressed for the change for years, filing shareholder proposals for Exxon to guarantee protections against discrimination based on sexual orientation since 1999.

To articulate its policy through the lens of legal conformance is not an affirmative changing of course and full adoption of equality, but instead a calibrated response to retain government contracts.
Exxon has previously resisted making the change, saying it already prohibited all forms of discrimination at its offices anywhere in the world.

But lesbians, gays, bisexuals and transgender, or LGBT, people now are federally protected classes. In July, President Barack Obama signed an executive order banning federal contractors from discriminating against LGBT workers.

The U.S. government relies on supply contracts for fuels from many oil companies, which also have lease agreements to work on federal lands or offshore.

An organization that monitors companies' LGBT policies suggested Exxon's policy change was a calculated one while New York State Comptroller Thomas DiNapoli, who pushed for the move, welcomed it.

"To articulate its policy through the lens of legal conformance is not an affirmative changing of course and full adoption of equality, but instead a calibrated response to retain government contracts," said Deena Fidas of The Human Rights Campaign Foundation.

DiNapoli, who oversees 12 million Exxon shares, said: "We commend Exxon for joining its many Fortune 500 peers and investors in the 21st Century where LGBT rights are synonymous with civil rights."

In September 2013, Exxon said it would extend benefits to spouses of its U.S workers in same-sex marriages. At the time, it was a sweeping reversal by one the world's top companies following a landmark ruling by the U.S. Supreme Court that led to same-sex couple eligibility for federal benefits.

Exxon's peers including Chevron (CVX), Royal Dutch Shell (RDS-A) and BP (BP) are known for their more liberal policies for gay and transgender workers.

Oil up on Iraq concerns but poised for record 7-month drop

* Oil to fall more before mild recovery in second half-poll

* OPEC increases January output to 30.37 bpd -survey (Recasts, updates trading, dateline, byline to U.S. session, previous LONDON)

By Barani Krishnan

NEW YORK, Jan 30 (Reuters) - Oil rose on Friday as concerns over fighting in Iraq extended short covering from the previous session, but crude prices were still poised for a seventh month of declines, the longest rout on record.

A supply glut and OPEC's refusal to cut output has driven benchmark Brent and U.S. crude futures down 60 percent since June. Chart watchers as well as analysts tracking market fundamentals believe the selloff will continue for a few more months at least.

A Reuters poll shows oil prices may post only a mild recovery in the second half of the year, with prices still averaging less in 2015 than during the global financial crisis.

Crude was up in early trading Friday in New York on renewed violence in oil producer Iraq, where Islamic State militants had struck at Kurdish forces southwest of the oil-rich city of Kirkuk.

Brent climbed 46 cents, or about 1 percent, to $49.58 per barrel by 10:25 a.m. ET (1525 GMT), after a session high at $49.80. For the month, Brent was down about $8, or almost 14 percent. It had peaked at above $115 in June.

U.S. crude rose 80 cents to $45.33 a barrel, after reaching $45.54 earlier. For January, U.S. crude was also down about $8, or 15 percent. It had traded as high as $107 in June.

"The renewed fears over (Islamic State militants) and Iraq has allowed the market to come back a little today, but otherwise the trend is certainly pointing lower," said John Kilduff, partner at Again Capital, an energy hedge fund in New York.

Production from OPEC, or the Organization of the Petroleum Exporting Countries, rose in January to 30.37 million barrels per day (bpd), a Reuters poll showed, a sign that key members of the group were resolute about defending their market share.

Data this week also showed U.S. crude oil inventories had reached their highest levels since the 1930s.

A Reuters survey of 33 economists and analysts forecast that Brent would average $58.30 a barrel in 2015, down $15.70 from last month's poll in the biggest month-on-month revision since prices last collapsed in 2008-2009.

Brent has stayed within a band of $45-$50 since hitting a near six-year low of $45.19 Jan. 13. (Additional reporting by Ron Bousso in London and Henning Gloystein in Singapore; Editing by Jason Neely, John Stonestreet and Bernadette Baum)

Thursday, January 29, 2015

Kremlin: Ukraine gas networks idled by 2019
Russian Minister of Foreign Affairs Sergei Lavrov says Europe remains an important trading partner in the energy sector. UPI/David Silpa

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VIENNA, (UPI) -- European natural gas consumers need to prepare the infrastructure needed to avoid Ukrainian territory by 2019, an official from Russia's Gazprom said Wednesday.

Europe gets about a quarter of its natural gas needs met by Russian suppliers, though the majority of that runs through a Soviet-era transit network in Ukraine. Simmering conflict, and gas contract issues reaching back to at least 2006, exposes that artery to risk.

The Kremlin has worked to advance transit networks that avoid Ukrainian territory, most recently with Turkish Stream, a revamped project that replaces the now-scrapped South Stream pipeline. By 2019, Ukrainian networks will be idle and Gazprom Chairman Viktor Zubkov said Europe needs to be ready.

"Considering the decision made on re-directing supplies from 2019, European partners do not have so much time [for infrastructure preparation]," he said from a European gas conference in Vienna.

Gazprom officials met earlier this week in Ankara to discuss planning for Turkish Stream. The company said about 70 percent of the pipeline would follow the planned South Stream route, with 150 miles slated for a new corridor to Europe.

Gazprom said the first gas supplies would run through the network to Turkey by 2016.

