EIA, API figures show recession's impact on US industry in 1Q

Government and industry statistics show that the US oil and gas industry was hit hard as the economic recession deepened during this year's first quarter.

Nick Snow
OGJ Washington Editor

WASHINGTON, DC, Apr. 17 -- Government and industry statistics show that the US oil and gas industry was hit hard as the economic recession deepened during this year's first quarter.

US oil and gas drilling plunged to levels not seen since 2004, ending 6 consecutive years of year-to-year growth for the period, said the American Petroleum Institute on Apr. 15. US petroleum product deliveries dropped 3.4% year-to-year to an average 19.2 million b/d, their lowest first-quarter level since 1998, it said in a separate report Apr. 15.

A day earlier, the US Energy Information Administration said in its latest short-term energy outlook that it expects reduced demand from a weaker economy to offset any demand increases resulting from lower product prices this summer driving season. EIA said it anticipates US motor gasoline demand will rise 1% year-to-year to 9.1 million b/d from levels that were depressed last summer because of dramatically higher retail prices.

It expects retail gasoline prices, which averaged $3.81/gal nationwide last summer, to average $2.23/gal during the 2009 period. EIA forecasts diesel fuel prices, which averaged $4.37/gal nationwide last summer, will average $2.27/gal this driving season.

"My leading petroleum indicator for how the general economy is doing is diesel fuel," API Chief Economist John C. Felmy told OGJ on Apr. 16. "Demand for low-sulfur diesel was down about 6% during the first quarter. Until I see that change, it tells me that economic activity is slowing down."

Smaller US share
In its March monthly statistical report, API said the 19.2 million b/d of average US product deliveries, which is how it measures demand, during 2009's first quarter contrasted with a first-quarter peak of 20.8 million b/d in 2005.

"The substantial, 4-year decline means that the US share of world oil consumption fell from nearly 25% in the first quarter of 2005 to under 23% in early 2009, based on International Energy Agency estimates," API said. Paris-based IEA on Apr. 13 also slashed its forecast for worldwide oil demand (OGJ Online, Apr. 13, 2009).

API's latest quarterly well completion report showed that an estimated 11,071 oil wells, gas wells, and dry holes were completed in the US during 2009's first 3 months—22% less than in 2008's first quarter and 35% lower than the total for 2008's final quarter. The estimated number of new exploratory wells fell 11% from 2008's first quarter, while the estimated number of deep wells—those 15,000 ft or deeper—and shallow gas wells slipped 13% and 36%, respectively, year-to-year, it indicated.

A resurgence of oil well completions, which began earlier in the decade, subsided this past quarter as the total fell 23% from a year earlier to 4,060 wells, API said. Overall, the share of estimated oil well completions was 36% of total drilling activity in the past 3 months, down from 40% a year earlier, it added.

Gas continued to be the primary domestic drilling target, with an estimated 5,735 wells completed during 2009's first quarter, according to API. This was still 23% lower than the total for the comparable 2008 period and represented the most several quarterly declines for gas plays this decade.

API, which does not track gas production, said domestic crude oil and condensate production increased 4.7% year-to-year in the first quarter to average 5.3 million b/d.

EIA said it expects US crude production to increase by 440,000 b/d to an average 5.4 million b/d this year, largely due to a larger Gulf of Mexico contribution as Thunder Horse and Tahiti platforms go into operation. It forecast a 0.3% drop in US gas production for the year.

Different paths
"Natural gas and oil are taking different paths," said Frederick Lawrence, vice-president of economics and international affairs at the Independent Petroleum Association of America. "Oil prices have gone up since Jan. 1, but natural gas has not," he said on Apr. 16. "So if a company's operations are gas-directed, it's going to be hit harder, especially if it's full of more-expensive gas plays."

Some producers may have become victims of their own success with the stunning growth of deep shale gas production, Lawrence told OGJ. "It improves the country's energy security, but its economics aren't favorable for producers right now," he said. "Producers with marginal wells face similar problems. Higher prices probably will return with demand, but it's not clear when that will happen. They need to keep operating in the meantime."

Felmy noted that gas prices have dropped sharply year-to-year. "The slower economy depressed demand, but there also was robust production last year, which could set a record. Combine that with strong inventories and gas producers face depressed prices right now," he said. EIA noted that Henry Hub spot prices began April below $4/Mcf, adding that it expects them to stay around that level until seasonal space heating demand revives next fall.

Producers also are responding to lower prices and demand by reducing their activity. "Several capital budgets have been revised downward after starting the year lower than they were in 2008," said Lawrence. "It's a combination of lower oil and gas prices and, for smaller firms, much tighter credit," said Felmy.

That apparently led to workforce reductions during the first quarter. Although they represented only part of the US oil and gas industry, the latest US Bureau of Labor Statistics monthly employment figures showed that there were an estimated 167,600 domestic oil and gas extraction jobs on a seasonally adjusted basis in March, down 0.2% from 167,900 in February and 1.1% from 169,400 in December 2008.

Producers face other forces beyond operating costs and low commodity prices, Lawrence said. "They realize that a host of political and general economic issues could affect them. We know that for a lot of companies, the Obama tax proposals could add a lot more pressure on their bottom lines at a particularly bad time," he said.

Summer outlook
EIA said the estimated 217 million bbl of gasoline stocks as of Apr. 1 appear to be ample heading into the summer driving season. It expects diesel and other distillate inventories to be a record 142 million bbl at the same time because overseas demand, which was strong a year ago despite record-high prices, is much lower this year because of the worldwide recession.

"The expected continuing decline in diesel fuel consumption in the United States this year as well as the growing weakness in distillate fuel usage outside the US are projected to result in lower refining margins for distillate throughout the forecast period. Because of the global weakness in industrial output and the onset of a recovery in motor gasoline consumption, domestic diesel prices could fall below gasoline prices this summer," EIA said in its latest monthly forecast.

It suggested that US refiners probably will emphasize gasoline production this summer because its average wholesale margins will be higher at 39¢/gal than diesel's (31¢/gal, compared with 80¢/gal in summer 2008).

Lower demand led US refiners to reduce inputs to crude distillation units 2.6% to an average 14.5 million b/d this past quarter from 14.9 million b/d in 2008's first 3 months, according to API's monthly statistical report. Utilization fell somewhat year-to-year to 82.3% from 84.6% although operable capacity rose 0.3% to 17.63 million b/d from 17.59 million b/d.

Felmy said inventories looked good at the end of the first quarter, "but we still need to get through the switch from the summer to winter blend. We'll have to monitor that on a week-to-week basis. The report for May 1 will provide the best indication."

Contact Nick Snow at nicks@pennwell.com.

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