littleoilblog

where they count is at the wellhead…  i.e. net to the seller after basis differential, transportation etc.  Right now in Midland that number could be as low as$75/bo.  We hear that Permian crude destined for Cushing is getting -$6/bo!  Add a charge for transportation, marketing, etc. and your netback could be -$10…Between this and the drop in NGL values, it will get interesting.  Pity the unhedged, and buy their assets!

Great Op Ed piece in todays WSJ by Nansen Saleri of Quantum Resevoir Impact.  http://online.wsj.com/article/SB10001424052702303610504577420203695017594.html

It doesn’t get much more local than the annual meeting of the Permian Producers and Royalty Owners Association in Amarillo.

This is where I come to meet “little oil”. Topics include regulation, ongoing efforts to improve the industry’s image (world ? premier of the the movie Truthland) and Apache’s position in the Anadarko Basin Granite Wash play.

The regulatory hot button concerns whether the Less Prairie Chicken is and endangered species and what is the extent of its habitat. The PPROA points out that the chicken is a hunted species in Kansas.

The Granite Wash is one of many plays that, while not as headline grabbing as the Eagle Ford, Bakken and Permian, demonstrate the extraordinary “unlocking” of oil & gas resources from horizontal drilling/fracing and strong prices. Others include in the DJ Niobrara, Cana Woodford, Tuscaloosa Marine Shale, Utica, Mississippi Lime, Monterey and even the Barnett Combo play. Apache has 14,000 locations just on the quarter million acres they got with Cordillera in the wash play.

All great for US energy security, but will keep pressure on domestic oil and liquids prices. Speaking of which, WTI has an $80 handle today.

Producers chasing liquids rich plays such as the Eagle Ford, Permian exacerbates  the glut of gas and is now creating a bubble of liquids.  For the past year at least, oil and gas companies have touted “effective” natural gas prices of $8-12/mcf due to the high value of the liquids (NGLs, condensate and oil, but largely ethane  and propane by volume) in the gas.   Of course, we are now over-supplied in liquids, or so it appears based on the price of those components.  In one of our projects in West Texas, our effective gas price has dropped from almost $10/mcf to less than $6 since December.  In our project, the primary production is oil and the gas is a windfall. But in other areas, i.e. the Eagle Ford, the primary production is, or was, rich gas.  If their realizations are down 40% in three months, it has to be causing some pain.  Since the Eagle Ford is largely public companies, this won’t show up until June 30 at the earliest, but you heard it here first.

Coincidently, service company yards in our area are filling up; particularly the frac yards.  This supports what we’ve heard about new supply hitting the market and driving frac costs down.  Feels like the beginning of a downturn.  Oil and gas investors should remain cautious.

A steady strem of prognosticators, including TPH, Bentek and BP are forecasting a glut of light sweet crude this year coming from the Bakken and Eagle Ford and Permian.  With domestic demand flat, less refining capacity due to closures and domestic refining biased towards heavy crude, this will keep the WTI/Brent differential in the $20 range and displace imports from Saudi, Nigeria and Iraq.  Ethane also looks to be oversupplied, while other components of the barrel (propane, butane and natural gasoline) can be balanced by exports.  Gas still uncertain despite rig count and EIA 914 production heading in the right direction.  As Dave Pursell reminds us (and has proven in the Barnett), production can grow even with rig count flat to down.  Those of us with dollars to invest are convinced this will be the year that dry assets get disgorged…but we’ve been saying that for the last three years.  Falcon has managed to stockpile some gas, inlcuding a PSA signed today.  We’ve  had to dumpster dive to do it, but are happy with 1P reserves acquired at less than $0.25/mcf.

The skepticism I mentioned earlier notwithstanding, I saw at least six deep rigs working yesterday in Pawnee Co., OK, just west of Tulsa.  So, somebody believes in this play because each one of those rigs is drilling $5-7 million hole.  Over lunch with a couple of public company E&P types, both with acreage positions, one was excited about the play and the other was guarded.  Some other things they all seem to agree on, 1) this is not a resource play in the sense that there is aerial uniformity, and 2) it ranks right up there in terms of   geologic complexity.  I was reminded that this a carbonate deposit (or series of deposits) so lithology will change in every direction and with it productivity.  So, my take away is still that this play has more exploration risk than an Eagle Ford or Bakken; doesn’t mean its bad, just different risk.