Europe, for its part, has looked to rival suppliers to advance its own energy security needs, expressing frustration with the monopoly Gazprom holds over transit and supplies. Russian Foreign Minister Sergei Lavrov said, as Russia's largest trading partner, Russia would remain the key energy supplier for Europe.

Wednesday, January 28, 2015

Oil slips to $49 as U.S. crude inventories hit record

A container vessel sails past as smoke billows from Royal Dutch Shell's Pulau Bukom offshore petroleum complex in Singapore September 29, 2011. REUTERS/Tim Chong

By David Sheppard
LONDON (Reuters) - Oil slipped to $49 (32 pounds) a barrel on Wednesday after U.S. crude stocks soared to the highest on record last week, and as a firmer dollar weighed on prices.

The U.S. Energy Information Administration said U.S. crude stocks rose by 8.9 million barrels last week to 406.73 million barrels, the highest level since records began in 1982.

While the build was not quite as large as the 12.7 million barrel increase reported by industry group the American Petroleum Institute on Tuesday, prices remained under pressure despite large draws in gasoline and distillate inventories.

Gasoline stocks fell by 2.6 million barrels while distillate stocks, which include diesel and heating oil, fell by 3.9 million barrels, the EIA said.

"Refined product demand continues to be the sole source of strength for the market, but it is not enough to overcome the tidal wave of crude oil supplies for now," said John Kilduff at Again Capital LLC in New York.

Brent crude oil for March delivery was down 52 cents at $49.08 a barrel by 1550 GMT, having touched an intraday low of $48.65. It hit a near six-year low of $45.19 a barrel two weeks ago.

U.S. crude for March delivery fell $1.17 to $45.06 a barrel, and hit an intraday low of $44.52.

Fast growing U.S. shale output has pushed oil prices almost 60 percent lower since June, with losses accelerating after the Organization of the Petroleum Exporting Countries said it would not cut output in a bid to preserve its market share.

Analysts at Goldman Sachs said in a note published on Jan. 27 they expected U.S. crude, also known as WTI, to remain near $40 a barrel in the first half of this year.

"(That) should slow supply growth and balance the global oil market by 2016," the Goldman analysts said.

"We then expect oil prices to move to the marginal cost of production," which the bank pegged at $65 a barrel for WTI and $70 a barrel for Brent.

Brent has consolidated in a narrow range just below $50 in the past two weeks as traders assess whether further price falls would push too many small producers out of the market.

(Additional reporting by Himanshu Ojha in London, Robert Gibbons in New York, and Florence Tan in Singapore; Editing by David Evans and William Hardy)

Russia To Retaliate If Bank's Given SWIFT Kick

Russia plans to retaliate if its banks are banned from the international banking system’s standard line of communication.

Whether it’s official paranoia or a real possibility, Russia is convinced the West is out to get them. After last year’s sanctions, the next move might be limiting banks from sending and receiving messages through the Society for Worldwide Interbank Financial Telecommunications, known as SWIFT.  If that happens, Russia would look like a pariah state, comparable to Iran. A SWIFT ban, in any capacity, would also isolate Russian banking from its biggest market — Europe.

In September, Economic Development Minister Alexei Ulyukayev said it was unlikely SWIFT would punish Russian banks in any way. Regardless, Russia’s Prime Minister Dmitry Medvedev said Tuesday that if SWIFT limited Russian banks on its system, Russia’s reaction to the Belgium-based organization’s rules will be “unlimited”.

“Yet again discussions have started in limiting the so-called SWIFT payment system. We’ll wait and see what happens. Of course, if these decisions are made, I would like to note that our economic reaction as with any other reaction will be unlimited,” Medvedev said today.

If Russian banks are limited from participating in the SWIFT system, it will hurt investor sentiment worse than it already is.
Russia has been talking about harsh retaliations against the West since last spring. That’s when Brussels and Washington were threatening a tougher sanctions regime two months after Russia’s annexation of Ukrainian peninsula Crimea, and increased bloodshed in four eastern Ukrainian provinces on the Russian border. Both Brussels and Washington believe Russia is aiding and abetting pro-Russia separatists fighting against the Ukrainian military.

Russia was dealt a tougher hand in July when the West sanctioned energy and finance firms, and banned long term financing for all domestic companies. Russia retaliated by sanctioning food imports from Europe and the U.S. Nevertheless, Russia has yet to bring out its big guns: Gazprom Gazprom natural gas.

Gazprom, Russia’s state owned natural gas company, is the single biggest foreign supplier of gas to Europe.

Russia’s government never threatened to play its Gazprom hand. But if its banks were shunned by SWIFT, it would ostracize Russian business and finance from important markets. The embarrassment might cause Russia to over-react.

In September 2014, the European Parliament urged member states to consider excluding Russia from SWIFT as part of its sanctions. Russia’s Central Bank said the country might introduce alternative channels of interbank communications to replace SWIFT, meanwhile.

SWIFT is overseen by 10 central banks — Belgium, Canada, France, Germany, Italy, Japan, The Netherlands, United Kingdom, United States, Switzerland, and Sweden — as well as the European Central Bank. SWIFT says it “is and always has been in full compliance with applicable sanctions.” The company is not a lending institution. And sanctions against Russia are rather specific, banning exports of equipment used in oil and gas exploration and production, banning cooperation with Russian energy firms on drilling projects, and banning financing longer than 90 days.

SWIFT has acted on broad-based sanctions in the past.

