We have become so accustomed in recent years to seeing headlines about companies making major acquisitions to either move into the booming Permian Basin or expand their existing operations there that when we read a headline that says “ConocoPhillips Sells Permian Assets and Expands Elsewhere” (Houston Chronicle, April 3, 2018) it really grabs your attention. In the face of a big independent like Pioneer Natural Resources announcing in February that it is staking its entire business on the Permian, or Concho Resources making the largest-ever acquisition of Permian assets, any news of a big Permian player selling acreage there seems counter-intuitive.
Of course, when you drill down into the Chronicle’sstory, you find that the news about ConocoPhillips (COP) isn’t so earth-shattering. In fact, the disposition of acreage in the Permian was made up of several small packages of non-core properties that have thus far remained largely undeveloped. Prior to these sales, COP owned 144,000 net acres of leasehold in the greater Permian region, and the vast majority of that acreage still remains in the company’s portfolio. , and using the proceeds from the sales to acquire acreage in other producing areas.
One of those areas is the liquids-rich natural gas play in Alberta and British Columbia called the Montney Field, where COP announced a 35,000 acre acquisition that brings its overall leasehold in that area to 140,000 acres. Despite being a leaseholder in the Montney since 2009, COP had drilled just 29 appraisal wells there through the end of 2017, and plans to continue its resource appraisal activities throughout 2018. This new acquisition is a clear indication that the company is seeing positive results there.
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While many in recent years have tried to characterize the production of oil and gas from shale formations, with its repeating processes and low frequency of dry holes, as essentially a “manufacturing” process, it really is not at all similar to the making of textiles, steel and plastics.
All of which is sort of a long way around to getting to a headline that ran in Monday’s Arab News: “The Big Question for U.S. Shale: Is it Permanent or Just Permania?” Given that nothing in oil and gas is ever permanent, the obvious answer to the question is that the current situation related to U.S. oil and gas development is a great, big case of “Permania.”
The real question, as borne out by the discussions atlast week’s CERAWeek conference in Houston, is just how justified the current case of rampant “Permania” happens to be, and more importantly, how long it will last. If you ask Tim Dove, CEO at the largest Permian Basin producer, Pioneer Natural Resources, it is very justified indeed. So justified, in fact, that Dove announced just a few weeks ago that his company would be divesting 100 percent of its non-Permian Basin assets soon, and betting its entire future on maximizing the potential from its more than 700,000 acres of leasehold in the massive Permian region.
“What we’re staring at beneath our feet cannot be replicated anywhere else in the United States. That’s a given,” Dove told the IHS Markit-sponsored conference last week, “We have a golden goose right before us.”
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It is hard to imagine a more effective means of slowing the nascent oil and gas drilling boom in the United States than to artificially increase the price for steel via import tariffs.
Oil storage tanks? Made from steel. Dehydrator units and compressor stations and heater-treaters and amine units? Made from steel. Drilling rigs? Made from steel. All those pumpjacks moving up and down across the landscapes of the Permian Basin, the Eagle Ford Shale region and the Bakken Shale? Made from steel.
The Dakota Access, Keystone XL, Colonial, Transco and every other oil or natural gas pipeline constructed anywhere on the face of the earth? Made from steel. Those massive deepwater platforms being fabricated at Ingleside, Texas? Made almost entirely from steel. Those gigantic ships exporting crude oil out of Houston and Corpus Christi and LNG from Sabine Pass? Made from steel. Those oil refineries arrayed along refinery rows in New Orleans and Pittsburgh and Houston and Corpus? Made almost entirely of steel.
Just as natural gas and petroleum liquids are the fundamental feedstocks for an array of manufacturing processes in the U.S. and across the globe, . No steel, no oil, no gas. It really is that simple.
So it should come as no surprise that, after President Donald Trump announced last Thursday that he would be imposing new tariffs on imports of steel and aluminum, industry representatives immediately began to voice concerns. I started to say “unexpectedly announced” in that previous sentence, but it also should not have surprised anyone that the President made that announcement. After all, he had promised on many occasions during his 2016 campaign that he would take this exact action, which he believes will create stronger steel and aluminum industries in the U.S.
