|Quote of the day from our Aussie O&G analyst friend:
...from an anonymous letter circulating in Saudi Arabia, said to be written by an unhappy faction of princes:
“We will not be able to stop the draining of money, the political adolescence, and the military risks unless we change the methods of decision making, even if that implied changing the king himself.” (Our Note: between this, Amerca's poor leadership and Russia's Mid-East adventure, oil and gas prices may not be in a week what we believe they will be today. -dh)
Today: Doyon, Limited, a major Alaska landowner, describes its aggressive exploration program for oil and gas in an accessible area west of Fairbanks, in Interior Alaska. Read more (thanks to Doyon's James Mery)....
A president leading his nation toward disaster
When one considers the Administration's passive-aggressive opposition to virtually all fossil energy projects, he reveals himself to be an enemy of American public interest.
We have described these and many other attacks on the U.S. economy by this administration.
The pattern is undeniable.
Were the Congress not so lacking in self-confidence and determination to defend the Constitution against all enemies, both foreign and domestic, they should have authored impeachment charges long ago.
So now, just consider that one important result of denying the export of plentiful American oil, is to minimize international demand for U.S. oil shale and other energy projects--that could improve national security, dramatically increase employment of American citizens, neutralize much of the balance of payments deficit, reduce the national debt and improve U.S. leadership in the world power vacuum now being filled by a Russian leader-- a man with fire in his belly and traditional leadership skills, no matter how badly perverted they may be.
Denying American energy exports is a frontal attack on the free market, on the wellbeing of American companies and citizens.
It is yet another act that comforts America's enemies and denies benefits to allies and other friends of the United States.
It is another sign of a leader coaxing his flock to follow him to a cliff overlooking a very deep canyon, from which there is no returning.
“It is unfortunate that the White House fails to understand the national security and geopolitical benefits of lifting the ban on oil exports. Ask Poland, which is 96 percent reliant on Russia for its oil, or Japan, which must continue to rely on Iran, if U.S. oil ‘is not needed at this time.’ The veto threat reveals a fundamental misalignment within the administration. These policy contradictions merit further attention. Regardless of what the president’s advisers may tell him, congressional legislation has become necessary: even though he has the authority to act, he has not – even though the time is right, the need is clear, and the global dividends promise to be significant.”
In July, the U.S. Senate Energy and Natural Resources Committee, chaired by Murkowski, reported favorably her bipartisan bill, the Offshore Production and Energizing National Security Act (S. 2011). If enacted, the bill would fully repeal the outdated restrictions on exporting American oil, while preserving the emergency authorities of the president to act during emergencies.
Here is a piece we have posted in the last 24 hours on our NGP Facebook and Twitter pages re: Alaska's economic future.
Today's Wall Street Journal Editorial: "A new report takes apart the EPA’s veto of a mining project" (Thanks for the tip, Dan Kish.)
In an accompanying piece the WSJ notes:
Our columnist Bret Stephens writes that at the President’s Friday press conference, Mr. Obama described alternatives to his Syria policy as “mumbo-jumbo,” “half-baked ideas,” and “as-if” solutions. “So it is with this president. It’s not enough for him to stake and defend his positions. He wants you to know that he thinks deeper, sees further, knows better, operates from a purer motive. His preferred method for dealing with disagreement is denigration,” says Mr. Stephens.
One for the annals of overbearing bureaucracy—the EPA issued a rejection of an Alaskan mining project before the mine’s owner had even applied for permits. A Journal editorial says that a report due to be released today finds that the EPA’s decision to ignore regular procedure led to basic scientific flaws. As a result, other government agencies refused to cooperate with the Beltway regulator.
It is by now beyond dispute that the Environmental Protection Agency went rogue when it halted Alaska’s proposed Pebble Mine project. And yet, there’s more.
The more comes via an independent report that criticizes the agency for its pre-emptive 2014 veto of Pebble, a proposal to create the country’s largest copper and gold mine in southwest Alaska. Under the Clean Water Act, the Army Corps of Engineers evaluates permit applications for new projects. The EPA has a secondary role of reviewing and potentially vetoing Corps approval. Here, the EPA issued a veto before either Pebble could file for permits or the Corps could take a look.
Pebble CEO Tom Collier didn’t take this lying down. He filed a lawsuit. Then he asked former Senator and Defense Secretary William Cohen to conduct an outside investigation. Mr. Cohen agreed, as he writes, “on conditions of independence. I would follow the facts wherever they may lead, and any conclusions would be mine alone.” His 346-page report, released to be Tuesday, is a straightforward yet withering takedown of EPA’s conduct. Read more, here.
Alaska's Economic Survival. Certainly part of the State's economic survival rests on the outcome of federal treatment of Alaska natural resources, as in the recent Pebble and Shell matters. But a big part of Alaska's future rests in the judgment of Alaskan public officials.
Some, like me, will say, "Alaskans, their governor and legislature need to help our biggest investors become MORE competitive in a low price environment."
Others will say, "We need to take more from our biggest investors in a low price environment NOW so we don't suffer."
The first group is dedicated to the long haul and to a sustainable economy. The second seeks maximum transfer of wealth "from them to us" NOW, at the expense of the long term, at the expense of our kids' generation.
The first approach offers an economic spiral up, leading to a brighter future for all. The second leads to an economic death spiral down, wherein the hope of the future is mortgaged for the temporary pleasures of the present.
The same principle of a sustainable and hope-filled future applies to national taxing, spending and economic sustainability issues.
Dave Harbour, former Chairman
Alaska Council on Economic Education
Faithful readers know we are dedicated to building and maintaining the most thorough archive existing anywhere, documenting the history of Alaska and Northern Canadian natural gas monetization efforts.
Herb Butler's contribution today helps bring us to the current era.
However, we provide here for your reference, links to the long and more detailed history of Alaska and Canadian northern gas pipeline and LNG projects.
We are indebted to Herb Butler and the Fairbanks News Miner for providing this Alaska gas project commentary and timeline. -dh
1976: The U.S. Congress passed the Alaska Natural Gas Transportation Act in an effort to encourage the construction of a gas pipeline from Prudhoe Bay to the Lower 48.
1980: A Right-Of-Way license was issued by the Federal Energy Regulation Commission to the Alaskan Northwest Natural Gas Transportation Company. In 2008, that license was voluntarily withdrawn. There are many conflicting opinions why this effort failed to deliver fuel gas to a large U.S. market. The primary reason was the refusal of the oil field producers to provide marketable (high quality) natural gas from the Prudhoe Bay field.
1999: The Alaska Gasline Port Authority was formed. AGPA is comprised of the three boroughs, Valdez, Fairbanks North Star and North Slope. The mission of this group is to develop a liquefied natural gas export system based in Valdez. The source of fuel gas is from the Prudhoe Bay oil field.
