ExxonMobil, Chevron, Shell, will prosper in the present environment
March 16, 2009
Analysis by: Michael Lynch
Implications
Clifford Krauss in Fort Worth, Texas reported in the March 15 issue of the New York Times that the number of oil and gas rigs running across the country has plunged to 1,200 today from 2,400 last summer. Efforts to squeeze more oil from old fields has slowed. Drilling for natural gas has almost ceased. Natural gas prices are down two-thirds since last summer. American consumers now buy gasoline for $1.92/gallon rather than the $4.11/gallon last July. But thousands of highly paid oil and gas workers have been laid off. Devon energy has reduced its rig count in the Barnett shale play from 35 to 8. Investment cutbacks by oil companies will create difficulties and lead to price spikes once demand returns. Some experts predict that lower U.S. production will lead to increased liquefied natural gas (LNG) imports by the end of 2009. Increased crude oil production in the Gulf of Mexico will lead to higher U.S. avails.
Analysis
These major companies are not slowing down development of LNG in the belief that the future still looks pretty good. Shale gas in the U.S. is relatively expensive to develop. When finding and development costs are added to operating costs, gas sold at $2.70/million Btu in the Mid-continent is uneconomic (as Chesapeake Energy’s CEO Aubrey McClendon recently noted when reporting his company had shut in 200 million MMCFD). LNG from Qatar, Australia and Malaysia can be imported at Lake Charles, Louisiana for under $1.00/million Btu. But two constraints currently exist. The first is that better markets exist elsewhere, particularly Europe and the Far East where LNG prices are linked to crude oil. The second constraint is lack of regasification facilities in the U.S. Most observers think the worst is over as far as consumption of both crude oil and natural gas. Today’s lower prices encourage consumption all over the world. Even now, crude oil consumption in the U.S. is creeping upward to mid-year 2008 levels. Demand in mid-June 2008 was 20.40 million bbl/day. By mid-December, it had fallen to 19.26 million. Now, as of mid-March demand has risen to 19.54 million. With the driving season almost here, it will continue rising. The crude oil price curve began to flatten in November 2008 and by early December, was asymptotic at +/- $40/bbl for WTI and $45/bbl for Brent blend. To some the $5/bbl differential between the two markers was an indication that the world price was substantially higher than the U.S. price, implying a market more closely balanced. In March, the prices of the two markers have converged near $45/bbl, implying that the U.S. demand is more or less in line with world demand. If these indications are reliable, the trend is upward. That OPEC stood pat on Saturday is significant. They must see a balance sooner rather than later. Decline rates for shale gas wells are extremely high. So it is possible that shortages will appear in the second half of 2009 that cannot be filled with imported LNG. Thus the problems of the shale gas drillers may lessen with employment again going up as natural gas prices again exceed $5/million Btu. Chronologically we are in March of 1932 with expectations of continued declines for two more years. I think international energy markets will recover earlier. This does not in any way lessen the threat to the U.S. as an ongoing entity. The government debt has become a sword of Damocles. The Chinese (and others) fret that default is in the cards. That risk is high. Only a 50-state constitutional convention can stave off disaster. Hard choices wait in the wings. Do we save China or do we save the U.S.A? That is the reality. Nevertheless, as concerns the American shale gas drillers, the hope and the expectation of all those who are now laying down rigs is that tomorrow will be better. “Tomorrow, tomorrow, I love you tomorrow, you’re always a day away.” From Broadway hit “Annie.” |
