5th April 2019
Oil Drilling Activity
Onshore US drilling activity saw a sharp increase of 19 with a total active count of 1000 rigs; those targeting oil up 15, with the total at 831. Across the three major unconventional oil basins, the oil rig count increased by 9, with Permian up 8, Williston up 1 and Eagle Ford flat. With WTI prices up $10 per barrel since the beginning of 2019 acting as a spur to new well investment, should lead to sustained growth in oil production in 2019, aided by commissioning of new pipeline capacity to the Gulf Coast.
Total US domestic crude output increased to 12.2 million barrels per day, up 100,000 barrels per day. Data showed that crude oil inventories increased by 7.2 million barrels last week, compared to forecasts for a stockpile draw of 0.425 million barrels, after an increase of 2.8 million barrels in the previous week. US crude inventories grew more than expected last week as a Texas chemical spill cleanup continued to impact port activities in the Houston ship channel.
The number of Americans filing applications for unemployment benefits fell to a more than 49-year low last week, pointing to sustained labor market strength despite slowing economic growth. The US economy added 196,000 jobs in March, however, wage growth expanded 3.2%, below an expected gain of 3.4%.
Carbon Management – A competitive advantage
A shift in the traditional oil and gas industry view of competitive metrics and the strategic value of carbon management occurred this week. However, it was easy to miss. Saudi Aramco, the world’s most profitable company, signaled in a bond prospectus for raising capital to buy SABIC – the Kingdom’s petrochemical company, that its low carbon intensity oil is one of their ‘competitive strengths’ compared to other major producers.
Saudi Aramco rightly point out that climate- and carbon-related policy risks to oil and gas include litigation, threats to infrastructure, and most notably reduced demand. Investors consider these above-ground risks seriously, compounding recent oil price fluctuations on the opportunity costs associated with the long-term future value of their investment. Electricity supply and renewable energy can be seen by some as a better long-term investment.
Now this news is just after my article in the March 22 Monitor on a study that Gaffney, Cline & Associates was involved in, which was led by Stanford University and published in the peer-reviewed journal Science, on the global carbon intensity of crude oil production. The study and its results were repeatedly highlighted in the Saudi Aramco bond prospectus, given Saudi Arabia was the second lowest carbon intensive oil evaluated out of nearly 90 other countries.
Traditional oil and gas industry views for navigating the impacts of peak oil demand have considered the marginal cost of production and diversification of end-use (e.g., into petrochemicals – being the another connection to this Saudi Aramco news). The industry has therefore been focused over the last decade in moving from ‘volume’ to ‘value’, not adding supply but instead focusing on lowering the costs of existing supplies. However, following this announcement by Saudi Aramco, oil and gas company strategies should also now consider the dual metric of lifting cost and carbon intensity in their portfolio decision making to remain competitive. Applying a carbon price to the carbon intensity of oil and gas production can clearly impact the marginal cost of supply curve, and has some very interesting impacts on the merit order.
However, the story does not end there of course. The oil and gas industry has constantly found innovative ways to unlock technology that impacts the merit order and reduces the cost of supply, and Carbon Management will now have its place at the table with 4D seismic, horizontal wells, and hydraulic fracturing. Whilst conventional wisdom is on the tactical value of Carbon Management to cost effectively comply with evolving regulations in a timely manner, industry leaders understand the strategic value is to ensure market competitiveness following peak demand and secure continued confidence from investors.
Natural Gas - Part Hydrogen, part CO2
As more and more energy suppliers start to consider the forthcoming “Energy Transition”, a variety of technologies are vying for their place in a decarbonized world, and many of these revolve around natural gas...Methane, and its cousin, Hydrogen.
A number of technologies are already well established which are hydrogen based, including fuel cells, which have been with us for several decades already, but lack the commercial features necessary for widespread use. There are other ways of using hydrogen in conjunction with natural gas, one of which is the manufacture of synthetic gas, potentially through electrolysis at times of slack demand, but where wind powered turbines have excess capacity. A way of storing excess power from renewables, for use at times when the sun is not shining and the wind is not blowing is of course the “silver bullet” that so many power generators have been searching for to finally enable renewables to take a larger share of the generating mix.
