Articles Posted in Oil and Gas News

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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.

KBTX-Photo-Burleson-County-well-blow-out-01_30_20

KBTX Photo

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.

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As production in Texas’ Permian Basin increases, so does the industry’s need for pipelines to transport production to treatment facilities and markets. Kinder Morgan, EagleClaw Midstream Ventures and Apache Corporation recently announced they have signed a letter of intent to build yet another oil and gas pipeline, to be called the Permian Highway Pipeline Project (PHP Project). The 42 inch pipeline will be designed to carry about 2 billion cubic feet per day and will be about 430 miles long, from Waha hub in Pecos County, Texas to several liquid natural gas facilities on the Texas Gulf coast. (Waha is a West Texas trading hub and pricing point). It appears from news releases that much of the pipeline capacity will be used to transport production by the three partners, but they are apparently also considering adding enough capacity to transport production from other companies.

ExxonMobil and Plains All American Pipeline have also announced that they have signed a letter of intent to build a common carrier pipeline from Wink and Midland, Texas to Webster, Baytown and Beaumont, Texas.

If you get a call from a landman representing a pipeline company, do yourself and your property a favor: do not try to negotiate a pipeline easement without the assistance of an attorney experienced in this area. The truth is that you don’t know what you don’t know, and in all probability you will have to live with your mistakes for many decades.

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Economists at IHS Markit  recently issued a report (summarized here) that predicts that oil production in the Permian Basin will almost double by 2023, increasing by 3 million barrels per day (mbd) to 5.4 mbd.  That level of growth will account for more than 60% of net global oil production. As Daniel Yergin, vice-chairman of IHS Markit indicates, “(i)n the past 24 months, production from just this one region—the Permian—has grown far more than any other entire country in the world. Add an additional 3 mbd by 2023—more than the total present-day production of Kuwait—and you have a level of production that exceeds the current production of every OPEC nation except for Saudi Arabia.”

In a separate report, summarized here, IHS Markit predicts that natural gas production will rise in the United States by almost 8 billion cubic feet per day (bcf/d) or more than 10 percent in 2018 alone. Altogether, U.S. production is expected to grow by another 60 percent over the next 20 years, the report says. In the Permian Basin alone, production of both natural gas and natural gas liquids (NGLs) are  expected to double from 2018 to 2023, reaching 15 bcf/d and 1.7 mbd, respectively.

The_West_Texas_Permian_Basin

The Permian Basin

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As readers may recall, the US Environmental Protection Agency published a draft report in 2015 that concluded that there was no evidence that hydraulic fracturing (“fracing”) led to widespread, systemic impacts on drinking water resources in the United States.

Environmental groups went ballistic over this conclusion. Bowing to public pressure, the EPA decided to rewrite the report. In 2016, the EPA published a redrafted final report that you can read here. That report concluded that activities in the hydraulic fracturing water cycle “can” impact drinking water resources “under some circumstances”.

Shari Dunn-Norman, associate professor in the petroleum engineering department at Missouri University of Science & Technology, was a member of the 31-person Scientific Advisory Board panel of “subject matter experts” that reviewed EPA’s work during the study. Professor Dunn-Norman recently shared her thoughts about the experience at a Hydraulic Fracturing Technology Conference put on by the Society of Petroleum Engineers in The Woodlands, Texas.

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The U.S. Geological Survey released an updated report (that you can read here) regarding the alleged link between induced earthquakes, defined as earthquakes triggered by commercial activities, disposal wells or and hydraulic fracing.

A Preliminary Forecast Model For Induced Quakes

USGS scientists studied 17 geographical areas spanning eight states, where increased seismic activity has been recorded that is presumably attributable to human activities and commercial endeavours, to try to develop a preliminary forecast model designed to determine how induced earthquakes could be assessed in geographical regions where increased oil and gas operations are occurring. The report is the first comprehensive study conducted on the hazard levels associated with human activity induced earthquakes.

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EOG-Graph

Graph courtesy of EOG Resources

EOG Resources has been experimenting with enhanced oil recovery (EOR) techniques that may be good news for Texas mineral and royalty owners. Specifically, EOG has been using injections of natural gas to increase oil production on approximately 15 wells. They report that the new technique can result in producing 30% to 70% more oil from the Eagle Ford shale, at an additional cost of about $6 per barrel of oil.

EOG cautions that the technique may not be suitable for all wells in all reservoirs, however the early results from the EOG wells have resulted in attempts by scientists and other oil companies to study and duplicate the EOG results. For example, David Schechter, a petroleum engineering professor at Texas A&M University, has altered his lab that has been used to test carbon dioxide (CO2) for EOR to safely observe how natural gas affects reservoir rock. BHP Billiton and its partner Devon Energy have two EOR pilot projects in the Eagle Ford. Marathon Oil and Core Laboratories are also reportedly beginning pilot projects.