David A. Jaffe, Partner, Fox Rothschild LLPEQT’s announcement last week of its acquisition of Rice Energy marks the end of one phase and the beginning of another in the epic U.S. shale revolution. Marcellus 1.0, as I like to refer to it, was mainly about rapidly amassing scale and establishing staying power in the face of enduring lackluster commodity prices. In fact, the merger deal is a proximate result of the Darwinian shakeout of marginal producers that occurred during Marcellus 1.0. The acreage ultimately to be acquired by EQT can trace its lineage back through Rice Energy to the bankruptcy of Alpha Natural Resources – proof that in the energy sector being a “fast follower” is often a superior strategy to that of being the “first mover.” One of the attributes that attracted EQT to Rice is the pricing arbitrage it will garner through Rice’s transport assets that will provide EQT access to premium prices in markets outside the Appalachian basin.

As Marcellus 1.0 ends and the shale play enters the next phase, EQT’s pricing benefit may portend a less sanguine future for the region generally. This phase will require the development of the storage, treatment and processing infrastructure necessary to convert the raw natural gas resource into its more valuable composite derivative products. Unless the necessary midstream infrastructure can be developed at an accelerated pace, this humongous, once-in-a-generation asset will migrate out of the region, and along with it will go all of the accompanying downstream wealth-building commercial activity. I am reminded of that noteworthy metaphor referred to by our last businessman presidential candidate, of a “giant sucking sound” that will occur as the Appalachian gas makes it way out of the basin down to the Gulf Coast for processing before being re-transported north to the largest end use markets.

Oil pipeline
Copyright: dreamerb / 123RF Stock Photo

Of the lessons that emerge from our region’s industrial past, one stands out in cautionary fashion. Wealth accrues not where the commodity is mined but where the value-added processing occurs. This was certainly the outcome of our last industrial revolution (think coal vs. steel). In order to avoid this fate in the shale revolution, regional and state governments, economic development agencies and the corporate community in Pennsylvania and Ohio need to collaborate and get busy building out the necessary infrastructure. So far the signs are promising.

Let’s avoid that giant sucking sound…

It is widely rumored that the Marcellus Shale Play can support a total of 3 ethane crackers.

The math goes like this:

  • By 2026-2030, an additional 267,000 barrels per day (b/d) of ethane could be available for use as a petrochemical feedstock from the Marcellus Shale Play;
  • It is estimated that a world class cracker like Shell’s requires 90,000 b/d of ethane in order to produce the projected 1.5 million metric ton per year of ethylene;
  • Thus, an additional 267,000 b/d of ethane is enough feedstock to support three ethane crackers each drawing 90,000 b/d of feedstock from the Marcellus Shale.
Engineer at refinery
Copyright: 36clicks / 123RF Stock Photo

These figures and estimates derive from a March 2017 report created by HIS Markit, entitled “Prospects to Enhance Pennsylvania’s Opportunities in Petrochemical Manufacturing.”

Assuming the above, it is true then the Marcellus natural gas fields can support a total of three crackers. Without doubt, the economic impact of hosting three crackers in our Region will have an enormous economic impact and remake Southwestern Pennsylvania into the second largest petrochemical center in the nation, trailing only the Texas-Louisiana Gulf Coast. If this indeed comes to pass, it will herald a new renaissance in 21st century manufacturing, which will permanently change the face of Southwestern Pennsylvania.

However, there is no guarantee these additional crackers will come to fruition. The  Shell cracker is only one which today is a reality. For 2  additional crackers to open here depends upon whether our region can quickly build out the physical infrastructure needed to support additional crackers (i.e., large available contiguous real estate tracts, transmission pipelines, fractionation plants, fabrication facilities, rail lines, barge access, craft labor of all sorts, etc.)  If this infrastructure is not in place in short order, Marcellus gas will continue to flow out of our region, depriving us of the enormous economic benefits from local consumption of this natural resource. As we sit here today, Marcellus gas, rich in ethane, is being exported and will continue to be shipped to refineries in the Gulf Coast, Canada and Europe.

So the race is on – can we build this infrastructure fast enough to attract at least 2 more crackers and lock in the economic benefits before Marcellus producers exhaust this natural resource via long term supply contracts and export it elsewhere?

