Guest commentary by David Middleton
From the International Energy Agency’s Oil Market Report (OMR):
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OMR: Twin Peaks
12 October 2018
Both global oil demand and supply are now close to new, historically significant peaks at 100 mb/d, and neither show signs of ceasing to grow any time soon. Fifteen years ago, forecasts of peak supply were all the rage, with production from non-OPEC countries supposed to have started declining by now. In fact, production has surged, led by the US shale revolution, and supported by big increases in Brazil, Canada and elsewhere. In future, a lot of potential supply could come to the market from places like Iran, Iraq, Libya, Nigeria and Venezuela, if their various challenges can be overcome. There is no peak in sight for demand either. The drivers of demand remain very powerful, with petrochemicals being a major factor. In a new IEA study “The Future of Petrochemicals”, the Agency points out that rising living standards, particularly in developing countries, are already underpinning strong demand growth for plastics and this will continue for many years to come.
As the oil market reaches the landmark 100 mb/d level, prices are rising steadily. Brent crude oil is now established above $80/bbl, with infrastructure constraints causing North American prices to lag somewhat. Nonetheless, our position is that expensive energy is back, with oil, gas and coal trading at multi-year highs, and it poses a threat to economic growth.
It is an extraordinary achievement for the global oil industry to meet the needs of a 100 mb/d market, but today, in 4Q18, we have reached new twin peaks for demand and supply by straining parts of the system to the limit. Recent production increases come at the expense of spare capacity, which is already down to only 2% of global demand, with further reductions likely to come. This strain could be with us for some time and it will likely be accompanied by higher prices, however much we regret them and their potential negative impact on the global economy.
100 million barrels of oil per day… That’s fracking awesome!
What’s even more awesome?
It is an extraordinary achievement for the global oil industry to meet the needs of a 100 mb/d market, but today, in 4Q18, we have reached new twin peaks for demand and supply by straining parts of the system to the limit.
It is “an extraordinary achievement”… But, have we really “reached new twin peaks for demand and supply by straining parts of the system to the limit”?
While it is true that booming energy demand will continue to put upward pressure on product prices and rising prices will eventually slow economic growth and curb demand… That’s just the psychological nature of oil prices and not indicative of the resilience of “the system.” The Boom/Bust cycle is simply the nature of the beast.
How resilient is the “Oil and Gas System?
Pretty fracking resilient, at least here in the U.S.A.
Oct 10, 2018
Hello, Michael: Beware The Resiliency Of The U.S. Oil And Gas System
I doubt there’s anything in our energy-environment discussion more under appreciated than the sheer complexity of extracting oil and natural gas from the ground and then delivering it to end-users, as safely as possible. It’s a massive 24/7/365 non-stop system, processing 39 million gallons of oil and 3.8 Bcf/d of natural gas every hour.
This is a far more challenging endeavor than the anti-oil and -gas business apparently comprehends. But the ongoing effectiveness of it is mandatory: oil and gas supply 65% of the energy that we Americans consume to run the economy. It’s no wonder then that Petroleum Engineering is the highest paying major in college.
This elaborate system used for oil and gas extraction and delivery is perhaps most threatened during times of severe weather, such as the destructive hurricanes we’ve had over the past 14 months. To say the least, such events strain the entire network. Just think about the challenge from a geographical standpoint, last month’s Hurricane Florence was double the size of Pennsylvania.
At each level of the distribution chain, supply and demand is the key factor.
Generally, demand ramps up right before the hurricane hits the affected areas, as Americans fill-up for evacuation. This can cause prices to temporary spike because the rest of the supply chain hasn’t had time to respond.
Yet things normalize quickly: “Gas Prices Remain Stable Amid the Aftermath of Hurricane Florence.” During last year’s historic hurricane season, U.S. oil prices remained remarkably stable, mostly in the $47 to $52 range. The impact of Hurricanes Harvey and Irma on natural gas prices was mostly muted.
Looking forward, as more hurricanes hit, especially in the vulnerable Gulf, the impacts will need to be buffered even more. The Gulf holds about 50% of our total oil storage capacity and 40-45% of our working storage for gasoline and diesel fuel.
Centered in Louisiana and Texas gulf regions, the Strategic Petroleum Reserve is a cornerstone of our response strategy for refiners and can hold nearly 730 million barrels of petroleum – a full 35 days of total U.S. usage (including imports). The Gulf accounts for nearly 20% of total U.S. crude oil production.
Indeed, the expansion of the oil and gas markets and associated infrastructure over the past decade has made our system much more complex and integrated. For example, since 2008, crude oil production is up 122% to 11.1 million b/d and gas output has surged almost 50% to ~85 Bcf/d, with much more coming.
This increasingly expansive network, wisely guided by the companies that run it, has proven remarkably resilient in the most difficult of times and cannot be taken for granted in the years ahead.
