June was a busy month for energy watchers. Energy and climate-change bills, replete with amendments good and bad, were moving through nearly a dozen Congressional committees. Oil prices rebounded, leaving natural gas in the dust. And three institutions made big bets on unconventional gas resources.
The U.S. depends on imports for 60% of the oil it uses. Last year, petroleum and petroleum products amounted to more than $380 billion of our $677-billion trade deficit. So it’s no surprise that most issues the oil and gas industry cares about are in play in the House and Senate: the way frac fluids are regulated, the way taxes are levied, access to leases in Utah and offshore, and deepwater royalty relief.
Regulation of frac fluids could be devastating, driving the cost of drilling up and the gas rig count down further.
But from North Dakota, which is enjoying a renaissance thanks to the Bakken oil shale, came an amendment to allow wider leasing in the faraway eastern Gulf of Mexico and Destin Dome. The Senate Energy and Natural Resources Committee passed it. Sen. Byron Dorgan’s amendment opens the eastern Gulf but maintains a 45-mile buffer zone to protect Florida’s coast. Experts think the Destin Dome alone could hold up to 3 trillion cubic feet of natural gas reserves. The eastern Gulf as a whole contains 3.9 billion barrels of oil and 21.5 trillion cubic feet of gas, according to government estimates.
As significant as pending changes to the E&P operating climate are, the financial side of the business could change just as dramatically. The administration may revamp how companies and their counterparties hedge price risk.
“The American Clean Energy and Security Act of 2009 (the Waxman-Markey energy global climate bill) contains provisions regarding commodity hedging that would have a devastating impact,” warns the IPAA.
“Under the proposed legislation, independents would be required to conduct their hedging activities directly with the exchanges and post cash collateral twice daily based on the value of their hedges. By not drawing a clear distinction between producers and speculators, the result will be a likely decrease in natural gas and oil production. At a minimum, it will create an uncertain and uneven ability to plan.”
U.S. gas output rose 7.5% in 2008, or 10 times the 10-year average. This was the strongest volumetric growth on record, according to the BP Statistical Review of World Energy, released at press time.
But legislative threats—especially over frac regulation—could slow down the industry’s impressive growth, although the industry’s strong belief in itself continues to propel deals.
“It’s not obvious sometimes how a financing can be done or how obstacles can be overcome, but it is always obvious when there is a deal there [that ought to be done],” said Bill Weidner, managing director of the Rodman Energy Group, speaking at Oil and Gas Investor’s Energy Capital Week held in Houston last month.
And so at press time, three large institutional investors stepped up to the plate.
Kohlberg Kravis Roberts & Co., the huge New York-based private equity player, agreed to inject $350 million into the Marcellus shale play in the form of convertible preferred debt in privately held East Resources Inc. of Warrendale, Pennsylvania. East has 650,000 net acres in the Marcellus, primarily in the Keystone State.
The same week, 2008 start-up U.S. Drilling Capital Management LLC, based in Houston and Greenwich, Connecticut, also stepped up. It agreed to invest up to $75 million in SandRidge Energy Inc., to fund development of the latter’s Pinon gas field in the West Texas Overthrust.
And finally, Morgan Stanley Private Equity committed capital to privately held Triana Energy Investments LLC, again for the Marcellus. This is Morgan’s second investment in Triana; its last one was epic, resulting in a sale of Appalachian assets to Chesapeake Energy Corp. for $2.2 billion in 2005.
These deals remind us that there is more than one way to fund the growth of a play or a company. They should remind us, too, that the industry will find a way to operate despite onerous regulations and adverse tax regimes that may lie ahead.
--Leslie Haines
Recommended Reading
Sangomar FPSO Arrives Offshore Senegal
2024-02-13 - Woodside’s Sangomar Field on track to start production in mid-2024.
NAPE: Chevron’s Chris Powers Talks Traditional Oil, Gas Role in CCUS
2024-02-12 - Policy, innovation and partnership are among the areas needed to help grow the emerging CCUS sector, a Chevron executive said.
CNOOC Makes 100 MMton Oilfield Discovery in Bohai Sea
2024-03-18 - CNOOC said the Qinhuangdao 27-3 oilfield has been tested to produce approximately 742 bbl/d of oil from a single well.
TPH: Lower 48 to Shed Rigs Through 3Q Before Gas Plays Rebound
2024-03-13 - TPH&Co. analysis shows the Permian Basin will lose rigs near term, but as activity in gassy plays ticks up later this year, the Permian may be headed towards muted activity into 2025.
Proven Volumes at Aramco’s Jafurah Field Jump on New Booking Approach
2024-02-27 - Aramco’s addition of 15 Tcf of gas and 2 Bbbl of condensate brings Jafurah’s proven reserves up to 229 Tcf of gas and 75 Bbbl of condensate.