Natural Disaster (Louisiana Oil & Gas Association)
June 19th, 2009 Natural Disaster
Don Briggs -
Louisiana Oil & Gas Association -
The good news is oil should average $67/barrel for the rest of 2009; the really bad news is natural gas prices may fall further.
Six months into 2009, the oil and gas industry finds itself reeling from what we can now call the “crash of 2009.” Oil and gas industry executives are in a challenging period, closely watching their companies’ assets, trying to have some understanding of what oil and natural gas prices will do and just how far the domestic rig count will drop.
This is by no chance the industry’s first “rodeo.” The domestic oil and gas industry has had its share of good times and bad, which have been different in their own way, but have shared some commonalities. The invasion of Iraq in 2003 caused oil prices to climb; the Asian economic collapse in 1997-98 sent prices to $10 per barrel; the Iraqi invasion of Kuwait sent them up above $20; and of course the severe economic downturn took place from 85-86 when prices plunged to near $12 after OPEC flooded the market with surplus production. Each of these global incidents took their toll on the oil and gas industry by impacting global supply and demand.
Is the “crash of 2009″ any different from the incidents in the past decades? One could arguably that it is. The global oil supply and demand factor is common in all of the past peaks and valleys; however, there are other factors making the “crash of 2009″ more profound, such as the world economic meltdown; the U.S. recession; the collapse of vital capital lenders; and the election of a biased, anti-oil and gas industry administration in Washington. All of the ingredients for the perfect storm.
What is the current crude oil short-term outlook?
As of the middle of June, oil prices have recovered to above $72 per barrel from a low of $35 in February. The Energy Information Administration estimates the price of West Texas Intermediate crude oil to average $67 per barrel for the second half of 2009, which would be a $16 per barrel increase over the first half average.
Of course gasoline prices are seasonally climbing along with rising oil prices, which puts pressure on a struggling economy. The oil and gas industry will once again be blamed for hindering the financial recovery of the world’s economies.
What many do not understand is that the domestic oil and natural gas industry cannot sustain itself with prices below its cost. According to a 2006 study, the finding cost for a barrel of oil in the Gulf of Mexico is $63 per barrel, making it the single most expensive finding cost in the world. In a recent Bernstein Research study of 100 E&P companies in Texas, Oklahoma, Kansas and Arkansas, the average break-even price for a company to sustain itself without any growth is $45 per barrel.
In spite of the continued decline in domestic crude oil production and the continued decline in the number of rigs drilling for oil (a mere 183 rigs), U.S. crude oil production is projected to increase by 150,000 barrels per day in 2009. The increase is due to the 400,000 barrels per day of new production coming online from major deepwater projects in the Gulf of Mexico, such as Thunder Horse.
The world is awash with oil. Inventories are full, pipelines are full and there are nearly 100 million barrels in ships on the high seas looking for the right price and time to unload. For most purposes, OPEC has the price of oil in the middle of its suggested range of $60-$80 per barrel, and I would look for OPEC to maintain its current production quotas in the August meeting in Vienna. OPEC will have to be sensitive to world economies struggling to recover.
The short-term outlook for natural gas, however, is bleak.
The natural gas industry is also swollen with surplus production. U.S. working natural gas in storage is 17 percent above the five-year average. EIA predicts natural gas stocks to reach 3,659 billion cubic feet at the end of the 2009 injection season (October), roughly 94 Bcf above the previous record of 3,565 Bcf reported for the end of October 2007.
According to EIA, “the monthly average Henry Hub natural gas spot price is expected to stay under $4 per thousand cubic feet (Mcf) until late in the year as abundant natural gas supplies converge with weak demand driven by an 8 percent decline in industrial sector consumption.” The electric power industry will take advantage of the low natural gas prices and, using cogeneration, will switch from oil to natural gas for its energy source, offsetting some of the 8 percent decline from the industrial sector.
Unlike the oil sector of the industry, natural gas prices are predicted to remain in their current posture with little to no increase until late 2009. EIA suggests natural gas spot prices will average $4.13 per Mcf in 2009 and $5.49 per Mcf in 2010. The Bernstein Research study suggests the mean break-even price for the Mid-Continent marginal gas producers surveyed was $4.66/Mcf, well above recent prices in the range of $3.80/Mcf.
