August 16, 2019

August 16, 2019

16th August 2019

Oil Drilling Activity

Onshore US drilling activity dropped 2 with a total active count of 907 rigs; those targeting oil up 6, with the total at 770. Across the three major unconventional oil basins, the oil-rig count was down 1, with Permian down 3, Williston and Eagle Ford each up 1.

Sources: EIA Weekly Update and GCA Analysis

US domestic crude output was flat; crude oil production stands at 12.3 million barrels per day, just under its weekly record high at 12.4 million hit in May. 

Crude oil stockpiles rose for the second week after nearly two months of declines as higher net imports persisted. Inventories rose 1.6 million barrels compared with expectations for a decrease of 2.8 million barrels, as refineries cut output.  Two new oil pipelines from the Permian basin to the US Gulf Coast have opened this month, adding over 1 million barrels per day of incremental transport capacity.  This has reduced price differentials at WTI Midland Hub and also the WTI-Brent differential as transit costs decline.  Brent is now trading at less than $4 per barrel premium to WTI (Cushing), down from $7-9 per barrel premium over the last year.

Carbon Management – The role of third-party verifiers in oil and gas, and the application to Carbon Management

For this week’s Monitor, I have asked Rawdon Seager, GCA’s Technical Director responsible for Global Quality Assurance and industry expert on oil and gas reserves and resources evaluations, to start with an overview on the role of third-party verifiers in oil and gas, which provides some context for this role to be applied in Carbon Management.

Rawdon: “All reputable oil and gas companies have internal procedures in place to ensure that their recorded estimates of oil and gas reserves and resources are consistent with the applicable definitions and corporate guidelines. This goes far beyond the mandates of the Sarbanes-Oxley Act of 2002 that prescribes the need for appropriate corporate governance: it is fundamental to a company’s business to have a reliable estimate of future recovery based on defined investment plans. Only then can management make decisions about mergers, acquisitions, divestments, etc. Companies listed on a US stock exchange must comply with the US Securities and Exchange Commission (SEC) regulations, which were updated in 2009, while internationally the Society of Petroleum Engineers (SPE) et al. sponsored Petroleum Resources Management System (PRMS 2018) is more common (some countries have their own definitions). In the US, there is no legal requirement for companies to seek external validation of their reported reserves estimates, although some will engage third-party consultants anyway to provide an independent verification of the integrity of the reserves process and the reasonableness of the internally derived results. In other countries, however, such independent verification is required by the relevant authorities. Most such engagements are carried out on the basis of an audit of estimates made by the company’s technical staff.”

As Rawdon points out, the independence of third-party verifiers underpins their value to the oil and gas industry. The same is true for the application of third-party verifiers to Carbon Management practices in oil and gas, to ensure that all stakeholders can be assured as to the quality of actions being taken – be it quantification of Greenhouse Gas (GHG) emissions, evaluation of Carbon Intensity (CI), implementation of the recommendations from the Task Force for Climate Related Financial Disclosures (TCFD), and/or the GHG reductions achieved through implementation of Carbon Solutions.

A specific example where such a role for third-party verifiers is being debated today is the US Section 45Q tax credit for Carbon Capture, Use and Storage (CCUS). This requires security measures to be put in place for the determination of CO2 geological storage, so it does not escape into the atmosphere. Whilst the EPA’s underground injection control well program and GHG reporting requirements are available for deep saline formations, there is a question about what, if anything beyond current practice, is needed for the injection and geological storage of CO2 that occurs in conjunction with Enhanced Oil Recovery (EOR).

The recently published International Organization for Standardization (ISO) 27916 provides a relevant standard for demonstrating secure geological storage of CO2 injected in EOR operations. For implementation, appropriately qualified accreditation bodies should implement rigorous procedures to be followed by third-party verifiers in accordance with the guiding principles of assuring environmental integrity for the safe, long-term containment of CO2 within the EOR formation complex. These accreditation bodies can include government agencies or other organizations, but the selection of these is important to ensure that they will enhance the acceptance of CCUS and the energy products to which it is applied across regional and national borders, thereby providing a framework to underpin trade through the removal of technical barriers. Another important consideration is that the accreditation body allows for a broad range of third-party verifiers to be certified to remove implementation barriers. For example, there is already precedent for the use of registered or certified petroleum engineers to perform various safety and performance verifications in oil and gas to assure high professional standards of impartiality and competence. Whilst operating companies as the first party can employ these verifiers as staff members, it is best practice for the individuals themselves to come from other parts of the organization to the business they are implementing their certification duties for to ensure that as a third-party verifier they act independently in accordance with the accredited body procedures. Third-party verifiers, therefore, do not necessarily have to be third-party consultants.

