November 2, 2018

November 2, 2018

2nd November 2018

Oil Drilling Activity

Onshore US drilling activity was flat with a total active count of 1046 rigs; those targeting oil decreased 1, with the total at 874. Across the three major unconventional oil basins, the oil rig count decreased 2 and stands at 612, with Permian down 2, Eagle Ford and Williston flat. 

Source: U.S. Energy Information Administration, Petroleum Supply Monthly

EIA reported last week’s total US domestic crude output at 11.2 million barrels, an increase of 300,000 barrels per day as Gulf production has been restored. The higher crude oil prices at the end of 2018 and forecasted throughout 2019 will likely support increased US crude oil production. EIA forecasts US crude oil production to increase by 1.0 million barrels per day in 2019, aided by new export capacity from the Permian Basin to the Gulf Coast.

New applications for US unemployment aid fell last week and the number of Americans receiving benefits was the lowest in more than 45 years as labor market conditions tightened further. The labor market is viewed as being near or at full employment.

US hiring rebounded by more than forecast in October, annual wage gains topped 3% for the first time since 2009 and the jobless rate held at a 48-year low, signaling the labor market will keep driving consumption and economic growth.

Natural Gas – Argentine’s renaissance begins

Large natural gas pipelines have become a bellwether for strategic shifts in global energy usage patterns, and the direction and size of flow tells us a lot about the geopolitics that are such a strong influence on energy investment.  When a strategic gas pipeline changes direction of flow, it is usually a sign of decline in basin production, such as when the UK’s interconnector reversed, starting gas imports from Continental Europe.  However, when it changes direction twice, it becomes a strong symbol of renaissance, and so it is with the pipeline between Argentina and Chile.

It has been twelve years since the last major exports of gas from Argentina to Chile, but this week the flow of gas from Argentina to Chile recommenced as the two countries embarked on closer strategic ties that are designed to establish a more integrated approach to both gas and power in the region.  This comes on the back of a deal signed earlier this year, which removed other restrictions on gas exports to Chile.  The suspension of exports to Chile led to some diplomatic strain back in the mid-2000s. This time, however, there seems no doubt that Argentina, with the recent significant growth in Vaca Muerta gas production, is heading towards energy self-sufficiency, and may have the potential for significant exports too.  This first step to becoming a major energy supplier to Latin America is a relatively simple one, based on existing pipeline infrastructure and an established trading relationship.  However, as self-sufficiency turns to surplus, things will become both more complex, and more costly.

The recent FID for LNG Canada demonstrates very clearly, if any proof were needed, that the US does not have a monopoly on LNG exports from the Americas.  Canada has been exporting oil and gas for decades, but so far, the only market available to it was the US.  Of course, in recent years with the revolution in shale gas and tight oil, the US has significantly reduced its demand for Canadian oil and gas, leaving Canadian gas largely stranded.  Although Argentina has pipeline access to four potential neighboring countries, Chile, Brazil, Uruguay and Bolivia, like Canada, it is competing with major gas resources in other parts of Latin America, especially Brazil.  If they look to the hard lessons learned by their northern cousins, Argentina will be seeking to diversify its access to global gas markets through LNG and so even at this nascent stage in the development of the nation’s massive shale gas resource, the more far-sighted oil and gas investors are doing just that.

LNG projects are notoriously difficult to deliver, and ten years or more is typically required where no infrastructure exists.  For Argentina, though, with its very advanced gas infrastructure, the challenges are a mix of technical, commercial, and regulatory.  Recent progress with the “learning curve”, improving productivity while reducing costs of drilling and completions needs to be maintained to establish a truly low cost source of feed gas for LNG.  The last few years has also seen dramatic reductions in the cost of liquefaction, with some Australian projects having peaked at above US$2,000 per tonne per annum of export capacity, but recent US experience and FLNG conversions getting down to nearer US$500/tonne per annum.  Harnessing these cost efficiencies will be vital to a successful LNG strategy in Argentina, but accessing the opportunity before the next wave of LNG construction gets underway will be key.

So that leaves the regulatory challenges, and the future shape of the wholesale gas and power market, which continue to hold back even domestic investment. With subsidies and caps for both gas and power continuing to influence profitability, and a temporary export tax on natural gas, the move towards a more market-based energy framework still has some way to go.  A strategic problem requires strategic answers, and a glance at Argentina’s export based economy shows just what a difference LNG could make.  Argentinian agricultural exports have declined in recent years, but figures for 2016 show that soybean meal, corn, soybean oil and soybeans exports together amounted to some US$21.3 billion.  Consider LNG Canada, with its planned ultimate capacity of 26 million tonnes, representing around US$13bn in annual revenues based on a US$10/MMBtu delivered price.  Such a project in Argentina would not only quadruple its 2016 trade surplus, but would also make a material difference to the nation’s GDP. 

