March 8, 2019

March 8, 2019

8th March 2019

Oil Drilling Activity

Onshore US drilling activity decreased 11 with a total active count of 1,004 rigs; those targeting oil down 9 (a decrease of 1.07%), with the total at 834. Across the three major unconventional oil basins, the oil rig count increased by 1, with Permian down 1, Williston up 3 and Eagle Ford down 1. 

Sources: EIA Weekly Update and GCA Analysis

EIA reported last week’s total US domestic crude output flat at 12.1 million. The EIA data also showed that crude oil inventories increased by 7.1 million barrels last week, compared to forecasts for a stockpile build of 1.2 million barrels, after a loss of 8.6 million barrels in the previous week.

US February's job growth slowed to a crawl with just 20,000 payrolls added, but it may have been more the result of temporarily sluggish growth and not a sign of recession.

Carbon Management – Securing confidence in continued oil and gas investment

Looking in the rear view mirror is always a good practice to reduce risks whilst driving. It is something one learns to do a lot more of after taking defensive driving courses and living in Houston, but also important working in Carbon Management for the oil and gas industry.

The 1973 oil crisis was the first tipping point in the energy transition that is here today. Many oil net import countries faced resulting economic crises, and so turned instead to developing alternative energies to manage future price fluctuations and ensure future energy security. Man-made global warming and climate change concerns then added extra emphasis in the 1980s and resulted in the 1992 Kyoto agreement. This has led to the ground-swell of investment that has now delivered massive cost reduction in renewables, quicker and greater than anyone expected. Now the recent 2015 Paris agreement calls for more stringent governmental commitments for post 2020 emissions reductions and covers 55% of all global Greenhouse Gas emissions.

There are signs beginning to surface that energy investors could be worried about oil and gas sector risks because of both shorter-term price fluctuations and longer-term carbon policy impacts. Reduced available capital is an existential threat that could cause a shortfall in oil and gas supply when global energy demand is increasing, and resultant increases in prices along with unabated carbon emissions could threaten our long-term social license to operate. This is why Carbon Management can secure confidence in continued oil and gas investment, and also allow new forms of low carbon and sustainable energy investors to consider investing in carbon solutions for oil and gas that are lower risk and higher reward than their current renewable energy portfolios.

Many consider Carbon Management to be solely an additional cost to continued oil and gas production, and therefore should only be implemented for regulatory compliance. However, have you considered the additional value that Carbon Management can bring to oil and gas? We consider it to be a fundamental way we need to consider how to do business now, to ensure we prevent a future crisis that is looming in our future.

Natural Gas – Shortages and surpluses

This week it would be wrong to let this bulletin go by without drawing attention to the record prompt price which briefly pushed natural gas prices at the Sumas hub (at the border of Canada and the US in the pacific Northwest) to US$220/MMBtu.  This was not surprisingly a record for North American gas prices; and, when put in terms of US$/Bbl of oil, it equates to over US$1,300 per barrel.  Of course, the circumstances were somewhat unique, in that supply has been disrupted for several months because of pipeline issues and the need for integrity testing in the area.  However, it does underline what has been the case for many years now, which is that finding gas is relatively easy these days; its taking it to market that remains a real challenge.

In the same way that Sumas gas consumers had to pay a king’s ransom for their gas, Permian producers continue to pay a king’s ransom for capacity to take their gas away from the Waha hub, and so we have a bizarre reversal where gas is being flared in one corner of the US, while others are paying huge prices in another.

The same is starting to ring true globally, where the Permian efforts to find gas outlets are being replicated on a national scale.  With Golden Pass and Venture Global’s LNG export projects seemingly reaching critical points this last few weeks, Jordan Cove seems to be striving for its regulatory clearances once again. Next Decade have entered into a lease for land on which to build, and the US’ only floating project, Delfin LNG, has received a boost lately, from a sense that the US-China trade dispute may be starting to see compromises on both sides, including the LNG tariffs.

For anyone who has spent a career in natural gas, and can remember the debates and hand-wringing over whether gas was too precious a fuel to use for power generation, these latest developments show how far the industry has come.  Far from the world running out of gas, the challenge has been moving it from places that have too much, to places where it is scarce.

Crude Oil – Crude demand is wobbly

The oil market is well supplied and demand is wobbly at best and UD crude production is at an all-time high. EIA reported Wednesday that storage was up 7 million barrels last week and stands at 27 million above last year level.

Crude prices dropped about 3% on Friday, prompting a turn lower for the week, as a downbeat employment report from the US and trade data from China reinforced worries about global economic growth, and energy demand.

Crude prices have been hit by surging US crude production, which, according to the EIA, held at an all-time high of 12.1 million barrels per day last week. The rise in North American production undermines supply cuts led by the OPEC and its non-member allies, including Russia, that had helped crude prices rise about 20% this year.

OPEC and its partners have pledged to curb output by 1.2 million barrels per day, and they are likely to push back their decision whether to extend the production agreement to June from April.

Chevron and Exxon Mobil released rival Permian basin projections on Tuesday, pointing to increased shale oil production in the largest US oil basin. The increases would bolster the pair as the dominant players in the West Texas and New Mexico field, with one-third of Permian production potentially under their control within five years.

Weekly Recap

Crude Oil Price

Brent, the global benchmark for oil, decreased US$1.86 to US$64.30 a barrel, reflecting a loss of 2.81% on the week.

WTI crude fell US$2.27 to US$54.86 a barrel, down 3.97% on the week.

Drilling Activity

Source: BHGE Rotary Rig Count

Total US rig count (including the Gulf of Mexico) stands at 1,027, down 11 this week. The horizontal rig count stands at 904, a decrease of 7 this week. US rig activity continues to show constrained growth for 36 of the last 38 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

Sources: EIA Weekly Update and GCA Analysis

US crude oil refinery inputs averaged 16 million barrels per day, with refineries at 87.5% of their operating capacity last week. This is 100,000 barrels per day more than the previous week’s average.

US gasoline demand over the past four weeks was at 8.9 million barrels, down 2.0% from a year ago. Total commercial petroleum inventories decreased by 0.4 million barrels last week.

US crude net imports averaged 4.198 million barrels per day last week, up by 1.64 million barrels per day from the previous week. Over the past four weeks, crude oil net imports averaged 3.629 million barrels per day, 39.2% less than the same four-week period last year.

US crude imports averaged 7.0 million barrels per day last week, up by 1,084,000 barrels per day from the previous week. Over the past four weeks, crude oil imports averaged 6.7 million barrels per day, 11.7% less than the same four-week period last year.

Crude oil inventories increased 7.1 million barrels from the previous week. The crude stored at Cushing (the main price point for WTI) increased 0.8 million barrels; total stored is 47.5 million barrels (~53% utilization).

Authors

March 8, 2019

P. Kevin Galvin

Facilities/Cost Engineer - kevin.galvin@gaffney-cline.com
March 8, 2019

Nick Fulford

Global Head of Gas/LNG - nick.fulford@gaffney-cline.com
March 8, 2019

Nigel Jenvey

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

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