July 27, 2018

July 27, 2018

27th July 2018

Oil Drilling Activity

Onshore US drilling activity continued to tread water, increasing by 6 with a total active count of 1,030 rigs; those targeting oil increased 3, with the total at 861. Across the three major unconventional oil basins, the oil rig count increased by 3 to 606, with Permian up 4, Eagle Ford down 2 and Williston up 1.

EIA reported last week’s total domestic crude output at 11 million barrels a day, no increase from the previous week, but still a record and nearly 6 million barrels a day higher than the US achieved in the same period in 2008. 

Drilling in deep water — defined as water depth greater than 300m — has traditionally required high oil prices to ensure profitability. However, the economics of some projects, with cost coming down and crude prices going up, can now challenge US shale fields.

These economic projections for offshore deep water will be welcomed by the Deep Water Drilling Contractors, many of whom are still waiting to see an upturn in both rig utilization and day rates.

Natural Gas – “Vast amounts of LNG”...Trump

After the war or words over Nordstream 2 a fortnight ago, natural gas has once again featured in the high stakes game of trade wars and tariffs that has been playing out between the US and the EU.  In a characteristic tweet that seems to be the preferred way to set foreign policy these days, President Trump tweeted on Thursday that “European Union representatives told me that they would start buying soybeans from our great farmers immediately. Also, they will be buying vast amounts of LNG!”

Whether or not Europe really does buy vast quantities of LNG remains to be seen, as currently almost every other major global market for gas is paying more than Europe, taking into account freight from the US.  With its ample supplies of Russian, Norwegian and North African gas, the US remains just one of a number of possible suppliers, and in fact, European LNG import capacity has been running at around 25% utilization. This did not stop European Commission President Jean-Claude Juncker saying that Europe would build more LNG regas terminals to handle the “vast amounts” of LNG.  In the delicate game of diplomatic positioning, which has been going on since the US announced its trade tariffs, some “artistic license” is no doubt inevitable and indeed terminals such as the one on Krk Island in Croatia, which have the potential to shift the gas balance in Eastern Europe, are of course still being pursued, with much support from the US Administration and the EU. Not only that, but in Germany, the focus on President Trumps recent dissatisfaction about Russian gas imports, plans for a first LNG import terminal are also receiving a lot of attention, with support from both state and federal government and talk of support from a government infrastructure fund.

While the US appears poised for LNG world domination, Canada remains in the shadows, with Shell announcing this week that in spite of many promising features, they and their partners in LNG Canada, planned for Kitimat in British Columbia, still need to fine tune aspects of the project to improve competitiveness.  While things are looking positive for a decision in 2018, it appears Canadian LNG still needs a little more time, though the fundamentals continue to be strong, with a vast low cost gas resource to monetize.  However, on a more positive note for Canada, this time on the East Coast, Pieridae has filed for its export licence, ironically largely based on low cost Marcellus gas making its way up from the US.

Gas has made its way onto the international stage, playing its part in the geopolitical games that were once the domain of its big brother oil.  Its days of anonymity are once and for all behind us as we continue in a world of "vast amounts of LNG".

Crude Oil – US companies continue debt reduction and hedging

First-quarter 2018 financial results for 46 US oil exploration and production companies EIA regularly tracks reveals that they used increased cash from operations to fund capital expenditures and reduce debt. Most of these companies have announced planned increases in capital expenditures from 2017 to 2018 and have hedged more oil production for 2018 and 2019.

Hedging is a risk management strategy used to smooth revenue outcomes; however, the practice cannot insulate producers from rising production expenses, which increased 26% from the first quarter of 2017 to the first quarter of 2018. Production expenses such as the cost of goods sold, operating expenses, and production taxes totaled US$24.24 per barrel of oil equivalent in the first quarter of 2018, the highest level since the fourth quarter of 2014. In addition, some of the financial hedging methods used by several companies resulted in financial losses when crude oil prices increased in the first quarter of 2018. These factors did not appear to limit the growth in cash from operations; the US$5 billion increase represented growth of 49% from first-quarter 2017.

The FT reported that ConocoPhillips, the US energy exploration and production company, swung back to big profits in the second quarter 2018, helped by rising oil prices and growing output in its US shale operations. ConocoPhillips said that while it planned to remain disciplined on spending it was raising its guidance for capital expenditure as a result of higher-than-expected oil prices.   

Alongside the stronger oil price, production in the second quarter, excluding operations in Libya, which have been affected by the conflict in that country, was up 5%. The boost to production came principally from the 37% growth in the “big three” US shale oil regions: The Permian Basin of Texas and New Mexico, the Eagle Ford, also in Texas, and the Bakken in North Dakota. Together the three regions are now producing more than 300,000 barrels of oil equivalent or just under a quarter of ConocoPhillips output. 

Most of the Majors and large independents are following a similar trend by incorporating flexible, onshore US tight oil/gas into their global portfolio, with BP purchasing a US$10 Billion package of predominantly liquids rich assets from BHP. 

WTI crude oil spot prices averaged US$68.07 a barrel in the second quarter of 2018, a year-over-year increase of US$19.92 a barrel (41% increase). Higher crude oil prices and continued increases in US crude oil production suggest second-quarter 2018 financial results for companies could expect to show higher cash from operations.

Financial results for the second quarter of 2018 will be released in August for most of the US focused players and will be keenly scrutinized for ability to lock in value as well as volume growth.  Increased share buy-backs are already been reported as a means of delivering shareholder returns over and above those from field operations.

Weekly Recap

Drilling Activity

Source: BHGE Rotary Rig Count

Total US rig count (including the Gulf of Mexico) stands at 1048, up 2 this week. The horizontal rig count stands at 922, flat this week. US rig activity has shown nil growth for 9 of the last 10 weeks and is up just 9% above last year’s total.

Compared to a November 2014 figure of 1,876 active rigs, the current level is just above 50% of the 2014 high.

Crude Oil Price

Brent, the global benchmark for oil, increased US$1.29 to US$74.60 a barrel, reflecting a gain of 1.76% on the week.

WTI crude fell US$0.52 to US$69.48 a barrel, down 0.74% on the week.

US Crude Oil Supply and Demand

Sources: EIA Weekly Update and GCA Analysis

US crude oil refinery inputs averaged 17.3 million barrels per day, with refineries at 93.8% of their operating capacity last week. This is 46,000 barrels per day more than the previous week’s average.

US gasoline demand over the past four weeks was at 9.7 million barrels, down 0.5% from a year ago. Total commercial petroleum inventories decreased by 9.7 million barrels last week.

US crude imports averaged 7.8 million barrels per day last week, down by 1,296,000 barrels per day from the previous week. Over the last four weeks, crude oil imports averaged 8.3 million barrels per day, 6.1% more than the same four-week period last year.

US crude exports averaged 2.683 million barrels per day last week, an increase of 1,222,000 barrels per day from the previous week. Over the last four weeks, crude oil exports averaged 2.127 million barrels per day, 147% more than the same four-week period last year.

Crude oil inventories decreased 6.1 million barrels from the previous week. The crude stored at Cushing (the main price point for WTI) decreased 1.2 million barrels; total stored is 23.7 million barrels (~26% utilization).



July 27, 2018

P. Kevin Galvin

Facilities/Cost Engineer - kevin.galvin@gaffney-cline.com
July 27, 2018

Nick Fulford

Global Head of Gas/LNG - nick.fulford@gaffney-cline.com
July 27, 2018

Ryan Pereira

Global Director – Gas & LNG - ryan.pereira@gaffney-cline.com

Signup to receive our latest articles

We're here to help