Energy Matters

Analysts weigh in on lumpy production, rig counts, waiting on completions and the decline curve.

Lumpy Bakken oil-production figures of late shouldn’t be alarming, explain analysts with Tudor, Pickering, Holt & Co. Securities Inc.

North Dakota state figures have shown production growth trending sideways in the last months of 2012 and into January. An April 2013 estimate is that daily production jumped some 40,000 barrels in February to 778,971 barrels a day, a new all-time high.

However, the TPH team notes, the sideways production figures were “despite a lack of the variables that are typically rumored to cause production hiccups—no infrastructure issues, relatively dry weather in fourth-quarter 2012 and the rig count actually dropping so no rig shortage.

“Supply bulls have held that Bakken production growth has been temporarily stunted by a change to (multi-well) pad drilling and that production will ultimately accelerate from current levels as (frac) crews work through the (well-) completion backlog.”

The TPH team expects total, daily Bakken production will grow by 150,000 barrels this year. “We see four key factors determining growth: number of rigs drilling, rig efficiencies, EURs (estimated ultimate recovery) per well and underlying production declines. Infrastructure is a limiting reagent that we don’t see playing a role in halting growth going forward.”

1. As for rig count, the state reports 186 rigs were working on new wells in March, down from 218 in May 2012 and up from 81 in January 2010.

2. Rig efficiency—i.e., the pace at which drilling each well is being achieved—in the play has grown some 10% to 15% annually, according to TPH estimates.

3. “Meanwhile, on the E&P side, we’ve seen EURs stay relatively constant,” the team reports. “The net impact is that apparent rig efficiencies in the play are less than other horizontal plays because well type has changed”—i.e., the Bakken uses longer laterals, thus more total footage to drill.

4. As for production decline, this has grown. “Of the 700,000 barrels per day producing at year-end 2012, roughly 50% comes from wells drilled during 2012, meaning that producers have to replace 244,000 barrels a day, assuming 40% first-year declines and 25% vintage 2010-12 declines, with that number increasing each year as base production increases.

“So factor No. 1 has declined, No. 2 is improving, No. 3 is declining and No. 4 is creating a bigger headwind to growth with each year.”

More data inbound

Other securities-research teams estimate Bakken production will grow to 1.5 million barrels per day. The TPH team reports, “We think that the recent, seasonal plateau highlights that figures like that would take a meaningfully higher rig count than present to be achieved.”

It concludes that more will be clear as Bakken producers complete their first-quarter earnings calls in the coming week, “which should provide a more current update than the two-month-lagged, government, production data.”

Among the key calls are those of

–NOG (Northern Oil & Gas Inc.), “a good proxy for (Williston) basin growth as it holds working interests across wide swaths of Bakken acreage,” and

–WLL (Whiting Petroleum Corp.), CLR (Continental Resources Inc.) and HES (Hess Corp.), which are making 30% of gross Bakken-play production, combined.

New-well decline

As for Bakken production decline, Bob Brackett, senior analyst for securities-research firm Bernstein Research, estimates Bakken-play well output was falling some 30% in their first year in 2011-12. Thus, January 2012 production of some 545,000 barrels a day in North Dakota would include 312,000 barrels from wells that came online in the prior 12 months.

He also expects new-well productivity to decline as more are landed outside the highly drilled sweetest spots. And, he believes that some of the recent Bakken-play production growth has been due to a drawdown of the well-completion backlog as frac spreads are more available in the past year as they have been leaving the smallest-margin U.S. shale-gas plays.

“While 2012 U.S. crude production admittedly surprised slightly to the upside, we believe investors are increasingly baking in linear—i.e. constant, absolute growth—or even accelerating production increases into U.S. oil projections through approximately 2016,” Brackett concludes.

“For sure, growth will continue at a healthy clip, but accelerating production-growth forecasts in areas like the Bakken don’t make sense to us.”

Waiting on completion

Lynn Helms, director of the North Dakota Industrial Commission’s Department of Mineral Resources, reports that the number of Bakken-play wells waiting on completion (WOC) services has actually been growing in the past few months, however. In February 2012, he reported some 300 wells were WOC. That fell to roughly 250 the following month and roughly 240 the next. However, he estimated 347 WOC in August, 410 this past January and 375 in April.

As for production, Helms reported in April that January 2013 oil production from North Dakota was 737,787 barrels a day, up from 235,925 barrels a day in January 2010. He forecasts February 2013 production was 778,971 barrels a day, a new historical high.

Meanwhile, the state’s oil producers continue to connect associated-gas production from Bakken-play wells into pipe and onto sales. In January, captured-gas production was 791 million cubic feet a day, up from 255 million a day in January 2010, and Helms estimates February gas capture was 850 million a day, a new state historical high.

He adds that there are now an estimated 8,500 oil- and gas-producing wells in North Dakota, up from some 4,600 in January 2010, and 186 rigs were working on new wells in March, down from an all-time high of 218 in May 2012. “Over 95% of drilling still targets the Bakken and Three Forks formations,” he notes.

Still to be produced

An updated U.S. Geological Survey assessment of additional Bakken oil—that is, “undiscovered, technically recoverable”—that may be produced from the Williston Basin, plus now including an assessment of additional oil that may be produced from the underlying Three Forks formations, to be 7.4 billion barrels—roughly half from the Bakken and half from the Three Forks.

