Shale Jobs Disappear As Production Growth Slows

Friday December 13, 2019

1. OPEC+ cuts deeper

- OPEC+ agreed to cut output by an additional 500,000 bpd last week. Overall, the group has agreed to hold 2.1 mb/d off of the market for the first quarter.

- OPEC production is now 2.69 mb/d lower than it was a year ago. Iran and Venezuela have lost a combined 1.4 mb/d compared to last year.

- Those disruptions were entirely offset by a 1.5 mb/d increase in supply from the U.S. this year.

- But the task for OPEC+ is not over. The IEA still sees a supply surplus of 0.7 mb/d in the first quarter.

2. Tullow's 70% stock meltdown

- Tullow Oil (LON: TLW) saw its share price fall off a cliff this week, falling by 70 percent in a single day. It was one of the worst performances from a London-listed company in a decade, as the FT put it.

- The meltdown was the result of a revelation by the company of its dismal performance in Ghana. The company's flagship operation has a list of technical issues - in particular, more water than expected has entered its oil field.

- Tullow slashed its production guidance to just 70,000 bpd in 2020, down from 100,000 previously.

- Cash flow is expected to fall to just $150 million as a result, down from a previous forecast of $500 million.

3. Shale base declines increase

- The IEA sees U.S. shale growing by 1.1 mb/d in 2020, down from 1.6 mb/d in 2019, but still a substantial growth rate.

- However, not everyone agrees. Goldman Sachs put its growth figure at 600,000 bpd.

- IHS Markit is even more pessimistic, seeing growth of just 440,000 bpd, as the industry struggles with a rising base decline rate.

- "Because of the large increases of recent years, the base decline production rate for the Permian Basin has increased dramatically, and we expect those declines to continue to accelerate," Raoul LeBlanc, vice president of Unconventional Oil and Gas at IHS Markit, said in a statement. "As a result, it is going to be challenging, especially for some companies with cash constraints, just to keep production flat."

- IHS says that the Permian's base decline rate will swell to 1.5 mb/d by the end of 2019, "a staggering 40% base decline rate."

4. The shale job engine stalls

- The growth of U.S. shale led to employment growth both in drilling and the array of spinoff industries, including manufacturing and finance. But as shale slows down, the jobs are disappearing.

- The energy sector in Houston is expected to lose 4,000 jobs in 2020 as investment banks and other services cut back.

- There is around 60 million square feet of vacant corporate office space, a vacancy rate of more than 26 percent, according to a report from the Greater Houston Partnership.

- "The situation Houston faces today is eerily similar to what it faced after the 1980s bust - an oversaturated real estate market, a bleak outlook for oil and gas, and the need for innovation to drive the economy forward," the report said.

5. Diesel contango a reflection of weak demand

- Refining margins for diesel in Europe have declined due to weaker than expected demand. The IMO rules on sulfur were thought to lead to a spike in demand for distillates, as shippers and refiners switch over to low-sulfur fuels.

- But diesel inventories are larger than anticipated, and margins in Europe have declined from $19 per barrel in October to just $15 per barrel in mid-December, according to Reuters.

- The near-term futures structure has dipped into contango - a December contract has traded at a lower price than a January contract - a reflection of a weak and oversupplied market.

- "Diesel margins have been rather soft into the fourth quarter due to weak global activities, lower refinery turnarounds and a warm start to the winter, while initial demand for transition to IMO 2020 is likely being met by inventory build for low sulphur fuels through 2019," Goldman Sachs said.

6. Nickel stocks surge

- Nickel prices shot up this week, rising above $14,000 per ton for the first time in two weeks, according to Commerzbank.

- But the price gains came even as inventories surged. "In our opinion, the fact that sharp rises in nickel stocks in the LME warehouses have been ignored is one indication that the current price surge is being driven largely by speculation," Commerzbank wrote.

- Inventories rose by 52,800 tons in just a matter of days, an increase of 75 percent.

- Other metals, such as aluminum, also saw an increase in inventory.

- The price gain is largely due to short covering, the investment bank said.

7. Chevron's $11 billion write down

- Chevron (NYSE: CVX) announced an $11 billion write down this week, largely the result of a reevaluation of long-term oil and gas prices, forcing it to lower the value of its assets.

- Chevron's Appalachian shale gas assets were a particular focus, along with its stake in the Kitimat LNG project in Canada.

- The company's capex program is down sharply from pre-2014 levels and is expected to stay at around $20 billion per year.

- Chevron may divest from Appalachia as it increases its focus on the Permian.

- Many analysts noted that this isn't just a Chevron problem.

- "I would expect most companies to have to write down gas assets this year," Muhammed Ghulam, a Houston-based analyst at Raymond James & Associates, told Bloomberg.