June 21, 2019

June 21, 2019

21st June 2019

Oil Drilling Activity

Onshore US drilling activity dropped 2 with a total active count of 939 rigs; those targeting oil up 1, with the total at 789. Across the three major unconventional oil basins, the oil rig count decreased by 2, with Permian down 2, Williston and Eagle Ford flat.

Sources: EIA Weekly Update and GCA Analysis

US domestic crude output decreased by 100,000 barrels per day for the second week; US crude oil production stands at 12.2 million barrels per day. US crude inventories decreased 3.1 million barrels last week, a larger than expected drawdown of 2 million barrels, the first drop in three weeks.

The prospect of talks on a trade deal with China, combined with a more accommodative European Central Bank, and market expectations that the Federal Reserve could cut interest rates as soon as next month, are all factors that have eased worries about demand—for today.

Carbon Management – Ensuring oil and gas stays on the right side of history

This week GCA had the pleasure of attending the first ever Society of Petroleum Engineers (SPE) Gaia Summit. The topic of discussion was “Oil and Gas on the Right Side of History?”. Invited attendees included 50 thought leaders from the oil and gas industry and its stakeholders – sustainability practitioners, operations and R&D, academia, investors, trade and professional associations, experts and community voices. Gaia is the Greek Primal Mother Earth goddess, and the summit was designed to identify options that will support the oil and gas industry’s challenge of meeting growing energy needs whilst protecting our environment.

We must embrace change. While the oil and gas industry does not get credit from society for what it has already contributed – providing large scale energy and materials that underpin so much of today’s world, it has been dormant on the need to ensure society understands this. However, we now face changing demands and our future role is being challenged.

Carbon and climate-change risk is already informing the decisions of governments and companies, and consumers are making decisions based on a products impact on the environment. As a result, new sectors and markets are emerging that are leading to global business opportunities. Biofuels – from plants, trees and waste are being blended into oil and gas supplies to reduce their carbon footprints and diversify supplies. The oil and gas industry are participants in a global energy system that is already transitioning to be lower carbon, and we need to be considerate and responsive to what society needs and wants.

There is no silver bullet to achieving this. It will require Carbon Management and the scale-up of every low-carbon option, including energy efficiency, flaring-fugitives-venting elimination, integration of renewables, and the use of carbon capture, use and storage (CCUS).

CCUS is undergoing a renaissance, and likely its final opportunity to contribute to large-scale reductions in CO2 emissions by capturing CO2 streams from stationary process and combustion emission sources and storing the CO2 in geological formations, or transforming and securing it into manufactured products. CCUS is not just a technology that abates use of fossil fuels, but it also enables the direct removal of CO2 from the air via direct air capture (DAC) and will open the way to negative emissions. The inclusion of CCUS into the energy system offers the lowest cost, deep de-carbonization pathway. In fact, without CCUS, the cost of meeting mid-century CO2 reduction targets would double. For existing businesses that rely on the use of fossil fuels, CCUS manages the risk of future domestic and international carbon and climate policies, as it caps CO2 emissions liabilities at effectively $100/tonne. It will be the backbone of our future industry.

The right side of history can be achieved by embracing the output from the Gaia Summit. Leaders will be the new captains of our industry and early adopting companies will sustain their businesses for the long term.

Natural Gas – David and Goliath

Two very different gas projects have hit the headlines this week; one is the FID of the Anadarko (soon to be Total) Mozambique LNG project, with its planned 12.88 million tonnes per annum, feeding hungry gas markets in India and South Asia.  The other, if you read beyond the headlines, is a micro LNG project in the Marcellus, supplying an LDC in New England.  Both are significant.

First, in Mozambique, the Anadarko project and the competing Exxon/ENI project have been running neck and neck for the last few years, each with a different approach to the technical design, and each working with different, but overlapping, gas resources.  With the unitization agreement signed some time ago, and even various agreements to collaborate on what will essential be the same onshore location for both projects, these two mega-LNG developments are very much twins.  How the ENI/Exxon project will respond to this announcement remains to be seen, but they too have suggested that 2019 might be their time for FID.  Either way, Mozambique looks to be hosting a major onshore LNG facility at long last, and this week’s announcement is a testament to all those working on the project, and the government agencies and multilaterals who have helped it come to fruition.

