Much has been made of the recent confidence tumble in America’s Permian Basin, the low cost and prodigious shale play that straddles Texas and New Mexico. It began when Pioneer Natural Resources announced its second-quarter financial results – reporting net income of US$233 million, compared to a net loss of US$268 million the same quarter last year. But the positive results weren’t what investors focused on – it was expected, given the recovery in crude prices this year. Instead, they zoomed in on Pioneer’s decision to slash US$100 million from its 2017 capital budget, as well as anomalies within its production data – an unexpected drop in oil production that was somewhat offset by higher natural gas output (though from new wells, unusually), accompanied by higher costs. Pioneer’s stock took a tumble, down by 16% at one point, and it dragged all other Permian-related stocks with it – spooking investors that held shares of EOG Resources and RSP. Editorials and analytical notes were written furiously, warning that enthusiasm in the Permian was waning.
Meanwhile, the weekly rig count data released by Baker Hughes-GE fell by one the week Pioneer released its results. Within the topline number, active rigs in the Permian basin were flat week on week, having been the main source of rig count growth over the past year together with the Eagle Ford basin. The week after, active rig counts fell by 5, with the Permian and Eagle Ford losing 2 and 3 sites, respectively. On a macro scale, the market would cheer this as a sign that US oil production is finding a new plateau at the current level of crude prices, stuck around US$50/b. On a micro level, it is causing some jitters among Permian producers – many of whom have trimmed their spending targets for 2017 and 2018, including heavyweights Diamondback Energy and Devon Energy, in anticipation of a slowdown.
Are we about to see a collapse in the Permian? Absolutely not. After a period of rapid growth in early 2017, in response to crude prices jumping on the OPEC supply freeze pact, the Permian is merely hitting a wall of marginal gains. Permian producers raised production rapidly earlier this year, anticipating that prices would maintain at US$60/b, thereby unleashing supply that moderated prices again. With the outlook now pointing towards prices stubbornly sticking to the US$50/b level, producers are now adjusting their approach. The Petroleum Economist reports that "oil bulls and OPEC ministers who are looking for cracks in the shale recovery due to recent announcements by Anadarko, Hess and Whiting Petroleum are cutting their 2017 budgets, will be disappointed. It may just be too soon claim any victory that US shale is shutting down. EIA reports that DUCs (Drilled but Uncompleted Wells) have nearly doubled from this time last year to around 2,250. If oil remains at sub-$50, companies could start pulling rigs, and start shifting to cheaper and quicker options of completing their DUCs. This will power production growth for at least several months."
Growth in the Permian will continue through 2017 and 2018, but at a slower pace. The Permian region is projected to represent about 30 percent of total U.S. crude oil production in the coming year. Wood Mackenzie is predicting the Permain output will rise by 300,000 b/d by the end of 2017, pushing past the 2.7 mmb/d level. Meanwhile, supermajors ExxonMobil and Chevron are both increasing their presence in the Permian attracted by lower costs – the average wellhead breakeven presence in the Permian hovers around US$35/b – aiming to raise production there by 20% and 35%, respectively, from low bases. Meanwhile, Falcon Seaboard Resources just announced a US$145 million Permian fund.
Interest in the Permian isn’t waning. The ride is just slowing down, because the industry in the Permian has moved past the short, sweet period when prices rise faster than costs, and is now adjusting to that. And even the furore around Pioneer is misplaced; the company has said that the unexpected drop in oil production was short term and would be fixed in the next quarter. Pumping more natural gas isn’t a huge problem either – Permian player Parsley boosted its gas production forecast for the year in fact – since it diversifies output and total resources are still expanding. Now, in fact, might be a good time to cherry pick Permian stocks – the valuations remain good, while the stock prices have taken a beating. With OPEC, mainly Saudi Arabia attempt manoeuvring again to support prices, the Permian basin phenomenon is far from over.
P.S. for continuity of investments in the energy industry, making the right choices are key for future success. Read more about Scenario planning and the so what question a recent blog post by Henk Krijnen. Henk Krijnen will be in Kuala Lumpur this October 2017, presenting a very timely "Masterclass on Scenario Planning for Decision Making in the Energy Industry". Find out more https://goo.gl/tauq5x. If you are too busy during this period, check out our training series on “Training to Navigate Uncertainty in Oil & Gas”
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In 2021, the makeup of renewables has also changed drastically. Technologies such as solar and wind are no longer novel, as is the idea of blending vegetable oils into road fuels or switching to electric-based vehicles. Such ideas are now entrenched and are not considered enough to shift the world into a carbon neutral future. The new wave of renewables focus on converting by-products from other carbon-intensive industries into usable fuels. Research into such technologies has been pioneered in universities and start-ups over the past two decades, but the impetus of global climate goals is now seeing an incredible amount of money being poured into them as oil & gas giants seek to rebalance their portfolios away from pure hydrocarbons with a goal of balancing their total carbon emissions in aggregate to zero.