2003: The state of Alaska formed the Alaska Natural Gas Development Authority, whose mission is to develop a natural gas pipeline from Prudhoe Bay to Valdez and a spur line to Southcentral Alaska.
2004: The U.S. Congress passed the Alaska Natural Gas Pipeline Act to resolve or clarify many issues attendant to the permitting of an interstate Alaska natural gas pipeline. ANGPA also provided an $18 billion loan guarantee and some tax relief.
2007: The state of Alaska passed the Alaska Gas Inducement Act. AGIA would provide a $500 million matching contribution to the construction of a gas line from Prudhoe Bay through Fairbanks, Delta Junction, Tok Junction and into Canada following the Alaska Highway. Notice that the matching contribution seems to be the only inducement in this vehicle.
2008: TransCanada, a gas pipeline company, was awarded the only AGIA license. TransCanada states their pipeline would not be completed until 2018. Denali Pipeline was created by British Petroleum and Conoco in competition with TransCanada for the AGIA license and continued on with their project after TransCanada was selected by AGIA.
2009: The Alaska Gasline Development Corporation is created by the Legislature to advance the plans for Alaska Stand Alone Pipeline, another plan with no forward momentum.
2011: Denali Pipeline discontinues their pipeline project.
2014: TransCanada terminates the AGIA license but expresses an interest in building a pipeline from Prudhoe Bay to Southcentral Alaska (Nikiski) because of the work already accomplished under the AGIA plan. It is this position that Gov. Bill Walker wants to purchase for $100 million. A definitive plan or project does not exist to deliver high-quality natural gas to the LNG port in Nikiski. The Alaska LNG Project is added to AGDC’s responsibilities.
The Cook Inlet natural gas supply is dwindling at a continuous rate. Fairbanks Natural Gas buys its gas at Point Mackenzie in the Matanuska Valley from Enstar. FNG has had to pass on increasing prices to the local customers in Fairbanks. FNG is unable to expand its distribution in Fairbanks because of Enstar pricing and allocation. The expected shutdown of Cook Inlet natural gas sources will happen by 2020 unless a new gas field is found. At this point, there is no alternative source other than Prudhoe Bay.
FNG is trying its best to acquire quality natural gas in Prudhoe Bay, to no avail. The Prudhoe Bay gas is of extremely low quality because it contains 12 percent carbon dioxide (CO2) and approximately 76 percent methane. FNG cannot produce LNG (frozen methane) at Prudhoe Bay without extracting all of the CO2. This is because CO2 freezes much sooner than methane and therefore causes all kinds of freezing cycle stoppages. FNG and/or their producer must build an extraction system before a freezing system. Then there is the disposal issue. What do you do with all the CO2 that is extracted? FNG was purchased by AIDEA in 2015. AIDEA is spending a large amount of money to build gas storage and distribution systems in North Pole and Fairbanks without a guaranteed source of natural gas.
This is good news to the refineries and the liquid fuel distributors. They have some positive future expectations. We consumers in Alaska are facing a dilemma though. We must contend with a status quo situation well into the next years and maybe even longer. Large fuel oil bills will become even larger in size there is no doubt about that. The natural gas users are facing a grim future. They must think of reverting back to liquid fuel.
Two facades are in place in Alaska.
1. AIDEA has spent a large amount of money on a natural gas supply system in the Fairbanks and North Pole area without any guaranteed source.
2. Gov. Walker wants to pay TransCanada pipeline $100 million dollars for their interest in a pipeline project that does not exist. The Alaska LNG Project is only a plan, just like all the other plans before it. A schedule and budget does not exist. The media has reported proposed costs as high as $65 billion.
Herb Butler is a retired oilfield and refinery engineer who spent decades working in the oil and gas industry in Alaska. He lives in Fairbanks.
More about Timeline
More about Transcanada
- ARTICLE: Alaska governor plans to call for company buy-out in gas project
- ARTICLE: Companies file export application for Alaska LNG
- ARTICLE: Itemized work on Alaska gas line confidential
- ARTICLE: Feds: No more false starts on Alaska gas pipeline
Today, Facebook friends were mulling over the possible benefits of government ownership of Alaskan energy projects. Norway was sited, as it often is these days, as a place where government ownership has produced wonderful results. In fact, it seems that Alaska's governor, based on recent statements, may well be considering using Norway as an example of how Alaska should approach the monetization of its oil and gas resources.
We wrote the following piece today:
"Are Norway and Alaska Identical Twins, or Are They Apples and Oranges?"
"Norway is a sovereign country that, along with its ownership of companies, can and does eliminate costly appeals and delays by activists.
"Alaska is a quasi sovereign state whose energy activities are subject to federal regulatory delays and federally permitted (if not encouraged) due process, sue and settle tactics and "endless" judicial challenges.
"Yes, Norway can balance some of the inefficiency of government ownership by sympathetic government regulation.
"Socializing Alaskan industry produces all of the dangers of crony capitalism and all of the risks of hostile federal government regulation, augmented by costly and in many cases, frivolous social, political and legal activism.
"Norway and Alaska share some things in common, including a northern climate, majestic landscapes and bountiful natural resources.
"That does not mean this state and that country are alike in every way.
"Once again, we are cautioned about comparing apples and oranges.
9-30-15 Natural Gas Reserves Tax: Governor Walker's Brilliant Strategy For Encouraging Industry Investment in Alaska
Natural Gas Reserves Tax: Governor Bill Walker's 'Brilliant Strategy' For Encouraging Industry Investment in Alaska
Governor Bill Walker (NGP Photo) has spent a career and millions of OPM (i.e. other people's money) dollars on Quixotic wanderings around the world in failed attempts to make his infeasible visions of an Alaska LNG project economically viable.
See today's comment by our Mid-Atlantic analyst friend on Shell's departure and an earlier, expensive, Alaskan dry hole.
See our additional, 3-1-12 commentary in box below-right. -dh
As a governor, he is now using bullying tactics to achieve his latest vision of an Alaska LNG export project controlled, at least in part, by him.
Not being personally satisfied with the reasonable progress producers are making toward gas pipeline investment decisions, Walker has ordered a special session of the Legislature and is "upping the ante", calling for implementation of a "reserves tax" on natural gas that would, in essence, tax companies for not marketing the gas.
(...as if oil and gas companies do not want to sell their expensively obtained, proven reserves.)
He convened a media gathering on September 25 to discuss the special session and we encourage our critically thinking readers to carefully evaluate the tenor, logic and quality of his interaction with reporters. Also make note of questions reporters did not ask that you would have asked.
On September 25, 2015 -- the same day -- the Legislative Budget and Audit Committee invited a presentation by legislative consultant, Enalytica, on potential impacts of a reserves tax on gas.
