Today’s Key Takeaways: ConocoPhillips sets new record for drilling. Study: oil companies have very limited role in setting gas prices. European Union considers relaxing environmental regulations for wind, solar projects to add capacity more quickly. Alaska Senate passes $4200 PFD.
NEW OF THE DAY:
ConocoPhillips set new record for North Slope horizontal oil drilling; production on slope holding steady
Tim Bradner, The Frontiersman, May 10, 2022
North Slope production held steady in April compared with March and April of 2021, according to production data released May 1 by Alaska’s Department of Revenue.
The Alpine field, one of three larger fields on the slope, has been restored to normal production after being cut 8,000 barrels per day in January and February as operator ConocoPhillips dealt with an unusual underground gas release.
In another development, ConocoPhillips completed its first long horizontal production well to a new project in the Alpine field, Fiord West. The well was drilled to 35,526 feet, a new record for an Alaska horizontal well.
That distance means the drill rig in the Alpine field has drilled horizontally, or laterally, from the location of the rig to the underground Fiord West deposit.
Meanwhile, overall North Slope production averaged 489,565 barrels per day in April, almost dead even with 483,400 barrels per day in March and 489,303 barrels per day in April 2021, according to the revenue department data.
In year-over-year comparisons, the Prudhoe Bay field, the largest North Slope field that is operated by Hilcorp Energy, averaged 314,831 barrels per day in April 2022 compared with 483,440 barrels per day in April 2021.
Kuparuk River, operated by ConocoPhillips, averaged 104,270 barrels per day in April compared with 113,152 barrels per day in 2021. The Alpine field, also operated by ConocoPhillips, averaged 49,901 b/d in April compared with 48,710 barrels per day in April 2021.
The small Lisburne field operated by Hilcorp averaged 20,563 barrels per day in April compared with 22,350 barrels per day in April 2021. This includes output from the Lisburne reservoir underlying part of the eastern
Prudhoe Bay field but also includes production from several smaller nearby reservoirs such as Endicott, Point McIntyre and Niakuk.
Natural gas condensates from the ExxonMobil-operated Point Thomson field 60 miles east of Prudhoe Bay are transported by pipeline and “comingled” with Lisburne field production and also included in the data for that field.
While North Slope production is holding steady it also continued on a gradual, long-term decline. In April 2019, the last year before the pandemic affected industry worldwide, the North Slope averaged 506,475 b/d.
Prudhoe Bay actually showed an increase from 2019 to 2022, from 297,045 barrels per day in April 2019 to 314,831 in April 2022, the two other larger slope fields showed declines.
Kuparuk River dropped from 122,843 barrels per day in April 2019 to 104,270 barrels per day in April 2022. The Alpine field dropped from 66,151 barrels per day in April 2019 to 49,901 barrels per day in April 2022.
The effects of new production will gradually be felt in the next few months. ConocoPhillips’ new GMT 2 project in the National Petroleum Reserve will be increasing in output through late spring and summer, for example.
In a related development, ConocoPhillips cut Alpine field production at its CD1 drill site as the company dealt with gas release from an undetected below-ground low pressure gas pocket at approximately the 4,000-foot level where gas had migrated to the surface as through gravel on the CD1 production pad.
The company cemented off a section of a water injection well on the pad to stop gas entering the well bore. However, the Alaska Oil and Gas Conservation Commission, a state agency that regulates well safety, reported that minute quantities of gas were still being detected inside well houses on the CD1 production pad.
No gas was being detected outside the well houses, though. ConocoPhillips relocated workers from the pad as a precaution when the gas was detected. No injuries or damage resulted from the release, however, the company said in a statement.
Small gas pockets are not unusual on the North Slope and can be a drilling hazard if they are high-pressure. In other developments, ConocoPhillips has completed the first extended-reach horizontal production well drilled to Fiord West, an undeveloped accumulation in the Alpine field.
“The Fiord West Well drilled to the planned total depth on April 11. The total measured depth of the well is 35,526 feet measured depth making it the longest North American land based well (a record that was previously held by a CD5 well). We are currently running completions in the well,” ConocoPhillips spokesperson Rebecca Boys said in a May 3 statement.
ConocoPhillips used a specialty-built heavy drill rig, Rig 26 operated by Doyon Drilling Co., for the project.
Technical difficulties in drilling the well were encountered that resulted in a delay in completion, according to sources familiar with the project. Drilling on the well started in second quarter 2021.
Additional horizontal wells are planned, but ConocoPhillips told state officials in filings that it will do pilot test wells to assess subsurface conditions for planning of the added wells.
The first well will also be used as an injector rather than for production as had been initially planned, state officials were told. This means that a startup of Fiord West might await the additional drilling. ConocoPhillips has estimated that Fiord West will produce 20,000 b/d when fully online.
The company has had good luck in drilling long horizontal wells elsewhere on the slope, particularly at the CD5 drillsite adjacent to the Alpine field, but localized geological conditions can create problems in drilling these complex wells, according to sources.
