Tuesday Energy Update
(Because Energy Fuels Our Lives)
Despite recent low crude prices and a significant drop in the DrillingInfo rig count during January, the giant Permian Basin of West Texas and Southeast New Mexico continues to expand its role as the main driver of energy growth in North America. In just the past week, we have seen the following significant events that are attributable all or in part to what has become the world’s second most-productive oil and gas resource:
A driver of upstream and midstream profits – Both ExxonMobil and Chevron beat analyst expectations with their 4th quarter earnings announcements, driven mostly by their upstream and midstream developments in the Permian. Exxon beat forecasts by almost one-third, with its full-year 2018 earnings coming in at the highest level since 2014. Driven by its Permian drilling, Chevron’s oil and natural gas production rose to an all-time high as the company produced a record 3 million barrels of oil per day (bopd) during the 4th quarter.
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During the course of a radio appearance I made on January 29 (BYU Radio’s “Top of Mind” program hosted by Julie Rose) I was reminded of just how little most Americans really understand about oil and gas in general, and how the gasoline or diesel they use in their cars is manufactured and delivered to their local gas stations.
That’s not a criticism of ordinary Americans, because 98% of them have no real need to understand such things in the course of their lives, and our system of education does almost nothing to educate them about this particular topic. Nor is it a criticism of Ms. Rose, who herself is extremely knowledgeable, but poses questions she knows most of her listeners are wondering about.
Given all of that, I have endeavored here to put together seven key things to know about oil and gasoline that might help the average person better understand this key element in their daily lives:
- Where does Gasoline come from? – Gasoline is one of many products derived from crude oil at oil refineries. One good way to think of crude oil is as a complex soup with all kinds of ingredients floating around in it. The refining process basically takes the crude oil soup that comes up out of the ground through oil wells and separates all those ingredients out of it. Gasoline is like the noodles in your chicken vegetable soup.
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Just when you thought continued belief in any of the various brands of “Peak Oil” theory could hardly become less sustainable, you get a week like this one. No matter whether you come at Peak Oil from the supply side or the demand side, several events this week would have had to put you in a definitively sour mood.
Starting off this “No Good Terrible Very Bad” week for the Peak Oilers, UN International Energy Agency (IEA) Executive Director Fatih Birol debunked a popular piece of the demand side of the theory. Speaking to the World Economic Forum in Davos, Switzerland on January 22, Birol told the delegates that “To say that the electric car is the end of oil is definitely misleading.” Oh.
Birol expanded on that theme by adding emphatically that “Cars are not the driver of oil demand growth. Full stop.” Birol made things even more problematic for those who wish to dramatically accelerate the displacement of internal combustion cars with EVs via massive subsidies for environmental reasons by pointing to the fact that EVs in fact do little to reduce emissions, pointing to the fact that most of the electricity globally is still generated using coal and other fossil fuels. “Where does the electricity come from, to say that electric cars are a solution to our climate change problem? It is not,” he said.
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And just like that, everybody stopped talking about the possibility of $30 oil.
Remember those gaudy days, all of two weeks ago, when the price for WTI had dropped to $42 per barrel and fears were rising that the OPEC+ countries had somehow lost all control over the market and prices would continue to fall? Yeah, those were some good times, huh?
Today, January 15, the WTI price has recovered to over $51/bbl, a rise of 25% in two weeks. That did not happen because of suddenly higher global demand, because no such thing has taken place; nor did it happen due to a dramatically lower U.S. rig count, since the DrillingInfo domestic rig counthas dropped by just 15 rigs since January 1; and it didn’t happen due to the much-publicized recent curtailments in Canadian crude production, which have thus far taken about 140,000 barrels of oil per day off of the market.
So, why did the price go right back up the last two weeks after tanking so dramatically towards the end of December? The answer has largely to do with recent actions taken by OPEC+ nations.
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Well, that all escalated – or rather, de-escalated – quickly, huh? During the course of a six-day vacation around Christmas, the WTI price for crude dropped from $50/bbl down to $42/bbl. That takes a situation on oil prices that was already troubling for most domestic producers into the potentially-calamitous range for companies saddled with heavy debt loads and high lifting costs.