The slide presentation results are both logical and predictable and we link the presentation here for you to review and assemble your own conclusions. Aside from the potential impact on a gas pipeline and its potential investors, the Walker reserves tax proposal sends a chilling signal to all potential Alaskan investors.
...from our 3-1-12 Commentary.
"No one objects to reasonable and predictable taxes for the oil industry or anyone else, but a taxing authority, to command respect and encourage investment, should not only seek a fair share for itself but give a fair shake to the taxpayer.
That means predictable tax policy, stable policy, policy that does not discriminate, policy that is never retroactive--unless retroactivity benefits the taxpayer.
A good tax policy would also focus on filling the pipeline, making a sustainable investment climate for our kids; indeed, husbanding our resources as if we were responsible adults who care not just for the need-greed of this generation but for the economic survival of future generations of Alaska's children." -dh
We believe it unassailable that the Walker reserves tax idea sends this signal to those who may be contemplating an investment in Alaska: "You can invest and agree to the rules of the game. But we are a 'sovereign state, by golly,' and if we want we can increase taxes or add new taxes anytime we want--and as in the past we can make those tax changes apply retroactively if we want.
"Be advised: if we spend state money irresponsibly and create a deficit, you have deeper pockets than our citizens, small businesses, the hallowed fishing industry or the tourism industry; accordingly, in such a case we will come after YOU."
This provincial, "think locally not globally" attitude has permeated the thoughts and actions of a loud, vocal minority of Alaskans throughout Walker's pro-oil tax, anti-Canadian pipeline, gasline partner hostility career. This unhealthy, illogical and myopic attitude ignores that Alaska's resources compete with other oil & gas provinces, mostly close to tidewater. Most of Alaska's competitors:
- don't have to construct an 800 mile pipeline to move resources to tidewater, and
- have lower labor costs, and
- are in closer proximity to the markets, and
- operate in friendlier climates, and
- enjoy lower logistical costs
Therefore, Alaska must be EXTRA competitive. In the past, the Prudhoe Bay oilfield saved Alaska from having to act responsibly and be competitive. It was the largest field in North America, prolific beyond imagination and supplied 20% of America's domestic oil demand. In spite of predatory state taxation Prudhoe Bay was profitable.
Alaska now has to learn humility in order to be competitive. Alaska is no longer the biggest oil producing state. It is now 4th, after North Dakota, Texas and California.
Production -- upon which 90% of the state operating budget and over a third of the state economy depends -- continues to decline.
Today, world oil prices are half as high as state revenue forecasters predicted and upon which politicians based their high public spending decisions.
In our columns since Monday, readers have learned much about what Shell's Alaskan Arctic OCS departure portends for the state's undiversified, oil-dependent economy.
One would think that with Alaska's economy teetering on the edge of insolvency (i.e. Scroll down for our commentary since Monday), a prudent Alaskan leader would respond accordingly.
One prudent response would be to kindle dynamic efforts to become attractive to natural resource investors, especially in light of Shell's departure.
But now, our Quixotic champion doubles down on threatening the state's three major investors -- BP, ConocoPhillips and ExxonMobil -- whose presence has sustained Alaska in unprecedented wellbeing for half a century.
He proposes levying a new tax on the three major investors for the gas that is not yet marketable. We believe it's partly because of his actions and words: he is desperate to be a part of -- if not in charge of -- a real, live LNG export project. But his irresponsible industry-hostility is a form of populism which could mobilize some pro-tax citizen sentiment in a state that has not responsibly controlled its lavish public spending.
Throughout life, we have generally avoided the temptation to engage in sarcasm or petty and trite clichés.
But when a person happens into high position and acts contrary to logic, basic courtesy and fairness, critics might with justification refer sarcastically to that behavior as, "brilliant".
And, as to clichés, well, "...if the shoe fits, wear it!"
Yesterday's news about Shell pulling out of its Arctic exploration program could also have some good news for long term oil markets. The USGS had previously estimated that the Arctic contained ~90 billion barrels of recoverable oil - with a goodly part of this being in the US sector. Some recent media reports had quoted this number as being "reserves", whereas they are in fact highly speculative prospective resources.
Given the very very few drilling based data points that this number was based on, Shell's failed Burger J well is likely to significantly downgrade this number - possibly by a number as large as tens of billions of barrels.
Henry Hub gas prices fell yesterday to US$2.59. Expected mild Autumnal weather in the US was the key driver.
Platts has recently reported that Asian spot LNG prices (for delivery in October) are expected to fall again. Mild weather on this side of the Pacific, combined with currently high inventory numbers, is the main causal factor behind the fall. A strong El Nino later this year will only reinforce this.
The interaction of these low Pacific prices with the expected wave of US LNG due to start by the end of this year is unclear. Existing contracted gas purchases will trump spot price economics and the likes of Cheniere should be protected by take or pay contracts for their liquefaction capacity - but the actual volumetric output from the plants (and hence the effect on Henry Hub gas prices) may be less than previously expected.
First ... the dry hole Sohio and BP drilled off-shore of the North Slope of Alaska many years ago. In the link below, others apparently also remember it. Mukluk was one of the mis-steps by Sohio management that finally convinced BP to buy out the minority public interest of Sohio, and replace the management.
This old memory still works (sometimes).
As it is described in the link:
There, in the Beaufort Sea, a consortium of companies invested nearly $1 billion in the 1980s drilling a well named Mukluk.
They were confident they’d find oil. At the time, geologists boasted that it was an incredibly low-risk venture, in part because the formation appeared to mimic the massive Prudhoe Bay oil field on Alaska’s North Slope.
But their bullishness was misplaced. In December 1983, it was revealed the well contained nothing but salt water and traces of long-gone oil.
Decades later geologists armed with new data theorized that the oil actually had been sucked out by BP from an existing site onshore on the North Slope.
For decades, Mukluk has been considered the industry’s most expensive dry hole — a case study in what can go wrong below ground, even when everything else operationally goes right.
Shell’s Burger J well might give it competition.
YOU READ ALASKA GOVERNOR BILL WALKER'S ANNOUNCEMENTS HERE FIRST, YESTERDAY
BELOW IS TODAY'S UPDATE
(Scheduled for completion this weekend)
I always enjoy your newsletter, but your recent re: the NG issues one is special.
In my nearly 60 years in Alaska I have witnessed "many positive", and "too many negative" uses of the resources found within the boundaries of Alaska (not the boundaries of the State of Alaska) but nothing, not fish plants, not bridges to nowhere, not barley farms, etc., come anywhere near the Natural Gas fiasco that got underway with the El Paso group so long ago.
I have many observations and opinions on what has transpired over time, and will not list them.
But I continue to marvel at the way our "leaders" (elected and not) and the consultants, have been able to relieve the bank accounts (and the money goes somewhere!)!
