WTI takes the lead, abandoned orphan wells are begging for more, and China tightens the leash on gasoline.
Alrighty everyone welcome back and happy new year! *party blower noise* This is Tavis Kilian with RARE PETRO Bringing you the first episode of Monday Madness in 2022. I don’t know about you folks, but we had Monday off thanks to the generous higher-ups in the company so that is why this episode is actually being delivered on a Tuesday. Are you folks big for new years resolutions? If so, go ahead and email your goals to firstname.lastname@example.org so that we can bring them up in the next episode. Maybe we can get an accountability thing going on. Other than that, you are always welcome to send us any questions you have about the world of energy, and we would be more than happy to discuss them on an episode of Monday Madness, pro-bono! Well, I guess that depends on how complicated it gets. We can scratch the surface for free. But I know you didn’t come to listen to me ramble on about anything and everything, you came here to hear about the statistics and news about energy that you love so dearly.
First, commodity prices. At the end of last week, WTI prices were between 76 and 77 dollars. After a rather quiet Monday of slow upward progress, we are greeted with a $77.25 price point this fine Tuesday morning. This is a phenomenal increase considering that the price was only at $68 as recently as December 20 of last year. The Omicron variant seems to be breaking new records for case count causing more restrictions and localized lockdowns around the world, but that hasn’t put too much of a damper on this commodity price. After all, people still like to have in-home heating, electricity, manufactured goods, foreign goods, and new clothing whether or not they are sick with COVID. While this quick spike is likely to get flattened back out to $76, it is still nice to see the commodity chasing the $80 range we got to briefly enjoy in 2021. Natural gas is next on the chopping block, but it did not have as nearly a nice week. After a brief bench at $4.20 last Wednesday, natural gas mainly fell into the end of the year. Still, from new years eve to now, we have witnessed a ten-cent increase to bring it to $3.77. I have to say, I am still incredibly surprised by this. I won’t go as far as to say that the price is wrong, but it does seem fishy. Natural gas supplies are pretty tight globally, and the lack of investment in new wells through last year would leave you to believe that things are headed into some pretty dark territory. Apparently, those fundamental factors don’t trump whatever else is at play, so patience is key with these. Overall, WTI is living its life to the fullest, and natural gas seems to be the dark horse of the energy world (or perhaps that is just my optimism speaking).
Next, the rig count. This data for this one was released on New Year’s Eve and fell rather short of the fireworks and celebrations you might expect. The total change was zero. This leaves us 586 rigs or 235 more than we had this time last year. If we break it down into the nitty-gritty, we start to see some more detail emerge. The Haynesville and Cana Woodford each saw a one rig increase. The Permian however, saw a 1 rig decrease. Pretty terrible way to end out the year, but hey, it’s kind of like having that one final drink at 11:55 PM before you try your hand at a dry January in 2022. State by state results are even worse for Texas as they lost 2 rigs total. Utah follows closely with one lost rig. Louisiana, Oklahoma, and New Mexico bring you a new rig each. The gained rigs will be horizontal and target an equal mix of oil and gas. The offshore environment didn’t change. I know it’s not the most exciting report to end 2021, but none is a whole lot better than fewer. Last rig count, Canada had 133 rigs. The most recent rig count shows that they dropped 43 rigs to 90. Ouch. I can only assume it has something to do with deadlines, financials, or legislation for the new year but it still hurts to see. An underwhelming rig count for sure.
Lastly, the inventory report. We had lots of fun on the written report at www.rarepetro.com, but if you missed it (along with our delicious and fun cocktail recipe), here is the barebones information. The EIA has been reporting drawdowns week after week, and this most recent report is no different. They predicted a 3.2 million barrel drawdown and weren’t too far off from what they reported at 3.5 million barrels. The API ended up releasing their report just a day earlier, but the forecasted number is suspiciously similar to what the EIA decided to report. Either way, the API seemed to overestimate by just a little bit but still reported a drawdown of 3 million barrels. This is the fifth week of drawdowns by the EIA’s numbers, and the past 3 weeks have been greater than 2.5 million barrels. That hasn’t happened since the start of September. Furthermore, the oil inventories are expected to trend downward at this point, but it still leaves the inventories below the 5-year historical average. It is not time to panic yet, but energy may get to be more expensive in January. Gasoline inventories decreased by about 1.5 million barrels which brings it even further away from being within the historical 5-year range. Last week the price of gasoline fell by 2.3 cents, but this week the downward acceleration has stopped. The weekly price change is only 8 tenths of a cent. Not even a full cent. It is too early to call anything now, but this may be the end of decreased fuel prices. The EIA reports on these prices every month, but it is shocking to see just how little the price came down. If prices continue to run up once again, the Biden administration is going to catch a lot of flack as they put plenty of effort into lowering the prices just to see them decrease 10.5 cents per gallon over a month (according to AAA data). Regular gasoline in California still costs an average of $4.655 per gallon and folks around here bring it up rather frequently. Something has got to change. You can’t teach an old dog new tricks, and that applies to distillate and propane inventories. They are repeating one of their favorite daredevil stunts where they plummet right up against the border of the 5-year range to maybe dip their tows into record low territory before coming back. This time, however, distillate inventories are expected to go up pretty quickly in the next month, so let’s see if it can maintain the pace.
