June 1, 2018

June 1, 2018

1st June 2018

Oil Drilling Activity

Onshore US drilling activity climbed by 3 to reach a total of 1039 rigs; those targeting oil increased 2 with the total at 861. Across the three major unconventional oil basins, the oil rig count was unchanged; total stands at 601, with Permian down 1, Eagle Ford up 2 and Williston down 1.

The expansion in US production continues; US production rose by 44,000 barrels a day to 10.769 million barrels a day, a gain of 1.4 million barrels a day year on year, largely from onshore Lower 48 unconventional wells.

Source: BHGE Rotary Rig Count and GCA Analysis

Adding the 4.25 million barrels a day of NGL plant liquids and 1 million barrels a day of fuel ethanol then the total US liquids supply (excluding 1 million a day of refinery processing gains) is in excess of 16 million barrels a day.  The US is the largest liquids producer in the world, with a recent EIA forecast that it will average over 17.5 million barrels a day in 2019.

Natural Gas – A new member of the Shale Gas Club?

In the heyday of the North American shale gas boom, some 5 years ago now, other countries were lining up to join the elite club of shale gas producing nations.

Poland was one of the first bright spots, partly as a means to break the Russian stranglehold on that part of Europe, in terms of gas supply.  However, progress has been disappointing, a number of companies have withdrawn, or significantly scaled back their efforts, and things are on the back burner again.

France, Germany and Scotland all had some early promise, but have now succumbed to fracking moratoriums. In England, although some of the acreage in the northwest of the country shows considerable promise, the burden of planning processes, and a cautious approach by local and central government, means that it will be years before the true potential of that acreage is understood well enough to consider large scale development.

South Africa also showed early promise, but once again the geology and other factors such as water supply have conspired to push the economics beyond what can sustain the combination of well cost and performance.

China, of course, has undoubted potential for unconventional gas, and the CBM industry there is attracting subsidies to enable it to gain scale, though water shortage represents a major constraint to large scale fracking operations, for now.

However, in spite of this poor track record in exporting the North American shale gas model, it does now appear that one country, Argentina, is about to join the US and Canada as a successful shale gas producer.  The Vaca Muerta has been well understood for decades, in terms of conventional oil and gas, but for the last few years, the gas and condensate windows of the basin have attracted a great deal of development activity.  With initial production levels improving, drilling and completion costs falling and a developing supply chain, the economics of the Vaca Muerta gas are already challenging LNG imports, and it seems likely that in future years, LNG will be backed out by these increasing levels of domestic production.

With the “reverse seasonality” of the Southern Hemisphere summers occurring when the Northern Hemisphere is short of gas, and when prices rise, who knows what opportunities await those with more imaginative LNG export plans.  For those who remember just how quickly the US turned from LNG imports to LNG exports, the idea of Argentina following a similar path is not so far-fetched.

The next few years will be key in establishing exactly how far Argentina is able to follow the US and Canada in its own version of the shale gas revolution, but it is definitely a space to watch very closely.

Crude Oil – Oil stocks fall to three-year low

The world’s most closely watched grades of crude oil continued to go their separate ways Friday, with West Texas Intermediate, the US benchmark, under pressure while Brent crude, the global standard-bearer, traded higher.

Oil prices paused on Thursday as investors considered whether a rebalanced market may lead OPEC to ease its production cuts.

The premium of Brent to WTI ballooned beyond $11 a barrel on Thursday, the largest since March 2015. That spread has doubled in less than a month, as a lack of pipeline capacity in the US constrains crude output. The wider premium makes US crude exports more competitive than those linked to the Brent price, such as North Sea or West African grades of oil.

The IEA said major oil producers succeeded in their mission to rebalance the energy market and eliminated an oil glut that weighed on crude prices. Commercial crude stocks in industrialized economies have fallen to their lowest level in three years.

Commercial oil inventories for the Organization for Economic Cooperation and Development countries declined in March by 26.8 million barrels month-on-month to 2.819 billion barrels. That is 1 million barrels below the latest five-year average metric widely used to assess the rebalancing process.

Iran will likely seek to export as much oil as possible before the full bite of US sanctions set in. Tehran is already on track to post its highest crude oil exports since the nuclear sanctions were last lifted in early 2016. The country shipped 2.6 million barrels per day in April and May.

US employers added 223,000 nonfarm payrolls in May, more than expected, while the unemployment rate fell to a new 18-year low of 3.8%, according to the jobs report released on Friday. May is the 92nd straight month of job growth in the US — the longest streak ever. 

Weekly Recap

Drilling Activity

Source: BHGE Rotary Rig Count

Total US rig count (including the Gulf of Mexico) stands at 1060, up 1 this week. The horizontal rig count stands at 929, up 3 this week.

Compared to a November 2014 figure of 1,876 active rigs, the current level is above 50% of the 2014 high. The rig market is tighter than it appears because many older rigs have been scrapped, cannibalized for spare parts, or are simply unsuitable for drilling the very long wells now favored by shale producers.

Crude Oil Price

Brent, the global benchmark for oil, increased $0.14 to $77.13 a barrel, reflecting a gain of 0.18% on the week.

WTI crude fell $2.42 to $66.39 a barrel, down 3.52% on the week.

US Crude Oil Supply and Demand

Sources: EIA Weekly Update and GCA Analysis

US crude oil refinery inputs averaged 17.2 million barrels per day, with refineries at 93.9% of their operating capacity last week. This is 527,000 barrels per day more than the previous week’s average.

US gasoline demand over the past four weeks was 9.7 million barrels, up 0.8% from a year ago. Total commercial petroleum inventories increased by 1.8 million barrels last week.

On the supply side, EIA data indicated that Lower 48 crude production now stands at 10,265 million barrels per day, an increase of 20,000 barrels this week.

US crude imports averaged 7.6 million barrels per day last week, down by 0.528 million barrels per day from the previous week. Over the last four weeks, crude oil imports averaged 7.7 million barrels per day, 5.5% less than the same four-week period last year.

US crude exports averaged 2.179 million barrels per day last week, an increase of 431,000 barrels per day from the previous week. Over the last four weeks, crude oil exports averaged 2.093 million barrels per day, 125.8% more than the same four-week period last year.

Crude oil inventories decreased 3.6 million barrels from the previous week. The crude stored at Cushing (the main price point for WTI) decreased 0.6 million barrels; total stored is 35.5 million barrels (~39% utilization).

Authors

June 1, 2018

P. Kevin Galvin

Principal Advisor - Sr. Manager Facilities/Cost Engineering Advisor - kevin.galvin@gaffney-cline.com
June 1, 2018

Nick Fulford

Global Head of Gas and LNG - nick.fulford@gaffney-cline.com

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