The State of Oil and Gas: October 3, 2016

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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

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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

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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

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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

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Broken Pipe

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.

Antero’s Water Treatment Plant in West Virginia

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Ken Ward, Jr. of the Charleston Gazette-Mail put together an excellent article on the wastewater treatment plant that Antero Resources is building on the Doddridge County and Ritchie County line.  He explains the need for the plant, the controversy around the plant, and gets into the regulatory framework that is either being used or abused depending on your point of view.  There are a number of points of view represented.

Basically, the plant takes up a lot of space and has disrupted the lives of the people who live next to it.

For regulatory purposes the plant is supposed to be privately held and used by Antero.  Being private instead of commercial, the plant doesn’t have to go through some regulatory approvals.  Interestingly, Antero will be taking water from other companies and treating it.  Usually that would be commercial, not private.   It looks like Antero is using a loophole to avoid regulations.  People don’t typically like that kind of thing, particularly when their lives are being disrupted by someone who is making a lot of money disrupting their lives.

There’s more in the article.  We won’t ruin it all for you here.

The State of Oil and Gas: September 15, 2016

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This article over at RealMoney.com poses the question, “have American producers achieved sustainable profits?”  It doesn’t give an answer, but points out that Saudi Arabia is probably in a world of hurt either way.  It’s short and worth the read.

Chesapeake is by far and away the largest producer in the Utica Shale at 1 million acres, 146,000 BOE of production per day, and having drilled 588 new wells in 2015.  Check out the chart in this article.

It’s August 18, 2016 and oil prices continue to rise based on mere speculation that OPEC and Russia will freeze oil production.  I’ll believe that when I see it.  Gas prices are on the rise because of lower than expected storage numbers.  That makes sense.  Oil prices on the rise because OPEC is talking, yet again, about freezing production doesn’t.

This article from Seeking Alpha suggests that $50/bbl oil is here to stay.  It gives three reasons, one of which is that investors are very willing to invest in oil and gas companies still.  That is one thing that I had been wondering about.  If investors had not been willing to do so, we could have seen serious decreases in production in the near future.  Since they’re willing to, we’re a lot less likely to see a serious decrease in production and a corresponding increase in oil and gas prices.  While the article is written with oil in mind, you could easily replace the numbers for oil with numbers for gas and get the same story.

Another article from Seeking Alpha (sometimes they’ve got a lot of great stuff) is predicting that gas prices are going to continue to move higher.  If you like to read stuff from a commodity trader’s point of view, this is an article for you.

Today is September 1, 2016.  Oil prices are still hovering around $45/bbl, and gas prices are still hovering around $2.75/MCF.  We’ve seen a significant increase in the number of inquiries from potential clients who’ve been offered oil and gas leases lately.  The most interesting was an Antero Resources lease in Monongalia County.  Northeast Natural Energy has been working in Monongalia County for about a year, in the same area that Antero is working.  If NNE is interested in making some money by flipping their leases, they timed it just right.  This is good news for anybody who signed leases with NNE, because another company showing interest in the same area means that there’s good potential for production there.  We hope you Monongalia County, WV mineral rights owners get great royalty checks in the very near future!

OPEC will be meeting this month to announce that they have not reached a deal to freeze production.  Oil prices will fall when that news is announced.  Saudi princes selling oil prices short will make a bundle.  If I knew enough about trading commodities, I would make a bundle, too.  Actually, I probably wouldn’t because everybody else with half a brain will be selling short at the same time.  Or maybe I just showed my lack of knowledge about how trading commodities works?  It doesn’t matter, I do West Virginia oil and gas law.

This article has as its thesis that OPEC no longer has the power to control oil and gas prices.  I agree.  The article is interesting because it discusses the current state of the oil and gas industry, much the way this blog post does.  It’s worth a few minutes to read.

It’s September 15, 2015 and the price of gas is at $2.91/MCF and the price of oil is $43.70/bbl.  Prices have been relatively stable lately.  Drilling seems to be picking up just a little bit nationwide as the rig count has gone up a bit.  Leasing has definitely picked up in West Virginia.  We’ve picked up several new lease negotiation clients this week.  While interest in leasing up property in the northern panhandle is picking up, it also seems to be picking up in the old core, consisting of Ritchie, Tyler, Doddridge, and Harrison counties.  We’ve also run across a lease from Antero Resources in Monongalia County, which is a new interest for them.  Previously, Northeast Natural Energy and EQT were the only companies working in that county.

We’re looking forward to seeing what happens with the OPEC meeting in Algeria on September 26-28.  We fully expect them to announce that they will not be curtailing or freezing production.  We also fully expect lots of people to speculate that they will.  It would be great for American producers if they did, as that would drive prices up and give American producers an opportunity to start drilling again.

Westmoreland County Pipeline Explosion: Corrosion Found Back in 2012

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This is big news.  Anyone living close to a natural gas pipeline really ought to read this article.

The short story is that Tetco found corrosion on its pipeline back in 2012.  They didn’t just find a little bit, either.  Fully 1/3 of the thickness of the pipe had corroded away.  That didn’t set off alarm bells, though.  Why?  Because the industry standard was to expect 1-3% of the thickness of the pipeline to wear away each year.  Since the pipeline was scheduled for another inspection in 2019, they figured they would just check up on it then.

The corrosion actually occurred at a rate of 10-15% per year.

The pipeline exploded.

The company is going to be paying out the wazoo for damage to property and to the poor guy who got burns over most of his body while running away from the fireball.

The moral of the story is this: when the pipeline representative tells you that the pipeline has regularly scheduled inspections and that they know how to keep it safe, they aren’t right.

The rep isn’t lying.  The rep believes what his/her employer is telling them.  The pipeline actually believes it is doing what it should (in most situations).  They’re just not right.  They simply can’t account for any and all contingencies.

Pipeline companies really need to step up the inspection schedules and come up with some better technology to protect the people that live next to their pipelines.  We mentioned in a previous post that less than 20% of all pipeline problems are discovered by the technology employed for that purpose.  Well over 50% are discovered by landowners and pipeline employees visually inspecting the pipeline right of way.  That’s just not acceptable, at least not when the company is telling people that their technology will keep them safe.

Pipeline News Article with some Substance

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It’s rare to see a news article about either the Atlantic Coast Pipeline or the Mountain Valley Pipeline to have much other than environmental or company rhetoric.  This one is the exception, including quotes from a Virginia attorney who obviously has some experience with pipeline easements, quotes from some actual easement agreements, a bit of analysis, and some hard numbers.  It was nice to see.  Please pop over to the article and read it.