The U.S. Oil And Gas System barely noticed Anthropocene Superstorm Michael…
GOM Oil And Gas Production Rebounds After Michael
By Irina Slav – Oct 15, 2018
Oil and gas production in the Gulf of Mexico has started recovering after hurricane Michael, the Bureau of Safety and Environmental Enforcement said. With evacuated personnel now back to all 687 manned platforms in the Gulf, the production decline that followed the hurricane’s passage through the area is beginning to be reversed.
Still, the BSEE said, 15.8 percent of oil production capacity remains shut in for the time being. That’s equal to 268,824 bpd. In natural gas, 8.9 percent of capacity remains shut in, equal to 227 million cu ft per day.
The hurricane shut in more than 40 percent of oil production capacity in the Gulf of Mexico, according to data from the BSEE from last week, as well as almost 32 percent of gas production capacity.
A total of 89 platforms were evacuated by the time Michael made landfall last Wednesday in Florida, as well as seven drilling rigs, with shut-in production totaling almost 718,900 bpd. Some 813 million cubic feet of natural gas production has also been taken offline this week.
Despite the high portion of shut-in capacity in the Gulf, the developments did not have a significant effect on prices: most of U.S. production comes from onshore reserves, so the 40 percent of GOM capacity not producing last week represents just 6 percent of the total national production capacity.
Also, it was clear from the start the shut-in would be temporary, so there was no time for traders to start worrying about a possible supply shortage in the wake of the hurricane, which has become the third-strongest storm in U.S. history.
Despite the recent onslaught of Gorebal Warming mutant hurricanes, the IEA’s Twin Peaks and and the glut of the U.S. “shale revolution,” production from the Federal waters of the Gulf of Mexico continues to rise…
APRIL 11, 2018
U.S. Gulf of Mexico crude oil production to continue at record highs through 2019
U.S. crude oil production in the Federal Gulf of Mexico (GOM) increased slightly in 2017, reaching 1.65 million b/d, the highest annual level on record. Although briefly hindered by platform outages and pipeline issues in December 2017, oil production in the GOM is expected to continue increasing in 2018 and 2019, based on forecasts in the EIA’s latest Short-Term Energy Outlook (STEO). EIA expects the GOM to account for 16% of total U.S. crude oil production in each year.
Based on STEO’s expected production levels at new fields and existing fields, annual crude oil production in the GOM will increase to an average of 1.7 million b/d in 2018 and 1.8 million b/d in 2019. However, uncertainties in oil markets may still affect long-term planning and operations in the GOM, and the timelines of future projects may change accordingly.
In 2016, producers brought seven new projects and expansions online and ramped up production in 2017, collectively contributing to an average of 126,000 b/d of production in 2017. Another two projects came online in 2017, contributing 10,000 b/d of new production last year. EIA expects these nine projects to ramp up over the next two years. Producers expect four new projects to come online in 2018 and six more in 2019.
Because of the amount of time needed to discover and develop large offshore projects, oil production in the GOM is less sensitive to short-term oil price movements than onshore production in the Lower 48 states.
Production from the Gulf of Mexico actually exceeds both the Bakken and Eagle Ford shale plays, trailing only the infinitely YUUGE Permian Basin…
While shale gets the headlines, the economics of deepwater Gulf of Mexico wells may actually be better.
Gulf of Mexico is equally important as Permian for U.S. oil production, Rystad says
Well productivity improvements in GoM deep water have been more significant than the recent improvements in shale. Figure 2 shows average oil well decline curves across all shale oil and GoM deepwater wells in two different periods: 2011-2013 and 2014-2016. Average shale oil well productivity increased by 38% in the first 1.5 years after a well is turned-in-line from 2011-2013 to 2014-2016. The improvements were predominantly driven by the growing contribution from horizontal wells and boosted well configuration: longer laterals, more frac stages per lateral, increased proppant and fluid intensity. However, the average productivity in the first 1.5 years improved even more, by 41-42%, in GoM deep water over the same period. Significant uplift in average well productivity was caused by the high contribution to the average from several deep-water installations in 2014-2016 (e.g. Jack/St. Malo, Lucius) where a typical well produced at the rate of over 10,000-12,000 bpd for more than 12 months. An average recent GoM deep-water well produced 3.6 MMbbl of oil over the first 18 months.
Hurricanes can be devastating… Politicians are worse
Hurricanes in 2005 (Katrina & Rita) and 2008 (Ike) inflicted extensive damage on Gulf of Mexico oil & gas infrastructure, depressing production by about 250,000 bbl/d from 2006-2008. The Obama maladministration’s unlawful drilling moratorium and “permitorium” in response to the Deepwater Horizon blowout and oil spill depressed production by about 500,000 bbl/d from 2011-2013.
How hurricanes create opportunities in the oil patch
Deepwater Wildcatter: Meet Talos Energy, The New Gulf Of Mexico Pure Play
May 31, 2018
After two days of Harvey’s tropical torment, the streets of Tim Duncan’s suburban enclave in Kingwood, Texas, north of Houston, were impassable. The power was out and night falling when word came that another 6 feet of Hurricane Harvey floodwaters were on the way. Wading through waist-high water, Duncan hoisted his wife, Christy, his 6-year-old son and two dogs into a FEMA rescue boat.
