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Natural Gas Prices Surge on Larger-Than-Expected Inventory Draw

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Natural-gas inventories shrank by 117 billion cubic feet in the week ended Jan. 1

NEW YORK–Natural-gas futures soared Thursday after weekly inventory data showed that stockpiles fell more than expected last week.

Natural-gas inventories shrank by 117 billion cubic feet in the week ended Jan. 1, the U.S. Energy Information Administration said Thursday. Analysts and traders surveyed by The Wall Street Journal had expected the agency to report a 100-bcf withdrawal.

Futures for February delivery extended gains on the news and recently rose 15.1 cents, or 6.7%, to $2.418 a million British thermal unit on the New York Mercantile Exchange, on track for the highest settlement since October.

“Finally we got a real winter scenario,” said Bob Yawger, director of the futures division at Mizuho Securities USA Inc. “That had been something that was not showing up.”

Inventories remain 15% above five-year average levels for this time of year.

Moderate weather-driven demand and robust production has pushed the natural-gas market into oversupply in recent months. Stockpiles usually start drawing in early winter as more consumers use natural gas for indoor heating, but mild temperatures this winter meant that inventories kept growing until late November.

However, frigid temperatures appeared across much of the U.S. last week, driving stronger demand.

Storage withdrawals could near 200 bcf a week in the next two weeks due to continued cold weather, said Kyle Cooper, an analyst at IAF Advisors in Houston.

“We are entering the historically coldest time of year,” Mr. Cooper said. “We still have high relative inventory levels to deal with, but the underlying balance is actually quite bullish.”

Too Good to Be True? Unique Tax Aspects of the Oil and Gas Industry

Red-Velvet-Bundt-Cake-5-of-5Would you be excited as an investor if you had the chance to invest a sum of money late in the tax year and yet deduct almost your entire investment as a business expense in the year you invested?

This “have your cake and eat it too” result can be accomplished with the right type of investment and proper planning.

Drilling Costs can be written off against active income in the year they are incurred. Here is how it works:

  • Intangible Drilling Costs: These costs include everything but the actual drilling equipment. Labor, supplies, chemicals, mud, grease and other miscellaneous items necessary for drilling are considered intangible. These expenses generally constitute up to 80% of the total cost of drilling a well and are 100% deductible in the year incurred. For example, if an investor contributed $100,000 to drill a well, and if it were determined that 75% of that cost would be considered intangible, the investor would receive a current year deduction of $75,000. Furthermore, it doesn’t matter whether the well actually produces or even strikes oil. As long as it starts to operate by March 15 of the following year, the deductions are allowed.
  • Tangible Drilling Costs: Tangible costs pertain to the direct cost of the drilling equipment itself, i.e., the drilling rig, motors, tanks, etc. These expenses are also 100% deductible, and will be depreciated over seven years. Therefore, in the example above, the remaining $25,000 could be written off according to a seven-year schedule.
  • Active vs. Passive Income: The tax code specifies that a working interest (as opposed to a royalty interest) in an oil and gas well is not considered to be a passive activity. This means that all net losses are active income incurred in conjunction with well-head production and can be offset against other forms of income, such as wages, interest, capital gains, etc. This is significant because high net worth investors frequently have more passive write offs but higher active income; therefore, many deductions are never utilized. Not so in oil and gas investing.

There are numerous issues to consider before adopting this type of structure that are not addressed here. This article is intended merely to demonstrate that proper planning can make major differences in outcomes when it comes to income taxation of oil and gas operations. For More In Depth information Click Here

 

Fracking Drives Oil and Gas Reserves to Record Levels

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American oil and natural gas reserves are at their highest levels since 1972, according to a new analysis released by the Institute for Energy Research on Thursday.

Most of the new reserves are due to hydraulic fracturing, or fracking.

“The fact is, we’re not running out of energy, we’re running into it,” IER spokesman Chris Warren told the Daily Caller News Foundation. “Our proved reserves of oil and natural gas are hitting record levels thanks to innovations in hydraulic fracturing and horizontal drilling technologies, which have allowed companies to tap into our vast shale resources.”

“The shale boom has put to bed the idea of ‘peak oil,’” Warren added. “It is also proof that real energy solutions come from American ingenuity rather than subsidies and mandates.”

 

American reserves of crude oil and natural gas have risen for six consecutive years, although the U.S. produced more oil and natural gas than any other country in 2014, according to the EIA.

American oil production in 2014 was 80 percent higher than in 2008. And the United States produced an average of about 9.3 million barrels of crude oil per day in June. These huge increases in production and reserves are directly attributable to exploitation of tight oil formations and shale gas via fracking.
America controls the world’s largest untapped oil reserve, the Green River Formation in Colorado. This formation alone contains up to 3 trillion barrels of untapped oil shale, half of which may be recoverable. That’s five and a half times the proven reserves of Saudi Arabia. This single geologic formation could contain more oil than the rest of the world’s proven reserves combined.

