The May STEO Forecasts Good News on Predicted Pricing, But Concerning Predictions on Production

The U.S. Energy Information Administration (“EIA”) released its Short-Term Energy Outlook (“STEO”) on May 12, 2020, but noted that it was subject to “heightened levels of uncertainty because the effects on energy markets of mitigation efforts related to the 2019 novel coronavirus disease (COVID-19) are still evolving.”

The May STEO elaborated on the extent of this uncertainty as follows: “Reduced economic activity related to the COVID-19 pandemic has caused significant changes in energy supply and demand patterns. Crude oil prices, in particular, have fallen significantly since the beginning of 2020, largely driven by reduced oil demand because of COVID-19 mitigation efforts. Despite the April agreement between the Organization of the Petroleum Exporting Countries (OPEC) and partner countries (OPEC+) to reduce production levels beyond the end of the STEO forecast period, crude oil prices have remained at some of their lowest levels in more than 20 years. Uncertainties persist across EIA’s outlook for other energy sources, including natural gas, electricity, coal, and renewables.”

Aside from uncertainty, what are the takeaways from the May STEO

The good news is that there are some positives:

  • Brent Crude Prices – Better than we Thought?  Prices are predicted to get better than we thought.  According to the May STEO, the EIA forecasts that Brent crude oil prices will average $34/b in 2020, which is down from an average of $64/b in 2019 but better than I think many folks were thinking. The EIA further forecasts that Brent prices will rise to an average of $48/b in 2021, $2/b higher than forecast last month, as EIA expects that declining global oil inventories next year will put upward pressure on oil prices.
  • Natural Gas Prices – On the Rise?  The EIA is also forecasting that natural gas prices will generally rise through the rest of 2020 as U.S. production declines and that Henry Hub natural gas spot prices will average $2.14/MMBtu in 2020 and then increase in 2021, reaching an annual average of $2.89/MMBtu.  The EIA reportedly expects prices to rise largely because of lower natural gas production compared with 2020.

There are some not-so-great aspects of the May STEO as well:

  • Gas and Jet Fuel Consumption – Significantly Down:  According to the May STEO, for all of 2020, the EIA forecasts that U.S. motor gasoline consumption will average 8.3 million b/d, a decrease of 11% compared with 2019, while jet fuel and distillate fuel oil consumption will fall by 25% and 10%, respectively, during the same period.
  • Domestic Crude Oil Production –  The EIA forecasts U.S. crude oil production will average 11.7 million b/d in 2020, down 0.5 million b/d from 2019. In 2021, EIA expects U.S. crude oil production to decline further by 0.8 million b/d.

Despite the positive news about pricing, the forecasts on oil production are significant.  According to the May STEO:

If realized, the 2020 production decline would mark the first annual decline since 2016. U.S. crude oil production has not declined for two years in a row since the 17-year period of declines beginning in 1992 and running through 2008. Typically, price changes affect production after about a six-month lag. However, current market conditions will likely reduce this lag as many producers have already announced plans to reduce capital spending and drilling levels.

It is difficult to predict what oil production will look like in the future, especially given all of the uncertainty.  Many factors, including unknown factors such as specific impacts of COVID-19 on the industry, will come into play.  Stay tuned!

Tell Me Somethin’ Good

According to Oil & Gas 360’s article originally from CNBC entitled, Oil prices may now be at a bottom after historic OPEC deal, US energy secretary says, “[o]il prices are down more than 55% year-to-date, having experienced the worst price plunges in nearly two decades in the face of record supply, disappearing storage space and global demand eviscerated by coronavirus lockdowns around the world.”

I don’t know about you, but I could use some good news in the energy sector right now.  I would take any good news right now, actually.  Enter today’s blog – Tell me Somethin’ Good.

