What If We Ban OPEC Oil?

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One of Donald Trump’s promises during his campaign was that he would ban oil from all OPEC countries.

This article over at Alberta Oil Magazine discusses some of the implications of doing that.  It points out that we use about 20 million barrels a day, produce about 8.5 million right now, and produced about 9.4 million in 2015 and about 8.7 million in 2014.  We import only 3 million to 3.5 million barrels a day from OPEC countries.

Looking at the EIA reports, we get about four times as much oil from Canada as we do from Saudi Arabia, and almost as much from Mexico as we do from Saudi Arabia.  All told, though, we get about 1/3 of our imports from OPEC countries. We would have to make up that 3-3.5 million barrels a day from somewhere.

If we banned OPEC imports it’s almost certain that OPEC would pick up some customers that non-OPEC countries currently supply, just by cuthing prices.  Those non-OPEC countries would have some additional supply floating around, and would very likely just sell to the US.  Most of the difference we need would be made up from shuffling around suppliers and customers.

Some of the difference would probably be made up by Canadian tar sands, but the tar sand operations would probably take a while to bring production back up.  After the fires in Alberta earlier this year, the oil sands operations took a few weeks to bring back to full operations.  Opening up new areas would likely take a lot more than a few weeks.

Mexico would probably try to take up some of the slack as well, but most oil exploration outside the United States is the old style, requiring months to years to bring significant oil production online.

That’s assuming there will be slack in oil supplies.  Presumably, we would just start buying more oil from countries which already provide us oil.  Of course, there may be treaties and transportation issues that I don’t know about which would limit the amount of oil we could buy from non-OPEC countries.  If something, anything, gets in the way of our acquiring more oil from current non-OPEC sources, then the price of oil will certainly rise and production in the US will increase. Any kind of uncertainty will drive market prices up. 
Any real slack in oil supplies would be taken up by American companies, doing horizontal fracking.  The nice thing about a fracking operation is that it can be up and running in months, sometimes even weeks.  Areas like the Permian and the Bakken which have been heavily explored and leased would be able to bring new production online within months.  That’s not counting DUCs, drilled but uncompleted wells which just need to be fracked or turned in line (open the valves) to start producing.

There is one point about this entire thing that is worrisome for those of us in the Marcellus/Utica area.  Increased oil production brings increased natural gas production.  From the majority of oil wells there is some natural gas produced.  This natural gas isn’t just vented or burned onsite.  It’s sold into the pipeline system, and competes with gas produced elsewhere.  If we do see increased oil production in the US, the associated natural gas production will drive down prices and demand, even if slightly, for Marcellus/Utica gas.

Another Earthquake in Oklahoma

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There was a 5.0 earthquake near Cushing, Oklahoma.  There was some damage to downtown buildings.  No people were hurt, thankfully.

Of course, anyone who is involved in oil and gas or who is an environmentalist knows that the speculation will center around disposal wells being the cause.

Disposal wells are used to get rid of produced water, or the water that comes back out of a well after fracking and other stimulation processes.  Disposal wells have been used for almost as long as oil and gas production has been a thing.  Disposal has become a concern in recent years because horizontal fracking creates a lot more produced water than conventional processes ever did.  The theory is that injecting that much water into underground formations is lubricating fault lines, thus making it easier for earthquakes to occur, and also creating pressure imbalances that need to be released, thus making it more likely that an earthquake will occur.

So far, there is only a possible correlation, not an actual cause/effect relationship, between disposal wells and earthquakes.  The correlation is there, but it could just as easily be a coincidence.  Some things are going to be hard to prove, of course.  How do you prove exactly what’s going on thousands of feet underground?

Here in West Virginia, there’s a big water treatment plant being built.  It will handle a lot of produced water, so the produced water won’t have to be injected into the ground.  If disposal of produced water in injection wells is causing earthquakes, it will be less likely to happen here.

Interesting random fact: Cushing, OK is home to one of the largest oil hubs in the world.

The State of Oil and Gas, November 2, 2016

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Fracking companies have been increasing the length of the horizontal lateral in an attempt to increase efficiency; building one pad and using one hole to access more acres should be economically efficient.  However, a study by Bernstein Research shows that longer laterals are not necessarily more efficient.  The culprit is friction.  More pipe creates more resistance.  The result is a lower average peak rate, or put in other words, the highest amount of production you could expect from a well at it’s best is lower.

On the other hand, adding more sand (“proppant”, because it props the cracks open) to a well increases the production from the well.  That seems to be a pretty logical conclusion, since larger and (presumably) more cracks means more product can move through the formation to the well.  However, adding more proppant is a recent change.

Natural gas developers added 11 new rigs across the U.S. last week, which is a good thing at this point.  Production has been falling for a while, and new sources of production are needed to keep numbers up.  11 new rigs will probably not halt the falling production numbers, but will slow it.

