Energy Investing and Economy

Recent work features a blend of economic and business trends. In energy, the direction of oil prices continues to weigh on investors, while new policies clash with market forces. • Read a Q&A interview with Seeking Alpha, the crowd-sourced investor platform, about the outlook for 2018: "Remaining a Realistic Optimist in Energy."

• New research about shale oil highlights that U.S. shale oil is plentiful and competitive.

In other work, Dallas Committee on Foreign Relations hosted a speaker event about complexity science and its contribution to solving problems arising from a faster-paced, distributed and connected world. Can complexity science's approach help policymakers develop better ideas? Read "Can Complexity Science Save the Day?"

Two brief articles were written for D CEO magazine in the second half of 2017:

• Is manufacturing alive and well in North Texas? Activity in this sector is more diverse and innovative than one imagines. Read "Manufacturing is Thriving in North Texas," July-Aug 2017.

• Indications suggest that the flatbed and specialty trucking business has a foothold in Dallas via Daseke Inc., a publicly-traded consolidator in the segment.

Energy Policy in the U.S.: The Play of Conventional and Alternative Sources

Re-published from Dialogues, United States Association for Energy Economics  By Jennifer Warren

With less than 100 days into a new administration, the Trump administration has indicated new directions in energy policy. A comprehensive vision of U.S. energy policy has not been articulated however. America's energy landscape is dynamic and markets have considerable sway. The fundamentals of supply, demand, price and technological advances continue to push and pull the energy mix, shaping the amalgam that is U.S. energy. Notably, several key areas were emphasized on the campaign trail and contours of policy are echoing those pledges.

Conventional sources

The oil and gas industry was an obvious constituent that Trump wanted to support. The opening up of federal lands for more drilling was a campaign item. As an indication of support for the oil and gas industry, on January 24th, Trump signed a presidential memorandum that indicated movement on construction of the Keystone XL and Dakota Access pipelines. The $4.2 billion Rover pipeline, stretching from Pennsylvania to Ontario, was also advanced by the Federal Energy Regulatory Commission, where bottlenecks and economic impacts were stymieing the flow of natural gas.

As for policy directions and drilling on public lands, according to Amy Jaffe, executive director of Energy and Sustainability, University of California-Davis, "Trump has been direct in saying that he wants the oil and gas industry to be healthy and expand because it is important for the country." She continues, "Drilling on public lands is a bit of red herring. Companies know where the resources are and where there is infrastructure in place, for example in the Permian or Marcellus." The question she poses: "Do they want to drill on federal lands in other locations that lack infrastructure when you have this existing lower-48 resource base on private lands [via shale] all ready for the market."

As mentioned in a recent natural gas article, the idea of a trade spat with Mexico isn't a favorable development for U.S. natural gas producers, refiners or midstream firms. In the last several years, Mexico has increased its consumption of U.S. natural gas. A number of U.S. firms have added Mexico's market to their business plans, a new opportunity that formerly did not exist. In an era with the potential for excess supply and ample capacity, export markets like Mexico have served as a relief valve, helping buoy various oil and gas industry players during a downturn that is turning upward. The U.S. oil and gas industry has evolved with technological change under the pressures of a competitive global market and holds a position of strength.

Relief to the coal industry is the other major pledge with policy implications. The Clean Power Plan (CPP) was a major policy measure that was expected to shape and refine energy consumption and power generation. The Energy Information Administration projects a 26% decline between 2015 and 2040 in coal production with CPP implementation. Without the CPP, they expect production to remain at 2015 levels.

Alternative energy

In conversation with Jaffe, she mentions that the majority of states are implementing the clean power plan because these clean energy initiatives were already in motion. She does not expect these states to reverse course. "Some utilities are moving away from coal because natural gas is cheaper, or because shareholders will not invest in coal generation," she notes.

Additionally, more Fortune 500 companies are committed to using clean energy. The Googles and Walmarts are announcing to stakeholders that they intend to be 100% renewable by certain dates. "Therefore, as a firm, you have to be in a state that supports renewables," she says.

