January 2017, Vol. 244, No. 1

In The News

In the News

EIA Sees Slippage in U.S. Crude Oil, Natural Gas Production  

A late-year report by the Energy Information Administration (EIA) said U.S. crude oil production averaged 9.4 MMbpd in 2015 and is forecast to average 8.9 MMbpd in 2016 and 8.8 MMbpd in 2017.

EIA forecasts Brent crude oil prices to average $43/b in 2016 and $52/b in 2017. West Texas Intermediate (WTI) crude oil prices are forecast to average about $1/b less than Brent prices in 2017. The values of futures and options contracts indicate significant uncertainty in the price outlook, EIA Administrator Adam Sieminski said.

The NYMEX contract values for March 2017 delivery traded during the five-day period ending Dec. 1 suggest that a range from $34/b to $71/b encompasses the market expectation of WTI prices in March 2017 at the 95% confidence level.

EIA said natural gas marketed production is forecast to average 77.5 Bcf/d in 2016, a 1.3 Bcf/d decline from 2015. For 2017, EIA forecasts that natural gas production will increase by an average of 2.5 Bcf/d from the 2016 level. EIA trimmed its output projection in its monthly energy outlook for 2016 to 72.34 Bcf/d, down from the 72.49 Bcf/d it forecast in October. That compares with an all-time high of 74.14 Bcf/d in 2015. EIA has forecast dry gas production will return to a record high in 2017, rising to 75.06 Bcf/d, according to Reuters.

The last time year-over-year gas production declined was in 2005 when hurricanes Katrina and Rita hit the Gulf Coast, damaging energy infrastructure. In 2005, over 20% of annual U.S. dry gas output came from the federal waters in the gulf. Today, the seven biggest U.S. shale fields provide over 60% of the nation’s dry gas production, while the Gulf of Mexico accounts for just 4%.

Growing domestic natural gas consumption, along with higher pipeline exports to Mexico and LNG exports, contribute to the Henry Hub natural gas spot price rising from an average of $2.49/ MMBtu in 2016 to $3.27/MMBtu in 2017. NYMEX contract values for March 2017 delivery traded during the five-day period ending Dec. 1 suggest that a price range from $2.20/MMBtu to $5.04/MMBtu encompasses the market expectation of Henry Hub natural gas prices in March 2017 at the 95% confidence level.

Gas output from Ohio, home to the Utica shale formation, jumped 13% in August, to an average 4.27 Bcf/d, even as supplies fell across most of the U.S., including the Marcellus play in Pennsylvania. Producers are doubling down on Ohio amid speculation that gas flows from the Utica will eventually rival output from the Marcellus, America’s biggest shale reservoir, according to Bloomberg.

Ohio accounted for about 5% of U.S. gas supply in August, up from less than 2% for the same period in 2014, EIA data show. The initial volumes of gas flowing out of wells in the Utica are climbing as operators improve well designs, said Andrew Cosgrove, an analyst at Bloomberg Intelligence.

EIA expects the share of U.S. total utility-scale electricity generation from natural gas will average 34% in 2016, and the share from coal will average 30%. In 2015, both fuels supplied about 33% of total U.S. electricity generation. In 2017, natural gas and coal are forecast to generate 33% and 31% of electricity, respectively. Non-hydropower renewables are forecast to generate 8% of electricity generation in 2016 and 9% in 2017. Generation shares of nuclear and hydropower are forecast to be relatively unchanged from 2016 to 2017.

After declining by 2.6% in 2015, energy-related carbon dioxide (CO-2) emissions are projected to decline by 1.3% in 2016 and then increase by 0.9% in 2017. Energy-related CO-2 emissions are sensitive to changes in weather, economic growth, and energy prices

Pennsylvania Fines Gas Company $3.5 Million

Pennsylvania environmental regulators have fined a natural-gas driller more than $3.5 million for violations at 10 well sites and six pipeline locations. The Department of Environmental Protection (DEP) said Dec. 7 subsidiaries of Rice Energy Inc. operated an unpermitted wastewater impoundment that leaked, improperly constructed wells, violated rules for erosion and sediment control, failed to obtain permits and committed other infractions.

Regulators say the violations took place over several years at sites in Washington and Greene counties in western Pennsylvania. Canonsburg-based Rice has already paid the fines. DEP has entered into several agreements with Rice and said the company has either fixed or is scheduled to fix the problems at its wells and pipelines. A Rice Energy spokeswoman says the company is “pleased to have reached an amicable agreement” with DEP.

West Texas Protesters Emboldened by Dakota Access

Protesters were arrested in West Texas on Dec. 6 near a pipeline being built from the Permian Basin to Mexico. Members of the Big Bend Defense Coalition were protesting Dallas-based Energy Transfer Partners construction of the Trans-Pecos Pipeline in Alpine. The Brewster County Sheriff’s office arrested coalition founder Lori Glover and Alpine resident Roger Siglin.