One year ago there were 1,504 rigs drilling for natural gas in the United States; today there are 685 rigs drilling for natural gas, a 54 percent decline. Consequently, the total U.S. marketed natural gas production is expected to decline by 1.1 percent in 2009 and by 2.6 in 2010.
Some analysts believe the need for the natural gas rig count to climb to the levels of 2008 to sustain production levels may not be necessary, pointing to the technology of the unconventional “resource plays.” Wells being drilled in plays like the Haynesville Shale in north Louisiana come on line as barnburners; however, the high rate of production falls off in 12 months and then levels off for several years. I don’t pretend to be an expert, but I do believe the 28 percent production depletion rate will eat away very quickly at the 4 Bcf per day surplus production, and the industry will need to scurry to stay up in the year to come.
In Acadiana we know how to adjust to the peaks and valleys of the industry caused by supply and demand. Right now, however, the focus of most industry executives is on the uncommon ground of politics in Washington, D.C. Proposals before Congress, if passed, will literally throw the fundamentals out the window.
Don Briggs -
Louisiana Oil & Gas Association -
The good news is oil should average $67/barrel for the rest of 2009; the really bad news is natural gas prices may fall further.
Six months into 2009, the oil and gas industry finds itself reeling from what we can now call the “crash of 2009.” Oil and gas industry executives are in a challenging period, closely watching their companies’ assets, trying to have some understanding of what oil and natural gas prices will do and just how far the domestic rig count will drop.
This is by no chance the industry’s first “rodeo.” The domestic oil and gas industry has had its share of good times and bad, which have been different in their own way, but have shared some commonalities. The invasion of Iraq in 2003 caused oil prices to climb; the Asian economic collapse in 1997-98 sent prices to $10 per barrel; the Iraqi invasion of Kuwait sent them up above $20; and of course the severe economic downturn took place from 85-86 when prices plunged to near $12 after OPEC flooded the market with surplus production. Each of these global incidents took their toll on the oil and gas industry by impacting global supply and demand.
Is the “crash of 2009″ any different from the incidents in the past decades? One could arguably that it is. The global oil supply and demand factor is common in all of the past peaks and valleys; however, there are other factors making the “crash of 2009″ more profound, such as the world economic meltdown; the U.S. recession; the collapse of vital capital lenders; and the election of a biased, anti-oil and gas industry administration in Washington. All of the ingredients for the perfect storm.
What is the current crude oil short-term outlook?
As of the middle of June, oil prices have recovered to above $72 per barrel from a low of $35 in February. The Energy Information Administration estimates the price of West Texas Intermediate crude oil to average $67 per barrel for the second half of 2009, which would be a $16 per barrel increase over the first half average.
Of course gasoline prices are seasonally climbing along with rising oil prices, which puts pressure on a struggling economy. The oil and gas industry will once again be blamed for hindering the financial recovery of the world’s economies.
What many do not understand is that the domestic oil and natural gas industry cannot sustain itself with prices below its cost. According to a 2006 study, the finding cost for a barrel of oil in the Gulf of Mexico is $63 per barrel, making it the single most expensive finding cost in the world. In a recent Bernstein Research study of 100 E&P companies in Texas, Oklahoma, Kansas and Arkansas, the average break-even price for a company to sustain itself without any growth is $45 per barrel.
In spite of the continued decline in domestic crude oil production and the continued decline in the number of rigs drilling for oil (a mere 183 rigs), U.S. crude oil production is projected to increase by 150,000 barrels per day in 2009. The increase is due to the 400,000 barrels per day of new production coming online from major deepwater projects in the Gulf of Mexico, such as Thunder Horse.
The world is awash with oil. Inventories are full, pipelines are full and there are nearly 100 million barrels in ships on the high seas looking for the right price and time to unload. For most purposes, OPEC has the price of oil in the middle of its suggested range of $60-$80 per barrel, and I would look for OPEC to maintain its current production quotas in the August meeting in Vienna. OPEC will have to be sensitive to world economies struggling to recover.
The short-term outlook for natural gas, however, is bleak.
