30th August 2019
Oil Drilling Activity
Onshore US drilling activity dropped 11 with a total active count of 876 rigs; those targeting oil down 12, with the total at 742. Across the three major unconventional oil basins, the oil-rig count was down 2, with Permian down 5, Williston up 3 and Eagle Ford flat.
US domestic crude output increased 200,000 barrels per day; crude oil production stands at 12.5 million barrels per day, a weekly record high. This increase in production is almost certainly a reflection of the newly expanded pipeline take-away capacity out of the Permian basin with plenty of room for further expansion this year and next. The differential between WTI Midland and WTI Cushing prices has declined from $10-15+/Bbl in second half of last year to around $0.50/Bbl today, providing further cash stimulus to upstream producers without firm export capacity to bring their barrels online. With leasing tight oil producers reporting technology gains allied with lower costs, the EIA forecasts of sustained production growth into 2020 are supportable, even with fewer active rigs.
Crude oil stockpiles decreased for the second week; inventories dropped 10 million barrels compared with expectations for a decrease of 4.7 million barrels. Gasoline and distillate stocks each fell by 2.1 million barrels.
Hurricane season is heating up and could see Dorian strengthen to a Category 3 or 4 hurricane by the time it reaches Florida’s east coast early next week. Dorian could still turn but as of now, it appears the Gulf of Mexico and most of its production will not see significant disruptions, small comfort to the citizens of Florida who will almost certainly feel its wrath.
Carbon Management – What is in the toolbox for Carbon Intensity evaluation?
It is important to have a standard methodology for evaluation and a metric for comparison of Greenhouse Gas (GHG) emissions from various oil and gas projects to aid in energy transition decision-making. The introduction of Carbon Intensity (CI) and a tool called the Oil Production Greenhouse gas Emissions Estimator (OPGEE) were introduced exactly for this purpose. Last week’s Monitor covered CI, and this week we cover OPGEE.
OPGEE is an open-source Excel-based tool that quantifies the CI for a given oil production operation with a breakdown of various sources of emissions and their relative contribution to the overall CI. OPGEE takes up to 50 inputs to characterize the fields production methods (i.e., artificial lift, secondary/tertiary recovery techniques, etc.), field properties (production rate, reservoir pressure, number of wells, etc.), oil and gas composition, processing practices (gas processing pathway, flaring and venting levels, etc.), and transport methods (distance to refinery and by which means) among others. The tool then evaluates CI for every phase of the ‘lifecycle’ of the produced crude oil, including Exploration, Drilling, Production, Processing and Transportation. The sum of CI for all the phases is termed the lifecycle CI for the field. OPGEE has the capability to evaluate several fields or the same field at different points in time with a single run of the tool.
It is evident from our analysis that fields can be compared based on their CI, and insights into the major causes for emissions can be derived. The OPGEE tool provides a comprehensive look at an operation’s sources and magnitudes of emissions, which allows for prioritization of improvements. In addition, since the tool is Excel-based, it is widely useable. Because it is open-source, it can be adopted by any organization to assess GHG emissions as they can verify the methodology and validate the results.
OPGEE does, however, have some drawbacks. The amount of data required to evaluate the CI of a field can be difficult to collect or simply unavailable. In addition, to the novice user the large number of sheets and calculations that underpin its ability to fill such gaps in data, can make it difficult to verify. However, given that the tool is continuously improved by a community of developers and users, it stands a good chance of success of being widely deployed as a standard for CI evaluation of oilfield operations.
Do you already use OPGEE as a part of your toolbox for oil and gas portfolio and asset management? If so, we welcome your feedback.
Natural Gas – Stranded gas with a good home
This week’s announcement that BP is to withdraw from Alaska after six decades will focus attention on how the State’s gas will be monetized in coming years. The questions being asked in Alaska are no different from those that apply in many gas-rich jurisdictions these days, which are remote from major centers of demand. As global gas prices continue to show little signs of improving, the costs of producing, processing, liquefying and shipping gas in such a remote location start to look high. However, with new technologies, and new markets becoming more accessible to natural gas, there may be some innovative ways to use gas locally, rather than relying on the tried and true approach of large-scale export.
Oil is a much higher value commodity these days (about twice the value in energy terms), and needs much lower transport costs. For a state such as Alaska, consuming as much natural gas locally, and maximizing oil exports, would be a sensible strategy to pursue. As the largest per capita consumer of jet fuel, about one seventh of power generation being from oil, and with homes in some parts of the state still being heated and powered by diesel, there are ample markets to target for natural gas, and increase export revenues from oil.
