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The Eagle Ford Shale Finally Gets A Little Media Love

For most of the past year, the ongoing boom in the Permian Basin has sucked all the oxygen out of the room in terms of media reporting on the oil and gas industry in Texas.  The mergers and acquisitions frenzy of 2016 raised per-acre acquisition costs to $40,000, and that in turn led a rapid rise in the Permian’s rig count and subsequent drilling boom to take advantage of the higher oil prices that came about at the end of the year.  That story, which has resulted in the Permian’s becoming not only the nation’s largest oil producing basin, but also it’s second largest natural gas producing basin (more on that next week), is very compelling and needed to be told.

But the last year has seen another compelling growth story come about in the state’s other major oil play, the Eagle Ford Shale region of South Texas.  It’s a story in which the region’s rig count has more than tripled in a year, from less than 30 to more than 90, in which new-well productivity has more than doubled in less than two years, and in which the economic driver that turned this historically poor region into the nation’s hottest economic development area from 2011 thru mid-2014 has begun to rise again.

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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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For President Trump, Pulling Out Of Paris Is The Only Logical Move

Jonathan Swain and Amy Harder at Axios reported on Sunday morning that President Donald Trump has told “confidants” that he has made the decision to pull the United States out of the Paris Climate Accords, and will make an announcement soon, most likely this coming week.  This report will certainly produce a major backlash from the anti-fossil fuel lobby in the U.S. and globally, which correctly views the commitments made by former President Barack Obama under this executive agreement as the main driving force for increasingly restrictive regulations of the U.S. fossil fuel industries.

But this report, if true, should surprise no one after the President was the only G7 leader who refrained from endorsing the Paris Accords on Saturday, a move that came after one of his advisers had told the media that Mr. Trump’s views related to Paris were “evolving.”  This statement was taken by many Paris supporters as an indication that the President might be moving towards changing his mind and keeping the U.S. in the agreement after all.

Such hope by Paris supporters has always seemed like a pipe dream, though, since the Obama commitments within the Paris accord stand in direct opposition to the commitments made by candidate Trump during the 2016 campaign, as well as the energy policy-related actions taken by President Trump since assuming office.

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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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