OTC '15: North American energy leaders paint mixed picture for 2015, beyond

HOUSTON -- In a wide-ranging discussion Tuesday, energy officials and executives from the U.S., Canada and Mexico acknowledged that their E&P sectors face a number of short-term challenges, but they also are upbeat about the longer-term potential.

“We obviously have to get by the lower, current oil prices,” said Dr. Gustavo Hernández Garcia, who is general director for E&P at Mexican state firm Pemex. “For us, the key factors of low oil prices have been increased U.S. production, uncertainty over OPEC quotas, and China’s economy and resulting oil demand.”

Hernández said that for Pemex, as well as other operators that eventually will enter Mexico under the new, opened regulatory regime, there are a number of key issues that must be addressed in the low-price environment. “There has to be reduced CAPEX spending, supply chain optimization, improved cash flow, and a reduction or restructuring of debt,” he explained. “Also, companies must reassess their markets, divest non-core assets, and retain core talent while still reviewing the head count. These things must be done.”

Regarding implementation of Mexico’s E&P opening and energy market reforms, Hernández said that the government has the option of proceeding at a fast, moderate or slow-motion speed, although he personally preferred the fast approach. “If we want to achieve the full potential of these reforms, we need to implement a truly competitive market, as fast as possible,” he explained. “But if we want a more moderate pace, the government can pursue a dual regime of competitive areas and protected activity. It would be unfortunate to have the result be unrealized potential, if slow-motion implementation occurs.”

Representing the U.S. and the Obama administration, Deputy Assistant Energy Secretary Paula Gant, who heads up DOE’s Office of Oil and Gas, highlighted the trilateral cooperation that she has with her counterparts in Canada and Mexico as helping to form the basis for secure North American energy supplies. She also spoke in glowing terms about the great increases achieved in domestic oil and gas production during the last five or six years.

Noting that DOE funds a fair amount of oil and gas technology research that has contributed to increased production in some U.S. areas, Gant extrapolated the point by insinuating that the Obama administration was responsible for much of the country’s output growth, “through careful stewardship of our resources.” Judging by the murmurs that became audible in the crowd, audience members were not buying that line of discussion. As a couple of attendees remarked after the panel discussion concluded, Gant, and the Obama White House in general, can’t claim credit for the production gains, when they’ve allowed the EPA and Bureau of Land Management to consistently throw obstacles in the way of U.S. operators during the last half-dozen years.

One item from Gant’s presentation that was not in dispute are current shale play production levels, as of April 2015. “Leading the shale plays in output are the Permian basin, at 2.0 MMbopd, and the Marcellus shale at 16.7 Bcfgd,” said Gant. Right behind those two plays is the Eagle Ford shale at 1.7 MMbopd and 7.5 Bcfgd. Other top shales include the Bakken at 1.3 MMbopd, and the Utica at 2.0 Bcfgd.

Representing Canada was David Ramsay, provincial minister for Justice and Industry, Tourism and Investment in the Northwest Territories (NWT). “We are very interested in developing our province’s resource base,” said Ramsay, who noted that potential development of natural gas resources in his province would be “a natural extension” of gas-related work done in neighboring British Columbia. “We’ve spent considerable money on infrastructure improvements, particularly completion of the next leg of the Mackenzie Valley highway, which should help open the area to oil and gas exploration quite a bit. We’ve also passed new bills on air and water quality to clarify regulations for the industry.”

As the NWT legislature debates draft fracing regulations, Ramsay said he believes that “responsible NWT production in the future could help sustain North American energy supplies, even if U.S. production declines.”

Michael Bahorich, executive V.P. and chief technology officer at Apache Corp., presented his companys recent actions as an example of what many U.S. operators are doing to adjust their operations in the down market. “Back in 2009, 66% of our activity was international and in the Gulf of Mexico, and 34% was North America onshore, and our production was 537,000 boed, with a 50% liquids share,” said Bahorich. “As of fourth-quarter 2014, we had shifted to 60% onshore North America, with production of 609,000 boed, of which 62% are liquids.

“We’ve reduced our rig count in North America from 90 in third-quarter 2014 to 17 today,” continued Bahorich. “We’ve also been attacking our cost structure, consolidating acreage, lowering our decline rate and working hard to optimize our supply chain.” He added that Apache is focusing strategically on organization, technology and capital allocation. “On the technology side, we’re maximizing recovery and minimizing cost. We’ve also had $7 billion of asset sales in 2014, including an exit of LNG assets. But we’ve also added 100 people to our San Antonio office, to concentrate on one of our core areas in the Eagle Ford. We also have the third largest acreage position in the Permian, another core area.”

Flotek CEO & President John Chisholm said that from his service company point of view, “the single most important factor in today’s market is the marginal cost of production.” Chisholm wondered aloud, whether scarcity (peak oil) “is gone forever,” and “is OPEC dead, dying or just on the injured reserve list?”

The headliner for the panel was U.S. congressman Bill Flores, a Republican representing central Texas, a former oil and gas executive. “My experience allows me to understand the impacts on real-world people of over-reaching federal policies,” said Flores. “We have a situation of Obama administration disregard for the law, out-of-control regulations and out-of-touch bureaucrats.

Flores said that he and Louisiana Gov. Bobby Jindal have authored their own blueprint for energy policy, entitled, “Organizing for Abundance.” The plan focuses on development and infrastructure, technical innovation, unlocking “a manufacturing renaissance,” bolstering national security, and addressing risks of climate change. “The Jindal-Flores plan would greatly expand exploration and usage of North American oil and gas,” explained Flores. “We need to expand development on federal lands and put some of the resulting greater revenue into an energy endowment fund. We would continue working toward constructing the Keystone XL pipeline, as well.”

Some discomfort on the part of DOE’s Gant was visible, when Flores said that “use of alternative fuels, solar and biofuels, should be driven by when they’re technically and economically ready, and not driven by artificial incentives form government. Gant also visibly fidgeted, when Flores slammed the EPA for passing 19 pieces of air emissions rulemaking, targeted at the oil and gas industry, and declared that the agency’s “cost analyses are a sham.”