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Last Updated: November 24, 2016
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OSLO, Norway (Bloomberg) -- Oil and gas companies in Norway cut spending forecasts for 2017, deepening what was already a record reduction in offshore investment.

The companies expect to invest 147 billion kroner ($17.2 billion) next year, down 3.6% from a previous estimate, according to a quarterly survey published Wednesday by Statistics Norway. They previously reduced their forecast in August.

“2017 will be yet another challenging year,” Tommy Hansen, director of communications at the Norwegian Oil & Gas Association, an industry lobby group, said in a statement.

Energy companies have put exploration and development projects on hold to weather a decline in crude prices that started in 2014. In Norway, western Europe’s biggest oil producer, spending is set to drop for a third year in 2017 as investors wait for the market to rebalance. Cutbacks there and elsewhere threaten to create a supply shortfall in years to come, according to consultants Wood Mackenzie.

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EIA forecasts lower crude oil prices despite tighter global liquid fuels balances

In the October 2019 Short-Term Energy Outlook (STEO), the U.S. Energy Information Administration (EIA) forecasts lower crude oil prices in the fourth quarter of 2019 and in 2020 despite tighter global balances. The tighter balances are largely the result of unprecedented short-lived loss of global supply following the September 14 attacks on crude oil production and processing infrastructure in Saudi Arabia. The production declines contribute to overall stock draws in the second half of 2019 with a relatively large stock draw in the third quarter. In the fourth quarter, however, EIA forecasts global supply growth will outpace global demand growth, resulting in an inventory build, offsetting some of the third quarter draws (Figure 1). EIA lowered its crude oil price forecast for the fourth quarter of 2019 by $1 per barrel (b) to $59/b, reflecting current price trends, and lowered its crude oil price forecast for 2020 by $2/b to average $60/b because of expected supply growth.

Figure 1. World liquid fuels production and consumption balance

In the October STEO, EIA forecasts total global petroleum stocks in the second half of 2019 will decrease by an average of 290,000 barrels per day (b/d), compared with the September STEO forecast stock build of 250,000 b/d for the same period. EIA forecasts total world crude oil and other liquids production for the second half of 2019 to average 101.3 million b/d, down by 550,000 b/d from the September STEO. Most of the production decline is the result of lower output from Saudi Arabia, reducing the collective output of the Organization of the Petroleum Exporting Countries (OPEC) to 34.8 million b/d for the second half of 2019.

In the October STEO, EIA assumed the Abqaiq facility and Khurais oil field would produce at their pre-attack levels by the end of October. Compared with the September STEO, EIA revised OPEC spare capacity, most of which is located in Saudi Arabia, lower by an average of 200,000 b/d in the second half of 2019. Saudi Arabia's total capacity (including spare capacity) declined following the Abqaiq attack, and EIA expects Saudi Arabia will use some of its remaining spare capacity to backfill inventories and lost production through the end of 2019. Beginning in January 2020, EIA forecasts that OPEC spare capacity will return above 2.0 million b/d.

Crude oil prices increased sharply following the attacks; Brent front-month futures prices rose by nearly 15% on Monday, September 16, the first day of post-attack trading. This increase was the largest one-day percentage increase on record for Brent front-month futures prices. The increase was larger in the front months of the futures strip than in the later months, indicating the market expected the outage to be relatively short lived, and prices fell quickly after the attack (Figure 2). Saudi Arabia continued to export crude oil by drawing from inventories, increasing production in other fields, and reducing domestic refinery inputs. Abqaiq's relatively quick return to operations likely lessened the extent and duration of the price increases. Brent front-month futures prices fell to lower than pre-attack levels on October 1, settling at $59/b for the December contract and have fallen slightly since then.

Figure 2. Brent crude oil futures curves

The relatively quick return to pre-attack price levels likely reflects demand-side concerns and increased down-side price risk. Despite tighter forecast global petroleum markets in the second half of 2019, EIA expects that the Brent crude oil price will average $60.63/b in the second half of 2019, nearly unchanged from the $60.68/b forecast in the September STEO. EIA forecasts that global petroleum inventories will increase by nearly 550,000 b/d in the first half of 2020, which is expected to put downward pressure on crude oil prices. EIA forecasts the price of Brent crude oil to average $57.34/b during the first half of 2020. However, EIA expects the price of Brent crude oil to increase to $62.48/b in the second half of 2020 as global petroleum stock builds slow and petroleum balances are relatively tighter than during the first half of the year.

