In this week’s miscellany of articles, we see how different faces of the industry are adapting to changes in their world. These are the full versions of the “Drilling Deeper” news items that appeared as abbreviated versions in the print edition of PBOG’s April 2016 issue.
Leaders Outline Path in Changing Landscape
This year’s International Petroleum (IP) Week was held just two months after the historic COP21 agreement reached in Paris last December. Climate change and oil prices were always going to be a key focus for the conference. The three-day program of events featured senior industry leaders discussing strategies for the oil and gas industry for navigating in the current environment.
The world is seeing a shift in supply and demand, in particular, we are seeing a new chapter for China—with the decoupling of energy demand and economic growth, improved efficiency, and a shift in consumption away from coal. More than ever, IP Week 2016 has clearly shown an energy transition is underway, with anticipated growth in renewables and nuclear in previously oil-and-gas-dominated regions such as the Middle East. The conversations over the course of the week show a consensus towards oil prices remaining low for a while longer. But it is these economic conditions that are reshaping supply.
Russia proclaimed a fairly stable market which they attribute to a flexible taxation regime, lower production costs and diversifying into the oil services industry, growing fast in refining. Specifically, Rosneft are focusing on Asian markets and concentrating on promoting and developing long-term contracts.
While policymakers are stepping up their commitment to reducing carbon, as the world expands, energy demand continues to grow. Sustainable energy production is therefore key. From BP’s perspective, this can be achieved via the development of natural gas, reduced flaring and methane, improved efficiency, and increased renewables. Energy efficiency can often be thought of specifically relating to the demand sector. However, it is a massive opportunity and there is so much more that can be done. It is more than just using less but also making processes in producing energy more efficient.
The mood over the three days was, overall, cautiously optimistic. There’s no doubt that the falling oil prices paint a bleak picture for oil producers. However, combined with the stronger global commitment and political will for emissions reduction, the oil and gas sector is facing up to diversification to remain competitive.
None of these challenges are new and the industry isn’t starting from scratch. The policies are needed to frame development and education is fundamental. In the longer term, these challenges should be viewed as opportunities to open new ways of thinking, creating innovative business models, and demonstrating responsible leadership.
IP Week is organized every year by the Energy Institute (EI) and is its flagship oil and gas event. The official program comprises a series of conferences and a prestigious industry dinner. Speakers include senior figures from the leading oil and gas producers, alongside government departments, trading houses, and analysts. The events attract around 2,000 energy professionals to London from more than 50 countries around the world.
Unconventional Gas Changing Global Markets
The growth of unconventional gas is spreading across the world with major implications over many years for markets and prices according to a new World Energy Council study Unconventional Gas, A Global Phenomenon which looks at where and how fast the revolution is taking place.
The study, developed with project partner Accenture Strategy, says that despite an uncertain price environment, the magnitude and speed of change is not only influencing the United States market, but also other markets including countries such as China, Argentina, and Algeria which have similar potential as the United States in shale gas production. Also, countries such as Mexico, Saudi Arabia, South Africa, Poland, and Turkey are mentioned in the study as having significant potential for shale gas development.
Cristoph Frei, secretary general, World Energy Council, said, “Unvconventional gas is causing a shift in the dynamics of the natural gas market which will be felt for many decades to come. Its spread around the world is being accelerated because it can make gas more affordable to consumers and reduce concerns about the security of supply.
“So far, the surprising resilience of the U.S. shale gas market has led the way in the shale gas boom, and whilst other countries may not have the unique characteristics of the United States, they will learn how to become LNG producers or exporters which will change the global dynamics of energy.”
The study identifies three emerging global trends:
- Shifting portfolio allocations: current price uncertainties are resulting in operators shifting their capital to more flexible, shorter-cycle investments rather than in deep well projects which is exemplified by the United States.
- International growth of unconventional gas operators: new operators across the world are realizing the global opportunities and bringing new supplies to the markets such as China, Australia, and Argentina which will have an effect on markets before 2020.
- Interconnected markets: excess supplies in some countries have led to price normalization and other structural shifts that are making the market more global and transparent across the three main regional hubs of Asia, Europe, and North America.
Lower oil prices and weakened Asian demand has resulted in the virtual disappearance of the price spread between the Japanese LNG and UK markets in 2016. Additionally, U.S. prices remain depressed due to the continued build-up of domestic supplies.
In order to realize the full potential of the global gas phenomenon, the study goes on to highlight the need for certain decisive interventions to alleviate uncertainty in the market:
- Industry: Bring a higher degree of focus to portfolio allocation, risk management, and efficiency and continue to seek new and innovative investment partnerships to deliver projects.
- Policymakers: Establish policies that promote a liquid market and competition needed for security of supply and the formation of clear price signals.
