If you have spent much time with us in the RBN blogosphere, you know how we like to understand the supply/demand balance in the context of price trends, and vice versa. So we’ll start there by examining both recent history and the forward curve for U.S. domestic crude oil—West Texas Intermediate (WTI) at Cushing, OK. In the left graph in Figure 1 we have the trend line—or lack thereof—for WTI since January 2015. On average, the price for WTI has been $47/bbl (orange line); at one point “zooming” up to $60/bbl and last year at this time dropping briefly below $30/bbl (blue line). But for the most part, WTI has been hanging in a range pretty close to $50/bbl.  And then on the Figure 1 right graph there is the forward curve—or, again, lack thereof. Same story. Fifty bucks in 2017, all the way out to 2021 and beyond.  For a long time after crude prices crashed, the forward curve was in “contango” —futures prices rising steadily over time. And that was the case whether the spot price was $50/bbl or $30/bbl. But no longer. You can sell or buy $50/bbl U.S. crude oil for five years out, and even further into the future if you wish. And it is not just crude oil. The closing price on Friday for Henry Hub natural gas for June 2027 (that would be more than 10 years from now!) closed at $2.964/MMbtu, 11 cents below the closing price for April 2017.  Now that’s a sobering statistic. 

Figure 1 – Crude Prices and Crude Forward Curve; Source: CME/NYMEX

So have those sobering forward prices resulted in curtailments of spending and drilling? Hardly. Figure 2 shows the Baker Hughes rig count from January 2016 to last Friday. On the oil side to the left, since the low in May 2016 the rig count has more than doubled, from 316 up to 652. It’s about the same story for gas (on the right), up from 81 in August of last year to 155 on Friday.  U.S. producers are putting rigs back to work at a rate almost as fast as the rate they idled those rigs back in 2015 and early 2016.

Figure 2 – Crude and Gas Rig Count; Source: Baker Hughes

We examined several of the reasons for this phenomenon in Faster Horses - The Four Things Driving 2017's Different Kind of Recovery, with the short story being:

  1. Larger leaseholds. Producers are assembling ever-larger leaseholds in the parts of key shale plays they have determined to be the most promising, to concentrate their operations to gain economies of scale and to provide enough of a “fairway” to drill longer laterals.
  2. Longer laterals. Those larger, contiguous leaseholds allow for the drilling of much longer laterals, up to two miles or longer these days—a practice that enables producers to access far more hydrocarbons per well.
  3. Extra sand. Water and proppant (sand) injected into horizontal wells under high pressure creates small cracks in tight shale rock that allow oil, gas and natural gas liquids (NGLs) trapped in the formation to flow more easily into the well and up to the surface.
  4. More “choking back.” Because longer laterals and extra sand free up far more hydrocarbons, producers can throttle (or “choke back”) initial production from the well, a practice akin to pinching the neck of a balloon so it takes longer for the air to get out. In fact, producers often need to choke back production from these super-producing wells so the supporting downstream infrastructure isn’t overwhelmed by surging volumes in the first few months of a well’s production.

In our School of Energy curriculum, we show how these factors impact producer rates of return (very positively), how to estimate how much new drilling those returns imply, and then how to derive a production forecast based on that drilling activity. The goal in doing so is not just the intellectual exercise of production forecasting, it is the determination of what a given production forecast means for midstream infrastructure—gathering systems, natural gas processing plants, and especially pipeline takeaway capacity.

 

Check Out Kyle Cooper’s Weekly View Of Natural Gas Markets At Http://Www.rbnenergy.com/Markets/Kyle-Cooper

To illustrate why this is such a big deal, consider Figure 3. This graphic combines crude oil takeaway capacity out of the Permian since 2011, projected out through the end of 2022. The black line is actual crude oil production, while the blue dashed line is RBN’s “Growth” production forecast scenario for the Permian. Takeaway capacity for each of the pipelines out of the Permian is shown in the colored layers, with four projects planned to add to this capacity over the next couple of years: the Magellan/Plains BridgeTex 2017 expansion, the Plains Cactus 2017 expansion, the 2018 Enterprise Midland-to-Sealy system, and the 2018 Energy Transfer/Sunoco Permian Express II expansion. This graphic tells us several things. First, back in 2013 and 2014, takeaway capacity was very tight (red dashed ovals). During those periods, the price differential between Midland WTI and Cushing WTI blew out, spiking up to $20/bbl (Midland below Cushing) during periods when capacity was maxed out, with Midland averaging about $4.50 under Cushing for the two-year period. The purple oval indicates that there could be another period of tight capacity coming in the next few months, depending on the rate of Permian production growth and the timing of the Enterprise and Sunoco projects.

And then there is 2021. The black box indicates that production is projected to exceed takeaway capacity in that year, unless another pipeline is expanded or built. It that likely? You bet. Is it a certainty? No, not until the pipe is in the ground.

Figure 3 – Permian Crude Oil Takeaway capacity and RBN “Growth” Production Forecast; Source: RBN

It is this kind of analysis that we’ll be examining at our School of Energy, not only for crude oil but also for natural gas and natural gas liquids (NGLs). And of course, we’ll consider not only the Permian but all of the other major shale basins.

These are just some of the issues that we’ll be addressing at School of Energy (SOE). If you are not familiar with SOE, it is structured more like a classroom experience than a typical energy talking-heads conference. We work through current developments in some aspect of the market and then examine these developments in the context of Excel models that grapple with a wide range of issues, including production economics, production forecasting, coal-versus-gas displacement, crack and frac spreads, gas processing economics, and ethane rejection. These models are similar to what we’ve used in past SOEs, except that they have all been updated and upgraded. Likewise, the course content follows the same themes we write about each day in the blog, namely that the relationships between the energy commodities have changed, and that the markets for natural gas, NGLs and crude oil are tied together in ways never seen before the Shale Era. School of Energy is designed to integrate your knowledge of these three commodities with hands-on, practical instruction and training.

Conference Details

RBN’s School of Energy is scheduled for April 25-26 at The Houstonian Hotel, 111 North Post Oak Lane, Houston, TX. The format is classroom style—see picture below. You will need a laptop computer, wireless internet capable, with a current version of Microsoft Office.    

You will have access to both the slides and spreadsheet models used in the coursework in real-time. At the end of the course you will walk away with all of these materials, annotated with your own notes taken during the course. There will be math, but nothing beyond your basic spreadsheet formulas and functions.

It’s not all work though. On Tuesday night we’ll be breaking out the mudbugs in our second annual Crawfest. Wash it all down with cold beverages and enjoy meeting a big crowd of fellow energy folks.

Register now and take advantage of the early bird rate for a 17% cost savings! This rate ends Friday, March 31st! To register for the conference, go to the Events tab on the RBN website: https://rbnenergy.com/events

If you have any questions, email Brenda via school@rbnenergy.com or call 888-612-9488. School of Energy conferences tend to sell out early. Please register now. 

 

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Back in the Saddle Again is the title of two very different songs. The first was written and recorded by singing cowboy Gene Autry in 1939. It became his signature song for the next 60 years and included the memorable line, “Out where a friend is a friend”.  And then there is the other Back in the Saddle Again––the one by Aerosmith, written by Steven Tyler and Joe Perry, from the Rocks album. The song was released in 1977 and peaked at #38 on the Billboard Hot 100. And the most memorable line from that tune? “No tongue's drier than mine.”