American Oil and Gas Reporter - March 2016 - 36

FIGURE 2
Total U.S. versus Appalachian New Natural Gas Production Capacity
Declines (March 2014-February 2016)
Total U.S.

Appalachian

120,000
110,000

New Gas Production Capacity (Mcf/d)

100,000
90,000

109,432

80,000
70,000
60,000
50,000
40,000
30,000
20,000

41,412

32,473

14,010

10,000
0

Mar

Apr

May Jun

Jul

Aug

Sep

Oct Nov

2014

reached record amounts in 2015. The
world's one-time "swing producer" has
been effectively producing at capacity,
and most industry experts believe there
is little, if any, behind-valve spare production. Any sudden interruption in global
supply likely could not be met by additional Saudi production, causing today's
perceived supply glut to become a shortage.
When sanctions hit Iran, the country
immediately dropped 600,000 bbl/d from
its official oil production levels. The fact
that the Iranians are reporting the same
production (to the barrel) since then
causes that official number to be quite
suspect. Iran has not been investing in its
infrastructure, and it requires outside dollars to reinvest in existing production.
The necessary capital investment ranges
from $30 billion to $500 billion over the
next five years, depending on the source,
to simply maintain existing production.
Oil priced at $30/bbl is not an environment
amenable to outside tender offers.
Some claim there will be no net new
production in the near term, and that Iran
merely will start to recognize the oil production it previously sold on the black
market. In any case, 500,000 bbl/d of
new Iranian oil production remains baked
into most supply forecasts. Score another
one in the "not-a-driver" category.
The Chinese economy has been exhibiting signs of extreme duress, suggesting that demand growth could weaken
materially. Imports of metals and building
materials are down substantively, but oil
36 THE AMERICAN OIL & GAS REPORTER

Dec Jan Feb Mar Apr

Month

May Jun

Jul

2015

Aug

Sep

Oct Nov

Dec Jan

2016

imports are not. China continues to import
crude oil at increasing rates, most likely
taking advantage of the low-price environment to strengthen its strategic reserves.
China's growing "guns versus butter" investment shift is not likely a bearish sign
for crude oil, either.
Production growth estimates from both
the International Energy Agency and the
U.S Energy Information Administration
suggest that the market is not going to
respond elastically to lower oil prices. In
essence, IEA and EIA are saying that
lower prices will not drive higher consumption for the first time in history, despite the "surprise" increase in global
consumption in 2015. That is four nondrivers.
Let us make it five. Russia found itself
in a fun position in 2015 as economic
sanctions hammered the value of the
ruble by 50 percent. Essentially, Russia
had a half-price drilling environment and
was effectively hedged by its cratering
currency because it pays for new wells
in rubles and sells its crude in dollars.
This advantage no longer exists with
commodity prices at the levels seen to
date in 2016. Russia is not likely to spend
$1.00 to get back $0.20 in the first year.
Wielding The Big Stick
Forget the rest of the "pick six" factors.
If anyone assumed OPEC was not in
charge of global oil prices, he was dead
wrong. And by OPEC, let's be honest,
and say Saudi Arabia. Only Russia, Saudi
Arabia and the United States, technically

American Oil and Gas Reporter - March 2016

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