November 8, 2019

November 8, 2019

8th November 2019

Oil Drilling Activity

Onshore US drilling activity decreased by 6 with a total active count of 793 (Y/Y decrease of 267) rigs; those targeting oil down 5, with the total at 684. Across the three major unconventional oil basins, the oilrig count was down 8, with Permian down 4, Williston down 1 and Eagle Ford down 3. 

Source: Baker Hughes Rig Count

US domestic crude output was flat for a fourth week; crude production remained at 12.6 million barrels per day. The majors and super independents (EOG, Pioneer, etc.) are reporting sustained US oil production growth in their Q3 reports, balancing declines from smaller players who are required to conserve capital at current oil prices. 

Crude stockpiles increased; inventories gained 7.9 million barrels compared with expectations for a 1.51 million-barrel gain. Crude stocks at the Cushing, Oklahoma, delivery hub for US crude rose for a fifth straight week, gaining 1.7 million barrels last week.

Major global oil firms snubbed a second Brazilian oil auction in a row on Thursday, passing up promising offshore blocks and forcing officials to reconsider a bidding system that gives a privileged position to state-run Petroleo Brasileiro SA.

Carbon Management – Is this the end of oil production, as we know it?

This week Saudi Arabia finally announced that it will launch the biggest initial public offering (IPO) ever, for a planned 5% of Saudi Aramco that produces 10% of the world’s oil production and had a net income of $111 billion in 2018. To put this in context – Aramco had a net income that was twice that of Apple, and more than the big five IOCs combined (ExxonMobil, Shell, BP, Chevron and Total). However, the value of this piece of Aramco has been a key area of debate. Aramco is aiming for a valuation of $2 trillion, but some analysts have different views.

Why? While last month's drone attacks on Aramco’s facilities highlighted some obvious above ground risks that could affect the valuation, longer-term oil supply and demand uncertainties are more likely to be the key reasons for these differences. What may not have been fully taken into account by some is that Saudi Aramco will likely be the "last man standing" in a changing energy market because of a combination of low cost and low carbon intensity (CI) production at scale.

Saudi Aramco has the second-largest proven oil reserves and the second-largest daily oil production, and widely reported to have lifting costs that are half that of IOCs. However, beyond these conventional metrics, and of critical importance in the energy transition, is that according to a global analysis of crude oil supply its CI of 4.6 gCO2e/MJ is less than half the global volume weighted average.

But it does not end there. This week has also seen Saudi Aramco join the World Bank Zero Routine Flaring by 2030 initiative. This builds on Saudi Aramco being a founding member of the Oil and Gas Climate Initiative, which focuses on other Carbon Management techniques such as energy efficiency, methane reduction, and Carbon Capture, Use and Storage (CCUS).

To compete in the anticipated upheaval in the oil market over the next decades to come will need a combination of such fundamental attributes, supported by Carbon Management plans to ensure success. All oil production needs to evolve. This is why the Saudi Aramco IPO signals the end of oil production, as we know it.

What does the CI of your oil portfolio look like now and in the future? Can you undertake projects that reduce your GHG emissions to reduce your CI that are cost-effective and allow you to still remain competitive? Contact us to find out how our Carbon Management practice can help you prepare and take the risk out of an uncertain future.

This blog builds on the most downloaded Society of Petroleum Engineers (SPE) paper of 2019 to date, “The End of Petroleum Engineering as We Know It,” authored by our president Nathan Meehan and podcast now available here.

Natural Gas – Will an LNG-based Calypso run finally takeoff in the Caribbean?

It has been exactly two decades since LNG ships first came into the Caribbean with the startup of the Atlantic LNG facility in Trinidad. Since then, three islands have started importing LNG – Dominican Republic, Puerto Rico, and more recently, Jamaica. However, this accounts for a meagre one-tenth of the number of islands that are present in the Caribbean, which is as such very surprising given the significant cost and emission benefits that could be realized by substituting diesel and fuel oils with LNG.

While, over the years, a number of LNG import projects have been proposed in several of these islands, and there have been quite a few false starts, LNG in the Caribbean has not as yet taken off to the extent one would have expected. Two major reasons typically quoted in the industry have been – (a) the lower international credit ratings, combined with lack of a track record in long-term purchases (traditionally a key project financing requirement); and, (b) the lower volumes that each of these islands require (typically, 0.5 MTPA or less), which have made it uneconomic and logistically difficult to supply LNG.

With little or no growth expected in traditional markets like North Asia and Europe, and a plethora of LNG export projects vying for market, we have been seeing a number of new countries successfully capitalize on the window of opportunity and develop LNG import projects over the last few years, especially in South and South East Asia, Middle East, and parts of Africa. A number of these emerging markets have low international credit ratings and little or no track record in major investments and purchases. They are now increasingly sought after, even by LNG suppliers who in the past preferred to look the other way! Because of the enhanced scope for development of the underlying economies with use of LNG, a number of development banks such as the World Bank, IADB and OPIC have been supporting the financing of these projects through loans and guarantees.

