I had an interesting email inquiry from a reader over the weekend. I don’t know if he’d want to be identified by his full name, so let’s just refer to him as Sergio. The email poses an interesting question that has not received much, if any, public discussion, so I decided to address it here.
The note was fairly long, but here are some excerpts that capture the essence of his inquiry:
“I read with interest your recent article in OilPrice about the US achieving “energy dominance”. You note that what the US oil and gas industry most needs is sustainable prices for oil and gas. I suspect that having some certainty that oil prices will not drop below a certain sustainable level would be of immense benefit to the industry, even more so than having higher prices that may not last for long.
It seems to me that this could be achieved by the US govt setting a price floor for crude oil sold in the US, at a level that is at least sustainable for most of the shale oil industry. A price floor of say $45 – $50 per barrel might do the job at the moment, and because that is about the current oil price it could probably be imposed by the govt without any large political backlash. After all it would not raise the current gasoline price. In fact it could even be a popular move if sold to the public in an intelligent manner.”
Ok, let’s stop there. Any such policy would naturally be a proposal by the Republican Party, given the long history of the Democratic party of opposing any policy that might benefit the oil and gas industry. That eliminates any thought of such a proposal being “sold to the public in an intelligent manner”, right? I mean, these are Republicans we’re talking about.
Let’s move on.
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Ben Van Beurden, the CEO of Royal Dutch Shell, set off a minor media firestorm last week in an interview with Bloomberg TV when he made the following remarks:
- “The whole move to electrify the economy, electrify mobility in places like northwest Europe, in the U.S., even in China, is a good thing.”
- “We need to be at a much higher degree of electric vehicle penetration — or hydrogen vehicles or gas vehicles — if we want to stay within the 2-degrees Celsius outcome.”
Following the interview, a spokesman for the company told Bloomberg that Mr. Van Beurden plans to purchase an electric car as his next personal automobile. It’s great that a CEO of a major integrated oil company makes enough money to afford a Tesla or one of the other very expensive electric vehicles being turned out by European and U.S. automakers.
We can all hope that, over time, the technology will advance to the point where it is competitive with cars powered by internal combustion engines, and thus become affordable to the masses in the middle- and lower-classes of the developed world. But we’re not there yet. For proof, one only needs to look at the lesson Tesla learned when it tried to market its electric vehicles in Hong Kong, where the government ended its substantial subsidies for EVs in April of this year. There, the company registered zero sales in April, after having sold more than 3,000 of its Model S cars during the first quarter of the year. These subsidies matter, bigly.
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Every fad runs its cycle: The ’50s gave us the hula-hoop, the ’60s gave us tie-dyed t-shirts, the ’70s gave us leisure suits, the ’80s gave us Cabbage Patch Dolls, the ’90s gave us Pokemon, and the ’00s gifted us with The Atkins Diet (on which I once lost 36 pounds and then gained it all back in a single year). Fads come and fads go, but the thing that they all have in common is that, when we look back from the viewpoint of history, we wonder how they ever became so popular to begin with?
Thus begins the saga of “Fracking” and its application to the very safe, heavily-regulated industrial process of hydraulic fracturing by activist conflict groups, the news media and the entertainment industry that has run a similar course over the past ten years. Starting around early 2008, we began to see groups like the Natural Resources Defense Council (NRDC), the Sierra Club and other major environmentally-focused conflict groups using the term “Fracking” ubiquitously in their messaging campaigns to oppose the oil and gas industry the U.S.
The use of the term – which is adopted from the remake of the Battle Star Galactica series that aired during the early years of this century – quickly spread into the media, which is not surprising. After all, the term is stark, it is sexy, and it is adopted from a cuss word (In Battle Star Galactica, the term “Frakking” was used to describe the act of sexual intercourse) that had become well-known in pop culture. We first began seeing the term used in left-wing media outlets like ProPublica, but it quickly spread to the mainstream outlets, as journalists and editors began to see the use of the term attracted traffic to their websites.
Over the following few years, the use of the term expanded almost exponentially in the media and then into the entertainment industry, as the public became increasingly aware of the boom in shale oil and natural gas that “fracking” had made possible. (Nevermind, though, that “fracking” had to be wedded to horizontal drilling in order to achieve that feat – , and thus almost never appeared in headlines, articles or movies.)
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If you read the Dallas Morning News for information about the oil and gas industry, you’d be best advised to do more than just scan the headlines. Here are two examples of headlines that just don’t really match the content of the articles:
Trump Won’t Declare Dallas Firm’s Dakota Access Pipeline A Major Disaster – Well, no, that’s not at all an accurate description. The state of
Governor Burgum did ask the President to declare the site of the months-long protest/riot action against the Dakota Access Pipeline to be a “major disaster” in an effort to seek federal help in footing the $38 million bill for policing the often-violent protesters and cleaning up the epic mess they left behind when they finally cleared their illegal site. Given that it was the federal government, under Barack Obama, that allowed these rioters to illegally occupy the site for half a year, it would seem that the Governor had a valid complaint. President Trump disagreed, which is his right. Either way, it would have been nice for the headline writer to accurately portray the content of the article.
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There is no question that , one that can legitimately be referred to as a revolution. Though the national news media, with its myopic focus on presidential tweets and scandal-mongering, has largely missed it, there is no denying that our energy policy world has had a radical shift since last November 8.
For the oil and gas industry, this shift has been mostly positive: the rollback of a series of ill-advised, poorly-constructed, often unnecessary regulations, the opening up of new tracts of federal lands and waters to leasing, the speeding up of permitting processes and lease sales are all policies designed to stimulate the production of U.S. oil and gas resources, in keeping with the Administration’s “America First Energy Plan”, and the President’s goal of U.S. “Energy Dominance.” After eight years of little but bad news coming out of Washington, DC, the industry has been very grateful for these and other efforts by the Administration to encourage increased domestic production, the industry’s new-found optimism reflected in the rising rig counts and drilling permit applications of the first 6 months of 2017.
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Last Friday I wrote about the single rig-drop in the Baker Hughes U.S. rig count, noting that it could be an early harbinger of a second-half 2017 slowing of the somewhat frantic pace of drilling we saw during the year’s first six months. We’ll need to wait to see what happens in the next two weeks to be fairly sure whether or not that is the case.
But here’s the funny part: as they are wont to do, many “experts” in the energy media are already telling their audiences that the trend is already here (which, again, is possible), which means the domestic industry is going to slow rapidly (not likely at all), which in turn means the crude price is about to rise back up above $50 in short order (again, not likely at all), which in turn means that, after a month or two, the U.S. industry will then again begin activating a bunch of additional rigs and drilling a bunch more wells before the end of 2017.
That last part is really, really unlikely, given current circumstances.
First, there was the report on Monday that OPEC’s June production rose significantly, to its highest level of 2017. This indicates that more OPEC member countries are beginning to exceed their agreed-to quotas as time goes on. Given that this has been a consistent OPEC pattern throughout its history, this comes as no surprise.
Second, as I wrote a couple of weeks ago, my belief based on discussions with industry contacts, and on 38 years of participating in oil and gas industry corporate budgeting processes, is that, barring a true price collapse into the $30s that lasts for at least a couple of months, the rig count will not fall rapidly, as some are predicting today. Instead, we will most likely see a stagnation or very modest decline in the rig count in coming weeks as companies begin to execute on revised, lower capital budgets for the second half of the year.
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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 , 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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