Today’s Key Takeaways: Small producers pulling back in Permian. No incentive to store oil and build back inventories. Can new Shell CEO convince Trudeau to bet on LNG? Drilling AK gold prospects in Fairbanks and Goodpaster mining districts. West Anchorage senate race key to AK senate control.
NEWS OF THE DAY:
Private Oil Drillers Are Hitting Their Limits
Collin Eaton, Bennoit Morenne, The Wall Street Journal, September 19, 2022
Smaller producers in the hottest U.S. oil patch are pulling back, after harvesting many of their best locations
Dozens of small drillers helped fuel a resurgence in the busiest U.S. oil patch over the past two years. But they tapped many of their best drilling spots, and will have to ease their rapid pace of drilling as their inventory shrinks, analysts and executives say.
Private oil companies in the Permian Basin of West Texas and New Mexico emerged from the pandemic-induced oil downturn last year as a growth engine for U.S. shale, now running almost half of the working drilling rigs there, up from a quarter before the pandemic. Their publicly traded rivals are restrained by shareholders pushing for conservative spending and using leftover cash to pay investors and reduce debt.
After growing rapidly, most smaller producers now have, on average, around six years of drilling locations that could generate returns at low prices, according to data provided to The Wall Street Journal by energy analytics firm Enverus Inc. Energy executives say those limitations will likely lead them to slow their drilling.
“Can private companies maintain this pace indefinitely? The answer is no,” said James Walter, co-chief executive of publicly listed Permian Resources Corp., PR -2.76%▼ a new company formed by the combination of Colgate Energy Partners III LLC and Centennial Resource Development Inc. “There’s just not enough companies of scale, with enough quality inventory.”
The constraints will likely lead many private producers to level out activity or sell themselves to larger companies that would temper their growth, executives and analysts say. A pullback could crimp overall U.S. oil production. Private producers hold around one-fifth of the Permian’s most valuable acreage, analysts say.
Some private drillers said the Enverus inventory data was overly conservative but largely didn’t dispute that private companies lack the assets to keep growing rapidly. Some said supply-chain constraints and financial considerations were the main reasons they are slowing Permian drilling, not inventory.
The Wall Street Journal reported earlier this year that drilling inventory limitations have also made larger shale companies hesitant to return to their rapid, prepandemic growth.
The Permian’s crop of private oil producers is already showing signs of restraint. Despite oil topping $120 a barrel this year, they have dispatched about 22 new rigs since December, compared with last year’s deployment of 86 new rigs, according to Enverus. They have added just four since May and are expected to maintain or reduce activity in the region next year, analysts said.
“They can’t be depended on long-term to fuel U.S. and global oil-production growth,” said Stephen Sagriff, an Enverus analyst. The number of rigs working in the Permian has recently declined by eight since a two-year peak in late July to 343, according to oil-field services company Baker Hughes Co. BKR 0.13%▲
Private drillers’ rapid expansion in 2021 figured into lofty projections that U.S. oil production would climb by about 1 million barrels a day or more for this year. The Energy Information Administration’s monthly data show Texas and New Mexico oil production in June—the latest month for which data was available—rose 2.1% from December.
The EIA has lowered its forecast to 690,000 barrels a day of growth this year. If private drillers continue slowing, U.S. oil output could come in hundreds of thousands of barrels a day below expectations, analysts said.
Mike Oestmann, CEO of private-equity-backed Tall City Exploration, said he isn’t concerned about running out of inventory but estimates the costs to drill a well and bring it online are up about 40% over past year because of soaring costs for material and labor, and that the number of rigs working in the Permian appears to have reached a plateau.
Private companies in the Midland Basin, the eastern portion of the Permian, would run out of drilling locations viable at $60-a-barrel oil or less in about 5.6 years, on average, at their current pace, according to Enverus. They had an average of 5.8 years of the same inventory in the Delaware Basin, the western part of the Permian.
In a study earlier this year, Wells Fargo estimated the U.S. has about six to nine years left of shale-drilling locations, overall, that could generate sustainable returns with oil below $45 a barrel. The bank separately concluded that private companies had even less inventory than publicly listed producers, said people familiar with the analysis.
Granholm Call to Build USA Fuel Stockpiles a Losing Proposition
Chunzi Xu, Bloomberg/Rigzone, September 19, 2022
US Energy Secretary Jennifer Granholm’s call on fuel suppliers to build inventories has just one problem: It’s a losing proposition.
Diesel futures in New York are trading in the widest backwardation for this time of year in data going back to 2008. A backwardated market is one where prompt deliveries are priced at a premium over future deliveries, meaning the product in storage is losing value each day. More often than not, the diesel market is in contango for this time of year, assuring the product gains value over time.