Thanks, keep up the good reporting.
Terry T. Brady, MS (wood science), for
The Governor's Bombshell
We call Governor Bill Walker's actions this week a 'bombshell' because just as they create a new relationship with Alaska's largest investors so do they change Alaska's reputation as an investment destination. While the Governor has created "change he surely hopes Alaskans will believe in", at the same time, he has destroyed Alaska's attempt over the last few years to make itself more attractive to investors.
Here is, 1) what the Governor did and, 2) how we react to those actions after nearly 45 years of experience in Alaska as a regulator, educator, journalist, small business owner, municipal employee, oil industry executive and non-profit sector volunteer.
What The Governor Did
- Alaska Governor released a "Summary Report on the Review of the Alaska LNG Project Process"
- The "review" should be read in context of his very personal transmittal letter sent to legislators.
- Above is a video he released yesterday.
- Here is a bearish oil price report provided by the Governor
- Here is the Governor's proclamation calling for a special session to, among other things, establish a 'reserves tax' on industry investors applying to gas that is available but not committed to a market.
- Here is the Governor's news release, discussing the above actions.
- Alex DeMarban's ADN review of events.
- We think Alaska's leaders may sometimes forget that sophisticated observers are watching, from all over the world! Here's an example, our Australian oil and gas industry analyst friend who is quite candid about his view of Alaskan leadership and its LNG project.
- Here is our recent and highly relevant review of the Alaska investment climate.
Our Reaction To What The Governor Did
General. Governor Walker assumed office knowing the economic challenges were awesome.
Oil prices ranged at half the level the state operating budget required and that operating budget, in turn, was 90% dependent on Prudhoe Bay oil production. The entire economy of Alaska is over a third dependent on this sole source of income. Annual deficits of $3.5 - $5 billion will deplete the state's available savings within two - three years depending on the level of spending cuts politicians are ready to approve. Still, an almost $10 billion state employee retirement program unfunded liability awaits full funding.
Alaska's oil income flows from a 1/8 royalty share of the oil; a discriminatory, statewide 20 mil oil and gas property tax; one of the highest production (i.e. 'severance') taxes in the free world; and, a corporate income tax.
While the royalty rate was one of the lease terms agreed upon during the famous 1969 Prudhoe Bay lease sale, the bulk of oil taxation was added after the lease holders began making their massive investment in developing the ANS reservoirs and building TAPS. For the dozen years following the lease sale, taxes were increased about a dozen times. At least twice in Alaska's history, higher tax rates were applied retroactively for the sole purpose of clawing into state coffers, more money.
While Alaska got away with its unfair and predatory taxation for a long time, even the great and prolific Prudhoe Bay reserves would dwindle, age and continue need massive reinvestment in order to spawn new production. The trouble is that with the highest oil taxes in the free world, Alaska's political leadership had created the highest per capita taxing authority in America, the highest debt per capita state in the nation characterized by some of the most lavish social programs devised by man. Alaska even has more non-profit organizations per capita than any other state.
In the early 1990s, Dr. Scott Goldsmith (NGP Photo) of the state university's Institute of Social and Economic Research began warning that if Alaska were to begin slowly cutting the growth of spending its economy could arrive at a "soft landing", meaning a sustainable, long term economy.
Common Sense for Alaska, a public interest non-profit organization, sponsored government-spending conferences leading to powerful recommendations for a constitutional amendment limiting government spending increases to an inflation/population formula.
All public officials paid lip service to both Dr. Goldsmith's warnings and Common Sense's recommendations, to no effect. Spending continued to explode.
Alaskan apologists justified their high oil taxes and high spending in this way: "We are a large state with a small population and our cost of living is higher than elsewhere; therefore, it costs more for us to maintain government services."
Problem with that argument is that no matter how much a person, family or government wants to spend more money, one simply can't spend more than one brings in without sacrificing credit worthiness. (Of course, the Federal government has shown that it can spend over $18 trillion more than it takes in, but even its citizens pay for its irresponsibility when, ultimately, inflation devalues the currency) Recently the rating agencies, as we have long predicted, began putting Alaska on notice that its cost of borrowing is likely to increase since its economic risks have now become too large for analysts to ignore.
In addition to the low price era in which Walker finds himself, production has been steadily declining for years at a 5-7% rate.
In the mid 80s, Alaska produced over 2 million barrels per day to feed about a fifth of America's domestic oil needs. The Trans Alaska Pipeline System (TAPS) which transports Alaska North Slope (ANS) oil to tidewater now operates at only about a quarter of its capacity. Nearly three-quarters empty is another way to put it.
Governor's Background. Governor Bill Walker was born, raised and spent most of his life in the state. We believe that many who know him would agree he is a gifted public speaker with charismatic qualities. He knows the state well.
These attributes would benefit one's role as governor.
But being governor of a State dependent on oil investment requires a studied, wise, world view of the opportunities, the competition, the alliances leading to a successful term of office.
As a lawyer, much of his professional background, counter-intuitively, dealt with politics and marketing. He held elective posts in Valdez, site of the major, 1989 oil spill, and served as the general counsel and major marketer of a municipally-owned authority.
The Alaska Gasline Port Authority (AGPA) was designed to promote (i.e. and then finance, build and own) a gas pipeline/LNG export project.
During this time, Walker continually criticized other parties (i.e. like the oil industry) for not cooperating with AGPA's or predecessor LNG project efforts.
An observer might conclude Walker's AGPA was never successful for logical reasons: 1) From the early 80s to the late 90s, the Lower 48 gas price was too low to support any project and the world LNG trade was in its infancy. 2) During the years, before the shale phenomenon, when the Lower 48 needed Alaskan gas, the most economical way to monetize ANS gas was to send it by pipeline directly down to those markets, and not to try to send it via tankers to Asian markets. 3) When the shale revolution produced massive gas supply for North American markets, Asia looked more promising, especially after the Nakashima tragedy in Japan lessened interest in Nuclear power and increased interest in natural gas fired power plants. At that point, the major gas owners rather quickly shifted their sights to Asia and with ample expertise and contacts had no need for a 'middle man' like AGPA to market their gas.
Others may view it differently, but this scenario provides a very understandable backdrop for this governor's 'Alaska-centric' judgment and decision making.
While his AGPA attempts failed to monetize ANS gas, now he is governor and, again, he may be viewing the oil companies as roadblocks when, in fact, their diligent efforts have brought an ANS gas monetization project farther forward than ever before.
We believe it ironic that Walker's zeal to be the man at the helm of an LNG project may, in fact, be clouding his judgment and sabatoging the project.
