Contango CoupleJPG

Over the past few weeks, I have heard oil and gas industry folks discussing “contango” and I am not embarrassed to admit that at one point I misheard one gentleman and thought he was asking me to dance…as in, asking me if I “can tango.”

To save you from finding yourself in this situation, here is a short primer on “contango,” not to be confused with a dance.

  • What is “contango”

According to Investopedia’s definition of contango, “Contango is a situation where the futures price of a commodity is above the expected future spot price.”  Explained in a different way, Investopedia says that, “Contango refers to a situation where the future spot price is below the current price, and people are willing to pay more for a commodity at some point in the future than the actual expected price of the commodity.”

Still a little confused and wishing you were actually asked to dance instead? Me too.

Investopedia’s “Breaking Down ‘Contango’” is a little more helpful – it says the following:

“When market is “in contango,” it describes a situation in which the delivery price of a particular futures contract has to converge downward to meet the futures price. A market that is in contango indicates that the forward or futures curve is upward sloping.”

Investopedia also gives us the following example of contango: “Assume an investor goes along with a futures contract at $100. The contract is due in one year. If the expected future spot price is $70, the market is in contango, and the futures price will have to fall (unless the future spot price changes) to converge with the expected future spot price.”

Clear as mud?  Here is a helpful video Contango: CNBC Explains.

  • Why are we talking about “contango”

Now that we know what “contango” is, why are people talking about it?  The word on the street is that the contango in the oil market is decreasing and according to media outlets such as Bloomberg, “the fading contango is the clearest sign of recovery.”  The recent article entitled, “Look Past OPEC Freeze Hype to Really Understand Oil’s Advance” discusses and explains the current narrowing of the oil contango in detail.

However, if it is one thing that the commodity market has taught us over the past two years it is that it is unpredictable…

Stay tuned for more on the contango in the oil market – In the meantime, dust off your dancing shoes and twirl around the dance floor, knowing what a contango is!

 

Rock Springs

It is no secret that now is a turbulent time for the coal industry in Wyoming and across the county.

My hometown was once synonymous with coal mining; in fact, my great-grandfather moved from working in the coal mines of Walsenburg, Colorado to Wyoming to work in the coal mines of Rock Springs.  To say coal mining was once robust in my home state would have been an understatement. At one time, there were said to be more than 130 coal mines operating in Sweetwater County, Wyoming.  Read the full essay on Rock Springs, Wyoming by Chris Propst on WyoHistory.org here.

We have all seen the recent headlines concerning bankruptcies, debates about self-bonding and coal mine remediation requirements and coal-reliant states diversifying their revenue sources in light of the downturn in the coal industry.  Slightly under the radar, however, another coal-related issue has been happening without too much publicity – the increased regulation of coal mine dust.

The Mine Safety and Health Administration (“MSHA”) revised standards on exposure to respirable coal mine dust back in 2014 – see the final rule here.  The rule was aimed at lowering the amount of permissible coal dust over a two year period.

  • Why Is This Important Right Now?

You guessed it – we are coming to the end of the two year period. The final phase of the rule began this month – on August 1, 2016.  The final phase of the rule lowers the respirable dust limit from 2.0 mg per cubic meter of air to 1.5 mg per cubic meter of air.

According to an article in The National Law Review entitled, Respirable Coal Dust Samples Prove New Dust Rule is Achievable, Mine Safety Agency Announces, “99 percent of the coal mine dust samples collected from April 1, 2016, through June 30, 2016, were in compliance with its coal mine dust standards requiring lower levels of dust.”

This is big news for the coal sector – not under the radar for the industry.

 

Rig

Back in April, we saw oil prices increase based on talks of a production freeze from Organization of the Petroleum Exporting Countries (“OPEC”). We discussed this in our posts “Good News: Oil Prices on the Rebound” – where prices increased 4%, and “Optimism in Oil Prices.”

As of this morning, WTI Crude was $48.10 per barrel and Brent Crude was $50.75 per barrel – according to Bloomberg Energy.  Crude is reportedly now up more than 20% since it settled below $40 a barrel on August 2.  And OPEC is scheduled to meet next month….and they are expected to renew talks of a production freeze.

Talk about déjà vu…which I recently learned is an expression derived from the French, meaning “already seen.”

The recent increase in oil prices is once again linked in part to news that OPEC and major producers and exporters “will probably revive talks on freezing output levels when they meet in Algeria next month,” according to CNBC article “US Crude Rises to 6-week high above $48 a barrel on talks of supply freeze.”