But that rounds out all of our statistics. I’d like to now talk about how $250 million in federal aid is being distributed on the 14th. Not too long ago, that infrastructure bill was passed. Of the more than 1 trillion dollars that will be finding their way into repairs and overhaul, $250 million was set aside for oil and gas to target the abandonment of orphaned oil and gas wells. Folks, that doesn’t even begin to cover all of the costs that will be associated. If you didn’t know, orphan wells are wells that were simply left once they become uneconomic. If you are putting more money in than you are getting out, it wasn’t uncommon to just walk away from it. This is a concern for many as it does allow subsurface fluids to release to the surface. Sometimes this allows once isolated zones to communicate as the wellbore environment changes and equipment begins to break down. Now, when I say equipment begins to break down, I’m not talking about simple rusting and scaling over a 3 year period. I’m talking full-on corrosion and shearing. You have to remember, this isn’t always a well that Old MacDonald walked away from last week. These are wells that may be half a century old or more, especially in areas like Pennsylvania where the American business of oil extraction really kicked off. Now, back to that number. $250 million sounds like a lot of money, but consider that a single well abandonment may run you anywhere from $20,000-$70,000 depending on the depth and how much cement is required to properly abandon the well. That doesn’t even begin to consider the costs for labor and machinery required to then demo any existing facilities on-site and remediate it to get it looking normal again. Each state has different rules and regulations that you must follow so the costs may vary, but I am incredibly doubtful that $250 million dollars could even abandon a quarter of the orphaned wells in a state like Oklahoma. What about moving forward? The feds aren’t likely to… well okay… the feds might not shell out a quarter of a billion dollars for oil and gas abandonments every year, so that money has to come from somewhere else. State coffers will be bled dry too quickly if local governments front the cost. This is why many states are now looking into legislation requiring a larger cash bond put forth for every well to take care of abandonment, should that be an issue. This is going to be a pretty expensive investment. Imagine having to put forward an extra 50k on top of a well that is already wildly expensive to drill. Energy is going to have to be a lot more expensive to incentivize producers to drill with this new deficit built into their bottom line. I’m excited to see how this money gets distributed, and even more excited to see an age where abandonments emerge as a dominant subsector of the energy industry, but I think we are going to encounter many bumps and bruises along the way.
Next, we look at China. The large country is a phenomenal indicator of what we may expect in markets as they play almost exclusively by fundamentals. Year over year, China is slashing its fuel export quotas by 56%. What might this mean? It could mean that China is concerned with how much gasoline and other fuels it has on hand. You need to have enough for yourself first, and then you can take excess to market for a profit. Otherwise, this could mean that China is taking an economic shot at the US. As you all know, gasoline prices are hovering at a high bench despite lots of effort on the federal level. Perhaps China is looking to reduce the amount of fuel that is imported to the US to prevent our prices from recovering. Some say that China is said to be looking to limit fuel exports and reduce the oversupply of refined products as part of a larger plan to cut emissions, but considering their lack of commitment at COP26 or really any global collaboration, I am incredibly skeptical. Not only are exports affected, but last week, Chinese authorities granted 11 percent lower crude import quotas to independent refiners in the first batch of quota allowances for 2022. The government, intent on reforming the independent refining sector and cracking down on tax evasion and illicit practices at the teapots, is now allowing its independent refiners to import 109 million tons of crude oil in the first batch for 2022. It seems that the state is playing favorites with its own companies and doing its best to redirect profits from independent producers to itself. Again, not incredibly telling of why this is happening, but 56% is something significant to be noted.
But that is all we’ve got for this episode. If you want more energy content, look no further than our website www.rarepetro.com. We post new content almost daily, so there is no shortage of news for you to enjoy and read. Other than that, send all your energy questions to email@example.com so that we may cover them on the show. This has been Tavis Kilian with RARE PETRO, and until we see you next time, take care, everybody!