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Last Updated: March 21, 2016
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This is the first edition of the "Oil Industry Insider Report" which is planned to be produced in a weekly basis to share oil and gas industry insights, recent trends and important events taking place.


We start our weekly oil industry insider's report with the most important oil market event where oil prices' rally reversed course as a result of Iran's resistance to join other producers in freezing oil production as well as a continuous build of U.S. crude stockpiles.

On Monday, following the news of Iran's declaration not to cap its oil output, and the continuous build of U.S. crude stockpiles, Brent crude dropped down 86 cents, or 2.13 percent, at $39.53, while WTI lost $1.32, or 3.43 percent, at $37.18.

Although speculators are optimistic about the short term of oil prices, and expecting the rally to gain momentum, oil producers on the other hand are not trusting that prices will hold up over the medium-term. According to Morgan Stanley, oil producers are hedging against the volatility in prices after prices have surged by about 40 percent in recent weeks, and this means they are limiting how far oil prices can go.


In hedging against volatility, oil producers sell futures contract at the current oil prices, usually with the intention to buy those contract back prior to their expire. In this case, producers would earn a net gain if the settlement prices are lower than what they sold the contracts for. If prices are higher, producers lose because they have to buy the contract at higher prices than the hedged price.


The increase in hedging against volatility at $40-a-barrel range tells us that producers are incentivized to sell and produce more oil for a long period of time in order for oil prices to remain below their prevailing hedges.


Rig Count: Continuous fall in the U.S. and elsewhere


According to Baker Hughes rig count service, U.S. rotary rig count dropped 9 last week to 480, with 386 oil rigs and 94 natural gas rigs. The number of rig count is down 645 from 1,125 last year, and it seems the rig count will continue declining as the oil market is locked between financial volatility and fundamental volatility.


Regardless of the continuous decline in U.S. rig count, its production has shown a huge resistance due to the role advanced technology played in offsetting the effect of rig count decline. However, as time goes, the effect of low rig count starts to take place, and this is what is happening right now. The of resilience of U.S. is weakening and production continues to decline.


At the international level, the rig count is also experiencing a downturn trend. According to a report by Houston-based Simmons & Co. International, the international rig count is down by 30 to 43 percent since 2014. While in the Middle East drilling and exploration is maintained, in Africa and Latin America it is not so.


Low oil prices have led many producers in Africa and Latin America to reduce their rig count. The consequences of such  fall in the international rig count will be obvious in the medium-term in terms of a reduction in oil supply. 


Oil Production: Freeze and fall taking place


U.S. oil production has been showing a great deal of resilience since the beginning of oil prices crash. This seems not to be the case anymore as production drop started to accelerate over the past few weeks.


According to the weekly U.S. oil production data by EIA, the U.S. oil production is about 9,078,000 million barrel a during the first week of March. U.S. production has dropped to this level on October last year before it starts increasing again, but this time the production is likely to drop further.


U.S. crude production is expected to decline to 8.19 million barrels a day next year according to the EIA's Short-Term Energy Outlook on March 8.


In terms of the global oil production, according to the IEA's OIl Market Report on March 11, the global supply eased by 180 kb/d in February, to 96.5 md/d, due to lower oil production from both OPEC and non-OPEC producers. Production stood around 1.8 mb/d above a year earlier as non-OPEC decline was offset by gains in OPEC output.

According to IEA, OPEC crude oil production eased by 90 kb/d in February to 32.61 mb/d as a result of production losses from UAE, Iraq and Nigeria. OPEC output was supposed to decline more however the rise in flows from post-sanctions Iran offset the output losses from other cartel's members.  Production from non-OPEC is estimated to decline by 750 kb/d, to 57.0 mb/d in 2016.

Currently the main focus is on non-OPEC countries to see if high-cost output is falling. In fact, that is currently happening right now, with U.S. oil output falling continuously, and according to EIA, U.S. production is expected to fall by 530 kb/d.