So what are the options for a competent accreditation body for implementation of ISO 27916? In the US, the American National Standards Institute (ANSI), which currently acts as the accreditation body for GHG reporting verifications, is an obvious choice. Other international entities such as the SPE and/or the American Association of Petroleum Geologists (AAPG) could also play a role. As Rawdon points out, the SPE and its sister professional societies already play a role internationally in reserves and resources evaluations.

Natural Gas – Gas and Oil ... Divorce papers are final

Back in 2012 when oil was still well above $100/bbl and Henry Hub had dropped to less than $3, LNG buyers in Asia were queuing up for US indexed gas based import contracts, and over a matter of months, some 10 MTPA had been committed to in what was seen as bargain basement gas.  With long-term contracts still being priced in the 12 or 13% range, US gas plus a fee for liquefaction and fuel was looking to be somewhere around $8-9/MMBtu delivered to Asia, compared to around $12-13/MMBtu based on traditional oil contracts.  Things soon changed however, and in 2016 when Brent was sitting at less than $40, Henry Hub indexed gas was looking costly.

For the last few months, however, oil indexed gas has been looking like the loser in this tug of war that has lasted for the last 5 years or so.  With September NBP trading at $3.84 and Asia prices at only $4.65, and September Brent at $65, landed gas in Europe and Asia come out at only 6% and 7% of Brent, almost half what the long-term contracted price would be.

When this happened in Europe, there was a swathe of arbitrations and price reviews that brought down long-term contract prices to line up with gas-on-gas competition, and there are signs that Asia is starting to move down this path too, now that it is clear where the oil/gas equation is starting to stabilize.  Oil and gas have had for some years now an uneasy relationship, in the pricing department, and things seem to have reached breaking point as we approach the next heating season.

Crude Oil – US production outpace global demand growth

The global economic slowdown, amplified by tariff conflicts and uncertainty over Brexit, is also hitting European economies. A slump in exports sent Germany's economy into reverse in the second quarter. Oil prices plunged after fresh Chinese and European economic data revived global demand fears and US crude inventories rose unexpectedly for the second week in a row.

Crude oil prices have been under pressure, as the news and fundamental picture is growing more bearish. The trade war with China has pressured the market along with a rising dollar and weaker outlook for demand worldwide. The biggest issue might be the prospects for the "oil glut" to continue to grow, as the US continues to pump out oil at an increasing rate.

The EIA detailed their forecast in the "August Short-Term Outlook" for increased production well into 2020, and demand is not expected to keep pace. One of the biggest worries for the market is that demand may weaken even further as economic activity has been slowing around the world and some countries in Europe are slipping into recession. With the trend toward zero interest rates and even negative rates, what type of monetary policy is left to help Europe’s economies.

Longer term, the market could continue to drift lower.

Weekly Recap

Crude Oil Price

Brent, the global benchmark for oil, decreased $0.02 to $58.38 a barrel, reflecting a loss of 0.03% on the week.

WTI crude rose $0.51 to $54.35 a barrel, up 0.95% on the week.

Drilling Activity

Source: BHGE Rotary Rig Count

Total US rig count (including the Gulf of Mexico) stands at 935, up 1. The horizontal rig count stands at 815, down 2. US rig activity continues to be restrained and is 120 rigs below (-11%) last year’s total. US shale operators continue to focus on well productivity (i.e., well completion), DUC wells (inventory reduced by 100 in July) and operational efficiency over rig growth. Crude price continues to support capital discipline over production growth by the drill bit.

US Crude Oil Supply and Demand

Sources: EIA Weekly Update and GCA Analysis

For the second week crude oil inventories increased, up by 1.6 million barrels from the previous week. The crude stored at Cushing (the main price point for WTI) decreased 2.6 million barrels; total stored is 44.8 million barrels (~50% utilization).

US crude oil refinery inputs averaged 17.3 million barrels per day, with refineries at 96.4% of their operating capacity last week. This was 475,000 barrels per day less than the previous week’s average.

US gasoline demand over the past four weeks was at 9.7 million barrels, up 0.6% from a year ago. Total commercial petroleum inventories increased by 2.4 million barrels last week.

US crude net imports averaged 5.0 million barrels per day last week, down by 252,000 barrels per day from the previous week. Over the past four weeks, crude oil net imports averaged 4.5 million barrels per day, 27.5% less than the same four-week period last year.

    

Authors

August 16, 2019

P. Kevin Galvin

Facilities/Cost Engineer - kevin.galvin@gaffney-cline.com
August 16, 2019

Nick Fulford

Global Head of Gas/LNG - nick.fulford@gaffney-cline.com
August 16, 2019

Nigel Jenvey

Global Head of Carbon Management - nigel.jenvey@gaffney-cline.com
August 16, 2019

Rawdon Seager

Global Head of Quality Assurance - rawdon.seager@gaffney-cline.com

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