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The Oil And Gas Situation – Confusion Reigns In The Energy Media

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 North Dakota’s governor – Doug Burgum – did not ask President Trump to declare the Dakota Access Pipeline to be a “major disaster”.

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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The Trump Energy Policy Revolution Creates Its Own Set Of Challenges

There is no question that President Donald Trump and his Administration are bringing about a real sea change in federal energy policy , 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.

But all of this change, even when positive, does bring a downside for an industry that places a high priority on its ability to plan its business :  Uncertainty.  Anytime you have rapid and radical change, whether positive or negative, confusion and uncertainty are going to result.  There is no question that the industry experienced a great deal of rapid, radical change of the negative sort over the last eight years, but when companies knew what was coming, they could at least plan for compliance and work the costs into their projected economics for planned capital spending.


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U.S. Shale Industry Is Nimble, Except When It Isn’t

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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Rig Streak Ends, Oil Price Streak Maintains – What Does It All Mean?

Friday marked the end of the 23-week streak of uninterrupted gains in the U.S. rig count , as the overall count fell by 1, according to the Baker Hughes survey.  Meanwhile, the price for crude oil rose for the sixth consecutive trading session, the longest such streak of the year .  Though the price for WTI still hovers around a modest $46/bbl, both events were encouraging signs to an industry that had not had much to celebrate throughout most of the month of June.

On June 19, I wrote about my belief  that we would see the U.S. drilling rig count level off and even begin to fall slowly as U.S. producers readjust their drilling budgets for the 2nd half of 2017.  The rate of increase in the rig count has been slowing for several weeks as these budget adjustments began to kick in, and this week’s single-rig decrease is a sign that the overall count may have peaked or is close to doing so for the remainder of 2017.

This is a good thing for the future of oil prices, because the U.S. shale industry had heated up so rapidly over the first six months of the year that a cooling off period as become needed.  The rapid rise in overall U.S. oil production had inhibited the effort by OPEC and Russia to re-balance global supply and demand and greatly diminished investor confidence in the commodity.  If Friday’s slight decline does signal a peak or near-peaking of the rig count, that will serve as a bullish price signal in coming weeks and months.

As well, the six-day rise in the global crude prices is a positive sign, but no one should celebrate too strongly over the July 4 holidays, since all that really happened was an uptick from a very low WTI price of around $43/bbl up to Friday’s still-low $46 finish.  That price is still not at a level necessary to sustain current levels of new drilling in most U.S. oil-producing basins.
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Is The U.S. Close To Achieving ‘Energy Dominance’?


If you hadn’t heard, the Trump Administration has declared this week to be “Energy Week”, a week during which the President and his senior officials are focusing on the theme of “U.S. Energy Dominance.” Not “energy independence” or “energy security”, both themes past presidential administrations have focused upon – “energy dominance.”

So, what does it all mean, and can the United States actually achieve it? Good questions. Here are some answers.

First, when President Trump talks about his goal of Energy Dominance, he’s referring to a plan that envisions implementing policies that encourage four major elements:

 • Taking full advantage of America’s amazing abundance of oil, natural gas and coal;

• Increasing exports of all three of those fossil fuels and their related products;

• Relying more on imports of oil from Canada, Mexico and other Western Hemisphere nations, and less on imports from the Middle East and North Africa; and

• Leveraging all of those three elements to enhance U.S. bargaining positions in its foreign policy initiatives.

Right on cue, we saw the President engage in a bit of energy-leveraging during his discussions this week with Indian Prime Minister Narendra Modi, folding India’s growing reliance on U.S. LNG imports into his request for a lessening of the rapidly growing nation’s import tariffs on U.S. goods. We should expect to see the President rely more and more on this sort of leverage as U.S. exports of oil, LNG and coal continue to rapidly grow in coming years. This, more than anything else, is what the President means when he talks about Energy Dominance.

Critics point to the reality that the U.S. currently imports about half of its daily crude oil needs, but they miss the point. This is not a discussion about energy “independence” – the President clearly understands that the U.S. will always be a net importer of crude oil.

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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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