The Oil And Gas Situation – 2016 Year In Review

In the history of the oil and natural gas industry in the United States, 2016 will be remembered as one of the most eventful in terms of major market developments, asset transactions and developments in public policy. As we approach year’s end, I thought it would be interesting to take a look at some of the year’s major events:

• The Permian Basin exploded – While other major U.S. oil and gas producing basins – like the Eagle Ford and Haynesville Shale areas – languished in the mire of an ongoing oilfield depression, the multi-play Permian Basin heated up in a big way. Throughout the summer and fall, company after company announced major asset acquisitions in the region, with some, like Pioneer Resources, talking about their ability to profitably drill even with oil prices in the $30-$40 range. As the price for West Texas Intermediate (WTI) ramped up to near and above $50, the region’s rig count escalated apace, to over 250 and still rising.As if the region’s known resources weren’t attractive enough, in early September, Apache Corp. announced a discovery of what it believes to be between 3 and 9 billion barrels of economically producible oil in its Alpine High play. Then, in mid-November, the USGS raised enthusiasm for the Permian even higher with a new, gigantic resource estimate for the Wolfcamp formation.  At year’s end, the oil boom was alive and well in West Texas and Southeast New Mexico, even with WTI selling in the low $50s.

• Costs of drilling plunged – One of the main drivers of the explosive growth of drilling in the Permian, along with slowly-rising rig counts in other major basins during the second half of 2016 was the ongoing impressive lowering of the costs involved in drilling, completing and operating new wells. At the beginning of the year, it was not uncommon to see operators reporting that such costs had decreased by up to 30% from 2014 levels. But by year’s end, we were seeing some companies, like Oasis Petroleum, reporting that they were now able to drill and complete new wells at half the cost of 2014 levels, due to lower service provider rates, shorter drilling times, and impressive gains in process efficiencies.  Anyone surprised by this likely hasn’t studied much about the history of the oil and gas industry, which is filled with example after example of overcoming diversity through process improvements and the development and deployment of better technologies. Some things never change.

• Expected Ultimate Recoveries (EURs) soared – Process improvements and advancing technologies were also largely responsible for a dramatic uptick in EURs during 2016. Drilling times were shortened, new hydraulic fracturing technologies enabled producers to better identify sweet spots and access more of the formation rock during each frac job, and gathering and pipeline infrastructure continued to be built out in younger play areas, allowing more efficient takeaways for associated natural gas and liquids.  Combined with falling drilling and completion costs, the higher EURs result in a lower commodity price needed to make an increasing number of projects economic to drill. All great news for an industry that hadn’t had much of that during 2014 and 2015.

• Hundreds of companies filed for bankruptcy – But the good news did not come quickly enough for many companies, especially in the upstream sector of the business. A growing sense of dread accompanied the spring redetermination season, as producer after producer announced that debt loads incurred in anticipation of ongoing high commodity prices had become too large to bear in the ongoing low price environment.  In all, more than 200 oil and gas companies had filed for bankruptcy protection by the end of October, with more still teetering on the brink. Although a number of bankruptcies were also filed during 2015, 2016 will be remembered as the year the bust hit hard.
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  David Blackmon ,  

  Contributor

  I write about issues impacting the energy sector

  Opinions expressed by Forbes Contributors are their own.

  In the history of the oil and natural gas industry in the United States, 2016 will be remembered as one of the most eventful in terms of major market developments, asset transactions and developments in public policy. As we approach year’s end, I thought it would be interesting to take a look at some of the year’s major events:

  

  ANDREWS, TX – JANUARY 20: An oil pumpjack works at dawn in the Permian Basin oil field on January 20, 2016 in the oil town of Andrews, Texas.  (Photo by Spencer Platt/Getty Images)

  • The Permian Basin exploded – While other major U.S. oil and gas producing basins – like the Eagle Ford and Haynesville Shale areas – languished in the mire of an ongoing oilfield depression, the multi-play Permian Basin heated up in a big way. Throughout the summer and fall, company after company announced major asset acquisitions in the region, with some, like Pioneer Resources, talking about their ability to profitably drill even with oil prices in the $30-$40 range. As the price for West Texas Intermediate (WTI) ramped up to near and above $50, the region’s rig count escalated apace, to over 250 and still rising.As if the region’s known resources weren’t attractive enough, in early September, Apache Corp. announced a discovery of what it believes to be between 3 and 9 billion barrels of economically producible oil in its Alpine High play. Then, in mid-November, the USGS raised enthusiasm for the Permian even higher with a new, gigantic resource estimate for the Wolfcamp formation.  At year’s end, the oil boom was alive and well in West Texas and Southeast New Mexico, even with WTI selling in the low $50s.

  • Costs of drilling plunged – One of the main drivers of the explosive growth of drilling in the Permian, along with slowly-rising rig counts in other major basins during the second half of 2016 was the ongoing impressive lowering of the costs involved in drilling, completing and operating new wells. At the beginning of the year, it was not uncommon to see operators reporting that such costs had decreased by up to 30% from 2014 levels. But by year’s end, we were seeing some companies, like Oasis Petroleum, reporting that they were now able to drill and complete new wells at half the cost of 2014 levels, due to lower service provider rates, shorter drilling times, and impressive gains in process efficiencies.  Anyone surprised by this likely hasn’t studied much about the history of the oil and gas industry, which is filled with example after example of overcoming diversity through process improvements and the development and deployment of better technologies. Some things never change.

