September 20, 2019

September 20, 2019

20th September 2019

Oil Drilling Activity

Onshore US drilling activity dropped 18 with a total active count of 842 rigs; those targeting oil down 14, with the total at 719. Across the three major unconventional oil basins, the oil-rig count was down 6, with Permian, Williston and Eagle Ford each down 2. 

Sources: EIA Weekly Update and GCA Analysis

US domestic crude output was flat for a third week; crude production stands at 12.4 million barrels per day, remaining below the record high of 12.5 million barrels per day set at the end of August.

In a recent monthly report, the EIA indicated that US oil output from seven major shale formations is expected to rise by approximately 74,000 barrels per day in October to a record 8.843 million barrels per day. The biggest increase is forecast for the Permian basin, where production is set to climb by 71,000 barrels per day to a record of about 4.485 million barrels per day.

The ever-improving pipeline and export infrastructure, allowing more regional oil to find its way to the global market, should improve Permian’s long-term production potential even further.

Crude stockpiles increased for the first time in three weeks; inventories gained 1.1 million barrels compared with expectations for a 2.5 million-barrel drop.

US dry gas production is around 92 Bcfd, a gain of 6.5% year on year, led by Haynesville, Permian, Marcellus/Utica tight gas more than offsetting 10%+ declines in older Barnett and Fayetteville plays.  LNG exports have provided half of the net gain in gas demand over the same period.  With restrained Henry Hub prices, associated liquids provides the economic basis for much of the gas supply growth.  US field NGL production is now in excess of 4.5 million barrels a day, up over 50% in the last 4-5 years.

Clearly, the US upstream tight oil/gas sector continues to deliver greater volumes with less rigs, a combination of improved application of technology and focus on sweet spots, yet analysts continue to criticize the “failure to deliver sustained shareholder value” from many companies.

Carbon Management - Changing climate for oil and gas

Climate change is one of the most significant challenges facing the world and action is required to mitigate the risks of adverse impacts on society. To maintain the social license for oil and gas means we have to take action through Carbon Management.

With the UN Climate Change Summit taking place in New York next week, around 60 heads of state will look to find a way to achieve greater ambition on tackling climate change. Oil and gas delivers energy at the scale the world demands and lifts people out of poverty; however, we need to deploy Carbon Management practices to deliver more energy in a responsible manner.

Oil and gas jobs, infrastructure investments and economic benefits are a bedrock in global financial systems. To ensure an energy transition occurs in a manner that does not destabilize financial systems and markets, we have to make clear-headed decisions through Carbon Management.

Humans have always been influenced by climate – where we live, what we eat, how we earn our living, how we move around, etc. Climate also controls food production, water resources and influences energy use, transmission of disease, etc. The impacts of climate change are therefore risks to human health, increases in the risk of extreme weather, damages to eco-systems and sea-level rise endangering coastal areas.

The more greenhouse gases (GHGs) in the atmosphere, the more heat is trapped and the warmer the average temperature gets. Each of the past four decades has been warmer than the previous one. January this year was more than 0.4 degrees Celsius warmer than the 1981 to 2010 average and the fourth warmest on record. Every year since 1977 has been warmer than the 20th century average. Global warming results in climate change, which is how the weather acts over a long period of time – usually around that 30-years benchmark. Scientific consensus exists that the earth is warming, and that this warming is the result primarily from human activities. The debate is about projecting or forecasting future climate change and the magnitude of impacts it will have, not whether human activities are influencing climate change and that consequences will be more severe.

Houston, my hometown and the oil and gas capital of the world, along with other areas of the world have experienced never seen before flooding given warmer air holds more moisture. These events are causing significant property damage and, tragically, loss of life. While we experience wetter conditions, other drier areas of the world experience drier conditions. As these extremes in weather continue to worsen, so too will opinions, political views and impacts. No matter what your opinion about climate change, the world is undergoing an energy transition. The youth of today are listening to the climate scientists, are adopting new technology, and are shaping policy like never before. They want a green new deal.

The world around us is quickly changing. We produce fossil fuels, but not with fossilized thinking. We therefore need to move quickly and responsibly to take energy forward through Carbon Management in oil and gas. Contact us to find out more.

Natural Gas – Smell of gas and brackish water...vibrant air in Houston!

Houston was indeed the epicenter of the global gas world this week, with the Gastech conference being held here; however, delegates and exhibitors learned just as much about the vagaries of a strong Tropical Depression (Imelda) as they did about gas and LNG.  As if to mirror the veritable flood of LNG that is making its way onto the world stage from the Gulf of Mexico, there was just as much energy in the upper atmosphere as there was being put into closing LNG sales deals from the many Gulf Coast export projects that were represented at the event, alongside many of the more traditional gas players.

