23rd August 2019
Oil Drilling Activity
Onshore US drilling activity dropped 20 with a total active count of 887 rigs; those targeting oil down 16, with the total at 754. Across the three major unconventional oil basins, the oil-rig count was down 7, with Permian down 7, Williston and Eagle Ford flat.
US domestic crude output remained flat for the third week running; crude oil production stands at 12.3 million barrels per day, just under its weekly record high at 12.4 million hit in May. Well completions exceed wells drilled each month, on a rising trend since March 2019 with plenty of uncompleted wells available to sustain this trend for some while to come to maintain current oil and growing gas production. Major land rig contractors are anticipating a further decline in rig utilization for the remainder of this year as capital discipline bites into oil and gas company drilling budgets.
Crude oil stockpiles deceased after two weeks of increases; inventories dropped 2.7 million barrels compared with expectations for a decrease of 1.9 million barrels. The latest figure compared with inventory builds for each of the last two weeks. Last week saw an increase of 1.6 million barrels and the week before, a rise of 2.4 million barrels.
Carbon Management – Carbon Intensity, the keep-fit climate exercise regime
The oil and gas business environment is constantly changing, requiring that projects and operations vary to ensure competitiveness. This means that absolute Greenhouse Gas (GHG) or ‘carbon’ emissions targets become redundant and not a stable basis for performance measurement. A Carbon Intensity (CI) target, the amount of GHG emissions on a product unit basis, is more durable as it allows a company the flexibility to respond and change its plans. Assessment of CI can be done efficiently and effectively at a country, corporation, business unit, or asset level. A lack of timely action in determining the existing and future CI of oil and gas could result in higher compliance costs, price discounts, cancellation of supply contracts, higher financing costs and even stranded reserves.
Our analysis of multiple oil and gas supply chains suggests that some oil and gas has over 6 times the CI of others, meaning that the total life-cycle emissions (including end-use) varies considerably. A range of factors cause the differences, including level of regulation, technology availability and adoption, capability and know-how, the maturity of the oil field, the recovery methods used, and the presence of markets. In other words, not all oil and gas is created, developed and operated equally.
Most oil and gas companies are yet to provide the disclosures necessary to enable investors to assess how they are performing with carbon emissions, and therefore how they are managing the risks and opportunities associated with the low carbon energy transition. Our review of the top 10 oil and gas companies that are already engaged in a low carbon transition found that they all have started reporting the CI of their business. However, no calculation was comparable because of differences in units used, changes in boundaries (operated, operated control, equity), variations in completeness (Scope, inclusion of all GHGs) and contrasting approaches to accuracy and transparency (some verified with independent but limited assurance, some with self-reporting only). At the moment, oil and gas companies that are reporting their carbon emissions performance are not doing so in a manner that enables confidence in the integrity of the information.
While there are industry guidelines for reporting GHG emissions, these do not provide recommendations related to carbon performance indicators such as CI. Guidelines will ensure all relevant issues have been dealt with in a factual and coherent manner, using a standardized and documented method for calculation, have a clear audit trail with disclosure of assumptions, data sources and uncertainties quantified and reduced as far as practicable. Once accomplished oil and gas investors will be able to assess their current and future performance, know that the right strategic decisions are being taken, and engage with those companies that are not performing well.
A simplified framework and a classification system based on CI will consistently identify which assets and activities will be sustainable in the energy transition, and what equipment and services are available to reduce carbon-intensity. This will secure business models and asset valuations, enabling sustainable investment and lending decisions to be made with confidence.
Natural Gas – Europe, a haven for homeless LNG
Much of the focus of the last few weeks in this blog has been the growing implications of the oversupply in the global gas sector, arising largely from the inexorable increase in LNG exports from the US. These exports are in turn, supported by a sustained increase in US shale gas production, on trend to reach 70 Bcfd later this year.
During the last year, a number of factors have conspired to create an unprecedented global fall in gas prices, resulting in not only low gas prices per se, but also low prices in comparison to oil. Quite apart from US gas production, these include more Australian LNG helping to balance Pacific LNG markets, and lower demand in Japan and Korea, as well as weather effects, which have dampened demand in recent weeks.
