As we approach the end of 2018, the situation for the domestic oil and gas industry is shifting in ways that could serve to dampen the ongoing boom as we move into 2019. Increased price volatility, tariffs and other trade-related considerations, along with pipeline bottlenecks and tight export infrastructure capacity could all serve to slow the growth of U.S. oil output in the coming year.
Let's take a look at some of these looming limiters in more detail:
Crude Oil Price Volatility - After almost three full quarters of a slow but steady rise in the price for crude, the last six weeks have been characterized by a higher degree of volatility and a significant downward trend, as the price for West Texas Intermediate (WTI) has dropped from an October 3 high of $76.31/bbl to around $66/bbl.
Had this drop in prices taken place during September or November it would have had less impact around what to expect for 2019. As it is, this 15% fall in prices happened just as the companies drilling most of the wells in the U.S. - the large independent producers and the majors - are in the midst of setting their capital budgets for 2019. Obviously, when a company is setting its drilling budget in a $66/bbl price environment, it is likely to allocate less capital than it would in a $76/bbl environment.
So, while the current price picture is plenty strong enough to result in continued overall production increases, we can expect this October price drop to have a dampening effect on the pace of growth during the first half of 2019.
The Permian bottleneck is here. - The long-anticipated bottleneck in pipeline takeaway capacity from the Permian Basin is here, and there is very little relief in sight for the next 9-12 months as midstream companies struggle to catch up with the drilling boom. Producers can be very creative in finding other solutions during such periods of time, so we can expect overall Permian production of both oil and natural gas to continue to rise despite the bottleneck, though at a slower pace.
Trade wars impact exports for both oil and LNG. - The Trump administration's growing trade war with China is starting to negatively impact exports of both crude oil and LNG as the two countries continue to trade escalating blows.
On August 1, China halted imports of U.S. crude oil. While oil is a global, fungible commodity and the effects of that move will shake out in the longer term, it did cause short-term disruptions as U.S. suppliers scrambled to secure new markets for their product. As noted in previous columns, the Trump administration's tariffs on imported Chinese steel have also resulted in increased costs throughout the domestic oil and gas industry, which is heavily reliant on steel in all of its operations.
Meanwhile, the trade war is also beginning to have a negative effect on the build-out in LNG export infrastructure in the U.S. On Tuesday, the proposed Magnolia LNG terminal located near Lake Charles, LA suffered a setback when a major Australian investor announced it would delay its final investment decision until 2019 in light of China's apparent decision to forego signing any new long-term LNG import deals with U.S. providers until the trade dispute is resolved.
While it still seems likely that cooler heads on both sides will ultimately prevail and result in a new trade deal within the next year or so, it is becoming increasingly difficult for for major investors to base multi-billion dollar decisions on that expectation.
Crude export facilities also running into roadblocks. - Meanwhile, the Gulf Coast's key port facility is running into headwinds in preparing its infrastructure for a new influx of production as the takeaway bottleneck in the Permian Basin resolves itself over the next two years.
As noted earlier this year, the Port of Corpus Christi (PortCC), which has in some recent months been responsible for moving fully half of the nation's crude exports, is taking on debt in order to self-fund 2/3rds of the $330 million price tag for deepening and widening its main ship channel. This project is needed to allow the Port to fully load the largest class of oil tankers, or VLCCs.
Unfortunately, despite two years of trying, PortCC officials have been unable to convince congress to fully fund its own share of the cost. Congress did include a rather paltry $13 million towards its obligation in September's so-called "mini-bus" spending bill, but that still leaves right at $100 million still outstanding before the Army Corps of Engineers can move ahead with the project.
As a near-term stop-gap, PortCC announced on Monday that it has entered into a long-term agreement with the Carlyle Group to develop a major crude oil export terminal on Harbor Island, located across the Intra-Coastal Canal from the resort town of Port Aransas. The Intra-Coastal is not currently deep and wide enough to allow the landing and full-loading of VLCCs, but under the agreement, Carlyle would be responsible for privately funding the cost of making it so. If completed, this terminal would become the first onshore U.S. port facility capable of fully-loading VLCCs for export.
If everything goes according to plan, the Harbor Island terminal would be operational in late 2020. However, it is being opposed by a group of residents near Port Aransas, who have been very vocal in their opposition as this project has gone through its conceptual stage. So this will obviously become a key process to watch in the coming months.
Bottom line: We can expect the domestic oil and gas boom to continue into 2019 as long as commodity prices remain at or higher than their current levels. But the factors listed here and others will serve to limit the scale of the boom until they are resolved.
