January 10, 2020

January 10, 2020

10th January 2020

Oil Drilling Activity

Onshore US drilling activity decreased by 14 with a total active count of 759 (Y/Y decrease of 293) rigs; those targeting oil down 11, with the total at 659. Across the three major unconventional oil basins, the oilrig count decreased by 7, with Permian down 6, Williston down 1 and Eagle Ford flat.

Source: Baker Hughes Rig Count

US domestic crude production was unchanged once again last week; crude production stands at 12.9 million barrels per day, of which ~2.4 million barrels per day is offshore and Alaska production. Crude inventories increased 1.2 million barrels, an unexpected increase in crude stockpiles. A combination of surging imports and lower refinery runs largely drove the surprise stockpile build. A build in refined product inventories added to the bearish data and deepened the commodity’s losses that was already on the defensive because of the cooling of geopolitical tensions between US and Iran.  

Venezuela’s oil exports plummeted 32% last year to 1.001 million barrels per day, as a lack of staff and capital drove output to its lowest level in almost 75 years and US sanctions shrank exports markets.

Carbon Management – Strategic value of Carbon Capture Use and Storage

We evaluated data from the Intergovernmental Panel on Climate Change (IPCC) Fifth Assessment Report (AR5) to assess the potential impact of carbon capture, utilization and sequestration (CCUS) on oil and gas demand. The AR5 database has over 1,000 scenarios from 31 global energy models. The impact of CCUS can be determined by comparing energy use from oil and gas between those scenarios that deployed CCUS and those that had no CCUS deployment, while also meeting the 450ppm global average temperature limit.

We found that the impact of CCUS on oil was that an additional 1,233 Exajoules (EJ), or ~200 billion barrels of oil, could be sustained through CCUS deployment through 2050, while also meeting the 450ppm global average temperature limit. This addition represents about 15% of cumulative oil production to date.

We also found that the impact of CCUS on gas was that an additional 1,351 EJ, or ~1,300 trillion cubic feet of gas, can be sustained through CCUS deployment through 2050, while also meeting the 450ppm global average temperature limit. This addition represents about 30% of cumulative natural gas production to date.

Through this analysis, we find CCUS enables society to continue using oil and gas at scale as an affordable and reliable energy source while also ensuring CO2 concentrations are limited to avoid the worse impacts of climate change.

There are also other additional sources of strategic value for CCUS implementation including continued resource development, use of existing infrastructure, creation of jobs, and growth of gross domestic product. Have you considered these to address social license and sustainability questions related to your oil and gas assets?

Natural Gas – 2020, Year of the Container

The first murmurings within the LNG community around LNG containerization arose some 5 years ago, as a speculative technology that could be used for very specific applications of small-scale storage.  Today, with over 100 containers per month being moved around the world, especially to the Caribbean and to China, the container business seems to be entering mainstream consideration.

News that container traffic between Japan and China is about to accelerate is a good reminder that the advantages of containers are starting to prove themselves as we enter 2020, with low freight costs, greater economies of scale from container manufacture, and a better established supply chain to the end-user.  In the US, LNG containers by rail have received regulatory approval in multiple states, and LNG by rail is benefiting as a subset of the containerization trend.  It is worth noting that the traditional container industry was responsible for a revolution in sea freight some 50 years ago now, and currently accounts for over 60% of global trade in goods.

With this week seeing a record disconnect between oil and gas, with a thirty-fold difference in $/MMBtu and $/bbl, we can expect to see a big upsurge in pressure to switch to gas, for example, in the transport and small scale generation markets.  Both these segments require upfront investment to enable the switch to gas or LNG; but with containerization now offering yet more efficiencies, freight and storage options, more and more solution providers are likely to be examining it.

2020 might be the year of the Rat in traditional Chinese zodiac mythology, but it may also be the Year of the LNG Container.

Crude Oil - 2020 Global Economic Prospects: Slow growth remains

Following its weakest performance since the global financial crisis, the world economy is poised for a modest rebound this year – if everything goes just right. Global growth is set to rise by 2.5% this year, a small uptick from 2.4% in 2019, as trade and investment gradually recover, the World Bank’s semi-annual Global Economic Prospects forecasts.

Advanced economies are expected to slow as a group to 1.4% from 1.6%, mainly reflecting lingering weakness in manufacturing. Emerging market and developing economies will see growth accelerate to 4.1% from 3.5% last year. However, the pickup comes largely from a small number of large emerging economies shaking off economic doldrums or stabilizing after recession or turbulence.  For many other economies, growth is on track to decelerate as exports and investment remain weak.

While the global economic outlook for 2020 envisions a fragile upward path, there is a high degree of uncertainty around the forecast given unpredictability around trade and other policies. If policy-makers manage to mitigate tensions and clarify unsettled issues in a number of areas – they could prove the forecast wrong by sending growth higher than anticipated.

As the market shifts its focus towards rising US crude stocks and away from fears of an imminent escalation of conflict between the US and Iran, the Strait of Hormuz should not be ignored.

The Strait of Hormuz, located between Oman and Iran, connects the Persian Gulf with the Gulf of Oman and the Arabian Sea. The Strait of Hormuz is the world's most important oil chokepoint because of the large volumes of oil that flow through the strait. In 2018, its daily oil flow averaged 21 million barrels per day, or the equivalent of about 21% of global petroleum liquids consumption.

The inability of oil to transit a major chokepoint, even temporarily, can lead to substantial supply delays and higher shipping costs, resulting in higher world energy prices. Volumes of crude oil, condensate, and petroleum products transiting the Strait of Hormuz have been stable since 2016, when international sanctions on Iran were lifted and Iran’s oil production and exports returned to pre-sanctions levels.

Flows through the Strait of Hormuz in 2018 made up about one-third of total global seaborne traded oil. More than one-quarter of global liquefied natural gas trade also transited the Strait of Hormuz in 2018.

There are limited options to bypass the Strait of Hormuz. Only Saudi Arabia and the United Arab Emirates have pipelines that can ship crude oil outside the Persian Gulf and have the additional pipeline capacity to circumvent the Strait of Hormuz.

Weekly Recap

Drilling Activity

Total US rig count (including the Gulf of Mexico) stands at 781, a decrease of 15 from last week. The horizontal rig count stands at 698, down 3. US rig activity continues to show constraint and is 297 rigs below (-28%) last year’s total.

US Crude Oil Supply and Demand

Sources: EIA Weekly Update and GCA Analysis

Crude oil inventories increased by 1.2 million barrels from the previous week. The crude stored at Cushing (the main price point for WTI) decreased 0.8 million barrels; total stored is 35.5 million barrels (~39% utilization). Total US commercial crude stored stands at 431 million barrels (~55% utilization).

US crude oil refinery inputs averaged 16.9 million barrels per day, with refineries at 93% of their operating capacity last week. This was 387,000 barrels per day less than last week’s average.

US gasoline demand over the past four weeks was at 9.0 million barrels, down 0.4% from a year ago. Total commercial petroleum inventories increased by 14.8 million barrels last week.

US crude net imports averaged 3.7 million barrels per day last week, up by 1,777,000 barrels per day from the previous week. Over the past four weeks, crude oil net imports averaged 2.98 million barrels per day, 42.5% less than the same four-week period last year.

Authors

January 10, 2020

P. Kevin Galvin

Facilities/Cost Engineer - kevin.galvin@gaffney-cline.com
January 10, 2020

Nick Fulford

Global Head of Gas/LNG - nick.fulford@gaffney-cline.com
January 10, 2020

Nigel Jenvey

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

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