Navigant Research Blog

Oil Prices Cut Drilling Sector Sharply

— September 17, 2015

Magnifiers_webOil drilling rig numbers in the United States have been declining rapidly, down about 57% from a year ago. The total count was 675 as of last week, up one from the week before. This marks the sixth week that rigs have been added by domestic oil drillers, although the numbers are still far lower than they were at this time last year, when the total number of oil rigs sat at 1,575. The rig count is approaching historic lows: the highest historical rig count was 4,530 in 1981; the lowest was 488 in 1999.

The total quantity of oil produced has not decreased nearly as rapidly as the number of rigs. Due to technology advances and greater efficiency, each rig has been yielding more oil production on average. Additionally, fewer rigs are being shut down in the most productive regions—the Bakken, Eagle Ford, and Permian plays. The U.S. Energy Information Administration estimated a decline of 100,000 barrels per day from June to July. This brought production in June to 9.3 million barrels a day. Overproduction in a tepid marketplace leads to further declines in the price of crude oil.

A Double-Edged Sword

The decline in drill rigs is related to declines in the price of crude oil, which has fallen from $98.15 in August 2014 to $45.63 a year later. Despite the obvious decline in drilling sector jobs, there are benefits to the declining numbers of rigs. Drilling rigs tend to use a lot of fuel, and quite often diesel. Recent regulations proposed by the U.S. Environmental Protection Agency limit the emissions produced by a diesel rig, but the real impact on emissions comes from the declining numbers of engines using the fuel. The decline in diesel use has enormous benefits for other sectors of the economy, including a surplus of diesel fuel to be used for agricultural purposes. Consumers in the United States are experiencing lower retail costs for gasoline and heating oil; worldwide, importing countries are also experiencing economic growth due to the lower cost of oil. Yet, the stronger U.S. dollar prevents this growth from being as dramatic as that in the States. Lowered oil prices are positively affecting many oil-importing countries, while negatively affecting the exporters.

Globally, it appears that the fall in oil prices should have a positive impact. Drastic declines in the price of oil tend to shift extra income to consumers, driving global economic boosts. According to The Moscow Times, whenever the price of oil is halved (as evidenced in recent years 1982–1983, 1985–1986, 1992–1993, 1997–1998, and 2001–2002), it is followed by rapid global growth. The inverse is also accurate, with rising oil prices preceding every global recession in the past 50 years. If trends hold true, the current decline in oil prices could lead to greater economic well-being around the world.

Last week, oil prices began to increase gradually, but a 3-day uptick was followed by a $2.10 fall to $47.10 a barrel. This still marks an increase from the $39.57 price of August 26. Perhaps the decline in oil drilling rig counts will not persist so very long, after all.


In Profit Crunch, Oil Firms Look to Big Data

— June 5, 2015

New_Picture_webAs the price of crude continues to fall and the availability of places for oil companies to store oil shrinks, oil and gas companies are looking for ways to reduce costs and preserve profits. Operational efficiency is a familiar path—one that leads to layoffs, up to 75,000 coming at companies big and small, as reported by Continental Resources. At the same time, some companies are looking inward to big data as a way to make operations and exploration more efficient. We’ve written about the large potential for big data to make buildings, for example, more efficient. And it’s clear that the value of big data lies in its context.

In the case of oil and gas, it is important to keep in mind how diverse this industry is. The use of data in oil exploration and production is wholly different from its employment in oil refining, distribution, and marketing.

Down the Stream

According to the panel members of a recent Cleantech Forum panel on the digitization of the oil and gas industry, there’s scant consensus on data models and formats in single business units, let alone across an entire company or the industry. The spread of digitization is not universal, either. This presents a clear challenge to the industry–data analytics are only useful when the data is consistently collected and, well, analyzed. But it also presents an opportunity. Any company that can figure out how to collect, integrate, and analyze data across the oil and gas stream—from wellhead to gas pump—will be able to unlock the potential of both operational efficiency and optimization. Those gains in efficiency will save money and help the companies achieve their sustainability goals.

A few companies are already testing that promise. WellAware is looking to bring a new Internet of Things (IoT) network for oil and gas, providing customers a view into the production, conveyance, and processing of petroleum products. The Texas-based firm deploys sensors and gathers data from existing monitors to provide visualizations and analytics on system performance. To compete with OSIsoft, an incumbent in oil and gas data collection and historian services, WellAware will provide hardware and advanced analytics—two offerings that OSIsoft either does not offer or outsources.

Human Input

A different approach, one based on large time series data analysis, is offered by Mtelligence Corporation and MapR, a provider of the powerful open-source Hadoop solution. Called Mtell Reservoir, the solution will focus on real-time and historical sensor data analysis to provide system managers operational insight. Given the large volume of data gathered in a drilling operation and the time it takes to load and analyze data, an in-stream solution will have great value.

These big data solutions are poised to give oil and gas operators greater intelligence and insight into operations. However, they don’t close the loop on operations, removing the need for people making decisions. This is due in part to the complex nature of drilling through multifaceted substrates and processing materials of varying quality. Production technologies like directional drilling and fracking have changed the oil and gas business and are in part responsible for the current low oil prices. Data analytics may help to stem the profit losses in the near term.


Oil-Gas Price Swings Slow New Energy Investment

— February 18, 2015

As I wrote in this blog in 2012 and in 2013, rising volatility in the oil-to-gas ratio points to a substantial shift in market dynamics for clean energy. Even if short-lived, this shift will have substantial implications for investment in new energy technologies.

