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Big Picture Report: Where is the Worldwide Oil Industry Going Over the Next Few Decades?

July 12, 2024 Article by Jeffrey Price

The Economist issued one of its impressive surveys recently focused on this topic (see article here). As usual, there was a lot to take in, and very little of it was down-in-the-weeds reporting on today’s immediate issue as it was a discourse on major trends among producers and users. We don’t necessarily subscribe to the author’s positions, but every one is thought-provoking and worthy of serious consideration. Let’s take a look:

First, the major producers in the Middle East know that they need to transition their societies into a post-oil scenario. They are well aware of the impacts of global warming, including sea level rise which has implications for their citizens. Given the peculiar social pact between the ruling House of Saud and the 37 million citizens of Saudia Arabia, Saudi leadership well knows that it needs to transition its citizens into productive jobs in sustainable industries. That being said, getting from here to there is most definitely a major challenge.

Second, given the cost-efficiency of lifting oil that the Middle Eastern countries have, it will be the last man standing. But, third, the European majors (e.g., BPX, Shell) learned a lesson over the last 10-20 years that transitioning into green energy projects does not generate an ROI comparable to projects in their core competency of fossil fuel development and production. Thus, they’ve retreated back to what they do best.

Fourth, in that regard, as discussed in the May 24^th edition of the Wall Street Journal (see article here), the Norwegian Sovereign Wealth Fund has reversed course and is voting against a nominated director for the Exxon board who is overzealous in his support of curbing emissions. This position is an example of the pendulum swinging against the green initiatives that effectively puts the shareholders of the company into a penalty box if the company is forced to invest in pursuits that don’t measure up to the minimum acceptable profit thresholds.

Fifth, cutting-edge U.S.-based companies, such as Occidental Petroleum, may be onto something by focusing on developing and commercializing technologies in carbon capture. Oxy is differentiating itself as a leader in this critical area. If it achieves a breakthrough, it will be a game-changer for the role of fossil fuels in the second half of this century.

Sixth, there will always be uses for petroleum-based products for specialized transportation (e.g., aviation), plastics, chemicals, fertilizer, etc. But, interestingly, The Economist asserts that there has been a delicate balance between day-to-day consumption and production – they incorrectly call it “demand and supply” – but recently, we can see something that may be a new trend or is it just an aberration. We’re talking about OPEC’s weakening influence on the worldwide market which has translated into a need to find ways to cut daily production by an estimated 1.5MM bbls per day below the rated capacity of the members of the cartel as discussed in a June 1^st New York Times article. The Saudis are making major adjustments in their CapEx to postpone expanding their own daily production capacities because it has become clear to them that demand is not sufficient to absorb that additional level of oil at an acceptable price. Therefore, to preserve today’s worldwide price points (e.g., Brent in the $70s and low $80s), Saudi Arabia has curtailed its own production and certainly has no intention of pointlessly expanding capacity. This is quite a shift from the conditions that existed a dozen years ago prior to the American shale revolution.

In fact, seventh, the U.S. shale industry has become the global swing producer. U.S.-based producers can and do push up prices or push them down by adjusting their own drilling budgets. Indeed, it is not escaping notice that the rig count in the U.S. is now down by 10% from a year ago. Yet, U.S. production is still creeping upwards. That’s because productivity in the industry simply keeps improving. The Economist points out that the amount of reserves generated per unit of drilling budget is double what it was two years ago. The Economist points out that back then, the oil & gas industry was the worst performer among all the significant sectors in the stock market, but today, it is among the best performers as discipline in its CapEx decisions has become the mantra of the C-suite.

We at First Keystone see this phenomenon ourselves because companies joining our growing community recently who are looking for industrial buildings for lease in Pecos are taking much longer views of their business than they were as recently as early 2022. Back then, a three-year lease seemed like a stretch, but nowadays, the debate is 3 or 5 or just simply buying the facility. This change in thinking comes about when there is rational capital budgeting.

There is lots more in these three articles to absorb when one tries to get their arms around the long-term viability of this industry. Your questions and comments are invited!

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.

LNG Plant Review – Overblown Reaction?

