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Why Billions Are Pouring Into U.S. Shale

U.S. Shale Oil Boom

Introduction…Private equity funds raised $19.8 billion for oil ventures in the first quarter.  That is nearly three times the total raised the same period last year.

The accelerating pace of oil private equity, along with hedge funds and investment banks, arrives even as the recovery in oil prices from 8-year low has stalled at $50 per barrel due to stubborn oil glut.

Why the increase investment now?  The shale sector has become increasingly attractive to investors not because of rising oil prices, but rather because producers have achieved startling cost reductions – slashing up to half the cost of pumping a barrel in the past two years. Investors also believe the glut will dissipate as demand for oil steadily rises.

The financiers are confident that they can squeeze increasing returns from shale fields – without price gains – as technology continues to cut costs.  In addition, “Demand for oil has been more robust than anyone imagined three years ago,” said Mark Papa, chief executive of Centennial Resource Development Inc. (CDEV.O).

What now…This year’s drilling rush could be tested if global supplies grow too fast or if demand cools. The U.S. drilling rig count is rising at its fastest pace in six years and U.S. crude stockpile are close to 533 million barrels – near an all-time high and enough to supply the United States for 25 days.

In summary...”Shale funders look at the economics today and see a lot of projects that work in the $40 to $55 range” per barrel of oil, said Howard Newman, head of private equity fund Pine Brook Road Partners, which last month committed to invest $300 million in startup Admiral Permian Resources LLC to drill in West Texas.

Source: Earnest Scheyder, “Undaunted by oil bust, financiers pour billions into U.S. shale, Reuters, 17 April 2017

Is OPEC On Brink Of Collapse?

 OPEC Meeting

Introduction...The end of OPEC has been predicted on many occasions.  The average life of cartels in the 20th century is 3.7 to 7.5 years.  OPEC was founded September 1960.  So, that makes it one of the very longest running cartels at 57 years.

Cracks have been developing…Though cracks have been developing in the cartel since the start of the current oil crisis, the group has managed to stay together so far. Nevertheless, the success of the current OPEC deal for production cuts will decide its future as a cartel.

OPEC’s success in boosting oil prices…Since its inception, OPEC has been fairly successful in boosting prices by various means. A few of the price increases, however, were due to reasons other than direct OPEC action, nevertheless benefitting their members.

Though the 1973 oil embargo was brought on by political reasons, OPEC used the production cuts of the embargo to boost oil prices from $3 a barrel in 1973 to $12 a barrel in 1974.

The 1979 energy crisis was not a brainchild of OPEC. The production dropped due to the Iran-Iraq war, and the price of oil doubled in about 12 months, again benefitting OPEC members.

OPEC was able to boost prices using production quotas and production cuts following the Asian Financial Crisis in 1997.

What has OPEC done to support oil prices in the current oil crisis?

OPEC, as any cartel would, has used two strategies to influence oil prices. However, both have been unsuccessful in achieving their objectives.

In 2014, Saudi Arabia, the de facto leader of OPEC, attempted to stifle the competition of the shale oil drillers by keeping their production intact. As a result, oil prices plummeted to multi-year lows of about $27 a barrel in February 2016. The drop in oil prices saw 119 North American oil and gas producers file for bankruptcy from the beginning of 2015, according to Haynes and Boone, LLP.

U.S. oil production dropped about 883,000 barrels a day by August 2016, after topping out at 9.7 million barrels a day in April 2015. Nevertheless, the price decrease went well below OPEC’s expectations. Meanwhile, many shale oil drillers used a combination of better technology and hedging to continue pumping oil, despite the low prices.

As its first strategy failed to effect the U.S. shale oil production to the extent presumed, OPEC then adopted a second strategy of cutting production. On November 30, OPEC sealed a deal to cut production after months of difficult negotiation. Though prices bounced and broke out of the $52 levels – a strong resistance – they could not reach the $60 levels preferred by OPEC members.

