Shale Production Heads Into Overdrive

Friday February 16, 2018

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. Exxon battered

(Click to enlarge)

- ExxonMobil's (NYSE: XOM) share price traded at about $75.50 as of February 15, down more than 15 percent since February 1.

- That kind of drop is very rare for one of the world's largest integrated oil companies. As Bloomberg Gadfly notes, the period of Feb. 1-9 saw the worst decline in Exxon's stock since October 2008 during the depths of the financial crisis. Gadfly points out that the company lost some $56 billion in value.

- The oil major's woes are multifaceted. Exxon posted poor fourth quarter figures two weeks ago - lower production levels and weak cash flow.

- Bloomberg Gadfly also points out that Exxon used to trade at a strong premium relative to its peers, but that is no longer the case.

- The longer-term story is that Exxon has seen its return on capital employed fall, undercutting the case for its high share price. Moreover, some of its competitors offer more advantages in terms of cash flow or production growth.

- In other words, the luster for holding Exxon shares has worn off.

2. Shale surge overstated or understated?

(Click to enlarge)

- The EIA receives a lot of criticism for some of its figures, but the agency does what it can with the best available data. One source of criticism over the past year has been the large discrepancy between its weekly U.S. oil production estimates, which are published on a rapid turnaround but are based on fewer sources of data, and the monthly estimates, which are more accurate but are published on a several-month lag.

- Last year, the weekly data was consistently higher than what showed up in the monthly data later on, raising speculation that the agency was overstating the growth of U.S. shale. Because the weekly figures have a lot of influence on oil prices in a given week, the critique was that inflated EIA data was suppressing prices by overstating output from shale.

- But now the opposite has occurred. Monthly data for November showed output skyrocketed, catching up and even surpassing the weekly data.

- There will always be discrepancies between these two sources, but the upshot is that there are a lot fewer voices out there who believe that U.S. shale is not growing at a rapid pace since both the weekly and monthly data are now sharply on the rise.

3. Innovation and digitalization to cut production costs

(Click to enlarge)

- The oil industry is rapidly shifting towards more energy digitalization, cloud computing, automation, robotics data analytics and other technological advances that could change the face of the industry.

- Schlumberger (NYSE: SLB) executives told the FT the cost savings for shale development could reach as much as 40 percent. The IEA, in a 2017 report, put the potential savings at a more modest 10-20 percent for the industry on the whole.

- "It might help keep oil prices at the reasonable levels, meaning in the $60s, and let everyone produce economically," Schlumberger executive vice president Ashok Belani told the FT.

- He also notes that a drilling rig staffs 26 people today. In five years, the same rig may only need 5 people.

- Chief information officer of Chevron (NYSE: CVX), told the FT that "humans are largely driving the drill bit. But we believe that will increasingly be automated and turned over to a computer, just like an autopilot in an aircraft."

4. Pipeline bottlenecks, rail shortage pushes down Canadian oil prices

(Click to enlarge)

- Canada's oil prices are plunging because major pipelines are largely full, and rail cars are not able to keep up.

- More Canadian oil is coming online, depressing benchmark prices.

- Meanwhile, wheat and canola backlogs are clogging up the railways as well, leaving little room for oil.

- Oil inventories in Canada are rising, and Western Canada Select plunged in December, with losses continuing into January.

- The WCS discount to WTI reached $30 per barrel in January but has since narrowed to about $22 per barrel.

- As the rail backlog begins to clear, more oil could move on rail. But no major pipeline capacity addition is expected for a few years.

5. Nigeria aims higher

(Click to enlarge)

- OPEC has posted high compliance rates, helped along by the plunge in Venezuela's output.

- While there are other potential outages, the market also faces upside risks. Nigeria is aiming to add 250,000 bpd of capacity by 2020, hoping to ratchet up production to 2.5 mb/d.

- Nigeria agreed to cap its production this year at 1.8 mb/d as part of the OPEC agreement. But if capacity expands, Nigeria might be tempted to exceed that target.

- Nigeria produced 1.819 mb/d in January, according to OPEC's secondary sources. S&P Global Platts puts the figure at 1.93 mb/d, a two-year high and above the promised target.

- "If they can pump more in Nigeria, I don't see why they wouldn't," Warren Patterson, a commodity strategist at ING Bank NV, told Bloomberg. "If you get Nigeria exceeding the cap, then you're going to get others who pump a little bit more. The longer the deal goes on for, the more likely it's going to fall apart."

- Meanwhile, Iraq could add several hundred thousand barrels per day of production capacity by the end of the year, another potential risk to the deal.

6. Cushing inventories plunge

(Click to enlarge)

- Crude stocks at the critical hub of Cushing, OK continue to fall sharply, and they fell by another 3.7 million barrels this week to just 32.7 million barrels, the lowest level since early 2015.

- Still, overall U.S. inventories have started to creep up, rising to 422 million barrels last week, up from 411 million barrels in mid-January.

- The combination of the startup of the Diamond Pipeline from Cushing to Tennessee, plus reduced flows from the Keystone pipeline, is helping to draw stocks in Cushing, Reuters reports.

- "The Diamond Pipeline is increasing takeaway capacity out of Cushing directly, but there's also 600,000 to 700,000 barrels a day of new capacity commissioned and in the process of ramping up from Texas 's Permian directly to the Gulf Coast," Michael Wittner, managing director and global head of oil research at Societe Generale, told Reuters.

- More refinery maintenance could lead to a reversal, helping to ease demand that could push up inventory levels.

- For now, the drawdowns are adding some upward pressure on WTI.

7. Natural gas reserves up

(Click to enlarge)

- The U.S. had 341.1 trillion cubic feet (Tcf) of proved natural gas reserves at the end of 2016, according to the EIA, an increase of 5 percent from a year earlier. Oil reserves remain unchanged.

- "Proved" reserves are those in which "geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions," the EIA says.

- New discoveries can boost the figure, but so can improvements in technology or cuts in production costs.

- Pennsylvania, home to the Marcellus Shale, saw a net increase of 6.1 Tcf of natural gas reserves in 2016.

- The Marcellus is expected to see explosive growth in gas production this year, which has depressed prices even amidst a record season for gas demand because of cold weather.

That's it for this week's Numbers Report. Thanks for reading, and we'll see you next week.