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Compromise can get energy legislation moving
The energy industry should be willing to compromise with opponents to get key legislation it wants, such as crude oil exports and faster LNG export licensing, three members of Congress told the North American Gas Forum.
They also agreed U.S. energy policy has a role to play abroad.
In a wide-ranging panel discussion, Sen. Heidi Heitkamp (D-N.D.); Rep. Ted Poe (R-Texas); and Rep. Bill Johnson (R-Ohio) agreed that an all-or-nothing approach by industry won’t work. Heitkamp said there are “irrational” positions on both sides of energy issues.
“I’m the 49th most liberal senator from the 50th most conservative state—I know about compromise,” Heitkamp said at the Washington, D.C., conference.
Current energy issues “are no-brainers that would take five minutes to solve in a boardroom,” Heitkamp said, but added that government doesn’t work the same way corporations do. Congress has to hear and respond to multiple viewpoints. Unfortunately, energy issues now are falling into two, bitterly opposed camps and the energy industry will suffer if it doesn’t respond.
“Energy opponents are in an irrational conflict with the oil and gas industry: They (energy) are the bad guys” in the view of environment activists, Heitkamp said. However, energy providers tend to want everything they seek and ignore their opponents. Thus, nothing gets done, she said.
“Everybody loves the golden egg that is being laid but very quickly that golden egg is getting cracked. What’s happening is violating Economics 101. Energy is a commodity,” Heitkamp added.
The North Dakota senator referred to “the Keystone effect,” what would normally be a mundane regulatory issue becomes a do-or-die environmentalist cause. “Keystone is not about catastrophic climate change; it’s about American jobs. It’s a pipeline,” she said. But the industry’s failure to see early on the views of the project’s opponents, and respond to those views, has stalled construction. “For me, this is a fairly urgent issue,” she said.
Poe, who represents Texas’ 2nd District in suburban Houston, emphasized the need to increase energy exports. He humorously invoked the advertising slogan of Texas’ famous Blue Bell Ice Cream, “We eat all we can and sell the rest.”
“In Texas, we use all [the oil and gas] we can and want to sell the rest. But we can’t sell it abroad,” he said. “In Houston, 50% of our economy is the port, and 50% of that business is energy related.”
Poe said his membership on the House Foreign Affairs Committee has convinced him that LNG exports “are an economic issue and also a geopolitical issue” that can serve as a counterweight to Russia’s attempt to dominate Europe.
The representative told of a meeting he had with the prime minister of Ukraine in Kiev after the Russian invasion.
“He told me, ‘quit sending us canned food and send us natural gas.’ That was two years ago, and we haven’t done anything to help Ukraine (or) other eastern European countries of the Baltics. Gazprom turned off Ukraine’s gas in the winter of 2009 for political reasons. It’s cold and dark in Ukraine in the winter, people died because of that,” Poe said.
He added that the federal government “should let the market control” export issues. “For example, we can trade anything we make with Mexico except crude, that’s nonsensical,” Poe said.
Johnson was elected to eastern Ohio’s mostly rural 6th District—the center of the Utica unconventional shale—in 2010. He said he has learned, like Poe, from trips abroad just how important the shale revolution has been to the world’s energy market.
“You can’t go anywhere in the world and talk about gas and not see a map of eastern Ohio,” he said, adding the Utica development provides an economic growth model for both Washington and the Ohio capital in Columbus. “Unemployment has fallen 60% in my district and is driving down the unemployment rate across our state. That’s why Ohio is the leading state for economic development in the Midwest.”
ETE/Williams deal spurs mixed reactions
During one unsettled stretch of business while he was chairman and CEO of The Williams Cos. Inc., Joe Williams observed, “Everything is for sale but my wife and my huntin’ dog—and I’ll talk to you about the dog.”
“But at what price?” might be the question some Williams shareholders are asking after the firm announced a merger with Energy Transfer Equity LP (ETE).
Williams’ shares, as well as Energy Transfer units, fell sharply following the announcement at the end of September. The agreed-to, $37.7 billion price was below a $53.1 billion offer ETE made in June that was rejected as “significantly undervalued” by Williams’ board at the time.
However, the underlying value of the transaction remains close to the earlier bid, given the decline in the two firms’ stock market value in recent weeks. The new offer also includes $6 billion in cash for Williams’ stockholders, along with stock in a new C-corp, Energy Transfer Corp.
Retired in 1994, Joe Williams remains an honorary director of the company his uncle founded in 1908. Energy Transfer and Williams expect to close the deal in first-half 2016 following a shareholder vote and customary antitrust reviews.
Analyst reaction to the announcement varied. “WMB says yes!,” Tudor, Pickering, Holt & Co. said in an analysis the morning of the announcement. “Positive for ETE/WPZ (Williams Partners LP). We liked the deal as proposed three months ago and still do.”
