Everywhere I go, people are asking me what I think about the price of oil. As of press time, the price is near a three-year low, a solid 20-plus percent below pricing only earlier this year. The reason is multifaceted. Certainly, supply is up and demand is down. Everyone who reads BIC Magazine knows how the U.S. supply has been ramping up. But also on the supply side, Saudi Arabia surprised everyone recently by cutting its price for exports to the U.S. More tragically, the ISIS barbarians are funding evil by selling oil at half of market price. On the demand side, Americans are driving less and with much more fuel efficient vehicles. Internationally, the economies in Europe and Asia are sputtering, so the demand falters. Lastly, there is the effect of a strong dollar. With the now very long and steady, albeit weak, U.S. economic recovery juxtaposed against other global economies, the value of the dollar versus the yen and euro has increased quite a bit in the last year. With oil priced in dollars, that means it takes fewer dollar units to purchase the global unit of oil.
What does current pricing mean for the U.S. energy industries? And how far would the cuts have to continue to have a significant negative effect?
First, on the E&P side of the business, conventional wisdom is most production is still profitable at $80/bbl pricing. But the game just isn’t as fun at $80 as it is at $100. Certainly overleveraged newcomers to the shale game will be forced out. This will create M&A opportunities for more efficient operators with a strong balance sheet. Further, not all shale is created equal nor is all shale currently produced using best available technology. Karr Ingham, petroleum economist for the Texas Alliance of Energy Producers, recently said some shale can be produced economically at $35 or $40/bbl and in the same play, because of rock quality, other land may need $85/bbl to support production. Further, Ingham points out that 90-100 percent of all the wells permitted in many shale plays are for gas, not oil. The market for gas is growing from both power plants and chemical plant start-ups. Regarding major E&P firms, most of their projects are not based on $100 oil. The long life cycles on mega projects necessitate a conservative internal price forecast to justify start-up. Overall, things could and will slow down if the pricing stays around $80, but we won’t fall off of a cliff like we did in the 1980s.
In the midstream business, for many projects, the E&P costs are sunk, so economics going forward are not as dependent on pricing. I can’t see holding back developing the infrastructure to transport what is already found and ready to transport to market. Further, many LNG projects are underway in various stages of progression. There is likely to be some gradual movement on the crude export ban that will necessitate infrastructure. And often overlooked, U.S. production of NGLs topped 3 million barrels a day. Unlike oil and natural gas, NGLs can be easily exported overseas, where prices are higher. Connections to the global market insulate NGLs from price swings when domestic demand is overwhelmed by supply. If you are interested in a national look at pipeline projects, John Saucer, vice president of Research and Analysis, Mobius Risk Group, made an interesting observation at a BIC event recently, saying there were so many workarounds underway for Canadian crude to come to the U.S., the Keystone XL is losing relevancy. Overall for the midstream, many projects that have been in permitting or engineering stages may not get done, but even before the pull back in pricing, nobody expected them all to come to fruition because of labor issues and overall level of competition. There is a historical peak of activity underway that won’t stop; maybe some pull back was necessary anyway.
Regarding the downstream sector, refiners benefit from low cost crude, as was reflected in the strong earnings reports last month. What the intregated energy companies choose to do with capital budgets, well, they haven’t exactly all tipped their hands yet. I expect them to pull back some, but the spending levels won’t fall off a cliff.
We are still amply blessed to be working in such a great environment, and in a great nation. With the recent election and the Republicans taking a majority of the Senate, perhaps we will see more industry friendly regulation being passed. If we all work smartly, I have faith our economy will grow, increasing demand and raising prices again. We have lots of great information in this issue of BIC to help you work smartly.
In this issue, we feature interviews with Michael D. Watford, chairman of the Independent Petroleum Association of America; Kory Judd, general manager of Chevron Richmond; Chuck Friedrichs, vice president of domestic sales at Tri Tool Inc.; and Tobie Craig, vice president of marketing and workforce development strategies at Turner Industries.
We also include information on advanced work packaging and workface planning, workforce development, industrial development, natural gas supply and demand, maintenance best practices, energy in film and more.
We hope to see you at our upcoming screenings of “FrackNation.” We will co-host our Baton Rouge, Louisiana, screening, with the Louisiana Mid-Continent Oil and Gas Association at the LSU Center for Energy Studies on Friday, Dec. 12. We will host our Houston area screening at the Houston Area Safety Council in Pasadena, Texas on Thursday, Jan. 8. Please visit BICMagazine.com for further details.
May God give you the desires of your heart and may all of your plans succeed. Merry Christmas, Happy New Year and peace be with you.
