Articles Posted in Oil and Gas News

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As anyone who reads my blog is aware, I represent only mineral, royalty and surface owners and never represent oil companies. My passion has always been helping owners make the best use of their land and mineral assets and get the best compensation for leases, easements and surface use agreements. However, the current political discussions regarding the oil and gas industry seem to omit some important facts that we may all want to keep in mind.

Clearly, the oil and gas industry has been the subject of many public discussions. Regardless of your view, the suggestions that we eliminate fracking, transition away in the short term from oil and gas and remove what have been called “subsidies” to the oil and gas industry, involve a number of potential unintended consequences that we all should be aware of:

  • All the plastics in our life are derived from oil and gas. Without petroleum, there will be no cell phones, computers, appliances, cars and many other items that we use in our daily life. (Maybe that’s a good thing!)
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In a bit of welcome news for Texas mineral owners, according to the metrics calculated by Baker Hughes, the oil and gas drilling rig count for Texas and the United States is going up. Specifically, the rig count has gone up by 13 rigs since October 9, 2020. This represents the fifth week in a row that there has been an increase in the rig count. This past week has represented the largest increase since January 2020. Of course, there has been a decrease of 569 rigs since October 2019, so there is a ways to go.

Over half of the rigs have been added in Texas and especially in the Eagle Ford Shale.

The downward pressure on oil and gas prices due to the OPEC/Russian price war and the erosion of demand due to the covid virus has decimated oil prices, although they currently seen to be holding steady at about $40 per barrel for oil, according to the Energy Information Administration. In September, the Henry Hub natural gas spot price averaged $1.92 per million British thermal units (MMBtu), down from an average of $2.30/MMBtu in August, 2020.

 

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In August 2020, the Energy Information Administration (EIA) issued the second part of its report on the Wolfcamp shale play of the Midland sub-basin section of the Permian Basin, which you can read here. The report is an interesting analysis of the geology of this area. The accumulations in the Permian Basin that became hydrocarbons were deposited during the Pennsylvanian through the late Wolfecampian geologic era while an inland sea covered this area.

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As many of you know, the Permian Basin has been producing for about 100 years. So far, it has produced more than 35.6 billion barrels of oil and about 125 trillion cubic feet of natural gas. Last year, this area accounted for more than 35% of total U.S. crude oil production. The EIA estimates that its reserves of oil and gas make the Permian one of the largest hydrocarbon producing basins in the world.

The Permian Basin contains three sub-basins: the Delaware, Central and Midland. The Wolfcamp play extends in the subsurface of all three of these sub-basins. It has been called the most prolific oil and gas bearing formation within the Permian Basin. The Wolfcamp formation is, in turn, divided into four sections, or benches, designated by A, B, C and D. Each bench differs in a number of ways, including its porosity and organic content. Since many areas of this play have very low permeability, production often requires multistage hydraulic fracturing.

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There is a new book out in September 2020 by Daniel Yergin. As some of you know, he is the author of The Prize (which won a Pulitzer Prize) and The Quest, both of which are essential reading for anyone seeking an understanding of the history and nature of the oil and gas industry. The new book is entitled: The New Map: Energy, Climate, and the Clash of Nations, and will no doubt be just as interesting as his previous books.

Some of the points he addresses in the new book are:

  • the future of the shale boom
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Many Texas mineral interest and royalty owners have seen their royalty checks shrink or disappear altogether in the second quarter of 2020. The covid crisis caused prices to slip to nearly zero in some cases and in response, in April, May and June 2020, many operators shut in wells that they could no longer afford to operate. There was concern among some in the oil and gas industry that shutting in these wells could cause permanent damage to the wells and/or the reservoirs.images5

It now appears that those fears were probably unfounded. A recent press release by Rystad Energy, based on an analysis of second quarter earnings reports from 25 large, publicly traded oil companies, reports that most US onshore operators will restore nearly all shut-in oil wells by the end of the third quarter of 2020. This has no doubt been driven by the partial rebound in oil  prices. The operators sampled said they did not face any issues in bringing wells back online. Rystad Energy’s Vice President for North American Shale and Upstream, Veronika Akulinitseva, said “No loss of production has been reported by any operator following the shut-ins and moderation of output, with most companies flagging a smooth return of operations, and in some cases posting a positive production impact from those reactivations”. One operator, EOG Resources, indicated that nearly all their reactivated wells have exhibited some degree of “flush production”. Flush production is an increase in production after a well is reactivated because the bottom hole pressure has been building up while the well was shut in.

