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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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What A Difference An Election Makes – World Oil Magazine

APRIL 2017 ///Vol 238 No. 4

FEATURES

What a difference an election makes

The upstream oil and gas regulatory structure has been turned upside-down on the federal level, and what was once thought nearly impossible, in terms of certain projects, now seems far more likely.

David Blackmon, Contributing Editor

A Clinton administration would have meant increasingly heavy-handed efforts to control every aspect of the oil and gas development process from Washington D.C.; more stringent emissions requirements; a rapidly-expanding bureaucracy at the EPA—especially in the area of water enforcement in the wake of the implementation of the Waters of the United States (WOTUS) regulations; rapidly rising regulatory costs; and more and more withdrawals of federal lands and waters from the realm of oil and gas leasing. Even to those of us who believed that Donald Trump had at least an even chance to win, the conventional wisdom dictated that the best advice was to prepare for a Clinton administration while hoping for a big surprise to take place on Nov. 8.

Lo and behold, the big surprise came about, and the whole world of federal regulation of the oil and gas industry has been turned on its head. Upon assuming office in 2009, and embarking immediately on his campaign to vastly increase the federal bureaucracy and regulatory reach, Barack Obama famously said, “Elections matter.” That statement was completely true then, and it remains true today.

Let’s take a look at some of the many ways that this election matters in the realm of regulatory policy toward the oil and gas industry.

LET THE PIPELINES BE BUILT

Just four days after he assumed the office of the presidency, Donald Trump demonstrated conclusively that his proposed “America First Energy Plan” was more than just campaign rhetoric, as he signed executive orders designed to ensure the completion of two major oil pipelines—Keystone XL and Dakota Access—that had been held up for purely political considerations by former President Obama.

Keystone XL. The President’s order on Keystone XL invited the operator, TransCanada, to re-apply for its cross-border permit, and directed the U.S. State Department to “take all actions necessary and appropriate to facilitate its expeditious review.” The order further gave the State Department 60 days, from receipt of TransCanada’s new application, to issue a final decision.

That’s all very positive, and after suffering through six years of delays lacking much, if any, merit from the Obama administration, it no doubt seemed like a breath of fresh air to the company’s executives. Indeed, the company confirmed, later that same day, that it had already begun preparing its new permit application. That application was submitted several days later, and the State Department approved it in late March.

While some conflict groups continue to mount court challenges to the pipeline, and various state-level approvals will still need to be obtained by Trans-Canada, there is no doubt that the November election completely changed the equation related to this important pipeline project.

Dakota Access Pipeline (DAPL). The President’s order on DAPL (Fig. 1) was directed not to Energy Transfer Partners, the builder of the pipeline, but to the Army, ordering the Corps of Engineers to “take all actions necessary and appropriate,” to conduct this review and approve the pipeline “in an expedited manner… to the extent permitted by law and as warranted.” Within a few weeks, the Army responded affirmatively, withdrawing its requirement for conducting a full environmental impact study, which the Obama administration had forced in December for political reasons, and issuing the final easement necessary to allow the line’s final segment to move ahead to completion.

Fig. 1. The Dakota Access Pipeline is now a reality, after being held up for months on end. Photo:  Energy Transfer.

Fig. 1. The Dakota Access Pipeline is now a reality, after being held up for months on end. Photo: Energy Transfer.

That all had taken place by mid-February, and the completion of the final segment of the pipeline took less than a month, after having been held up for a half-year by the political machinations of the Obama administration in support of an often-violent and destructive protest action. Oil began flowing through the DAPL a week after a U.S. Court of Appeals rejected an appeal by the Standing Rock Sioux and Cheyenne River Sioux tribes on March 18.

All of which proves that, despite all information to the contrary, the federal government can move pretty rapidly when it is motivated to do so.

WATERS OF THE UNITED STATES REGULATION

When I last wrote about this atrocious expansion of the EPA’s regulatory reach (Fig. 2) under the auspices of the Clean Water Act in 2016, it had suffered an adverse decision in a federal district court, which had issued a nationwide injunction, prohibiting the EPA from moving ahead with its enforcement. The rule was still awaiting a hearing before an appellate court when President Trump assumed office on Jan. 20.

Fig. 2. The WOTUS went too far in defining what would be covered by the Clean Water Act, as exemplified by this stream and wetlands rendering.  Source:  U.S. Environmental Protection Agency.

Fig. 2. The WOTUS went too far in defining what would be covered by the Clean Water Act, as exemplified by this stream and wetlands rendering. Source: U.S. Environmental Protection Agency.

On Feb. 28, the President issued an Executive Order, directing his EPA administrator, Scott Pruitt—who, as Oklahoma’s attorney general, had filed the lawsuit that resulted in the injunction on this rule—along with the Army Corps of Engineers, which also has jurisdiction to a lesser extent, to conduct a review of the rule and issue a revised rule that would bring it in line with the language of the Clean Water Act.

A key piece of this order, as NPR points out, is that:

Trump said that in any future proposed rule, the EPA and the U.S. Army Corps of Engineers should consider Justice Antonin Scalia’s opinion in a 2006 Supreme Court ruling, which focused on the scope of the Clean Water Act. In that case, Scalia stated that the “waters of the United States” are limited to “only relatively permanent, standing or flowing bodies of water.” He added: “The phrase does not include channels through which water flows intermittently or ephemerally, or channels that periodically provide drainage for rainfall.”

An adherence to this guidance from the President would result inevitably in a dramatically scaled-back regulation which, in its proposed form, would effectively give the EPA and Corps the right to exert federal authority over pretty much any body of water, no matter how small, man-made, ephemeral or temporary it might be, in the entire country. At that point, the rule truly would become what EPA, in its initial talking points on the matter, claimed it was: a rule largely intended to clarify jurisdictions between the EPA, Corps of Engineers and state regulators in specific circumstances. Heck, it could even turn out to be a regulation worth the industry’s support.

