Energy Issues

It’s the end of June and the heat is becoming unbearable, here in Texas. But it’s not just the heat. It is also the continuing actions of U.S. shale producers who, for the 23rd week in a row, have increased the U.S. rig count. As I write this, the tally of rigs drilling for oil stands at 758, the highest number since April 2015 and more than double the 330 active oil rigs just a year ago. That’s with WTI trading at around $43/bbl after five straight weeks of declines, nearing a 10-month low. And, that is with OPEC’s ongoing production cuts, that have now been extended to March 2018.

The result is a forecast U.S. production increase to 9.3 million bopd in 2017, followed by a record 10.0 million bopd in 2018. What is going on?

Big data’s role. One thing that is going on is the use of big data to lower the cost of E&P in the current, low-price environment. Sensors employed for measurements as diverse as weight-on-bit to fluid levels now enable operators to adjust a large number of parameters, to cut time and lower costs. When speaking to Reuters (http://www.reuters.com/article/usa-oil-bigdata-idUSKBN19E0DJ), Matt Fox, ConocoPhillips’ executive vice president for strategy, exploration and technology, noted that the company used data from hundreds of sensors to adjust weight-on-bit in its Eagle Ford drilling operations. When applied to the more than 3,000 wells that the company plans to drill in the Eagle Ford, big data could lead to “billions and billions of dollars” in savings according to Fox.

And, this is just one example of the recently emerging application of big data. In fact, according to Binu Matthew, manager of digital products at GE Oil & Gas, in the same Reuter’s article, before the crash of 2014, big data was just an “afterthought” for most oil companies. It was estimated by Ernst & Young in a study last year, that 68% of the 75 large oil and gas companies studied have invested more than $100 million, each, in data analytics over the past two years. And, notes Reuters, “nearly three-quarters of those firms planned to allocate between 6% and 10% of their capital budgets to digital technology” going forward.

But the presence of big data is still small in the industry. General Electric (GE), which has moved aggressively into the big data space, estimates that only 3% to 5% of all oil and gas equipment is connected digitally. And less than 1% of the data collected is utilized in decision-making. To GE, and others, these low figures represent huge growth potential. That growth will take time. Kate Richard, chief executive of private equity investor Warwick Energy, speaking to Reuters, noted that “there is a huge amount of data prep, data sanitization, and data extraction needed for big data to be totally disruptive.” That data manipulation is five to ten years away, she estimates.

Other factors. If big data can lower costs to spur activity in low-oil-price scenarios, activity should increase, as noted earlier. But that is not the case across the U.S. market. The ability to increase activity depends on a number of factors, including oil price levels, capital spending budgets, and access to funds from the investment banking sector.

“The price tumble has dragged down shares of oil and natural gas producers, and raised the specter of trims to drilling budgets set when oil was trading around $50 a barrel” (Oil bear market separates strong, weak U.S. shale producers, Reuters). “Analysts say prices that stick between $40 and $45 a barrel could trigger some companies to quietly scale back planned drilling activities . . . companies will try to push that back as long as possible,” said Dan Katzenberg, an oil industry analyst at Baird.

A Wall Street sell-off of energy stocks largely has spared those shale producers with strong balance sheets, hedged production and significant operations in the Permian basin. Investors are treating them as likely not only to survive but thrive at below $45/bbl. The Permian basin can produce profitably, even if oil prices drop below $40/bbl. “Investors are starting to make that separation between companies that were already outspending cash flow and those that weren’t,” said Katzenberg.

According to the report, some Permian oil producers see the crude price drop as an opportunity to buy acreage cheaply from distressed peers. “I’m kind of licking my chops right now,” said Avi Mirman, CEO of Lilis Energy, which bought Permian acreage at a discount when oil prices last plunged two years ago. “I would not complain, if oil prices got down into the $30s” per-barrel range, he said.

So, all should go fairly well for producers with strong balance sheets and good cash flow, particularly in the Permian basin—maybe. Even those companies with access to investment dollars may be limited in today’s environment. It appears that Wall Street and the investment banking community may be losing their fascination with oil and gas. In a mid-June note to clients, investment analysts Tudor, Pickering, Holt & Co. noted that some investment bankers have said that they have “little to no interest in providing a second lifeline to the industry.”

According to David Purcell, Tudor Pickering’s head of macro research (and a World Oil editorial advisor), “it’s like you are having a party and it’s awesome, and then the parents come home and the party is done.” That is the reaction of the investment community that siphoned some $8 billion to shale producers in the three months after OPEC announced their production cuts, a move that came not long before oil company shares lost 22% of their value over several months.

The bottom line? If you want a roller coaster ride, don’t bother with the amusement park. Just join the oil and gas industry. 

About the Authors

William J. Pike

World Oil

William J. Pike has 47 years’ experience in the upstream oil and gas industry, and serves as Chairman of the World Oil Editorial Advisory Board.