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OPEC, FLARING, OFFSHORE DRILLING AND MOREFundamentalEdge Report | July 2018
© 2018 Drillinginfo, Inc. All rights reserved. All brand names and trademarks are the properties of their respective companies.
Contents
INTRODUCTION 3
OPEC QUOTAS AND CRUDE OIL UPDATE 4
NATURAL GAS FLARING: TX AND ND CASE STUDIES 7
OFFSHORE DRILLING ACTIVITY 11
FERC MLP’S RULE ANALYSIS 15
US/EU AGREEMENT AND IMPACT TO US LNG EXPORTS 16
© 2018 Drillinginfo, Inc. All rights reserved. All brand names and trademarks are the properties of their respective companies.
Introduction
This monthly update of the FundamentalEdge report presents an analysis of key market dynamics
currently impacting the energy market.
➢ Crude oil prices have climbed on a balanced supply & demand reality coupled with geopolitical
tensions, continued Venezuelan production declines, the reinstatement of Iranian sanctions, & periodic
supply outages. Prices were initially driven up by speculators, but this segment has played a lesser and
lesser role in recent months as the long positions have retreated. OPEC has decided, after a long
period of overcompliance, that they will normalize production to quota levels.
➢ Gas flaring is part of the exploration, production and processing process of crude oil, gas and NGLs
from shale plays. In North Dakota, the flared volumes became so large that regulatory agencies had to
intervene. Regulations of gas flaring incentivized the addition of infrastructure, mainly processing plants,
in order to move gas to markets. In Texas and specifically in the Permian Basin, production is
growing faster than processing and pipeline takeaway capacity. Flaring is at record highs with 1Q018
volumes four times higher than levels seen before 2010.
➢ Since the US shale era started, offshore drilling has seen its contribution to total US production
reduced significantly. However, earlier this year, President Trump proposed a plan to open up nearly all
US offshore areas for drilling. Major offshore producers are expecting a rebound in activity. Offshore
projects have long lead times and are very capital intensive. They must compete with quicker turn-
around onshore unconventional projects.
➢ Finally, FERC’s rule on MLP’s and the US/EU agreement are also analyzed in this report (Slides 15-
16)
© 2018 Drillinginfo, Inc. All rights reserved. All brand names and trademarks are the properties of their respective companies. 4 OPEC, FLARING, OFFSHORE DRILLING AND MORE
OPEC: Compliance, SANCTIONS, & The Adjustment
OPEC Quotas Update
TABLE 1
Member Quota (MBbl/d) June 2018 (MBbl/d) Compliance (MBbl/d) Max. Prod. (MBbl/d) Spare Cap. (MBbl/d)
Saudi Arabia 10,058 10,460 -402 10,640 (Nov. 2016) +180
Iraq 4,351 4,550 -199 4,680 (Dec. 2016) +130
UAE 2,874 2,900 -26 3,180 (Dec. 2016) +280
Kuwait 2,707 2,720 -13 2.940 (Aug. 2016) +220
Venezuela 1,972 1,300 +672 2,610 (Jul. 2012) +1,310
Angola 1,673 1,450 +223 1,850 (Aug. 2012) +400
Algeria 1,039 1,050 -11 1,200 (Jan. 2012) +150
Qatar 618 1,050 -2 750 (Sep. 2012) +130
Ecuador 522 620 -8 560 (Sep. 2016) +30
Gabon 193 530 -7 253 (Dec. 2012) +53
Iran 3,797 200 +7 3,850 (Oct. 2016) +60
Eq. Guinea 128 3,790 -2 272 (Jun. 2012) +142
TOTAL 29,932 29,700 +232 32,785 +3,085 +982
97%
84%95%
86%92%
77% 75%
87% 91%
105%115%
134% 138%
152%
165%174%
158%
120%
60%
80%
100%
120%
140%
160%
180%
1/17 2/17 3/17 4/17 5/17 6/17 7/17 8/17 9/17 10/17 11/17 12/17 1/18 2/18 3/18 4/18 5/18 6/18
Co
mp
lian
ce (
%)
OPEC has had above 100%
compliance since October 2017.
