25th January 2019
Oil Drilling Activity
Onshore US drilling activity increased 9 with a total active count of 1038 rigs; those targeting oil up 10 (an increase of 1.2%), with the total at 862. Across the three major unconventional oil basins, the oil rig count increased 4 and stands at 614, with Permian up 3, Williston up 2 and Eagle Ford down 1.
EIA estimates of drilled uncompleted (DUC) wells in 2018 were revised downwards by 4% last month, but the revised estimates still show an increase of 1,735 wells in 2018, with 95% of the net gain in the Permian basin. By contrast, completion crews have outpaced new wells drilled in Bakken and especially Appalachia.
EIA reported last week’s total US domestic crude output at 11.9 million, unchanged from last week. US crude oil inventories unexpectedly surged last week; the EIA data showed that crude oil inventories rose by 7.97 million barrels last week. That was compared to forecasts for a stockpile draw of 0.042 million barrels, after a decline of 2.683 million barrels in the previous week.
US crude exports dropped sharply last week to 2.035 million barrels per day, a decrease of 931,000 barrels per day. If crude producers have defended their upstream margins and elected to send barrels into storage rather than to export because of low prices in late December, one might anticipate a balancing decline in oil inventories and a rebound in exports brought on by the US$10/barrel increase in WTI since Christmas.
Natural Gas – LNG project financing “my way”
Project finance has been important in the development and construction of global LNG projects in recent years; and, despite pushes in the US towards more equity-focused models, and in Canada and other projects nearing FID where financing through affiliate marketing is the favored approach, conventional project financing still has an increasingly important role to play. Last week, members of GCA’s Gas and LNG team engaged with the New York legal and finance community to discuss current trends in oil and gas project financing.
One of the differences in sources of finance for US projects has been increased participation by infrastructure funds, more accustomed to financing toll highways, bridges or airports, where a steady source of tariff income is used to service debt and repay capital. The difference for LNG is that even under a tolling contract, cash flow from LNG sales continues to be the fundamental source of all revenue for the capacity holder.
Risk identification and allocation is key in terms of project finance structuring and lender evaluation. Because of the complexity of LNG projects, frequently examined risks include those concerning:
Completion risk (given recent records of time and schedule overruns especially in Australia)
Operational risk and performance guarantees (given plant shutdowns and underperformance)
Gas feedstock risk (which is still of key importance for dedicated reserves, but less so for US liquefaction plants able to tap into vast shale gas resources)
Having said that, going into 2019 we are seeing the increased emphasis on the following risks, which GCA has been closely evaluating:
Political risk: Recent tariff and trade wars have resulted in increased uncertainty in these areas, not just in terms of volume risk, but also in terms of pricing risk sometimes adding 10-20% to the considered cost of LNG. Gas has become an increasingly used geopolitical weapon, much as oil was in the 1990s and 2000s. As an increasing number of members join the LNG sellers and LNG buyers club, we can only expect perceptions of regulatory and political risk to rise.
Host country government and corruption risk: As we enter a world in which projects are developed in new countries with a less established track record in energy development, it is important that this key risk is well understood and managed. Both sellers and buyers need to work together with legal, financial and technical advisors to navigate often sensitive hurdles in project development.
Regulatory risk: No more so than the recent government shutdown in the US, and despite moves last year to streamline and speed up the regulatory and permitting process, we have seen increased concern from LNG developers regarding regulatory risk. One of the increasingly common trends that has impacted timing of LNG project development is the shift from "right of way permits," to one of important and required environmental studies and consents.
Offtake (revenue) risk: In an increasingly globally commoditized LNG market, there is potentially room for alternative disposal of contracted LNG. However, with fluctuating global prices, there is also potential for increased dispute and arbitration, especially concerning unfulfilled take or pay obligations. This is true especially where disconnects emerge between the short-term or spot market, and the long-term offtake contract.
Project financing will continue to dominate the landscape in the years to come as we expect to see a proliferation of new wave projects approved to meet the growing global LNG demand. However, as Sinatra famously sang, and increasingly led by innovative thinking from North America, many of the next wave of LNG project developers could well be singing, “I did it my way”!
Crude Oil – Global economic growth determines future crude price
The oil price recovery that began in early 2016, and which gathered momentum in the second and third quarters of 2018, faltered in the fourth quarter and prices regressed back towards the long-term average of US$56 per barrel for Brent. Oil and gas demand has never been higher with the IEA reporting demand growing 1.3 million barrels a day to over 100 million barrels a day for the first time in 2018.
US production of crude, lease condensates and gas liquids surged by more than 2 million barrels per day in 2018, the largest one-year increase reported in any single country in the history of the oil industry.
The shale boom, coupled with signs of slowing consumption growth and unexpectedly generous US sanctions waivers on Iran's oil exports, pushed the market towards a large surplus in fourth quarter 2018. The result has been a sharp drop in prices which has already prompted OPEC, and especially its principal member Saudi Arabia, to cut production sharply.
Lower crude prices are also expected to moderate the growth in US shale production this year and next, although after a delay, as the industry completes new wells started during 2018.
The EIA forecasts growth in US petroleum liquids supply will slow from 2.22 million barrels per day in 2018 to 1.73 million barrels per day in 2019 and 1.24 million barrels per day in 2020.
The speed and depth of any slowdown in US shale production is uncertain; it will depend on what happens to crude prices. Oil prices this year will be influenced by the health of the global economy, aided at the wellhead in the US by a US$5-10 barrel decline in the pricing delta between WTI Midland and WTI Gulf Coast as pipelines are commissioned.
US shale production growth, the policy of OPEC and its allies, US sanctions on Iran, and the threat of sanctions on Venezuela each could have an impact on crude prices. However, that impact will be secondary and it is more likely to be crude prices that determine the fate of US shale production, OPEC+ policy and US sanctions.
Kirill Dmitriev, head of the state-backed Russian Direct Investment Fund, indicated last week that “For US shale production to go down, you need Brent oil prices at US$40 per barrel and below. That is not healthy for the Russian economy.”
Total US rig count (including the Gulf of Mexico) stands at 1059, up 9 this week. The horizontal rig count stands at 932, an increase of 3 this week. US rig activity continue to show constrained growth for 30 of the last 32 weeks and stands 12% above last year’s total. US shale operators remain focused on well productivity (i.e., well completion) and operational efficiency over rig growth.
Crude Oil Price
Brent, the global benchmark for oil, decreased US$0.59 to US$61.22 a barrel, reflecting a loss of 0.95% on the week.
WTI crude rose US$0.60 to US$53.27 a barrel, up 1.14% on the week.
US Crude Oil Supply and Demand
US crude oil refinery inputs averaged 17.0 million barrels per day, with refineries at 92.9% of their operating capacity last week. This is 174,000 barrels per day less than the previous week’s average.
US gasoline demand over the past four weeks was at 8.7 million barrels, down 0.1% from a year ago. Total commercial petroleum inventories increased by 6.7 million barrels last week.
US crude imports averaged 8.2 million barrels per day last week, up by 664,000 barrels per day from the previous week. Over the past four weeks, crude oil imports averaged 7.7 million barrels per day, 2.1% less than the same four-week period last year.
US crude net imports averaged 6.156 million barrels per day last week, up by 1.6 million barrels per day from the previous week. Over the past four weeks, crude oil net imports averaged 5.4 million barrels per day, 18.2% less than the same four-week period last year.
Crude oil inventories increased 8.0 million barrels from the previous week. The crude stored at Cushing (the main price point for WTI) decreased 0.2 million barrels; total stored is 41.3 million barrels (~46% utilization).
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