19th July 2019
Oil Drilling Activity
Onshore US drilling activity dropped 4 with a total active count of 926 rigs; those targeting oil down 5, with the total at 779. Across the three major unconventional oil basins, the oil-rig count was up 1, with Permian up 3, Williston flat and Eagle Ford down 2.
US domestic crude output decreased by 300,000 barrels per day; crude oil production now stands at 12 million barrels per day. Crude stocks fell for a fifth consecutive week, dropping 3.1 million barrels; yet posting a smaller-than-expected weekly decline whereas stockpiles of gasoline and distillates saw sizable gains.
Iran said it had seized a foreign oil tanker in the Gulf it claimed was smuggling 6,200 barrels of fuel. The news comes amid rising tensions between Tehran and the West over the safety of shipping in the Strait of Hormuz.
Carbon Management – Californian Low Carbon Fuel Standard ... friend or foe?
The California Global Warming Act of 2006 laid the foundation for the Low Carbon Fuel Standard (LCFS) as a policy to reduce GHG emissions from all transport fuels sold (gasoline, diesel, biofuels, LNG, CNG and electricity for EVs) in the state. The LCFS became effective in 2011 and it places carbon intensity (CI, the amount of emissions per unit energy) targets on fuels. After an initial period of legal challenges and incorporation of fixes, the LCFS was amended in 2018 including a more ambitious 20% reduction goal of CI by 2030.
Fuel suppliers that have a lower CI than the target generate credits and those with a higher CI than the target generate deficits. A fuel supplier with deficits must have enough credits through generation and acquisition to be in annual compliance. Until recently fuel suppliers have consistently over-complied, leading to a bank of credits that can be sold or used to meet compliance over time.
However, because of blending constraints of ethanol in conventional engines and limited adoption of alternatives, the credit bank is being drawn-down and CO2 credit price has now risen to between $169/tCO2 and $190/tCO2 in the past 12 months. This provides an incentive for existing fuel suppliers to lower their CI through implementation of Carbon Management practices, and potential for other fuel producers with lower CI to enter the market.
With the CI of global crude oil production being as low as 3.3gCO2e/MJ and the LCFS CI target currently at 12.2 gCO2e/MJ, there is the potential for the California fuels market to reward these low carbon crude oil suppliers with a possible arbitrage based on the CI of up to $8 per barrel currently.
Furthermore, in 2018, the LCFS was amended to enable Carbon Capture Use and Storage (CCUS) projects that reduce emissions associated with the production of transport fuels sold in California, and also includes projects that directly capture CO2 from the air to generate LCFS credits. To qualify, projects need to meet the requirements of the CARB CCS Protocol. For projects in the US, this can be combined with the federal tax credit for CCUS called 45Q, which is effectively $35/te for secure geological storage during EOR and $50/te for saline formation storage. The incentives are therefore available for existing fuel suppliers to reduce their CI to ensure their sustainability in this market.
Whilst some view the LCFS as a policy that distorts the market and causes higher consumer prices, others see the benefits it brings in the energy transition by providing incentives for Carbon Management and a continued role for oil as part of cleaner transport fuels.
If you want to know more about how to assess your potential in this market, please contact GCA.
Natural Gas – Small scale becoming large scale
This week’s announcement by Fortis, that it is expanding its containerized LNG exports from British Columbia to China is a timely reminder that the world of small scale LNG liquefaction and transportation is thriving. From the first, experimental cargo two years ago, to an industrial scale project now planned around a two year, 53,000 tonne per annum trade, the growth in this niche market is set to continue.
Sixty-one years ago now, the Methane Pioneer forged the way for transoceanic shipments of LNG that have resulted in the giant, ice breaking LNG carriers that we see today. In the same way, the Fortis project may also herald much more substantial opportunities in the LNG sector, especially where smaller scale power generation, or bunkering (marine fuel) requirements are being served.
In the opposite corner of North America, Crowley is also pioneering the use of ISO containers. Between the trade to China, out of BC and the exports from Florida to the Caribbean, well over 100 containers per week are now being shipped, full of LNG originating from small scale, purpose built plant.