This has driven declining global
inventories & increasing prices. In
the last OPEC meeting, members
holding quotas agreed to return
compliance to 100% (increase
production).
Compliance returned to 120%
quickly and the normalization to
100% is likely to continue.
DI estimates 3,085 MBbl/d could
come online if all quota holding
producers achieve maximum
volumes since 2012. This is
defined as “spare capacity”.
Reinstated Iranian sanctions may
take some production off the
market. This could cause a loss
of 961 MBbl/d of global supply.
The recent maximum production
from these countries since 2012
were used to estimate “spare
capacity”. When questionable
volumes (much earlier peaks,
Venezuela, & Iran) are removed,
there is an additional 982 MBbl/d
that may come online.
Source: IEA and DI Analysis
© 2018 Drillinginfo, Inc. All rights reserved. All brand names and trademarks are the properties of their respective companies. 5 OPEC, FLARING, OFFSHORE DRILLING AND MORE
SHORT-TERM FORECAST: GLOBAL SUPPLY/DEMAND
-0.1
8
0.4
7
0.5
5 1.2
6
1.3
4 1.7
7
0.9
4 1.6
1
1.3
3
0.2
6
0.1
5
1.3
2
0.2
9
-0.9
1
-0.4
1
-0.1
9
-0.0
5
0.0
0
-0.0
4
0.0
3
1.5
2
0.4
8
0.5
6
0.6
3
-2.0
-1.0
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
86
88
90
92
94
96
98
100
102
104
1Q
20
14
2Q
20
14
3Q
20
14
4Q
20
14
1Q
2015
2Q
20
15
3Q
20
15
4Q
20
15
1Q
20
16
2Q
20
16
3Q
20
16
4Q
20
16
1Q
20
17
2Q
20
17
3Q
20
17
4Q
20
17
1Q
20
18
2Q
20
18
3Q
20
18
4Q
20
18
1Q
20
19
2Q
20
19
3Q
20
19
4Q
20
19
World
Oil S
up
ply
/De
man
d Im
ba
lan
ce
(MM
Bb
l/d)
Worl
d O
il S
up
ply
(M
MB
bl/d
)
Supply/Demand Imbalance [RHS] Demand Supply
Global Supply and Demand Outlook
CHART 1The global crude market has had
a supply deficit for a longer than
a year but that deficit has
dwindled despite all of the
troubles impacting supply.
If OPEC returns to 100%
compliance, the US continues on
its current trajectory, and demand
follows IEA’s forecast, then,
contrary to popular opinion, the
market may be heading towards
an oversupply situation.
The recent slow down in the pace
of inventory declines shows that
this has already started.
However, it must be noted that
there are some factors that could
reverse this course:
- Continued Venezuelan
declines.
- Libyan & Nigerian production
fluctuations.
- Inability of OPEC countries to
offset these declines by
bringing back online spare
capacity.
Source: IEA and DI Analysis
© 2018 Drillinginfo, Inc. All rights reserved. All brand names and trademarks are the properties of their respective companies. 6 OPEC, FLARING, OFFSHORE DRILLING AND MORE
Crude Oil Prices: 2014-18 Drivers
$0
$20
$40
$60
$80
$100
$120
1/1
4
4/1
4
7/1
4
10
/14
1/1
5
4/1
5
7/1
5
10
/15
1/1
6
4/1
6
7/1
6
10
/16
1/1
7
4/1
7
7/1
7
10
/17
1/1
8
4/1
8
7/1
8
Fro
nt
Month
Futu
res (
$/B
bl)
Brent WTI
Start of 3 yrs.