The natural gas industry is also swollen with surplus production. U.S. working natural gas in storage is 17 percent above the five-year average. EIA predicts natural gas stocks to reach 3,659 billion cubic feet at the end of the 2009 injection season (October), roughly 94 Bcf above the previous record of 3,565 Bcf reported for the end of October 2007.
According to EIA, “the monthly average Henry Hub natural gas spot price is expected to stay under $4 per thousand cubic feet (Mcf) until late in the year as abundant natural gas supplies converge with weak demand driven by an 8 percent decline in industrial sector consumption.” The electric power industry will take advantage of the low natural gas prices and, using cogeneration, will switch from oil to natural gas for its energy source, offsetting some of the 8 percent decline from the industrial sector.
Unlike the oil sector of the industry, natural gas prices are predicted to remain in their current posture with little to no increase until late 2009. EIA suggests natural gas spot prices will average $4.13 per Mcf in 2009 and $5.49 per Mcf in 2010. The Bernstein Research study suggests the mean break-even price for the Mid-Continent marginal gas producers surveyed was $4.66/Mcf, well above recent prices in the range of $3.80/Mcf.
One year ago there were 1,504 rigs drilling for natural gas in the United States; today there are 685 rigs drilling for natural gas, a 54 percent decline. Consequently, the total U.S. marketed natural gas production is expected to decline by 1.1 percent in 2009 and by 2.6 in 2010.
Some analysts believe the need for the natural gas rig count to climb to the levels of 2008 to sustain production levels may not be necessary, pointing to the technology of the unconventional “resource plays.” Wells being drilled in plays like the Haynesville Shale in north Louisiana come on line as barnburners; however, the high rate of production falls off in 12 months and then levels off for several years. I don’t pretend to be an expert, but I do believe the 28 percent production depletion rate will eat away very quickly at the 4 Bcf per day surplus production, and the industry will need to scurry to stay up in the year to come.
In Acadiana we know how to adjust to the peaks and valleys of the industry caused by supply and demand. Right now, however, the focus of most industry executives is on the uncommon ground of politics in Washington, D.C. Proposals before Congress, if passed, will literally throw the fundamentals out the window.
Views: 59
Replies to This Discussion
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Permalink Reply by Mike LeHanna on
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The first thing I see wrong with this article is the author's willingness to predict energy prices: "...oil should average $67/barrel for the rest of 2009; the really bad news is natural gas prices may fall further."
This is pure speculation. It was only last year that all the "experts" were saying oil would never fall below $100 a barrel.
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Permalink Reply by Jon Williamson on
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I thought these were EIA predictions and not the author's.
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Permalink Reply by Grillin' - MmmMmm on -
I partially agree with you KB that the organization is biased. But the bias is towards "pro-business" stances. I think their conclusions that the current administration is "anti-oil and gas industry" are drawn from looking at the actions taken to date by the administration, not due to political organization.
Can you name one thing that the administration has done that HELPS the oil and gas industry?
Can you name one thing that the administration has done that HURTS the oil and gas industry?
When put in those terms, and using a legal pad with a vertical line drawn down the middle, list all the HELPS on the left and the HURTS on the right. I tried to do this but probably because I am "biased", I can't find anything to put on the HELPS side. Can you provide me a few?
Here's my list of HURTS:
1. getting rid of deprecition/depletion treatment for oil/gas drilling
2. took hundreds of thousands of acres of federal lands off the table for leasing
3. reversed previous admin's bidding schedule for many leases
4. has supported the inquisition on frac fluids
5. is pushing cap/trade/carbon tax legislation
6. is pushing mandated healthcare insurance, whereby employers will be forced to provide health insurance or be taxed/fined
7. abolishment of foreign income tax treatment
8. pushing for further restrictions in leasing offshore, such as changing EXISTING CONTRACTS (leases) to change the terms of those leases (sounds like Venezuela to me!; how does a government change a contract that was legally entered into, just because they don't like the terms?)
I'm sure there are more than just these. I'm open to any HELPS you can find, but I can't.
