If you work for a producer or oil field services company, you might have a bit of an issue with that title. But just for a moment, put your worries aside and consider the silver lining – huge improvements in our industry’s productivity over the last few years. Things are getting better and better. In fact that is part of the problem. Producers have just become too productive for their own good. We’ve seen the consequences of this kind of productivity improvement before, not in the energy industry, but in electronics. Moore’s law, remember? In today’s posting we’ll look at some of the evidence of huge productivity improvements, what it has meant for production volumes, and the implications for U.S. producers now facing many of the same issues that electronics companies have dealt with for decades.
Hydrocarbons
In time honored RBN blogging tradition – we’ve been at this blogging business three years –we look back today at the 250 blogs posted this year to see which ones had the highest hit rates. The number of hits any blog gets tells you a lot about what is going on in the energy markets – which topics resonate with our members, and which don’t attract much attention. Last year the big hitter blogs came in about 17,000 hits. This year the big numbers are closer to 50,000. With that many folks paying attention these days it is even more important that we take a page out of the late Casey Kasem’s playbook to look at the top blogs of 2014 based on numbers of website hits.
Natural gas production in the Lower 48 has surged 40 percent since 2005 – hitting record levels in recent months in spite of low prices and a drilling migration away from dry gas to liquids plays. Following a similar trajectory, natural gas liquids (NGLs) output from gas processing plants jumped 40 percent since 2009 as drilling for wet (high BTU) gas accelerated. Crude oil production from shale did not take off until the end of 2011 but since then has surged an astronomical 56 percent to 7.8 MMb/d. While this winter’s harsh weather has placed a temporary slow down on these skyrocketing production numbers, RBN fully expects the growth trend to continue - putting the U.S. within sight of energy independence in the not too distant future. Along the way plenty of new opportunities for the industry will be tempered by market challenges. Today we preview RBN’s latest Drill Down Report.
The second release of the EIA’s new monthly Drilling Productivity Report (DPR) for November came out on Tuesday (November 12, 2013) showing December natural gas production is expected to increase in four of the six regions covered. But one region alone – the Marcellus – accounts for 76 percent of natural gas production growth. In fact if the Marcellus were a country it would rank 5th in world gas production – ahead of Qatar. The DPR provides a breakdown of rig productivity and production from new and legacy wells and includes access to historical data back to 2007. Today we continue our review of the latest Energy Information Administration’s (EIA) report.
Last month the Energy Information Administration (EIA) debuted a new monthly report detailing oil and gas drilling productivity in six of the largest US production basins. Rather than just being an “after the fact” report telling us what happened in the past, the new report provides a forecast of oil and gas production for the current and next month out in each of the six basins. The initial report indicates that oil production will increase by roughly 60 Mb/d in these basins during November with gas production increasing by 0.4 Bcf/d. The report also highlights continued improvement in rig productivity. Today we begin a series interpreting the new drilling rig productivity data.
Worried about 2013? You are not alone. There are many rational reasons to be concerned about possible developments in energy markets this year, let alone phobias about the number thirteen (triskaidekaphobia). But hey, this is the first working day of the New Year, so let’s look on the positive side. In fact we are so psyched that we are going to violate the cardinal rule of consulting. We are going to make predictions. Of the future! So hold on to your seat and get ready for our Top Ten Energy Prognostications for 2013, which according to Chinese astrology is the Year of the Snake. Hmm, that doesn’t sound good.
During 2012 we’ve posted over 200 RBN blogs, covering everything from ethylene cracker margins (Ethylene Ethylene, Prettiest margin I ever seen), to northeast natural gas basis (The Mighty Algonquin) to the impact of a major crude pipeline reversal (Oh-Ho-Ho it’s Magic). Now in our last posting of the year it seems appropriate to take a page out of Casey Kasem’s playbook to look back at the top blogs of 2012 based on website hits. And there’s more! In response to many members who have asked, we’ll also provide an index of all of our blogs by topic. And finally we will introduce a new website feature that will give you the ability to see what is trending on the RBN site in real time. BTW, we are not really going to look at 40 blogs. After all it is New Year’s Eve. But we will look a few of the really big winners for 2012.
