October 20, 2017

October 20, 2017

20th October 2017

Oil Drilling Activity

Drillers decreased onshore rigs by 15 (8 targeting gas), total stands at 892. Across the three major unconventional oil basins, the oil rig total dropped to 489, rig growth has stalled in the major oil basins reflecting crude prices hovering just above US$50 WTI level. Rigs targeting oil decreased by 7, total stands at 736.

EIA’s data continues to indicate that oil supplies are tightening and that higher prices are likely in 2018 and this could spur the return of growth to US onshore rigs targeting oil. Rig count typically follow changes in the WTI price with an approximate four-month lag. However, rigs targeting oil are declining and this could be a result of “end of year” cash flow constraints. 

Sources: EIA Weekly Update and GCA analysis

Natural Gas – The road to LNG demand growth, bunkering down to business

One part of the LNG sector that has started to grow significantly – and offers another potential step change in the traditional LNG business model – is the use of LNG in new markets, particularly those which compete with diesel in high horsepower applications.  LNG use in transportation has featured prominently in the last 2 weeks.

News announcements over the past few weeks have perhaps given new hope that the classic “chicken and egg” dilemma when it comes to major adoption of LNG as a road transport fuel - the tradeoff for the truck operators between the cost (compared to low sulphur products) and emissions (SOx and NOx) benefits coupled with the critical need for a reliable, convenient source of LNG – might once and for all have been “cracked”.

A number of the larger engine providers to the truck industry have been developing LNG fueled engines over the last decade, and while early models focused on dual fuel engines capable of burning a blend of gas and diesel, the focus for the last few years has been on LNG only fueled engines, which have been proven to have greater fuel efficiency and reliability.

LNG filling stations in the United States are currently limited at around 100 operating today; but they could be added to at the rate of between 10 and 20 filling stations per year, especially along highways that carry large volumes of heavy freight.

Perhaps more interesting is the recent huge growth and further potential in countries such as China. 

  • By 2014, LNG powered heavy duty vehicles had secured 2.1% of the market from diesel, equating to some 120,000 LNG powered trucks, with over 60,000 other LNG powered vehicles also in use
  • Today, LNG trucks account for c.4% of around 6 million heavy vehicles in China
  • This year, the Chinese government move to curb diesel sales to try to fight pollution and city smog has resulted in demand for LNG trucks reportedly soaring by over 500% in the first half of the year
  • The payback periods to recoup investment can sometimes be as low as 1 year, and probably 3 years at the most depending on utilisation and fuel cost differentials (with diesel currently costing between 10-30% more than gas on average at Chinese filling stations)

China is looking far and wide for LNG sources, meaning they could surpass Japan as the world’s largest LNG importer by the early to mid-2020s.  The potential LNG supplies continue to come quickly and from a variety of sources.  Chevron recently announced the commencement of LNG production and cargoes to be available in the coming weeks from their Wheatstone LNG project in Australia, helping the country to surpass Malaysia to reach number 2 spot in terms of global LNG supply capacity.

Elsewhere looking at LNG use in transportation, the last month has seen several interesting announcements, including the following:

  • VW who are looking at shifting their product 100 LNG powered Scania trucks
  • Uniper, via their subsidiary Liqvis, are also looking to supply LNG to Meyer Logistik to enable them to operate 20 LNG powered trucks to transport food around the greater Berlin area
  • The UK and Netherlands are looking for ways to follow suit
  • Russia's state-owned Sovcomflot announced plans to build and operate 5 LNG-fuelled and ice-class rated oil and product tankers

The outlook for the LNG industry over the next decade is now looking very different than at any point in the previous five decades of global trade. More than ever before, we are going to see new customer segments and especially innovative new uses for gas and LNG as market drivers.

GCA’s Nick Fulford (Global Head of Gas & LNG) and Ryan Pereira (Principal Commercial Manager) were recently selected to contribute to 2 leading LNG publications:

The first publication,“Liquefied Natural Gas, The Law and Business of LNG, Third Edition” contains a more in depth discussion of new markets for LNG, including marine, road, rail and small scale uses:

http://www.globelawandbusiness.com/books/liquefied-natural-gas-the-law-and-business-of-lng-third-edition

The second publication, “Shale Gas, A Practitioner's Guide to Shale Gas and & Unconventional Resources, Second Edition” features an opening chapter on the impact of the US shale boom on worldwide natural gas price trends:

http://www.globelawandbusiness.com/books/shale-gas-a-practitioner-s-guide-to-shale-gas-and-other-unconventional-resources-second-edition

Please contact Nick or Ryan for further discussion on any of these topics.

