Transportation bottlenecks lowering drilling investments

Fuel Fix:

Despite rising production and commodity prices, investing at North American oil fields has turned sluggish.

This year marked only the third time in more than a decade that North American producers budgeted less than their cash flow forecasts allowed, reversing a trend that buoys sales in the U.S. oil field services sector and job creation in energy hubs, including Houston.

At first glance, it’s strange: No unexpected surge in prices pushed up cash flows, as in 2005, and no dead stop in the credit markets hit spending, as in 2008.

Oil and gas remains a robust industry chasing the fruits of triple-digit oil prices.

But the spending downturn of 2013 had several catalysts — last year’s lower expectations for commodity prices, increased shareholder pressure for financial discipline and the retrenching of Chesapeake Energy, which was the largest driller in the nation two years ago.

A further roadblock is the lack of viable energy transportation infrastructure between new shale plays and U.S. markets.

“Why go out and drill when you don’t have the pipeline to get it out?” said Marshall Adkins, an analyst at Houston investment banking firm Raymond James.

After double-digit growth in two of the past three years, U.S. producers are projected to invest just 3.4 percent more than last year, according to a survey of 300 companies by Barclays.

Producers late last year made conservative budget forecasts, predicting prices of $85 per barrel for U.S. benchmark West Texas Intermediate crude and $3.47 per million British thermal units for Henry Hub natural gas. Prices have risen higher than that this year — ending last week at $102.87 for oil and $3.59 for gas.

Meanwhile, investment continues in the Eastern Hemisphere. Producers have sent a ton of money to the Middle East and the Asia-Pacific regions, as Saudi Arabia and other big producers reassert their dominance and China’s appetite for hydrocarbons keeps growing.
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There is more.

The investment in new pipelines is growing rapidly and that could lead to more investment in drilling as the pipelines come on line.   Until they do producers in those areas will have to depend on more expensive rail transportation.