Iraq is now saying it won’t cut production.  Just like that, oil prices fall.  We’re below $50/bbl again.  Now, Iraq could just be positioning for negotiation, or it could be serious.  Their excuse is that they need money to fight terrorists.  $50/bbl oil isn’t too bad for them right now, as they are still working to get production back up to pre-sanction levels.  So it’s hard to say what they will do at the next meeting.  Most experts expect Saudi Arabia to cut production anyways, so maybe Iraq will just continue to produce and take advantage of Saudi Arabia’s unilateral cuts.

Stephen Tindale is a former leader of Greenpeace, and he’s saying that fracking is an important technology, and should be encouraged.

On October 24, 2016, gas prices have dropped well below $3.00/MCF.  Last week saw warm, but not hot, weather.  This week is going to be quite cooler, so we should see a jump in prices before this gets published on November 1.

Costs for drilling gas wells are still dropping.  That means that even in a low price market it makes sense to keep drilling and producing gas.  That’s exactly what Antero is doing.  They have announced that instead of producing 1.75 billion cubic feet of gas per day during 2016, they are actually going to produce 1.8 billion cubic feet of gas per day.

It’s November 2, 2016, and oil prices and natural gas prices have fallen significantly since last month.  Oil prices have dropped for the same reasons they always do (supply/demand), but the details are unusual.  Essentially, there were a few weeks where there were drawdowns on oil storage, then all the oil that everyone expected to be there during those weeks suddenly showed up and we had the largest increase in oil storage in 34 years.  Also, the price of oil jumped when OPEC announced it would cut production, then dropped when Iraq announced it wouldn’t participate in the cut.  Is anybody really surprised by that?  The result of these factors was that prices dropped from over $50/bbl to around $45/bbl.  Regrading natural gas we have hit the “shoulder season”, the time between summer (storage) and winter (high use) where storage numbers always go up.  Temperatures were comfortable, so gas use was low, and traders for some reason decided to sell natural gas futures.  This Seeking Alpha article seems to think that traders overshot the fundamentals of the market, so the price will go back up.  Right now we’re at about $2.75/MCF.  Not horrible for gas production in West Virginia, but also not good.

Deadly Pipeline Explosion in Alabama

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Gas burning from the Colonial Pipeline. Marvin Gentry/Reuters.

Gas burning from the Colonial Pipeline. Marvin Gentry/Reuters.

A gas (as in gasoline) pipeline in Shelby County, Alabama has exploded.  Interestingly, this is the Colonial Pipeline, the very same pipeline that had a major leak a few weeks ago.

One person has been killed in the explosion, six injured, and two are still missing, according to the most recent reports I can find.  There is a surprising lack of information out there right now.  Most of the major news outlets don’t seem to be covering it.  That’s a bit of a surprise considering how much press the Dakota Pipeline protest has received.

From what I can glean, there was repair work being done to the pipeline.  An excavator hit the pipeline, and triggered the explosion.

The explosion has started a brush fire.  Alabama has been very dry lately, so a brush fire is a real danger.  Between 30 and 40 acres have been burned.

EQT Buying Trans Energy

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EQT is buying Trans Energy’s properties in Marion, Wetzel, and Marshall counties.  Any of our clients who have leases with Trans Energy will soon be dealing with EQT.  Just a heads up.

This purchase will not change any of the terms of your lease.  However, if Trans Energy was interpreting it one way, you may find that EQT will interpret it another.  If your lease prohibited the company from deducting post-production costs you should really keep an eye on your check stubs to make sure that EQT doesn’t start to deduct post-production costs.

Stone Energy: Bankruptcy and Sale

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Stone Energy has been hurting badly for a long time.  They have been flirting with bankruptcy for at least a year.  This summer they re-opened some wells and I thought they might be able to avoid bankruptcy, but the news says otherwise.

As part of the deal, Stone Energy is going to sell it’s Marcellus leases to Tug Hill.  Tug Hill is growing slowly but surely in the northern panhandle of West Virginia.

Any of our clients who have leases with Stone Energy will soon be dealing with Tug Hill.  Nothing should change, as the lease governs the relationship between you and the company, regardless of which company it is.

The State of Oil and Gas, October 17, 2016

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Every time you turn around there is something new being built that is being powered by natural gas.  One recent example is three cruise ships being built for Carnival Cruise Lines.  They’ll be powered by liquid natural gas, which is far cleaner a fuel than what a lot of them are powered by, bunker oil.

Drilled but uncompleted wells (DUCs) are being completed.  Rumors are that by January the DUCs in the Marcellus area will be gone.  The EIA has begun publishing the estimated number of DUCs, and the Marcellus numbers don’t indicate zero DUCs by January 2017.  In fact, as of the end of August 2016 there were still 642 DUCs, down from 658 in July for a change of -11.  Even if you count January 2017, that’s only six months at 11 wells per month for 66 wells total, leaving 592 wells.  Obviously the rate of change is going to change month to month, but it’s going to have to grow an awful lot to get to zero wells left by January 2017.

A deep-water project by Statoil in the North Sea is producing oil at $10/bbl.  That’s competitive with Saudi Arabian oil.  It’s all because of standardization.  Previously, a lot of oil industry equipment was made to order.  Efforts have been made to use off-the-shelf components.  The savings are huge.  The implications are also huge.  Deep-sea projects were the most expensive projects, and consequently the first to get the ax in the recent price wars.  If they can all be made this cost-competitive, the Saudis are going to have to worry about deep ocean oil reserves affecting the market as much as they have to worry about American reserves.

