26th July 2019
Oil Drilling Activity
Onshore US drilling activity dropped 5 with a total active count of 921 rigs; those targeting oil down 3, with the total at 776. Across the three major unconventional oil basins, the oil-rig count was down 6, with Permian up 3, Williston down 8 and Eagle Ford down 1.
US domestic crude output decreased by 700,000 barrels per day; crude oil production now stands at 11.3 million barrels per day, predominantly influenced by shut-in of Gulf of Mexico production brought on by storm Barry. Most of the manned platforms that had been evacuated in the run up to the storm were back on manned status by 21 July; hence, GOM production will rebound relatively quickly as the BSEE reports no major damage to offshore platforms.
Crude stocks fell for a sixth consecutive week, dropping 10.8 million barrels; double the 4.4 million-barrel decline expected. These production and stock declines are temporary disruptions caused by the storm.
The European Central Bank joined the US Federal Reserve in making clear that more stimulus could be coming soon to support an economy weakening in the face of global tensions over trade.
Carbon Management - How can governments get it right for oil and gas?
Many governments are struggling to find solutions to develop or sustain their economic competitiveness, whilst also achieving the ambitious GHG emissions reductions goals and commitments of the Paris Agreement.
The fundamental reason is that primary energy supply is tied to CO2 emissions, population and gross domestic product (GDP) growth. Whilst there was some glimmer of hope a few years back that the link between GDP and CO2 emissions could be broken, more recent data shows this was a temporary phenomenon likely linked to the global recession a decade ago and subsequent period of recovery. Populations are growing, the middle class is expanding, energy demand is increasing and so too are CO2 emissions. The linkage still exists and our ability to change course is getting harder at the same time as climate change impacts are becoming more evident.
Carbon and climate policy and regulations are, however, being implemented to manage GHG emissions across the globe, which are starting to shape consumer demand and product supply. Many look to carbon pricing as a leading indicator of this evolution; however, as per our March 15 Monitor, these are yet to be effective given average prices are at $7 per tonne of CO2 equivalent ($/t CO2e). So what is causing this change in energy supply and use? An investigation of 46 key countries across the world has identified that 550 individual energy policies and regulations exist that relate to carbon and climate within their economies. Of the key energy technologies that underpin the energy transition, 289 are related to incentivizing the adoption of renewables and 144 at energy efficiency.
Less than 10% of the 550 individual energy policies and regulations relate to the other key technologies for carbon management in oil and gas (i.e., Venting, Flaring and Fugitives reduction) and Carbon Capture, Use and Storage (CCUS) implementation. Clearly more must be done by governments and industry to develop supporting policies and regulations in these areas. They are essential to achieving substantial GHG emission reductions, whilst assuring the prosperity associated with responsible oil and gas development continues.
In addition, it is clear that a key issue for the future will be how to balance these existing individual policies and regulations across the range of low carbon energy technologies, and then integrate them with implementation of a carbon price in the longer term. Getting this wrong can undermine markets, increase costs, reduce GDP and limit GHG emissions reductions. Getting this right will clearly underpin the success of governments.
Natural Gas – More good news for renewable natural gas
A number of developments this week have underlined the growing role of renewable natural gas (RNG) as a profitable, albeit niche market, thatis gathering momentum because of the drive to eliminate carbon.
To understand some of the drivers for clean fuel, we need look only as far as California, where the city of Berkeley passed a law this week, which will ban new natural gas connections to residential buildings from 2020. It seems only a few years ago that coal was the main casualty of the move to a low carbon energy mix, but it seems these days that natural gas is only a few steps behind in terms of losing market share to less carbon intensive fuels.
At the same time, the CNG market, using renewable gas, is continuing to grow in both the US and Europe, especially for vehicles such as buses and refuse trucks that have relatively low daily mileages, and return to a central depot each night. Another Californian innovation, their Low Carbon Fuel Standard, has been adopted by some other states and Canadian provinces, and is helping the growth in gasification technology using agricultural waste and landfill sites, highlighted previously in this weekly Monitor.
