May 3, 2019

May 3, 2019

3rd May 2019

Oil Drilling Activity

Onshore US drilling activity was flat with a total active count of 966 rigs; those targeting oil up 2, with the total at 807. Across the three major unconventional oil basins, the oil rig count decreased by 1, with Permian down 1, Williston down 1 and Eagle Ford up 1.

Sources: EIA Weekly Update and GCA Analysis

Total US domestic crude output increased by 100,000 barrels per day; US crude oil production accelerated to a record level of 12.3 million barrels per day. US crude inventories showed a significate increase of 9.9 million barrels last week, compared to an expected increase of 1.4 million barrels. US production and inventories is expected to help offset declines elsewhere in the world.

The US economy is so far expanding at a solid pace this year, despite fears last winter about the US-China trade war; slower global growth and higher interest rates would tip the economy into recession.

Carbon Management – Carbon capture readiness for power plants

Application of carbon capture to fossil and biofuel power plants is viewed as a critical way to achieve decarbonization at scale in the 2030s to 2050s. Two large scale integrated carbon capture, use and storage (CCUS) demonstration projects are already in operation on coal-fired power plants in North America, and a number of additional smaller scale pilot projects are in operation on natural gas and biomass power plants. CCUS technology is proven; its application in the absence of any technology breakthroughs in capture, and development of transport and storage infrastructure, is a matter of power market dynamics and societal willingness to pay for emissions reductions.

Electricity markets are changing quickly with the rise of low cost solar and wind, resulting in competitive levelized cost of energy (LCOE) with conventional generation technologies (coal, natural gas and nuclear) in certain circumstances. The additional cost of permitting and complying with various environmental regulations, coupled with higher marginal operating costs for coal and nuclear plants, is resulting in retirements. However, these intermittent renewable sources will generally reach effective grid saturation at about 30-50% penetration – where further capacity additions do not match demand profiles. The solution so far in many countries has therefore been a build out of natural gas plants – both combined cycle baseload and gas peaking plants, which can quickly follow the changes in supply and demand to fill the gap with low cost, but intermittent renewables.

However, energy storage in the form of lithium-ion and flow batteries can also quickly follow the changes in supply and demand, whilst also allowing for further renewable capacity additions, and are undergoing spectacular levels of cost reduction recently due to design improvements resulting in better energy density, cell life and system costs. LCOE competitiveness at about $200/MWh with gas peaking plants in some regions is now a possibility. With credible predictions of further technology cost and performance improvements for grid scale battery storage over the next decade that could overcome remaining system integration, reliability and resiliency concerns, this leaves carbon emissions from gas-fired power plants – albeit approximately half that of coal - as being an important residual element in decision making for which solution – gas or energy storage - is the most effective partner for renewables.

Natural gas for power is therefore now being viewed by some as more of a transition fuel – with a potentially shortening period of applicability – and new gas power plant decisions might result in premature curtailment and leave stranded assets. The carbon solutions for natural gas power are to eliminate methane emissions in the supply chain – a current emphasis of the oil and gas industry – and deploy CCUS at the power plant. Given the existing significant upfront capital costs of deploying carbon capture technology and lack of sufficient power market incentives, ‘carbon capture readiness’ is a key solution to deploy now to answer such sustainability concerns.

So what does carbon capture readiness entail? Simply put; allocation of space for carbon capture equipment, assessment of the technical feasibility of retro-fitting carbon capture equipment, and the preliminary assessment of a CO2 storage site are all that is required to mitigate investment concerns. Could the reign of natural gas in power be short lived? Natural gas power can be considered a long-term partner to renewables with carbon capture readiness.

Natural Gas – Biogas achieves a landmark

The ebb and flow of technology is a fascinating topic in itself, and even more so when applied to natural gas.  Developments such as large scale LNG started in the developed industrial economies of Europe and Asia, but much of today’s investment is in the rapidly developing economies of South Asia, Africa and Latin America.  On the other hand, biogas solutions are traveling in the other direction.  After decades of application in agriculturally based economies, Biogas is now emerging as a mainstream technology in Europe, and other regions where carbon management is becoming key.

