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Insurgent Shale: Prospects and Perils for US LNG Exports

Midterms 2018: Election brings mixed results for energy interests

Are some shale producers under-reporting gas flaring to keep oil flowing

Politics in Colorado could drive oil and gas industry to 'friendlier basins'

The midterms and oil Anti-drilling measure could crush Colo. oil, gas industry


Insurgent Shale: Prospects and Perils for US LNG Exports

The emergence of the US as a major exporter has rapidly transformed the way the global LNG industry operates, but its economic success will not come without challenges, first and foremost from a potential bottleneck at the Panama Canal.

In just a matter of years, American shale gas exports have loosened the grip of traditional exporters and restrictive long-term contracts.

The impact has been particularly strong in the Asian markets, the epicenter of the traditional LNG business model, based on destination-restricted, oil-indexed, longterm contracts, and by far, the largest recipient of US LNG volumes since exports began in February 2016.

The ramp-up in US LNG exports has only just begun. By 2020, volumes are forecast to more than quadruple from around 14.4 million mt in 2017 to 62 million mt, after the completion of Elba Liquefaction Project, Freeport LNG, Cameron LNG and Corpus Christi LNG.

Significant surplus gas production, increasingly competitive E&P techniques, rising oil prices and export-favorable policies at home are likely to support growth in the US LNG industry, with eleven LNG export projects approved by the US Department of Energy and 16 others proposed so far.

These projects, however, come with their own set of challenges, and their success depends on four key factors: cost competitiveness, midstream optionality, commodity price spreads and potential constraints in the Panama Canal, a major threat to US LNG global expansion.

Cost Competitiveness

The US shale industry has become leaner and more efficient over the past decade, partly driven by lower commodity prices in 2014-2017 that have led to greater oil and gas production with fewer rigs and lower costs.

Over the next five years, US natural gas output is forecast to reach 2.7 Bcm/day, up 20% over the current production, driven by faster and cheaper well-completion techniques, rising initial production rates and shallower decline curves, according to S&P Global Platts Analytics.

In the domestic market, this would likely ensure that gas prices remained competitive for the industry, power plants and consumers, avoiding an eastern Australian-style gas crisis, wherein rising domestic gas prices have created political opposition to LNG exports.

In the global arena, this would likely raise the competitiveness of US LNG, even in the distant Asian markets, which have so far received around 45% of US LNG volume since exports began.

Looking forward, the continued ability of US shale producers to control their upstream costs, even in a high commodity price environment, will partly determine the competitiveness of US LNG versus other key LNG producers such as Qatar and Australia.



Midterms 2018: Election brings mixed results for energy interests

Washington, D.C., Nov. 07 2018 — Reflecting a deeply divided political landscape, results were decidedly mixed on the wide range of oil, natural gas and power issues at play in the raucous and sharp-edged US midterm elections, which came to a head Tuesday.

Democrats regained control of the House of Representatives, Republicans held the Senate, and voters decided on new gasoline tax hikes, limits on drilling both onshore and offshore, power market structures and more.

In a key, high-impact ballot measure tussle, Colorado voters turned back a push to severely limit drilling for oil and gas in the state's burgeoning Denver-Julesburg Basin. Elsewhere, voters in California and Missouri rejected gasoline tax increases, while a carbon tax was defeated in Washington.



Are some shale producers under-reporting gas flaring to keep oil flowing

Gas flaring activity may have been under-reported to allow oil production to continue

Infrastructure insufficiency may have driven some oil producers in New Mexico, Texas and North Dakota to flare significant volumes of associated gas and to under-report flaring activity to authorities to allow production of much higher-valued oil to continue.

Natural gas flaring information provides a window into central aspects of oil and gas activities, especially within the U.S. shale sphere, where natural gas takeaway capacity remains insufficient to meet abundant associated-gas production from oil-targeted wells in several plays, including the Permian Basin and Bakken Shale.

Traditional record keeping and flaring reporting contribute delay and may invite errors, manipulation

U.S. flaring data has traditionally been collected from producers by state agencies, who then share it with the U.S. Energy Information Administration. The EIA in turn aggregates and publishes the information on an annual basis, but after a nine-month delay. EIA-compiled flaring data thus relies upon summary reports from states, which in turn rely upon self-reporting by producers.

Not only does the multitiered system invite errors and possible manipulation, but also the significant lag in the release of the aggregated data from the EIA precludes timely tracking and analysis efforts by independent entities.

