June 8, 2018

June 8, 2018

8th June 2018

Oil Drilling Activity

Onshore US drilling activity was unchanged at a total active count of 1039 rigs; those targeting oil increased 1 with the total at 862. Across the three major unconventional oil basins, the oil rig count increased by 2 to 603, with Permian up 3, Eagle Ford flat and Williston down 1.

The expansion in US production continues; US production rose by 31,000 barrels a day to 10.8 million barrels a day. With increasing crude oil prices and rig counts over the past several months, the US EIA continues to closely monitor US crude oil production trends. The Drilling Productivity Report (DPR) provides a month-ahead projection of oil production for seven significant US shale formations that are driving US production growth.

Source: U.S. Energy Information Administration, Petroleum Supply Monthly with data for March 2018; Weekly Petroleum Status Report, with data for the week ending May 25, 2018; Short-Term Energy Outlook, May 2018; Drilling Productivity Report, May 2018

The US$10/barrel delta between Brent and WTI is sustained by the bottlenecks in pipeline capacity out of the Permian Basin to the Gulf Coast plus the need for heavier, sour crude feedstock to optimize throughput of the Complex Refineries in SE Texas and Louisiana.  US crudes are thus especially attractive to overseas buyers, with 1.1 million barrels per day exported in 2017, rising to an average of 1.86 million barrels per day in April 2018 and almost 2.1 million barrels per day in May 2018.  Key customers include China and Europe in addition to traditional demand from Canada’s eastern refineries.

Natural Gas – India to become a top 3 LNG importer

India, now the third largest energy consumer in the world after China and the US, is making its mark as a major LNG buyer. Last year’s estimates indicate that India’s natural gas consumption is about 58 billion cubic meters per annum (2.05 trillion cubic feet). As domestic gas production is not able to keep pace with increasing demand in the country, India imports close to half of the natural gas it needs, mostly as LNG. In 2017, it imported more than 19 million tonnes of LNG, making it the fourth largest LNG importer in the world, behind Japan, China and South Korea.

Before some of the recent entrants into the LNG seller space, India only had long-term LNG supply contracts with Qatar, which used to supply the vast majority of India’s LNG imports. In the past few years, however, India has leveraged the buyer’s market to sign long-term contracts with other exporters including the US, Australia and Russia. Currently, Qatar still remains the biggest supplier while US and Russia are becoming substantial to the Indian LNG market. In fact, there are long-term contracts in place between the Gas Authority of India Limited (GAIL) and a couple of US exporters, amounting to 5.8 million tonnes per annum (mmtpa) of LNG to India. Of the 5.8 mmtpa, 2.3 mmtpa has been contracted from Dominion’s Cove Point terminal, from which the first cargo was received at the Dhabol re-gas terminal in Maharashtra, India in late March. The remaining 3.5 mmtpa has been contracted from Cheniere’s Sabine Pass terminal, from which deliveries to India should be starting as soon as Train 4 at Sabine Pass begins operations.

GAIL has also made a 20-year contract with Gazprom Marketing & Trading Singapore (GMTS) to receive 2.5 mmtpa. At the Dahej import terminal in Gujarat, GAIL received its first Russian LNG cargo, originating from the Sakhalin-2 LNG terminal, on Monday this week. The contracted price of this Russian LNG is supposedly US$7/MMBtu, which seems significantly cheaper than US LNG based on GCA’s estimated prices of Cove Point LNG, at US$8.50/MMBtu delivered, and Sabine Pass LNG, at US$9.20/MMBtu delivered, if the LNG carriers take the Suez Canal route to arrive at the west coast of India. If this is the case, then India may choose to bring in more LNG from Russia than from the US in the future.

Whatever the mix, the total long-term contracted LNG between India and various exporters is at 22 mmtpa to date. This level of gas consumption in India is coming from a mere 6% gas share in India’s total energy mix. The government is planning to increase the share of gas in India’s energy portfolio to 15% by 2030, which can only mean that LNG imports will rise in India in the coming years. This scenario bodes quite well for LNG exporters, and coupled with increasing imports in China, may create a tighter market for LNG much more quickly than previously expected.

Crude Oil – US gasoline consumption

Gasoline consumption by household vehicles depends on both driving behavior (measured by vehicle miles traveled, or VMT) and vehicle fuel economy (measured in miles per gallon). Changes in gasoline prices are typically the primary factor in short-term fluctuations in gasoline expenditures, while changes in VMT and fuel economy (i.e., vehicle purchases) are more likely to influence longer-term trends.

In 2017, the total VMT for household vehicles was 2.11 trillion vehicle miles, down from the 2.25 trillion vehicle miles reported by NHTS for 2009, the previous NHTS survey year. Vehicle travel in households with only one vehicle increased from 2009 to 2017, which was the only category to do so.

US households with more than one vehicle, the average use per vehicle within a household is greatest in a two-vehicle home, where the average vehicle travels about 11,000 miles. This average declines as households add more vehicles; a six-vehicle home averages about 6,700 miles per vehicle.

Households in the United States with more vehicles not only travel more, but they often put more miles on their most-used (primary) vehicle compared with households with fewer vehicles, according to the Federal Highway Administration’s National Household Travel Survey (NHTS). Households with just one vehicle drove an average of about 11,100 miles per year, while households with more than five vehicles traveled a total of about 41,800 miles; each additional vehicle within a household had less average use. About two-thirds of households have either one or two vehicles.

Weekly Recap

Drilling Activity

Source: BHGE Rotary Rig Count

Total US rig count (including the Gulf of Mexico) stands at 1062, up 2 this week. The horizontal rig count stands at 934, up 5 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, decreased US$0.23 to US$76.90 a barrel, reflecting a loss of 0.30% on the week.

WTI crude fell US$0.53 to US$65.86 a barrel, down 0.80% on the week.

US Crude Oil Supply and Demand

Sources: EIA Weekly Update and GCA Analysis

US crude oil refinery inputs averaged 17.4 million barrels per day, with refineries at 95.4% of their operating capacity last week. This is 214,000 barrels per day more than the previous week’s average.

US gasoline demand over the past four weeks was 9.5 million barrels, down 1.1% from a year ago. Total commercial petroleum inventories increased by 15.8 million barrels last week.

US crude imports averaged 8.3 million barrels per day last week, up by 0.715 million barrels per day from the previous week. Over the last four weeks, crude oil imports averaged 7.9 million barrels per day, 4.4% less than the same four-week period last year.

US crude exports averaged 1.714 million barrels per day last week, a decrease of 465,000 barrels per day from the previous week. Over the last four weeks, crude oil exports averaged 2.052 million barrels per day, 129.8% more than the same four-week period last year.

Crude oil inventories increased 2.1 million barrels from the previous week. The crude stored at Cushing (the main price point for WTI) decreased 0.9 million barrels; total stored is 34.6 million barrels (~38% utilization).

Authors

June 8, 2018

P. Kevin Galvin

Principal Advisor - Sr. Manager Facilities/Cost Engineering Advisor - kevin.galvin@gaffney-cline.com
June 8, 2018

Nick Fulford

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

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