In March 2012, the European Union passed regulation prohibiting SWIFT from providing services between European and Iranian banks. SWIFT is incorporated under Belgian law and required to comply with its home government’s rules. SWIFT disconnected the EU-sanctioned banks from Iran.
Sberbank's over the counter shares in the pink sheets are trading well below their moving averages. Some find this attractive. But geopolitics continue to make Russia's biggest bank an unattractive investment. If sanctions worsen, Sberbank is likely to remain risky for the remainder of 2015.
Sberbank’s over the counter shares in the pink sheets are trading well below their moving averages. Some find this attractive. But geopolitics continue to make Russia’s biggest bank an unattractive investment. If sanctions worsen, Sberbank is likely to remain risky for the remainder of 2015.
In theory, the same could happen with Russian banks. A limitation on SWIFT’s messaging platform makes it harder for banks like Sberbank Sberbank to communicate with corporate and financial partners. Global bank communication can be like a Tower of Babel. SWIFT exists to get everyone speaking the same language. Russia getting slapped with limits sends a negative message to investors who will see it another step towards Russian isolation from its core markets.

Investor sentiment is already at all-time lows due to the Ukraine crisis.
Ukraine Strikes Back

The Ukraine variable is deteriorating. This is worse for Russia than SWIFT.

Local media in Ukraine have reported that pro-Russia rebels have begun a fresh front in the city of Mariupol, located on the Sea of Azov in Donetsk. The attacks have led to renewed calls for sanctions.
Mariupol is important for Russia strategically.  If taken over by the separatists, it could create a land bridge to Crimea further South. Crimea was annexed by Russia on March 17, 2014.

Both Washington and Brussels are not happy with the latest news of separatist fighting in Donetsk. Prolonged sanctions do not bode well for the Russian economy. SWIFT limits on Russian banking only serves to worsen investor sentiment.
The good news for Russia is that the E.U. is not totally all-in on prolonging sanctions, scheduled to expire in July.

German Foreign Minister Frank-Walter Steinmeier said on Monday about sanctions that, “A lot depends on how the next three days go. After the talks I’ve had in the last days with some European colleagues, nobody is desperately ambitious to meet in Brussels to impose sanctions.”

Meanwhile, the Ukrainian currency, the hryvnia, and Russian ruble continue to decline. Credit Default Swaps on 5-year sovereign debt for both countries continue to climb, adding to the negatives on Russia.

Russia’s fate as an investment right now is too connected to the whims of foreign governments, and ethnic Russians in Ukraine who have an ax to grind with Kiev. None of these actors are good news for holders of the Market Vectors Russia (RSX) exchange traded fund. Despite deep value in Russia’s stock market, investors will be a prisoner to the news flow out of Belgium and Ukraine for months to come.

Tuesday, January 27, 2015

The US Shale Boom May Come To An Abrupt End

U.S tight oil production from shale plays will fall more quickly than most assume.

Why? High decline rates from shale reservoirs is given. The more interesting reasons are the compounding effects of pad drilling on rig count and poorer average well performance with time.
Rig productivity has increased but average well productivity has decreased.

Every rig used in pad drilling has approximately three times the impact on the daily production rate as a rig did before pad drilling.

At the same time, average well productivity has decreased by about one-third.

This means that production rates will fall at a much higher rate today than during previous periods of falling rig counts.

Most shale wells today are drilled from pads. One rig drills many wells from the same surface location, as shown in the diagram below.


The Eagle Ford Shale play in South Texas is one of the major contributors to increased U.S. oil production. A few charts from the Eagle Ford play will demonstrate why I believe that U.S. production will fall sooner and more sharply than many analysts predict.

The first chart shows that the number of active drilling rigs (left-hand scale) in the Eagle Ford Shale play stabilized at approximately 200 rigs as pad drilling became common. The number of producing wells (lower scale), however, has continued to increase. This is because a single rig can drill many wells without taking the time to demobilize and remobilize. In other words, drilling has become more efficient as less time is needed to drill a greater number of wells.

The next chart below shows Eagle Ford oil production, the number of producing wells and the number of active drilling rigs versus time. 

This chart shows that production growth has not kept pace with the rate of increase in new producing wells since mid-2012. That is because the performance of newer wells is not as good as earlier wells.
The final chart shows that the rate of daily production is now more dependent on the number of drilling rigs than on the number of producing wells. Rig productivity--the barrels per day per rig--has increased but average well productivity--the barrels per day per well--has decreased. In other words, production can only be maintained by drilling an ever-increasing number of wells.

Average rig productivity has almost tripled since early 2012. Average well productivity has decreased by one-third over the same period. This means that every rig taken out of service today has more than three times the impact on daily production as before pad drilling became common.

Most experts do not anticipate any significant decrease in U.S. tight oil production in the first half of 2015. Their analyses may not have accounted for the effect of pad drilling and the decrease in average well productivity.

Using the Eagle Ford Shale as an example, U.S. oil production should fall sooner and more sharply than many anticipate. This will be a good thing for oil price recovery but maybe not such a good thing for the future profitability of the plays.
This article originally appeared at Copyright 2015.

Why the Keystone XL Pipeline Should Be Approved Now

Keystone Pipeline Oklahoma
Sue Ogrocki/AP

The Keystone XL pipeline has been debated for years. Between various amendments being proposed and staunch opposition from President Obama, the fate is still uncertain about the 1,200-mile portion connecting Alberta, Canada, to the rest of the pipeline running down the center of the U.S. to the Gulf of Mexico. In the most recent update, the GOP-controlled House voted 252-161 in November to proceed with the pipeline.

