Replies to This Discussion

Permalink Reply by Jack Straw on January 4, 2013 at 4:58pm

Jim,

         That is a tough question to answer.

Some drilling will be driven by existing rig contracts. Some drilling will be driven by the need to hold leases ... we may see the drilling of the vertical leg, with low (uneconomic) production to hold acreage ... with the intent to re-enter the hole in the future and drill out the pad with horizontals.

There are a lot of sunk costs associated with the stalled land rush. There is drilling that cannot be justified on the basis of full-cycle costs; but justified on the basis of half-cycle costs. If sunk costs are ignored, they might be able to proceed on the basis of the need for cash flow.

Some drilling will be driven by the fact that some of the money is coming from being "carried" by partners (foreign and domestic) .. an example CNX carried by Noble Energy.

Chinese Companies such as CNOOC might ignore economics in order to participate to gain expertise that they can take back to China (the technology that has unlocked the potential of the unconventional drilling is homegrown American technology that has Global implications). Government sponsored foreign companies do not need to quarterly answer to shareholders or bankers .... they can take strategic long term tactics. 

As rigs get stacked, rig rates will come down (as the drilling companies require cash flow to survive); lower rig rates can change the economics.

Lesser activity can entice oil field contractors to lower prices and thus lower completion costs; thus improving economics.

What I expect: the Oil & Gas Operators will get slimier and slimier in their dealings with landowners. A while ago CHK were the exception; increasingly other operators are emulating CHK's behavior .... sad to say.

 

My honest appraisal is that (wearing my investor hat) I would avoid the Upstream NG and NGL end of the business.

Again, wearing my investor hat, I would look at the Midstream pipline companies; MLPs pay highly attractive distributions. We need to build out a tremendous amount of infrastructure.

And again, wearing my investor hat, I would look at the Downstream companies that are benefiting from the cheap domestic prices of NG and NGLs (both shockingly 1/4 of the cost of these same commodities in Europe and Asia).

 

Wearing my Landowner hat (that is sadly my largest hat), I feel that I will have a long wait for payday. I feel that it will be a long time before I get my Marcellsus Shale well; while I wait, I take great pleasure in hearing of the good fortune of others.

 

All IMHO,

                  JS

 

 

 

 

 

 

 

 

 

 

• ▶ Reply

Permalink Reply by Jack Straw on January 5, 2013 at 5:55am

Fang,

RE: "this is all way too early to make a definitive declaration"

Agreed, there are many variables to consider, with no one having a "crystal ball" to predict the future. That said, I still try to guess.

RE: “gas prices are cheap right now and don't make a good ROI in the short term it makes it worth companies to convert to NG as their source of energy. So for investors it's a good long term investment.”

A reality associated with the Marcellus and Utica Shale wells is the steep initial slope of the Decline Curves. An exceptionally high proportion of the ultimately recoverable reserves would seem to be produced in the first several years of production. Existing wells in production will be produced, regardless of commodity prices; the Operators need the cash flow (economics are not a factor – cash flow is King). Short term ROI sucks, long term does not count for much, as the bulk of production is dictated to be short term by the nature of the cursed Decline Curve.

When NGL and/or Natural Gas prices are high, the high initial productivity allows for a very rapid ROI.

The "flip side of the coin" is that when NGL and/or Natural Gas prices are low, the "flush gas" is produced and sold at prices that negatively impact ROI.

In situations where the Decline Curves are so steep the O&G Operators find themselves on a "treadmill"; they have to keep running in order to stay in place. By this, I mean that in order to maintain production they have to continue drilling at a rapid pace – the faster they drill today, tomorrow they will need to drill at an even faster pace.

Should drilling halt (or slow down as we are particularly seeing in the dry gas areas), production will rapidly decline.

To a degree, this phenomenon has been masked by the number of drilled wells that are waiting on fracing/completion, the number of wells that are shut-in awaiting gathering lines and the number of wells that are throttled back (producing, but producing at much less that what they are capable of).

At some point, availability of infra-structure, the elimination of the backlog of wells drilled – but not yet in production, and increased demand from new end users will solve the current “low price” environment. The cure for low NG prices are low NG prices; as low prices will promote demand from fuel switching (from coal to NG, from Heating Oil to NG, and from Gasoline/Diesel to compressed NG). If I could predict the exact date at which this turn-around might occur, I could thus become a rich man (sadly, I have never been one to accurately “time the market”).

 

While we await a turn-around, we can take solace in the fact that at this critical juncture, cheap Natural Gas and NGLs are good for: American consumers, American Industry, American Jobs and America’s balance of payments. I also believe that cheap Natural Gas and NGLs will spur innovation, as new uses are found for this newly available, plentiful resource.

 

The history of the O&G Industry (from Col. Drake onwards) has been one of Boom and Bust.

We are not in a Bust, but we are certainly in a slowdown.

Until such time as the infra-structure is in place, the backlog of wells dealt with and the supply/demand ratio approaches parity, the ROI associated with drilling additional wells sucks – the nature of that darned steep Decline Curve is the enemy. Once the current hurdles are crossed, we might all be shocked by how quickly things change – and how rapidly a new phase of drilling takes place. Admittedly, patience is a virtue; but not one that I particularly enjoy being forced to endure.

 

 I think that we are in agreement about the long term; but, I believe that we respectively and respectfully disagree about the near term.