However, this modest rally in crude oil prices rejuvenated the U.S. shale oil drillers, and U.S. oil production is now on the rise. As a result, crude oil has dipped again and is hovering near the $50 per barrel level.

The market believes that if crude oil prices remain above $50 per barrel, U.S. shale oil production will increase. For this reason, OPEC is finding itself in a catch-22 situation: It is losing market share to the U.S. shale oil drillers, but it is unable to propel prices considerably higher. It is losing its ability to influence prices above a certain level.

What happens if the Cartel fails in its objective?…A cartel is able to hold its members only when it fulfills their objective of higher prices, which has not been the case with OPEC. The member nations will now look to fulfill their objective by cheating and acting individually, according to their requirement.

Saudi Arabia, which was the leader of OPEC and the price setter of the world, is losing its clout in OPEC. Even in the current round of production cuts, most of the work is being done by Saudi Arabia, whereas the other members are shying away from their designated quotas.

In summary…OPEC has far outlived the average lifespan of a cartel, but if the OPEC members don’t regroup and act together, chances are that the cartel will come to an end very soon.

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Source: Rakesh Upadhyay, “The End Of OPEC Is Near,” Oilprice.com, 31 March 2017; “OPEC: Brief History, opec.org

Russia Cutting Oil Production As US Shale Escalates

Massive Oil Discoveries In Texas

Introduction…Russia plans to fulfill its obligations to cut oil output in line with the agreement between oil producing countries by the end of April, while more broadly assessing longer-term structural developments in the market, according to the country’s energy minister.

“Russia is reducing its oil production in stages, in accordance with the plans that we worked out voluntarily with our production companies,” Alexander Novak told CNBC during an exclusive interview in Arkhangelsk, Russia.

“The decrease in production in January and February were ahead of tempo with regards our initial plans. Currently, in March we have already reached a reduction level of 200,000 barrels a day. We anticipate complying with the figure set forth in the agreement by the end of April,” he revealed, noting this would constitute a reduction of 300,000 barrels of oil per day.

US Shale Escalates...The Russian energy minister’s comments come amid changes in U.S. policy under new President Donald Trump who has pushed forward the idea of energy independence for the country by executive order. This as recent months have seen a resurgence in activity by U.S. shale producers who have been encouraged to return to supplying the market given a rebound in the oil price.

“It’s clear that we are all assessing the situation in a sober fashion, we understand that there will be a rise in the production of shale oil” …Novak, “acknowledging that the rise in shale oil production could be up to 400,000 barrels a day this year.”

In summary…The oil producers are acknowledging that U.S. oil independence is not new.  Now President Donald Trump is pushing forward with executive order to that goal with his “America First Energy Plan.”

Source: Gemma Action, “Amid surging US shale, Russia is quietly cutting production and looking at bigger picture,” CNBC, 30 Mar 2017; “An America First Energy Plan,” WhiteHouse.gov.

Why President Trump’s Keystone XL Pipeline So Controversial

Keystone XL Pipeline Route

Introduction…After years of wrangling and what appeared to be a full stop by the Obama Administration in 2015, TransCanada Corp. has finally been granted approval from a U.S. president to build its Keystone XL pipeline across the Canada-United States border.

On Friday, Under Secretary of State for Political Affairs Thomas Shannon Jr. signed the permit. But to make its way across the country, individual states where the pipeline would be constructed still have to sign off. And that’s easier said than done.

“While presidential approval is a major step forward for the pipeline, the battle is far from over as the company still needs to secure some of the land rights with landowners, still needs a permit in Nebraska and is expected to be met with protestor opposition,” said analysts at Tudor, Pickering, Holt & Co. in Houston.

Still, this long-awaited announcement was received with general applause from industry supporters, but it still has some hurdles in its path. The U.S. Chamber of Commerce President and CEO Thomas J. Donohue said the permit is proof that things have changed in Washington

Why is it so controversial…According to the above map, the existing TransCanada pipline starts in Haristy, Alberta and terminates at Patoka, Illinois and Port Author, Texas.  Surely the short add to the Houston port is not a problem.  So, what is the issue being disputed?