There is a 95% chance 4.42 billion will be produced and a 5% chance as much as 11.43 billion may be produced, the USGS adds. The 7.4-billion-barrel estimate is roughly twice that of a 2008 assessment of the Bakken only; the difference is entirely from adding estimates for Three Forks potential.

“Since the 2008 USGS assessment, more than 4,000 wells have been drilled in the Williston Basin, providing updated subsurface geologic data,” the USGS reported when releasing the highly anticipated 2013 assessment Tuesday.

“Previously, very little data existed on the Three Forks Formation and it was generally thought to be unproductive. However, new drilling resulted in a new understanding of the reservoir and its resource potential.”

The Bakken and Three Forks formations may also contain 6.7 trillion cubic feet of recoverable gas—ranging from a low estimate of 3.4 Tcf and a high of 11.3 Tcf—and a half-billion barrels of recoverable natural gas liquids (NGLs).

Editor’s note: Click for a map of the USGS’ 2013 Bakken and Three Forks assessment areas.

-Nissa Darbonne, Editor-at-Large, Oil and Gas Investor, OilandGasInvestor.com, Oil and Gas Investor This Week, A&D Watch, A-Dcenter.com, UGcenter.com. Contact Nissa at ndarbonne@hartenergy.com.

The No. 1 U.S. growth industry in this century is just “oh so 20th century.”

President Obama’s proposed changes to tax law are rich with irony. An initial section lists tax incentives to encourage manufacturing, research, clean energy, bringing jobs back to America and creating new jobs. Listed later are tax-law repeals to discourage American oil and gas production—thus, discouraging manufacturing, research, clean energy, bringing jobs home and creating new jobs.

Ultimately, according to the Treasury Department report, Obama wishes to end the American oil and gas industry because it is, well, just oh-so-20th-century. And, as current tax law encourages drilling for U.S. oil and gas, then this must be stopped.

“The President agreed at the G-20 Summit in Pittsburgh to phase out subsidies for fossil fuels so

that the United States can transition to a 21st-century energy economy,” the Treasury Department reports in “General Explanations of the Administration’s Fiscal Year 2014 Revenue Proposals.” Concerning the repeal of tax credits for trying to make an old oil well continue to make oil (the enhanced-oil-recovery or EOR tax credit), the department reports, “the credit, like other oil and gas preferences the Administration proposes to repeal, distorts markets by encouraging more investment in the oil and gas industry than would occur under a neutral system.

“This market distortion is detrimental to long-term energy security and is also inconsistent with the Administration’s policy of supporting a clean-energy economy, reducing our reliance on oil and cutting carbon pollution. Moreover, the credit must ultimately be financed with taxes that result in other distortions, e.g., in reductions in investment in other, potentially more productive, areas of the economy.”

It is ironic in that, in his 2014 tax-related proposals, most of the business activity Obama wishes to encourage with incentives are ones in which the American oil and gas industry has been vigorously engaged in the past decade, particularly as a result of new, horizontal drilling and fracture-stimulation completions in ever-tighter rock:

–Bringing jobs back to the U.S. and basing new jobs in the U.S.

–New manufacturing in communities affected by economic disruption.

–Research and experimentation.

–Hiring veterans.

–Production of enhanced-technology vehicles.

–Alternative-fuel vehicles.

Activities he wishes to discourage—via repealing existing credits—have been critical to advancement of U.S. oil and gas production:

–The EOR credit for enhanced efforts to recover further oil and gas from existing fields and wells.

–New drilling for oil and gas resources (intangible drilling credits or IDCs).

–Spending on studying America’s subsurface via development of geological and geophysical data.

In short, Obama believes that encouraging American oil and gas production begets yet more American oil and gas production. And, it does. Incongruous is why this is a bad thing. Meanwhile, subsidies for solar and biomass fuels, laws and regulations requiring poor-energy-quality ethanol use, and other non-fossil-fuel incentives don’t make the marketplace neutral.

Instead, the marketplace is working just fine—and largely due to growing American oil and gas production. Obama and Treasury could consult the Labor Department and Department of Energy for facts:

–New U.S. natural gas production and its use in electricity generation, transportation and other formats have resulted in the past several years in a reduction of U.S. greenhouse-gas (GHG) emissions by more than the Kyoto Protocol would have required, if the U.S. had participated in it. (EIA)

–In March, North Dakota—the home of the giant new Bakken oil play—had the lowest unemployment rate in the U.S., 3.3%. (Labor Department, March 2013). In a Labor Department study of 17 counties in North Dakota and Montana that consist of the Bakken oil play, jobs grew to 105,891 in 2011 from 77,937 in 2007. Total wages grew to $5.4 billion from $2.6 billion. Average annual pay grew to $50,553 from $33,040.