Satellite systems provide independent, comprehensive capture of gas flaring activity

A potentially more accurate and timely flaring assessment option is available through sophisticated satellite systems owned by the U.S. government. Entities, such as NASA and the National Oceanic and Atmospheric Administration, or NOAA, operate satellites that incorporate Earth surveillance systems that offer noninvasive, real-time data collection across the U.S. and around the globe. Remote, real-time information gathering is an invaluable resource compared to conventionally reported, ground-based data, which varies in quality, standardization and timeliness.

Natural gas flaring at the local, state, regional, national and global scale is a significant area of interest to many stakeholders, including regulators, lawmakers, environmental activists, energy analysts and the oil and gas industry. There are several motivations for growing interest. Some coincide with efforts to reduce hydrocarbon waste, lower emissions of greenhouse gases and decrease sources of pollution. In addition, investors, industry analysts and competitors, among others, seek alternative avenues to evaluate operational, financial and regulatory environments that are continually evolving. 

Noninvasive and real-time sensing and assessment of flaring has several advantages over traditional collection methods; it does not encroach on property or other borders and mitigates the time delay between producers reporting to authorities and the subsequent release of the aggregated information by these bodies. Independent comprehensive assessment also mitigates the potential for accidental or intentional under-reporting as well as other inadvertent errors associated with traditional methods.

Investment, industry, regulatory, legal and environmental stakeholders may benefit from the ability to accurately assess hydrocarbon flaring around the globe. The implications around competition, regulation, pollution and greenhouse gases emission generate significant value to the practice. Access to conventional data sources for many aspects of oil and gas operations is delayed because of varied reporting schedules and because many sources of data are considered proprietary and are simply not made available. On the other hand, remote collection and assessment of flaring data provides a viable addition to the traditional information contained in sources such as well permits and reported production data.

NOAA algorithm estimates flared volume at plus-minus 9.5% accuracy

NOAA began to monitor global flaring by satellite a few years ago. The organization applies sophisticated processing systems to observe and analyze flaring signals. The data generated from observations of shortwave and near-infrared emissions at night is collected, processed and archived through a system known as the Visible Infrared Imaging Radiometer Suite.

NOAA researchers have constructed a data processing algorithm that determines the quantity of gas combusted during flaring from point sources; data identified as non-flaring-related, such as forest fires and city lights, is disregarded. The results of the formula have been assessed by NOAA as accurate to within plus or minus 9.5% of the actual flared gas volume. S&P Global Market Intelligence, in preparation of its analysis, retrieved several years of global flaring information from NOAA and performed its own spatial aggregation upon a selection of the data. The analysis incorporated the NOAA-calculated values of flared gas volumes for distinct combustion sources in Texas, New Mexico and North Dakota and aggregated them to arrive at a composite annual flared volume for each state.

Texas upstream may have burned twice as much gas as reported to EIA from 2012-2017

The data amassed for Texas from NOAA satellite scans has translated to 163 Bcf of gas flared in 2017, or about 2.6% of the state’s natural gas production; this level was virtually unchanged compared to the 2016 observation of 160 Bcf or 2.5% of production. However, 2016 and 2017 flaring levels were improved compared to 2015, when 204 Bcf or 2.9% of production was burned. Despite the progress, the levels of combustion appear to amount to roughly two times the levels producers self-reported to the state, who ultimately submits the data to the EIA.

Whether the pattern of lower flaring indicated by the NOAA data, calculated as a fraction of total production from EIA information, repeats in 2018 is a central question. Considering the accelerated pace of production activity in the Permian for much of 2018 and the continued constrained takeaway capacity from the region as gas supplies burgeon, an upward creep in gross flaring level would be expected.

Texas legislation is designed to prevent resource waste, but some producers may under-report flaring

Texas generally classifies the flaring of natural gas, outside of allowed exemptions for safety and short-term well-completion procedures, as a waste of resources. The flaring of natural gas for the purpose of disposal, such as when insufficient transport infrastructure is available, is not directly permitted under Texas statutes. However, the Railroad Commission of Texas, the body tasked with regulating the oil and gas industry, has the authority to issue administrative exceptions to allow long-term flaring of natural gas. Oil-targeted wells in the Permian contain an abundance of associated gas. The under-capacity of long-haul gas transportation out of the basin is not expected to be eased until several large gas transport projects are completed over the next several years.

