November 22, 2019

November 22, 2019

22nd November 2019

Oil Drilling Activity

Onshore US drilling activity decreased by 3 with a total active count of 781 (Y/Y decrease of 271) rigs; those targeting oil down 3, with the total at 671. Across the three major unconventional oil basins, the oil-rig count was down 1, with Permian down 3, Williston flat and Eagle Ford up 2.

Source: Baker Hughes Rig Count

US domestic crude output was flat last week; crude production stands at a peak of 12.8 million barrels per day.

Crude inventories rose by 1.4 million barrels, compared to the 1.6-million-barrel increase expected. Record US crude production, which held steady at 12.8 million barrels per day, largely drove the stockpile build. Crude stocks at the Cushing, Oklahoma delivery hub for US crude decreased for the second time in seven weeks, down 2.3 million barrels last week.

OPEC and its allies are likely to extend existing oil output cuts when they meet next month until mid-2020, with non-OPEC oil producer Russia supporting Saudi Arabia's push for stable oil prices amid the listing of state oil giant Saudi Aramco.

Carbon Management – Advancing carbon capture innovation

While there is no silver-bullet to Carbon Management, Carbon Capture, Use and Storage (CCUS) is widely considered a vital carbon solution or clean energy technology that is available today; but according to the International Energy Agency, it is not on track for meeting the world’s sustainable development goals.

Amine absorption CO2 capture technology is proven today for use at commercial scale. The original patent for this “process for separating acidic gases” was filed in 1930 by R.R. Bottoms. This technology is capital intensive because of its large scale and complexity, along with significant energy and maintenance costs for operation. While cost and performance improvements have been achieved over time, this is now reaching fundamental limitations in the thermodynamics of the regeneration energy needed. Cost reductions are therefore stalling.

Other newer technology types include cryogenic, adsorption, membranes, and process systems that have been researched, developed and in some cases demonstrated at commercial scale over the last decade. Typically, these technologies require less capital and have lower energy demand to operate. While some hold promise, deployment on commercial power plants or industrial facilities still has a significant amount of risk for investors because of total as spent cost and long-term operational performance uncertainties.

A novel approach has therefore materialized, where some of these newer technologies are being demonstrated at much smaller-scales. Sometimes they are being combined into hybrid systems, or integrated with renewable power and heat sources. Innovation at this small, modular scale carries less risk, reducing cycle times to success or failure. While they are currently less mature, these innovations could potentially result in breakthroughs in cost that with further support and time potentially move back into power and large-scale industry applications.

Are you considering CCUS as part of your Carbon Management plans? GCA has worked on 65 CCUS projects over the last couple of decades for clients and has been working on the US National Petroleum Council CCUS Study for the last two years, and will be published on December 12, 2019.

Natural Gas – Is floating storage a thing now?

With each gas year, traditionally starting on October 1, new trends emerge, and surprising developments take place, even for those who follow the market closely.  The surprising feature this year, in the nascent global gas market, has been the confluence of accelerated volumes of LNG being produced from a range of new sources globally, and a sluggish winter demand response.  The result?  Lots of LNG looking for a home.

In September, the signs were already there that amidst a growing expectation of rising winter prices, LNG sellers were going long on shipping, to eke out a few more weeks and months at sea, hoping that the arbitrage available would more than pay for the additional charter costs.  It is worth looking at that equation for a moment.  With a daily charter rate, let us say in the region of $80,000, and roughly 4 bcf on board a typical vessel. That comes to about two cents a day per MMBtu, for each day of delay between loading and final sale, or 60c/Month, let us say 70c allowing for boil off.

For a trader who opted to buy a cargo at the end of August, they would have been offered somewhere in the region of $4.50/MMBtu for Asia delivery.  By the end of October, the realized price would have been $5.95/MMBtu, so a profit of $1.45/MMBtu, versus a “storage” cost of $1.40....  A good deal?  Perhaps not stellar, but those with good timing who managed to bag a vessel at perhaps $50-60,000 per day might have done well enough.

Using VLCCs as a way to store oil has been common practice for decades, as traders seek to maximize profits.  Perhaps like many aspects of the crude trade that have found their way to gas and LNG, floating storage is now here to stay.

Crude Oil – Demand slows while supply increases

On the demand side, US refineries have cut their crude processing by almost 100 million barrels so far this year, mostly in response to slack demand in the US and overseas. Crude processing in the year-to-date has fallen for the first time since the recession of 2008/09. US refineries have processed 16.61 million barrels per day of crude so far in 2019, down from 16.91 million barrel per day at the same point in 2018.

On the supply side, EIA forecasts US oil production increases to 12.3 million barrels per day in 2019 from 11.0 million barrels per day in 2018. Output in the Permian region is the primary driver for oil production growth, and EIA forecasts Permian production grows by 915,000 barrels per day in 2019 and by 809,000 barrels per day in 2020.

EIA forecasts that overall US oil production will continue to increase; EIA expects the growth rate will slow because of a decline in oil-directed rigs. According to Baker Hughes, active rig counts fell from 877 oil-directed rigs in the beginning of January 2019 to 674 rigs in mid-November, a 23% decline. Rig counts in the Permian region fell 15% during this period, from 487 to 408 rigs.

EIA expects WTI-Cushing oil prices to stay lower than $55 per barrel until August 2020; they anticipate that drilling rigs will continue to decline as producers cut back on their capital spending, resulting in notable slowing in the growth of domestic oil production over the next 14 months.

With oil-rig counts declining, improvements in rig efficiency, which allows fewer rigs to drill the same number of wells, partially offsets decline. Additionally, higher initial production from wells (although not necessarily the total estimated ultimate recovery) is offsetting some of the slowdown in oil rigs.

Weekly Recap

Drilling Activity

Total US rig count (including the Gulf of Mexico) stands at 803, down 3. The horizontal rig count stands at 699, down 3. 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 1.4 million barrels from the previous week. The crude stored at Cushing (the main price point for WTI) decreased 2.3 million barrels; total stored is 44.2 million barrels (~49% utilization). Total US commercial crude stored stands at 450.4 million barrels (~57% utilization).

US crude oil refinery inputs averaged 16.4 million barrels per day, with refineries at 89.5% of their operating capacity last week. This was 519,000 barrels per day more than the previous week’s average.

US gasoline demand over the past four weeks was at 9.4 million barrels, up 1.9% from a year ago. Total commercial petroleum inventories decreased by 5.0 million barrels last week.

US crude net imports averaged 2.94 million barrels per day last week, down by 172,000 barrels per day from the previous week. Over the past four weeks, crude oil net imports averaged 3.3 million barrels per day, 37.4% less than the same four-week period last year.

Authors

November 22, 2019

P. Kevin Galvin

Facilities/Cost Engineer - kevin.galvin@gaffney-cline.com
November 22, 2019

Nick Fulford

Global Head of Gas/LNG - nick.fulford@gaffney-cline.com
November 22, 2019

Nigel Jenvey

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

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