Dan Sullivan, US Senator, Alaska, Maiden Speech, Master Resource, Dave Harbour PhotoOur friend, Rob Bradley, Master ResourceRob Bradley (File Photo-R) of the Master Resource Blog, saw U.S. Senator Dan Sullivan's (NGP Photo) Maiden Senate Speech on this website and has further promoted it to his large international audience (here).  (Our original coverage and speech text)  -dh

Halloran Opines On Proposed Ohio Severance Tax and Future of Oil Prices

James Halloran, Energy Analyst, Ohio, Severance Tax, Oil Prices, Northern Gas PipelinesRepublican Governor Proposes Ohio Severance Tax?  Our friend, Independent Energy Analyst James R. Halloran (File Photo) just returned from the Ohio Oil and Gas Association Winter Meeting where he reported that, "the big issue is Governor Kasich’s proposal for a (completely mis-named) “severance tax”. We will have a lot more on that topic after (maybe) cooling off slightly. Momma did not train this writer to suffer fools gladly, and that is what Ohio is faced with on the topic of taxation of the oil & gas business."

Steve Heimel of APRN retires, Personal, Photo by Dave Harbour(Point of personal privilege: our friend and longtime APRN senior reporter Steve Heimel (NGP Photo)  is retiring after decades covering countless Alaska issues.  -dh)

On oil prices, Halloran says, "The overwhelming question (outside of Ohio) is,  When will oil prices go back up (how high is a second implicit question)? That question was posed to us numerous times at the Winter Meeting. Our standard answer is that oil pricing is a process, not an event. Assume for the moment that Brent oil (we try to stay with the international price for analysis purposes) were to return to $70 by midyear (this is NOT a prediction; it is for discussion purposes): Can we tell them what will happen to the price in the next six months after that?

"The relevant questions that need answering first", he says, "are:

  • "Have there been fundamental changes in the market that will cause crude oil to trade at a different price range than $94-114 for an extended period of time? If so, what are they, and how will they affect the industry longer term?
  • "If the the major inputs to the current market are more likely of a transient nature, what will have to change for prices to recover? Will a price recovery cause some of these transient inputs to recur?"

He elaborates that, "there are some effects that are of a transient nature (maybe) that are significant contributors to the oil price drop, of which we have commented heavily in the last several months:"

  • "The strong dollar, which is following a trend to get even stronger, and which will likely provide a major head wind for any near-term recovery
  • "Massive amounts of capital and incredibly low interest rates, putting many PE, Major, and vulture players ready to jump into the Energy pit. This is related to the strong dollar, and will provide no relief from the fact that there are too many players.
  • "Too much production, which is having a hard time to find a home (see the chart of inventories below, courtesy of Mike Bodell), which graphically illustrates the situation.
  • "Much of the capital cutbacks are coming out of the hide of service companies, so that lower costs will not really bring lower production volumes soon."

"No one is cutting back to the point of ceding “market share” to others. This capitalism at its purest. Unfortunately, it is being done in an environment in which central banks are imposing zero effort to observe capital discipline: Nothing. Nada. Rien. Zip.

"The only “good news” (but less helpful than one might think) is that the rig count continues to drop.  It is too much to try to get trends from the rig count on a weekly basis, so we will be looking at it monthly. This should make it easier to spot trends. Our observations are as follows:

  • "The downturn in rigs is much more directed toward oil (no surprise). Oil rigs are down 45% from our base date last December, compared to 25% down for gas rigs. The Marcellus, Utica, and Eagle Ford, which have large dry gas plays, are not down in rigs as much as the other basins.
  • "Vertical rigs are down much more than horizontals. Also, Small Basins are harder hit than the major basins.  This consistent with the WSJ article, which indicates that major players are still drilling big wells (just not completing them).

"BOTTOM LINE:  The beatings will continue until capital discipline improves and/or the number of players is reduced.  There may be rallies, but they will likely be shallow."  (Note: While Halloran has sources to back his statistics, we removed them in the interest of space.  -dh)