New England’s fuel-supply problem goes beyond short-term market conditions. The region is structurally more vulnerable than ever with the shutdown of an East Coast Canadian refinery in 2020. Last winter, the region relied on diesel imports from Russia, an option no longer available under sanctions. Europe, another swing supplier to the area, is facing a fuel problem of its own as it tries to keep the lights on without Russian natural gas. New Englanders burn fuel for heating homes, and dangerously low stockpiles could put consumers at risk of a cold winter.
New England distillates stockpiles, which include diesel and heating oil, sit at the lowest level ever for this time of year, about half of where they were at the same time in 2021, government data show.
In a meeting with New England governors on Thursday, Granholm asked oil and gas companies to “ensure they are building adequate inventories to handle disruptions from hurricanes or other events,” according to the US Department of Energy.
“Presently, there is no incentive to store oil and build back inventories given the backwardation in the market,” said Ernie Barsamian, a storage broker in the region. This remains true even if the spread has narrowed from historic highs seen at the start of Russia’s war in Ukraine.
“When it comes to backwardation, it’s kind of like being pregnant. You either are or you aren’t,” Barsamian said.
Oilpatch hopes Shell’s new Canadian CEO can persuade Trudeau to bet on LNG
Megan Potkins, Financial Post, September 16, 2022
Canada could have one of worlds the most carbon efficient LNG plants, according to incoming CEO
A Canadian has been tapped to lead one of the world’s most important energy companies, and some of his fellow citizens in Alberta’s oilpatch hope he’ll be able to get the Canadian government to overcome its skepticism about the viability of exporting liquified natural gas to Europe.
Shell PLC, the London-based supermajor that ranks among the world’s biggest oil and gas companies in terms of market capitalization, said on Sept. 16 that Wael Sawan, a Lebanese and Canadian national who studied at McGill University in Montreal, will replace longtime chief executive Ben van Beurden on Jan. 1.
“We will be disciplined and value focused, as we work with our customers and partners to deliver the reliable, affordable and cleaner energy the world needs,” Sawan, 48, said in a press release.
The announcement comes at a critical moment for the company, as it attempts to position itself for a net-zero carbon emissions future amid a worsening energy crisis in Europe. Shell is fighting a Dutch court ruling last year that ordered the company to accelerate its efforts to meet the Paris climate goals, and earlier this week European Commission President Ursula von der Leyen said she intends to seek a windfall tax on the profits of energy producers.
But the toughest challenge for Shell’s new chief executive could be balancing the company’s ambitious decarbonization goals while keeping shareholders happy by maintaining profitability. Analysts said they doubted that Sawan, who currently runs the integrated gas, renewables, and energy solutions division, would alter the course set by van Beurden.
Credit Suisse analysts told their clients in a note that Sawan is well known to investors and expected his appointment to have limited impact on Shell’s strategy. “The shift is likely to be more of a continuation than revolution,” RBC Capital analysts said in a note of their own.
However, at least one fund manager said he hopes Sawan will take advantage of his Canadian roots to coax Prime Minister Justin Trudeau to get over his skepticism about Canada’s potential to supply Europe with liquified natural gas, since Shell is leading the LNG Canada joint venture in British Columbia that is set to become the country’s first LNG export terminal when it opens in 2025.
Millrock partners drill AK gold projects
Shane Lasley, North of 60 Mining News, September 16, 2022
Felix hits gold at Treasure Creek; Resolution awaits more assays from Tourmaline Ridge
Australian mineral exploration companies have been busy this summer with drill programs targeting gold prospects on the Treasure Creek and 64North projects that Millrock Resources Inc. has generated in Alaska’s Fairbanks and Goodpaster mining districts.
Treasure Creek is one property that makes up an enormous land package that Millrock and Felix Gold Ltd. have accumulated in the Fairbanks Mining District.
As a private company, Felix entered into a strategic alliance with Millrock Resources Inc. in 2021 on several Interior Alaska gold exploration projects – Treasure Creek and Ester Dome near the city of Fairbanks, plus the Liberty Bell project about 70 miles to the southwest.
In exchange for becoming a roughly 6% shareholder of Felix after its early 2022 listing on the Australia Stock Exchange, Millrock assigned the company all rights to the Fairbanks District and Liberty Bell properties.
In the Goodpaster District, Resolution Minerals Ltd. is exploring Tourmaline Ridge on the West Pogo Block of the roughly 106,250-acre 64North gold project.
Under a deal signed at the end of 2019, Resolution has the option to earn up to a 60% joint venture interest in 64North, which consists of nine claim blocks Millrock assembled around Northern Star Resources Ltd.’s Pogo gold mine property.
While drill programs have been carried out this summer at Treasure Creek and Tourmaline Ridge, only a handful of results have been returned for both projects due to slow turnaround times at the assay labs.
