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Oil Prices: Expect The 2nd Half Of 2017 To Look A Lot Like 2H 2016

So here we are, right where I expected things to be last December, when I wrote my projections for 2017:  U.S. oil and gas drillers have activated almost 300 additional drilling rigs during the year’s first six months, U.S. oil production has soared as a result, offsetting much of the cuts implemented by OPEC and Russia, and the result is that the U.S. industry has drilled itself right back into a lower price situation , with the price for WTI hovering in the $44-$45/bbl range.

This very predictable response by the U.S. industry to the higher oil prices at the end of 2016 has effectively slowed the ability of the OPEC/Russia alliance to close the global supply glut, causing commodity traders to lose confidence.  Saudi Arabia is responding by significantly reducing its exports to the U.S., in the hopes of creating a few weeks of large storage draws, which they hope will restore investor confidence and cause the price to tick upwards.  They may or may not be correct – we’ll just have to wait and see.

In the meantime, U.S. rig additions have begun slowing somewhat over the past few weeks – although the week of June 10 – June 16 became the 22nd straight week of rising rig counts – as the industry begins to scale back its drilling plans for the 2nd half of the year in response to the lower price.  This again is no surprise to anyone who understands how the U.S. industry works, as I wrote in December:

  • But prices may rebound the second half of the year – Of course, a lower oil price will lead many producers to reduce drilling budgets during their mid-year reviews, and rig counts will cease to rise, and possibly even fall off somewhat.  With OPEC still at least making some effort to control production levels and global demand still steadily rising, a leveling-off of U.S. production should cause the market to rebound.

 

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Fracking Says “You’re Welcome, America” For Low Gasoline Prices

The late spring and early summer months have traditionally been sort of a silly season for the oil and gas industry when it comes to public policy action in Washington D.C.  It is the season during which U.S. refineries are required by federal regulations to switch over from creating “winter blends” of gasoline to “summer blends” in ongoing efforts address ozone and other Clean Air Act considerations.

This activity has in years past resulted in significant increases in gasoline prices at the pump just as the summer driving season is getting underway.  The reason is that there are many dozens of different summer blends that are designed to address clean air concerns in many specific geographic areas of the country.  This buffet of blends first requires hundreds of refiners to create each specific gasoline recipe in the right quantities, which in turn requires truck, rail and pipeline distributors to deliver specific quantities of each and every blend to thousands of specific wholesalers and retailers in specific locations all across the country at specific times.

It is, in other words, a massive logistical nightmare which inevitably results in bottlenecks, delays, shortages, overages and other kinds of interruptions.  All of that in turn inevitably results in rising costs of transportation, which in turn, at the end of the day, get passed along to the consumer at the pump.

In previous years, the public outcry  from moms and dads about rising gasoline costs right when they’re getting ready to drive the family out to Yellowstone or down to Key West has been loud and long, and that outcry inevitably makes its way to their members of congress.  Those members of congress tend to want to respond to such public outcries, if for no other reason than to slow the numbers of emails, phone calls and faxes flooding into their district and national offices.  The quickest and easiest way for them to respond is to hold a hearing.

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No, U.S. Shale Drillers Have Not Won A War With OPEC

  • More than 200 U.S. energy companies filing for bankruptcy in less than 2 years;
  • A commodity price about half of what it was 3 years ago;
  • Rig count half of the 2014 level;
  • An industry just now beginning recover from large layoffs during 2015 and 2016.

If the current state of the U.S. upstream oil and gas industry is what an industry looks like when it has “won” a war, then let’s not have any more wars, OK?

But that’s exactly what some in the energy-related news media would have you believe:  that the U.S. shale industry has succeeded in staring down the OPEC cartel’s effort to put it out of business and emerged victorious.  Several readers contacted me and ask me if that was not in fact the bottom line of the piece I posted last Friday, titled “OPEC Still Fundamentally Misunderstands U.S. Oil Industry.”

Well, no, that was not the point, but since some took it that way, I guess a fuller explanation is in order.

The point of that previous piece – one of the main points, anyway – was that the U.S. shale industry had survived fairly intact from an effort to kill it off. Still standing three years after the assault began, the industry is now leaner , more efficient, able to extract much higher volumes of oil from the same formations than it had been, and better equipped to withstand any future shocks, whether naturally occurring or artificially derived.

