U.S. Economic Growth Slows

Low Crude Prices Spark a Domino Effect
Low prices impact state economies

Impact of Lower Oil Prices

Data is beginning to surface on the U.S. economic growth for the first quarter of 2015 and its not looking good.

Marketwatch reports that the gross domestic product expanded by only 0.2% annual pace, well below what was forecasted. Gains over the prior three quarters were 2.2%, 5% and 4.6% respectively.

Related: Low Crude Prices Not Good for All

Much of the blame is being placed on the downturn in the energy industry. The 50% plunge in crude prices in 2014 initiated a domino effect through the economy. U.S. energy producers have been forced to slashed investment and have cut at least 30,000 jobs since January, according to the Commerce Department and it is estimated that the reduction in energy-related spending may have shaved 0.6% percentage points off of U.S. growth.

Many had predicted that the low oil prices would actually spark economic growth as consumers found more disposable from lower gasoline prices.

Scott Hoyt, director of consumer economics at Moody’s Analytics shared an optimistic with Marketwatch, saying that “Energy-related investment and jobs are falling rapidly. However, these cuts will soon begin to fade, and the benefit to consumers from the lower oil prices will grow,” said.


Halliburton Closing Minot Facility

Bakken Jobs in Jeopardy as Company Streamlines Operations
Halliburton Closing Minot Facility

Halliburton Closing Minot Facility

Beginning April 1st, Halliburton will no longer have a presence in Minot, North Dakota. A spokesperson confirmed Tuesday that the company will suspend operations and close the facility, transferring employees to their Williston and Dickinson locations.

This is the latest in a string of announcements from Halliburton about their efforts to streamline operations in the face of the current crude pricing downturn. Earlier this year the company reported worldwide layoffs of 6,500 people followed by an announcement that they would close their facility in Regina, Saskatchewan in March.

Related: Energy Giants Announce Layoffs

Spokesperson Susie McMichae said that “The company continue to make adjustments to its workforce based on current business conditions. We value every employee we have, but unfortunately we are faced with the difficult reality that reductions are necessary to worth through this challenging market environment,” said McMichael.

Energy Giants Announce Layoffs

Cheap Oil to Blame for Job Cuts in Several Sectors
oil prices and layoffs

Energy Workers Face Layoffs

Lower crude prices are a double edged sword. The average consumer may enjoy the benefits as cheap fuel reduces the costs of goods and services, but for those whose livelihood relies on the energy industry, the extra cash will be of little solice if they no longer have a job. It has taken some time for the reality of the low oil prices to finally trickle down, but after months of plummeting crude, the boom will become bust for the many who will soon face a pink slip.

Related: Low Oil Prices Offer Uneven Effect

Since November, one company after another announced massive reductions in their 2015 budgets as they have scrambled to cope with the dramatic 50% drop in crude prices since the summer. The next predictable step began last week as companies announced layoffs and prepare to scale back drilling operations.

Amidst the happy refrains from people who are enjoying lower gasoline prices, there is the occasional cynical comment that suggests the only ones who are hurt by low crude prices are the nameless, faceless, deep pockets of the energy companies. This represents a short-sighted and narrow view of the current reality facing workers, families and local economies.

Not only do layoffs affect workers directly, but a report authored by Dr. Robert W. “Bill” Gilmer for U.H.’s Bauer School of Business estimates that with each new energy job created/eliminated, there are three – four other jobs that are also create/eliminated.

Discussing the impact on Houston, Gilmer predicts that “These cuts will be felt from Houston’s machine shops and factories to its office towers. The question becomes how this strange mix of good news and bad balances out to affect Houston’s economic prospects in 2015 and beyond. 

Since January 1st, a handful of companies have announced layoffs and it is only a matter of time before others follow. Some analysts predict things could get very ugly as the layoffs extend to local governments, small business and energy-supporting industries. Highlighted below are several giants who recently announced layoffs for early 2015.

