October 4, 2019

October 4, 2019

4th October 2019

Oil Drilling Activity

Onshore US drilling activity dropped 5 with a total active count of 830 rigs; those targeting oil down 3, with the total at 710. Across the three major unconventional oil basins, the oil-rig count was down 3, with Permian up 1, Williston up 2 and Eagle Ford down 6. 

Sources: EIA Weekly Update and GCA Analysis

US domestic crude output decreased 100,000 barrels per day; crude production stands at 12.4 million barrels per day. EIA’s latest Short-Term Energy Outlook forecast of 12.2 million barrels per day average US production for 2019 looks solid.  However, their forecast for an average of 13.2 million barrels per day for 2020 could come under pressure if the US exits 2019 near current levels.  There is no doubt the industry has the capability to add 100,000 barrels per day every month next year (equals EIA projection); whether it has the cashflow and investment support is the real question.  

Crude stockpiles increased for the third time in four weeks; inventories gained 3.1 million barrels compared with expectations for a 1.5 million-barrel gain. 

Meanwhile, marketed US gas production continues to rise, reaching a new peak of 94 Bcfd, up 8.4% from a year ago, with 70+ Bcfd from shale gas and that associated with tight oil.  Stored gas volumes are well ahead of last year, so there should be ample supply to keep the US warm for the coming heating season.   

The economy added 136,000 jobs in September and the unemployment rate fell to 3.5%, a 50-year low, but wages grew at a slower-than-expected pace last month.

Carbon Management – Eight compelling reasons for action

This week GCA attended the Society of Petroleum Engineers (SPE) Annual Technical Conference and Exhibition (ATCE) in Calgary, Canada. This year was definitely different. The opening plenary and 8 out of 11 special sessions addressed sustainability issues from various lenses - innovation, technology, license to operate, gender, methane emissions, and the United Nations sustainable development goals. So many sessions in fact, that it was impossible to attend them all.

We had the opportunity to participate in the opening special session on “Reframing Environmental Sustainability Challenges as Opportunities for Innovation,” moderated by Cesar Patino and co-panelists Josh Etkind, Kamel Bennaceur, and Susannah Pierce. For the very first session of ATCE, on a cold and snowy Monday morning, we were delighted to see a full room with over 100 audience members.

So what are the reasons for this growing interest in Sustainability that is sweeping the oil and natural gas industry? Why is Sustainability now moving from the banners of activists, into boardrooms, on to the desks of company employees and now into the conference halls of professional societies?

There are eight key compelling reasons across Policy, Technology, Market and Finance issues:

Policy

* Climate change laws and policies have doubled every 5 years since the Kyoto Protocol.
* Voting for shareholder resolutions on climate have doubled since 2015.

Technology

* $3 trillion in public investment into renewable technologies.
* Wind, solar and battery costs have reduced by 80%.

Market

* For the last few years, more capital is spent on electricity than oil and gas supply.
* Over half of all new energy-generation capacity is now renewable.

Finance

* Increasing debt to equity ratios have resulted in over $1 trillion of debt in oil and gas supply.
* Capital spending risk assessments and portfolio hedging is becoming commonplace.

Sustainability is becoming mainstream and Carbon Management is at the center of the current. Deployment requires the engagement, experience and capability of the entire workforce to deliver it effectively and efficiently. Professional societies such as the SPE provide a key resource to develop and share best practices, define standards, and find common ground to solve the issue and ensure the oil and natural gas industry continues to provide energy with less emissions to the world.

Thanks to the SPE.

Natural Gas – Decarbonizing Houston

With its “drill baby drill” image, lack of public transit, and streets clogged with full size SUVs and F150s, Houston for many people, is the antithesis of the Paris accord and attempts to decarbonize.  However, if you look closely enough, there are signs of several “green shoots” and a more progressive move to turn Houston into a center for thought leadership and momentum behind the energy transition.

This week, a group from Houston and beyond gathered at the Baker Institute, Rice University, to attend a daylong program addressing the Energy Transition, including a session dedicated to the role that natural gas can play in the decarbonization of the world’s energy supply chain.

There were a number of inescapable conclusions from the session, which are very familiar to everyone in the industry, including the huge cost reductions in renewables, particularly solar, and the global growth in electricity generation, which will be the dominant force in the energy sector for many decades to come.  The role that natural gas will continue to play in fueling power was less clear.  Some saw gas continuing to play a substantial role, as a partner to wind, solar and other renewables, while others considered natural gas primarily as a source of hydrogen in the new economy. 

