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On lifting the oil export ban: Many benefits, few costs


With the drop in oil prices, it was probably just a matter of time before debate over lifting the ban on crude oil exports heated up. Now, it appears, that time has come.


Last week, U.S. Rep. Joe Barton of Texas introduced legislation to end the ban, and Sen. Lisa Murkowski, the incoming chairman of the Energy and Natural Resources Committee, has said that President Obama – not Congress – should do it.


To be sure, the ban is a relic of another time. It was enacted in 1975 in response to the Arab oil embargo, during a period when domestic energy development was nowhere near what it has become today. Now, almost 40 years later, the United States has surpassed both Saudi Arabia and Russia as the largest producer of oil and natural gas liquids.


The potential economic benefits of lifting the ban in this new energy world are significant:
 

  • It would save Americans as much as $5.8 billion per year in gasoline costs between 2015 and 2035, according to ICF International.
  • It would create 630,000 new jobs at its peak in 2019, the Aspen Institute said in an October 2014 report.
  • It would increase U.S. production to 11.2 million barrels per day, up from the current 8-million-plus bpd, and generate almost $750 billion in new investment to the U.S. economy, IHS Energy projected.
  • It would “increase the size of the economy, with implications for employment, investment, public revenue, and trade,” the Government Accountability Office concluded in October. GAO added that removing the restrictions could also “contribute to further declines in net crude oil imports, reducing the U.S. trade deficit.”


Economics aside, there’s also a legitimate fair-market argument to be made.


When OPEC refused to cut production last month, it was widely seen as a move by Saudi Arabia to preserve its market share. That reinforced a simple fact: the oil market is worldwide and competition is global. OPEC and the Saudis are taking actions to increase competitive pressures on the United States in an effort to curb our shale production.


It seems to make sense for Congress and/or the president to seriously consider policies that would allow the U.S. energy industry to do business on a relatively equal footing with our competitors.


And let’s not forget that, despite the fallout from recent price declines, America isn't going to stop drilling. Yes, the rig count was down last week. But it still totaled 111 more than were operating last year; in Texas, it was still up 24 from 2013. Beyond that, the U.S. Energy Information Administration forecast this past Friday that U.S. crude output would average 9.3 million bpd in 2015, up 0.7 million bpd from this year.


So if we have a product that the world wants – a product whose export delivers tangible benefits to the American economy and U.S. consumers – and we’re going to keep producing it, I am hard-pressed to see the logic of not making it available to the international market.


I recognize that refiners oppose lifting the ban, as they are the beneficiaries of cheaper oil. That’s understandable. Green activists are also opposed, fearing the additional production that would result threatens the environment. That’s understandable only to the degree that they oppose all things fossil fuel and have made a noisy career demonizing the risks hydraulic fracturing – the evidence of its safety notwithstanding.


I also acknowledge that there may be some infrastructure issues related to exports. And I realize concerns have been raised that lifting the ban may result in higher consumer fuel prices, although the October GAO report pretty much rejected those claims.


But I just don’t think we should allow the Saudis and OPEC to put the brakes on the U.S. shale boom. Nor do I think we should as a rule support policies that conspire against free and fair trade.


I have said before that the U.S. energy industry has been the one consistently bright light in the post-recession economy. We can only hope that as this debate moves forward, policymakers don’t do anything that could extinguish it.

 

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No longer the big dog, OPEC may have picked the wrong oil-price fight


It’s been 10 days since OPEC decided not to cut production, and opinions as to the eventual impact on oil prices are all over the map. That’s probably not going to change in the short-term; it seems that for every expert who says the industry can weather a price drop, there’s another one forecasting doom.


But this past week has seen some developments that, while hardly amounting to a crystal ball for the future, deserve to be considered in any oil price discussion.


To start with, if OPEC and the Saudis expected U.S. drillers to run for cover at sub-$80 oil, they were sorely mistaken. Last week, the rig count actually rose by three, to 1,575. That’s the most since mid-November. On top of that, output rose 6,000 barrels a day for the week ending Nov. 28 to 9.08 million, the highest level since the government has been compiling data.


So if the Saudis really are trying to wage a price war with American shale oil producers, the early indications suggest they may have picked the wrong fight with the wrong opponent.


Then there’s this fact, from a team of analysts at ITG Research: In the Bakken, Eagle Ford, and Permian formations – which account for 88 percent of all U.S. shale production – companies can drill profitably in some areas at $25 per barrel. That’s an awfully long way from the current $65-$70 range that has made analysts and investors jumpy.


Next, as I have said before, companies have already begun to shift away from fringe areas and focus on their sweet spots.


While permits and applications for may have dropped in the Bakken, Eagle Ford, and Permian, the high-producing portions of those plays are still holding their own. In fact, Apache and Continental Resources have both said that by moving activity to more productive fields, they will see double-digit increases in output even as their rig counts decline. They probably won’t be alone.


