September 21, 2018

September 21, 2018

21st September 2018

Oil Drilling Activity

Onshore US drilling activity decreased by 2 with a total active count of 1028 rigs; those targeting oil decreased by 1, with the total at 866. Across the three major unconventional oil basins, the oil rig count increased by 5 and stands at 610, with Permian up 5, Eagle Ford up 1 and Williston down 1.  

Sources: EIA Weekly Update and GCA Analysis

EIA reported last week’s total US domestic crude output at 11.0 million barrels a day, returning to the record high reached four weeks ago.  It would be over simplistic to assume 866 rigs active for oil was the level required to sustain 11 million barrels a day.  Industry has drilled but not completed almost 1,630 new wells in 2018 year to date, 77% of them in the Permian basin.  Once the new pipeline capacity is in place, coastal export capacity will be at a premium as 1+ million barrels a day of new well production comes through the system.  Frac hands should also be earning some good overtime to bring all those wells on stream.

President Trump took another swipe at global oil producers as the price of Brent crude inched toward the US$80-a-barrel threshold, tweeting at the Organization of the Petroleum Exporting Countries to get prices down.

Natural Gas – Two timely reminders

Two stories have dominated the headlines this week on natural gas, one with a very local theme, with lessons for the whole industry, the other very much continuing the global march of natural gas, and its role in international trade and politics.

First, the local angle.  For US readers, most will be aware of the headlines made earlier this week following a series of gas explosions in the Boston area, which tragically resulted in the death of a high school student, and widespread damage to homes and premises over the neighborhood of Lawrence, Andover and North Andover.  While the investigation continues, there has been speculation that some kind of over pressurization of the distribution system may have been at the root of the multiple explosions.  Over the next few weeks and months, there will assuredly be a series of detailed investigations to ascertain what technical, procedural and operational failures may have led to this disastrous outcome.

Even though natural gas is a fundamentally safer fuel than many other hydrocarbons, these events remind us all that safety must remain baked into the heart of the natural gas industry, probably no more so than with LNG, given the huge amounts of energy carried in each ocean going vessel, or storage facility.

The LNG sector is rightly proud of its excellent safety record, and the high standards that characterize the industry.  However, as we continue to see a proliferation of new players in the sector, new technologies, and more widespread movement of LNG through things like reloads, bunkering and ship-to-ship transfers, the industry needs to remain even more focused on maintaining its record.

The events in Boston are a timely reminder that public acceptance of gas, or LNG, regardless of the societal benefits of burning it in place of a realm of dirtier and costlier alternatives, relies on a continued safety record that is second to none.  The damage done to the unconventional gas sector as a result of the negative PR associated with fracking is enough of a reminder that in spite of its benefits, the jury of public opinion is still not fully convinced that gas is the future of energy ...

Moving back to a theme that has been written about in a number of recent weekly bulletins, the other big headline this week has been the renewed focus on import tariffs affecting US LNG exports to China.  With the recent uptick in the trade dispute between the US and China, the reality of export tariffs on LNG will hit exporters from Monday, with an initial 10% surcharge.

Albeit less than the 25% that had been discussed, the fact that it involves real money, and will impact global trading patterns so early in America’s nascent export trade with China will come as a shock to many.  While it will have no effect on the four US export projects that will join Sabine and Cove Point by the end of next year, for those projects rapidly homing in on FID, the “next wave” of LNG exports, it may have an effect.  Lenders who had become relatively comfortable with LNG export projects as a sustainable and relatively low risk destination for funds may think again, if the trade dispute worsens.

Between the reminders about the ever-present need for a focus on safety and integrity, and the geopolitical risk that large scale LNG is always subject to, both news themes this week emphasize the need for a continued focus on diligence, professionalism, and sustainability.  These are essential to underpin the growing role of gas in the global economy, if it is to reach its full potential for economic development, wealth creation, and environmental benefit.