Besides that, the oil market is putting much hope for a recovery on the proposed new producers talk on coordinated output action even-though Iran has already rejected the idea of cooperating in production freeze. However, the effect of Iran's decision not to cooperate in the production freeze might amount to nothing as it canbe offset by OPEC's members who increased their production to compensate for the partial loss of Iran's oil supply when it was under sanctions.

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China adds incentives for domestic natural gas production as imports increase

Rapid growth in China’s natural gas consumption has outpaced growth in its domestic natural gas production in recent years. China’s natural gas imports, both by pipeline and as liquefied natural gas (LNG), accounted for nearly half (45%) of China’s natural gas supply in 2018, an increase from 15% in 2010. To increase the domestic production of natural gas, the Chinese government has introduced incentives for several forms of natural gas production.

Natural gas production has recently grown in China largely because of increased development in low-permeability formations in the form of tight gas, shale gas, and to a lesser extent, coalbed methane. In September 2018, the Chinese State Council set a target of 19.4 billion cubic feet per day (Bcf/d) for domestic natural gas production in 2020. In 2018, China’s domestic natural gas production averaged 15.0 Bcf/d.

In June 2019, the Chinese government introduced a subsidy program that established new incentives for the production of natural gas from tight formations and extended existing subsidies for production from shale and coalbed methane resources. This subsidy is scheduled to be in effect through 2023. In addition to the changes in the subsidy program, the government allowed foreign companies to operate independently in the country’s oil and natural gas upstream sector.

China domestic natural gas production by type

Source: U.S. Energy Information Administration, based on China National Bureau of Statistics and IHS Markit

Production of tight gas, shale gas, and coalbed methane collectively accounted for 41% of China’s total domestic natural gas production in 2018. China has been developing tight gas from low-permeability formations since the 1970s, especially in the Ordos and Sichuan Basins. Tight gas production was negligible until 2010 when companies initiated an active drilling program that helped lower the drilling cost per vertical well and improve well productivity.

Shale gas development in China has focused on the Sichuan Basin: China National Petroleum Corporation’s (CNPC) subsidiary PetroChina operates two fields in the southern part of the basin and the China Petroleum and Chemical Corporation (Sinopec) operates one field in the eastern part of the basin. PetroChina and Sinopec have respectively committed to producing 1.16 Bcf/d and 0.97 Bcf/d of shale gas by 2020, which, if realized, would collectively double the country’s 2018 shale gas production level.

China's tight gas, shale gas, coalbed methane, and synthetic gas producing areas

Source: U.S. Energy Information Administration

China’s coalbed methane development is concentrated in the Ordos and Qinshui Basins of Shanxi Province. These basins face significant challenges, including relatively low well productivity and relatively high production costs.

China also generates synthetic natural gas from coal, a source that accounted for 2% of China’s natural gas production in 2018. China’s synthetic gas projects involve gasifying coal into methane in coal-rich provinces, such as Inner Mongolia, Xinjiang, and Shanxi. In 2016, the Chinese government hoped to reach 1.64 Bcf/d of coal-to-gas production capacity by 2020. China’s coal-to-gas production was less than 0.3 Bcf/d in 2018 as stricter environmental mandates have slowed down plant construction and increased the cost of further developing coal-to-gas.

October, 24 2019
The United States now exports crude oil to more destinations than it imports from

As U.S. crude oil export volumes have increased to an average of 2.8 million barrels per day (b/d) in the first seven months of 2019, the number of destinations (which includes countries, territories, autonomous regions, and other administrative regions) that receive U.S. exports has also increased. Earlier this year, the number of U.S. crude oil export destinations surpassed the number of sources of U.S. crude oil imports that EIA tracks.

In 2009, the United States imported crude oil from as many as of 37 sources per month. In the first seven months of 2019, the largest number of sources in any month fell to 27. As the number of sources fell, the number of destinations for U.S. crude oil exports rose. In the first seven months of 2019, the United States exported crude oil to as many as 31 destinations per month.

