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Expo/Industry events for the next few months

West Virginia Oil and Gas Expo
Oct. 5, 2016
Mylan Park's Expo Center
Morgantown, WV

Midstream PA 2016
October 13, 2016
Penn Stater Conference Center
State College, PA

Latest facts and a rumor from the Marcellus and Utica Shale

  • Why the Ramp Up May Take a While?  Everyone is waiting for drilling to pick up from mountains of Northeastern PA to plains of North Dakota, to Rockies in Colorado and the oil fields in West Texas.  We are starting to see a slight blimp in the rig count in Texas and North Dakota.  Will it continue?  I don’t think anyone can forecast movement in the rig count without any degree of certainty.

    There seems to be certainty around two components when the rig counts increase which means drilling will pick up.  

    Where will E&P Companies Find Workers?

    Shale Directories have been involved in a number of industry events in 2016 in the Appalachian Basin.  At almost every event, E&P Companies have expressed concern about finding workers when drilling picks up which it will if the NatGas prices continue to be strong and reach the $3.00 - $3.50 price levels by the end of the year.

    At last week’s DUG East Conference, E&P Companies began to mention the idea that initially they may have to pay a signing bonus to get good workers to return to the oil and gas industry.  Many of the drilling areas in the Appalachian Basin had never experienced any drilling which occurred in the early years of the play.  A number of good, talented workers jumped into the oil and gas industry with its attractive compensation and benefits packages. Many of them are now in other industries with new jobs.  It remains to be seen if these workers will return.  If local oil and gas workers do not return to the industry when drilling picks up, will we see another major influx of oil and gas workers from Texas, Louisiana, Oklahoma and North Dakota?

    How ready are the rigs?

    There are hundreds of stacked rigs throughout the U.S., but they are not ready to go.  I read an opinion in OilPro last week where someone pointed out that many of these rigs have used for parts for operating rigs.  With the considerable pricing pressure on the oil field service companies, they have purchased not new parts, but rather cannibalized them from existing rigs.  Hence, when the drilling picks up considerably, there may not be enough rigs to meet the demand.

    When the drilling picks up, the phenomenon of these issues will be that the E&P Companies will pay whatever, it takes to drill.  The pricing pressures on contractors will go away.  The phrase, “I don’t care what it costs.  I need it on the well site now,” may be heard again.  

    I’ll be monitoring this closely.  Stay tuned to see if this happens.
  • Range Getting Active in Northern PA.  Range will be moving workers from Texas to Williamsport, PA to start ramping up. (RUMOR)

    If this rumor is true, it will be interesting to see local workers will return to the oil and gas industry.
  • ETE Terminates Williams Deal.  Days after a Delaware court ruled it can walk away from a $20 billion merger it wanted out of for months, Energy Transfer Equity (ETE) on Wednesday officially terminated its  merger with Williams.

    “Consistent with its rights and obligations under the merger agreement, ETE subsequently provided written notice terminating the merger agreement due to failure of conditions under the merger agreement,” Energy Transfer said in a statement Wednesday.

    Eighteen months after ETE began talks to acquire its pipeline giant rival, Delaware Chancery Court Judge Sam Glasscock ruled last Friday the company can back out of the deal.

    The value of the deal prior to the collapse in crude prices and subsequent plunge in the stock value of both companies was $33 billion.

    ETE counsel Latham & Watkins has advised Energy Transfer it was unable to deliver a required tax opinion by June 28, as per the merger agreement.

    In effect, Latham couldn’t say the deal would be tax-free, Kallanish Energy finds.

    “Williams does not believe ETE had a right to terminate the merger agreement because ETE breached the merger agreement by [among other reasons] failing to cooperate and use necessary efforts to satisfy the conditions to closing, including delivery of Latham & Watkins LLP’s Section 721(a) tax opinion,” Williams said, in a release.

    The company’s shareholders on Monday voted to approve the takeover and filed a notice of appeal.

    The proposed deal is considered one of the largest deals undone by the plunge in crude oil prices.
  • DUC’s Are Disappearing.  Producers nationwide, rather than drilling new wells during the ongoing price plunge, rather are rapidly completing the large number of “DUCs” sitting in shale plays nationwide, Ponderosa Advisors Bernadette Johnson said last week.

    The number of DUCs, drilled, but uncompleted, wells, today has fallen to roughly 3,100 nationally, according to Johnson, director of Research and Analytics at Ponderosa, addressing an audience at last week’s eighth annual DUG East Conference & Exhibition, in Pittsburgh, Pennsylvania.

    The 3,100 figure is down from upwards of 5,000 earlier this year, Kallanish Energy reports.

    DUCs piled up even as new drilling plunged, said Johnson. “Before the price collapse, the U.S. was drilling roughly 3,000 wells a month,” according to Johnson. “Today, we are drilling about 986 wells a month.”