In recent years, as the price of oil climbed to over $100 a barrel, the oil-to-gas ratio—which compares the price of a barrel of crude oil to that of a million Btu (mmBtu) of natural gas—spiked to as high as 52:1 in a single month from a relative constant of around 10:1. While this apparent equilibrium had held steady since the mid-1980s, the widening gap between the price of oil and that of gas seemed to represent a new reality, with natural gas prices holding below $3 per mmBtu (Henry Hub).

In the last several months, as oil prices have slid to less than $50 per barrel, that ratio has come crashing back down to Earth. At a current 13:1, the oil-to-gas ratio is once again nearing historic levels—and again reshuffling the deck for a cleantech industry yearning for macroeconomic certainty.

Ratio of Crude Oil to Natural Gas: 1990-2015


(Source: Navigant Research)

While the boom in shale oil and gas recovery (among other factors) has ushered in an apparent return to historical equilibrium, experts are divided on what the future holds. Some argue that the recent spike in the oil-to-gas ratio was a short-term anomaly and that forces will continue to act to bring prices back into their long run equilibrium. Others question whether a stable long-term relationship between crude oil prices and natural gas prices even existed in the first place.

While the jury is still out on the putative correlation between oil and gas prices, we can expect continued volatility in the oil-to-gas ratio. This creates a challenging environment for new energy technologies going head-to-head with existing infrastructure.

The Incumbent Edge

Volatility dampens growth in new energy technologies in several ways. First, it cools investors’ appetite for clean energy ventures, due to the potential risk that seemingly profitable investments one day may turn out to be unprofitable due to changing fuel costs. Building natural gas infrastructure may look attractive in 2012 if you’re in the United States, for example, but not so wise when the price of a barrel of crude oil drops by more than 50% in 2014. This is an issue of asset stranding.

Second, it lowers customers’ tolerance for risk. As noted in our recently published report, Combined Heat and Power for Commercial Buildings, the impact of price swings are most acutely felt by consumers looking to hedge with one fuel against the other. When oil prices accelerated past $100, consumers of heating oil and gasoline, for example, began looking to natural gas alternatives. These decisions can be straightforward when price signals are stable, but actual (or even perceived) volatility favors a wait-and-see approach.

The Underminer

Third, it undermines the role of incentives and other mechanisms for stimulating the deployment of new energy technologies. Still more expensive than incumbent technology in most cases, clean energy has enjoyed incentives that put emerging energy technologies on an even playing field with fossil fuels. Fuel price volatility can make it especially challenging to establish reasonable incentive levels for the long term.

While Navigant Research’s forecasts for distributed generation technologies like solar PV (see our Global Distributed Generation Deployment Forecast report) and energy storage (see our Community, Residential, and Commercial Energy Storage report) in the United States remain strong despite lower energy prices, volatility is likely to mostly benefit the status quo.


With Cheap Oil Flowing, U.S. Looks to Next Energy Revolution

— January 26, 2015

With oil prices continuing to languish and Saudi Arabia moving through a royal succession upon the death of King Abdullah, the idea that the “OPEC era is over” has gained credence among government officials and industry analysts. “Did the United States kill OPEC?” asks New York Times economics reporter Eduardo Porter. The answer, he argues, is essentially yes: “The Nixon administration and Congress laid the foundation of an industrial policy that over the span of four decades developed the technologies needed to unleash American shale oil and natural gas onto world markets,” thus loosening OPEC’s grip.

The reality is a bit more complicated than that: OPEC still produces nearly 40% of the world’s oil; the United States produces less than 18%. And oil at $50 a barrel could actually increase OPEC’s power as producers of unconventional reserves, which are more costly to produce, are driven from the market. Like the coal industry, OPEC is not going anywhere anytime soon.

The Big Opportunity

The shale revolution does, however, offer some other welcome knock-on effects, if policymakers are alert and astute enough to take advantage of them.  “Cheaper oil and gas will contribute an estimated $2,000 per American household this year, and $74 billion to state and federal governments coffers,” note Ted Nordhaus and Michael Shellenberger of the Breakthrough Institute, a San Francisco-based energy and climate think tank. The Breakthrough Institute has done extensive research on the role of public-private partnerships in the development of the seismic and drilling technology advances that underlie the shale revolution. Should the government choose to take advantage of it, this windfall could fund a multi-decade R&D program for renewable energy similar to the one that led to the shale boom.

“We can afford to spend a tiny fraction of the benefits of the bounty that cheap oil and gas have brought so that our children and grandchildren can similarly benefit from cheap and clean energy in the future,” declare Nordhaus and Shellenberger.

The Gas Tax Solution

That’s an inspiring concept. The execution is likely to be messy, though. Any such spending would probably need congressional support, or at least consent – and the U.S. Senate only last week finally reached agreement that “climate change is real and not a hoax.” That’s a long way from dedicating billions to develop alternative energy sources.

One suggestion put forth by clean energy activists is an increase in the U.S. gas tax. A few cents extra per gallon (on gas that’s about half the price it was a year ago) could help fund a massive crash program to develop inexpensive, clean energy technology (not to mention shore up the failing U.S. Highway Trust Fund).

But raising the gas tax is like the National Popular Vote – a terrific idea that’s unlikely to happen in our lifetimes. Even though polls consistently indicate that consumers are willing to spend slightly more for the energy they consume in order to limit climate change, actually slapping extra taxes on motorists at the pump is unlikely to be a winning move in Washington – which explains why President Obama left it out of his call for a “bipartisan infrastructure plan” in his State of the Union address.


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