January 2024 - 1keystone.com

Surprising Increase in U.S. Oil Production in ’23

January 25, 2024 Article by Jeffrey Price

The Wall Street Journal reported on Tuesday, January 2^nd, that there was a “surprise surge in American oil-and-gas production and exports” exceeding forecasts by roughly 600,000 daily barrels (read article here). In fact, the U.S. grew its daily production by 900,000 barrels up to a whopping 13.2 million BOPD. That makes the U.S., by far and away, the largest crude oil producer in the world!

If you have been reading many of our previous opinion pieces, you probably noticed our prods directed at the U.S. O&G industry – especially the super-majors – to ramp up production in order to contribute to the U.S. war effort to bolster Ukraine’s valiant defense against the onslaught from the Soviets (oops, there I go again – I meant the Russians). This 900,000 daily barrel increase is, thus, a highly welcomed development that – if you consider the alternative – helps prevent the Russians from benefitting from genuine windfall profits. In fact, the Russians have done remarkably well in terms of balance of payments thanks to maintaining most of its daily production which is being sold at decent prices averaging in the $50s and $60s per barrel. Thus, its balance of payments have been surprisingly healthy. However, if the United States had not bolstered its production, the Russians would not have had to decrease their own daily output (as have the Saudis) in order to prop up worldwide prices of crude oil. In such case, OPEC+ would have had its way and the price of oil would be much closer to $90 or $100 a barrel. From the standpoint of geopolitical goals, this outcome constitutes a significant victory. Indeed, WSJ the article points out that “shale production could help stabilize markets in times of crisis”…Thank you American oil & gas!

And First Keystone is pulling in this same direction by constructing state-of-the-art office/warehouses for lease in Pecos, Texas, the epicenter of one of the top oil-producing provinces under American control.

Interestingly, capital spending planned for 2024 is slated to increase by only 2%. However, the overall level is an impressive $115 billion, but it’s much reduced from the $150 billion average from 2010 through 2015. But today’s lower levels of CapEx is characterized by much greater oil field efficiencies. In fact, a prolonged period of pricing stability has enabled the service and supply industries – the backbone of the industry – to control its costs and prices. Indeed, after the break in late 2014, the industry went through a prolonged period of low oil prices where only Tier 1 reserves were economic. During that era where prices for services and supplies were inflated due to the prior boom, developmental drilling was not cost-effective. In a nutshell, most oil & gas provinces were marginal at best, if not outright money losers.

Today’s era of stability has made demand for services and supplies more predictable. The costs of services are in equilibrium with the revenue streams of their customers. In First Keystone’s line of business, that translates into potential tenants who have an interest in leasing office/industrial space in Pecos (Texas), being able to take a longer view. Nowadays, they are entering into leases that are at least three or more years, and in more and more cases, outright purchases. Before this era of stability set in, the planning time horizons of typical service and supply companies were not that long. The high highs and low lows of that occurred in that 2010-2015 period simply discouraged taking the chance to lease space for five years. There was legitimate fear of a deep, painful retrenchment if crude prices plunge to $45 or lower. Those spikes are fading into the distant past as more stable and predictable business environment has emerged.

Unfortunately, O&G production is, in and of itself, not static even if it might be stable. As we all know, there is a natural decline. Moreover, as Tier 1 drill sites are exhausted, producers will have to shift to less attractive prospects. Profits may shrink; indeed, losses might be incurred if prices drop unexpectedly low (and hedges weren’t locked in). But technological improvements inevitably emerge that transform marginal rock into profitable reserves. Nevertheless, there will be an inevitable throttling back of production in the Permian. Some say it might not be far from now that the peak is reached. We’ll be addressing this topic in an upcoming commentary. Let us know your thoughts and thank you for your interest.

The opinions expressed above reflect only those of the author and do not represent those of the First Keystone Pecos Industrial Park organization. First Keystone welcomes responsible fact-based discourses on these topics.

Conversion to Green Energy is a Mirage on the Horizon

January 10, 2024 Article by Jeffrey Price

Just how long will it take to convert the US economy over to a genuinely “green energy” system? Five years? Ten? Multiple decades??? The answer is that it’s waaaay out there and any perceptions that it will be sooner fly in the face of cold hard facts.

The Wall Street Journal published a relevant article laden with data and graphs (click here for article) that overwhelmingly indicate that the notion of a rapid transformation of the American economy – much less the world economy – away from fossil fuels to nuclear and renewables (i.e., “clean” energy) is decades out. Among the more provocative graphs was one that showed that EVs currently constitute 10% of all new vehicle sales. That means that today’s fleet of motor vehicles in the United States remains destined to be overwhelmingly gasoline (or diesel) fueled for a long, long time since the average life of a vehicle now stretches well past 10 years. The notion of a rapid conversion to green energies is a pipe dream.

Another myth that is debunked in the article is the notion that the electrical generating industry can somehow shed itself of natural gas-fired generating plants. There is no replacement in the wings. Exactly one nuclear plant is underway in the U.S. and it is woefully behind schedule and over-budget. Of course, China and France are building nukes (along with the Russians), but the rest of the world is shunning them. In fact, countries like India and China continue to construct coal-fired generating plants – that means that new consumers of coal are being activated. That notion is regrettable considering the abundance of cleaner-burning NG. Solar is laudable, but there’s no funding to scale-up to truly change out fossil fuel-fired generation facilities.

And what about wind? It’s laughable as the windiest places in the U.S. aren’t anywhere near the factories and people. And, did you know that soup-to-nuts for new transmission lines – lovely things that they are – is measured in decades? Of course, Nantucket is windy. But oh those folks – with clout – don’t want to look at those garish contraptions.

So, in the meantime, NG and oil are here and that’s going to be for decades! Therefore, the Delaware Basin, of which Pecos is the hub, will continue to grow as one of the primary engines that will produce NG, the abundant transition fuel. And, First Keystone is supporting this industry with our focus on Pecos warehouses to lease which is an essential cog in the O&G industries’ infrastructure to provide this vital resource. In conclusion, as “feel good” as it is to advocate “clean” energy sources, the duration of the process to get to that endgame is measured in decades. Indeed, clean energy, the transition is somewhere way over the horizon. In the meantime, communities like Pecos, Texas are essential to keep cars moving, homes lit, and factories working.