March 29, 2018

March 29, 2018

29th March 2018

Oil Drilling Activity

Onshore US drilling activity decreased by 2, and stands at 977.  Rigs targeting oil decreased by 7, standing at 797. No significate oil rig growth has occurred over the past 10 months, while oil production growth continued over that same period. Without oil rig growth, oil production growth will become more dependent on enhancing well productivity. 

The EIA reported this week that US production edged up by 26,000 barrels a day to 10.433 million barrels a day—a fresh weekly record. 

Source: EIA Weekly Update and GCA Analysis

Natural Gas – USA: It's official, a net exporter

Although not a surprise, seeing the data published by the EIA, which showed that the US was a net exporter of gas in 2017, brought home what a significant historical landmark this is.  Since 1957, America has needed to import gas, much of it from Canada over the last six decades, and only a few years ago, policy makers and industrial buyers were fretting over where to turn next for this key fuel for the US economy.

In historical terms, it is not simply the reversal that is significant; it is the speed with which this massive shift in energy geopolitics has occurred, and the reverberations that are still running around the world as a result.  The global gas industry, for which the LNG sector is effectively the market balancing mechanism, is continuing to adjust on an almost weekly basis to the scale of US exports, set to grow so significantly in the next 18 months.

The speed of change is captured in the EIA chart above, with Alaskan LNG exports the only previous evidence of any kind of link, and then only with the only one of the US States on the continent without gas links to the other 48.  With the exponential rise in the last two years or so, such a sudden change will continue to resonate.

As Houston becomes a major LNG capital, joining its much better established brethren in London and Singapore, there will continue to be major adjustments, some of which were highlighted in last week’s Monitor

Already we have seen the emergence in Houston of LNG trading groups, international law firms seeing the need for a Houston office, as well as a host of banking and finance enterprises springing up from this newly discovered source of business.  While many of these newly emerging entities will forge innovative and unmapped routes to success in LNG, there will also be value in the decades of experience that some of the more traditional entities in Europe and Asia have learned from.

The battle between Houston-based innovation in LNG, and London- and Singapore-based tradition and experience, will be one of the most interesting and closely followed stories of 2018 and 2019, and all that can be concluded as of today is that there will be one certain group of winners: LNG customers and, most especially, those who are only now entering the business.

Crude Oil – Keeping the deal thru 2018?

OPEC and its allies look set to keep their deal on cutting oil supplies for the rest of 2018, although some producers are starting to worry that high prices may be giving too much stimulus to rival output. OPEC, Russia and several other non-OPEC producers have curbed output since January 2017 to erase a global glut of crude that had built up since 2014. They have extended the pact until the end of 2018, and meet on June 22 to review policy.

The deal has boosted Brent oil prices, which topped US$71 a barrel this year for the first time since 2014. However, it has also encouraged an increase of US shale oil production, fueling a debate about how effective the curbs will be going forward.

The deal has delivered an even bigger cut than called for, mainly because of a drop in Venezuelan production, where output is collapsing because of an economic crisis. Compliance with the deal reached an unprecedented 138% in February.

Venezuela's crude oil production has been on a downward trend for two decades, but has experienced significant decreases over the past two years. Crude oil production in Venezuela fell from an annual average of 3.2 million barrels per day in 1997 to an average of 2.4 million barrels per day in 2015. More recently, Venezuela's crude production fell from a monthly average of 2.3 million barrels per day in January 2016 to 1.6 million barrels per day in January 2018.

A combination of relatively low global crude oil prices and mismanagement of Venezuela’s oil industry has led to the accelerated decline in production. Venezuela's economy is extremely dependent on oil revenue, so the production declines are having a negative impact on the country's finances as well.

Weekly Recap

Drilling Activity

Total US rig count (including the Gulf of Mexico) stands at 993, down 2 this week with rigs targeting oil down 7. The horizontal rig count stands at 870, unchanged this week.

The total number of active onshore rigs decreased by 2 and stands at 977.  Compared to a November 2014 figure of 1,876 active rigs, the current level is slightly 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.

Across the three major unconventional oil basins, the oil rig total decreased 2; stands at 560, with Permian down 2, Eagle Ford and Williston flat. 

Source: BHGE Rotary Rig Count

Crude Oil Price

Brent, the global benchmark for oil, decreased US$0.28 to US$69.24 a barrel, reflecting a loss of 0.40% on the week.

WTI crude dropped US$0.49 to US$64.29 a barrel, down 0.76% on the week.

US Crude Oil Supply and Demand

Sources: EIA Weekly Update and GCA Analysis

US crude oil refinery inputs averaged 16.8 million barrels per day, with refineries at 92.3% of their operating capacity last week. This is 18,000 barrels per day more than the previous week’s average.

US gasoline demand over the past four weeks was 9.4 million barrels, up 0.5% from a year ago. Total commercial petroleum inventories deceased by 1.6 million barrels last week.

On the supply side, EIA data indicated that total domestic crude production increased 26,000 barrels to 10,433 million barrels a day. The Lower 48 crude production now stands at 9.917 million barrels per day, an increase of 25,000 barrels this week.

US crude imports averaged 8.1 million barrels per day last week, an increase of 1.1 million barrels per day from the previous week. Over the last four weeks, crude oil imports averaged 7.7 million barrels per day, 4.0% less than the same four-week period last year.

US crude exports averaged 1.578 million barrels per day last week, an increase of 5,000 barrels per day from the previous week. Over the last four weeks, crude oil exports averaged 1.534 million barrels per day, 93.3% more than the same four-week period last year.

Crude oil inventories increased 1.6 million barrels from the previous week. The crude stored at Cushing (the main price point for WTI) increased 1.8 million barrels; total stored is 31.2 million barrels (~35% utilization).

Authors

March 29, 2018

P. Kevin Galvin

Principal Advisor - Sr. Manager Facilities/Cost Engineering Advisor - kevin.galvin@gaffney-cline.com
March 29, 2018

Nick Fulford

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

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