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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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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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In The Oil Patch Radio Show, Episode 114 – RRC Chairman Christi Craddick

Here’s our latest show featuring Christi Craddick of the Texas Railroad Commission! We also have the Associate editor of SHALE Oil & Gas Business Magazine, David Blackmon on the show to update us on where the price of oil is heading. Enjoy!

Listen to the Podcast Here:
Originally aired on 06/17/2017 – 06/18/2017 Episode 114 of “In The Oil Patch” This week on “In The Oil Patch”: host Kym Bolado and her cohost Alvin Bailey welcome Chairman Christi Craddick to the show.
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