    Johnson said she/Ponderosa projects 3.8 trillion cubic feet (Tcf) of natural gas will be storage (working gas in storage at June 17, totaled 3.10 Tcf, the Energy Information Administration reported) by the end of the year.

    Also: the basis in the Northeast (compared to Henry Hub) is tightening; prices for natural gas liquids in Appalachia are strengthening; frack spreads are slowing, with signs they are reversing; and the ethane market will tighten.
  • Shell Provides More Information about the Cracker.  Royal Dutch Shell's decision to build a multibillion-dollar petrochemical plant in Beaver County came down to three key considerations: location, location and tax incentives.

    Pennsylvania lies above the ethane the facility will consume, is close to most customers of the polyethylene it will produce, and offered the global energy giant a package of credits worth as much as $1.6 billion over 25 years.

    “I can tell you, hand to my heart, that without these fiscal incentives, we would not have taken this investment decision,” Shell Appalachia Vice President Ate Visser told industry officials who gathered Downtown on Tuesday for the Northeast U.S. & Canada Petro­chemical Construction Conference.

    Visser elaborated on the reasons for picking the site along the Ohio River in Center and Potter , and explained the project's time line, three weeks after the Anglo-Dutch company made its final decision to build the plant. It was the first public comments on the ethane cracker from a Shell official since the June 7 announcement.

    “We're sitting here in a world-class resource base at the door of the customer,” Visser said during a discussion of natural gas liquids such as ethane, a product of many of the Marcellus and Utica shale wells in this region. “This will give us long-term, sustainable, competitive advantage.”

    PA Lawmakers in 2012 approved a package of incentives aimed at luring Shell. They authorized a tax credit for companies that use ethane — in this case to make the building blocks of plastic — that invest more than $1 billion and employ more than 2,500 workers during construction. They also extended a tax-free Keystone Opportunity Zone in Beaver County and provided other grants.

    Officials said the plant will employ 6,000 construction workers, create 600 good jobs for operation and attract related manufacturers to build additional facilities.

    “They have options to go anywhere in the world. Shell had a number of major investments they were considering along with this one, all over the world,” state Economic and Community Development Secretary Dennis Davin said earlier in the petrochemical conference.

    When Shell this month ended nearly five years of suspense over whether it would go ahead, it said construction would begin in 18 months, with completion set for early in the next decade.

    Visser noted spending cuts Shell has implemented in recent years as global oil prices crashed. He called the wait “consistent with managing our capital situation, our capital discipline, affordability in the current low-oil-price environment.”

    The delay gives Shell time to finish design work and preparation of the site, which began more than a year ago and involves construction of a bridge and two river docks, relocation of State Route 18 and CSX Transportation train tracks, and movement of 7.2 million cubic yards of dirt to cap soil polluted by the zinc smelter that was there.

    “It means when we start with main construction, we'll have all our ducks in a row,” Visser said.

    It also gives time for an increased ethylene supply from Gulf Coast crackers that are starting operation over the next few years to be absorbed by the market, he said.

    Shale gas drillers say having Shell build here will benefit an industry hit by low prices and reduced activity over the past two years. Shell will consume about 100,000 barrels per day of ethane, which will come from 10 companies including Marcellus producers Antero Resources, Consol Energy and PennEnergy Resources.

    “The best thing you can do for production is have the demand right at home, right in the basin,” said Steve Woodward, a senior vice president at Antero, the top ethane supplier for the plant. “It creates jobs. It creates a number of synergistic possibilities all around.”
  • Upbeat Drillers Comments on Cracker and Exporting.  Royal Dutch Shell’s decision to build its ethane cracker near Monaca, Pa. and Dominion Resources’ plans to export liquefied natural gas from the Cove Point facility in Maryland give industry leaders hope that demand for their products will continue to grow.

    As drillers dig deeper and farther to achieve maximum output from wells, the limits of the Marcellus and Utica shale boom continue to stretch.

    “We are building crackers,” said Bernadette Johnson, managing director of Ponderosa Advisors, which provides analytical research for the industry, said while speaking during the 2016 DUG East Conference this week. “This is very good for the Marcellus and Utica region.”

    Recently, the U.S. Energy Information Administration projected domestic ethane production to grow from 1.1 million barrels per day in 2015 to 1.4 million barrels each day in 2017, an increase of 300,000 barrels daily — with a significant portion to be drawn from Marcellus and Utica drilling. In fact, there is so much ethane in the region that pipeline operators Sunoco Logistics and Kinder Morgan collectively plan to spend about $3.5 billion to move the liquid out of Ohio, West Virginia and Pennsylvania for processing elsewhere.

    Industry leaders believe Shell’s ethane cracker makes it more likely that PTT Global Chemical will eventually decide to build a similar facility at Dilles Bottom because Shell’s commitment shows the projects are viable in the region.