- Consumers: Evaluate the economic and environmental benefits of diversifying energy assets with natural gas in power, industry, transportation, and chemicals and consider innovative investment partnerships to secure supplies.
In addition, the study says that there are also societal and environmental concerns which national oil companies are best-placed to address and thereby puts them in a prime position to take advantage of growth opportunities.
Christoph Frei said, “Already, the rapid growth in unconventional gas has significantly disrupted global trade flows. With concerns about affordability and security driving exploration into unconventional resources outside of North America, unconventional gas will continue to be a key factor in how the world energy market develops.
“In particular, continued growth in the United States and Australia will significantly influence the balance of supply and demand with Argentina, China, and Saudi Arabia emerging as unconventional gas producers out to 2020-2025.”
Melissa Stark, managing director, Energy industry group, Accenture, and co-author of the report, added, “The report emphasizes the smooth nature and optionality of the U.S. shale gas supply. The U.S. LNG exports are very different from any supply we have seen before because this supply can come on-stream very quickly in response to market demand and prices. This LNG supply is driving fundamental changes and commercial innovation in the global LNG market.”
The rapid growth of unconventional gas is demonstrated by the United States—in December 2015 49 percent of its gas supplies came from unconventional gas and by 2019 it is predicted that U.S. LNG supplies will account for one fifth of global capacity and that the United States will be the third largest LNG exporter.
The study, which is the work of leading industry and academic experts from across the world who are part of the Council’s Natural Gas Knowledge Network, will be launched at the Africa Gas Forum during the Africa Energy Indaba on Monday 15 February.
Unconventional Gas, A Global Phenomenon is one of 15 Knowledge Networks studies for the World Energy Resources flagship study which will be presented at the 23rd World Energy Congress in Istanbul, Turkey in October 2016.
For the full report see: https://www.worldenergy.org/publications/2016/unconventional-gas-a-global-phenomenon/
Heartland Institute on Clean Power Plan
On Tuesday, the U.S. Supreme Court halted implementation of President Barack Obama’s Clean Power Plan (CPP) regulations. The 5–4 decision favored a group of 27 states and agencies that recently petitioned for a stay of the administration’s sweeping plan to cut carbon dioxide emissions.
Isaac Orr, research fellow, Energy and Environment Policy:
America’s future is a little brighter today because the Supreme Court has dealt a major blow to President Obama’s Clean Power Plan (CPP).
The supposed goal of the CPP was to reduce carbon dioxide emissions significantly below 2005 levels by shuttering the nation’s coal-fired power generation fleet and focusing on natural gas and renewable energy sources.
While replacing coal with renewable energy may invoke warm and fuzzy feelings, it would have had serious negative consequences for working families – who would wonder why the electricity bill keeps going up every month.
The United States produces only 2 percent of its total energy from wind and solar combined. We actually generate more energy from burning wood than wind and solar. The fact of the matter is, we are going to be dependent upon fossil fuels for a long time because they are the most affordable, abundant sources of energy we have. The Supreme Court delivered a decisive victory to middle-income Americans.
Jay Lehr, science director:
This is indeed good news but climate realists must not let their guard down. Obama will load EPA with executive orders to continue to damage our economy in any way possible to achieve his goal of placing America on a level playing field with the world’s weakest economies. The Supreme Court ruling will infuriate a man who believes he is above the Court, the Constitution, and Congress.
Sterling Burnett, research policy, Environment and Energy Policy:
This is great news. The fact that the Supreme Court stayed the rule, a highly unusual action for the Court to take, showed the justices recognized how far-reaching the rule was, and that they did not want a repeat of the Mercury and Air Toxics Rule fiasco.
For the Court to take this action, a majority of the justices must feel the states challenging the rule have a significant likelihood of ultimately prevailing on the merits. This indicates the CPP goes beyond EPA’s power under the Clean Air Act.
Though the case will go on, because it will take at least a year or longer to get through all the hearings and appeals, the fate of this rule will ultimately land not in the Supreme Court but in the hands of the next President. He or she will have to decide whether to defend the rule in court or pull it before it ultimately reaches the Supreme Court for scrapping or a rewrite.
None of the Republican candidates has defended the rule, so if a Republican wins, the rule will likely be pulled. If a Democrat wins, the case may go forward, but based on the current action, the Supreme Court will probably overturn the rule. In either case, Obama’s climate legacy is in tatters, and his commitments in Paris COP-21 will come to nothing.
Marita Noon, executive director:
In a cycle of “huge” headlines, the Supreme Court’s 5–4 decision to halt implementation of the Obama administration’s Clean Power Plan is huge.
Never before has the highest court in the land gotten involved in a case currently being litigated by a lower court. Never before has the Supreme Court blocked EPA. The Clean Power Plan is now likely on hold forever as Tuesday’s decision halts it until the case is litigated by an appeals court and reaches the Supreme Court–which puts it into the next President’s purview.
