January 24, 2020

January 24, 2020

24th January 2020

Oil Drilling Activity

Onshore US drilling activity decreased by 3 with a total active count of 772 (Y/Y decrease of 266) rigs; those targeting oil up 3, with the total at 676. Across the three major unconventional oil basins, the oilrig count increased by 3, with Permian up 2, Williston flat and Eagle Ford up 1.

Source: Baker Hughes Rig Count

US domestic crude production was unchanged last week; crude production stands at 13 million barrels per day, a peak rate, of which ~2.55 million barrels per day is offshore and Alaska production. Oil prices continue to trend lower after weekly data from the EIA indicated that US crude supplies fell by 400,000 barrels for the week. API reported an increase of 1.6 million barrels for the week.

More than 200 oil and gas companies in North America have filed for bankruptcy since 2015, and the list of casualties could continue to climb this year.

Carbon Management – Advancing solutions to methane emissions

Gaffney, Cline is pleased to announce the addition to its Carbon Management practice of Methane Management solutions, led by Jennifer Stewart. Before joining GCA, Jennifer was Senior Vice President, Legislative, Regulatory and Sustainability for Southwestern Energy Company (SWN), the fifth largest natural gas provider in the US, where she led efforts to identify, develop and implement methane reduction solutions in unconventional resource developments. Under Jennifer’s leadership, SWN led all North American producers with the lowest methane intensity under the EPA’s GHG Reporting Program and received recognition among environmental shareholder activist groups and regulatory bodies as the leading upstream producer for methane abatement practices and disclosures, and operating practices.

This week, three thousand leaders from around the world are meeting at the annual World Economic Forum in Davos, Switzerland to shape global, regional and industry agendas. These agendas can be described as climate, climate and ... climate. Climate is also at the top of global investors’ agendas.  “Climate risk is investment risk,” Laurence Fink, chief executive of BlackRock Inc., the world’s largest asset manager, said in his annual letter earlier this month. 

Global investment in natural gas infrastructure may be at a crossroads given the increasing and heightened financial and economic risks associated with climate. In the current low commodity environment, it is crucial that organizations address climate risks, not just asset and operational risks, to ensure financial viability. It is undisputed that natural gas is the key to a low-carbon energy future, primarily by displacing coal for power generation. The ongoing displacement of coal-fired generation by natural gas in the US and the UK, and the policy-driven coal-to-gas switching in China, demonstrate the environmental benefits of natural gas. The IEA recently estimated that coal-to-gas switching globally avoided more than 500 million tons of CO2 emissions between 2010 and 2018.

However, the credibility of natural gas is undermined if venting, flaring and fugitive methane emissions along the natural gas supply chain are not managed, as methane has a warming potential of approximately 30 to 90 times greater than that of CO2, depending on the timescale of the assessment. If global emissions exceed as little as 3.2% of overall gas volume, gas is no better than coal from a climate perspective. 

The GCA Methane Management offer provides advisory solutions using a value-based approach, offering both technical, commercial and strategic services:


* Setting emission reduction targets/benchmarking

Measurement methodology assessment and advice Commercial

Assisting in ensuring economic results by analyzing the marginal cost of abatement curve by mitigation measure

Provide recommendations for effective methane emission reduction design, baseline and targeted emissions surveys, and predictive maintenance

Independent auditing and attest services for methane emission reduction data and results


* Regulatory and policy advocacy at all government levels

* Monitoring and interpretation of polices, regulations and laws related to methane emissions

* Stakeholder engagement, including investors, lenders, regulators, policy makers, and NGOs, including developing community engagement and communication strategies to ensure a social license to operate

* Corporate governance guidance regarding engagement and buy-in with directors, senior leadership and employees

Natural Gas – More bad news for US producers

One of the features of the natural gas market, wherever you are in the world, is the link with the weather.  Cold weather drives demand for heating, hot weather indirectly drives demand through power generation for AC.  The measure typically used to determine how much gas demand is likely to change based on weather is the Heating Degree Day (HDD), which measures the difference between a datum temperature at which heating demand is at a minimum, times the number of days that it occurs.  In the US, the first two weeks of January generated only 316 Heating Degree days, some 30% below the 30-year average, repeating a similar pattern at the start of 2019.  The result?  February gas prices only fractionally above $2/MMBtu, the lowest since 2016.

Domestic gas production in the continental US was already diminishing as a result of months of low prices, and seems set to fall further in light of the lack of demand, and plentiful storage at the start of 2020.  With weather and economics conspiring against pure-play gas producers in the US, we can expect to see drilling activity slow down even more than in the last quarter of 2019, and gas volumes decreasing accordingly.  For now, gas productivity seems to be adequate for both domestic needs, and the increasing demands for LNG exports.  At some point, supply and demand will intersect, and we can expect a price response.  How much, and when, are the key questions that all gas marketers are guessing at right now.

Crude Oil – Geopolitical risk offset by surplus supply

Several geopolitical events have provided upward pressure on crude oil prices in recent months. These events include attacks on oil tankers transiting the Persian Gulf and the Red Sea, the September 2019 attack on Saudi Arabia’s energy infrastructure, and recent tensions between the US and Iran.

Although the immediate price spike following the mid-September attacks on Saudi Arabia was relatively short-lived, the attacks contributed to an increased price risk. As a result, monthly average Brent prices rose from $63 per barrel in September to $67 per barrel in December. Crude oil prices increased during this period despite global liquid fuels inventories growing by 130,000 barrels per day.

Further increasing the geopolitical risk premium on global oil prices, the US military action in Iraq in January 2020 increased uncertainty about potential disruptions to oil production and shipping in the Middle East. Following these developments, the price of Brent crude oil reached $70 per barrel, but prices have subsequently fallen.

Expectations that a well-supplied market would be able to absorb disruptions that have cut Libya’s crude production are beginning to take hold. Markets appear to fret less about supply disruption in the Middle East because of the US shale oil production growth. Additionally, spare OPEC capacity, which stands at ~3 million barrels per day, helps reduce the oil risk premium.

Weekly Recap

Drilling Activity

Total US rig count (including the Gulf of Mexico) stands at 794, a decrease of 2 from last week. The horizontal rig count stands at 710, up 1. US rig activity continues to show constraint and is 268 rigs below (-25%) last year’s total.

US Crude Oil Supply and Demand

Sources: EIA Weekly Update and GCA Analysis

Crude oil inventories decreased by 0.4 million barrels from the previous week, compared with expectations for an increase of 500,000 barrels. The crude stored at Cushing (the main price point for WTI) decreased 0.9 million barrels; total stored is 34.9 million barrels (~39% utilization). Total US commercial crude stored stands at 428.1 million barrels (~54% utilization).

US crude oil refinery inputs averaged 16.9 million barrels per day, with refineries at 90.5% of their operating capacity last week. This was 116,000 barrels per day less than last week’s average.

US gasoline demand over the past four weeks was at 8.6 million barrels, down 1.4% from a year ago. Total commercial petroleum inventories decreased by 1.9 million barrels last week.

US crude net imports averaged 3.2 million barrels per day last week, down by 53,000 barrels per day from the previous week. Over the past four weeks, crude oil net imports averaged 3 million barrels per day, 46.2% less than the same four-week period last year.


January 24, 2020

P. Kevin Galvin

Facilities/Cost Engineer - kevin.galvin@gaffney-cline.com
January 24, 2020

Nick Fulford

Global Head of Gas/LNG - nick.fulford@gaffney-cline.com
January 24, 2020

Nigel Jenvey

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

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