The decline in oil prices since the beginning of the fourth quarter of 2018 is of similar magnitude to the fourth-quarter price decline in 2014. After the fourth-quarter 2014 price decline, prices dropped further in 2015 amid high volatility for several years, which contributed to bankruptcies, consolidations, and closures within the industry. When comparing the financial positions of U.S. oil producers as of the third quarter of 2018 with the third quarter of 2014, most measures of profitability and balance sheet fitness indicate companies should be able to weather the recent price downturn. Oil price volatility and uncertainty remain high, however, and financial pressures could increase if prices continue to decline.
The percentage price decline from the beginning of the fourth quarter of 2018 through December 18 followed a similar path when compared with the same period starting at the fourth quarter of 2014 (Figure 1). From October 1 through December 18, front-month West Texas Intermediate (WTI) crude oil prices declined 39%. In 2014, they declined 40% during the same period. A key difference in assessing the financial position of U.S. oil producers in 2014 compared with 2018, however, is that oil price levels were significantly higher in the years leading up to the 2014 price declines compared with 2018. In addition, in 2014 oil prices had already declined 15% from their highs in June by the start of the fourth quarter. In 2018, the start of the fourth quarter marked the highest prices of the year.
Given the different price levels, oil company revenues per barrel were significantly lower in the third quarter of 2018 compared with the third quarter of 2014. According to the third-quarter 2018 financial results of 40 U.S. oil companies, their median upstream revenue was $45.33 per barrel of oil equivalent (BOE). This same set of companies in the third quarter of 2014 had median upstream revenues of $64.57/BOE (Figure 2). The 44 companies included then have been reduced to 40 companies because of consolidation through mergers and acquisitions. Another evident difference between these two periods is that the companies have significantly reduced production expenses since 2014, ultimately contributing to higher profitability despite the decline in revenues. Median company production expenses declined from $13.97/BOE in the third quarter of 2014 to $9.87/BOE in the third quarter of 2018. In fact, the median company's production expenses in the third quarter of 2014 would have been in the 75th percentile of production expenses in the third quarter of 2018, highlighting a broad reduction in production expenses among U.S. oil producers.
In contrast to the different operating environments of the two periods, measures of leverage (debt) and liquidity (ability to pay short-term liabilities quickly) do not appear to have significantly changed between 2014 and 2018. After the oil price decline of 2014, many companies restructured their balance sheets through debt consolidation, asset impairments, and asset sales. In the third quarters of 2014 and 2018, nearly all of the companies had long-term debt-to-asset ratios of less than 50%, meaning most of their assets were financed by the owners of the companies (Figure 3). Although no defined standard for an appropriate long-term debt-to-asset ratio for oil and natural gas production companies exists, the financial risk of inability to repay loans typically increases as the ratio increases. Alternatively, a ratio that is too low can indicate an inefficient use of resources available for investment.
Even though measures of leverage between the two periods are comparable, this group of U.S. oil producers has slightly different measures of liquidity in 2018 compared with 2014. In the third quarter of 2018, 80% of the companies had a ratio of cash assets to short-term liabilities of less than 40%, compared with 66% of companies with this ratio as of the third quarter of 2014. Similar to leverage ratios, no standard ratio is considered adequate, but a higher ratio indicates that a company has more ability to weather financial downturns.
An important caveat with comparative analysis of oil companies in two different periods is the survivor bias inherent in company selection. In this case, the U.S. Energy Information Administration (EIA) cannot assess a company's financial position in 2018 if the company did not survive the 2014 price decline, either because the company restructured from bankruptcy, delisted from a public securities exchange, or closed entirely. Companies that survived the 2014 price decline may provide a more positive picture of the overall financial position of the oil industry in 2018. However, this possible bias could be small because many of the same companies reported in both periods.
As discussed recently in EIA's Short-Term Energy Outlook and previous editions of This Week in Petroleum, price volatility and uncertainty remain high. The recent decision for countries inside and outside the Organization of the Petroleum Exporting Countries (OPEC) to reduce production levels could stabilize prices, but other supply factors or lower-than-expected demand could put further downward pressure on oil prices.
