The oil and gas industry began 2019 hoping to thrive and ended the year mostly happy to survive.
Offshore drilling dominated exploration but, despite several significant discoveries, reserve replacement rates remained low. Global geopolitical tensions simmered and sometimes boiled over throughout last year.
In oil and gas prices, “Lower-for-Longer” came back to linger.
The world saw abundant crude oil production and a surfeit of natural gas. By the end of the year, a slowdown in U.S. shale development loomed and OPEC had pledged yet another production cutback in hopes of propping up prices.
Optimism about crude prices prevailed at the start of 2019, despite recent declines. Brent crude had peaked at more than $80 per barrel in October 2018, only to fall back by year-end.
Still, projections pointed to an uplift in prices with producers hoping U.S. benchmark West Texas Intermediate crude would average well over $60 during the year.
It didn’t happen. WTI crude rallied to more than $65 in April then dropped to about $51 in June, and spent the rest of the year mostly bouncing around between $55-$60 a barrel. Analysts agreed about the root cause of the price weakness: too much production, too much available product.
In an article for the Bloomberg news service in June, Javier Blas wrote, “The first tentative glances into 2020 by oil consultants are nearly unanimous about the prospect of oversupply – a view shared in private by major commodity trading houses. The surpluses are all the more remarkable because none is predicting a recovery in Iranian and Venezuelan output.”
If oil prices slipped off the rails last year, natural gas prices looked more like a complete train wreck. Gas futures prices in the United States, which had climbed above $3.50/million BTU (MMBtu) in the last quarter of 2018, took a nosedive in 2019.
By August, those futures had fallen below $2.15/MMBtu. Prices rallied in October but dropped again as the year drew to a close.
In September, analytics and information company IHS Markit predicted the average Henry Hub gas price would fall below $2/MMBtu in 2020, “the lowest prices have averaged in real terms since the 1970s. In nominal terms, the last time that prices fell below $2 was 1995,” it reported.
Sam Andrus, IHS Markit executive director covering North American gas markets, said, “It is simply too much too fast. Drillers are now able to increase supply faster than domestic or global markets can consume it. Before market forces can correct the imbalance, here comes a fresh surge of supply from somewhere else.”
The industry chalked up a number of impressive exploration successes in 2019 as offshore drilling again dominated exploration efforts. Discoveries continued in the Guyana-Suriname Basin and in the eastern Mediterranean.
Kosmos Energy hit a significant gas find offshore Mauritania with its Orca-1 well. Shell announced a second large Perdido-area Wilcox discovery at its Blacktip prospect in the Gulf of Mexico.
Total and partners made South Africa’s first important deepwater discovery in the Outeniqua Basin. Gazprom reported major success in Russia, and Iran hinted at uncovering a huge new field.
But a worrisome trend continued as conventional oil discoveries replaced only a fraction of expenditures from existing reserves.
In October, consulting and analysis firm Rystad Energy reported the “resource replacement ratio for conventional resources now stands around 16 percent, which is the lowest seen in recent history.”
“This means that only one barrel out of every six consumed is being replaced by new sources. This is the lowest replacement ratio we have witnessed in the last two decades,” said said Palzor Shenga, Rystad Energy senior analyst.
In December, the firm updated the replacement ratio to 23 percent, “which is slightly better than the 21 percent for 2018. But we are still below” 2013-2015 levels, said Shenga.
Permian Basin Woes
Operators in the Permian Basin faced a growing problem in the second half of 2019. Access to shale oil and other liquids remained strong, but access to capital had begun to weaken seriously.
Industry observers noted two causes. First, investors were demanding better returns from Permian production. An often-quoted statistic said drillers in the basin had burned through $200 billion in investment during the past decade.
Second, stocks of Permian-play companies had fallen out of favor. According to Bloomberg, the S&P 500 Oil & Gas Exploration stock index dropped 21 percent in the last 10 years, as most other sectors zoomed upward.
And investor dollars weren’t the only thing Permian players were burning. Flaring or venting associated gas became a widespread practice. In November, Pioneer Natural Resources CEO Scott Sheffield called it “the biggest problem” in the basin.
Ryan Duman, principal analyst-Lower 48 upstream for Wood Mackenzie, told the EXPLORER that medium term spending demands “could erode some of the ultra-low breakevens” companies had achieved in the Permian Basin. He predicted a coming round of consolidation with the number of operators in the basin falling off over the next five years
In Other News
Who’s who and who’s leaving town? Last year TransCanada Corp. changed its name to TC Energy, Vanguard Natural Resources to Grizzly Energy, Park Place Energy to Trillion Energy, Huntley and Huntley to Olympus Energy, DrillingInfo to Enverus. Encana Corp. made plans to move its headquarters from Calgary to Denver and become known as Ovintiv Inc.
Ensco and Rowan merged as Valaris plc, and the new company announced itself as the world’s largest offshore drilling contractor.
T. Boone Pickens, legendary U.S. independent, died in September at the
age of 91.
Last year the Federal Energy Regulatory Commission approved multiple LNG terminal plans and other gas-export projects, making the United States the world’s fastest growing LNG exporter – at a time when some LNG markets around the world already appeared oversupplied.
As the year wound to a close, Exxon Mobil won a lawsuit brought by the state of New York, which claimed the company had misled investors about the financial risks of climate change. Weatherford International emerged from a Chapter 11 bankruptcy.
And OPEC and affiliated producers, known as “OPEC+,” agreed to deepen oil production cuts by an additional 500,000 barrels/day to at least March 2020, reducing their total output by 1.7 million barrels/day in yet another attempt to stabilize world oil prices.