 

All IMHO,

                   JS

 

• ▶ Reply

Permalink Reply by Jack Straw on January 5, 2013 at 7:30am

I never really made a direct response to Jim’s posted article on Ethane Rejection (and its implications); I immediately headed off on a tangent.

Hopefully I will not insult anyone by making my current response too basic; just do not want to leave anyone behind who might be less familiar with the background.

First the supply/demand equation got out of whack for Marcellus Dry Gas (too much supply was quickly developed in relationship to a much slower growth in demand). NG (methane) prices dropped precipitously. The Upstream rapidly got too far ahead of the available Midstream infrastructure and the capabilities of the Downstrean users to absorb the increased supply.

Next, rigs and operations moved from the Marcellus Dry Gas areas to the “wet” areas of the Marcellus and (particularly) the Utica. Now the supply/demand equation has gotten out of whack for the Natural Gas Liquids.

This is not my area of expertise, but my limited understanding is that:

A small excess of NGLs could be accommodated by allowing them to enter the Natural Gas pipelines. This increases the BTU content of the pipeline gas stream – utilities charge consumers with a BTU adjustment. This mechanism works well when there are small excesses of NGLs.

 

If too many NGLs enter a Natural Gas Pipeline, potential operational problems arise.

Some of these NGLs can (in a liquid phase) collect in such places as low spots and otherwise interfere and partially obstruct the pipeline flow.

Also, when too many NGLS are present, the BTU content becomes so high as to risk damage to the consumer’s equipment. Orifices are of a diameter associated with a gas containing a typical BTU; when the BTU content exceeds the desired amount, burners run hot – potentially reducing the life of equipment and appliances.

 

As the new supply of NGLs entered the Ohio/PA market some went into the NG pipelines and some displaced NGLS imported from outside the area, as needed by the local industries that use NGLs. As supplies increased further, prices have dropped, and lower prices have resulted in fuel switching – thus sopping up some of the excess supply.

As Ohio/PA (and surrounding states) had not been traditional producers of NGLS, existing NGL pipelines and infrastructure were set up to bring NGLs into the area; there was scant availability of facilities designed to export NGLs.

As supplies have continued to further increase, it is becoming increasingly difficult to accommodate the excess supply. Some can be tankered out by rail or barge. The direction of flow of existing NGL pipelines can be reversed (such that NGLs travel to hubs where there can be distributed to available markets) – but this requires regulatory approvals and the investment of time and money (time being perhaps the largest restraint). And, importantly, industry is starting to develop to locally utilize the NGLS (chemicals, plastics, etc.) – sadly, this “best solution” requires (by far) the greatest lead time.

All solutions to a large excess of NGLs take time, effort, investments and regulatory approvals.

 

Finally, I get around to the initial basic question: “it seems that ethane and even propane prices are very low. Could it be low enough to reduce drilling in wet gas”.

 

I think that the simply answer is yes. And to pose an even more negative possibility; it is quite possible that some existing wells will necessarily be shut-in (where leases allow) or production throttled back (where leases do not allow shut-in).

If the Supply/Demand situation gets too far out of whack, excess NGLs will have no place to go (regardless of price). The economic Law of Supply and Demand is one law that cannot be repealed.

 

We need a rapid build out of infrastructure in order to forestall large surpluses resulting in a slamming on of the brakes.

We need our State and Federal regulatory agencies to quickly (yet critically) look at proposed projects.

We need our elected and appointed State and Federal representatives to quickly (yet critically) look at proposed projects.

The economic health of the area is to a large degree dependent upon action (action in a timely manner).

Personally, I would rather see the NGLS stay local (creating high paying local jobs)  – rather that pipelining our wealth to the Gulf Coast (or elsewhere where the value added aspects of the resource are lost to our area). I passionately want to see what is beneath the surface brought up and out for the  maximum benefit of the people of the area - they deserve no less.

 

All IMHO,

                     JS

   

• ▶ Reply

Permalink Reply by Trapper on January 5, 2013 at 9:20am

Thanks again Jack! Have you ever considered running for office? At the very least , you would make a fine Senator. You have my vote.

• ▶ Reply

Permalink Reply by Jim Litwinowicz on January 5, 2013 at 2:27pm

Jack; thats quite the dissertation. I agree whole-heartedly that this country needs to accelerate the conversion to nat gas. The benefits are many fold....reviving manufacturing, reducing imports, weaning ourselves off of Mideast oil, improved national defense,  increasing government revenue, anti-inflationary, lowering unemployment, improving the environment, and more.

Shame they extended the wind and solar tax exemptions but did nothing to help the US convert to nat gas.

• ▶ Reply

Permalink Reply by Jack Straw on January 5, 2013 at 3:05pm

RE: "Shame they extended the wind and solar tax exemptions but did nothing to help the US convert to nat gas."

And to add insult to injury, they extended tax credits (provided by the taxes WE pay) to Hollywood to assist in producing movies such as "Promised Land".

 

The real Promised Land  is where we live .... the Politicians promise and we all know what lands at our feet (and try scraping that off your shoes)!

 

JS 

• ▶ Reply

Permalink Reply by Jim on January 6, 2013 at 8:05am

LNG is going to save nat gas pricing....We're stuck with sub $4 pricing till then.

• ▶ Reply