Insisting on certain state control of and equity in a mega project perverts the private enterprise system to begin with. Then, to be criticizing the investors, refusing to talk about a comprehensive fiscal security package for them and threatening them with a gas reserves tax radiates a hostility sufficient to dampen the ardor of any Alaska investor, current or potential.
In fact, we would be not the least surprised to someday read an announcement from one or more producers to the effect that, "The governor has indicated his desire to own and operate an ANS gas pipeline/LNG system. We respect that desire and, accordingly, are withdrawing from our plan to construct such a project. Instead, we stand ready to sell the state the research and planning material we have developed and will support the governor's efforts in any reasonable way. Our efforts had led Alaska closer than ever before to launching a successful ANS gas monetization project and we were completely on schedule with that effort, but for the governor's demand that we spend additional time and money studying a 48" pipeline alternative. The time honored adage that, 'too many cooks spoil the soup', is as true now as it was in the old days. Rather than face a continuingly critical state administration for what we believe has been our on-time, on-budget, good faith gas monetization effort, we conclude it prudent to transform our project support into support for the governor's state-ownership idea, whatever that turns out to be. Meanwhile, we shall shift the majority of our focus now on investing in expanded throughput of TAPS, upon which the state government and the people of Alaska depend."
Please check back this weekend; much more coming....
|KTVA Video/story by Liz Raines. The Alaska Stand Alone Pipeline (ASAP) was almost ready for construction after more than five years. At a board meeting Wednesday, members of The Alaska Gasline Development Corporation (AGDC) decided to mothball it, saying they didn’t want to run parallel projects. Instead, the agency plans to focus efforts and funding on AKLNG, the larger pipeline project that involves large oil companies like Exxon Mobil, BP and ConocoPhillips.
ADN by Alex DeMarban. ... concerned with public apathy about an effort the state has pursued unsuccessfully for decades -- to tap and sell gigantic volumes of North Slope gas -- the Alaska Gasline Development Corp. has proposed launching a communication campaign to educate the public about Alaska LNG.
(John) Burns, the chair, said there’s a lot of “gas line fatigue” in Alaska, with people confused about the process. Some don't understand that the large sums the state is putting into the project are investments that will one day yield income, he said.
An education campaign could help unify the state’s messages that currently come from multiple sources, including the governor's office, AGDC and agencies working on the effort, officials said.
“The general public has to know what’s going on. It’s Alaska’s pipeline,” said board member Dave Cruz.
Miles Baker, vice president of external affairs and government relations, said the campaign could probably cost “several million dollars” over the next couple years.
(AGDC President Dan) Fauske said that's possible, but a final plan has yet to be presented to the board.
"We really have no clue," he said, referring to the potential cost.
FRIDAY'S EARLY REPORT: MORE TO COME, INCLUDING OUR VIEW OF WHY WE CHARACTERIZE THE GOVERNOR'S RELEASE ON THURSDAY AS A BOMBSHELL REPORT (I.E. NOT MEANT AS AN ENDORSEMENT.) MEANWHILE, WE WANTED YOU TO HAVE THIS MATERIAL AS SOON AS POSSIBLE. PLEASE REVIEW IT AND DEVELOP YOUR OWN REASONED PERSPECTIVE. -DH
Reference: Governor Bill Walker's transmittal letter to Legislators
Reference: Governor Bill Walker's, "Summary Report on the Review of the Alaska LNG Project Process"
We will provide our dear readers with commentary later in the day on Friday.
Here is the copy of an email alert we also issued Thursday on this subject:
- A Governor who has endured a quixotic journey of several decades to force private industry to build a project of his own dreams, and
- Legislative leaders who created a several hundred million dollar state-owned "Alaska Gasline Development Corporation" (AGDC) to deliver North Slope Gas to citizens in case a larger interstate project did not materialize, now run by Walker's appointed board members, and
- Alaska's largest investors, the North Slope Producers, who purchased leases, found oil and gas and have the right to market it while providing a royalty in kind (RIK) or royalty in value (RIV) to the state, and
- Fairbanks citizens and politicians anxious to benefit from a state-financed -- and to this point state managed -- natural gas distribution system concept, enabled by Walker appointed members of a state investment corporation, and
- Politicians from all over the state who are thinking, "How can my constituents and I benefit from any of the horse trading going on", and
- Frightened citizens whose leaders have created a $4-5 billion ANNUAL deficit in the state operating budget which is almost 90% funded by North Slope producers -- at a time when production is declining, world oil prices remain depressed and state spending continues rising.
Regular readers will know that this blog considers the Alaska LNG (AKLNG) project to be the Aesopian tortoise of the LNG project world – not as flashy as some, but plodding towards first gas next decade.
However, that tortoise carries a heavy shell that would be familiar to LNG project proponents in most locations around the world – a Government that wants to maximize its share of something that does not as yet exist – and therefore risks getting a larger share in nothing rather than a reasonable share in something.
Australian readers of this blog will likely be familiar with only one Alaskan Governor – the surprisingly socialist (when it comes to taxing oil companies) Sarah Palin. Her populist instincts live on in the State and even the Russian news service Interfax today points out that AKLNG risks being bogged down by politics (http://interfaxenergy.com/gasdaily/article/17647/alaska-lng-could-be-left-out-in-the-cold).
Alaskan based website Northern Gas Pipelines (http://www.northerngaspipelines.com) today provides an update on the latest Government meddling in AKLNG and asks the reasonable question – “with so many government cooks in the LNG kitchen, really, what could possibly go wrong?”
Dave Harbour, publisher of Northern Gas Pipelines, is a former Chairman of the Regulatory Commission of Alaska and a Commissioner Emeritus of the National Association of Regulatory Utility Commissioners (NARUC). He served as NARUC's official representative to the Interstate Oil & Gas Compact Commission (IOGCC). Harbour is past Chairman of the Alaska Council on Economic Education, Anchorage Downtown Partnership, and the Anchorage Chamber of Commerce. He served as President of the American Bald Eagle Foundation, Common Sense for Alaska and the Alaska Press Club. He is Chairman Emeritus of the Alaska Oil & Gas Congress.
Opinions or viewpoints expressed in this webpage or in our email alerts are completely independent. They are solely those of the publisher and are not intended to reflect the opinion(s) of any affiliated company, person, employer or other organization which or who may, in fact, oppose the views stated herein. -dh
ADN by Pat Forgy.
The North Slope Borough has become fabulously wealthy from taxes on the oil industry and its massive Prudhoe Bay infrastructure. More....
Our Mid-Atlantic Energy Senior Consultant Friend
(Reference this Fuel Fix Story by Collin Eaton)
While Alaska producers are poised to finance and build a gas pipeline/LNG export project, Alaska's new Administration seems to be doing everything possible to delay it into oblivion.
We have commented on these various matters separately over the governor's first year in office; we believe that, this issue cannot be separated from the theme of our consultant friend's article on the left.