The latest manifestation of the LNG oversupply has been the turn down in pipeline supplies in Europe, where LNG imports have increased three-fold over the last 10 months, creating a ten-year low in natural gas prices. Storage in Europe is also at record levels, and the effects are being felt by many of Europe’s traditional gas suppliers such as Russia, Norway, and Algeria, all of whom have seen market share move to LNG.
Currently, Europe is the only major gas market where price takers can reliably deliver LNG outside long-term contracts, and where the only risk is price. Japan, Korea and other parts of Asia are moving towards unbundled gas and power markets, which would enable the same ability to dispose of uncontracted gas, but they are still several years away from being a true “sink”. Brazil, Argentina and other major gas markets are a few years behind that. However, the pattern is clear, and seemingly set, and all these market changes will help commoditize gas, and create global price linkages, where supply and demand set price.
These seismic shifts in global gas markets are creating a series of headwinds for gas suppliers, and with the next round of LNG projects already on the way, the trend seems to be set for several years to come, unless higher than expected demand arises, from China and India especially.
As the world prepares itself for what could be a sustained period of low prices, the industry will need to consider its response. Lower than planned project returns for equity holders, take or pay consequences for buyers who have locked in to out-of-the-money contracts, and lenders starting to worry about debt service payments are all going to be major factors to consider. For now, European homeowners can thank US oil and gas producers for a few more Euros in their pocket this winter, as their heating bills plummet.
Crude Oil – Fuel consumption unlikely to accelerate
Oil prices held steady after the Energy Information Administration reported a draw of 2.7 million barrels in crude oil inventories. Prices have been trending higher over the last few days on the back of positive signals about the trade conflict between the US and China.
Crude oil from the Organization of the Petroleum Exporting Countries made up 30% of world oil supply in July 2019, down from more than 34% a decade ago and a peak of 35% in 2012. Despite OPEC-led supply cuts, Brent oil has tumbled from April’s 2019 peak above $75 a barrel to $60, pressured by slowing economic activity amid concerns about the US-China trade dispute.
The decline in prices, should it persist, and erosion of market share could raise the question of whether continued supply restraint is serving producers’ best interests.
US refineries have cut the volume of crude processed so far this year, but stocks of gasoline and distillates remain ample, highlighting the slack demand for transportation fuels. US refineries have reduced crude input by an average of 247,000 barrels per day since the start of the year compared with the same period in 2018.
Year-to-date processing rates have fallen for the first time since 2011 and by the most since the recession of 2008/09. Refinery crude consumption has fallen by around 56 million barrels so far compared with the same period in 2018.
Refineries cut processing sharply during the regular maintenance season in March and April and have never made up the shortfall. Processing has remained at or below prior-year rates throughout the summer driving season, normally the highest demand of the year.
Fuel consumption is stuck in the doldrums and unlikely to accelerate much until the domestic and international economies improve.
Crude Oil Price
Brent, the global benchmark for oil, increased $1.46 to $59.84 a barrel, reflecting a gain of 2.50% on the week.
WTI crude rose $1.01 to $55.36 a barrel, up 1.86% on the week.
Total US rig count (including the Gulf of Mexico) stands at 916, down 19. The horizontal rig count stands at 797, down 18. US rig activity continues to be restrained and is 126 rigs below (-12%) 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
Crude oil inventories decreased, down by 2.7 million barrels from the previous week. The crude stored at Cushing (the main price point for WTI) decreased 2.5 million barrels; total stored is 42.3 million barrels (~47% utilization).
US crude oil refinery inputs averaged 17.7 million barrels per day, with refineries at 95.9% of their operating capacity last week. This was 401,000 barrels per day more than the previous week’s average.
US gasoline demand over the past four weeks was at 9.7 million barrels, up 1.5% from a year ago. Total commercial petroleum inventories increased by 4.0 million barrels last week.
US crude net imports averaged 4.4 million barrels per day last week, down by 617,000 barrels per day from the previous week. Over the past four weeks, crude oil net imports averaged 4.7 million barrels per day, 28.5% less than the same four-week period last year.
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