“We must protect our water, challenge corporate greed, and come to our senses on the truth of fossil fuels and climate change,” said Glover, who had chained herself to the project’s gate. Former oil field worker Arajoe Battista chained himself to a fence there but was not arrested, the sheriff’s office said.

The arrests come on the heels of a temporary victory in North Dakota, where protesters have fought for months against the completion of Energy Transfer’s Dakota Access Pipeline. Big Bend Defense Coalition is hoping to rally troops to Alpine, in the middle of the Chihuahuan Desert, about 70 miles north of Big Bend National Park. Residents moved there to be closer to nature and escape big business, protesters said. The coalition said it would soon gather at a winter camp in hopes protesters from North Dakota would move south. 

Fees for Underground Storage Regulatory Program Proposed

The Pipeline and Hazardous Materials Safety Administration (PHMSA) wants to collect $8 million in new user fees from the natural gas industry in order to run an underground gas storage facility regulatory program. Rules for that program have not been issued in a final form.

The ability to assess those user fees, however, is dependent on Congress appropriating the $8 million for each of fiscal year 2017-2019. The current Congress has not passed a 2017 appropriations bill for the year starting Oct. 1, 2016. Any final action probably won’t take place until at least March, and will reflect spending cuts favored by the congressional GOP, which will have a willing partner in new President Donald Trump. So that appropriation is far from a done deal.

The fee structure PHMSA favors would have 10 tiers based on the working gas capacity, i.e., number of wells, of each operator. The smallest fee would be $12,308 for operators with less than 1.5 MMcf. The highest would be $142,857 for more than 85 MMcf.

ConocoPhillips Wants to Sell Alaska Kenai LNG Export Terminal

ConocoPhillips is in the process of selling its Kenai LNG export terminal in Alaska. The plant entered service in 1969 and for 47 years was the only LNG export terminal in North America. Nearly all of the LNG produced at the plant has been sold to Japan. ConocoPhillips said its efforts to market the Kenai plant are consistent with regular reviews of assets to ensure the company is optimizing its portfolio.

In 2015, the Kenai plant operated for six months, ConocoPhillips said, liquefying 20 Bcf of gas and delivering six cargoes. It has the capacity to liquefy 0.2 Bcf/d. ConocoPhillips said it has not exported any gas so far in 2016 because of market conditions. The Kenai plant remains operational and ready to resume exports.

NuStar Boosts Presence in Port of Corpus Christi

NuStar Energy purchased crude oil and refined product storage assets in the Port of Corpus Christi from Martin Midstream Partners for $93 million. When combined with NuStar’s existing terminal operations in Corpus Christi, the acquisition will give the company over 3.6 MMbbls of total storage in the Port of Corpus Christi, including 3.1 MMbbls of crude oil storage and 577,000 bbls of refined product storage.

The terminal NuStar is acquiring includes 1.15 MMbbls of total storage, which is comprised of 900,000 bbls of crude oil storage and 250,000 bbls of refined product storage. The terminal has direct connectivity to Eagle Ford crude oil production and receives crude oil and condensate via its connection to the Harvest Pipeline and through its six-bay truck rack. The terminal has access to two of the port’s deepwater crude oil docks, including exclusive use of the port’s new crude oil dock, and a barge dock. The terminal is located on 25 acres with room for expansion.

“Corpus Christi has been a strategic hub for NuStar for many years, and this acquisition will not only solidify our presence there, but also give us the ability to serve a new pipeline and new customers, and provide us greater connectivity to domestic and international crude oil and refined products markets,” said NuStar president and CEO Brad Barron.

Can Enbridge Recoup Costs of Rejected Pipeline Project?

Canadian legal experts are divided whether Enbridge can recoup some or all of the $500 million it says it spent in seeking federal government approval to construct a $7.9 billion oil sands pipeline to Kitimat, on the B.C. coast, according to a report in the Vancouver Sun.

Enbridge said company executives and their partners, including B.C. and Alberta aboriginal groups that were in position to receive $2 billion in benefits, will discuss options after Canadian Prime Minister Justin Trudeau’s cabinet killed the Northern Gateway project Nov. 29.

Two private-sector lawyers told the newspaper that Enbridge has a legitimate legal case.

“In my view, the Crown has the discretion to change or alter policy,” a Vancouver-based lawyer said. “But it can’t do so with impunity in a situation such as this, where over the course of several years the proponent carried out the duty to consult on behalf of the Crown and participated in an arduous regulatory process, only to be let down by Canada’s unsatisfactory efforts,” the attorney said.

A Calgary lawyer said he couldn’t predict a legal challenge would succeed, but he does believe there’s a case to be argued. “You can’t victimize people who relied on the rules in good faith,” she said.

University of Victoria law professor Chris Tollefson commented, “I think it would be an extraordinary precedent for government to be held liable for regulatory negligence here.”

