February 28, 2020

February 28, 2020

28th February 2020

Oil Drilling Activity

Onshore US drilling activity decreased by 1 with a total active count of 767 (Y/Y decrease of 248) rigs; those targeting oil down 1, with the total at 678. Across the three major unconventional oil basins, the oilrig count was flat, with Permian up 2, Williston flat and Eagle Ford down 2. 

Source: Baker Hughes Rig Count

US domestic crude production was unchanged last week; crude production stands at 13 million barrels per day, of which ~2.55 million barrels per day is offshore and Alaskan production.

Oil prices slumped to their lowest in more than 2.5 years and were set for their steepest weekly fall in four years as the global spread of the coronavirus stokes demand fears. Markets are increasingly worried about an economic slowdown weighing on oil demand as the virus spreads beyond its epicenter in China to more than 40 other countries.

Traders in money markets are starting to bet the Federal Reserve may be forced into an emergency interest rate cut if the coronavirus gets much worse. They are driving down benchmark yields in US Treasuries to record lows.

Carbon Management – Magic of CO2 utilization; waste into a commodity

A few weeks ago, I had the opportunity to sit down and speak to Congressman Dan Crenshaw (R-TX 2nd District) on CO2 capture and utilization technologies as a way to deal with CO2 emissions. The podcast is available here or as an apple podcast, and I thought I would share a few more insights in this week’s Monitor.

In my opinion there are three reasons why more carbon capture, use and storage (CCUS) projects are not happening at the scale of deployment needed. First, the value of CCUS has not been widely communicated and understood. The value it brings to society by securing existing infrastructure, industry and energy supplies - safeguarding investments, securing jobs, providing energy security - and with the investment required to achieve at-scale deployment, it will grow gross domestic product (GDP) while also allowing the world to reduce its CO2 emissions. Second, there is a need to integrate parts of the CCUS supply chain to deliver a project – from various industry sectors, technical disciplines, commercial contracts and financing requires capability, innovation and commitment. Third, CCUS is capital and operating cost intensive and, apart from potential revenues from use, it only directly addresses the externality of CO2 emissions and, at an average, a global carbon price at $7/tonne CO2 is vastly lower than the $100/tonne needed to create a business case for CCUS.

That is why there is a growing interest in CO2 utilization, effectively turning a waste product into a commodity. CO2 can provide a source of carbon to make just about anything. CO2 was the first gas to be described as a discrete substance in 1640 and it is naturally occurring from volcanoes, hot springs, geysers, mineral dissolution, aerobic organism respiration, biological decay and fermentation of sugars. Anthropogenic (man-made) production comes from combustion of wood and fossil fuels, and from process emissions from oxidation. CO2 is already a commodity today in its use for inert gas welding, fire suppression, refrigerant, pressurized gas, food and beverage, enhanced oil recovery solvent, water treatment, and a chemical building block for urea. Today, the largest use of CO2 is Enhanced Oil Recovery (EOR) where 1 tonne of CO2 injected can produce 2-4 barrels of EOR, and 1 tonne of CO2 is sold for ~$20 at today’s oil price. However, the total scale for these existing CO2 commodity markets is 90 million tonnes per annum (about three times larger than all of today’s CCUS projects combined). We need 4 billion tonnes per annum of CCUS by 2030 (nearly 50 times more) for the world to be on track to meet the goals of the Paris Climate Agreement.

However, there are many more uses of CO2 as a commodity. Markets such as fuels/chemicals and building materials have $100s of billions in revenue and could theoretically absorb billions of tonnes of CO2. However, there are of course incumbent methods to produce these products that would need to be displaced cost effectively. There are 4 mains pathways for utilizing CO2: 1) thermochemical; 2) electrochemical and photochemical; 3) biological; and, 4) carbonation; that all have large potential and a range of technology readiness. To produce fuels and chemicals from CO2, splitting carbon from oxygen requires energy, and then the carbon needs to be combined with a source of hydrogen, requiring more energy. To produce building materials, we do have thermodynamics on our side, but the CO2 needs to be combined with a source of magnesium or calcium. Like Congressman Crenshaw, I also believe that technology and innovation has the potential to unlock these options. While some may question what scale will be possible, let’s not judge based on perfection, when we need all the good things we can get right now.

Natural Gas – Pipeline vs. Railroad

The gas sector is notoriously slow to change, and for good reason.  The huge capital deployment needed for any gas project to fly typically requires decades of relatively low risk revenues, against which to offset the investment.  As a result, the tried and tested take-or-pay contract has been the favorite means through which to secure revenues, especially for lenders.  As gas markets become more fungible, and gas is dispatched to a wider range of well-developed wholesale markets, attitudes are slowly changing.  Let us look at three emerging technologies and gas markets that may drive the next set of changes for natural gas and LNG.


