State of the Oil & gas Industry Dynamic Challenges Facing...
Transcript of State of the Oil & gas Industry Dynamic Challenges Facing...
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Edward Cross, P.G., M.B.A.President
Kansas Independent Oil & Gas Association
Kansas Senate Utilities CommitteeKansas State Capitol Room 548-S
Topeka, KansasJanuary 17, 2017
STATE OF THE OIL & GAS INDUSTRY
DYNAMIC CHALLENGES FACING
KANSAS OIL & GAS INDUSTRY
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AMERICAN ENERGY RENAISSANCE
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CRUDE OIL MARKET DYNAMICS SINCE MID-2014
• Oversupply
• U.S. Oil Production
• OPEC Dump Low-Cost Oil on Market
• Deceleration of Demand Growth
• Strong U.S. Dollar
• Oil Demand Remains Inelastic
• World Oil Supply becoming Increasingly Inelastic
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CRUDE OIL MARKET STRUCTURE
• Oligopoly
• OPEC Cartel Collude to Influence Market Price
• U.S. Producers are Perfect Competitors
• Price-Takers Not Price-Makers
• Cost Structure Optimization Determines Profit
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CAPITAL BUDGETING DECISIONS
• Generalized Internal Rate of Return Discounted Cash Flow Analyses
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
$10 $15 $20 $25
Inte
rnal
Rate
of
Retu
rn (
IRR
)
Crude Oil Market Price
Production Valuation
5 BOPD
10 BOPD
15 BOPD
20 BOPD
Standard IRR
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SUPPLY LEVERAGE DIMINISHING
$0
$40
$80
$120
$160
1 3 5 7 9 11 13 15
Pri
ce o
f O
il
Quantity of Oil
The New World
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IMPACT OF OIL PRICE COLLAPSE ON OIL
INDUSTRY NATIONALLY
• Capex Cuts
• $61.2 billion in 2015
• $89.6 billion in 2016
• Layoffs
• 250,000 Direct Industry Layoffs
• 1 million Indirect Industry Layoffs
• Rapid Decline of Domestic Rig Count
• Declined by 62% in 2015
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OIL & GAS INDUSTRY BANKRUPTCIES
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• Layoffs
• 20% - 30% in Production Sector
• 55% - 60% in Service Sector
• 3,100 Direct Industry Layoffs
• 3,000 Indirect Industry Layoffs
• Loss of $341 million in Family Income
• Reduced Activity
• 50% Drop in Permits in 2016
• 67% Drop in Permits in 2015
• 40% Drop in Rig Count in 2016
• 60% Drop in Rig Count in 2015
• Cut Capex by 75% - 80% in
2016
• $300 million in 2016 ($1.3
Billion in 2014)
• Deferred Well Completions &
High-Cost Wells Temporarily
Shut-In
• Royalty Payments Dropped
by $400 million in 2016
IMPACT OF OIL PRICE COLLAPSE ON
KANSAS OIL INDUSTRY
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WHO ARE INDEPENDENTS?
• Small Businesses
• Drill & Produce Crude Oil and Natural Gas
• Not Integrated
• Sell Crude Oil and Natural Gas to Purchasers
• Do Not Generate End-Products
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KANSAS OIL & NATURAL GAS PRODUCTION
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KANSAS OIL & NATURAL GAS DYNAMICS
• Average Daily Oil Well Production = 2.63 BOPD
• 44% of Kansas Crude Oil Production From Marginal Wells
• 45% of Total Kansas Oil Wells are Classified as Marginal Wells
• Average Daily Natural Gas Well Production = 27 McF/day
• 67% of Kansas Natural Gas Production from Marginal Wells
• 55% of Kansas Natural Gas Wells are Classified as Marginal Wells
• Supports 118,000 Kansas Jobs and $3 Billion in Family Income
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KANSAS OIL & NATURAL GAS PRODUCTION
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KANSAS OIL & NATURAL GAS TAX COLLECTIONS
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KANSAS OIL & NATURAL GAS INDUSTRY ACTIVITY
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WHAT ARE MARGINAL WELLS?
• IOGCC Defines Marginal Wells as
• Oil Wells Producing 10 BOPD or Less
• Natural Gas Wells Producing 60 Mcf of Natural Gas Per Day or Less
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MARGINAL WELL ECONOMIC IMPACT STUDIES
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ECONOMIC COST TO U.S. ECONOMY
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IMPACT ON MAJOR U.S. INDUSTRY OUTPUT
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EFFECT ON JOBS BY INDUSTRY SECTOR
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DIRECT JOBS LOST PER YEAR PER STATE
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WHAT ARE COMPANIES DOING?
• Supply Chain Optimization
• Operational Improvements
• Reduce and Refocus Capex
• Acquisition/Divestiture
• Talent Acquisitions
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KEY CHALLENGES FACING KANSAS PRODUCERS
• Crude Oil Prices
• Do Not Compensate for Loss of Capex in U.S. Economy
• Production Rollover Happened Sooner and was More Severe than
Anticipated
• Market has Entered into an Inflection Phase
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LOW CRUDE OIL PRICES NOT LONG-TERM
STORY OR TREND
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WHAT WILL POWER THE U.S. IN THE FUTURE?
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KEY CHALLENGES FACING
KANSAS OIL & GAS INDUSTRY
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FEDERAL LEGISLATIVE CHALLENGES
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FEDERAL ENERGY & TAX POLICY DYNAMICS
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FEDERAL REGULATORY CHALLENGES
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EMISSIONS
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• PHMSA
• Tank Gauging
• RCRA
• TRI
• TSCA
• NEPA
• Induced Seismicity
• Endangered Species Act
• PSM
• Silica Exposure
• Ozone
• WOTUS
• ONRR
• And More
FEDERAL REGULATORY ONSLAUGHT
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KIOGA REGULATORY ADVOCACY
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• EPA Report Finds No Evidence that Hydraulic Fracturing has any Systemic Groundwater Impacts
• U.S. Supreme Court Grants Stay of EPA Clean Power Plan
• Nationwide Stay Issued Against EPA “Waters of the U.S.” (WOTUS) Rule
• LPC Listing Vacated
• BLM Hydraulic Fracturing Rule Struck Down
GOOD NEWS
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GOING FORWARD INTO 2017 AND BEYOND
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Trump Leadership Council
Council for a Secure America
• Make U.S. Energy Independent
• Create Jobs and Expand
Opportunities
• Fewer & Smarter Regulations
• Make Rules More Efficient and
Effective
• Curb Lawsuit Abuse
• Keep Trial Lawyers in Check
FORM STRATEGIC COALITIONS
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KIOGA MULTIDIMENSIONAL
PUBLIC INFORMATION EFFORTS
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EXPANDING THE MESSAGE
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EDUCATING THE NEXT GENERATION
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FEDERAL & STATE LEGISLATIVE TOURS
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ENERGY FOR THE FUTURE!
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THANK YOU
www.kioga.org
Kansas Independent Oil & Gas Association
Edward Cross, President