Whether the commission would allow widespread flaring of excess gas while transportation networks are built has been debated by many industry observers. The statewide rule 32, formally known as Texas Administrative Code, Title 16, Part 1, Chapter 3, Section 3.32, specifically bans the flaring of any volume of gas that may be metered unless it is for a specific exempted short-term purpose. Measurable volumes of gas are expected to be used for lease operations or sold for the benefit of the owners and the state treasury.

Satellite-derived flaring data highlight an apparent gap in accuracy of standard methods

NOAA calculations of flared gas volumes, though incrementally higher than those reported by the EIA, follow the same general trends within the states examined by S&P Global Market Intelligence. The NOAA-derived flaring estimates are likely more representative of actual field combustion levels as they are generated through a unified observation system with signals normalized globally, whereas EIA estimates result from the aggregation of hundreds to thousands of reports submitted by producers to state agencies, who in turn submit a summary compilation to the EIA.

The multiplicity of measurements and filings appear likely to introduce a higher potential for errors, the possibility of under-reporting — either accidental or intentional — and the propagation of inconsistencies in normalization considering the breadth of producers, volume of source records and tiers of processing.

NOAA data highlight inconsistencies, potential material underestimates of flaring in some instances

Texas upstream industry may have flared nearly 1 Tcf of natural gas from 2012-17

The NOAA algorithm incorporates multiple parameters including the intensity of flaring within specific heat and wavelength ranges, allowing non-flaring-related noise to be excluded from calculations. The NOAA combustion estimates, as aggregated by S&P Global Market Intelligence, exhibit a level of flaring in Texas roughly two-fold higher compared to EIA data over the same time frame.

According to figures derived from NOAA flaring data, the average annual volume of gas flared in Texas over the years 2012 through 2017 was 163 Bcf. In contrast, EIA flaring data indicates an average of 86 Bcf burned each year over the same period. Either perspective indicates a non-trivial level of gas flaring, with 977 Bcf combusted over six years by NOAA data or 516 Bcf according to data from EIA reports.

New Mexico flaring appears understated in 2016 and 2017, with irregularity in reported production

The discrepancy between NOAA and EIA flaring data was rather more striking when activity in New Mexico was scrutinized. Gas flaring activity in 2012 and 2013 in the state, as measured by NOAA and aggregated by S&P, was roughly 15% higher in both years compared with the levels published by the EIA; S&P calculated figures of 14 Bcf and 24 Bcf in 2012 and 2013, respectively, from the NOAA data, compared with 12.3 Bcf and 21.1 Bcf as reported by EIA.

The NOAA/EIA discrepancy grew considerably in 2014 and 2015, with NOAA figures higher than EIA-reported levels by 64% or 31 Bcf in 2014 and 69% or 42 Bcf in 2015; the EIA data indicated 19.1 Bcf and 24.9 Bcf in 2014 and 2015, respectively. The gap widened again in 2016 and 2017, with NOAA-based flaring data indicating a value of 31 Bcf in 2016, which is five times greater than EIA data, and 23 Bcf in 2017, or 7.5 times higher than EIA data; the EIA presented levels of 6.2 Bcf and 3.0 Bcf for 2016 and 2017, respectively.

A possible explanation for the widening gap between the two flaring assessment systems regarding the New Mexico examples could be the inability of gas infrastructure construction to keep pace with the explosion in drilling, completion and production in the portion of Permian Basin located in the southeastern corner of the state. The situation may have resulted in higher gas volumes than could be dealt with, and producers may have under-reported flared volumes as they struggled to keep the increasing oil production moving to market.

Paradoxically, but in line with the posits above, New Mexico crude oil production grew in 2017 by 17.1% to 171 million barrels from 146 million barrels in 2016, according to EIA data, while natural gas production reported to the EIA increased by only 3.1% to 1,197 Bcf in 2017 from 1,161 Bcf in 2016. The disparity in growth is a conundrum considering that the majority of new oil production in New Mexico in 2017 resulted from unconventional shale oil, primarily from the Permian, which is laden with associated gas.

North Dakota's efforts to rein in excessive flaring confirmed by NOAA data; some challenges remain

North Dakota flaring activity, as measured by NOAA and compared with data collected and reported by the EIA, shows closer agreement between the two data sets, compared with observations in Texas and New Mexico. Over the years 2012 through 2017, NOAA-derived flaring activity has averaged 25% higher than that reported by the EIA. During the years 2013 through 2015, the NOAA and EIA flaring levels were only about 10% apart. However, in 2017, NOAA data indicated flaring of 114 Bcf for the year, a level nearly 30% higher than the 88.5 Bcf reported by the EIA.

