Category Archives: Natural Gas Prices

What If We Ban OPEC Oil?

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One of Donald Trump’s promises during his campaign was that he would ban oil from all OPEC countries.

This article over at Alberta Oil Magazine discusses some of the implications of doing that.  It points out that we use about 20 million barrels a day, produce about 8.5 million right now, and produced about 9.4 million in 2015 and about 8.7 million in 2014.  We import only 3 million to 3.5 million barrels a day from OPEC countries.

Looking at the EIA reports, we get about four times as much oil from Canada as we do from Saudi Arabia, and almost as much from Mexico as we do from Saudi Arabia.  All told, though, we get about 1/3 of our imports from OPEC countries. We would have to make up that 3-3.5 million barrels a day from somewhere.

If we banned OPEC imports it’s almost certain that OPEC would pick up some customers that non-OPEC countries currently supply, just by cuthing prices.  Those non-OPEC countries would have some additional supply floating around, and would very likely just sell to the US.  Most of the difference we need would be made up from shuffling around suppliers and customers.

Some of the difference would probably be made up by Canadian tar sands, but the tar sand operations would probably take a while to bring production back up.  After the fires in Alberta earlier this year, the oil sands operations took a few weeks to bring back to full operations.  Opening up new areas would likely take a lot more than a few weeks.

Mexico would probably try to take up some of the slack as well, but most oil exploration outside the United States is the old style, requiring months to years to bring significant oil production online.

That’s assuming there will be slack in oil supplies.  Presumably, we would just start buying more oil from countries which already provide us oil.  Of course, there may be treaties and transportation issues that I don’t know about which would limit the amount of oil we could buy from non-OPEC countries.  If something, anything, gets in the way of our acquiring more oil from current non-OPEC sources, then the price of oil will certainly rise and production in the US will increase. Any kind of uncertainty will drive market prices up. 
Any real slack in oil supplies would be taken up by American companies, doing horizontal fracking.  The nice thing about a fracking operation is that it can be up and running in months, sometimes even weeks.  Areas like the Permian and the Bakken which have been heavily explored and leased would be able to bring new production online within months.  That’s not counting DUCs, drilled but uncompleted wells which just need to be fracked or turned in line (open the valves) to start producing.

There is one point about this entire thing that is worrisome for those of us in the Marcellus/Utica area.  Increased oil production brings increased natural gas production.  From the majority of oil wells there is some natural gas produced.  This natural gas isn’t just vented or burned onsite.  It’s sold into the pipeline system, and competes with gas produced elsewhere.  If we do see increased oil production in the US, the associated natural gas production will drive down prices and demand, even if slightly, for Marcellus/Utica gas.

Why Your Royalties are Low Right Now

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There are actually a couple of reasons why your royalty checks are pretty small (relative to a couple years ago) right now.  First, production from wells always decreases over time, second, the price of gas is down, third, the producer is probably taking post-production costs out of your check, and fourth, the producer is probably throttling back production from the well.

Side Note: if you think your producer is taking out post-production costs you should call the office and talk with us about it.  We can probably force them to stop.

We’re going to focus on the second reason in this post, the price of gas.  Prices are down for a couple of reasons.  One is that there’s just way more gas available across the nation than there ever has been.  A second reason is that the gas here in the Appalachian basin is…..stuck.  It’s backed up.  It’s constrained.  Whatever you want to say, there’s just not enough transportation capacity for it all.

Because there’s not enough transportation capacity, you aren’t getting paid top dollar for the gas coming out of your property.

It’s not just that we can’t transport all the Appalachian basin gas to someone who will buy it, either.

The price of gas is set at the Henry Hub in Louisiana.  The Henry Hub is a place where a bunch of pipelines come together and there’s a bunch of storage.  Whatever gas is selling for at the Henry Hub is the benchmark price for gas in the United States.  It changes constantly based on a huge number of factors.

Here in the Appalachian basin there are a couple of local hubs.  Prices for gas are set at these hubs.  They are based on the Henry Hub price, and then changed either up or down depending on local market conditions.  Once upon a time we could sell gas for more than Henry Hub prices.  It hasn’t been that way in a long time.

Because we’re producing so much gas we don’t have enough space for it all in the local hubs and other pipelines in the area.  Because of that, gas sells at a discount to the Henry Hub price.

So not only can we not get all our gas into a pipeline in the first place, we also can’t get full price for it.

And that is one of the reasons why royalty checks have been relatively small lately.

