Shale Economics 101: An Interview with O&G Giant Rusty Braziel
MDN has long been a fan of Rusty Braziel, co-founder of Bentek Energy (later sold to Platts) and founder/president of RBN Energy. Earlier this year we wrote about the release of Rusty’s new book, “The Domino Effect” and his appearance on Jimmy Cramer’s Mad Money program (see The Smartest Man in the Oil (& Gas) Patch: Rusty Braziel). A few weeks back Rusty sat down with Don Stowers, Chief Editor of Pennwell’s Oil & Gas Financial Journal, to talk about the big picture–some of the most important issues facing the oil and gas industry, the lasting impact of the Shale Revolution, and Rusty’s thoughts from 40-plus years in the energy business. It turned into the cover story of their June 2016 issue. Below is a recap of a few of the questions (and Rusty’s answers), along with a copy of the full article. Worth the read!…
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In 2013, Dominion announced a 20-year deal to export 100% of the output from their planned Cove Point, MD LNG plant. All of the Marcellus gas from Cove Point will get exported to both India and Japan (see 
Last week BP released its annual Statistical Review of World Energy–the 65th edition! (We have a full copy embedded below.) A number of big energy companies, like Exxon Mobil, as well as government agencies, publish similar reports that characterize current and future world energy trends. However, one analyst we read says BP’s report is the best: “I have relied upon the BP World Energy report for years. It is not a report to be viewed with a partisan eye, but as merely one of the best, if not the best, energy trend device available anywhere. In comparison to government agencies like the U.S. Energy Information Administration (EIA) the global International Energy Association (IEA) or OPEC’s own World Oil Outlook, the BP report has proven itself to be far more valuable in finding investable trends. I would never recommend any oil sector without having the statistical evidence of the BP World Energy Report behind me.” In scanning a summary of this year’s report, one statistic stands out for us. Environmental radicals constantly prattle on that renewable energy sources could replace fossil fuels, if we only had the will to change. What utter rubbish, as proven by this stat: In 2015 renewable energy, mostly used to generate power, reached 2.8% of global energy consumption, up 2% in the last ten years. Did you get that? Only 2.8% of the energy used in the world is generated by wind, solar, etc. Fossil fuels are here to stay through not only our own lifetimes, but the lifetimes of our children and grandchildren. Someday maybe we’ll be famous for having been prescient in penning these words (we’ll be long dead and gone)–but mark our words, fossil fuels are not going away any time soon…
Strong demand from electric power generators will push natural gas demand this summer up by an estimated 4 billion cubic feet per day (Bcf/d), according to a new report from the Natural Gas Supply Association (NGSA). However, even though there’s more demand, because supplies are so bountiful, the price of natural gas over the summer is actually expected to go down, not up. Using published data and independent analyses, NGSA evaluated the combined impact of weather, economic growth, customer demand, storage inventories and production activity on the direction of natural gas prices for the summer of 2016 compared to last summer. The NGSA says summer 2016 will see a “remarkable growth in demand.” Even so, NGSA expects “downward pressure on prices compared to last summer.” Bummer. It’s great news for consumers and power generating plants. But not so good news for drillers. Below we have a full copy of the NGSA report…
CNBC, not known for being an objective news source (witness the Republican debate debacle earlier this year), conducted a survey among 22 strategists, traders and analysts on the topic of the price of oil. MDN sometimes covers oil stories because natural gas oil are joined at the hip. Often the same E&Ps that drill for oil also drill for gas. And when you drill a hole in the ground, you get what you get–not only oil, but “associated gas” and gas liquids. Hydrocarbons of all kinds come out of the holes drilled. So it pays to pay attention to the oil market and what’s happening with the price of oil. According to the CNBC survey, those responding said overall they expect drilling to pick back up with the price hitting $50 per barrel. But they also said it won’t really pick up in earnest until the price hits $60 per barrel. Roughly half expect the price of oil to remain in the $40-$50 range until the end of 2016, with the other half thinking it will go higher. Only 9% believe come Dec. 31 the price will be at or above $60/barrel…
