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New gas plays making Gulf Coast LNG imports look like a passing fancy

August 28, 2008

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oil, gas, regulation, politics, Houston, refining, gasoline, beer, wind, alternate energy, policy, economics, bicycles

There have been a series of small signs recently of a sea change in the U.S. gas business.  The U.S. has so much gas one energy CEO said his company is looking for a way to export the stuff because the price here is about half the world price.  The CEO of Chesapeake Energy Co. Aubrey McClendon has taken a big interest in creating new markets for the stuff. He's lobbying lawmakers in Washington to expand the market for gas as a fuel for vehicles in the United States and even exporting it in the form of Liquefied Natural Gas, better known as LNG. "My view is we make a great widget here and that widget is valued at X here and 2X around the world, and so . . . we're trying to figure out a way to get it on a boat and get it to some overseas markets," McClendon said during a recent <a href="http://media.corporate-ir.net/media_files/irol/10/104617/85Transcript200808000[1].pdf">conference call.</a> And the owner of a big new LNG terminal in Freeport, Texas, <a href="http://fossil.energy.gov/programs/gasregulation/authorizations/Orders_Issued_2008/08_70_LNG_app.pdf">filed</a> for permission to export LNG imported into the terminal. This odd arrangement is needed to keep the facility, which turns LNG into natural gas, cool enough for maintenance purposes. It blamed the change on the jump in U.S. gas production, much of that coming from unconventional gas plays in oil shale and from the Rockies.   Freeport LNG LLP Vice-Pres. Bill Henry told the <a href="http://www.ogj.com/display_article/337403/7/ONART/none/Trasp/1/Freeport-LNG-applies-to-export-gas-imports/Aug. 19 ">Oil & Gas Journal</a> that due to lower prices for gas in the US: "There is very little LNG scheduled into the US for the next 12 months." It was reported recently in <a href="http://www.rigzone.com/news/article.asp?a_id=65800">Rigzone</a> that China paid $17 per million BTUs for LNG, which is more than double the value of that amount of natural gas traded on the New York Mercantile Exchange, where the price has been around $8.  So in the space of less than four years energy experts have done a 180 degree turn on LNG imports. Back in December, 2004 a ConocoPhillips executive said this in an <a href="http://www.chron.com/CDA/archives/archive.mpl?id=2004_3825810">interview</a> with the Houston Chronicle:  'We consider LNG to be a very important part of the energy supply in this country going forward," said Sig Cornelius, president of global gas at Houston's ConocoPhillips. "It's hard for us to come up with a scenario that says this is a passing fancy."  So is the industry going to be bullish on LNG exports?  Well certainly the shale boom exploration shows the potential for growing natural gas supplies for decades to come. McClendon said the increasing efficiency of gas produced from shale means they can weather lower prices better than other sources of gas.  In terms of gas marketing, I'd guess selling natural gas for vehicles, with the help of new federal energy policies, sounds more likely than building gas export facilities.Investors need only consider billions invested in LNG import plants in the U.S. that are now looking like white elephants to see the risks in long-terms bets based on natural gas prices.   So what do you think this will all lead to? Has America's energy supply outlook brightened so much we'll be in the energy exporting business, or will this rosy supply outlook vaporize when drillers react to the fall of natural gas prices?

Tags: natural gas lng chesapeake freeport shale china

Does BP deal show majors finally care about gas from shale?

July 18, 2008

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oil, gas, regulation, politics, Houston, refining, gasoline, beer, wind, alternate energy, policy, economics, bicycles

