21st April 2017
Drillers added 11 onshore rigs (only 5 targeting oil), increasing activity for a 14th week in a row, bringing the total to 834. This extends the recovery into an 11th month as operators, following crude price expectation, continue to boost spending on new production. Onshore rigs now stand at 110% above the same period a year ago.
Natural Gas – Watch out for the gas tsunami
With the continuing buildup of rigs in the US, there is renewed interest in deepwater oil in the Gulf, Brazil, and Mexico; but all are masking a potentially big problem for gas producers. These emerging light tight oil (LTO) plays are backing out heavy oil like the Canadian oil sands and other oil resources with a substantially lower gas-oil-ratio.
The additional production arising from these increasing amounts of LTO is more than enough to “move the needle” in global gas. For example, each barrel of Permian oil produced instead of heavy oil will also produce about 3,000 cubic feet of extra gas. If just 1 million barrels of heavy oil is replaced with LTO, someone has to find a home for an astounding 3bcf/day of gas – equivalent to 40% of the UK’s average daily demand or 20 million tonnes of LNG per annum!
Furthermore, the effect will not be just more gas (for which markets are already scarce). Dry gas developments, which will essentially fill the gap between supply and demand, will be pushed further down the supply stack in another blow for companies without the benefit of a liquids rich portfolio. The result will be an even longer wait until the market can accommodate developments which are predominantly dry.
One effect that we are likely to see for upstream investors is a much greater earlier focus in the investment cycle for what can be done with all that gas. Within that environment, it’s no surprise that gas-to-power is dominating every emerging economy. Given the current outlook for downward price pressure and a potentially long period of a “buyers’ market” in gas, the move to lighter oil is likely to boost the share of natural gas in the power generation market.
Petrochemicals are already a major feature of the US resurgence in gas, with multi-billion dollar investments planned for all the major LTO/wet gas producing regions of the US, and many of the IOCs are looking at similar investments internationally.
In Africa, where the challenge of dealing with associated gas has been around for decades, new ways of using gas and avoiding flaring are being successfully rolled out. One obvious answer is diesel. The retail price of diesel in Nigeria has reached over 260 Naira/litre in the Lagos area, equivalent to over US$25/MMBtu. There is also a huge market in standby diesel generation. One of the attractive monetization routes available is to make natural gas an easy substitute.
In next week’s blog, we will take a more detailed look at some of the other alternatives to flaring that can work in Africa and other emerging economies. Some of those lessons may end up being rolled out around the world as billions of cubic feet of gas hit international markets because of the light oil boom that is unfolding.
Permian and Gulf of Mexico Flatten Crude Price
Crude prices could see downward pressure again by the end of the year due to a resurgent US crude production. Crude has recovered from lows reached in February 2016 and has mostly hovered above $50 a barrel since the beginning of the year following an agreement by The OPEC and Non-OPEC Countries to cut production.
US producers, who are underway for a full recovery, will restart an invasion of crude supply by the end of the year and this could certainly have a negative impact on the global crude markets. US crude producers are continuing to expand production following the rebound in crude prices.
The OPEC agreement is in place and working, and most likely will be extended, but in simple terms, the short-term effect on crude markets is not immediate because global crude stocks are extremely high. It could take another few years, rather than six months, for demand to outstrip supply.
US crude production peaked in the first quarter of 2015, before entering a decline phase amid collapsing activity across major shale oil basins. The greatest cumulative decline during the downturn was delivered by major shale oil plays outside of the Permian Basin. Total crude output from these unconventional basins contracted by ~830,000 barrels per day from first quarter 2015 to fourth quarter 2016. An additional ~370,000 barrels per day decline came from conventional crude production in the Lower 48, excluding Gulf of Mexico and Alaska.
Only two sources of crude supply in the US remained resilient throughout the downturn; the Permian Basin and Gulf of Mexico, a one-two punch combination. The Permian Basin added ~300,000 barrels per day from first quarter 2015 to fourth quarter 2016. While the Gulf of Mexico delivered ~240,000 barrels per day growth over the same period.
Recent growth in rig counts across major oil shale basins and the maturation of the US base production sets the stage for acceleration of additional US crude production onto the global crude market.
Sources: EIA Weekly Update and GCA analysis
Oil Drilling Activity
Total US rig count (including the Gulf of Mexico) stands at 847, up 8 last week, with rigs targeting oil up 11. The horizontal rig count increased to 706, up 11 last week.
The total number of active onshore rigs increased to 823. When compared to a November 2014 figure of 1,876 active rigs, the current level remains 56% below the 2014 high.
Across the three major unconventional oil basins, the oil rig total increased to 450 (up 12 last week), with Permian up 8, Eagle Ford up 3 and Williston up 1.
Crude Oil Price
Brent, the global benchmark for oil, declined $2.96 to US$53.03 a barrel, reflecting a loss of 5.29% on the week.
WTI crude dropped $2.56 to US$50.69 a barrel, down 4.81% on the week.
US Crude Oil Supply and Demand
Sources: EIA Weekly Update and GCA analysis
US crude oil refinery inputs averaged 16.9 million barrels per day, with refineries at 92.9% of their operating capacity last week. This is 241,000 barrels per day more than the previous week’s average.
US gasoline demand over past four weeks was at 9.3 million, down 0.7% from a year ago. Total commercial petroleum inventories decreased by 1.7 million barrels last week.
On the supply side, EIA data indicated that total domestic crude production increased 17,000 barrels to 9.252 million barrels a day. The Lower 48 crude production now stands at 8.722 million barrels per day, up 21,000 this week.
US crude imports averaged about 7.8 million barrels per day last week, a decrease of 68,000 barrels per day from the previous week. Over the last four weeks, crude oil imports averaged 7.9 million barrels per day, 2.0% above the same four-week period last year.
Crude oil inventories decreased 1.0 million barrels from the previous week and persist at historically high levels. The crude stored at Cushing (the main price point for WTI) was down 0.8 million barrels; total storage is 68.4 million barrels (~76% utilization).
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