Clearing Up Some Confusing Headlines About The U.S. Oil And Gas Industry

Suncor Energy Inc. oil tanks stand in this aerial photograph taken near Fort McMurray, Alberta, Canada, on Thursday, June 4, 2015. Photographer: Ben Nelms/Bloomberg

In the oil and gas industry, sometimes it is hard to figure out what is real and what isn’t – what is really happening, and what really isn’t happening. I spent 38 years in the industry, and still have a hard time figuring it all out. Here are some good recent examples of stories whose headlines made bold claims that, upon reading the entire stories, turned out to be quite nuanced:

Are investors really abandoning the shale industry?
Did the World Bank really cut off funding of oil and gas projects?
Has the business case for building the Keystone XL pipeline really passed?

All are good questions, all of which have been the subject of multiple media reports in the past weeks, and all have more complex answers than the simplistic media headlines that are all most people actually read. So, let’s clarify some things.

Are Investors Abandoning The U.S. Shale Industry?

We’ve seen many reports alleging that investor funds are drying up for the shale industry during the second half of this year, yet shale producers somehow keep managing to get their business done. Indeed, in recent weeks we’ve seen a series of announcements of major new investments in domestic shale by private equity and institutional investors, and the Fall debt re-determination season passed without noticeable major hiccups.

So, what gives? A look at recent presentations by the CEOs at corporate shale producers, like this one from Encana’s Doug Suttles, shows a focus on responding to demands by investors that these companies dedicate more of their resources towards actions that will increase returns on investment capital, a pressure I wrote about in early November. One result of this investor pressure has been the announcement of a wave of stock buy-back programs since August. Investors are also pressuring companies to change executive compensation programs that have been, in their view, too focused on increasing production at the cost of profits.

As the Wall Street Journal pointed out on December 13, 70 percent of U.S. shale is produced by just 30 companies. Thus, if most of these companies can be convinced to allocate resources to initiatives to raise investor returns, this problem will become largely resolved.

Did The World Bank Cut Off Funding of Oil and Gas Projects?

That is certainly what the casual reader would have believed from reading the headlines attached to stories like this one from the UK Telegraph last week. Many other news outlets carried similar stories with similar click-baiting headlines that indicated that the World Bank plans to cut off all funding for oil and gas projects in 2019. Indeed, even the reader who tends to scan not just headlines, but also reads the first few paragraphs of most of these stories would have read nothing to contradict the headline message.

In the Telegraph’s story, the reader had to get all the way to the 9th paragraph to see the story’s highly significant catch:

In some exceptional circumstances, the organisation may still offer some financial support for upstream gas in poor countries “where there is a clear benefit in terms of energy access for the poor and the project fits within the countries’ Paris Agreement commitments”, the WBG said.
That may include continuing support for projects such as the $700m Ghana Sankofa Gas Project which is intended to increase availability of natural gas for clean power generation.

Given that the World Bank’s mission is focused entirely on helping developing nations improve the circumstances for their people, that’s a pretty significant exception, especially when one considers the crystal clear benefits responsible oil and natural gas development can bring to impoverished nations. It is entirely possible that this announcement, which was made at the One Planet Summit in Paris, could in fact end up producing no real policy change at all. But it sure got a nice round of applause in Paris.

Has the business case for building the Keystone XL pipeline passed?

Ummmmmmm…no. That line of thought was used by opponents of the project and some media analysts in the weeks leading up to the final regulatory approval of the Nebraska route for the line that was issued in November. The logic employed was that so much time had passed while the pipeline’s cross-border permit was being held up for political reasons by the Obama Administration that the rationale for the project had become stale, and the demand for its capacity longer existed.

But this week saw a rash of stories like this one in World Oil Magazine about the rising discounts to WTI experienced by Canadian crude producers due to a lack of pipeline capacity:

Heavy Canadian crude fell to the lowest in almost four years against benchmark prices Tuesday as bottlenecks on pipelines and rail networks crimped exports.

Canadian crude’s discount to West Texas Intermediate futures has widened more than $15 since August as pipeline companies including Enbridge Inc. rationed space amid high Western Canadian inventories. Rail cars struggled to catch up on deliveries after line disruptions over the past two months.
“You are in a serious pain point right now,” Mike Walls, a Genscape Inc. analyst, said by phone from Boulder, Colorado. “It’s the perfect storm of too much supply and not enough capacity.”

The truth is that, even with several other pipeline expansion/new build projects scheduled to come on-line from now through the end of 2019, there is still plenty of demand for the added capacity that Keystone XL will ultimately provide.

For his own part, Trans-Canada CEO Russ Girling said in late November “that the company has been ‘very encouraged’ by discussions with potential shippers in recent weeks on the proposed 830,000 barrel a day pipeline and that TransCanada expects to secure enough binding commitments from shippers to advance the project.” Sure sounds like the company investing billions of dollars in the Keystone XL project thinks the business case for completing the northern leg of the line remains strong. At the end of the day, that’s really all that matters.