June 19-20, 2017
Pittsburgh, PA

Engineer at refinery
Copyright: 36clicks / 123RF Stock Photo

Over 400 attendees are expected to attend this groundbreaking conference focused upon the construction of Shell Oil’s $6 billion ethane-steam-fed cracker located some 30 miles outside of Pittsburgh. Conference particulars can be found at the Northeast U.S. Petrochemical Construction Conference website. Construction is slated to commence in the fall of 2017.

I’m planning to attend the conference and will provide updates afterwards.

Working from New York makes a person think about energy…the amount of energy it takes to fuel the sparkling Big Apple, the energy that radiates from the charming, lovely old architecture, and the energy from all the folks walking the sidewalks.

The talk of the town? Oil prices.

As I write this, oil prices are continuing to slip a little more. According to Bloomberg Energy, WTI is currently at $44.47 per barrel, down .58% and Brent crude is at $46.87, down .28%.

The headlines today reflect the same concern as the talk in the Big Apple:

The crux of the issue: global supply outweighing demand and the concern that this over-supply pace will continue.

As always, we will continue to monitor oil prices and keep you apprised.

Peter F. Drucker famously said, “Trying to predict the future is like trying to drive down a country road at night with no lights – while looking out the back window.”

With that in mind, last September, I wrote “Is Predicting the Future of Energy Like Driving Down a Dirt Road at Night with No Lights On?” – the full article can be found here.

One of the focus points was on the oil price rollercoaster. Back in the September 2016 Short-Term Energy Outlook, the U.S. Energy Information Administration (“EIA”), had predicted “high uncertainty in the price outlook.”

Fast-forward to June of 2017:

  • Uncertainty is still in the air and oil prices still are giving us a run for our money.
  • While many thought we were seeing signs of a recovery and still others anticipated more of a wild ride, oil price volatility is still occurring.

“Crude markets are taking oil optimists by surprise yet again,” according to Bloomberg article, “America’s Stubborn Oil-Supply Glut Catches Funds Off Guard.” “Not only did supplies in the U.S. surge in last week’s Energy Information Administration report, but the agency also forecasts U.S. crude output will average more than 10 million barrels a day next year for the first time,” according to Bloomberg.

Prices are reflecting the uncertainty in the market – Marketwatch reported today that prices last week dropped nearly -4%, and according to Bloomberg, some folks are predicting prices will go lower.

As I write this, Bloomberg Energy is reporting that WTI Crude is inching upward at $46.39 per barrel, a 1.22% increase, and that Brent Crude is at $48.74 per barrel, a 1.23% increase.

The takeaway is that the future of energy and the future of oil prices can be very difficult to predict as there are so many factors, both domestic and internationally, that can have an impact. However, one thing seems constant in the near future – volatility.  OPEC’s May report is reportedly expected to be released this week, and many hope that it will shed some light on production data.

Until then, we will have to do our best to drive on this dirt road with no lights on!

 

The folks ‘in the know’ are predicting at least a “modest” oversupply in global oil markets next year…

Yesterday, the U.S. Energy Information Administration (“EIA”) released its Short-Term Energy Outlook – a full copy of the report can be found here.

Key Takeaways:

  1. Oil Prices: According to the Forecast Highlights, “EIA forecasts Brent spot prices to average $53/b in 2017 and $56/b in 2018. West Texas Intermediate (WTI) crude oil prices are forecast to average $2/b less than Brent prices in both 2017 and 2018.”
  2. OPEC Extension: OPEC announced an extension to voluntary production cuts through March 2018 (remember, they were supposed to end this month – June 2017).
  3. Natural Gas Expected to Increase: According to the Forecast Highlights, a 1.0 Bcf/d increase in U.S. dry natural gas production is predicted.
  4. Wind and Solar Electricity Generating Capacity Expected to Increase: According to the Forecast Highlights, wind energy generation capacity is expected to increase from 81 GW in 2016 to 88 GW by the end of 2017 to 102 by the end of 2018; similarly, solar capacity additions are expected to increase to 32 GW by the end of 2018.

Oil & Gas Journal published an article yesterday discussing the EIA’s recent Short-Term Energy Outlook entitled, “EIA: Global oil oversupply could return in 2018.” Specifically, the Oil & Gas Journal article discusses oversupply issues and states as follows:

  • “The US Energy Information Administration lowered its crude-oil price forecast and raised its US production outlook for 2018 in its latest Short-Term Energy Outlook. The lower price forecast reflects the possibility of a return to modest oversupply in global oil markets in 2018.”
  • “The expectation of supply growth in 2018 could contribute to oil-price weakness in late 2017 and early 2018.”