In Germany, a plant opened this week, converting hydrogen derived from wind generation into natural gas, which is injected into the grid. In most parts of the world, however, without some kind of economic incentive, such as a carbon tax, using capital-intensive processing facilities to turn hydrogen into methane are sub-economic. However, there are other ways of using hydrogen in combination with natural gas. Some studies suggest that up to 30% hydrogen blended with natural gas could still represent a safe way of operating the distribution grid, without any safety issues around burner stability. Alternatively, another approach would be to convert an entire natural gas distribution system to hydrogen, and abandon natural gas altogether.
A study carried out by Equinor and a number of UK gas distribution companies suggests that the reverse process to the one in Germany, a de-methaniser could be used in conjunction with underground sequestration of carbon to convert methane to hydrogen, and distribute it directly to residential customers. Such a process would not be unlike the major roll out of natural gas in the 1970s, which saw a gradual replacement of town gas with North Sea gas (so called “hi speed gas”), rolled out street by street across the entire country.
Whatever the energy transition holds, it seems certain that methane and hydrogen, acting together, along with carbon capture, will most likely be a major plank of moving to a zero carbon world.
Crude Oil - Tightening global supply and demand
Supply may tighten more; a US official said on Tuesday that three of eight countries granted waivers by Washington to import oil from Iran had cut such purchases to zero, adding that improved oil market conditions would help reduce Iranian crude exports further. But despite also being under US sanctions, Venezuela's state-run energy company, PDVSA, kept oil exports near 1 million bpd in March.
Crude prices are being supported by the efforts of the OPEC and allies such as Russia, a group known as OPEC+, to reduce oil output by about 1.2 million barrels per day this year. Supply from OPEC countries hit a four-year low in March, while production from Russia fell to 11.3 million barrels per day last month, but missed the country's target under the supply deal.
US crude imports rose and crude exports fell, which translates into higher net imports. Crude processing remained lower than usual and crude production increased to a new record level of 12.2 million barrels per day. Despite the sharp increase in US crude inventories, prices are positioned to move up on tightening global supply and signs of demand picking up.
Crude Oil Price
Brent, the global benchmark for oil, increased US$0.79 to US$69.46 a barrel, reflecting a gain of 1.15% on the week.
WTI crude rose US$1.92 to US$62.39 a barrel, up 3.18% on the week.
Total US rig count (including the Gulf of Mexico) stands at 1025, up 19 this week. The horizontal rig count stands at 901, an increase of 10 this week. US rig activity continue to show constrained growth for 39 of the last 42 weeks and stands just 2% above last year’s total. Crude prices direct US shale operators to focus on well productivity (i.e., well completion) and operational efficiency over rig growth.
US Crude Oil Supply and Demand
US crude oil refinery inputs averaged 15.8 million barrels per day, with refineries at 86.4% of their operating capacity last week. This is 18,000 barrels per day more than the previous week’s average.
US gasoline demand over the past four weeks was at 9.2 million barrels, down 1.5% from a year ago. Total commercial petroleum inventories increased by 7.2 million barrels last week.
US crude net imports averaged 4.04 million barrels per day last week, up by 386,000 barrels per day from the previous week. Over the past four weeks, crude oil net imports averaged 3.859 million barrels per day, 35.4% less than the same four-week period last year.
US crude imports averaged 6.8 million barrels per day last week, up by 223,000 barrels per day from the previous week. Over the past four weeks, crude oil imports averaged 6.7 million barrels per day, 12.1% less than the same four-week period last year.
Crude oil inventories increased 7.2 million barrels from the previous week. The crude stored at Cushing (the main price point for WTI) increased 0.2 million barrels; total stored is 47.1 million barrels (~52% utilization).
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