• Expected Ultimate Recoveries (EURs) soared – Process improvements and advancing technologies were also largely responsible for a dramatic uptick in EURs during 2016. Drilling times were shortened, new hydraulic fracturing technologies enabled producers to better identify sweet spots and access more of the formation rock during each frac job, and gathering and pipeline infrastructure continued to be built out in younger play areas, allowing more efficient takeaways for associated natural gas and liquids.  Combined with falling drilling and completion costs, the higher EURs result in a lower commodity price needed to make an increasing number of projects economic to drill. All great news for an industry that hadn’t had much of that during 2014 and 2015.

• Hundreds of companies filed for bankruptcy – But the good news did not come quickly enough for many companies, especially in the upstream sector of the business. A growing sense of dread accompanied the spring redetermination season, as producer after producer announced that debt loads incurred in anticipation of ongoing high commodity prices had become too large to bear in the ongoing low price environment.  In all, more than 200 oil and gas companies had filed for bankruptcy protection by the end of October, with more still teetering on the brink. Although a number of bankruptcies were also filed during 2015, 2016 will be remembered as the year the bust hit hard.

• Fracking was exonerated – Despite inaccurate (fake?) media reports that the EPA had “changed its mind” in the re-release of its six year-long study on possible water impacts from Hydraulic Fracturing, the fact of the matter is its original finding that “fracking” has no systemic impacts on underground water did not change. The only change was in the way the finding was messaged, and the admission by the agency that, after spending six years and tens of millions of taxpayer dollars desperately trying to prove otherwise, it has found no evidence that “fracking” is a widespread threat to the nation’s water resources.

• Anti-development activism moved from upstream to midstream – Frustrated by eight years of mainly failure to ban hydraulic fracturing at the local, state or federal levels, and three years of poor results in implementing unreasonable setback laws, 2016 will be remembered as the year that leaders in the radical anti-development movement decided to make the move from the upstream segment of the business to the midstream. No doubt emboldened by the illusory “victory” handed their way when President Obama ignored the law to block the northern leg of Trans-Canada’s proposed Keystone XL Pipeline via executive fiat, anti-development organizers latched onto the protests against Energy Transfer’s Dakota Access Pipeline begun by the Standing Rock Sioux Tribe as their next cause celebre’.Having left the site of that ongoing protest trashed for the winter, they now have moved into Texas seeking warmer ground. The midstream segment of the business, notorious for its reluctance to engage in effective public communications efforts, now has a big job on its hands, whether it wants it or not.

• LNG Exports ramped up – 2016 will also be remembered as the Year of the Exports for the domestic oil and gas industry, as strong lobbying efforts in Washington led to public policy shifts enabling U.S. producers to seek new, international markets for some of their production.  On the LNG front, Cheniere Energy saw the first shipment from its new Sabine Pass facility ship out right at the end of 2015, and volumes moving out of this facility have ramped up significantly as 2016 has rolled along. Sabine Pass remains the only currently-operational LNG export facility in the U.S. but four other major facilities are under construction and will begin opening up in 2017.

• Oil exports almost doubled – Meanwhile, thanks to the congressional repeal of the idiotic 1970s-era ban on crude oil exports, domestic oil producers have been able to almost double their exported volumes during the first nine months of 2016. Per the Energy Information Administration, U.S. oil exports averaged 394,000 barrels per day in January, and had grown to 694,000 per day by September.

• The U.S. became a net exporter of natural gas – Another bit of very significant export news came in November when, according to U.S. Global Platts, the United States became a net exporter of natural gas. This came about not only thanks to exports of LNG, but also due to more cross-border pipelines being built to take gas into Mexico, and to a lesser extent, to Canada.

• OPEC “surrendered” – Or did it? Time will tell, but this is how some analysts interpreted OPEC’s agreement within its own membership and with Russia and other non-OPEC oil exporting nations to curtail exports of crude oil beginning January 1. Certainly, the strong leadership towards this deal exhibited by Saudi Arabia indicates that that country’s leaders have tired of burning through the country’s sovereign wealth funds at such a rapid pace, during their two-year effort to cripple the U.S. shale industry.Many analysts declared these shale drillers to be the “winners” in this competition, but it must be noted that many shale producers were counted among those 200+ companies that sought the protection of U.S. bankruptcy laws during 2016. So, if they’re the “winners”, it seems to be a Pyrrhic victory at best.

• Help is on the way! – Or is it?  Again, time will tell.  But the presidential election didn’t go exactly as pretty much all the polls and “experts” predicted that it would, and Donald J. Trump will become the nation’s 45th president on January 20, 2017.  Along with him will come nominees like former Texas Gov. Rick Perry for Secretary of Energy, Montana Congressman Ryan Zinke for Secretary of the Interior, Oklahoma Attorney General Scott Pruitt as EPA Administrator, and ExxonMobil CEO Rex Tillerson for Secretary of State.  If that looks like a pretty pro-oil and gas lineup to you, trust me, you are not alone.

In any event, it does at least appear that 2016 will be remembered as the year during which the worst of the 21st century’s biggest oil bust (so far) came and went. Then again, if we know one enduring truth about the oil and natural gas industry, it is that appearances are often quite deceiving.

No doubt, 2017 will have many, many surprises in store.

Next Week:  An Oil And Gas Industry Preview for 2017.

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