The CNBC article goes on to report, “[m]any OPEC members have been hurt badly by a collapse in oil prices over the past two years.  While some Gulf exporters have very low output costs, other producers such as Iran and Venezuela need oil prices above $100 to balance their budgets.”

The Wall Street Journal also reported today that the rise in oil prices were “on hopes that the world’s largest exporters would revisit a deal to freeze output.”

Interestingly, OPEC issued its’ Monthly Oil Market Report last week and the featured article was “Crude and Product Price Movements.” A full copy of the report can be found here.

Many are skeptical whether a production freeze will actually come to fruition this time around, after facing a dead end last time. Remember that in April, the officials from 18 oil-producing nations failed to reach a deal to freeze oil production while meeting in Qatar because all parties couldn’t agree to participate in the freeze.  A good refresher on what happened in April when OPEC members tried to get on the same page about a production freeze can be found in The New York Times article from April 17, 2016 entitled, “In Doha, Major Oil Exporters Fail to Agree on Production Freeze.”

We will keep you posted on next month’s OPEC meeting and the status of the talks on a potential production freeze…

 

Hummingbird Cake

There certain things we rely on in this life – things we consider absolute and reliable staples.

Sometimes, we try to use our staple items as an indicator for other things – as a sort of litmus test. We impose some kind of symbiotic relationship stemming from our staple concept and attempt to use that single factor to make a judgment about the future success or failure of something else.

For many, they rely on the U.S. rig count as an indicator of future production and the overall “health” of the oil and gas industry. According to Petropedia, the rig count is “an official listing of all of the oil and gas rigs that are operational at a certain location” and the tally “helps in collecting data that helps in analyzing several factors and indicating the status of drilling activities.” We previously discussed “The U.S. Rig Count – What it means in Layman’s Terms” here.

For me, baking is my staple and it is the outcome when baking a cake on a Sunday that has the ability to set the tone for my week. Case in point – the Hummingbird Cake.

  • Wait, Why Do We Rely on the Rig Count?

The answer is simple – because we always have. We have historically considered the rig count to be an indicator of production.

Some would say that with the volatility in oil prices over the past 2 years, the rig count alone is not much of an indicator of anything. In fact, we previously discussed this earlier in the spring in our post, North Dakota Stats: Reduced Rig Count Not Significantly Impacting Production. We opined that with the relatively drastic decline in the rig count in North Dakota, one would expect to see a more significant decline in production.

According to a Bloomberg article this morning entitled, Private Explorers Lead U.S. Rig Count to Longest Rally in Years, Baker Hughes Inc. is reporting that “[t]he total U.S. rig count has climbed 19 percent since bottoming out at the end of May.”

The currently reported number of rotary rigs in the U.S, as of August 12, 2016, was reported to be 481. When compared to the low point in May of 404, the next question becomes does this recent increase in rig count correspond with a projected increase in production?

  • Is the Increase in the Rig Count Expected to Increase Production?

Not yet.

The U.S. Energy Information Administration (“EIA”) released its Drilling Productivity Report today.  A full copy of the EIA’s report can be found hereAccording to the EIA, “[t]he Drilling Productivity Report uses recent data on the total number of drilling rigs in operation along with estimates of drilling productivity and estimated changes in production from existing oil and natural gas wells to provide estimated changes in oil and natural gas production for seven key regions.”  In general, the Drilling Productivity Report appears to be projecting decrease in oil production by region, from August to September this year.

  • What is the Take-Away?

In this volatile and unusual price environment, no one factor can truly be relied on to predict future production, industry highs and lows, or industry recovery. There are too many factors at play internationally to be able to pin analysis on the rig count alone.

Luckily for me, things are much less volatile and unpredictable in my kitchen and the quality of my Hummingbird Cake, an unusual cake made with oil instead of butter that contains more fruit than flour, is still a reliable indicator of how my week will go.  The classic recipe filled with bananas, pineapple and spices, first submitted by Mrs. L.H. Wiggins in 1978, became one of the most requested recipes of Southern Living Magazine and it is still a staple for my life.

“Because we always have relied on this” may not work with rig counts anymore and may only work in the kitchen…

 

paper boat

Earlier this summer, the 102-year-old shipping route – the Panama Canal, expanded to add a third lane to accommodate larger ships – including the big tankers that transport liquefied natural gas (LNG).

As a result of this estimated $5.25 billion upgrade, LNG exports from the U.S. are now poised to increase by sea.