You know what magical thinking is? It’s when an analyst/consultant repeatedly predicted that the world had reached “peak oil” production and that oil production was/will soon decline, leading to insanely high prices for oil. Then the shale revolution happened. Oops. So much for the discredited “peak oil” theory. But the same analyst, for a long time, kept repeating his discredited theory. We call that magical thinking. That same analyst then predicted “peak natural gas”–that the shale revolution was a bubble and would soon end because shale wells peter out so quickly, dontcha know. The analyst never factored new technology, and new shale layers, would be discovered. Oops. More magical thinking. Now that same analyst says cheap shale gas will end soon–the price is about to go insanely high. Yet more magical thinking…
What will it take for drillers to begin drilling again? That’s a question getting asked frequently by analysts on quarterly earnings calls with Marcellus/Utica drillers. The short answer is for the price of natural gas to go up and stay up. How high? Here’s some interesting economics from Southwestern Energy CEO Bill Way: every time the price of natural gas increases another quarter ($0.25), it translates into $185 million in cash flow for his company. If the price went up 50 cents, Southwestern would reactivate two drilling rigs. Another key factor in when drillers will start drilling again are DUCs–drilled but uncompleted wells. The DUC inventory is going down–but many drillers still have a year’s worth of DUCs they can leverage before they have to sink new holes…
Fitch Ratings, one of the world’s top ratings services (rates stocks, bonds and more), issued a press release/opinion on Friday that tackles the issue of LNG (liquefied natural gas) and how the LNG market is rapidly and radically changing because of U.S. shale gas. Historically the price for LNG and oil have been linked. When the price of oil goes up or down, so too does LNG. But that’s now changing, because of the super abundance of U.S. shale gas. Fitch points out that with the U.S. now in the LNG export game, the link between LNG, natural gas and oil has “weakened.” They also say the U.S. natural gas market is “too big and too well supplied” for LNG exports to affect natgas prices here at home. In other words, we can export all of the LNG we want and it still won’t raise the domestic price of natural gas for consumers…
MDN is certainly not of this opinion, but we spotted a Reuters article that quotes several natural gas market analysts who say recent announcements of pipeline delays may boost natgas prices–and that’s a good thing. Of course being a good thing is in the eye of the beholder. Pipeline delays in the Marcellus/Utica–like the Constitution Pipeline–mean (a) lack of takeaway means natural gas prices in the Marcellus/Utica region will continue to be the lowest in the country, which means (b) drilling in the Marcellus/Utica will continue to slow and won’t restart any time soon, consequently (c) that will lead to less production, and so (d) less supply in the northeast will mean prices for natural gas, and things that natgas produces (i.e. electricity) will go higher in places like New York City and New England. Whether that’s all good news or bad news depends on your point of view…
How low can world LNG prices go? One of the potentially important markets for U.S. LNG is Japan. Historically when drillers would get $3-$4 per thousand cubic feet (Mcf) here at home, they could easily get $8 or more per Mcf in Japan–if they could just get the gas loaded onto ships and get it there. Hence facilities being built like Dominion’s Cove Point, Maryland, which export gas to Japan (and India). But something happened on the way to the LNG party. Last December Platts reported LNG deliveries to Japan and Korea were fetching $7.40/Mcf (see 
In the natural gas world there are two seasons: winter (when you use natural gas) and summer (when you “inject” or store natural gas). The “winter strip” goes from November to March, and the “summer strip” runs from April through October. Storage levels are a key factor in the pricing of natural gas. Economics 101: the price for commodities like natgas is purely a function of supply and demand. If you have more supply than demand, the price goes down. In the northeast part of the country we just came through the mildest (temperature-wise) winter in a generation. We used a lot less natgas than we normally would. That means the gas sitting in storage didn’t get drawn down nearly as much as it usually does. That’s what you would expect, and the U.S. Energy Information Administration (EIA) has confirmed it. We ended the winter heating season at the end of March with “record high levels” of natgas sitting in storage. And now we begin the process of storing more. If all other factors remain equal–meaning there’s no new or sudden increase in demand this summer–it doesn’t take a genius to figure out how record high storage levels will affect the price. Here’s the EIA with their latest on storage…
In an interview on CNBC, Chevron chairman and CEO John Watson said some interesting things. Among them: Watson believes the oil markets will “balance out” (price/production-wise) in the “coming months.” He also spoke about the prospects for LNG, saying it’s “maturing” and we are entering “a new phase”…