Category: Oil & Gas

3 posts

According to Steve Blackwell, CEO and Managing Partner of Invito Energy Partners, the energy industry  faced several challenges in 2022 including labor shortages, increased costs due to supply chain issues, a changing regulatory climate, declining refining capacity, and declining commodity prices in the second half of the year.  Blackwell notes that these issues are primarily a result of the COVID-19 pandemic with the associated shutdowns and supply chain disruptions  and uncertainty brought by ongoing international conflicts and domestic fed policy with interest rates.

The energy industry has been impacted by political tensions between Russia and Ukraine, with Russia using energy as a tool to erode support for Ukraine. Russian energy companies have limited the flow of natural gas to Europe, causing prices to rise and prompting countries to search for alternatives. This has led to increased oil and gas revenues for Russia as countries are willing to pay a premium for more Russian energy.

However, Russia’s reliance on the globalized energy market to support its economy has begun to have negative consequences. The Ukraine war and the West’s aversion to Russian energy imports could lead to the end of the international oil market, with a more regionalized version defined by politics taking its place. In response, the European Union and the Group of Seven nations have begun phasing out Russian oil imports and have approved an oil price cap for Russian imports, which could significantly impact Russia’s energy revenues.

Looking ahead to the first half of 2023, Blackwell expects commodity prices to remain range bound and relatively stable, but with the potential for higher prices as we approach the end of the second quarter as demand concerns subside and the market returns to a focus on supply. He also expects OPEC to continue its prioritization of higher oil prices over market share. He also sees the costs for drilling of wells to stabilize and decrease as we move through 2023.

‚ÄúThe biggest challenges facing the industry recently have been labor shortages, increased costs due primarily to supply chain issues, an ever-changing regulatory climate, refining capacity declines, and recent declines in commodity prices from the highs during the second and third quarters of 2022,‚ÄĚ Blackwell explains.

Despite these increasing hurdles, Steve Blackwell remains optimistic about the future of the energy industry. He believes that with the right strategies in place, the industry can meet the challenges of the present and build a more sustainable and prosperous future.

Overall, the energy industry is facing a range of challenges, but there are also opportunities for growth and innovation as the industry adapts to changing market conditions. As Blackwell notes, the key will be to stay informed and stay nimble in order to navigate the shifting landscape and emerge stronger on the other side.

About Steve Blackwell

Steve Blackwell is the CEO and Managing Partner of Invito Energy Partners. With over 14 years of experience in the energy industry and more than 20 years of executive-level experience, Blackwell brings a wealth of knowledge and expertise to his role.

During his tenure as President of Petromax Operating, Blackwell oversaw the deployment of over $100 million in investor capital into three operated fields, where the company leased over 86,000 acres of mineral land and drilled 39 horizontal wells. He also oversaw the divestment of these assets for nearly $900 million, with an average rate of return of 370%.

As Chief Operating Officer of U.S. Energy Development Corporation, Blackwell oversaw the deployment of over $100 million in investor capital, resulting in the drilling of 29 wells in the company’s Eagle Ford shale asset. Under his leadership, the company was able to decrease costs per well by 25%, increase average EURs by 5%, and increase the return on investment. Blackwell holds a B.S. in Business Administration, Finance, and Accounting from Central Michigan University.

Opinions expressed by US Business News contributors are their own.

Investment Risk ‚Äď Oil and Gas Evaluations¬†

Understanding proper¬†oil and gas (‚ÄúO&G‚ÄĚ)¬†investment risk analysis is at the¬†core¬†of¬†a¬†successful¬†long-term investment strategy.¬† Truthfully, this can¬†be¬†complicated and intimidating‚Ķand¬†as boring as watching¬†grass grow.¬†¬†So,¬†what‚Äôs an investor to do?¬†¬†¬†

 Here is a macro look at the evaluation process and its importance in performing accurate risk analysis.  But prior to jumping headfirst into this process, it is essential to understand two things.  First, this assessment process is usually long, capital intensive, and the last analysis piece that includes many technical (engineering and geologic) and financial (accounting and modeling) assessment processes.  Doing these accurately is how oil and gas companies prioritize and allocate funds, projects areas, and ongoing development of these assets.  Second, no other industry has the varied exposure to so many different risk types that exist beyond just a single/simple economic evaluation of the assets only.  Quantifying and understanding these risks are crucial…done right…can save an investor much heartache. 

 Risk Analysis: Capital Intensity 

What makes O&G investments different from other industries is how capital intensive they generally are.  Within the industry, capital intensity can also vary tremendously by asset type like onshore or offshore, exploratory, developmental, drilling, infrastructure, legacy well redevelopment, or processing facilities.  Most have multiple asset types in each investment project.  Because of this, O&G companies often rely on a multifaceted risk analysis to ensure the right projects get funded.   

 According to Deloitte, during the last decade the industry registered net negative free cash flows of $300 billion, impaired more than $450 billion of invested capital, and saw more than 190 bankruptcies.  What gives? 

 Historically, oil and gas companies would diversify investment capital into multiple revenue streams and asset areas to offset market variations…while systematically and methodically developing and hi-grading those assets.  But the US shale revolution and oil prices over $100/bbl, threw caution to the wind with massive capital inflows into the industry, prompting inaccurate and euphoric project evaluations, fueled by inexperienced investors as well as O&G industry professionals.   

¬†As¬†the industry experienced¬†the¬†incoming and¬†outgoing tides¬†of¬†commodity¬†variations,¬†Warren Buffets¬†infamous¬†saying¬†became a reality‚Ķ‚ÄĚOnly when the tide goes out do you discover who’s been swimming naked.‚Ä̬†

 Risk Analysis: Quantifying Risk Types 

Today, those remaining in the industry are reverting to time tested methods and strategies to evaluating projects and quantifying risk, but with a new ESG twist.  Let us explore these different risk types. 

 Political Risk 

A projects political risk can be impacted by federal, state, and local forces.  Any change in government policies, regulations, taxes, permitting, and restrictions should promote a re-evaluation of economics, timing, and ultimately whether a project is worth doing at all.  O&G companies should demonstrate an understanding and history of identifying these risks and ways of properly planning for them. 

 Environmental Risk 

Environmental¬†risk¬†impacts¬†include¬†worker safety, local ecology,¬†natural resources, and¬†waste management.¬† This must be factored into¬†a projects¬†risk¬†analysis.¬† Spills, worker incidents, accidents, property damage, and¬†local water and habitat impacts are¬†the biggest¬†source of¬†financial risk…second to none.¬† Any prudent¬†O&G assessment should involve a¬†detailed¬†review of these impacts, proper insurance coverages¬†and detailed plans¬†of¬†compliance measures¬†in each jurisdiction¬†like¬†spill response (SPCC plans) and regulatory certification (Tier II & Quad O).¬†¬†In the new age of ESG investing, methane emissions and flaring¬†plans need to be disclosed and quantified.¬†¬†¬†

 Technical Risk 

Minimizing technical risks requires project teams to employ a diverse set of skills like Geologists, Engineers, Project Managers, Procurement Specialists, and Business Development.  Each discipline requires a wide range of tools and data used to develop interpretations of existing features like faults and legacy production or create exploratory predictions of new assets using seismic or taking physical cores of the rock.  This information is then used to estimate project costs, materials, and infrastructure necessary to implement and bring online a project’s hydrocarbon production potential.   

 Economic Risk 

Because the required O&G capital investment is so large, economic analysis on returns, capital & operating expenditures, and sensitivity analysis of oil and gas pricing needs to be highly understood and accurately modeled.  This modeling is complex, can be highly subjective, and can yield a wide range of non-unique outputs depending on the experience and background of the modeler.   

 Evaluation Analysis: Modeling Risk 

So, how can you verify your O&G investment is a good deal?  O&G companies use a variety of ways to qualify their data to ensure their estimates are accurate including economic modeling and statistical sensitivity assessments. 

¬†With over 15 different inputs, economic forecasting and modeling¬†is the¬†foundation and most preferred approach to evaluating risk.¬† However, each input can have accumulating effects¬†to predicting¬†returns¬†and are subject to how aggressive or conservative¬†a company’s mentality¬†is.¬†¬†These inputs, over time,¬†can¬†also¬†be escalated, held constant, or varied depending¬†on these outlooks.¬† Each input is¬†built on real data sets, which¬†they¬†themselves need to be processed, qualified, and¬†risked.¬† A more aggressive company may treat one input set differently¬†than another…which can lead to wide differences in project outcomes.¬†¬†¬†

 Running statistical sensitivity analysis takes economic models a step further by creating, quantifying, and testing risk parameters.  This concept is applied to every aspect of the risk process, data, modeling, time value of money, cash flow, and ultimately quantifying the project uncertainties and full implications of each action a company makes. 

 Good investment decisions start with quantifying the risk types, understanding the modeling, and evaluating how aggressive or conservative a company applies and tests its project ideas.  The complexity of O&G risk factors is intimidating but can be overcome by inquiring into each of these different facets of analysis.  Having a team with the technical skill set and experiences to draw upon is essential to a profitable oil and gas investment.   

There are an estimated 1 billion people on the planet without electricity, another billion with only intermittent access, and 3 billion that still cook with biofuels…aka WOOD.

An estimated….

8 million people die annually of malnourishment

5 million people die annually from lack of clean water

3 million people die annually of indoor air pollution

While there are many factors that affect the¬†health of humanity, it‚Äôs hard to argue against the impact that hydrocarbons¬†AND¬†machines (‚Äútechnology‚ÄĚ) have had in covering the basic needs of humans; such as nutrition, health care, education, safe water, clean air, transportation, among others.

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Cooking with Biofuels

The flip side, energy poverty. Opponents of fossil fuels oversimplify the impact on humanity to environmental factors, mother earth, while ignoring interlinked health factors and lack of healthier alternatives.

Affordable access to hydrocarbons is, however, only one factor to sustaining alternatives for health. Energy-producing technology must be efficient!¬†NO¬†energy system is renewable since all technology requires the mining and processing of millions of tons of elements. Hydrocarbon based technologies, compared to ‚Äúgreen‚ÄĚ technology, on average use 10x less in these materials extracted and processed to produce the same amount of energy.

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However, this conversation is not implying climate, certain energy sources, or the policies that drive them are silver bullets to health. Instead, availability to access and the lack of efficient alternatives are.

Merely, increasing energy use, when applied to developing nations, may indeed increase the growth of Gross Domestic Product (GDP) per person. However, once saturation is reached, it cannot be sustained without the application of efficient technology.

There is no single solution that can snatch the last billion people on earth out of poverty. But hydrocarbons have led the charge since the dawn of the petroleum age when Abraham Gesner invented kerosene making coal and petroleum practical fuel sources. But limiting humanities access to efficient energy choices, has massive negative implications to human health.

Energy Poverty = Poverty

The modern world today enjoys some of the lowest poverty rates in history with unparalleled progress in the human condition. As the global economy has exploded the last 25 years, roughly 130,000 people are lifted from poverty every day. As a result, humanity is empowered to save lives, the environment, air quality, and water quality as never before. But, until more sustainable energy technology can be invented, hydrocarbons affect on health will continue to usher humanity forward for generations to come.