As development projects are delayed during this low energy price era, experienced oil industry specialists in many areas -- including gas exploration, production, pipelines, liquefaction and ocean transport -- are being laid off and/or retired.
Our consultant friend has observed that this trend endangers future projects, not because of future oil prices but because of the serious lack of oil and gas specialists needed when demand and higher prices again call for more production -- from highly technical projects.
It is another viewpoint that public and private officials involved in pipeline/LNG projects should bear in mind.
If politicians waste too much time trying too hard to dictate what projects investors should build, how, in what timeframe and with what personnel policies (i.e. as Alaskan politicians tend to do), Alaska's gas pipeline could remain a pipe dream for another, perhaps poorer but wiser, generation to tackle.
-dh (Note: we will immediately correct any factual errors in this or any archived material. Please write us with any additions or corrections. Thank you.)
Wood Mackenzie has estimated that the number of major drilling projects on which the oil industry can make money, given current economics, is down by huge amount (although the numbers are actually a little fuzzy). We have written about this trend several times recently, including our note on diminished North Sea drilling. We do not have access to the complete WM report – their press release is below – but it is still fair make several points about the implications of this trend:
· It will be tough to get to the cost reductions estimated as necessary below, without fudging the numbers. The oil companies already challenge costs in a very disciplined manner for every project, even after it goes FID.
· Given current cash flows, it is probable that a number of projects declared marginally profitable after being put through the cost reduction wringer will get deferred for significant time, or simply mothballed.
· This process will have a cascade effect if it goes on for several years. The longer it goes on, the more the reason for deferral will be lack of qualified
specialists. Prostitution is not world’s oldest profession; the oil industry is. The business lost the bulk of a whole generation through layoffs in 1980s and 1990s. With the layoffs this time around, the talent needed for the next upturn simply will not be there.
· Many of these projects will take multiple years to be developed. The lack of timely response to deal with a supply/demand imbalance will also contribute to greater volatility in the future.
Bottom Line: We have seen this movie before. The monsters involved will be bigger and more convoluted in the current version of the story, but the result will be the same. It will not end well.
Today's Energy Links Are From Larry Persily, Former Federal Gas Pipeline Coordinator
Oil and gas news briefs for Sept. 21, 2015
LNG buyers making progress in push for more flexible contracts
(Platts; Sept. 18) - Calls for increased contract flexibility dominated discussions at the fourth annual LNG Producer-Consumer Conference in Tokyo this week, as industry participants met once again to deliberate emerging trends in the LNG market. The debate advanced some from a year ago, when price indexation had largely taken center stage. With some flexibility now granted in this area, the focus increasingly turned to the still-restrictive terms around LNG delivery schedules and destinations.
Numerous industry observers saw the removal of destination clauses, take-or-pay terms and wider quantity tolerance in contracts as key components that will be necessary to manage the looming supply glut in LNG. "LNG producers must improve on the contract practices of the past. Simply put, producers need to help increase the flexibility of the trade," said Jae-do Moon, South Korea's vice minister for trade, industry and energy.
Jean-Pierre Mateille, Total Gas & Power's vice president for trading, conceded that changes around delivery and schedule terms in contracts were inevitable. "Contracts are becoming shorter.” Most U.S. LNG exports will allow destination flexibility, Mateille said, “We see the traditional link between producer of gas and buyer has been broken up by this new business model.” Satoshi Kusakabe, commissioner of Japan METI's Natural Resources and Energy Agency, said removal of destination clauses would help the market because it would draw more players and increase liquidity and spot trades.
Meanwhile, market uncertainty and lack of new project sanctions has prompted caution of future shortages. "Even at current projections, we need to add about 20 million metric tons of LNG per year to maintain a stable supply demand balance [from 2023 onward]," said Demus King, general manager for offshore resources at Australia's Department of Industry and Science. "To deliver in 2023, FIDs need to be made in the next few years."
Global commodity traders see big opportunities in LNG
(Reuters; Sept. 17) - Mining and trading giant Glencore is mounting a challenge to Trafigura and Vitol to become the top merchant trader of liquefied natural gas as a global market in which sales are largely frozen in decades-long contracts looks ready to thaw. Trafigura recently adopted tactics developed from years of trading oil to become the world's top LNG merchant, investing in logistics and storage, while also providing credit and shouldering risk for buyers.
Glencore, on the other hand, plans to double its global LNG trading team and trade as many as 50 cargoes of the fuel over the next year — almost twice what Trafigura traded in its past fiscal year. LNG could soon surpass iron ore as the world's second-biggest traded commodity, with estimates of the market's worth ranging between $90 billion and $150 billion. "The opportunity for growth in LNG trading is spectacular," said Glencore's global head of LNG, Gordon Waters, who joined the firm in July after 18 years at BP.
Trading companies, which industry sources say have so far accounted for less than 10 percent of overall LNG trade, could help trigger a more liquid Asian LNG market, with exchanges from Singapore to Tokyo launching indices and futures contracts in preparation. Glencore — which has had a limited presence in LNG up to this point — plans to trade in spot or short-term deals over the next year and double the size of its three-trader team based in Singapore, London and Madrid.
First Nation seeks title to island at proposed LNG plant site
(Globe and Mail; Canada; Sept. 18) - The Lax Kw’alaams First Nation is seeking aboriginal title to Lelu Island and Flora Bank, creating a legal obstacle for a Malaysian-led consortium that wants to build a liquefied natural gas export terminal near Prince Rupert, B.C. The aboriginal group will file a notice of civil claim to launch the legal action next week in B.C. Supreme Court, Lax Kw’alaams Mayor Garry Reece said Sept. 18.
Pacific NorthWest LNG, led by Malaysia’s Petronas, is proposing to construct an LNG export terminal on Lelu Island, and also build a suspension bridge and jetty to a dock for Asia-bound tankers. Pacific NorthWest LNG has offered assurances that the design of marine infrastructure will not harm the environment. But the Lax Kw’alaams believe there would be environmental damage because Flora Bank contains juvenile salmon habitat in eelgrass beds next to the island in the Skeena River estuary.
“We want to protect crucial salmon habitat, protect our food security and ensure that governments and industry are obligated to seek our consent,” Reece said. The area is part of the traditional territory of the Allied Tsimshian Tribes of Lax Kw’alaams, and Reece believes that gaining aboriginal title will provide the First Nation with an effective veto over specific aspects of Pacific NorthWest LNG’s proposal. The B.C. government said it respects the right of the Lax Kw’alaams to seek title, while the Prince Rupert Port authority said it is examining the implications of the legal challenge.