The planned 1,179-mile (1,897km) pipeline running from the oil sands of Alberta, Canada, to Steele City, Nebraska, where it would join an existing pipe. It could carry 830,000 barrels of oil each day.

It would mirror an operational pipe, also called Keystone, but would take a more direct route, boosting the flow of oil from Canada.

A section running south from Cushing in Oklahoma to the Gulf opened in January 2014. At the coast there are additional refineries and ports from which the oil can be exported.

The pipeline would be privately financed, with the cost of construction shared between TransCanada, an energy company based in Calgary, Alberta, and other oil shippers. US-produced oil would also be transported by Keystone XL, albeit in smaller quantities than Canadian.

Why do the US and Canada want XL?

Canada already sends 550,000 barrels of oil per day to the US via the existing Keystone Pipeline. The oil fields in Alberta are landlocked and as they are further developed require means of access to international markets. Many of North America’s oil refineries are based in the Gulf Coast, and industry groups on both sides of the border want to benefit.

An increased supply of oil from Canada would mean a decreased dependency on Middle Eastern supplies. According to market principles, increased availability of oil means lower prices for consumers.

President Trump said the project would create 28,000 construction jobs.

Canadian Prime Minister Justin Trudeau has said he will work with the new US leader regarding the pipeline, and that he was “confident that the right decisions” would be taken.

Despite the recent push to find renewable sources of energy and move away from fossil fuels, the amount of oil produced in northern Alberta is projected to double by 2030.

It’s argued by some that by developing the oil sands, fossil fuels will be readily available and the trend toward warming of the atmosphere won’t be curbed.

The fate of the pipeline is therefore held up as symbolic of America’s energy future.

In the here and now, more energy is required to extract oil from the Alberta oil sands than in traditional drilling, and Environment Canada says it has found industry chemicals seeping into ground water and the Athabasca River.

This risk to local communities is one of the reasons many have opposed the project.

The ongoing protest over the Dakota Access Pipeline near Standing Rock Indian Reservation makes for some good theater, but the protesters have as yet been unable to demonstrate that the pipeline actually trespasses on Indian lands or that it will likely lead to groundwater pollution.

Both trespassing and water pollution are serious issues that would rightly open up the owners — in this case, Energy Transfer Partners — to crippling lawsuits.

In North Dakota, however, the pipeline passes through private property and a likelihood of groundwater pollution has not been established.

In summary…Two and one-half million miles of pipelines cross the United States.  There has been oil spills in the past.  It appears that better inspections of these pipelines could increase saftety.  As for the Keystone XL Pipeline, President Trump now passed the decison onto the states where pipeline would be constructed.

References:  Dean Daugherty, “Trump’s Keystone XL Approval Moves Fight to Individual States,” Rigzone.com, 24 Mar 2017; “Keystone XL Pipeline:  Why is it so disputed?”  BBC News, 24 January 2017; Lena Groeger, ” Pipelines Explained: How Safe are America’s 2.5 Million Milles of Pipelines?” ProPublica, 6 December 2016.

Dumping Billions In Canadian Assets For Premian Basin

Permian Basin Assets Replaced Canadian Assets

Introduction…Marathon Oil (NYSE: MRO) is selling its Canadian subsidiary, including the company’s 20 percent non-operated interest in the Athabasca Oil Sands Project, to Royal Dutch Shell PLC and Canadian Natural Resources Ltd. for around $2.5 billion in cash, according to a March 9 release.

Additionally, Marathon scooped up 70,000 acres in the Permian Basin from Midland, Texas-based BC Operating Inc. in a deal worth about $1.1 billion, per the release. That includes about 51,500 acres in the Northern Delaware Basin portion of the Permian.

According to the Wall Street Journal, Shell announced it’s selling all of its Canadian oil-sands projects for around $7.25 billion. Shell will keep a 10 percent interest in Athabasca with Canadian Natural (NYSE: CNQ). Meanwhile, Irving, Texas-based rival Exxon Mobil Corp. (NYSE: XOM) recently said production wasn’t profitable in the region and removed around 3.3 billion barrels of oil from its stated reserves, much of which was attributed to the oil sands, the WSJ reports.