Schlumberger: reported layoffs of a staggering 9000 workers more

Halliburton: recently laid off workers in Houston, but declined to give a specific number more

Apache: Also laid off an undisclosed number of workers worldwide more

U.S. Steel: Over 700 expected to be let go starting in march more

Low Oil Prices Offer Uneven Economic Effect

Energy Reliant States Will Suffer if Prices Remain Low
Low prices impact state economies

Impact of Lower Oil Prices | click to enlarge

As consumers enjoy the benefits of plunging gasoline prices this holiday season, it is still unclear how cheaper crude will impact the overall health of the U.S. economy.

One Washington think tank has estimated that, though many parts of the country will experience a slight economic stimulus in 2015, the lower oil prices will bring a significant downturn in the economic health of energy dependent states.

Unprecedented production in the United States shale plays have contributed to an increase in worldwide oil supplies, resulting in gasoline prices plummeting to their lowest level in almost five years. This has proven to be an economic boom of sorts to American families who are pocketing an additional $25-$75 per month. An additional perk will come as reduced fuel costs will eventually affect the pricing of consumer goods and services.

Stephen Brown with Resources for the Future writes that, “The reduction in oil prices provides US consumers with what amounts to an annual increase in disposable income of $350 billion (about 2.0 percent of US GDP) through reduced prices for gasoline, diesel fuel, other petroleum products, and goods and services whose production uses petroleum products. The average US household will see a raw gain that amounts to $2,790 per year.”

The economic picture is not so rosy for everyone. Energy producers and states that are heavily invested in oil production will take a hit in 2015. Some companies have announced they will slash their budgets, with many predicting cuts in their exploration efforts. This will have a ripple effect that will impact local economies and support industries as tax revenues are reduced and layoffs are inevitable.

Download the entire report from rff.com.

IHS: U.S. Shale Production Growth Will Slow, but Still Remain High

~ 80% of Potential Drilling in 2015 Would Remain "Resilient" at $70 per Barrel
ND Pump Jack Photo

ND Pump Jack | Click to Enlarge

The dip in oil prices isn’t making a huge impact yet on the vast majority of U.S. shale production.

According to a report by research consultancy IHS Energy, most shale plays are economic and ~80% of potential drilling in 2015 would remain strong at WTI crude oil prices as low as $70 per barrel.

“Since 2008 the cumulative growth in U.S. tight oil production has been 3.5 million b/d—far exceeding supply gains from the rest of the world combined—making tight oil the key driver of global supply growth,” said Jim Burkhard, Vice President, IHS. “While current lower crude oil prices do present challenges for new investment, IHS analysis shows that the vast majority of potential U.S. supply growth in 2015 remain economical at $70 for WTI.”
                                                                        Jim Burkhard, VP IHS        

WTI traded at ~$76 on Monday, a nearly 20% drop since September. As a result, Bakken operators, including Emerald Oil, Inc., have already announced plans to potentially scale back their drilling programs in 2015.

Read more: Emerald Oil May Scale Back Bakken Drilling Program in Q1 2015

North Dakota’s Department of Mineral Resources (DMR) Director Lynn Helms updated lawmakers in October on the status of oil & gas development in the state. Helms said two factors could negatively impact oil production – lower oil prices and new flaring regulations.

Read moreBakken Drillers Could Be Forced to Scale Back 2015 Efforts

Growth Still High, But Expected to Slow in U.S. Shale Plays

At lower prices, growth will slow, but still remain high, according to the report. In 2015, IHS estimates U.S. shale production will grow by 700,000 b/d at an average price of $77 per barrel in 2015. By contrast, in 2014, growth from U.S. shale plays was more than 1-million b/d.

“Expectations of the future—and the trajectory of oil prices—means that prices do not need to fall to the breakeven price before psychology, investment, and thus output, is affected,” Burkhard said.”

Approximately 80% of anticipated production has a break-even price between $50 to $69 per barrel, according to the report.

Marathon Oil’s Bakken Drilling Speed Improves 10% In The Second Quarter

Bakken Production Grew 5% Over The First Quarter
Marathon Oil Bakken Map

Marathon Oil Bakken Acreage Map | Click to Enlarge

Marathon Oil averaged 25 days from spud to spud in the first quarter and that time improved to 22 days in the second quarter. The company’s spud to total depth for each well fell to 15 days.