–U.S. oil production had fallen to an average of 5.0 million barrels a day in 2008, despite oil prices peaking at some $148 a barrel that summer. Meanwhile, production this past March was an estimated 7.16 million barrels a day. (EIA, April 2013)

–Imports from OPEC members were 3.85 million barrels a day in January, down from a peak of 5.98 million a day in 2007. (EIA, April 2013)

–Imports from non-OPEC members peaked in 2006 at 8.19 million a day. In January, these imports were 6.12 million (EIA, April 2013)

–Energy imports of all types, including coal, have declined from a peak of 34.7 quadrillion Btu in 2005 to 26.6 quadrillion in 2012. (EIA, April 2013)

–Natural gas use in power generation, replacing coal, thus less carbon emission, grew to 9.137 trillion cubic feet (Tcf) in 2012 from between 6 and 7 Tcf a year in the prior six years. (EIA, April 2013)

–Natural gas use as a vehicle fuel was an estimated 33 Bcf in 2012, up from 29 Bcf in 2010. (EIA, April 2013) Natural gas use in transportation overall was 763 trillion Btu in 2012, up from some 602 quadrillion in 2004. (EIA, April 2013)

–Petroleum use in transportation was 24.7 quadrillion Btu in 2012, down from a peak of 27.8 in 2007. (EIA, April 2013)

New American oil and gas production is clearly brilliant for the American energy consumer, trade deficit, employment rate and national security. Yet, for Obama, it is a nuisance.

-Nissa Darbonne, Editor-at-Large, Oil and Gas Investor, OilandGasInvestor.com, Oil and Gas Investor This Week, A&D Watch, A-Dcenter.com, UGcenter.com. Contact Nissa at ndarbonne@hartenergy.com.

A renewed American industrial economy is a reminder of the economic security free markets provide.

To hear Rodney Cohen’s story reminds one of the opening chapters of Atlas Shrugged, when innovation has the potential to further catapult America in its greatness. At the time of the writing, 1957, the scientific premise of the work was farfetched but upon which Rand played out a clash of communism and capitalism, a strange business anti-Darwinism—survival of the least fit.

In the more than 50 years since it was published, one premise has, in fact, become reality: production of oil from shale. Of course, the Ellis Wyatt character’s breakthrough may have been of oil from true shale—oil that has to be produced with mining or thermal assistance—unlike that from the Bakken, for example, which is from rock that sits between shale barriers.

However, the need to get all of this new oil to market brings the railroad into play and exactly what has developed from the more than 700,000 barrels of new Bakken oil that is now being made a day from North Dakota and Montana.

And, that brings steel into play, like the Hank Rearden character’s Rearden Steel. Factories across America are fast at work today, building thousands of new railcars for transporting Bakken and other new North American oil to refineries that were to be shuttered if not for this new, lower-priced feedstock. BNSF expects to be railing some 700,000 barrels a day of American oil to refiners by year-end. That’s up from some 150,000 barrels a day at year-end 2011.

Meanwhile, steel-making itself has become more economic as well by newly abundant, low-priced U.S. natural gas—produced from shale.

But, who is Rodney Cohen? A few years ago, Cohen had three heads—at least, that’s how some folks looked at him when he put forth an idea of investigating whether low-priced Bakken oil feedstock, the existing rail system and low-priced natural gas could make profitable a refinery in Philadelphia that was destined for closing.

Curious, indeed.

The managing director of The Carlyle Group’s U.S. Equity Opportunities and his colleagues continued to gather information. “We were trying to understand what the real potential was,” Cohen told attendees at Hart Energy’s Marcellus-Utica Midstream conference in January. “At that point, (production) numbers were being thrown around in the Bakken that were all over the place. It was very hard to understand what the real potential was.”

Eventually, the potential and the reliability of supply became apparent. Last summer, Carlyle closed the acquisition of the Philadelphia plant, just a month shy of Sunoco Inc.’s planned shuttering of the 330,000-barrel-a-day refinery, which produces some 26% of the region’s fuel.

Meanwhile, Bud Brigham, who sold his Bakken-producing Brigham Exploration Co. in 2011 to Statoil ASA for $4.7 billion, says the new U.S. industrial revolution reminds him often of Rand’s story. An advocate of reading Rand’s work, Brigham is co-executive producer of Atlas Shrugged II: The Strike, which premiered in Washington this past fall.

“She wrote about what’s happening today over 50 years ago,” Brigham says. “Amazingly, she even wrote about Ellis Wyatt, an oil man who was rejuvenating the Rockies because he figured out how to get oil out of shale…That stimulated the rail business…, and steel…in an otherwise struggling economy. The parallels are remarkable.

“Clearly, this is huge for the country today, particularly the lower cost structures, improved trade balance and less dependency on foreign energy supplies.”

Dan Pickering, a multi-decade energy analyst and chief investment officer for TPH Asset Management, agrees that the revolution is the real deal. “Shale is translating to lower commodity prices, which is creating an input-cost advantage for U.S. manufacturing. Users are getting more comfortable with supply availability, which is going to translate to more demand.

“I am optimistic on the renaissance. That doesn’t mean it is great for stocks at all points, but it is good for consumers, industrials and the American populace.”

Brigham hopes the rest of the novel doesn’t play out, though—government controls that result in a new Dark Age, “a brief flare of hope that will be snuffed out by collectivism…Though it’s not pleasant to think about, that is my biggest concern.”

Government and labor did well by the Philadelphia project, from the mayor, governor and members of Congress to concessions by trade unions, however. Cohen says, “We were in a moment of time when the U.S. government realized we may be left with no refiners in this PADD 1 area or maybe very few. And, what is the implication of that? I think that was a little scary to everyone.”