Meanwhile, for those with LNG cargoes to sell in the remainder of 2018, gas prices are strong in Asia and more recently in Europe too, widening the gap with Henry Hub, which has remained stubbornly flat below US$3.

Crude Oil – US refiners process record volume

US oil price rose to a more than two-month high, bolstered by a sixth weekly crude inventory drawdown and strong domestic gasoline demand, amid ongoing supply concerns over US sanctions on Iran. US crude inventories fell 2.1 million barrels last week to 394.1 million barrels, the lowest level since February 2015. Gasoline consumption usually picks up in the summer and wanes in autumn, but demand remained strong in the latest week, estimated at 9.5 million barrels per day.

US Crude processing typically declines by almost 1 million barrels per day between the middle of August and early October, before starting to pick up again from the start of November. However, this year the decline may need to be deeper and/or longer than average, otherwise the market will head into the year-end with too much fuel, especially gasoline.

US refiners have processed a record volume of crude in the last three months, reversing the previous shortage of distillate but leaving the US with record gasoline stocks at the end of the summer driving season.

Refiners have carried on processing at elevated rates after the end of the normal summer driving season to rebuild previously depleted distillate stocks. However, the now-plentiful supply of gasoline and to a lesser extent distillate implies refiners may have to cut processing more sharply than usual over the next couple of months to avoid creating a glut of refined products.

Fuel availability has been helped by the absence of a direct hurricane hit on the major refining centers located on the coasts of Texas and Louisiana, in stark contrast to the refinery closures caused by Hurricane Harvey in 2017. Refiners use the shoulder season between the end of summer driving demand and the onset of winter heating to undertake scheduled maintenance and change refinery configurations.

The Organization of the Petroleum Exporting Countries and other producers including Russia meet on Sept. 23 in Algeria to discuss how to allocate supply increases within their quota framework to offset any loss of Iranian supply. US sanctions affecting Iran's oil exports come into force on Nov. 4. Although many buyers have scaled back purchases, it is unclear how easily other producers can compensate for lost supply.

Weekly Recap

Drilling Activity

Source: BHGE Rotary Rig Count

Total US rig count (including the Gulf of Mexico) stands at 1053, down 2 this week. The horizontal rig count stands at 919, down 2 this week. US rig activity has shown little growth for 16 of the last 18 weeks and is up 13% above last year’s total.

Compared to a November 2014 figure of 1,876 active rigs, the current level is just above 50% of the 2014 high.

Crude Oil Price

Brent, the global benchmark for oil, increased US$1.62 to US$79.68 a barrel, reflecting a gain of 2.08% on the week.

WTI crude rose US$2.41 to US$71.04 a barrel, up 3.51% on the week.

US Crude Oil Supply and Demand

Sources: EIA Weekly Update and GCA Analysis

US crude oil refinery inputs averaged 17.4 million barrels per day, with refineries at 95.4% of their operating capacity last week. This is 442,000 barrels per day less than the previous week’s average.

US gasoline demand over the past four weeks was at 9.7 million barrels, up 2.0% from a year ago. Total commercial petroleum inventories decreased by 0.4 million barrels last week.

US crude imports averaged 8.0 million barrels per day last week, up by 433,000 barrels per day from the previous week. Over the past four weeks, crude oil imports averaged 7.7 million barrels per day, 6.9% more than the same four-week period last year.

US crude exports averaged 2.367 million barrels per day last week, an increase of 539,000 barrels per day from the previous week. Over the last four weeks, crude oil exports averaged 1.871 million barrels per day, 171.4% more than the same four-week period last year.

Crude oil inventories decreased 2.1 million barrels from the previous week. The crude stored at Cushing (the main price point for WTI) decreased 1.3 million barrels; total stored is 22.3 million barrels (~25% utilization).

Authors

September 21, 2018

P. Kevin Galvin

Principal Advisor - Sr. Manager Facilities/Cost Engineering Advisor - kevin.galvin@gaffney-cline.com
September 21, 2018

Nick Fulford

Global Head of Gas and LNG - nick.fulford@gaffney-cline.com

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