BP has <a href="http://www.rigzone.com/news/article.asp?a_id=38287">bought </a>natural gas properties from Chesapeake Energy Corp for $1.75 billion, which is not big money for the oil giant, but does stand out in a way.      Big investments in natural gas plays in shales– like this one in the Woodford Shale in the Arkoma Basin of Oklahoma -- have been the exception rather than the rule for the majors. Shell and ConocoPhillips both have positions in some of the hot <a href="http://www.rigzone.com/news/article.asp?a_id=38287">plays </a>within this booming business, but don’t show up in lists of the top players.      Independents like Chesapeake have been the pioneers in this business of finding and producing gas tightly held in shale in the United States. For example Chesapeake is cashing out of holdings in Oklahoma to expand in three other plays, ranging from the Barnett in and around Fort Worth which is the birthplace of this exploration trend, to the Marcellus in the Appalachians.        A story in the June issue of Oil and Gas Investor cited an estimate by the U.S. Geological Survey that the reserves that could be produced in areas within the Appalachian totaled more than 30 trillion cubic feet. With exploration and technological advances that estimate could rise. The story didn’t mention a major involved in this entire region.     So where are the majors?     While their CEOs testify before Congress complain they’re locked out of offshore reserves in the U.S., the string of shale plays stretching from New York in an arc to West Texas, and many places in between, has been largely the province of independents.     Certainly the biggest oil companies have to focus on certain types of opportunities.     ExxonMobil has said it seeks out investments where it can earn high-enough returns on investment and go after reserves big enough to matter to its bottom line. Often these require it to demonstrate its technological prowess.     That sounds a lot like gas shale. The reserves are huge and the benefits of advancing the technology still are potentially large because current methods fail to extract much of the gas trapped in those tight rock formations.     It will be interesting to see if BP expands its stake in gas shale from here.  And in the past companies like Exxon and Chevron Corp. have come in big after others made the early discoveries.     The majors are also spending on research into ways to extract oil from shale in the Rockies, as was discussed by this recent <a href="http://www.chron.com/disp/story.mpl/front/5885419.html">story</a> by David Ivanovich in The Houston Chronicle, which could make a big difference in future oil supplies.       It’s easy for people in Washington D.C. to blame high oil and natural gas prices on big oil companies not producing enough, which ignores who really owns the world’s oil. But from the perspective of Houston, does it also look like they are not using the capital and talent they possess as well as they should to find and produce more energy?

Tags: natural gas lng chesapeake freeport shale china natural gas shale oil major exxonmobil

Back in the USA: oilwell service companies benefit from shale exploration

July 22, 2008

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oil, gas, regulation, politics, Houston, refining, gasoline, beer, wind, alternate energy, policy, economics, bicycles

The headlines on the earnings reports for oilwell service companies confirm the obvious – really high oil and gas prices boost profits – but there was a surprising subplot in there that could matter for a lot of companies.  Drilling in the U.S.A. is looking like a big money makers for these companies again. Domestic rig counts have been rising for years. But the bottom lines of oilwell service companies haven’t much profited as they have in other places were there are tight supplies, which allowed hefty price increase.  But in the earnings reports released since Friday, the reports from Sclumburger (SLB), Halliburton (HAL), Baker Hughes (BHI), BJ Services (BJS) and Weatherford (WFI) all said he profits from North America were looking up.  Schlumberger said it entered the year with doubts about North America, but “now uncertainty around the direction of natural gas drilling in North America has been removed.”During Weatherford’s conference call, the CEO, Bernard Duroc-Danner, said "No doubt, at this time, we expect a robust 2009 in the United States," in the drilling business.BJ Services raised its expected earnings for its next quarter to 8 to 14 percent more than the analyst’s average from Thompson Financial after “U.S. drilling activity exceeded expectations.”  Those paying electric bills like know one reason for all their happy talk – natural gas has remained high – selling for more than $10 per thousand cubic feet. That encourages more drilling, and the number searching for gas is up. But it’s the kind of wells getting drilled that is the big news here.  After years of accumulating acreage in natural gas shale plays, exploration and production companies need to deliver the promised production.  "Everybody's been talking about their plays," said Ben Dell, an oil services analyst at Sanford C. Bernstein & Co. in New York quoted by Bloomberg. "The reality is, now they have to deliver it, and that means that money gets transferred down the food chain.”   Analysts said that good news for the service companies because gas in this hard-to-produce rock requires lots of their premium products – specialized drilling equipment able to drill sideways, pressure pumping to break up the rock and specially designed chemicals to induce production. The list goes on and on. But the upshot is: they’re selling lots of high-priced products and services.  Which geeks up analysts, like Kurt Hallead, who covers oil and gas at RBC Capital Markets in Austin, Texas, who was quoted by Bloomberg news as saying: "The fourth quarter's going to be a fundamental blowout for the oilfield- services industries.”  What’s not so talked about is whether this could be an image changing moment for the exploration companies shelling out the cash. While the geologic risk isn’t so great in shale and the production methods are improving, it’s still a fairly high upfront investment in fields that can produce steadily but relatively slowly.  Is there any money to be made here by investors?  Well based on trading Tuesday morning it’s a weak maybe on the services side. Out of the five big names with earnings out -- SLB, HAL, BJS, BHI, WFT – only two were up. This likely reflects oil prices dropping that morning like a rock. Strength in North America is a nice plus for the industry’s Big 2, Schlumberger and Halliburton, but oil production in the Eastern Hemisphere is so much bigger.  This could be a long-term drag for the E&P companies with big shale plays. The rising cost of developing those reserves could be about as financially attractive in the short run as sending a kid to college.  So what’s your take on whether this is for real and how to play it?

