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A Preview Of America’s Oil And Gas Industry In 2018

The closing of the year 2017 means it’s time to take a look forward at the prospects for America’s oil and gas industry in 2018.  This past year will likely come to be remembered as the year during which the industry emerged from the three-year depression created when Saudia Arabia made the decision to flood the market with crude in 2014 in a misguided attempt to recapture market share it had lost to America’s growing shale industry.

 

The big question for the industry going into 2018 is whether it will be able to consolidate the gains made during 2017, and build on the lessons learned from the mid-year 2017 price collapse that was directly caused by its rapid increase in drilling during the first half of the year.  I’ve written many times about the lack of any government mechanisms to bring discipline to the highly-competitive upstream segment of the industry, but as we will see, producers are already receiving help in that regard that they had not anticipated six months ago, but which is exactly the help they need to help them avoid a repeat of the first half of 2017.

 

With that, let’s take a look at what 2018 is likely to hold for the U.S. oil and natural gas industry:

 

  • $60 WTI will produce a domestic supply response, but it will be muted – There is no question that the upstream business will get busier drilling when the new year dawns – the only question is, how busy? The significant increase in new drilling permit applications in Texas and elsewhere during October and November is a strong sign that upstream companies are preparing to implement stronger drilling budgets starting in January.  On the other hand, that disciplinary help I mentioned above is coming in the form of strong investor pressure on corporate management teams to increase returns on their investments.  This pressure resulted in a slowdown in the pace of drilling for the last 4 months of 2017, and is going to carry over into the new year.  The result:  Where the industry activated almost 300 additional drilling rigs during the first third of 2017, we should expect an increase of no more than half that many additional rigs in the first 120 days of 2018.

 

  • Oil prices will remain comparatively strong throughout the year – As I noted in last week’s year-end wrap-up piece, the export limitation agreement between OPEC and Russia has been a resounding success, both in strengthening the crude price and also in taking much of the volatility out of the system by re-balancing the market. So long as those countries continue to maintain the discipline they exhibited throughout 2017, and U.S. producers don’t go wild with new drilling, there is good reason to project that crude prices will move higher at the end of 2018 than they stand today.

 

  • The midstream industry will boom – It’s already booming in Texas, where upwards of a dozen projects are underway to build new takeaway capacity for oil, natural gas, and natural gas liquids coming out of the pipeline-constrained Permian Basin. These are all intra-state lines that do not require approval from the Federal Energy Regulatory Commission (FERC).  New permitting and construction of interstate lines was held up for much of 2017 due to a lack of a quorum on the Commission, as President Trump’s nominees were held up in the U.S. Senate, but FERC has approved more than 8 bcf in new natural gas pipeline capacity since that roadblock was cleared in August.  Much of this new capacity is designed to relieve the longstanding bottleneck for gas coming out of the Marcellus Shale.  Bottom line:  There will be a lot of new steel going into the ground throughout 2018.

 

  • The Permian Basin will continue to boom throughout 2018 – We’ve seen a rash of speculative “analysis” pieces recently pushing the proposition that producers have drilled up all the best locations in the vast Permian Basin and are now running out of viable drilling projects. We will find out very clearly in 2018 that these analyses are laughably wrong, as drilling and production from the Permian will grow steadily throughout the year, as will the profitability of the companies doing the drilling and producing.

 

  • Oklahoma’s state government will mess up a good thing in the SCOOP/STACK – The central part of Oklahoma has been blessed with the discovery of a world-class resource play in the SCOOP and STACK areas, but the state’s government seems intent upon messing them up. As has been demonstrated by the strong rig counts and drilling activity in this region over the past 2 years, the SCOOP/STACK is competitive for attracting major industry capital investments with its current production tax structure, which assesses an initial 2percent tax.  But an intractable budget deficit problem appears likely to result in the legislature deciding to raise that rate back to its former 7percent.  If that happens, 2018 will see a big chunk of capital dollars originally targeted for investment in Oklahoma move to projects in the Permian, Eagle Ford and DJ Basins instead.  You can’t just take 5percent off the top of these multi-million dollar investments without suffering negative consequences.  It’s a lesson some state governments seem to have to learn over and over again.

 

  • Petrochemical and other manufacturing based on natural gas will continue to boom – The American Chemistry Council reported in early December that low-priced and abundant natural gas has now resulted in an amazing $185 billion in new petrochemical plant and equipment investments currently in the planning and construction stages in the United States. These investments will result in the creation of 822,000 new jobs by 2025.  We can expect that inventory and the resulting jobs to keep growing throughout 2018, because natural gas prices aren’t going anywhere anytime soon.

 

  • Exports of both oil and LNG will keep rising – Exports of domestic crude doubled during 2017, and the U.S. Energy Information Administration (EIA) projects they will double again by 2020. Increasing volumes of light sweet crude coming out of the Permian Basin and Eagle Ford Shale will ensure 2018 will be the catalyst for a continuation of this trend.  Meanwhile, new LNG export terminals at Cameron, LA, Elba Island, GA, and Freeport, TX are scheduled to come online during 2018, increasing U.S. export capacity by almost 2 billion cubic feet per day by year’s end.

 

  • Federal public policy will continue to become more favorable for energy production and export – It might seem hard to see how this will happen, since so many favorable public policy decisions were executed by congress and the Trump Administration during 2017, but this is a very aggressive Administration, and it is intent upon finding every avenue it can to facilitate the President’s “U.S. Energy Dominance” agenda. So it’s a safe bet that 2018 will see many more policy actions taken that will help maximize U.S. energy production and export capacity.

 

  • Taken as a whole, all of these factors and more mean that 2018 appears to be setting up to become the strongest year for the U.S. oil and natural gas industry since 2013. It’s hard to believe that it has only been 4 years since the industry was so healthy.  Having lived through it all, it feels like it’s been forever.

 

Source: Forbes

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