13th September 2019
Oil Drilling Activity
Onshore US drilling activity dropped 10 with a total active count of 860 rigs; those targeting oil down 5, with the total at 733. Across the three major unconventional oil basins, the oil-rig count was down 8, with Permian down 8, Williston up 1 and Eagle Ford down 1.
US oil drilling rig activity is now below its September 2017 level of 750 rigs.
US domestic crude output remained flat; crude production stands at 12.4 million barrels per day, below the record high of 12.5 million barrels per day set at the end of August. Even with gains in productivity per well, the rate of US oil production growth (see chart) since early 2019 has clearly slowed, in tandem with a declining rig count. EIA’s recent Short Term Energy Outlook is projecting US production averaging 13.2 million barrels per day in 2020. If this average is to be attained next year, surely rig count cannot continue to decline at its present rate, down 100+ rigs in 8 months. There is a lively debate online about the accuracy of reported DUC well inventory, potentially because of a lag in the reporting of completions; thus, the scope for them to sustain production growth may be more muted.
Crude stockpiles deceased for the third week; inventories dropped 6.9 million barrels compared with expectations for a decrease of 2.7 million barrels.
The IEA indicated this week in its latest oil report that the relentless stock builds seen since early 2018 have halted. However, soon the OPEC+ producers will once again see surging non-OPEC oil production with the implied market balance returning to a surplus and placing downward pressure on prices. The challenge of crude market management remains a daunting one well into 2020.
Carbon Management – Is it me…thane?
Methane (CH4) is the main component of natural gas, however, methane emissions are rising and it is a potent, and the second most prevalent, Greenhouse Gas (GHG). 1 tonne of methane has the global warming potential of 25 tonnes of carbon dioxide (over a 100-year time horizon, including indirect effects of ozone and water vapor production). Current levels of methane in the atmosphere at 1.8 ppmv have doubled since pre-industrial times. So where do these GHG emissions come from? What is the contribution from livestock, wetlands, natural geologic seeps, and coal mines? While there are many natural and man-made sources of methane, the range of uncertainty in natural gas systems is considered the largest because of sparse activity data, large daily variations, numerous sources and limited measurements.
Natural gas offers many health and environmental benefits over other traditional fuels given it has low or zero emissions of the main air pollutants, including fine particulate matter (PM2.5), sulfur oxides (SOX), and nitrogen oxides (NOX). According to the International Energy Agency (IEA) 2016 special report on air pollution, coal use dominates global emissions of SO2, oil products used for transport are the dominant source of NOX, while the combustion of wood and other traditional solid fuels are responsible for more than half of current PM2.5 emissions.
The IEA also estimates that annual methane emissions from natural gas supply are 61 million tonnes (a GHG impact of 1,290 million tonnes of CO2-eq annually) and comprises 61% of total gas supply GHG emissions. For comparison, this is equivalent to annual transport related emissions in Europe, or all energy sector emissions in Canada and Germany combined. However, there is also uncertainty in the level of methane emissions that can occur – planned or unplanned – in the value chain from natural gas production to final commercial or residential customer. This uncertainty over the level of methane emissions, the vast majority of which is not measured but estimated, has been raising questions about the extent of the climate benefits that natural gas can bring.
Our analysis shows there is clear scope to reduce methane emissions cost-effectively; after all, natural gas has commercial value and keeping it within the supply chain means that additional methane captured can often be monetized directly and GHG emissions reductions can result in economic savings or be carried out at low cost.
When society compares the benefits of coal-to-gas switching it needs to consider both CO2 emissions of end-use combustion, along with the indirect emissions of CO2 and methane released during production, transport and processing. If the methane emission intensity of natural gas is below 5.5%, then gas has lower lifecycle GHG emissions than coal. These green credentials of natural gas can be confirmed. Are you confident in the accuracy of your methane emission numbers? Do you know the options and costs of reducing your methane emissions? There are many technologies available that can help monitor and manage methane emissions cost effectively to assure and ensure the benefits of natural gas in the global energy system continue.
