Daniel B. Markind, Esq.
Weir and Partners, LLP

There is a lot of oil and gas turmoil out there now, but the industry has been there many times before and there is a future, based on good foundations laid.

As predicted, administrators in Oklahoma ordered well volumes reduced in injection wells that receive the waste water from hydraulic fracturing operations.  Yesterday, state regulators ordered 27 wastewater injection wells located in Northwestern Oklahoma to decrease by 18 percent their average daily intake.

The move came following a series of earthquakes that the Oklahoma Geological Survey claimed was “very likely” the result of subsurface injection of wastewater from drilling operations.  On January 6, the U.S. Geological Survey recorded a magnitude 4.7 earthquake near Fairview, Oklahoma, about 60 miles from the Kansas state line.  Less than one minute later, a 4.7 earthquake was recorded a half-mile away.  The next day, two magnitude 4.0 earthquakes hit. It is reflective of some of the oil and gas turmoil that exists right now.

The Oklahoma plan is part of a “much larger approach” that Tim Baker, Director of the Oklahoma Corporation Commission’s Oil and Gas Conservation Division, says is needed.  It also comes one day after residents of Logan County, about 35 miles northwest of Oklahoma City, filed a class action lawsuit seeking redress for the damages caused by the earthquakes.  Clearly, the old way of business will not be sustainable for wastewater, especially in Oklahoma.

Oklahoma’s move comes as economic woes continue to bedevil the industry.  Today, J.P. Morgan announced it was setting aside 49% more year over year for credit loss provisions, including $124 million against potential bad debts in its oil and gas portfolio. This came during an otherwise extraordinary earnings report by the bank, which maintained almost equal revenue from last year despite decreasing its assets by over $200B.

Energy drillers will not be so fortunate. Fuel Fix reported that a study by consultancy AlixPartners revealed North American oil drillers were likely to come up $102 billion short on the cash they need to operate in 2016 as the oil price falls to $30 barrel (with some predicting $20 and a few suggesting it might fall to $10).

Individually, the stock prices of oil and gas drillers are getting walloped.  Chesapeake Energy’s stock price has fallen 80% from last year, Southwestern 74%, Range 52% and Cabot 48%.  Indeed the U.S. Energy Information Agency now predicts it will not be until late in 2017 before world gas and oil supply and demand begins to rebalance.  One need only look at the active rig count in the Marcellus to see the carnage.  Currently it stands at 37.  Last year at this time it was at 77.

With all the bad news, the good news is that the companies are more efficient than ever and able to produce more than ever.  And, not all forecasts of future oil and gas prices are negative.  Some see a fairly quick return to the $40-50 range for oil, with equivalent rises for gas.  The capture earlier this week of two small U.S. Navy ships by the Iranians shows just how volatile the Middle East situation is.  Unrest in this region generally leads to energy price increases.

Photo of recent Iranian capture of US sailors (now released)

Into the breach could step the United States.  In February, the first shipment of Marcellus Shale ethane will sail from the Port of Philadelphia to Norway and Scotland, via the Mariner East 1 pipeline from Western Pennsylvania to Sunoco Logistics’s refinery in Marcus Hook, Pennsylvania.  European chemical producer INEOS has spent $1B completing the link between Southeastern Pennsylvania and Norway by creating a fleet of 575-foot tankers to ferry ethane from the Philadelphia Metropolitan Area to  chemical plants in countries whose feed stock of ethane is dwindling from declining North Sea fields.

Mariner East 2 would quadruple Marcus Hook’s capacity and further cement Philadelphia as an energy hub, allowing exports to Sweden.  As with so much else in this field at this time, however, what seems an obviously beneficial move economically, politically and yes ecologically is being fought hard all along its route.

One would think that given the current world situation, the United States would build out its infrastructure and modernize its pipeline system.  One would be wrong.  As reported here numerous times, New York State continues to hold up the 401 Clean Streams Permit needed to construct the Constitution Pipeline that would connect the Marcellus gas fields in Northeastern Pennsylvania to the Tennessee Pipeline in Schoharie County, New York, south of Schenectady.

From there gas could be delivered to New England, which is currently partially dependent on imported gas from Yemen.  At New York’s request, Constitution Pipeline Company, LLC, the owner of the pipeline, resubmitted its application for a 401 Permit last April.  That gave New York until April 2016 to make a decision.  New York has shown no inclination or willingness to move faster.   It is doubtful the members of the LLC (Williams Partners, L.P., Cabot Oil & Gas Corporation, Piedmont Natural Gas Company, Inc. and WGL Holdings, Inc.) will be so accommodating next time New York State requests something from them.

The Mariner and Constitution stories, and of course the Keystone situation, are examples of an erosion of trust between the private and public sectors.  That is very unfortunate, given America’s current advantages.  To put everything in perspective, as difficult as things are for United States energy concerns, they are much worse abroad.

In Russia, where half of government revenue comes from energy exports, the Putin government is cutting spending another 10%, on top of a 10% spending cut last year.  Russia’s top financial official, Anton Siluanov, ordered all government departments to come up with ideas for new cuts.  Saudi Arabia posted a record $98B budget deficit in 2015.  Iran reemerges onto the world oil exporting stage but its production will only retard any price rebound.

On a relative scale, the United States and domestic producers are doing remarkably well.  That will not mollify those who are losing their jobs or in danger of losing their investment, but it should guide both political and business decision makers as we head into the 2016 election year.