The price forecast is highly uncertain and supply or demand factors may emerge that could move prices higher or lower than EIA's current STEO forecast. Driven by revisions to global economic outlook, EIA has revised its 2019 liquid fuels demand growth outlook lower in the STEO for the last nine consecutive months and 2020 consumption has been revised down eight of the last nine months. EIA's price forecast also accounts for a higher level of petroleum supply risk in the aftermath of the attacks in Saudi Arabia.

U.S. average regular gasoline prices increase slightly, diesel prices fall

The U.S. average regular gasoline retail price rose less than 1 cent from the previous week to $2.65 per gallon on October 7, 26 cents lower than the same time last year. The West Coast price rose by nearly 10 cents to $3.64 per gallon, and gasoline prices in California continued to rise, increasing by 14 cents to $4.09 per gallon, 55% higher than the national average and 39 cents higher than the same time last year. The Midwest price increased by more than 1 cent to $2.50 per gallon, and the Rocky Mountain price increased by less than 1 cent, remaining at $2.71 per gallon. The Gulf Coast price fell by more than 4 cents to $2.28 per gallon, and the East Coast price fell by 2 cents to $2.49 per gallon.

The U.S. average diesel fuel price fell nearly 2 cents to $3.05 per gallon on October 7, 34 cents lower than a year ago. The East Coast and Gulf Coast prices each fell by more than 2 cents to $3.04 per gallon and $2.80 per gallon, respectively, the Midwest price fell by 2 cents $2.97 per gallon, the Rocky Mountain price decreased 1 cent to $3.02 per gallon, and the West Coast price decreased by less than 1 cent to $3.64 per gallon.

Propane/propylene inventories increase

U.S. propane/propylene stocks increased by 0.1 million barrels last week to 100.8 million barrels as of October 4, 2019, 11.9 million barrels (13.4%) greater than the five-year (2014-18) average inventory levels for this same time of year. Gulf Coast inventories increased by 1.0 million barrels, and Midwest inventories rose slightly, remaining virtually unchanged. East Coast inventories decreased by 0.9 million barrels, and Rocky Mountain/West Coast fell slightly, remaining virtually unchanged. Propylene non-fuel-use inventories represented 4.4% of total propane/propylene inventories.

Residential Heating Fuel Price Survey Begins This Week

Beginning this week and continuing through the end of March 2020, prices for wholesale and residential heating oil and propane will be included in This Week in Petroleum and on EIA's Heating Oil and Propane Update webpage.

As of October 7, 2019, residential heating oil prices averaged nearly $2.95 per gallon, 41 cents per gallon lower than at the same time last year. The average wholesale heating oil price for the start of the 2019–20 heating season is $1.99 per gallon, over 48 cents per gallon below the October 8, 2018, price.

Residential propane prices entered the 2019–20 heating season averaging nearly $1.86 per gallon, 53 cents per gallon less than the October 8, 2018, price. Wholesale propane prices averaged more than $0.58 per gallon, 43 cents per gallon lower than the same time last year.

October, 14 2019
Recent decrease in U.S. crude oil production was geographically isolated, likely temporary

Monthly U.S. crude oil production fell by 276,000 barrels per day (b/d) in July 2019, based on the latest data in the U.S. Energy Information Administration’s (EIA) Petroleum Supply Monthly. This hurricane-related decrease was the largest decline in monthly crude oil production in more than a decade. The decline was temporary and geographically isolated to the Federal Offshore Gulf of Mexico. EIA expects that U.S. crude oil production will continue to increase through the remainder of 2019.

Crude oil production in the Federal Offshore Gulf of Mexico fell by 332,000 b/d in July when some production platforms were evacuated in anticipation of Hurricane Barry. According to information from the U.S. Department of the Interior’s Bureau of Safety and Environmental Enforcement (BSEE), 283 offshore oil and gas platforms in the Gulf of Mexico (about 42% of the regional total) were evacuated in mid-July as Barry approached.

BSEE estimated that about 70% of Gulf of Mexico crude oil production was shut in (i.e., not operating) at the peak of the disruption as a result of the evacuation. Excluding the Federal Offshore Gulf of Mexico, U.S. crude oil production in the rest of the United States rose by a combined 56,000 b/d in July, partially mitigating the disruption.

