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The greatest story never told? Methane emissions from natural gas continue to drop

In case you missed it – and chances are you did, because virtually no one in the media covered the story – there was a recent report out of Washington that once again underscores the positive role of natural gas in environmental protection.

The U.S. Environmental Protection Agency released its latest greenhouse gas inventory, updating emissions estimates for oil and gas operations. The findings show that methane releases from natural gas production continue to drop:

  • Net methane emissions have fallen 38 percent since 2005. This occurred during a time when natural gas production increased 26 percent.
  • Methane emissions from hydraulically fractured natural gas wells are down 79 percent since 2005.
  • Total methane emissions from natural gas systems have dropped 11 percent since 2005.

Those numbers are significant for a lot of reasons.

To begin with, they are absolute evidence that energy companies can and will continue to operate in an environmentally responsible fashion – without intrusive, burdensome government regulations. Keep in mind that these successes were achieved voluntarily. They prove that the industry does not need punitive, politically motivated rules to meet its cleaner-air obligations.

The data also pretty much deflate the hot-air rhetoric coming from critics of both drilling and hydraulic fracturing. Natural gas is a clean-burning fuel, and it can provide a bridge to a clean energy future. Environmentalists may not like that, and they certainly won’t admit it. But facts are facts, and when those facts come from an EPA that has the energy industry in its crosshairs, their relevance cannot be denied.

Finally, and along those same lines, the EPA estimates reinforce the impact that natural gas is having on overall carbon emissions. CO2 releases have been plummeting and are now at a 20-year low. Anyone who doesn’t believe that natural gas – and especially its increased use in electricity generation – has not contributed in a big way to that decline just isn’t paying attention.

Of course, none of this is likely to have any effect on EPA’s upcoming methane rules, which are scheduled to be proposed this summer and become effective in 2016. That’s interesting, too, given that the agency’s latest report acknowledges the reduction in emissions was in part due to voluntary efforts by the industry.

So much for the “if it’s not broke, don’t fix it” theory.

It’s been said before, but bears repeating: When the government pursues expensive, unnecessary policies that target oil and gas development, it risks crippling an industry that – even in the current price climate – is still an economic force. That’s unfortunate.

But to do it despite clear evidence that the industry is already pretty much accomplishing what the rules would mandate? That’s not just unfortunate. It makes no sense at all.

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Does Shell deal send an M&A message to the market?

Last week, Burleson LLP held our 10th annual Energy Form, a panel of industry insiders who offered their observations on issues facing the oil and gas sector – in this case, how companies are managing in the difficult price environment.

There was a consensus that 2015 would continue to be tough. And while everyone offered a prediction as to what the price per barrel would be at the end of 2016, we all agreed this kind of forecast, in this kind of uncertain market, was guesswork at best. So I’ll skip the specifics and just say there was a collective sense the market will rebound sometime next year.

One thing the panelists did note was that this low-price cycle differs in a critical way from others: companies still have access to a lot of cash. The question is, will they use it and if so, what will they use it for?

We may have gotten at least a partial answer with Shell’s announcement that it will buy BG for about $70 billion. Whereas we’d previously seen smaller companies that were laden with debt targeted for acquisition, this was a mega-merger that harkened back to the 1990s, when huge deals transformed the industry.

However, whether this signals a trend in which big companies will use their cash for big transactions is another matter.

In the wake of the Shell-BG deal, there were a number of reports suggesting that the acquisition was evidence the oil industry sees the light at the end of the price tunnel. Banks and analysts both said it sent a message of confidence to the market that could lead to additional mergers and acquisitions.

That may be true. But it may not happen anytime soon. As one Credit Suisse investment banker told the Houston Chronicle, “Our view is there will be more M&A a little bit later. But will (the Shell-BG deal) result in a rash of other big deals? Not necessarily.”

Maybe there won’t be a “rash” of big deals anytime soon, but Morgan Stanley said there could be at least one major transaction on the horizon.

In a client note issued this past Friday, the investment firm’s analysts said Exxon Mobil might be a candidate to make the next megadeal. It has a relatively strong balance sheet and access to cheap debt, two factors that put it in a good position to pursue an acquisition, the target of which would probably be a company whose focus is on offshore operations, according to Morgan.

