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Houston, We Now Have Swing Producer Status

Houston, We Now Have Swing Producer Status

By Thursday, 22 March 2018 06:15 AM Current | Bio | Archive

Recently, during CERAWeek, an annual energy conference in Houston, there were many conversations about how the world of energy has changed, thanks largely due to the domestic shale revolution of recent years and the country’s dramatic increase in production of oil and gas.

In fact, many of the nearly 650 speakers in attendance – many of whom were CEOs, U.S. Senators, government ministers and industry thought leaders – described the altered landscape by detailing how the U.S. has replaced Saudi Arabia as the world’s top “swing producer,” the lone producer that can best increase or decrease supply at a minimal cost and thus influence the market the greatest. Record increases in exports furthers this influence.

The U.S. has been able to assume this role through the application of state-of-the-art technology, mechanizing the oil and gas exploration process and creating top-of-the-line manufacturing processes. This enabled the industry to lower the cost of production and take the world stage as a leader.

Lowering costs and increasing efficiency were critical to the U.S. shale industry surviving the record-low oil prices that pervaded in recent years. Conventional wisdom held that lower prices would create widespread bankruptcy, drive energy players out of the market and cause investors and financiers to abandon U.S. oil and gas and seek other investments.

This scenario only partially occurred. Some bankruptcies occurred – especially in the service sector – and there was some capital flight. But the industry, overall, applied fiscal discipline and dramatically lowered costs through the application of technology and by negotiating lower rates with service companies.

Contrary to this picture of the past, we now find ourselves in a higher oil price environment - with prices hoovering at or over $60 a barrel. This means that U.S. shale producers, who have greatly reduced costs, should be making more profit per barrel. This also suggests that some shale plays that have been recently marginally economic or uneconomic could now be viable, further increasing U.S. crude oil and gas production.

The question now is: Can the U.S. industry maintain its fiscal discipline in the wake of higher prices and new pressures?

First, service companies, which feel they have been operating at a discount, will seek higher rates to make up for the lean years they have faced. How much margin will they gain?

Second, capital markets have forced producers to become more pure-play focused, concentrating on one to two plays. Will they continue to keep this focus?

Third, as drilling rig counts continue to rise, will additional production begin to put pressure on prices and push them downward?

Fourth, what will Saudi Arabia and Russia do? Will they accept the new environment, or will they try to dethrone the U.S. from its newfound role as the global “swing producer?” And how?

Fifth, investment banks have been financing shale producers, allowing them to produce more barrels even at a loss. Will they now demand more fiscal discipline from shale producers?

During CERAWeek, OPEC members and global leaders made numerous statements about America’s new role as an energy goliath. True, yes, but that doesn’t mean these leaders and their nations will accept that fact lying down.

Will the “Goldilocks just right” price result in overall global cooperation or will a price war ensue? Currently, U.S. production is only subject to market forces exerted by consumer demand and Wall Street. However, the Russians and the Saudis are subject to state social contracts with their citizens and will attempt to use market forces to their advantage, either by temporarily limiting their output or by fighting for market share. Case in point: OPEC President Suhail al-Mazrouei remarked that OPEC was working on a plan for a formal alliance with Russia and other oil producing countries.

A final factor is that the U.S. has control over is its regulatory and fiscal regime. Congress and the Trump administration have continued to pursue regulatory reform, reversing policies the last administration implemented that were not industry-friendly. Recent tax code changes should also help producers and energy consuming industries.

But the U.S. continues to face challenges from anti-development forces trying to stop pipeline development, hydraulic fracturing and anything related to fossil fuel development. And increasingly protectionist trade policies and the potential for trade wars could not only hurt the U.S. energy industry but the global economy.

As a nation, we must have control over several important factors that will affect our future and ensure they remain aligned with our goal of energy dominance and keeping that swing-producer status firmly minted.

Jack Belcher is executive vice president for HBW Resources and consults energy and transportation clients on government relations, regulatory affairs, situational risk management, coalition building and stakeholder relations. He is also Managing Director of the National Ocean Policy Coalition.

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The U.S. has replaced Saudi Arabia as the world’s top “swing producer,” the lone producer that can best increase or decrease supply at a minimal cost and thus influence the market the greatest. Record increases in exports furthers this influence.
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Thursday, 22 March 2018 06:15 AM
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