EXPANDED FEDERAL LEASE SALES

On March 6, the Interior Department announced that it would hold, on Aug. 16, a regionwide lease sale, which will include all available unleased areas in the federal waters of the Gulf of Mexico. Although most acreage within 125 mi of the Florida coast remains off-limits through 2022, the proposed Lease Sale 249 will include blocks in waters adjacent to Alabama, Mississippi, Louisiana and Texas. All told, more than 73 million federal acres will be offered in the sale.

“Opening more federal lands and waters to oil and gas drilling is a pillar of President Trump’s plan to make the U.S. more energy independent,” said Secretary of Interior Ryan Zinke, “The Gulf is a vital part of that strategy, to reduce our dependence on foreign oil.”

The Trump administration also promises that expanded onshore lease sales related to federal lands will follow in the near future, as a part of its America First Energy Plan.

ONRR ROYALTY VALUATION REGULATIONS

Another controversial last-minute act by the out-going Obama administration was the effort by the Office of Natural Resource Revenue (ONRR) to change the valuation requirements for royalty payments related to oil and natural gas produced from federal lands.

The regulations would essentially require lessees to value federal royalties on the same basis as they value Indian royalties. The problem here is that Indian leases contain provisions—the so-called “major portion” and “dual-accounting” clauses—that enable Indian lessors to collect royalties on a higher valuation standard than the federal government can demand from its leases, which lack these important clauses. Thus, this new ONRR regulation is a clear violation of federal lease terms.

The regulation went into effect on Jan. 1, but it was suspended by the Department of Interior on Feb. 24, due to concerns that the rule is, indeed, inconsistent with federal lease terms and would likely run into trouble in the federal courts, where it has been challenged by various industry groups.

The rule also had run into serious pushback from congressional Republicans. House Resources Committee Chairman Rob Bishop (R-Utah) issued the following statement upon learning of DOI’s decision to suspend the rule:

“The Trump administration made the right decision to suspend this illogical and legally dubious rule. It is already causing uncertainty for future investment and development on federal and tribal lands, and increasing electricity rates for rural communities, including those in my district. The next step is to do so permanently, and avoid Congress having to do it for them.”

A permanent pulling of the rule would, indeed, be an ideal final solution, but this temporary suspension is a good start, and yet another bit of proof that, as President Obama said, elections really do matter. wo-box_blue.gif

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The Oil And Gas Situation – New Price, Production, Policy, Pipeline Targets Arise

Some thoughts on the domestic oil and gas situation as we move into May…

More rigs, more jobs, more drilling, but for how much longer…:  As I pointed out at the beginning of April, the U.S. oil and gas industry added more than 200 new active drilling rigs during the first quarter of 2017.  The pace of new rig activation slowed somewhat during April, but the count continued to rise as a total of 46 new rigs came online during the month.  The current U.S. domestic rig count of 870 is more than double the count of 420 at the end of April, 2016.

It will be interesting to see how much longer this upwards trend in the rig count will continue, given the softening oil price.  The corporate upstream companies have now implemented their capital plans for the first half of 2017, and are beginning the process of evaluating how those plans should be adjusted for the second half of the year.  The rising drilling activity and increasing demand for service companies and their products has predictably resulted in corresponding increases in service costs.  One would expect that, combined with a sub-$50 oil price, to result in a leveling off and possibly even a falling rig count for the last two quarters of the year.

But so much of that depends what OPEC does.: Will OPEC extend its current agreement to curtail production, which expires on June 30, or won’t they?  The answer to this question, more than any other single factor, will determine where the price of crude goes, and thus where the U.S. rig count and drilling budgets go for the second half of 2017.

 The 2017 capital budgets for the majors and the large independent producers who drill the great majority of wells in the U.S. were put into place in anticipation of a crude price at or above $50/bbl.  But the price for West Texas Intermediate (WTI) has recently fallen below that level due in large part to uncertainty about where OPEC will head beginning July 1.

 

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President Trump’s First 100 Days In Oil And Gas: Elections Really Do Matter

President Donald Trump’s 100th day in office is this Saturday, and the debate is raging about what he has or has not accomplished during that short period of time, which in the past has traditionally been a sort of “honeymoon” period for new presidential administrations.  It’s highly debatable whether or not this particular President received any sort of honeymoon at all, since such periods in the past have involved semi-favorable coverage from the press and a good deal of cooperation from congress, but that’s another subject for another writer.

My mission here at Forbes.com is to talk about public policy related to energy in general, and oil and natural gas in particular.  Focusing strictly on that area of policy, it seems to me that President Trump, through his 98th day in office, has already become the most impactful president in my lifetime , which, since I’m pretty old, goes back to Dwight D. Eisenhower.

Shortly after he took office in 2009, former President Barack Obama famously told the Republican congressional leaders, “Elections have consequences, and at the end of the day, I won.” Those words are as true today as they were then, and those who deal with public policy matters in the oil and gas industry are finding out that the 2016 election mattered in a really big way.  You might even say it was “Yuge”.

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In The Oil Patch – Mathusi Pahl (ep. 107)

In The Oil Patch – Episode 107: host Kym Bolado and her cohost Alvin Bailey caught up with Mothusi Pahl, Senior Vice President of Alphabet Energy! Mothusi and his team have taken huge strides in converting oilfield flares into a usable and extremely efficient energy source. You have to hear this interview!

As always, we also have our associate editor of SHALE Oil & Gas Business Magazine, David Blackmon with us to give us pertinent updates concerning the oil & gas industry.

Listen to the Podcast Here

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