Expect Production Declines In North Sea, U.S. Shale

Friday, March 4, 2016

In the latest edition of the Numbers Report, we’ll take a look at some of the most interesting figures put out this week in the energy sector. Each week we’ll dig into some data and provide a bit of explanation on what drives the numbers.

Let’s take a look.

1. Solar breakout year

(Click to enlarge)

- 2016 is poised to be another record year for solar. Of the expected 26 gigawatts of new electric capacity added this year, large-scale solar arrays will capture 9.5 GW, the most out of any other source.
- Moreover, that only accounts for utility-scale solar projects, and doesn’t include rooftop solar, which is also growing quickly. SEIA, the solar industry’s trade group, believes an additional 4 GW of residential and commercial solar will come online, bringing the 2016 total to 15 GW of new solar, or about double the capacity added in 2015.
- 2016 will be the first year that solar grabs the top spot for new sources of electricity generation.
- The preponderance of large solar projects, particularly grouped towards the end of the year, is heavily influenced by what were once expiring tax credits – incentives that were extended through the end of the decade as part of a budget deal the U.S. Congress passed in late 2015.
- Separately, an estimate from Bloomberg New Energy Finance predicts that around 100 million households will have solar by 2020. Off-grid solar will become a $3.1 billion market by the end of the decade.

2. ExxonMobil leads in industry in prudent investing

- The return on average capital employed (ROCE), a measure of the efficiency of dollars invested, has declined at all of the oil majors as oil prices have crashed.
- ExxonMobil still remains a leader in this regard however, with a 7.9 percent ROCE in 2015.
- As a result of sound investment decisions, ExxonMobil has not needed to write-down a substantial volume of assets relative to its peers. It has some of the lowest installed capital costs.
- Shell, on the other hand, has taken huge impairments in the Arctic and in Canada’s oil sands.
- Exxon may not represent a huge growth opportunity, but it consistently uses shareholder dollars wisely.

3. Saudi Arabia’s foreign exchange depleting

- Saudi Arabia lost more than $115 billion in foreign currency in 2015, as it burned through reserves to prop up its economy and its fixed exchange rate.
- The burn rate accelerated in the fourth quarter as oil prices dropped to new lows. In December, the Saudi government used more than $14 billion.
- With a budget deficit of $98 billion in 2015, a problem that has not yet been fixed, Saudi Arabia will continue to deplete its cash reserves.
- Reuters reported that the government is seeking a $10 billion loan from international banks.
- S&P downgraded Saudi sovereign credit by two levels in February to A-.

4. UK oil production declining

(Click to enlarge)

- The North Sea off the coast of the UK has been a major source of oil production for decades. But it has also been in decline for a long time. 
- The surge in oil prices into triple digits between 2011 and 2014 delayed the decay of the North Sea. Although production costs are some of the highest in the world, $100 oil made new investments profitable. With multiyear lead times, those projects came online in 2015, which is why production ticked up a bit. 
- Oil & Gas UK, a trade group, says that the UK’s North Sea will see less than 1 billion pounds in investment in 2016, eight times lower than the five-year average. Production could decline from 1.6 mb/d to just 800,000 barrels per day by 2025.
- More than 40 percent of the oil fields in the British North Sea, or 15 percent of total production, are operating at a loss at current prices. 
- Investment has dried up and after a handful of projects reach completion, there is very little on the horizon in terms of new development after 2018. The North Sea, as Oil & Gas UK puts it, is at the “edge of a chasm.”

5. U.S. oil production falling in 2016

(Click to enlarge)

- Many of the most well-known shale drillers, outside of the majors, are announcing production declines for the year. 
- Companies like Continental Resources (NYSE: CLR) and Whiting Petroleum (NYSE: WLL) made headlines when they said they would stop completing wells this year. 
- Shale wells decline rapidly, so companies need to drill new wells to offset declining production. But with oil prices so low, little drilling is taking place. That inevitably leads to output declines.
- The EIA sees U.S. production falling by 700,000 barrels per day this year, followed by another loss of 200,000 barrels per day in 2017.

6. LNG prices have crashed

(Click to enlarge)

- LNG prices have crashed since 2014.
- LNG shipments to Japan fell by the most in six years in January. China’s LNG demand fell for the first time in 2015. The demand picture is flat.
- Meanwhile, supply is booming. Cheniere Energy (NYSE: LNG) shipped its first LNG shipment from the United States in late February, a cargo that departed for Brazil. Australia is set to add six new LNG export terminals by the end of the decade, which includes the $54 billion Gorgon LNG terminal that is expected to ship its first cargo imminently.
- JKM prices – the benchmark for LNG delivery in East Asia – have plunged to just $5.339 per million Btu (MMBtu) for March delivery, a nearly 30 percent decline from a year ago, and the lowest on record since 2009.
- Any new sources of supply that have not lined up contracts for delivery will struggle to turn a profit, at least at these prices. LNG export terminals that have not received a final investment decision (FID) may not obtain one for quite a while.

7. U.S. exports of refined products plateaued

- The massive increase in both oil and natural gas production beginning in the last decade led to a surge in exports of refined products. Above is a chart of exports of distillate fuel oil.
- The crude oil export ban also helped refiners ship product abroad by creating a discounted feed stock (crude oil) that could be turned into a refined product that would fetch a premium.
- The U.S. became the largest exporter of refined fuels in the world. Distillate fuel exports grew at a compound annual growth rate of almost 30 percent between 2004 and 2013.
- But exports have flat lined over the past few years as new refineries in the Middle East (especially Saudi Arabia) and Asia have come online.
- Stockpiles have grown dramatically because of global oversupply. U.S. distillate stockpiles have jumped to 48 days’ worth of supply, up from the long-term average of a 32-day supply.

That’s it for this week’s Numbers Report. Thanks for reading, and we’ll see you next week.