Jefferies LLC released a mixed review in its analysis. “While the announcement of the agreed transaction will be viewed as a positive to many (Williams) shareholders given the uncertainty surrounding the space and inclusion of a cash consideration to the deal, we believe some shareholders may be disappointed as the implied value is identical to what was rejected just three months earlier and were perhaps expecting a marginal uplift in implied deal terms,” it said.
Oppenheimer & Co. worried that “significant underperformance by ETE is (a) concern about how the deal gets financed in a way that supports its effort to achieve investment-grade ratings,” but noted “the overall market for MLPs remains dismal, with the Alerian down 35% year to date.”
Stone Fox Capital Advisors was more negative, headlining its analysis with “Energy Transfer Equity won Williams, but shareholders lost.” The report added, “The lack of an increased bid and the negative implications of industry trends already had investors on high alert. The increased cash portion of the deal suggesting major shareholders at Williams want to cash out and the higher debt for the new entity didn’t help. Not to mention, the biggest issue with the deal is the complexity and the lack of a compelling story regarding future synergies.”
Both firms saw their shares drop immediately, although broad market benchmarks, such as the midstream-heavy Alerian MLP Index and Standard & Poor’s 500, also were down but by smaller amounts.
Assuming the merger goes through, the new Energy Transfer Corp. will be a midstream behemoth that would rival Kinder Morgan Inc. in size. Oppenheimer & Co. noted in its report that “the transaction will create the third-largest energy franchise in North America and will add a range of synergies. Assets may also migrate across the different entities in the Energy Transfer family,” which would include Williams Partners, Sunoco LP and Sunoco Logistics LP.
And similar to C-corp Kinder Morgan, the surviving partnership would be treated as a conventional corporation rather than an MLP. The new organization would have more than 100,000 miles of crude, gas and product pipelines; gather and process more than 19 Bcf/d of gas; and transport more than 32 Bcf/d of gas.
GDF Suez adjusts strategy to fit the times
There are two ways of looking at energy investments in 2015, a top executive at GDF Suez said at a recent forum at Rice University in Houston: the old and the new.
The dual strategy of the Paris-based multinational, in the process of changing its name to Engie, is to focus on services in mature markets like the U.S. and Europe, and to invest in infrastructure in emerging markets, Zin Smati, president and CEO of GDF Suez North America Inc., said at the “North America in Global Energy Markets: Infrastructure and Integration” conference.
The global nature of his company offers a unique perspective, Smati said.
“We see things that are happening in North America maybe a little bit ahead of other people because we can see what the behavior of customers is, what they want and what they’re looking for,” he said.
GDF Suez has its corporate eye on several trends and how they will impact the important North American market as well as global trade flows. Long term, the continent’s growing population will feed growing demand for energy and other resources. Short term, the impact is from shale gas.
“The expectation is that shale gas is going to be 45% of U.S. gas supply in the future,” Smati said. “Expect demand to go up. When you look at CO2 and global warming, the amount of CO2 in Europe is actually going up; in the United States it’s actually going down without trying very hard, which is thanks to shale gas.”
Smati sees North American gas creating a $300 billion investment opportunity over the next two decades in terms of creating systems for putting it to use. This includes power generation—replacing nuclear and coal-fired plants—and as transportation fuel. But gas is not alone on the investment horizon. Solar has started to make a huge impact as well.
“Let me put it in context for you,” he said. “If you build a gas-fired power plant and gas is $5 [MMBtu], the cost of gas alone is almost the same as the price of power coming from a large solar power plant today. It is amazing. That cost is coming down in a massive way and having a huge impact. When you look at the penetration of solar, it is huge.”
The movement toward solar will ultimately cut into demand, and therefore price, for natural gas. GDF Suez is already adjusting its strategy for LNG in the U.S., turning away from construction of massive liquefaction facilities, like those on the Gulf Coast, toward smaller facilities in the middle of the country.
The key, Smati said, is to position the company for growth in the LNG fuel market for trucking and shipping, as well as growth in the consumption of CNG.
SPE panel: hope is not a strategy
Do not count on a rise in global oil and gas demand to lift the industry out of today’s downturn. Operating in today’s environment requires a new way of thinking, building on past lessons and adopting new technology, to operate more efficiently.
That was the sentiment of panelists at the recent Society of Petroleum Engineers annual Technical Conference and Exhibition in Houston. The event kicked off as the supply-demand imbalance continued to add to commodity price instability, forcing companies to find more ways to maintain or grow production at a lower cost.
The worldwide supply of oil is tightening as some producers, including in U.S. tight oil plays, forgo completions and postpone projects to cope with oil prices that have plummeted from more than $100 per bbl last summer to about $45 per bbl today.