There is a flip side, Jaffe refers to as a fault line, "But to have the renewables, there can be a problem if higher costs get kicked over to fixed income folks. The perception is that flush Google-type firms are benefiting from federal tax credits when they buy renewables, while some of the costs are borne in the overall rate base by regular, working people." This is an example of the rise of the contention between the 'elites versus the rest' that has changed the political landscape of late. Jaffe suggests, "There maybe some temporary reprieve from electricity reform [under Trump], but that may wind up being more about the pace of change than the fact that change is coming."

The climate change agenda is a broad and diffuse issue that has many arteries. In these initial days, and given the weight of other issues such as trade, security and economy, this item may not be a high priority for the administration. However, executive orders to roll back the Clean Power Plan, the Climate Action Plan and the Paris Agreement are said to be on the horizon.

Jaffe offers, "At UC Davis, we talk about “the three transportation revolutions” — automation, shared mobility and electrification. These technologies will come forward but not because of climate change policy. In both developing and developed countries, traffic congestion is a real problem. Firms like UPS and FedEx are using big data to save on fuel and labor costs, offers Jaffe. At UPS, after implementing computer-based route planning, they saved 100 million vehicle-miles traveled in the U.S. with that program. "If we were to cede [our advances in technology] to China, that would be a disaster for American jobs," says Jaffe.

"It remains to be seen how automation and clean technology shakes out with respect to economic planning over this Administration," observes Jaffe. "Politicization exists but energy technology and clean tech are important as a source of competitiveness in the U.S.," says Jaffe. Advances in technology have implications for military applications, cyber security, electricity grid security, and the movement of goods inside the U.S. Further, notes Jaffe, the movements of goods in the U.S. has a major influence on the competitiveness of exports, and the competition of manufacturing versus importing foreign goods. Thus, policies that have knock-on effects need to be fully scored.

U.S. Natural Gas on the Move

Re-published from Dialogues, United States Association for Energy Economics  Over the next two decades, natural gas production grows and so does demand in the resource-rich U.S. The price of natural gas is expected to stay in a range of below $4, and climb to $5 for the next couple of decades, according to the Energy Information Administration's (EIA) 2017 outlook. "At the low end of the price range, this forecast reflects the incredible abundance of low-cost shale resources," says Ben Schlesinger, gas expert and professor at the University of Maryland.

Fields aplenty

The prolific Marcellus-Utica fields have greatly extended the resource potential of the United States. In a 2016 presentation, Schlesinger compared the Marcellus-Utica to Russia's Yamal Peninsula, its largest gas resource with annual potential production of 310-350 billion cubic meters (bcm). The Bovanenkovo field, the largest in the Yamal region, has potential production by 2030 of 220 bcm — the Marcellus was already producing 219 bcm in June of 2016, and now 233 bcm. Qatar's production was 181 bcm in 2015, with approximately 25.1 (trillion) tcm of estimated recoverable gas, compared to the Marcellus-Utica of 12.8 tcm. One difference: the Yamal region is in the Arctic in comparison to the Marcellus' near-suburban location of Pittsburg, Pennsylvania, cites Schlesinger, meaning a different and far lower cost structure and access.

Source: Ben Schlesinger Associates, 2016; EIA June 2016; Gazprom; BP 2016

Most Marcellus-Utica gas today is flowing south to meet Gulf Coast demand, west to Chicago, and northward into Central Canada. As Schlesinger points out though, pipeline capacity in the Northeast is still limited, by design, from states' energy choices. In addition to the Marcellus-Utica, more gas discoveries have come to light in the Permian Basin. Apache Corporation recently announced an estimated 75 trillion cubic feet (tcf) of rich gas in the Permian's furthermost corners of the Southern part of the Delaware Basin called the "Alpine High."

Gas movements

From natural gas demand and production growth, shale gas is expected to be the largest contributor to U.S. production growth to the year 2040. Schlesinger notes, "Demand grows around the Gulf Coast region because of industrial demand, LNG exports, demand from Mexico, and power plants. This gas is moving south. Price depends on how long the Marcellus-Utica holds out, and what new technologies come along."

The natural gas export story for the U.S. has already had twists and turns. According to the EIA 2017 forecasts, after 2020, U.S. exports of liquefied natural gas (LNG) grow at a more modest rate as U.S.-sourced LNG becomes less competitive in global energy markets. "I do not see the 16-20 bcf per day of exports as in earlier forecasts," Schlesinger assesses. "The U.S. regulators have approved enough LNG projects now to make us the largest exporter in the world by far —more than Qatar even. But some of these projects, and others waiting in the wings, are not fully subscribed and are on hold." Schlesinger suggests the U.S. will hit a certain level and then hold at that level, to see whether a second tranche of projects will see the light of day.