Here is some good news from the energy sector, from electricity to mining, and oil and gas – there is a lot of good happening out there that we can focus on:

Here is my favorite news article – trust me, it is worth the read:

Even though the energy sector has been hit hard by the coronavirus, it is doing amazing things to help others.  Try not to get too bogged down by the bad news, troubling statistics and overall anxiety-inducing situation – focus on the good!  

“Agreement in Principle” on OPEC Production Cuts?

The Organization of the Petroleum Exporting Countries (“OPEC”) and other countries including Russia may have reached a tentative agreement during its virtual meeting today to temporarily cut a significant volume of production; however, at the last-minute, Mexico did not approve the deal.

According to The New York Times article entitled, OPEC and Russia Reach a Deal to Cut Oil Production: Live Updates, OPEC and other oil-producing countries reportedly agreed to cut about 10 million barrels a day, or about 10 percent from normal production levels, in May and June, and hope that more cuts can be agreed to tomorrow.  However, Mexico is currently reluctant to join in the deal.

Here are a few headlines to keep you in the know:

Much is still up in the air, especially with Mexico. Whether this temporary production cut will be enough or whether further cuts will follow also remains to be seen. Possible further trims could reportedly come from a meeting of the Group of 20 nations tomorrow.

Stay tuned!

Crude Oil Prices and Prices at the Pump

This morning, I noticed that the price of gasoline at the pump was $1.77 per gallon.  To put that in perspective, when I first started driving, I remember the price being around $2.02 per gallon…

How does the price of crude oil correlate to the price of gasoline at the pump?

Good question!  As of the publication of this blog, according to Bloomberg Energy, the price of WTI Crude is $26.10 per barrel and Brent Crude is $33.63 per barrel.  There is clearly a correlation between the price at the pump and the price of a barrel of crude oil.

Crude oil is the main component making up gasoline, so the price of a barrel of crude oil truly does account for a substantial part of the price of gasoline. 

However, in addition to refinery costs, etc., there are other factors that come into play when looking at the price of gasoline at the pump.

The other main factor to consider when looking at the price at the pump, and the price of crude oil as well, is demand.  Recent headlines have been addressing lower gasoline demand: 

According to Bloomberg’s article entitled, Staggering Loss of Oil Demand Raises Pressure on OPEC+ to Cut Output:

“The most shocking drop in U.S. consumption was concentrated on gasoline, long the fuel that powered the American way of life. The Energy Information Administration said a proxy for gasoline demand fell to 5.06 million barrels a day, the lowest since weekly data is available starting in 1990. Separate monthly data suggests the U.S. may have not consumed so little gasoline anytime since 1969, the year of the moon landings.”

A critical factor in both crude oil prices and the price of gasoline is supply.  The big discussion concerning supply recently has focused on the global crude oil supply.  As we all know, that is where The Organization of Petroleum Exporting Countries (“OPEC”) has historically come into play.  OPEC is reportedly set to meet virtually this week actually, on April 9, 2020.

Hand in hand with supply issues come storage issues.  In fact, storage issues that we did not think possible may be on the horizon.  According to a recent article in S&P Global entitled, No place to go: Oil storage filling up amid collapsing demand, excess production, “Concerns are mounting that the U.S. soon may not have enough oil storage to absorb a collapse in demand caused by the coronavirus that has started to ripple through the supply chain, with consequences for producers, pipelines, refiners and consumers.” 

Therefore, while consumers may be happy about the low price of gasoline at the pump, we cannot lose sight of the other factors contributing to that low cost and the potential consequences of the same.  Stay tuned…

U.S. DOE to Purchase Crude from Small to Midsize Producers

In the wake of crude oil price’s recent plunge, the United States Department of Energy (“DOE”) has announced that it will fill the Strategic Petroleum Reserve (“SPR”) to its maximum capacity by purchasing 77 million barrels of American-made crude oil.  The DOE’s announcement can be found here.  