Environmentalists tout Canada's oil sands as "dirty oil" and worry about environmental impacts during construction and in the event of pipeline leakage. Supporters argue it would provide the United States with a politically stable source of oil and a means for Canada to bring its oil to market. President Obama has a unique level of power over Keystone XL, as it requires a "presidential permit" due to its cross-country reach.

Obama has repeatedly said he would veto any Keystone XL legislation that arrives on his desk and even rejected the permit application for the pipeline approval three years ago. However, there are many ways the completion of the Keystone XL pipeline will benefit the U.S. and Canada, and it should be built now even while the price of oil is low.

Why Is Oil Sand Considered Dirty Oil?

Beyond the concern that pipelines can leak and pollute land and water supplies, there is concern over the production method for oil in Alberta as it's in the form of oil sands. Alberta's oil sands are the third-largest oil reserve in the world, after Saudi Arabia and Venezuela. Oil sand is a natural a mix of sand, clay, minerals, water and bitumen. The bitumen, a viscous oil, must be separated and treated before being used for fuel, and requires quite a lot of energy to extract and refine. Additionally, the process involves surface mining, which creates large holes in the ground, uproots trees and ships separated sand to landfills, although disturbed land does go through a reclamation process.

When it comes to greenhouse gas emissions, however, the State Department released an environmental review stating the heating required to separate the bitumen would likely not have an effect. It might not be preferable in some ways to traditional oil production, but North America can better compete with OPEC if this pipeline is built.

There are four major benefits of approving the Keystone XL.

1. Politically Stable Source of Oil

Our oil doesn't always come from friendly sources. As of 2013, the U.S. Energy Information Administration reported that 32 percent of U.S. oil imports came from Canada, while 38 percent came from OPEC countries. These countries include Iran, Iraq, Kuwait, Saudi Arabia, Venezuela, the United Arab Emirates, Algeria, Nigeria and Angola, among others. The political dynamic between the U.S. and these countries, as well as other importers like Russia (5 percent in 2013) could change on a dime, and the U.S. experienced the fallout previously of having its oil imports tied to unfriendly exporters during the Arab oil embargo that skyrocketed prices and made it nearly impossible to obtain gasoline in the U.S. Domestic oil production has greatly changed since the 1970s, however, taking further advantage of the resources of a friendly exporter, Canada, and those at home in the form of shale oil could prevent geopolitical changes from affecting domestic gasoline access in the future.

Alberta's oil reserves have no value for the country if they can't be delivered to a market that will use it. The Keystone XL pipeline will move 830,000 barrels of crude a day from Canada's oil sands through Montana, South Dakota and Nebraska -- the heart of America's shale reserves -- to the rest of the Keystone pipeline, where the crude can be refined in the Gulf of Mexico. This move would help Canada make use of a resource with great financial potential.

2. Safest Form of Oil Transportation

Declaring any one form of oil transportation safest is largely dependent on whether your metric is death, oil released, land area or water contaminated, habitat disturbed or CO2 emitted. Considering the alternative of transporting oil from Canada via train or pipeline, pipeline wins in terms of speed, cost and spillage. About 70 percent of crude oil and petroleum in the U.S. is transported by pipeline -- and 97 percent is transported in Canada this way.

According to Forbes, an increase in oil production in North America has increased our use of train transportation for the crude oil. A lack of new pipelines to transport this increased supply is causing trains to get larger and the risk of spillage to increase. According to the Association of American Railroads, 400,000 carloads of oil were transported in 2013 via train compared to just 9,500 in 2008; in 2013, more crude oil was spilled in rail accidents in the U.S. than in the entire period of 1975 to 2012. Compared to oil tankards that can spill in the ocean and cause damage like that of the Exxon Valdez disaster, which is still causing damage in the 1,300 miles of ocean it polluted, new pipeline technology is advanced and safer.

It's true that pipeline spills have accounted for more damage than train spills in the past. The new Keystone XL pipeline will be built with the newest leak detection technology and boasts the safety of 57 new safety proceedures to its design. According to TransCanada's website, the Keystone XL pipeline will "be safer than any other pipeline constructed and operated in the United States," according to the final environmental impact statement the State Department and U.S. Pipelines and Hazardous Materials Safety Administration issued. According to the Keystone XL pipeline's official website, satellite technology will be implemented to monitor 20,000 points of data regarding the pipeline's operational conditions.

3. Temporary Job Opportunities

Although the Keystone XL pipeline doesn't promise long-term job opportunities (the State Department projects just 50 permanent jobs will be created) 42,100 jobs will be created for two years during the construction phase along with an estimate by TransCanada, the company building the pipeline, of 9,000 created positions. True, these jobs might not provide long-term security, but will still equip approximately 51,150 people with work experience that can be carried on to other opportunities.

4. Oil Prices Will Rise Soon

A new Washington Post and ABC News poll found that there's less urgency felt toward the passing of the Keystone pipeline, with just 34 percent of Americans responding that it should be built now. But really, the current plummet in the price of oil is actually the strongest reason why the pipeline should be built now.

Oil is abut $46 a barrel, representing a 58 percent drop in price since June 2014. This is largely due to an economic downturn in Europe and China, which has created an oil surplus of 1.5 million barrels per day. This surplus is driving down prices, though OPEC stated in late November it would not adjust its oil production levels, as many OPEC countries -- including its largest oil producer, Saudi Arabia -- have lower costs of production than other countries and do not want to lose market share by decreasing production, expecting others to do so.

