Ramblings On A Saturday Morning -- Sort Of About The Bakken -- February 20, 2016

Updates

March 19, 2016: in the original post below I give a fair amount of space to the announcement that Carrier (the HVAC company) is moving to Mexico, lock, stock, and barrel, -- or should I say, and air conditioner? Whatever. Today in The New York Times a look at the personal pain this move is causing. There's a simple fix for this and it doesn't involve tariffs, but if I can think of if, so can the best and the brightest at Foggy Bottom and the Commerce Department.
 

Original Post

 

I'll get this off my chest and then get back to what I had planned to do. Yesterday I linked a pretty good Chicago Tribune article with regard to what the headline writer called the "Bakken bust."

Having just visited the Bakken I was able to see firsthand how little "visible" activity there was. What is not being reported is the incredible amount of infrastructure that is now in place. Folks, I think, forget, (I certainly do) that the US still imports 5 million bopd. The shale oil in Texas, Oklahoma, and North Dakota is not going to go away (except that amount being lifted to the surface).

From what little I know about the oil and gas industry it looks like the only other major US source of oil is federal Gulf of Mexico oil which will hit record production in 2017. So, just how much oil are we talking about? I assume it's a gazillion bopd that will end on-shore drilling as we know it. So, let's look. From the EIA two days ago:

U.S. Gulf of Mexico (GOM) crude oil production is estimated to increase to record high levels in 2017, even as oil prices remain low.

EIA projects GOM production will average 1.63 million bopd in 2016 and 1.79 million bopd in 2017, reaching 1.91 million b/d in December 2017. GOM production is expected to account for 18% and 21% of total forecast U.S. crude oil production in 2016 and 2017, respectively.

Production in the GOM is less sensitive than onshore production in the Lower 48 states to short-term price movements. However, decreasing profit margins and reduced expectations for a quick oil price recovery have prompted many GOM operators to pull back on future deepwater exploration spending, reduce their active rig fleet by scrapping and stacking older rigs, and restructure or delay drilling rig contracts. These changes added uncertainty to the timelines of many GOM projects, with those in the early stages of development at greatest risk of delay or cancellation.

What? Less than 2 million bopd by the end of 2017. Under incredibly adverse pricing conditions right now, the Bakken is producing 1 million bopd from an area smaller than my little finger compared to the size of the US Gulf of Mexico. Seriously. Bakken operators have dropped from 200 rigs to 40 rigs, and they have limited drilling to a couple of areas around Williston and Watford City, and they are still producing one million bopd. If the Gulf of Mexico is forecast to move toward 2 million bopd by the end of 2017, I would assume something similar in the Bakken. It appears that in both the Bakken and the GOM the costs have been "sunk" as they say. Now it's simply a matter of managing production. 

Much more could be written, but time to move to the second issue.

As noted above, the oil isn't going anywhere. There are something like 13,000 wells that need to be managed in North Dakota, all of them within a couple of hours driving time from Williston, Tioga, and Watford City. Those 13,000 wells will require a minimum workforce to maintain those wells. Fracking of DUCs continues and that will require a minimum workforce, and it's hard to imagine there being no active rigs in the Bakken. One cannot outsource drilling Bakken oil to Mexico. One cannot move the Bakken shale to south of the border where it can be drilled more cheaply. The Bakken is the largest continuous reservoir of oil ever discovered in the lower 48 and it isn't going anywhere.

But elsewhere, there is a real "bust" going on and those are the jobs in the heartland of America that are being moved to Mexico. The other day I mentioned that the air conditioning company Carrier was leaving Indiana -- completely leaving Indiana -- to move to Mexico. I was unaware that a second company in Indiana was doing the same thing. Along with Carrier, the company that provides microprocessor-based controls for the HVAC and refrigeration industries for Carrier, will be moving to Mexico:

In a move guaranteeing that 2,100 workers will be out of a job, two Indiana plants have plans to move operations to Mexico.

The companies, who make products for heating, ventilating and air conditioning (HVAC), will begin layoffs within the next two years.

Carrier Corp. said it would shutter its Indianapolis plant employing 1,400 workers and move its manufacturing to Mexico. The plant's workers would be laid off over three years starting in 2017.

United Technologies Electronic Controls (UTEC) also announced Wednesday that it will move its Huntington manufacturing operations to a new plant in Mexico, costing the northeastern Indiana city 700 jobs by 2018. Those workers make microprocessor-based controls for the HVAC and refrigeration industries.

Carrier Corp. and UTEC are both units of Hartford, Connecticut-based United Technologies Corp.

Carrier's president of North American HVAC systems and services, Chris Nelson, said the company is closing the Indianapolis plant in response to "the continued migration of the HVAC industry to Mexico." He said that migration has included the company's suppliers and competitors.

United Steelworkers president Chuck Jones said Carrier's move is disgraceful considering that it has been in Indianapolis since the early 1950s. He said the 1,400 affected workers are scared.

Based on that article, it sounds like the entire American HVAC industry is moving to Mexico: "the continued migration of the HVAC industry to Mexico."

Again, ObamaCare was not mentioned in the article.

It is likely that we may see more jobs moving to Mexico even as some American jobs are returning to the US from China. This may be completely unrelated, but it should be noted that over the past ten years the US has been improving the infrastructure required to get energy (natural gas) to Mexico. With adequate (and inexpensive) energy in Mexico, the country will be able to increase its manufacturing capacity.

The best way to encourage Mexicans not to cross the US border illegally is to provide them jobs in their own country. It looks like Carrier and UTEC are doing just that since the politicians refuse to address the issue. 

Oh, by the way, back to the EIA article on "record" production forecast for the Gulf of Mexico by the end of 2017. Here's the graph (color me very, very unimpressed). The record production might be 100,000 bopd more than what it was in 2009 before the Obama administration .... don't get me started ... if that's what the EIA is banking on going forward, I'm not worried about the Bakken in the long term.

If it reaches a "record high" in 2017, does that suggest production could level off after that, perhaps decrease, because of all the canceled / deferred deep-sea projects.

By the way, I've searched the web and can find no stories telling us where President Obama is today. On a day when so much is happening (South Carolina, Nevada, a funeral, just for starters) it is interesting that the president cannot be located. Doubly interesting considering his narcissism.