In the News: Crude Oil Prices Poised to Drop Further

September 2015, Vol. 242, No. 9

Since the oil price collapse, global oil production has risen, not fallen. Since the fateful Nov. 27, 2014 OPEC meeting, aggregate production from the U.S., Saudi Arabia, and Iraq is up 2 MMbop/d – far more than demand.

November is also when the U.S. inadvertently became the swing oil producer. Prices have not yet fallen far enough or for long enough for an appreciable U.S. supply adjustment to occur. It may not be far off, especially if oil prices fall further with new Iranian supplies, says a study from IHS Energy that notes:

• Oil prices will be under downward pressure until there is evidence the glut is shrinking. This won’t happen quickly unless prices fall even further from recent levels.

• For a decline in U.S. output to appreciably erode the global surplus, prices would need to range in the low $40s or less for several months. In 2014, production from wells with a break-even cost of around $60 for WTI produced enough oil to offset declines from pre-2014 wells and keep U.S. production flat with 2013. The rest of last year’s incredible growth came from higher-cost wells. But costs are lower this year by about 20%. A break-even cost of $60 in 2014 is now in the upper $40s per barrel for WTI. This is why only lower prices will catalyze a faster supply adjustment.

• With lower prices, U.S. production in the second half of 2015 would record its first significant decline in seven years. A severe drop in prices, lasting several months, would increase the likelihood of a significant price increase in 2016-17. Production growth from elsewhere, including Saudi Arabia and Iraq, is unlikely to keep pace with demand growth if U.S. production falls appreciably.

Natural Gas No. 1 for Power Generation, at Least for Now

Natural gas overtook coal as the top source of U.S. electric power generation for the first time ever earlier this spring, a milestone that has been years in the making as the price of gas slides and new regulations make coal more risky for power generators. About 31% of power generation in April came from gas and 30% from coal, according to research company SNL Energy, based on data from the Energy Information Administration. Nuclear power was third at 20%.

As the shale boom drives the price of natural gas sharply lower to levels about a third of what they were 10 years ago, power companies have been installing more gas turbines as their plants become more flexible and retire some older coal-fired facilities. They have long switched between natural gas and coal, depending on commodity prices. However, new regulations that aim to restrict the emission of greenhouse gasses, and the risk that more are on the way, have added pressure to make the switch.

Federal data shows that in April, the amount of electricity generated with natural gas climbed 21% compared to April 2014, while the amount generated with coal fell 19%. In April 2010, 44% of electric power generation came from coal and 22% from gas. The EIA said in a May report that it expects the level of coal-generated electricity to rebound as gas prices rise later this year and coal-fired plants return from spring maintenance.

Overall, the EIA expects about 36% of total U.S. electricity generation to come from coal in 2015 and 31% to come from gas. Federal analysts predict that this year the amount of electricity from natural gas will increase 3% compared to last year while the power from coal will go down 10%.

Meanwhile, the Energy Department reported that heat-trapping pollution from U.S. power plants hit a 27-year low in April. Economist Allen McFarland said a big factor was the long-term shift from coal to cleaner and cheaper natural gas. Outside experts also credit more renewable fuel use and energy efficiency.
Electric power plants spewed 141 million tons of carbon dioxide in April, the lowest for any month since April 1988. The power plants are responsible for about one-third of the country’s heat-trapping emissions.

Marathon to Buy MarkWest for $15.6 Billion

Refiner Marathon Petroleum Corp will expand into natural gas processing with its $15.6 billion acquisition of MarkWest Energy Partners LP. Marathon Petroleum is buying MarkWest through its pipeline unit, MPLX LP. The cash-and-stock deal will create the fourth-largest master limited partnership valued at $21 billion.

MarkWest, the second-largest U.S. natural gas processor, has plants across the country, including the Marcellus and Utica shales. It has over 4,000 miles of pipelines, mostly natural gas and gas liquids, and one crude oil pipeline.
“Strategically, this brings MPC/MPLX a major Northeast natural gas gathering and processing footprint, which complements MPC’s nearby refining footprint,” said Raymond James analyst Cory Garcia.

The deal enables Marathon Petroleum to add condensate storage and stabilization plants in anticipation of the export of processed condensate after relaxation of the crude export ban. MPLX operates crude oil and refined product pipelines in the Midwest and Gulf Coast and is building a condensate pipeline in Ohio to move output from the Utica Shale. MarkWest will operate as a unit of MPLX after the deal closes.

Black Hills Corp. Acquiring Source Gas Holdings

South Dakota-based Black Hills Corp. will acquire SourceGas Holdings LLC from investment funds managed by Alinda Capital Partners and GE Energy Financial Services for $1.89 billion. SourceGas operates four regulated natural gas utilities serving 425,000 customers in Arkansas, Colorado, Nebraska and Wyoming and a 512-mile regulated intrastate natural gas transmission pipeline in Colorado.

The combined entity will serve over 1.2 million electric and natural gas utility customers in 790 communities in eight Rocky Mountain and Midcontinent states. Black Hills Corp. will operate the acquired company under the name Black Hills Energy.

Enterprise Sells Offshore Business to Genesis Energy

Enterprise Products Partners L.P. is selling its offshore Gulf of Mexico pipelines and services business, which primarily consists of its Offshore Pipelines & Services business segment to Genesis Energy, L.P. for $1.5 billion. Enterprise’s offshore assets include ownership interest in nine crude oil pipeline systems with over 1,100 miles of pipeline, nine natural gas pipeline systems with 1,200 miles of pipeline and interest in six offshore hub platforms.

