There are quite a few angry royalty owners up in Pennsylvania. They’ve put together a video that tells their side of the story.
The State of Oil and Gas, October 17, 2016
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
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
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.
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.
The State of Oil and Gas: October 3, 2016
There has been a lot going on in oil and gas these past two weeks, so we’re going to go ahead and post this a couple weeks early.
If Libya were to start producing a lot of oil again, it would probably drive the price of oil down some. There was some expectation that they would start up again soon, but that expectation is now gone. A general has seized control of all the oil ports in Libya, in opposition to the coalition government. The government had been losing popular support for some time. Perhaps the general will step in and take control of everything and start production back up. Even if he does, it will take some time. We don’t expect Libya to affect oil prices for the rest of this year.
Venezuela says that OPEC and non-OPEC countries (Iran) are close to an agreement that would limit oil production. We’re still skeptical that an agreement will be reached. After all, there was some belief that the Doha meeting back in April would be successful, though I rather suspect that was more wishful thinking on the part of some people than reliance on facts.
It seems that Libya is producing oil again. Reports of two tankers with a total of over a million barrels of oil have left the country. A Libyan official has stated that they will be producing 600,000 barrels per day within a month, and over 900,000 barrels per day by the end of the year. If that actually happens it will drive the price of oil down some. Whether it actually happens is not something I would bet on. Libya is a pretty unstable country after all. I’d let time tell on this one.
A surprising number of American companies have been able to avoid bankruptcy during the downturn in oil and natural gas prices. They’ve had to cut costs and increase production. One of the major factors in increasing production has been increasing the amount of sand that is flowed into the fracks. The linked article goes into some detail that would be interesting if you’re thinking of investing in sand supply companies.
There is a lot of data in this study by Deloitte. The long and short of it is that the oil and gas industry looks like it’s coming back. Higher prices for both oil and gas are expected in the next couple of years. This jives with what we’ve been reading and experiencing.
Iran has doubled exports from last year. Libya and Nigeria are ramping up exports as well. The increase in production from those countries is going to drive the price of oil down. OPEC is meeting to discuss the possibility of freezing production. Perhaps (but I really think this is a stretch) the specter of prices dropping below $40/bbl again will drive OPEC to actually come to an agreement.
On the other hand, this article from the Financial Post makes the case for a crazy future for oil prices. Basically, it says that the lack of investment in new fields/projects is going to come back to haunt us. It’s worth taking five or ten minutes to read.
While the oil market is interesting, the natural gas market is what really drives development in West Virginia. There isn’t as much written about the natural gas market as it’s not a worldwide commodity with political ramifications. It’s slowly becoming more so. This article over at Forbes talks about how Japan’s use of natural gas is likely to rise, contrary to what most analysts think. Sure hope so. A lot of Japan’s natural gas will come from the Marcellus/Utica area.
Along the same vein of thought, Cheniere Energy has announced that it’s second liquefaction train at the Sabine Pass plant in Louisiana has reached Substantial Completion. In other words, they can start liquefying gas with it. This is interesting for us here in WV because gas from the Utica/Marcellus area will feed the Sabine Pass plant. Demand is growing!
This article from Reuters says that while demand is growing, production is dropping off. We’re looking at a future of stable prices for natural gas, at least for the time being. It will be interesting to see what happens through this next winter.
That was quick, but hardly unexpected. The price of oil is dropping on news that Iran has rejected a deal with Saudi Arabia that would have limited it to producing under 4 million barrels per day. Iran was producing 4.1 to 4.2 million barrels per day before it had sanctions imposed on it, and it is producing about 3.6 million right now. Iran has always stated that it wants to get back to producing over 4 million. Talk has now turned to OPEC’s November meeting. Do I go out on a limb and predict that OPEC will not agree to a production freeze in November? Sure, why not. With the understandable caveat that unpredictable events could change things.
Michael Lynch over at Forbes argues that the long-term price of oil is impossible to determine.
Jim Willis of Marcellus Drilling News attended a conference where two analysts discussed whether the Marcellus/Utica area is going to be able to make up for the slow down in gas production from other parts of the country. Long and short, no. There are a lot of very interesting bullet points in the article.
USA Today ran a story about wind farm projects not getting off the ground. Part of the problem has to do with how the BLM allocates property. The more interesting part of the story was that of 46 wind farms approved by the Obama administration since 2009, only 15 have made it into operation. That kind of track record is going to keep wind power from competing with natural gas for a long time.
