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U.S. Federal Gulf of Mexico crude oil production to continue to set records through 2020

U.S. crude oil production in the U.S. Federal Gulf of Mexico (GOM) averaged 1.8 million barrels per day (b/d) in 2018, setting a new annual record. The U.S. Energy Information Administration (EIA) expects oil production in the GOM to set new production records in 2019 and in 2020, even after accounting for shut-ins related to Hurricane Barry in July 2019 and including forecasted adjustments for hurricane-related shut-ins for the remainder of 2019 and for 2020.

Based on EIA’s latest Short-Term Energy Outlook’s (STEO) expected production levels at new and existing fields, annual crude oil production in the GOM will increase to an average of 1.9 million b/d in 2019 and 2.0 million b/d in 2020. However, even with this level of growth, projected GOM crude oil production will account for a smaller share of the U.S. total. EIA expects the GOM to account for 15% of total U.S. crude oil production in 2019 and in 2020, compared with 23% of total U.S. crude oil production in 2011, as onshore production growth continues to outpace offshore production growth.

In 2019, crude oil production in the GOM fell from 1.9 million b/d in June to 1.6 million b/d in July because some production platforms were evacuated in anticipation of Hurricane Barry. This disruption was resolved relatively quickly, and no disruptions caused by Hurricane Barry remain. Although final data are not yet available, EIA estimates GOM crude oil production reached 2.0 million b/d in August 2019.

Producers expect eight new projects to come online in 2019 and four more in 2020. EIA expects these projects to contribute about 44,000 b/d in 2019 and about 190,000 b/d in 2020 as projects ramp up production. Uncertainties in oil markets affect long-term planning and operations in the GOM, and the timelines of future projects may change accordingly.

anticipated deepwater Federal Gulf of Mexico field starts

Source: Rystad Energy

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. In 2015 and early 2016, decreasing profit margins and reduced expectations for a quick oil price recovery prompted many GOM operators to reconsider future exploration spending and to restructure or delay drilling rig contracts, causing average monthly rig counts to decline through 2018.

Brent crude oil price and U.S. Gulf of Mexico rig count

Source: U.S. Energy Information Administration, Thompson Reuters, Baker Hughes

Crude oil price increases in 2017 and 2018 relative to lows in 2015 and 2016 have not yet had a significant effect on operations in the GOM, but they have the potential to contribute to increasing rig counts and field discoveries in the coming years. Unlike onshore operations, falling rig counts do not affect current production levels, but instead they affect the discovery of future fields and the start-up of new projects.

Crude oil used by U.S. refineries continues to get lighter in most regions

API gravity of U.S. refinery inputs by region

Source: U.S. Energy Information Administration, Monthly Refinery Report

The API gravity of crude oil input to U.S. refineries has generally increased, or gotten lighter, since 2011 because of changes in domestic production and imports. Regionally, refinery crude slates—or the mix of crude oil grades that a refinery is processing—have become lighter in the East Coast, Gulf Coast, and West Coast regions, and they have become slightly heavier in the Midwest and Rocky Mountain regions.

API gravity is measured as the inverse of the density of a petroleum liquid relative to water. The higher the API gravity, the lower the density of the petroleum liquid, so light oils have high API gravities. Crude oil with an API gravity greater than 38 degrees is generally considered light crude oil; crude oil with an API gravity of 22 degrees or below is considered heavy crude oil.

The crude slate processed in refineries situated along the Gulf Coast—the region with the most refining capacity in the United States—has had the largest increase in API gravity, increasing from an average of 30.0 degrees in 2011 to an average of 32.6 degrees in 2018. The West Coast had the heaviest crude slate in 2018 at 28.2 degrees, and the East Coast had the lightest of the three regions at 34.8 degrees.

Production of increasingly lighter crude oil in the United States has contributed to the overall lightening of the crude oil slate for U.S. refiners. The fastest-growing category of domestic production has been crude oil with an API gravity greater than 40 degrees, according to data in the U.S. Energy Information Administration’s (EIA) Monthly Crude Oil and Natural Gas Production Report.

Since 2015, when EIA began collecting crude oil production data by API gravity, light crude oil production in the Lower 48 states has grown from an annual average of 4.6 million barrels per day (b/d) to 6.4 million b/d in the first seven months of 2019.

lower 48 states production of crude oil by API gravity

Source: U.S. Energy Information Administration, Monthly Crude Oil and Natural Gas Production Report

When setting crude oil slates, refiners consider logistical constraints and the cost of transportation, as well as their unique refinery configuration. For example, nearly all (more than 99% in 2018) crude oil imports to the Midwest and the Rocky Mountain regions come from Canada because of geographic proximity and existing pipeline and rail infrastructure between these regions.

Crude oil imports from Canada, which consist of mostly heavy crude oil, have increased by 67% since 2011 because of increased Canadian production. Crude oil imports from Canada have accounted for a greater share of refinery inputs in the Midwest and Rocky Mountain regions, leading to heavier refinery crude slates in these regions.

By comparison, crude oil production in Texas tends to be lighter: Texas accounted for half of crude oil production above 40 degrees API in the United States in 2018. The share of domestic crude oil in the Gulf Coast refinery crude oil slate increased from 36% in 2011 to 70% in 2018. As a result, the change in the average API gravity of crude oil processed in refineries in the Gulf Coast region was the largest increase among all regions in the United States during that period.

