9th December 2016
The onshore rig count surged 27 (5%) this week, bringing the total to 602 compared with 686 a year ago (down 13%), but up ~56% since the low in late May 2016. Rigs targeting oil jumped 21(4%), standing at 498, up 60% (183) since May.
While all eyes have been on the oil market over the last few weeks, the US has quietly achieved a milestone that marks a departure from nearly 60 years of established natural gas history. Gas production data shows, on average, natural gas net exports of around 400 MMcfd for each day of November, making the US a net gas exporter for the first time since Dwight D Eisenhower was president.
When you think this represents just one half of one percent of US daily production, you may be forgiven for thinking this isn’t something very remarkable. However, coming just a few months after the start of LNG exports, and with American LNG capacity slated to reach at least 60 MTPA (millions of tonnes per annum, equivalent to around 9 BCFD), this is actually nearer to 10% of todays daily production when you include fuel losses in the LNG manufacturing process. This is a big event for natural gas and for US companies as a whole, and marks out a trend that will have wide ranging implications over the medium term.
The start of this new age, with the US as a significant gas exporter, coupled with new volumes from Australia, is already shaking up the somewhat traditional world of global gas. Over the past year or so we have started to see the first green shoots of global price interconnections beginning the break down the regional market dynamics that have existed for decades.
Although the amount of LNG moving around and between markets is still not enough to stabilize regional differences, in addition to Henry Hub based exports to Asia we have seen other gas market prices, such as the UK’s National Balancing Point (NBP), proposed as a benchmark for gas originating in North America. Added to this are a variety of ever more creative pricing methodologies and benchmarks such as the Singapore SLiNG index, launched in 2016, poised to reconcile buyer and seller differences in risk tolerance.
Taking advantage of these new global dynamics, and the availability of low cost LNG, we are also seeing a range of new gas importers turning away from competing fuels such as refined products, and to some extent coal, as they undertake major investments to gasify their economies. A fundamental feature of these gasification strategies is gas or LNG to power, which has become such a staple of developing economies in Asia, Africa and Latin America, and is driving billions of dollars in new investments.
The other feature of the LNG industry, which has been quietly simmering away for the past 5 years or so, is the harnessing of LNG not through world-scale trans-oceanic shipments of millions of tonnes, which has been the text book solution of the last 50 years, but through mid or small scale applications. This includes the burgeoning market for ship bunkering, heavy goods vehicles, locomotive, and mining plant, all of which are driving other innovations such as moving LNG by truck, LNG by rail, and containerisation.
Coupled with these market changes we are also seeing a rapid evolution of innovative marine/floating solutions for both floating LNG (FLNG), floating LNG storage and regasification (FSRU) and technologies which are challenging how we look at gas to power, such as floating storage, regasification and power (FSRP), all combined on a single hull. All this at time when the availability of older, still serviceable LNG carriers as candidates for conversion is reaching a peak.
As we look at these factors in the last month of this year it may be that when the history books are written, 2017 will be the year when these smaller, innovative projects steal the limelight from their bigger brothers in the form of large, land-based export projects whose fate seems more uncertain now than ever before.
With these new developments, other challenges are being presented to gas project developers, not least of which is trying to secure appropriate financing arrangements in a world where long term, oil-indexed, take or pay contracts are rapidly disappearing into history, and newer, more flexible ways of addressing price and volume risk start to emerge. Thus far, major lenders have been loathed to support major financing which is based on global gas price risk, seen as more risky than the well-established global dynamics of oil.
To understand their nervousness, you only have to look at the current financial challenges facing many of those who, just a few years ago, signed long term agreements for liquefaction capacity from the many US export projects. As the current wave of excess LNG starts to have an impact, and with the firming up in Henry Hub prices, the ability of those capacity holders to place gas profitably in Europe, Latin America, or Asia is now under pressure, and hundreds of millions of dollars of reservation charges are now looking at risk, at least in the short to medium term.
