- 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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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
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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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. “
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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.
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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.: 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 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 , 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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As crude oil from the Bakken region began to flow into the Dakota Access Pipeline (DAPL) in mid-April, Reuters carried a story indicating that the largest refiner on the East Coast will no longer be taking delivery of Bakken crude via rail:
“It’s the new reality,” said Taylor Robinson, president of PLG Consulting. “Unless there’s an unforeseen event, like a supply disruption, there will be no economic incentive to rail Bakken to the East Coast.”
Thus, the DAPL has already begun to improve the economics of drilling for and producing oil from the Bakken Shale, whose rig count has begun to rise over the last few months. And while the aggressive and often-violent protesters who spent half a year opposing the project’s completion would never admit it, DAPL is also already improving the safety of moving Bakken crude out of the basin to be sold and refined.
While rail companies and regulators have moved in recent years to improve the safety aspects of shipping crude by rail following several high-profile incidents, the truth remains that pipelines are far and away the safest means of moving crude oil to market. Rail will remain a part of the transportation mix for Bakken oil – it represented about 25% of that mix during February of this year – but its market share there will grow smaller in the coming months. That’s a positive for producers, refiners and the public.
Unfortunately, , where Andrew Cuomo continues to cost his constituents billions of dollars each year through his efforts to obstruct the building of needed natural gas pipelines in the Empire State. Gov. Cuomo is of course most famous for orchestrating a statewide ban on hydraulic fracturing, a ban that has denied New Yorkers to share in the riches provided to Pennsylvanians, West Virginians and Ohioans by the massive Marcellus Shale resource, which also extends into Southwestern New York.
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[Note: I posted this piece at Forbes.com on April 22, 2013, but it remains relevant today.]
Today is Earth Day, and it is very likely that the fact that abundant fossil fuels like oil, natural gas and coal, are natural resources, and gifts to humanity from Mother Earth herself will be lost amid all the frightful doom and gloom predictions that will be launched by environmental activists and repeated by various media outlets.
All the vitriol thrown at these fossil fuels by the environmental community notwithstanding, it is a simple fact that our prosperous, modern, energy-hungry society was made possible by the existence of these fuels. Without the discovery of and ability to produce fossil fuels, it is likely that mankind would still be mired in a Medieval form of existence, reliant on burning wood for heat, horses for transportation, and still living largely in the dark after nightfall.
But what about wind, solar and nuclear? The production of modern wind turbines, solar panels and nuclear power plants are extremely energy-intensive enterprises, and are by and large powered by the burning of fossil fuels. In other words, without the massive energy levels generated by the fossil fuel chicken, the “green” energy eggs would not have been possible.
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