24th May 2019
Oil Drilling Activity
Onshore US drilling activity was down 4 with a total active count of 957 rigs; those targeting oil down 5, with the total at 797. Across the three major unconventional oil basins, the oil rig count decreased by 1, with Permian down 3, Williston and Eagle Ford each up 1.
US domestic crude output increased by 100,000 barrels per day; US crude oil production still below the record level of 12.3 million barrels per day reached three weeks ago. US crude inventories showed a significant increase of 4.7 million barrels last week, compared to an expected increase of 1.8 million barrels. EIA data shows Permian April monthly wells drilled is down 58 from the peak of 613 drilled last October, yet uncompleted wells increased 47 during the month. In total, 676 Permian DUC wells have been added since October 2018. Roll on those pipeline expansion projects for the Permian in the next few months and these trends ought to be reversed.
US gasoline prices this Memorial Day weekend are nearly the same as last year’s.
Carbon Management – Big brother is watching
Measuring, verifying and accounting for GHG emissions is becoming a regulated necessity and important social license to operate consideration for fossil fuel producers in many countries. However, what about those that are not currently regulated to do so, or are not facing social pressure? Well, the reality is that big brother is now watching, and with the birth of his siblings, there will soon be no escape.
The world’s first satellite system to identify specific sources of greenhouse gas emissions is circling the earth. It is currently comprised of a satellite called Tropomi launched by the European Space Agency (ESA) and another satellite called Claire launched by GHGSat Inc., a Montreal-based company. Tropomi has a resolution of about a square mile on Earth —an area that lets it see the emissions from a specific city, whilst Claire can focus on an area as small as 164 square feet. Between them, they can home in on facilities to determine their emissions. This system with orbital satellites traveling at over 4 miles per second will be able to map emissions every 24 hours across the globe.
Whilst one set of eye’s can only do so much, there are more than a dozen additional satellites being planned for launch by governments and companies over the next few years to truly track global greenhouse gas emissions. These new satellites have lower costs, better performance and higher quality data. Examples include GHGSat Inc.’s next two satellites, MethaneSat from the Environmental Defense Fund, which will launch in 2021, and GeoCarb from NASA.
However, it does not stop there. There are “tiered systems” of sensors also being developed that are carried by aircraft, drones and weather balloons, along with ground-based emissions sensors to monitor large industrial complexes. With data being collected from all these systems and sensors, along with machine learning and artificial intelligence being able to interrogate and analyze it, the regulatory and environmental community will be able to measure, verify and account for greenhouse gas emissions from any facility on the earth.
These satellites also give companies a powerful tool to monitor exactly what is going on, and to react accordingly. Reducing methane emissions goes beyond critically important environmental and social benefits, as keeping more product in the pipe is just good business.
The oil and gas industry only has a few years left to systematically manage our carbon emissions, and it can already make financial sense to act.
Natural Gas – Will there be a window for Gas to Liquids?
Every time natural gas prices drop significantly below that of crude oil, attention once more turns to the question of gas-to-liquids. The question typically posed at times like this is whether the time has come to look for ways to monetize natural gas in the guise of liquid fuels more traditionally derived from oil.
Gas to Liquids, unlike LNG, involves some very complex chemistry, and some fundamental inefficiencies that typically see around half the gas being burned in the process of creating long, complex hydrocarbon molecules. The plants can be complex to operate, and plotting a commercial path through the choice of product, from low Sulphur diesel, naptha, gasoline, high quality lubricants and other possibilities is exceptionally challenging.
However, with LNG delivered prices currently hovering around the $5/MMBtu range (equivalent to around $30/Bbl in oil terms) in both Europe and Asia, the gas/oil arbitrage in recent weeks has been sufficiently high to rekindle the debate, mainly from gas suppliers looking for higher revenues to underpin upstream investments.
