Friday, October 11th, 2019
Happy Friday and welcome to Energized, your weekly look into the geopolitics, news, and happenings of energy markets.
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Now, onto this week’s issue.
Curated weekly oil and gas newsletter
Oil Prices and Markets
+ Fast Facts – Houston Chronicle “Fuel Fix” as of Sunday, October 6th, 2019
Light, sweet crude (dollars per barrel): $52.81
Last Week: $55.91
Natural Gas (dollars per million British thermal units): $2.352
Last Week: $2.404
Rig count (United States): 855
Last Week: 860
ConocoPhillips is trimming assets in its quest to lower average breakeven cost per barrel.
“Our business legacy in the U.K. reflects a 50-year history of achievement and operational excellence. Our workforce there should be proud of their accomplishments, and we look forward to maintaining our commercial trading business in London and continuing as operator of the Teesside oil terminal,” said Ryan Lance, CEO of ConocoPhillips.
+Big oil circles Permian riches – Rigzone
“(Bloomberg) — A bloodbath in energy stocks is creating a rich opportunity for Big Oil to dominate America’s hottest shale play.”
The article expands on prior points brought up in this newsletter, most notably on Shell and ConocoPhillips. As we have mentioned before, Shell and ConocoPhillips have steered clear of chasing high-priced Permian assets, focusing instead on bolstering cash flow by improving operations and lowering average breakeven cost per barrel. ConocoPhillips and Shell may just get their chance to bottom fish from desperate E&P companies strapped for cash.
“Despite record U.S. output, the S&P index of independent exploration and production companies is trading near its troughs of 2008 and 2015, when crude prices sank south of $35 a barrel. The producers are now worth just 4.5 times their earnings before certain items, compared with 9 times about a year ago.”
The article argues that oil majors would rather acquire smaller companies than purchase the assets outright. Examples mentioned include Pioneer and Concho for Exxon or EOG and Oxy for another major.
When oil is struggling to stay above $50 a barrel, much less return to above $60, things change. Size and a diverse portfolio matter, which is exactly what Exxon and Chevron bring to the table. “The two heavyweights are betting their ability to fund enormous drilling programs and build associated infrastructure like pipelines and gas terminals means they won’t encounter the growing pains the independents are currently experiencing.”
+ Shale boom is slowing just when the world needs oil most – The Wall Street Journal
“U.S. oil production increased by less than 1% during the first six months of the year, according to the Energy Department, down from nearly 7% growth over the same period last year.”
Production comparisons to 2018 are difficult because output grew so quickly last year. U.S. shale total production is still blasting through prior records, just at a slower growth rate.
““We’re getting closer to peak production and we are reaching the peak of the general physics of these wells,” said James West, a managing director at Investment bank Evercore ISI.”
“One factor that could lead growth to continue is the increasing shale footprint of major oil companies such as Exxon Mobil Corp. and Chevron Corp. They are now among the fastest-growing producers in the Permian Basin of Texas and New Mexico, investing heavily in factory-style shale production.”
This kind of “factory-style production” resembles the same operational model as an offshore play. Capital intensive, years of planning, but calculated break-even costs. With scale, Exxon and Chevron can lower their breakeven levels with the best of the independents. As mentioned in the previous article, Exxon and Chevron can include drilling programs and other infrastructure developments like pipelines and gas terminals to give them an edge over independents.
“Production in the first 90 days of an average shale well, its most productive period, declined by 10% in the first half of the year compared to the 2018 average
There are a lot of headwinds facing shale producers in the Permian, Bakken, Eagle Ford, and other North American plays. To sum them up:
- Lower oil prices, thereby squeezing margins
- Less output per well
- Fewer barrels per horizontal foot
- Negative Wall Street sentiment
- Debt notes to pay
- Skin in the game from arguably paying too much for certain assets, especially in the Permian
EKTi contributor, Jim Crompton, released an article on LinkedIn last week detailing the struggles of the North American shale sector, posing the question “can digital transformation help or is it another technology distraction and a hole to throw money in and never get anything back?”