of Oversupply Start of 7 mos. of
Price Capitulation
False sense of hope
from summer demand
The low point
following continued
inventory builds
OPEC & Non-OPEC
quotas agreed upon
Inventory worries
continue. But OPEC
extends quotas
Supply
outages
Supply outages & geopolitical
tension continues, helping normalize
inventories
OPEC decides to increase
production
Global Supply and Demand Outlook
CHART 2
Source: EIA and DI Analysis
© 2018 Drillinginfo, Inc. All rights reserved. All brand names and trademarks are the properties of their respective companies. 7 OPEC, FLARING, OFFSHORE DRILLING AND MORE
Gas Flaring in North Dakota
0%
5%
10%
15%
20%
25%
30%
35%
40%
0.0
10.0
20.0
30.0
40.0
50.0
60.0
70.0
Jan
-13
Ma
r-1
3
Ma
y-1
3
Jul-
13
Se
p-1
3
Nov-1
3
Jan
-14
Ma
r-1
4
Ma
y-1
4
Jul-
14
Se
p-1
4
Nov-1
4
Jan
-15
Ma
r-1
5
Ma
y-1
5
Jul-
15
Se
p-1
5
Nov-1
5
Jan
-16
Ma
r-1
6
Ma
y-1
6
Jul-
16
Se
p-1
6
Nov-1
6
Jan
-17
Ma
r-1
7
Ma
y-1
7
Jul-
17
Se
p-1
7
Nov-1
7
Jan
-18
Ma
r-1
8
Gas F
lare
d (
%)
Gas V
olu
me (
Pro
duced/F
lare
d)
[Bcf]
Gas Produced (Bcf) Gas Flared (Bcf) Flared Gas (%)
Gas flaring has been a key issue
in the Williston basin in North
Dakota.
It offers great insight into impact
of effective implementation of
flaring regulations.
North Dakota regulatory agencies
released upcoming policy
changes with an 88% gas capture
expectation.
ICO- 24665 gas
capture regulation
implemented
88% gas capture
(Nov. 2018)
Gas Flaring in North Dakota
CHART 3
Source: www.nd.gov, DI
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North Dakota Processing Plant Capacity
The additional gas in system
was handled by a significant
growth in processing plant
capacity.
The capacity of processing
plants doubled in the two years
following ICO-24665
implementation in 2014.
North Dakota Natural Gas Processing Capacity
CHART 4
Source: www.nd.gov
0.9
1.3
1.5
1.92.0
0.0
0.5
1.0
1.5
2.0
2.5
3.0
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Bcf/
d
+1.1 Bcf/d
© 2018 Drillinginfo, Inc. All rights reserved. All brand names and trademarks are the properties of their respective companies. 9 OPEC, FLARING, OFFSHORE DRILLING AND MORE
Permian: Gas Flaring Trends
The Permian Basin has seen
significant growth in the last 5
years. This has also been
accompanied by increased
flaring of natural gas produced
from the Basin.
Flared natural gas went from
0.31 Bcf in Jan 2011 to 7.74
Bcf in 2018 (2,384% increase)
Although still volumetrically
small in comparison to overall
production, the growth
trajectory may indicate a
potential problem in the future.
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
0.00
50.00
100.00
150.00
200.00
250.00
300.00
350.00
400.00
450.00
500.00
Jan
-01
Au
g-0
1
Ma
r-0
2
Oct-
02
Ma
y-0
3
Dec-0
3
Jul-
04
Fe
b-0
5
Se
p-0
5
Ap
r-06
Nov-0
6
Jun
-07
Jan
-08
Au
g-0
8
Ma
r-0
9
Oct-
09
Ma
y-1
0
Dec-1
0
Jul-
11
Fe
b-1
2
Se
p-1
2
Ap
r-13
Nov-1
3
Jun
-14
Jan
-15
Au
g-1
5
Ma
r-1
6
Oct-
16
Ma
y-1
7
Dec-1
7
Gas F
lare
d (
%)
Gas V
olu
mes (
Fla
red/P
roduced)
[bcf]
Gas Produced (Bcf) Gas Flared (Bcf) Gas Flared (%)
Recent growth in
Permian Flared
gas ratios
Permian Gas Production and %Flared
CHART 5
Source: TXRRC
© 2018 Drillinginfo, Inc. All rights reserved. All brand names and trademarks are the properties of their respective companies. 10 OPEC, FLARING, OFFSHORE DRILLING AND MORE
Permian: Gas Flaring Trends
Current trends show potential
for increased flaring in the
Permian Basin.
