Industry at large...

US production, a bright spot or chimera? What happens when the tanks fill up? Will the hedgers run out of hedge? Neil McNaughton’s hodge-podge of oil and gas miscellany.

Its been a year or so since I shared my ‘industry at large’ folder during which time a lot has happened. The oil price had halved so this is not such cheery reading as last year but here goes...

According the API, US crude production ‘hit its highest level since March 1986 last November,’ up 15% 9 million bopd and the highest monthly rate since ‘peak oil’ back in 1973.

Speaking at a recent Credit Suisse event, Schlumberger’s Patrick Schorn observed that while capex increased fivefold from 2001 to 2012, this only produced a 10% hike in production. This was ‘becoming less and less sustainable even before the dramatic fall in the oil price.’ Schorn criticized the industry’s lack of integration, ‘in many operations, a number of different companies are involved, each interfaces with the customer but looks after its own commercial interest.’ Schorn also revealed that 2014 North American revenues for a Halliburton/Baker Hughes combination are $8bn (double SLB). But internationally, SLB beats HAL/BHI with $7 (vs 6) billion revenue and a (commercially interesting) 24% return vs. 15% for HAL/BHI. Oh, and SLB also has announced 9,000 layoffs and HAL, 6,400.

A study by Gaffney Cline finds that a falling rig count may have a two million barrels/day impact on US unconventional oil production despite US Energy Information Administration forecasts to the contrary. The picture emerging is complex and nuanced by the time lag between drilling and production hook-up. Continental Resources is reportedly drilling but not completing wells, ‘seeking to defer flush production in the hope of capturing a price recovery or spike.’

IHS forecasts that the ‘stunning growth’ in US oil production may come to a halt mid-2015 as low oil prices start to bite. Around half of new wells in 2014 had a breakeven price of $60 or less while some 30% require $80 or higher. Another IHS study finds unsurprisingly that small US E&Ps are particularly exposed with a ‘worrisome’ median debt-to-appraised worth of assets ratio of 51% and anticipates ‘serious liquidity issues should prices remain depressed beyond 2015.’

Drillinginfo’s Allen Gilmer thinks that the rig count is old hat and is a concept that has become abstracted from production. He proposes a new Drilling-info Index that identifies actual drilling locations along with production data to provide an accurate indication of capacity. Gilmer estimates that of late, around 6 million barrels of new ‘produce ability’ has been coming into the system every year, offset by ‘very high decline rates.’

Avere Systems’ co-founder and CTO Mike Kazar said that software patents should be axed adding that, ‘copyright protection is sufficient to prevent wholesale IP theft. This worked fine through the early 1990s, when software patents were first allowed in the US.’ Kazar was joining Pure Storage in its call to the government to cut the patent term to just five years and to introduce a ‘use it or lose it’ clause to target patent trolls.

President Obama has requested $842.1 million for fossil energy programs in the 2016 financial year budget. The funds will enable the Office of Fossil Energy advance technologies related to the ‘efficient, affordable and environmentally sound use’ of fossil fuels and the management of strategic reserves. Some $560 million are allocated to fossil energy R&D into carbon capture and storage and ‘advanced energy systems’ that blend fossil energy usage with CCS and ‘cross-cutting’ research. $44 million will go to the natural gas program to ensure that shale gas development is conducted in a manner that is ‘environmentally sound and protective of human health and safety.’

In a ‘public commitment to openness,’ PG&E has provided the California public utilities commission with copies of 65,000 emails exchanged between the company and its regulator over a nearly five-year period beginning in 2010. The emails were the subject of a ‘voluntary review’ PG&E undertook in 2014 as a result of which PG&E ‘self-reported apparent violations’ of rules governing ex parte communications. At issue are some inappropriate conversations between PG&E and CPUC relating to ongoing litigation over the 2010 San Bruno pipeline explosion.

On a more positive note , a recent report from Wood Mackenzie shows how improved well design in the Haynesville shale has transformed the play. The Haynesville had fallen out of favor but today, the economics have shifted with a new breed of massive gas wells said to be one of the best hedges against plummeting oil prices.

A recent position paper from the Railroad Commission of Texas’ David Porter argues that the US crude oil export ban is a ‘dated policy’ and contributes to low oil prices that are hurting the State’s economy. ‘If Congress and the Obama administration were to repeal the prohibition on crude oil exports, studies show that domestic energy production would increase along with GDP, job growth, and capital investment, all while reducing our national trade deficit.’ The continuing shale revolution is necessary to sustain the ‘Texas miracle’ and help cement the US’ status as a global energy superpower.

Finally, an interesting piece in the March 16th edition of Bloomberg/Business Week on how US oil in storage has risen at the Cushing hub, from 18 million barrels last summer to over 50. What’s more, some are reported to be paying over a dollar a month per barrel for storage (that’s worse that the Bundesbank!)

Now here’s a thought. I expect that some of the oil going into storage has been sold via hedging contracts. Wo what happened when the storage fills up? Do the hedgers run out of hedge?


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