Pipeline, export infrastructure boost Oklahoma production
Energy Editor Adam Wilmoth chatted online Tuesday with readers about Oklahoma’s energy business. The following is an excerpt from that conversation.
Q: What effects of the soonto-be rapidly increasing LNG export market are you seeing in Oklahoma, if any?
A: We already are seeing several effects in Oklahoma from the expanding liquefied natural gas export market. The first and, so far, only operational LNG export facility is run by Houston-based Cheniere Energy, although several others are working their way through the permitting and construction processes. Cheniere is working on a pipeline that would start in the STACK in Kingfisher County, run through the SCOOP in south-central Oklahoma and connect to existing pipelines in Bryan County. From there, the Midship Pipeline would connect Oklahoma’s natural gas production directly to the Louisiana Gulf Coast and Cheniere’s LNG export facility.
LNG exports also have made natural gas fields in Louisiana and east Texas more favorable for drilling. Chesapeake Energy is drilling in the Louisiana Haynesville, and Enable Midstream Partners recently expanded its pipeline and processing reach in the Ark-La-Tex basin.
Q: In your opinion does it appear that Oklahoma’s oil and gas companies are getting back on their feet, or are they still in recovery mode from the lower commodity prices?
A: The industry in Oklahoma has recovered. Executives are planning for oil prices in the $40 to $60 range for at least the next several years. Companies have cut costs and have improved drilling and completion techniques to the point where they can be profitable at that level. Hiring still has not picked up as companies are trying to be more efficient and operate at a low cost. Improved techniques have allowed companies to increase production with fewer drilling rigs and crews.
Lower prices have caused companies to focus on only the best oil fields. Fortunately for Oklahoma, the state’s oil fields have become among the most popular and least expensive places to operate. Part of the reason is because the rock beneath Oklahoma contains several layers of producible zones, allowing companies to drill up to 20 or so wells into different rock layers from one drilling pad. Oklahoma also is beneficial to producers because the state has significant pipeline and processing infrastructure and is near enough to the Gulf Coast processing, refining and export infrastructure.
Q: Have there been any energy industry effects with regard to the ongoing legislative budget standoff?
A: So far, the oil and natural gas industry has staved off most proposed gross production tax hikes, and drilling continues to increase throughout the state. But business does not like uncertainty. Industry leaders have said the continued threat of tax hikes could affect decisions as companies plan for 2018 drilling. Others, however, have questioned how much of a factor the gross production tax is in corporate decisions when other variables — including commodity prices and access to completion crews and products — vary much more widely and have a much larger effect on industry profits.
Q: Private equity seems to be pouring into the SCOOP-STACK plays and buying up mineral and leasehold acreage at pretty high prices. Any benefits or downsides to these actions for Oklahoma?
A: You are correct that Oklahoma’s oil fields have benefited substantially from private investment over the past few years. The money has funded many smaller oil and natural gas producers and has allowed for pipeline and processing infrastructure to be built, boosting production revenue and job growth throughout the state.
Private equity usually wants a return within a few years. There are many models and many ways such investors can do business. One common model is for companies to use private equity to build up acreage, drill some wells, prove the average can be profitable and then sell to a larger producer. That model has been used heavily in the Permian Basin in west Texas and southeast New Mexico over the past several years. Oklahoma’s STACK and SCOOP fields are newer in terms of investment and private capital involvement, but we might start seeing those private equitybacked companies over the next few years trying to sell themselves to larger private and publicly traded companies.