Tags: natural gas lng chesapeake freeport shale china natural gas shale oil major exxonmobil natural gas shale oilwell services halliburton schlumberger oil

Take a look at where the oil, and gas, is in the Arctic

July 24, 2008

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oil, gas, regulation, politics, Houston, refining, gasoline, beer, wind, alternate energy, policy, economics, bicycles

The U.S. Geological Service has come out with its report of the oil and gas potential for the artic which shows there’s a lot to produce there, and a lot we don’t know because exploration has been so limited.The widely reported study shows there’s enough oil there to supply the world’s needs for about three years currently – 90 billion barrels – and three times that amount of natural gas -- an estimated 30 percent of the global undiscovered gas.Likely reserves are generally on the outer continental shelf with more oil on the U.S. and Canadian side and more gas on the Russian side. The biggest single region listed is the Artic Alaska with an estimated 30 billion barrels in reserves, which it compared to 22 billion barrels in proved U.S. oil reserves.At least this report doesn’t suggest there’s any reason to go to actual war with anyone. The report said there’s little indication that oil or gas will be found in international waters beneath the pole. But as the slideshow points out, there’s no data from drilling for these harsh areas so this picture will change as more is known.Oddly the map on the main page showing assessment resujlts and related reports, does not have a link for the areas near Alaska.If you care about energy issues it’s worth taking the time to check out the <a>map,</a> <a>slideshow </a>and other information offered by the USGS, most of which is understandable to a non-scientist.  This will be a point of much debate for many years to come as advocates for drilling battle those against it.What's your take on this report -- are these estimates any better that wild guesses?

Hurricane Gustav may show the Gulf of Mexico has lost its clout in the gas business

August 28, 2008

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oil, gas, regulation, politics, Houston, refining, gasoline, beer, wind, alternate energy, policy, economics, bicycles

