2nd August 2019
Oil Drilling Activity
Onshore US drilling activity dropped 3 with a total active count of 918 rigs; those targeting oil down 6, with the total at 770. Across the three major unconventional oil basins, the oil-rig count was down, with Permian down 1, Williston and Eagle Ford flat.
EIA data shows unconventional oil and gas wells drilled in June was 1,342, down 185 from the peak of 1,527 achieved in October 2018, whilst completions rose 121 per month over the same period. There is a clear correlation with WTI prices that peaked at $76 per barrel on October 3, 2018 and subsequently have traded between $50-60 per barrel for most of the period since last November.
US domestic crude output increased by 900,000 barrels per day, recovering from an earlier GOM storm; crude oil production now stands at 12.2 million barrels per day. Crude stocks fell for a 7th consecutive week, dropping 8.5 million barrels; more than twice the 2.6 million-barrel decline expected.
Crude prices are expected to be range-bound near current levels this year as slowing economic growth and a protracted trade dispute curb demand.
Carbon Management – The new building blocks of modern society
Green buildings are generally considered those that are energy efficient and get their energy supply from renewable sources. This is because energy usage in buildings and their construction accounts for 36% of global energy consumption and nearly 40% of total CO2 emissions. US buildings are therefore responsible for more CO2 emissions annually than those of any other country except China. With global building expected to grow by 60% by 2040 because of rapidly expanding cities, energy efficiency and low carbon power supply is an important focus area for global GHG emissions management.
However, another significant source of CO2 emissions associated with buildings is with the production and transport of their construction materials. These ‘embodied emissions’ as they are termed, equals roughly 8-10 times the annual energy used to heat and cool the building. High levels of heat and processing of raw materials (minerals and chemicals) both produce large amounts of CO2 emissions. The production of cement, a key component of concrete, produces 8% of the world’s CO2 emissions. The production of steel, a key component of high-rise building construction, produces a similar amount, 6.5% of the world’s CO2 emissions. Their combination is the same as the entire country emissions for the US.
However, the cement and steel industries are improving their GHG emissions performance – mainly through energy efficiency and use of lower carbon fuels – which together can perhaps achieve 50% reduction in CO2 emissions. However, there is also a 100% solution, through the application of carbon capture, use and storage (CCUS). Whilst CCUS has been conventionally considered a deep de-carbonization option for power, options are now being investigated in such energy-intensive industries as cement and steel, which hold the potential for lower cost due to higher purity CO2 emissions. The incremental cost of CCUS application to these building materials – roughly 10% for steel and 50% for cement – whilst a significant increase in product cost, are a marginal cost of the total building construction cost given a significant amount is related to land and labor – not the materials used. With the additional use of captured CO2 to produce novel cements through absorption into the cement matrix during the curing process, improving its strength and weather resistance – there are product benefits too.
There is one CCUS project already in operation in the steel industry and one in planning for the cement industry. So what could be the most effective pathway to the adoption of low carbon construction materials and further deployment of CCUS in these industries? Could it be through inclusion in those voluntary Green building certifications such as ‘Energy Star’ and ‘LEED’ that I previously mentioned to create market demand?
Natural Gas – Hedging your bets
The natural gas business used to be so much simpler than it is today, when prices (largely speaking) tracked those of oil, price volatility was very low, and much of the industry was governed by a relatively comfortable regulatory framework that rendered adequate, if modest earnings, from what was seen as the sleepy hollow of the hydrocarbon world.
These days, natural gas is a much more exciting world; but with that excitement comes risk, uncertainty and earnings volatility. A quick scan of the gas-related news this week demonstrates just how much risk now resides in natural gas these days:
1. Retail Markets
News that the largest player in the UK gas retail space, Centrica (who trade as British Gas), has announced a substantial reduction in dividends and a share price collapse is a timely reminder that energy customers are fickle, and governments tend to find ways to keep them happy. Customer switching is now easier than ever, with a range of internet and device-based systems to drive the industry towards thinner and thinner margins. Combined with populist government policies to cap certain price tariffs, the customer end of the business worldwide is becoming a hard place to make a living.
2. Wholesale Markets
With a reported LNG sale to China going for just $3.80/MMBtu, LNG prices in Asia, for many decades the last bastion of premium gas pricing, are heading for their lowest levels in ten years. Global prices for non-contracted LNG are suffering from a perfect storm of LNG oversupply, and mild weather holding back AC demand in what should be the hottest part of the year. Compounding this are US gas prices in the low $2 range, and US dry gas production forecast to exceed 90 bcfd in 2019. With the ramp up in light tight oil (LTO) in the US producing prodigious amounts of associated natural gas as a bi-product, the challenge of finding a market is proving a difficult one. Record flaring is now a feature of the US gas scene, so much so that the US has moved up to fourth in the global gas flaring league table, accounting for around 10% of gas flared globally.