The initial solicitation is for the purchase of 30 million barrels by confidential Request for Proposal (“RFP”) and can be found at: https://www.spr.doe.gov/doeec/OilPurchase.htm. The focus of this initial crude oil RFP is small to midsize domestic oil producers – throwing a lifeline to those who have been hit especially hard by the price drop. 

According to the DOE’s announcement, “the [DOE] is working with Congress to finalize the funding to support the purchase of the full 77 million barrels of oil, consistent with the President’s directive.”  With regard to delivery, the announcement recognizes that the private sector needs time to plan for delivery logistics, so the solicitation is for crude oil to be delivered in May and June; although, early April deliveries are encouraged.

The purchase is sure to be controversial – as discussed in an article in The Hill entitled, “Trump administration prepares to buy 30M barrels of oil amid industry slump.”  However, the reality of the far-reaching benefits of the oil purchase cannot be overlooked, as oil and gas industry employees impact so many other service sectors in the nation.  Further, targeting small and midsize producers for the initial RFP will provide crucial relief for these companies who are the lifeblood of the oil and gas industry, but who may not have the financial wherewithal to weather oil prices below $30 per barrel for long.

What is Going on With OPEC??

There have been many changes recently, but one of the changes on the forefront of my mind has been “what is going on with OPEC”?  It feels like a major shift has happened with The Organization of the Petroleum Exporting Countries (“OPEC”).

Background

By way of a short reminder, OPEC has been around since 1960 – in fact, this year marks the 60th year since its founding.  Its mission is:

“to coordinate and unify the petroleum policies of its Member Countries and to ensure the stabilization of oil markets in order to secure an efficient, economic and regular supply of petroleum to consumers, a steady income to producers and a fair return on capital for those investing in the petroleum industry.”

There are 13 member countries including Saudi Arabia. 

Current Status

According to the Investopedia article entitled, OPEC vs the U.S.: Who Controls Oil Prices, “OPEC controls oil prices through its pricing-over-volume strategy.” 

Now, there is a big question mark behind that sentence.  OPEC allegedly controls oil prices, but we all know that many other factors impact the equation as well, including global politics, supply and demand and technology. 

Stability has historically been the primary goal of OPEC, but recent events have turned oil prices and supply on their heads.  The recent headlines indicate that a shift has happened in OPEC:

What does this mean for OPEC?  Has OPEC lost its grip and with it, its purpose and utility?  Only time will tell.

Wyoming’s Oil and Gas Resources Summarized as we Start the New Decade

This month, the Wyoming State Geological Survey issued the Oil and Natural Gas Resources in Wyoming January 2020 Summary Report.  A free copy may be downloaded here.  The report assesses where the Cowboy State is, and forecasts where it is headed, when it comes to one of the state’s most valuable resources – oil and natural gas. 

In short, the outlook for the Cowboy State is positive and the oil and gas sector appears poised for growth

HIGHLIGHTS OF THE REPORT

By way of a quick summary, the report provides as follows:

  • “Wyoming oil production is forecast to reach levels not seen since 1993 for the second consecutive year.” 
  • “With substantial reserves of oil and natural gas (the EIA estimates Wyoming reserves are enough to supply the U.S. with 46 days of oil and 262 days of gas), a favorable regulatory environment, and operators’ increased ability to lower production costs in unconventional reservoir development, Wyoming will remain a significant contributor to the national energy portfolio.”
  • Natural Gas Leader:  “The Greater Green River Basin is the top gas-producing basin in Wyoming, accounting for 60 percent of the state’s 2018 natural gas production.”
    • Projects in this basin are progressing more slowly than anticipated and hoped; however, “[t]hese long-term projects will significantly increase the basin’s total natural gas production if and when they come online.”
  • Oil Production Leader:  “The Powder River Basin has traditionally been, and continues to be, Wyoming’s top oil-producing basin, consistently accounting for at least one-third—and since 2014, more than half—of the state’s oil annually.”
    • The future of Powder River Basin oil production in general will be largely dependent on market conditions and will be “susceptible to crude oil prices, surpluses, and the international market.”
  • Wildcatter:  Wildcat wells, defined by the Commission as, “wells outside known fields or new wells which are determined by the Commission to have discovered oil or gas in a pool not previously proven productive,” accounted for 40 percent of the state’s total 2018 oil production.  “This percent-contribution from wildcat wells is expected to continue its upward trend in the future.”

