June 28, 2019

June 28, 2019

28th June 2019

Oil Drilling Activity

Onshore US drilling activity dropped 1 with a total active count of 938 rigs; those targeting oil up 4, with the total at 793. Across the three major unconventional oil basins, the oil rig count was flat, with Permian up 2, Williston and Eagle Ford down 1. 

Sources: EIA Weekly Update and GCA Analysis

US domestic crude output decreased by 100,000 barrels per day for the third week; US crude oil production now stands at 12.1 million barrels per day.  In the Permian basin, EIA data shows wells completed has declined by 60 wells per month since last summer, while wells completed has risen by the same number, both are in the 500-550 per month range in May 2019.  This still leaves almost 4,000 Permian DUC wells to complete, so increasing production volumes to fill the new Texas pipelines coming on line this year should not be an issue if the frac fleets are ready to gear up.

US crude inventories decreased 12.8 million barrels last week, far surpassing expectations for a decrease of 2.5 million barrels. The large drawdown comes at the same time as news that the largest and oldest refinery on the US East Coast will be permanently shut after a massive fire last week caused substantial damage. Philadelphia Energy Solutions plans to shut down the 335,000 barrel per day refinery complex next month.

Carbon Management – Net-Zero targets and products become reality

This week the UK government is the first major economy that has joined other governments that comprise $14 trillion or 16% of global gross domestic product (GDP) in a pledge to reach net-zero greenhouse gas emissions by 2050, a science-based target necessary to avoid the worst effects of climate change. Net-zero targets have also been adopted by 23 major cities and 568 companies. Somewhat remarkably, some oil and gas companies have also taken such leadership positions, including Eni and Baker Hughes.

Whilst some cities such as Tokyo, where the annual G20 Summit will be held on Sunday, and companies such as Shell have yet to commit to this level of emissions reduction, they have this week entered into a milestone net-zero agreement of their own; the world’s first carbon neutral LNG cargo. To achieve this, nature-based carbon credits are being used to compensate the full lifecycle CO2 emissions – from exploration, production, liquefaction, transport and end use of the natural gas. According to Shell, this is a choice that they can now offer other customers.

In the April 26 Monitor, we covered the role that carbon offsets can have in Carbon Management and the news that Eni had invested in planting 20 million acres of forest in Africa to deliver their net-zero goals. The potential scale of nature-based solutions such as those that Eni are developing and Shell are now using for their products is large. According to research led by The Nature Conservancy, nature-based solutions have the potential for 11 billion tonnes of CO2 mitigation per annum. 

A sobering thought, however, is according to the IEA, fossil fuel emissions in 2018 rose nearly 2% to 33 billion tonnes of CO2e because of increased energy demand. This is a sign of things to come with increasing energy demand – some 25% increase by 2040 compared to today is expected – because of rising populations and wealth of some 2.5 billion people. However, it is clear form this new that nature-based solutions, whilst no silver bullet, can make a sizeable contribution to Carbon Management in oil and gas. Additionally, new market opportunities are developing as the world transitions to a lower-carbon energy system and this includes lower carbon – even carbon neutral – oil and gas products.

Natural Gas – Carbon offsets

The news that Shell has offered a full carbon offset on LNG supplies for Tokyo Gas and GS Energy highlights many features of the changing nature of LNG trading, and indeed the global gas sector as a whole.  Quite aside from the carbon-related features, it is another illustration of the power of the customer, and the steps that LNG sellers are willing to take to secure an outlet in what is turning out to be a difficult summer for gas sellers. With LNG now commonly being traded on a short-term basis at well under $5/MMBtu, the cost of a carbon offset, against a better price for the product, may be very good business.

Turning back to the carbon agenda, for a moment, Total, one of the other major LNG players, has been developing ways to achieve a lower carbon footprint through an offset of their corporate air travel.  After an outright travel reduction of 20%, they chose to offset the remainder through a biogas digester project in Adilabad district, India. In doing so, not only was there a reduction in greenhouse gas emissions, by harnessing methane in a useful manner, but there were also numerous health benefits from avoiding the burning of wood, and the consequent respiratory issues that accompany use of wood-fired cooking stoves indoors.  Furthermore, the bi-product from the digester can be recycled as manure, to improve agricultural productivity.

