Keystone Pipeline Leaks, Surface Owners Need to Think Ahead

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Here in West Virginia and the greater Marcellus shale and Utica shale area we really need pipelines.  The big issue that is keeping us from producing a lot more gas and from receiving a price closer to the Henry Hub price for that gas is that the existing pipeline infrastructure is full.  Packed to the brim.  Overflowing, if that were possible.  We’re big fans of pipeline projects because we need them.

However, we also believe in going into a situation with our eyes wide open.  For pipelines that means you have to be aware that sometimes they fail.  We’ve documented a few explosions and leaks here in West Virginia in the past.

The big news about a pipeline failure comes to us today from South Dakota, where the Keystone pipeline is leaking.  Apparently the company originally told regulators that the pipeline had spilled about 187 gallons of oil.

The leak was discovered last Saturday.  Now, when we say the leak was discovered, we don’t mean that an actual hole was found spewing oil into the air or onto the ground or, heaven forbid, into a body of water.  No, the company merely observed some numbers which indicated that there was a leak.  They either detected a drop in pressure or calculated a lack of delivered product or something.

Six days later they still haven’t pinpointed the source of the leak.  Consequently, the company thinks they have leaked about 16,800 gallons of oil.  Somewhere.

To be fair, they’ve narrowed the location of the leak down and shut off that portion of the pipeline.  They are even digging in the area to find the oil that was spilled and to find the leak and patch it.  It won’t take long, but it’s already taken longer than it should.

This story points out the problem with having a pipeline close to your house.  At some point a natural gas or oil pipeline is going to leak somewhere.  You have to be aware of that eventuality so that you can plan and prepare for it.  You probably can’t stop the pipeline from being located near you, but you can at least do things to mitigate the damage.

You can start off by getting more money from the company.  Take some of that money and buy emergency supplies.

Prepare an emergency plan for what you are going to do in various pipeline-related emergencies.  If the pipeline springs a leak what are you going to do and where are you going to go?  What if the pipeline explodes?  Will you need to do different things in the winter and summer?  What about in the middle of the night or during school hours?  Make sure to think this through thoroughly.

The 42-inch and 36-inch pipelines being built in West Virginia are good for the economy, but we have to be aware of the associated dangers, too.  A 42-incher is going in a few hundred yards from my house, and we’ll be thinking this stuff through ourselves.  Make sure you do, too.

A Virtual Pipeline to a Scottish Cracker Plant

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Ineos is a company that, hitherto, has been mostly in the news for it’s plans to build a “virtual pipeline” across the Atlantic Ocean using eight Dragon-class ships to haul ethane from the Marcus Hook deep water terminal to its two petrochemical sites in Norway and Scotland.  That gas originates from the Marcellus shale and makes its way to the Marcus Hook terminal by way of the Mariner East pipeline.  The first shipment of that gas arrived in Norway around the 23rd of March, not quite two weeks ago.

The latest news about Ineos is that it plans to re-open a cracker plant that it had previously mothballed because of a lack of gas.  The cracker plant had relied on gas from the North Sea, but that source dwindled and in 2008 Ineos had to close the plant down.  Now that a new, enormous source of ethane has opened up in the form of the Marcellus shale it has become possible, nay, advantageous to re-open the cracker plant.

Prepare yourself now for some opinionated opining on the part of the writer.

Why can’t we get a cracker plant in West Virginia?!  They’re going to ship ethane hundreds of miles through a pipeline to Marcus Hook, ship it across the Atlantic in eight enormous ships to Scotland and Norway, and crack it there.

Now we all know that the costs for a new cracker plant are measured in billions, and it’s obvious that bringing an already existing plant back into operation is a lot less expensive than that.  It seems, however, that at an average cost of $200 million dollars (that’s not even the actual cost of a Dragon-class ship which we suspect is a good bit more), a fleet of eight LNG transport ships comes to at least $1.6 billion, a good chunk of what a new cracker plant would cost.

The benefits to West Virginia in jobs and tax revenues would make up some of the rest of the difference, and consider the increase in the value of the product.  We would go from shipping the raw, relatively inexpensive ethane out of state to turning it into polyethylene resin, a much more expensive product that is the basis for all kinds of petrochemical products.  We would sell a more finished product at a higher price.

Seems like a pretty important thing for West Virginia, but it just doesn’t seem to be happening.

As an aside, this article tells the story of how the whole project came into being.  It’s a great read.  It also suggests that the cost for the first two Dragon ships was about a billion dollars.  That would have included quite a bit of R&D, so we can’t say that each Dragon ship costs $500 million dollars, but it does suggest that $200 million is probably on the low side.