As the oil and gas industry is well aware, this is a President who is very focused on keeping the promises he made throughout his campaign. Indeed, Trump spent a great deal of time and energy throughout 2017 following through on a broad array of actions he had promised to take that are quite positive for the industry: the rescission of a group of Obama-era regulations and executive orders the industry opposed; pulling the U.S. out of the Paris Climate Accords; issuing executive orders restarting the stalled Dakota Access and Keystone XL pipeline projects, along with one rescinding the Obama Clean Power Plan; speeding up energy-related permitting processes at EPA, The Department of Interior and the Commerce Department; Implementing a new 5-Year Plan that opens up vast new areas of federal waters to oil and gas leasing; and passing a tax bill that is hugely beneficial to the oil and gas industry.
The result of this rapid sea-change in energy policy has been to help stimulate investment in an industry that had spent 2015 and 2016 pulling in its sails to try to weather a perfect storm of low commodity prices and a flood of new regulations coming down from Washington, DC. It isn’t hard to understand that some in the industry thought this honeymoon might go on forever.
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In the oil and gas industry, sometimes it is hard to figure out what is real and what isn’t – what is really happening, and what really isn’t happening. I spent 38 years in the industry, and still have a hard time figuring it all out. Here are some good recent examples of stories whose headlines made bold claims that, upon reading the entire stories, turned out to be quite nuanced:
- Are investors really abandoning the shale industry?
- Did the World Bank really cut off funding of oil and gas projects?
- Has the business case for building the Keystone XL pipeline really passed?
All are good questions, all of which have been the subject of multiple media reports in the past weeks, and all have more complex answers than the simplistic media headlines that are all most people actually read. So, let’s clarify some things.
Are Investors Abandoning The U.S. Shale Industry?
We’ve seen many reports alleging that investor funds are drying up for the shale industry during the second half of this year, yet shale producers somehow keep managing to get their business done. Indeed, in recent weeks we’ve seen a series of announcements of major new investments in domestic shale by private equity and institutional investors, and the Fall debt redetermination season passed without noticeable major hiccups.
So, what gives? A look at recent presentations by the CEOs at corporate shale producers, like this one from Encana’s Doug Suttles, shows a focus on responding to demands by investors that these companies dedicate more of their resources towards actions that will increase returns on investment capital, a pressure I wrote about in early November. One result of this investor pressure has been the announcement of a wave of stock buy-back programs since August. Investors are also pressuring companies to change executive compensation programs that have been, in their view, too focused on increasing production at the cost of profits.
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America’s ongoing oil and natural gas revolution is delivering big benefits to our economy, our environment and to our nation’s security. As the world’s top energy producer, America is leveraging this position of strength to grow good-paying jobs and economic opportunity here at home while firming up important trading partnership with key allies abroad. The increasing use of natural gas in power generation is also improving our environment at the same time.
This positive shift is a win for the America people and a blow to nations that previously used their energy resources against the U.S. as a political weapon.
Thankfully in Washington, American energy dominance is a central focus of the Trump administration’s policy priorities. With smart, jobs- and consumer-focused policies at the federal level as well as in energy-producing states, our economy and global political muscle will only grow stronger.
Anyone who follows energy trends hears a lot of debate around new pipelines, and how anti-fossil fuel activists want to stop infrastructure development that’s critical to creating jobs and boosting America’s manufacturing sector. We see much less discussion in the energy-related news media about how refineries and existing pipelines are responding to energy revolution’s shifting market dynamics and the benefits these actions bring to consumers.
In the Midwest, refineries have made massive new investments – literally billions of dollars in capital – to expand operations to process more North American crude in recent years. According to Morningstar, these refiners can now process 300+ more mbopd today compared to 2010. And it’s a trend that will likely continue forward.
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Energy Week, Episode 7: Covering the Oil and Gas Landscape With Allen Gilmer
David and Ryan were happy to welcome DrillingInfo Chairman Allen Gilmer to the show. The show begins with a discussion about DrillingInfo’s recent acquisitions and the services it provides to a wide variety of clients. The discussion then moved to a recently-released study from MIT which theorizes that the U.S. Energy Information Agency is over-estimating the potential for oil and gas recovery in U.S. shale plays, a thesis with which Allen strongly disagrees. Next, Ryan and David asked Allen about his views about the Eagle Ford Shale and its potential, before moving to a similar discussion about the Permian Basin. The show closes with Allen giving listeners his views on the outlook for natural gas this winter and in the coming years.
