The Cost Of Drilling Continues To Rise

1. Price of Drilling Continues to Edge Higher Despite Cheaper Raw Materials

- According to IHS Markit, the average cost of developing upstream oil and gas assets rose by another 1.8% in Q3 2022 as high industry activity is squeezing availability.

- Most of the drilling appreciation came from the land and offshore rig markets, up by 11% and 12%, respectively, with land rig prices ballooning throughout most of this year.

- Whilst steel prices have decreased globally recently, pipe prices have barely fallen as steel mills are attempting to hold onto elevated margins for pipe as demand remains extremely robust.

- The overall inflation of upstream costs is expected to hit 12% this year as high oil and gas prices keep activity high, with 2023 expected to see another 5% cost inflation.

2. Power Generation Will Need to Triple to Meet Hydrogen Needs

- According to Bloomberg, the production of hydrogen will become the main source of electricity demand by 2050, roughly equivalent to 23 000 TWh, surpassing the construction sector and industry.

- Buoyed by the proliferation of solar and wind generation for green hydrogen, the energy requirements of hydrogen production by 2050 will be equal to the world's total electricity demand right now.

- UK oil major BP (NYSE:BP) recently announced blue and green hydrogen will become a foundation stone of its low-carbon business, revamping most its remaining refineries that currently run on grey hydrogen from natural gas.

- Under the Inflation Reduction Act, the US authorities offers a $3 per kg tax credit for clean hydrogen which brings the cost of electrolysed hydrogen below grey and blue hydrogen.

3. Tanker Build-up in Turkish Straits Hits Kazakh Oil

- Transit times for oil tankers passing through the Turkish Straits from the Black Sea to the Mediterranean have risen to a 12-month high after Turkey's demand that vessels present P&I coverage for passage.

- With several tankers sitting idle since late November, the average transit delay for southbound tankers shot up to 10 days recently, triple what it was a mere week ago.

- Ironically, all the 18 crude tankers currently held up in front of the Bosphorus Strait carry the Kazakh CPC Blend, a light sour grade that is not subjected to any US/EU sanctions and should be free to market.

- The International Group of P&I Clubs rejected Turkish demands as overblown and advised members not to issue coverage letters, whilst Russian cargo covered by domestic insurance have been passing freely.

4. European LNG Back in Vogue as Cold Hits the Continent

- Europe is set to confront its first string of sub-zero temperatures due to a weaker polar vortex, LNG has come back to the forefront of the continent's agenda amidst record send-out levels.

- Weak wind power generation and nuclear outages in Sweden and France have narrowed the options for Europe's utility companies which try to lock in as many LNG volumes as possible.

- Europe's LNG imports in November have been the second-highest in history at 10.1 million tons LNG, according to Kpler data, keeping gas inventories still at relatively safe levels of 90%.

- Front-month futures on the Dutch spot TTF benchmark have been trading just slightly below €140 per MWh, equivalent to some $45/mmBtu which is more than $10/mmBtu higher than in Asia.

5. India Needs Gas to Meet Power Needs

- The Indian government has asked state-controlled energy firms such as GAIL (NSE:GAIL) to ramp up imports of natural gas in anticipation of higher demand in the summer of 2023.

- Delhi is seeking to avoid repeating the power generation meltdown seen this April when nationwide demand outstripped capacity by more than 7% amidst tight coal stocks and low gas imports.

- Natural gas accounts for a mere 1.5% of India's power generation currently, but it is seen as a key fuel in bridging periods of tightness from April to June when air conditioning usage is at its peak.

- India has been mitigating the electricity squeeze by higher coal imports (despite recording peak domestic production this year), however natural gas is easier to ramp up in demand peaks.

6. First-Ever US Pacific Offshore Wind Auction Gets European Traction

- The first-ever federal offshore wind lease auction in the Pacific region generated $757 million from five competitive bids, surpassing the one previously held in the Atlantic coastal areas of NY/NJ.

- Four of the five available blocks were taken by European companies, represented by Equinor, RWE, Copenhagen Infrastructure Partners, and Ocean Winds (a JV between ENGIE and EDP Renewables).

- The two auctioned areas in Morro Bay and Humboldt Bay are poised to become a key element in California's ambition to wield 5 GW of offshore wind capacity by 2030.

- This auction was also the first in the United States to be licensing floating wind capacity, with the winning companies' provisional assessments putting potential capacity in the leased areas at 7.1 GW.

7. Is Lithium Just too Hot to Drop?

- Lithium prices have been the one commodity that did not experience a major downward slide in 2022, trading at near-record levels of $82,000/mt of lithium carbonate, more than double year-on-year.

- According to Bank of America, lithium supply would need to increase by a factor of 10 over the next 10 years if it is to meet expected demand, with any delay impacting the market balance.

- That said, prospects for further growth have been capped as China's key EV carmaker BYD announced it expects the lithium market to swing back into a surplus in 2023 amidst weaker demand growth.

- Simultaneously, sales of electric vehicles - 80% of global lithium demand - are expected to slow down next year in China as the government cuts EV subsidies.