For example, Eni Oil and Gas has encountered technical difficulties in drilling and completing its North Nikaitchuq exploration well, a long horizontal well drilled to test potential offshore producing reservoirs in federal Outer Continental Shelf waters north of State of Alaska submerged lands along the coast.
Eni operates the small Nikaitchuq and Oooguruk fields in coastal waters north of the Kuparuk River field.
OIL:
Oil jumps as Russia gas flow to Europe falls, EU Russian oil ban looms
David Gaffen, Reuters, May 11, 2022
Oil prices jumped almost 5% on Wednesday after plunging nearly 10% in the last two sessions, buoyed by supply concerns as flows of Russian gas to Europe fell and the European Union worked on gaining support for a Russian oil embargo.
Russian gas flows to Europe via Ukraine fell by a quarter on Wednesday after Kyiv halted use of a major transit route blaming interference by occupying Russian forces. It was the first-time exports via Ukraine have been disrupted since the invasion. read more
Brent crude rose $4.59 to $107.05 a barrel by 11:13 a.m. EDT (1543 GMT). U.S. West Texas Intermediate crude climbed $5.02 to $104.78.
“I suspect the gas disruptions in Ukraine are having a steadily increasing impact,” said Jeffrey Halley, analyst at brokerage OANDA.
The EU has proposed an embargo on Russian oil, which analysts say would further tighten the market and shift trade flows. A vote, which needs unanimous support, has been delayed as Hungary has dug in its heels in opposition. read more
“I expect that prices are going to continue to move on up especially if the European Union comes to an agreement to phase out Russian oil purchases over the balance of this year,” said Andrew Lipow, president of Lipow Oil Associates in Houston.
U.S. crude stocks rose by more than 8 million barrels in the most recent week, due to another large release from strategic reserves, the Energy Information Administration said. Commercial crude inventories have been growing as the White House has elected to flood the market with oil to offset the rise in prices.
However, fuel prices have kept rising on the decline in refining capacity and surging demand for products worldwide – just as Russia’s exports have been curtailed. That has driven refining margins to near-record levels in the United States. Despite the build in crude stocks, gasoline inventories fell by 3.6 million barrels in the latest week.
“These draws are occurring across products – we are seeing refiners not able to keep up with demand for gasoline,” said Tony Headrick, energy market analyst at CHS Hedging.
Oil was also supported by hopes of Chinese economic stimulus, after China’s factory-gate inflation eased and investors took comfort in signs of lower domestic COVID-19 infections.
The price of crude has surged in 2022 as Russia’s invasion of Ukraine added to supply concerns, with Brent reaching $139, the highest since 2008, in March. Worries about growth caused by China’s COVID curbs and U.S. interest rate hikes have prompted this week’s slump.
A backdrop of tight supply because of what major producers say is partly a result of inadequate investment remains supportive for oil. The United Arab Emirates energy minister highlighted these concerns on Tuesday.
GAS:
Don’t Look to Oil Companies to Lower High Retail Gasoline Prices
Garrett Golding, Lutz, Kilian, Federal Reserve Bank Dallas, May 10, 2022
The rise of U.S. retail gasoline prices in March 2022 has triggered a debate about whether U.S. oil companies are doing enough to rein in high gasoline prices and whether these companies should be held accountable for not increasing the production of crude oil.
We take a closer look at the premises underlying this debate. We show that, even though the price of oil makes up over half of the retail price of gasoline, oil companies play an extremely limited role in how retail gasoline prices are set.
While U.S. retail gasoline prices in many regions have remained stubbornly high since March, this situation reflects frictions in the retail gasoline market rather than the supply of oil or the price of oil.
We discuss why, in many regions, pump prices have not fallen as quickly as oil prices have recently and explain why this asymmetry need not be an indication of price gouging.
Finally, we examine the obstacles to substantially increasing U.S. oil production. We make the case that even under the most favorable circumstances, higher production growth is unlikely to materially lower global oil prices—and, thus, U.S. retail gasoline prices—in the foreseeable future.
Gasoline Retailing Involves a Complex Supply Chain
Before a gallon of gasoline is pumped into a car’s tank, it has traveled through a complex supply chain.
Independent oil and gas companies—those without refining assets—are responsible for 83 percent of U.S. oil production and about half of the oil consumed in this country. Oil is sold in competitive markets at prices reflecting global supply and demand. It is refined into gasoline, diesel, and other fuels whose prices are similarly set in competitive markets.
Fuels are then sent to more than 400 U.S. distribution facilities, from which they are sold and delivered to retailers and end users at another price depending on local conditions. Gas station operators set retail prices based on their expected acquisition cost for the next delivery of fuel from the local distributor, federal and state tax rates, and a markup that covers operating expenses, such as rent, delivery charges and credit card fees.
Since only 1 percent of service stations in the U.S. are owned by companies that also produce oil, U.S. oil producers are in no position to control retail gasoline prices.
How the Cost of Oil Feeds into the Gasoline Price
The price of oil constituted 59 percent of the retail price of gasoline in March 2022, according to the Energy Information Administration (Chart 1).
This fact is important for understanding the transmission of oil price shocks to retail gasoline prices.