Petronas will market ‘package deals’ to sell some of its B.C. LNG
(Platts; Sept. 15) - Pacific NorthWest LNG will look to sell additional volumes of gas from its planned Prince Rupert, B.C., facility to Asian buyers as part of "package deals,” responding to buyer demand, company president Michael Culbert said Sept. 16. “The Chinese, Japanese and Indian markets are seeking diversity [in supply sources] and Petronas is looking at a portfolio of supplying LNG for 20 to 30 years that will be sourced from Canada besides Australia and other global producers," he said.
"A prime advantage of mixing LNG supplies from Canada with other producers will be stability of supply that buyers are demanding," he said on a webcast of the Peters and Co. annual conference in Toronto. Petronas holds 62 percent of the B.C. project that is aiming to start exports in late 2019 or early 2020. Petronas is responsible for marketing the LNG, Culbert said, and already has sold nearly 50 percent of the output under long-term deals with Sinopec, Indian Oil Corp., Japex and Petroleum Brunei.
Culbert did not indicate how much LNG that Petronas plans to sell under the package deals, or if negotiations have already started with Asian buyers. Pacific NorthWest LNG is awaiting final clearance from the Canadian Environmental Assessment Agency before taking a final investment decision to build its LNG facility.
Asian owned-and-operated LNG plant new to the market
(Nikkei Asian Review; Sept. 16) - Companies in East Asia are teaming up to secure cheap, stable supplies of liquefied natural gas. In the process, they are attempting an end-around of the oil giants that dominate the LNG business. One example of how they are trying to do this can be found in Indonesia, where Japanese trading company Mitsubishi and Korea Gas, the world's largest LNG importer, built an LNG plant.
The hope is to eventually ease Big Oil's grip on Asia's LNG market. In August, the first shipment of LNG made its way from the new Donggi Senoro plant to an LNG receiving terminal operated by Pertamina, Indonesia's state-owned oil and gas company. This fall, LNG from the Donggi Senoro plant will be shipped to Korea Gas and Japanese electric utilities, said Toru Kawabata, operations director for the joint venture.
The new plant in Indonesia — at 2 million metric tons annual capacity — is much smaller than the Middle East's typically gigantic production facilities, though it has huge implications for East Asia's LNG market. It is a wholly Asian enterprise in an industry used to Western oil companies taking the lead in building and operating LNG plants — and its output will stay in Asia. Neither Mitsubishi nor Korea Gas has any experience operating an LNG plant, however, and the team has gotten off to a shaky start. After production began, operating errors have caused emergency shutdowns.
Major LNG carrier operator says Australia gas could go to Europe
(Sydney Morning Herald; Sept. 17) - If Asia doesn't want Australia's liquefied natural gas, Europe will take it, said the CEO of one of the world’s largest independent owner and operator of LNG carriers. Australian LNG producers are seeing growth demand in top-consuming East Asia countries, like China, Korea and Japan, dry up as those economies slow down. That's causing some Australian developers whose projects are due to come online to look elsewhere, said Gary Smith, who heads up Golar LNG.
"The only other liquid market that is open to them with the U.S. now closed is Europe," Smith said Sept. 16 at the annual Capital Link Global Commodities Energy & Shipping Forum in New York. "And we've seen it before where cargoes start moving west from Australia instead of east." East Asia nations are not taking a lot of additional supply commitments, with some buyers reselling their cargoes, Smith said. Unless markets in Asia change, Australian LNG is “going to have to go farther to find a home,” he said.
European demand for LNG is constant, since the fuel can be used to replace pipeline gas or used by generators to produce electricity, he said.
U.S. report shows coal losing favor in China
(U.S. Energy Information Administration; Sept. 17) - Economic deceleration, industry restructuring and new energy and environmental policies have slowed China’s growth in coal consumption and are also driving more centralized and cleaner uses of coal. After nearly a decade of rapid growth, coal consumption — which currently supplies two-thirds of China's overall energy use — grew only 1 to 2 percent in 2012 and 2013 and was essentially flat in 2014, according to the U.S. Energy Information Administration.
Total energy consumption in China has slowed as its economic growth has eased and as the composition of its gross domestic product has shifted. In 2013, the service-sector share of GDP surpassed the industry-sector share for the first time in Chinese history. The service-sector share further increased to 48 percent in 2014. Policies to accelerate the development of service industries are likely to sustain the transition away from industry, further weakening coal consumption, the EIA said in its report.
Industry restructuring has reduced China’s energy demand growth from coal-intensive industries such as steel, cement and fertilizer as industry growth slows and processes become more energy efficient. In addition, China's severe air pollution challenges have led to new policies and regulations to restrict coal use in coastal China, to upgrade the nation's coal-fired power generation fleet, and to accelerate the increase of alternative energy technologies.
Idled oil rigs mean less gas production in U.S.
(Bloomberg; Sept. 16) - The retrenchment in drilling for oil in the U.S. is threatening to leave a different market short: natural gas. “The impacts of oil-rig counts extend beyond oil; the outlook for U.S. natural gas is critically dependent on the outcome of this balancing act in U.S. oil rigs,” Anthony Yuen, a strategist at Citigroup in New York, said in a report to clients Sept. 16. “If the oil market remains oversupplied and oil-rig counts fall, the decline in associated gas production would leave the market short of gas.”
Associated gas is the gas that comes out of oil wells along with the crude. Supplies of this byproduct from fields including the Bakken formation in North Dakota and the Eagle Ford in Texas may fall by about 1 billion cubic feet a day next year as drillers idle rigs in response to the collapse in oil prices, Yuen said. The U.S. Energy Information Administration has already forecast that shale gas production will drop in October for the fourth straight month, a record streak of declines.
Crude producers in the Lower 48 states may have to keep the number of working rigs low for a while longer to balance the global oil market, Yuen said. A premature recovery in the rig count may “exacerbate the current oversupplied environment” and weaken prices, he said. While oil prices have been down, natural gas futures have been lower, too, settling at $2.66 per million Btu on the New York Mercantile Exchange Sept. 16, down 41 percent from June 20, 2014.
Floating LNG storage, regasification ships gain in popularity
(Bloomberg; Sept. 15) - At a time when oil and gas producers are writing down assets and canceling projects worldwide, one niche area is booming. Hybrid ships, called floating storage and regasification units, or FSRUs, offer emerging nations from Egypt to Pakistan a cheaper, quicker way to attack power shortages by importing liquefied natural gas. They cost about $300 million to build, half as much as an onshore import terminal, and are up and running as much as six times faster, sometimes within as little as a year, according to FSRU owners Hoegh LNG Holding and Excelerate Energy.
Built at shipyards in South Korea, Hoegh sees as many as 55 such vessels in use within five years, from about 20 now and just one a decade ago. “The main driver is speed,” Sveinung Stohle, Hoegh’s chief executive officer, said by telephone from the company’s Oslo office. “Demand for FSRUs follows a drastic reduction in the cost of LNG. We see that this has caused a very strong increase in requests.”