North Dakota regulators have struggled with unauthorized flaring by producers and have sought methods to track down violators. North Dakota plans to require producers who exceed allowed flaring levels of 15% of production to shut their wells until gas infrastructure construction has caught up with demand.

NOAA data keystone for North Dakota regulators to detect unauthorized flaring, increase compliance?

North Dakota regulators have sought tools to track down producers who exceed allowed flaring levels in an effort to conserve natural gas that could be used for other purposes, and NOAA flaring data could be the key to their efforts. The remote sensing capabilities of the NASA/NOAA satellites include capturing the latitude and longitude coordinates of flares.

Considering the detailed location information required for issuance of oil and gas drilling permits, cross-referencing the geographic information captured by the Oil and Gas Division, Department of Mineral Resources, North Dakota Industrial Commission with that contained in the NOAA flaring database would likely allow flagging those sites that exceed flaring thresholds for follow-up.



Politics in Colorado could drive oil and gas industry to 'friendlier basins'

The Colorado oil and gas industry has described Proposition 112 as a production ban and raised tens of millions of dollars to fight the measure in Nov. 6 state elections, but industry critics have contested that description.

The Colorado Oil and Gas Conservation Commission made a dire prediction for the industry before Proposition 112 even made the ballot: the measure, which would require setbacks of 2,500 feet for new oil and gas production, would cut off approximately 85% of nonfederal land in the state from future oil and gas development. According to the Colorado Oil and Gas Association, or COGA, passage of Proposition 112 would push oil and gas development toward the Kansas and Nebraska borders, where there is little of either resource.

"Proponents have been pushing this 2,500-foot number for over four years, and they've done the math," COGA Communications Director Scott Prestidge said. "Proposition 112 is intentionally designed to serve as a ban, plain and simple."

"A 500-foot setback consists of 18 surface acres, but a 2,500-foot setback is 450 surface acres, which is a 25-times larger setback," Prestidge said. He noted that the measure would add dozens of new buildings and features that would need setbacks.

In commentary on the Colorado vote, Sanford C. Bernstein analyst and Senior Vice President Bob Brackett said conversations with HighPoint Resources Corp., Bonanza Creek Energy Inc. and PDC Energy Inc. have led him to believe that Proposition 112 will fail. The vocal segment of the state's population that is against oil and gas production, however, could eventually take its toll on the industry, he said."We believe longer term that the industry will continue to fight a battle for education and against excessive regulation … and strategic prudence suggests the ability to pivot to friendlier basins is a longer-term desire," Brackett said.

Environmental group Colorado Rising, which supports the measure, said the industry's concerns about the 2,500-foot setback are overblown. They contend that the setbacks are less of an issue with advanced fracking technology.

"I am getting information that the [Colorado Oil and Gas Conservation Commission] map is flawed in its analysis," group spokeswoman Anne Lee Foster said. "Additionally, they aren't factoring the use of horizontal drilling to access minerals. It's very misleading."

COGA said drilling laterals of the length needed for a 2,500-foot setback is largely ineffective in Colorado. "It's common to see laterals of one to two miles in Colorado, but beyond that is rare," Prestidge said.

In an Oct. 19 call organized by management services company Raymond James & Associates Inc., a Colorado political analyst said the chances that Proposition 112 will pass have increased but still remain below 50/50. Should it buck the odds, the consequences for local governments as they lose a source of revenue could be severe, said Jep Seman, the co-founder and principal of Colorado Advocates.

"It's the old political adage that all politics is local, and that adage is still true today," Seman said. "The industry will be pushing — whether their voice matters is a question — but the real pressure will come from local counties. When they have a decline in revenue, they will start putting real pressure on legislators."

Seman said the industry and other parties are preparing for the possibility of Proposition 112 passing by readying legal challenges. "There will be litigation immediately."

With two weeks before election day, industry supporters have started a vigorous door-to-door effort to get voters to send in their ballots in the state's mail-only election. The industry has also enlisted the help of one of the most popular men in Colorado: former Broncos quarterback John Elway, who has made a commercial asking voters to reject the proposition.

"They're leaving it all on the field," Seman said.



The midterms and oil Anti-drilling measure could crush Colo. oil, gas industry

The oil industry is watching and waiting as Colorado voters head to the polls Nov. 6 and decide whether to pass a ballot initiative to expand the required distance between new oil wells and populated areas.