Well Energy People Connect has returned just in time to talk about hurricanes.  And while I think there's more than enough talk about commodity prices I couldn't help but notice that something telling happened Wednesday - natural gas prices dropped. A lot. Down 6.5 percent Wednesday, according to <a href="http://www.bloomberg.com/apps/news?pid=20601087&sid=aRtoDvI6WmIY&refer=home">Bloomberg News</a>.  Not what one would expect in the face of comments like this from Rigzone:  "The entirety of the Gulf energy production region remains under the gun, " <a href="http://www.rigzone.com/news/article.asp?a_id=65944">according</a> to Jim Rouiller, a senior energy meteorologist with weather forecasting firm Planalytics.   One explanation was the weekly supply report from the Department of Energy's Energy Information Administration that natural gas in storage rose significantly more than expected.  That explains it, sort of, since supplies in the ground could make up for lost production if the storm knocks out big platforms and pipelines in the Gulf.  But in more bullish times traders responded emotionally even to iffy storms that were not even certain to get into the Gulf of Mexico. This <a href="http://blogs.chron.com/sciguy/archives/hurricanes/gustav/">report</a> from Eric Berger from The Houston Chronicle makes a convincing case that a nasty storm will roll through the prime zone for gas production in the Gulf of Mexico, so what's up?  One likely answer: the Gulf of Mexico just doesn't matter as much as used to. Consider the total production figures from the EIA's natural gas <a href="http://www.eia.doe.gov/pub/oil_gas/natural_gas/data_publications/natural_gas_annual/current/pdf/nga06.pdf">report</a> for 2006, which showed the steady decline in the share of gas coming out of the Gulf of Mexico.  Back in 2002 it represented 22 percent of the total national output, dropping to 15.2 percent in 2006. Now Bloomberg puts it at 14 percent, which reflects falling output on the Outer Continental Shelf and the rush to explore onshore in unconventional places like gas shale and coal seams.  Which is why, when I asked a project manager for a natural gas pipeline company I'd met, if a hurricane this year would cause gas price to shoot way up he quickly said no. He had a vested interest in reducing the importance of Gulf of Mexico gas, but the numbers seem to back him up.  Add to that the potential shutdowns of big gas users, like chemical plants, if the storm hits a vital stretch of the coast, and it becomes clear that the markets reaction Wednesday made a certain amount of sense. But of course by the time you read this it will probably have totally changed because energy markets are designed to make anyone talking about them look dumb.  What do you think we'll learn from this Gustav?

Question of the day: do oil and the financial crisis mix?

September 25, 2008

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oil, gas, regulation, politics, Houston, refining, gasoline, beer, wind, alternate energy, policy, economics, bicycles

With the return of electricity to my home life, I'm now able to shift my worries the big wide world of the financial crisis. It's not so different really. Houston loses electricity Wall Street loses liquidity. Power either way. But what's it mean for oil and gas? Well for one it's suddenly not such a big deal, which is generally a plus for oil companies. Even in Houston bailout talk is page 1 while House passage of bill to allow a lot more offshore drilling (maybe eventually) is on the cover of the business section. Lower oil prices can never get much play, particularly in the face of the biggest financial crisis since the Great Crash. Oil companies may not get any love from the general public, but they are paying their bills and some are even hiring. Which leaves looking for connections here. The financial appetite of the energy business are gargantuan, and there's traders and bankers everywhere you look. But so far I only see passing references like these:  It appears $100 a barrel is a bit of a magic number. One example was in this Dow Jones <a href="http://www.rigzone.com/news/article.asp?a_id=67099">story</a> quoting Ali Asghar Arshi, Executive Director for International Affairs at the National Iranian Oil Co., said if prices dropped to less than $100 per barrel : "The cost of construction right now, especially in the oil and gas industry, has tripled. Therefore if revenues from oil sales are reduced, it may definitely affect our investment. There is no doubt about that," Arshi said. But if prices go back to double digits he predicts output cuts by OPEC. And this Iranian is also looking for help in Washington D.C. :  If they implement (the bailout plan) very well and financial institutions go back on the right track, then the price of crude oil would be considered going above $100 a barrel because the market is confident.  Closer to home, smaller players with projects in Canada's oil sands are feeling worried as well. Like Iranians they are feeling pinched between rapidly rising prices for construction and services, and lower oil prices.  This <a href=" http://www.rigzone.com/news/article.asp?a_id=66893 ">story</a> from Rigzone quotes an independent producer whose business was designed to reduce his borrowing and operating costs as much as possible. Finding oil in the sands isn't so hard. Financing the production of the stuff could become a problem:. If the credit markets are a disaster, we're going to have to slow down," said Richard Gusella, president and chief executive of the small oil sands developer Connacher Oil & Gas Ltd. (CLL.T). "When the banks have trouble, we all have trouble."  Until recently, banks and other investors have been eagerly pouring their dollars into Alberta's vast oil sands, the world's second-biggest reserves behind Saudi Arabia's trove. Rocketing crude prices have more than compensated for spiraling cost inflation and a growing regulatory burden, and many analysts reckon only a sustained dip toward $70 a barrel will affect most major projects proposed by major oil companies. The more costly developments, however, may flounder well before then. One plus for Gusella and others who use steam to coax the heavy crude out of the sands is the much lower price of natural gas, which is a big negative for players like Chesapeake Energy which has invested massively in prospects in gas shale. Surprising rapid growth from that quarter had depressed natural gas prices. Even the cutoff of most production from the Gulf of Mexico hasn't helped. This <a href="http://www.upstreamonline.com/live/article163642.ece">story</a> from Upstream Online talks about its steps to conserve cash.  Chesapeake Energy is cutting capital expenditure on drilling by 17% through 2010 due to a plunge in natural gas prices and concerns about a US market surplus, the company said. Chesapeake is also cutting its forecast of growth in gas production to 18% from 21% for this year and 16% from 19% for both 2009 and 2010. It will temporarily cut production by a net 100 million cubic feet per day in the Mid-Continent region, where well head prices were "substantially below" break-even costs.    Even Gazprom with its gigantic Russian reserves is facing some unwanted questions about it's debt load. That happens when a company's market value drops by nearly 50 percent in a week this story from Rigzone quotes Gazprom bass Alexei Miller saying its nearly$50 billion debt is not affecting its ability to finance projects, and it's not suffering from the financial crisis. But the <a href="http://www.upstreamonline.com/live/article163716.ece">story</a> cites a Reuters report that Gazprom is working on a plan to cut its debt, which rose 52 percent last year:  So based on these tidbits, the financial crisis is bad news for those with  high costs  and heavy debt loads. The boring virtues of cost cutting and debt reduction will be cool again. And if bailout doesn't work, look out. None of these qualify as an insight. What do you see changing due to financial crunch?