While supply to smaller LNG markets has potentially become more economic in recent years with the increased availability of FSRUs and with LNG prices coming under pressure in a buyers’ market, overcoming challenges with regards to LNG supply logistics has been slower. As such, one would ideally look to supply most of the Caribbean markets through small scale LNG supply chains. However, a major bottleneck such developments have faced is the incompatibility of conventional LNG terminals to berth smaller LNG ships. While in the context of the Caribbean this has been resolved to some extent with the addition of a smaller LNG berth in the AES Andres terminal, the significantly lower availability of smaller LNG ships in the market continues to pose a challenge to such trades. An alternative that has been successfully implemented in parts of the Caribbean has been the transport of LNG in ISO containers, loaded onto conventional container ships from the US Gulf Coast. This solution, however, caters only to very small volumes of LNG and requires investment in several ISO containers (even running into hundreds) to sustain a reasonably sized LNG chain.

Another potential solution that has been talked of in industry circles for quite some time is the concept of “milk runs” from a proximate LNG export hub. We might finally be seeing a confluence of factors that could make them a reality. The Atlantic LNG facility is now fully depreciated and most of its supply contracts would have expired by the early 2020s. With incremental gas finds in the region, it could provide a very cost effective supply source from where one can envision milk runs (or, shall we say, calypso runs) of LNG ships across the Caribbean and even Central America. While renewables could eventually be the fuel of the future, and quite a few governments in the region are rightfully promoting the same, LNG-to-power chains connecting brown LNG exports to CCGT power plants repurposed to run on gas are very cost effective and emission friendly solutions during the energy transition.

We are starting to see a similar concept evolve in the Mediterranean region, where the existing export terminals in Egypt are coming back to life to cost effectively meet the energy requirements in the region and commercialise the available resources. Cyprus has just approved the $9 billion Aphrodite gas development that will pipe gas to Egypt and support further East Med. LNG exports. Needless to say, however, this requires significant collaboration amongst the Caribbean islands, which has been absent so far. Here’s hoping that all the relevant stakeholders recognise this window of opportunity that is presenting itself, and make calypso runs a reality!

GCA looks forward to further discussions around this topic at the talk organized by the SPE in Port of Spain, Trinidad, on November 18, 2019:

   

Crude Oil – Capital discipline to continue into 2020

For the first time since 1978, the US recorded a surplus in petroleum trade of $252 million in September 2019. From being an oil importer, a nation dependent on oil-producing regions, it is now a net oil and gas exporter.

Shale took the world by surprise over the last five years as US production grew to new heights, defying laws of pricing and oil & gas price break evens as the industry managed to lower the cost of oil.

US oil production had peaked in 1970 at 9.6 million barrels per day and in 2005 it fell to 5.2 million barrels per day, declining for 35 straight years. Crude Oil imports reached 10.1 million barrels per day in 2005, 50% of total US consumption. The US economy was highly dependent on oil imports from countries like Venezuela and Saudi Arabia.

Fracking changed the industry forever, a technology that had been around since the 1940s. Vast improvement in technologies like horizontal drilling and fracking, despite falling oil prices, have today seen the US get back to production of about 12.6 million barrels per day.

Thanks to a very lucrative High Yield Energy market, US shale companies were able to borrow at cheap rates by issuing bonds and using that to pump that money back into the system. Cash flow discipline was never maintained. They kept borrowing to produce even at negative cash flow rates.  After years of being promised better capital discipline, investors have turned very negative toward US shale.

US shale companies have to begin to pay their debt back. As the debt matures, many company managements will be forced to exercise even more capital discipline, focusing on repaying their debt rather than boosting production. After all these years, they have no choice but to focus on balance sheet repair as the bond and credit markets are closed to them.

Weekly Recap

Drilling Activity

Total US rig count (including the Gulf of Mexico) stands at 817, down 5. The horizontal rig count stands at 710, down 7. US rig activity continues to decline and is 267 rigs below (-25%) last year’s total.

US Crude Oil Supply and Demand

Sources: EIA Weekly Update and GCA Analysis

Crude oil inventories increased, a gain of 7.9 million barrels from the previous week. The crude stored at Cushing (the main price point for WTI) increased 1.7 million barrels; total stored is 47.7 million barrels (~53% utilization). Total US commercial crude stored stands at 446.8 million barrels (~57% utilization).

US crude oil refinery inputs averaged 15.8 million barrels per day, with refineries at 86.0% of their operating capacity last week. This was 273,000 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 2.7% from a year ago. Total commercial petroleum inventories increased by 3.9 million barrels last week.

US crude net imports averaged 3.71 million barrels per day last week, up by 336,000 barrels per day from the previous week. Over the past four weeks, crude oil net imports averaged 3.1 million barrels per day, 42.3% less than the same four-week period last year.

Authors

November 8, 2019

P. Kevin Galvin

Facilities/Cost Engineer - kevin.galvin@gaffney-cline.com
November 8, 2019

Nigel Jenvey

Global Head of Carbon Management - nigel.jenvey@gaffney-cline.com
November 8, 2019

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