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July, 2016

Possible Return of the TMS?

Posted by bernell on July 8, 2016

There are vague local signs of life here in the heartland of the Tuscaloosa Marine Shale.  I won't go into what I'm seeing, because much of it could just be wishful thinking on my part.

That said, I thought it would be a good time to look back on the TMS and then think of the possibilities for the foreseeable future.

First, let’s review what happened in 2014 to deflate the TMS so quickly.

Most folks recall that Saudi Arabia declared its intent not to lose market share of the world crude oil market in December of 2014.  The price for oil, already on its way down at this point due primarily to increased production in other parts of the Middle East, continued to decline more or less steadily from around $100 per barrel in mid-2014 until hitting bottom, it seems, in February of 2016 at around $26.  During this fall the U. S. Oil Shale boom deflated tremendously and, more to our concern, the drilling in the TMS came to a screeching halt.

But, let’s be clear, Saudi Arabia’s decision and the world oil market was only one of the problems for the TMS in 2014.  Another issue here was that transportation lines (rail and pipeline) for high quality oil from North Dakota and low grade oil from Canada suddenly opened up via rail and pipelines in 2014 to the Gulf Coast creating a sudden oversupply for refineries here.

Gulf Coast refineries are more geared to use a large quantity of heavy or low grade oil, so the high grade oil oversupply was the most hurtful to the previous advantage in pricing available for the TMS high quality Louisiana Light Sweet crude.  This advantage suddenly became a negative in 2014 and prices for our oil suffered.

So, what has changed?  Several things.  In the short term, wild fires in Canada interrupted the heavy oil supply and our Gulf Coast refineries responded somewhat by converting to the refinement of light oil for some of its output.  More lasting changes include: U. S. oil production, especially from shale plays has dropped; world-wide oil production has dropped; world-wide usage has risen; congressional approval for exporting of U. S. crude oil has expanded our opportunities for sale. (Note: the U. S. now has the largest amount of proven oil reserves of any country in the world passing Russia and Saudi Arabia.)

But, the most noteworthy occurrence is the June, 2016 declaration by Saudi Arabia of “mission accomplished” in its goal to maintain market share.  Basically, Saudi Arabia has called a cease fire in its war on the oil markets...for now.

Dampening these positive factors include historically high crude oil and gasoline inventories that are dropping more slowly than hoped.  We also know that, despite Saudi Arabia’s cease-fire declaration, there is no intent on their part to allow prices to rise back to the $80+ level any time soon.  There isn't a lot they can do to stop the continuing development in existing plays, but keeping the prices somewhat controlled will dampen the expansion of the shale play in the U. S.

Will the price get high enough for a return to the TMS?

I don't know, but one more positive that may tip things in our favor is that during our two year hiatus to bringing on new production here other shale plays have continued drilling and completion activities with resultant innovations creating lower costs and higher productivity from shale wells. The price level needed for a return to the TMS may be much lower than we once thought. 

Meanwhile, the average price for Louisiana Light Sweet crude in May rose to $48.80 per an OPEC report with a roughly $2 premium over Brent and WRI pricing.  June pricing peaked around $50 from what I can learn. So, no doubt, we’re closer to whatever the magic price level is than we were in February, 2016.

Am I predicting a sudden boom of activity in the TMS?  No.  But, don’t be surprised if some new activity occurs over the next few months.  Especially remember that the TMS was and remains a science project and some of the returning activity may be on existing wells. 

For example, Goodrich has two wells that have never been fracked.  Trying out some new fracking methods on these wells might not be a bad idea. One never knows how an innovation that works in one shale play will transfer to another until it is tried.

Another experiment I would expect would be that of re-fracking old wells.  Fracking old wells for a 2nd, 3rd or even 4th time may be practical in the TMS, but the only way to know for sure is to do it and see.  Goodrich Crosby 12H-1 has been operating about 3½ years and Encana Anderson 17H-1 and 18H-1 wells have been operating for over 4 years.  Re-fracking these wells would provide great insight as to the long-term value of the play.

So, a return to action today?  No.  But keep your ears to the ground.  Late 2016 or early 2017 may not be out of the question. 

What do you think about it?