NrgEdge Editor

Sharing content and articles for users
Last Updated: May 25, 2016
1 view
Business Trends
image

Enthusiasts believe that shale gas is simultaneously cheap, abundant and profitable thus defying all rules of business and economics. That is magical thinking.

The recently released EIA Annual Energy Outlook 2016 sparkles with pixie dust as it forecasts almost unlimited gas supply at low prices out to 2040 and beyond. Exuberant press reports herald a new era of LNG exports that will change the geopolitical balance of the world and make America great again.

But U.S. shale gas production is declining because of low prices and shale gas companies are in deep financial trouble because in the real world, price and cost matter. 

That is not magical.

First Quarter 2016 Financial Performance

The financial performance of shale gas-weighted E&P companies in the first quarter of 2016 was a disaster.

Chesapeake Energy, the biggest shale gas producer in the world, had negative cash from operations.

That means that oil and gas sales didn’t even cover operating costs much less capital expenditures like drilling and completion.

Other shale gas-weighted companies including Anadarko, Comstock and Petroquest also had negative cash from operations. Goodrich and Sandridge are in bankruptcy and Exco and Halcon will soon follow. Ultra, Forest, Quicksilver, Swift and Talisman were lost in action last year.

On average, surviving companies out-spent cash flow by two-to-one both in 2015 and 2016 but many normally strong companies greatly increased negative cash flow this year. 

Devon Energy has been cash-flow neutral through much of the shale gas revolution but disturbingly increased capex-to-cash flow 5-fold in the first quarter of 2016. Similarly, Southwestern Energy has had an excellent record of near-cash flow neutrality but doubled its negative cash flow in 2016.

The debt side of first quarter earnings is far more disturbing. The average debt-to-cash flow ratio for shale gas companies increased almost 4-fold to more than 7, up from less than 2 in 2015.

Devon’s debt-to-cash flow was more than 21 and Southwestern’s, more than 17. Gas prices below $3 cannot be sustained without damaging the balance sheets and income statements of even well-managed companies.

Debt-to-cash flow is a critical determinant of risk from a bank’s perspective because it measures how many years it would take to pay off debt if 100% of cash from operations were used for this purpose.

This means that it would take these companies an average of 7 years to pay down their total debt using all cash from operating activities.

The energy industry average from 1992-2012 was 1.53 and 2.0 was a standard threshold for banks to call loans based on debt-covenant agreements. That threshold increased in recent years to about 4 but 7 years to pay off debt is clearly beyond reasonable bank exposure risk.

Low Gas Prices and Declining Production

Shale gas is the principal support for all U.S. gas production since conventional gas is in terminal decline. U.S. dry gas production has declined almost 1 Bcf per day since September 2015 largely because of low gas prices

Henry Hub gas prices have fallen for the last 2 years from more than $6/mmBtu in January 2014 to $2 today and prices have been below $3/mmBtu since early 2015. A similar gas-price decline occurred from June 2011 to April 2012 (Figure 3). Then, dry gas production fell when prices dropped below $3/mmBtu.

$3 is well below the break-even gas price for any operator in any play. Even in the Marcellus–the most commercially attractive shale gas play–break-even prices are more than $3.

Shale gas production has fallen 0.83 Bcf/d since February 2016 All plays have declined from their respective peaks except the Utica Shale. Marcellus production accounts for more than a third (-0.36 Bcf/d) of shale gas decline in 2016. There is certainly no shortage of supply in that play but low prices and related delays in pipeline commitments have taken their toll on production.

There are no longer any horizontal rigs drilling in the Barnett or Fayetteville, plays that were supposed to help provide the U.S. with 100 years of gas supply. That is the intersection of magical thinking and low gas prices.

Posted in The Petroleum Truth Report on May 24, 2016

Shale gas Gas Prices Low Prices Declining Production
3
0 0

Something interesting to share?
Join NrgEdge and create your own NrgBuzz today

Latest NrgBuzz

Your Weekly Update: 24 - 28 February 2020

Market Watch   

Headline crude prices for the week beginning 24 February 2020 – Brent: US$56/b; WTI: US$51/b