In 2016, total exports of U.S. natural gas were nearly 7 bcf per day.[i] Eagerly anticipated, the U.S. also began exporting liquefied natural gas in 2016 from the Cheniere-Sabine Pass facility, with ultimate capacity of over 4 bcf/d. [ii] Four more facilities are under construction. U.S. natural gas pipeline exports increased by 21.7% to 5.9 bcf/d in 2016, largely because of rising exports to Mexico.[iii] Part of Mexico's energy policy included in their five-year plan calls for the increased import of U.S. natural gas as the country grows it share of natural gas power generation. With the recent contentious political atmosphere between Mexico and the U.S., however, energy firms connected to the production and midstream side stand to lose out if trade and cooperation becomes imperiled.

Other regions in the world such as East Africa, China, and Argentina are keen to develop their own resources as well. Depletion, competition from other suppliers and technological advances will potentially keep the lid on LNG prices. "We are not going to flood the world with U.S. LNG," surmises Schlesinger.

Changeable energy

The energy scene is changing. Just as technology revolutionized drilling in the U.S., bringing a revolution to oil and gas producers and related industry, other energy forms are becoming more competitive. "Cost are down in solar energy, with many more installations on the horizon," observes Schlesinger. "This is wreaking havoc among some utilities. Then you couple batteries with solar energy and it will change how people power their homes in regions like the Sunbelt." While renewable energy forms displace coal-fired power generation, they also may curtail a portion of gas-fired generation as well, Schlesinger relayed.

Market pricing and competitive forces alongside technological change will constrain and influence energy production and choices. The market will drive America's energy mix, but new policy directives can potentially provide some tailwinds or opportunities to maximize profit for companies.

Jennifer is a writer and communications specialist focusing on energy, resources and thought leadership work for companies and institutions. Her work has appeared in numerous academic, policy and business publications.

[i] http://www.eia.gov/todayinenergy/detail.php?id=28932

[ii] https://www.eia.gov/naturalgas/weekly/archivenew_ngwu/2017/01_19/

Natural gas pipeline deliveries to the Sabine Pass liquefaction terminal averaged 1.9 Bcf/d for the report week, 14% higher than the week earlier. Pipeline deliveries set a new record on January 18 reaching 2.05 Bcf/d, indicating the start of the commissioning of Train 3.

[iii] http://www.eia.gov/todayinenergy/detail.php?id=28932

Oil Markets Mash-Up 2017: Part II

Re-published from Dialogues, United States Association for Energy Economics  With OPEC's attempts to constrain supply, U.S. shale's incentives, and plenty of geopolitical intrigue ahead, a definitive guide to oil markets seems elusive. In the Energy Information Administration's (EIA) short-term report, global petroleum and other liquids consumption growth is expected to be about 1.6 million b/d in 2017 and 1.5 million b/d in 2018, with most of the growth from China, India and the Middle East, particularly Saudi Arabia. Still, they expect OPEC crude to grow from 33.2 million b/d in 2017 to 33.7 million in 2018.

Just Right?

In 2017, demand appears to soak up past excesses and align more with production. And 2018 offers the impression of a tighter picture of the balance between supply and demand. Will these be the Goldilocks years for consumers?

Many variables underpin the longer view of the composite that is price. The EIA recently estimated a high oil price case considering the impact of higher world demand for petroleum products, lower OPEC upstream investment, and higher non-OPEC exploration and development costs. And a lower price case assumes the opposite. The difference between the two cases is roughly 5 million b/d in consumption in the U.S. For context, in 2014, OPEC planned upstream investment was about $120 billion, declining to less than $40 billion each year thereafter to 2018 (see chart at end of article). According to analysts Wood Mackenzie, global upstream investment reverses its decline in 2017, with a "recovery" level of over $500 billion of investment expected in 2019.

Price Making

The influence of Saudi Arabia, however, still matters for global oil, as noted by economist Alhajji in the first article. James Smith, USAEE past president, offers color about the Saudi's situation: "The Saudis’ problem is that they have too much oil—more than they will ever be able to sell given the rise of shale, the likely taxes and prohibitions due to climate change concerns, etc. If they don’t sell it now, they never will."

