We have noticed several trends, one in oil drilling and production, and the other on natural gas drilling and production that could have a significant impact upon prices.
We at BootheGlobalPerspectives agree that "pictures and graphs" enrich communication. The images tell much of the story.
PRICES DROP AND PRODUCTION DECLINES, SAY THE CHARTS.
Shale oil is an unconventional oil produced from oil shale rock fragments by pyrolysis, hydrogenation, or thermal dissolution. These processes convert the organic matter within the rock (kerogen) into synthetic oil and gas.
So, let us look at U.S. Shale Oil production, like we have seen in the Permian Basin. Worldwide we have seen that while the USA was the world's largest oil producer, last year production declined since late 2018. Fifty nine percent of this US production came from shale oil production. In 2019, the price of oil dropped about 18 percent from the year's peak of $66.30 in April to near $54.18 the first week of November 2019. Production has dropped from 10.96 million barrels a day in 2018, by 1.8 million barrels a day, for the same period in 2019. That may be the result of the initial production of new wells, which quickly after a few months, tapers down. We have seen this all over Texas and New Mexico on new well sites.
OPEC is worried about these falling prices, especially Saudi Arabia, and some believe this may be why the Saudis decided to take their largest oil company "public" in a two trillion-dollar public offering, to diversify the risk in a market that has the potential to fall. Most experts believe the offering is to high on the outset. They seem to want the stockholders to buy the stock now, take the market risk, and already upon announcement of this offering the price of oil has dropped.
Bloomberg wrote in October: "Signs of a slowdown permeate the Permian Basin, the 55 million acres in West Texas and New Mexico." This year (2019) shows a 19 percent drop in drilling, impacting drillers, earth movers, road builders, chemical sales, and all kinds of equipment. Dozens of support industries such as trucking, parts, pumps, rigs and on and on are seeing sales decline. Hotel proceeds are declining, home sales slowing and fewer new jobs are available now in November of 2019 compared with the same period in 2018. Now, the economy in towns such as Artesia, Hobbs, Clovis, Carlsbad is still good, very good. But the smart money is watching the same signs that I am sharing with you.
Caterpillar Inc. makes a huge range of heavy equipment, generators and pumps, all used by used by drillers in the Permian. But Caterpillar has now lowered expectations for sales and earnings. They are seeing lower second-quarter sales in oil and gas equipment. The company warned investors that annual profit will probably decline, in part because of lower expectations for West Texas and New Mexico revenue.
Jesse Thompson, Sr., business economist of the Houston branch of the Federal Reserve Bank of Dallas, said: "You've got to buy less stuff if you want to get your costs down, and that's the phase we are entering into."
Secondly, there is a change in the market supply for oil and natural gas.
Guyana, Norway, Brazil and Canada are entering the market with new fields that test out to be huge. Thus while USA production zoomed up, it seems to have dropped recently. Expectations are that new production from these four nations is going to flood the market with new oil.
See the new production from Guyana, Norway, Brazil and Canada, that will be hitting the market. Unless there are great changes in the international markets, this could impact the price of oil, and this would impact jobs, drilling, production, and possibly impact new "boom" areas such as the Permian of New Mexico and Texas. Independent drillers are finding it harder every month to compete and make those earlier "boom style" profits, while the big companies, with their financial clout are better situated to hang in for the long term.
Wild card. This does not take into account sources of new oil that could come from Iran or Venezuela who have faced some market difficulty due to political pressures.
Consider the world's largest oil reserves by country:
1. Venezuela: 300,878 million barrels
2. Saudi Arabia: 266,455 million barrels
3. Canada: 169,709 million barrels
4. Iran: 158,400 million barrels
5. Iraq: 142,503 million barrels
6. Kuwait: 101,500 million barrels
7. United Arab Emirates: 97,000 million barrels
8. Russia: 80,000 million barrels
9. Libya: 48,363 million barrels
10. USA: 39,230 million barrels.
The USA has leveraged it's smaller proven reserves by new technology, new extraction and new and more efficient ways to locate and extract oil and gas reserves. Thus the USA is the top oil producing country in the world, with an average of 17.87 million barrels per day, which accounts for 18 percent of the world's production as of October 11, 2019. The USA calls itself a "net exporter" of oil and gas, that is no longer dependent upon Saudi Arabia, Venezuela, Iraq, Kuwait or the UAE.
One factor that must be taken into consideration: Production of "fracked natural gas" has shown that these wells produce very well at first, but then after an initial period, the production falls off at increasing rates. Therefore, this creates an appearance of an enormous "boom" at first, but after initial fracking, drilling and the first few months of production, the volume falls down rapidly. These wells often require several high pressure follow up fracks which use huge amounts of water. Then the water, with toxins and pollutants, must be disposed of or reinjected in some cases. This process has "leaked," creating other issues. In the Barnett Shale area of Fort Worth, after 1200 natural gas wells had been drilled, with huge projections and expectations, reality indicated that after five years, most of these "high production wells" had dropped to a small percent of their initial production. This is a fact that oil and gas drillers have had to learn and factor into their financial planning and projections. Many legal actions have popped up, showing that local homeowners near these wells have seen their water wells polluted by the fracking process. The oil companies often are forced to provide confidential financial settlements or face bad publicity. This is just another "risk factor," but it hasn't been a major factor in slowing the drilling down.
