Recently, Randle Myers with Coastline Royalty Company forwarded some observations and comments based on some interesting articles regarding Oil & Gas prices. We thought you might find his comments and the articles interesting and insightful, so we asked his permission to share them with you here.
On oil prices, the CEO of EOG Resources states that “nobody believes the current oil price is anywhere close to sustainable” and that the oil price has to migrate up to the “marginal cost” required to produce oil of $70 - $80 per barrel. He hopes it will be by late this year, but “certainly” by 2017.
On gas prices, Art Berman, who is generally a prophet of doom and gloom, states that near term natural gas price increases are “inevitable”, and presents some pretty good data to support it. He presents EIA data showing that conventional U.S. gas production declined by 16.75 bcfgpd since 2008, but that this decline was offset by the growth in shale gas production during the same period. However, in the past four months, shale gas production growth has not only stopped (in response to low prices), but actual shale gas production declines started in July 2015 & are down 0.72 bcfgpd over the past 4 months.
He estimates that conventional gas will continue to decline at 2.5 bcfgpd per year, while legacy shale gas continues to decline at 12.5 bcfgpd per year, for a total decline of 15 bcfgpd per year, meaning that new production of 15 bcfgpd per year will be needed for U.S. gas production to remain “flat”. I agree with him that current gas prices are below the true replacement costs for most of the shale gas plays in the U.S., and I also agree with him that the era of freely available capital from Wall Street that was the driver of the over-drilling of the past several years is over. E&P companies drilling out of their cash flows rather than with junk bond money should start bringing supply and demand back in balance pretty quickly.
Both articles reflect my belief that neither the oil and gas industry, or any other industry, can produce their product at a loss over the long term. The price the product sells for eventually has to reflect the true cost of production plus some profit, or it can’t be produced.
Randle S. Myers
Coastline Royalty Company, LLC