Oil and Gas Price Volatility

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rollercoaster

There are two interesting articles over at Bloomberg about oil prices.  The first says that the United States shale oil is coming to be seen as the world’s swing producer, or in other words, it has the most control over price and availability of oil on the market.  That’s good for the United States, but may be bad for prices.  The United States doesn’t have the ability to just turn a spigot and produce more oil when demand increases.  We have a bunch of wells drilled, but they need to be fracked and brought online, which can take months.  Getting laid-off crews back together adds time to that.  Not being able to respond quickly to market demand means that prices could jump a lot in a short period of time.  When that happens, everybody and their dog gets back into the oil and gas development game, and within a year or two there’s an oversupply, driving prices down.  The unpredictability would make for a rough time economically for most of us.

The second says that big oil companies fear a big jump in prices in the near future, which meshes well with what the first article says.  Some companies are expecting low prices for at least a few years, but most companies are expecting a decrease in supply leading to an increase in price.

The United States oil and gas industry has never been known for moderating itself well.  When prices rise, everyone opens the spigots and starts developing new plays.  When prices drop, everyone shuts down production and abandons projects.  There are very few players who work slow and steady, with a real long-term outlook.  It would be good if a few more of the big companies would think long-term.  I know this goes counter to the culture of getting the biggest short-term dividends for stockholders, but it would certainly be better in the long-term for everyone.

ASCENT Cracker Plant Status Update

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This is disappointing.  The ASCENT project, the ethane cracker plant that is planned for Parkersburg, WV, has been put on hold.  There are other plants that are planned for the region, but none in West Virginia.  It would be a good thing for West Virginia to have one of these plants built here.  The jobs and tax money would do Parkersburg a lot of good economically.  It would put the ethane produced here in West Virginia to a better use than just being placed into the pipelines with the methane and sold for heating purposes.

The good news is that the project hasn’t been cancelled.  Odebrecht says it will still be completed in 2020, just a few years later than previously scheduled.

West Virginia Oil and Gas Severance Taxes

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Dollar SignThere’s good news and bad news on this front.  The good news is that severance taxes doubled from 2013 to 2014.  The bad news is that not much of it is going back to the local governments.  In Pennsylvania, 60% of the severance tax goes to the county of origin, and 40% goes to the State government.  In West Virginia, 90% goes to the State, and 10% goes back to the counties, with 3/4 allocated to the county of origin, and 1/4 allocated to all other counties.

I haven’t spent the time figuring out what the State uses the money for, but I doubt much of it is earmarked for repairing roads, plugging old wells, mitigating nuisances like dust and noise, or cleaning up after those oil and gas companies that don’t clean up after themselves.  It seems to me a larger portion of that money should be going back to the county of origin.

Drilling Rig Count Stable, or Pretty Close To It

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A Reuters article states that there will probably not be a rebound in demand for drilling rigs in the near future.  This is due to a large number of wells that have been drilled but not fracked or completed, and a large number of wells that could be refracked.  Natural Gas Intel has an article saying pretty much the same thing, but looking at it from a different direction.

Looks like the roughnecks who still have their jobs have a pretty decent chance of finishing out the year with a job.

 

Mountain Valley Pipeline in the News

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The plot thickens, as they say.  Actually, people are just expressing their opinions about the MVP, and getting those opinions in the news.  It’s still interesting stuff.Gas Pipeline Construction West Virginia

The thing that interests me is that the “expert” was quoted in the article as saying that the traditional price for pipelines was a dollar per foot.  I think he was probably misquoted, as the traditional price was a dollar per inch per foot.  I think the reporter just missed the “per inch” part.  For a 10-inch pipeline, you would get ten dollars per foot.  So if the pipeline crossed 100 feet of your property, you’d get $1000.

The traditional price is definitely low these days.  I’d say that two dollars per inch per foot is the starting point, and I’ve negotiated upwards of three dollars per inch per foot in the past.

One other very important point that the article makes is that these pipelines are going to be here for decades.  A one-time payment is not appropriate for such lengthy agreements.  There needs to be an annual or monthly payment of some sort, even if it’s small.  A periodic payment will assure the landowner that the pipeline is still in use.  If the payment stops coming, the landowner will be able to assume that the pipeline is no longer in use.

One idea that the article doesn’t point out is the possibility of getting wheelage paid.  Wheelage is basically a royalty on the gas that passes across your property.  Wheelage would work to accomplish the same goals that periodic payments would.