The announcement that Edge Gathering Virtual Pipelines 2 (Edge) had delivered 30,000 gallons of LNG (about 3,300 tonnes) to a site 300 miles away may not seem very big in the context of global trade; but repeated enough times, it starts to be meaningful.  Dealing with stranded gas, whether it is dry gas or a mix of gas, oil and NGLs, has been a tough nut to crack forever, especially with the continuing low value of gas in the US compared to oil.  The small, truckable liquefaction unit, built by Galileo, is said to be capable of a kind of “plug-and-play” type installation, but of course for LNG, so much depends on field gas quality.  Any meaningful quantities of water, CO2 and particularly Mercury can spell disaster for LNG plants, hence cleaning gas coming straight from the wellhead can often be the Achilles heel of such projects.

While this may not be a case of David versus Goliath, the success of “distributed LNG” would definitely change the market dynamic.  If it were to become widely available, who knows how many giant Mozambique-style projects would make it as far as FID in future.

Crude Oil – Stoking Middle East tensions

Oil rose after Iran said it shot down a US spy drone, stoking Middle East tensions further after the attack on two tankers last week. President Trump ordered an attack on Iran in retaliation for the downing of a surveillance drone in the Strait of Hormuz but called the operation off just before it was due to occur.

The Strait of Hormuz, located between Oman and Iran, connects the Persian Gulf with the Gulf of Oman and the Arabian Sea. The Strait of Hormuz is the world's most important oil chokepoint because of the large volumes of oil that flow through the strait. In 2018, its daily oil flow averaged 21 million barrels per day, or the equivalent of about 21% of global petroleum liquids consumption.

The inability of oil to transit a major chokepoint, even temporarily, can lead to substantial supply delays and higher shipping costs, resulting in higher world energy prices. Volumes of crude oil, condensate, and petroleum products transiting the Strait of Hormuz have been fairly stable since 2016, when international sanctions on Iran were lifted and Iran’s oil production and exports returned to pre-sanctions levels.

Flows through the Strait of Hormuz in 2018 made up about one-third of total global seaborne traded oil. More than one-quarter of global liquefied natural gas trade also transited the Strait of Hormuz in 2018.

There are limited options to bypass the Strait of Hormuz. Only Saudi Arabia and the United Arab Emirates, plus to a lesser extent Iraq, have pipelines that can ship crude oil outside the Persian Gulf and have the additional pipeline capacity to circumvent the Strait of Hormuz.

OPEC is poised to extend oil-output cuts for the rest of the year when its members meet next month to assess global supply and demand. Saudi Arabia, Iraq and the United Arab Emirates all want to keep restraining production in a bid to support crude prices amid signs of faltering demand.

Weekly Recap

Crude Oil Price

Brent, the global benchmark for oil, increased $3.30 to $65.00 a barrel, reflecting a gain of 5.35% on the week.

WTI crude rose $4.85 to $57.23 a barrel, up 9.26% on the week.

Drilling Activity

Source: BHGE Rotary Rig Count

Total US rig count (including the Gulf of Mexico) stands at 967, down 2. The horizontal rig count stands at 846, down 6. US rig activity continues to show constraint for 50 of the last 53 weeks and is 84 rigs below (-8%) last year’s total. Crude prices trending lower and US shale operators continue to focus on well productivity (i.e., well completion) and operational efficiency over rig growth. Capital discipline over production growth remains the driller’s impetus. 

US Crude Oil Supply and Demand

Sources: EIA Weekly Update and GCA Analysis

Crude oil inventories decreased 3.1 million barrels from the previous week. The crude stored at Cushing (the main price point for WTI) increased 0.7 million barrels; total stored is 53.6 million barrels (~60% utilization).

US crude oil refinery inputs averaged 17.3 million barrels per day, with refineries at 93.9% of their operating capacity last week. This was 200,000 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 2% from a year ago. Total commercial petroleum inventories decreased by 0.4 million barrels last week.

US crude net imports averaged 4.045 million barrels per day last week, down by 444,000 barrels per day from the previous week. Over the past four weeks, crude oil net imports averaged 4.177 million barrels per day, 30.4% less than the same four-week period last year.

US crude imports averaged 7.5 million barrels per day last week, down by 144,000 barrels per day from the previous week. Over the past four weeks, crude oil imports averaged 7.5 million barrels per day, 7.6% less than the same four-week period last year.



June 21, 2019

P. Kevin Galvin

Facilities/Cost Engineer - kevin.galvin@gaffney-cline.com
June 21, 2019

Nick Fulford

Global Head of Gas/LNG - nick.fulford@gaffney-cline.com
June 21, 2019

Nigel Jenvey

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

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