SAFE HARBOR STATEMENTS:
Certain statements in this blog post may contain forward-looking information within the meaning of Rule 175 under the Securities Act of 1933 and Rule 3b-6 under the Securities Exchange Act of 1934, and are subject to the safe harbor created by those rules. All statements, other than statements of fact, included in this release and other potential future plans and objectives of the company, are forward-looking statements that involve risks and uncertainties. There can be no assurance that such statements will prove to be accurate and actual results and future events could differ materially from those anticipated in such statement.

 

Low oil prices could lead to global fuel shortages in the future, the IEA has warned.

8c837f9f-5246-460c-8d68-fd8679db4d46The IEA said Tuesday that while low prices are good for consumers, they could eventually “trigger energy-security concerns.”The low prices are squeezing U.S. shale and other high cost producers. Many have been forced to slash investment budgets to cope with the new reality.The IEA said that spending on exploration and production has fallen 20% this year, and it warned against further cuts.

Now is not the time to relax. Quite the opposite: A period of low oil prices is the moment to reinforce our capacity to deal with future energy security threats,” said Fatih Birol, IEA executive director.

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The watchdog’s main scenario is for prices to gradually recover to around $80 a barrel by 2020, assuming a pick up in global economic growth and hence demand for oil.
But there is a serious risk that prices will stay around $50 a barrel until the end of the decade. If that happens, the IEA warned, the world will be forced to rely on a small number of Middle Eastern producers. Most other producers would find prices that low unsustainable, and would be priced out of the market.

SAFE HARBOR STATEMENTS:
Certain statements in this blog post may contain forward-looking information within the meaning of Rule 175 under the Securities Act of 1933 and Rule 3b-6 under the Securities Exchange Act of 1934, and are subject to the safe harbor created by those rules. All statements, other than statements of fact, included in this release and other potential future plans and objectives of the company, are forward-looking statements that involve risks and uncertainties. There can be no assurance that such statements will prove to be accurate and actual results and future events could differ materially from those anticipated in such statement.

Drillers Unleash ‘Super-Size’ Natural Gas Output

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In spite of current low prices, the enormous amounts of natural gas contained in the U.S. subsoil make it very profitable to extract if modern drilling techniques are used.

Some energy companies taking advantage of these advances are extracting gas from the Haynesville Shale, which spans Louisiana and Texas. The gains come from extending horizontal drilling by thousands of feet.

Experts claim that if this trend continues, the era of low American gas prices could extend for decades into the future. The cost of natural gas is important because it increasingly powers the U.S. economy and its demand has risen at a 2.4% annual growth rate during the last decade.

The Haynesville field, which produces 8% of the nation’s natural gas, is the second largest in the United States after the Marcellus Shale. Moreover, it has the benefit of being located near several major pipelines and industrial facilities, thus, an increase in production would have a large impact on gas prices across the entire country.

Production of natural gas has gained relevance because:

  • Domestic natural gas is abundant and inexpensive, mainly due to the newer drilling and extraction techniques.
  • Gas now is used to generate about 30% of U.S. electricity and heat nearly half of all American homes.
  • Its cost is critical to the current administration’s aim to reduce carbon emissions in electricity generation.

Furthermore, the costs of extracting gas using hydraulic fracturing have fallen recently. Experts agree that inexpensive gas will have a profound impact on energy generation and the overall U.S. economy.

SAFE HARBOR STATEMENTS:
Certain statements in this blog post may contain forward-looking information within the meaning of Rule 175 under the Securities Act of 1933 and Rule 3b-6 under the Securities Exchange Act of 1934, and are subject to the safe harbor created by those rules. All statements, other than statements of fact, included in this release and other potential future plans and objectives of the company, are forward-looking statements that involve risks and uncertainties. There can be no assurance that such statements will prove to be accurate and actual results and future events could differ materially from those anticipated in such statement.

Oil to climb ‘substantially’ higher

Pumpjacks taken out of production temporarily stand idle at a Hess site while new wells are fracked near Williston, North Dakota November 12, 2014. REUTERS/Andrew Cullen

Pumpjacks taken out of production temporarily stand idle at a Hess site while new wells are fracked near Williston, North Dakota November 12, 2014. REUTERS/Andrew Cullen

World oil prices will rise “substantially” in the coming months after hitting the bottom of a months-long rout several weeks ago, with a supply squeeze looming as early as this summer, according to PIRA Energy’s Gary Ross.