Marathon hit total depth on 22 wells and brought 16 wells to production. That compares to 18 wells drilled and 22 wells brought to production in the first quarter. [Read more…]

Bakken Crude Can Get Premium Prices on the West Coast

California Doesn't Have Much Receipt Capacity, so Oil is Moving East
Tesoros Carson Refinery

Tesoro’s Carson Refinery Near LA | Click to Enlarge

Bakken crude can realize premium prices by moving west. The only problem is there isn’t much receipt capacity. Long distances, very little pipeline capacity, and limited rail mean it’s hard to move crude West out of ND. Recent estimates show more than 40,000 b/d of Bakken crude is being transported to Washington, but only a few thousand barrels per day is making its way south into California. That’s a problem. West Coast refineries are paying over $105 per barrel for Alaskan crude, while oil in North Dakota is trading for as little as $80 per barrel.

Assuming it would cost $15 per barrel to move crude by rail to Southern California, those looking to profit stand to make $10+ per barrel based on current spreads. That’s more than enough incentive for refineries and midstream companies, but its easier said than done.

“It’s entirely possible California refiners decide they can’t get this done in time to catch the arbitrage, so refiners wouldn’t get the benefit of low-cost crude from the Midcontinent,” said David Hackett, president of energy consultancy Stillwater Associates.

East Coast and Gulf Coast refiners are enjoying some of the best margins in the world, but on the West Coast, refiners are missing the party. If significant rail receipt capacity isn’t built or pipelines converted to oil, refineries might miss out on the benefits of the current domestic oil boom all together.

Tesoro mentioned two relevant measures at its analyst day in early December 2012:

  • Access to cost advantaged crude
  • Ability to cost-effectively address regulator compliance

Bakken crude can help with first issue, but they’re going to have to get the state on their side to make advances with the second issue. Coming off a recent $2.5 billion acquisition of the Carson Refinery from BP, Tesoro has plenty at stake and I don’t expect they’ll let the current oil boom pass them by.

Read an entire article discussing hurdles in California at foxbusiness.com

Kodiak Oil & Gas is Spending More & Lowering Guidance

Kodiak Oil and Gas Bakken Shale Map

Kodiak Oil & Gas Bakken Shale Map | Click to Enlarge

Kodiak Oil & Gas lowered its production guidance for 2012 last week, but beat earning expectations today. The company expected to average 17,000-21,000 boe/d in 2012, but has lowered its production expectation to 15,500-17,500 boe/d. The company still reported a 300% increase in sales volumes year over year for Q3 and expects to hit its 2012 exit rate of more than 27,000 boe/d. My understanding is the company got a little ahead of itself with early projections and is being saved now by better realized prices. Better oil prices led the company to an earnings beat even though production volumes were lower than expected.

The company is also spending $165 million more than initially planned, while completing 66 net wells compared to 51 planned. The total capital budget was planned with $585 million in expenses, but 2012 spending is going to fall closer to $750 million. Almost $80 million of the outspend is due to non-operated areas being developed more quickly than expected. The other $85 million is due to higher costs than expected across the board. The company has spent about 20% more than expected on drilling and completing wells, salt water disposal facilities, and leasehold acquisitions.

The outspend isn’t troubling considering the company is completing almost 30% more wells, but lower production guidance suggest wells aren’t performing quite as strong nor are they coming online as quickly as the company expected. Kodiak expects to complete 26 net wells in the fourth quarter. That represents almost 40% of total activity for the year.

KOG’s CEO commented:

“Kodiak continues to make progress in growing its production, as demonstrated by the 50% increase in average quarterly sales volumes for the third quarter of 2012 compared to the first quarter of 2012. With a large number of wells scheduled to be completed in the fourth quarter, we should see that same upward trajectory continue over the coming quarters. We completed 10 gross (9.3 net) wells during the month of October, and with two completion crews working steadily through year end, we expect to meet or exceed our stated 2012 exit rate guidance of 27,000 BOE/d.”

Kodiak also expects well costs to fall below $10 million in the coming year. Current wells are running approximately $10.5 million to drill and complete, but pad drilling should allow the company to drill more wells with fewer rigs.