TAKEAWAY:  While Wyoming continues efforts to diversify its economy, the report has provided good news for the anticipated growth of the oil and gas sector in the Cowboy State as we start 2020.  We all hope that the upward trends seen in the report continues!

A Change in the Winds: EIA Forecasts Bump in Renewable Energy for 2020

The U.S. Energy Information Administration (“EIA”) released its latest Short-Term Energy Outlook (“STEO”) on January 14, 2020, which can be found here.  This STEO is the first to include energy forecasts into 2021. 

Among the interesting forecasts contained in the STEO is the prediction surrounding the rise in renewable energy for 2020 and into 2021.  Specifically, the forecasts surrounding the increases in wind generation caught my eye.

Wind and solar generation expected to grow 15% in 2020

The predicted increase in wind generation is also discussed in detail in the EIA’s Today in Energy entitled, EIA forecasts slower growth in natural gas-fired generation while renewable energy rises. The EIA forecasts that “generation from nonhydropower renewable energy sources, such as solar and wind, will grow by 15% in 2020—the fastest rate in four years.”

Specifically, the EIA reportedly “expects a 32% increase of new wind capacity – or nearly 30 GW [gigawatts] – to be installed in 2019 and 2020.” 

Wind and solar generation expected to grow 17% in 2021

What is more, the EIA expects its forecasted changes in electric power generation to continue into 2021.  According to Today in Energy, the “EIA forecasts U.S. generation from nonhydropower renewable energy sources will grow by 17% next year as the electric power sector continues expanding solar and wind capacity.”

Although many were expecting to see forecasts predicting electricity generation from renewable energy sources to rise, many were not expecting to see such significant increases forecasted in the area of wind generation specifically.  Only time will tell if wind will truly expand at these high rates in 2020 and into 2021.  Stay tuned!

Did I Miss Something? What Happened in the Energy Sector in the Rockies Around the Holidays

Returning to work after the holiday season may have left many of you wondering if you missed anything important while you were in a cookie-induced holiday slumber. 

Here is a short summary of some key items that happened in the energy sector in the Rocky Mountain region around the holidays to keep you in the loop:

Wyoming Amended APD Rules

Effective December 20, 2019, the Application for Permit to Drill (“APD”) rules have been amended for the State of Wyoming.  The revisions to the APD rules can be found here

It is no secret that the number of challenges to oil and gas operatorship have increased recently in Wyoming and that those challenges frequently result in a costly and time-consuming process that ultimately ends up delaying development. 

Wyoming’s APD rules were amended in response to the increased volume of drilling permits filed in the Cowboy State and are an effort by the Wyoming Oil and Gas Conservation Commission (“WOGCC”) to reduce not only the backlog of permits, but costly battles for operatorship. 

Here is a quick summary of what you need to know about the new APD Rules – for more detail, check out the rules here:

  1. Wyoming remains a “first-to-file” state when determining operatorship – the race is still on.
  2. BUT there are now time limits (2-year anniversary of the most recent spud well in the DSU) and the opportunity/procedure for a challenging operator to seek operatorship.

The new WOGCC Rules – Chapter 3, Section 8, are worth a read for the details; specifically, subsections 8(l) and 8(m), the latter of which articulates the process that a challenging operator will utilize, within the two-year window.  The Notice of Intent to File an 8(m) Application and the 8(m) Hearing Application under Section 8(m) are going to be the new meat and potatoes.  Note that there are ten (10) criteria for the 8(m) Application that must be included when challenging operatorship and these criteria are contained in Section 8(m)(i).   