We make it a practice to “walk the lease” on any project we consider for investment. The field tour, as obvious as it sounds, is important. For one thing, it helps establish that the thing actually exists. Plenty of Brooklyn Bridges get sold in this business. More importantly, it tells you something about the Operator. We don’t care so much that the tank batteries (photos) are pristine and freshly painted, but we sure as heck want to know they aren’t corroded and leaking. Then there is the culture; field speak for how much civilization there is or isn’t. Houses, roads, power, etc. Hard to run a pumping unit without power and tanks full of oil aren’t much use if a truck can’t get to them. It’s also good to know if the natives are friendly. If the land/surface/mineral owner meets you at the gate with a firearm, maybe rethink the deal. Finally, you will learn something’s about your field personnel just by riding around in a pickup with them for a day or so. Like do they get lost driving to the lease? Bad sign. Or do they put you in the seat that has to get out and open/close the gates? That would indicate they are experienced field hands. And finally, which of the following do you volunteer for: a beautiful April day in Oklahoma or August in West Texas? Cha.

Having just returned from the Kansas Independent Oil & Gas Assn. Mid-Year meeting in beautiful Garden City, KS, I can offer the following observation on the Ms Lime play:  the overwhelming majority of the independents I’ve spoken to, in Kansas and Oklahoma, express skepticism.  More than a few have farmed out their deep rights. The only thing everyone can agree on, is that there is a lot of buzz and a lot of water.  Maybe that’s why American is flying non-stop from DFW to Garden City all of a sudden.

Obama on the bad oil speculators…really?!?!  I started in this business in 1982 and I can say without doubt that the biggest game changer, shale plays notwithstanding, is orderly and efficient hedge markets.  I say bring on the speculators because I want as many participants in that market as possible.

Final rant…actually sort of recanting a previous rant; I’m less bearish on oil than I was.  I still think China is a huge wildcard, but I’m becoming convinced that spare capacity (i.e Saudi) is smaller than I thought.  To reasons: 1) Saudi’s spare capacity, what the IEA call “Sustainable Production Capacity”, ain’t all that great to begin with at about 2 million barrels/day and a growing chorus thinks its closer to zero. 2) For most of modern time, almost all of this capacity was exportable.  That is changing.  Two recent studies suggest Saudi may be a net importer of oil by 2040 due to increasing domestic demand.

1 – Cramer on CNBC this morning gushing about the “great” production growth at Chevron and Anadarko.  Isn’t more supply in the face of weak demand a harbinger of lower prices?

2 – McDonald’s in Midland, TX is reportedly offering $500 sign on bonuses.  Not to be out done, Subway is offering a grand.

3 – The number of pundits saying the solution to low nat gas prices is low nat gas prices, while forgetting the corollary is also true: high oil price will “fix” high oil prices.

4 – Bungalows in Bangkok…in 1998, a little property bubble in a little Asian nation took down the Thai economy, currency, etc. and ultimately Russian sovereign debt and LTCM.  Oh, it also caused oil prices to fall by half.  So, imagine the “Condo’s in China” headline.  Oil at $50?

Lake Charles, LA. Louisiana Oil and Gas Assn annual meeting. Lunch speaker Charif Souki, CEO of Cheniere confirmed first export from SPL (Sabine Pass Liquefaction) in 2015; 0.5 Bcfd growing to over 2Bcfd in 2018. Contracts for the rated capacity in hand from BG as well as companies in Spain, India and Korea. All it takes is $10 billion! And today’s announcement of $2 billion from Blackstone may get it done.

No Oscar buzz for the Haynesville. All eyes seem to be on the Tuscaloosa Marine Shale, Brown Dense and Smackover. Oil is definitely the best dressed this year.