What most of those present agreed upon was that for the medium term, natural gas has a bright future, with increasing demand and attractive economics.  Coupled with measures to reduce fugitive emissions of methane (considerably more damaging to the environment than CO2) and increasing the potential for renewable natural gas, such as biogas, the industry appears to be holding up well against the significant cost efficiencies delivered by renewables.

Perhaps the biggest question mark was over electricity storage.  Gas turbines continue to offer a practical and cost effective way of meeting variabilities in power requirements, whether it be as a result of weather changes, normal daily variations or combatting intermittency from wind and solar.  However, battery technology, especially at or near the end user, is rapidly becoming competitive with gas, and even without a major breakthrough in technology, the balance may shift more quickly than some are predicting.

Customer choice, of course represents another part of the picture.  This is where the carbon intensity involved in the development, production and transportation of gas can make a big difference to an end user’s willingness to take delivery of it.

In Europe, a grade of petrol (or gasoline) is being sold at pumps, which include an offset fee, paid voluntarily by car drivers.  While that may be a little too radical for Houston right now, there are signs that the city will take up the carbon challenge very soon, and with potentially dramatic results.

Crude Oil – Prices remain stuck

This year, the oil market has faced some of the worst supply disruptions in recent times and yet prices remain stuck in the $60s.

OPEC’s oil production tumbled the most in 16 years last month after the worst-ever attack on Saudi Arabia’s energy infrastructure temporarily halved its output. Earlier in the summer, Russia’s Druzhba contamination crisis forced it to make sharp output cuts and US financial sanctions on Iran remain in force.

Yet Brent crude has averaged around $66 a barrel for most of 2019, far from a price that suggests the world faces an oil shortage.

US crude-oil prices slid, hitting a nearly two-month low after weekly inventory figures reignited worries about a supply glut. Prices have erased all of their 15% rally from mid-September that followed supply disruptions in Saudi Arabia, hurt by projections for soft demand and steady production growth.

In the first half of 2019, US exports of crude oil increased to average 2.9 million barrels per day, an increase of 966,000 barrels per from the first half of 2018. Also in the first half of 2019, US crude oil exports set a new record-high monthly average of 3.2 million barrels per day in June 2019.

Asia was the largest regional destination for US crude oil exports—1.3 million barrels per day in the first half of 2019—followed by destinations in Western Europe, which received 824,000 barrels per day. US crude oil exports to North America, which almost exclusively go to Canada (the largest single destination for US crude oil exports globally) did not change much from the first half of 2018 to the first half of 2019, averaging 458,000 barrels per day.

As US crude oil export volumes have increased, so have the number of export destinations. During first half of 2019, the number of US crude oil export destinations surpassed the number of US crude oil import sources.

Weekly Recap

Crude Oil Price

Brent, the global benchmark for oil, decreased $2.95 to $58.67 a barrel, reflecting a loss of 4.79% on the week.

WTI crude fell $2.33 to $53.17 a barrel, down 4.20% on the week.

Drilling Activity

Source: BHGE Rotary Rig Count

Total US rig count (including the Gulf of Mexico) stands at 855, down 5. The horizontal rig count stands at 749, down 3. US rig activity continues to be restrained and is 196 rigs below (-19%) last year’s total.

US Crude Oil Supply and Demand

Sources: EIA Weekly Update and GCA Analysis

Crude oil inventories increased for a third week, up by 3.1 million barrels from the previous week. The crude stored at Cushing (the main price point for WTI) decreased 0.2 million barrels; total stored is 40.7 million barrels (~45% utilization). Total US commercial crude stored stands at 422.8 million barrels (~54% utilization).

US crude oil refinery inputs averaged 16.0 million barrels per day, with refineries at 86.4% of their operating capacity last week. This was 496,000 barrels per day less than the previous week’s average.

US gasoline demand over the past four weeks was at 9.3 million barrels, down 0.1% from a year ago. Total commercial petroleum inventories decreased by 0.9 million barrels last week.

US crude net imports averaged 3.4 million barrels per day last week, up by 29,000 barrels per day from the previous week. Over the past four weeks, crude oil net imports averaged 3.5 million barrels per day, 38.1% less than the same four-week period last year.

   

Authors

October 4, 2019

P. Kevin Galvin

Facilities/Cost Engineer - kevin.galvin@gaffney-cline.com
October 4, 2019

Nick Fulford

Global Head of Gas/LNG - nick.fulford@gaffney-cline.com
October 4, 2019

Nigel Jenvey

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

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