American Oil and Gas Reporter - November 2015 - 107

ConventionCoverage: Permian Basin Petroleum Association

Short-Term Pain Leads
To Long-Term Gain
By Danny Boyd
Special Correspondent

MIDLAND-Oil and gas operators can
expect more contraction-perhaps for up
to another year-as companies continue
to adjust to low oil prices. But overall,
long-term global demand will continue
to climb and offset spare capacity that is
more restricted than some may realize,
an industry analyst told members of the
Permian Basin Petroleum Association.
Speaking at PBPA's 53rd annual meeting, Oct. 15 at the Midland Petroleum
Club, Colin Fenton, a strategic adviser
with Blacklight Research LLC, said prices
might remain soft over the next year and
force companies to continue to reduce
labor and consolidate assets.
"But after that, this part of the world
is going to be the sweet spot on the
planet for energy production," suggested
Fenton, keynote speaker at PBPA's membership luncheon. "The Permian will continue to grow. Part of the Organization
of Petroleum Exporting Countries' strategy
is to try to throw a tomahawk this way,
but at the end of the day, the world needs
the oil and gas that is going to be produced
in Texas, New Mexico, Oklahoma and
elsewhere."
Unrealistic promises from "Group of
7" nation leaders to wean the world off
hydrocarbons by the end of the century
without providing a plan and realistic alternatives already are contributing to a
sagging stock market, Fenton said. He
added that the promises didn't account
for what likely would be climbing petroleum demand in the years ahead.
"The best indications are that our civilization is not going to get off oil and
gas," he projected. "It needs 13 million
more barrels a day in new liquids just to
get to 2030 because all the people in
China and India want to drive, too."
Fenton cautioned PBPA members to
examine the extent of price swings, rather
than just consider current prices when
contemplating drilling programs. Talk
among analysts of lower prices for longer
is moot without price stability, he opined.
Contributing to the near-term outlook

for price recovery, Fenton pointed out
that China had surpassed the United States
as the world's largest crude importer,
and continued to buy supplies. Instability
in the Middle East could create disruptions
at any time that would drive up the price
of oil, he added, and division within
OPEC, especially between Saudi Arabia
and Iran, contributes to instability as
members position themselves to sell more
to China.
"I think you will see China and others
tighten the market, and there is going to
be diminishing availability of accessible
inventory. I would argue that is happening
already," Fenton offered.
Despite increasing production, he said
OPEC had spare capacity only of about
1.5 million barrels a day.
"Don't get dogmatic on price," Fenton
cautioned. "Realize that if something
goes south in Syria, you might actually
have a $90 average price in 2017, and
these are conditional probabilities. That
number could be $200 before you even
knew what happened."

Despite some near-term market softness,
the Permian Basin remains "the sweet
spot on the planet for energy production"
in a world destined to continue relying
on hydrocarbons, Colin Fenton, a strategic adviser with Blacklight Research
LLC, assures the Permian Basin Petroleum Association during its annual meeting, Oct. 15 in Midland.

One question remains, he said: At
what point do numerous regional conflicts
add to a world war?
"We have seen all the elements we
saw in the 1930s over and over again,
and the complete denial in the U.S. government is scary," Fenton worried.
He recommended companies look at
options in the stock market because of
volatility, including selling calls, collecting
the premiums, and using them to buy
puts.
Companies should expect more "extinctions" among their ranks, anticipate
and accept structure change, avoid being
dogmatic on the price level, plan for high
volatility, avoid categorizing potential
conditions as being "inconceivable or
impossible," and engage in practical
scenario analysis, Fenton advised.

Dominant Source
As evidence of declining activity, the
Texas Railroad Commission had issued
slightly more than 8,000 drilling permits
by mid-October, about a third the amount
it had issued by the same time in 2014,
RRC Chairman David Porter told PBPA
members at breakfast.
Still, the Permian Basin continues as
the dominant source of oil and gas activity
in the state, and accounts for a fourth of
the national rig count and roughly half
of Texas' tally, Porter observed.
He said the RRC was working to
update rules to reflect the reality that
horizontal drilling and completions now
dominated upstream activity, he said.
"All our regulations over the past 100
years basically were set for a vertical
world, but we are no longer in a vertical
world," Porter said.
He said the RRC was to begin the
process of developing a statewide rule
on unconventional reservoirs in late October.
He noted that efforts continued in the
state to promote liquefied and compressed
natural gas as motor fuels for fleet vehicles,
which he said would contribute to overall
gas demand. Additional gas demand in
Mexico also is helping Texas operators,
he held.
NOVEMBER 2015 107

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