  • Is this expansion a big deal?  Yes!

According to the Wall Street Journal (WSJ), the expansion of the Panama Canal is “poised to capitalize on the surge in U.S. natural-gas output and the interest in new export markets including Japan, South Korea, India and China.”  According to predictions by Oscar Bazán, the Panama Canal’s executive vice president for planning and business development, featured in “The Panama Canal Expands” article in the WSJ, LNG exports are expected to increase – “By 2020, Mr. Bazán said he expects liquid natural gas to be one of the main products transported through the canal.”

In fact, Bloomberg Markets explained in “A New Trade Route for Natural Gas Opens in Panama,” that “[w]hen the Panama Canal’s expanded locks slide open in late June, perhaps no one was happier than executives in the U.S. shale industry.  With the goal of making the U.S. a global powerhouse for natural gas exports, these frackers have their sights on Asia. Now they have a more direct route that could significantly benefit their bottom line.”

The article goes on to report that “[f]or gas companies reeling from the recent collapse in prices, which in March reached the lowest level since 1998, the drop in time and shipping costs will provide a much-needed lift.”

  • How will this expansion increase LNG exports?   By making it quicker, cheaper and much easier to get LNG to other markets.

 

The Bloomberg Markets article details HOW the expansion can boost LNG exports as follows:

“The canal’s deeper channels can accommodate the kind of football-field-size tankers that transport liquefied natural gas (LNG), shaving 11 days and one-third the cost of the typical round trip to Asia.”

The route through the Panama Canal also provides a competitive option for gas companies shipping from the U.S. Gulf to Asia when compared to going through the Suez Canal or around Africa’s Cape of Good Hope.

  • When will LNG exports increase? The timing is difficult to pinpoint, but…

Only a week after the locks opened, the Panama Canal Authority reportedly announced its first booking for an LNG carrier.  In fact, the U.S. Department of Energy has predicted 550 tankers could be crossing each year by 2021.

We look forward to seeing the economic impacts of this potential increase in LNG exports by sea. The “ripple effect on the economy” of the canal’s expansion predicted by Forbes’ article, “Panama Canal Expansion: A Potential Supply-Chain Game-Changer” will be welcome.

Colorado Sign

Here in colorful Colorado today, activist groups with the hope of having anti-energy measures placed on the ballot this fall were faced with a deadline. They were required to gather at least 98,492 valid signatures of Colorado registered voters by 3 pm today.

According to the Denver Business Journal, they squeaked in just before the 3 pm deadline – delivering the signatures to the Colorado Secretary of State’s office at 2:30 pm.

Last week and this weekend, supporters of Initiative No. 75 (amending the state’s constitution to provide more local government control over oil and gas operations) and Initiative No. 78 (mandating 2,500 foot setbacks for new oil and gas development facilities and any operation that used hydraulic fracturing) were pounding the pavement in Denver to get more signatures.  On Friday alone on my walk from the office to the gym only a few blocks away I was stopped by 3 people who unsuccessfully asked me to “sign their petition to help restrict fracking.”

I was left walking and hoping that the people who did sign understood the real consequences of signing their name to that petition…

The Reality – Do people understand the consequences of the ballot proposals?

Will this situation be similar to Brexit – when many people who voted to leave the EU did not understand the potential consequences and wanted a “do over” the next day?

To avoid that buyer’s remorse from happening here, we point you to the Energy In Depth article summarizing the three things to know about the anti-energy initiatives – the full text of the article can be found here.  It is absolutely crucial to be educated on these proposals and to understand their potential consequences; because, as noted by The Denver Post earlier this summer, there may be a hidden purpose behind Initiative No. 78 – in effect, to ban oil and gas production.

What is the most important potential consequence?

Hands down, the 2,500 foot setbacks mandated by Initiative No. 78 carry the most important potential consequences to future development.

The Colorado Oil and Gas Conservation Commission (“COGCC”) conducted a GIS-based assessment of the proposed ballot Initiative No. 78’s impact on surface lands available for new oil and gas development facilities or hydraulic fracturing operations – A full copy of the assessment can be found here.

The Key Findings of the COGCC assessment of Initiative No. 78 were:

  • 90% of surface acreage in Colorado would be unavailable for future oil and gas development or hydraulic fracturing under the proposed mandatory setback requirement
  • 85% of surface acreage in Weld County, Colorado – the state’s largest producing county, would be unavailable for new oil and gas development or hydraulic fracturing operations

The Denver Post asked a crucial question: “Did proponents know this when they wrote the initiative?  If not, they were reckless. If they did know, they were devious regarding their true intent, since their real purpose apparently was to ban oil and gas development while pretending to seek allegedly reasonable limits on its reach.”

