2nd June 2017
Drillers added 8 onshore rigs, increasing activity for a 20th week in a row and bringing the total to 889. Onshore rigs now stand 507 rigs above the same period a year ago.
Natural Gas – Independents on their way back
This week GCA had an opportunity to meet with a group of independent, typically Gulf Coast focused oil and gas producers, midstream and service companies, as well as their lenders and private equity backers. Many of these companies are just dusting themselves off after a period in Chapter 11, and cautiously getting back into drilling programs, acreage deals, and other economic activity that the more sustainable oil and gas environment is enabling.
As growth plans start to emerge, these companies may well start to consider some of the opportunities that America’s recent entry into the global gas sector will create, such as smaller scale LNG, engineering and manufacturing associated with exports, and a much larger revenue pool to access. Just for the LNG capacity under construction, gas demand, largely focused on the Gulf Coast region, will be some 9 Bcf/d, and the annual wellhead revenues generated base on today’s forward gas price will be in the region of US$10bn. However, that same gas delivered to customer’s facilities in Europe, Asia, or Africa, for example, will generate closer to US$25bn.
In other words, producing the gas isn’t even close to the largest part of the revenue pool available, and with modest returns available to those simply producing, there could be a temptation to move along the value chain, and look to capturing superior returns as a result.
But of course, it’s not just LNG that’s connecting the Gulf Coast with the rest of the world. In 2014 China’s largest direct investment in the US to date was announced, with the planned construction of a world scale petrochemical facility, the first phase of which will focus on Methanol exports, commencing within months, vying with the LNG carriers off the Louisiana coast.
As America’s independents start to feel more secure with their cash flow and returns, and lenders get more confident about the risks still inherent in oil and gas, who knows what new entrants into midstream, chemicals and LNG we might see emerging from this large, and highly entrepreneurial group of companies and individuals, and of course those providing the finance?
Crude – abundant supplies available
New advances in drilling coupled with fewer regulations are making it cheaper to extract both oil and gas from onshore United States. The US is the world's third leading producer of crude, and the flow of shale oil is increasing on a weekly basis, up 22,000 barrels per day last week.
As of Friday, June 2 there were more than twice as many oil rigs operating in the United States compared with a year ago (733 vs 325). The US is a major player in the global crude market, and its influence is likely to grow. With the price of oil around the US$50(WTI) per barrel level, US shale continues to provide the nation with abundant supplies of energy.
The demand for deepwater drilling has declined as US shale has made a significant proportion of the crude oil resources located deep under the floor of the ocean sub economic at current crude prices. While cost reductions, efficiency gains and reengineering are positively impacting the seemingly bleak prospects for deepwater as seen only a year or two back, deepwater drillers are still likely to face a difficult time in the years ahead as US shale continues to be a lower cost, shorter cycle alternative that is readily available.
There continues to be abundant supplies of crude available in the global market to fill any short term gap. Crude continues to flow with total OPEC output at around 33 million barrels per day and US production rising.
The three largest producers of crude in the world are Russia, Saudi Arabia, and the US. Together, the three nations' crude output is almost equal to that of OPEC. So long as the price is around US$50(WTI) per barrel, producers may be satisfied by the price, but at that level, the US sway in the world's crude market is increasing.
Increasing flows of shale oil and the potential for more OPEC output in 2018 could slow a deepwater drilling rebound. Because of new technology that allows shale extraction for lower costs in an environment of fewer regulations, deepwater drilling could remain spotty for the next several years. The world is currently well supplied with crude and if any shortages occur OPEC and other producing countries could pump up the volume very quickly.
Oil Drilling Activity
Total US rig count (including the Gulf of Mexico) stands at 916, up 8 last week, with rigs targeting oil up 11. The horizontal rig count increased to 771, up 5 last week.
The total number of active onshore rigs increased to 889. When compared to a November 2014 figure of 1,876 active rigs, the current level remains 53% below the 2014 high.
Across the three major unconventional oil basins, the oil rig total increased to 488 (up 4 last week), with Permian up 2, Eagle Ford and Williston up 1.
Crude Oil Price
Brent, the global benchmark for oil, decreased US$1.77 to US$49.69 a barrel, reflecting a loss of 3.44% on the week.
WTI crude fell US$1.51 to US$47.43 a barrel, down 3.09% on the week.
US Crude Oil Supply and Demand
Sources: EIA Weekly Update and GCA analysis
US crude oil refinery inputs averaged 17.5 million barrels per day, with refineries at 95% of their operating capacity last week. This is 229,000 barrels per day more than the previous week’s average.
US gasoline demand over past four weeks was at 9.6 million, down 0.7% from a year ago. Total commercial petroleum inventories decreased by 5.2 million barrels last week.
On the supply side, EIA data indicated that total domestic crude production increased 22,000 barrels to 9.342 million barrels a day. The Lower 48 crude production now stands at 8.835 million barrels per day, up 22,000 this week.
US crude imports averaged 8.0 million barrels per day last week, a decrease of 309,000 barrels per day from the previous week. Over the last four weeks, crude oil imports averaged 8.1 million barrels per day, 6.6% above the same four-week period last year.
Crude oil inventories decreased 6.4 million barrels from the previous week and persist at historically high levels. The crude stored at Cushing (the main price point for WTI) deceased 0.8 million barrels; total storage is 64.8 million barrels (~72% utilization).
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