With a thirteen fold increase in Biogas supplies to UK customers since 2017 reported by the Green Gas Certification Scheme, as many as 1m homes are now said to be supplied with this alternative to conventional gas.  In a separate development, the UK government’s Committee on Climate Change (CCC) this week published a report suggesting that as many as 10m homes could be supplied from this source by 2050 as part of a wide ranging series of changes to reach a net zero carbon outcome.

Although unrelated, the UK’s so-called “fracking tsar” Natascha Engel resigned last week, claiming that there was “no purpose” to her job, and that policy restrictions amounted to a “de facto ban”.  In her statement, she also set out a case for shale gas development in the UK as a huge opportunity, as well as a meaningful part of a carbon reduction set of policies.

Meanwhile, natural gas prices around the world continue to slide, even more so when compared to oil, so the gas industry appears to be approaching a crunch. As a low cost fuel to underpin economic growth globally, and as a transition fuel to a lower carbon future, gas is winning on all fronts.  Politically and environmentally speaking, there seem to be gathering storm clouds.  The next few years will inevitably see many changes in the sector as a result of both.  That dichotomy will be sure to drive controversy, especially with the steadily growing public activism directed towards emissions.

Crude Oil – Production at breakneck pace

The US shale oil drilling boom has started to cool as a decline in oil prices since the end of the third quarter of 2018 has lowered well boring and completion rates. The number of rigs drilling for oil in the US has fallen by more than 9% from its cyclical peak in November 2018.

The US is the biggest oil producer in the world, having overtaken Saudi Arabia and Russia last year. Looking ahead, US output could equal that of both countries by 2025, according to International Energy Agency estimates. And in January, the Department of Energy said that the US will become a net exporter of energy in 2020—something it has not achieved in almost 70 years.

The US is producing oil at a breakneck pace. This is turning up in domestic inventories, which have been building steadily over the past seven months. For the week ended April 24, oil stocks rose by 9.9 million barrels, much more than what analysts had anticipated. At 470 million barrels, total crude stocks now sit at their highest level since October 2017.

The Permian shale play in West Texas continues to see growth in oil and gas production. This month, the Permian will account for ~35% of US crude production and ~17% of natural gas supply. Oil and gas extraction in the play has more than doubled since 2016.

The Permian is also assured to become better connected to US oil and gas export facilities along the Gulf of Mexico. The pipelines are coming to help companies swamped by low prices in the region. There are at least 12 pipelines in Texas currently under construction, with almost 30 more in the pre-construction stages. Around 11,000 miles of pipe could be added. 

Weekly Recap

Crude Oil Price

Brent, the global benchmark for oil, decreased $2.72 to $70.59 a barrel, reflecting a loss of 3.71% on the week.

WTI crude fell $2.47 to $61.77 a barrel, down 3.84% on the week.

Drilling Activity

Source: BHGE Rotary Rig Count

Total US rig count (including the Gulf of Mexico) stands at 990, down 1 this week. The horizontal rig count stands at 873, flat this week. US rig activity continues to show constrained growth for 43 of the last 46 weeks and remains below (-3.8%) last year’s total. Crude prices are convincing 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

Crude oil inventories increased 9.9 million barrels from the previous week. The crude stored at Cushing (the main price point for WTI) increased 0.53million barrels; total stored is 45.2 million barrels (~50% utilization).

US crude oil refinery inputs averaged 16.4 million barrels per day, with refineries at 89.2% of their operating capacity last week. This is 137,000 barrels per day less than the previous week’s average.

US gasoline demand over the past four weeks was at 9.5 million barrels, up 1.5% from a year ago. Total commercial petroleum inventories increased by 12.7 million barrels last week.

US crude net imports averaged 4.803 million barrels per day last week, up by 100,000 barrels per day from the previous week. Over the past four weeks, crude oil net imports averaged 4.278 million barrels per day, 34.6% less than the same four-week period last year.

US crude imports averaged 7.4 million barrels per day last week, up by 265,000 barrels per day from the previous week. Over the past four weeks, crude oil imports averaged 6.8 million barrels per day, 19.2% less than the same four-week period last year.



May 3, 2019

P. Kevin Galvin

Facilities/Cost Engineer -
May 3, 2019

Nick Fulford

Global Head of Gas/LNG -
May 3, 2019

Nigel Jenvey

Global Head of Carbon Management -

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