The Base Case shown depicts
a scenario where the current
rate of flaring of 2% is held
steady throughout the
forecast.
The Growth Case takes into
consideration the rate at which
the flared gas ratio has been
growing over the last 4 years.
0.00
50.00
100.00
150.00
200.00
250.00
2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035
Gas F
lare
d (
Bcf)
Gas Production (Bcf) Flared Gas Growth Case Flared Gas (Base Case)
~ 5 Bcf (base case)
~ 30 Bcf (growth case)
Permian Gas Flaring Scenarios
CHART 6
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Offshore Drilling
Gulf of Mexico Oil and Gas Leasing Program
CHART 7
Source: BOEM
President Trump proposed a plan to open up
nearly all US offshore areas for drilling,
including 25 of 26 regions of the outer
continental shelf. On January 4, 2018, US
Secretary of the Interior Ryan Zinke announced
the National Outer Continental Shelf Oil & Gas
Leasing Program (National OCS) for 2019–
2024. The lease program is estimated to
provide 90 billion barrels of undiscovered
technically recoverable oil as well as 330 trillion
cubic feet of undiscovered technically
recoverable natural gas.
The first lease sale, Lease Sale 250, for almost
14,000 blocks produced very little interest, as
only 815k acres of the 77MM acres were bid on.
The Bureau of Ocean Energy Management will
hold another lease sale, Lease Sale 251,
scheduled for August 15th, 2018. This sale
includes more than 78MM acres in the Gulf of
Mexico. It will be interesting to see the attention
Lease Sale 251 receives.
Offshore drilling projects are capital intensive
due in part to the long lead times, making it less
attractive when oil and gas prices are in a
downturn.
© 2018 Drillinginfo, Inc. All rights reserved. All brand names and trademarks are the properties of their respective companies. 12 OPEC, FLARING, OFFSHORE DRILLING AND MORE
Proposed Offshore Projects 2018-19
Gulf of Mexico Crude Projects
TABLE 2
Source: EIA July18 Short Term Energy Outlook
In the near term, there are multiple projects
expected to come online.
Most offshore projects are taken on by the
major players in the oil and gas industry.
Mentioned on the previous slide, investing in
offshore projects makes a company vulnerable
to significant price changes.
Non-major players are more comfortable drilling
onshore shale, where you can drill a well and
have production online in several months and
stop drilling when needed based on market
conditions.
However, without these more capital intensive,
long lead offshore projects (globally), there may
occur a shortage in supply due to lack of
investment in the longer run.
FieldMajority
Operator
Water Depth
(ft)
Discovery
Year
Anticipated
Start Date
Amethyst Stone Energy 1,200 2014 2018
Stampede-Knotty Head Hess 3,557 2005 2018
Stampede-Pony Hess 3,497 2006 2018
Otis LLOG 3,800 2014 2018
Bushwood Apache 2,700 2009 2019
Gotcha Shell 7,844 2006 2019
Phobos LLOG 6,919 2013 2019
Rydberg Shell 7,500 2014 2018
Tomcat Stone Energy 1,200 2014 2018
Kaikias Shell 4,575 2014 2018
© 2018 Drillinginfo, Inc. All rights reserved. All brand names and trademarks are the properties of their respective companies. 13 OPEC, FLARING, OFFSHORE DRILLING AND MORE
Offshore Projects Map
© 2018 Drillinginfo, Inc. All rights reserved. All brand names and trademarks are the properties of their respective companies. 14 OPEC, FLARING, OFFSHORE DRILLING AND MORE
Gulf of Mexico Production
Gulf of Mexico Dry Gas & Crude Oil Production
CHART 8
Source: DI ProdCast
0.0
0.5
1.0
1.5
2.0
2.5
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
20
16
20
17
20
18
20
19
20
20
20
21
20
22
20
23
Cru
de P
roduction (
MM
Bbl/d)
GOM Crude Production
Natural gas production in the Gulf of Mexico
has been on a steady decline since 2005 when
levels reached over 10 Bcf/d and accounted for
19% of total US dry natural gas production.