In conclusion... Canadian oil sands are falling out of favor with majors due to its high production costs.  On the other hand, Permian Basin oil and gas production is highly favored due to its relatively low production cost and its well established iinfrastructure .

Permian Basin is also favored by our partners who are purchasing saltwater disposal wells due to increased production of water from the new oil production.

Oil Shortage, Price Spike Predicted

Oil Price Spike Predicted

Introduction — Rising Canadian and U.S. production will not be enough to make up for tepid global investment, leading to a supply shortage in oil markets in a few years, a International Energy Admisitration report published last Monday said.

In its annual five-year forecast released in Houston Monday, energy watchdog Paris-based International Energy Agency said “it is far from clear that enough projects will enter the pipeline in the next few years to avoid a potentially tight market by 2020 and with it, the possibility of a price spike.”

The report comes as major oil and gas producers continue to slash their exploration budgets amid lower oil prices. Years of sharply growing oil supply have put the market into a state of oversupply in recent years, depressing prices. That led to widespread retrenchment on the part of debt-laden major oil producers. Late in 2016, OPEC and its non-OPEC allies agreed to curb supplies in an attempt to put oil markets closer into balance.

In Summary…$25 trillion investment in new oil-producing capacity over the next 25 years needed to meet the growing demand as reported here in this newsletter.

Source: “IEA predicts oil supply shortage and price spike within three years,” Financial Post, Jesse Snyder, 6 Mar 2017; “$25 Trillion Investment Needed, Oil And Gas Insider, Bill Moist, 22 Jan 2017

Why Major Oil Company Goes Big On US Shale

 Apache Oil Co. Drilling Near Davis Mountains

Introduction…A major oil company does big on US shale drilling.  Here’s why.

Exxon goes big on U.S. shale. New ExxonMobil (NYSE: XOM) CEO Darren Woods gave his first presentation to investors this week, where he outlined a strategy to step up investment in U.S. shale.

Exxon will allocate a quarter of its 2017 budget to short-cycle shale projects. The move will help the oil major navigate an uncertain market, as cash can be returned to the company much quicker from shale drilling than it can from the major offshore projects that Exxon has long been accustomed to.

Still, Exxon will move forward aggressively on its large offshore discovery in Guyana, hoping to bring it online in the next few years.

Conclusion…It’s quicker positive cash flow that brings ExxonMobil to shale oil production.  Even a company this big wants a quicker return on its capital expenditures.

Oil Sold Out Of Asia Tanker Storage As Market Tightens

Oil Tankers Stationed Eastern Coast Of Singapore 

Introduction…Traders are selling oil held in tankers anchored off Malaysia, Singapore and Indonesia in a sign that the production cut led by OPEC is starting to have the desired effect of drawing down bloated inventories.

The Organization of the Petroleum Exporting Countries (OPEC) and other producers outside the group, including Russia, announced late last year that they would cut output by almost 1.8 million barrels per day (bpd) during the first half of 2017, looking to drain a glut that pulled down prices from over $100 per barrel in 2014 to around $56.50 currently LCOc1.

“OPEC’s strategy is targeting inventories – given the scale of the overhang, the market won’t rebalance in six months – we expect an extension into (the second half of 2017),” said Energy Aspects analyst Virendra Chauhan.

As OPEC’s cuts start to leave some demand unmet, a hefty 6.8 million barrels of crude has been taken out of tanker storage from Linggi, off Malaysia’s west coast, in February, shipping data in Thomson Reuters Eikon shows.

An additional 4.1 million barrels and another 1.2 million barrels have been taken out of storage on tankers in Singaporean and Indonesian waters, the data shows

In the short-term, the flood of crude from floating storage will add to supplies coming into Asia from as far away as the Americas and Europe.