He concludes, “It’s incredibly exciting times…, when new ideas are developing every day…, game-changing ideas….”

Editor’s Note: Dr. Tara Smith, professor of philosophy at the University of Texas, where she currently holds the Anthem Foundation Fellowship for the Study of Objectivism, will present a lecture, “The Virtuous Egoist,” 7:30 p.m., March 25, 2013, in Houston at Rice University, Sewell Hall, Room 301. The program is free and open to the public. More details on this and more upcoming lectures are available at HoustonObjectivism.com.

-Nissa Darbonne, Editor-at-Large, Oil and Gas Investor, OilandGasInvestor.com, Oil and Gas Investor This Week, A&D Watch, A-Dcenter.com, UGcenter.com. Contact Nissa at ndarbonne@hartenergy.com.

This long-known Nevada rock remains underexplored.

As Noble Energy Inc.’s exploration of the Elko Basin in northeastern Nevada has captured industry and Wall Street attention, Utah-based Phoenix Oil & Gas LLC has developed three prospects south of Elko, including for Chainman shale. Oil and Gas Investor visited with Jonathan Baker, landman for Phoenix, recently, including at NAPE in Houston in February.

Investor Oil production from Nevada has been hit or miss in the past—mostly miss?

Baker Shell (Oil Co.) was the first major active in the basin. They had to create their own topographical maps; these didn’t exist before then. They spent years in southeastern Nevada studying this and then a corporate decision was made to exit Nevada. All that data was kind of lost.

There was a Grant Canyon well in the 1980s that made 4,000 barrels a day for eight years without decline. It was a miraculous discovery. The operator tried to offset that well, but they really couldn’t find anything else. They happened to nail (the formation in that one). The volume of oil produced from that zone—there is oil more than three times the pore space available for it, so it is a dynamic reservoir. It’s coming from somewhere else and it’s tied to the Chainman shale.

In the mid-1980s, Exxon (Corp., pre-merger with Mobil) had a huge area out here. We believe they were onto it, but Valdez happened and they had to forfeit all of their land in the frontier areas. After they pulled out, it seems all the big boys quit looking out here.

Investor Tectonic shifting and other geologic events have made the subsurface in Nevada particularly complex?

Baker Yes. This makes it difficult for conventional 2-D seismic to build a view of the subsurface very well, at least using older seismic methods. Noble Energy is shooting 3-D here; it is in the Elko Basin. I spoke with them at NAPE and they seemed pleased with data from the first shoot; they’re gearing up for their second. Chainman shale isn’t the target where they are. We’ve always compared that area to the Uinta Basin in terms of setting and maturity. We wish them success.

Investor Their success would bring oilfield services to near your prospect area?

Baker Yes. It would also get people to take a second look at Nevada.

Investor From what formations have producers made wells in Nevada in the past?

Baker Most wells in Nevada have only been drilled to 2,000 to 4,000 feet and are in the volcanics. The Grant Canyon well was a 4,500-foot test in Devonian. That’s where the 4,000 barrels a day came from. It is an extremely prolific, karsted-dolomite-type section, several hundred feet thick.

There has recently been a new discovery, Tomera Ranch, up in Pine Valley in Eureka County. The operator is Andromeda Oil LLC. They’re producing from around 2,000 feet from a sand within the Chainman. They’re not really strong wells. They’re conventionally drilled and we think they’re conventionally completed too. So who knows what could happen if you put a larger frac job into this formation?

Investor How long have you had these prospects?

Baker Four or five years ago, we started putting them together. We met a group in Texas that had a good finding tool we liked. We high-graded three prospect areas in Nevada. We then met a gentleman who had looked at this too. He had done some conventional field work, attitude collection, rock samples—the old-school geology. He had high-graded the same three areas. These happen to be where Exxon’s big contract area was and Chevron had a contract area at one time as well. So we’re within the sandbox. We think we’ve high-graded where in the sandbox we want to be.

Investor Are there bail-out zones in the area?

Baker The nice thing about where we’re situated is we have a very nice, stacked potential here. We have the Chainman shale that is a geological equivalent of the Barnett stacked on top of the Pilot shale that is the geological equivalent of the Bakken out here, with very large conventional opportunities—anticlines, regional karsting in the Devonian—below that. From a big picture, you have three really good shots out here—if just drilling deeper than what’s been done in the past.

Editor’s Note: Baker can be reached at jonathan@phoenixoilandgas.com. Details of drilling in Nevada, based on state records, are available here.

-Nissa Darbonne, Editor-at-Large, Oil and Gas Investor, OilandGasInvestor.com, Oil and Gas Investor This Week, A&D Watch, A-Dcenter.com, UGcenter.com. Contact Nissa at ndarbonne@hartenergy.com.

Saudi Arabia is already producing some 800,000 barrels a day fewer than this past spring.

Daily U.S. oil imports—estimated by world oil traders to have fallen by as much as some 1 million barrels this past year—will decline yet further in 2013, according to IHS vice chairman Dr. Dan Yergin and IHS CERA managing director Jim Burkhard. Overall, as a result of new U.S. unconventional-oil production, such as from the Bakken oil play in North Dakota and Montana, net U.S. oil imports are 42% of daily supply today, down from 60% in 2005, says Dr. Nariman Behravesh, IHS chief economist.