  • The Covid-19 outbreak continues to be the main headline – and the main driver – behind crude oil price trends, as the virus’ global spread continues
  • While the virus appears to be increasingly contained in its country of origin, the last week has seen major outbreaks in other parts of the world, including South Korea, Italy and Iran; this is approaching the level of a global pandemic – where the outbreak spreads in multiple locations independently
  • There is major concern that the virus outbreak in Iran could spread in the Middle East, impacting oil supply as Afghanistan, Bahrain and Kuwait all reported their first cases; the virus is now confirmed to be present in 55 countries (and suspected in at least 10 more), with over 83,000 cases globally
  • The new intensification of the outbreak might force OPEC+’s hand to act in March, after Russia scuppered a planned emergency meeting in mid-February meant to coordinate a response to the outbreak
  • With the economic meltdown in Venezuela continuing, President Nicolas Maduro has declared an ‘energy emergency’ and announced plans to revamp PDVSA in order to produce more crude; meanwhile the US sanctioned Russia’s Rosneft over maintaining ties with the Maduro regime and PDVSA
  • The US active rig count inched up last week with net gains coming from a single new oil rig, while gas rigs were flat for a new weekly total of 791
  • Fears the contagion widening its footprint outside of China has already sent global stock and commodity prices down sharply, with the Dow Jones reporting its single largest point drop in a day; unlike signs of global containment show, crude will remain in the red with Brent at US$51-54/b and WTI at US$46-49/b

Headlines of the week

Upstream

  • Equinor has dropped plans to drill for oil in the Great Australian Bight, abandoning a well in the offshore Ceduna basin after facing environmental protests; officially, Equinor’s reason is that the plans – already been abandoned several times by other players – did not ‘measure up commercially’
  • Eni announced a new discovery in Mexico, with the Saasken prospect in the offshore Sureste Basin estimated to contain up to 300 million barrels of oil
  • Africa Oil SA will take a 20% stake in South Africa’s Block 3B/4B in the Orange Basin from Namibian E&P player Azinam; Azinam has also taken a 50% stake (and operatorship) of Block 2B from Africa Energy Corp

Midstream/Downstream

  • Amid the ongoing Wuhan Covid-19 outbreak, China has slashed ceiling prices for gasoline and diesel for the second time in 2020, reducing gasoline prices by 5% and diesel by 5.7%, bringing the cumulative reduction to some 10%
  • A series of outages at key refineries on the US Gulf Coast and East Coast saw American retail prices rise by an average 5% y-o-y, triggering tight supplies
  • PetroChina has exported its first batch of Very Low Sulphur Fuel Oil (VLSFO) from its Liaohe refinery, after China waived consumption taxes and applied rebates of value-added taxes on clean marine fuels; more cargoes should follow
  • PetroChina has also resumed construction of its US$10 billion refinery project in Jieyang, Guangdong, after halting work following the Covid-19 outbreak
  • Malaysia is aiming to implement a B30 biodiesel mandate, up from the current B10 national level, following in the footsteps of Indonesia in an effort to reduce gasoil consumption and increase domestic demand for palm oil

Natural Gas/LNG

  • The USA, under Donald Trump, continues its campaign to prevent the completion of the Russia-Germany Nord Stream 2 pipeline, ratcheting up sanctions on key service providers like subsea pipeline provider Allseas Group
  • The government of Papua New Guinea and the natural gas/LNG joint venture led by ExxonMobil have informally resumed talks on the P’nyang Gas Agreement, with hopes to restart formal talks as soon as possible
  • Neptune Energy announced first gas from its new L5a-D4 well in the Dutch North Sea, tying the deepest field in the area back to the L5a-D platform
  • Hit by a mild winter and the Wuhan Covid-19 outbreak, China’s natural gas consumption declined for the first time in two years, with demand down by some 1 % y-o-y in January, mainly from industrial and power usage
  • Ramp-up at Eni’s Zohr field in Egypt continues, expected to rise to its peak plateau rate of 3 bcf/d in March 2020, confirming Egypt as a gas power
  • India’s AG&P has broken ground on the Karaikal Port LNG import facility in Puducherry, India, with operations expected to start by Q4 2021
  • Shell is ‘evaluating development options’ for its Manatee field in Trinidad & Tobago, after the government gave a go-ahead with first gas planned for 2025
  • ConocoPhillips has pushed its FID on the Barossa gas development in Northern Australia until Q2 2020, but first gas is still on track to hit the market in 2024
  • As the Abadi gas project in Indonesia takes off after a long period of gestation, operator Inpex has signed MoUs for takeoff with with PT PLN and PT Pupuk
  • The US FERC has given clearance for Cameron LNG Train 2 in Louisiana to go ahead, adding to a huge swathe of new US LNG capacity coming onstream
February, 28 2020
Wind has surpassed hydro as most-used renewable electricity generation source in U.S.

annual electricity generation from wind and hydroelectric sources

Source: U.S. Energy Information Administration, Electric Power Monthly

In 2019, U.S. annual wind generation exceeded hydroelectric generation for the first time, according to the U.S. Energy Information Administration’s Electric Power Monthly. Wind is now the top renewable source of electricity generation in the country, a position previously held by hydroelectricity.