Currently though, Europe still has the lead in biogas technology, with over 17,000 plants supplying some 10 GW of gas-fired power generation. In fact, Denmark has gone as far as to suggest that its entire natural gas system could be run on biogas within 20 years.
With the US heading towards 100 Bcf/day, and the waste from a 2,000 lb steer being capable of producing around 60 cubic feet of methane, it would take well over a billion head of cattle to achieve Denmark’s goal in America. However, with the 100 million head of cattle that do exist in the US, it is a sobering thought that they are capable of sustaining today’s entire LNG export needs, through the simple mechanism of an anaerobic digester.
LNG Economics – The longest of long games?
Meanwhile, spot LNG prices remain soft, great news for Chinese consumers who are ramping up imports this summer, but tough on profitability for the Majors who are midway through shifting the balance of their hydrocarbon production away from oil towards gas. The arrival of so much new export capacity in 2018/2019 was always likely to exceed demand growth, with more trains to come on line in 2020, but thereafter LNG supply and demand growth are supposed to achieve balance. New LNG FID decisions are targeting first sales in 2023-2025, but if too many of them reach the same conclusion, the pricing “sweet spot” may be delayed and achieved by only those with the longest of long games.
Crude Oil – Capital to flow to shareholders?
First-quarter 2019 results for 43 US oil producers indicate they have increased shareholder distributions through dividends and share repurchases during the past two years, averaging 28% of cash from operations since the beginning of 2018. As the overall level of net income, or after-tax profits, increased for these companies in recent quarters, many of them increased both shareholder distributions and capital expenditures.
Producers have been balancing increases in capital expenditures with other uses of cash. Producers have reduced debt—particularly in 2016 and 2017—but more recently, they have increased shareholder distributions through dividend increases and share repurchases.
Analyzed on a quarterly average basis, these companies have generally increased cash from operations, capital expenditures, net share repurchases, and dividends for the past several years through 2018. Except for dividends, however, these all declined in the first quarter of 2019 compared to their 2018 quarterly averages.
The financial statements reveal that, when combining gross share repurchases with dividends, the companies spent more than $4 billion on shareholder distributions in the first quarter of 2019, which was 31% of cash from operations. Although they can vary from quarter to quarter, shareholder distributions through share repurchases and dividends have averaged 28% of cash from operations since the beginning of 2018.
Several factors will influence the level of shareholder distributions in the future. WTI prices in the second quarter 2019 were $8.19 per barrel (12%) lower than the same period in 2018, which may reduce revenue and cash from operations despite growth in oil production. If these totals were to decline, companies may have to limit shareholder distributions or capital expenditure, which had been growing simultaneously.
Crude Oil Price
Brent, the global benchmark for oil, increased $1.16 to $63.58 a barrel, reflecting a gain of 1.86% on the week.
WTI crude rose $0.68 to $56.30 a barrel, up 1.22% on the week.
Total US rig count (including the Gulf of Mexico) stands at 946, down 8. The horizontal rig count stands at 823, down 6. US rig activity continues to decline and is 102 rigs below (-10%) 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 push.
US Crude Oil Supply and Demand
Crude oil inventories decreased 10.8 million barrels from the previous week. The crude stored at Cushing (the main price point for WTI) decreased 0.4 million barrels; total stored is 50.4 million barrels (~56% utilization).
US crude oil refinery inputs averaged 17 million barrels per day, with refineries at 93.1% of their operating capacity last week. This was 233,000 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 1.5% from a year ago. Total commercial petroleum inventories decreased by 6.7 million barrels last week.
US crude net imports averaged 3.7 million barrels per day last week, down by 562,000 barrels per day from the previous week. Over the past four weeks, crude oil net imports averaged 4.2 million barrels per day, 32% less than the same four-week period last year.
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