There are a lot of other things that a landowner could negotiate for in a pipeline right of way setting.  Get the advice of an attorney who is competent in this area before you sign a pipeline right of way agreement.  If you don’t already have one, give my office a call at 304-473-1403.Gas Pipeline Construction

 

I’d like to point out that the pipelines in the pictures above are much smaller than the MVP will be.  Those are probably 36-inch pipes, and the MVP will be 42 inches.

Every Negotiation is Different

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DocumentI’ve told most of my clients that they will not get the same deal that any of my other clients did.  It just doesn’t work out that way.  I’ve started lease negotiations with the same landman from the same company in the same area at the exact same time and ended up with two rather different leases signed months apart from each other.  Different clients have different needs.

It looks like the State of West Virginia is running into something similar.  The State worked out and signed a lease with Statoil to drill under part of the Ohio river.  Before that deal was started, the State began working out a lease with Gastar to do the same thing under a different part of the river.  The Gastar deal still isn’t finished.

Cash for Clunkers Should Have Required You To Buy This Car

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Honda Civic CNGHonda has been selling a compressed natural gas Civic since 1998.  Who knew?  Apparently, availability was limited to four States until October of 2011, but it is now available in 37 States.  I can’t find a list of which States, but the website offers a dealer locator, and there’s probably a dealer near you.

The interesting thing to anybody in the market for this size car would be the price per mile.  To drive 25 miles, you can expect to pay $1.47 for natural gas, and $1.93 for the gasoline equivalent.  You also get to drive in HOV lanes in a lot of states.

The obvious drawback is refueling.  If there are no CNG stations in your area, this car will be ridiculously impractical.  If you’re not going to be deterred, however, you could get a Phill home refilling station.  Be forewarned that refilling at home can have detrimental effects on your warranty.  Read it carefully before deciding.

Efficiency Leads to Profits, and Should Lead to Higher Bonuses and Royalties

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DocumentWell now, this is an interesting take on things.  It appears that oil and gas companies that are working in the shale formations are actually doing pretty well still, in spite of the decrease in energy prices.  This article from Bloomberg says that improvements in efficiency have probably made up for the decreases in prices.

The most interesting number that the article quotes, at least for my clients, is that Antero has costs of less $18/bbl of oil produced from Appalachia.  That’s pretty impressive.  It also means that they can afford to pay a bit more in bonus and royalty amounts.

When you’re negotiating your lease, make sure to ask for more than you think you can get.  In most cases, you will be pleasantly surprised.

Lone Gunman in West Virginia Oil Field

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A foreman for HG Energy was checking on a leak at a well site in Lincoln County, WV on Monday when he was shot by someone who apparently is an anti-fracker/driller.  The gunman was dressed in camouflage and he had “black stuff rubbed all over his face”.  For those of you not from West Virginia, camouflage is so commonplace that you sometimes see people wearing it in court.  The black would have been to camouflage his face.  He would have just looked like any other hunter.

He was walking along the road leading to the well site as the foreman was leaving.  The foreman stopped to see if the man needed help, as apparently vehicles get stuck in the area often.  When he did, the man held up a tape recorder and then a gun.  The tape recorder was hard to hear, but the foreman said it sounded like “stopping the drilling or no more drilling”.

When the recording stopped, the gunman pointed the gun at the foreman’s head.  The foreman grabbed the gun, the gunman pulled the trigger, and the bullet tore through the foreman’s hand, shattering a bone.  The foreman had left his truck in gear, so he hit the gas and drove off.

Police tracked a scent from the area with dogs for about four miles to a four wheeler track, where the scent was lost.  Police aren’t confident that the scent they tracked was that of the gunman.

Local environmental groups have quickly denounced the attack.

 

PA Production Down

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noise-maker-colorThis is big news.  (If that link doesn’t take you to the full article at MDN, do a Google search for the article’s title.)  PA’s DEP released production numbers for February, and total production as well as production across the board is down from January.  EQT’s production data is absent, but even if EQT’s production doubles from January (which it won’t), production will still be down.  I expect that the same thing is happening in other natural gas producing areas.

A reduction in production means a reduction in storage levels and a reduction in supply overall.  This is a direct result of the dwindling rig count everyone has been talking about for months.  This is also a direct result of low natural gas prices.  I’ve heard talk that some companies have been cutting back production from currently producing wells because of said prices.  Decreased production/supply should lead to an increase in price.

If and when prices start to go back up, we’ll see producers start to turn the spigots back on, and bring already drilled wells into production.  I don’t expect a huge jump in prices.  I also don’t expect to see many, if any, new rigs brought back to work.  There is just too much supply from currently producing wells and potential supply from completed but non-producing wells to justify firing up those idled rigs.  I expect that to happen about the beginning of 2016.

This isn’t the end of low gas prices, but it may be the beginning of the end.