September 22, 2017

September 22, 2017

22nd September 2017

Oil Drilling Activity

Drillers deceased onshore rigs by 2, total stands at 913. Across the three major unconventional oil basins, the oil rig total remained flat at 495, rig growth remains weak in the major oil basins with crude prices at US$50 WTI. Rigs targeting oil have decline for six weeks running and this trend could continue into the fourth quarter.

Sources: EIA Weekly Update and GCA analysis

Natural Gas – Australia on the back foot

For those who follow the exploits of the three LNG giants, Qatar, Australia and now of course the USA, the geopolitical battle is starting to hot up, in terms of whose gas goes where over the next few years.

Next year, Australia will get to the top of the LNG leader board, with a nameplate 85 MTPA (millions of tonnes per annum) due to be completed, overtaking Qatar with their 77 MTPA.  The US, while currently still well behind exporters like Nigeria with their 24 MTPA, are set to rapidly join the big league with 65 MTPA in operation or with FID.

So, while Australia will be able to enjoy top ranking for a year or two, things aren’t looking so good for the future.  This week, the Australian Competition and Consumer Commission (ACCC) reiterated its concerns about future gas shortages in Australia, which some see LNG exports contributing.  So not only are we likely to see that 85 MTPA remain static for some time, it’s also possible that some of those export plants, especially those in Queensland, will have their feedstock gas rationed.

Meanwhile, Qatar has made clear that it intends to win back its top exporter slot that it has held for many years with an expansion to 100 MTPA by around 2022 to 2024.

In the US, on the other hand, gas restrictions seem to be the last thing on anyone’s mind, and with the 10-year strip having faded by around 20c since the summer, sitting at or below $3/MMBtu for the foreseeable future, cheaper feedstock for US exporters seem a likelier outcome.

Having finally got ahead, Australia seems to be facing strong head winds with both Qatar and the US gaining ground.  In ten years’ time, 2027, it will be interesting to see whether the US, from being the backmarker in 2017, will have overtaken both its rivals.

At the moment all three exporting countries can take comfort from the fact that LNG is one of the fastest growing segments in the energy sector, spurred by lower prices and better availability.  As we know from the last 10 years; however, the next 10 years could be full of surprises.

Crude Oil – US exports expected to grow

US oil is trading at the biggest discount to the global market in two years, extending a boom in exports of crude from US oil shale fields to refiners in Europe and Asia. After Hurricane Harvey hammered the Gulf Coast last month, the price of Nymex crude sank to as much as $6.30 a barrel below its European counterpart, Brent—the widest gap since August 2015.

Harvey all but stopped the flow of oil to and from the US Gulf Coast, but crude exports jumped back up by 775,000 barrels a day to 928,000 barrels a day in the past two weeks of September, as ports reopened following the storm. Crude exports are expected to hit records in the coming months and volumes are likely to surge in the last three months of the year - perhaps more than double amounts from the same time last year.

Strong foreign appetite for US crude will push up against the limits of export infrastructure. The current gross export capacity stands at about 2.2 million barrels a day, but it’s more like 1.8 million barrels a day after accounting for factors such as fog and the logistics of loading massive tankers. One obstacle to more exports could soon be resolved. The Louisiana Offshore Oil Port, LOOP, is the one place in the US that is deep enough for supertankers that can most profitably make the journey to Asia. LOOP is looking to add the capability to load those tankers next year.

The recent discount on West Texas Intermediate (WTI) crude, the US reference price, is poised to increase American shipments. In recent years, the rise of the US oil shale industry has pushed oil prices down world-wide and exports have become a relief valve for US oil drillers.

Second-quarter 2017 financial statements for US oil companies (55) indicate that aggregate liquids production grew year over year for the first time since the fourth quarter of 2015. Cash flow from operating activities also increased year over year, the third consecutive quarter of year-over-year growth, reaching the highest level in nearly two years. US oil companies’ ability to sufficiently meet financial obligations and their increased activity, advocate that production could continue growing in the coming quarters.

Total liquids production for the surveyed companies averaged 5.3 million barrels per day (about 60% of US production), a 1% increase compared with the second quarter of 2016 and the first annual increase in production since the fourth quarter of 2015. Since the beginning of 2017, more than two-thirds of these companies increased their capital expenditures, investing in drilling and completing wells that contributed to the production growth in the second quarter of 2017. Capital expenditures for these companies increased 37% year over year in the second quarter of 2017, totaling $14.5 billion.

Sources: EIA Weekly Update and GCA analysis

Weekly Recaps

Oil Drilling Activity

Total US rig count (including the Gulf of Mexico) stands at 935, down 1 this week with rigs targeting oil down 5. The horizontal rig count stands at 790, down 5.

The total number of active onshore rigs deceased to 913(down 2).  When compared to a November 2014 figure of 1,876 active rigs, the current level remains 50% below the 2014 high.

Across the three major unconventional oil basins, the oil rig total continued at 495, with Permian up 6 and Eagle Ford and Williston down 3.

Crude Oil Price

Brent, the global benchmark for oil, rose US$0.94 to US$56.55 a barrel, reflecting a gain of 1.69% on the week.

WTI crude increased US$0.64 to US$50.45 a barrel, up 1.28% on the week.

US Crude Oil Supply and Demand

Sources: EIA Weekly Update and GCA analysis

US crude oil refinery inputs averaged 15.2 million barrels per day, with refineries at 83.2% of their operating capacity last week. This is 1.1 million barrels per day more than the previous week’s average.

US gasoline demand over past four weeks was at 9.5 million, up 0.2% from a year ago. Total commercial petroleum inventories decreased 6.6 million barrels last week.

On the supply side, EIA data indicated that total domestic crude production increased 157,000 barrels to 9.51 million barrels a day. The Lower 48 crude production now stands at 9.048 million barrels per day, up 179,000 this week.

US crude imports averaged 7.4 million barrels per day last week, an increase of 888,000 barrels per day from the previous week. Over the last four weeks, crude oil imports averaged 7.2 million barrels per day, 10.9% below the same four-week period last year.

Crude oil inventories increased 4.6 million barrels from the previous week. The crude stored at Cushing (the main price point for WTI) increased 0.7 million barrels; total storage is 59.8 million barrels (~66% utilization).

Authors

September 22, 2017

Nick Fulford

Global Head of Gas and LNG - nick.fulford@gaffney-cline.com
September 22, 2017

P. Kevin Galvin

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

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