As with many LNG investments, though, long term returns are what count, and with growing demand globally for gas, the current oversupply will inevitably be eliminated, with most commentators looking at a market re-alignment in the early 2020s. That said, there are still many of us who recall the 1980s “gas bubble” that was similarly destined to disappear … only, in practice, to be replaced by the “gas sausage” !
Today, as we look at prospects for the US, we have to examine things through two lenses…short to medium term, where the ability to place US LNG profitably is under pressure, and longer term where low cost gas resources counted in the hundreds or even thousands of TCF (trillion cubic feet), accompanied by a proven, efficient supply chain, well established regulatory environment, and an oil and gas friendly industrial sector all conspire to render US LNG perhaps the most competitive global source for the next several decades.
With the potential for US LNG to be the price setting mechanism for global gas prices, even more attention will be placed on how to manage price risk, whether through additional foreign investment in upstream gas, a bigger market share for LNG aggregators and traders, and perhaps a steady stream of new projects on the Gulf Coast, not forgetting the competitive nature of projects in both Mexico and Canada. For gas players in those countries, the latest political developments are starting to place a greater focus on NAFTA, and how that may affect the current free movement of gas.
Over the next few weeks, we will be taking each of these new gas and LNG developments in turn, with a focus both on the US gas sector, but also on some of those developments thousands of miles away. As we enter an era where the decisions of a power authority in South Asia start to influence the annual development budget of an Appalachian independent, and everyone else in between, we will do our best to join the dots, help these emerging gas market connections to take hold, and create the bright new world for gas that’s just beginning to dawn.
U.S. crude stock fell last week despite a hefty build at the Cushing, Oklahoma hub while gasoline and distillate inventories rose as refining runs pick up. Crude inventories fell 2.4 million barrels, compared with analysis expectations for a draw of 1 million barrels. A significant decline in the U.S. gulf coast pulled overall crude stocks down, as the region saw a 6.9 million barrel drawdown. However, crude stock at the Cushing delivery hub for U.S. crude futures increased by 3.8 million barrels.
Oil Drilling Activity
The total number of active onshore rigs increased to 602. When compared to a November 2014 figure of 1,876 active rigs, the current level is approximately 68% below the 2014 high.
Across the three major unconventional oil basins, the oil rig total increased to 315 (up 15 last week), with Eagle Ford up 3, Permian up 11 and Williston up 1.
Total U.S. rig count (including the Gulf of Mexico) stands at 624, up 27 last week, with rigs targeting oil up 21. The horizontal rig count increased to 503, up 18 last week.
Brent, the global benchmark for oil, was down $0.04 to US$54.10 a barrel, reflecting a loss of 0.07% on the week.
WTI crude rose $0.02 to US$51.40 a barrel, up 0.04% on the week.
U.S. Supply and Demand
Sources: EIA Weekly Update and GCA analysis
U.S. crude oil refinery inputs averaged 16.4 million barrels per day, with refineries at 90.4% of their operating capacity last week. This is 134,000 barrels per day more than the previous week’s average.
U.S. gasoline demand over past four weeks was at 9.1 million, down 1.2% from a year ago. Total commercial petroleum inventories increased by 1.4 million barrels last week.
On the supply side, EIA data indicated that total domestic crude production decreased 2,000 barrels to 8.697 million barrels a day. The Lower 48 crude production now stands at 8.175 million barrels per day, down 2,000 barrels a day.
U.S. crude imports averaged about 8.3 million barrels per day last week, an increase of 755,000 barrels per day from the previous week. Over the last four weeks, crude oil imports averaged 8.0 million barrels per day, 5.9% above the same four-week period last year.
Crude oil inventories decreased 2.4 million barrels from the previous week and remain at historically high levels. The crude stored at Cushing (the main price point for WTI) was up 3.8 million barrels; total storage is 65.3 million barrels (~73% utilization).
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