Meanwhile, Saudi Arabian output has grown in the midst of “the unconventional oil and gas revolution in the United States, which has pushed up U.S. oil output by 25% since 2008 and turned North Dakota into the second-largest oil-producing state in the United States. It is here where we see the first effects of the unconventional revolution on world energy markets,” Yergin and Burkhard report.

What effect will this and other world oil supply/demand developments have on the international oil scene? Yergin and Burkhard explore this in the “Oil Market Outlook: Non-OPEC’s Big Chance” section of a new report, “Energy and the New Global Industrial Landscape: A Tectonic Shift?” The report was released at the World Economic Forum 2013 annual meeting in Switzerland this past week.

“Indeed, it looks as though 2013 may see a rare occurrence for the world oil market: Supply growth from non-OPEC(-member countries) may exceed the growth in world oil demand. This has happened only four times since 1986 and two of those years were during the Great Recession of 2008–09, when oil demand fell,” Yergin and Burkhard report. “…Oil-supply growth outside of OPEC—led by tight-oil development in the United States—could meet or even exceed the total gain in world oil-demand growth.”

They expect daily supply from non-OPEC-member countries will increase by some 1.1 million barrels this year, “slightly higher than the expected increase in world oil demand.”

So what effect will this have on world oil prices? There might be no change, if OPEC members curtail their production by as much as new, non-OPEC-member production grows, thus eliminating a situation of more excess world oil supply. Yet, the specter of that much go-to, crisis-production capacity could soften the “fear premium” that continues to encourage a $100-plus Brent oil price.

“In this case, there (would be) a moderation in oil prices, but no severe and sustained decline. Spare (daily) production capacity would increase from around 2.8 million barrels in 2012 to about 4 million in 2013.”

They add that an OPEC cutback—at least by Saudi Arabia—is already obvious, with it surfacing some 9.1 million barrels a day in December, down from 9.9 million last spring.

They note too that these scenario forecasts assume meaningful growth in non-OPEC supply. “The non-OPEC-supply story is based on real potential—no­tably further large gains from the ongoing revival of North American oil production. However, non-OPEC-supply projections have a history of disappointment due to technical and weather-related difficulties and security challenges. A strong year of non-OPEC gains would buck the past decade’s trend of underperformance—but such growth is far from assured.”

This aside, Yergin and Burkhard also comment on whether the unconventional-resource revolution will sweep the world. They expect it will, but slowly. The United States differs from other countries in that it has a large number of private oil companies (“independent” oil companies), mineral rights are held—with small exception—by individuals and private companies rather than by the government, infrastructure for transporting and processing oil exists, and there is a plethora of oilfield services and equipment at the ready.

“Moreover, the development of these resources requires experience, the build-up of knowledge and trial and error. It also involves different…work practices and mindset. Governments also have to create fiscal and regulatory regimes that permit work to go ahead and avoid being overly prescriptive with evolving technologies.”

(In the oilfield, “overly prescriptive” is when the government practically regulates the color of work boot or the zipper length of coveralls.)

Unconventional resources are known in Mexico and Argentina, for example, note Yergin and Burkhard. “Our own research indicates that the resource base in China may be larger than that in the United States. However, it is in very early days, and we believe that it will take several years before significant amounts of unconventional oil and gas begin to appear in other regions.”

The report is available at “Energy and the New Global Industrial Landscape: A Tectonic Shift.”

-Nissa Darbonne, Editor-at-Large, Oil and Gas Investor, OilandGasInvestor.com, Oil and Gas Investor This Week, A&D Watch, A-Dcenter.com, UGcenter.com. Contact Nissa at ndarbonne@hartenergy.com.

In brief, earnings from all types of capital gains and dividends or distributions are equally taxed higher.

What affect does the “fiscal-cliff relief” legislation of earlier this month have on investments in energy MLPs? Oil and Gas Investor asked the team at tax- and business-consulting firm UHY Advisors.

“With the American Taxpayer Relief Act of 2013…investors in energy MLPs will pay as much as 24% more on their ordinary income that flows through on their Schedule K-1s—43.4% versus 35%—among top-bracket taxpayers and up to 59% more in capital gains when they sell their holdings—23.8% versus 15%,” the firm reports.

The firm breaks out the ordinary-income—or income from distributions—increase this way:

–MLP ordinary income for top-bracket taxpayers with incomes of $450,000 or more (married, filing jointly) is now taxed at 39.6%.

–Taxpayers with adjusted gross incomes of more than $250,000 are now also liable for an additional 3.8% Medicare surtax on investment income.

=This brings the total tax on MLP-investment-related ordinary income for top-bracket taxpayers to 43.4%. This is 24% more than the 2012 rate of 35%.

As for the increase in capital-gains-related taxes, which kicks in only upon divestment of MLP units, the UHY Advisors team reports:

–On the sale of MLP units held for at least one year, taxpayers with $450,000 or more in modified adjusted gross income—that is, taxable income before itemized deductions and personal exemptions plus tax-exempt income—are now liable for a 20% long-term capital-gains tax, plus the new 3.8% Medicare tax.