The “magic of price” has caused a rapid resurgence in global oil demand and triggered a surprisingly steep collapse in the number of U.S. drilling rigs that may be more difficult to reverse than many expect, Ross, a founder and executive chairman of influential consultants PIRA Energy Group, told Reuters in an interview.

“The balance is getting tighter and while we’ve accumulated quite a bit of inventory, and we may accumulate a bit more, the worst is pretty much over,” said Ross.

And Saudi Arabia’s spare production capacity has dwindled as the kingdom pumps oil at a record rate, leaving the global market facing a summer of higher demand and growing geopolitical risks with a spare supply cushion of as little as 700,000 barrels per day (bpd), or around 0.7 percent of the market.

“The world has been focused for the last six months on destroying supply,” Ross said on Monday. “Increasingly the mindset is going to change, they’ll have to start thinking about creating supply again, and that’s going to mean a lot higher prices than today. Substantially higher.”

To see a video of the interview: reut.rs/1DxWk93

PIRA, one of the first big energy consultancies to anticipate the tumble in oil prices last fall, is among others, including big commodity traders Gunvor and Vitol, in calling a bottom, despite U.S. crude stocks that have swollen to record levels more than 20 percent higher than last year.

Beyond calling the bottom, however, Ross is taking a more bullish view than some analysts who have warned of a prolonged lull or a new slump to as low as $20.

“Prices are way too low; they can’t last, especially with such small spare capacity,” he said.

SAFE HARBOR STATEMENTS:
Certain statements in this blog post may contain forward-looking information within the meaning of Rule 175 under the Securities Act of 1933 and Rule 3b-6 under the Securities Exchange Act of 1934, and are subject to the safe harbor created by those rules. All statements, other than statements of fact, included in this release and other potential future plans and objectives of the company, are forward-looking statements that involve risks and uncertainties. There can be no assurance that such statements will prove to be accurate and actual results and future events could differ materially from those anticipated in such statement.

 

R

 

Amid Oil Downturn, Silver Lining for Shale Producers

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The slump in oil prices is more than a year old now, with bad news continuing for producers around the world, including those responsible for the shale revolution in the U.S.

Just look at second-quarter earnings, which largely show disappointing results again for oil companies and their shareholders.

But while there may be no end in sight for the industry’s dilemma, there may be a silver lining for producers, especially those using the downturn to hone drilling techniques, like hydraulic fracturing, to reinforce their output and profits later.

Among those who see such positive signs for drillers is Bill White, the chairman of Houston operations for Lazard, the global investment bank, and a former three-term mayor of the Texas metropolis.

“Most of the shale oil and gas is produced from a relatively small percentage of the shale wells and a fairly small percentage of the fracks in each well,” White said in an interview. “When the industry learns to drill more wells like the best wells and to make more fracks productive, you will see a vastly greater amount of oil and gas produced in the United States at the same total cost.”

White, while well known for his political experience in Houston, has spent much of his career in energy, including as an official in the Clinton administration and a chief executive of a company that built oil service businesses.

“This is a topic I discuss weekly and almost daily with senior executives of the service companies and the oil and gas industry,” White said. “There’s a lot of progress being made. In this sense, that is the next big chapter in the shale revolution.”

As an example, White cited the U.S. independent EOG Resources, which told investors in May that it could earn a higher return producing oil in Texas at $65 a barrel then than it did at $95 in 2012, thanks to new technology and other cost-saving measures.

“They’re producing more oil per dollar spent,” White said of EOG, which he noted is not one of Lazard’s clients.

Among the innovations coming down in cost is micro-seismic technology that interprets sound waves to more precisely guide the direction of drilling and the application of fracking, he said.

The energy research firm Wood Mackenzie offers a similar outlook in a new paper that draws a comparison with the lull in Gulf of Mexico drilling following the blowout of BP’s Macondo well in 2010 and a government moratorium on new wells.

“Operating practice and company psychology changed when players stopped running on a leasing treadmill and increased their focus on basin science,” Wood Mackenzie said.

Once offshore drilling resumed, the average size of discoveries was 30 percent larger, even as the number of discoveries fell by half, according to the analysis, which credits producers with using the slow-down to enhance the ways they vet prospects and design wells.

“Today’s tight oil wells are better producers than those drilled only a few years ago,” Wood Mackenzie said, referring to shale formations. “Expected ultimate recoveries have grown by over 10 percent each year with the application of better drilling technology, more robust modeling and experienced asset teams.”

With the “pencil-sharpening” exercises only increasing in the oil and gas sector, those improvements in ultimate recoveries will continue onshore as well as offshore, it added.

Said White: “If the last 10 years have been a shale revolution with a lot of excitement and celebration, then over the next 10 years we’ll be watching the revolutionaries pay greater attention to the critical task of deploying technologies that steadily lower the average cost of production.”