20th December 2019
Oil Drilling Activity
Onshore US drilling activity increased by 12 with a total active count of 788 (Y/Y decrease of 265) rigs; those targeting oil up 18, with the total at 685. Across the three major unconventional oil basins, the oilrig count increased by 14, with Permian up 5, Williston down 1 and Eagle Ford up 10 (~19% increase).
US domestic crude production unchanged last week; crude production stands at 12.8 million barrels per day, of which ~2.4 million barrels per day is offshore and Alaska production. Crude inventories decreased 1.1 million barrels, compared to expectations for a 1.9 million barrel decline. US refineries processed 16.6 million barrels per day of crude last week, down 846,000 barrels per day (-5%) compared with the same week in 2018.
The Democrat-led House of Representatives voted to impeach Trump for abuse of power and obstruction of Congress. Trump became only the third president charged with high crimes and misdemeanors and will now face a trial in the Republican-controlled Senate.
Carbon Management – All I want for Christmas….
In last week’s monitor, we covered the launch of the US National Petroleum Council CCUS Study and that Gaffney, Cline & Associates is hosting the Cost Assessment Tool, which is used to assess the costs to capture, transport and store the largest 80% of all US stationary sources, for public use on our website. Another differential feature of the report was that the resulting recommendations from this analysis are laid out in a Roadmap. The recommendations are categorized into financial incentives, supportive legal and regulatory frameworks, technology and capability, and stakeholder engagement themes, and allocates them into three phases to achieve deployment at scale:
Activation phase: Clarifying existing tax policy and regulations could activate an additional 25 to 40 million tonnes per annum of CCUS, doubling US capacity within the next 5 to 7 years. This would require a $50 billion investment, including $2 billion for infrastructure investment, and create 10,000 annual jobs. The volume of CO2 captured, transported and stored would be equivalent to ~10% of the US crude oil infrastructure system.
Expansion phase: Extending and expanding current policies and developing a durable legal and regulatory framework could enable the next phase of CCUS projects achieving 75-85 million tonnes per annum of CCUS within the next 15 years. This would require an $150 billion investment, including $9 billion for infrastructure investment, and create 40,000 annual jobs. The volume of CO2 captured, transported and stored would be equivalent to ~25% of the US crude oil infrastructure system.
At-scale deployment phase: Achieving CCUS deployment at scale, an additional 350-400 million tonnes per annum of CCUS, in the next 25 years will require substantially increased support driven by national policies. This would require $680 billion investment, including $28 billion for infrastructure investment, and create 230,000 annual jobs. The volume of CO2 captured, transported and stored would be equivalent to ~75% of the US crude oil infrastructure system.
It was my pleasure to lead the development of the Roadmap with a team of US and international CCUS experts. The output is a two-page spread, which is found on pages 56 and 57 of the study Executive Summary. Delivery of this study was what I wanted for Christmas, and I hope you find it useful too. Many thanks to all the NPC staff and study team, my monitor readers and clients; it has been a pleasure to work with you this year ... happy holidays!
Natural Gas – A “gas” Christmas carol…
Exactly 176 years ago this week, Charles Dickens published what has become an annual favorite at this time of year....his short story “A Christmas Carol.” It was a social commentary on the changes that fundamentally affected how society evolved in 19th century London, and intended to make readers consider their own values and guiding principles, using the holiday period as a wider analogy.
Those familiar with the story will know that the main character, Ebenezer Scrooge, was visited during the night of Christmas Eve by three ghosts – Christmas Past, Christmas Present and Christmas Future, all setting out a vision of previous happy times, the challenges of the present day, and the future implications of isolation, and lack of social conscience.
As we approach the end of 2019, so the world of natural gas is changing before our eyes, presenting a similar opportunity to reflect on the last decade, and what lessons need to be learned to ensure continued success in future. What might those same ghosts have had to say about the way the gas industry might approach what promises to be a very different future?
The Ghost of Gas Past would take us back to a world of relative simplicity and good fortune. From a position in the mid-2000s where gas was getting scarcer and more expensive, by the start of this decade the “shale gale” was upon us. In global markets where gas price was still largely linked to oil, the huge gas resources that emerged from the application of unconventional technology appeared to offer a windfall of mammoth proportions. US companies long searching the globe for new opportunities brought their capital home, and in other parts of the world LNG investments took off, as the prospects of growing Asian demand, based on multi-year take or pay deals, assured lenders of a low risk, high value opportunity.
