WILL U.S. OIL OFFSET LOSS OF U.S. NATURAL GAS PRODUCTION, REDUX

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QUARTER OVER QUARTER, OIL DEMAND STILL EXCEEDS NATURAL GAS, CALLING FOR CHANGE IN U.S. ENERGY POLICY (Previously posted April 24, 2012)

Serious Transition In U.S. Gas, Oil Production

For the last couple of quarters, concerns have mounted on natural gas pricing and surpluses. Back in February I wrote on this space “How Do We Burn U.S. Natural Gas Surplus” wherein I describe substantial opportunity for the U.S. in the global LNG export market.

Last couple of days have seen Halliburton and Schlumberger announce results for Q1, which revealed a current state of affairs in North America and future expectations. Halliburton's CEO, David Lesar, described circumstances in the company's April 18 earnings conference call. The CEO pointed out that since the first of the year, gas rigs have declined by 151, or -19%. Contrasting declines in gas rigs, said Lesar, is the rise in oil rigs of 125, or 10%. A net decline in U.S. rig count comes to only -1%.

Lesar describes the different trends between gas and oil as “a significant rig shift that is taking place in the U.S. between natural gas and oil.” He also explained that “the shift from natural gas to oil was dramatic and disruptive to operations.” Disruptive to the extent that company margins were just short of expectations because the drop in gas rigs was more than anticipated.

Paal Kibsgaard, CEO of Schlumberger, in their earnings call on April 20 noticed similar issues. He however took circumstances a step further. Kibsgaard said “we have over the past two quarters, signaled that hydraulic fracturing pricing is starting to come under pressure.”

Between the two company heads, we see that reduction in natural gas production is now greater than expected and faster than anticipated. To the point it is disrupting operations and even effecting overall hydraulic fracturing prices.....indicating dynamics are reaching into creating a surplus of fracturing capacity.

Transition Tells Of Pressure On Oil Production

One would have anticipated such a dynamic on dry gas plays versus rich gas liquids plays (dry gas being simple methane gas versus gas with butane, propane, etc.). Dry gas has been the cheapest, while common expectation is that fields rich in gas liquids would command production given sustained pricing. But....

Under-utilization of capacity on gas in general seems occurring and certainly supported by evidence.

Schlumberger CEO said “during the first quarter, the downward pricing trend seen in the gas basins also reached the liquids-rich basins.” Telling of the natural gas industry, be it dry or liquid gas, is Kibsgaard's remark that “the pricing impact varies by basin as excess capacity is moved around, but we expect to see lower pricing reaching all basins in the coming quarters.”

Halliburton's CEO sees the same dynamic, but to an apparently reduced extent. Lesar said that “the dry natural gas basins will be the most challenged, followed by those more easily accessible oily basins that are located next to natural gas basins...”

Given market dynamics of unexpected and deeper declines in natural gas production, it does appear that vast capacity will have to be moved to North American oil production. Goals are for reductions in natural gas capacity to be offset by increases in demand for North American oil capacity.

Should such a goal not be realized, in North America, people will have to be laid off and production capacity left idle. Attending the proposition are losses on capital expenditures and production income.

I would appreciably enjoy goals of oil production offsetting natural gas production to manifest. We would then see sustained employment, capacity utilization, returns on investment and so forth.

Problems With Oil Production Increases Offsetting Declines In Gas Production

Troubling is the perpetual glut of the Cushing Hub. This glut is now notorious, constitutes no news and in fact a reason for obvious pipeline reversals and additions.

Only in February 2012, the U.S. Energy Information Administration produced a report regarding refinery activities in Northeast markets. Looks as if refineries are struggling in that location and infrastructure requires congruent transition to fix the struggle. Another potential solution is pricing optimization with U.S. production, but this also requires infrastructure changes. In the last year, an unknown quantity of resource has been realized in the U.S. How do we move with this knowledge? It is ultimately knowledge that begs the addressing of transition.

This country has huge potential for growth and a lead on comparative advantage, especially with clean fuels. Clean fuels are advanced products of the basic fuel products this world knows, needs, and currently uses. In this country, our ability is to help emerging economies clean the use of basic fuels.