One of the questions around the future of the gas industry, and the success of the many projects vying for off takers and finance, is the extent to which low cost gas can capture market share traditionally belonging to oil.  Among the talk of bunkering projects and diesel substitution, there was a surprising new angle from NASA administrator Jim Bridenstine, who spoke of the potential of LNG as a fuel for the next generation of space rockets… low cost, reliable and safe.  In many ways, this could have been a commercial for many of the terrestrial uses for LNG, as the talk of sustainable energy and the energy transition gain momentum.

On a more reflective note, whether it is the anticipated double digit growth in the LNG sector, the increasingly urgent demands of investors looking for some kind of return for their gas investments, or power station developers looking to lock in low cost fuel, the conference echoed many of the features of the industry right now… lots of promise, but still some hesitation to lock in to long-term deals.  With an increasing focus on the sourcing of gas for the next wave of LNG projects, it was also a timely opportunity to consider the varying fortunes of gas producers.  On the one hand, we have a collective sigh of relief from hard done by Permian producers who are finally seeing some pipeline capacity to take their gas to market.  However, dry gas producers in the northeast, on the other hand, are laying off rigs, with investors simply unable to make an adequate return in the current sub-$2.50 environment.

Forecasting the gas outlook at the moment is about as difficult as any weather prediction. Houston this week was a reminder that life is an uncertain business, whether it comes from the gas that is a few miles under our feet, or the weather that is a few miles above us...

Crude Oil – OECD commercial inventories are readily available

Oil prices rose sharply this week, buoyed by supply risks as the market assesses the fallout from last weekend's drone attacks on Saudi oil infrastructure.

On Saturday, September 14, 2019, an attack damaged the Saudi Aramco Abqaiq oil processing facility and the Khurais oil field in eastern Saudi Arabia. The Abqaiq oil processing facility is the world’s largest crude oil processing and stabilization plant with a capacity of 7 million barrels per day, equivalent to about 7% of global crude oil production capacity.

Following the September 14 attack and ensuing outage at the Abqaiq facility, the amount of available spare capacity that can be brought online within 30 days in Saudi Arabia is unknown. In addition, because Saudi Arabia holds most of OPEC’s spare capacity, there is likely little spare production capacity elsewhere to offset the loss.

Russia may be able to increase production in response to a disruption and higher prices, but the amount of time needed for these volumes to become available is uncertain. The US would also likely be able to increase production, but it would take longer than 30 days. Therefore, without Saudi Arabian spare capacity the global crude oil market is vulnerable to production outages, as events would be more disruptive than normal.

This week Saudi Arabia set out a timeline for a resumption of full operations, saying it had restored supplies to customers at levels prior to the attacks by drawing from its oil inventories.

It indicated it would restore its lost production by the end of this month, and bring its output capacity back to 12 million barrels per day by the end of November. These plans suggest Saudi Arabia will have no spare capacity for at least the next two and a half months and therefore no way to absorb any further shocks.

The most readily available alternative source of supply during a supply outage is stocks of crude oil. As of September 1, commercial inventories of crude oil and other liquids for Organization for Economic Cooperation and Development (OECD) members were estimated at 2.9 billion barrels, enough to cover 61 days of its members’ liquid fuels consumption


Weekly Recap

Crude Oil Price

Brent, the global benchmark for oil, increased $4.45 to $65.06 a barrel, reflecting a gain of 7.34% on the week.

WTI crude rose $3.65 to $59.10 a barrel, up 6.58% on the week.

Drilling Activity

Source: BHGE Rotary Rig Count

Total US rig count (including the Gulf of Mexico) stands at 868, down 18. The horizontal rig count stands at 756, down 20. US rig activity continues to be restrained and is 185 rigs below (-18%) last year’s total. 

US Crude Oil Supply and Demand

Sources: EIA Weekly Update and GCA analysis

Crude oil inventories increased, up by 1.1 million barrels from the previous week. The crude stored at Cushing (the main price point for WTI) decreased 0.6 million barrels; total stored is 38.7 million barrels (~43% utilization). Total US commercial crude stored stands at 417.1 million barrels (~53% utilization).

US crude oil refinery inputs averaged 16.7 million barrels per day, with refineries at 91.2% of their operating capacity last week. This was 788,000 barrels per day less than the previous week’s average.

US gasoline demand over the past four weeks was at 9.5 million barrels, down 1.8% from a year ago. Total commercial petroleum inventories increased by 0.9 million barrels last week.

US crude net imports averaged 3.9 million barrels per day last week, up by 446,000 barrels per day from the previous week. Over the past four weeks, crude oil net imports averaged 3.5 million barrels per day, 39.8% less than the same four-week period last year.

   

Authors

September 20, 2019

P. Kevin Galvin

Facilities/Cost Engineer - kevin.galvin@gaffney-cline.com
September 20, 2019

Nick Fulford

Global Head of Gas/LNG - nick.fulford@gaffney-cline.com
September 20, 2019

Nigel Jenvey

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

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