“Challenges for shale industry include: tougher regulations (especially in some states like California and Colorado); a vicious investment cycle (borrow money, to acquire leases (or companies), to drill wells, to grow production, but facing steep decline curves and lagging pipeline infrastructure, production growth increasing more slowly, well counts going down, supply exceeds demand (except when you can export) keeping prices low).” Compton then hits the jugular: “The end result is that many investors are leaving the oil and gas market looking for better returns.”
Crompton goes on to highlight that only 13 percent of executives believe they are getting both top-line and bottom-line-growth from their digital investments (Accenture Delivering Digital dividends, 2017 Industry X.0 research). Poor results are usually not a fault of the technology itself but the implementation of that technology. Accenture found 5 main barriers that stunt the effectiveness of implementing digital technology:
- Inability to effectively combine rapidly evolving digital technologies
- Workforce lacking the skills to design and deliver value with digital tools
- Insufficient data security and trust
- Inability to measure performance of digital technology investments
- Lack of intimate, accurate and continuous knowledge about customer needs
Accenture’s recommended solution to overcoming these 5 barriers are 5 “value triggers” which Crompton describes as “common-sense steps to create value more quickly.”
- Talent Readiness
- Is management capable to lead and does the workforce have/can learn the technical skills required?
- Capital Adequacy
- Acquiring a start-up, M&A activity, are the funds there to make this happen?
- Ecosystem Maturity
- “The maturity of the ecosystem to drive value with a technology, including partners and vendors, is the third value-trigger to consider. Do joint venture partners and suppliers share the same vision for an artificial-intelligence enhanced supply chain with their tech vendors?”
- Adoption Intensity
- Integration, what’s the starting point, what’s the estimated growth across the market, what’s the benchmark?
- Value Potential
- “Value potential centers on estimating the realistic returns on digital technology investments, which sets expectations for both executives and shareholders. Quantifying expected top-line and bottom-line gains can serve as a useful benchmark throughout their digital reinvention journey.”
Jim Crompton is an adjunct faculty member at the Colorado School of Mines and the Managing Director of Reflections Data Consulting.
+ Frac spread drop could end soon – Rigzone
“Hydraulic fracturing operations in U.S. shale basins have been trending downward since the spring of this year, and the number of active frac spreads has dropped for the past 12 consecutive weeks.”
“Primary Vision points out that U.S. frac spread counts are down nearly 100 since mid-spring. Roughly two-thirds of the reported declines are in three plays:
- Permian Basin: down 30 frac spreads
- Eagle Ford Shale: down 20 frac spreads
- Williston Basin: down 15 frac spreads”
The article is a bit misleading. There’s no indication that frac operations will cease declining. Instead, the article is basically saying “well it can’t get much worse, can it?” Regardless, there are some good facts in the article. I was unaware we are in the midst of one of the longest declining Frac spread counts since 2014.
+ Guyana nears oil and gas turning point – Rigzone
The World Bank is estimating that Guyana’s GDP growth rate will rise from 4.6% to 34% in 2020 thanks to Exxon Mobil floating, production, storage, and offloading (FPSO) vessels like the Liza Destiny. “The FPSO will tie back to eight production wells and yield up to 120,000 gross barrels of oil per day starting next year. After Liza Destiny, ExxonMobil may deploy four more FPSOs to Stabroek and produce more than 750,000 bpd of crude by 2025. ”
Although great news for Guyana, the country is desperately trying to avoid the “resource curse”, a common pattern for developing countries with newly accessed energy reserves.
Consequences of the “resource curse” include the following:
- “The country’s government spends what it expects to earn in the future, taking on debt.
- Inflation can rise, impeding the development of other industries.
- Companies operating in the countries struggle to get things done because there is no clear regulatory framework.
- Local citizens become frustrated at the lack of any tangible benefits they initially see from the resource finds.”
So far, things are good for Guyana. Exxon and its partners have executed efficiently thanks to no significant hurdles by Guyana’s government. Licenses have been renewed for further development. Attractive fiscal terms have already rewarded investors in the project.
Give the article a read if you are interested in the growing oil market in Guyana, as well as lessons that Guyana can learn from a more seasoned African oil and gas producer, Ghana.
Have a great weekend!
EKT Interactive Managing 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.