Favorable Economics, the Permian, and Choices
In July, I wrote about the ramped up activity in the Permian Basin.
The point of that story was to merely observe and document that period
of time in the Basin.
In the data offered over the course of several articles, the conclusion
was clear: the U.S. is in the early period of another boom from U.S.
production of oil, and Texas is largely the zone for the majority of the
production capacity. While the Bakken Shale and the Eagle Ford receive
numerous well-deserved headlines, exploration and production (E&P)
firms were busy making new history in the Permian Basin.
The largest producer in the Permian Basin is Occidental Petroleum,
also known as Oxy. This also makes the firm the largest producer in
Texas. Pioneer Natural Resources, Apache and Kinder Morgan Production
follow behind Oxy in Permian Basin production for 2012. According to the
Energy Information Agency, in 2012 the U.S. imported approximately 10.6
million barrels of crude oil
per day. The ratings agency Moody’s recently made an announcement about
the impact of the “Permian revival” on exploration and production
(E&P) firms. In their communication, they mention producers
speculate that the full development of the Wolfcamp Shale could result
in 2 million barrels a day — more than the 1970s peak for the entire
basin. That is nearly 20% of U.S. daily imports. When might that happen?
Hard to say.
There are many factors that weigh into
how much oil and gas producers will produce, foremost though is price.
Spot prices for crude oil settled around $109 for West Texas
Intermediate (WTI) and $112 for Brent as of September 9th. Assuming
prices do not tank, as they did with natural gas, the trend will be
longer lived than a short-term one. Oil is more dear, less fungible, and
geo-politically important.
But what could make prices dive in negative ways? One is Syria. In a
worst-case scenario, initially high prices would occur from potential
supply shocks in the region. If conditions remain unhinged, then it
could dampen the recovery underway in the U.S. Economic demand could
decline and oil prices might as well. But all of these forces have to
align, and they likely will not. The U.S. is more resilient than given
credit. This scenario is if Syria does not comply with the diplomatic
solution of handing over its chemical weapons stockpiles. The U.S.
strikes, and regional violence is ignited, which could be currently
described in terms of a slow boil in the Middle East. Iraq is still
vulnerable; Iran remains a wildcard. The terrorist organizations are
predictably unpredictable. This would be unfortunate to say the least.
Another price-related issue surrounds the interplay between natural
gas and oil production. One significant producer in the Permian Basin
has changed its focus since 2005, from a 40/60 oil-to-gas ratio, to
roughly the opposite, that is the production of more oil than gas. Some
producers do not have the luxury of switching their energy portfolios
that quickly. Supermajors Shell and Exxon have production mixes of over
50% gas. Exxon’s acquisition of gas-focused XTO Energy in June 2010
tipped the balance in favor of gas. When energy demand increases, due to
more favorable and sustained growth, and natural gas prices stabilize,
new choices may be made by firms. Demand for natural gas will continue
to grow in power generation and transportation, along with the
infrastructure required to deliver the gas to markets.
The U.S. economy, along with positive signs from China and
occasionally Europe, is finally hobbling along rather than limping. The
U.S. continues to benefit from low-priced natural gas and increased oil
production from the unconventional energy revolution. The consultancy
IHS calculates U.S. disposable income gains of $1,200 in 2012, with more
savings expected to accrue to consumers’ pocketbooks, as much as $3,500
in 2025, their study
projection period. In essence, the oil and gas ‘revolution’ buffered
families, to a degree, from the lingering ill effects of the recession.
This is good news, but I’m not sure how many people really felt that.
The U.S. energy gains are restoring U.S. competitiveness in world
markets. America’s gains can become beneficial to preferential trading
partners in different ways, sort of economic friends with benefits.
http://www.energytrendsinsider.com/2013/09/12/revival-in-oil-and-gas-production-and-the-spaces-in-between-2/
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