As we consider the Ghost of Gas Present, we find that things have changed for the worse. Gas has become the victim of its own success, with prices in the US, Europe and Asia at record lows, and every part of the value chain, from upstream producer’s right down to the retailers supplying the end-customer under more financial pressure than ever before. Not only that, but the public concern over climate change has rapidly eroded natural gas’ image as a clean, sustainable fuel, with its image further tainted by a media-fueled unease about fracking. With gas prices increasingly linked to regional indices, and the demise of the take or pay contract, lenders too are reluctant to support gas projects, seeing them as more risky, especially with increasing stakeholder pressure to invest only in low carbon energy infrastructure.
So today, as we look forward, one might wait with trepidation to see the vision set out by the Ghost of Gas Future.... Stranded gas resources, write downs, diminishing market share and disappointing returns could be the picture for the next decade or more, unless the lessons of the past learned and acted.
Inevitably, 2020 will bring a period of stabilization, with global gas demand starting to soak up some of today’s excess production. In the US, we are likely to see a price response to the downturn in upstream investment and activity, and a return to more sustainable wholesale prices, even for relatively dry gas without any liquids revenues to help make ends meet.
As natural gas defines its role more actively as a transition fuel, and the world starts to understand the cost of abatement and the limitations of renewables more fully, it has the potential to spark a re-energized vision for the future. A future not only as a transition fuel, but coupled with hydrogen technology and CCUS, a long-term place in a zero-carbon economy.
Furthermore, as natural gas continues to compete with oil-based products, particularly diesel, a series of new, untapped markets can create a growing demand, and a raft of cost-effective technologies are emerging that will bring down the cost of gas storage and freight.
Finally, with the evolution of new wholesale markets and gas hubs around the world, developers and lenders alike can persuade shareholders that stable returns, and manageable risks are once again to be expected from major gas investments, and confidence can quickly return to the sector.
So what tale will that Ghost of Gas Future bring to us next week? Well, much depends on how the industry reacts to the challenges of 2020, but for an industry that has successfully navigated so much change over the last several decades, a bright, optimistic (and low carbon) future seems to be just around the corner. Charles Dickens’ story had a very happy conclusion, and the future of gas undoubtedly holds similar promise.
Crude Oil – Crude held in pipelines increased 64%
Petroleum terminals in the Gulf Coast that once imported large volumes of crude oil now load crude oil tankers for export to international destinations. Growing crude oil exports have supported increases in US crude oil pipeline capacity.
The removal of restrictions on US crude oil exports at the end of 2015, combined with higher crude oil production, allowed an increase in crude oil exports in the Gulf region, which grew from 3,000 barrels per day in 2010 to 1.8 million barrels per day in 2018.
Pipelines are the primary method of transporting crude oil in the US. The increase in crude oil production in recent years has required construction of new pipelines and reconfiguration of existing pipelines, including conversion of natural gas pipelines to crude oil pipelines.
The Gulf Coast region, which was responsible for 70% of the growth in crude oil production between 2010 and 2018, has experienced the largest pipeline buildout during that time. The Permian Basin, covering West Texas and southeastern New Mexico, contributed the most to crude oil production growth and supported higher crude oil inventories in the region, including increased pipeline fill.
Crude oil held in pipelines (pipeline fill) in the US grew from 75 million barrels in March 2011, the earliest data available, to nearly 124 million barrels in September 2019, a 64% increase. The increase is becuase of the significant expansion of the crude oil pipeline system. Almost 97% of the 48 million barrel increase in crude oil pipeline fill occurred in the Gulf Coast and the Midwest.
In the Midwest, Cushing, Oklahoma—a key crude oil storage hub—has experienced significant increases in crude oil pipeline capacity as new crude oil tank farms are built to handle rising supplies. Crude oil working storage capacity in Cushing rose 59% between March 2011 and September 2019 to reach 76 million barrels.
Total US rig count (including the Gulf of Mexico) stands at 813, an increase of 14 from last week. The horizontal rig count stands at 706, up 13. US rig activity continues to show constraint and is 270 rigs below (-25%) last year’s total.
US Crude Oil Supply and Demand
Crude oil inventories decreased by 1.1 million barrels from the previous week. The crude stored at Cushing (the main price point for WTI) decreased 0.2 million barrels; total stored is 40.2 million barrels (~45% utilization). Total US commercial crude stored stands at 446.8 million barrels (~57% utilization), above the five-year average for this time of year.
US crude oil refinery inputs averaged 16.6 million barrels per day, with refineries at 90.6% of their operating capacity last week. This was 35,000 barrels per day less than last week’s average.
US gasoline demand over the past four weeks was at 9.1 million barrels, up 0.5% from a year ago. Total commercial petroleum inventories decreased by 0.9 million barrels last week.
US crude net imports averaged 2.95 million barrels per day last week, down by 541,000 barrels per day from the previous week. Over the past four weeks, crude oil net imports averaged 3.0 million barrels per day, 39.9% less than the same four-week period last year.
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