Amidst the downsides being seen in terms of realized price for gas, there are still some bright spots in the upstream arena, with major gas projects being undertaken in many diverse geographies. Mega-gas projects are being developed in Russia, Africa, the Eastern Mediterranean and Latin America where the Brazilian pre-salt and the Argentinian Vaca Muerta shale gas development have the potential to transform the gas picture in the southern cone.
4. LNG Shipping
With several of the LNG shipping, logistics and FSRU providers reporting increased earnings in recent weeks, based on improvements in LNG charter rates, finally LNG ship owners appear to be reversing years of below-par earnings and depressed charter rates, albeit very much geared towards more modern, high-tech vessels with lower fuel consumption and operating costs.
5. New Opportunities
The bright spots for natural gas now seem to be largely coming from new, non-traditional markets such as LNG bunkering, which has prompted explosive growth in small-scale LNG vessels, and marine infrastructure. The proliferation of players in the LNG space is also creating a whole new industry in gas and LNG trading, while producers and consumers both battle to manage price and volume risk in this ever more complex arena, where billions of dollars of value can be created or destroyed without proper risk management and careful analysis.
Amidst this sea of uncertainty, only one lesson appears to be evident, and it is that some kind of involvement along the gas value chain appears to be the prudent strategy right now. For many Asian LNG buyers, this has been a key pillar of their strategy for some time, partly based on hard lessons in gas procurement, which have left them on the wrong end of high gas prices. For many of the majors, this is also a feature of their business, with involvement along the value chain in the long term protecting them from the ebb and flow of value that we are seeing at the moment. For other, smaller companies, however, the problem of economic rent shifting around the value chain can be a significant challenge, and one that requires careful assessment. However, in today’s sophisticated global market for natural gas, solutions often exist if you have an open mind, and the right partner.
Crude Oil – Backwardation in Brent prices vanishing
Oil dropped on Thursday, declining for the first time in six days, after the US Federal Reserve dampened hopes for a string of interest rate cuts and as rising US output keeps the market well supplied.
The US Federal Reserve reduced rates on Wednesday, but against expectations, the head of the US central bank said the move might not be the start of a lengthy series of cuts to shore up the economy against global economic weakness.
Backwardation in Brent prices, a market structure in which later-dated contracts trade at lower levels than near-term contracts, has to a large extent vanished, signaling a well-supplied market despite OPEC-led output cuts and US sanctions on oil producers Iran and Venezuela.
Crude oil production growth in the Lower 48 states (excluding the GOM) will continue in 2020 but at a slower rate than in 2019 as crude oil prices flatten. EIA forecasts that the price of WTI Cushing will increase from an average of $60 per barrel in 2019 to $63 per barrel in 2020, and the price of WTI in Midland will increase from $58 per barrel in 2019 to $62 per barrel in 2020.
Onshore crude oil production has become more efficient; US crude oil production increased in 2019, even as the number of active oil rigs fell from 952 in January to 861 in June. Based on this trend of increasing efficiency, EIA forecasts that crude oil production in the Lower 48 states (excluding the GOM) will increase from 10.0 million barrel per day in 2019 to 10.7 million barrels per day in 2020.
EIA forecasts crude production will grow through 2020, but anticipates growth will slow in 2020 as crude prices flatten. A downside risk to Permian crude oil production is the increased production of associated natural gas from this region. If natural gas pipeline constraints are not eased and tighter limits are put in place on flaring natural gas, drilling in areas with high concentrations of natural gas in the Permian region may be reduced.
Crude Oil Price
Brent, the global benchmark for oil, decreased $0.96 to $62.62 a barrel, reflecting a loss of 1.51% on the week.
WTI crude fell $0.49 to $55.81 a barrel, down 0.87% on the week.
Total US rig count (including the Gulf of Mexico) stands at 942, down 4. The horizontal rig count stands at 819, down 4. US rig activity continues to decline and is 101 rigs below (-10%) last year’s total. US shale operators continue to focus on well productivity (i.e., well completion), DUC wells and operational efficiency over rig growth. Capital discipline over production growth by the drill bit remains the current course.
US Crude Oil Supply and Demand
Crude oil inventories decreased 8.5 million barrels from the previous week. The crude stored at Cushing (the main price point for WTI) decreased 1.5 million barrels; total stored is 48.9 million barrels (~54% utilization).
US crude oil refinery inputs averaged 17 million barrels per day, with refineries at 93% of their operating capacity last week. This was 43,000 barrels per day less than the previous week’s average.
US gasoline demand over the past four weeks was at 9.6 million barrels, down 1.3% from a year ago. Total commercial petroleum inventories decreased by 10.1 million barrels last week.
US crude net imports averaged 4.1 million barrels per day last week, up by 353,000 barrels per day from the previous week. Over the past four weeks, crude oil net imports averaged 4.1 million barrels per day, 33% less than the same four-week period last year.
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