US and GoM crude: the outlook for production, flows and freight
Last week, we gave a webinar that focused on our expectations for US shale, Canadian and Gulf of Mexico oil production in 2022. We then leveraged these projections to forecast US crude exports for this year, as well as where that growth should come from. We then used our findings from both the production and export forecasts to predict what this means for the freight market in the year ahead.
North America production growth to potentially reach 1.5mbd in 2022
Strong cash flows in H2 2021 allowed shale oil companies to reduce debt levels, and boost dividend yields. On the back of this improved financial health, there is a greater temptation to boost cash flows via higher output. We see oil prices above $80/bbl as a catalyst to spur on production growth even if the view is not homogeneous across producers. Based on Q4 21 earnings releases and managements’ conference calls, capital investment should increase by 20% in the US shale oil sector, which would support production growth of almost 1 mbd on average in 2022 compared to 2021.
However, higher output will come at a higher cost: completion services are approaching a high level of utilization for both Halliburton and Schlumberger, the two biggest oil service companies in the US. We see labor and equipment shortages as limiting to 2022's production upside. Due to less equipment capacity, cost inflation is jumping by 10-20%, in addition to higher cash costs to drill new wells in 2022 (completion of DUCs was the priority through 2021).
The Gulf of Mexico is often viewed as a steady influence in US crude production. In 2022, more than 10 major projects are deemed to start in addition to a few smaller fields. Smaller platforms with improved standardized designs have been a key part of these cost reductions. In the Gulf of Mexico, we expect production to increase by 150 kbd, reflecting new production will outpace the gradual slowdown in output from existing wells.
In Canada, while many majors have left both the country and the Canadian oil sands sector, dynamics are changing - similar to shale - now that oil prices have surpassed $80/bbl. Investments in 2022 should rise by 20% compared to last year, of which $5bn should be allocated to oil sands.
Oil sand players have provided production guidance during Q4 earnings releases, and it is clear that production is on track for another year of record output in 2022, up by potentially 300 kbd. Imperial Oil should see its oil production grow by 12%, Suncor by 7% and Cenovus by 6%.
Altogether, with US shale, and Canada, North American oil production could increase by almost 1.5 mbd y/y.
US seaborne crude exports to average 3.15 mbd in 2022, up 350 kbd versus 2021
Based on our higher production forecast, we have revised our expectations for US crude exports for 2022. We now project seaborne exports to average 3.15 mbd, which is 350 kbd higher than the 2021 average. There is a very small volume of land-based exports to add to that number, some 50 kbd, which leaves our average for total US crude exports this year at 3.2 mbd.
The increase is not projected to come from new projects. In fact, there are no new export projects predicted to come online until 2024 – and even these are by no means guaranteed. The most likely project to come to fruition is the Sea Port Oil Terminal (SPOT), which is an offshore buoy project from Enterprise where a VLCC can be fully loaded offshore Freeport, Texas. The second possible export project is the Blue Marlin Export Terminal from Energy Transfer, which would also be an offshore buoy able to fully load VLCCs, located off the southwest coast of Louisiana.
The increase in crude exports this year will instead come from existing docks and ports. As the chart below illustrates, Corpus Christi and Houston account for the lion’s share of US crude exports, essentially providing a baseload of around 2.4 mbd in any given month. In fact, three load points account for nearly a half of all US Gulf crude exports: Enbridge’s Ingleside Energy Center at Corpus Christi, which can partially load a VLCC, Buckeye’s South Texas Gateway terminal at Corpus which can do the same, and Enterprise’s Houston terminal.
While Corpus Christi and Houston will continue to do the heavy lifting when it comes to exports, we project that other ports will add incremental volumes to lift exports to a record this year. First of all, a couple of recent pipeline developments mean that Canadian crude is going to have a bigger influence on exports. In recent months, both the reversal of the Capline pipeline, which now sends Canadian crude down to St James in Louisiana, and the Enbridge Line 3 replacement, which sends Canadian crude into Wisconsin, have increased Canadian crude imports into the US, and specifically, down to the US Gulf Coast. Due to these developments, one of two scenarios will play out: either we will see higher volumes of Canadian crude being exported from the US Gulf, or it will be increasingly consumed by US Gulf refiners, displacing US Gulf of Mexico barrels such as Mars, which are then exported instead. Either way, stronger Canadian flows into PADD 3 look set to result in higher exports from Louisiana – be it from St James or LOOP.
Two other developments in the coming months will support US Gulf exports. The Ted Collins pipeline from the Houston Ship Channel to Nederland is set to be completed, which will provide an outlet for Bakken crude after exports of the light sweet North Dakotan grade have dropped off considerably in the last year. And the completion of the Wink-to-Webster pipeline is set to link Permian Basin crude with export facilities in Texas City and Beaumont. Both projects give an outlet for crude from key US shale plays, at a time when production is ramping up once more.
While we expect US crude exports to push higher - encouraged by stronger production, amid greater availability of Canadian barrels, and with SPR barrels boosting commercial inventories - we do expect US Gulf Coast imports to dip next month as a result of Cushing inventories falling to a multi-year low. Falling Cushing inventories mean that the Brent-WTI spread has narrowed significantly and should get to the point where Cushing barrels are priced to stay put rather than be pulled to PADD 3.
Looking beyond these temporary headwinds, US crude exports should peak at the end of the year, with light sweet crude grade exports making up well over 80% of exports, despite an incremental improvement in medium and heavy crude export volumes.
Higher US exports to benefit all vessel types
The outlook for higher exports is largely consistent with trends seen across vessel types in the last year, although we do see a slight increase in Suezmax and VLCC loads going forward.
We project average exports on VLCCs of 1.3 mbd this year, up 16% y/y. The growth in VLCC demand will depend on Asia's appetite. There is less opportunity from China due to the cut in independent refiner crude import quotas, but South Korea and India should be key growth markets. However, OPEC+ is struggling to increase production in line with its planned 400 kbd per month target, and exports from the group dropped 800 kbd in January. This could open the door for an increase in Chinese buying. As China and other consumers in Asia ramp up imports, there may be some incremental demand for Atlantic basin crudes if Asian demand grows faster than Middle East export growth.
The Gulf of Mexico, which includes Mexico export volumes, is set to become the largest VLCC market in the Atlantic as West African Gulf volumes continue to decline. This could further accelerate if the Dangote refinery in Nigeria comes online toward the end of this year as the company plans. This will see more ballasters head to the Gulf of Mexico over other load regions. As US import volumes have been in decline, reducing the number of natural backhaul opportunities, exports will be more reliant on ballasters to the US Gulf.
After a rebound in demand for Suezmax exports from the US Gulf last year, we expect to see a continuation of this trend, with these vessels picking up cargoes across the destination spectrum, lifting exports to 620 kbd, up 14% y/y. There will be an increase in flows to Europe, but the bigger driver of ton-miles will be exports to Asia, particularly India.
We also expect to see growth in exports on Aframaxes but at a lower rate of 10% y/y. This still equates to average exports of 1.2 mbd but this would mean it is falling behind VLCCs in terms of market share. This will be mainly due to slower growth in exports to Europe relative to Asia, as well as a slightly higher share of the European market taken by Suezmaxes. However, this is likely to be a very slight shift and Aframaxes will remain the dominant supplier to Europe. Cross-gulf flows from Mexico to the US could fall slightly as the country aims to reduce crude exports, but we do not expect to see a significant impact this year.