U.S. refinery inputs by region

Source: U.S. Energy Information Administration, Monthly Imports Report and Monthly Refinery Report

East Coast refineries have three ways to receive crude oil shipments, depending on which are more economical: by rail from the Midwest, by coastwise-compliant (Jones Act) tankers from the Gulf Coast, or by importing. From 2011 to 2018, the share of imported crude oil in the East Coast region decreased from 95% to 81% as the share of domestic crude oil inputs increased. Conversely, the share of imported crude oil at West Coast refineries increased from 46% in 2011 to 51% in 2018.

Your Weekly Update: 7 - 11 October 2019

Market Watch  

Headline crude prices for the week beginning 7 October 2019 – Brent: US$58/b; WTI: US$52/b

  • As Saudi Arabia confirms that it has ‘fully restored’ its crude output, the effects of the attack on the Abqaiq facilities has faded, with the market now turning its focus to the restarted US-China trade talks in hope that a deal can be reached
  • Optimism is not high that a deal can be struck, and the spill over effects on global oil demand and the global economy high, with the IMF having downgraded its projections for global economic growth five times in the last 18 months
  • In OPEC, another blow has been dealt, as Ecuador will quit the organisation in January 2020; linked to ongoing economic unrest, Ecuador states that it is being ‘honest with itself’ over its ability to adhere to the supply deal, prioritising increasing revenue over membership of the oil group
  • There is every chance that Ecuador may return to OPEC once the political situation calms down, with previous members Gabon and Indonesia having also withdrawn and re-entered the club; however, this symbolic exit will raise questions about OPEC’s ability to control and balance supply
  • Given this, Nigeria has reiterated that OPEC is ready to make deeper cuts if necessary if crude oil prices continue to tumble, prioritising market stability
  • The persistent decline of the US active rig count continues, as Baker Hughes data shows the net loss of another five rigs last week; all losses were inland rigs, pointing to consolidation and improved productivity in the sector
  • Rangebound trading should be expected in the short-term, unless an unlikely breakthrough in the US-China trade war happen; Brent should continue to trade in the US$58-60/b range, while WTI maintains its discount at US$53-55/b


Headlines of the week

Upstream

  • Brazil’s planned offshore auction for November is already attracting major attention, with 14 companies registered for acreage in the Buzios, Atapu, Itapu and Sepia blocks that contain proven reserves of at least 5 billion barrels, with the potential for at least 6 billion barrels more
  • Aker BP’s Valhall West Flank platform in the North Sea – tapping into 60 million barrels - will start up this year after approval by the watchdog
  • Angola will be offering nine blocks – 11, 12, 13, 27, 28, 29, 41, 42 and 43 – in the Namibe basin and one in Benguela basin on November 12
  • Iran is going ahead with a US$1.8 billion oil pipeline to the port of Jask, which will bypass the Persian Gulf with its position on the Gulf of Oman, possibly shielding crude exports away from military action as well as boost shipments of Caspian Sea oil through the country
  • Norway’s Petroleum Fund has been given the go-ahead to sell oil and gas stocks worth US$5.9 billion as it moves to focus on cleaner energies, gradually exiting upstream stocks but maintaining downstream ones
  • Africa-focused Delonex Energy announced that it had made four oil discoveries in Chad’s frontier Termit basin, with drilling starting in 2020

Midstream/Downstream

  • LyondellBasell and China’s private petchems player Bora Enterprise has started building their US$2.5 billion petrochemicals plant in Liaoning, the largest petchems investment by a Chinese ‘teapot’ refiner thus far
  • Husky has begun reconstruction activities at the Superior Refinery in Wisconsin, after acquiring the site in 2017 and after a fire that damaged most of the site in 2018, with an expected return in 2021
  • Pertamina and Saudi Aramco’s long-running talks to collaborate on the upgrade of the Cilacap refinery in Java continues to roll on, with the latest delay linked to disagreements over the valuation of the refinery
  • Venezuela’s 955 kb/d Paraguan Refining Center has partially restarted after being knocked out of operation by a lightning storm in early September

Natural Gas/LNG

  • Total has completed its acquisition of Anadarko’s 26.5% operated interest in the Mozambique LNG project for US$3.9 billion, part of its deal with Occidental Petroleum to acquire Anadarko’s assets in Africa
  • After failing to renegotiate the Papua LNG plan with Total, the government of Papua New Guinea has now turned the P’nyang deal, hoping to seek better terms from project operator ExxonMobil
  • Abu Dhabi’s ADNOC has started accepting bids for stakes in its natural gas pipelines system, a move that could potentially bring in US$5 billion
  • Petronas has signed a deal with Korea Midland Power (Komipo) to supply 240,000 tpa of LNG over five years beginning 2020
  • The first liquefaction unit at the US$2 billion, Elba Island LNG plant in Savannah, Georgia has reached commercialisation stage, the first of 10 planned units that will have a production capacity of 2.5 mtpa of LNG
  • The Venture Global Plaquemines LNG project Louisiana will be going ahead after receiving regulatory clearance from the US FERC

Corporate

  • After nearly a decade at the reins, BP’s CEO Bob Dudley will step down in Q1 2020, to be succeeded by the current upstream CEO Bernard Looney
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.

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.

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)