November 15, 2019

November 15, 2019

15th November 2019

Oil Drilling Activity

Onshore US drilling activity decreased by 9 with a total active count of 784 (Y/Y decrease of 274) rigs; those targeting oil down 10, with the total at 674. Across the three major unconventional oil basins, the oilrig count was down 5, with Permian down 4, Williston down 1 and Eagle Ford flat.

Source: Baker Hughes Rig Count

US domestic crude output increased for the first time in five weeks, up 200,000 barrels per day. Crude production now stands at a peak of 12.8 million barrels per day.

Crude stockpiles increased; inventories gained 2.2 million barrels compared with expectations for a 1.6 million-barrel gain. Crude stocks at the Cushing, Oklahoma delivery hub for US crude decreased for the first time in six weeks, down 1.2 million barrels last week.

The increase extended a string of seven weekly inventory builds over the last eight weeks that added a total of more than 40 million barrels of oil to US commercial inventories of crude oil.

Carbon Management – A pea-soup recipe?

The concept behind a carbon tax dates back a hundred years to the time when London was experiencing severe air pollution in the form of smog, caused by coal burning in factories and residences. These “pea-soupers,” as the smog events were called owing to the color and thickness of the fog, had a social cost. Because of the smog, poor visibility during commutes led to accidents, vulnerable people became sick and sometimes died, clothes and furniture needed to be cleaned and perhaps replaced, etc., all of which were costs that the general public incurred. In economics terminology, this social cost is considered a negative externality, which simply put is an undesirable outcome to the general public from a market activity.

In 1920, the British economist Arthur Cecil Pigou addressed the occurrence of such negative externalities with the concept of the posthumously named Pigouvian tax, which is a tax to the producers of the market product (coal in that instance) causing the externality. The implementation of a Pigouvian tax forces the producer to pay for the social cost, thus reducing the total output in the market to a socially optimal level. The carbon tax, which is a critical point of policy discussion globally in the transition of the energy industry to a low-carbon future, is an example of a Pigouvian tax. Economists of all political affiliations generally agree that a carbon pricing mechanism is a simple and effective market-driven approach to reduce greenhouse gas emissions.

As many governments and regulatory bodies have already implemented or are considering a carbon price, it is of particular relevance to energy-intensive, and hence greenhouse gas or carbon-intensive, industries such as oil and gas, cement, steel/iron, and of course power generation. In the interest of quantifying the impact of a carbon price on oil and gas production, we have conducted a brief case study on an illustrative mature onshore field in late-life decline. With the help of Stanford University’s OPGEE tool, we were able to generate a carbon intensity profile over a 20-year operating period. The results suggest that for such an onshore field, the carbon intensity of oil production can more than double during the timeframe, especially in the presence of significant associated gas flaring. Any potential consequence for oil reserves can be as much as 20%, owing to the acceleration of the economic limit in the presence of additional costs from a price on emissions.

We have presented this case study at the 37th annual United States Association of Energy Economics (USAEE) conference that took place in Denver earlier this month, available here. A pea-soup recipe can impact your business, so if you would like to find out how a carbon price may impact the economics of your oil and gas fields, and get advice on solutions to manage this, please contact us.

Natural Gas – LNG, Jim ... but not as we know it!

The LNG industry has done well.  It has made it past its 50th birthday in the best of health, and yet times are changing.  The energy transition is causing end-users to question whether natural gas remains a sufficiently climate friendly fuel to be such a large part of the primary energy mix.  Gas has a strong case as a stepping stone to a zero carbon world; but as part of the final solution, its fossil fuel label prevents it from being part of that small and exclusive club of acceptable energy sources for the 2050s and beyond.

As every high school student knows (especially those graduating from any European educational institution), the ultimate solution to the clean energy challenge is Hydrogen.  A lesser known fact is that today, almost all Hydrogen used in industry starts life as part of a methane molecule, and has the carbon element stripped off it through some sort of reforming process.  The problem today is that for the most part, the carbon that is removed is vented or otherwise allowed to get back into the atmosphere.

The challenge for natural gas, therefore, is to establish a value chain that involves carbon capture alongside a reforming plant, and onward delivery of hydrogen to the end user, either for combustion or for use in a fuel cell.  This is, of course, the same challenge for coal, and in Australia, for example, there are pilot projects looking at coal gasification and reforming, coupled with liquid hydrogen exports to Japan in specially constructed ocean going vessels.

The equation needed for gas involves vast resources capable of being developed at reasonable cost, coupled with geology able to sequester CO2 safely and indefinitely.  Where might we find such a candidate?  Some might say that Argentina is well placed in this competition with its vast Vaca Muerta gas resources, and its traditional, largely depleted oil fields, that could be the sink for the carbon.

Could Argentina skip the LNG solution entirely and move straight to exports of liquid Hydrogen?  Science fiction, some might say, but to quote the oft spoken phrase used by Bones in Star Trek, perhaps its “LNG, Jim, but not as we know it.”

Crude Oil – Gloomy price forecast

Crude oil price dipped after the EIA reported a crude oil inventory increase for the week.

Brent crude oil spot prices averaged $60 per barrel in October, down $3 per barrel from September and down $21 per barrel from October 2018. EIA forecasts Brent spot prices will average $60 per barrel in 2020, down from a 2019 average of $64 per barrel, with West Texas Intermediate prices an average $5.50 per barrel less than Brent. EIA reports this forecast price decrease to be because of rising global oil inventories, particularly in the first half of next year.

The latest World Energy Outlook by the International Energy Agency has added gloom to the crude price picture. The authority said it expected global demand for crude oil to peak around the mid-2020s and plateau by 2030, at around 106 million barrels per day.

USA now a net Petroleum Exporter

Based on preliminary data and model estimates, EIA estimates that the US exported 140,000 barrels per day more total crude oil and petroleum products in September than it imported; and this expanded to 550,000 barrels per day in October. If confirmed in survey-collected monthly data, it would be the first time the US exported more petroleum than it imported since EIA records began in 1949. EIA expects total crude oil and petroleum net exports to average 750,000 barrels per day in 2020 compared with average net imports of 520,000 barrels per day in 2019.

Weekly Recap

Drilling Activity

Total US rig count (including the Gulf of Mexico) stands at 806, down 11. The horizontal rig count stands at 702, down 8. US rig activity continues to decline and is 279 rigs below (-26%) last year’s total.

US Crude Oil Supply and Demand

Sources: EIA Weekly Update and GCA Analysis

Crude oil inventories increased, a gain of 2.2 million barrels from the previous week. The crude stored at Cushing (the main price point for WTI) decreased 1.2 million barrels; total stored is 46.5 million barrels (~52% utilization). Total US commercial crude stored stands at 449 million barrels (~57% utilization).

US crude oil refinery inputs averaged 15.9 million barrels per day, with refineries at 87.8% of their operating capacity last week. This was 154,000 barrels per day more than the previous week’s average.

US gasoline demand over the past four weeks was at 9.5 million barrels, up 2.6% from a year ago. Total commercial petroleum inventories decreased by 5.9 million barrels last week.

US crude net imports averaged 3.12 million barrels per day last week, down by 589,000 barrels per day from the previous week. Over the past four weeks, crude oil net imports averaged 3.1 million barrels per day, 40.8% less than the same four-week period last year.

Authors

November 15, 2019

P. Kevin Galvin

Facilities/Cost Engineer - kevin.galvin@gaffney-cline.com
November 15, 2019

Nick Fulford

Global Head of Gas/LNG - nick.fulford@gaffney-cline.com
November 15, 2019

Nigel Jenvey

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

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