Essentially, countries with lower production costs are willing to ride out a period of lower prices as smaller producers and countries with higher production costs cease to be profitable, opening up more market share when the supply decreases and prices increase once more.

So why should the U.S. be building the Keystone XL pipeline now? While oil prices are low, it's not financially feasible for North America to produce shale oil and refine oil sands. However, once prices increase, American oil production will follow and we'll want the infrastructure in place to support it. U.S. energy independence might not have arrived as scheduled, but there's still a reason to pursue it. Between unfriendly oil sources and the ability to put oil production jobs and needed infrastructure in the hands of Americans, it's a future that OPEC doesn't want to see and one we should pursue swiftly.

Edward Stepanyants contributed to this report.

Monday, January 26, 2015

U.S. gas prices at April 2009 low, bottom in sight: Lundberg survey

(Reuters) - The average price of a gallon of gasoline in the United States fell 13.3 cents in the past two weeks, falling to its lowest level since late April 2009, but the end of a months-long slide may be near, according to the Lundberg survey released Sunday.

Prices for regular grade gasoline fell to $2.07 a gallon in the survey dated Jan. 23 from the previous survey on Jan. 9.

The recent drop has taken prices down more than $1.24 a gallon from the same period a year ago, a decline driven by losses in the crude oil market from its June peak.

However, survey publisher Trilby Lundberg noted that the drop in pump prices was less steep than it had been in previous periods and that the price many wholesale customers paid for gasoline rose in the past 10 days, suggesting a bottoming-out or increase in retail gasoline prices could be looming.

"The street price crash is either coming to an end or is already at its bottom," Lundberg said, noting that it would take another substantial slide in the price of oil to reverse the gains in wholesale prices.

Both U.S. CLc1 and Brent LCOc1 crude futures continued their decline in the past week, after finishing the week ended Jan. 16 up slightly. These shallower price losses were part of the reason why the gasoline price drop was less steep this week and contributed to the gains in wholesale prices.

On Friday, Brent crude closed up at $48.79 a barrel, while U.S. crude settled down 72 cents at $45.59.

The highest price within the survey area in the 48 contiguous U.S. states was recorded in San Francisco at $2.54 per gallon, with the lowest in Albuquerque, New Mexico at $1.73.

(Editing by Eric Walsh)

The Gasoline Storage Tanks

The gasoline sold at service stations is stored underground in buried tanks. Each holds several thousand gallons of gas. There are at least two of these tanks per station and each tank usually holds a different grade of gas. Having the gas tanks underground presents an obvious problem: If the gas must get to a dispenser (and your car's gas tank) located above ground, it has to defy gravity in order to get there -- like a waterfall flowing uphill. But moving the gas from its subterranean hideaway up to street level isn't as difficult as you might think.

Most service stations do the job using one of two types of pump -- a submersible pump or a suction pump:
  • A submersible pump, as its name implies, is submerged below the surface of the liquid, where it uses a propellerlike device called an impeller to move the fuel upward. Slanted blades on the rotating impeller push the water the way the blades on an electric fan push air.
  • A suction pump moves the gas using the principle of unequal pressure. A pipe is inserted in the water. A motor above the fluid level removes enough air from the pipe to decrease the air pressure above the gasoline. The motor continues to remove air until the air pressure above the gasoline is lower than the air pressure pushing down on the gas outside the pipe. The weight of the surrounding air forces the gas inside the pipe upward even as gravity tries to pull it back down. When the air pressure inside the pipe is low enough, the gas simply climbs up into the aboveground dispenser.
The major advantage of a submersible pump over a suction pump is that the impeller can push water over longer vertical distances. However, because the gas tanks at most service stations are located only a few feet below the dispenser, a suction pump is usually more than adequate for the task at hand. There's more to this process, though, and we'll explore it further on the next page.

The Check Valve

The route that the gas takes from the tanks to the aboveground dispenser isn't terribly complicated, though it may take a few minor twists and turns. When pumping is complete and the pump motor is turned off, the gas inside the pipe doesn't simply fall back into the tank. Instead, it's held inside the pipe by a check valve. The check valve, which is located above the gas inside the pipe, creates an airtight seal above the fluid. Although the bottom of the pipe remains open, the vacuum pressure created by the check valve holds the gas in place. This is a process known as keeping the prime.

Using a check valve to hold the gas inside the pipe prevents unnecessary wear and tear on the suction pump and assures that a supply of gas will remain in the pipe so that the next customer won't have to wait for it to be drawn all the way up from the tank. It may not seem like a big deal, but the process can take 10 to 15 seconds. That isn't a very long wait by any means, but it can be an eternity when you're waiting for gas to be pumped.

The power that drives the pumps usually comes from the same electric grid that powers the lights and appliances in your home, though a few states require that service stations maintain a backup power supply in case of power failure.

Now that the gas is on the way to the car and it's time for the customer to start pumping, how does the dispenser know just how much gas the customer has pumped? Considering the volatility of gas prices these days, that may be the only thing the customer may care about. Find out the key to this mystery on the next page.

The Flow Meter

As a driver, your primary objective at the pump is to get your tank filled so that you can get your car back on the road. The goal of the service station owner and the company that supplies the gas, however, is to know just how much gas you've pumped so they can properly charge you for it. That's where the flow meter comes in.

As the gasoline travels upward into the dispenser, it passes through a flow control valve that regulates the gasoline's flow speed. It does this via a plastic diaphragm that gets squeezed more and more tightly into the pipe as the flow of gas increases, always leaving just enough room for the proper amount of gasoline to get through. If you've set a predetermined amount of gas to be pumped, the flow of gas will slow down as you approach the limit.

