February 14, 2020

February 14, 2020

14th February 2020

Oil Drilling Activity

Onshore US drilling activity decreased by 1 with a total active count of 766 (Y/Y decrease of 262) rigs; those targeting oil up 2, with the total at 678. Across the three major unconventional oil basins, the oilrig count increased by 3, with Permian up 3, Williston and Eagle Ford flat.

Source: Baker Hughes Rig Count

US domestic crude production was up 100,000 barrels last week; crude production stands at 13 million barrels per day, of which ~2.55 million barrels per day is offshore and Alaska production.  Associated gas production in both the Bakken and Permian plays, in part due to rising GORs, exceeds current gas processing and export capacity.  Sustained gas flaring persists in both regions; however, new processing/pipeline capacity is due later this year, which should help greatly reduce flared volumes, with more to come.  Given the financial world’s focus on the Carbon Intensity of E&P operations, these gas expansions are essential if oil producers are to maintain access to finance.

Federal Reserve Chairman Jerome Powell came close to acknowledging that the central bank may not have the firepower to fight the next recession and called on Congress to get ready to help. The current low level of interest rates means that it would be important for fiscal policy to support the economy if it weakens.

Carbon Management - Emissions audits to ease stranded asset fears

On February 4, I had the chance to sit down to speak to the Petroleum Economist about the GCA Carbon Management practice objective to de-risk continued investment in oil and gas through the energy transition, and specifically our work on Carbon Intensity quantification and the impact of Carbon Pricing on reserves and resources. Their article was published on February 5 and can be found here.

Our work includes the quantification of current and future carbon intensity for oil and gas supply, defined as the amount of CO2 equivalent emissions per unit of energy produced. We offer both a simple classification system approach based upon recovery, transport and refining methods, and a more detailed analysis that includes specific field properties, equipment and performance data within a supply chain. We continue to work with the world’s leading organizations such as Stanford University, University of Calgary and the Massachusetts Institute of Technology, which are developing the underpinning open-source models, to ensure wide-spread use and transparency. We have a global database of over 9,000 fields to allow benchmarking of assets, regions, portfolios and corporate performance.

A forecast of carbon intensity allows an assessment of the impact of carbon policy and regulations on audited oil and gas reserves and resources. As an extension of GCA’s traditional reserves booking services, this assessment determines the economic impact of various carbon-pricing scenarios based on the carbon intensity forecast. This helps with portfolio management, identification of emissions reduction options, and whether any resources or reserves are at risk of being stranded.

This provides client value in aiding investment decisions and providing confidence to investors and other stakeholders that diligent evaluation of climate and carbon-related risks and opportunities are being performed and that appropriate measures are being taken to address such concerns.

The traditional model of reserve-based lending, where a company’s value and ability to borrow money is predicated on the estimated future value of its reserves, will increasingly be impacted by views of assets’ carbon footprint in a world with a finite carbon budget. We therefore fundamentally believe that the oil and gas industry will benefit from having a standardized method of calculating carbon intensity and the impact of carbon policy and regulations on audited reserves and resources, to support its investment decisions and ease the fears of investors. Our approach underpins the scenario analysis required for completing the Task Force for Climate-Related Financial Disclosures (TCFD) requirements.

Natural Gas – The future of farming?

It is very easy to forget that the origins of the oil and gas industry come from agriculture, or to be more accurate, from natural cycles of growth and vegetative decay.  A process that led to the creation of the huge sedimentary deposits some 300 million years ago that have become today’s oil and gas resources.

With BP's announcement this week, of a net zero carbon future, it pays to remember that energy and agriculture have always had strong synergies and common technologies that have evolved together.  For example, biogas has moved from a “cottage industry” to big business in Europe over the last decade, and in the ASEAN region today roughly half a million jobs are provided by the liquid biofuels industry.

Over the next few decades, both energy and farming are going to undergo major structural changes, which revolve around the single goal of deep decarbonization.  As BP, and indeed most energy companies these days, contemplate future investments and the demands of shareholders, the farming sector may become a more and more important source of synergies and solutions for oil and gas.

