Increased Oil Competition: Survival Of The Fittest

 

Is the U.S. shale oil industry in trouble? No, it is engaged in a high-stakes competition for market share. As oil flooded the market in 2014-15, prices dropped dramatically and producers began burning midnight oil to manage the downward economic pressures. While some overleveraged companies won’t survive the economic challenge, in true Darwinian fashion, the fittest will prevail.

According to the U.S Energy Information Administration’s (EIA) “Drilling Productivity Report,” it is estimated that by January 2016, daily production in the seven most prolific shale oil and gas areas in the U.S is expected to fall by 116,000 barrels of oil and 365 million cubic feet of gas. Those seven production areas—ranging from the Utica and Marcellus shale deposits in the Northeast and the Bakken, Niobrara, Haynesville, Permian, and Eagle Ford deposits in the middle of the country—accounted for 92 percent of domestic oil production growth and all natural gas production during the years 2011-14.

The decline is directly attributable to a 2014 decision by the Organization of Petroleum-Exporting Countries (OPEC) to produce without regard to market supply. Consequently, a barrel of Benchmark Brent crude oil that brought $114 in June 2014 today brings under $40. OPEC members, particularly Saudi Arabia, can afford the lower price because they can pump oil for as little as $15 a barrel --a competitive advantage American producers cannot match.

In December, OPEC doubled down on its strategy and oil prices hit a seven-year low. The lower price hits OPEC profits too, of course, but the greater harm is done to competing oil producers with higher production costs. Those companies can only stop producing and exploring. Many will fail altogether.

So far, some 250,000 job losses around the world are attributed to the lower prices, about 79 percent of that in oil field-service companies like Schlumberger and Halliburton. Swift Worldwide Resources speculates that more than 10,000 workers have been let go by struggling independent contractors and subcontractors. In keeping with their independent status, such companies typically don’t announce layoffs.

The glut of oil has affected shale oil field operations—OPEC’s primary target—with the number of oil rigs in North America declining 62 percent from December 2014, according to WTRG Economics. Some shale oil producers with high production costs are going bankrupt, while other producers are, in the words of an Oxford Institute for Energy Studies report in November, “[going] into hibernation” or otherwise adjusting as needed.

Many companies are creating different survival adjustments include selling off assets, such as pipelines, to private equity investors, -- part of Chesapeake Energy’s strategy--  “refracking” wells using newer technologies,.  and using multi-pad drilling with “walking rigs” that are moved from hole to hole on a single site.  Well-endowed companies are shelving Arctic megaprojects (e.g. Royal Dutch Shell) or getting out of deepwater drilling altogether (e.g. ConocoPhillps) in favor of shale oil production. ExxonMobil has drilling rights to 1.5 million acres in the Permian Basin shale formation and in October was looking to acquire more.

As the OPEC challenge continues, producers are implementing ways to keep their heads above water. Many producers are downsizing their employees and finding cost effective means for continual oil production, however despite the temporary strategies that are in place, it is not certain who will survive.

by Giles Lambertson, a Power Production News contributor

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Obama's Clean Power Plan
2015 Hurricane Preparedness
Cogeneration Explained

Natural Gas Overlooked in Obama's Clean Power Plan

NatGas: the Unnoticed Bridge to Achieving Obama’s Clean Power Initiative

Los Angeles, CA – (September 18, 2015) – It is now apparent that the Obama Administration’s Clean Power Plan aims to significantly reduce the amount of power generated by coal. It’s a game changer for utilities, mining companies and equipment suppliers. And, it’s another spotlight moment for renewables but in the long run, the real champion will be natural gas.

The final CPP rules issued by the EPA on Aug. 3 reflect important revisions from those proposed in 2014, including some that were detrimental to the survival of the power industry. But the fact remains that the federal government is focused on increasing power from sources like wind and solar while cutting power from coal.