Smith cites a "market share trap" for which he learned about twenty-five years ago from his days at university studying under Professor Adelman of Massachusetts Institute of Technology. "They [Saudi Arabia] can boost the price of oil by cutting production," Smith says, "but working against so many competing suppliers and dwindling demand, they would soon be limited to 0 barrels in the attempt to keep prices at $100. They have moved on."

In the near term, spot price volatility is still expected. The political risk component of supply outages isn't diminished with an OPEC quota given the risks in the neighborhoods of Iraq, Iran, Nigeria, Libya, Saudi Arabia and Venezuela, to name a few. The inelasticity of supply and demand are still central to oil pricing too, in spite of the addition of U.S. shale oil. "The time required for shale to ramp up to offset these outages (drawing well permits, mobilizing rigs, completing wells) is measured in months of years, not days," offers Smith. "Volatility of the spot price of oil depends on the almost immediate need to rebalance markets when supply flags or demand surges."

In considering the year ahead, economic growth and consumption inform a view of the demand for oil. In The Economist's outlook for 2017, China and India's GDP growth is expected to be 6% and 7.5%, respectively. Other Asia, excluding New Zealand, Australia, and Japan is expected to grow 5.2%, while Australasia is 3% to North America's 2.3% and Western Europe's 1.1%. The Middle East and Africa are forecast at nearly 3%. The EIA projection for real oil-weighted world GDP growth increases slightly from 2.2% in 2016 to 2.7% in 2017.[i] Demand marches on, but dollar strength will matter too.

Mixing It Up

The transportation sector, a major driver of oil demand, is changing in new ways that is yet to be fully calculated. For example, many commercial fleets have or are considering the switch to natural-gas powered vehicles, and the growth is expected to continue. However, the costs versus the benefits are being weighed in consideration of oil and diesel pricing and new information related to the lifecycle emissions of methane when the entire supply chain is studied.[ii]

Ridesharing usage and the changing mix of light-vehicle ownership from conventional to hybrid and electric vehicles influences gasoline consumption. With Tesla's new Nevada-based Gigafactory, lower battery costs envisioned by Tesla will power an initial 1.5 million of its own electric vehicles. The International Energy Agency suggests electric cars grow from 1.3 million in 2015 to 30 million in 2025; oil demand could be reduced between 1.3 million to 6 million b/d by 2040 depending on policies (and of course adoption). With more definition about U.S. energy policy anticipated, a world of constituents —investors, firms, consumer groups, and policymakers—have voted for the Paris Agreement to reduce carbon emissions.

Predicting the exact nature of oil markets in the long term is challenging. But the year ahead looks to offer continued lower prices, in a relative sense, to support the economic prosperity that many countries hope to advance.

Jennifer is a writer and communications specialist focusing on energy, resources and thought leadership work for companies and institutions. Her work has appeared in numerous academic, policy and business publications. 

 

[i] http://www.eia.gov/outlooks/steo/marketreview/crude.cfm

[ii] http://blogs.edf.org/energyexchange/2017/01/06/new-study-improves-understanding-of-natural-gas-vehicle-methane-emissions-but-supply-chain-emissions-loom-large/

Reflecting on Oil Supply 2017: Part I

Re-published from Dialogues, United States Association for Energy Economics  These are interesting times for economists charged with predicting oil markets. As the new year begins and the dust somewhat settles from challenging political and geopolitical climates, the question arises: what are the prospects for oil supply in the year ahead? Is the expected tightening of supply really going to manifest? First, OPEC and non-OPEC producers of Russia-plus have pledged to cut production of approximately 1.8 million barrels per day and their ability to comply with the caps is under scrutiny. Second, U.S. exploration and production companies, particularly those with a shale oil focus, are increasing production based on better pricing. Market prices, producer incentives and demand also play their parts on the stage of world oil, and more on that in a follow-up article.

