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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The UK has just designated the Persian Gulf as a level 3 risk for its ships – the highest level possible threat for British vessel traffic – as the confrontation between Iran with the US and its allies escalated. The strategically-important bit of water - and in particular the narrow Strait of Hormuz – is boiling over, and it seems as if full-blown military confrontation is inevitable.
The risk assessment comes as the British warship HMS Montrose had to escort the BP oil tanker British Heritage out of the Persian Gulf into the Indian Ocean from being blocked by Iranian vessels. The risk is particularly acute as Iran is spoiling for a fight after the Royal Marines seized the Iranian crude supertanker Grace-1 in Gibraltar on suspicions that it was violating sanctions by sending crude to war-torn Syria. Tensions over the Gibraltar seizure kept the British Heritage tanker in ‘safe’ Saudi Arabian waters for almost a week after making a U-turn from the Basrah oil terminal in Iraq on fears of Iranian reprisals, until the HMW Montrose came to its rescue. Iran’s Revolutionary Guard Corps have warned of further ‘reciprocation’ even as it denied the British Heritage incident ever occurred.
This is just the latest in a series of events around Iran that is rattling the oil world. Since the waivers on exports of Iranian crude by the USA expired in early May, there were four sabotage attacks on oil tankers in the region and two additional attacks in June, all near the major bunkering hub of Fujairah. Increased US military presence resulted in Iran downing an American drone, which almost led to a full-blown conflict were it not for a last-minute U-turn by President Donald Trump. Reports suggest that Iran’s Revolutionary Guard Corps have moved military equipment to its southern coast surrounding the narrow Strait of Hormuz, which is 39km at its narrowest. Up to a third of all seaborne petroleum trade passes through this chokepoint and while Iran would most likely overrun by US-led forces eventually if war breaks out, it could cause a major amount of damage in a little amount of time.
The risk has already driven up oil prices. While a risk premium has already been applied to current oil prices, some analysts are suggesting that further major spikes in crude oil prices could be incoming if Iran manages to close the Strait of Hormuz for an extended period of time. While international crude oil stocks will buffer any short-term impediment, if the Strait is closed for more than two weeks, crude oil prices could jump above US$100/b. If the Strait is closed for an extended period of time – and if the world has run down on its spare crude capacity – then prices could jump as high as US$325/b, according to a study conducted by the King Abdullah Petroleum Studies and Research Centre in Riyadh. This hasn’t happened yet, but the impact is already being felt beyond crude prices: insurance premiums for ships sailing to and fro the Persian Gulf rose tenfold in June, while the insurance-advice group Joint War Committee has designated the waters as a ‘Listed Area’, the highest risk classification on the scale. VLCC rates for trips in the Persian Gulf have also slipped, with traders cagey about sending ships into the potential conflict zone.
This will continue, as there is no end-game in sight for the Iranian issue. With the USA vague on what its eventual goals are and Iran in an aggressive mood at perceived injustice, the situation could explode in war or stay on steady heat for a longer while. Either way, this will have a major impact on the global crude markets. The boiling point has not been reached yet, but the waters of the Strait of Hormuz are certainly simmering.
The Strait of Hormuz:
Headline crude prices for the week beginning 8 July 2019 – Brent: US$64/b; WTI: US$57/b
Headlines of the week
Utility-scale battery storage units (units of one megawatt (MW) or greater power capacity) are a newer electric power resource, and their use has been growing in recent years. Operating utility-scale battery storage power capacity has more than quadrupled from the end of 2014 (214 MW) through March 2019 (899 MW). Assuming currently planned additions are completed and no current operating capacity is retired, utility-scale battery storage power capacity could exceed 2,500 MW by 2023.
EIA's Annual Electric Generator Report (Form EIA-860) collects data on the status of existing utility-scale battery storage units in the United States, along with proposed utility-scale battery storage projects scheduled for initial commercial operation within the next five years. The monthly version of this survey, the Preliminary Monthly Electric Generator Inventory (Form EIA-860M), collects the updated status of any projects scheduled to come online within the next 12 months.
Growth in utility-scale battery installations is the result of supportive state-level energy storage policies and the Federal Energy Regulatory Commission’s Order 841 that directs power system operators to allow utility-scale battery systems to engage in their wholesale energy, capacity, and ancillary services markets. In addition, pairing utility-scale battery storage with intermittent renewable resources, such as wind and solar, has become increasingly competitive compared with traditional generation options.
The two largest operating utility-scale battery storage sites in the United States as of March 2019 provide 40 MW of power capacity each: the Golden Valley Electric Association’s battery energy storage system in Alaska and the Vista Energy storage system in California. In the United States, 16 operating battery storage sites have an installed power capacity of 20 MW or greater. Of the 899 MW of installed operating battery storage reported by states as of March 2019, California, Illinois, and Texas account for a little less than half of that storage capacity.
In the first quarter of 2019, 60 MW of utility-scale battery storage power capacity came online, and an additional 108 MW of installed capacity will likely become operational by the end of the year. Of these planned 2019 installations, the largest is the Top Gun Energy Storage facility in California with 30 MW of installed capacity.
As of March 2019, the total utility-scale battery storage power capacity planned to come online through 2023 is 1,623 MW. If these planned facilities come online as scheduled, total U.S. utility-scale battery storage power capacity would nearly triple by the end of 2023. Additional capacity beyond what has already been reported may also be added as future operational dates approach.
Of all planned battery storage projects reported on Form EIA-860M, the largest two sites account for 725 MW and are planned to start commercial operation in 2021. The largest of these planned sites is the Manatee Solar Energy Center in Parrish, Florida. With a capacity of 409 MW, this project will be the largest solar-powered battery system in the world and will store energy from a nearby Florida Power and Light solar plant in Manatee County.
The second-largest planned utility-scale battery storage facility is the Helix Ravenswood facility located in Queens, New York. The site is planned to be developed in three stages and will have a total capacity of 316 MW.