FSRUs are emerging as the fastest alternative for gas imports as nations imposing limits on carbon dioxide emissions turn to cleaner-burning gas. Competition has cut costs of leasing such vessels by 20 percent to about $120,000 per day from five years ago, said Keith Bainbridge, managing director of industry consultant CS LNG in London. Once the 1,000-foot ships are moored, LNG is transferred from arriving tankers through pipes. The LNG is regasified onboard and typically used at a nearby power plant.
Australia antitrust regulator delays decision on Shell-BG deal
(Wall Street Journal; Sept. 17) – Shell’s $70 billion takeover of BG Group has hit a snag after Australia’s antitrust regulator flagged concerns the deal might squeeze domestic supplies of natural gas and drive up prices. The Australian Competition and Consumer Commission said Sept. 17 it would delay a decision on the deal by about two months toNov. 12, after receiving a welter of submissions from businesses worried Shell would curb local supply in favor of more lucrative sales to Asia through BG’s LNG terminal.
Shell’s proposed acquisition of BG is, in part, a bet that developing countries will move to cleaner-burning gas amid growing pressure to curb emissions. The regulator’s review of the Shell-BG tie-up has become entwined in a separate study of Australia’s East Coast gas market, which Commission Chairman Rod Sims said is one of the few in the world under the shadow of supply uncertainty despite a global gas production boom.
Australia is due to become the world’s biggest producer of liquefied natural gas within two years, as several multibillion-dollar export terminals that began construction when oil and gas prices ran hot start shipping cargoes of LNG to Asia. While that investment holds out the prospect of sharply higher revenues for state and federal governments in Australia, it has also spooked local businesses, which fear paying more for energy as fuel that would have previously fed the domestic market gets shipped overseas.
Gas association launches pro-pipeline public awareness campaign
(Houston Chronicle; Sept. 14) – Increased domestic production has spurred a need for new pipelines to carry natural gas across the country, but also a wariness by some Americans worried about pipelines snaking through the ground. The Interstate Natural Gas Association of America hopes to combat some of the skepticism by rolling out a new ready-for-social-media campaign with videos, graphics and a website emphasizing that pipelines are a vital energy link for the nation.
“If you think about citizens who live near pipelines or in communities where pipelines are proposed to be constructed, they probably don’t know much about natural gas or natural gas pipelines and the tremendous contributions (they) make to overall quality of life,” said Don Santa, CEO of the gas association. With the campaign, INGAA argues that pipelines are the safest method for transporting gas. In addition, gas is better for the environment than the coal it often displaces for power generation.
Cathy Landry, an INGAA spokeswoman, said the group is trying to reach “everyday Americans,” including landowners and others in communities affected by pipeline construction — people who may not realize that natural gas is used to generate electricity as well as fuel furnaces. The campaign is being launched as opponents to oil and gas development have focused more attention on pipelines.
Analyst forecasts another record year for U.S. gas production
(Platts; Sept. 18) - Record levels for production, power burn and storage injection will help make 2015 another record year for natural gas, Jeff Moore, senior energy analyst at Platts unit Bentek Energy, told attendees Sept. 18 at the 38th annual Coal Marketing Days conference in Pittsburgh. Moore said that while coal plant retirements have helped fuel an increase in natural gas generation, the real driver behind in the rise in demand is the commodity's continued low price.
With the Henry Hub price staying below $3 per million Btu, natural gas generation is deployed ahead of coal, Moore said. The only time gas demand for power generation was near these levels was in 2012, the year the Henry Hub price dipped to about $2 in May, he said. Bentek sees the price rounding out in 2015 at an average of $2.68 and increasing to $2.84 in 2016. From 2017 to 2020, Bentek expects the price to average $3.38, $3.85, $4.23 and $4.42, respectively.
Efficiencies in horizontal drilling and a drastic increase in the initial production rate from wells in the Marcellus and Utica shales will push gas production to a new high in 2015, Moore said. Total U.S. marketed gas production is averaging 72 billion to 72.5 billion cubic feet per day this year but will ramp up to near 74 bcf by the end of 2015, Moore said. Gas inventory levels are predicted at an all-time high at the end of the year, but the volumes depend on winter weather.
U.S. oil production finally starts trending lower
(EnergyWire; Sept. 17) – U.S. crude oil production is finally starting to decline, according to statistics and experts. After months of production increases — even in the midst of falling oil prices — total output volumes have been trending downward as production growth in some areas is being outpaced by declines in major shale oil regions. The trend appears to be holding.
Earlier, it had been difficult to tell whether output declines represented a steady trend or the occasional variance seen month to month. Output continues to expand in the Permian Basin of west Texas and southeastern New Mexico and in federal waters in the Gulf of Mexico. But declines in the North Dakota Bakken Shale, in south Texas' Eagle Ford Shale and from other fields appear to be outpacing growth elsewhere.
"There is evidence now that production from the shale plays is declining, not at a rapid rate, but I just recently saw some data for the Eagle Ford and the Bakken which do show production declines over the last couple of weeks," said Bernard Weinstein, director at the Maguire Energy Institute at Southern Methodist University. The U.S. Energy Information Administration sees a gradual decline continuing for the next year, with U.S. oil production forecast to reach 8.63 million barrels a day in August 2016, a drop of nearly 1 million barrels per day from the April 2015 high-water mark.
Low oil prices may cut into production as companies run out of cash
(Bloomberg; Sept. 17) - As much as 400,000 barrels a day of oil production is at risk as U.S. shale companies like Samson Resources run out of money and are forced to slow drilling. Total debt for half of the companies in a Bloomberg index of more than 60 producers has risen to a level that represents 40 percent of their enterprise value. It’s a sign of distress that shows equity values falling in the face of oil’s crash, said Rob Thummel, a managing director and portfolio manager at Tortoise Capital Advisors.
The companies facing high debt loads, which include Encana and Chesapeake Energy, produced 1.1 million barrels a day in the second quarter of this year, according to data compiled by Bloomberg. If more companies file for bankruptcy as Samson did Sept. 16, or embrace the kinds of draconian cuts needed to survive, output could fall by 200,000 to 400,000 barrels, Thummel said. A loss of that much crude would be the steepest U.S. decline since 1989 — about the same as Oklahoma, the sixth-largest producing state.
“We are going to see a major response because these financially challenged companies won’t be able to produce as much as they did in the past,” he said. As companies run short on cash from low oil prices, they may be forced to idle drilling rigs, file bankruptcy or seek more expensive financing and sell assets. In the past year, U.S. oil producers used 83 percent of their operating cash flow to pay for debt service, according to the U.S. Energy Information Administration. A year earlier, it was less than 60 percent.