The Weekly USA Oil & Gas Update: 03 June 2014

Rig Counts - select states with key plays

Oil & Gas Prices - Bloomberg/EIA

General News

North American liquefied natural gas (LNG) infrastructure investment to top $120 billion

According to a recent report by Lux Research, North American companies plan to invest $120 billion into building out the infrastructure to liquefy and export natural gas to the world market. This would enable US producers to export as much as 30% of domestic gas produced by 2020. Exporting allows producers to access the much more lucrative international market, which pays two to four times what natural gas sells for in the US. "This would eliminate extremely low North American gas prices, hurting some domestic users, but would benefit the international economy overall," said Lux's Daniel Choi. Article here

Too much light sweet crude for US refiners?

The crude oil coming out of the Bakken and Eagle Ford is light sweet crude, like that sold on international markets under Brent pricing. The US has a limited number of refineries configured to process this grade of crude, and they are getting overwhelmed, resulting in dropping prices for Bakken crude. The answer--crude exports to countries with refining capacity for the overflow of light sweet crude. The US has a ban on exports in place however, and doesn't look to be lifting it anytime soon. Oil economist Vikas Dwivedi told the audience at the 2014 Williston Basin Petroleum Conference that unless the export ban is lifted, "we will be drowning in light sweet crude." Major congestion for refining capacity, with today's current takeaway options, could happen as soon as later this year. "We are living on borrowed time," said Dwivedi. Article here

Unconventional Oil & Gas News

Tight oil drillers amassing debt, writing down assets

Advances in drilling for tight oil in shale has brought about huge increases in crude oil production, but at a considerable price. According to a Bloomberg News analysis of 61 E&P companies targeting tight oil, revenue from this group increased just 5.6% while overall debt doubled. Many companies in the group spent more than 10% of their sales on interest to service this debt. Drilling for tight oil is expensive, and typically only profitable when oil prices exceed $80/barrel. Additionally, in the rush to develop tight oil, many companies made poor decisions on acreage that turned out to be only marginally productive, resulting in asset write-downs of $35 billion. "The list of companies that are financially stressed is considerable", said Benjamin Dell, managing partner of energy investor Kimmeridge Energy. Capital continues to flow into the industry regardless, given the lack of high-return alternatives, but expect some shakeout and consolidation in the next few years. As one analyst reported, "many players in this industry have already noted that the revolution is not as technically and financially attractive as they expected."Article here

Environment and Safety News

In Colorado, industry solving noise, light problems with giant walls

Much of the development in Colorado's Niobrara formation in the DJ Basin takes place near urban or suburban areas. Proximity of the industrial processes to homes has created tension, mostly from noise, traffic, and unsightly lights, shining throughout the night for drilling and completions activities. Resident Tiffani Angus said that the operations a quarter mile from her home are "very noisy, sounds like an airplane taking off." To mitigate these impacts, at least for sights and sounds, the industry is trying large, earthen-colored fabric walls. The walls surround well sites, rising 32 feet on a steel frame. They seem to be working to some extent. Mead, Colorado town manager Dan Dean said "the walls do help mitigate the impact of construction." Some people are suspicious however, wondering if the walls primary intent is to hide something from the public. Stakeholder Relations Manager Alex Hohmann with Anadarko said "What's funny is that at some of these open houses, we'll get just as many people saying 'Build me a wall' as people saying 'Heck no, I want to see the mountains' or 'What are you hiding?' People can be suspicious of what's behind the walls." Article here

Mergers and Acquisitions News

Aubrey McClendon receives an additional $4 billion to invest into shale plays

The former CEO of Chesapeake had already raised $4.7 billion, and recently received commitments for an additional $4 billion. Much of this will go into developing Ohio's Utica Shale, a play given up on by others as the formation proved to have fewer liquids than expected. Dry gas is hard for many companies to make money on, without a natural gas liquids stream to boost revenue. Low-cost drillers are finding the Utica's high-volume dry-gas wells profitable however. Chesapeake, the Utica's leading driller, says the Utica is a "world class asset". McClendon's American Energy Partners also expects to have a low-cost structure similar to Chesapeake's, and has the capital and acreage to develop. McClendon now needs the people to do it. He recently declared at a Houston energy conference that "I need deals and I need people". I expect that the industry's most dynamic promoter will find both. Article here