=This brings the total tax liability on gains from the sale of long-term holdings of MLP units—or any other investment—to 23.8%. This is 58.6% more than the 2012 rate of 15%.

–As for short-term capital gains on investments, which are for those held for less than one year, these are taxed at the same rate as ordinary income, or 39.6% for top-bracket income earners.

The team adds, “Please note that, depending upon the MLP, some or all of the gain on a sale could be taxed as ordinary due to the recapture of certain deductions taken by the MLP against ordinary income.”

Net/net, while both ordinary-income and capital-gains tax rates on profits from investing in energy MLPs are higher, they’re similarly higher for profits from other types of investments, so investor appetite for units in energy MLPs should be unchanged as a result of new tax law.

More information is available from UHY Advisors.

-Nissa Darbonne, Editor-at-Large, Oil and Gas Investor, OilandGasInvestor.com, Oil and Gas Investor This Week, A&D Watch, A-Dcenter.com, UGcenter.com. Contact Nissa at ndarbonne@hartenergy.com.

…And, while cutting the well count by half.

Thane Gustafson’s newest book on the politics of Russian business focuses on how Soviet oil and gas assets were distributed in the 1990s, who won them and how their ownership has evolved in the past two decades—a culmination of Gustafson’s research, relationships and interviews beginning in the 1980s.

Of course, the fate of Russian oil upstart Mikhail Khodorkovsky is well known, particularly within international human-rights courts and councils.

Lesser known is the role of Joe Mach, a veteran Schlumberger well specialist and University of Tulsa petroleum-engineering graduate, who was hired by Khodorkovsky’s Yukos in early 1999 to turn around its declining oil fields. Mach’s is one of the many tales Gustafson shares in his new Wheel of Fortune: The Battle for Oil and Power in Russia.

Gustafson writes, “Joe Mach enjoyed playing the part of the tough, rough-spoken Tulsa petroleum engineer, complete with cowboy boots and cigar. His language was so colorful, it was said he spelled ‘oil’ as a four-letter word.” By 1999, Mach’s career had already spanned several decades.

Khodorkovsky, who was still in his 30s at the time, meanwhile, “was a chemical engineer by first training and knew nothing of wells and reservoirs…and the logic of (Mach’s) nodal analysis appealed to him immediately….”

Mach went to work, training Yukos engineers. Mach tells Gustafson, “These people had one job: to look at each well, calculate its performance gap and sort them in descending order. The well with the biggest gap went on top and we worked on that well.”

Gustafson writes, “For Joe Mach, West Siberia was an oilman’s dream. ‘Siberia is the simplest environment in the world: It’s one big beachfront,’ he would tell visitors. ‘The Ob’ River is flowing today right over where it was 130 million years ago. It’s the same place. You can see it on seismic; you can see it on the logs. The West Siberian landscape has not changed in 130 million years.’

“The result was a uniquely uniform and prolific environment for oil. ‘You can go a thousand kilometers; it’s the same g[------]ed sand. All across, it’s 18% porosity. The water saturation is very consistent. The other no-brainer is [that] the reservoir pressure is 4,500 pounds and the bubble point’s 1,800. In other words, it’s pure oil. Man, it doesn’t get any simpler than that.’”

Relatively little of the oil the rocks contained had been produced yet. “Pumps, fracs and floods: These became Mach’s mantra over the next five years. But he might as well have said ‘shibboleths, bad practice and screw-ups’ because making changes in these three basic techniques ran straight up against established ways, beliefs and rules.

“From the moment Mach arrived at Yukos, the fight was on, both inside the company and out, in Moscow and in the field.”

Russian pumps at the time were old school in terms of power. Gustafson cites the Russian newspaper Moskovsky Komsomolets’ interview with Khodorkovsky in 2002. “When Joe first arrived, our guys said, ‘We know everything better than anybody.’ But Joe says, ‘Set the pump lower!’ And they said, ‘Go [----] yourself. (Da poshel ty!)’ Because we knew that if you set the pump low in the well, it’d burn out. Joe insisted. So we lowered it, and it burned out. Another one, and it burned out too. Six pumps burned out, but Joe kept saying, ‘Lower, lower g[------] it! One out of three will burn out, but the other two will work so well that you won’t miss the third one.’”

Yet, hydraulic fracturing, which Gustafson points out was as common in West Texas oil fields as wind, was Mach’s “most controversial innovation” in the Russian oil patch. The proppant—that is, ceramic spheres used to hold rock open after being fractured—that Mach ordered for the jobs became known in the field as “Joe’s balls.”

Khodorkovsky was eventually imprisoned in 2003, just weeks after his 40th birthday, on a variety of allegations that are internationally recognized as “trick charges” as Putin’s means of depowering the successful capitalist who had Western-style ambitions for Soviet-era-embedded Yukos.

Gustafson writes that Mach’s large fracs were among the charges. Also offensive was Mach’s prioritization of fixing the best oil wells first and shutting in some 7,000 poor wells—roughly half of Yukos’ inventory.

“Mach regarded this wholesale triage as one of his proudest achievements,” Gustafson writes. “Yet there was one small problem with shutting down wells in this way: It was illegal.”

