Friday, August 2nd, 2019
Happy Friday and welcome to Energized, your weekly look into the geopolitics, news, and happenings of energy markets.
Before diving into this week’s content, we’d like to remind you to join our Energized LinkedIn Group. We will be releasing frequent news and snippets of Energized newsletters through the group. We hope to see you there.
Now, onto this week’s issue.
Curated weekly oil and gas newsletter
+Stocks, bond yields, oil fall on new China tariffs – The Wall Street Journal
August wasn’t exactly welcoming to oil prices. Yesterday, WTI fell nearly 8%, the worst one-day performance since February 2015. Oil closed Thursday at $54.48 and ended the day down 7%, recouping some losses.
The overall weekly drop wasn’t as severe. In fact, it was less than 3%, considering light, sweet crude started the week at $55.63 and had made gains during the first half of the week before Thursday’s bloodshed.
+The EU and the US Oilpatch – The Drilldown: In-depth answers to oilfield questions (Episode 114)
An end-of-2018 study by the EIA found that Return on Equity (ROE) had risen to 13%, on average, for 43 of the US’s largest operators. That’s great news for an industry that has experienced years of double-digit negative ROE like -40% in the dark years of 2016.
The average cost per barrel of these 43 companies, including everything from production taxes to operating costs, was $48 in 2018.
The EIA’s study found that the bigger the oil company’s production is, the greater the profitability. Meaning, the lower the cost per barrel.
As an example, the study measured a profitability ratio across all 43 companies.
The ratio was simply cash flow from operations/ capital expenditures.
Anyone in finance will tell you this is the simplest way to measure whether or not a company’s existing operations are profitable. If the number is above 1, operations are profitable and if it’s below 1, your business is losing money.
With a couple of exceptions, the only companies that were above 1 were the ones that were producing more than 100,000 barrels per day. 9/12 operators of the >100,000 bpd operators were over 1, with the best of them at nearly 2 and the average of the 12 at 1.25.
1.25 is a sensational number, meaning that for every $1 that the company is spending they are returning $1.25 in cash flow. You’d put every bank, and hedge funds tied to the stock market for that matter, out of business if you could guarantee that return.
Since the positive cash flow is concentrated in the larger companies, the statistic is misleading. The US operator group as a whole appears to be profitable, but a closer analysis concludes that, in fact, 75% are unprofitable. While 13% ROE is an accurate average, it’s buoyed by the larger and more profitable operators whereas the smaller operators can lose money hand over first and barely dent the industry average.
In fact, some of the 31 smaller operators had as low as 0.5 profitability ratios, meaning they are only returning 50 cents on the dollar from their investments.
Texas drillers are responding to concerns over Permian flaring. The flaring is a result of natural gas production that now exceeds 14 billion cubic feet per day. With nowhere to go, the gas has to be stored or flared, the latter of which is the cheaper but environmentally taxing option.
EOG Resources and four other producers are experimenting with highly pressurized natural gas as a newly enhanced oil recovery tool. Shooting the pressurized gas downhole has the potential to increase output from older wells by 30-70% by using 25% of the associated gas produced from oil wells.
Widespread adoption of this technique would certainly improve the West Texas gas glut, but only pipelines can mitigate the hemorrhaging of gas into the atmosphere. Permian flaring doubled between late 2017 and late 2018.
Lately, offshore has dwindled in the shadow of the Permian spotlight, but Shell’s Appomattox Deepwater platform is simply a marvel.
We have mentioned the Appomattox in previous Energized newsletters and will continue to provide more updates as they come.
JPT released an article that sheds more light on the sheer scale and financial impact of Appomattox.
“Appomattox creates a core long-term hub for Shell in the Norphlet through which we can tie back several already discovered fields as well as future discoveries,” said Andy Brown, Shell’s upstream director.
Shell is relying on deepwater investments to stir investor confidence. Like ConocoPhillips, Shell is one of the only major players who isn’t chasing Permian assets, opting instead to improve operational efficiency and go for untapped value offshore.
Shell’s goal is to produce 900,000 bpd from worldwide deepwater by 2020.
+The oilfield of the future will include a mobile wireless network – Oil & Gas Engineering
-Onshore and offshore oil fields can be painfully remote. This is a deep dive into kinetic mesh networks and their impact on connectivity in the field.
North American Shale
+From Independence to Collaboration – World Pipelines
This is one of the best shale-related articles I have read in a long time.
There are high expectations for the Permian. Widely accepted estimates that Permian production could reach 5.4 million bpd by 2023 would mean that the Permian alone would produce more than every OPEC country, except Saudi Arabia. For that to happen, it will take a lot more than just pipelines. Independents and majors must collaborate to construct hospitals, schools, roads, and living quarters in the Permian. Pipelines leading to Houston and Corpus arrive at crowded ports. Brownsville and other coastal towns are ripe for infrastructure builds. The days of independents not having to worry about global markets are over. The article stresses the importance of independents working together.
I don’t want to spoil the article for you. It’s a fantastic read that provides a harsh reality on what it will really take to make the Permian sustainable for years to come.
+ Permian oil companies donate $16.5 million for new Midland-Odessa charter schools – Houston Chronicle
“The new Permian Strategic Partnership of 20 energy companies said it will donate $16.5 million to support the opening of 14 new charter schools in the Midland-Odessa area. The Permian Strategic Partnership, which was created last year to support growth in the booming Permian Basin, has pledged more than $100 million overall thus far to help improve roads, schools, health care, housing, and workforce training.”
+ Crude oil inputs to Mexico’s refineries fall for the fifth year in a row – Houston Chronicle
“Crude oil inputs to Mexico’s six aging refineries has fallen for the fifth year in a row, a new report from the U.S. Energy Information Administration shows. On average, Mexico’s petroleum refineries consumed a combined 600,000 barrels of crude oil per day in 2018, the report shows. The figures mark five consecutive years of declines and a 50 percent drop from 2013 crude oil inputs. Gasoline and diesel production at those six refineries has also seen five years of declines.”
Last week, in Energized #16, we cited the API midyear report that US oil exports reached a new all-time high of 3.3 million. Naturally, refineries are responding to the business opportunity by constructing and renovating export terminals.
Phillips 66’s latest project, called the Bluewater Texas Terminal, joins over eight other projects in the prime export terminal real estate hub around Corpus Christi. Coastal real estate in Corpus Christi is some of the most expensive in the gulf due to Corpus’ location as both the last stop for many pipelines and the beginning of Gulf exports. Realizing the toll Corpus real estate prices would take on capital expenditures, Phillips 66 decided to build their export port 20 miles off of Corpus Christi.
Ambitious and amusing, Phillips 66 is acting like it’s just another day at the office. Reuters quotes Dennis Nuss in the article as saying “[Phillips 66’s proposed project] would provide an additional safe and environmentally sustainable solution for the export of abundant domestic crude oil supplies from major shale basins to global markets.”
The article goes on to mention several joint ventures that Phillips 66 has entered to build pipelines linking its domestic assets to the Gulf Coast.
+The Frackers – Gregory Zuckerman
I haven’t personally read “The Frackers” but it’s been recommended to me a handful of times. Instead of linking the book itself, I wanted to share Zuckerman’s 1-hour interview with Columbia Business School from 2014. The interview conveys the essence of the book; unexpected entrepreneurs that became industry icons.
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 that specializes in gas compression, turbomachinery, onshore and offshore drilling, and well service content for the oil and gas industry.
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