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What 2017 means for oil and gas industries

Oil moves higher; growing U.S. natural gas exports are among the trends expected to highlight 2017.

02/12/2017


In November 2016, OPEC abandoned its strategy of using delivery of over-abundant oil supplies to starve out shale producers and other high-cost drillers. OPEC and non-OPEC producers agreed to cuts of more than 1.7 million barrels per day.

"Looking at the promised OPEC reduction, it's wise to keep in mind that in recent years, in fact, for at least the last 20 years, the record of OPEC members adhering to these agreements has been spotty at best," said Laith Amin, SVP for Digital Enterprise North America at Advisian.

The record, in fact, indicates about 60% adherence to past agreements, and many believe this is what will transpire now.

"On the other hand, the present agreement is the product of fierce negotiations," Amin said. "Saudi Arabia's traditional role has been that of a swing producer. They've grown tired of that role. They want to demonstrate their seriousness and that of others when it comes to production. Because this ignoring of quotas has been a hard lesson for them."

In early December 2016, the International Energy Agency (IEA) said it sees global demand growth of 1.4 million barrels a day in 2016 and of 1.3 million barrels per day in 2017. The energy watchdog group said that global inventories should start to shrink in the first half of 2017.

If the OPEC-brokered agreement is taken seriously, it will demonstrate a high level of cooperation not only within OPEC but also with non-OPEC members such as Russia, Amin said. "To a degree, this reflects the lessened influence of OPEC itself." 

What follows from it

If the biggest producers with the lowest costs per barrel of oil, "limit their production so that the price of crude oil, already up to the $50 a barrel range, rises further, that will initiate supply coming from sources higher up the cost-curve. These include a portfolio of U.S.-based assets, such as shale, that do have higher costs," Amin said.

Amin said the ensuing market shift will mean that more supply will be coming from the U.S. "In fact, more quickly than we thought would happen, rig counts and increased activity in the U.S. are already happening," said Amin.

The rising price and expanded activity may be a surprise to others as well. As late as early December 2016 the U.S. Energy Information Administration (EIA) said U.S. crude oil production averaged 9.4 million barrels per day (b/d) in 2015, and it is forecast to average 8.9 million b/d in 2016 and 8.8 million in 2017, with an on-going commitment to lower costs.

If OPEC-based cooperation holds good, Amin believes oil prices will increase to the $60/bbl range. "But with the increased supplies, probabilities the price will rise to as high as $90 or $100 a barrel are slim," he said.

Gas goes its own way

Substantial increases in natural gas prices were seen in the U.S. in the last year, but, as Amin notes, there is still a long way to go. "Fundamentally speaking, natural gas is not as shippable or as tradable as liquids. For the present we'll continue to be very well supplied except where the needed piping network and other infrastructure isn't evident, such as in the northeast U.S.," he said.

It wasn't that long ago in the U.S. that no significant increase in natural gas production was anticipated. What was looked for were significant imports. Now all that import infrastructure that was being built is being converted to export infrastructure. "In the next four to five years both U.S. coasts will be exporters of liquefied natural gas," said Amin. "Where importation was to occur, there is a lack of infrastructure for distribution of domestic production. Shale oil and gas took the industry by surprise."

International prices for liquefied natural gas (LNG) will be more generally of interest to U.S. producers in future. As the export terminals come on line, "International prices for LNG and greater levels of LNG export will tend to support international natural gas prices from falling too far."

In many international markets, oil is indexed to LNG, and "as oil prices increase LNG prices will recover from their lows of the last three or four years ago, exposing opportunities for arbitrage," Amin said. "These exporters will be very competitive, price-wise, under different market conditions."

Per the U.S. EIA Report, natural gas marketed production is forecast to average 77.5 billion cubic feet per day (Bcf/d) in 2016, a 1.3 Bcf/d decline from the 2015 level, which would be the first annual production decline since 2005. In 2017, natural gas production is forecast to increase by an average of 2.5 Bcf/d from the 2016 level.

The report further states that growing domestic natural gas consumption, along with higher pipeline exports to Mexico and LNG exports, will contribute to the Henry Hub natural gas spot price rising from an average of $2.49 per million British thermal units (MMBtu) in 2016 to $3.27/MMBtu in 2017.

NYMEX contract values for March 2017 delivery traded during the five-day period ending December 1, 2016 suggest that a price range from $2.20/MMBtu to $5.04/MMBtu encompasses the market expectation of Henry Hub natural gas prices in March 2017 at the 95% confidence level. 

Administrations and regulations

In 2017 the EPA will be finalizing regulations related to fugitive methane emissions from on-shore oil and gas wells. It isn't clear yet what means producers will use to meet these standards, and they are looking for innovation from industry suppliers.

Scott Pruitt, who will be the head of the Environmental Protection Agency for the Trump administration, will bring a new look to regulation of the oil and gas industry of which he is a part.

"It will be interesting to see how the appointment will change policy and how the industry believes these fugitive emissions can be cost-effectively controlled," Amin said.

Per its news release, the EPA is finalizing a set of standards that will reduce methane, volatile organic compounds (VOCs) and toxic air emissions in the oil-and-gas industry. The final standards, the agency says, will significantly curb methane emissions from new, reconstructed and modified processes and equipment, including sources not covered in the agency's 2012 rules.

These sources include hydraulically fractured wells, some of which can contain a large amount of gas along with oil, and equipment used across the industry that was not subjected to the 2012 rule changes. In May 2016, the agency issued a request for information to the industries that includes inquiries as to what technologies industry players foresee being used to limit emissions.

While it may not prove easy for the new administration to actually rollback existing regulation, agency approval processes may be accelerated. Reports indicate that if the administration normalizes relations with Russia and lifts sanctions, we may see increased petroleum exports from Russia in the second half of the year.


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