15th March 2019
Oil Drilling Activity
Onshore US drilling activity decreased 3 with a total active count of 1001 rigs; those targeting oil down 1, with the total at 833. Across the three major unconventional oil basins, the oil rig count increased by 3, with Permian down 1, Williston up 3 and Eagle Ford up 1.
EIA reported last week’s total US domestic crude output at 12.0 million barrels, a drop of 100.000 barrels per day. Their data also showed that crude oil inventories decreased by 3.9 million barrels last week, compared to forecasts for a stockpile build of 2.7 million barrels, after a gain of 7.1million barrels in the previous week. With refiners starting to come out of maintenance, OPEC+ cuts starting to kick in, and Venezuelan crude imports dropping, a future with more draws in the coming weeks is likely.
Dry gas production held steady at 88.3 Bcfd, with a stock draw of 204 Bcf (week to March 8) leaving 1,186 Bcf in storage, 560 Bcf (32%) below the last 5 years’ average. Despite these positive indicators, Henry Hub gas prices continued to soften to $2.81/MMBtu this week as we approach the end of the heating season. Of the 91 Bcfd total demand (excluding fuel/losses), 11% was for LNG and Mexico pipeline exports.
The number of Americans filing applications for unemployment benefits increased more than expected last week, suggesting the labor market was slowing. Additionally, sales of new US homes slumped 6.9% in January, a possible sign that buyers paused during the government shutdown.
Carbon Management – The adoption of carbon pricing in oil and gas
The Kyoto Agreement in 1992 (effective 2008-2012) and its Doha amendment in 2012 (effective 2012-2020), have now been superseded by the milestone Paris Agreement in 2015 for implementation of more stringent governmental commitments for post 2020 emissions reductions, and includes 55% of all global GHG emissions. As follow-up, governments and industries are now setting their own contribution targets and methods for reductions.
Of these, carbon pricing mechanisms (cap and trade, or taxes) are considered by many economists as being the most effective and efficient solution to combat climate change.
The latest International Panel on Climate Change (IPCC) report issued in early October 2018, lowered the threshold considered for the most severe effects of climate change from 2 deg. C to 1.5 deg. C. It also says that heavy taxes or prices on CO2 emissions ranging from $135 to $5,500 per ton of carbon dioxide pollution in 2030 would be required to achieve the levels of reduction required.
While carbon pricing mechanisms today cover 20% of emissions, average prices at $7 per tonne CO2 equivalent ($/t CO2e) have not been effective. Disparities in implementation between countries (prices range between $1-139/t CO2e) and potential for increased costs of living, means that implementing effective carbon price mechanisms is therefore thwart with political turmoil, as recently evidenced in France with the Gilets Jaune protests on fuel tax increases. Solutions to these and other issues have been proposed with economy wide application, revenue neutral rebates to low income households, border adjustment taxes, and incentives for domestic manufacturing businesses. However, coordinating an orderly development of a fair and equitable regional, national and global market to a level that can alone achieve the GHG reduction targets and commitments is a monumental task.
Adopting carbon pricing in the oil and gas industry also needs to be implemented with care. Whilst most major oil and gas companies include carbon pricing in their operated emissions, a $100/te CO2 carbon price applied to the full value chain would put an extra $1 on a gallon of gasoline and would double the price of natural gas at the Henry Hub. We therefore need to carefully implement carbon solutions that are well below this carbon price threshold to ensure oil and gas remains an affordable and secure form of energy for many decades to come. The good news is that there are many carbon solutions that can achieve this. They include energy efficiency, fugitives and flaring reduction, waste heat recovery, use of low carbon energy for power and heat, and ultimately carbon capture, use and storage (CCUS). Adoption of these solutions by the oil and gas industry has not been used in climate and energy modeling work, and provide a cost-effective way for our industry to manage carbon and climate risks.
Do you know what the lowest-cost and highest-volume carbon solutions are for your business? Assessment can be done efficiently and effectively at a country, corporation, business unit, or asset level with the right skills and experience.
Natural Gas - Activity heating up in the sunny Eastern Mediterranean
GCA participated in the Eastern Mediterranean Gas Conference (EMGC 2019), held last week in Cyprus, and opened by the Minister of Energy, Commerce and Industry, H. E. Yiorgos Lakkotrypis. In his opening address, the Minister reflected on the recently announced gas discovery made at the Glaucus-1 well in Block 10 offshore Cyprus, which at some 5-8 Tcf GIIP as announced by ExxonMobil, is one of the largest global finds in the past two years. Other recent Cypriot finds such as Calypso and Aphrodite, as well as increased success in the waters offshore Egypt, Israel and Greece were also discussed. In tandem with this, a key focus of the forum was the role of gas in providing a cleaner, reliable and more affordable source of energy supply in the region and more widely in Europe, and to this extent an update was provided on the planned LNG import project in Cyprus.