Natural Gas – Controlling the gateway to market
One of the realities of the gas value chain is that it is typically governed by two bookends, the realizable selling price in the chosen market, and the price that has to be realized at the wellhead to incentivize the investment in drilling and completion of the well. However, we are not living in typical times.
Over the last year, we have seen a steady decline in realized prices, in Asia and Europe, and the netbacks available to producers, whether they be LNG liquefaction projects or upstream companies, placed under severe pressure. The good news, such as it is, is that those who can provide ready access to the market, are doing well. The Gate LNG terminal in the Netherlands is a good example of a sound vision, based on expectations of higher gas demand and lower domestic production.... and great timing.
Over the last few months the terminal has handled a record number of deliveries, and has vaporized more LNG this year than during the rest of its operational life, going right back to 2011. Capacity holders in the terminal, which is one of the many LNG facilities in Europe exempted from full Third Party Access (TPA), are now able to capitalize on control over access to key gas markets in NW Europe, which has become especially valuable to US LNG buyers and producers, looking for a home for their gas.
Timing is even more significant, in that the Dutch government this week announced plans to cease regular production at the supergiant Groningen field 8 years early (2022) because of production-induced earthquake damage to residential homes.
In common with many of its neighboring facilities in Zebrugge and Dunkirk, the Gate terminal is looking at the increasingly attractive bunkering market, preparing to leverage iis proximity to the Port of Rotterdam, one of the busiest industrial ports in the world, where LNG as a marine fuel is receiving a big boost in the run up to introduction of the IMO restrictions in 2020. Road tanker operations are also a feature of the terminal, and another area for expansion as low LNG prices continue to encourage fuel switching in a variety of industries. Building on the success of road tanker transport, LNG by rail is also being seriously examined by a number of the European receiving terminals.
For the next few years, it would appear that of all segments of the gas value chain, control over LNG reception and re-gas in any major gas market, especially Europe with its sophisticated wholesale market, emerging gas hubs and unbundled transmission system, will be of considerable value.
Crude Oil – Oil rigs down 167 Y-o-Y, higher prices needed….
US oil and gas employment has been falling as producers and service companies respond to the decline in prices since the fourth quarter of 2018. The number of jobs in "mining support activities," a category that includes oil and gas drilling, as well as site preparation and well completion services, has been drifting gently lower since October 2018. Oil and gas employment is trending lower as the industry adjusts to lower petroleum and natural gas prices and lower levels of activity.
The number of rigs drilling for oil and gas has fallen by 167 or 16% from the same period last year. The number of new oil and gas wells drilled across the seven major shale plays monitored by US Energy Information Administration has declined by 14% in July from its peak in October.
So far, the number of wells fractured and completed each month has held up, despite the drilling downturn, which has kept US oil and gas production near record levels. However, as the inventory of drilled but uncompleted wells falls, it is likely completions will also turn down in the second half of 2019 and into 2020.
Fewer well completions is already translating into decelerating growth in US oil production, potentially marking the peak of the end of the second US shale oil boom.
Crude Oil Price
Brent, the global benchmark for oil, increased $0.71 to $60.61 a barrel, reflecting a gain of 1.19% on the week.
WTI crude rose $0.29 to $55.45 a barrel, up 0.53% on the week.
Total US rig count (including the Gulf of Mexico) stands at 886, down 12. The horizontal rig count stands at 776, down 7. 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 6.9 million barrels from the previous week. The crude stored at Cushing (the main price point for WTI) decreased 0.8 million barrels; total stored is 49.3 million barrels (~44% utilization). Total US commercial crude stored stands at 416.1 million barrels (~53% utilization). OPEC’s September MOMR shows OECD commercial crude stocks down 41 million barrels in July more than offsetting the increase in product inventory and just below the 5-year average crude stock level.
US crude oil refinery inputs averaged 17.5 million barrels per day, with refineries at 95.1% of their operating capacity last week. This was 114,000 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 0.2% from a year ago. Total commercial petroleum inventories decreased by 3.1 million barrels last week.
US crude net imports averaged 3.4 million barrels per day last week, down by 414,000 barrels per day from the previous week. Over the past four weeks, crude oil net imports averaged 3.65 million barrels per day, 39% less than the same four-week period last year.
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