February 2020

Drilling advances

The silly season
Jim Redden / Contributing Editor

As we’ve seen countless times, a shaky and inconsistent political structure can undermine the economic viability of a drilling asset, regardless of rock quality. That hard truth is playing out in much of the Americas these days, as onshore and offshore rigs are being held hostage to political machinations and irksome prattle.

Today, we have the latest presidents of Argentina and Mexico, which for better or worse, are hell-bent on reversing energy legislation that were the centerpieces of the previous administrations.

With the U.S. embroiled in a typically rancorous presidential election year, the leading Democratic Party contenders vow to not only put the kibosh on oil and gas development on federal properties, but ban fracing nationwide. While operators view this appeal to the party’s more progressive wing as largely unrealistic, they nonetheless have no choice but to consider contingencies. And, in Canada, the not-so-friendly oil and gas directives of the recently re-elected administration are blamed for literally running off one of the country’s flagship operators.

Changing courses. Let’s begin in Argentina, where Alberto Fernández had barely had time to hang up the first picture in his presidential office in December before the immediate future of the sweeping Vaca Muerta shale play was thrown into doubt. While Fernández is yet to formulate a concrete direction for the petroleum sector, analysts say it should not resemble  former President Mauricio Macri’s unfettered 2018 Energy Plan that directed Argentina to double production and become a global exporter. “Rather than concentrating on oil and gas for export into an oversupplied global market like his predecessor, the Fernández government has an opportunity to focus instead on developing low cost energy for Argentine domestic consumption,” Kathy Hipple, an analyst for the Institute for Energy Economics and Financial Analysis (IEEFA), wrote in a December briefing note.

In the meantime, international and domestic operators and service companies have largely hit the brakes on drilling and completion activity in the sweeping Vaca Muerta. Schlumberger, for one, hopes to fully divest its joint development interest in the Bandurria Sur shale asset in the first quarter of 2020. Speaking of Argentina during the fourth-quarter 2019 earnings call, CEO Olivier Le Peuch said only that “activity remains muted, due to the difficult investment climate.”

The presidential posture in Mexico is dumbfounding, at best. As soon as passionate nationalist Andres Manuel Lopez Obrador assumed the presidency in  December 2018, he proceeded to roll back former President Enrique Peña Nieto’s  historic 2014 energy reforms, which opened a long-closed door to international operators. Despite promising discoveries resulting from Nieto’s reforms, Lopez Obrador cancelled upcoming auctions, and advised Pemex to concentrate on onshore and shallow-water reserves, citing deepwater development as too expensive. ExxonMobil, Chevron and Shell led a coalition of international oil companies (IOC), which in December urged the president to re-consider the suspended auctions—a plea that has thus far fallen on deaf  ears.

The frailty of Lopez Obrador’s jingoistic policy will be on display this year,  as debt-ridden Pemex is forced to re-bid awards issued last May for drilling 20 “priority” fields. The closed-bidding round was intended to buoy local service companies and contractors,  which were later found to have neither the expertise nor resources to sufficiently service the contracts, according to a Jan., 2 Bloomberg report.

Ban improbable. Meanwhile in the U.S., independents with exposure to federally controlled land and water say the position espoused by Democrat presidential candidates to ban drilling and fracing is likely unenforceable.  “You can rest assured that we’ve done a lot of background legal work around this issue,” says Devon Energy CEO David Hager. “But, I think that at a high level, we would say that we think it is really fraught with serious legal ramifications.”

Cimarex Energy CEO Tom Jorden agrees, saying “We’re in a primary (election) season and, as always in the primary season, some ideas get floated that are a bit extreme. We don’t think that there is going to be a ban on fracking on federal lands.”

Murphy Oil, the fifth largest producer in the Gulf of Mexico, suggests any prohibition could ignite a consumer backlash. “First thing to happen, oil is going to go almost to $100, and gas will probably go to $8 or $9,” said President and CEO Roger W. Jenkins. “The Gulf of Mexico produces 2.5 MMbopd as an industry. I doubt very seriously, that would be closed off.” Of course, the ban promoters have given no indication how they plan to make up the just-under-$12 billion in federal royalties operators pumped into the national treasury last year.

To the north, the re-election of Canadian Prime Minister Justin Trudeau was the coup de grace that convinced Alberta-based Encana to pull up stakes and become a  corporate citizen of the U.S., says the company’s founder. “Given the re-election of national government ideologically opposed to the oil and gas industry’s very existence, it’s clear to me that its re-election struck the final blow to Encana as a Canadian-headquartered company,” long-retired Encana founder and CEO Gwyn Morgan wrote in a November Financial Post op-ed.

Encana says the re-location was to simply put it closer to deeper pools of investor capital, which, in itself, speaks volumes about the Canadian oil and gas investment climate. To top off Canxit (with apologies to the UK), Encana is re-branding as Ovintiv. “Apparently, the company’s board concluded even keeping a name that implies Canadian roots repels investors,” Morgan wrote.

About the Authors
Jim Redden
Contributing Editor
Jim Redden is a Houston-based consultant and a journalism graduate of Marshall University, has more than 40 years of experience as a writer, editor and corporate communicator, primarily on the upstream oil and gas industry.
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