Luckily, many reportedly consider there to be a low probability of Initiative No. 78 being approved and passed.  Still, we must appreciate the true potential consequences of these proposals.

Did they gather enough signatures to have the proposals on the ballot?

Unfortunately, it is too early to tell.

The Denver Business Journal reported this afternoon in its article, “Thousands of Signatures Delivered for Anti-Oil and Gas Ballot Proposals,” that organizers are claiming to have collected “over 100,000 signatures in support of each of the ballot petitions.”

However, it will take some time for the Colorado Secretary of State’s Office to sift through the petitions and tally up the actual number of signatures. The office reportedly has about a month, until September 7, 2016, to announce whether there are enough valid signatures on the petitions to have the proposals make the ballot.

River water

Today is the one year anniversary of the Gold King Mine wastewater release incident….

As you may recall, on August 5, 2015, the U.S. Environmental Protection Agency (“EPA”) was conducting an investigation into the Gold King Mine near Silverton, Colorado when approximately 3 million gallons of mine wastewater spilled into Cement Creek, a tributary of the Animas River, over a period of about eight days. The wastewater release flowed down the Animas River to the San Juan River.

The wastewater was “acidic, mine-influenced water,” according to the EPA, and the released waters cascaded through three states (Colorado, Utah and New Mexico) and three American Indian reservations (Southern Ute Indian Tribe, Ute Mountain Ute Tribe and Navajo Nation).

Where are we now, one year later?

  1. New EPA Report

Earlier this week, the EPA published a report to summarize the agency’s efforts to address the release entitled, “One Year After the Gold King Mine Incident: A Retrospective of EPA’s Efforts to Restore and Protect Impacted Communities;” the full copy of the text can be found here.  In addition, Assistant Administrator of the Office of Land and Emergency Management, Mathy Stanislaus, drafted a Memorandum that accompanied the report, which may be found here.

In the report, the EPA addressed the background of mining in the Western United States and the potential impacts of the 161,000 abandoned hardrock mines in the 12 western states and Alaska.  The EPA’s response to the wastewater release at the Gold King Mine is also explained in detail in the report, as were the environmental conditions post-incident.

The report also details the EPA’s financial commitments to the Gold King Mine wastewater release, stating that the EPA has dedicated more than $29 million to date.

In addition, the report describes the efforts the EPA has taken to improve its practices in light of this incident.  Specifically, the EPA has reportedly improved its notification and response systems and developed a draft “Best Practices and Approaches Report: Preventing Sudden, Uncontrolled Fluid Mining Waste Releases Prior to Conducting Response Actions at Mine Sites” that “compiles best practices and approaches for preventing fluid mine waste releases from collapsed adits and tailings impoundments/dams.” This draft best practices and approaches report is said to be currently undergoing external review by federal land management agencies, states and tribes.

  1. Criminal Investigation into EPA Fault Instituted

As reported earlier this week by The Denver Post, “Federal authorities have confirmed for the first time that a criminal investigation into the 2015 Gold King Mine spill is underway, saying their probe involves the U.S. Attorney’s Office and came at the request of members of Congress.”  The Senate Committee on Indian Affairs, led by its Republican committee chairs U.S. Senators John Barrasso, R-Wyo., and John McCain, R-Ariz., spearheaded the request for the criminal investigation.

  1. Superfund National Priority Listing Proposed

The EPA has also proposed a Superfund National Priorities Listing for the Bonita Peak Mining District (which includes the Gold King Mine).  Forty-eight mine sites are included in the Bonita Peak Mining District.  The National Priorities Listing would make the proposed district eligible for additional study and cleanup monies and resources under the EPA’s Superfund program.  The comment period on the proposed listing ended in June and the EPA will be making a final decision.  Documents related to the potential Bonita Peak Mining District site can be found on the EPA’s website here.

We will continue to keep you apprised of the status – stay tuned!

 

*Our previous blogs on the Gold King Mine Wastewater Release can be accessed here:

Why Am I So Interested in the Gold King Mine Wastewater Release? – May 11, 2016

April Showers Bring…EPA Money for the Gold King Mine Wastewater Release – April 29, 2016

The Aftermath of Gold King Mine August Wastewater Release: EPA Suspends Work at Ten Mine Sites – September 15, 2015

Plugging the financial well

This afternoon, Fox Rothschild LLP hosted “Plugging the Financial Well: Coping With Customers and Competitors in Bankruptcy,” with guest speakers Michael J. Viscount and Raymond M. Patella.

