American Oil and Gas Reporter - October 2015 - 125

ConventionCoverage: Colorado Oil & Gas Association

No Miracles Ahead, But
Opportunities Await
By Bill Campbell

DENVER-There is some possibility
Saudi Arabia could decide to take some
of the air out of world crude supply in
the not-too-distant future. Even so, thanks
to the growing efficiency of North American unconventional plays, betting on a
price-led recovery likely isn't a good
proposition.
Meanwhile, liquefied natural gas exports are the key to balancing North
American gas supply and demand, but
developing liquefaction capacity and selling into a world market is not an easy
proposition.
Nevertheless, there are opportunities
for U.S. independents with the necessary
skill sets and quality assets.
Those are among the observations and
opinions expressed during multiple sessions over the three-day Rocky Mountain
Energy Summit, sponsored Aug. 25-27
by the Colorado Oil & Gas Association
at Denver's Colorado Convention Center.

Calculating Break-Even
Thomas A. Petrie, chairman of Petrie
Partners in Denver, likened today's crude
oil market to the price collapse engineered
by Saudi Arabia in 1986, when the oil
ministry figured $15 a barrel was the
break-even price at which higher-cost
production such as the North Sea would
be shut in.
So the Saudis forced world oil prices
to around $12, Petrie recalled. But after
a few months, he said, then Oil Minister
Sheik Ahmed Zaki Yamani asked his
staff, "Why aren't we regaining market
share?
"That is when he learned the difference
between net-income break-even and
cash-flow break-even, which was about
one-third the level of net-income breakeven," Petrie surmised. "He began to
realize that if he really wanted to capture
market share, he would have to take
prices to a single-digit number. That is
when (the Saudis) changed their strategy.
The situation today is not all that different."

Based on production costs, Petrie calculated break-evens today of $7 for Saudi
Arabia, $13 for Iraq and $46 for Russia,
compared with $39 and $49 for the
United States and Canada, respectively.
But when one recognizes "the embedded
dependence on running the government,
maintaining stability and meeting social
needs" of major exporters, Petrie said
break-even costs rise to $89 for Saudi
Arabia, $105 for Russia and $114 for
Iraq.
"It is going to be a big task for most
of these countries to change because the
culture that involves exporting hydrocarbons as the main source of wealth and
economic drive is still there," he opined.
Already, he pointed out, Saudi Arabia
has gone to the debt markets and has announced deferrals in some infrastructure
programs.
Petrie said he believed Saudi Arabia
was waiting only to confirm a rollover in
production from major U.S. unconventional basins. "I would say less than six
months and possibly as little as three or
four months of declining output . . . will
be the point at which the Saudis change,"
he expressed. "I think that will be less
than a year from now. It could be a yearand-a-half, but it could be as soon as six
months."
However, he quickly added, "that
doesn't take us back to $80 or $90 a
barrel. Those are likely to be fond memories for some time."

Increased Efficiency
A number of Energy Summit speakers
were skeptical of a near-term price-led
recovery. "We are preparing for (the current pricing environment) to stay with us
for a long time," advised Wouter T. van
Kempen, chairman, president and chief
executive officer of DCP Midstream in
Denver.
"It is very hard, but we need some
pain," he added. "We need to go through
a cycle such as this to start getting rid of
some production and start affecting the
supply side."
Claire S. Farley, energy and infrastructure member at Kohlberg Kravis
Roberts in Houston, offered, "We are
not betting on a price recovery."
Remarking that "half the number of
rigs (can supply) the deliverability we
had in the past, and we probably are
going to get better from here," Farley
worried, "Every time there is a strong
price signal-an ability to hedge into $70-
we are able to pick up 500 rigs and create
an oversupply again."
On the basis of wells drilled per horizontal rig per month, Javier Diaz, manager
of energy analysis & consulting at Bentek
Energy in Denver, suggested, "The U.S.
increase in efficiency is about 60 percent
in the last five years."
David Lawler, CEO for BP's lower48 onshore business, agreed that "prices
will be lower for an extended period,"
and offered some examples of the up-

Thomas A. Petrie (right), listens to remarks by author
Robert O. Kaplan during the
opening day general session
at the Rocky Mountain Energy Summit, hosted by the
Colorado Oil & Gas Association on Aug. 25-27 at the
Colorado Convention Center
in Denver. Kaplan spoke on
Middle East and world geopolitics while Petrie, who is
chairman of Petrie Partners
in Denver, translated their
impact on crude oil prices.

OCTOBER 2015 125
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