Crude Oil –Shale production pushes exports

Pioneer Natural Resources indicated it will quadruple oil exports within a year, reflecting a continuing surge in US exports as shale output rises. Pioneer, one of the largest oil producers in the Permian Basin of West Texas and New Mexico, exported three cargoes of 500,000 barrels of oil in the third quarter and is expected to ship four in the fourth quarter. The number is expected to rise to 13 cargoes by the same time next year. Additionally, Continental Resources says it sold more than 1 million barrels of Bakken crude oil for November delivery to Atlantic Trading and Marketing, which intends to export the oil to China.

The Gulf Coast is leading the way as the US ships out record levels of crude oil and petroleum products to foreign markets. The US is routinely exporting more than 1 million barrels of oil a day and shipping out more than 6 million barrels of total petroleum a day, according to the US Energy Department. More than two-thirds of those petroleum exports are shipped through Gulf Coast ports.

The disagreement between crude trading groups on future price movements underscores the uncertainty over the key drivers of oil supply and demand. Growth in consumption has been stronger than expected this year, aiding the recent price gain, but the swiftness of an expansion in US output has also proved hard to predict. A surprise from one of those competing forces in 2018 could tip markets in either direction. Demand is growing, oil-field productivity is declining in the US and further weakening of the dollar may boost commodities. The market has tightened in the last few months but US shale producers have the ability to drive down prices, just as they did back in 2014.

In the past three years, as US shale production faded and gushed, the Organization of Petroleum Exporting Countries made historic shifts in production policy. The oil price has fallen by half from above US$100 a barrel, rebounded above US$65, then plunged to a 12-year low of US$28. In such a volatile environment one struggles to get a grip on the direction of the market.

The IEA has increased its estimate for 2017 oil demand growth in each of the past four months, now predicting the strongest expansion in two years. Nevertheless, even if OPEC extends its output cuts through 2018 it’s unlikely to dramatically reduce crude stockpiles that continue putting downward pressure on prices.

You will see oil prices at US$100 again and you’ll see oil prices at US$28 again -- that’s just a fact of the oil business.

Weekly Recaps

Oil Drilling Activity

Total US rig count (including the Gulf of Mexico) stands at 913, down 15 this week with rigs targeting oil down 7. The horizontal rig count stands at 771, down 15.

The total number of active onshore rigs decreased to 892 (down 15).  Compared to a November 2014 figure of 1,876 active rigs, the level remains 50% below the 2014 high.

Across the three major unconventional oil basins, the oil rig total was down 4, it now stands at 489, with Permian down 6, Eagle Ford up 1 and Williston flat.

Crude Oil Price

Brent, the global benchmark for oil, dropped US$0.23 to US$57.14 a barrel, reflecting a loss of 0.40% on the week.

WTI crude decreased US$0.59 to US$51.07 a barrel, down 1.14% on the week. 

US Crude Oil Supply and Demand

Sources: EIA Weekly Update and GCA analysis

US crude oil refinery inputs averaged 15.4 million barrels per day, with refineries at 84.5% of their operating capacity last week. This is 819,000 barrels per day less than the previous week’s average.

US gasoline demand over past four weeks was at 9.3 million, up 2.9% from a year ago. Total commercial petroleum inventories decreased 8.7 million barrels last week.

On the supply side, EIA data indicated that total domestic crude production decreased 1.074 million barrels to 8.406 million barrels a day. The Lower 48 crude production now stands at 7.894 million barrels per day, down 1.083 million barrels this week.

US crude imports averaged 7.5 million barrels per day last week, a decrease of 134,000 barrels per day from the previous week. Over the last four weeks, crude oil imports averaged 7.4 million barrels per day, 1.9% below the same four-week period last year.

Crude oil inventories decreased 5.7 million barrels from the previous week. The crude stored at Cushing (the main price point for WTI) increased 0.2 million barrels; total storage is 64 million barrels (~72% utilization).

Authors

October 20, 2017

Nick Fulford

Global Head of Gas and LNG - nick.fulford@gaffney-cline.com
October 20, 2017

P. Kevin Galvin

Principal Advisor - Sr. Manager Facilities/Cost Engineering Advisor - kevin.galvin@gaffney-cline.com
October 20, 2017

Ryan Pereira

Principal Commercial Manager, Global Gas and LNG - ryan.pereira@gaffney-cline.com

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