September 6, 2019

September 6, 2019

6th September 2019

Oil Drilling Activity

Onshore US drilling activity dropped 6 with a total active count of 870 rigs; those targeting oil down 4, with the total at 738. Across the three major unconventional oil basins, the oil-rig count was up 2, with Permian down 2, Williston up 3 and Eagle Ford up 1.

Sources: EIA Weekly Update and GCA Analysis

US domestic crude output decreased 100,000 barrels per day; crude oil production stands at 12.4 million barrels per day, below the record high set last week. At this level, US crude and condensate production is meeting 12.5% of Global Oil Demand, which is just over 100 million barrels per day (IEA, OPEC) and likely to remain at or above this level for the foreseeable future.  By comparison, OPEC achieved a 29.6% share of global demand in August, slightly higher than July because of moderate increases in delivery from Nigeria, Iraq and Libya offsetting production restraint in Saudi Arabia, and declines in Iran and Venezuela.

Crude oil stockpiles deceased for the second week; inventories dropped 4.8 million barrels compared with expectations for a decrease of 2.5 million barrels.

The US added 130,000 nonfarm payrolls last month, compared with economist expectations for 160,000. Enough to keep unemployment levels near historic lows at 3.7%.

Carbon Management – A different kind of revolution in Latin America….

The Latin America Region (LAR) is a significant energy resource holder and producer, comprised of countries with natural treasures but also economic and environmental challenges. Perhaps nowhere in the world is the dual challenge of producing more energy with fewer emissions, to lift people out of poverty and minimize environmental damage, more of a compelling dilemma to be solved. This week we provide insights into our comparative analysis of the Carbon Intensity (CI) of LAR oil plays using the OPGEE tool, and the risks and opportunities it presents from a market and policy perspective.

With 10% and 6% of global oil and gas production, respectively, and 20% and 4% of oil and gas reserves, how the LAR develops its hydrocarbon resources will impact the world. While both North American (NA) unconventional and LAR crudes will remain vital to regional and global supplies, unconventional production, especially from light tight oil is the most significant new source of fossil fuels in the last decade. Existing life cycle extraction of oil in LAR has some of the highest and lowest values of CI, and holds many opportunities to reduce carbon emissions and improve national wealth. Among the major oil and gas producers in the region, Colombia, Brazil and Argentina have the lowest CI, whereas Venezuela’s is nearly double their CI.

Venting, flaring and fugitive emissions (VFF) is estimated to be the foremost contributor to GHG emissions from oil and gas activity for the region with over 60 million tons of annual CO2 emissions. This is equivalent to 151 million barrels of oil consumption, or the CO2 emissions reduction potential of 16 Gorgon CCUS projects (one of the largest projects in the world at full capacity). However, global experience indicates that over half of these emissions can be mitigated today with proven technology, at scale and at no net cost. Among methods that can address VFF, Leak Detection and Repair (LDAR) programs, which are designed to identify and repair/replace leaking equipment to reduce or eliminate emissions, offer the greatest opportunity. LDAR programs provide accuracy, efficiency, flexibility and a safe operating environment while significantly reducing leaks and avoiding product losses from components such as valves, flanges, pumps and compressors. The largest opportunities for LDAR are currently in Mexico, while the development of the Vaca Muerta in Argentina will dominate the future.

Our proprietary approach to quantify policy and regulatory interests in carbon emissions issues analyzed aspects of over 1000 policies, regulations, and laws across the LAR. High-level trends indicate that regional efforts have been focused on diversifying the energy mix through greater integration of renewable energy and strengthening natural carbon sinks. Contrarily, oil and gas regulations with respect to VFF, energy efficiency or other carbon management alternatives for oil and gas are not yet a key area of focus. To remain competitive in a carbon-constrained world, the LAR oil and gas industry will have to embrace Carbon Management ahead of targeted policy and regulations, and oilfield services will provide the edge for rapid and targeted transformation. Operators, governments and regulators need to be able to avoid “locking in” development of suboptimal resources and providing incentives for shale operators to manage resources sustainably.

Natural Gas – Two steps forward, one back...

There has been a lot of LNG news this week, starting with the decision to move ahead with the Arctic LNG 2 project, being developed by Novatek.  This follows the successful Yamal LNG project.  If the economics are similar to those quoted for Yamal LNG, this will add another 20 million tonnes per annum of relatively low cost LNG to send to European markets, and will also make 2019 a decisively record year for LNG FIDs.

Competitive supplies to Asia are more challenging, however, given the larger shipping distances via the Suez Canal, but this is changing.  Melting sea ice is making the northern passage from Russia to China a more realistic option for most of the year round.  Last week, a crude carrier, the Korolev Prospect, left Murmansk and reached the Bering Strait this week en route to China, where it is expected to dock around September 14.  The voyage is not only significant as a result of this developing trade route, but it is also powered by LNG, one of six ships owned by Sovcomflot, with another five to be added to the fleet, a bi-product of the availability of LNG bunkering fuel in that part of the world.