GCA outlined the potential for Cyprus to emerge as a regional gas hub. This included sharing learnings on other advisory projects, especially in other parts of the world where more creative solutions have been required to unlock the potential for successful and sustainable gas monetization.
Examples of such creative solutions included:
Egypt - from exporter to importer, back to exporter
Australia - world’s largest export capacity by end 2019, but where at least four more LNG import projects are under consideration
Argentina - set to become a small scale seasonal exporter
Indonesia - historical top five LNG exporter needing LNG imports
USA - going full cycle from importer to top three global exporter by end 2019
Aside from the challenge of gas monetization, the conference also covered regional geopolitical collaboration, including the recently announced formation of the Eastern Mediterranean Gas Forum (Cyprus, Greece, Italy, Israel, Egypt, Palestine and Jordan), aiming to work together to exploit the region’s resources. There was also discussion from the service industries, as well as announcements of plans to enhance oil and gas port facilities in Cyprus to facilitate the higher regional activity.
There is certainly an increasing interest in the Eastern Med region, but for Cyprus, or any another country, to emerge as a “gas nexus” in the next 5-10 years there will need to be a coordinated approach. These will include development of substantial gas resources, pipeline infrastructure development, exports/imports (pipeline and LNG), and storage (to create security of supply and optionality and arbitrage opportunities for traders).
As summer approaches in the Eastern Mediterranean and the mainstay of tourism starts to ramp up, new and emerging gas development opportunities in the region are once again in the sunny spotlight. Come rain or shine, one thing is for certain, for the gas resources to be monetized they need not only be plentiful, but more importantly economic and competitive in an increasingly commoditized global gas and LNG world.
GCA has been heavily involved in advisory work in Cyprus, Egypt and the broader Eastern Mediterranean region across the upstream, midstream and LNG, and downstream power generation segments of the oil and gas value chain. If you would like to discuss how we can help in your gas monetization challenges and opportunities, please contact firstname.lastname@example.org.
Crude Oil – OPEC spare capacity growth
Despite expectations of a tighter market compared with last month’s forecast, EIA expects rising global inventories and OPEC spare capacity to limit upward price pressure. Brent crude oil spot prices averaged $64 per barrel in February 2019, up $5 from January 2019 and only about $1 lower than at the same time last year. The price increases reflect falling global inventories, which EIA estimates fell by 1.4 million barrels per day in February. EIA revised its 2019 forecast Brent crude oil price up by nearly $2 to $63 per barrel. The 2020 forecast Brent crude oil price remained unchanged at $62 per barrel.
The US production forecast is lower in both 2019 and 2020 compared with the EIA’s February forecast, despite an expected increase in pipeline capacity to move crude oil out of the Permian region. The US active oil rig count reached a 10-month low of 833 rigs as of March 15, suggesting the rate of US crude oil production growth should slow further. The EIA still forecasts US crude oil production to increase by 1.3 million barrels per day in 2019 and 0.7 million barrels per day in 2020.
Venezuela’s crude oil production in February totaled 1.1 million per day, down from 1.2 million barrels per day in January. The decline is a result of both the continuing trend of decreasing Venezuelan production because of the mismanagement of the country’s oil industry and, more recently, US sanctions that were put in place in late January.
Although lower forecast OPEC production puts upward pressure on crude oil prices, OPEC spare capacity will increase. Increasing spare capacity tends to moderate upward price pressures. OPEC spare crude oil production capacity to increase from an average of 1.5 million barrels per day in 2018 to 2.1 million barrels per day in 2019 and 2.6 million barrels per day in 2020.
Crude Oil Price
Brent, the global benchmark for oil, increased $1.93 to $66.23 a barrel, reflecting a gain of 3.00% on the week.
WTI crude rose $2.96 to $57.82 a barrel, up 5.40% on the week.
Total US rig count (including the Gulf of Mexico) stands at 1026, down 1 this week. The horizontal rig count stands at 907, an increase of 3 this week. US rig activity continue to show constrained growth for 37 of the last 39 weeks and stands 4% above last year’s total. Crude prices continue to push US shale operators to focus on well productivity (i.e., well completion) and operational efficiency over rig growth.
US Crude Oil Supply and Demand
US crude oil refinery inputs averaged 16 million barrels per day, with refineries at 87.6% of their operating capacity last week. This is 30,000 barrels per day more than the previous week’s average.
US gasoline demand over the past four weeks was at 9.0 million barrels, down 2.2% from a year ago. Total commercial petroleum inventories decreased by 10.2 million barrels last week.
US crude net imports averaged 4.2 million barrels per day last week, flat from the previous week. Over the past four weeks, crude oil net imports averaged 3.718 million barrels per day, 36.5% less than the same four-week period last year.
US crude imports averaged 6.7 million barrels per day last week, down by 255,000 barrels per day from the previous week. Over the past four weeks, crude oil imports averaged 6.8 million barrels per day, 9.0% less than the same four-week period last year.
Crude oil inventories decreased 3.9 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 46.9 million barrels (~52% utilization).
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