The last barrel

Things are looking up. As you can see from the forecast published in this issue, the outlook for the upstream industry is improving—particularly in North America. According to World Oil’s forecast, which is now in its 91st year, operators in the U.S. are set to spud more than 18,500 wells this year. Now at first glance, this number may not seem excessively impressive; it is, after all, a far cry from the number of wells drilled in 2014. However, it is a major improvement on last year—particularly when viewed in light of the rapidly changing political landscape facing the industry in the wake of last month’s presidential inauguration.

Challenges. The OPEC, non-OPEC production agreement reached toward the end of last year appears to have set a floor on the price of crude, with WTI trading in the low $50s since December. However, the price has struggled to go much higher than $54, and the steady climb in the U.S. rig count presents a considerable hurdle to those hoping for more of an upside. There are, however, two rather noticeable challenges—manpower and resources—awaiting shale producers as they seek to capitalize on the improvement in prices.         

According to Karr Ingham, an economist with the Texas Alliance of Energy Producers, which describes itself as the largest statewide independent oil and gas association in the nation, the industry in that state lost a whopping 103,000 jobs between December 2014 and October 2016. And while that number boggles the mind, it is worth noting that, as of December, another 205,300 Texans remained on the payrolls of upstream-related companies.

World Oil’s forecast is calling for a 26% increase in the Lone Star state, which is broadly representative of the increase across the domestic U.S. market. However, the essential question remains, how prepared are the service companies to respond to such an increase in demand? Given the amount of equipment that has been idled over the course of the downturn, and the number of skilled personnel that have been let go, one has to wonder at the industry’s remaining capacity. How much accumulated knowledge was laid off in the dark days of the downturn, and how much will this hamper operations going forward? While problems such as this may not rise to the fore immediately—indeed they may be ignored as people celebrate the industry’s reprieve—a sustained uptick in activity would no doubt reveal any shortcomings, particularly those relating to the loss of experience. After all, it’s impossible to know what you don’t know.

Flaring. Not content with the resurrection of the two major pipeline projects—Keystone XL and the Dakota Access Pipeline—the newly resurgent Republican party gave the industry another cause for cheer at the start of February. Mind you, the U.S. Bureau of Land Management published its final rule on venting and flaring in November, just two months before the Obama administration vacated office. Speaking at the time, Sally Jewell, the then U.S. Secretary of the Interior, hailed the new rule as “good government, plain and simple.”

However, as you would expect, producers were somewhat less enthusiastic, pointing out that the rule was in fact redundant, costly, and would hamper output. Whiting Petroleum, for one, said that “BLM’s creation of regulations, which duplicate EPA regulations, serves only to inhibit production and impede capital investment in energy production on federal and tribal lands.” Meanwhile, Encana Oil & Gas said that “BLM should focus on their multiple-use mission, including improving oil and gas permitting, not further delaying it.”

The rule, which was challenged in an ongoing court case brought by IPAA and the Western Energy Alliance, received a blow in early February, when the House of Representatives passed a joint resolution of disapproval.

IPAA President and CEO Barry Russell praised the vote, and urged the Senate to follow the House’s lead on the rule, which, he said, was more concerned with “shutting down production than creating a workable solution for industry.” Meanwhile, API President and CEO Jack Gerard, said, “BLM’s rule is technically flawed and redundant, and it could impede the technological innovations that have led to increased domestic use of cleaner-burning natural gas—the main reason U.S. energy-related carbon emissions have fallen to levels not seen since the early 1990s.”

The tide is changing, and given the new political reality, it’s possible, just possible, that domestic activity could eclipse our forecast. The wildcard, however, remains what happens after OPEC’s six-month production pact expires. We certainly live in interesting times. 

Adieu. After the privilege of penning this column, I’m afraid to say that the time has come for a curtain to be drawn across this particular task. As of Feb. 1, I transitioned out of the World Oil editorial team to take up broader duties at Gulf Publishing Company, World Oil’s recently liberated parent company. As part of the transition, Craig Fleming, World Oil’s technical editor (or Cranky Craig as I prefer to call him), will be putting pen to page for future iterations of this column. And as a seasoned industry stalwart, you can rest assured that there’ll be some fire in his belly.

While I may no longer be part of World Oil’s editorial team, I can honestly say that the experience has been exceptional, and I would like to extend a heartfelt thanks to World Oil’s Editor Kurt Abraham, World Oil’s Publisher Andy McDowell and to all of the magazine’s faithful readers who, I must say, were a joy to meet at locations far and wide. Until we meet again.