Election in West Anchorage could be key to control of Alaska state Senate
Yereth Rosen, Alaska Beacon, September 15, 2022
The state Senate race in West Anchorage pits two seasoned lawmakers against each other and could be critical in deciding the makeup of the majority caucus that controls the body’s business.
For Democratic Rep. Matt Claman, who represents the House district that comprises the northern part of the newly drawn Senate district, the prospect of a consensus-building majority comprising members of both parties is promising. It is the reason why supporters encouraged him to run for the Senate seat, he said.
“A lot of people asked me to run for the Senate because they wanted my approach that’s very bipartisan and working together to find solutions,” he said. “I think coalitions are really good for Alaska.”
But for incumbent Sen. Mia Costello, a Republican, the idea of a bipartisan coalition controlling the Senate is a threat. Her supporters want her to prevent that from happening, she said.
“I think to a lot of observers, they believe that if I were not to return to the Senate, some of the policies that were favored by a bipartisan organization may come up again,” Costello said. Those policies include “taxing some of our resources, going backwards in terms of the progress we made on crime,” she said. “I think there’s concerns that would happen again if I don’t return to the Senate.”
Both are veteran public servants with longtime high profiles in their district and in Anchorage as a whole.
Costello, a former teacher, served two terms in the House, then moved to the Senate in 2015 for two terms there, which included a stint as majority leader. She grew up in the Turnagain neighborhood in the northern part of the district and attended West Anchorage High School, and now lives in the southern part of the district. “I’ve spent my entire life in this district,” she said.
Claman, an attorney, served on the Anchorage Assembly from 2007 to 2010, including a period as chairman, and he was an acting mayor for several months in 2009, filling in after former Mayor Mark Begich began his term in the U.S. Senate. Claman was first elected to the House in 2014 and has served there ever since.
Claman, who lives in the Turnagain area, and Costello, who lives in the southern part of the Sand Lake area, both said the redrawn borders for Senate District H will not be much of a factor in the race. By Costello’s estimate, the district is 88% the same as it was previously – a little narrower and extending a little farther south to take in the Bayshore neighborhood, a precinct that she won in the August open primary.
In all, she said, she carried more of the district’s precincts than Claman did in that primary. But in total votes, Claman edged Costello 52.6% to 47.4%, according to the official results.
Both predict a close race in November.
To Claman, one of the top priorities is “putting partisanship aside” to work together across party lines. He is focused on what he called “fiscal responsibility,” as he defines it. “We really need to protect our savings accounts, and the dividend is not the biggest priority of government,” he said, referring to the annual payout to every resident from the state’s oil-wealth fund, the Alaska Permanent Fund. Another top priority is protecting “constitutional rights and the right to privacy,” with a focus on abortion rights.
To Costello, top issues include public safety, economic development, and also fiscal responsibility. But her concept of fiscal responsibility differs from Claman’s. Costello has consistently backed Gov. Mike Dunleavy and others on the right who prioritize large dividends. To Claman, those large dividends that Costello and like-minded legislators want are unsustainable without new taxes, which he said he opposes. Costello, too, opposes additional taxes. “We need new jobs, not new taxes,” her official Division of Elections candidate statement says.
On crime, Costello characterizes a past reform bill as “catch-and-release” legislation, and she characterizes herself as a bulwark against future softening of policies. Still, she and Claman have agreed on follow-up criminal justice legislation, the latter pointed out, including a recent bill to increase pay for state prosecutors, which he said is needed to effectively enforce laws and fight crime.
Their positions on abortion are in direct opposition.
“Alaska’s right to privacy protects the individual right to make private, personal health care decisions, including reproductive health care decisions,” Claman said in his Alaska Beacon candidate questionnaire.
Costello characterizes herself as “pro-life” and has consistently supported bills and other efforts to limit abortion access, though her efforts have often failed in the legislature or been blocked by the courts.
Outside of politics, the candidates have a lot in common.
Both have degrees from prestigious universities – Harvard in Costello’s case, Colorado College, and the University of Texas at Austin in Claman’s case.
Both tout the district for its abundant recreational opportunities, including Kincaid Park, the majority of the Tony Knowles Coastal Trail and several lakes. Both laud their districts’ schools and their neighbors’ commitment to community involvement. Both are athletic and outdoorsy, enjoying the recreational amenities in their district.
Costello was a star swimmer at West High School and at college, where she took some Ivy League championships. Her husband was also a top swimmer and competed for University of Alaska Fairbanks; their sons are on the Dimond High School swimming and diving team. Claman is a wilderness guide and accomplished hiker, boater, skier, and cyclist.
“If this race were being decided in a swimming pool, she would win,” Claman said. “And if the race were being decided on road bikes, I would win.”
What if it were a triathlon? “We’d both suffer in the run,” he said.