In The Oil Patch – Episode 109: host Kym Bolado and her cohost Alvin Bailey welcome our associate editor of SHALE Oil & Gas Business Magazine and resident politics/energy expert, David Blackmon back onto the show. This week’s show is completely focused on OPEC and the recent agreement they reached to extend the oil production output cut.
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.
I recently appeared on In the Oil Patch Radio with host Kym Bolado. We spent the hour discussing the tension between OPEC and U.S. Shale producers, and the prospects for an extension of the OPEC/Russia agreement to limit exports for the 2nd half of 2017.
- 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.
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.
On Monday, I wrote about the concerns of the offshore oil and gas industry regarding a set of last-minute Obama-era amendments to the Jones Act, and the failure of most of the Texas congressional delegation to engage on the matter. The Jones Act is a 19th century law that requires vessels carrying cargoes between U.S. ports to be U.S.-flagged and staffed by U.S. crews.
I won’t repeat the details here, other than that the industry is concerned that finalization of the proposed regulations in question, which would extend Jones Act requirements to include vessels carrying cargoes between U.S. ports and offshore oil and gas rigs and platforms, would result in a lack of needed shipping capacity and create needless delays in offshore development.
This morning, word came from the U.S. Customs and Border Protection Service (CBP), under whose authority the amended regulations were proposed, that it will suspend and reconsider them rather than finalize them, which it had been expected to do any day now:
“Based on the many substantive comments CBP received, both supporting and opposing the proposed action, and CBP’s further research on the issue, we conclude that the Agency’s notice of proposed modification and revocation of the various ruling letters relating to the Jones Act should be reconsidered. Accordingly, CBP is withdrawing its proposed action relating to the modification of HQ 101925 and revision of rulings determining certain articles are vessel equipment under T.D. 49815(4), as set forth in the January 18, 2017 notice. “
Photo Credit: Offshorepost.com
Battles tend to be pretty noncompetitive when only one side engages in the fight, and we see that happening right now in a dust-up over a last-minute action taken by former President Obama related to the Jones Act, an archaic 19th century law that mandates that only U.S.-flagged vessels are allowed to carry cargoes from one U.S. port to another.
Some background: on January 18, just two days prior to leaving office, the Obama Customs and Border Protection (CBP), which has regulatory authority under the Jones Act, issued a regulation that would reverse 40 years of court rulings by extending Jones Act flagging requirements to the various kinds of ships and barges that move equipment between ports and offshore drilling rigs and platforms. This move, like so many last-minute regulatory actions taken by the past Administration, was placed on a fast track designed to minimize stakeholder engagement that is required under the Administrative Procedures Act.
Had Trump officials not chosen to intervene, the original 30-day public comment period would have expired on Feb. 17, allowing CBP to issue a final rule just 30 days afterwards. As things stand, the 60-day extension of the comment period expired on April 18, and so CBP could issue a final regulation in the next handful of days.
So, you ask, why is this important? Well, first because offshore oil and gas producers don’t believe there currently exists an adequate number of U.S.-flagged vessels necessary to service the industry at its current level of activity, which is depressed by historical standards. And second, because the policy flies in the face of the stated goals of the Trump Administration to increase domestic energy production, largely by the elimination of last-minute Obama-era regulations just like this one.
I appeared on Bryan Crabtree’s radio program on Monday to talk about President Donald Trump’s impact on energy policy and the oil and gas industry. Follow the link below to listen in: