Low gas prices roil energy economics in Gulf

05 28, 2013 by The Advocate

The low natural gas prices that have juiced much of Louisiana’s economy are also reshaping the oil-and-gas industry in the Gulf of Mexico, pushing the focus away from the coast and toward deep water far offshore.

Indicators tell a tale of two economies — deep water, which has massive oil deposits that companies are spending billions of dollars to extract, and the shallow water fields that after decades are producing less oil and natural gas, experts say.

It’s also a tale of two commodities, oil and gas, with oil fetching a price that reaps producers profits and gas dipping below the point at which drillers make money.

“The shallow water has a lot of natural gas, but it also has a lot of oil production,” said Don Briggs, president of the Louisiana Oil and Gas Association. “Those companies that are heavily weighted in natural gas are really having a tough time.”

Many companies are getting out of the shallow water business because “it’s just so costly, the risks are just so great,” Briggs said.

He said some producers in the shallow gulf face the high cost of maintaining platforms that are decades old, and the costs rise as the structures get older and as the federal government adds more regulations.

Briggs noted that companies operating in the gulf’s shallow water, generally defined as water less than 500 feet deep, are concentrating on extracting the more profitable oil that remains while trying to stay away from natural gas.

It’s quite a turn from just a few years ago, when producing natural gas was highly profitable, he said.

The price per thousand cubic feet of gas spiked to $15 in late 2005 and early 2006 after hurricanes Katrina and Rita knocked out some of the offshore and land-bound facilities, according to Energy Information Administration prices at the Henry Hub, a key North American distribution point in Erath where gas spot prices and futures contracts are set.

After receding to just above $4 per thousand cubic feet in 2006, the price of natural gas rose again in 2008 to $12, EIA figures show.

After the 2005 hurricanes, forecasters predicted a future shortage of gas in the U.S., and investment dollars soon poured into facilities that could unload liquefied natural gas imported from foreign countries for U.S. consumption, Briggs said.

Meanwhile, drillers on land were perfecting a process called hydraulic fracturing, or fracking, which uses high-pressure injection to unlock gas embedded in shale rock. The process unleashed vast amounts of gas that hit the market.

In April 2012, the bulging supply drove gas prices down to about $2 per thousand cubic feet. Currently, the price hovers around $4, according to EIA numbers.

The lack of profits for offshore gas producers has meant financial pain for the gulf pipeline operators, said Eric Smith, associate director of the Tulane University Energy Institute.

Smith said pipeline system operators are not seeing enough natural gas flow through the pipelines. Less gas means less revenue, and the pipeline owners are looking to sell the systems, he said.

“The shallow water gas production is way, way off,” said Smith, adding that shallow-water gas can’t compete against onshore shale gas, which is much cheaper to produce.

Most companies that are profitable produce more oil than gas, Briggs said.

Oil has sold in the range of $60 to $100 a barrel since 2006, EIA figures show.

Data from federal agencies show gas production falling in all areas of the gulf while oil production is ramping up only in deep water. Although it’s cheaper to drill for oil in the shallow water, there is less of it to pull out.

In deep water, as far as 10,000 feet below the water’s surface, it takes massive amounts of investment capital and years of planning and construction to complete a project, said Smith, with the Tulane Energy Institute.

Deep water oil and gas developments cost much more than those in shallow water but remain an economic bonanza for contractors big enough to handle the scale, Smith said. Many of the smaller contractors who build platforms and lay pipe can’t handle the bigger projects and are now competing for a dwindling share of shallow-water work. The bigger projects use up about the same amount of dollars as the smaller projects that used to be spread around to contractors along the Gulf Coast, Smith said.

“Instead of 100 projects, you have two and they’re $3 billion each,” he said.
Removing iron

What is keeping some contractors busy are salvaging operations.

Smith said more platforms are being removed from the gulf’s shallow waters than are being installed.

In September 2010, following the BP Macondo oil disaster, President Barack Obama mandated the removal of “idle iron” in the gulf, hundreds of oil and gas platforms that are no longer producing, primarily in the shallow waters.

“There’s been a big increase in the number of platforms … that have been taken out,” said Allan Pulsipher, executive director of the LSU Center for Energy Studies.

The removals have been a boon to some contractors, like heavy-lift salvage company Bisso Marine, a New Orleans-based contractor that lifts topside production platforms weighing hundreds of tons. Also benefitting are companies that plug wells during abandonment operations so no oil or gas escapes from the holes drilled years ago.

Superior Energy Services works on wells from their drilled beginnings to their plugged-and-abandoned end. The company expects a lot of its revenue this year to come from deepwater drilling activity and platform decommissions.

“In the shallow water Gulf of Mexico, most of our revenue is related to production enhancement and end of life services,” Superior Energy wrote in its annual report, filed with the Securities and Exchange Commission.

More than 80 platforms ready for decommission in the gulf are in water ranging from 15 to 660 feet deep, with most in water less than 100 feet, federal Bureau of Safety and Environmental Enforcement records show.

Some platforms scheduled for removal have been in place for decades; one owned by Stone Energy in 68 feet of water south of Lafayette was installed in 1964.

Smith said the 150 to 200 removals each year are keeping contractors busy, but the work is finite. “We’re eating into the inventory,” he said.
Lots of gas

The price of natural gas likely will not climb much higher anytime soon, said Loren Scott, a Louisiana economist.

Scott said production companies offshore and onshore have closed some valves to wait for prices to rise.

Once the prices rise, the producers open the spigots to make more money, but the action feeds the market enough to lower prices again, he said.

“It’s never going up to $8 or $9 again,” Scott said. “There’s just too much darn gas.”

Scott said the same low-dollar gas that producers are trying to survive on is the driver for tens of billions of dollars in Louisiana industrial projects that are economically viable now because of cheap natural gas.

The plentiful supply has propelled U.S. gas producers to push to convert the natural gas import facilities, built a few years ago when it looked like America would run out of natural gas, into export facilities.

On Tuesday, Energy Secretary Ernest Moniz said he will delay final decisions on about 20 applications, including ones in Louisiana, to export liquefied natural gas until he reviews studies by the Energy Department and others on what impact the exports would have on domestic natural gas supplies and prices.

Chris John, president of Louisiana Mid-Continent Oil and Gas Association, said Moniz’s decision is disappointing.

“Even the Energy Department said there would be minimal impacts on the economy,” John said.

The energy industry was moving along a positive path to create more jobs and economic growth with the LNG facilities, and further delays are unnecessary, John said.

Only two LNG export facilities — one in Cameron Parish and the other in Texas — have Department of Energy approval to export the fuel to countries without free-trade agreements. At least eight other export facilities are proposed in Louisiana.

“It’s amazing,” Briggs said. “Overnight we went from not having enough gas for our petrochemical plants and prices were going sky-high to now having an abundance of natural gas.”