This pipe also contains the flow meter, which is a cast iron or aluminum chamber containing a series of gears or a simple rotor that ticks off units of gas as they pass through. Information about the gas flow is passed on to a computer located in the dispenser, which displays the metered amount of gas in tenths of a gallon. As the temperature of the gas changes -- on particularly hot and cold days, for instance -- the density of the gas may change, causing an error in the amount of fluid measured by the flow meter. The computer compensates this error by taking the gas temperature into account as it records the flow and adjusts the price accordingly.

Wear and tear on the meter may degrade its accuracy over time, which is why periodic inspections are necessary. Typically, inspectors will use a container of a certain volume, pump gas into it and compare the amount in the container with the amount metered on the dispenser. If the amounts don't match, the flow meter will need to be recalibrated and possibly refurbished or replaced. Although regulations for pump calibration come from the National Institute for Standards and Technology (NIST), the actual inspections are performed locally, usually by a state's Department of Weights and Measures.

Now that the gas is flowing and the amount of flow has been measured, there's only one step left: getting the gas into the customer's car. But that's a trickier process that you might think. For instance, what if the customer doesn't know when to stop pumping? Will he or she get soaked in a potentially lethal eruption of runaway fuel? Let's find out on the next page.

The Blend Valve

One of the first things that a customer will notice at the pump is the variety of choices offered. In most cases, a dispenser will offer several grades of gas -- sometimes as many as five -- each with a different octane rating. The desired octane rating is usually chosen simply by pushing a button. Does this mean that there are five different underground tanks feeding into that dispenser, each offering a different grade of gas? That's not usually the case. In fact, the dispenser can produce as many grades as it wants from as few as two underground tanks, as long as one tank contains the highest grade of octane available at that station and the other contains the lowest. The grades are blended together at the pump -- not unlike the way you'd blend gin and vermouth to make a martini -- producing a kind of octane cocktail. The precise proportion in which the grades are blended determines the octane of the gas that enters the customer's tank.

This feat of gas pump bartending is performed by something called a blend valve. This valve has inputs consisting of two grades of gasoline, each from different tanks. A single, moveable barrier called a shoe is connected to both in such a way that it can be moved across the inputs with a single motor-driven ratchet. As the ratchet opens one valve, it closes the other valve in precise but opposite proportion. This means that when one valve is, for example, 90 percent open, the other valve is 10 percent open, creating a mixture that consists of 90 percent of one octane and 10 percent of the other. By shifting the ratchet back and forth, the blend valve can produce any octane of gas, ranging from the highest to the lowest grades stored in the tanks -- and all octanes in between.

Keep reading to find out how the dispenser makes sure that you don't overflow the gasoline capacity of your tank.

The Automatic Shut-off

When the customer removes the pump handle from its place on the side of the dispenser, this action activates a switch that starts the dispenser operation. (In some cases the switch is spring-loaded and activates automatically; in others, the customer must raise a small lever manually to begin the process.) At that point, the customer simply inserts the nozzle into the car's gas tank and pulls the lever. Stopping the flow of gas is just as simple -- the customer need only release the lever to cut off the stream of fuel.

But what if the tank fills unexpectedly to the brim and the gasoline threatens to overflow? As anyone who's ever operated a gas pump knows, the pump will switch off automatically. But how does the pump know when to stop pumping?

As the gas level in the tank rises, the distance between the dispenser nozzle and the fuel grows smaller. A small pipe called a venturi runs alongside the gas nozzle. When the end of the venturi pipe becomes submerged in the rising gas, it chokes off the air pressure that holds the nozzle handle open and shuts down the flow of gas. Unfortunately, this shutdown can sometimes happen before the tank is full as the rapidly flowing gas backs up on its way into the tank. This can cause the gas handle to spring open before pumping is complete, leaving the annoyed customer to squeeze the handle again and risk the possibility of overflow. Pausing briefly will allow the gas to continue into the tank and the pump nozzle to start pouring gas again.

For more information on fuel and fuel efficiency, take a look at the links on the next page.

Oil prices slip after smooth Saudi transition

By Himanshu Ojha

LONDON (Reuters) - Oil prices slipped on Monday after Saudi Arabia's new King Salman moved to assuage fears of an unstable transition and any policy change in the world's largest oil exporter.

March Brent crude (LCOc1) was trading at $48.55 per barrel by 1509 GMT, down 24 cents, above an early low of $47.57.

West Texas Intermediate (WTI) crude for March delivery (CLc1) was at $45.57 a barrel, down 2 cents. The WTI front month had earlier touched a low of $44.35, just above the $44.20 hit on Jan. 13, which was its lowest level since April 2009.

Brent and U.S. crude futures turned positive briefly after Abdullah al-Badri, secretary-general of the Organization of the Petroleum Exporting Countries (OPEC), said he thought prices may have reached their bottom.

But it was not enough to keep prices above Friday's close for long.
"It was a bit of an overreaction from his comments," said Olivier Jakob, analyst at Petromatrix in Zug, Switzerland. "The only voice that counts is from Saudi Arabia."

"To have a meaningful market impact we need to see some signs coming out of Saudi Arabia that it will change," he said.

The new Saudi king, Salman, was quick to retain veteran Saudi oil minister Ali al-Naimi on Friday, in a message aimed at calming a jittery market.
Saudi Arabia led OPEC in a decision to keep oil production steady at 30 million barrels per day last November. This has added to a global supply glut that has more than halved prices since June.