Another successful example of bio digesters being used to offset carbon is in Vietnam, where a network of 180,000 bio-digesters has been installed, with similar benefits to the project in India.

Of course, one of the debatable and sometimes confusing features of today’s carbon market are the differences between renewable energy credits (RECs) and carbon offset.  For biogas, both can be relevant.  If the biogas is being used for power generation, for example, then the project can create RECs, in which case the offset for the same MWh being generated cannot be counted, whereas for cooking or heating, the offset is valid.

Either way, biogas projects are making an increasing contribution to the supply mix for natural gas, whatever the end market.  The difference we are seeing now is that biogas plants on an industrial scale are emerging, especially in Europe and parts of the US, such as California, where carbon strategies are on the increase.  The number of small, community-based digesters in more rurally-based economies continues to grow.

All of these factors are shaping a future for gas, which complements the growing carbon reduction goals that are becoming an ever more important feature of the energy supply industry.

Crude Oil - Stocks plummet nearly 13 million Bbl as exports peak

US refiners are ramping up crude processing for the summer driving season but throughput last week was still -463,000 barrels per day below the same week in 2018. US refiners have cut crude processing by a total of -43 million Bbl so far this year compared with 2018.

Gross inputs to US petroleum refineries—also referred to as refinery runs—and crude oil production both established new volumetric records in 2018. US crude oil production, which averaged 11.0 million barrels per day in 2018, has more than doubled since 2009.

Crude oil inputs to US refineries averaged 17.0 million barrels per day in 2018, compared with 14.3 million barrels per day in 2009. During that period, operable refinery capacity increased 1.2 million barrels per day, and utilization rose from 83% in 2009 to 93% in 2018, resulting in a 2.6 million barrels per day increase in crude oil inputs.

During the same period, US crude oil imports decreased by 1.3 million barrels per day and US crude oil exports increased by 2.0 million barrels per day. Overall crude exports rose to 3.8 million barrels per day, beating its previous record of 3.6 million barrels per day in February.

Weekly Recap

Crude Oil Price

Brent, the global benchmark for oil, increased $1.68 to $66.68 a barrel, reflecting a gain of 2.58% on the week.

WTI crude rose $2.26 to $59.49 a barrel, up 3.95% on the week.

Drilling Activity

Source: BHGE Rotary Rig Count

Total US rig count (including the Gulf of Mexico) stands at 967, flat. The horizontal rig count stands at 840, down 6. US rig activity continues to show constrained growth for 51 of the last 54 weeks and is 79 rigs below (-8%) last year’s total. US shale operators continue to focus on well productivity (i.e., well completion) and operational efficiency over rig growth. Capital discipline over production growth remains the driller’s impetus. 

US Crude Oil Supply and Demand

Sources: EIA Weekly Update and GCA Analysis

Crude oil inventories decreased 12.8 million barrels from the previous week. The crude stored at Cushing (the main price point for WTI) decreased 1.8 million barrels; total stored is 51.8 million barrels (~58% utilization).

US crude oil refinery inputs averaged 17.3 million barrels per day, with refineries at 94.2% of their operating capacity last week. This was 73,000 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 2.1% from a year ago. Total commercial petroleum inventories decreased by 11.9 million barrels last week.

US crude net imports averaged 2.9 million barrels per day last week, down by 1,160,000 barrels per day from the previous week. Over the past four weeks, crude oil net imports averaged 4 million barrels per day, 32.9% less than the same four-week period last year.

US crude imports averaged 6.7 million barrels per day last week, down by 812,000 barrels per day from the previous week. Over the past four weeks, crude oil imports averaged 7.4 million barrels per day, 10.2% less than the same four-week period last year.

      

Authors

June 28, 2019

P. Kevin Galvin

Facilities/Cost Engineer - kevin.galvin@gaffney-cline.com
June 28, 2019

Nick Fulford

Global Head of Gas/LNG - nick.fulford@gaffney-cline.com
June 28, 2019

Nigel Jenvey

Global Head of Carbon Management - nigel.jenvey@gaffney-cline.com

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