Is there any hope for the future?  Well, RBN Energy is doing a two-part series on pipeline buildout in the Appalachian basin.  Here’s the first part, and the second part will be coming in the near future.

On top of getting a better price for our gas compared to the Henry Hub, we also need to start shipping gas out of the country for foreign markets to buy.  Right now, 99% of the gas produced in the United States is consumed in the United States.  That is changing rapidly, with the Sabine Pass LNG plant shipping its first cargo of LNG back in February of 2016, and with other plants coming online in the next couple of years.  Once natural gas has become a world commodity we should be able to sell at a better price than we can get right now.

Stone Re-opens Mary Field

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Last September Stone Energy shut-in their Mary field here in West Virginia, citing low gas prices.  Today we hear that Stone has cut a deal to begin flowing gas to Williams pipelines from the Mary field.

This is an indication of two things: prices have risen far enough that production in the Marcellus region in profitable, and at least one company thinks that gas prices are going to remain high for a while.

Production was never completely shut-in in the Mary filed.  They’re producing about 45MMcfe per day right now.  Production is expected to increase to somewhere over 60 MMcfe per day in July and to over 100 MMcfe per day in August, so more than double in the next 60 days.

Some of our clients are going to be very happy about this news.  Better royalty checks!  Look for them in a mailbox near you.

The State of Oil and Gas – April 2016

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OPEC met over the weekend to discuss freezing oil production at January levels.  Predictably, the talks failed.  Iran was never going to agree to freeze production. For them, every barrel of increased production is money they didn’t have when sanctions were in place, and they need the money.  When Saudi Arabia announced that Iran’s participation was necessary, utter failure was clear.  That was Saudi Arabia’s intent all along.  They don’t want high prices yet.  They want to drive more high-price producers out of the market.

With that said, here are (some of) the articles we’ve read over the last month that give a good overview of what’s going on in the world and in the Marcellus/Utica region.  Enjoy!

Our opinion is that oil prices are unlikely to get much above $50/bbl any time soon unless American producers have let too many skilled workers go and won’t be able to ramp up production quickly when prices hit $50/bbl.  This Forbes article says that Saudi Arabia won’t let oil prices get much above $40/bbl because they want to keep American producers from having that option.

American natural gas production reached an all-time high in February.  That’s odd, because everyone has been saying that production has been declining for months.  Apparently the northeast has not been declining, but has been increasing.  Other areas are either flat or down a bit.  Additionally, the weather was warmer than usual meaning gas wells didn’t freeze over like they usually do.  That means there was greater than expected production.  All together it added up to record production.  One of these days we’re going to see gas production start to drop a lot, but today is not that day.

This article at the Washington Times says that oil will recover to $75/bbl by 2020.  We find that hard to believe.  By the time oil hits $50/bbl American frackers are going to be warming up the equipment and getting the band back together.  The only reason oil will hit $75/bbl will be if the frackers simply can’t get the band back together, having to retrain everybody.

Harvard Business Review makes the case for oil prices remaining near the $50/bbl threshold for the foreseeable future.  We find it interesting the most everybody is saying that $50/bbl is the likely soft cap on oil prices.  When everyone agrees about something it’s neither because the data is totally conclusive, or there’s some group-think occurring.  As data regarding oil and gas prices is never conclusive, we’re going with group-think.

The natural gas liquefaction plant in Cove Point, Maryland is on schedule to open in late 2017.

Here’s a guy saying that the $40/bbl rally is based almost entirely on financial influences, the Fed weakening the dollar being the culprit.  He’s saying that the market is imbalanced and there isn’t anything changing that, so there’s no reason for oil to bump up to $40/bbl.  Hey may be right, but $40/bbl for oil seems to be a pretty reasonable price, and maybe markets will just stay there.  And maybe pigs will fly.

We think pretty much everybody completely expected this, but now Saudi Arabia is saying that they won’t freeze their oil output unless Iran agrees to do so as well.  Iran is not going to.  It’s just not.  Predictably, oil prices have dropped.  Natural gas prices have barely moved, though, so we’ve got that going for us.  Also, it looks like April is going to be cold, not just unseasonably cool, so maybe we’ll chew up some of our stored gas a little later in the year than usual.

With the beginning of injection season, this article at the Wall Street Journal (behind a paywall) shows just where we are with gas storage.  It says we may be out of gas storage by August.  That will have, shall we say, interesting ramifications for the industry.  It’s a good thing the Cheniere LNG plant has come online and begun exporting recently.

