Fine: Changes ahead for oil and gas producers
The OPEC and non-OPEC agreement to reduce oil production officially begins this week. At mid-December when this column was submitted for publication, information surfaced that the “deal” was in trouble because OPEC barrels were under-stated. However, it appears the monitoring of output will begin with a January “surprise” that the 1.8 million barrels output is underway with moderate results.
It will be the bank newsletters from the futures markets that will catch up and swing to a “buy” at least by the end of January. Recall, “perception” pushes the button at oil trading computers. The upturn in 2017 oil prices to $ 60 per barrel of West Texas Intermediate before June has begun.
OPEC wants a price and supply agreement with shale oil producers here in the Southwest and in North Dakota. American producers are unable to collectively sign on, but notably the Hess Corporation, an independent energy company, has signaled cooperation based upon new transparency of information. Now the American rig count recovery is front and center on how OPEC in May will evaluate the agreement on producing less oil.
At least one additional rig in the San Juan Basin south should be expected and when added to an estimated 135 in the Permian-Delaware for 2017 will once more raise the question: is the OPEC production cut leading to an increase of American output? Are American Shale oil barrels replacing OPEC similar to the Saudi Arabian loss of market share in 1985? Will the Southwest's rapid increase in drilling and completion ultimately add to world oil supply and consequently lower the price oil — a "Second Downturn?"
This will make 2017 a volatile market year. Now will an OPEC-American“framework” restore demand and supply balance, the objective of the agreement in the first place? American producers are expected to demonstrate discipline and follow a 1 percent annualized demand increase which is the Saudi Arabian reference model.
But producers follow cash flow protection with hedging strategies. Much of 2017 Southwest production is sold forward (hedged) at prices between $51 and $53 per barrel. Some remains available for spot sales towards $60. OPEC should be watching our rig count and new production. New Mexico begins the year with oil output at 2015 levels or record high production which will be surpassed in 2017.
Reserve bank lending to smaller independent producers should reduce the pressure on debt repayment as the 2017 price oil rises. However, with higher cost of money as interest rates move up, producers will discover that this will not create 2013 or “boom” conditions” in debt financing of exploration and lease holding acquisitions. Overall, the San Juan Basin and the Four Corners general economy remains dependent on natural gas demand and prices.
President Trump’s choice of the retiring head of Exxon as secretary of state, if there is no withdrawal or rejection by the U.S. Senate, begins the “new world order in energy,” I spoke of in a Dec. 9 presentation at the San Juan College School of Energy.
First order of business is the American or “Washington” separation from the Obama administration on the Paris Agreement on climate change or low carbon economies. Without the United States, this exercise in globalism will fail. The second is American inward and outward oil power, economic nationalism and a retired Exxon chief who presided over an internationalist business model. The third is Russia.
What has been overlooked by media and analysts is the impact of Putin and Trump on the future of energy in the Arctic. Here the secretary of state can stake out the first energy world order change: Exxon and Rosneft (America and Russia) can unleash shale oil technology and conventional oil production in the Arctic once Obama administration oil sanctions against Russia because of foreign policy related to Ukraine are removed. Look for such questioning of the new secretary of state at Senate hearings. Exxon is the
partner of Russia in the Arctic and has been prohibited from having operational, financial, and technology oil and gas working relations with Russia.
American and Russian oil development in the Arctic has the potential of three Permian Basins in oil production and massive new world supply in six years. Lower oil prices early in the next decade can be expected as the Russian Arctic partners with American oil and gas investment and technology. This should begin with the Trump administration's secretary of state.
To repeat from my analysis at the School of Energy: Climate Change was the umbrella under which BLM and EPA oil and gas regulation has been developed under the Obama administration. Without American agreement with the Paris climate change objectives, the rules on natural gas capture and hydraulic fracturing and those on coal, mostly active and proposed, will have no place in the energy policy of President Trump. Economic nationalism – American oil first — eliminates Paris climate change globalism.
Just as the methane and natural gas leakage argument was presented as economic – wasted gas has value to producers — there is now an argument from environmentalist sources that investors and the oil and gas industry face an oil demand peak in the middle term. Similar to the oil supply peak warning 10 years ago — which vanished with shale oil technology — the public and financial institutions are now warned that instead of running out of oil supply we are now faced with running out of demand for oil.
I will fully engage this in the next column and an appearance at the School of Energy.
Daniel Fine is the associate director of the New Mexico Center for Energy Policy at New Mexico Tech. The analysis presented here is independent of positions of other institutions and is individual work.