Crude Oil

Wednesday, 01/11/2017

Maya, Mexico’s flagship heavy crude, has been a key staple in the diet of U.S. Gulf Coast refiners for a long time, and it has faithfully served as a price benchmark for nearly all heavy crude oil traded along the U.S. Gulf, and points beyond.  Maya’s price, relative to lighter benchmark grades such as Louisiana Light Sweet (LLS) or Brent, provides ready insight into the profitability of heavy oil (coking) refiners. But production of Maya peaked in 2004 and has declined considerably since then, raising questions about its continuing efficacy as a price benchmark. Now it’s come to light that a component of the Maya price formula was changed effective January 1, 2017. Although the change—related to the formula’s fuel oil price component—might be viewed as a relatively minor tweak, it raises new questions about this important heavy oil price benchmark. Today we begin a two-part series on Maya crude, the new price formula and its potential effects.

Tuesday, 01/03/2017

It hasn’t been widely reported, but during cold snaps in late fall and early winter, a number of crude oil producers in the Permian Basin have faced a “perfect storm” of events that made it challenging to meet crude pipelines’ vapor pressure standards. At first glance, this may seem like a problem for “the technical folks” to deal with, but in fact the issue has been affecting the ability to move crude to market, and the price of oil at Midland, TX versus the crude hub at Cushing, OK. It has even forced Permian producers to “shut in” some crude production—at least for a time—along several major pipelines in the region because they’ve been unable to adequately prepare their crude for piping or trucking. Today we examine an under-the-radar problem that’s been vexing producers in the U.S.’s leading crude oil play, and affecting oil prices and markets.

Tuesday, 12/13/2016

In 2015, Sooners held on tight as Oklahoma was rocked by 890 earthquakes with a magnitude of 3 or higher—up sharply from only 43 earthquakes in 2010 and an average of less than two earthquakes per year in the previous quarter-century. Oklahomans have experienced hundreds of earthquakes this year too, including a record-breaking 5.8 event on September 3 and, on November 6, a 5.0 quake very near Cushing, OK, which serves as the delivery point for the CME/NYMEX Light Sweet Crude contract and which has earned the nickname “Pipeline Crossroads of the World”. Today we look at the latest quake near Cushing and other recent pipeline disruptions to assess the resilience of critical crude-delivery systems.

Thursday, 12/08/2016

It’s been a tough few years for Canadian oil producers. As they ramped up production in the oil sands, Canadian E&Ps faced pipeline takeaway constraints that drove down the price of Western Canadian Select versus Gulf Coast crudes. The Keystone XL pipeline would have largely solved things, but when that project was killed by Canada’s U.S. friends and neighbors, oil sands producers had to settle for a series of smaller, more incremental projects that provided only a partial fix. The devastating Alberta fires of May 2016 reduced production and pretty much eliminated constraints for much of this year. But volumes have recovered, and if oil sands production is to continue growing, more pipelines and new customers will be needed. Today we consider Canada’s long-running effort to ensure there’s enough capacity to move its crude to market, two major projects that just won the backing of the Canadian government, and what may be next.

Thursday, 11/24/2016

With today’s low crude oil and natural gas prices, the survival of exploration and production companies depends on razor-thin margins. Lease operating expenses––the costs incurred by an operator to keep production flowing after the initial cost of drilling and completing a well have been incurred––are a go-to variable in assessing the financial health of E&Ps. But it’s not enough for investors and analysts to pull LOE line items from Securities and Exchange Commission filings to find the lowest cost producers, plays, or basins. More than ever we need to understand—really, truly, deeply—what LOEs are, why they matter, how they change with commodity prices, production volumes, and other factors, and how we should use them when comparing players and plays. Today we begin a series on a little-explored but important factor in assessing oil and gas production costs.

Monday, 11/21/2016

Forecasting in U.S. energy markets characterized by hair-trigger price volatility, ever-improving well drilling and completion productivity, and the unraveling of old norms is a bit of a high-wire act. But just as big-tent tightrope walkers get better with practice, energy prognosticators can gain from experience––and from taking a look back at previous forecasts to see what they got right, what they may have missed, and what’s changed in the interim. Today we continue our review of a recent presentation at RBN’s School of Energy earlier this month on forecasting lessons learned.

Monday, 11/14/2016

The Shale Revolution changed everything about U.S energy markets, and in the process made forecasting the production and pricing of crude oil, natural gas and NGLs a heck of a lot harder. But we all learn from experience. In the early days of the Revolution, few could have predicted how quickly output would rise, how challenging it would be for pipeline takeaway capacity to keep up with production, or how successfully crude-by-rail would fill the gap – until that gap went away with the Revolution’s most recent phase. Comparing past forecasts to what actually happened is instructive though, and maybe––just maybe––today’s projections for the future are more informed than the forecasts of 2011 or 2013. In today’s blog we look at a recent presentation on forecasting lessons learned at RBN’s School of Energy earlier this month.