TAKEAWAY: The takeaway is truly that Wyoming’s rule changes are an effort to articulate not only a clear and streamlined operatorship process in Wyoming, but a procedure for challenges to operatorship as well.  Here’s hoping the changes will address the operatorship issues.    

Colorado Provides Draft Wellbore Integrity Rules

On New Year’s Eve, the Colorado Oil and Gas Conservation Commission (“COGCC”) made the draft wellbore integrity rules available.  The draft wellbore integrity rulemaking was shared on the COGCC website on December 31, 2019 via Google Drive, which can be accessed here or directly from the COGCC website here.  The revisions to the draft form are provided in clean and also redline form to easily see the new changes, which are far too numerous to describe.  The revisions include new definitions, changes in bradenhead testing, isolation of coal seams and protected water, and changes to the requirements for the well location plat, casing and cement plan and requirements for stimulation at depths of 2,000 feet or less provided with a Form 2 A – Application for Permit to Drill, just to name a few. 

TAKEAWAY: The draft wellbore integrity rules were made public at a time when many of us may have missed it, yet they contain significant revisions to the rules.  The deadline to submit a Request for Party Status in connection with the wellbore integrity rulemaking is Monday, January 13, 2020. 

North Dakota Rule Changes in Process

The North Dakota Industrial Commission (“NDIC”) has been in the process of adopting changes to the oil and gas rules in the state since last spring/summer.  The amended rules were approved by the NDIC on or about November 25, 2019 and can be found here.  On December 20, 2019, the final rules were submitted to the Attorney General for a legal opinion on the same, which will be provided on or about January 24, 2020, according to the Timetable for Adopting Oil and Gas Rules

TAKEAWAY: The North Dakota rule changes are in process and will be effective April 1, 2020, reportedly after the Attorney General confirms their legality and after approval of the Administrative Rules Committee. 

Some key things certainly took place in the energy sector in the Rocky Mountain region around the holidays!

It’s a Wrap: New Outlooks for 2020

Many of us have the end of the year and the end of the decade on our minds: wrapping up projects, working to close deals and matters, and striving to end the year on as high of a note as we possibly can.  It is hard to believe but there are only 15 days left in 2019.

With the end of the year at the forefront, it puts many things into perspective.  The U.S. Energy Information Administration (“EIA”) recently released its December 2019 Short-Term Energy Outlook (“STEO”) which can be found here.  With 2019 coming to a close, we look to forecasting 2020. 

STEO Forecast Highlights – By way of a summary, here are the highlights of the December 2019 STEO:

  • Slower Increase in Oil Production:  The EIA is expecting slowing crude oil production growth in 2020, but growth in U.S. crude oil production is expected to increase over 2019 production.  The EIA is predicting the following: “Slowing crude oil production growth results from a decline in drilling rigs over the past year that EIA expects to continue into 2020. Despite the decline in rigs, EIA forecasts production will continue to grow as rig efficiency and well-level productivity rises, offsetting the decline in the number of rigs.”
  • Lower Oil Prices:  The EIA is expecting that “crude prices will be lower on average in 2020 than in 2019 because of forecast rising global oil inventories, particularly in the first half of the year.”
  • Continuing OPEC Production Limits:  The “EIA assumes that OPEC will limit production through all of 2020. . . .”  The new production target is reportedly “1.7 million barrels per day (b/d) lower than in October 2018, compared with the former target reduction of 1.2 million b/d.”
    • By way of a reminder, the Organization of the Petroleum Exporting Countries (“OPEC”) met last week and approved additional adjustments to the previous production cuts – more on this can be found here.
  • Increase in Crude Oil and Petroleum Exports:  The “EIA expects total crude oil and petroleum net exports to average 570,000 b/d in 2020 compared with average net imports of 490,000 b/d in 2019.”

These new outlooks for 2020 leave us with a hopeful anticipation overall as we close out the year.  Only time will tell if they are accurate forecasts!