Colorado ballot initiative 97, or Proposition 112, would require new oil and gas projects to be at least 2,500 feet from buildings, parks and certain wildlife areas. The state now requires as little as 500 feet of separation.

An estimated 90% of surface acreage in Colorado would be unavailable for development by adopting the buffer zone setbacks and federal land exemption proposed by the measure, according to a July study by the Colorado Oil and Gas Conservation Commission. The report also said 85% of acreage in Weld County, which is Colorado's largest oil- and gas-producing county, would be inaccessible for new drilling.

"The setback measure would put 85% of the state off limits to new oil and gas development," Karen Crummy, a spokeswoman for Protect Colorado, a group opposed to the measure, said in an Oct. 10 email. "More than 94% of non-federal land in the state's top five producing oil and natural gas counties (Weld, Garfield, La Plata, Rio Blanco and Las Animas) would be unavailable for new production."

In 2017, Colorado ranked seventh in U.S. oil production and fifth in gas production.

The opposition to the anti-drilling measure is well-supported by the oil and gas industry. As of Oct. 15, more than $34 million had been donated to a campaign to defeat it, while just a little more than $800,000 has been donated to environmental group Colorado Rising, which pushed for the measure from the start.

"The environmental groups on the other side of the argument are being heavily outspent," Raymond James analyst Pavel Molchanov said in an Oct. 5 research note.

There is also little support for the anti-drilling proposition politically. Neither of the candidates running for governor in Colorado — Democrat Jared Polis and Republican Walker Stapleton — are in favor of it. Additionally, 48 mayors from municipalities across the state are lined up against the measure and held a rally at the Colorado State Capitol on Oct. 16.

"[A]s always, elections ultimately come down to voter turnout, but our sense currently is that the odds are tilted in favor of a positive outcome for the industry," Molchanov wrote.

Opposition is based on the economic and fiscal impacts on the state and companies that operate within it, should voters pass the measure. "A half-mile setback is a blatant attempt by activists to ban oil and natural gas in Colorado and put working families on the unemployment line," said Dan Haley, president & CEO of the Colorado Oil & Gas Association.

Oil and gas producers with assets in Colorado include Noble Energy Inc., Anadarko Petroleum Corp., PDC Energy Inc. and DCP Midstream LP. For the industry, a change from the existing 500-foot setback requirement to a 2,500-foot requirement would eliminate between 62% and 80% of annual new oil and gas development in the state. By 2030, it would reduce the total value of production in the state by between 54% and 70%, according to a July study by Common Sense Policy Roundtable, a nonprofit think tank.

Between 2019 and 2030, the estimated dollar amount of lost oil and gas production ranges from $110 billion to $141 billion.

Although spokespeople from DCP Midstream, PDC Energy and Anadarko declined to comment on the Colorado ballot initiative, the industry is confident that efforts to defeat the ballot initiative will ultimately prove successful. "The industry's campaign is ongoing, sophisticated, robust, well-organized and well-funded," DCP Midstream said in September.

If it passes, the shock wave would reverberate far beyond the energy industry, Colorado Oil & Gas AssociationDirector of Communications Scott Prestidge said.

"The positive impact the oil and natural gas industry has on Colorado's economy is enormous, with an annual economic impact of $32 billion," Prestidge said in an Aug. 29 notice to Colorado residents issued after supporters filed with the Colorado Secretary of State the signatures necessary for the initiative to be included on the November ballot.

The state and its local governments would lose between $210 million and $258 million in tax revenue from the reductions in the oil and gas industry in the first year and between $825 million and $1.1 billion annually by 2030. By 2030, there would be roughly 115,000 to 147,800 fewer jobs through all sectors of the economy, with the oil and gas extraction industry making up 23% of the total losses, according to the Common Sense study.

The Colorado Farm Bureau filed a competing ballot measure, Initiative 108, that would allow private citizens to take individual counties or the state to court for compensation if any state law reduced their property value.

While the anti-drilling ballot measure in Colorado is unlikely to pass in November, legislators are likely to push for some kind of legislation in 2019 that would address oil and gas drilling.

"We will be looking at something that focuses on health and safety first, which may include things like more air and water quality monitoring and inspections, local control, cleaning up orphan wells, and public transparency and engagement," Colorado House Majority Leader KC Becker, a Democrat, said in an Oct. 13 email.

If the anti-drilling measure passes in Colorado, it could pave the way for other states to do the same, WindSail Capital Group co-founder and managing director Ian Bowles said during an Oct. 16 webinar. However, this would also likely open the door to litigation from the oil industry.