Gustafson’s 662-page Wheel of Fortune includes 110 pages of footnotes as endnotes, a 20-page bibliography and more than 1,000 indexed terms.

Since leaving Russia and what was left of Yukos in 2006, Mach runs an investment-consulting firm, Houston Consultants, according to the Society of Petroleum Engineers’ JPT publication, which recognized Mach in its 2009 annual “JPT Legends of Production and Operations” program.

In Mach’s first four years at Yukos, until the company was put into bankruptcy by the Putin government, JPT reports, “…Oil production more than doubled from 800,000 to 1.7 million barrels of oil per day. This was accomplished in part while the active, producing well count fell from more than 14,000 to 7,000. The increased production rate came about as a result of decreasing water cut by 15% and increasing the average rate per well fourfold, while reducing operating expense per barrel. Reserves increased by 3 billion barrels.”

Gustafson writes that Khodorkovsky admired Mach, who “did not discriminate between Russians and Americans; he was brusque with everybody” and whose manner of dressing down subordinates appealed to Soviet-era-styled workers’ expectations while Khodorkovsky’s manner was quiet. “(Mach) wove four-letter Anglo-Saxon into a unique language, which his interpreters struggled to render into Russian equivalents—no small achievement in Russia, the homeland of mat—the elaborate obscenity that is an art form among Russian males.”

In the Moskovsky Komsomolets’ interview in 2002, Khodorkovsky said of Mach, “He swears like a Russian.” Gustafson writes, “The unbelieving interviewer then asks, ‘In Russian?’ to which Khodorkovsky answers proudly, ‘In English, but the interpreter translates into Russian.’”

Gustafson’s book is available in print and Kindle format at Amazon.

-Nissa Darbonne, Editor-at-Large, Oil and Gas Investor, OilandGasInvestor.com, Oil and Gas Investor This Week, A&D Watch, A-Dcenter.com, UGcenter.com. Contact Nissa at ndarbonne@hartenergy.com.

Canadian gas-weighted deal-making will continue, though, for export as LNG.

2013 U.S. oil and gas M&A deal-making will consist of few transactions for natural gas, Wood Mackenzie researchers forecast. “U.S. shale gas is likely to remain out of favor until expectations of future pricing begin to strengthen,” the Scotland-based firm reports in its annual global M&A review, “and the timing on that event is as yet uncertain.”

Spend on U.S. shale-gas properties fell to some $3 billion in 2012 from as much as $30 billion in 2011. Instead, gas-weighted deal-making was focused in Canada, where buyers anticipate exporting production as LNG (liquefied natural gas), particularly into the heated Asia-Pacific market from plants on the British Columbian coast, the WoodMac team reports in “Global Upstream M&A: 2012 in Review and the Outlook for 2013.”

Buyers of Canadian gas in 2012 included PetroChina Co. Ltd., Chevron Corp. and Petronas. The lattermost’s $5.2-billion bid for Canada-based Progress Energy Resources Corp. received federal approval in December. “Canadian shale-gas spend increased from $3.3 billion in seven deals in 2011 to $11 billion in 13 deals in 2012,” WoodMac reports.

In the U.S., existing LNG-import-plant operators and other firms have filed federal applications to build export facilities. To date, only one-that by Cheniere Energy Inc. for export from Sabine Pass, Louisiana-has received full approval. The U.S. Department of Energy is awaiting a series of public comment on allowing more.

The WoodMac team expects more gas-for-export transaction headlines in 2013-globally. “LNG will remain a key theme, whether through equity stakes in Australasia or in emerging developments in East Africa.”

In the U.S., meanwhile, buyers will spend more on adding unconventional-oil reserves to their portfolios, the researchers expect. Overall in North America, “the U.S. will see the vast majority of investment, but Canadian, tight-oil M&A could grow as embryonic plays are proved up. Canadian shale gas will continue to attract interest as a feedstock for future LNG developments. (In that,) the upper end of the market will continue to be dominated by Asian players-NOCs (national oil companies) and Japanese trading houses-and the very largest IOCs (international, non-government-held oil companies).”

Of course, U.S. shale gas remains in play with contrarian buyers, so a big deal of this nature “cannot be ruled out,” the team adds.

Otherwise, among unconventional-resource M&A in this and coming years, “Australia aside, unconventional plays outside North America are too immature to attract material M&A spend. We may, however, see some early-stage joint ventures targeting unconventionals in China and Argentina.”

-Nissa Darbonne, Editor-at-Large, Oil and Gas Investor, OilandGasInvestor.com, Oil and Gas Investor This Week, A&D Watch, A-Dcenter.com, UGcenter.com. Contact Nissa at ndarbonne@hartenergy.com.

“…Hidden here was the final piece of the puzzle that would change South Texas forever.”

Mark Collette, investigative reporter for the Corpus Christi Caller Times, tells the story in a recent special report of the geological and leasing feat behind Petrohawk Energy Corp.’s discovery of the Eagle Ford shale play in South Texas. The 4-year-old play is currently believed to be the largest-in terms of barrels of oil equivalent (BOE) that it holds, including oil, gas liquids and dry gas-in the Lower 48 today, rivaling that of the giant Bakken oil system in North Dakota and Montana.