This latest collapse in crude prices comes on the heels of a longer-term drop that lasted throughout October and November. From October 2 through November 30, WTI fell from $76.41/bbl to $50.93, a decline of about 33%, as it became obvious to traders and investors that the market had become significantly over-supplied despite the re-implementation of U.S. sanctions on Iran by the Trump Administration.
This overall 45% drop in the domestic benchmark price for crude took place during the same period when producers were setting their capital drilling budgets for 2019. While one might think that reality would cause a significant curtailment of drilling activity during the first half of 2019, consider that only about a third of that price drop had come about by November 1, by which time most of these companies were finalizing those budgets. With WTI sitting at $63/bbl at that time, few were anticipating a further drop of this magnitude by the end of December.
Here’s the thing: Thousands of domestic drilling projects that are economic to drill at $63/bbl are uneconomic to drill at $42/bbl. So right now we are already beginning to see reports that some companies are going back and reconsidering some budgeting decisions that were made just a month ago. Others are likely still in wait-and-see mode as they try to assess whether the December price drop is a temporary result of panic-selling or a more long-term phenomenon related to a weakening global economy.
Given all of this, my first prediction is that we will see a gradual fall in the domestic U.S. rig count throughout the first half of 2019.
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Several recent big items of positive news relating to exports of oil and LNG along the Texas Gulf Coast might come just in time to help allay fears of new, downstream bottlenecks for production coming out of the Permian Basin and Eagle Ford Shale plays.
The current bottleneck, of course, involves a lack of needed pipeline takeaway capacity for oil and gas coming out of the Permian Basin. But a dozen or more pipeline expansions and new-build projects currently in progress promise to quickly alleviate that situation during the course of 2019 and 2020. The vast majority of takeaway capacity in these projects will be designed to move the production to ports along the Texas and Louisiana Gulf Coast, with several of the lines picking up crude and natural gas produced in the Eagle Ford along the way.
This outlook has in recent weeks produced a new concern that, as those new pipelines get filled up with more and more volumes coming out of West and South Texas, new bottlenecks could materialize related to the capacity along the Gulf Coast to refine and export the production. Several recent developments in the Corpus Christi area hold the promise of heading the potential new bottlenecks off before the can form.
Where natural gas is concerned, . The Maria Energy tanker, which has a capacity of 174,000 cubic meters of LNG, left the terminal with a full load on December 11, the first load of LNG to ever ship out of a Texas-based facility. “Exporting the first commissioning cargo of LNG from Texas demonstrates Cheniere’s ability to deliver projects safely and ahead of schedule, including the first greenfield LNG export facility in the lower 48 states,” Cheniere chief executive Jack Fusco said.
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They say numbers don’t lie, and the last two weeks for the U.S. oil and gas industry have seen the announcements of some pretty amazing numbers. These are numbers that demonstrate exactly how productive and efficient the business has become, and numbers that must be put into some context to understand how extraordinary they really are.
So, as we move into mid-December 2018, let’s give it a shot:
The U.S became a “net exporter” of petroleum liquids for the first time 75 years. – That’s right, the week of November 30 through December 5 saw the United States of America actually export more crude oil and other oil-derived liquids than it imported from other countries. The key part of that sentence is “other oil-derived liquids,” which include gasoline, diesel and other refined products. Rolling all of those products into the equation, the U.S. exported about 211,000 barrels per day more than it imported for the week, as reported by Bloomberg.
The U.S. did not become a net exporter of “crude oil,” as some others in the energy news media mistakenly reported. As Robert Rapier reported at Forbes.com over the weekend, our country is still a sizable net importer of crude alone, an equation that will not be reversed anytime soon.
Regardless, the fact that the U.S. had higher volumes of oil-derived liquids moving out of its various ports than it had coming for a full week is an extraordinary change of circumstance from just a decade ago, a true sea change delivered by the ability to extract oil from the nation’s shale formations.
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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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