    As global energy demands increase, U.S. natural gas can help quench the thirst for power, but only if producers can move their fuel abroad.

    Tom Petrie, chairman of the Petrie Partners advisory firm, also believes LNG terminals such as Dominion’s $3.8 billion Cove Point project will energize the sluggish drilling industry when they go into service. Dominion officials intend to have Cove Point operational before the end of 2017.

    “Cove Point has direct implications for you here in Appalachia,” Petrie said during the conference.

    When natural gas is cooled to minus-260 degrees Fahrenheit, it becomes a liquid that is one-six hundredth of its gaseous volume, making it easier to transport via vessel, according to the EIA.

    Recently, a ship departed the Cheniere Energy site in Louisiana loaded with LNG on its way to Brazil, while the company works on a similar plant in Texas. Petrie said encouraging more LNG exports could benefit the economy.

    “I think U.S. LNG exports could be one of the best job-creating opportunities,” he said.

    The amount of natural gas producers can draw from a single well should continue to increase, as the Eclipse operates its 3.5-mile long “Purple Hayes” well near Quaker City in Guernsey County. Company officials believe this is the longest horizontal shaft ever drilled onshore.

    “We’re very proud of the ‘Purple Hayes’ well,” Eclipse Senior Vice President Oleg Tolmachev said during DUG. “This allows us to reduce costs.”

    Horizontal drilling and fracking calls for drilling a vertical well two miles or deeper into the ground, while the contractors then drill a horizontal shaft from that point.

    After this, a fracking crew pumps millions of gallons of water, sand and chemicals into the well at high pressure to shatter the shale, which releases the valuable natural gas.

    “The well has a total measured depth of 27,048 feet, inclusive of the lateral extension. I am pleased to say that the drilling and completion of the well progressed almost exactly as designed, which, although expected by us, was truly remarkable and groundbreaking execution by our team,” Eclipse Chief Operating Officer Thomas Liberatore added.
  • Southwest Strengthens Balance Sheet.  Southwestern Energy said Monday it has entered into agreements with substantially its entire bank group for its $2 billion revolving line of credit and its $750 million term loan, to extend maturities and modify certain terms and conditions.

    “We have taken a significant step in managing our debt maturities and liquidity,” said Bill Way, Southwestern CEO.  “We have extended liquidity availability and a major portion of our debt by two years with only modest additional cost and covenants.  These actions deliver on the plan we discussed previously to strengthen the balance sheet … .”

    The company has entered a new $1.93 billion credit facility, consisting of a $1.19 billion secured term loan and a $743 million revolving credit facility, both due Dec. 14, 2020, Kallanish Energy reports.
  • New Life for Kinder’s Utopia Pipeline.  Kinder Morgan Inc. is getting a partner on its planned Utopia Pipeline across northern Ohio.

    The Texas-based pipeline giant announced on Tuesday that it had sold a 50 percent equity interest in the project to Riverstone Investment Group LLC of New York City.

    To acquire its ownership interest, Riverstone agreed to an upfront cash payment provided at closing, consisting of reimbursement to Kinder Morgan for its 50 percent share of prior capital expenditures related to the project and a payment in excess of capital expenditures to recognize the value created by Kinder Morgan in developing the project to this stage.

    Riverstone has also agreed to fund its share of future capital expenditures necessary to complete construction and commissioning of the pipeline.

    The $500 million pipeline is planned to carry liquids drilled from Ohio’s Utica Shale to Fulton County near Toledo where it would connect to an existing pipeline.

    It would run about 215 miles from the eastern terminus in Harrison County. Locally, it would pass through southern Stark and Wayne counties.

    The pipeline, 12 inches in diameter, will ship about 50,000 barrels of liquids per day. That could be boosted in the future.

    Construction would likely take place in 2017 and the line could begin services in late 2017 or early 2018.

    The name Utopia stands for Utica To Ontario Pipeline Access.

    The liquids, including ethane and propane, would be shipped to NOVA Chemicals Corp. for use as feedstock for producing plastics at its plant in Corunna, Ontario. There is capacity for additional customers.

    “The Utopia Pipeline will connect growing ethane supply sources in Ohio to the expanding petrochemical market in Sarnia,” said Don Lindley, president of Kinder Morgan’s Natural Gas Liquids, Products Pipelines.

    Added Steve Kean, Kinder Morgan president and chief executive officer: “This agreement also demonstrates our ability to originate projects with attractive returns that partners are willing to pay to participate and invest in.”

    The pipeline must be approved by several federal and state agencies but it does not require approval of the Federal Energy Regulatory Commission, as is required for the Nexus and Rover pipelines across northern Ohio. That is because the Utopia Pipeline does not cross state lines and it is not transporting natural gas.

