Let’s talk
Readers had questions about where the price of crude oil is headed and about plans for the state’s hottest plays in this week’s Energy Chat.
The Oklahoman's energy reporters, Adam Wilmoth and Jack Money, fielded questions during their monthly online energy chat. This is an edited transcript of that conversation. To see the full transcript, go to NewsOK.com.
Q. Is the STACK performing to expectations? Companies (particularly Devon) stated during earnings season it exceeded expectations, but also said they are pulling back because returns weren't what they wanted.
Wilmoth: The STACK still is a relatively new play and companies are trying to determine the best way to develop it. Devon initially was one of the more aggressive firms, drilling more than a dozen wells in one section and planning adjustments as needed.
While Devon executives are reducing the number of wells they plans to drill per section, they remain bullish, noting the firm still has 90 percent of its STACK drilling program to execute.
Other companies started out drilling fewer wells per section, and I wouldn't be surprised if some increase densities. All the public companies discuss results, and while it's common for there to be many different drilling strategies early, those tend to coalesce as results come in.
Q. What role will changing global dynamics such as sanctions on Iran, a production boost pledge by Saudi Arabia and other factors have on oil prices?
Wilmoth: After nearly four years of global oil oversupply, excess is used up and the market is returning to a more typical supply-anddemand picture where many factors could maintain or increase market prices.
Not long ago, Venezuela was one of the world's largest oil producers, and it now looks unlikely that its oil will return to the market any time soon. Iranian oil could be restricted by sanctions. Saudi Arabia has indicated it will increase production, but it is unclear how much it can add.
U.S. production has more than doubled over the past decade and could increase further, but is limited by Permian pipeline constraints and Wall Street's demand for companies to reduce costs.
Most industry observers I talk to and follow seem to think the price will stay in the current range or inch up a bit the next few months, but that's historically difficult to predict. At the end of last year, the prevailing wisdom was that oil prices would not much surpass $60 this year.
Q. Many of Oklahoma's publicly traded oil and gas companies hedged significant amounts of their oil and natural gas production in the second quarter of 2018. How did that work for them?
Wilmoth: Hedging makes executives look like geniuses when commodity prices go down, but not when prices go up. At the end of 2017, most prognosticators predicted oil prices likely would stay in the $50 range. When prices got into the high $50s, most companies hedged to guarantee needed cash flows to fund drilling, debt reduction and their other promises made to shareholders.
Oil prices peaked in late June at more than $77 a barrel, but hedged companies missed out from receiving those higher prices. Accounting rules also punish companies for locking in prices below market levels. Those companies must count the difference between the two as a non-cash charge against the revenue they would have otherwise received. That's why so many reported second-quarter losses, even with increased cash flows. One notable exception was Continental Resources, where executives don't hedge.
Q. Now that Wind Catcher is dead, where is wind energy development headed in Oklahoma?
Money: There remains quite the appetite for renewable energy among commercial operations looking to reduce their carbon footprints. I'm also told there's still a lot of unused wind capacity in Oklahoma, so I believe the industry will continue to grow.
Q. What's the latest on the situation in Kingfisher County regarding the use of temporary pipelines to get recycled water to well locations?
Wilmoth: The parties are negotiating to settle the issue out of court, but a court ruling still may be needed to clarify how it is regulated. State law gives the Oklahoma Corporation Commission exclusive jurisdiction over the oil and natural gas industry, and producers believe that prevents county governments' involvement. Kingfisher County Commissioners, however, say they have jurisdiction over the county rights of way and can determine what can and cannot be transported there.