Musings From the Oil Patch
A big challenge for producers in the Bakken is the lack of pipeline infrastructure to move associated natural gas production from the region. Many people are familiar with the NASA photo of the United States at night showing the gas flaring in the Bakken (red) compared to the lights of Minneapolis, Minnesota on the right hand side of the picture. This picture rivals ones from the past showing the huge volumes of gas being burned in Nigeria and Russia that could be seen from space.
A chart from the North Dakota Department of Mineral Resources shows how the percentage of natural gas produced in the state is burned. As the chart in Exhibit 16 shows, gas flaring was relatively minor until about 2005 and then it grew to about 24% in 2008 before falling 10 percentage points as a pipeline was opened up. From about 14% in 2009, the percentage of gas burned rose to the 35% area where it remains today awaiting more pipeline capacity and liquids-processing plants being built.
The Bentek natural gas production forecast relies on the continuation of the triumvirate of factors that have made oil shale plays as successful as they have been to date. Debottlenecking of various key producing basins appears a safe bet since it is based on projects already approved and in many cases already under construction with attractive returns. A continuation of improvements in drilling efficiency appears less secure as it depends on the drilling industry converting the balance of its old, conventional rig fleet into a new, AC-based one. That means higher day rates for working rigs in order for contractors to justify the investment in new rigs. What will higher dayrates mean for well economics? What happens to these oil and wet gas plays should oil prices fall from their current lofty levels? These latter considerations could impact the economics of shale drilling and thus gas output that would negatively impact the Bentek forecast since it is based on economic models employing 12-month forward strip pricing for crude oil and NGLs. The one offset to this logic is the dedication of large integrated and independent producers to drill through the period of poor economic returns because they believe in the eventual recovery of oil and natural gas prices that will reward them for their strategy.
Eoin Treacy's view The
flaring off of gas is a regrettable practice since it represents a waste of
such a valuable commodity. Improved infrastructure would result in natural gas
being considered in its own right rather than purely as a by-product of more
lucrative oil production. Rather than delay infrastructure development because
of argument centred on whether unconventional oil and gas development is environmentally
damaging, every effort should be made to harness as much of their bounty as
Energy intensive sectors such as utilities and chemicals have benefitted enormously from low natural gas prices and have been lobbying for a ban on export. Since a good deal of unconventional production is not economic below $4, the focus of producer attention has been on oil production. This has resulted in less investment in pure natural gas plays. As the prospect of natural gas exports becomes more political, a more balanced approach to natural gas production is necessary which may necessitate tolerance for somewhat higher prices. Without the political will to prioritise natural gas production and consumption, oil will continue to be considerably more economic and the incentive to build the necessary pipelines to reduce flaring will be absent.
Cheniere Energy has found support in the region of the 200-day MA on reactions since November 2011, when it secured the investment necessary to build its LNG export facility. (Also see Comment of the Day on November 22nd 2011). While somewhat overbought relative to the MA, a sustained move below $20 would be required to question medium-term scope for continued upside. The company's parent Cheniere Energy LP yields 6.8% and has been largely rangebound since 2012. It is currently rallying towards the upper boundary.