OPEC's dilemma

In late November 2016, OPEC announced it would reduce oil production levels by 1.2 million b/d to a ceiling of 32.5 million, beginning in January. Bloomberg estimates OPEC produced 33.1 million in December, down over 300,000 barrels since November. Still, according to the Energy Information Administration (EIA), OPEC crude oil production is expected to average 33.2 million b/d in 2017. USAEE member and oil market economist Anas Alhajji notes, "Some OPEC members, especially Saudi Arabia, are serious about the cut.  When it comes to production cuts, Saudi Arabia matters the most." He says OPEC would need to shave off 2 million b/d from December's output to meet its target, but that a cut of 1.2 million b/d is sufficient to increase prices. As for the forces driving prices in 2017, Alhajji cautions that production increases in both Libya and Nigeria, countries that abstained from any cuts, could have an impact as well.

In the past, OPEC production quotas have been predictably unpredictable. It is possible that the latest round will fall prey to an "animal spirits" syndrome in hindsight — "a spontaneous urge to action rather than inaction, and not as the outcome of a weighted average of quantitative benefits multiplied by quantitative probabilities." The urge to action is not spontaneous, but the intentions are good and the real options challenging. According to James Smith, USAEE's immediate past president and financial economist at Southern Methodist University, he expects about 75% of the cuts to occur in the first couple of months, but then production begins expanding again, resulting in a limited and temporary impact on prices. "The agreement among the parties is not “incentive compatible” from the perspective of economics," Smith states.

Incompatible incentives

In the grand scheme of production cuts, this incompatibility, specifically smaller producers ex-Saudi Arabia and Russia, stems from these producers' output comprising a small fraction of world output. "Their production levels have no perceptible impact on the market price," Smith adds. "However, their production levels have a large impact on their own revenues, which rise due to extra sales gained from departing from the agreement." With no enforcement mechanism, a repeat of violations by OPEC countries is expected to happen again, as in the past.

Then there is the case of the many thousands of U.S. oil and gas producers, beholden to their own company-level economic incentives. As prices for West Texas Intermediate crude oil approached and passed the $50 per barrel mark, numerous U.S. producers began increasing production. In the Energy Information Administration's recent forecast, U.S. crude oil production is forecast to average 8.9 million b/d in 2016 and 8.8 million b/d in 2017. Incidentally, about 500,000 barrels per day of crude oil were exported through October 2016, with more than half arriving at shores other than Canada, the chief U.S. export market. According to Smith, "each shale producer is a price taker. Every barrel of shale oil that can be developed economically will be developed and put on the market," he relays.

In the Permian Basin, for example, a falling rig count began to increase in June of 2016. In the October to November period, rigs increased by 16 to 223 in the region that has seen less production declines (even gains) relative to others.[1] One executive of a top Texas-based independent oil and gas firm expects 100 rigs to be added over a year from a late September statement. With economic incentives similar to the smaller OPEC countries, "Their collective production may drive the price down—to their collective misfortune," Smith surmises. U.S. shale production increases are not expected to reduce prices but limit an increase, according to Alhajji.

The price is right?

Suffice to say, supply could conceivably be kept in check for 2017, mirroring demand growth. "Shale may dampen longer term price movements, but not short-term volatility," notes Smith. Demand for oil in general and demand growth in particular are difficult to predict in this post-financial crisis world, one in which monetary policy has been playing an outsized role in investment decisions. The jury may still be out regarding the new normal.

Jennifer Warren is a writer and communications specialist focusing on energy, resources and thought leadership work for companies and institutions. Her work has appeared in numerous academic, policy and business publications.   

[1] See December 16, 2016 report at the Dallas Federal Reserve Bank

Pioneer's Leadership Transition

In spite of and because of recent OPEC activity to cut production, oil markets have continued to be volatile in terms of price. In late November, NYMEX crude oil futures were at $45, and today they hover around the $50 mark. In the U.S., the Permian Basin continues to grow oil production. The Energy Information Administration's DPR projects a 27,000 barrels per day increase from November to December in the Permian, with the Niobrara region increasing by 2,000 barrels per day. In the Bakken and Eagle Ford, production is still declining. The following link is a short feature about Pioneer, a leading Permian producer, and Tim Dove's transition as the new incoming CEO: • "How Tim Dove Will Move Pioneer Natural Resources Forward" published in D CEO, December 2016. (The chart caption should say shale oil, not oil shale.) 

