School’s Out for Summer

Last week we held the first RBN School of Energy at the St. Regis hotel in Houston.  Based on the feedback we received it was a huge success, achieving the goals we laid out for the conference.  Today we’ll report on the conference itself, and review some of the most important points covered in the curriculum.  Warning, this blog could (and should) be considered an advertorial, so read at your own risk.

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The Domino Effect

Last week’s School of Energy curriculum was built around the concept of the Domino Effect that we’ve been advocating in the RBN blogosphere for months now.  The idea is that  markets for natural gas, NGLs and crude oil are all tied together today in ways we’ve never seen before.  What happens in gas impacts NGLs, which influences crude oil, which loops back to the natural gas market.  There was a time when you could live out your career in the gas business, or the NGL business, or the crude business and get by knowing very little about the other hydrocarbon markets.  Those days are gone forever.

We try to highlight this theme whenever we get a chance.  We summarized the recent impact of linkages across the hydrocarbon markets in a blog that we posted last year titled The Domino Effect.  The thesis is that (a) shale technologies hit the natural gas markets - driving new efficiencies and productivity throughout the industry, (b) this productivity stimulated natural gas production, resulting in a supply overhang and depressed gas prices, (c) to avoid low returns for dry gas wells, producers shifted drilling budgets to wet (high BTU) gas and crude oil plays, (d) consequently NGL production increased, driving down prices for NGLs, particularly ethane and propane (with very positive consequences for petrochemical manufacturers), (e) in the crude oil markets, production in the Bakken and midcontinent plus Canadian imports increased dramatically, well beyond the ability of the pipeline infrastructure to move the barrels to market, resulting in wide Cushing-vs-US Gulf price differentials (with very positive consequences for midcontinent refiners), (f) while in the gas sector, wet and associated gas kept gas production strong.  So natural gas prices remain weak, and users of gas – gas fired power generation, industrials, commercials and residential customers are making and/or saving a lot of money (with negative consequences for competing fuels, like coal).

The Domino Effect could also work the other way.  For example, what happens if the U.S. starts exporting significant volumes of LNG in a few years? Given big LNG export volumes, in one possible scenario prices of gas go up, the relationship between crude and gas narrows, NGL processing margins decline, NGL production falls, NGL prices rise, petrochemical margins take a hit, producers shift from crude back to gas, etc., etc.  We’re not saying all these things are going to happen.  But they could.  And the challenge for all of us involved in energy markets is to analyze, monitor and understand these relationships as we anticipate these developments, not simply react to them.

The School of Energy curriculum provides an intellectual foundation including basic models of energy market relationships.  We lay out explanations of how the relationships between energy commodities have behaved over time, why they work that way, and most importantly, how to track and decipher how they change going forward. 

Class of February 2013

The February 2013 School of Energy sold out in early January.  We had planned for 100 people, and those registrations went pretty quickly.  Working with the hotel we were able to take another 30 folks, including sponsors, so that got us to a total attendance of 130.  About half of our attendees were from Houston while the other half traveled from other locations in the U.S. and Canada.  All registrants showed up, and for the most part hung with us for the full day and one-half.   We presented a total of 396 PowerPoint slides (mostly maps, charts, tables, and diagrams) and ten Excel models covering various aspects of the energy markets.

The School of Energy curriculum from last week (and that we plan to use in future classes) is organized into five blocks:

  • BLOCK #1: Introduction & Production.  This section includes introductory materials to get everyone on the same page (“The Fundamentals of Fundamentals”), and then gets into the foundation that ties gas, NGLs and crude together – Production.  We cover topics like rig productivity, type curves, production costs, and revenues.  We introduce Model#1 – Production Economics.  After that we dive into crude oil, natural gas, and NGL interdependencies, and Model#2 - The Great Ratio (the ratio of crude oil to natural gas prices).
  • BLOCK#2: The Crude Oil Market – First we look at key market developments, then drill down into issues like crude quality (heavy, light, condensates), transportation networks and trading hubs.  Model#3 deals with crude netback analysis for both pipeline and rail transportation.  The next topic is Refining Process and Analytics in preparation for Model#4 – the Crack Spread.
  • BLOCK#3: Natural Gas.  First up is a review of the transportation network, trading hubs, tariffs and basis.  Model#5 shows how netbacks and net-forwards work in the gas market.   We then examine flow/capacity analysis, the storage number, and demand. We finish up with Model #6 – Heat Rates & Spark Spreads, and Model #7 – Degree Days. 
  • BLOCK#4: NGLs. In this section we cover NGL markets and gas processing, then examine Models#8 Frac spread and #9 Processing Economics.  The next section addresses demand (petchem, heating/fuel and motor gasoline), and wraps up with Model#10 - petrochemical feedstock economics.
  • BLOCK#5: Brings all these topics together with a session on physicals versus financials and an assessment of the impact of market interdependencies over the next few years.

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Laptops were mandatory, and attendees were able to download the presentations and models, and to work with both hands-on.  Furthermore, everyone was able to walk out the door with all the course materials on their laptops.  Sorry, but these materials are not available to non-attendees.  The reason, of course, is purely commercial.  We plan to hold the conference again and want you to be motivated to attend.

Next Semester

Although we were very pleased with the registration and attendance at School of Energy, we unfortunately had to turn away a number of our RBN members who wanted to attend, but could not due to space limitations of our conference venue.  So we are going to schedule another School of Energy in the next few months.  Most likely it will be held again in Houston.  We’ll let you know as soon as possible when we have finalized the schedule and location. 

Thanks again to all of our attendees for making School of Energy a very successful event.  If you sent questions to our conference email address we’ll be back to you as soon as possible.  See you next time! 

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Each business day RBN Energy releases the Daily Energy Post covering some aspect of energy market dynamics. Receive the morning RBN Energy email by signing up for the RBN Energy Network.