Fundamental to our approach to energy markets at RBN is a view that natural gas, crude oil and NGLs have become much more interdependent than in the days before shale. What happens in gas impacts NGLs, which influences crude oil, which loops back to the natural gas market. We’ve written about these cross-commodity relationships in a number of RBN blogs during 2012, showing the calculations and walking through several spreadsheet models. Now we are taking our analysis one step further. Starting on December 31, 2012, we are launching a new RBN website feature called Spotcheck that displays daily updated graphs of these relationships. Today we’ll describe what is coming next week, and how you can interpret the trends to better understand developments in North America hydrocarbon markets.
The ratio between crude oil and natural gas (NYMEX) futures yesterday was 31.8. That is crude prices in $/Bbl were 31.8 X natural gas prices in $/MMbtu. In the 10 years from August 1997 to August 2007 the ratio averaged 7.5 X – that was the old world. Since August 2007 the ratio has averaged 19.4 X – with a dramatic rise during the last year to dizzying heights over 50 X. A major shift to high liquid hydrocarbon production has ensued. Now the futures market indicates the ratio will halve from 31 X to 15 X by 2020. Today we review the prospects for a return to a more normal crude to gas ratio.
Sometimes learning is about getting your mind changed. Over the past couple of days at Bentek’s Benposium conference in Houston there were a lot of presentations and powerpoint slides looking at all sides of the LNG export issue. I’m still not convinced that we’ll see more than one terminal built in the U.S. But I was convinced of three things: (a) there is a need for LNG exports to balance oversupply in the natural gas market, (b) pricing differentials support the economics necessary to build these facilities, and (c) if even a couple of the liquefaction plants and terminals are built, it will have a big impact on the natural gas market in North America.
Yesterday was Day#2 of Benposium, the annual Bentek conference being held at the Houstonian hotel in Houston. It was another day when I could attend the sessions as a participant, which is considerably harder work than it sounds. Between Tuesday and Wednesday there were seven outside speakers and 15 breakout sessions with Bentek analysts, each repeated twice over the two days. They went deep into natural gas, crude oil and NGL markets. After 48 hours of Benpo 2012, my brain is full. And there is one more day to go.
Rather than getting into the gory details of all these presentations, I thought it would be a good idea to take a page out of Cramer (that would be Cramer's Mad Money, not Cosmo Kramer) and do a lightning round on all of the major themes I heard across the two days.
Yesterday ICE next-day gas at Henry Hub posted at $1.85/MMbtu, down a penny from Wednesday. The CME/Nymex May contract settled at still another 10 year low (how many more 10 year lows could there be?) at $1.907, down 4.4 cnts. But May WTI crude oil at Cushing is still above one hundred bucks a barrel, closing at $102.27/bbl, off 40 cnts. Our favorite measure of fundamental market disparity – the ratio of prompt crude futures to cash gas is now up to 55X (simply 102.27/1.85).
Yesterday I attended and was a speaker at the Platts 6th Annual Rockies Oil & Gas conference at the Grand Hyatt Denver. There were about 350 registered attendees, by far the largest of these conferences. I’ve been a speaker at the event for the past four years. Good friend and master of ceremonies Stuart Nance (his first day on the job as VP of Bill Barrett Corp.) noted that in previous years the conference was titled Gas and Oil Conference. Now the order is reversed. That tells you a lot about the speaker topics and audience interest. I spoke at 2:15 and was the first to utter the word “gas”. And I only had 3 slides on the topic.
Yesterday the folks at RBC Capital Markets issued an excellent research piece titled “Cross-Sector Implications of North America Energy Supply Chain Evolution.” It is a look at the shale revolution from the perspective of a supply chain – the linkages between interconnected businesses involved in the development, extraction and production of liquid and gas hydrocarbon energy. The 31 page report makes some great points about the fundamentals of today’s hydrocarbon markets and recommends stocks that are expected to benefit from these developments. I thought it would be useful to summarize the high points of their investment thesis here. You’ll need to contact RBC if you want to see the report and its investment strategies.
Crude oil production in the Eagle Ford has ramped up from less than 50 Mb/d two years ago to almost 400 Mb/d today, and the growth shows no sign of slowing down. In most reports and statistics, all of this volume shows up as crude oil. But it’s not. Between 60%-70% of this production is condensate – a hydrocarbon classification that is somewhere between crude oil and natural gas liquids. It is valued differently from crude, can require handling different from crude, and can go into markets different from crude. But neither is it a natural gas liquid. Condensates are produced in the field, not extracted from a wet gas stream by a cryogenic processing unit. Condensates are neither fish nor fowl.