Historically, many of the largest monthly declines in U.S. crude oil production were the result of hurricanes. Hurricanes Gustav and Ike led to crude oil production falling by more than 1 million barrels per day in September 2008. Hurricanes Katrina and Rita led to a similar month-on-month decline in September 2005.

monthly Federal Offshore Gulf of Mexico crude oil production

Source: U.S. Energy Information Administration, Petroleum Supply Monthly and Short-Term Energy Outlook

By comparison, Hurricane Barry’s disruption occurred relatively early in the hurricane season and had less of an effect on total U.S. crude oil production. As onshore U.S. crude oil production has grown, the Gulf of Mexico’s share of the national total has fallen from a high of 29% in 2009 to 16% in 2018.

In developing crude oil production forecasts for each month’s Short-Term Energy Outlook, EIA uses the latest data from the Petroleum Supply Monthly and Weekly Petroleum Status Report, among other sources. As a result, EIA had already accounted for estimates of Hurricane Barry’s effect on crude oil production in the Gulf of Mexico in the August edition of the STEO.

In the October STEO, released earlier this week, EIA expects that U.S. crude oil production will increase in each remaining month of 2019, and ultimately reach 13.0 million b/d in December 2019. EIA expects U.S. crude oil production to average 12.3 million b/d in 2019 and 13.2 million b/d in 2020.

October, 14 2019
Equinor Goes “Bigly” in the North Sea

At a time when most of the news in the North Sea is about exits – ExxonMobil has just sold its unoperated upstream assets in Norway and ConocoPhillips has departed the UK section of the North Sea – there are still sparks of brightness in this long-mined offshore area. Equinor’s Johan Sverdrup field which contains some 2.7 billion barrels of oil equivalent has started up, two months ahead of schedule and US$4.3 billion below original cost estimates.

When it hits peak production, this new ‘North Sea giant’ will produce up to 660,000 b/d of crude oil, accounting for a third of all oil production in Norway. When complete, the Johan Sverdrup development will be one of the largest in the Norwegian Continental Shelf. It is a shot in the arm that Norway’s industry needs right now. Equinor has had a good track record in making new discoveries over the past two years, but they all mainly small and cannot outweigh declining production elsewhere. John Sverdrup is very different. Discovered in 2010, Johan Sverdrup straddles two separate production licences, discovered as Avaldsnes by Lundin Petroleum and Aldous Major South by Equinor and the field was renamed to its current form in 2012. Equinor holds a 42.6% stake in the field, with Lundin Norway, Petoro, Aker BP and Total constituting the rest.

The project has been championed as a model of the lower-cost, innovative thinking approach that the Norwegian upstream has taken since the 2014 downturn of the oil and gas industry. With first oil already flowing, it will help reverse the steady decline in Norwegian oil production, which fell to 1.65 million b/d in August, down 3.9% m-o-m and down from the all-time peak of 3.4 million b/d in 2011. Prudence paid off; green-lit in 2015, Equinor and its partners managed to secure significant discounts on services and equipment, resulting a break-even cost of less than US$20/b. The location of John Sverdrup is also crucial; believing the Norwegian Continental Shelf to be fully explored, activity has shifted to the Barents Sea. But though there are some big fields in the Barents coming onstream, exploration there has generally underperformed. So the field has been seen as a cause for hope, discovered in a mature basin 160km from Stavanger that was thought to be completely tapped out

Interestingly, John Sverdrup also has wider implications beyond the oil industry. With production set to reach 440,000 b/d by mid-2020, it will contribute about US$100 billion to the Norwegian state coffers over 50 years. It will inject additional fuel into the Norwegian Oil Fund – the country’s sovereign wealth fund – that recently decided to jettison upstream oil stocks (while keeping downstream oil stocks). This illustrates a dichotomy: while Norway as a whole is supportive of clean energy, oil & gas remains a crucial backbone of the country’s economy. So while the conversation around the North Sea will still centre around decommissioning and departures, Johan Sverdrup is proof that there are still (big) pockets of opportunity underneath these cold waters.

Johan Sverdrup:

  • Discovery: 2010
  • Location: 160km west of Stavanger, NCS
  • Ownership: Equinor (42.6%), Lundin Norway (20%), Petoro (17.36%), Aker BP (11.57%), Total (8.44%)
  • Size: 2.2-3.2 billion barrels of oil
  • Project: Phase 1, Oct 2019 (440,000 b/d); Phase 2 startup 4Q 20202 (660,000 b/d)
October, 10 2019