Happy Friday and welcome to Energized, your weekly look into the geopolitics, news, and happenings of energy markets.
Fast Facts – Houston Chronicle Fuel Fix
Light, sweet crude (dollars per barrel): $61.94
- Last Week: $63.30
Natural Gas (dollars per million British thermal units): $2.567
- Last Week: $2.58
Rig count (United States): 990
- Last Week: 991
“The offshore rig marketed utilization rate in the Gulf was 83.3%, up from last year’s 74.5%.
From what I’ve read, offshore investment levels are expected to rise in 2019. The increased utilization rate of offshore rigs is encouraging for a sector of oil and gas desperately in need of growth. One theory for the resurgence in offshore interest is the oversaturation and logisitcal problems surrounding the Permian Basin. Acreage in the Permian is being snatched up and bid higher and higher. Pipeline takeaway capacity is severely lagging behind production demands by nearly 1 million bpd now. Given the current market climate, it makes sense that offshore drilling would be seen as an alternative investment to onshore at this time.
The drama is over.
Chevron displayed some seriously savvy negotiating skills in its quest to acquire Anadarko. What started 4 weeks ago finally ended when Chevron sailed into the sunset with $1 billion from Anadarko. In the original terms of the agreement between Chevron and Anadarko, Chevron offered $65 per share for Anadarko, which was a 35% premium to what the shares closed at the day before the buyout was announced. As part of the deal, Chevron convinced Anadarko to agree to pay $1 billion if Anadarko walked away from the deal. For Chevron, it’s a classic negotiating tactic, essentially saying “I will pay this much for your company, and if I don’t get it, I still want something.” A total win-win for Chevron.
For Anadarko, it was a no brainer. Partnering with a titan like Chevron to create the largest combined acreage in the Permian and increasing your stock price 35% in a day is a beautiful thing. But when Vicki Hollub, CEO of Occidental Petroleum, came in, guns blazing with an offer to pay $76 per share for Anadarko and backed by $10 billion from Warren Buffett, everything changed. Anadarko waited for Chevron to raise their bid, but Chevron decided to simply walk away instead.
From watching numerous interviews, I can tell you that Hollub seemed tenaciously set on acquiring Anadarko at all costs. For that reason, I think Chevron did the right thing. They attempted to increase their dominance in the Permian and they set a price they were comfortable with. When Oxy offered $11 more per share or over 15% more than Chevron’s offer, the $1 billion breakup fee probably looked like the real prize. I truly hope that all companies benefit. For now, it’s clear that both Chevron and Anadarko won.
There are many question marks surrounding Oxy. Unlike Chevron, who is many multiples larger than Anadarko, Oxy is only slightly bigger than Anadarko. On top of that, Oxy already has $11 billion in debt, and that’s before Warren Buffet’s $10 billion, 8% interest loan. Oxy basically bought something its own size when it didn’t have the cash to do so. Their stock price is suffering from it. It has fallen nearly 15% since Oxy first offered to buy Anadarko and now sits at a 5-year low. Oxy would argue that the price was worth it to create the largest most dominate Permian E&P behemoth the world has ever seen. Oxy has no shortage of vigor, but it remains to be seen if the financials can hold up.
+Basic steps to take when applying analytics processing – Oil & Gas Engineering
-Upstream oil and gas operations improved using data analytics.
-“According to McKinsey, these types of improvements represent a $50 billion-dollar opportunity in upstream oil & gas, including increasingly important shale oil”.
Onshore: North America
+Number of drilled but uncompleted wells reaches record highs – Houston Chronicle
The EIA’s monthly drilling report for March, which was released in early May, found 8,500 Drilled but Uncompleted (DUC) wells in the United States. A DUC is a well that has been drilled but hasn’t undergone completion activities to start producing crude oil or natural gas. Completion activities include casing, cementing, perforating, fracking, and other procedures. When wells are in their uncompleted stage, they aren’t earning money. Production is the step after drilling and completing the well that brings hydrocarbons to the surface so they can be converted to cash.
You can learn more about drilling, completions, and production in our Oil 101: Introduction to Upstream Course which is part of our Oil 101 package. You can find Oil 101 here.