Wednesday, 11/09/2016

Forty years ago, Alaska was seen as the next big thing for U.S. crude oil production––and it was. With the completion of the Trans Alaska Pipeline System in 1977, Alaska North Slope production took off, and by early 1988 it was topping 2 MMb/d and accounting for nearly one-quarter of total U.S. output. But that was the peak; since then, ANS production has fallen steadily, and in August 2016 it averaged only 443 Mb/d, or 5% of the national total. While there is clearly a lot of oil (and natural gas) still in the ground in the North Slope region, developing those resources would be very costly. Today we begin a two-part series on energy production in the 49th state with a look at the oil side of things.

Monday, 11/07/2016

The Army Corps of Engineers is said to be considering alternative routes for the most controversial segment of the Dakota Access Pipeline, which could help break the impasse that has stalled construction on that part of DAPL. If the 450-Mb/d crude oil delivery project gets back on track soon––something that no one knows for sure––an important two-part question remains: Where will the crude to fill the 450-Mb/d pipeline come from, and where will it be fed into DAPL? Today we look at the supply sources that will help fill one of the most important oil pipelines now under development.

Thursday, 10/20/2016

Several oil-sands expansion projects committed to when crude oil prices were double what they are today are finally coming online, and midstream companies active in Alberta are building new crude/diluent pipelines and storage capacity to keep pace. New storage caverns for natural gas liquids are also in the works, giving a much-needed boost to Canada’s Energy Province. Today we conclude our series on midstream infrastructure under development in or near Western Canada’s oil sands region that move and store hydrocarbon liquids.

Monday, 10/17/2016

Many factors are weighed before a midstream company commits to building, or a shipper commits to shipping on, a major crude oil pipeline. Where is incremental pipeline capacity needed? What would be the logical origin and terminus for the pipeline? What should the project’s capacity be, and what would be the capital cost of building the project? Where the economic rubber really meets the road is the question of what unit cost––or rate per barrel––would the pipeline developer need to charge to recover its costs and earn a reasonable rate of return on its investment.  A really important aspect of that is what the developer will be allowed to charge, once regulators get into it.   Today we continue our review of crude oil pipeline economics with an overview of who regulates oil pipelines, how they do it, and what it means for rates.

In Part 1 of this series we discussed the fact that new pipeline development is driven by either need or opportunity, and more often than not, a combination of the two. The key question that pipeline developers and their customers (the shippers) have to consider before committing to build new capacity, we said, is whether it will “pay” to flow crude on the pipeline once it’s built––not just the first year or the first three, but for years if not decades to come. To answer this question, pipeline developers and shippers have to consider both current and future economics. There are three fundamental factors that drive pipeline economics: 1) future supply dynamics (and the resulting price impact) at the origination point (Point A); 2) future demand (and price) at the destination point (Point B); and 3) the transportation cost to flow crude from Point A to Point B.  

Monday, 10/10/2016

Oil-sands expansion projects coming online and the resulting need for more diluent are among the drivers behind a number of midstream infrastructure projects in the province of Alberta, including natural gas processing plants and fractionators; oil and diluent pipelines; and oil/NGL storage facilities. The total volume of work is surprising, considering the fact that oil-sands production economics are iffy right now, if not downright upside down. Today, we continue our look at midstream projects under development within Canada’s Energy Province, this time focusing on gas processing and fractionation facilities.

Sunday, 10/02/2016

Term charter rates for medium-range Jones Act tankers have fallen by two-thirds since they peaked at $120,000/day in mid-2014, to only $38,000/day done in September 2016, which is good news for producers but a punch in the stomach for ship owners. A sharp rise in the number of vessels being added to the Jones Act fleet has surely contributed to the charter-rate collapse. Less obvious are the degrees to which the rate drop may have been influenced by the decline in superlight Eagle Ford crude oil production, or by the lifting of the ban on U.S. crude oil exports. Today, we examine the evidence.

Tuesday, 09/27/2016

Many factors are weighed before a midstream company commits to building, or a shipper commits to shipping on, a major crude oil pipeline. Where is incremental pipeline capacity needed? What would be the logical origin and terminus for the pipeline? What should the project’s capacity be, and what would be the capital cost of building the project? Where the economic rubber really meets the road is the question of what unit cost––or rate per barrel––would the pipeline developer need to charge to recover its costs and earn a reasonable rate of return on its investment. Today we continue our review of crude oil pipeline economics with a look at the rules-of-thumb for determining what pipeline transportation rates would be.

Monday, 09/26/2016

The prospects for sellers of Williston Basin/Bakken crude oil in what once was a prime growth market—the U.S. East Coast—have been dwindling fast, as have the volumes of Bakken crude being railed and barged to refineries along the Mid-Atlantic coast and the Canadian Maritimes. Today we look at how a combination of weak crude oil prices, declining production, high relative freight costs, and the lifting of the U.S. crude oil export ban have opened the door to more imports from West Africa, and left Bakken producers out in the cold.