Only time will tell! We all know how difficult it is to predict prices, supply and demand…

River

The Gold King Mine was in the news this week  – by way of a reminder, the Gold King Mine wastewater release occurred from an inactive Colorado gold mine near Silverton, Colorado, back in August of 2015 and the impacts were great, to say the least.

I have been following the Gold King Mine wastewater release since it happened, see the first post entitled, “The Aftermath of Gold King Mine August Wastewater Release: EPA Suspends Work at Ten Mine Sites” and see my favorite post entitled, “Why Am I So Interested in the Gold King Mine Wastewater Release?”

While the media attention on the Gold King Mine wastewater release has waned, the topic is back in the news this week in an article entitled, “EPA Urged to Prioritize Gold King Mine Cleanup” – discussing a recent letter sent to the EPA by United States Senators Tom Udall and Martin Heinrich and three members of Congress.

A full copy of the letter can be found here – the letter address the timely utilization of the $4 million long-term water quality monitoring program for affected areas, which has been authorized by the Water Infrastructure Improvements for the Nation (WIIN) Act of 2017.  An interview with Senator Tom Udall discussing the letter in more detail was featured in, “Udall Talks Gold King Mine Spill Compensation.”

  • What is the WIIN Act?

As mentioned above, “WIIN” stands for “Water Infrastructure Improvements for the Nation.” According to the EPA’s “Frequent Questions About the WIIN Act,” “[t]he WIIN Act was enacted on Dec. 16, 2016” and “[i]t is primarily aimed at improving the nation’s water infrastructure.”

The WIIN Act itself is certainly not light reading – the full text can be found here.

Simply put and as summarized in the EPA’s “Frequent Questions About the WIIN Act,” the WIIN Act “includes, under section 5004(c), a directive for EPA to pay ‘any claim made by a State, Indian tribe, or local government for eligible response costs relating to the Gold King Mine release’ that occurred on Aug. 5, 2015.”

  • Who can seek reimbursement under the WIIN Act with regard to response costs incurred in connection with the Gold King Mine wastewater release?

Only certain claims qualify – ‘any claim made by a State, Indian tribe, or local government.’ It is crucial to note that the WIIN Act does not apply to costs incurred by private parties in connection with the Gold King Mine wastewater release.

  • What costs qualify?

The guidelines for whether response costs are eligible for reimbursement under the WIIN Act can be found by reviewing Understanding Reimbursement for Eligible Response Costs Incurred Due to the Gold King Mine Release.

The clean-up and reimbursement processes have been lengthy and nearly 2 years later, folks are still in it for the long haul.

We will continue to update you on the progress and status…stay tuned!

flaming gorge

Big picture concepts have filled my mind lately – I am trying to take a step back and see the whole picture instead of getting too deep in the weeds and isolated details. It made me curious – what is the 30,000 foot view of the state of the oil patch right now?

In sum, overall this year I have seen rising confidence with a healthy degree of skepticism and conservative enthusiasm when it comes to the energy sector. Let’s break down the components from a 30,000 foot view:

  • Prices

After the oil price collapse in late 2014, it seems that the volatility in prices may have reduced somewhat. Oil prices seem to have experienced a “sort of” stable recovery, despite the bumpy ride we saw earlier this spring. By that, I mean we are all counting our lucky stars that we haven’t woken up to $30 oil lately and prices have stayed in the same general range and haven’t caused us too many anxiety attacks so far in 2017.

Indeed, the New York Times published an article by Clifford Krauss this week entitled, “Oil Prices: What to Make of the Volatility” which provides a great primer of current issues and succinctly states, “[t]o be sure, the oil markets could be poised for another wild ride, with Wall Street and academic analysts predicting a price of anywhere between $40 and $70 by the end of the year.” However, the New York Times article notes that we are not out of the woods yet when it comes to volatility: “Wide swings are possible, if not probable. Political and economic upheaval in a major oil-producing country like Venezuela could cause a price spike.”