So why does the DUC number matter? DUC count is increasing mostly due to the situation in the Permian Basin. As it stands now, the Permian has exceeded its takeaway capacity by about 1 million bpd. As a result of the bottleneck, there are a record 4,000 Drilled but Uncompleted wells (DUCs) in the Permian, representing an 800% increase in just 5 years. Thankfully, pipeline projects are underway to increase the total takeaway capacity to as high as 5.8 million bpd by the end of 2020. Once the bottleneck is resolved, operators who took advantage of improved drilling techniques and leveraged the latest cost-reducing technology will be sitting on an immense stockpile of untapped cash flow thanks to drilled but uncompleted wells. Operators with a high inventory of DUCs can complete the wells at their discretion, timing the market once new pipelines are built.
It will be interesting to see how different operators play their hand. Complete all your wells at once, and the market will be flooded with a rush of Permian crude, likely maintaining the already painful discount that Permian spot prices trade to WTI. Wait too long, and risk delaying completions further as the newly constructed pipelines will likely be flooded with product.
Companies have been waiting for months, some of them over a year to complete their wells. Timing the market will vary from company to company, but one thing is certain. Service companies, who have been sitting on their hands, will be showered with completion jobs.
How the Permian shakes out is something to pay attention to. From logistics to market functions, to animal spirits, there is so much that goes into the sustainable fortune of a juggernaut like the Permian. The recent record DUC count suggests that independents and majors alike are willing to spend money in the short term for the prospect of profits down the road.
+Redesigning Compressor Stations-World Pipelines
This article highlights the benefits of using compressor trains driven by large power block gas turbines versus smaller turbines. A savings of $102 million over 30 years was found by choosing a hypothetical configuration of four compressor stations using five 41 MW gas turbine-driven compressor trains across all stations instead of a more traditional model such as four compressor stations using nine 24MW gas turbine-driven compressor trains across all stations.
Using larger power blocks reduces the number of compressor trains required while operating more efficiently and economically over a wide range of power loads.
When legacy compressor stations were built 30 years ago, they chose smaller power block designs for 3 main reasons:
- “Flexibility: via greater turndown capabilities for low-load conditions without recycling.”
- “Availability: when running at partial loads, which effectively resulted in one unit acting as a spare compressor train.”
- “Efficiency: because gas turbines at the time could be operated across a wide load range by shutting off units, resulting in higher outputs from the remaining units in operation.”
Today’s turbine technology allows for larger trains, resulting in less installed capital cost and risk, less maintenance cost and sparing, and improved operational flexibility and efficiencies which lower operating costs.
…Why does any of this matter?…
According to the American Petroleum Institute:
- Oil production will grow to 12 million bpd by 2035 (thanks to growth in unconventional sources).
- Natural gas production will nearly double to 131 billion cubic feet per day.
- Growth in NGLs.
- Infrastructure development for oil, gas, and NGLs will command between $12.3-19.0 billion in annual capital investment through 2035.
- Which translates to 27,000-45,000 miles of transmission and distribution pipelines
- With 10-12 million horsepower of compression replaced or added through 2035
- 218,000 – 240,000 miles of gathering lines in addition to 23-29 million horsepower of additional compression to move the products to the processing plants.
- Scrubbing CO2 out of the atmosphere and turning it into fuel has been the mission of Canadian energy Company: Carbon Engineering.
- “Instead of condensing steam, air in this cooling tower flows past an alkaline solution of potassium hydroxide and water. Mildly acidic CO2 gloms onto the basic potassium hydroxide, forming potassium carbonate. Calcium is then used to grab the carbon from the potassium in a pellet reactor borrowed from the water-treatment biz. Finally, pure CO2 is liberated the way gold is separated from ore in a gold-ore roasting calciner. A paper mill’s caustic recovery loop keeps the potassium and calcium in continual reuse”.
Most of you are already familiar with our Oil 101 course, at least the free version. Did you know that we have companies that license the course to use as internal training for sales, IT and operations teams? If your group needs this, let’s talk.
Have a great weekend!
EKT Interactive Contributing Editor
Head Writer | Eau Claire Writing
Eau Claire Writing is a Houston-based freelance writing company specializing in gas compression, turbomachinery, onshore and offshore drilling, and well service content for the oil and gas industry.
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