12th July 2019
Oil Drilling Activity
Onshore US drilling activity dropped 6 with a total active count of 930 rigs; those targeting oil down 4, with the total at 784. Across the three major unconventional oil basins, the oil-rig count was down 10, with Permian down 6, Williston flat and Eagle Ford down 4.
US domestic crude output increased by 100,000 barrels per day for the second week; crude oil production now stands at 12.3 million barrels per day. Crude stocks fell 9.5 million barrels, more than triple the 3.1 million-barrel draw expected as refineries ramped up output. EIA reports that stock levels are still 10% higher than a year ago and some 35% higher than the long-term trend up to 2014, albeit US domestic production has increased 3.8 million barrels a day over the last five years.
Federal Reserve Chair Jerome Powell signaled that easier monetary policy could be implemented later this month.
Carbon Management – Efficiency, a way to have our cake and eat it too!
More than 400 leaders from over 50 countries gathered last week in Ireland to discuss ways to unlock the vast potential of energy efficiency. Dr. Fatih Birol, IEA Executive Director, launched a new global Commission for action on energy efficiency and said, "No meaningful energy transition can take place without energy efficiency.”
Energy efficiency, using less energy to perform the same task, has been called “the fifth fuel” (after coal, oil and gas, nuclear power, and renewables), and is the largest and least expensive global energy resource, that can also deliver more than 40% of the carbon emissions reductions needed by the Paris Agreement. However, implementation is behind plan, and there are signs that this is getting worse, not better. Whilst energy efficiency made the largest impact on curbing emissions growth in 2018, much more potential exists, and its contribution was around 40% lower than in 2017.
For oil and gas companies, energy efficiency should be the first carbon solution of any carbon management strategy. Using less energy reduces operating and maintenance costs, but it can also mean that more product will be available for sale, providing a return on investment that also reduces CO2 emissions. Who said ‘there was no such thing as a free lunch’ or ‘you can’t have your cake and eat it too’? In the words of Amory Lovins of the Rocky Mountain Institute, “not a free lunch, but a lunch you’re paid to eat”. Delivering environmental benefits can actually be just plain and simple good business.
What impact can this make? Analysis suggests that energy efficiency has the potential to economically reduce CO2 emissions from oil and gas supply chains by about 20-40%. Globally this could deliver nearly 2 Giga tonnes per year of CO2 emissions reduction, which is 10 times more impact than achieved from the increase in use of renewable energy sources in 2018. Despite this huge potential, energy efficiency projects do not usually happen at scale by themselves – they require investment of time and money – and they therefore need policies to ensure their implementation versus other business priorities.
Natural Gas – Not all projects are created equal
Sabine Pass LNG is the largest operating LNG export terminal in the US, with five trains that already export circa 3 Bcfd (billion standard cubic feet per day) and a sixth train recently approved for construction that will export another 0.6 Bcfd in a few years. The terminal’s metamorphosis from LNG imports to exports is well known in the industry as the start of the US LNG export revolution, which has come to play a very significant role in the global LNG dynamics in recent times.
One of the main advantages existing import terminals, such as Sabine Pass LNG, had compared to Greenfield developments was that they already possessed some of the infrastructure necessary for exports, notably the LNG storage tanks (five of them in the case of Sabine Pass LNG). This helped them offer competitive rates and reduce project execution risk. While the Sabine Pass LNG project successfully commenced exports in 2015, and has grown in size and stature since, an important aspect that appears to have been overlooked is the fact that the tanks were built in the mid-2000s with only a single cryogenic insulation, which makes them more susceptible to leaks. In recent years, “full containment” LNG tanks, which have two layers of cryogenic insulation, have become a norm in the industry and the Federal Energy Regulatory Commission (FERC) nowadays strongly recommends them to projects. In fact, almost all the new projects are adopting them. While costlier, they provide greater reliability and safety in operations.
This Achilles’ heel at the Sabine Pass LNG terminal came to fore in February last year when a significant leak was observed at one of the tanks. Subsequent inspections conducted by the Pipelines and Hazardous Materials Safety Administration (PHMSA) found that there were a number of leaks in another tank too. Also, it was found that the terminal operators have been grappling with similar concerns in four out of the five tanks over the last decade. The two tanks have since been placed out of service. The FERC and PHMSA issued a joint letter this week saying that appropriate corrective measures have still not been completed by the operator, and neither agency is prepared to authorize the approval of a return to service of the two tanks unless they have been completed to satisfaction.