So, we were wrong about OPEC! They agreed to agree to a production freeze at their meeting in November. Seems there are some details to work out in the interim. As a result, the price of oil has climbed consistently the last few days. It hasn’t hit $50/bbl yet, but that seems almost inevitable. Interestingly, the price of oil has hit $50/bbl once already this year. If I recall correctly, that was also on speculation that a production freeze was in the future. Will they end up freezing production? Maybe. I still rather doubt a production freeze will happen. It just doesn’t make sense when American production companies can ramp up production pretty quickly and you’re giving them two months heads-up. But I was wrong about this, I could be wrong about that, too.
A Brief Look into Oil and Gas Financing
Drilco, a West Virginia company, is asking for accredited investors to buy in to its drilling program. We usually wouldn’t post about this kind of stuff, but it is a company from West Virginia doing work in West Virginia and we really kind of like all aspects of the oil and gas industry, so here it is.
The offer says that they hold 15,000 acres in seven West Virginia counties, suggesting that they will be working in all seven counties. As you dig into the paperwork a little farther, however, you see that they are going to be working on the Ritchie/Gilmer county border, and that they already operate 200 wells in that area. They don’t even name the other five counties (although we skimmed a lot of the document, we think we read everything that would discuss locations). They probably mention the other five counties just in case they run into insurmountable difficulties in the projected project area and have to make a move elsewhere.
They say that they will be drilling to the Big Injun, Mississippian, Berea, Devonian, and Marcellus (which is a part of the Devonian). Other companies are drilling horizontals to the Big Injun, Mississippian, and Berea, looking for oil. The Devonian is going to be a gas play. Drilling horizontals in search of oil seems like a good idea, but will run into challenges with fracking as old, unrecorded wells could sap off frack energy.
They say they will be drilling ten vertical and ten horizontal wells. The vertical wells will be more exploratory than anything.
They also say that their horizontals will be between 2,400 feet and 3,500 feet. This suggests two things. One, they don’t have the technology that other companies do to extend their laterals out over 6,000 feet. Two, they are hemmed in by leases owned by other companies, or the formations they will be drilling to are perforated by old vertical wells that would prevent efficient fracking.
It’s an interesting look into the world of high finance and oil and gas development.
EDIT: Just to be clear, we aren’t endorsing Drilco, suggesting that anybody invest with them, or anything like that. We just thought it was interesting to see what the financing side of oil and gas development looked like, and that other people might be interested, too.
Why West Virginia Hasn’t Been as Heavily Developed as Ohio
When you spend significant time doing research about the Marcellus and Utica shales you come to realize that there’s a lot more development going on in Ohio and Pennsylvania than there is in West Virginia. It takes a bit longer to figure out why. The really short answer is: geography. The slightly more detailed answer can be found in this article over at Marcellus Drilling News. I’ve been a subscriber to MDN for years, mostly for their daily news summary, but every once in a while they have a good article of their own. This is one of them.
To sum it up for those who aren’t subscribers or can’t other wise view the article, the really valuable parts of the Marcellus and Utica shales are those that produce oil and wet gas. Those parts underlie more of Ohio and Pennsylvania than they do West Virginia. There are three or four counties (the northern panhandle of West Virginia) that could potentially produce oil and wet gas. While there is wet gas in other West Virginia counties, the potential is just not the same as it is in Ohio and Pennsylvania.
While there has been a shift away from searching for wet gas lately, the search for oil is still there and drives a lot of decision making. West Virginia wells just don’t produce much oil and so West Virginia doesn’t attract as much attention from developers and investors.
Pipelines: FERC isn’t Going to Stop the Atlantic Coast Pipeline or the Mountain Valley Pipeline
Here is a well-reasoned editorial published in the Roanoke Times that makes a really good case for the argument that the FERC isn’t stopping the pipelines. It points out (perhaps accidentally) that the FERC doesn’t do a good job of making anybody happy, but it does an excellent job of doing what it’s supposed to. I won’t steal the article’s thunder as it’s not exactly long and is well written.
Lycoming County Pipeline Failure: Corrosion to Blame
A little over a year ago a 24-inch natural gas transmission pipeline in Lycoming County, PA failed. It didn’t explode, but people were evacuated for safety.
The investigation has determined that external corrosion was was to blame.
Interestingly, the pipeline had no history of internal corrosion.
It’s important to point out that these pipelines are failing after decades of use. It seems that as the pipelines get older, they would be more subject to corrosion. To counter that, pipeline companies could increase their inspections. But pipeline companies aren’t increasing inspection frequency.
Atlantic Coast Pipeline: General Contractor Hired
This article includes some other information, but the most important points are these:
- Spring Ridge Constructors will be the lead construction contractor for the entire project.
- ACP expects to get FERC certification in late summer or fall of 2017.