Houston: from energy capital to just another oil town

December 22, 2008

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oil, gas, regulation, politics, Houston, refining, gasoline, beer, wind, alternate energy, policy, economics, bicycles

In case you have been wondering why big oil service companies like Halliburton Co., Weatherford International and Transocean have been moving their headquarters from Houston to Switzerland and other places to the east -consider this report from Barclays Capital reported in <a href="http://www.upstreamonline.com/live/article168627.ece">Upstream</a> and other places over the weekend. It shows falling exploration spending in the United States is expected to be so down in the U.S. it will be dragging down the world total.     Global spending on oil and gas exploration and production will shrink 12% to $400 billion in the coming year as the steep slide in energy prices and tight credit markets reverse a six-year trend of rising budgets, analysts at Barclays Capital said. Spending in the US is expected to show the sharpest drop, falling 26% to $79 billion from the 2008 mark of $106 billion, Barclays analysts James Crandell and James West said in their semiannual report based on a survey of oil and gas companies.   Or as the CEO of Weatherford Bernard J. Duroc-Danner said in the <a href="http://www.chron.com/CDA/archives/archive.mpl?id=2008_4676934">Houston Chronicle</a>: when explaining why its headquarters was moving to Geneva:     The U.S. is an important market. It's just a market. It is not the primary market.   And the biggest growth area for exploration in the United States is pretty much of a disaster for service companies right now. Spending by these companies who spend a lot on finding natural gas in the United States, much of which is in unconventional reservoirs, is expected to be way down in 2009.   In the US, Chesapeake Energy is expected to cut spending by 51%, the analysts said, while Devon Energy is likely to cut by 44%, EOG Resources by 34% and SandRidge Energy by 78%.   To be fair, exploration spending in oil rich countries like Saudi Arabia and Russia will be down, just not so much. The gains are in parts of the Middle East, Africa and Latin America. One sign of how bad things have gotten, the report's author's warn this is an optimistic take, made when oil prices were at $58 a barrel and natural gas at 6.35 per thousand cubic feet - compared to around $43 and gas around $5.25.   "It is important to note that given the fluid economic conditions and volatility in oil and gas pricing, operators are continuing to revise budgets and the spending cuts could be understated."   So it's probably surprising that Barclay's short list of recommended oilwell service stocks includes two companies making the move east: Halliburton and Weatherford.

