March 6, 2020

March 6, 2020

6th March 2020

Oil Drilling Activity

Onshore US drilling activity increased by 1 with a total active count of 768 (Y/Y decrease of 236) rigs; those targeting oil up 4, with the total at 682. Across the three major unconventional oil basins, the oilrig count increased 3, with Permian up 4, Williston down 1 and Eagle Ford flat.

Source: Baker Hughes Rig Count

US domestic crude production increased 100,000 barrels last week; crude production stands at 13.1 million barrels per day, a new peak, of which ~2.55 million barrels per day is offshore and Alaskan production.  EIA data shows that the Permian is still leading the increase in oil production, aided by substantial new oil pipeline capacity to the coast. However, as the rate of increase is slowing, with more pipelines to come, there will be excess oil send-out capacity and, hence, pressure on oil tariffs.  The same cannot be said for the Permian’s associated gas, where pipeline constraints mean Waha gas hub prices continue to oscillate around zero to $1/MMbtu.

Expectations of central bank action to counter recession fears served to support oil prices as did the US Fed’s decision to cut rates by half a percentage point in response to coronavirus-related fears. The outlook for the rest of the year is not particularly optimistic; forecasters expect global oil demand to grow by less than previously expected, all because of the coronavirus epidemic.

The February jobs report reflected much better than expected job gains and an unemployment rate back at a 50-year low, before the coronavirus outbreak escalated and threatened to weigh on economic activity.

Carbon Management / Natural Gas - A pathway for natural gas to be a destination fuel

Multinational companies from all sectors are committing to be carbon neutral by 2050.  The challenges this poses are: 1) the amount of carbon-based energy consumed; and, 2) the sources of carbon emissions. In 2018, 63,000 trillion watts of power consumed globally, 2.8 million tonnes of oil equivalent was consumed in transport, and over half the world’s carbon emissions are from non-fossil fuel sources, such as agriculture, metals, fertilizers, and manufacturing.

At the same time, emerging populations, which now consume 40% of energy, are anticipated to grow 25%, and their per capita energy use is estimated to rise 80%. This leads to power consumption possibly increasing to 120,000 trillion watts a year, doubling carbon emissions from today’s levels.

Achieving the energy transition will take place with the assistance of renewables; but even if investment in renewables double over the next 30 years, wind and solar may only reach 15% of the 2050 energy mix.

What is the answer? Natural gas. Switching from coal to gas is estimated to result in a 20% lower carbon emission than the current energy mix by 2050.  Moreover, if gas-fired generation is decarbonized, emissions savings are even greater. Power plants are under design that capture carbon from burning natural gas and use that carbon under pressure for recovery of heat, rather than water and steam. Excess carbon is sequestered or sold. With the recent clarification of Section 45Q, investment in carbon free power generation projects could prove viable to investors.

Yet, there is an ongoing narrative that natural gas is a “dirty” fuel that should no longer be used. Presidential candidates in the US have proposed to ban hydraulic fracturing to stop the production of all hydrocarbons. Substantial billion-dollar natural gas pipeline projects in the Northeast US, destined to transport natural gas from the Marcellus shale, canceled because of environmentalist activism.  Why is this?  Natural gas as a fuel source is inherently not bad – but it still produces greenhouse gas emissions, both in the supply and end use. We know by now that the heat-trapping effect of natural gas if it is released in the supply chain is substantially higher than carbon dioxide that is produced when it is combusted – so there reaches a break-even point where natural gas is no better than coal, depending on the volumes that are vented and flared or emitted via fugitive emissions.

So how can we reconcile both of these true concepts: 1) we need to transition from coal to natural gas to achieve the energy transition; and, 2) natural gas is a powerful heat-trapping source, which is possibly worse than coal? Reconciliation is possible with a holistic, value approach to carbon management along the entire natural gas value chain – production, gathering, transmission, distribution, and generation. Fugitive emissions can be eliminated with facilities and production design, and where design stops leaks must be detected on a regular basis and fixed as soon as safely possible. In oil production, flaring should be either eliminated, or as efficient as possible if it is not feasible or practical to discontinue it.

That said, a holistic methane management program’s most valuable tool is people. Process comes second – and the tools come last. Employees, leadership, investors and customers must be engaged and bought into the program. They must understand why a program exists, what success looks like, and how they individually contribute to that success. Leadership should have a vested interest in the program, and it should be transparent and understandable by all stakeholders. Only then, the potential of natural gas can be realized.

Crude Oil – Taking market share

Crude is down more than 20% since the start of the year as the coronavirus has sapped demand for oil around the world.

OPEC wants to make the largest oil-production cut since 2008, but whether it does will depend on if it can convince Russia to join the deal. The cartel indicated that it wants an output cut of 1.5 million barrels per day through June 30, on top of a 1.7-million-barrel reduction that the group agreed to in December.

The deal is contingent on Russia. It would entail OPEC members cutting 1 million barrels per day, while non-OPEC members (a group known as OPEC+ that includes Russia) would account for the additional 500,000 barrels. A meeting between OPEC members and other oil exporters is taking place on Friday March 6 with the outcome very much in the balance. (CNBC and Bloomberg reporting deal has failed, possible next meeting in June, WTI down to $42.)

Oil prices signal some doubt about the deal going through, or perhaps uncertainty about whether it will be effective in narrowing the gap between supply and demand.

OPEC offered a grave outlook for the oil market; global oil demand growth in 2020 is now forecast to be 0.48 million barrels per day, down from 1.1 million barrels per day forecast in December 2019.

Oil producers who have taken part in the cuts have had to weigh the market-share effect of cutting output versus the need to stabilize oil prices. The risk is that countries not constrained by OPEC: the US, in particular, will take market share as their rivals cut back.  Some at the OPEC+ meeting may be hoping a period of sub $45 WTI oil price will be sufficient to curtail US and other non-OPEC production, but the response time can be measured in months rather than days.

Weekly Recap

Drilling Activity

Total US rig count (including the Gulf of Mexico) stands at 793, up 3 last week. The horizontal rig count stands at 708, flat. US rig activity continues to show constraint and is 236 rigs below (-23%) last year’s total.

US Crude Oil Supply and Demand

Sources: EIA Weekly Update and GCA analysis

Crude oil inventories increased by 0.8 million barrels from the previous week, compared with expectations for a build of 3.3 million barrels. The crude stored at Cushing (the main price point for WTI) decreased 1.9 million barrels; total stored is 37.2 million barrels (~41% utilization). Total US commercial crude stored stands at 444.2million barrels (~57% utilization).

US crude oil refinery inputs averaged 15.7 million barrels per day, with refineries at 86.9% of their operating capacity last week. This was 312,000 barrels per day less than last week’s average.

US gasoline demand over the past four weeks was at 9.0 million barrels, up 1.0% from a year ago. Total commercial petroleum inventories decreased by 11.9 million barrels last week.

US crude net imports averaged 2.1 million barrels per day last week, down by 476,000 barrels per day from the previous week. Over the past four weeks, crude oil net imports averaged 2.91 million barrels per day, 19.9% less than the same four-week period last year.


March 6, 2020

P. Kevin Galvin

Facilities/Cost Engineer -
March 6, 2020

Nick Fulford

Global Head of Gas/LNG -
March 6, 2020

Nigel Jenvey

Global Head of Carbon Management -

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