Meanwhile, in the southern hemisphere, Argentina continues to press on with plans for a multi-million tonne LNG export plant, based on the substantially growing Vaca Muerta gas production.  This may have to find markets further afield than the southern cone, given the potential for development of huge associated gas production that may evolve from development of the pre-salt oil discoveries in Brazil.  These Brazilian gas volumes contain relatively high CO2  content, which combined with deepwater costs, makes them unlikely to compete as LNG feedstock in the near term but will instead target Brazilian gas demand.

So with Russia and Argentina on the offensive, what about the US?  Well, for Lake Charles, LA at least, some delays appear likely after Shell applied to have their permits extended to a 2025 completion deadline.  With a number of technical/construction delays cited in the filing, the original completion dates appear to be beyond reach, in any event.  However, with LNG prices softening significantly globally, and more supply than demand, a delay also appears commercially advantageous.

As if to underline this trend, Freeport LNG announced this week that their first commissioning cargo left the Gulf coast this week, with full operation expected to be achieved over the next few months.

Crude Oil – Sluggish oil consumption

Global GDP growth has been the primary driver of oil consumption for the last 50 years - with crude prices playing a secondary regulating role, forcing consumption into line with production in the short term.
 
Global GDP increased by 3.0% in 2018 but it is forecast to slow to just 2.6% in 2019, according to the World Bank. GDP growth of 2.6% would be the slowest since 2014 and before that 2012, when oil consumption increased by just 1% in both cases. Since the World Bank produced its forecasts three months ago, however, most indicators have pointed to a further deceleration in growth. The most likely outcome is now that GDP growth will come in below 2.5%, perhaps significantly lower, the worst since the recession of 2008/09. By inference, oil consumption growth is likely to slip below 1% and 1 million barrels per day, in line with BP's latest forecast.

Oil consumption has grown at an average annual rate of 1.5% over the last two decades, but this year is likely to fall short of that. Until the global economy recovers momentum, oil consumption growth is likely to stay well below trend, keeping pressure on OPEC+ to constrain production to support crude prices.

US oil producers and their contractors are cutting budgets, staffs and production goals amid a growing consensus of forecasts that oil and gas prices will stay low for several years. The US has 898 working rigs, down 14% from a year ago, and even that is probably too many.

Bankruptcy filings by US energy producers through mid-August this year have nearly matched the total for the whole of 2018.  Signs of a downturn come as the shale sector had just started generating the cash flow demanded by investors, who have grown weary of drilling expansions without returns.

Last quarter, a group of 29 top publicly-traded producers generated more in cash - $26 million - than it spent on drilling and dividends. A year earlier, the same group had spent $2.4 billion more than it generated.

Despite that progress, small to mid-sized shale firms are now pulling back on production targets amid the gloomy price projections.

Weekly Recap

Crude Oil Price

Brent, the global benchmark for oil, decreased $1.07 to $59.90 a barrel, reflecting a loss of 1.75% on the week.

WTI crude fell $1.27 to $55.16 a barrel, down 2.25% on the week.

Drilling Activity

Source: BHGE Rotary Rig Count

Total US rig count (including the Gulf of Mexico) stands at 898, down 6. The horizontal rig count stands at 783, down 1. US rig activity continues to be restrained and is 148 rigs below (-14%) last year’s total. US shale operators continue to focus on well productivity (i.e., well completion), DUC wells (inventory reduced by 100 in July) and operational efficiency over rig growth. Crude price continues to support capital discipline over production growth by the drill bit.

US Crude Oil Supply and Demand

Sources: EIA Weekly Update and GCA Analysis

Crude oil inventories decreased, down by 4.8 million barrels from the previous week. The crude stored at Cushing (the main price point for WTI) decreased 0.3 million barrels; total stored is 40.1 million barrels (~45% utilization).

US crude oil refinery inputs averaged 17.4 million barrels per day, with refineries at 94.8% of their operating capacity last week. This was 27,000 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 0.9% from a year ago. Total commercial petroleum inventories decreased by 4.9 million barrels last week.

US crude net imports averaged 3.8 million barrels per day last week, up by 934,000 barrels per day from the previous week. Over the past four weeks, crude oil net imports averaged 4.0 million barrels per day, 37% less than the same four-week period last year.

   

Authors

September 6, 2019

P. Kevin Galvin

Facilities/Cost Engineer - kevin.galvin@gaffney-cline.com
September 6, 2019

Nick Fulford

Global Head of Gas/LNG - nick.fulford@gaffney-cline.com
September 6, 2019

Nigel Jenvey

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

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