Collette reports in a Dec. 29, 2012, article, “The Wildcatter: Corpus Christi’s Gregg Robertson, key member of Eagle Ford discovery, named 2012 Newsmaker of the Year,” of how Robertson, a long-time Corpus Christi-based geologist, was called upon by Petrohawk’s president and chief operating officer, Dick Stoneburner, in 2008 to help evaluate whether internal suggestions of the possibility of an Eagle Ford play could pan out. Robertson’s work included a trip to Texas’ library of more than 500,000 core and other rock material at the Bureau of Economic Geology’s headquarters in Austin that is part of a more than 2-million-box collection of subsurface materials there and in Houston and Midland.

Collette writes of Robertson’s Austin trip to analyze some Eagle Ford rock from an old South Texas well attempt, “The brown boxes sat like building blocks stacked 15 feet high in endless rows of towering metal shelves at a University of Texas research campus…Hidden here was the final piece of the puzzle that would change South Texas forever…Only Gregg Robertson knew where to look: Row 57, Bay H, Shelf 4.

“There, the manila pouches of ash-gray pebbles sat in their box. They probably went unnoticed since 1952, five years before Robertson was born. That’s when a Phillips Petroleum drillbit brought the cuttings up from a layer of sediment deposited on the sea floor more than 66 million years ago.”

For the full, approximately 3,800-word tale, see Collette’s article: “The Wildcatter: Corpus Christi’s Gregg Robertson.”

For a full report on the founding and growth of Petrohawk, which was sold in 2011 to BHP Billiton Ltd. for $15 billion for its leadership positions in the Haynesville and Eagle Ford shale plays plus horizontal Permian Basin potential, see the November 2011, Oil and Gas Investor, report, “Floyd-Opoly.”

–Nissa Darbonne, Editor-at-Large, Oil and Gas Investor, OilandGasInvestor.com, Oil and Gas Investor This Week, A&D Watch, A-Dcenter.com, UGcenter.com. Contact Nissa at ndarbonne@hartenergy.com.

“Economic development announcements are a welcomed sight in Louisiana as the rest of the country struggles to overcome one of the worst economic recessions since the Great Depression.”

Here, Louisiana Oil & Gas Association president Don Briggs discusses, in a guest column, industrial developments in the state as a result of an abundance of new Louisiana and other U.S. gas. -Nissa Darbonne

“One glance at the newspaper or a few minutes of watching the evening news and it is clear that the Louisiana economy is thriving with comparison to the rest of the United States. Plants are re-opening, oil and gas rigs can be seen peering over the treetops, the chemical and manufacturing industry are booming, and new hotels and restaurants are lining the frontage roads. A major contributing factor to our state’s economic success is the natural gas industry.

“Louisiana and many regions of the United States are experiencing a shale revolution, largely in part to the technology surrounding hydraulic fracturing and lateral drilling. While these shale plays are not newly discovered, many of them are now newly reachable within the last few years. Since 2008 alone, the natural gas industry in Louisiana has provided over $14 billion in economic impact, with more than 60,000 jobs created due to the Haynesville shale play in Northwest Louisiana.

“New construction projects are popping up all over Louisiana, thanks to the abundant natural resources that Louisiana has beneath our feet. In Cameron Parish, Cheniere Energy Inc. is constructing a liquefied natural gas (LNG) exportation plant that is an $11-billion investment in Louisiana’s economy. Another win for Louisiana is coming to Calcasieu Parish thanks to (South Africa-based) Sasol (North America Inc.), as it will be producing high-quality transportation fuels from natural gas. Sasol will be making an up to $21-billion investment in the state. And Caddo Parish is receiving two economic victories, one from BHP Billiton, which opened a $70-million, state-of-the-art facility that houses its Haynesville shale operations office, and the other victory coming from Benteler International AG, which will be opening a steel-making operation to the tune of $900 million.

“Dr. David Dismukes, a Ph.D. at the Center for Energy Studies at LSU, released a study recently with specific numbers about the future of our state. He said that the “abundance of natural gas resources has led to a virtual manufacturing renaissance in Louisiana where, to date, some $62.3 billion in new capital investments have been announced.” Dismukes goes on to say that, resulting from the natural gas induced projects, over 214,000 jobs and more than $9 billion in increased wages will likely result over a nine-year period.

“Jobs, multi-billion-dollar investments and new plants are each part of the macro-level ripple effect of the shale revolution that is taking place right here in Louisiana as well as around the country. To be more specific, Louisiana is the second-largest producer of natural gas in the United States and the third-largest consumer of natural gas. Dismukes credits the consumption level as being due to the massive “energy-intensive manufacturing industry” in Louisiana.

“Economic development announcements are a welcomed sight in Louisiana as the rest of the country struggles to overcome one of the worst economic recessions since the Great Depression. These aforementioned announcements are just a few examples of what a bright future Louisiana can expect. As more natural resources are developed in Louisiana and abroad, we can only hope to see more plants open and more jobs available.”

For more information about the Louisiana Oil & Gas Association, go to LOGA.la.

-Nissa Darbonne, Editor-at-Large, Oil and Gas Investor, OilandGasInvestor.com, Oil and Gas Investor This Week, A&D Watch, A-Dcenter.com, UGcenter.com. Contact Nissa at ndarbonne@hartenergy.com.