While there has not been much impact so far on the volume of exports from Sabine Pass LNG (7 out of the total of 12 vessels shipped from the US last week), the issue clearly needs to be addressed at the earliest. This is not only to sustain the output at required levels once Train 5 enters commercial operations a few months from now and eventually Train 6 starts up, but also to prevent serious disruptions and safety incidents at the terminal in the future, especially given the possibility that the other tanks too might be prone to similar issues.
This instance serves to remind us of drawbacks in adopting generalized notions such as “brownfield developments are always better than greenfield developments.” With an overwhelming menu of US LNG projects to choose from, it would be prudent of potential investors and LNG buyers to look closer into the various components that make up the project rather than make decisions based on generic understanding of projects. As the saying goes, not all (projects) are created equal.
Crude Oil – Prices higher on supply disruption
Oil prices gained after US crude inventories shrank more than expected and as major producers evacuated rigs in the Gulf of Mexico ahead of an expected storm.
Major oil firms began evacuating and halting production in the Gulf of Mexico after weather forecasts warned Tropical Storm Barry was approaching the waters offshore Louisiana. The Gulf of Mexico is home to 17% of US crude oil output, which stands at around 12.3 million barrels per day.
Chevron Corp, Royal Dutch Shell, BP, Anadarko Petroleum, Exxon Mobil and BHP Group were in the process of removing staff from 15 offshore platforms.
In the July 2019 update of its Short-Term Energy Outlook (STEO), the EIA forecasts that Brent crude oil prices will average $67 per barrel in 2019 and in 2020. EIA expects that West Texas Intermediate (WTI) crude oil prices will average $60 per barrel in 2019 and $63 per barrel in 2020.
The forecast of relatively stable crude oil prices in the mid-$60 per barrel range reflects EIA’s expectation that heading into 2020, global oil consumption will grow at a similar rate as global oil supply at current price levels. EIA expects that the combination of strong growth in US and other non-OPEC liquid fuels production and slowing global oil demand growth will contribute to a balanced market.
EIA expects US crude oil production to average 12.4 million barrels per day in 2019 and 13.3 million barrels per day in 2020. Growth in US crude oil production is attributable to tight oil formations in the Permian region of Texas and New Mexico, which account for 950,000 barrels per day of the growth in 2019 and 740,000 barrels per day of the growth in 2020.
A downside risk to Permian crude oil production is the increased production of natural gas from this region. Drilling in areas with high concentrations of natural gas in the Permian region might increase only if natural gas pipeline constraints are eased and tighter flaring limits are not implemented.
Crude Oil Price
Brent, the global benchmark for oil, increased $3.54 to $66.85 a barrel, reflecting a gain of 5.59% on the week.
WTI crude rose $3.28 to $60.26 a barrel, up 5.76% on the week.
Total US rig count (including the Gulf of Mexico) stands at 958, down 5. The horizontal rig count stands at 831, down 8. US rig activity continues to show constrained growth for 53 of the last 56 weeks and is 96 rigs below (-9%) last year’s total. US shale operators continue to focus on well productivity (i.e., well completion), DUC wells and operational efficiency over rig growth. Capital discipline over production growth by the drill bit remains the current impetus for most independent oil companies.
US Crude Oil Supply and Demand
Crude oil inventories decreased 9.5 million barrels from the previous week. The crude stored at Cushing (the main price point for WTI) decreased 0.3 million barrels; total stored is 52.2 million barrels (~58% utilization).
US crude oil refinery inputs averaged 17.4 million barrels per day, with refineries at 94.7% of their operating capacity last week. This was 148,000 barrels per day more than the previous week’s average.
US gasoline demand over the past four weeks was at 9.7 million barrels, up 1.2% from a year ago. Total commercial petroleum inventories decreased by 3.8 million barrels last week.
US crude net imports averaged 4.25 million barrels per day last week, down by 342,000 barrels per day from the previous week. Over the past four weeks, crude oil net imports averaged 3.9 million barrels per day, 32.4% less than the same four-week period last year.
US crude imports averaged 7.3 million barrels per day last week, down by 284,000 barrels per day from the previous week. Over the past four weeks, crude oil imports averaged 7.3 million barrels per day, 12.3% less than the same four-week period last year.
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