Duncan, the 45-year-old chief executive of Talos Energy, was beside himself. For four months he had been orchestrating the $2.5 billion merger of his privately held company with Stone Energy, publicly traded and bankrupt. Acquiring a troubled outfit almost as big as his own was a risky play, but it would make Talos a public entity without the expense of a public offering.
“I’ve got to get this deal done,” Duncan told himself. “The flood can’t be an excuse.”
Duncan is a refreshing burst of high-energy enthusiasm. Though he grew up in Egypt, Texas and Florida (son of an oil-company man), he talks more like a New Yorker. When the hurricane hit he was amid “critical” negotiations with bondholders Franklin Templeton Investments and Mackay Shields about restructuring over $800 million of combined debt. Money managers Riverstone and Apollo Management, principal owners of Talos’ equity, were also at the table. The task would have been a challenge even if Harvey hadn’t wrecked Houston. Says Jerry Schretter, a managing director at Citi who has advised Duncan for years: “For Tim, crises are an opportunity.”
Indeed, this is a guy who has displayed a knack for making the most of tough situations. Talos’ biggest asset is the Phoenix field (formerly known as the Typhoon field), 165 miles south of New Orleans. It was first developed by Chevron, which drilled a half-dozen wells and installed a production platform, tethered to the seafloor 4,000 feet down. Then came Hurricane Rita in 2005, which capsized the roughly 13,000-ton Typhoon platform and sent it drifting 60 miles across the gulf.
Who’d want to clean up after that? Talos would. It now pumps 16,000 barrels a day from Phoenix into a unique ship called Helix Producer, another asset that stirs up unpleasant memories for environmentalists. In 2010 Helix helped capture some of the 4 million barrels that gushed from BP’s Macondo well after the Deepwater Horizon disaster.
Output at Phoenix will grow. Talos reexamined seismic data, enabling it to make new discoveries 3,000 feet deeper than the old reservoirs.
Hurricane Rita destroyed Chevron’s Typhoon (maybe not such a good choice of names) tension leg platform (TLP), creating the opportunity to deploy the Helix Producer I to resurrect an oil field, now called Phoenix.
The Helix Producer I (HP1) was converted from a North Sea train ferry into a floating production unit (FPU). It was the first ship-shaped FPU in the Gulf of Mexico.
HELIX PRODUCER I
THE GULF OF MEXICO’S FIRST FLOATING PRODUCTION UNIT
The Helix Producer I, a ship-shaped, disconnectable, dynamically positioned (DP2), floating production unit, is designed to produce hydrocarbons and export to shore via pipeline or tanker.
The Helix Producer I, is equipped with a Disconnectable Transfer System (DTS) which allows the ship to weathervane during production. This setup also allows disconnection from ﬂowlines, pipelines and umbilical’s, enabling the vessel to seek shelter from severe weather and during conditions when position onsite cannot be safely maintained.
Upon return to the production site, the DTS buoy can be retrieved and reconnected to the vessel so that processing operations can restart.
The Helix Producer I, is designed to serve smaller oil ﬁelds in deepwater over the life of the facility, and can also be utilized as an Early Production Test Vessel.
The vessel has dual certification to operate both in U.S. waters (maintains a Certificate of Compliance issued by the USCG) and international waters (maintains IMO / SOLAS Certificates issued by Lloyd’s Register on behalf of the Bahamian Maritime Authority.
The HP1 can literally move out of the paths of hurricanes. In another odd bit of trivia, the first oil ever produced through the HP1 was from Macondo. The HP1 and several other Helix vessels were involved in containing the Deepwater Horizon oil spill…
READY TO RESPOND.
Based on the lessons learned and technologies developed for the BP Macondo spill response, Helix has developed its Fast Response System (HFRS) to respond to a future spill. The system uses proven methodologies to provide spill response capacity. Since February 2012, the HFRS has been cited as the spill response system of record for more than 90 new drilling permits issued in the Gulf of Mexico.
At full production capacity, the Helix HFRS can handle up to 55,000 BOPD, 70,000 BLPD and 95 MMSCFD, at 10,000 psi in water depths to 10,000 feet.
The Helix Producer I and Q4000 operate in the Gulf full time, with experienced crews. Calling off working vessels is operationally preferable to a modular system that would take longer to deploy and go untested for extended periods.
The HFRS includes key subsea systems to transport hydrocarbons to the surface for capture and disposal are kept in inventory in the Gulf of Mexico, where they are maintained and available for deployment at any time.
How’s that for resilience? A production platform that can dodge hurricanes and respond to oil spills! And Bill McKibben thinks that a group of kayakers could slow us down.
David Middleton has been a geophysicist/geologist in the oil & gas industry since 1981, including 6 years with Helix’s E&P subsidiary, ERT Gulf of Mexico (2006-2012).