Geopolitics and Energy Mash Up

Surprisingly, the geopolitics in play in my last post are not much different than today's. The Q&A below offers some insights into Putin's moves on the world stage. With low oil prices still lingering and whipsawing around, the green side of energy has seemingly decoupled from oil's tethers. In offering a balanced lineup of subject matter —from global security and shale gas to edgy academic research and energy market plays, the following new works are highlighted:

• A Q&A with Ambassador Pinkering on global hot spots. See the 11/06/15 entry.
• New findings that shale gas wells are not over-drilled.
• Re-freshed content and design of the Cox School faculty research site. (The profile about crowd-sourced investment research is interesting.)
• A look at Toyota's claim about conventional gas engines going by the wayside in 2050, and how various scenarios could present themselves.
• Finally, a couple of firm's reporting in the third quarter offer clues as to how various sides of the oil and gas business are faring: Halliburton here and Pioneer here. In a depressed pricing environment, firms are focused on strengths like never before.

Looking Back to See Ahead

To catch up with recent writings, I'm posting two items that capture noteworthy trends in oil markets: 1) "U.S. Shale Gale: A Whale Of A Tale, And Permian Walkabout," that speaks to U.S. producers' activities in light of the new normal in pricing;  and

2) "Cartels, Sci-Tech And Breaking Bad: Oil Markets' New Normal?" offering more scenarios possible in oil markets than answers.

The upcoming OPEC meeting may offer little new information, as the strategy to pursue market share, particularly for the Saudis and Gulf states, continues to manifest. Geopolitics in the Middle East are in a perilous status quo.

While often writing about oil markets and U.S. shale resources, the advances in renewables, infrastructure developments (including U.S. midstream), and other energy and resource developments are being studied and considered. A recent article about global infrastructure firm Fluor captures some of the diversity in energy that overlays the global map. An excerpt follows since this article will be inaccessible in a couple of days:

Natural gas demand is expected to grow by 30% between 2014 and 2025 and production will increase by almost 40%, notes an IHS study. This demand is driven by power generation and industrial users. With low natural gas prices and ample NGL supply, the American Chemistry Council expects investment of $135 billion in 211 projects; this estimate was upped from a February 2014 estimate of $100 billion and 148 distinct investments.[i]

Fluor is also involved in the highly technical work of nuclear power plants, including their decommissioning. Recently, the company acquired 98% ownership of a nascent nuclear technology called NuScale. Majority-owned by Fluor, NuScale Power, LLC is developing a new kind of nuclear plant considered a safer, scalable version of pressurized water reactor technology, designed with natural safety features.

A big bet, Fluor believes NuScale could revolutionize the nuclear power industry and offer a $400 billion-dollar market.[7] In two decades, the business could be 'huge,' especially with their exclusive rights to build the smaller-scale, modular units. These 50-megawatt (MW) units can be stacked, like six packs, creating a 300 MW plant or more scaled-up plant based on the need. A recent Wall Street Journal article mentioned how the West, and particularly the U.S., is being usurped by China and Russia in nuclear build expertise. However Fluor may capitalize on the trend regardless of who leads the effort given their global footprint and ability to scale nuclear energy in diverse and new ways.

U.S. Energy Supply Alters Benchmarks and Trade

The Dallas Committee on Foreign Relations recently posted the inaugural publication of its "Global Themes Forum," an occasional series of articles, essays and thought pieces about topical global affairs issues. The first installment is a thought piece on global oil markets titled, "U.S. Energy Supply Alters Benchmarks and Trade Scenarios." See the item listed January 27,2015. And if the big picture isn't of concern, a dive into global oil markets after the Saudi succession, or how consolidation in the U.S. energy industry is beginning, may be of interest.

1) "Post-Saudi Succession, Oil Markets Seeking An Elusive Equilibrium" here.

2) The Energy Transfer merger between "family" members: "Energy Transfer Merger Creates Second Largest MLP, Scale Economies" here.

Oil Market Gyrations Creating an Altered Horizon

The timeframe of November through the first part of December saw levels of volatility in oil prices unseen for years. This article details some of the numbers supporting the shapeshifting market. But, in time, the fundamental drivers of supply, demand and geopolitics will clear up the tattered picture, as it always does. The OPEC decision to leave quotas intact created a tsunami effect for industry players. However, a slight bit of clarity is emerging as one large oilfield services firm notes some initial observations in production and investment activity around the world.