The Jacksonville, Florida plant is allied to a bunkering requirement for container vessels operating out of that port, and the Fortis plant also provides LNG for BC Ferries, so both of these smaller scale units are now serving both ship operators and power generation customers. There are also signs of growth in similar smaller scale plants for bunkering elsewhere in the world, such as the newly sanctioned Sohar plant in Oman.
The new maritime constraints on burning High Sulphur Fuel Oil (HSFO) and Gasoil (Diesel) are expected to provide a further boost for the smaller scale side of the business when the restrictions on Sulphur and particulates are introduced in 2020, with LNG providing a cost effective alternative to expensive flue gas desulphurization (FGD) equipment.
Although still very much a newcomer to the LNG space, these smaller scale projects, in aggregate, are growing rapidly. With many more manufacturers now offering mass-produced LNG containers, and ship operators increasingly looking to gas, economies of scale will soon start to offer savings, especially in markets like China, where road tankers are widely used to move LNG significant distances.
Crude Oil – Permian is slowing
Sluggish consumption growth is pressuring oil prices even as Saudi Arabia and its allies try to prop up the market by cutting their production. US refineries have so far this year processed 48 million barrels of crude and other liquids, less than at the same point in 2018, according to an analysis of weekly data from the EIA. Gross inputs into refineries have averaged 16.90 million barrels per day compared with 17.15 million barrels per day in 2018.
Even with restricted crude run rates, however, gasoline stocks are just 4 million barrels below 2018 levels while distillate inventories are 15 million barrels above last year. Refiners have reconfigured their equipment to maximize output of middle distillates and minimize production of residual fuel oil ahead of the introduction of new marine fuel regulations at the start of 2020.
Demand weakness and rising fuel stocks continue to pressure oil prices in recent weeks despite diplomatic tensions in the Middle East Gulf and a slowdown in new well drilling in the US.
Permian tight oil production may flatten based on correlation of rig count and 7-month lagged production. Drilled uncompleted wells may help prolong production growth despite falling rig counts; however, the shale boom in the Permian is slowing down.Permian tight oil production should flatten based on correlation of rig count and 7-month lagged production. Drilled uncompleted wells may prolong production despite falling rig counts. Permian tight oil production should flatten based on correlation of rig count and 7-month lagged production. Drilled uncompleted wells may prolong production despite falling rig counts.
Crude Oil Price
Brent, the global benchmark for oil, decreased $4.43 to $62.42 a barrel, reflecting a loss of 6.63% on the week.
WTI crude fell $4.64 to $55.62 a barrel, down 7.70% on the week.
Total US rig count (including the Gulf of Mexico) stands at 954, down 4. The horizontal rig count stands at 829, down 2. US rig activity continues to show constrained growth for 54 of the last 57 weeks and is 92 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 3.1 million barrels from the previous week. The crude stored at Cushing (the main price point for WTI) decreased 1.4 million barrels; total stored is 50.8 million barrels (~56% utilization).
US crude oil refinery inputs averaged 17.3 million barrels per day, with refineries at 94.4% of their operating capacity last week. This was 172,000 barrels per day less than the previous week’s average.
US gasoline demand over the past four weeks was at 9.5 million barrels, down 1.7% from a year ago. Total commercial petroleum inventories increased by 11.7 million barrels last week.
US crude net imports averaged 4.3 million barrels per day last week, up by 44,000 barrels per day from the previous week. Over the past four weeks, crude oil net imports averaged 4.0 million barrels per day, 36.1% less than the same four-week period last year.
- GCA Oil & Gas Monitor
- Latin America
- North America
- Asia-Pacific & China
- Middle East
- Russia & Caspian
- Business of Energy
- Midstream & Downstream
- Gas & LNG
- Meet our Experts
- Project Experience Brochures
- Training Business
- GCA Oil & Gas Monitor: 2019 archive
- GCA Oil & Gas Monitor: 2018 archive
- US Oil & Gas Monitor: 2017 archive
- US Oil & Gas Monitor: 2016 archive
- US Oil & Gas Monitor: 2015 archive
We're here to help
Europe / Africa / Middle East / Russia & Caspian
gaffney-cline & associates