Money managers cut their net long U.S. crude futures and options positions in the week to Jan. 20, the U.S. Commodity Futures Trading Commission said on Friday.
Oil services firm Baker Hughes (BHI.N) published data on Friday that showed the number of U.S. oil rigs fell for a seventh straight week to 1,317, the fewest since January 2013.
Germany-based Commerzbank said output would remain high in the short term but production from U.S. oil rigs would continue to dwindle in the coming weeks, eventually supporting prices.

"It is only a question of time before this is reflected in decreased oil production," Commerzbank analysts said in a note to clients on Monday.

"In our opinion, this indicates that prices will recover in the second half of the year."

(Additional reporting by Florence Tan in Singapore; editing by John Stonestreet and David Clarke)

'Not Mayberry anymore': Oil patch cops scramble to keep up

WATFORD CITY, N.D. (AP) — Police chief Art Walgren knew how much the oil boom had changed this once-sleepy town when he spotted something that would have been unheard of not long ago: license plates from Sinaloa, Mexico, home to one of the world's most violent drug cartels.

Before, there was little chance police would see cars here from nearly 2,000 miles away. And little reason to worry about out-of-state plates. Now, though, police are scrambling to deal with new kinds of criminal threats and suspicious activity that have cropped up along this frozen prairie.

The gusher of oil and money flowing from the Bakken fields has made policing more demanding and dangerous, forcing small-town officers, county sheriffs and federal agents to confront everything from rowdy bar fights to far-reaching methamphetamine and heroin networks and prostitution rings operating out of local motels.

"It's not Mayberry anymore," says U.S. Attorney Tim Purdon, the state's top federal prosecutor. "Our police and prosecutors are going to have to adapt to keep pace. We have organized criminal gangs selling drugs, sex trafficking and out-of-state flim-flam men coming in. And the cases have become more and more complicated."

Most newcomers to the Bakken — which spans western North Dakota, eastern Montana and part of Canada — move here honestly in search of a new job or, in some cases, a new life. But more people also means more crime, overcrowded jails and overwhelmed police departments, often with relatively inexperienced officers who are constantly racing from call to call.

"What do we need? More people," Purdon says. "We are responding but we need to have more cops, more prosecutors and more judges. We can't expect to move an incredibly large number of cases through the same machinery that's been in effect for the last 20 years."

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In this Tuesday, Dec. 16, 2014 photo, Watford City …
Reinforcements are on the way. In November, the FBI announced it will open a permanent office in the Bakken — time and location to be determined — joining other federal agencies devoting more resources to the area. State law enforcement groups also are teaming up with local police to crack down on newly emerging criminal enterprises.

"There used to be a saying that 40 below keeps out the riff-raff," says Steve Kukowski, Ward County sheriff. "That's not true anymore."

Not all crime is on the rise. In North Dakota, the number of murders dropped in 2013, but drug arrests increased nearly 20 percent and robberies were up 29 percent compared with 2012. In Montana, oil patch arrests rose by 80 percent between 2008 and 2012, and drug investigations initiated by the state Department of Justice in that area nearly tripled between 2010 and 2013, according to state Attorney General Tim Fox.

Police aren't just dealing with more drugs, but more calls on everything from reports of suspicious strangers to gunfire. Officers who fielded a call or two a night years ago might now scramble to handle 20, 30 or more. About a third of law enforcement officers surveyed in a 2013 North Dakota State University study of oil patch police reported that fears of crime have increased in their communities since the boom began.

Here in Watford City, the police force has multiplied from just four, including the chief, in 2010 to 19 sworn officers serving a population that could grow to 15,000 by 2017, a nearly tenfold increase since the last census. Even more dramatic: In 2006, there were just 41 calls for service, according to the university study. Last year, there were 7,414.

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In this Thursday, Dec. 18, 2014 photo, Dickinson Police …
"It puts a lot of pressure on us," says Walgren, a 25-year police veteran who became chief last spring. "We're so used to trying to maintain that small-town attitude where you always wave at your neighbor and everybody's always your friend. Now, there are more people that you don't know than those that you do."

That changes police strategy. "Before if you had a bunch of thefts, you'd have a handful of most likely suspects — people who were hard-up for money," Walgren explains. "Now it's much more anonymous and you have to go outside the box ... learn new techniques and handle crimes you've never dealt with before."

Watford City is a town in transition. The days of shuttered Main Street storefronts are over. Billboards beckon with job opportunities. Construction cranes are visible from almost any corner of town. Projects worth tens of millions of dollars are planned or in the works, including apartments, a hospital, a high school, two hotels (several have recently opened) and, not surprisingly, a law enforcement center.

Gas flares light the night skies, illuminating pump jacks that nod up and down, like giant birds feeding from the soil. Hulking rigs barrel down newly widened roads. So-called man camps — rows of identical barracks-like housing — have popped up in wind-swept fields just outside town. And workers in hard hats, coats trimmed with reflector tape and mud-caked boots line up in the pre-dawn darkness at the Kum & Go gas station-convenience store for chewing tobacco and coffee.

This is not the Wild West, as some media accounts have suggested, says Walgren, but his officers are navigating a new landscape: For the first time, the department now has two full-time detectives to investigate crimes such as financial fraud, including embezzlements — there have been two bigger-than-ever cases in the last six months. Police conduct training sessions at motels on how to be alert for sex trafficking (cash only is a red flag). And arrests have been made that have indirect ties to the Sinaloa cartel, the chief says.

