Friday, October 7 2016
In the latest edition of the Numbers Report, we’ll take a look at some of the most interesting figures put out this week in the energy sector. Each week we’ll dig into some data and provide a bit of explanation on what drives the numbers.
Let’s take a look.
1. OPEC’s gift to the oil industry
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- OPEC’s decision to cut its collective production by somewhere between 200,000 and 700,000 barrels per day caused oil prices to spike by 6 percent.
- That led to huge gains for the energy industry. The combined market cap of the 10 largest U.S. oil and gas companies surged by $36 billion on the day the OPEC deal was announced.
- ExxonMobil (NYSE: XOM) alone saw its value rise by $15 billion.
- Notice in Bloomberg’s chart that Valero (NYSE: VLO) did not gain on the news. The downstream sector is not exactly enthusiastic about higher oil prices, which could eat into their margins.
2. Nigeria could spoil OPEC’s party
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- Nigeria was exempted from OPEC’s production limits due to the huge losses to its oil sector this year from militant attacks.
- Nigeria’s oil production dropped by about 800,000 barrels per day between late 2015 and this past summer, falling to a 22-year low of about 1.4 million barrels per day.
- But the frequency of attacks has slowed as the Niger Delta Avengers have remained mostly…
Friday, October 7 2016
In the latest edition of the Numbers Report, we’ll take a look at some of the most interesting figures put out this week in the energy sector. Each week we’ll dig into some data and provide a bit of explanation on what drives the numbers.
Let’s take a look.
1. OPEC’s gift to the oil industry

(Click to enlarge)
- OPEC’s decision to cut its collective production by somewhere between 200,000 and 700,000 barrels per day caused oil prices to spike by 6 percent.
- That led to huge gains for the energy industry. The combined market cap of the 10 largest U.S. oil and gas companies surged by $36 billion on the day the OPEC deal was announced.
- ExxonMobil (NYSE: XOM) alone saw its value rise by $15 billion.
- Notice in Bloomberg’s chart that Valero (NYSE: VLO) did not gain on the news. The downstream sector is not exactly enthusiastic about higher oil prices, which could eat into their margins.
2. Nigeria could spoil OPEC’s party

(Click to enlarge)
- Nigeria was exempted from OPEC’s production limits due to the huge losses to its oil sector this year from militant attacks.
- Nigeria’s oil production dropped by about 800,000 barrels per day between late 2015 and this past summer, falling to a 22-year low of about 1.4 million barrels per day.
- But the frequency of attacks has slowed as the Niger Delta Avengers have remained mostly quiet in recent weeks. Repairs have allowed Nigeria to bring back a substantial volume of oil.
- The large Forcados export terminal could soon come back online, which could help Nigeria restore production to just under 2 mb/d in October. That is essentially a 0.5 mb/d increase from August levels, which alone is almost equivalent to the high-end estimate for OPEC’s planned production cuts.
- Estimates from Nigeria, however, should be taken with a grain of salt. The Niger Delta is still extremely unstable and attacks could resume on oil industry targets at any time.
3. Biofuels key to cutting airline industry emissions

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- Renewable energy is cleaning up the electricity sector and EVs offer alternatives to vehicle transit. But the airline industry has few alternatives.
- The UN is considering an accord this week to compel the airline industry to reduce greenhouse gas emissions, but with electrification not viable at this point, any emissions reductions will need to come from biofuels.
- But investment in biofuels has been falling steadily for about a decade, mostly due to corn ethanol going out of fashion. Investment dipped to $322 million in the first half of 2016, down about 64 percent from the same period last year.
- The global biofuel industry only has the capacity to produce 100 million gallons of jet fuel each year, a fraction of 1 percent of the industry’s fuel needs (83 billion gallons per year).
- Still, many experts are bullish on biofuels. The airline industry supports the UN deal to reduce emissions, and with jet fuel the largest expense for airliners, they are eager for alternatives. More demand should help drive larger investments and production, but biofuels remain far off.
4. Major oil discovery in Alaska

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- Caelus Energy LLC announced this week that it made a major oil discovery in Alaska. The find could hold as much as 6 billion barrels, with 2.4 billion barrels estimated to be recoverable, which could grow Alaska’s oil reserves by 80 percent.
- The find is on Alaska’s northern coast, and would require the construction of a pipeline to connect it to Prudhoe Bay.
- The field might eventually produce 200,000 barrels per day if developed. Alaska only produces about 483,000 barrels per day, down from a peak in the 1980s at over 2 mb/d.
- The field could be key to extending the life of the Trans-Alaskan Pipeline. Oil flows have dropped dangerously low, almost too low to keep the pipeline operating.
- However, development will be difficult and expensive. Caelus will drill another well in the winter of 2018 to advance the project.
5. Hedging increases after OPEC deal

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- Bloomberg reports that hedging activity from U.S. shale producers spiked following the OPEC deal, as drillers hoped to lock in 2017 production to provide some certainty.
- “When calendar 2017 pricing rises into the low-to-mid $50s, as it is doing now, producer hedging rises materially,” Adam Longson, commodity strategist at Morgan Stanley, wrote in a note to clients.
- U.S. independent oil companies only have about 16 percent of their 2017 production hedged already, which is lower than the 39 percent locked in for the rest of 2016.
- Precise data is hard to come by at this point, but spot prices for WTI rose over the past week while 2017 futures prices stayed flat, suggesting more companies are selling production for next year.
6. U.S. natural gas seeing structural demand increase

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- The construction wave of natural gas power plants is leading to a structural increase in U.S. gas demand.
- Installed gas-fired electricity capacity rose to 448 gigawatts in July 2016, up 25 GW from the end of 2012. Another 11.5 GW will be added by the end of next year.
- At the same time, gas production was down 4 percent in July year-on-year, both due to low natural gas prices and the two-year oil bust that led companies to scale back drilling of both oil and gas.
- Unlike typical demand statistics that that the market trades on, U.S. gas demand is rising structurally, not just cyclically.
- Higher demand combined with falling supply is unsustainable. Prices will have to rise, which will lift the share prices of gas companies, and a new round of drilling will commence. Meanwhile, coal could see a temporary reprieve as it becomes more competitive with gas for electricity generation.
7. Finding new discoveries getting more expensive

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- The oil industry likes to trumpet its falling production costs, and indeed E&Ps have cut costs over the past two years.
- But as Bloomberg Gadfly notes, the cost of finding and discovering new reserves has actually been on the rise in recent years.
- Discovery costs spiked in 2015 because so many reserves were taken off the books, raising the overall average cost of discovery. But the cost of finding new reserves had been increasing since 2011 anyway.
- Bloomberg Gadfly provides some rough estimates for a survey of E&P companies that should give investors pause: all-in “lifting costs” (production costs) are at about $10 per barrel, plus finding and development costs at about $15 to $25 per barrel. But the realized price of a barrel of oil equivalent (which includes natural gas) at just $20 per barrel.
- In short, while E&P companies like to publish metrics like falling production costs, the bottom line is that much of the industry is outspending cash flow. The “resilience” of U.S. shale, which is often celebrated in the media, depends enormously on generous investors and creditors.
That’s it for this week’s Numbers Report. Thanks for reading, and we’ll see you next week.