The controversy in Canada surrounding the Coastal GasLink pipeline designed to supply gas to the LNG Canada facility has brought into sharp focus the difficulties faced by gas developers globally, especially as the carbon impact of gas is causing more and more debate.  Although by no means straightforward, another existing form of transport infrastructure, which has come to the rescue of the oil industry in recent years, has been the rail network.

LNG-by-Rail has been slowly gathering momentum, and approved in certain states and countries, albeit with limitations and controls. LPG has long been traveling in pressurized railway cars, and although the parallels are only of limited relevance, LNG cars would appear to be a feasible option.

The US Federal Government’s Pipeline and Hazardous Materials Safety Administration (PHMSA) approved one such scheme last year, although a number of states have expressed concern.

LNG Isotainers

Isotainers are specially designed containers that can use the extensive intermodal infrastructure for containerized goods.  Typically, 45 ft in length, each container can carry around 20 tonnes of LNG, which amounts to around a million cubic feet of vaporized gas.  These containers can not only travel by road and rail, but are increasingly being used to transport LNG by sea, whether from Canadian ports to China, or to supply power plants in Jamaica.

One of the advantages of using existing intermodal container infrastructure is the low cost that the industry has achieved over years of efficiencies and logistical improvements.

Modular mid-Scale LNG

The third ingredient that, together with intermodal isotainers and rail, could materially change the outlook for gas is the increasing trend towards factory built modular mid-scale liquefaction plant.  So called “plug and play” technology, which enables most of the construction and commissioning to be carried out at the factory, these plants are increasingly being used to achieve early first gas, and a more flexible approach to field development plans to control the pace and extent of capital deployment.

Between these three technologies, the opportunity to develop remote gas via smaller modular plant and move it to market by existing, low cost infrastructure is becoming a reality.  It will also enable potential inroads into new markets, such as diesel substitution.  Canada, watch this space!

Crude Oil – Middle East and North Africa production, 2019 to 2025

Middle East and North Africa (MENA) oil producers expect to increase oil production capacity by 5.7 per cent over the next five years (up to 2025), to 33.5 million barrels per day from the current 31.7 million barrels per day. Growth estimates are predicated on political and fiscal stability, current expansion plans by governments, and international oil companies (IOCs), which will also influence how much of this capacity is actually brought on line. A best-case scenario for the selected countries shows capacity growth led by the UAE, itself able to deliver 0.6 million barrels per day of growth over the outlook period, while Libya and Kuwait increase by 0.5 million barrels per day and Iraq by 0.3 million barrels per day. The growth more than offsets modest capacity declines for some of the smaller regional producers, especially where those countries have chosen to switch their focus away from sustaining crude oil output in favor of gas and unconventional hydrocarbons development.

The impact of sanctions, years of underinvestment due to civil war, poor sectoral management and (where applicable) present and future OPEC production policies continue to weigh heavily on growth prospects. The highest potential growth country, Iraq, has high security and political risk and it is for that reason that it is not the leading growth prospect. The forecast acknowledges that Baghdad has expanded its upstream sector, despite the political tensions between regions and the federal government, and despite years of civil war in the north of the country.

Libya’s civil war has for periods disrupted the recovery of the oil sector and forced the suspension of oilfield operations and exports. The interruptions have been the exception rather than the rule and, in a best-case scenario, Libya’s National Oil Corporation should be able to continue to expand production from existing fields over the medium term, restoring pre-2011 capacity levels.

Sources: Oxford Institute for Energy Studies


Weekly Recap

Drilling Activity

Total US rig count (including the Gulf of Mexico) stands at 790, down 1 last week. The horizontal rig count stands at 708, down 6. US rig activity continues to show constraint and is 250 rigs below (-24%) last year’s total.

US Crude Oil Supply and Demand

Sources: EIA Weekly Update and GCA analysis

Crude oil inventories increased by 0.5 million barrels from the previous week, compared with expectations for a build of 2.467 million barrels. The crude stored at Cushing (the main price point for WTI) increased 0.9 million barrels; total stored is 39.1 million barrels (~43% utilization). Total US commercial crude stored stands at 443.4 million barrels (~56% utilization).

US crude oil refinery inputs averaged 16.0 million barrels per day, with refineries at 87.9% of their operating capacity last week. This was 202,000 barrels per day less than last week’s average.

US gasoline demand over the past four weeks was at 8.9 million barrels, up 0.3% from a year ago. Total commercial petroleum inventories decreased by 2.1 million barrels last week.

US crude net imports averaged 2.6 million barrels per day last week, down by 423,000 barrels per day from the previous week. Over the past four weeks, crude oil net imports averaged 3.2 million barrels per day, 12.6% less than the same four-week period last year.


February 28, 2020

P. Kevin Galvin

Facilities/Cost Engineer - kevin.galvin@gaffney-cline.com
February 28, 2020

Nick Fulford

Global Head of Gas/LNG - nick.fulford@gaffney-cline.com
February 28, 2020

Nigel Jenvey

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

Signup to receive our latest articles

We're here to help