One area that has risen to prominence over the last year or so has been the production of cultured meat, and vegetable derived meat substitutes.  These technologies are arguably poised to transform the food production industry, offering consumers a less expensive, less carbon intensive, and potentially more nutritious product, compared to traditionally farmed meat.

So why is this important to the oil and gas industry, and its carbon footprint?  Currently, around a quarter of the earth’s ice-free surface is devoted to livestock grazing and feed.  The increasing population, coupled with changes in diet, mean that animal farming needs are contributing to a loss of 13 billion hectares of forest annually.  If these new food technologies were to simply halt that growth, and push a similar land area back into energy production, not only would a large nature-based carbon sink emerge, but also a renewable natural gas (RNG) economy could start to develop at scale.

The biogas yield from agricultural grass species shows to be as high as 36 MWh per hectare per annum, about the same energy consumed per person, in Western Europe.

If these changes in land use are even half as much as some are predicting, the Energy Transition and the agricultural revolution may end up being the same.

Crude Oil – COVID-19 virus batters China’s economy

Global oil demand will suffer its first quarterly drop in a decade as the COVID-19 virus pounds the economy in China and its impact ripples throughout the world. Global oil demand was hit by the novel coronavirus (COVID-19) and the widespread shutdown of China’s economy.

Oil demand could fall by 435,000 barrels year-on-year in the first quarter of 2020, the first quarterly contraction in more than 10 years when it dropped during the global economic crisis.

Demand for oil should grow this year as the outbreak is contained; IEA slashed its forecast for the increase in global consumption by nearly a third to 825,000 barrels per day, the smallest increase since 2011.

With China being a big consumer of oil and the source of most of the growth in oil demand in recent years, the crisis will have a major impact on oil producers.

At the end of last year, OPEC and its allies including Russia, called OPEC+, agreed to further cuts in oil production to compensate for rising production in the US and avoid excess supplies that would depress prices.  Approximately 2 million barrels per day of Iranian (embargo) and Libyan (internal dispute) are not currently reaching the market.

They are now considering an additional cut of 600,000 barrels per day to compensate for the drop in demand because of COVID-19. The IEA estimates that the demand for OPEC crude has dropped from 29.4 million barrels per day in the final quarter of 2019 to 27.2 million barrels per day in the first three months of this year.

This is 1.7 million barrels per day below what OPEC produced in January.

Weekly Recap

Drilling Activity

Total US rig count (including the Gulf of Mexico) stands at 790, flat last week. The horizontal rig count stands at 713, up 2. US rig activity continues to show constraint and is 263 rigs below (-25%) last year’s total.

US Crude Oil Supply and Demand

Sources: EIA Weekly Update and GCA analysis

Crude oil inventories increased by 7.5 million barrels from the previous week, compared with expectations for a build of 2.93 million barrels. The crude stored at Cushing (the main price point for WTI) increased 1.7 million barrels; total stored is 38.4 million barrels (~43% utilization). Total US commercial crude stored stands at 442.5 million barrels (~56% utilization).

US crude oil refinery inputs averaged 16 million barrels per day, with refineries at 88% of their operating capacity last week. This was 48,000 barrels per day more than last week’s average.

US gasoline demand over the past four weeks was at 8.8 million barrels, down 2.9% from a year ago. Total commercial petroleum inventories decreased by 1.0 million barrels last week.

US crude net imports averaged 4.0 million barrels per day last week, up by 806,000 barrels per day from the previous week. Over the past four weeks, crude oil net imports averaged 3.3 million barrels per day, 31.1% less than the same four-week period last year.

Authors

February 14, 2020

P. Kevin Galvin

Facilities/Cost Engineer - kevin.galvin@gaffney-cline.com
February 14, 2020

Nick Fulford

Global Head of Gas/LNG - nick.fulford@gaffney-cline.com
February 14, 2020

Nigel Jenvey

Global Head of Carbon Management - nigel.jenvey@gaffney-cline.com

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