U.S. average regular gasoline and diesel prices decrease
The U.S. average regular gasoline retail price decreased more than 5 cents from last week to $2.37 per gallon on December 17, 2018, down more than 8 cents per gallon from the same time last year. Rocky Mountain prices fell 8 cents to $2.58 per gallon, Midwest prices decreased nearly 8 cents to $2.14 per gallon, West Coast prices fell nearly 6 cents to $3.11 per gallon, Gulf Coast prices fell more than 4 cents to $2.03 per gallon, and East Coast prices decreased more than 3 cents to $2.35 per gallon.
The U.S. average diesel fuel price decreased 4 cents from last week to $3.12 per gallon on December 17, 2018, 22 cents per gallon higher than a year ago. Rocky Mountain prices fell more than 6 cents to $3.18 per gallon, West Coast and Midwest prices each decreased nearly 5 cents to $3.60 per gallon and $3.02 per gallon, respectively, Gulf Coast prices decreased more than 3 cents to $2.90 per gallon, and East Coast prices fell nearly 3 cents to $3.17 per gallon.
Propane/propylene inventories decline
U.S. propane/propylene stocks decreased by 3.3 million barrels last week to 73.2 million barrels as of December 14, 2018, 5.6 million barrels (7.1%) lower than the five-year (2013–2017) average inventory level for this same time of year. Midwest inventories decreased by 2.5 million barrels, Gulf Coast and East Coast inventories each decreased by 0.4 million barrels, and Rocky Mountain/West Coast inventories decreased slightly, remaining virtually unchanged. Propylene non-fuel-use inventories represented 6.4% of total propane/propylene inventories.
Residential heating oil prices decrease slightly, propane prices flat
As of December 17, 2018, residential heating oil prices averaged almost $3.19 per gallon, down 1 cent per gallon from last week's price but nearly 30 cents per gallon higher than last year's price at this time. The average wholesale heating oil price for this week averaged $1.96 per gallon, over 3 cents per gallon less than last week and nearly 4 cents per gallon lower than a year ago.
Residential propane prices averaged $2.44 per gallon, less than 1 cent per gallon higher than last week but 4 cents per gallon lower than a year ago. Wholesale propane prices averaged nearly $0.86 per gallon, almost 6 cents per gallon less than last week and nearly 18 cents per gallon lower than a year ago.
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Pioneering technology expert tells ADIPEC Energy Dialogue up to 80 per cent of plant shutdowns could be mitigated through combination of advanced electrification, automation and digitalisation technologies
Greater use of renewables in power management processes offers oil and gas companies opportunities to create efficiencies, sustainability and affordability when modernising equipment, or planning new CAPEX projects
Abu Dhabi, UAE – XX August 2020 – Leveraging the synergies created by the convergence of electrification, automation and digitalisation, can create significant cost savings for oil and gas companies when making both operational and capital investment decisions, according to Dr Peter Terwiesch, President of Industrial Automation at ABB, a Swiss-Swedish multinational company, operating mainly in robotics, power, heavy electrical equipment, and automation technology areas.
Participating in the latest ADIPEC Energy Dialogue, Dr Terwiesch said up to 80 per cent of energy industry plant shutdowns, caused by human error, or rotating machinery or power outages, could be mitigated through a combination of electrification, automation and digitalisation.
“Savings are clearly possible not only on the operation side but also, using the same synergies between dimensions, you can bring down the cost schedule and risk of capital investment, especially in a time when making projects work economically is harder,” explained Dr Terwiesch.
A pioneering technology leader, who works closely with utility, industry, transportation and infrastructure customers, Dr Terwiesch said despite the increasing investment by oil and gas companies in renewables and the growing use of renewables to generate electricity, both for individual and industrial uses, hydrocarbons will continue to have an important role in creating energy, in the short to medium term.