The Future of American Liquefied Natural Gas (LNG)

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Daniel Gross, writing in the Dallas News, thinks that liquefied natural gas is going to be the next big international trade commodity for the United States.  He points out that natural gas sells for $8.25 per MCF in Japan while it sells for less than $2.00 per MCF here in the U.S.  With the first shipment of liquefied natural gas leaving the Cheniere facility in February and a shipment of ethane leaving the Marcus Hook facility in March, exports have begun.  Ineos, the company behind the Marcus Hook shipment, wants to have eight shipments per month within four years.  The Cheniere facility is supposed to eventually have four processing “trains” and only has one right now.  There is also a project, not mentioned in the article, in Canada called Bear Head LNG which is intended to process Marcellus shale gas and sell it to countries that don’t have free trade agreements with the United States.  There are quite a few other projects in the works, too.  Mr. Gross may be right.  LNG exports will at very least make a big splash in the natural gas market.

Mountaineer Gas to Expand Service in Eastern Panhandle

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Just about anyone in West Virginia who uses natural gas to heat their homes or cook their food buys from Mountaineer Gas.  Mountaineer Gas also provides gas to industrial customers.  They are expanding their services in the eastern panhandle, adding 46 miles of low pressure distribution pipelines in Morgan, Berkeley, and Jefferson counties.  The pipelines will be between 6 and 12 inches, and run at about half the pressure of a typical transmission line, or several hundred PSI.  The project is expected to be complete by the end of 2017, but still needs approval from the Public Service Commission before work can begin.

The new pipelines are intended to provide gas to industrial and commercial customers.  Lack of gas has been a factor in the decisions of some companies to not locate in the eastern panhandle.  The new Proctor and Gamble plant will need natural gas, and this project is probably part of that deal.  Having natural gas available will make it possible for other companies to locate there in the future.  This is something we weren’t aware of that needed to happen in order to improve West Virginia’s economy.

Any eastern panhandle landowners who will be affected by the Mountaineer Gas pipeline should remember that they can negotiate with the company for better terms, including making the right of way or easement temporary, larger payments, and increased control of the property.  If you sign the first offer they put in front of you, you are doing yourself a disservice, as well as anybody who might inherit or buy the property from you.

DUCs Have Been Coming Online Already

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This is a fascinating article on the Reuters website.  It says that some oil companies have already been completing and producing oil from their Drilled but UnCompleted (DUC) wells.  The majority of the work has been in Texas, near the oil refineries, which allows the producer to realize a price close to benchmark prices.  Some of the production has been farther away though, as some companies have their oil production hedged at high enough prices to make production profitable.

This is interesting because it means that some of the oversupply that people have been factoring into their calculations has already been used up.  We may see a bump up in oil prices based off this information.

The question becomes, are some gas producers doing the same thing?  Antero Resources here in the Appalachian Basin has all of their gas production hedged at prices high enough to make a profit.  They also have some DUCs.  Are they completing and producing their DUCs?  Are other companies?  If they are, is the price of gas going to go up sooner than expected?  It’s hard to tell, but we sure do hope so.

West Virginia Needs This Kind of Thing

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Primus Green Energy has announced that they are building a gas to liquids plant somewhere in the Marcellus Shale region.  The actual location has not been announced.  Since the plant is supposed to be up and running in 2017 it’s safe to assume that the location has already been decided.  If it hasn’t our governor, legislators, and county officials should be contacting Primus to see what they can do to get it located inside this State. Shoot, gas producers should be knocking their door down.  The plant will be able to use pretty much any type of gas that comes out of the ground and we have a real oversupply of wet gasses to the extent that wet gasses are costing producers money.

That said, Primus Green Energy hasn’t put together a commercial scale plant yet. They currently have one pre-commercial demonstration plant located in New Jersey.  Scaling up to commercial sizes may pose some difficulties.  However, the technology seems to be viable, and the company doesn’t seem to be a fly-by-night operation, so it seems that taking a bit of a risk would be worth it.

Perhaps the most interesting aspect of their technology is that it appears that it can be done on small scales.  There are currently only five gas to liquids plants operating globally, with four proposed, according to the EIA.  Most of them are pretty large.  The one pictured in the link above is certainly not large.  Perhaps this is the kind of plant that could be developed on a local basis with smaller capital funding costs.

Ohio’s Clinton Sandstone Produces Oil From Horizontal Fracturing

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EnerVest is drilling horizontal wells down to the Clinton formation in Ohio.  The Clinton produces oil, but not in huge quantities.  It’s enough to make a profit though, even in today’s bad oil market.  The wells cost just under $2 million, and return between $7 million and $10 million.  That’s a pretty good ROI.

Cunningham Energy is doing something similar with the Big Injun and the Weir Sand formations here in West Virginia.  They’re not drilling a lot right now, and the market isn’t good for oil right now, but if they’re able to keep the lights on until oil prices start to come back up they should be in a really good position.

Speaking of oil prices, they’re back over $41/bbl today.  We don’t see those prices being sustainable over the long term but if the Saudis are able to get Iran to agree to a production freeze at any level, maybe they will be.  Maybe.