The stay was granted based on the likelihood that the parties who sued will win the case. In the unlikely event the rule ultimately survives the courts, it will be a different EPA that implements it.
Bette Grande, research fellow, Energy Policy:
With billions of dollars on the line for the lignite and coal industry, the Supreme Court has put a stay on EPA’s Clean Power Plan. This gives the industry and the states some much-needed breathing room. This is a strong ‘states rights’ win for the 27 attorneys general from across the country standing for the right of each state to regulate the industries within its borders.
This will allow for the lights and heat to stay on for thousands of families as reliable electricity is delivered to all. And now we can have a full debate about the true costs and benefits of EPA’s scheme.
Kyle Maichle, project manager, Constitutional Reform:
A group of 27 state attorneys general who sued the Environmental Protection Agency over the Clean Power Plan should be commended for their brave stand for protecting jobs and cheap energy. The attorneys general were correct to engage in nullification of EPA’s harmful policies that would increase energy rates and kill good jobs. Middle-and-lower-income Americans would have been hurt the most if the Court did not issue this stay.
States will continue to look for ways to nullify the Obama EPA if more regulations are pushed through executive action rather than the legislative process.
The Heartland Institute is a 32-year-old national nonprofit organization headquartered in Arlington Heights, Illinois. Its mission is to discover, develop, and promote free-market solutions to social and economic problems. For more information, visit our Web site or call 312/377-4000.
President’s Budget Bad for Consumers, Energy
NOIA writes:
“The President’s budget, while most ideological, is also most illogical in that it threatens the development of a broad range of energy sources necessary for continued economic growth and energy security. The proposals aimed at the oil and natural gas industry will unfortunately also hit American consumers hard, weaken our economy, reduce direct funding to states, and threaten our status as the world’s leading producer of oil and natural gas. From the new energy taxes to the elimination of Gulf state revenue sharing for offshore energy production, this budget proposal is just the latest in a series of all-out regulatory assaults on American energy and U.S. consumers. These ‘keep it in the ground’ proposals do not encourage economic growth or bolster national energy security, but instead would put our country and American families and consumers on the hook for the radical policies of this Administration.
“The President also proposes to fully fund the Land and Water Conservation Fund (LWCF), yet does nothing to encourage the exploration and development of offshore oil and gas, which is the source of funding for the LWCF. In addition, his administration has proposed an overly prescriptive well control rule that could increase risk offshore and lead to a de facto moratorium in the Gulf of Mexico, thereby reducing the very source of revenue for the LWCF,
“The United States is the global leader in oil and gas production and yet the president has abandoned his balanced ‘all-of-the above’ energy philosophy and his administration is holding back our nation’s energy independence through regulations and policies that deter the very industry innovations that make our nation’s energy success possible. The President should broaden his vision by encouraging all forms of energy to further our nation’s position as the global energy leader, strengthen our economy, and keep energy affordable for American consumers.”
ABOUT NOIA
NOIA is the only national trade association representing all segments of the offshore industry with an interest in the exploration and production of both traditional and renewable energy resources on the nation’s outer continental shelf. NOIA’s mission is to secure reliable access and a fair regulatory and economic environment for the companies that develop the nation’s valuable offshore energy resources in an environmentally responsible manner. The NOIA membership comprises about 300 companies engaged in business activities ranging from producing to drilling, engineering to marine and air transport, offshore construction to equipment manufacture and supply, telecommunications to finance and insurance, and renewable energy
IHS: Gloomy Outlook for O&G
The depressed oil price environment is painting a gloomy outlook for North American exploration and production (E&Ps) companies, and further, significant CAPEX cuts are needed in order for the group to demonstrate real financial discipline and align spending more closely with cash flow, according to new analysis from IHS (NYSE: IHS), the leading global source of critical information and insight.
According to the IHS Energy Comparative Peer Group Analysis of North American E&Ps, which assessed the impact of lower oil and gas prices on 2016 cash flow estimates for the North American E&P peer group, under the IHS low-case scenario, to maintain a capital spending-to-cash-flow ratio in the historical range of approximately 130 percent, spending for the E&Ps would need to be cut by a further $24 billion, or 30 percent, from the most recent estimates.
This would be a cut of almost 50 percent from 2015 spending levels. HIS reports the current capital-spending estimate for the group totals more than $78 billion, which is 23 percent lower than an estimated $101 billion in 2015.
“Our analysis strongly suggests that additional steep spending cuts are required by this peer group of 44 North American E&P companies in order to bring spending in line with lower projected cash flows,” said Paul O’Donnell, principal analyst at IHS Energy and author of the analysis. “Given that most companies made preliminary 2016 spending plans when the price outlook was comparatively higher, we expect to see further spending cuts announced throughout the 4Q15 earnings cycle that reflect the current price environment.”