“If you look at the energy density constraints, clearly electricity is gaining share but electricity is not the source of energy; it is a conduit of energy. The energy has to come from somewhere and that can be hydrocarbons, or nuclear, or renewables.” he said.
Nevertheless, he added, the greater use of renewables to generate electricity offers oil and gas companies the option of integrating a higher share of renewables into power management processes to create efficiencies, sustainability and affordability when modernising equipment, or planning new CAPEX projects.
The ADIPEC Energy Dialogue is a series of online thought leadership events created by dmg events, organisers of the annual Abu Dhabi International Exhibition and Conference. Featuring key stakeholders and decision-makers in the oil and gas industry, the dialogues focus on how the industry is evolving and transforming in response to the rapidly changing energy market.
With this year’s in person ADIPEC exhibition and conference postponed to November 2021, the ADIPEC Energy Dialogue, along with insightful webinars, podcasts and on line panels continue to connect the oil and gas industry, with the challenges and opportunities shaping energy markets in the run up to, and following, a planned three-day live stream virtual ADIPEC conference taking place from November 9-11.
An industry first of its kind, the online conference will bring together energy leaders, ministers and global oil and gas CEOs to assess the collective measures the industry needs to put in place to fast-track recovery, post COVID-19.
To watch the full ADIPEC Energy Dialogue series go to: https://www.youtube.com/watch?v=QZzUd32n3_s&t=6s
Utility-scale battery storage systems are increasingly being installed in the United States. In 2010, the United States had seven operational battery storage systems, which accounted for 59 megawatts (MW) of power capacity (the maximum amount of power output a battery can provide in any instant) and 21 megawatthours (MWh) of energy capacity (the total amount of energy that can be stored or discharged by a battery). By the end of 2018, the United States had 125 operational battery storage systems, providing a total of 869 MW of installed power capacity and 1,236 MWh of energy capacity.
Battery storage systems store electricity produced by generators or pulled directly from the electrical grid, and they redistribute the power later as needed. These systems have a wide variety of applications, including integrating renewables into the grid, peak shaving, frequency regulation, and providing backup power.
Most utility-scale battery storage capacity is installed in regions covered by independent system operators (ISOs) or regional transmission organizations (RTOs). Historically, most battery systems are in the PJM Interconnection (PJM), which manages the power grid in 13 eastern and Midwestern states as well as the District of Columbia, and in the California Independent System Operator (CAISO). Together, PJM and CAISO accounted for 55% of the total battery storage power capacity built between 2010 and 2018. However, in 2018, more than 58% (130 MW) of new storage power capacity additions, representing 69% (337 MWh) of energy capacity additions, were installed in states outside of those areas.
In 2018, many regions outside of CAISO and PJM began adding greater amounts of battery storage capacity to their power grids, including Alaska and Hawaii, the Electric Reliability Council of Texas (ERCOT), and the Midcontinent Independent System Operator (MISO). Many of the additions were the result of procurement requirements, financial incentives, and long-term planning mechanisms that promote the use of energy storage in the respective states. Alaska and Hawaii, which have isolated power grids, are expanding battery storage capacity to increase grid reliability and reduce dependence on expensive fossil fuel imports.
Source: U.S. Energy Information Administration, Form EIA-860, Annual Electric Generator Report
Note: The cost range represents cost data elements from the 25th to 75th percentiles for each year of reported cost data.
Average costs per unit of energy capacity decreased 61% between 2015 and 2017, dropping from $2,153 per kilowatthour (kWh) to $834 per kWh. The large decrease in cost makes battery storage more economical, helping accelerate capacity growth. Affordable battery storage also plays an important role in the continued integration of storage with intermittent renewable electricity sources such as wind and solar.
Additional information on these topics is available in the U.S. Energy Information Administration’s (EIA) recently updated Battery Storage in the United States: An Update on Market Trends. This report explores trends in battery storage capacity additions and describes the current state of the market, including information on applications, cost, market and policy drivers, and future project developments.