So, in light of all of the things the admin is doing to HURT the oil/gas industry, why wouldn't someone draw the conclusion that the admin is Anti-Oil/Gas industry? If someone walked up and slapped you once each day, it wouldn't take long before they would be deemed "Anti-KB". So, if the O&G industry is getting slapped by Obama every time they turn around, why wouldn't he be deemed "Anti-O&G"??
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Touche' Mmmarkkk...you said a mouthful my brother. This is nothing more than payback from the Dems. Anyone can see the measures being undertaken by our current regime will undoubtedly hurt domestic oil and gas companies.
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Permalink Reply by Grillin' - MmmMmm on
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KB: No HELPS to add to my list??
When I said "hurt" I meant for the industry. Hurt means taking federal land off the table for drilling, taking away tax structures that allow companies to drill wells AND make a return, hurt means raising the cost to run a refinery by XX%, which will eventually lead to shutting down the refinery and importing our gasoline from countries that don't have the "tax and trade and payoff cronies" approach. In the end, oil/gas companies are run for profit and shareholder return. When things decrease that profit and return, then the company stops doing things. Like stops drilling in the U.S. and spends its time and money in other countries. Like moving the company out of the U.S. so that it isn't within reach of the regressive tax code.
When all of this comes down, and we start laying off more and more people in the O&G industry, it will be interesting to see all of the O&G former employees with their Obama/Biden bumper stickers leaving the parking lot. Kind of want to ask "How's the 'Change You Can Believe In' working for you?" My neighbor interviewed a few folks for a job and realized that one of the candidates was a big "O" supporter. Guess who didn't get the job? Anyone who supports a regime whose purpose is to destroy an industry shouldn't be looking for work within that industry.
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Permalink Reply by Grillin' - MmmMmm on
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So I'll take that as you've come up with no HELPS. Thanks anyways.
"we refine so little already."
Really? our percentage of imported refined products seems to be quite low so we must be refining a lot.
"There's plenty of land leased that yet has been produced."
Great answer; political pap though. Might it be that the land leased is not prospective after being studied by explorationists? Just because its leased doesn't mean there's oil/gas underneath.
"The threat of moving offshore already has been debunked."
I actually think you'll find capital spending budgets of the majors being moved further and faster to international projects and less in the US.
Deal with business: regulation, taxation, etc. ARE business! They are key driving factors that make business profitable or not profitable! They are important.
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Permalink Reply by P.G. on
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Didn't Obama promise the US will be independent from Foreign Oil within 10 years?
One would think he'd be getting something started that would accomplish that already, unless his taxing it out of reach of the common citizen is the plan, huh?
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yep that's what he promised....and based on what I have seen his vision doesn't include natural gas. His handlers are pushing the wind/solar/bio/clean coal remedy. There is no doubt Obama and his handlers know about peak oil. It is obviously political suicide to address it. My gut is he has until 2012 +- so lets see how he and Chu spin it. Natural gas is the only way to get from 2012+- to his second term. We are living in intersesting times.
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Permalink Reply by Grillin' - MmmMmm on
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P.G.: He promised a lot of things...he's a freaking politician. The funny part is people thought he would follow through on the promises. Have we not learned that no matter what party, what gender or what race, a politician is going to promise everything in the world and rarely deliver on all of it.
During the campaign, he "promised" that no one would be forced to buy health insurance. Now, he's saying his thoughts have "evolved". I'm guessing his thoughts on making America independent of foreign oil are "evolving" as well. Those with half a brain have always known that this is impossible in 10 years...maybe impossible in 30 years. He's certainly doing his best to make it impossible by shackleing our ability to drill in the most prospective areas.
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Permalink Reply by boby on
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I don't think the writer here is paying any attention to the facts he is quoting. He says the world is "awash in oil", a buzz phrase used throughout the media; because there is "100 million barrels in ships on the high seas awaiting the right price and time to unload". Big deal, the world uses 85 million barrels A DAY!
He states oil production will increase by 150,000 barrels a day in the US due to the fact Thunderhorse is coming online at 400,000 barrels a day. ok, two things : We don't find a Thunderhorse every year and without Thunderhorse oil production would have declined by 300,000 barrels a day.
His 28 percent depletion for annual Haynesville well production I believe, is way too light.
When you sift these facts, both oil and gas are in for increased in price, in my opinion.
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