  • Employment

In Denver, we have seen a visible uptick in land-related work, but many worry that the layoffs experienced in the downturn got rid of many experienced workers, who had to move on to other careers and industries in order to find work. Bloomberg published an article this week entitled, “Fracking Crews Shortage May Push Oil’s Biggest Bubble to 2018” which discusses how oil companies “are struggling to find enough fracking crews after thousands of workers were dismissed during the crude rout.” From this article, it sounds like demand for workers is back up and headed to where it was during the boom.

  • Bankruptcies

The number of oil company bankruptcy filings seem to be going down…According to Haynes and Boone LLP’s Oil Patch Bankruptcy Monitor, the most recent version of which as of April 27, 2017 can be found here, as of this time last year, approximately 40 companies had filed for bankruptcy from January 2016 to mid-May 2016. The good news is that according to the Oil Patch Bankruptcy Monitor’s tracking, less than 10 companies have filed for bankruptcy so far in 2017. Similarly, according to Haynes and Boone LLP’s Oilfield Services Bankruptcy Tracker, the most recent version of which as of April 27, 2017 can be found here, the number of oilfield service companies that have filed for bankruptcy so far in 2017 also is down from the same time last year.

From a 30,000 foot view, things appear to be encouraging in the oil and gas sector.

Record Year

The number of producing oil wells in North Dakota just hit a new record…by all accounts, North Dakota could be on track for having a record year.

On Friday, Lynn Helms, Director of Mineral Resources for the North Dakota Industrial Commission, released the Director’s Cut dated 5/12/2017 – which can be found here.

The Director’s Cut outlines oil and gas activity for the State of North Dakota on a monthly basis. The March 2017 Director’s Cut contains some interesting information:

  • New Record: A new all-time high number of producing wells has been reported – The number of wells producing oil, according to the preliminary count in the March 2017 Director’s Cut, is 13,632. This is up over 100 wells since the numbers reported for February 2017.
  • However, Daily Oil Production is Actually Down: According to the March 2017 Director’s Cut preliminary numbers, oil production is down from 1,034,248 barrels/day in February 2017 to 1,025,638 barrels/day for March 2017.
  • Rig Count Up: The rig count as of Friday was reportedly 51, up from 39 in February of 2017.
  • The Comments section of the March 2017 Director’s Cut gives us the insight that “[m]ore than 98% of drilling [in North Dakota] now targets the Bakken and Three Forks formations.”

As of right now, the price of oil is up. According to Bloomberg Energy, WTI Crude is currently at $49.06 per barrel, up 0.43%, and Brent Crude is at $51.98 per barrel, up 0.33%.

Good news for a Monday! Here’s hoping it is a record year…

EIA May STEO

The U.S. Energy Information Administration (“EIA”) released its Short-Term Energy Outlook (“STEO”) yesterday for the month of May – the forecast highlights can be found here and the full report can be found here.

Here are a few of the main takeaways from the May STEO forecasts:

  • Crude Oil – the recent drop in prices may continue:

According to the petroleum and natural gas markets review portion of the May STEO:

“Expectations of supply growth in 2017, particularly in the United States, as well as concerns that a potential extension of the [OPEC crude oil production cut] agreement will not reduce global inventories as quickly as expected contributed to a sharp drop in crude oil prices in the first week in May.”

“EIA projects that the global crude oil market in 2017 and 2018 will have more supply growth compared with the April STEO, resulting in a lower forecast of crude oil prices in the coming months.”

  • Coal – increased demand predicted:

According to the EIA’s Forecast Highlights regarding coal in the May STEO:

“EIA expects growth in demand for U.S. coal exports to contribute to a 5% increase in coal production in 2017.”

According to the EIA’s Notable Forecast Changes:

“EIA forecasts coal exports to average 63 million short tons (MMst) in 2017 and 60 MMst in 2018, these are 5% and 14% higher, respectively, than forecast in the April STEO. The export forecast is higher than last month because of slightly lower expected domestic use of coal for electricity generation and because of higher assumed global coal prices.”

  • Wind – capacity expected to rise:

According to the EIA’s Notable Forecast Changes:

“This month’s STEO forecast for wind power capacity in 2018 is 7% higher than in the April STEO because of new information about planned capacity additions. Wind capacity is now projected to rise from 88 GW in 2017 to 102 GW in 2018, an increase of 16%.”

Only time will tell if these forecasts will come to fruition – stay tuned.