“Earnings from our offshore business represented only 3% of Enterprise’s gross operating margin, and our offshore assets do not effectively integrate with our downstream crude oil and natural gas pipeline systems,” said Michael A. Creel, CEO for Enterprise’s general partner. “We plan to redeploy proceeds from this sale into attractive growth opportunities that would extend and expand our integrated midstream system and should generate higher risk-adjusted returns on capital, such as acquisitions and organic projects in the Eagle Ford and Permian shale plays.”

Scientists Study Effect of Oil Spill in Relation to Human Well-Being

Some of the greatest impacts of the 2010 Deepwater Horizon oil spill occurred deep below the water’s surface, hidden from the eyes and minds of people who live on the coast. A project by Dr. Paul Montagna, chair for Ecosystems and Modeling with the Harte Research Institute (HRI) for Gulf of Mexico Studies at Texas A&M University-Corpus Christi, is designed to determine if there are links between environmental damage done offshore in the Gulf and the overall well-being of coastal residents.

The project is among the first funded by the National Academies of Sciences’ (NAS) Gulf Research Program. After the oil spill, the federal government asked the NAS to establish a program to fund research to enhance oil system safety, human health, and environmental resources in the Gulf of Mexico. The program has $500 million in funding over a 30-year period. Montagna was awarded $118,000.

The study will look at three categories of ecosystem services from the Gulf:

• Provisioning, which is the ability for the Gulf to sustain a food web that benefits human activities like fishing

• Recreational activities like birding and swimming

• Cultural heritage benefits, like the satisfaction and joy people get from visiting the ocean.
Deepwater production already accounts for over 80% of oil and 45% of natural gas extracted in the Gulf.

Utica Shale Much Richer than First Thought

The Utica Shale and associated hydrocarbon-rich rock zones hold significantly more potentially recoverable natural gas than early estimates predicted, according to new research, which suggests it could hold technically recoverable volumes of 782 Tcf of natural gas and nearly 2 Bbbls of oil.

The estimates from a research partnership organized by West Virginia University represent the average of a wider range of possibly recoverable amounts of oil and gas in the Utica, which includes parts of Ohio, West Virginia, Pennsylvania and other states and includes neighboring oil- and gas-bearing geologic layers.

UIL Holdings Investing In Northeast Energy Direct

UIL Holdings Corp. will invest in a natural gas transmission pipeline project designed to alleviate capacity constraints in the system that serves New England and the Northeast. Kinder Morgan’s proposed Northeast Energy Direct (NED) project would extend 188 miles of transmission pipeline from New York state through Massachusetts and New Hampshire. The new pipeline is expected to begin commercial operation in 2018.

UIL has acquired a 2.5% interest ($80 million) in Northeast Expansion LLC. UIL will have additional options – under limited circumstances – to increase its equity participation. Northeast Expansion is the joint venture responsible for development, construction and ownership of the pipeline, which will be part of Kinder Morgan’s Tennessee Gas Pipeline system.

Earlier this year, regional transmission pipeline constraints led a UIL subsidiary, The Berkshire Gas Company, to impose a moratorium on new natural gas customers in its eastern region. The company acknowledged the moratorium would be lifted as a result of this project’s commercial operation. Public reports have identified natural gas transmission pipeline constraints as a key factor behind wintertime spikes in the price of electricity generated at natural gas power plants.

Keystone Pipeline Delivers Billionth Barrel of Oil to US

TransCanada reported July 30 it has safely delivered the 1 billionth barrel of Canadian and U.S. crude oil on the Keystone Pipeline System, generating nearly US$200 million in property taxes, schools, roads, hospitals and over 14,000 construction jobs for the 11 states and provinces it crosses.

The system is one of the most extensive crude oil pipeline systems in North America, delivering to refineries at Wood River and Patoka, IL, Cushing, OK and Port Arthur, TX.

Russ Girling, TransCanada’s president and CEO, said, “To put this achievement in perspective, it would take approximately 1.7 million train cars or 3.3 million trucks to transport 1 billion barrels of crude oil.”

Low Natural Gas Prices Drive Demand Growth at U.S. Industrial Users

Reversing a decline that lasted over a decade, U.S. industrial natural gas consumption has risen steadily since 2009 as low prices have supported use of natural gas as a feedstock for the production of bulk chemicals. Industrial facilities, including methanol plants and ammonia- or urea-based fertilizer plants, consumed an average of 21Bcf/d in 2014, a 24% increase from 2009.

Several new industrial facilities began service this year, with additional projects scheduled to come online through 2018, the Energy Information Administration (EIA) said. The EIA forecasts that new projects will help drive growth in industrial natural gas demand through the end of 2016, climbing to 22.5 Bcf/d. In 2016, three methanol plants are expected to come online in the Gulf of Mexico area, and a large nitrogen fertilizer plant is under construction on Louisiana’s Gulf Coast.

Ammonia- or urea-based fertilizer plants are planned in agricultural areas outside of the Gulf Coast to take advantage of higher domestic gas production. A large fertilizer/urea plant in Iowa is set to come online and two fertilizer plants are planned for towns less than 75 miles away in southern Indiana. Each of the two plants would use 100 MMcf/d.

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