Equally, with technologies such as gas-to-methanol consuming large quantities of CO2, there is also a range of CCUS applications that come to mind, especially in a wider gas-to-liquids strategy leading to high quality, low Sulphur fuels that could access local aircraft, road transport and shipping markets.
For example, substituting gas for Alaska’s jet fuel, diesel and gasoline demand would free up some 40 million barrels of oil for export, and harness nearly 1 bcfd of otherwise stranded natural gas. The economics of gas gathering, processing and conversion are also challenging, but diverting low cost gas to local markets, and high value oil to export is attractive. It is a strategy that many countries with ample associated gas, and a national budget highly leveraged on oil exports could do well to investigate further.
Crude Oil – Oil rigs continue to plunge
Brent prices held steady, withstanding pressure from concerns about economic growth, while a sharp fall in US inventories boosted West Texas Intermediate crude futures.
Concerns about a slowdown in economic growth because of the trade war between the US and China, the world’s biggest oil consumers, along with the potential hit to crude demand, are maintaining downward pressure on prices.
China and the US were discussing the next round of face-to-face trade talks scheduled for September, but hopes for progress hinged on whether Washington could create favorable conditions. San Francisco Federal Reserve President said she is in a watch and see mode as she assesses the need for another US interest rate cut for an economy that has strong momentum but faces headwinds from uncertainty and a global slowdown.
Concerns about the global economy have muted the impact of oil production cuts that the Organization of the Petroleum Exporting Countries, Russia and other producers have been exercising over the past 2-1/2 years.
Morgan Stanley has lowered its oil price forecasts for the rest of the year, citing a weaker economic outlook, faltering demand and higher shale oil output. Middle East tensions and tight crude supply and demand fundamental could impact future crude prices.
Choke points for maritime crude trades
The Bab el-Mandeb Strait is a sea route chokepoint between the Horn of Africa and the Middle East, connecting the Red Sea to the Gulf of Aden and Arabian Sea. Most exports of petroleum and natural gas from the Persian Gulf that transit the Suez Canal or the SUMED Pipeline pass through both the Bab el-Mandeb and the Strait of Hormuz.
Chokepoints are narrow channels along widely used global sea routes that are critical to global energy security. The Bab el-Mandeb Strait is 18 miles wide at its narrowest point, limiting tanker traffic to two 2-mile-wide channels for inbound and outbound shipments.
Closure of the Bab el-Mandeb Strait could keep tankers originating in the Persian Gulf from transiting the Suez Canal or reaching the SUMED Pipeline, forcing them to divert around the southern tip of Africa, which would increase transit time and shipping costs.
In 2018, an estimated 6.2 million barrels per day of crude oil, condensate, and refined petroleum products flowed through the Bab el-Mandeb Strait toward Europe, US and Asia, an increase from 5.1 million barrels per day in 2014. Total petroleum flows through the Bab el-Mandeb Strait accounted for about 9% of total seaborne-traded petroleum (crude oil and refined petroleum products) in 2017.
Crude Oil Price
Brent, the global benchmark for oil, increased $1.13 to $60.97 a barrel, reflecting a gain of 1.89% on the week.
WTI crude rose $1.07 to $56.43 a barrel, up 1.93% on the week.
Total US rig count (including the Gulf of Mexico) stands at 904, down 12. The horizontal rig count stands at 784, down 13. US rig activity continues to be restrained and is 142 rigs below (-14%) 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
Crude oil inventories decreased, down by 10 million barrels from the previous week. The crude stored at Cushing (the main price point for WTI) decreased 1.9 million barrels; total stored is 40.4 million barrels (~45% utilization).
US crude oil refinery inputs averaged 17.4 million barrels per day, with refineries at 95.2% of their operating capacity last week. This was 295,000 barrels per day less than the previous week’s average.
US gasoline demand over the past four weeks was at 9.8 million barrels, up 2.4% from a year ago. Total commercial petroleum inventories decreased by 11.2 million barrels last week.
US crude net imports averaged 2.9 million barrels per day last week, down by 1,506,000 barrels per day from the previous week. Over the past four weeks, crude oil net imports averaged 4.4 million barrels per day, 31% less than the same four-week period last year.
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