This article at Seeking Alpha says the we probably hit the lowest point for oil prices back in February.  Zoltan Ban, the author, says the drilled but uncompleted (DUC) wells are not enough to stop any increase in price by a corresponding increase in production, but will “temper” it.  The U.S. is going to have about 2 million barrels per day of decreased production this year.  When you consider that total worldwide use is about 95 million barrels per day, and the Saudis only have at most 4 million barrels per day of surplus production they could bring online, it puts the numbers in perspective.  Next year could be a crazy year for oil prices.

Schlumberger (pronounced sh-LUM-ber-jay) is the largest provider of services to the oil and gas industry.  You’ll see their trucks lumbering around anywhere there is an oil and gas play.  They’re big.  Their CEO gave a presentation in which he said that the efficiency gains that all the oil and gas producers have used to cut costs of drilling and completing wells are not permanent.  In other words, Schlumberger is going to start raising their prices the second the price of oil goes up and drilling activity picks up.  What goes around comes around.  Schlumberger has been playing ball with the producers while prices are down, but the producers are going to have to play ball with service providers when prices go up.  The result will be a slowing of new development when oil prices start to rise, so oil prices will have to rise farther before producers start to drill.  The farther oil prices rise without new development, the more likely it is that the glut of oil will turn into a dearth of oil and really drive prices up.  Ouch.  Not good.

This article at Seeking Alpha is predicting natural gas at $2.90 per MCF by the end of this year, and at an average of $3.20 per MCF in 2017.  The article suggests that we’ve reached the bottom for natural gas because production is dropping off and we’re going to have a hot summer, and we’re going to have added exporting of LNG.  We’ll be a little surprised if prices hit $2.90 per MCF, and a little surprised if production drops off as much as the article suggests, but we do expect gas to start to go up toward the end of this year or the beginning of 2017.  Note: the comment section is just as interesting as the article.

The EIA’s monthly report shows that the Marcellus and Utica plays are slowing down, with production nearly flat.  The prediction for May is that production will be flat.  This is probably the beginning of the end of the gas surplus.

Saudi Arabia, Kuwait, and UAE are all making plans to increase production.  The article posits that Saudi Arabia is really only doing so to keep their market share, and the projected numbers bear that out.  Kuwait and UAE are a little more than that, though.

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.

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.

 

 

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.

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,

 

 

 

Oil is a $30 per Barrel Commodity, and That’s Good News for West Virginia

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We don’t often run across a good rule of thumb that we don’t know at this point.  Here’s one that’s new.  Outside of some occasional spikes, oil will always hover around $30 per barrel when adjusted for inflation.

There are a couple of other items of interest in this article by Anya Litvak of the Pittsburgh Post-Gazette.  The big takeaway for everybody, though, is that $30 figure for the inflation-adjusted price of oil.  When oil prices start to rise, we can know they will drop.  How it got to over $100 per barrel for a while there is beyond my ken.  It stayed there for quite a while, too.

Taking a look at the historical values for WTI crude oil prices, you can see some lengthy spikes.  Make sure to remove the options for “Log Scale” and “Show Recessions” just above the graph.  The interesting thing to note is that when prices climb above about $80 they usually stay up for about five years.  The major spikes were in 1980 and in 2008.  The major crashes were in 1985 and in 2009.  The crash just after 9/11 wasn’t as big as we would have expected.  Interestingly, the crash in 2009 was followed by a huge spike which lasted for about five years.

All of the major crashes look to me like they followed a stock market crash.  You’re welcome to correct me if I’m wrong.  The times when oil prices really did well were times when the economy was humming right along in the 1980s and when there was a lot of money being put into the economy by “easing”.  I don’t have the economic background to explain what was going on just before the 2009 crash, but I imagine someone reading this can explain that for us.

Regardless, the price of oil isn’t going to stay below $30 for long if it drops below that, and it’s not going to get back up to $100 any time soon.  I’ll be surprised if it gets above $50 per barrel any time soon, to be honest.  The frackers just have too many wells ready to produce when the price starts to rise.  I think this bodes well for the economy as a whole in the near future.  Cheap and less volatile energy prices are great for the United States economy, and probably for the world economy as well.

They heyday of ridiculously high bonus amounts for signing oil and gas leases is over.  Luckily in West Virginia the bonus amounts never got ridiculously high.  We’re still seeing bonus amounts surprisingly close to what we saw two years ago.  Royalty amounts are holding pretty steady, too.  It’s still a good time to own oil and gas mineral and royalty rights in West Virginia