In 2017, the US produced 9.2 Bcf/d and
represented only 4% of total US gas production.
Drillinginfo expects GoM dry gas production to
increase to ~3.3 Bcf/d by 2023, up 0.3 Bcf/d
from 2017.
On the oil side, crude production averaged 1.4
MMBbl/d in 2015 for a 27% share of total US
production. In 2017, crude production was
higher and set a record high at 1.7 MMBbl/d.
That represents 19% of the total crude
produced.
Drillinginfo expects GoM crude production to
reach ~2.2 MMBbl/d by 2023 as the projects
listed in the previous two slides are placed
online.
0.0
2.0
4.0
6.0
8.0
10.0
12.0
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
20
16
20
17
20
18
20
19
20
20
20
21
20
22
20
23
Dry
Gas P
roduction (
Bcf/
d)
GOM Dry Gas Production
© 2018 Drillinginfo, Inc. All rights reserved. All brand names and trademarks are the properties of their respective companies. 15 OPEC, FLARING, OFFSHORE DRILLING AND MORE
FERC MLP Rule Change
MLP Consolidations
TABLE 3
On March 15th, 2018 FERC proposed a rule on
MLP owned interstate gas & liquids pipelines
following a FERC v United Airlines court case.
MLPs would no longer be able to include
income tax in their cost of service tariff rates
because it caused a double recovery of income
taxes. FERC produced a final ruling on July
18th, 2018, which was a relief to many.
FERC provided 4 options to pipelines to
address the Tax Cuts and New Jobs Act.
1) File a rate reduction with FERC.
2) Commit to file a rate case in the future.
3) File with FERC reasons why you should
not be subject to a rate reduction.
4) Do nothing.
As for MLPs, FERC gave them a choice as it
relates to option 1. The MLP can keep the
income tax allowance in their cost of service
tariff calculation, however, they must adjust the
calculation based on the reduction of corporate
taxes from 35% to 21%. MLPs can otherwise
choose to do away with the income tax
allowance to lower the cost of service tariff to
be more “just and reasonable”. Note, they can
also choose to do nothing. This rule is merely
guidance on how FERC will handle future
cases.
Before FERC announced the final ruling on
July 18th, buyouts or restructurings happened
for some MLPs. Williams Cos had attempted to
purchase it’s MLP back in 2015, so Williams
buying the remaining units for the MLP was
only a matter of time. However, for the other
companies, it is unknown if these companies
would have completed this kind of transaction if
FERC hadn’t announced a rule change in
March.
Buyer Seller Price ($MM) Stock Premium
Williams Cos. Williams Partners LP $10,500 6.4%
Enbridge Spectra Energy Partners LP $4,185 0%
Enbridge Enbridge Energy Partners LP $6,592 0%
Loews Corp Boardwalk Pipeline Partners $1,500 0%
Cheniere Energy Inc Cheniere Energy Partners LP N/A 1%
© 2018 Drillinginfo, Inc. All rights reserved. All brand names and trademarks are the properties of their respective companies. 16 OPEC, FLARING, OFFSHORE DRILLING AND MORE
US/EU Agreement and Impact on LNG Exports
2017 US LNG Exports and Price by destination
CHART 9
$-
$1.00
$2.00
$3.00
$4.00
$5.00
$6.00
$7.00
0
100
200
300
400
500
600
700
800
900
1,000
Asia Americas Europe Other
LNG Exports (MMcf/d) Average Price of LNG ($/MMBtu)
Source: EIA
On July 25th, President Trump
announced that the United
States and the European
Union have agreed to
strengthen their strategic
cooperation with respect to
energy. This includes
facilitating more US natural
gas shipments to the EU.
In 2017 and as shown in
Chart 9, the US sent most of
its gas (45%) to Asia where
gas prices are more
favorable. Only 14% of US
gas found a home in Europe
where prices are 20% lower
than in Asia,
Therefore, although this
agreement may have an
impact in the longer term after
LNG terminals are built, Asia
will continue to be main
destination for US gas due to
the competitive advantage in
terms of higher prices.
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