Annual wind generation totaled 300 million megawatthours (MWh) in 2019, exceeding hydroelectric generation by 26 million MWh. Wind generation has increased steadily during the past decade, in part, because the Production Tax Credit (PTC), which drove wind capacity additions, was extended. Annual hydroelectric generation has fluctuated between 250 million MWh and 320 million MWh in the past decade, reflecting a stable capacity base and variable annual precipitation.

U.S. electricity generation from hydroelectric and wind

Source: U.S. Energy Information Administration, Electric Power Monthly

Annual changes in hydroelectric generation are primarily the result of variations in annual precipitation patterns and water runoff. Although weather patterns also affect wind generation in different regions, capacity growth has been the predominant driver of annual changes in wind generation.

Both hydroelectric and wind generation follow seasonal patterns. Hydroelectric generation is typically greatest in the spring when precipitation and melting snowpack increase water runoff. Seasonal patterns in wind generation vary across the country, but wind generation is usually greatest in the spring and fall.

operating capacity of hydroelectric and wind generators

Source: U.S. Energy Information Administration, Preliminary Monthly Electric Generator Inventory

Wind capacity additions tend to come online during the fourth quarter of the year, most likely because of tax benefits. Wind capacity additions totaled 10 gigawatts in 2019 (3.8 GW installed in the fourth quarter), making 2019 the second-largest year for wind capacity additions, second only to 2012.

As of the end of 2019, the United States had 103 GW of wind capacity, nearly all of which (77%) were installed in the past decade. The United States has 80 GW of hydroelectric capacity, most of which has been operating for several decades. Only 2 GW of hydroelectric capacity has been added in the past decade, and some of those additions involved converting previously nonpowered dams.

Although total installed wind capacity surpassed total installed hydroelectric capacity in 2016, it wasn’t until 2019 that wind generation surpassed hydroelectric generation. The average annual capacity factors for the hydroelectric fleet between 2009 and 2019 ranged from 35% to 43%. The average annual capacity factors for the U.S. wind fleet were lower, ranging from 28% to 35%. Capacity factors are the ratio of the electrical energy produced by a generating unit for a specified period of time to the electrical energy that could have been produced at continuous full power operation during the same period.

hydroelectric and wind capacity factors

Source: U.S. Energy Information Administration, Electric Power Monthly

February, 28 2020
EIA forecasts natural gas inventories will reach record levels later this year

In the U.S. Energy Information Administration’s (EIA) February Short-Term Energy Outlook (STEO), EIA forecasts that the Lower 48 states’ working natural gas in storage will end the 2019–20 winter heating season (November 1–March 31) at 1,935 billion cubic feet (Bcf), with 12% more inventory than the previous five-year average. This increase is the result of mild winter temperatures and continuing strong production. EIA forecasts that net injections during the refill season (April 1–October 31) will bring the total working gas in storage to 4,029 Bcf, which, if realized, would be the largest monthly inventory level on record.

Mild winter temperatures for the current winter have put downward pressure on natural gas prices and led to smaller withdrawals from natural gas into storage. Year-over-year growth in dry natural gas production and natural gas exports—especially liquefied natural gas (LNG)—throughout 2019 also affected natural gas storage levels. On October 11, 2019, the total natural gas in storage surpassed the previous five-year average—an indicator of typical storage levels—for the first time since mid-2017.

lower 48 states working natural gas in storage

Source: U.S. Energy Information Administration, Natural Gas Monthly, Weekly Natural Gas Storage Report, and Short-Term Energy Outlook

The total natural gas in storage at the start of this heating season was 3,725 Bcf on October 31, 2019. EIA expects withdrawals from working natural gas storage to total 1,790 Bcf at the end of March 2020. If realized, this would be the least natural gas withdrawn during a heating season since the winter of 2015–16, when temperatures were also mild.

Injections into and withdrawals from natural gas storage balance seasonal and other fluctuations in consumption. Natural gas demand is greatest in the winter months, when residential and commercial demand for natural gas for space heating increases. Natural gas consumption in the power sector is greatest in summer months, when overall electricity demand is relatively high because of air conditioning.

monthly U.S. natural gas supply and disposition

Source: U.S. Energy Information Administration, Short-Term Energy Outlook

In the latest STEO, EIA expects the total working natural gas in storage will exceed the previous five-year average for the remainder of 2020, despite declines in dry natural gas production, increases in natural gas consumption in the electric power sector, and increases in natural gas exports. EIA expects monthly natural gas production to decline from last year’s record levels in 2020 as lower natural gas prices reduce incentives for natural gas-directed drilling and as lower crude oil prices reduce incentives for oil-directed drilling and associated gas production.

February, 25 2020