Finally, while everyone is talking about OPEC’s impact in prices, I want to point out again that the tangible positives of technology may well outweigh the potential negatives of the cartel’s recent move.


Drillers can now get more oil out of fewer wells thanks to advances in horizontal drilling and hydraulic fracturing. That makes rig counts – although many continue to point to them as a bellwether of industry health – less important than productivity. And U.S. producers are more productive, and more efficient, than ever.


None of this, however, is to say that the oil-price dust hasn't settled yet.


Brent closed Friday at $69.07, the lowest price since October 2009. Last Thursday, Saudi Arabia cut prices in the United States. Companies continue to revisit their capex strategies. And we’re very likely to see some mergers and acquisitions, and smaller independent companies that took on a lot of debt to capitalize on the U.S. boom may be at risk.


All of that said, I still tend to agree with Richard Dolgener, the Andrews County, Texas, judge who said that OPEC’s decision to hold the line on output wasn’t an insurmountable challenge:


“The other countries that have been the big dogs, they’re going to have to figure out that we’re here to stay.”


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After OPEC: Why reports of a shale slowdown in U.S. are greatly exaggerated


Here are some thoughts on OPEC’s predictable decision last week to not cut production:
 

  • The cartel has essentially declared a price war on U.S. shale, largely because Saudi Arabia wants to preserve market share at any cost. Having put away more than $745 billion in cash reserves, the kingdom is banking that it can withstand lower prices long enough to force U.S. drillers to throttle back production. But most forecasts have domestic output increasing through next year, perhaps as much as 1 million barrels per day. So don’t be surprised if the Saudis – and OPEC – have to reconsider their actions when the cartel meets next in June.
  • Even though oil prices took a beating last week after OPEC’s announcement, there are indications that the anxiety over prices at or below $70 is a bit overstated. As I’ve written before, only 4 percent of U.S. shale output needs prices at or above $80 to be profitable. Beyond that, the International Energy Agency has noted that most production in the Bakken, which some observers believe is OPEC’s real target, is viable at or below $42; in North Dakota’s most productive area, McKenzie County, costs are just $28 per barrel. And a new analysis by IHS finds that 80 percent of new tight-oil production in 2015 would still be economic at between $50 and $69.
  • Along those same lines, a Citigroup analyst has pointed out that while the $70 to $80 figure represents full-cycle costs – including land acquisition and infrastructure – it can cost as little as $40 to put an additional well into production. In other words, once the operational foundation is in place, the price floor can potentially drop.
  • The biggest losers in the current pricing climate won’t be in the United States, but in other producing nations around the world. Citigroup has put the break-even cost for production at $161 for Venezuela, $160 for Yemen, $132 for Algeria, $131 for Iran, $126 for Nigeria, and $125 for Bahrain, $111 for Iraq, and $105 for Russia. That’s a long way from this morning’s $70.29 price for Brent. It also explains why Algeria and Venezuela were reportedly furious over Saudi Arabia’s hard line on production cuts.
  • Russia and Venezuela, in particular, will be hit especially hard. The Russian ruble, which is closely connected to oil prices, dropped to record lows following OPEC’s decision, and shares in Rosneft – the state-owned oil company – have fallen 40 percent this year. In Venezuela, oil represents 95 percent of exports and a quarter of the gross domestic product; the country has already been forced to sell its oil domestically at a subsidized price, contributing to a growing budget deficit. So when prices fall further and the global market is oversupplied, the Venezuelan economy will only get further pummeled.


But here’s one of the more interesting potential questions: Will U.S. politicians summon the courage to act in response to OPEC’s undeclared price war on American shale? It’s an issue David Hufman of the oil broker firm PVM raised in a note to clients last week:


“How long will it be before OPEC (members) are accused of price dumping and a U.S. Senator calls for protection for shale oil producers? At the very least, we can expect the clamor for freedom to export U.S. domestic crude to increase to reduce the possibility of deep discounts that could make or break shale oil economics.”


I can’t see that happening now. But with a Republican Senate arriving in January, there may be at least a slight chance that Washington will do something to support an industry that has almost singlehandedly supported the U.S. economy over the past few years.


In the meantime, prices will likely remain volatile, and the dust isn't going to settle for a couple of weeks. This morning, crude dropped another 3 percent to $67.53 before rebounding, and prices remained pretty stable. I still believe the market’s going to find a balance. Where that ends up being is anyone’s guess. But that still doesn’t change my sense that reports of a price-driven plunge in U.S. shale development are greatly exaggerated.

 

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Though crude prices are dropping, there's no need to panic


A lot of people have been ringing their hands lately about the falling price of crude oil. I’m not one of them.


That’s not to say there isn't any cause for concern. Prices are down in the neighborhood of 30 percent, though Brent crept above the $80 mark at the end of last week and U.S. crude ticked up 66 cents, to $76.51. Unless you’re motorists, who get relief at the pump, or refiners, who make more money when oil prices drop, the decline is probably less-than-great news.


