WEEKLY ENERGY RECAP: Pondering Permian pipeline

A pump jack operates in the Permian Basin oil production area near Wink, Texas U.S. August 22, 2018. (REUTERS)
Updated 11 August 2019

WEEKLY ENERGY RECAP: Pondering Permian pipeline

Oil prices tumbled last week as Brent crude fell below $60 per barrel for the first time in eight months. Brent finished at $58.53 while WTI fell to $54.50 per barrel.
Some analysts suggest that Brent has dropped on fears that the trade spat will expand into a full currency war, overshadowing the risk of supply disruptions in the Arabian Gulf. There has also been much attention paid to gloomy global economic sentiment dragging the oil price down — yet demand continues to be strong in China, the world’s biggest buyer of crude oil, and that has been reflected by record high imports.
We should instead consider the financial fragility of the US shale industry amid tightening of liquidity that has made it clear that US shale requires longer investment horizons than expected. The US oil rig count is at a 19-month low amid a broad drilling slowdown.
Shale risks being left behind by increasingly skeptical US capital markets. Drilling has slowed in the Permian Basin, and the slowdown has been even more acute outside this region.
The key mathematics of US shale oil growth have become more challenging, partly because of the rapid growth achieved in 2018. Decline rates for existing wells have risen, and production growth means the month-to-month decline is applied across a higher base. Changes in Permian well productivity estimates suggest that shale is much less resilient and hence output growth is set to slow sharply amid lower plans for capex.
Small and mid-sized shale producers have suffered from a financing squeeze since late 2018 when oil prices plummeted to similar prices levels. Shale investors are growing weary of a sector that has struggled to generate cash returns.
US loans to sub-investment energy companies fell by a third in the first half of 2019, compared with the same period last year.
Equity offerings were down by two-thirds and bonds by half. Shareholder pressure on larger explorers has dampened interest in acquisitions. This makes the capital constraints facing smaller producers all the more onerous, with investors shunning the space enough to crush equity values and kill off attempts to build scale.
Last year saw midstream operators deftly circumvent anticipated capacity shortfalls through de-bottlenecking and accelerated construction schedules.
Estimates vary, but the market largely expects a major shortfall in Permian pipeline takeaway capacity to persist late into 2019. At that point, Permian producers are expected to breathe a collective sigh of relief, with no further oil infrastructure bottlenecks on the horizon till 2020.
The Permian Basin continues to dominate US shale oil output growth but the rapid pace is becoming increasingly difficult to sustain in the face of pipeline constraints.
So far, infrastructure expansion has failed to keep pace with Permian output growth. So the future sustainability of oil recovery in the Permian is still questionable as shale producers have different levels of exposure to the bottlenecks.

Faisal Faeq is an energy and oil marketing adviser. He was formerly with OPEC and Saudi Aramco. Twitter:@faisalfaeq


US President Trump does not want to do business with China’s Huawei

Updated 19 August 2019

US President Trump does not want to do business with China’s Huawei

  • US Commerce Department expected to extend a reprieve that permits Huawei to buy supplies from US companies to service its customers

WASHINGTON: US President Donald Trump on Sunday said he did not want the United States to do business with China’s Huawei even as the administration weighs whether to extend a grace period for the company.
Reuters and other media outlets reported on Friday that the US Commerce Department is expected to extend a reprieve given to Huawei Technologies Co. Ltd. that permits the Chinese firm to buy supplies from US companies so that it can service existing customers.
The “temporary general license” will be extended for Huawei for 90 days, Reuters reported, citing two sources familiar with the situation.
On Sunday, Trump told reporters before boarding Air Force One in New Jersey that he did not want to do business with Huawei for national security reasons.
He said there were small parts of Huawei’s business that could be exempted from a broader ban, but that it would be “very complicated.” He did not say whether his administration would extend the “temporary general license.”
Speaking earlier on Sunday, National Economic Council director Larry Kudlow said the Commerce department would extend the Huawei licensing process for three months as a gesture of “good faith” amid broader trade negotiations with China.
“We’re giving a break to our own companies for three months,” Kudlow said on NBC’s “Meet the Press.”