While a leap straight to a world scale LNG project is ambitious, other interim solutions appear feasible in the medium term, especially leveraging Argentina’s “reverse” seasonality.  A quick look at US gas export prices published by the US Dept. of Energy shows that while the average year-round price realized has only been just over US$4.50/MMBtu, the top 5% of sales, typically during northern hemisphere winter season when Argentina has excess gas capacity, has been over US$7/MMBtu.  With liquids rich Vaca Muerta gas delivering a significant bonus in condensate and NGLs, the short run marginal cost of “off peak” Argentinian gas is negligible, and even for seasonal exports, there appears to be scope to accommodate small-scale LNG capex within a potential margin of that magnitude.

While it represents a very complex jigsaw puzzle, a solution to the Argentinian LNG challenge appears within reach.  The big question is who will complete the puzzle first?

Crude Oil – Supply remains robust

Oil producers appear to be successfully offsetting the supply outages from Iran and Venezuela. Meanwhile, Washington has reached an agreement with eight countries including South Korea, Japan and India that would allow them to keep buying oil from Iran even after US sanctions against Tehran enter into force on November 5.

OPEC has boosted oil production in October to the highest since 2016 as higher output led by the United Arab Emirates and Libya more than offset a cut in Iranian shipments caused by US sanctions. The 15-member Organization of the Petroleum Exporting Countries has pumped 33.31 million barrels per day in October, up 390,000 barrels per day from September and the highest by OPEC as a group since December 2016.

US crude oil production has increased significantly during the past ten years, driven mainly by production from tight oil formations using horizontal drilling and hydraulic fracturing. EIA estimates of crude oil production from tight formations in August 2018 reached 6.2 million barrels per day, or 55% of the US total.

US crude oil production reached 11.3 million barrels per day in August 2018, according to EIA’s latest Petroleum Supply Monthly, up from 10.9 million barrels per day in July. This is the first time that monthly US production levels surpassed 11 million barrels per day.

Monthly crude oil production reached a record high in several states. Texas had the highest record level at 4.6 million barrels per day, followed by North Dakota at 1.3 million barrels per day. Production in the Federal Offshore Gulf of Mexico also hit a record high of 1.9 million barrels per day.

From May through August, production in the Gulf of Mexico grew by an average of 130,000 barrels per day every month, a significant increase from the growth rate in the first four months of the year. This increase was primarily the result of a number of fields returning to full production after several months of maintenance and other infrastructure issues that arose from Hurricanes Harvey and Nate in 2017.

The EIA’s latest analysis of planned refinery outages for the fourth quarter of 2018 finds that planned outages in the US are not likely to cause a shortfall in the supply of petroleum products—including gasoline, jet fuel, and distillate fuel—relative to expected demand. EIA has reached this conclusion despite the current high level of U.S. gasoline demand, which so far in 2018 has been close to the record high seen in 2017.

BP indicated this week that they do not expect any further significant correction in oil prices over the coming months with the return of global crude stocks to historical levels limiting price movements from current level.

Weekly Recap

Drilling Activity

Source: BHGE Rotary Rig Count

Total US rig count (including the Gulf of Mexico) stands at 1067, down 1 this week. The horizontal rig count stands at 929, up 2 this week. US rig activity continue to show constrained growth for 22 of the last 24 weeks and stands 19% above last year’s total.

Crude Oil Price

Brent, the global benchmark for oil, decreased US$3.95 to US$72.53 a barrel, reflecting a loss of 5.16% on the week.

WTI crude fell US$3.63 to US$63.17 a barrel, down 5.43% on the week.

US Crude Oil Supply and Demand

Sources: EIA Weekly Update and GCA Analysis

US crude oil refinery inputs averaged 16.4 million barrels per day, with refineries at 89.4% of their operating capacity last week. This is 149,000 barrels per day more than the previous week’s average.

US gasoline demand over the past four weeks was at 9.2 million barrels, down 1.5% from a year ago. Total commercial petroleum inventories decreased by 6.4 million barrels last week.

US crude imports averaged 7.3 million barrels per day last week, down by 334,000 barrels per day from the previous week. Over the past four weeks, crude oil imports averaged 7.5 million barrels per day, 2.5% less than the same four-week period last year.

US crude exports averaged 2.485 million barrels per day last week, an increase of 305,000 barrels per day from the previous week. Over the last four weeks, crude oil exports averaged 2.256 million barrels per day, 27% more than the same four-week period last year.

Crude oil inventories increased 3.2 million barrels from the previous week. The crude stored at Cushing (the main price point for WTI) increased 1.9 million barrels; total stored is 31.9 million barrels (~35% utilization).



November 2, 2018

P. Kevin Galvin

Facilities/Cost Engineer -
November 2, 2018

Nick Fulford

Global Head of Gas/LNG -

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