An Age of Abundance

An Age of Abundance

24th February 2017

The onshore rig count continued to rise, albeit only just, up 3 this week and posting its 16th increase in 17 weeks. This brings the total to 733, approximately 60% above the 473 a year ago. US drillers have added a total of 286 oil rigs in 36 of the past 39 weeks.

Since 2010, the US has been in an oil and gas boom. In 2015, US production was at near record levels, and it now produces more petroleum products than any other country in the world.

LNG as a marine fuel – hope for exporters is on the horizon

After a much heralded investment, the LNG powered Engie Zeebrugge, a 5,000 cubic metre LNG bunkering vessel (the first of its type) is on her maiden voyage from the South Korean shipyard where she was built.  Under the Gas4Sea label, which the sponsors hope will become one of the pioneering providers of LNG bunker fuel to the shipping industry, she will start operations based out of the Fluxys terminal at Zeebrugge where a special jetty has been built to accommodate small vessels of this type and those down to 2,000 cubic meters. In addition to Engie, the project is being backed by Mitsubishi and NYK lines from Japan.

As the implications of the IMO’s designated Environmental Control Areas, or ECA’s, begin to be felt with restrictions on SOX, NOX and particulates, both the operational necessity of burning clean fuel and the economic savings that can be achieved will start to appeal to ship owners worldwide.  With 35% less CO2 emissions and 80% less NOX compared to Gasoil, LNG is in many ways a perfect answer. Part of the justification for the vessel is an arrangement entered into between Engie and French container ship operators, which provide security of supply for the vessels, and a dependable market for the LNG.

The Engie arrangement with shipping group CMA CGM is very similar to the one entered into by Shell and Carnival Corporation last October, under which LNG bunkering services will be provided at various ports around the world to support Carnival’s newest generation of LNG powered mega-cruise ships.  Shell, who inked another LNG bunkering deal with a dredging company this week, are becoming one of the biggest protagonists for new markets for LNG.   Based on Shell’s projections in their first LNG Outlook, published this week, these new marine and transport markets are set to help support LNG annual market growth of 4%-5% in the 2030 timeframe.

It will take some time for LNG bunkering vessels to become a familiar sight in ports around the world, but the gas requirements of the sector are set to grow rapidly as the IMO environmental restrictions start to bite, providing a much needed new outlet for the LNG exporting industry.

Crude Oil - Expect prices to stay around $55-60 per barrel in the near term.

OPEC will not want to see the US shale revival turn into a new boom for it would risk a re-run of the 2014 price crisis. Oil prices may struggle to rise above $60 per barrel for any length of time this year because of increase shale production and the likely reversal of OPEC’s production curbs.

US. shale producers are growing production and potentially limiting further increases in near term oil prices. US crude production increased in both October and November, the first back-to-back increases since early 2015. Domestic oil production rose to 8.9 million barrels per day in November, up from a cyclical low of 8.6 million barrels per day in September.

Offshore production from the Gulf of Mexico accounted for more than half the total gain, adding an extra 175,000 barrels per day, with output from Alaska’s North Slope up 61,000 barrels per day. Additionally, production increases were reported from onshore predominantly shale plays in North Dakota (65,000), Oklahoma (11,000), New Mexico (15,000) and Texas (43,000).

Production from the lower US, excluding the Gulf of Mexico, were down 7.5 % (550,000 barrels per day) in November 2016 compared with November 2015.

After reaching a trough in August, US oil production seems to have resumed an upward trend. The number of rigs drilling for oil has risen by more than 280 (almost 90 percent) since the end of May 2016. US Operators are deploying an average of an extra 7 rigs each week to boost oil output.

The increase in the rig count understates the additional production because drilling and fracking operations have become more efficient. Rig counts tend to affect output with a significant lag because of delays in fracturing and turning wells to market.

Increases in output during October and November were likely the result of the added rigs deployed several months earlier. The rise in the rig count during the fourth quarter of 2016 and the start of the first quarter of 2017 should ensure that crude output rises.

Weekly Recaps

Oil Drilling Activity

The total number of active onshore rigs increased to 733.  When compared to a November 2014 figure of 1,876 active rigs, the current level is 60% below the 2014 high.

Across the three major unconventional oil basins, the oil rig total increased to 401 (up 6 last week), with Permian up 3, Eagle Ford up 4 and Williston down 1.

Total US rig count (including the Gulf of Mexico) stands at 754, up 3 last week, with rigs targeting oil up 5. The horizontal rig count increased to 624, up 10 last week.

Crude Oil Price

Brent, the global benchmark for oil, was up $0.67 to US$56.14 a barrel, reflecting a gain of 1.21% on the week.

WTI crude rose $1.00 to US$54.07 a barrel, up 1.88% on the week. 

US Crude Oil Supply and Demand

Sources: EIA Weekly Update and GCA analysis

US crude oil refinery inputs averaged 15.3 million barrels per day, with refineries at 84.3% of their operating capacity last week. This is 187,000 barrels per day less than the previous week’s average.

US gasoline demand over past four weeks was at 8.6 million, down 5.2% from a year ago. Total commercial petroleum inventories decreased by 11 million barrels last week.

On the supply side, EIA data indicated that total domestic crude production increased 24,000 barrels to 9 million barrels a day. The Lower 48 crude production now stands at 8.483 million barrels per day, up 17,000 this week.

US crude imports averaged about 7.3 million barrels per day last week, a decrease of 1.2 million barrels per day from the previous week. Over the last four weeks, crude oil imports averaged 8.4 million barrels per day, 7.5% above the same four-week period last year.

Crude oil inventories increased 0.6 million barrels from the previous week and remain at historically high levels. The crude stored at Cushing (the main price point for WTI) was down 1.6 million barrels; total storage is 63 million barrels (~70% utilization).

Authors

An Age of Abundance

Nick Fulford

Global Head of Gas and LNG - nick.fulford@gaffney-cline.com
An Age of Abundance

P Kevin Galvin

Principal Advisor, Field Development Planning - kevin.galvin@gaffney-cline.com

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