What to Expect in 2015 | Russell T. Rudy Energy LLC
According to a recent article in “Rigzone”, there is some good news on the horizon. Energy consulting firm Wood Mackenzie expects partial relief for oil and gas operators via reduced rates from service companies, asset high-grading, and efficiency gains. The article cites 15 trends we can expect to see in the coming year. I have confined the following summary to those related to domestic onshore exploration and production.
Reduced Costs-In response to drastically lower oil prices, operators have already decreased capital budgets. This will put significant pressure on drilling contractors and service companies to lower their rates. At an oil price of $50 per barrel, the horizontal rig count could drop by 40% compared to last year, and day rates by 30% or more.
Refracs vs. New Fracs-In 2014, as natural gas prices fell, operators in the Marcellus shale in Pennsylvania found that refracing existing completions were 25% cheaper than new fracs and often restored, and sometimes enhanced, initial recovery rates.
Haynesville/Dry Gas Resurrection-As drilling and completion costs drop in response to depressed oil prices, and return on oil projects drop, gas suddenly looks relatively more attractive. The Haynesville shale in North Louisiana will look especially inviting as projects there can break even at prices as low as $3.31 per thousand cubic feet.
Eagle Ford Remains on Top-Drilling and completion costs in the Eagle Ford shale in South Texas could drop 20% and 10% respectively. If this happens, many oil projects in this area will be economic at $50 per barrel.
Increased Merger and Acquisition Activity in the Permian Basin-As oil prices fall throughout the first half of 2015, smaller operators who have not hedged their production or have high interest expenses, might become merger or takeover targets. Expect this trend to develop in the second half of the year.
LNG Survives-The four projects already under construction (Sabine Pass, Cameron, Freeport and Cove Point) will all continue to move forward. Construction will begin on the Corpus Christi and Elba Island facilities as well.
Ethane out of Favor-As a result of oversupply, ethane is already more valuable as a fuel (added to natural gas to boost heating value) than as a chemical feedstock. However, most gas pipelines are already at maximum acceptable British Thermal Unit (BTU) levels. Consequently, ethane prices will remain depressed or fall further.
Keystone XL Pipeline Languishes-While the Republican congress will pass legislation enabling Keystone to move forward, Obama has promised to veto any legislative effort to accelerate the process. Republicans probably will not be able to recruit a sufficient number of Democrats to override a veto.
Still a Role for Master Limited Partnerships (MLP’s)-Resource focused MLP’s, such as Linn Energy and Breitbum Energy Partners, were hard hit by the recent drop in oil prices. However, those which are infrastructure oriented (e.g. transportation or storage assets) are less sensitive to commodity prices and will grow in the coming year.
Moderate Progress for Crude Oil Export Policy-There was some progress on the condensate export front in 2014, culminating in the government issuing new guidelines in December. While it is doubtful that the crude oil export ban will be lifted completely in 2015, incremental progress is anticipated.
Conclusion-There is no doubt that 2015 will present a number of challenges for the upstream oil and gas industry. However, there will also be opportunities for progress and innovation.
To read the article in its entirety, including those issues which relate to offshore, Canada and Mexico, please go to www.rigzone.com/news/article.asp?hpf=1&a_id=136801&utm .