Of course, as our Energy Forum panelists acknowledged, making predictions when no one knows where prices are going is a risky proposition at best. But a just-released M&A survey from the Brunswick Group revealed that more than half of the respondents expect an increase in deal-making in the U.S. oil and gas sector in 2015.

So the issue may not be whether we’ll an uptick in deals this year. The issue may be when.

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Don't expect Iran deal to affect oil markets anytime soon

Last week, of course, the big news worldwide was the Iranian nuclear deal. And while the market reacted predictably to the potential that sanctions could be lifted on Tehran’s oil exports – Brent prices fell 3.7 percent on the announcement – the full potential effect of the deal isn’t going to be felt anytime soon.

That’s the emerging consensus among most experts. They cite the following to support their arguments:

  • The agreement outlined last week was tentative. It still has to be finalized by June 30, and you can expect a pretty rancorous debate in the United States over whether it’s good or bad for the country. So there’s no guarantee it will stand as is.

  • The French bank Societe Generale, as reported by the Wall Street Journal, said that even if the deal is finalized, it’ll take three or so months to “lift or suspend oil and banking sanctions against Tehran and another six months to restore 1 million barrels a day of oil production and exports.”

  • The sanctions won’t be lifted until the International Atomic Energy Agency has “verified that Iran has taken all of its key nuclear-related steps,” according to the statement accompanying the deal. That verification process is not going to happen overnight.

  • Although lifting sanctions could push another 1 million to 1.2 million barrels of crude per day into an already supplied global market, there’s some question as to whether Iran’s oil sector will ever be able to recover to full production capacity.

  • It’s going to take some time for Iran to rebuild its oil infrastructure in order to get output levels where the country needs them to be.

The upshot of all this is that we’re probably looking at a minimum of six to nine months, and more likely over a year, until any Iranian oil hits the market. That probably explains why prices didn’t crash last week, dropping less than the $5-plus plunge per barrel that a lot of analysts were expecting.

What’s interesting about all this is that Iran is caught between a rock and a hard place on oil exports.

It’s true the country’s economy relies in no small part on oil, and that sanctions have basically cut its exports in half – from 2.5 million bpd to 1.3 million bpd now. But to balance its budget, Iran needs prices in the range of $130 per barrel. That’s not going to happen.

What’s more, even if Iran can push more oil into the global market, it’s still going to put downward pressure on prices. In other words, a country that needs a high-price environment is actually going to be contributing to a low-cost environment.

Here’s what most observers predict: Within six months of the sanctions being lifted, Iran will export an additional 200,000 to 600,000 bpd. But even if it hits full export capacity, don’t expect to see any real impacts until 2016 at the earliest.

So given all the current market uncertainties – which could get even more complicated depending on whether OPEC does anything at its June meeting regarding production – we could be in for an interesting year or so.
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Opponents of lifting the ban on U.S. crude exports saw their position weakened even further last week with a new study from Rice University’s Baker Institute for Public Policy.

Ken Medlock, the senior director of the Institute’s Center for Energy Studies, closely examined all of the major issues that have surrounded ending the prohibition. His conclusion could not have been any clearer:

This country gets stronger – and consumers don’t pay the price at the pump – if producers are allowed to sell crude overseas.

Here are some highlights of the report, which can be viewed in full here:
  • Since most of the crude that would be exported is of better quality than both Brent and WTI, it would sell for higher prices on the international market. Thus, ending the ban would have the practical effect of leveling the global playing field for U.S. oil companies.
  • Lifting the ban could benefit upstream producers and attract capital investment for the development of midstream infrastructure.
  • On the issue of energy security, “Removing the ban generates distinct energy benefits by providing a more stable and secure source of crude to a growing global market,” Medlock writes. “Greater stability lessens price volatility…(so ending the ban) will transmit an energy security benefit to U.S. consumers.”
  • Gasoline prices won’t go up. “Since refined products…can be freely traded in the international market, the prices of refined products sold in the U.S. are in a parity relationship with international prices for refined products,” he explains. “Thus, the discounted prices of oil produced in the U.S. are not reflected in U.S. gasoline and refined product prices.”