Under the IHS 2016 low-case price scenario, which assumes $40 per barrel of oil and $2.50 per thousand cubic feet(MCF) of gas, and is closer to current market conditions, IHS projects that the North American E&Ps will spend 188 percent of cash flow. This projection compares with a ratio of 133 percent under the IHS 2016 base-case scenario, which assumes a $50 per barrel of oil and $2.75 per MCF.
In the low-case scenario, the large E&Ps are projected to outspend cash flow by the greatest amount, equal to 195 percent of cash flow. These large E&Ps are the least hedged of the companies studied, making them more exposed to price fluctuations, but they also have the strongest balance sheets, offering a financial cushion, IHS said.
Despite their comparatively stronger hedging positions, as noted in the recent IHS hedging analysis, the small E&Ps are projected to spend 174 percent of cash flow, which “will be problematic since they already have highly leveraged balance sheets and cannot afford further balance sheet deterioration,” O’Donnell said. “The result could be forced asset sales at bargain prices, sizeable staff layoffs and, in the worst cases, bankruptcies,” he said.
Under the lHS low-case scenario, for the group to show real spending discipline and live within cash flow, IHS said, annual spending would have to be reduced by at least 64 percent compared with 2015, or by 42 percent under the IHS base case assumptions.
“These spending cuts will be particularly troublesome for the highly leveraged companies,” O’Donnell said. “These E&Ps are torn between slashing spending further to avoid additional weakening of their balance sheets, and the need to maintain sufficient production and cash flow to meet financial obligations.”
The IHS high-case scenario assumes $60 per barrel of oil and $3 per MCF of gas, but “given current prices,” O’Donnell said, “even our low-case scenario could be generous. Under our low-case scenario, we expect 2016 capital spending for the group will exceed cash flow for all companies, with the large and small peer groups spending 195 percent and 174 percent of cash flow respectively, compared with a slightly more conservative 157 percent for the midsize E&P companies.”
In this volatile market, IHS said its analysis indicates that Concho Resources, Whiting Petroleum, WPX Energy, Halcón Resources and PDC Energy are displaying the greatest spending discipline.
For more information on the IHS Energy Company and Transaction Research, please contact leslie.downey@ihs.com.
Gordian Group Opens Houston Operations
After a year working behind the scenes in Texas, New York-based investment bank Gordian Group is concentrating more resources on the Houston market and companies feeling the capital structure stress that falling prices have brought. With a Texas nexus due to its chairman, Fred Zeidman, residing in Houston, Gordian brings its unique focus on shareholders and old equity, a conflict-free approach that sets it apart from other financial advisory firms that advise both shareholders and creditors, thus providing great comfort to boards of directors seeking optimal advice and safety.
Recent transactions, such as the Transocean debt-for-equity swap and the Quicksilver bankruptcy 363 sale, are powerful evidence that the shareholder-centric approach of Gordian Group is important and not being addressed by others in the marketplace—in both situations, shareholders were completely wiped out.
Zeidman is a well-known Houston community leader who has Gordian Group seeking to support small and global businesses in complex, distressed financial situations in Texas. Zeidman has had great success in both the oil and gas sector and healthcare.
“Our team has been in business for more than 25 years and in that time has successfully completed nearly 300 engagements, wresting value for shareholders in difficult situations and protecting boards of directors in the toughest of times,” said Fred Zeidman, Gordian Group Chairman. “The sophisticated judgment and relentless commitment we bring to clients will be of great benefit to companies in Houston undergoing financial hardship and requiring critical decision making for the future of their organizations.”
With a proven track record and a team that consistently ranks among the top 10 investment bankers in the field of restructuring and M&A, the boutique firm provides services such as financial restructurings and reorganizations, mergers and acquisitions, public and private financings, and expert witness and litigation support.
“Our expertise is relevant to so many different companies in and around the Houston area, particularly within the oil and gas industry given current economic conditions,” continued Zeidman. “These companies need unconflicted advice from an advisor they can trust who is dedicated to finding creative solutions to their financial problems. We have plenty of ideas about how to benefit shareholders and protect boards even in this down pricing market. That’s the epitome of what we do here at Gordian Group.”
About Gordian Group
Founded in 1988, Gordian Group is an investment bank recognized as a national leader in helping its clients address complex situations, and has completed about 300 engagements on behalf of companies, boards of directors, and shareholders (including entrepreneurs and private equity firms), as well as state and federal agencies.
For more information, visit www.gordiangroup.com, or send email inquiries to Zeidman at fsz@gordiangroup.com or Peter S. Kaufman at psk@gordiangroup.comwww.gordiangroup.com.