State of Oil and Gas: Feb 2016

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While oil and gas supplies are way, way up, it seems that may not be the case forever.  Some people are projecting that the oil oversupply may end as early as 4Q 2016, and it seems that pretty nearly everybody agrees that the gas oversupply is going to be over sometime in 2017.  And just a couple of weeks ago, Saudi Arabia, Russia, Venezuela, and Qatar got together and agreed in principle that it would be a good idea to freeze (not cut back) production at January 2016 levels.  They wanted Iran to get in on it, but Iran won’t. They want to get back to making money on oil after sanctions against them were lifted.  American production will be down about 600,000 barrels per day at some point in 2016, but Iran will make up that difference.  It looks pretty bleak for the American fracking industry.

The real question becomes whether the industry will actually come close to balancing demand with supply.  At some point demand for oil is going to outpace production.  There are some people saying that the industry’s supply chain for labor, parts, machines, etc., is going to be in such a shambles that it won’t be able to ramp production back up in time to counteract a gigantic swing in energy prices.  Watch out for high prices at the pump this coming Christmas and in your utility bills the Christmas after.  If that happens, we could be in for a very volatile energy market for a few years.

In the same vein of thought, Daniel Jones over at Seeking Alpha thinks that natural gas production is going to drop off a lot before the end of this year.  A combination of high production and low demand has driven prices low enough to drive a lot of drillers into the ground, so to speak.  Fewer drillers means fewer new wells.  We need new wells to keep production numbers up because the old wells naturally experience a decline in production as reservoir pressured drops with production.  The lack of new wells means a drop off in production.

The long and short of it all is that we’re in for a serious rebound in oil and gas prices sometime in the future, but that future may not be near enough to save some of the oil and gas companies out there.

Gastar Selling Marcellus/Utica Property to Tug Hill

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Just a quick FYI for any of our clients who are leased with Gastar, Gastar is selling its Marcellus/Utica property to a company called Tug Hill.  If you leased with Gastar, you will soon be working with Tug Hill.  The sale is scheduled to close on March 31, 2016.

Gastar is selling for two reasons.  One, it wants to focus on its Oklahoma holdings, and two, it can’t get a good price for the gas it produces from the Marcellus/Utica.

Wonder of Wonders! A Tax Cut!

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Dollar SignWho knew that the West Virginia legislature had it in them?  They’ve gone and cut taxes!  Specifically, a severance tax on coal, oil, and gas that was intended to replenish the State’s Worker’s Compensation Fund’s old debts.  It’s not done yet, but the prognosis is good.

The legislature passed this particular severance tax back in 2005.  It was in addition to the usual severance tax, and imposed a 4.7 cents per MCF tax on all gas production.  At the time, they expected this tax to be in place until about 2025, but Marcellus shale development brought higher than expected revenue.  The old debts got paid off quicker than expected.

When the tax was imposed, Governor Earl Ray Tomblin was a State Senator, and he promised that the tax would be repealed once the debts were paid off.  I have to give him props.  It’s not often, after all, that you hear of a politician keeping promises.  That’s especially true when the promise is to repeal a tax.

We’re excited, because even though it’s only 4.7 cents per MCF, it’s something.  In today’s rough natural gas climate, any good news is very welcome.  This is good for producers, which in turn is good for royalty and mineral owners.  Here’s to a bump up, however slight, in your royalty checks!

 

Oil Production Freeze, Maybe……

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rollercoaster

So, now that oil has dropped below $30/bbl and seems to be staying there, the Saudis and the Russians have agreed in theory that not increasing production of oil would be a good idea.  The only trouble is that they don’t have Iran on board, and Iraq appears to be tentative.  The other OPEC countries might be a little difficult to convince as well.  You can’t tell me that Venezuela won’t keep the spigots open full blast as prices start to come up; their economy is hurting really bad.

Having the Saudis and the Russians come to even a preliminary agreement like this is not going to make any real difference right now, but it’s a step in a good direction.  Both countries are going to keep producing as much oil as they want, and both countries would benefit from increased prices.  If by some miracle they are able to convince some other countries to join in a production freeze, and nobody cheats on the agreement, then we could see a quick increase in oil prices.  By quick I mean at least a few months out, and probably not sooner than six months from when the agreement is implemented.  It will take some time to work through the stores of cheap oil that everyone has stockpiled.

Bottom line for US consumers is you don’t have to worry about ridiculously high gas prices for you summer road trip.