What is not fully considered by this new federal focus is the importance of natural gas in the overall equation; that’s where the plan misses the mark.  Natural gas remains the only viable choice to reach the plan’s goals. CPP seeks to reduce CO₂ emissions in 2030 by one-third from 2005 levels. States have up to three years to submit their own reduction plans.

As states develop compliance plans, they are “dependent on natural gas combined cycle turbines to pick up the slack when the sun doesn’t shine and the wind doesn’t blow,” says America’s Natural Gas Alliance (ANGA). The White House’s plan perpetuates a false choice between renewables and natural gas, says ANGA. The plan is “disingenuous” and ignores market realities for gas to provide much of the nation’s power while reducing emissions.

The industry trade group also notes the irony in the Energy Information Administration’s routine release of power generation data for April 2015, one day after the release of Obama’s plan. In that month, according to the EIA, the US generated more electricity from natural gas than any other fuel source, including coal. That was the same month the country emitted less CO₂ into the atmosphere than at any time since 1988.

“That’s no coincidence,” observes ANGA. And, as the most cost-effective and flexible option for power generation, natural gas “will balance the dual mandates of cleaner air and healthy economic growth.” Supporters of renewables were quick to underscore the ways the Obama plan discourages a “rush to natural gas,” due to its risks to consumers, public health and the climate. A report by one group notes the plan incentivizes “zero-carbon energy sources,” requires state compliance plans to meet a renewables target, limits gas combined cycle power to 22 percent above 2012 levels, and closes a loophole for new source gas plants.

What’s more, to illustrate the significant leverage given coal in the economy and power grid, 16 states filed protests with the EPA seeking to delay the rule while legal challenges are sorted out.

In the meantime, natural gas will play a pivotal role in reliably powering the economy and reducing emissions. “The president’s plan to reduce power plant emissions from higher-carbon fuels would greatly benefit from a clear emphasis on a clean, abundant, efficient fuel like natural gas,” said Nicholas Nadjarian, chief executive officer at Industrial Motor Power Corp, a leading power provider to O&G. “We can expect a steady increase in natural gas use in the power sector and are prepared to provide targeted solutions for our customers.”

by Dan Larson, a Power Production News contributor

Additional content from other PPN contributors:
2015 Hurricane Preparedness
Cogeneration Explained 

2015 Hurricane Season - Opposing Forecasts

You Can’t Predict the Weather, but You Can Keep the Power On

On April 9th, The National Oceanic and Atmospheric Administration (NOAA) released a report predicting a low activity storm season this year (50% lower than the 2005-2014 average).  This could have you breathing a bit easier about your businesses disaster preparedness.  But don’t ease off just yet, because according to Tropic Storm Risk (TSR), a group of leading forecasters, risk, and insurance agencies, early predictions are always tricky, one small change in wind pattern could compromise the low storm activity outlook for 2015.  The Atlantic hurricane season officially begins June 1st. Is your business prepared for the unpredictable?

There are many resources available to help your business plan for the worst.  FEMA’s Emergency Management Guide for Business and Industry provides a comprehensive emergency planning guide for businesses of all sizes.  Also, theUS Department of Health & Human Services, Disaster and Emergency Planning Guide, provides links to a variety of resources.  Yet, no matter what plan you reference, they all stress the importance of a backup generator (aka emergency, standby).

Colorado State Universities’ Tropical Meteorology Project claims that a number of different scenarios could occur this hurricane season—one of which could result in 4 – 5 major hurricanes, while TSR is predicting up to 13 tropical storms, 6 hurricanes, and 2 intense hurricanes.  With these potential scenarios at hand, lengthy power outages become a major concern for affected businesses.

This year’s predictions could go any number of directions, so even if your business has had a long streak of luck, it’s no time to get complacent.  In the Atlantic basin, hurricane preparation is a vital part of disaster planning for every business—every year.  While I might be partial, IMP consultants and sales folks are a great resource in determining appropriate power solutions for you needs.

by VS, a Power Production News contributor
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