In the longer-term, however, clearing oil out of inventories like tankers is part of OPEC’s goal to rebalance markets.

In conclusion…”Inventories will continue to decline driven by the combination of production cuts and the strong demand growth,” U.S. bank Goldman Sachs said this week in a note to clients, adding that it expected Brent prices to rise slightly in the second quarter, to $59 per barrel.

Source: Mark Tay | Singapore, “Oil sold out of tanker storage in Asia as merkt slowly tightens,” Retuers Commodities, 23 Feb 2017

Texas Fifth Straight Double-Digit Jump

The boom continues in The Permian Basin

Introduction: The US drilling rig count rose by double digits for the fifth consecutive week during the week ended Feb. 17.

Data from Baker Hughes Inc. shows the tally of active rigs gained 10 units to 751, an increase of 347 units since a modern era nadir of 404 touched last May 27 (OGJ Online, Feb. 10, 2017). In the last 2 months alone, the count has risen by 114 units.

Onshore rigs climbed by 13 to 730, with horizontal units up 7 to 614 and directional units up 6 to 72. The horizontal count has expanded by 300 since May 27.

The US offshore count dropped 3 units to 18 as it approaches lows not seen since the aftermath of the Macondo deepwater well blowout and crude oil spill. Three rigs remain drilling in inland waters.

Given the Permian’s overall increased drilling activity, the US Energy Information Administration forecasts Permian oil production to rise 70,000 b/d month-over-month in March to 2.25 million b/d (OGJ Online, Feb. 13, 2017). As of January, the basin boasted a suite of 1,757 drilled but uncompleted (DUC) wells, an increase of 84 from the December total.

EIA projects the Eagle Ford to record a 14,000-b/d month-over-month increase in March to 1.077 million b/d, marking the South Texas region’s first rise in Drilling Productivity Report data since late 2015. Its tally of DUC wells during January gained 11 month-over-month to 1,255.

In summary for Texas:  Texas is the only oil- and gas-producing state to record an increase with the exception Utah during the week, rising 1 unit to 6. The Permian Basin is driving much of the new drilling activity in Texas and the U.S.

Source: Matt Zborowski, “BHI: US rig count makes fifth straight double-digit jump, Oil & Gas Journal, 17 Feb. 2017

Why Saltwater Disposal Wells Attract Investors

Saltwater Disposal Wells

Introduction...Last October we discussed here The Surprising Discovery Of One Oil Executive.    Now we want to continue that discussion Why Saltwater Disposal Wells Attract Investors by enjoying the ATM of the oil patch as described by insiders.

  • Location – The proximity of the Saltwater Disposal Wells “CSWD” to producing fields is critical, as the cost of transporting produced water to a disposal facility is one of the larger recurring expenses that an operator incurs. Our next facility is one of three in this immediate area.  However, none of them will accept saltwater from outside truckers.  They use their wells for the water they produce only.  As a result, the truckers are driving by this property and driving as much as an additional 50 miles to dispose of their water.
  • Water Commitment – Our well currently under contract is being utilized for only 10% of its daily licensed disposal capacity.  With trucks driving past the property every day, it will be relatively easy to convert them to customers.  The good news is contract requires the grandson of the seller be allowed by dispose of his water which is the current 10% utilization.  By the way, this small utilization is profitable as is.
  • Commitment to the Customer – The management of our next facility also operates producing properties.  The management understands the other issues that concern an operator as it relates to choosing their disposal partner.  These Issues such include safety, ease and speed of off-loading.  Accurate and readily available reporting is important to the trucking company.

Conclusion: The steady cash flow that is not dependent on oil pricing or new discovery makes prime CSWD properties a valuable asset.  That is one reason these ATM’s of the oil patch rarely come up for sale.  However, we have found a seller who is retiring and wants to spend more time with his wife.  Does this intrigue you? Drop me an email if you desire additional information on this discovery.  We have a current property under contract that meets  these requirements.

This has been Bill Moist, MS, CPA reporting today Why Saltwater Disposal Wells Attract Investors.