Market Outlook 2013: Oil and Gas

Natural Gas

Prices fell, almost in half. What that has meant to the industry is 5% to 6% growth instead of the anticipated 10% to 12%, and there was a full trillion cubic feet extra gas in storage, which means the industry has had a very sluggish demand for gas in the summer. The problem is storage capacity; there’s a limit as to how much physical gas can actually go into storage, which is around 4 trillion cubic feet at this time.

“Consequently, for awhile, natural gas was trading lower than the BTU price of coal,” said Spears. “That means the power utility sector went toward cheap gas as a fuel source. The year-over-year change in gas consumption shows a 20% increase this year from power production companies, and for a period this year, gas provided as much fuel to the market as coal. That has given an overall lift to gas consumption – maybe as much as 5%.” As demand has risen, that helps operators whittle away the amount in storage, and therefore the price has moved back to around the $3 mark.

Spears admitted that the natural gas market was tricky to analyze. If the power sector uses a lot, prices could go too high, then coal takes back some of the market share. But at $3 to $3.40 per 1000 BTU, gas can retain its power share.

Oil

According to Spears, at this point, oil demand is expected to increase, but the estimate of surplus oil production capacity that exists in the world, as of the second quarter of 2012, is only 2.5 million barrels per day (MBD) spare capacity compared to 90 MBD. That’s only about 3%, which is historically pretty low. It looks like that spare capacity will jump here as additional sources of supply grow faster than does demand, but, because of the sanctions on Iran that are now being enforced by U.S. and Europe, almost all that incremental growth in surplus capacity will be Iranian oil that can’t find a market. So effectively, the world is not going to have any more commercially available crude than it does today, and that’s one of the reasons why the oil prices will remain around $90 to $100.

A year ago, when producers saw prices trade at greater than $100, operators were anticipating $87 per barrel; now planning for 2013, the price will most likely be closer to $80 per barrel, meaning caution in the U.S. drilling activity. So it will make producers more conservative and reluctant to increase capital spending.

Rig Count

The drop in gas prices and relative stability of oil prices has changed the proportion of gas to oil rigs. Natural gas rigs went from 900 to just around 400 over the past 8 or 9 months, but at the same time oil rigs increased to 1,400 as compared to the end of 2011 when there were only 1,000. Spears said, “The good thing for operators is that the rig is the same; they just have to move it around.”

Last year, many oil equipment services companies were planning their capex programs to increase their fleet of equipment and personnel, but now there is only a 5% increase year-over-year, so a lot of spare capacity has emerged among the service and equipment firms that get hired to drill wells. That means the cost of drilling has begun to fall as the service and equipment companies lower their prices. Stimulation services have also dropped, and the cost of fracturing jobs has dropped substantially because capacity has far exceeded demand to this point in 2012. Spears anticipates that going forward to the end of next year, that will stabilize, but in the meantime it’s allowing operators to stretch their drilling dollars.

Operators will be conservative in their drilling budgets as they recognize that infrastructure constraints are going to limit their markets. There have been proposals advanced, and pipeline restructuring work done to get oil and gas to where it needs to be, however, the infrastructure is an ongoing problem that needs to be addressed. In the meantime, there is a big discount between what an operator can sell his product for in the field, compared to what it might otherwise sell for at the refinery gate. That means that operators are staying conservative and some are selling assets. Consequently, according to Spears, operators are trying to reduce well costs either through operational improvements or getting price reductions from suppliers.

Outlook

A small decrease in the cost to drill and complete new wells is offsetting the 5% increase in drilling activity, leaving overall U.S. drilling and completion expenditures little changed in 2012. Spears expects these trends to remain in place for 2013 and that net additions to the NAM frac fleet are unlikely from year-end 2012 to mid-2014. Suppliers think that activity will remain sluggish for the next 12 to 18 months, depending on the weather.

Drilling activity in Canada is forecast to fall 5% in 2012 to an average of 400 active rigs. In May, 2012, Canadian gas production was 6% lower than the year-ago level, and the National Energy Board expects that new gas drilling will not be adequate to offset the decline in production from existing wells. Spears recommended watching the Canadian situation, suggesting that Canada will also see activity pick up in 2013.

Spears reminded the audience that is important to note that once we leave North America, 80% of the activity internationally is driven by oil prices. It’s very important for international markets. Except for China and possibly Australia, the shale market is not expected to grow quickly.

U.S. oilfield capital expenditure on new oilfield equipment is projected to exceed $14 billion in 2012, down 8% from 2011. A sharp fall in spending for new frac equipment will drive another 15% drop in U.S. oilfield equipment spending in 2013. Spears also expects that a combination of flat oil prices, weak NGL prices and slowly recovering gas prices is likely to keep operators cautious about their near-term plans for capex and drilling activity through 2013. With growth and pricing constrained, operators and oilfield service firms are expected to focus on margin/share improvement, selective acquisitions/divestitures and new market opportunities.

Kate Kunkel is senior editor of Valve Magazine and web editor for ValveMagazine.com. Reach her at kkunkel@vma.org