Still, this is no time to panic or to utter the dreaded “B” word – bust.


Prices are going down because supply is rising and demand is falling. The U.S. shale revolution has nearly doubled domestic oil and gas production since 2007. Libya is somewhat unexpectedly putting about 900,000 barrels per day into the global market. The Asian economy is slowing down in general, and especially in China, where there are indications that the world’s largest petroleum importer will have its weakest growth in almost a quarter century. (I do want to note, however, that China’s central bank cut interest rates Friday, which helped push Brent prices past $80.)


So it’s a pretty simple equation: Oversupply puts downward pressure on prices. But I’m still not all that worried, for a lot of reasons.


While many of the doomsayers are saying that the only way to stem the price drop is to put the brakes on shale production, they’re forgetting one thing: According to the Department of Energy, only 4 percent of the nation’s shale output needs an oil price above $80 to break even on their investments. So I wasn’t surprised to see last week that drillers are still planning on higher output even in a lower-price environment, or that the Energy Information Administration forecast that production in the Permian, Bakken, and Eagle Ford plays will keep going up.


Companies are also drilling more strategically. As long as prices stay lower, they will shift their focus to more productive areas and cut back activity in the less-productive, less-efficient ones. So they can still extract a lot of oil in the $75 to $80 range and be profitable.


That’s not to say there’s no impact on drillers. We’re already seeing cases where some companies are cutting capital expenditures, reassessing long-range plans, or taking a “wait-and-see” decision-making approach. And there will probably be some consolidations in the future.


At the same time, though, there have been reports that Devon is going to raise output by up to 25 percent next year, Pioneer by up to 21 percent, and EOG by double digits.


Those kinds of numbers hardly signal a panic in the oil patch.


Of course, as has been so often pointed out, oil prices are set on the global market, where OPEC – despite its weakened political clout, thanks to U.S. shale – remains a dominant player. That’s why all eyes will be on Vienna this week, where the cartel meets Thursday. There’s something of a civil war going on between Saudi Arabia, which has opposed a production cut in an effort to slow the American shale boom, and nations like Venezuela, which wants a cut in order to push prices back up.


What will happen at the meeting is anybody’s guess; predicting the outcome of a power struggle is a risky bet at best. For what it’s worth, Bank of America predicted Friday that the organization would cut production by no more than 500,000 barrels per day, as Saudi Arabia puts sales volumes over stopping the slide in prices. We’ll see.


But that’s beyond the control of U.S. drillers. What is in their control is an ability to produce oil efficiently and to adjust strategically as the market shifts. That’s what they’ve been doing, and that’s what they’ll continue to do. So while no one can be certain if prices have bottomed out – though I suspect they have, or are close to it – I think it’s safe to say that the domestic energy boom has in no way run its course.

 

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A strange headline reveals some painful truths for fractivists


I imagine that for most people, the headline in the Washington Post seemed laughably strange:


“Study: Fracking chemicals found in toothpaste and ice cream.”


Strange? Maybe. But also true. Researchers from the University of Colorado at Boulder found that fluids used in hydraulic fracturing include a lot of chemicals that are found in products Americas use, eat, or swallow all the time – including toothpaste, laxatives, and even ice cream.


The study sampled fracking fluids from five states, focusing on surfactants, which are used to break the surface tension between water and oil and allow for more oil to be extracted. Basically a soap, they are a critical ingredient in the “cocktail” that drillers use in the fracturing process.


Here’s what Michael Thurman, lead author of the study, had to say about the findings:
 

  • “We found chemicals in the samples we were running that most of us are putting down our drains at home.”
  • “What we learned in this piece of work is that the really toxic surfactants aren’t being used in the wells we have tested.”
  • “We’re finding chemicals that are more friendly to the environment.”
  • “The surfactants themselves are some of the same compounds that we use day to day, they are not some kind of dark, super-toxic chemicals.”


To most of us in the industry, this comes as no big surprise. Fracking fluids are 99-plus percent sand and water, and use chemicals that are also found in things like hair color, IV fluids, detergents, and cosmetics.


But what was interesting was the response from the anti-fracking movement, which has made a collective career out of pushing the idea that the fluids are dangerous. Or, perhaps better stated, the non-response.


One Colorado activist, given the chance to comment, declined, saying that any discussion of the study was “beside the point.” Except content of the fluid has always been the point to those opposed to fracking…until apparently it wasn’t.


“This study changes nothing,” said another. And it may not, at least from their perspective. Environmentalists have never felt constrained by the facts, so there’s probably little reason to believe that this study – from a respected school and not backed by the industry – will in any way soften their rhetoric.


But it should.


This is sound, objective science, and it deserves a place in the debate. As I’ve said before, the anti-drilling crowd has the absolute right to their own opinions. But they don't have the right to their owns facts. These facts speak for themselves. They need to be heard.

 

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