Saudia Arabia and Oil Prices

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This article at the English side of Al-Arabiya has a different take on Saudi Arabia’s motiviations and goals in keeping oil production up.  While the site most likely has a pro-Arab stance, the article seems to be worth reading.  Most sites have a pro-something-or-other stance anyways, so it’s probably handy to know beforehand what that things they’re proponents of is.  It also provides a good overview of some of the numbers involved in the Saudi budget and oil production.

State of Oil and Gas: March 2016

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Ah, the joys of predicting oil and gas prices.  I don’t think anyone at the end of January would have predicted that oil would have hit $40/bbl in mid-March, a mere six weeks later.  Won’t stop anybody from trying to predict future prices, of course.  We’ve given up on it here a Nuttall Legal.  Here are some the articles we’ve read about it in the last month.

It’s looking like oil prices are going to be low for a long time.  During this period of high production by, well, everyone, stockpiles of oil have risen to 1 billion barrels.  To put that into perspective, the world uses about 94 million barrels of oil each day.  (That’s more of a guesstimate than a precise number, but it’s close.)  World use has grown by about a million barrels per day each year over the last few years, meaning that in 2014 we were using about 93 million barrels per day, in 2013 we were using about 92 million barrels per day, and so forth.  Those are rough numbers, of course. Here are the official EIA numbers.  To be perfectly honest, nobody really knows exactly how much oil the world uses because reporting is imperfect and there’s a black market that’s unreported.  However, based off what we know, oil production would have to completely stop for about 10 days for us to work through the stockpiles of oil we know we have.  A halt in production like that would require the kind of worldwide catastrophe that would make us not care whether oil was being produced.  What we’re getting at here is that once there is a freeze or a cut in oil production it’s going to be a long time before the surplus oil will be used up.  That’s going to keep oil prices down for a lot longer than some people think.  We’ll say it once again, go ahead and plan that great American road trip for this summer.

Southwestern Energy is not drilling any new wells this year.  That will definitely contribute to a decline in gas production.  However, gas production in the Marcellus shale has been 2 billion cubic feet more than anticipated.  This because of increased efficiency by drilling rigs and new pipeline being opened.  It’s still an overall decrease in production, but not by nearly the amount anticipated.

For another perspective on oil prices, read this Foreign Policy article.  In it, Robert Mosbacher, Jr. hints that by 2017 we are going to see a massive shortage of oil and a corresponding increase in oil prices.  He also says that we’re going to see immense boom-bust cycles coming up.  He thinks that the Saudis should have done what they could to keep oil prices in the $40-$60 range.  At that range fracking would have been marginally productive, with some areas being economically producible and others not.  He says that the Saudis have not accepted the fact that they are no longer the world’s swing producer.  It’s hard to fault his reasoning.  Looking at the numbers he floats, it would take about six months (roughly) to burn through the 1 billion barrels of oil that are now stockpiled around the world.  By 2017, which is when he suggests that oil production will drop off enough to start to be felt, we may have quite a bit more in the way of stockpiles.  But at a burn rate of 5 million barrels per day you can burn through 1.85 billion barrels of oil in a year.  Just another point of view to think about.

This Reuters article points out one of the reasons that oil and gas prices are going to be low for a while.  Frackers are using new techniques to increase production from new wells.  They are decreasing the distance between frack stages and clusters, increasing the amount of frack fluid, increasing the amount of sand, and moving high speed rigs to the sweet spots in the respective plays.  All of these things bring production from each well up, and consequently bring the cost per barrel or MCF down.  Increased efficiency means that fracking can be profitable at lower energy prices.  The Saudis unleashed the beast and they don’t have any way to bring it back.

We’ve also reached a national low.  There were fewer drilling rigs operating in the United States then there have been since 1940.  We expect to see that number get even lower before it starts to increase.

This article from Seeking Alpha says that oil prices aren’t going to climb above $50/bbl until the end of 2017.

This article from fuelfix.com says that it’s not as important to drillers what the price of oil (or, presumably, gas) actually is.  It’s more important to have the money to drill.  And apparently banks are still willing to finance oil drillers to a certain extent.  It seems that some gas drillers are also a good bet.  Range Resources has a $4 billion line of credit, and have only used $95 million of it.  Even better, the borrowing base won’t be redetermined until May of 2017.  That’s a lot of money to keep the lights on, and it’s good for a long time.  We’re expecting gas prices to start to recover by then.

On the other hand, it looks like gas prices are going to stay down for at least most of this year.  That article points out that it’s likely to be a mild summer, gas storage is above the five year average, and production hasn’t really slowed down much yet.  Of course, that doesn’t take into account the LNG exports that have begun and the natural increase in gas usage from economic growth.  The catastrophic drop in prices the article predicts are unlikely, but a recovery is also unlikely.