March 20, 2024 Article by Jeffrey Price

Yes, it was a real head-scratcher to learn that the Biden Administration chose to apply extra scrutiny to a recent application for an LNG liquefaction plant.

On the other hand, the Biden Administration’s rationale included citations about “carbon emissions”. It isn’t really the fault of an LNG plant that there are carbon emissions from use of its products. In fact, to the extent that LNG hastens the demise of coal, it is most certainly a green energy. (That’s why NG is called a transition fuel.) The issue is: Does the Biden Administration now have hesitations about burning NG? When did that idea take center stage? Did they temporarily lose their sanity and forget that a war is raging in East Europe? US NG is a critical piece in this geopolitical “game”. The logic of liquifying it and sending it to Europe means that this is an increasingly affordable source of energy that undermines the leverage of the evil Putin regime… This pumping-the-brakes on LNG makes no sense when examined in the contact of the Administration’s foreign policies. But there’s more to consider.

When you peer under the hood and learn about what’s actually going on, the story changes a lot. Although its editorial board screams with pain, a reporter for the Wall Street Journal pointed out in this article that there is a surplus of projects that have obtained the appropriate permits that are looking around for the requisite long-term contracts needed before moving forward with the project. In other words, the United States actually has a glut of “paper” LNG plants. So, what’s the big deal if one of these is being held up?

The WSJ article also talked about producers of natural gas throttling back, but that’s hard to do when it is a by-product of oil drilling out in the Permian Basin. That’s among the reasons why First Keystone Pecos provides industrial buildings for lease to midstream companies – in fact, we have several different companies focused on NG that have recently set up shop in our Park. Why? It’s because natural gas is an important industry and it requires servicing. And, yet, it’s only a by-product! It is a profitable business if the appropriate infrastructure is built to move it inexpensively to the coasts where it can be liquified and shipped abroad. What would be the alternative? Flaring? Not drilling the oil well? More bitcoin mines?

One thing, in particular, rankles me about how this regulatory roadblock came down. Apparently, this character, Bill McKibben has turned “LNG exports into a cause celebre”. Apparently, there is some sort of a TikTok climate “influencer” who has also impacted the thinking in the Biden White House. Caving to pressure from this cabal is the kind of wrongheaded behavior by the Democrats that fuels the ire of the Republicans. And, not without justification – it’s plainly irrational.

Moreover, the position that the natural gas, produced within the U.S., contributes to global warming is correct. What’s not valid is the silly notion that choking it off will somehow help. U.S.-generated gas will be replaced by NG from Argentina, Qatar, or Russia. That’s Economics 101.

The United States is a country that has been fixated on counterbalancing the Russian pressure applied to the Europeans, and a moronic TikTok “influencer” has compelled them to take an irrational step?!? Who are the idiots in the Administration who made this choice? Transfer him/her to the Forestry Department (Alaska Division).

So, let’s hope the Biden Administration’s LNG plant review decision was just a moment of ineptitude and that they’ll get their eyes back on the ball! STOP THE RUSKIES!

There’s more to think about when the TikTok’ers whine about NG’s adverse effects on climate – it’s called “What is the alternative?”

The Biden Administration knows that the speed and success of a conversion to an electric-dominated transportation infrastructure will take time – take a look at this article from the Wall Street Journal – the build-out of networks is going to take time and gobs of capital. There is a long way to go.

In the meantime, First Keystone is the little engine that could as we supply Pecos industrial space for rent.

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.

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.

Big Oil Could Do a Lot More

November 30, 2023 Article by Jeffrey Price

You have heard from us about this before, but the right-leaning Wall Street Journal can’t stop pointing out the frustrating facts that the largest oil companies are very content to milk the cash flow from current production which, in turn, is paid out to shareholders. As previously reported, the largest oil companies have tens of billions of dollars in cash available beyond simply paying out to shareholders. Was this resource used to build value through the drill bit? The answer is “well sort of”. Let’s dig down a little.

