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Monday, December 11, 2017

Utica Shale Activity Stays Steady on Latest ODNR Report

New permits issued last week: 10  (Previous week: 10+-0
Total horizontal permits issued: 2703  (Previous week: 2694+9
Total horizontal wells drilled: 2187  (Previous week: 2184+3
Total horizontal wells producing: 1735 (Previous week: 1735+-0
Utica rig count: 21 (Previous week: 21)  +-0

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Chesapeake Energy Among Drillers Readjusting Drilling Strategy

From Seeking Alpha:
It did not take long after the bottom in the price of oil was reached in early 2016 for drilling to increase in the shale patch. Chesapeake (NYSE:CHK) is no exception in this regard, even though its approach was always comparatively more conservative. In the third quarter of 2016 it was operating 11 rigs, while in the last quarter it had 17 rigs drilling. It is actually a decline compared with the second quarter of this year, when it was employing 19 rigs. Evidently, the rising price of oil has not been enough of a stimulant to keep to the drilling pace that the company tried to have in the spring. 
It is, in many ways, difficult to understand what exactly determined Chesapeake as well as other shale producers to increase rig counts beyond what many of them, and apparently their shareholders, seem to be comfortable with at current oil & gas prices. Perhaps it was the expectation that the price of oil will increase more than it actually did. But in the case of Chesapeake, it is not as helpful as it is for many other companies. Given that it produces significantly more natural gas than crude oil, even though the company has been making an effort to shift production to more oil, it will be a long time before it will reach the point where natural gas will account for less than oil in terms of its revenue stream. Natural gas prices did see a more significant rebound in 2016 compared with oil, from the lows that were reached at the beginning of that year. Perhaps Chesapeake expected to see a continuation of the trend. Perhaps it should have waited for more confirmation of the trend, because as things stand right now, it seems the company may have harmed its chances of reporting some more positive quarters in terms of profitability.
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Thursday, December 7, 2017

Announcement of OPEC Plans Helps Shale Drillers

From Bloomberg:
OPEC and Russia just gave their most implacable foe, U.S. shale, an early holiday gift. 
As corporate boards for American oil explorers prepare to sketch out 2018 drilling budgets, Thursday’s historic agreement by Saudi Arabia, Russia and other major crude producers to extend supply caps for another year may prompt directors to spend more on drilling. That’s because the producer group’s restraint has meant higher prices for U.S. shale drillers, who haven’t been shy about hiring more rigs or flooding global markets with more cargoes.

After climbing out of a crater dug by the worst oil-market collapse in a generation, North American explorers probably will boost spending by 20 percent next year, according to an Evercore ISI survey of industry budget trends. That would follow an estimated 41 percent jump in 2017. 
“The North American E&P industry is very itchy to spend more capital dollars,” said James West, an Evercore analyst who’s recognized as the keeper of the keys to North American spending data going back to the mid 1980s. “They’re in the board rooms right now talking about budgets and OPEC is saying what they’re going to do through 2018.”
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Rig Count Drops on Latest ODNR Report

New permits issued last week: 10  (Previous week: 6+4
Total horizontal permits issued: 2694  (Previous week: 2687+7
Total horizontal wells drilled: 2184  (Previous week: 2180+4
Total horizontal wells producing: 1735 (Previous week: 1729+6
Utica rig count: 21 (Previous week: 23)  -2

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Monday, December 4, 2017

FERC Says Emails Show Rover Lied About Plans to Demolish Historic House in Carroll County

From NGI:
In 2015, Rover purchased the 1843 Stoneman House, which sits near a compressor station along the planned route, and was eligible for listing in the National Register of Historic Places. Rover eventually demolished the house, which FERC said it discovered during certificate proceedings for the project. 
The Commission denied a blanket authorization for routine construction activities when the certificate was issued earlier this year over what it viewed as Rover’s “intentional demolition” in violation of the Natural Gas Act, federal historic preservation laws and other regulations. A blanket certificate allows developers to conduct some construction activities without regulatory approval, but FERC said at the time that the company couldn’t be trusted to comply with its requirements. 
Rover has maintained that it bought the property to use as office space and only demolished it after learning that the home wasn’t suitable. In its Thursday order, FERC revealed that emails with contractors demonstrated that Rover “contemplated demolishing the Stoneman House before purchasing the property.” Rover asked its contractors immediately before buying the property if tearing down the historic house was permitted, according to FERC’s interpretation of the emails. 
The contractor acknowledged that no one could stop Rover from demolishing the house, but said doing so would be a “politically risky strategy,” FERC said in quoting from the correspondence. The contractor instead advised that Rover consider alternate locations for the house, which could be costly and difficult. Absent any action, the contractor advised Rover that it would likely have had to work through additional regulations with the Ohio State Historic Preservation Office to resolve adverse impacts the project would have had on the property. 
“Rather than pursuing either suggestion, Rover demolished the house,” FERC said in its order. “Based on this evidence, the Commission concluded that Rover both understood the requirements of section 106 [of the National Historic Preservation Act] and demolished the house with the intent to avoid the section 106 process.”
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Friday, December 1, 2017

Rover Pipeline Donates $30,000 to Emergency Services in Three Ohio Counties

From The Canton Repository:
Rover Pipeline donated $30,000 to emergency services in local counties crossed by the 713-mile interstate natural gas pipeline system. 
Emergency managers for Stark, Carroll and Tuscarawas accepted the money during a brief ceremony Wednesday. 
Rover is giving $10,000 to emergency services in all counties along the pipeline system, including 18 in Ohio, for a total of $270,000, said Rover spokeswoman Alexis Daniel. The money can be used to buy equipment or train first responders. 
Stark plans to use to the money to rehabilitate equipment and furnishings at the county Emergency Operations Center, which is at the Stark County Jail, said Emergency Management Agency Director Tim Warstler. 
Carroll will use the money to buy furnishings and a Smart Board and Tuscarawas will use its $10,000 to purchase air monitors and a Smart Board for their respective operations centers.
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Court Defines Drillers Right to Deduct Post-Production Costs in Ohio