Many Texas mineral and royalty owners are individuals who depend on their monthly royalty check to pay the bills. The reactivation of these wells, and the larger royalty checks for a month or so, will be good news to these owners. In addition, as production comes back, oil companies will begin to add back laid off employees, which is important to those families and also to the Texas economy as a whole.

 

 

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As oil prices have declined to unprecedented lows, consumers may feel glad for lower gasoline prices at the pump. However, the piper always has to be paid, and nowhere more so than in Texas.

As I discussed in a previous post, oil companies have been hit by a number of negative factors, some of their own making.  First, our country was experiencing a substantial oversupply of oil going into the current situation. Many oil companies continued to produce, despite the oversupply, because increased production resulted in higher stock prices which in turn resulted in higher bonus for officers of the oil company. To this extent, some oil companies have brought this situation upon themselves. Secondly, the production war between Russia and Saudi Arabia exacerbated the oversupply and helped drive the price of oil down. Third, as the price of oil declined, the value of individual oil company’s reservoirs declined. In the cases where reserves were used as collateral for loans, the bank would then require either repayment of at least a portion of the loan or new collateral for the loan. Oil companies that cannot comply default and/or file bankruptcy. Fourth, the covid 19 virus creates staffing issues for oil companies, both in their offices and in the field. Fifth, shelter in place orders have resulted in drastically reduced demand for oil and gas. Finally, all of these factors make lenders and investors very nervous and so new money for exploration, production and pipelines is becoming more scarce.

Not surprisingly, all of this has resulted in oil company bankruptcies. So far, since January 2020, several oil companies have filed for bankruptcy protection: Bridgemark Corporation, Southland Royalty Company LLC, Dalf Energy LLC, Sheridan Holding Company I LLC (who are actually an investment fund), Echo Energy Partners I LLC, Whiting Petroleum Company, Victerra Energy LLC, Gavilan Resources LLC, Ultra Petroleum and Sklar Exploration Company LLC. Other companies, including Chesapeake Energy Corporation and Denbury Resources, are reportedly preparing bankruptcy filings. There been some predictions that hundreds of oil companies will file bankruptcy by the end of 2021.

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The Texas School Land Board announced new policies in response to the covid pandemic. These policies apply to Texas Permanent School Fund (PSF) lands that are subject to the Texas Relinquishment Act, Texas Natural Resources Code 52.171 through 52.190. According to the General Land Office (GLO) website: “The policies delegates the Land Commissioner the authority to grant up to a six-month extension on all drilling commitments, when it’s deemed to be in the state’s best interest, made by lessees of permanent school fund property during 2020, and a 90-day tolling on calculations for enforcing lease terminations for halting of production or failure to produce in paying quantitiesAdditional actions include adopting a policy addressing a waiver of penalties and interest on late royalty payments submitted from April 1, 2020 through June 30, 2020 in light of the current oil and gas crisis facing the nation.”

Owners of school lands who observe operators on their property who are not drilling or who have producing wells on their property that have ceased production, need to be aware that the cessation of drilling or production may not be a default under the lease, at least until the grace period imposed by the GLO has expired. Keep in mind that, given the other pressures the oil industry is suffering from at the moment, it would not be surprising to see these waivers extended.

 

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The oil and gas industry has always been cyclical. Always has been and no doubt always will be. $20 per barrel oil is not new. Just during my career, there have been three substantial downturns in oil prices prior to the one we are experiencing today. These happened in approximately 1970, the mid-1980s, in the late 1990s. Each downturn was followed by a tremendous uptick in prices.