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In this Monday, Dec. 15, 2014 photo, a worker walks …
Drugs, a growing problem, are sometimes accompanied by violence. In November, the arrest of a 21-year-old woman who was charged with attempted murder after she allegedly shot a man in the face led to the arrests of three of her associates in a suspected meth and marijuana operation.

"I'm busier than I ever thought I'd be," the chief says. "It's the kind of stuff you don't expect in a small town."

What's happening in Watford City is not atypical.

In Dickinson, nearly 70 miles southeast, a highly visible four-person team patrols the bars on random Friday and Saturday nights to head off brawls that have become increasingly common. Police reported calls were up nearly 45 percent from 2009 to 2014, when there were more than 27,000.

"Some of the North Dakota niceness has left our community," says Dickinson Police Chief Dustin Dassinger. "It's an adjustment, not just for law enforcement but for everyone."

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In this Wednesday, Dec. 17, 2014 photo, oil pump jacks …
Being a police officer has become more stressful, says Capt. Joe Cianni, a 21-year veteran. "This department wasn't used to dealing with major crimes involving weapons," he says. "In the past, it used to happen once every four to six months. Now it's once a week."

The hectic pace tends to burn out officers and it's hard to recruit and retain new ones, he adds. Among the reasons: the high cost of living ($80,000 homes before the boom can now sell for $200,000), the remoteness of the city and a perception of North Dakota as a barren place with brutal winters and little else. Other towns say their officers are sometimes lured away to six-figure jobs in the oil fields.

Stretched thin, Dickinson police don't have enough staff to conduct sex stings that result in misdemeanors. Some officers participated in one federal-state-local operation in late 2013 that had to be cut short when authorities ran out of jail space after arresting 11 men, says Purdon, the prosecutor. They'd answered a bogus ad police placed in purporting to offer sex with a 14-year-old girl.

"That's shocking to me," Purdon adds. "It shows a level of demand for sex with underage kids that's really scary. ... You're crazy if you don't think there's a supply out there to match it." He says one man answering the ad wanted to know what was the youngest girl available.

State officials are shifting their resources, too, to pursue a new breed of savvier criminals.

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In this Monday, Dec. 15, 2014 photo, a Ward County …
In Montana, the state Department of Justice has dispatched veteran agents from the western part of the state to the eastern oil patch region to help younger, less experienced staff, according to Mark Long, the agency's narcotics bureau chief.

Local drug traffickers have been pushed aside by organized West Coast gangs and groups such as the Sinaloa cartel that "bring in everything they need," Long explains. "They're pretty well-educated on law enforcement techniques. It's 'been there, done that.' We have to get out ahead of the curve."

Long also says small-town police ask his agency for training, but they're more interested in patrol-related issues such as stopping bar fights than they are in investigating major crimes. "They're just trying to stem the tide of that day-to-day stuff. ... This isn't a knock on these guys," he says. "They've never had to deal with some of these problems. Some of these counties haven't had a homicide in 20 years. Now they're getting them."

Even in larger cities that have encountered major crimes, there are increasing dangers.

In Williston, N.D., the epicenter of the oil boom, two men have been killed in recent years outside two downtown strip clubs — one in a beating, the other a shooting.

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In this Tuesday, Dec. 16, 2014 photo, Watford City …
The mayor recently lamented that Williston was devoting 80 percent of its late-night policing to the side-by-side clubs, taking away needed resources from other parts of the city. And last month, the clubs lost their liquor licenses for 60 days — the second suspension in two years.

In December, Jonathan Horvath was sentenced to life without parole for the 2013 fatal club shooting.
It was the harshest sentence District Judge David Nelson had ever imposed in two decades of handling felonies. He'd always vowed, he says, never to take such an extreme step, believing an inmate can change over decades behind bars. But in this case, the judge says he wanted to reassure the victim's family that Horvath would never be freed.

"I don't really care what Mr. Horvath is like in 25 years," Nelson adds. "If he's found the Lord, he can preach in prison."

After handling perhaps two murder cases in the previous 20 years, Nelson says this one was among five he's had in the last 13 months, all but one involving newcomers. Horvath had come from Idaho to North Dakota looking for work. "He'd been there five days and committed murder," the judge says, "and now the state of North Dakota is going to pay how much for him for the rest of his life?"
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This Monday, Dec. 15, 2014 photo shows construction …
In Ward County, two hours east of Williston, the sheriff is facing a problem that exists in many parts of the oil patch: an overcrowded jail. In October, state corrections officials ordered the county to find a solution after more than 150 inmates had been double-bunked in the 104-bed jail. Since then, inmates have been transferred as far as 110 miles away, which will cost the county more than $700,000 this year, Kukowski says.

To free up space, people charged with petty theft, disorderly conduct and other low-level crimes are no longer jailed and instead are required to sign a pledge to appear in court. "We have no room at the inn," Kukowski says, noting the jail was built 30 years ago when the population was half of what it is now.

Next month, voters will be asked to approve up to $41 million in borrowing to renovate the courthouse and expand the jail by 100 cells — a recent plan to add 50 cells is already outdated.

"It's extremely frustrating," Kukowski says. "I never believed we would be facing some of the issues we're facing now ... The times have changed for those of us living in rural America. ... We absolutely have a lot of the same problems that inner cities have. We just have to deal with them."

Sharon Cohen, a Chicago-based national writer, can be reached at