“We probably should not look to the demand side of the equation to provide that salvation,” said Jorge Leis, managing director, Bain & Co. Driven by lower fuel prices, energy demand in the United States is expected to grow, providing a flicker of hope on the demand side, he added.
But he directed the packed roomful of attendees to what caused oil prices to fall—an oil oversupply courtesy of prolific unconventional plays in the U.S. coupled with near record production from Saudi Arabia, Iraq and the United Arab Emirates. Plus, expected demand weakened as growth slowed in China and the hoped for recovery in Europe did not materialize.
“All [of this] tells me that we shouldn’t hold out hope for correcting the supply-demand imbalance by hoping we can grow our way out of it on the demand side,” Leis said.
Overall, however, demand in Asia is still growing particularly in India, Indonesia, Philippines and China, all developing nations. Most of the forecast increase in energy demand will come from non-OECD countries, said Adif Zulkifli, senior vice president, corporate strategy and risk, for Petronas, the state-oil company for Malaysia.
“Although China seems to be slowing down, China is still growing [with] about a 4% to 5% GDP growth rate per year,” Zulkifli said, noting Malaysia is experiencing similar growth. “There is still quite a bit of demand that they require.”
Demand is clearly important but hoping for demand growth is not a strategy, especially considering non-OECD growth is expected to be about 3.7% worldwide this year, the lowest level since 2001 with the exception of the financial crisis, added Bernard Looney, COO of production for BP.
“We have to manage the things that we can manage, and manage the things that we can control,” Looney said. “That’s why we think it is very important to plan and operate prudently. There is a lot of waste and inefficiency in our system. We want to drive that out.”
Doing more, or the same, for less cost is also among the goals, he said.
“If prices and demand recover we will reap the benefits of that, and if it doesn’t, we’ll be ready for it,” Looney said.
Don’t stop thinking about midstream of tomorrow
With the sector weaving through the downturn’s stormy skies like a nimble fighter jet trying to reacquire a target, it might be time to remember that, before the dawn of the iPhone, midstream wasn’t cool.
The shale boom was still the stuff of bedtime stories for George Mitchell’s great-grandkids in those dreary days of the mid-2000s, and onshore oil and gas activity in the U.S. was well into its second decade of decline. A midstream asset was politely referred to as “mature,” a low-growth link in the value chain, and large integrated companies were divesting them or spinning them off.
Which explains, from the midstreamers’ point of view, why the revolution started without them.
“The combination of under-investment, disaggregation and a move toward entities that were intended to focus on harvesting the cash flow of mature assets meant that many participants were not equipped to capitalize on the investment opportunities created by the shale revolution,” wrote KPMG LLP experts in a report, “Building the Midstream Company of the Future.” Many of the companies in the sector were small and unable to fund major capital investment, and many others simply lacked the internal capabilities like project management, risk management and business development necessary to leap into the fray.
But with the initial boom in the rear-view mirror, companies are preparing for the next cycle.
“As you look at what companies are really going after during this time, it’s a lot of expanding capabilities,” said Brandon Beard, KPMG partner, financial due diligence, during a recent webinar discussing the report. “They are trying to acquire the people and the project pipeline that you need to go into new areas of the country or to gain new capabilities.”
The ready availability of debt financing creates an M&A friendly environment, he said. “Particularly in 2015, we see M&A continuing to increase in deal volume and in average size per deal, despite the short-term downturn.”
That said, KPMG’s strategists warn that neither consolidation, in and of itself, nor organic growth represent an effective long-term business strategy. They argue that what is needed to respond to what a presentation from The Williams Cos. called a “once in a generation industry super-cycle” is a series of actions that will result in a differentiated set of assets and capabilities.
An example is the acquisition last year of Oiltanking Partners LP by customer Enterprise Products Partners LP. Beard pointed out two strategic elements of that deal:
• It broadened Enterprise’s midstream services by giving it access to waterborne markets; and
• It reduced the company’s risk by taking control of a critical partner.
Enterprise managers “filled in a particular gap in a particular value chain to make them even more effective,” said Chris Click, KPMG’s principal, oil and gas strategy lead, during the webinar. But value chain isn’t the only option, he said. Other companies have taken a geographical approach to M&A, instead of simply using the tactic as a way to get larger.
MarkWest Energy, for example, leveraged its experience in the natural gas and NGL areas to develop a premier position in the Marcellus and Utica plays, then capitalized on its strong customer relationships in those plays to establish a presence in the Permian and other basins.
“We think midstream has a bright future leading to purposeful growth,” said Andy Steinhubl, KPMG principal and energy and natural resources strategy practice lead, who moderated the webinar. But only for those companies that make the right moves.
“To capitalize on the opportunities facing the industry,” KPMG authors wrote in their report, “companies need a dedicated focus on building advantaged capabilities, making the right business model choices and adaptations and creating operating model flexibility to create sustainable, long-term competitive advantage.”
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