Consultant: U.S. Oil & Gas Producers 'Collateral Damage' in Saudi Geopolitical Gambit

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Written by John Egan for Industrial Info Resources (Sugar Land, Texas)--Saudi Arabia is using oil as a weapon, but its real targets are Iran and Russia, not the U.S., John Harpole, president of Mercator Energy (Littleton, Colorado) told attendees at the Second Annual Colorado Energy Expo last week in Denver. In his view, U.S. Oil Producers are collateral damage in the Saudi's effort to bankrupt geopolitical foes. "Saudi Arabia has an army, but its best weapon is oil," he said May 13.

"I see a pain period of between one to three years while Saudi Arabia tries to bankrupt hostile regimes," Harpole continued, noting Iran relies on oil sales for 60% of its foreign revenue. Russia relied on oil and gas sales to fund about 40% of its budgets. The damage inflicted on U.S. oil producers is an unfortunate side effect of Saudi Arabia's broader geopolitical aims of inflicting financial pain on its foes. Iran is said to be backing jihadist groups in various parts of the Middle East and Africa, including a group that recently staged a coup and ousted the president of Yemen, on Saudi Arabia's southern border.

Global oil prices have fallen nearly 50% since last summer, the result of weakening global demand and burgeoning production. Saudi Arabia is producing as much as 10 million barrels per day (BBL/d) while the U.S. shale revolution has nearly doubled domestic production to about 9 million BBL/d in less than a decade.

In addition to straining many crude-oil producers, the global collapse of crude oil prices also wiped out a relatively brief competitive advantage the U.S. enjoyed over other countries that export liquefied natural gas (LNG). While most overseas LNG exporters priced their product off global crude oil prices, U.S. producers indexed their prices to the price of gas at Henry Hub, plus a fee for transportation. On paper, that gave U.S. LNG exporters a huge advantage last year when LNG prices in Asia were about $14 per million British thermal units (MMBtu).

But the collapse of Asian LNG prices, to about $7 per MMBtu, has made oil-indexed LNG contracts preferable to Henry Hub-linked ones, noted the Mercator Energy president. U.S. LNG exporters--who have yet to ship a single tanker of fuel--are expected to continue suffering a competitive disadvantage as long as the global oil glut holds down oil-indexed LNG prices in Asia, he predicted.

Harpole forecasted that only four U.S. LNG export terminals, and possibly one from Canada, eventually will be brought online, given the dramatic decline of global LNG prices.

He placed some of the blame for that on the Obama administration, which he claimed "slow walked" LNG export licenses. If the administration had moved faster, U.S. export terminals now under construction could have been operating and taking advantage of Asia's high LNG prices last year. U.S. terminals need crude oil priced at $60 to $65 per barrel to break even, he estimated.

The diminishing prospect of LNG exports from the U.S. will lower by as much as 50% the future incremental U.S. demand for gas over the next five years, altering the supply-demand balance and thus gas prices, he continued. Many experts had predicted LNG exports would add up to about 12 billion cubic feet per day (Bcf/d) to U.S. gas demand by 2020. But if Harpole is correct and only four LNG export terminals are brought online by 2020, that incremental demand will fall to between 6 Bcf/d and 8 Bcf/d.

The global collapse of crude oil prices has taken a heavy toll on U.S. producers, Harpole said May 13. Colorado producers have seen prices for their crude plummet from about $82 per barrel last August to about $49 per barrel at the start of this month. Producers in the Uinta Basin have seen a similar price decline. In the Denver-Julesburg (D-J) Basin, the crude-oil price selloff has lowered the rig count from an average of 54 in 2014 to 32 in the second quarter of 2015. Over that same time, the rig count in the Williston Basin has shriveled from 186 to 95, he said.

In the D-J Basin, Harpole estimated "only a couple of producers" can make money when their oil fetches $55 per barrel in the market. In the current price environment, he said he expected Colorado's crude-oil production will be about 17%, or 70,000 BBL/d, below what it would be in a higher-priced environment. Higher crude-oil prices were expected to drive the state's production to about 410,000 BBL/d by 2020, but the current price trajectory cuts production that year to about 340,000 BBL/d.

Across the country, producers' internal rates of return (IRR) have plummeted as crude-oil prices fell. In the Niobrara Shale, located in the D-J Basin, IRRs were 60% last July, before prices started falling. In January 2015, they were slightly more than 10%. Eagle Ford oil producers enjoyed IRRs as high as 70% last July, but six months later those fell to about 10%. In the Bakken Shale, IRRs have fallen from 50% to 10% between July 2014 and January 2015.

Harpole and another speaker at the May 13 event, Tracee Bentley, executive director of the Colorado Petroleum Council (Denver, Colorado), took turns criticizing the Obama administration's energy policy, particularly its hesitancy to lift the crude-oil export ban that has been in place for four decades.

"A political ideology that demonizes fossil fuels, and not geology, is the reason Oil & Gas Producers are in trouble today," Bentley told the May 13 event. "Fossil fuels have built the most advanced economy in the world, and it is bad public policy to impose unnecessary environmental regulations on oil and gas companies."

Oil and gas companies have added about $26 billion to Colorado's economy, according to a University of Colorado study Bentley cited. That study documented that nearly 7% of workers in Colorado were employed in the oil and gas business--either directly as oil company employees, or indirectly as employees in supplier companies.

Across the U.S., she continued, oil and gas production on private lands has soared by 57% since 2009. But production from federal lands has fallen 11% over that same time period. She blamed excessive red tape for the disparity.

Bentley and Harpole urged the White House to lift the crude oil export ban so domestic producers could access foreign markets. "I know people who are willing to swap U.S. light sweet crude for heavy crude from Mexico today," Harpole said. "It makes so much sense, with so many U.S. Gulf Coast refineries configured to run heavier, sourer grades of crude. U.S. refiners are not set up to run all the light sweet crude that is being produced today, and the inability to export that crude is hindering producers."

For more on that issue, see July 18, 2013, article - Big WTI Price Penalty Expected by 2018, as U.S. Light Sweet Crude Overwhelms Domestic Refinery Capacity.

"We need an administration with the wisdom, foresight and courage to lift the crude-oil export ban," Bentley said. Lifting that ban will mean $700 million in annual incremental economic activity in Colorado by 2020, she predicted. And she cited a study from consultants ICF International (NASDAQ:ICFI) (Fairfax, Virginia) that nine states would see incremental economic gains of $1 billion or more if the ban was lifted.

Expanded oil and gas development is a jobs and security issue, not an environmental issue, Bentley concluded, noting that omnibus legislation with bipartisan sponsorship to end the crude-oil export ban was introduced May 13 by Lisa Murkowski (R-AK), Heidi Heitkamp (D-ND) and 11 other Republican co-sponsors. The bill, the Energy Supply and Distribution Act of 2015 (S.1312), would, among other things, lift the ban on crude-oil exports.

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