From BakerHostetler:
As we previously explained, a question arose in Lutz, et al. v. Chesapeake Appalachia, L.L.C.[1] about how royalties should be calculated in oil-and-gas leases. That class-action case addressed leases with common language. Those leases required lessees to pay as royalties “the market value at the well of one-eighth of the gas [produced and sold or used off the premises].” Chesapeake argued that the plain language of the leases required using the “netback” method – which permits energy companies to deduct post-production costs from royalties – for calculating royalties. In effect, the netback method (1) recognizes that gas “at the well” isn’t as valuable as the gas brought to market, because bringing that gas to market entails costs, and (2) requires lessor/landowners to share in those costs. The plaintiffs disagreed and argued that Ohio should follow the “marketable product” rule, which calculates royalties based on the gas’s price once it’s brought to market, and thus imposes upon lessees (the oil-and-gas companies) the costs to market the gas downstream. 
Because there was no controlling rule in Ohio, the U.S. District Court for the Northern District of Ohio certified a question to the Ohio Supreme Court. That question was: “Does Ohio follow the ‘at the well’ rule (which permits the deduction of post-production costs) or does it follow some version of the ‘marketable product’ rule (which limits the deduction of post-production costs under certain circumstances)?” After oral argument in January 2016, the Supreme Court declined to answer the certified question regarding which rule Ohio followed. Instead, the court explained that oil-and-gas leases are contracts under Ohio law; and as contracts, the leases should be interpreted using traditional rules of contract construction. Lutz, et al. v. Chesapeake Appalachia, L.L.C., 71 N.E.2d 1010, 1013 (Ohio 2016). Two justices filed dissenting opinions – one suggesting that Ohio would follow the “marketable product” rule, and the other suggesting Ohio would follow the “at the well” rule. 
With the key question still unanswered, Chesapeake moved again for summary judgment on all the “at the well” leases, asking the District Court to determine how the royalties should be calculated. On Oct. 25, 2017, Judge Sara Lioi granted Chesapeake’s motion. The court focused on two issues: ambiguity and intent. 
Regarding ambiguity, the court rejected the plaintiffs’ argument that the leases were ambiguous, concluding instead that the leases’ clear and unambiguous language resolved the question. Based upon that language, the court concluded that “the Ohio Supreme Court would adopt the ‘at the well’ rule” in the leases that calculated royalties on “market value at the well.” In rejecting the “marketable product” rule, the court explained that states usually use that rule when leases do not address post-production costs. “Construing the lease under the ‘marketable product’ rule would ignore the clear language that royalties are to be paid based on ‘market value at the well.’” Additionally, the court emphasized that a close reading of the royalty provision showed that the parties intended to value the gas “at the well,” not downstream.
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Rivalry Between U.S. Shale and OPEC is Heating Back Up; OPEC Extends Production Cuts

Two articles from Bloomberg look at the reignited battle between U.S. energy producers and OPEC.

From the first article:
When OPEC meets with Russia and other allies in Vienna this week, they won’t be able to declare “Mission Accomplished” in their fight to end the oil glut. Instead, the producers are expected to extend their production cuts to the end of 2018 to counteract the historic surge in U.S. output. In the year since Saudi Arabia abandoned its battle for market share and led an agreement to cut supply instead, international benchmark Brent crude has risen by more than a third. That’s helped cash-strapped petrostates, but also spurred U.S. output to a 35-year high. The tug of war between shale and OPEC that’s dominated the oil market for three years shows no sign of ending.
Click here to view that article page, which includes a timeline detailing the past three years of ups and downs in the international oil market.

From the second article:
The clash between OPEC and America’s oil industry is reaching a day of reckoning.

The U.S. shale revolution is on course to be the greatest oil and gas boom in history, turning a nation once at the mercy of foreign imports into a global player. That seismic shift shattered the dominance of Saudi Arabia and the OPEC cartel, forcing them into an alliance with long-time rival Russia to keep a grip on world markets.

So far, it’s worked -- global oil stockpiles are draining and prices are near two-year highs. But as the Organization of Petroleum Exporting Countries and Russia prepare to meet in Vienna this week to extend production cuts, ministers have little idea how U.S. shale production will respond in 2018.

“The production cuts are effective -- it was absolutely the right decision, and the fact of striking a deal with Russia was crucial,” said Paolo Scaroni, vice-chairman of NM Rothschild & Sons and former chief executive officer of Italian oil giant Eni SpA. Nonetheless, “OPEC has not the same power. The U.S. becoming the biggest producer of oil in the world is a dramatic change.”
Click here to read that whole article. 

OPEC did meet yesterday, and agreed to extend production cuts.  That has sent prices upward even further.  From CNBC:
Oil prices spiked higher on Friday, heading toward 2½-year highs the morning after two dozen crude-producing nations agreed to limit their output through the end of 2018. 
U.S. West Texas Intermediate crude prices rocketed up 98 cents per barrel, or 1.7 percent, to $58.38 by 11:15 a.m. ET. That put the contract within striking distance of $59.05, its peak for this year and the highest level since July 2015. 
International benchmark Brent crude surged $1.11, or 1.8 percent, to $63.74, not far off last month's high of $64.65 that marked the best intraday level since June 2015.
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