Keep in mind that the current issues facing the oil industry are not from a single cause. In a sense, the industry is facing a multiple whammy. First, our country was experiencing a substantial oversupply of oil going into the current situation. Many oil companies continued to produce, despite the oversupply, because increased production resulted in higher stock prices which in turn resulted in higher bonus for officers of the oil company. To this extent, some oil companies have brought this situation upon themselves. Secondly, the production war between Russia and Saudi Arabia exacerbated the oversupply and helped drive the price of oil down. Third, as the price of oil declined, the value of individual oil company’s reservoirs declined. In the cases where reserves were used as collateral for loans, the bank would then require either repayment of at least a portion of the loan or new collateral for the loan. Oil companies that cannot comply default and/or file bankruptcy. Fourth, the covid 19 virus creates staffing issues for oil companies, both in their offices and in the field. Fifth, shelter in place orders have resulted in drastically reduced demand for oil and gas. Finally, all of these factors make lenders and investors very nervous and so new money for exploration, production and pipelines is becoming more scarce.

There has been a lot of discussion in the industry about the appropriate response to these factors. Some have suggested the imposition of tariffs on imported oil. Others have suggested direct federal assistance to oil companies. Unfortunately, there is no consensus in the industry on what solution might help, or even as to whether any solution is called for. The smaller independent companies appear to prefer some kind of federal assistance. On the other hand, it appears that many of the large oil companies, who are better equipped to weather the storm, would prefer to let the downturn play out and then gobble up the smaller independent oil companies who can no longer stay in business. There are others who fear that government assistance now means government overregulation in the future. Anyone who remembers the draconian and impossibly complex oil allocation and pricing regulations of the Carter Administration knows just how uneconomic and illogical government regulation can be.

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A well operated by Chesapeake Energy Corporation experienced a fiery blowout on Thursday, January 30, 2020.  The well, the Daniel H 1 H, is located in Burleson County, Texas near Deanville. The well is in an area where Chesapeake is drilling long lateral well bores to develop Eagle Ford shale deposits. Two of Chesapeake’s subcontractors, C.C. Forbes and Eagle Pressure Control, were operating a service rig to install new hardware on the well at the time of the accident. Unfortunately, three employees of these subcontractors were killed by the fire. News reports indicated that Boots & Coots, a well control company now owned by Halliburton, was hired to get the well under control and put the fire out.

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The U.S. Chemical Safety Board  (CSB) is sending a team to the well to investigate the accident. The CSB is an independent federal agency charged with investigating industrial chemical accidents. Headquartered in Washington, DC, the agency’s board members are appointed by the President and confirmed by the Senate. According to the CSB website: “The CSB conducts root cause investigations of chemical accidents at fixed industrial facilities. Root causes are usually deficiencies in safety management systems, but can be any factor that would have prevented the accident if that factor had not occurred. Other accident causes often involve equipment failures, human errors, unforeseen chemical reactions or other hazards. The agency does not issue fines or citations, but does make recommendations to plants, regulatory agencies such as the Occupational Safety and Health Administration (OSHA) and the Environmental Protection Agency (EPA), industry organizations, and labor groups. Congress designed the CSB to be non-regulatory and independent of other agencies so that its investigations might, where appropriate, review the effectiveness of regulations and regulatory enforcement.”
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The United States Energy Information Administration (EIA) recently issued a report that in September 2019 the United States exported more crude oil and petroleum products than it imported. This is the first month in the history of recorded data (since 1949) that exports have exceeded imports. Specifically, 8.76 million barrels were exported from the U. S. during that month, surpassing the 8.6 million barrels that were imported. The report also indicated that the EIA expects the U. S. to be a net exporter of crude oil and petroleum products through 2020 as well.

Much of this increase is due to the energetic production in the Texas Permian basin and Eagle Ford Shale. Abundant production has significant national security implications. When we are producing enough of our own oil and gas, we are less dependent on the vagaries of foreign governments, such as OPEC. Some of us are old enough to remember when the OPEC manipulations caused gas shortages in the United States and long lines at service stations.