 

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OPEC Still Fundamentally Misunderstands U.S. Oil Industry

A new report from OPEC estimates that crude oil production from non-OPEC nations will increase by 950,000 barrels per day during 2017.  This is a dramatic increase from last month’s estimate of a non-OPEC rise of 580,000 during the year.

This new, much higher estimate has raised concerns within the OPEC cartel that its efforts to balance the global supply/demand equation will require it to either extend its current production limitations into 2018, or to agree to even deeper cuts in its member countries’ own production levels.  Based on these concerns, the new report urges all non-OPEC nations to limit their own production:

A large part of the excess supply overhang contained in floating storage has been reduced and the improvement in the world economy should help support oil demand. However, continued rebalancing in the oil market by year-end will require the collective efforts of all oil producers to increase market stability, not only for the benefit of the individual countries, but also for the general prosperity of the world economy.

The report singles out U.S. shale producers as the main culprit for the lingering over-supply situation.  This is not surprising, given that overall U.S. oil production has risen by a whopping 800,000 bopd since last October, as U.S. producers have activated more than 250 new drilling rigs and implemented higher drilling budgets for 2017.

This expectation that U.S. producers are somehow going to join together with the national oil companies and controlled markets of OPEC, Russia and other countries to intentionally limit production betrays the same fundamental misunderstanding of the nature of the U.S. oil and gas industry that created the global supply glut  and resulting price collapse in the first place.

 

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Jones Act Update: CBP Withdraws Proposed Regulations

On Monday, I wrote about the concerns of the offshore oil and gas industry regarding a set of last-minute Obama-era amendments to the Jones Act, and the failure of most of the Texas congressional delegation to engage on the matter.  The Jones Act is a 19th century law that requires vessels carrying cargoes between U.S. ports to be U.S.-flagged and staffed by U.S. crews.

I won’t repeat the details here, other than that the industry is concerned that finalization of the proposed regulations in question, which would extend Jones Act requirements to include vessels carrying cargoes between U.S. ports and offshore oil and gas rigs and platforms, would result in a lack of needed shipping capacity and create needless delays in offshore development.

This morning, word came from the U.S. Customs and Border Protection Service (CBP), under whose authority the amended regulations were proposed, that it will suspend and reconsider them rather than finalize them, which it had been expected to do any day now:

“Based on the many substantive comments CBP received, both supporting and opposing the proposed action, and CBP’s further research on the issue, we conclude that the Agency’s notice of proposed modification and revocation of the various ruling letters relating to the Jones Act should be reconsidered. Accordingly, CBP is withdrawing its proposed action relating to the modification of HQ 101925 and revision of rulings determining certain articles are vessel equipment under T.D. 49815(4), as set forth in the January 18, 2017 notice. “

 

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Photo Credit:  Offshorepost.com

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Louisiana Congressional Delegation Whips Texas In Jones Act Dust-Up

Battles tend to be pretty noncompetitive when only one side engages in the fight, and we see that happening right now in a dust-up over a last-minute action taken by former President Obama related to the Jones Act, an archaic 19th century law that mandates that only U.S.-flagged vessels are allowed to carry cargoes from one U.S. port to another.

Some background:  on January 18, just two days prior to leaving office, the Obama Customs and Border Protection (CBP), which has regulatory authority under the Jones Act, issued a regulation that would reverse 40 years of court rulings by extending Jones Act flagging requirements to the various kinds of ships and barges that move equipment between ports and offshore drilling rigs and platforms.  This move, like so many last-minute regulatory actions taken by the past Administration, was placed on a fast track designed to minimize stakeholder engagement that is required under the Administrative Procedures Act.

Had Trump officials not chosen to intervene, the original 30-day public comment period would have expired on Feb. 17, allowing CBP to issue a final rule just 30 days afterwards.  As things stand, the 60-day extension of the comment period expired on April 18, and so CBP could issue a final regulation in the next handful of days.

So, you ask, why is this important?  Well, first because offshore oil and gas producers don’t believe there currently exists an adequate number of U.S.-flagged vessels necessary to service the industry at its current level of activity, which is depressed by historical standards.  And second, because the policy flies in the face of the stated goals of the Trump Administration to increase domestic energy production, largely by the elimination of last-minute Obama-era regulations just like this one.

