Float like a Butterfly

Float like a Butterfly

14th July 2017

Onshore Rig Update, the Key Driver for US Oil Production

Drillers increased onshore rigs by 1 this week, bringing the total to 928, which is a significant slowdown when compared to the 12 (7 targeting oil) rigs added last week and closer to two weeks ago where the count dropped by 2. The continued weakness in crude prices is forcing US shale producers to reassess the timing of future capital expenditures while continuing to hope for higher prices. 

Natural Gas – Float like a butterfly, reduce the liquefaction fee … who will be the greatest producer of Floating LNG?

The famous quote from the late great Muhammad Ali seems very apt for this week’s Monitor, as the “heavyweight” of FLNG, Shells Prelude vessel, finally approaches its destination.  Since 2015, GCA’s Global Gas and LNG group have been touting 2017 as the year in which the first FLNG titles would be claimed after years of fighting for supremacy.

It is important to start by noting that even among the “true FLNG” projects this includes a wide variety of facility types, ranging from essentially liquefaction-only facilities limited to benign water environments, to fully-fledged gas pre-processing, liquefaction, storage and offloading facilities that can operate in hostile environments. Think of it in terms of a minimal facilities shallow water Gulf of Mexico development versus a northern North Sea / Norwegian Sea integrated platform.  Big variances in complexity and cost therefore arise.

Although only five FLNG projects have reached a Final Investment Decision (FID) so far (and only one is currently operating), over 25 projects have been proposed and discussed over the past five years, often in multiple configurations.  Each FLNG project is unique, and needs to be considered on its own merits.

Petronas won the race to commence production in April 2017, from their 1.2 MMtpa PFLNG-1 Satu project in Malaysia.  This was around 7 years after the initial concept was conceived and involved about 3 years of construction.

Shell’s 3.6 MMtpa Prelude, the world’s biggest vessel and the largest floating facility ever constructed, is in transit to its first location at the Prelude gas field.  With an estimated cost of around US $14 billion, this is a strategic move by Shell to test FLNG technology before deploying it more broadly elsewhere.  With its capacity to handle condensate and LPG and an ability to function in challenging open water conditions. Prelude really is a different beast.

Just 30km or so from where Shell’s Prelude will float, another large floating monster with an estimated cost of around US $36 billon is already in situ.  The Japanese company Inpex’s Ichthys Explorer is a more traditional semi-submersible gas production platform, rather than a novel FLNG design, that aims to produce gas from the Ichthys gas field, and then pipe it to an LNG facility in Darwin. 

Of the next in line true FLNG projects, Exmar’s smaller scale 0.5 MMtpa Caribbean FLNG is estimated to be ready in a few weeks’ time (albeit still awaiting a final home), whilst Golar’s 1.2 MMtpa Cameroon FLNG conversion project is nearing completion and is expected to come on-stream during 2018.

The start of the race to lead the FLNG sector, which now appears to have left the starting gate, will now start to set the direction of this rapidly evolving new monetization route for gas.  As things develop, a range of features will still need attention as the many other projects considering floating facilities learn from others’ experience.  This will include technical challenges, and the commercial and project structuring features, many of which materially impact on financing and lender appetite.  Of course much of which will also influence where overall LNG market pricing eventually stabilises which ultimately determines economic success.

As ever with new applications of technology, there are bound to be some surprises over the coming months and years!  However, there is no doubt that 2017 is the year which will be looked back upon as a potential turning point and development in the evolution of the LNG industry.  Who will emerge as the greatest, and how low those liquefaction costs can become, remains to be seen.

Crude Oil – Rising Crude Demand

Oil prices steadied after evidence of stronger demand balanced reports of higher global production. Oil prices have dropped in recent weeks to levels not seen since the end of last year as US shale oil production has risen sharply.

Sources: EIA Weekly Update and GCA analysis

But there is evidence world oil demand is picking up, notably in the United States and China, the world's two biggest oil consumers. China imported 8.55 million barrels per day (bpd) of oil in the first six months of this year, up 13.8 percent on the same period in 2016, making it the world's biggest crude importer ahead of the United States. 

U.S. crude oil inventories dropped last week by the most in ten months, while gasoline stocks also decreased. Rising demand is helping to drain a global glut but the rebalancing of the market is taking longer than desired.

The IEA indicated that the oil market could stay oversupplied for longer than expected due to rising production. OPEC’s compliance with production cuts fell in June to its lowest levels in six months as members pump above their agreed allocation. OPEC’s compliance with cuts slumped to 78% in June from 95% in May.

A dramatic recovery in oil production from Libya and Nigeria and a lower rate of compliance by OPEC with its own output agreement continues to put downward pressure on oil prices. The recent weakness in crude prices could force US shale producers to reassess future capital expenditures. 

The IEA indicated that while crude output might be gushing, profits are not and recent press reports quoted company executives saying that oil prices need to move higher to maintain production growth.

Weekly Recaps

Oil Drilling Activity

Total US rig count (including the Gulf of Mexico) stands at 952, flat this week with rigs targeting oil up 2 and gas down 2. The horizontal rig count remained flat at 804.

The total number of active onshore rigs increased to 928.  When compared to a November 2014 figure of 1,876 active rigs, the current level remains 51% below the 2014 high.

Across the three major unconventional oil basins, the oil rig total remained flat at 497, with Permian up 4, Eagle Ford down 5 and Williston up 1.

Crude Oil Price

Brent, the global benchmark for oil, increased US$1.42 to US$48.64 a barrel, reflecting a gain of 3.01% on the week.

WTI crude rose US$1.64 to US$46.31 a barrel, up 3.67% on the week.

US Crude Oil Supply and Demand

Sources: EIA Weekly Update and GCA analysis

US crude oil refinery inputs averaged 17.2 million barrels per day, with refineries at 94.5% of their operating capacity last week. This is 103,000 barrels per day more than the previous week’s average.

US gasoline demand over past four weeks was at 9.7 million, down 0.3% from a year ago. Total commercial petroleum inventories decreased by 3.9 million barrels last week.

On the supply side, EIA data indicated that total domestic crude production increased 59,000 barrels to 9.4 million barrels a day. The Lower 48 crude production now stands at 8.94 million barrels per day, up 25,000 this week.

US crude imports averaged 7.6 million barrels per day last week, a decrease of 132,000 barrels per day from the previous week. Over the last four weeks, crude oil imports averaged 7.8 million barrels per day, 3.0% below the same four-week period last year.

Crude oil inventories decreased 7.6 million barrels from the previous week and persist at historically high levels. The crude stored at Cushing (the main price point for WTI) deceased 1.9 million barrels; total storage is 57.6 million barrels (~64% utilization).

Authors

Float like a Butterfly

Nick Fulford

Global Head of Gas and LNG - nick.fulford@gaffney-cline.com
Float like a Butterfly

P Kevin Galvin

Principal Advisor, Field Development Planning - kevin.galvin@gaffney-cline.com
Float like a Butterfly

Ryan Pereira

Principal Commercial Manager, Global Gas and LNG - ryan.pereira@gaffney-cline.com

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