Oil and gas companies are dominated by doers, movers and shakers." Whatever one might think about their methods, their philosophy and their ethics, they do know how to "get things done." After observing them, doing appraisals and environmental reports for oil companies in several states, we have no doubt, that those innovative, energetic oil and gas men in Texas and New Mexico will continue to find new "money pockets" of oil and gas production, and press for even more technical and innovative progress. The Permian Basin will be pumping oil and gas for many years to come.
Booms and growth impact property values and appraised values, and in our reporting we always emphasize economic trends, housing, hotel occupancy, supply and demand factors that might impact values of commercial real estate. It is a basic key to value that we believe important, especially to investors, lenders and property owners. To ignore these factors when estimating value would be wrong. Indeed, for example in towns like Carlsbad, old houses and residential lots are being purchased to be converted to new commercial buildings. The city is changing, thus we often report sales of residential areas because so many of those areas are gradually converting to business and commercial properties. The town is growing. Plus, if, for example, a company buys a lot and has an option for the adjoining property, we take this into account, because an option on "adding" property adds appeal and value for expansion. When markets are rapidly growing or changing, we use not only confirmed sales, but active listings, because often market activity moves so fast that listings often show more current value expectations than older, past sales. After 35 years of experience, living through many "booms" and "recessions," we believe the perspective of experience is a powerful added tool for our reports. In all of the cycles we have found that our value estimates have held up very well, as compared to others in the industry who were too conservative and more interested in style or spelling than substance.
PROGRESS FOR TOWNS OF THE PERMIAN BASIN:
Booms come, and then busts. It is the nature of economic cycles. But the Permian Basin has been generating new wealth for Texas and New Mexico for decades. It will continue, perhaps in a more balanced and regulated flow. Perhaps this is a good thought for towns such as Carlsbad that have had difficulty in keeping up with the expansion necessary to accommodate booms. Perhaps a "breath of calm" will give the city opportunity to catch up and see if the town of 30,000 people (with perhaps 40,000 more not yet counted) can systematically develop and lead progress to grow it into a city with a population of 100,000. This will require progressive leadership, aggressive, supportive and loyal engaged bankers, lenders and investors. The community needs leadership that can respond quickly to financial and development needs, but also consider what is best for the city in the long run. PROGRESSIVE NEW DEVELOPMENT OF RENEWABLE ENERGY INDUSTRIES COULD STABILIZE THE AREA AND TAKE THE EDGE OFF OF "BOOM AND BUST" CYCLES.
We love Carlsbad's people, for decades known to be progressive and constantly creating new appeal for their town. We at BBAR Inc. continue to bring and refer investors to the city and others who put out the welcome mat. Carlsbad should engage with loyalty to known supporters of the city, who know how to make things happen and know how to deal with "ebb and flow, booms and busts" to create long term economic growth. Let the "bean counters" and "jot and tittle" people sitting in front of their computers far away from the Permian Basin, play with their emphasis of "their policy books of style, jots and twiddles" do their thing. BUT, we say, "Let's see Carlsbad in a long-term planned growth over the next 10 to 30 years." Marvelous city, Carlsbad. Marvelous people. So how to stabilize the long term growth?
HOW TO WE SAVE THE ECONOMY OF THE REGION, AND CREATE LONG TERM LASTING JOBS AND COMPANIES?
Some believe that the new wealth from the "oil patch" should be partially invested in renewable energy products. Progressive leaders use the new wealth from "booms" to invest in attracting long term stable companies that are not "boom and bust" oriented. We could put a town, like Carlsbad on the national map, if the city and chamber, banks and development departments would stress diversification of the economy, and do it now, while the dollars are still flowing in. What if towns such as Carlsbad created new industrial and business emphasis on progressive new technologies? There are dozens of emerging technologies and one of them could take advantage of something that Carlsbad has in abundance. Sunshine. We are seeing that progress and the advent of new solar powered vehicles (autos and trucks) and expanded solar and wind powered turbines are gradually providing more and more of the energy needs for the USA. We'd love to see some of the tax revenues and income from this new oil and gas wealth devoted to creating more renewable energy projects for the future. Ironic, isn't it, that big oil and gas companies use dozens of solar powered applications, especially for remote projects. What if we really promote to solar manufacturing companies, new research companies, new distributors, and make Carlsbad a leader in new Solar Energy development and distribution? If you visit the UAE or Saudi Arabia, as we have done, that is what they are doing. As their oil and gas is pumped out, decade after decade, they are aggressively investing in solar, wind and other alternative energy projects so as to create a long-term energy source, so the area can continue to profit when the oil and gas is gone.
This type of progressive thinking would compliment the energy production of oil and gas from the Permian Basin. As oil and gas reserves are tapped out, solar, wind and other energy sources could continue to expand.
Many progressive oil and gas companies are using more and more equipment and advanced creations powered by solar and renewable energy. This is a time for progress and to think of the future. We encourage all in the Permian to think progressively, including the leaders, businessmen, bankers, lenders and forward thinking people. In that way, towns such as Carlsbad can continue to grow and prosper in a high tech, "clean" future, and not depend on the past. We are available to help or consult should you need or want "forward thinking" concepts. As an honorary member of the Chamber of Commerce, I am available on the side of progress for any city looking to the future. I am on the side of progress. On your side!
Ben Boothe, Sr., President of the "Boothe Companies." Let us hear from you by email: email@example.com
We have been active in 30 states and continue to advise, and support progress!