An article at ArabToday.net does a good job of summarizing the supply/demand balance for natural gas in the United States.  I was a little surprised by the source, since Arabs are in the business of producing oil, but hey, guess they keep tabs on the industry at large.

The National has a good analysis of the Septmeber Algeirs OPEC meeting and its ramifications.

One thing I’ve often wondered about is why fracking hasn’t caught on better in other places?  The answer is a bit complex, involving governments, politics, investment capital, and geology.  The latter appears to have killed shale drilling in Poland, which was very excited about the prospect for a number of years.  Other countries are still working on it, such as China, but aren’t having great success as yet.  It’s something to keep an eye on.

So, after OPEC announced that they were going to agree on a price freeze at their next meeting in November, the price of a barrel of oil worked it’s way up to $52/bbl.  Then, Russia announced that it was not going to cap production and the price dropped to (so far) $50/bbl.

Saudi Arabia played everybody.  This article from the Wall Street Journal says that the Saudis were going to cut production anyways, so getting other countries to agree to a production cut really didn’t change anything for the Saudis!  The Kingdom was already producing at record highs, and those high production numbers were apparently not sustainable.  If no deal had been reached, production would have dropped off anyways.  This way, it looks like OPEC still has power to influence world oil prices.

This article over at Fortune.com says that OPEC’s influence is significantly reduced from what it used to be.  It also points out that quite a few OPEC countries would have reduced output naturally if the recent agreement had not been reached.

Just like that, there’s news that rig counts in the United States have risen.  That news is keeping oil prices from rising any farther, in fact, as of today, October 17, 2016, at 10:00 a.m., the price of oil is under $50/bbl.  After the news of OPEC’s agreement to cut production, the price of oil rose to about $52/bbl, then started a slow, steady decline.

I’ll be shocked if prices stay above $50/bbl until the next OPEC meeting in November.  After that meeting, the price of oil will probably rise to about $55 or $60, and then drop off as American companies scale up production.  That’s my free prediction for the near future, take it for what it’s worth.

 

Pipelines: Trespass in West Virginia

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west-virginia-supreme-court

Last year, Judge Irons in Monroe County, WV ruled that the Mountain Valley Pipeline couldn’t survey private property without the permission of the owner.

There must be some owner’s still refusing to allow surveying.  The MVP has gone to the West Virginia Supreme Court to get that ruling overturned.  They probably wouldn’t do that unless they needed it.

I hope that the Supreme Court upholds the ruling.  I think that was the right ruling, properly interpreting West Virginia eminent domain law and trespass law.

I am strongly of the opinion that if a pipeline company wants to use someone’s surface they should work out an agreement with that person.  If they can’t, they should go around them.  It might be more expensive, it might be harder, and it might take longer.  Shoot, it might even make the project impossible.  But a person should be able to control their property.

I know that there are a lot of people who disagree with my position.  The good of the many outweighs the good of the few and such.

If the few choose to sacrifice themselves for the many, that’s fine.  That’s what the few should do.  But the many can’t force the few to sacrifice for them.  Our government is based on the rule of law.  The rule of law is meant to protect the few from the many.

The MVP shouldn’t have the right to force landowners to allow surveyors on their property.

UPDATE: November 17, 2016

The West Virginia Supreme Court upheld Judge Irons’ opinion.  You can’t survey on property in West Virginia for FERC projects without the permission of the landowner.

Atlantic Coast Pipeline: Opposition

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There are several groups that oppose the Atlantic Coast Pipeline and the Mountain Valley Pipeline.  The Southern Environmental Law Center, the Appalachian Mountain Advocates, and several local county groups.  There are probably some others I don’t know about.  Most of the opposition is focused in Virginia, but there is a little bit of organized opposition in West Virginia.

We’re in favor of the pipeline, as the additional takeaway capacity should increase the amount of development in West Virginia, and increased development here will increase the amount of business we do.

At the same time, it kind of hurts to see long stretches of West Virginia become less wild and wonderful.

pipeline-pic-2

This may not be West Virginia, but it sure looks a lot like what I’ve seen.

 

 

On the other hand, all but a few thousand acres of West Virginia was clear cut by the first few decades of the 20th century, so it wouldn’t be the first time that West Virginia has come back from intense environmental impacts.

That’s all beside the point, though.

These pipelines are going to be in the ground for decades.  Why?  There is enough gas in West Virginia to produce for decades, and in spite of the green movement (nothing against them, I think solar, wind, geothermal, and wave/tide are really cool tech) stating it can provide enough energy, the numbers just don’t support the claims.  It’s going to be decades before green energy is more than just a small proportion of total energy output.  So we’re going to need these pipeline for decades.  There will probably be more in the future, too.

In spite of the claims of the pipeline opposition groups, we do need these pipelines.  They do need to be done safely, and they do need to be done with as little environmental impact as possible, and the landowners’ needs have to be met.  But they do need to be done.