Links to Articles Referenced in this Episode:
MIT Study Suggests U.S. Vastly Overstates Oil Output Forecasts
After 2.5 Billion Barrels, Eagle Ford Has More Oil Coming
Gilmer: We Should View The Permian Basin As A Permanent Resource
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Bloomberg carried a report late last week titled “Goldman Says Oil Market’s Too Jittery When There’s No Need to Be.” The report summarized a memo from Goldman Sachs analysts positing that the just-completed extension of the deal between OPEC and Russia to limit oil exports “indicates a reduced risk of both unexpected increases in supply as well as excess draws in stockpiles.”
The report didn’t address the reality that one of the main reasons why the crude markets remain jittery is very likely due to all the conflicting reporting in the energy-related news media leading up to that extension. While there was never any real, firm reason to doubt the extension would get done, pretty much every day in November was filled with speculative stories with click-bait headlines expressing doubts the parties could reach agreement.
While this is just the nature of the U.S. news media in general these days, the reality is that there has been precious little volatility in crude prices throughout the second half of 2017. In fact, on June 19, I wrote the following:
The mid-year review processes [for corporate upstream companies] I mention there are now coming to conclusions, and as a result of those reviews, we can expect the domestic rig count to level off and even perhaps decline slightly over the second half of 2017.
That’s exactly what has happened as these large independent producers scaled back their drilling budgets for the second half of this year, and it’s the main reason the frequent ups and downs in crude prices that had characterized the previous two-plus years have been replaced by what has been a steady rise in prices over the last five months. The key understanding to grasp in this equation is that, on the global stage.
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In this episode, David and Ryan why the oil market seems overly jittery now that it appears the market is back in balance after three years of chronic over-supply. They also discuss how super tankers co-loaded with crude from both the U.S. and Mexico have helped open up Asian markets to U.S. producers, why solar really isn’t cheaper than coal despite all the hype in the media, and celebrate the fact that Shell has now restored its full cash dividend thanks to its strengthening bottom line.
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It has been a year now since we all awoke on Nov. 9, 2016, to the reality that, against all odds and all predictions by the polls and political “experts,” Donald J. Trump had somehow defeated Hillary Clinton in the race to become the 45th President of the United States. It was a stunning outcome to a seemingly endless campaign, one that had turned into the most vicious and personal presidential contest in modern times.
The oil and gas industry had not supported Trump’s candidacy during the Republican Party’s primary and nominating process, when most contributions from industry executives and company employee PACs flowed to more conventional politicians like Wisconsin Gov. Scott Walker, former Florida Gov. Jeb Bush, and Sens. Ted Cruz of Texas and Marco Rubio of Florida. The same held true in the general election, during which the vast majority of contributions from industry executives flowed to Clinton.
Despite that slight, Trump made the promotion of policies that support a healthy oil and gas industry a centerpiece of his campaign strategy from beginning to end. During his speeches, the primary and general election debates, and the hundreds of rallies he conducted before crowds of thousands of supporters, candidate Trump talked about issues all too familiar to those in and around the nation’s oil patches: the Keystone XL and Dakota Access pipelines, EPA’s Waters of the United States regulatory scheme, the Clean Power Plan and the Bureau of Land Management’s (BLM) hydraulic fracturing rule.
At a September 2016 rally in Pittsburgh, Trump made a speech that was very typical to what he said throughout his campaign: “I am going to lift the restrictions on American energy and allow this wealth to pour into our communities — including right here in Pennsylvania. The shale energy revolution will unleash massive wealth for American workers and families.”
It was an extraordinary thing. No candidate in modern times from any political party had worked so hard to make energy in general, and the oil and gas industry specifically, such a major part of his or her campaign’s messaging. When seeking support from the oil and gas industry and many others, though, Trump turned off many people with his rhetoric and antics on other matters. His unpredictability made millions of Americans simply uncomfortable with the idea of having this person occupying the highest office in the land. This factor remains true a full year after his election.
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