First, the Wall Street Journal in its September 28^th issue chronicled how the big oil companies have reigned in CapEx https://www.wsj.com/business/energy-oil/oil-prices-are-rising-shale-isnt-coming-to-the-rescue-83a672d?st=0cj4ys4iulzbdzc&reflink=desktopwebshare_permalink. We can’t fault them for this discipline – after all, the down cycles over the last half-century have been very painful for them. That’s why in this era of comparatively stable oil prices lodged on a very profitable plateau, we are not seeing rig counts spiraling up, up, and away leading to a bust. To be completely fair, the super-majors, as an example, have modestly increased their CapEx year-over-year, but Exxon has actually released a few rigs recently. Considering that the productivity of a rig has increased dramatically over the last few years, one could argue that real CapEx has increased.

But the second point is that since this article was published, both Exxon and Chevron have made blockbuster acquisitions of two very large “independent” O&G companies(https://www.wsj.com/finance/chevron-and-exxon-might-have-kicked-off-an-oil-land-grab-9b01ca32?st=a4ws8w8ufvwstdw&reflink=desktopwebshare_permalink). That’s where they are deploying their dollars. And does that build value through the drill bit? Well, it doesn’t look like it – unless the acquiror brings a value-add know-how that can unlock production that the acquiree was not capable of doing itself. Or vice versa. In fact, the value-add in the Exxon purchase may very well come from Pioneer which has established an enviable infrastructure to drive down its operating costs to a best-in-class level.

Coincidentally, First Keystone also seeks to provide infrastructure at best-in-class performance. Our warehouses for rent in Pecos are the most cost-effective option in today’s tight market in the Delaware Basin. We also build warehouses to buy serving the Pecos region, at very competitive price points – this is how we are supporting the O&G industry in its quest to build value organically – through the drill bit or productivity improvements.

In closing, as a professional investor, Exxon and Chevron cannot be faulted for buying out their smaller peers – it’s simply an endorsement of the value of the assets within these two acquirees.

Misnomers & Misunderstandings About the Importance of Hydrocarbons

September 5, 2023 Article by Jeffrey Price

The Wall Street Journal recently ran an insightful interview with the vivacious CEO of Huntsman Corp., Mr. Peter Huntsman (son of the founder) – see story here. Far from being an apologist for hydrocarbons, he is an ambassador who is quick to point out the widespread importance of hydrocarbons that make our modern-day life possible. One of his great quotes is that “They think the chemical industry is just plastic bags.”. He points out that everything from skateboards to makeup have a basis coming from oil & gas! Pretty good! He also points out that the proportion of energy that comes from other sources is simply unrealistically small. He’s not the only voice making this point, but it is a head-scratcher that the rank-and-file green energy advocate seems to not be able to grasp this simple fact of life. The Huntsman interview is just another of many level-headed news articles that point out the painful truth that hydrocarbons have a necessary and lasting role in a modern society.

Likewise, the First Keystone Industrial Park is leasing warehouses in Pecos, Texas to accommodate service companies that are the backbone of America’s increasingly important O&G industry. We have as members of our growing community cutting-edge service companies that are supporting the hydrocarbon industry in its most important province, the Delaware Basin! In fact, First Keystone welcomes three new members of its community – all of which exemplify this point! – ChampionX (recently expanded its facilities), Spindletop, and, most recently, TNT Midstream.

CapEx by Big Oil Turns Around?

August 29, 2023 Article by Jeffrey Price

Over the last few years, as a majority of the gargantuan Big Oil profits have been channeled into shareholder payouts, we have been lamenting the insufficiency of capital investment being made by Big Oil. As citizens and as developers, we have been frustrated by the decisions to de-emphasize reinvesting in their core businesses. But the investment community has applauded these moves translating into buoyant stock prices and huge C-Suite rewards. However, the Wall Street Journal ran a very interesting article on August 14, 2023 (see here) citing statistics that point towards a turnaround back toward investing in the core businesses. Recent statistics are eye-opening. For example, the cash hoard built by large oil reached $85 billion in late 2022 and has since dropped back to about $70 billion as of early 2023. Other statistics show that the percentage of cash deployment in early ’23 that was channeled towards CapEx has migrated from a low of 25% up to around 42%. This encouraging trend reflects a mirror image of reduced debt repayments which was a dominant use of cash as recently as two years ago. Hefty payouts to shareholders continue, at around 40%, but they have topped out. So, the most recent trend toward investing in O&G development certainly bodes well for supply and service companies. We at First Keystone have been assiduously investing all along in O&G support services having built and leased (or sold) three industrial buildings, totaling 14,500 sf, over the last year. In fact, our core business is to lease industrial real estate in Pecos, Texas to O&G service companies. Three new companies have recently joined our community – ChampionX, Spindletop Energy Products, and, most recently, TNT Surface & Supply. All of them serve midstream industries and some upstream, as well.