Traditionally, the European players have led this drive. Which is unsurprising, since the EU has been the most driven in this acceleration. But even the US giants are following suit. In the past year, Chevron has poured an incredible amount of cash and effort in pioneering renewables. Its motives might be less than altruistic, shareholders across America have been particularly vocal about driving this transformation but the net results will be positive for all.
Chevron’s recent efforts have focused on biomethane, through a partnership with global waste solutions company Brightmark. The joint venture Brightmark RNG Holdings operations focused on convert cow manure to renewable natural gas, which are then converted into fuel for long-haul trucks, the very kind that criss-cross the vast highways of the US delivering goods from coast to coast. Launched in October 2020, the joint venture was extended and expanded in August, now encompassing 38 biomethane plants in seven US states, with first production set to begin later in 2021. The targeting of livestock waste is particularly crucial: methane emissions from farms is the second-largest contributor to climate change emissions globally. The technology to capture methane from manure (as well as landfills and other waste sites) has existed for years, but has only recently been commercialised to convert methane emissions from decomposition to useful products.
This is an arena that another supermajor – BP – has also made a recent significant investment in. BP signed a 15-year agreement with CleanBay Renewables to purchase the latter’s renewable natural gas (RNG) to be mixed and sold into select US state markets. Beginning with California, which has one of the strictest fuel standards in the US and provides incentives under the Low Carbon Fuel Standard to reduce carbon intensity – CleanBay’s RNG is derived not from cows, but from poultry. Chicken manure, feathers and bedding are all converted into RNG using anaerobic digesters, providing a carbon intensity that is said to be 95% less than the lifecycle greenhouse gas emissions of pure fossil fuels and non-conversion of poultry waste matter. BP also has an agreement with Gevo Inc in Iowa to purchase RNG produced from cow manure, also for sale in California.
But road fuels aren’t the only avenue for large-scale embracing of renewables. It could take to the air, literally. After all, the global commercial airline fleet currently stands at over 25,000 aircraft and is expected to grow to over 35,000 by 2030. All those planes will burn a lot of fuel. With the airline industry embracing the idea of AAF (or Alternative Aviation Fuels), developments into renewable jet fuels have been striking, from traditional bio-sources such as palm or soybean oil to advanced organic matter conversion from agricultural waste and manure. Chevron, again, has signed a landmark deal to advance the commercialisation. Together with Delta Airlines and Google, Chevron will be producing a batch of sustainable aviation fuel at its El Segundo refinery in California. Delta will then use the fuel, with Google providing a cloud-based framework to analyse the data. That data will then allow for a transparent analysis into carbon emissions from the use of sustainable aviation fuel, as benchmark for others to follow. The analysis should be able to confirm whether or not the International Air Transport Association (IATA)’s estimates that renewable jet fuel can reduce lifecycle carbon intensity by up to 80%. And to strengthen the measure, Delta has pledged to replace 10% of its jet fuel with sustainable aviation fuel by 2030.
In a parallel, but no less pioneering lane, France’s TotalEnergies has announced that it is developing a 100% renewable fuel for use in motorsports, using bioethanol sourced from residues produced by the French wine industry (among others) at its Feyzin refinery in Lyon. This, it believes, will reduce the racing sports’ carbon emissions by an immediate 65%. The fuel, named Excellium Racing 100, is set to debut at the next season of the FIA World Endurance Championship, which includes the iconic 24 Hours of Le Mans 2022 race.
But Chevron isn’t done yet. It is also falling back on the long-standing use of vegetable oils blended into US transport fuels by signing a wide-ranging agreement with commodity giant Bunge. Called a ‘farmer-to-fuelling station’ solution, Bunge’s soybean processing facilities in Louisiana and Illinois will be the source of meal and oil that will be converted by Chevron into diesel and jet fuel. With an investment of US$600 million, Chevron will assist Bunge in doubling the combined capacity of both plants by 2024, in line with anticipated increases in the US biofuels blending mandates.
Even ExxonMobil, one of the most reticent of the supermajors to embrace renewables wholesale, is getting in on the action. Its Imperial Oil subsidiary in Canada has announced plans to commercialise renewable diesel at a new facility near Edmonton using plant-based feedstock and hydrogen. The venture does only target the Canadian market – where political will to drive renewable adoption is far higher than in the US – but similar moves have already been adopted by other refiners for the US market, including major investments by Phillips 66 and Valero.
Ultimately, these recent moves are driven out of necessity. This is the way the industry is moving and anyone stubborn enough to ignore it will be left behind. Combined with other major investments driven by European supermajors over the past five years, this wider and wider adoption of renewable can only be better for the planet and, eventually, individual bottom lines. The renewables ball is rolling fast and is only gaining momentum.
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