September Industry Affairs

Baker Hughes CEO: Sustainable Recovery Requires Higher Oil Prices

Velda Addison, Hart Energy Friday, September 9, 2016

Despite slowing production in the U.S., where shale producers have restrained themselves from unleashing their inventories of drilled but uncompleted wells (DUCs), signs of the oil market rebalancing remain elusive.

Baker Hughes Inc.’s (NYSE: BHI) CEO Martin Craighead believes oil prices in the upper $50s are needed to usher in a sustainable recovery for North America’s oil market. Until that happens, he warned oil and gas companies to forgo significant spending changes.

“Unfortunately, and as I’ve said before, we still haven’t seen changes in the underlying fundamentals to indicate that the oil market is close to rebalancing in order to support a more meaningful increase in oil prices,” Craighead said Sept. 7 during the Barclays CEO Energy-Power Conference. He pointed out sustained declines in U.S. crude oil production, but added “there is still substantial crude oil production capacity available globally along with stubbornly high inventories.”

He said this one day before commodity prices rose with WTI rising $2.12 to close at $47.62 per barrel (bbl), following a large drop in the crude stockpiles—most likely the result of Tropical Storm Hermine shutting in oil and natural gas production in the U.S. Gulf of Mexico—at one point by as much as 22% of oil and about 10%. The curbed activity sent crude stocks down by 14.5 MMbbl during the week of Aug. 29 to 511.6 MMbbl, according to the U.S. Energy Information Administration (EIA).

The drop, which Reuters reported was the biggest weekly decline since 1999, came as the EIA also forecast U.S. crude oil production to average 8.8 MMbbl/d in 2016, down from an average of 9.4 MMbbl in 2015. Production is expected to fall further in 2017, down to 8.5 MMbbl/d but slightly higher than previously forecast. The federal agency expects WTI crude oil prices to average about $42/bbl this year and $51/bbl next year.

In addition, the EIA raised the U.S. oil demand growth outlook, forecasting an increase of 200 Mbbl/d to 19.6 MMbbl/d in 2016 and an increase of 140 Mbbl/d to 19.74 MMbbl/d in 2017, Reuters reported.

But uncertainty remains with global energy demand.  “On the demand side, the global macroeconomic outlook including pockets of uncertainty in critical economies, does not reflect the oil demand growth needed in the near term to absorb this access supply,” Craighead added, later noting the ability of U.S. shale producers to add spare capacity to the market quickly by completing DUCs.

However, with supply-demand still unbalanced and oil prices hovering in the $40s, Craighead anticipates any activity ramp-ups in North America to be limited to core acreage such as assets in the Permian, Stack and Scoop.

In the Delaware Basin, operators such as WPX Energy Inc. (NYSE: WPX) and Apache Corp. (NYSE: APA) say they are excited about the multizone stacked pay potential. WPX estimated that there are about 60 MMbbl of oil in place in the Wolfcamp A per 640-ft section. Just this week, Apache confirmed the company discovered a significant play—called the Alpine High—in the Delaware Basin. Hydrocarbons in place on Apache’s acreage position include 75 trillion cubic feet (Tcf) of rich gas and 3 Bbbl of oil, according to the company.

Record Earthquake Threatens Oil And Gas Industry In Oklahoma By Nick Cunningham - Sep 06, 2016

A 5.6-magnitude earthquake shook Oklahoma this past weekend, enough to rank it as among one of the state’s most powerful on record. The earthquake, which took place just northwest of Tulsa on September 3, could shake more than just houses and buildings in the region – the latest tremor could upend one of Oklahoma’s most important industries.

Oklahoma is not traditionally known as one of the country’s most seismically active areas, but the frequency of earthquakes has skyrocketed in recent years. Last year, Oklahoma recorded 2,500 earthquakes with a magnitude of 2.5 or greater. That is up dramatically from just three quakes of that size recorded in 2005.

Seismologists are increasingly convinced that the culprit is the wastewater wells used in hydraulic fracturing. When oil and gas drillers frack a well, the wastewater that is left over is injected into disposal wells at high pressure. That is thought to contribute to the slipping of fault lines, increasing the likelihood of an earthquake.

The U.S. Geological Survey said that it would look into the specifics of the latest earthquake, but most believe that disposal wells could be singled out. “Without studying the specifics of the wastewater injection and oil and gas production in this area, the USGS cannot currently conclude whether or not this particular earthquake was caused by industrial-related, human activities,” the USGS said in a statement. “However, we do know that many earthquakes in Oklahoma have been triggered by wastewater fluid injection.”

The increase in the frequency of earthquakes has climbed in corresponding fashion with the rise of fracking in the state. For years, state regulators were reluctant to get involved, convinced by industry captains that they were doing all that they could to minimize the side effects of drilling. After all, oil and gas production has been a cornerstone of the Oklahoma economy for a long time.

But the tremors became too difficult to ignore and the state has slowly begun to put restrictions on industry players, with tougher oversight always coming shortly after the state is rocked by another quake. There are some 35,000 disposal wells in the state, according to Bloomberg, and state regulators have been putting restrictions on operators for more than a year. But the record-tying quake from a few days ago could spark a tighter crack down on disposal wells, which could slow the pace of drilling in Oklahoma.

Oklahoma’s Governor Mary Fallin, a Republican, declared a state of emergency after the latest incident. Regulators ordered drillers controlling 37 disposal wells to immediately shut down after Saturday’s earthquake. It was the first time that the state issued a mandatory order and the industry is watching closely to see if broader action is forthcoming.

“They are going to push the industry to come up with some permanent solutions,” said Michael Lynch, president of Strategic Energy & Economic Research Inc., in an interview with Bloomberg. “It’s hard to believe Oklahoma would move to ban fracking, but I can see where they would say to people that they have to do something else with the wastewater, which is believed to be the source of the increase in earthquakes.”

The Oklahoma Independent Petroleum Association told The Wall Street Journal that the state’s response could have a negative impact on oil and gas production. But so far the crackdown on drillers in the vicinity of the earthquake will not necessarily affect the more prolific oil and gas plays in the state, such as the SCOOP and STACK. The only publicly-traded company affected by the state’s mandatory shutdown was PetroQuest Energy Inc. The more well-known drillers in Oklahoma, such as Continental Resources and Devon Energy, likely won’t be impacted at the moment.

“You might see a little bit of a pause” in drilling following the state’s response, Michael Lynch told Bloomberg. “The first step will be restricting the wastewater wells, particularly the ones that seem to be causing the most harm.”