December 21, 2018

December 21, 2018

21st December 2018

Oil Drilling Activity

Onshore US drilling activity increased by 8 with a total active count of 1053 rigs; those targeting oil increased 10 (up 1.1%), with the total at 883. Across the three major unconventional oil basins, the oil rig count increased 2 and stands at 613, with Permian flat, Williston up 3, and Eagle Ford down 1.

EIA reported last week’s total US domestic crude output at 11.6 million, remaining flat for the past 8 weeks.  EIA’s data indicated another inventory draw in crude oil at 0.5 million barrels last week, the third draw down in eleven weeks. With US production flat and exports remaining robust, the trend to draw from crude stocks continues. 

Sources: EIA Weekly Update and GCA Analysis

At first glance, it is surprising that rig levels have remained robust over recent months despite a 36% decline from the WTI peak price in first week of October 2018 (US$76/Bbl).  However, oil price is not the only driver as in the first half of 2017, over 200 rigs were added, whilst WTI oil price was oscillating around US$50/Bbl, partly explained by massive cost/price reductions in the service/contracting sector.

It is unlikely that a repetition of that margin squeeze can be repeated in 2019; hence, if WTI price continues to weaken, something has to give.  New oil pipeline capacity out of the Permian Basin will be arriving throughout 2019, which will attract more wells on stream; potentially drawing on the near 9,000 drilled but not completed wells (projection of EIA data) competing with new wells being drilled.

The US Federal Reserve raised interest rates on Wednesday, as expected, but forecast fewer rate hikes next year and signaled its tightening cycle is nearing an end in the face of financial market volatility and slowing global growth.

Natural Gas – Twelve predictions for the year ahead

As we reflect on a transformative year for natural gas, this week we look ahead to 2019, and consider what it might hold in store.

1. Gas = Geopolitical

A few weeks ago, this bulletin talked about the role that natural gas is now playing across the globe, as an increasingly meaningful feature of foreign policy, especially for the US.  This trend seems very likely to gather even more momentum in 2019, with further rapid growth in LNG exports from the US, and the increasing role of gas and LNG in emerging economies, especially in SE Asia.

2. More FIDs

With LNG Canada confounding critics, and reaching FID in 2018, a new sense of urgency has been introduced into the increasingly competitive LNG export market, as resource holders struggle to get ahead of each other in the queue.  2019 seems poised to re-start the LNG production line, with Mozambique, Senegal/Mauritania, Qatari expansions, more Artic LNG and a host of other candidates pushing hard for FID, and grabbing whatever market starts to form in the early to mid-2020s.

3. More LNG going to affiliates

With few of the traditional, end-use triple A rated gas and power utilities still willing or able to enter into long term agreements, those LNG projects that do reach FID are likely to be supported through portfolio players taking their equity gas, or trading companies building an increasingly long-term supply base to underpin onward sales.

4. Less oil indexation

As end-users in Asia in particular start to be exposed to competitive wholesale markets for gas and power, with a more diverse array of IPPs and other gas buyers needing flexible volume and pricing, we are likely to see a continuing erosion in oil indexation for natural gas, both pipeline and LNG.

5. More pricing hubs and futures

Hand in hand with the move away from inflexible long-term oil contracts, the development of gas hubs, making steady progress in Continental Europe for some years, will continue to evolve, alongside financial futures and other risk management tools for both buyers and sellers.

6. Floaters

One of the most notable trends in LNG this last few years has been the migration towards floating infrastructure, both for FLNG and FSRUs.  2018 will be seen as the year that FLNG in particular entered the scene in a meaningful way, with conversions, such as the Golar vessel that delivered its first cargoes from Cameroon this year, and the purpose built PFLNG Satu. Although that vessel came into operation in 2017, its track record in 2018 has been good enough to earn accolades, and to spur Petronas to order a second vessel.  Meanwhile, all eyes are on both Coral and Prelude (cooled and ready to start operations as we go to press), as they approach in service dates.

7. Resurrección de la Vaca Muerta

This year, Argentina can officially be said to have joined the exclusive ranks of the Shale Gas Club, joining the US and Canada as a major producer of gas from tight, source rock, for which the Vaca Muerta has become the go-to destination for international investors.  With capital efficiencies improving, greater understanding of the sub-surface, and investment in gathering and takeaway capacity, 2019 could be the year that the “dead cow” is fully revived.

8. US gas prices

If the market is to be believed, Henry Hub is stuck at levels in the range US$2.70 to US$3/MMBtu for the next decade.  However, for all the talk of record levels of largely zero cost associated gas coming out of tight oil developments in the US, daily demand of around 90 bcf means that someone, somewhere has to be drilling dry gas.  How much dry gas can be economically produced at these gas prices is up for debate.  As companies increasingly have to justify continuing investments in drilling and completions to hard-nosed shareholders, it seems likely that technology will need to deliver ever greater efficiencies and well productivity to keep up, or prices will have to rise.

9. Finally, it pays to be a ship owner

One of the most dramatic shifts in the gas value chain in 2018 has been the remarkable recovery in spot charter rates for LNG carriers, especially the newer generation of fuel efficient tri-fuel, and 2-stroke low emission propulsion systems.  After years of struggling, finally demand appears to have caught up with supply, and the days of moving LNG from the US to Asia for US$1/MMBtu appear to be over, at least for now.  Ship owners have had a long wait, but perhaps 2019 will be their year.

