2015 was a transformational year for the U.S. shale revolution. Act I of the Shale Revolution is now behind us. We’ll look back at the first decade -- 2005-2015 as the halcyon days – when there was always another market just around the corner. Shale started with dry gas in Texas, but those prices were crushed by the economics of wet gas and NGLs. In just a few years, that market too was annihilated, but economically attractive Appalachia dry gas and the big kahuna, crude oil took center stage. Now after a year of being beaten senseless by low prices, it is clear that those markets too have succumbed to the scourge of shale oversupply. That’s the end of Act I. There is nowhere else for producers to turn. The market dynamics facing Act II of the shale revolution are unprecedented. There is simply no way to predict what is going to happen next. Right? That’s silly. Of course we can! It is the perfect time to roll out RBN’s crystal ball one more time for 2016 - Year of the Monkey. Yup, there is more monkey business coming to energy markets.
First, we need to check the report card. How did we do with the Top Ten RBN Prognostications for 2015, posted a year ago? Granted we didn’t make some of the big calls, like removal of crude export restrictions and crude getting down to the mid $30s/bbl. But overall, it was another pretty good year for the RBN crystal ball. Let’s tick through the list.
10. Crude prices won't 'rebound' or ‘recover’ any time soon. Welcome to the new normal. That was a shocking revelation for a lot of folks twelve months ago. Pundits were running around with predictions of V shaped recoveries, or W shaped, or even some U’s. But always recoveries. We saw no such recovery in the cards in last year’s prognostications, and of course that’s what happened - energy markets continued to take it on the chin all year long.
9. U.S crude oil production won’t decline any time soon. Another good one. When we made that prediction in December 2014, U.S. crude oil production was 9.4 MMb/d. Now, in EIA’s most recent monthly statistics, October 2015 production was 9.3 MMb/d. That’s pretty close. Surprise, OPEC ministers.
8. Gas processing has a problem. There was a problem, and that problem continued throughout the year with the 2015 Frac Spread averaging $2.20/MMbtu. But processors kept right on processing, because producers had committed to the capacity and because a lot of the gas must be processed to meet pipeline specs. So the problem didn’t go away. It just landed in the lap of producers.
7. Ethane-only petrochemical crackers have a problem. Ethane margins for petchems today are about 12 cnts/lb, versus more than 50 cnts/lb this time last year. That meets our definition of a problem, particularly for those new ethane-only crackers currently under construction. In comparison to the margins for other feedstocks, over the course of 2015 butane was better and propane was about the same. So any huge cost advantage for the new ethane crackers coming on over the next three years has evaporated.
6. Marcellus gas still has a problem. Good grief! What a massive understatement for 2015. The average NGI Tennessee Zone 4 Marcellus natural gas price for December 2015 was $0.99/MMbtu. That’s not the basis. That’s the price.
5. It is nice that condensate exports are legal, but the economics of condensate exports don’t make much sense. We hated to disappoint all those hopeful condensate exporters last year, but the handwriting was on the wall. Regardless of unfettered export regs, if it is worth more here than it is there, then you ought to keep it here. Only about 100 Mb/d of newly legal condensate exports left U.S shores in 2015, because the economics were upside down. A harbinger of things to come for crude exports? Absolutely.