By way of a live update following the event, here are a few of the take-away points:

  • There have been 21 new bankruptcy filings in the oil and gas industry in the first half of 2016
  • It is crucial that contracting parties learn how to enhance their prospects of getting paid
  • Tools such as tighter payment terms and letters of credit are key!
  • Make sure rights to recoup and set off are clearly articulated in contracts

Thank you to Crescent Point Energy for allowing us to hold the event in their wonderful space!

Gas Station

There is nothing better than starting your day with good news.

This morning, oil prices have reportedly jumped about 3%, after closing below $40 per barrel yesterday, for the first time since April.

As of 11 am MST, the price of oil has risen to $40.86 per barrel for WTI Crude Oil and to $43.04 per barrel for Brent Crude, according to Bloomberg Energy.  This represents a 3.42% increase in the price per barrel of WTI Crude and 2.97% increase for Brent Crude.

According to the CNBC article, “Oil Jumps 3% as Big US Gasoline Drawdown Offsets Crude Build,” the cause of the increase is simple.  Namely, “a larger-than-expected gasoline inventory drawdown that offset a surprise build in crude stockpiles.”

The Wall Street Journal agrees that “the unexpected drop in gasoline stockpiles” is the cause, reporting that “Stocks Inch Up, Along With Oil Prices.” The drop was certainly unexpected; as we previously discussed, the high gasoline inventory was previously predicted to be drowning the crude oil price recovery.

Many are calling this price rebound temporary and short-lived…

Only time will tell. One thing that this market has shown me is to expect the unexpected…but it was still nice to start the day with such good news!

 

My cousin the cowboy

After spending some time in Casper, Wyoming last week, I realized that an update from “The Oil City” could provide insight on my home state as a whole.

Casper, Wyoming, nicknamed “The Oil City” after its long history as an oil industry hub in the Rocky Mountains due to the exploration and development of the Salt Creek Oil Field as early as the late 1800s, is considered by many to reflect the pulse of the State of Wyoming as a whole.

So how is Casper doing?

Although Natrona County’s unemployment rate has risen to the highest unemployment rate of the state, reportedly coming in at a whopping 7.8%, Casper appears to be weathering the storm of the energy downturn.  The Oil City is clearly attempting to diversify and capitalize on the entrepreneurial spirit of the Cowboy State.

Similarly, the Casper Star Tribune reports that the state of Wyoming’s unemployment has risen – stating that “Wyoming’s unemployment rate continues to rise as the state remains mired in an energy bust.”  Wyoming’s unemployment rate reportedly reached 5.7% in June, while the national rate was 4.9%.  The average rig count in Wyoming for the month of July was only 8 rigs, according to the Casper Star Tribune.

Casper streets seemed quieter to me – indicating to me, a small-town girl from Rock Springs who has seen the effects of several downturns on an energy-reliant community – that workers have been leaving to find work elsewhere.

  • In fact, the Wyoming Business Report recently reported that “U-Haul reported that 36% more people moved out of Natrona [County] using the company’s trucks and trailers than moved into the county.”
  • As to the state as whole, sadly, Wyoming is reportedly the only western state to have more outbound than inbound U-Haul rentals.
  • Likewise, the Casper Star Tribune reports that the state’s “unemployment rate does not reveal the number of workers who lost jobs during the downturn and sought work outside of Wyoming.”

However, the tourism industry appears to be seeing an uptick in Casper; earlier this spring, sales of fishing licenses to nonresidents reportedly increased about 30% in Natrona County.  Guided fly-fishing trips, camping, outdoor adventuring and tourist traffic to Yellowstone, as we have previously discussed here, appear to be on the rise in Casper and in the state as a whole.  This is great news, as tourism and travel activities are said to have added $281 million to the Natrona County economy, as reported in Wyoming Business Report article, “Natrona County Officials Look to Tourism to Blunt Energy Downturn.”

The overall pulse of Casper’s community mirrors that of Wyoming as a whole – the people are kind, resourceful and resilient. Despite the downturn in the energy industry having serious impacts on the economy and individual families, Casper folks are warm and welcoming.  They are optimistic that the state will make it through the lean times facing the energy industry.