This last point is important.

Opponents of the ban, and politicians afraid of voter backlash, have consistently sounded the alarm that ending the prohibition would raise gas prices. But by my count, five previous studies – as well as the U.S. Government Accountability Office and the Federal Reserve Bank of Dallas – have all concluded that allowing exports would actually drop prices. The estimated declines ranged from 1.4 to 12 cents per gallon.

In other words, the whole pain-at-the-pump argument just doesn’t hold water.

The Baker Institute paper comes on the heels of another study, by IHS, that makes an equally compelling economic case for ending the ban. It finds that allowing crude exports would:
  • Generate between $26 billion to $47 billion in annual gross domestic product related to the crude oil supply chain;
  • Create from 124,000 to 240,000 new jobs annually between 2016 and 2030 in the companies and industries that make up the supply chain, and between 394,000 and 859,000 new jobs every year nationally; and
  • Provide an added $86 billion to $170 billion annually to the U.S. economy

Of course, none of this is going to stop critics from raising unfounded fears over the ban. They believe that exporting crude will result in more production, and more production – regardless of its benefits – will jeopardize their efforts to cripple drilling and push their renewables agenda.

But as the saying goes, facts can be a stubborn thing. And on this issue, the facts keep stacking up on the side of ending the ban. Policy-makers need to pay attention and do what’s right.
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New fracking regs: Another disconnect between the administration's words and actions

With the release last week of hydraulic fracturing rules for federal and tribal lands, the Obama administration has shown once again how White House rhetoric trumps reality when it comes to domestic energy policy.

On Friday, the Interior Department unveiled the new regulations, which will become effective in 90 days. They include language that imposes stricter rules on wastewater management and cement well casings, and a requirement that chemicals used in the process be posted on

The rules are so wrong, on so many levels, that it boggles the mind.

To begin with, states are already doing a good job at drilling oversight. There hasn’t been a single proven instance where fracking has tainted water. That sends a strong message that there’s no justification for the feds to step in and usurp what should be a state responsibility. What’s more, in states like North Dakota that already have disclosure rules, it could add a costly, time-consuming, unnecessary layer of regulation.

Speaking of government overreach, the rules are tougher than those that exist in most states. For example, they require that wastewater now has to be secured in covered tanks prior to permanent disposal rather than in pits. Ten states have similar requirements. So the federal government is now basically superseding rules in the other 40 that to date have been working pretty well.

Beyond that, compliance costs are expected to run about $11,400 per well. To the majors, that may not seem like much. But it will have an impact on smaller, independent companies that are already struggling in the current price environment. That’s ironic given that the White House has repeatedly voiced its support for small businesses. Apparently, that support doesn’t extend to small businesses in the energy industry.

The paperwork demands of the rules will probably increase the length of time required to process drilling applications, too. Right now, with the Saudi price war on U.S. shale companies slowing activity, that’s probably not a huge concern. But when prices do come back, and the declines in output are reversed, it could be.

Which brings me to the subject of timing. Issuing rules that add costs when oil prices have dropped 50 percent and natural gas prices are low makes absolutely no sense.

When you add all of this to the fact that the White House has shown no real inclination to lift the ban on crude exports; that it has shown no interest in allowing a waiver of the Jones Act to facilitate shipment to light, sweet crude to U.S. refineries equipped to handle it; and that it continues to target oil and gas companies by pushing punitive tax policies, one thing is clear:

For all its talk about the benefits of the U.S. energy revolution, this administration is more interested in crippling the boom than in sustaining it.

Let’s s face it, these rules are less about fracking than they are about fear. Because fracking, done responsibly, is safe. A number of former White House officials – including ex-EPA administrator Lisa Jackson, ex-Energy secretary Kenneth Chu, and ex-Interior secretary Ken Salazar – have all said as much. But the environmental community has successfully pushed the White House into advancing policies based on a doomsday “what if” scenario rather than on a real-world, fact- and science-based “what is” scenario.

The administration can say what it will, as often as it chooses, about how it has fostered America’s surge in production, and the advantages that delivers to the country. But actions speak louder than words. Unfortunately, what this White House says about energy, and what it does, are light years apart.

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