Depending on where LNG delivered prices finally stabilize in the longer term, by the time freight, liquefaction and fuel are factored in, the netback to the wellhead, and the returns at the gas producing asset start to look quite challenged in many locations. However, as this week’s sharp fall in crude oil reminds investors, GTL plants are very high capital items, relying on a continuing high differential between oil and gas for years, if not decades. Carbon implications, and how they might impact on GTL economics, are also another major uncertainty today, in the eyes of investors.
Perhaps the biggest benefit of higher oil prices, and an increasing carbon overhead, is the smaller scale use of GTL technology to capture flare gas. A combination of flaring limitations, carbon taxes, and other regulatory mechanisms can start to make flare gas capture, both through GTL and smaller scale LNG, commercially attractive, and environmentally beneficial at the same time.
While the jury is out on large scale GTL, other than in niche markets, using these relatively expensive technologies to make clean-burning and high value liquid fuels from natural gas being flared is making more and more commercial sense.
A further complication for midstream/downstream GTL investment is the continuing expansion of Natural Gas Liquids production around the globe. EIA’s latest Short Term Outlook is forecasting US NGL production in 2020 to be one million barrels a day higher than in 2018, an increase of 22% most of it destined for export and competing with existing naptha and gasoline projects.
Crude Oil – Downside risks to crude prices
The flare-up in trade tensions between the world’s largest economies, US and China, has raised doubt about near-term hunger for crude if a tariff conflict remains unresolved for a protracted period.
US oil benchmark (WTI) tumbled, taking the price to its lowest level since late March. WTI prices are tracking towards their largest weekly declines in 12 weeks, amid the lack of progress on trade between the US and China, paired with the larger than expected stockpile build in the US.
Embargoes are rarely effective in compelling a change in behavior because they create substantial incentives to circumvent the blockade by switching trade, building indigenous capacity or changing technology.
The US announced sweeping restrictions on the purchase of telecommunications equipment from, or the sale of advanced technology to, Huawei as part of the broad-ranging trade dispute with China. China could retaliate by restricting exports of rare earths and other critical metals to the US, and China’s president this week paid a high-profile visit to a rare-earth processing plant.
Neither strategy is likely to work in the longer term, though they may create some short-term disruption for both countries and their companies until supply chains can be re-routed. Experience suggests supply chains and technology are surprisingly flexible, more flexible than observers give them credit for at the time, and supply restrictions are rarely an effective form of diplomatic pressure.
A sharper-than-expected slowdown in global economic activity growth due to protectionism and a higher trade-weighted USD are key downside risks to crude price.
Crude Oil Price
Brent, the global benchmark for oil, decreased $3.82 to $68.86 a barrel, reflecting a loss of 5.26% on the week.
WTI crude fell $4.24 to $58.93 a barrel, down 6.71% on the week.
Total US rig count (including the Gulf of Mexico) stands at 983, down 4 this week. The horizontal rig count stands at 863, down 3 this week. US rig activity continues to show restraint for 46 of the last 49 weeks and is 69 rigs below (-6.5%) last year’s total. Crude prices are trending lower and pressuring US shale operators to focus on well productivity (i.e., well completion) and operational efficiency over rig growth. Capital discipline over production growth is the driller’s present behavior.
US Crude Oil Supply and Demand
Crude oil inventories increased 4.7 million barrels from the previous week. The crude stored at Cushing (the main price point for WTI) increased 1.3 million barrels; total stored is 49.1 million barrels (~55% utilization).
US crude oil refinery inputs averaged 16.6 million barrels per day, with refineries at 89.9% of their operating capacity last week. This was 98,000 barrels per day less than the previous week’s average.
US gasoline demand over the past four weeks was at 9.4 million barrels, up 1.1% from a year ago. Total commercial petroleum inventories increased by 16.8 million barrels last week.
US crude net imports averaged 4.021 million barrels per day last week, down by 244,000 barrels per day from the previous week. Over the past four weeks, crude oil net imports averaged 4.365 million barrels per day, 25% less than the same four-week period last year.
US crude imports averaged 6.9 million barrels per day last week, down by 669,000 barrels per day from the previous week. Over the past four weeks, crude oil imports averaged 7.2 million barrels per day, 9.4% less than the same four-week period last year.
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