Why Marcellus Is Both Boon and Bane for Cabot

In a recent posting of Market Realist, writer Keisha Bandz suggests the single most important factor severely affecting producers in the Marcellus Shale has been insufficient takeaway capacity.

As a result of infrastructure growth’s not keeping up with production growth, the region has had inadequate capacity to transport natural gas to demand centers and export locations. This has resulted in Marcellus gas trading at a discount to the NYMEX benchmark price, she said.

However, a study at the beginning of 2016 by the EIA showed that the price differential between the two had narrowed.

According to the EIA’s weekly natural gas update released Nov. 16, Tennessee Zone 4 Marcellus spot prices were trading at $1.98 per MMBtu, a discount of $0.55 compared to the Henry Hub spot price.

While this was possible through new pipeline projects placed into service in late 2015 and early 2016, several projects remain under the review of FERC. These projects include Energy Transfer Partners’ Rover Pipeline project, EQT Midstream Partners’ Mountain Valley Pipeline project, and Spectra Energy’s Nexus Gas Transmission project.

Inadequate pipeline capacity is one of the major reasons that several Marcellus producers, including Cabot Oil & Gas, have continued to see lower realized prices. COG’s natural gas price realizations, including hedges, were $1.75 per Mcf in the third quarter of 2016, down 13% compared to third quarter of 2015. Its Marcellus peer EQT’s average realized price for natural gas fell 16% to $2.16 per Mcf in the third quarter of 2016. Cabot’s other prominent Marcellus peers include Range Resources, Chevron and Rice Energy.”

New Multiphase Machinery Test Facility Available at SwRI

A 5,460-square-foot facility for developing and evaluating turbomachinery exposed to multiphase flow conditions is now available at Southwest Research Institute (SwRI) in San Antonio, TX. The Multiphase Machinery Test Facility can accommodate large-scale turbomachinery and testing with a variety of fluids.

“This facility greatly expands our capabilities for evaluating machinery under a range of conditions,” said David Ransom, manager of the Propulsion and Energy Machinery Section in SwRI’s Mechanical Engineering Division. “We now can evaluate much larger equipment and perform tests with hydrocarbons in addition to inert fluids.”

The facility will support oil and gas industry programs primarily, although SwRI researchers also will seek opportunities in the propulsion industry and other energy sectors.

“The bulk of the work initially will be prototype testing of natural gas foam for hydraulic fracturing research as well as compressor performance testing in wet gas conditions,” said Ransom, adding that “wet gas compression system research is a growing area for the oil and gas industry.”

The Multiphase Machinery Test Facility includes a 3,000-square-foot high bay with a 10-ton bridge crane, as well as a climate-controlled work space. There is an outside concrete pad for fluid tanks and space for future concrete pads. A separate building houses a control room, conference room, customer office space, and other amenities.

Poll finds 54% of B.C. residents Support Oil Sands Pipeline Project

Over half of British Columbians polled on behalf of an association representing Canada’s oil and gas industry support Ottawa’s approval of the Trans Mountain oil sands pipeline expansion. Fifty-four percent of British Columbians polled said they support the federal government’s green-lighting of the Alberta-to-B.C.-coast pipeline expansion while 26% oppose the project.

The survey, conducted by Ipsos Canada for the Canadian Association of Petroleum Producers, notes B.C.’s level of support for the project is above the national average, which was recorded at 37%. On Nov. 29, Canadian Prime Minister Justin Trudeau announced approval of the $6.8 billion Kinder Morgan Trans Mountain expansion to triple the line’s capacity to 895,000 bpd. Construction is expected to begin this fall if the company can settle court challenges and threatened civil disobedience.

Oil Stockpile in Oklahoma Nears All-Time Record

In the Oklahoma town of Cushing oil inventories are pushing close to an all-time high. U.S. benchmark futures prices are struggling to rise despite the promised production cuts agreed to by OPEC, Russia and other producers. The storage tanks are likely to stay full as refiners park crude in Oklahoma to lower their tax bills, according to Bloomberg.

Cushing, which prides itself as the “pipeline crossroads of the world,” is the delivery point for the West Texas Intermediate crude contract. With tanks that can hold 77 million barrels, it’s the biggest storage hub in the U.S. – and the tanks are filling up. For the OPEC-led efforts to boost prices, that’s a big problem. Too much oil in storage holds down pressure for higher prices. Cushing is getting more oil partly because of seasonal factors. Every year, U.S. Gulf Coast refiners try to reduce inventories in December to lower their tax bills, traditionally parking excess crude in Oklahoma and elsewhere.

Stockpiles rose by 1.22 million barrels in mid-December, following a 3.78 million jump the previous week that was the biggest since 2008. The inflows have pushed up stocks to 66.5 million barrels, close to the all-time record of 68.3 million set in May. With the promise of production cuts sending forward prices up, that’s also encouraging traders and refiners to hold onto inventories to sell later at better prices.