Dirty Secret: Green Energy “Panacea” Revisited – Another Update!

June 12, 2023 Article by Jeffrey Price

You may have reviewed a previous soapbox speech bemoaning the absurdity of the supply-chain flaws – hiding in plain sight – that afflict the mirage of a massive worldwide conversion to EV technologies. Well, the New York Times recently published an interesting series of charts – click here – that graphically illustrate the stranglehold that China has on this industry. In a nutshell, China has a dominant position somewhere in the supply chain for each of the critical materials comprising these vehicles: cobalt, lithium, nickel, etc.

We at First Keystone are all over this issue because energy is arguably the top geopolitical factor in the world today. Thanks to the unanticipated shale revolution, the U.S. has miraculously reversed its position of being dependent on nasty folks for oil, and has itself ascended into being a dominating force. It’s this power that has enabled the Biden Administration to put the screws on Putin’s Russia.

So back to EVs – it’s no surprise that the Biden Administration has eased off its rhetoric about the conversion to EVs. Without a complete re-jiggering of worldwide supply chains, the U.S. would be committing folly to place its transportation system into the controlling grip of the Chinese Community Party. And, we know the Biden Team is monitoring Chinese maneuvers very closely. That’s why strengthening the infrastructure of U.S.-based energy production is regarded as a critical geopolitical necessity. And, we at First Keystone are making our own small contribution to this effort by leasing industrial warehouse space in Pecos to well-established suppliers like ChampionX and to nimble new players like Spindletop Energy Products, the most recent member joining our community.

Indeed, it’s companies like these that are the backbone that makes the U.S.-based oil & gas industry so dynamic – and that helps to make the United States such a powerful geopolitical force.

Brent Embraces Midland

June 7, 2023 Article by Jeffrey Price

Say what!? Yes, the formula for calculation of Brent prices – for the first time – incorporates a factor based on U.S.-produced oil. Not just any oil, but it’s Midland price points – see recent Wall Street Journal article here. That’s not WTI. If that’s not an endorsement of the importance of the Permian Basin, then what is!?

That’s why in 2017 First Keystone set up shop in the up-and-coming western section of the Permian to bolster the supply of high-grade industrial buildings for sale or lease in Pecos, Texas. Of course, Midland has for generations been a major center of oil & gas service activity, but Pecos – a relative “newcomer” — must grow into a major satellite of the Midland-dominated Permian since roughly half of all drilling in the Permian now actually occurs out in the Delaware Basin sector where Pecos is THE Hub.

The World of EVs – Norway is 10 Years Ahead of the U.S. – What Does That Tell Us?

May 11, 2023 Article by Jeffrey Price

The New York Times ran a surprisingly interesting article on May 8^th on the unanticipated repercussions and benefits of a major shift to a national fleet of vehicles that is weighted toward EVs. There were all sorts of surprises. Among the takeaways were these: (1) improved air quality in downtown Oslo, (2) changes in parking patterns, (3) impacts on convenience stores, and (4) pleasant surprises for traditional auto mechanics. There’s more. Here’s the link: NYT Article.

Our own takeaway is that Permian-produced crude is going to be an essential energy source for decades to come. So, there needs to be a reliable infrastructure in this region to make that possible. That’s why our organization is dedicated to lease warehouse space in Pecos to make that possible. Meanwhile, the government and industries such as convenience stores will need to muster billions of dollars to build out the infrastructure that will support the charging of vehicles.

For the author here, I will continue to drive my 30 mpg mid-sized SUV to my summer cottage 345 miles away with zero anxiety about whether my car will crap out along the way.