 

UPS to Expand Use of LNG

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The article is pretty short, but the news is good.  UPS will expand its use of liquefied natural gas.  They currently use about 1.5 million gallons equivalents, and will be bumping it up another 500,000, or a solid 1/3 of what they currently use.  While it’s not huge, the more use of natural gas there is the better.  It’s cleaner than gasoline and produced in ridiculous amounts here in the States.

2016’s Forced Pooling Bill has been Introduced

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Pat McGeehanCasey Junkins of the Wheeling-Intelligencer reports on the forced pooling bill that’s before the West Virginia legislature this year.  There are quotes from Corky DeMarco, Pat McGeehan (pictured at right), and Tim Greene.  We’re happy to note that the article quotes McGeehan as saying that there is “stern opposition” to the forced pooling bill.  Mr. McGeehan is the leader of the opposition as far as we can tell, and we wish him luck and continued success in his opposition.

Please contact your legislators about this bill.

Parkersburg Cracker Plant News

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Cracker Plant

The proposed cracker plant for Parkersburg, WV is showing some more signs of life.  WV Department of Commerce Secretary Keith Burdette said that Odebrecht is expected to buy more land on site (link requires sign-in to read article) during this quarter of the year, so in the next two months.  While we still can only hope to be pleasantly surprised when/if they make a final decision, buying up property is a sign that there may be good news when that happens.

Royalty owners should all be pushing their legislators to do something to encourage Odebrecht to build this plant.  Turning the raw material into a more refined product before sending it out of state will bring more jobs and more stability to West Virginia’s economy.  That’s something we should all encourage.  Call or write your legislator.

Possible Alkylate Plant, Electric Plant

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refinery-alkylation-unit-390

One of the things that made the Marcellus shale so exciting for producers at the beginning of the Marcellus boom was that it was rich in natural gas liquids, including ethane, pentane, propane, and butane.  The latter can be refined into alkylate, an octane booster.  It is “key for cleaner burning gasoline” (.pdf).  More on mixing gasoline here.  So, changing butane to alkylate will help alleviate some of the environmental issues with burning hydrocarbons.  It won’t end it, of course, because hydrocarbons are still being burnt, but it will help.  Just another way that natural gas is helping improve things here in the good old U. S. of A.

All that said, MarkWest and Marathon are thinking about building an alkylation plant somewhere near an existing MarkWest plant in Jewett, Ohio.  Yes!  The more the merrier.  Use that natural gas up close to home.

On a related not, there’s a proposal to build a 550-megawatt gas-fired power plant in Elizabeth Township, PA.  The unusual thing about this plant is that the location is a contaminated industrial landfill.  Putting an energy plant on this site would be an excellent use of a bad resource.  It would kill two birds with one stone, putting to use difficult-to-use property and using abundant and cheap local natural gas to create needed electricity.

We hate to see the natural gas produced here in West Virginia not being put to its highest and best use.  Turning it into a final product close to home is much better than shipping it away as a raw product.  Now if only we could get a few more of these chemical plants, cracker plants, energy plants, and refineries located inside West Virginia.

 

State of the Oil and Gas Industry

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We’re not sure what to think about this Forbes article.  Allen Gilmer makes some very interesting points, including the fact that we have an oversupply of 2% in a world where we have a hard time measuring oil supplies accurately within 5%, and that U.S. drilling equipment won’t ramp up quickly because the equipment maintenance has been deferred in preference to keeping the business going.  He gives all the influence in oil markets to the Saudis, when we think that the U.S. will be able to influence prices pretty quickly once they start to rise.  But who died and made us experts, anyways?  The article is worth the read, even just to make you think a little differently about the state of oil and gas.

Andrew Hecht at Seeking Alpha has to point out the obvious, again, and probably will continue to point it out for the next year or so.  There is way too much gas in reserve and drilled (or fracked) but unproduced to allow gas prices to go up much.  It’s bad news for royalty owners.  It’s also a good argument for West Virginia mineral and royalty owners to make to their legislators when trying to convince them to vote against forced pooling; why force someone into a lease in this climate when waiting a few years should bring a better bonus and royalty?

Gaurav Sharma points out in a Forbes article that Iran might discount it’s oil in order to win back its previous European customers.  Anyone want to guess what that will do to oil prices?  Even though Iran is unlikely to produce more than 500,000 more barrels of oil in the next year, the Saudis will cut prices just to spite Iran.

Casey Junkins at the Wheeling Intelligencer put together a good article showing just how much natural gas we are producing from West Virginia compared to historical numbers.  Spoiler: it’s a lot.

Long and short, we’re going to see low energy prices for at least the rest of 2016, and maybe for all of 2017.  After that, it’s anybody’s guess.  Of course, oil and gas prices can be affected by things like wars and natural disasters,