Cozy boards may have paved the way for big trouble

January 6, 2009

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oil, gas, regulation, politics, Houston, refining, gasoline, beer, wind, alternate energy, policy, economics, bicycles

Christmas is over, time to go back to work and talking about trouble  This week a big bond rating firm pointed out that some exploration and production companies are headed for big trouble. While falling oil prices hurt every company, it's far worse for some than others.  The common thread is the ones who depended on continued high cash flows to cover heavy debt loads or pay for aggressive exploration programs, are in a bind. Nothing so surprising there given the price of crude and natural gas have fallen with the economy.  You can <a href="http://www.ogj.com/display_article/349425/7/ARTCL/none/none/Moody's-downgrades-independent-E&P-industry/?dcmp=OGJ.Daily.Update">read</a> about what Moody's Investors Service has to say about the "increased likelihood of fundamental credit deterioration beyond our normal cyclical expectations" on the Oil and Gas Journal site. That would appear to mean that the pain for many exploration and production companies will be worse than usual in a downturn.  The gloomy talk included a prediction of "a prolonged period of abnormally low cash margins and returns due to persistent demand-driven price declines' outpacing cost reductions and supply response. " In other words, even vicious hacking won't reduce costs enough to fix things, particularly at a time when lenders are not keen on lending, which may well mean bankruptcy as the likely option.  The report chides those who "ramped up capital spending and were increasing leverage as the market turned. All of which made me wonder if Moody's was offering any warnings before the world turned upside down so suddenly.  So I started looking around for past Moody's comments on the topic of independent oil company management and ran across this one is the Houston Chronicle's <a href="http://blogs.chron.com/newswatchenergy/archives/2007/09/moodys_ep_direc_1.html">Newswatch Energy</a> blog that seemed worth a second look. It quoted a 2007 Moody's report that said the boards of independent energy companies tend to be stacked with seasoned industry veterans, meaning they are really deep when it comes to engineering and geological challenges, but often challenged outside those areas.  The post by Chronicle reporter Tom Fowler quoted Moody's Assistant Vice President Drew Hambly:  E&P boards would benefit from having more directors with large company experience to help management deal with external changes. Faster turnover of directors would provide an opportunity to broaden the geographic scope of directors and introduce new perspectives...  He said the directors tended to come from a limited network of people with similar backgrounds and that may make them prone to "group think."  Other studies point out that they're whiter, older and have fewer women than the average corporate board.  It also questioned whether the tendency to reward top execs with stock options would result in short-term thinking.  The one thing a board dominated by seasoned people from the oil and gas business should know is this business goes up and down, often abruptly. The trouble caused by the combination of high debt loads and low cash flows suggests they didn't do enough to incorporate the worst in their plans. In a Business Week <a href="http://www.businessweek.com/managing/content/apr2008/ca20080429_920167.htm">story</a> about what makes a good board, Hamby did point out that board quality is a "lagging indicator" - in other words you don't know if they're not considering the big picture until things have gone bad. But that would suggest change when a company's management and board have proved to be overbold.  As a consumer I'm happy they placed those bets. The big drop in natural gas prices was greatly, aided some by aggressive discoveries in costly, unconventional formations, like the Barnett reservoir around Fort Worth. But those working for those clinging to jobs at debt heavy companies, or holding their falling shares, may well think Drew Hamby had a point.    Do you think there's reason for big changes at a lot of these companies?

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Rzznfzz
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News and talk about life, energy and other carbon-based phenomenon from a writer in Houston who has long followed the business.

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