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The Oil And Gas Situation – New Price, Production, Policy, Pipeline Targets Arise

Some thoughts on the domestic oil and gas situation as we move into May…

More rigs, more jobs, more drilling, but for how much longer…:  As I pointed out at the beginning of April, the U.S. oil and gas industry added more than 200 new active drilling rigs during the first quarter of 2017.  The pace of new rig activation slowed somewhat during April, but the count continued to rise as a total of 46 new rigs came online during the month.  The current U.S. domestic rig count of 870 is more than double the count of 420 at the end of April, 2016.

It will be interesting to see how much longer this upwards trend in the rig count will continue, given the softening oil price.  The corporate upstream companies have now implemented their capital plans for the first half of 2017, and are beginning the process of evaluating how those plans should be adjusted for the second half of the year.  The rising drilling activity and increasing demand for service companies and their products has predictably resulted in corresponding increases in service costs.  One would expect that, combined with a sub-$50 oil price, to result in a leveling off and possibly even a falling rig count for the last two quarters of the year.

But so much of that depends what OPEC does.: Will OPEC extend its current agreement to curtail production, which expires on June 30, or won’t they?  The answer to this question, more than any other single factor, will determine where the price of crude goes, and thus where the U.S. rig count and drilling budgets go for the second half of 2017.

 The 2017 capital budgets for the majors and the large independent producers who drill the great majority of wells in the U.S. were put into place in anticipation of a crude price at or above $50/bbl.  But the price for West Texas Intermediate (WTI) has recently fallen below that level due in large part to uncertainty about where OPEC will head beginning July 1.

 

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President Trump’s First 100 Days In Oil And Gas: Elections Really Do Matter

President Donald Trump’s 100th day in office is this Saturday, and the debate is raging about what he has or has not accomplished during that short period of time, which in the past has traditionally been a sort of “honeymoon” period for new presidential administrations.  It’s highly debatable whether or not this particular President received any sort of honeymoon at all, since such periods in the past have involved semi-favorable coverage from the press and a good deal of cooperation from congress, but that’s another subject for another writer.

My mission here at Forbes.com is to talk about public policy related to energy in general, and oil and natural gas in particular.  Focusing strictly on that area of policy, it seems to me that President Trump, through his 98th day in office, has already become the most impactful president in my lifetime , which, since I’m pretty old, goes back to Dwight D. Eisenhower.

Shortly after he took office in 2009, former President Barack Obama famously told the Republican congressional leaders, “Elections have consequences, and at the end of the day, I won.” Those words are as true today as they were then, and those who deal with public policy matters in the oil and gas industry are finding out that the 2016 election mattered in a really big way.  You might even say it was “Yuge”.

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Gov. Cuomo Proves Pipeline Politics Aren’t Limited To DAPL

As crude oil from the Bakken region began to flow into the Dakota Access Pipeline (DAPL) in mid-April, Reuters carried a story indicating that the largest refiner on the East Coast will no longer be taking delivery of Bakken crude via rail:

“It’s the new reality,” said Taylor Robinson, president of PLG Consulting. “Unless there’s an unforeseen event, like a supply disruption, there will be no economic incentive to rail Bakken to the East Coast.”

Thus, the DAPL has already begun to improve the economics of drilling for and producing oil from the Bakken Shale, whose rig count has begun to rise over the last few months.  And while the aggressive and often-violent protesters who spent half a year opposing the project’s completion would never admit it, DAPL is also already improving the safety of moving Bakken crude out of the basin to be sold and refined.

While rail companies and regulators have moved in recent years to improve the safety aspects of shipping crude by rail following several high-profile incidents, the truth remains that pipelines are far and away the safest means of moving crude oil to market.  Rail will remain a part of the transportation mix for Bakken oil – it represented about 25% of that mix during February of this year – but its market share there will grow smaller in the coming months.  That’s a positive for producers, refiners and the public.

Unfortunately, the good news about oil and gas pipeline safety has apparently not made its way to the governor’s office in Albany , where Andrew Cuomo continues to cost his constituents billions of dollars each year through his efforts to obstruct the building of needed natural gas pipelines in the Empire State.   Gov. Cuomo is of course most famous for orchestrating a statewide ban on hydraulic fracturing, a ban that has denied New Yorkers to share in the riches provided to Pennsylvanians, West Virginians and Ohioans by the massive Marcellus Shale resource, which also extends into Southwestern New York.

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