10. Bunkering boom

Staying with the marine theme, as IMO and other environmental regulations start to bite, LNG for marine bunkering is on its way from exotic to routine.  Each month sees more new vessels being built, designed exclusively with LNG as its fuel, including more container ships, more cruise liners, and car ferries, such as Brittany Ferries Honfleur, a 1,680 passenger vessel launched in Germany just this week.

11. Gas on the ropes

While there are many positive features and sources of optimism for the natural gas sector, there is a very large cloud on the horizon that will rain on gas’s parade if the industry does not take steps to remain competitive.  Solar, and other forms of renewable power generation, continue to make huge strides, as noted in last week’s bulletin.  Without greater flexibility, lower cost, and an array of technologies to offset carbon, natural gas may be earning a place as a transition fuel, but its longer term role in the energy mix appears far from certain.

12. Predictions are always wrong

Finally, if we have learned one thing from the last few years in the natural gas sector, it is that our industry is less predictable than ever.  Technology, prices, weather, and public sentiment all create an increasingly uncertain world for natural gas, and there is no reason to suppose that 2019 will contain any fewer surprises than each of the last few years has seen.  But then, that’s what makes life interesting!

Crude Oil – Crude price declines are similar to 2014

The selloff in oil continues as markets remain uneasy over concerns such as the faltering global economy, slowing demand for crude and oversupply from producers including US and Russia.

EIA forecasts that US crude oil production will continue to increase to record-high levels each month through May 2019, which will put further downward pressure on crude oil prices. US crude oil production will likely remain relatively flat from May to September before increasing toward the end of the year. EIA expects that US crude oil production will average 10.9 million barrels per day in 2018 and 12.1 million barrels per day in 2019.

The decline in oil prices since the beginning of the fourth quarter of 2018 is of similar magnitude to the fourth-quarter price decline in 2014. After the fourth-quarter 2014 price decline, prices dropped further in 2015 amid high volatility for several years, which contributed to bankruptcies, consolidations, and closures within the industry. When comparing the financial positions of US oil producers as of the third quarter of 2018 with the third quarter of 2014, most measures of profitability and balance sheet fitness indicate companies should be able to weather the recent price downturn. Oil price volatility and uncertainty remain high, however, and financial pressures could increase if prices continue to decline.

On December 7, 2018, OPEC and several non-OPEC countries announced a production cut of 1.2 million barrels per day from their October production levels beginning in January 2019 and running for the following six months. The cuts were in response to increasing evidence that oil markets would be oversupplied in 2019. This expectation of potential oversupply has been reflected in recent price declines. In the December STEO, EIA revised its 2019 price forecasts for Brent and WTI to US$61 a barrel and US$54 a barrel, respectively, which are both US$11 a barrel lower than forecast in the November STEO.

Strong US crude production could offset OPEC’s output cuts aimed at rebalancing the market by the end of 2019. This would undercut OPEC+ efforts as shale producers continue to increase production regardless of price. Assuming that US shale production expands at the rate the EIA forecast, OPEC+ may need to revisit their production cut agreement sooner rather than later. Many OPEC countries are emphasizing gas and petrochemicals growth in the face of limits to expanding oil production, however, the most attractive of these gas projects will deliver large volumes of sour condensate (and NGLs), not all of which will be absorbed in their expanding downstream sector.  The same “bonus condensate streams” may be true in some, but not all of the Global LNG expansion projects expected to achieve sanction next year.

Concerns of oversupply have hit crude prices hard in the last two months, with the price of US crude slumping to US$46 a barrel from a peak at more than US$76 a barrel in October.

Weekly Recap

Drilling Activity

Source: BHGE Rotary Rig Count

Total US rig count (including the Gulf of Mexico) stands at 1080, up 9 this week. The horizontal rig count stands at 940, up 13 this week. US rig activity continues to show constrained growth for 28 of the last 30 weeks and stands 16% above last year’s total. US shale operators remain focused on well productivity (i.e., well completion) over rig growth.

Crude Oil Price

Brent, the global benchmark for oil, decreased US$7.74 to US$53.52 a barrel, reflecting a loss of 12.63% on the week.

WTI crude fell US$6.65 to US$45.68 a barrel, down 12.71% on the week.

US Crude Oil Supply and Demand

Sources: EIA Weekly Update and GCA Analysis

US crude oil refinery inputs averaged 17.4 million barrels per day, with refineries at 95.4% of their operating capacity last week. This is 28,000 barrels per day less than the previous week’s average.

US gasoline demand over the past four weeks was at 9.1 million barrels, up 0.6% from a year ago. Total commercial petroleum inventories decreased by 10.3 million barrels last week.

US crude imports averaged 7.4 million barrels per day last week, up by 30,000 barrels per day from the previous week. Over the past four weeks, crude oil imports averaged 7.5 million barrels per day, 1.6% more than the same four-week period last year.

US crude exports averaged 2.325 million barrels per day last week, an increase of 51,000 barrels per day from the previous week. Over the last four weeks, crude oil exports averaged 2.561 million barrels per day, 79.3% more than the same four-week period last year.

Crude oil inventories decreased 0.5 million barrels from the previous week. The crude stored at Cushing (the main price point for WTI) increased 1.1 million barrels; total stored is 40.5 million barrels (~45% utilization).

     

Authors

December 21, 2018

P. Kevin Galvin

Facilities/Cost Engineer - kevin.galvin@gaffney-cline.com
December 21, 2018

Nick Fulford

Global Head of Gas/LNG - nick.fulford@gaffney-cline.com

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