    Kinder Morgan has scrapped plans for a second 12-inch pipeline for natural gasoline originally planned along the same Ohio route. The Utopia West Pipeline would have connected with the existing Cochin Pipeline in northwest Ohio to transport that liquid to Kankakee, Ill., and on to Alberta in western Canada to be used by Canadian tar sand producers.
  • New Player in the Bakken.  Independent refiner Tesoro has acquired a struggling 20,000-barrel-per-day oil refinery in southwestern North Dakota for an undisclosed price, Kallanish Energy learns.

    North Dakota-based MDU Resources and Indianapolis, Indiana-based Calumet Specialty Products Partners spent $430 million to build the Dakota Prairie Refinery in Dickinson, North Dakota.

    The refinery, which produces diesel, has yet to turn a profit since it came online last year.

    The plant lost $7.2 million in the first three months of the year, and officials in May announced plans to operate it at only 75% capacity.

    MDU Resources subsidiary WBI Energy on Monday bought out a subsidiary of Calumet and sold the refinery to a Tesoro subsidiary.

    “As a publicly traded corporation and a longtime North Dakota company, we felt a responsibility to our shareholders and to the state to find a solution that addressed the refinery’s financial challenges, while ensuring it would continue operating and contributing to its neighboring communities and the state,” MDU Resources CEO David Goodin said.

    When the refinery project was announced in February 2013, developers said the plant would provide fuel for drilling rigs and for trucks, trains and other equipment in the Bakken play.

    At the time, there were 184 drilling rigs in the region, each using about 3,000 gallons of diesel daily. There were only 31 rigs operating on Tuesday.

    Tesoro, which also owns a refinery in Mandan, North Dakota, about 100 miles to the east of Dakota Prairie, said the purchase of the Dickinson refinery gives it “strategic access” to crude from the Bakken and presents an opportunity for growth in the state.

    Tesoro will assume the $66 million in debt and contribute about $10 million toward working capital, the company said.

    “We expect to generate more than $20 million in annual operating income from this business — even if the current economic conditions continue,” said Greg Goff, Tesoro’s CEO.
  • Check out the Difference Between a Cracker in Appalachian Basin vs. Europe.  The cost to build an ethane cracker in the U.S. Northeast/Appalachian Basin in 2020, will cost roughly $250 million more that if the same facility was built along the U.S. Gulf Coast, according to data released by Petrochemical Update.

    Speaking to a standing room-only audience at the first Petrochemical Update-presented Northeast U.S. & Canada Petrochemical Construction Conference and Exhibition in Pittsburgh, Mike Devanney quickly added despite the huge price differential, there are advantages to locating in the Northeast.

    “The 16%, $250 million, higher cost – 60% of which are cost overruns — to build a cracker in the Northeast is large, there are advantages to building a facility in the Northeast,” according to Devanney, a retired executive with analytics firm IHS.

    The list of advantages includes readily available, low-priced ethane, because of its location – literally under the footprint of any proposed Appalachian cracker.

    Kevin Swift, chief economist for the American Chemistry Council, backed Devanney’s statement with hard data.

    “The price of naphtha in Europe [the region where naphtha is used in crackers] sells for $470 a metric tonne, while the cost in the Northeast for ethane is 18 cents a gallon.

    Comparing apples to apples, with 358 gallons in a metric tonne, the cost for a metric tonne of ethane would be roughly $64.44 – more than 700% lower than the same amount of naphtha.

    Devanney also said transportation costs are much lower for product produced from a cracker and nearby derivatives units, as compared to moving the same products from the Gulf Coast.

    Finally, three of the four publicly proposed crackers for the Northeast, including Shell Chemical’s project in Beaver County, Pa.(which just received a “go” earlier this month), the PTT-Marubeni joint venture in Belmont County, Ohio, and the Braskem project in Wood County, West Virginia, are owned by foreign companies.

    “Foreign plants favor exports,” according to Devanney. “The Northeast offers lower rail costs.

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Rig Count

  • Baker Hughes Rig Count the week of July 1, 2016
  • PA
    • Marcellus 13 unchanged
  • Ohio
    • Utica 12 unchanged
  • WV
    • Marcellus 11 unchanged
  • TX
    • Eagle Ford –33 down 1
  • TX & NM
    • Permian Basin – 154 up 4
  • ND
    • Williston – 26 unchanged
  • CO
    • Niobrara – 14 up 2
  • TOTAL U.S. Land Rig Count 408 up 11

PA Permits for June 16, to June 23, 2016

       County     Township            E&P Companies

1.    Butler        Butler Township     XTO
2.    Sullivan      Davidson              Exco
3.    Tioga         Middlebury            Schell

OH Permits for weeks ending June 18, 2016

        County     Township    E&P Companies

1.    Jefferson    Ross            Chesapeake
2.    Jefferson    Salem           Chesapeake

Joe Barone 610.764.1232
Vera Anderson 570.337.7149

Utica Summit 2019