Gasoline’s Slow Decline from Price Peak Not a Sign of Price Gouging
Much has been made of the fact that gasoline prices were quick to increase following the Russian invasion of Ukraine but have not come down as quickly as the price of crude oil since then (Chart 2).
Given that crude oil accounts for 59 percent of the cost of gasoline, a 34 percent increase in the price of oil should imply a 20 percent increase in the retail gas price. Likewise, a 22 percent decline in the price of oil should translate to a 13 percent decline in the pump price. However, that did not happen at the national level.
As Chart 2 shows, the spot price of gasoline (the price of gasoline at the refinery gate), as proxied by the prompt contract for New York Mercantile Exchange RBOB gasoline, generally rose and fell with the price of West Texas Intermediate crude oil. However, the response of U.S. pump prices has been highly asymmetric. While the price of retail gasoline cumulatively rose about as much as expected following Russia’s invasion of Ukraine, recent national retail gasoline prices dropped only 6 percent from the March peak, far less than the expected 13 percent.
This indicates that retail gasoline prices remaining persistently high was not the result of an oil shortage or high oil prices. Rather, the elevated retail gasoline prices must be attributed to events in the U.S. retail gasoline market beyond the control of oil producers.
Moreover, the asymmetry of the response of retail gasoline prices need not be evidence of price gouging. One potential explanation is that station operators are recapturing margins lost during the upswing, when gas stations were initially slow to increase pump prices. The reluctance to lower retail prices also likely reflects concerns that oil prices—and, hence, wholesale gasoline prices—may quickly rebound, eating into station profit margins.
Another possible reason for this asymmetry is consumers’ tendency to more intensively search for lower pump prices as gasoline prices rise than when they decline. This diminished search effort provides further pricing power to gas stations, causing prices to fall more slowly than they rose. This has prompted researchers to liken the response of gasoline prices to higher oil prices to a rocket—and the response to lower oil prices to a feather.
Yet another potential explanation for this asymmetry is that seasonal demand tends to increase as the weather warms, supporting higher retail prices.
MINING:
EU Considers Dropping Environmental Regulation For Renewables
Irina Slav, OilPrice.Com, May 11, 2022
The European Union is considering relaxing environmental regulations for wind and solar projects so new capacity can be added more quickly, the Financial Times has reported, citing documents produced by Brussels.
According to these, companies active in the wind and solar installation business will no longer be required to do an environmental impact assessment for their projects as long as they are planned for so-called go-to areas that EU members will be mandated to select in sufficient amounts to meet the EU’s emission reduction targets.
Before an area is classified as a go-to one, a “strategic” impact assessment will be conducted for each area, according to the report.
“Lengthy and complex administrative procedures are a key barrier for investments in renewables and their related infrastructure,” the document said, according to the FT. It also admits that this plan could “result in the occasional killing or disturbance of birds and other protected species.”
Europe has been scrambling to find alternative energy supplies as it seeks to reduce or even eliminate its heavy dependence on Russian fossil fuels. As part of these efforts, it has doubled down on plans to reduce its reliance on fossil fuels as a whole and replace them with renewable energy sources such as wind and solar.
The EU’s renewable power drive got a boost this week with a report from a climate nonprofit, Ember, which said that switching from Russian oil and gas to oil and gas from other sources would end up costing the bloc some $214 billion by 2030.
“Decades of over-reliance on fossil gas has made Europe incredibly vulnerable to volatile prices,” said Tara Connolly, a senior gas campaigner at Global Witness, an anti-corruption group that co-authored the report. “The Commission has massively underestimated the cost to consumers of continuing to rely on gas.”
POLITICS:
Alaska Senate votes for bigger dividend during budget debate
Associated Press, May 11, 2022
The Alaska Senate passed a state spending package Tuesday that includes dividends of about $4,200 to residents this year plus “energy relief” checks of $1,300.
The package passed 15-5 and next goes to the House, which will have to decide whether to agree with the Senate version. The House, in the version of the budget it passed in April, included a roughly $1,250 dividend and a $1,300 energy check.
Differences between the budgets that pass each chamber are typically settled in a conference committee. The regular session is set to end by May 18.
Debate over the annual size of the dividend, traditionally paid with earnings from the state’s oil-wealth fund, the Alaska Permanent Fund, has roiled the Legislature in recent years.
The Senate, during debate on the budget Monday, voted 10-9 in support of a dividend of about $4,200, calculated in line with a formula that was last used in 2015. The cost for that size dividend would be nearly $2.8 billion.
Many lawmakers have said that formula is unsustainable but the Legislature has not set a new one. Lawmakers instead have been setting the yearly payout.
The budget bill as it came to the Senate floor had called for a dividend of about $2,500 this year.
The state Supreme Court has ruled that absent a constitutional amendment, the dividend must compete for funds like other state programs. One year of funding for K-12 public schools, for comparison, is about $1.2 billion.
The cost of the proposed energy payment is estimated at $840 million.
Supporters of the Senate approach said Alaskans can use the financial help. Critics said it is not fiscally prudent.