This rise in U.S. export destinations coincides with the late 2015 lifting of restrictions on exporting domestic crude oil. Before the restrictions were lifted, U.S. crude oil exports almost exclusively went to Canada. Between January 2016 (the first full month of unrestricted U.S. crude oil exports) and July 2019, U.S. crude oil production increased by 2.6 million b/d, and export volumes increased by 2.2 million b/d.

monthly U.S. crude oil production and exports

Source: U.S. Energy Information Administration, Petroleum Supply Monthly

The United States has also been importing crude oil from fewer of these sources largely because of the increase in domestic crude oil production. Most of this increase has been relatively light-sweet crude oil, but most U.S. refineries are configured to process medium- to heavy-sour crude oil. U.S. refineries have accommodated this increase in production by displacing imports of light and medium crude oils from countries other than Canada and by increasing refinery utilization rates.

Conversely, the United States has exported crude oil to more destinations because of growing demand for light-sweet crude oil abroad. Several infrastructure changes have allowed the United States to export this crude oil. New, expanded, or reversed pipelines have been delivering crude oil from production centers to export terminals. Export terminals have been expanded to accommodate greater crude oil tanker traffic, larger crude oil tankers, and larger cargo sizes.

More stringent national and international regulations limiting the sulfur content of transportation fuels are also affecting demand for light-sweet crude oil. Many of the less complex refineries outside of the United States cannot process and remove sulfur from heavy-sour crude oils and are better suited to process light-sweet crude oil into transportation fuels with lower sulfur content.

The U.S. Energy Information Administration’s monthly export data for crude oil and petroleum products come from the U.S. Census Bureau. For export values, Census trade data records the destinations of trade volumes, which may not be the ultimate destinations of the shipments.

October, 23 2019
Recalibrating Singapore’s Offshore Marine Industry

The state investment firm Temasek Holdings has made an offer to purchase control of Singaporean conglomerate Keppel Corp for S$4.1 billion. News of this has reverberated around the island, sparking speculation about what the new ownership structure could bring – particularly in the Singaporean rig-building sector.

Temasek already owns 20.5% of Keppel Corp. Its offer to increase its stake to 51% for S$4.1 billion would see it gain majority shareholding, allowing a huge amount of strategic flexibility. The deal would be through Temasek’s wholly-owned subsidiary Kyanite Investment Holdings, offering S$7.35 per share of Keppel Corp, a 26% premium of the traded price at that point. The financial analyst community have remarked that the bid is ‘fair’ and ‘reasonable’, and there appears to be no political headwinds against the deal being carried out with the exception of foreign and domestic regulatory approval.

The implications of the deal are far-ranging. Keppel Corp’s business ranges from property to infrastructure to telecommunications, including Keppel Land and a partial stake in major Singapore telco M1. Temasek has already said that it does not intend to delist and privatise Keppel Corp, and has a long-standing history of not interfering or getting involved in the operations or decisions of its portfolio companies.

This might be different. Speculation is that this move, if successful could lead to a restructuring of the Singapore offshore and marine industry. Since 2015, Singapore’s rig-building industry has been in the doldrums as global oil prices tumbled. Although prices have recovered, cost-cutting and investment reticence have provided a slower recovery for the industry. In Singapore, this has affected the two major rigbuilders – Keppel O&M and its rival Sembcorp Marine. In 2018, Keppel O&M reported a loss of over SS$100 million (although much improved from its previous loss of over SS$800 million); Sembcorp Marine, too, faces a challenging market, with a net loss of nearly 50 million. Temasek itself is already a majority shareholder in Sembcorp Marine.

Once Keppel Corp is under Temasek’s control, this could lead to consolidation in the industry. There are many pros to this, mainly the merging of rig-building operations and shipyards will put Singapore is a stronger position against giant shipyards of China and South Korea, which have been on an asset buying spree. With the overhang of the Sete Brasil scandal over as both Keppel O&M and Sembcorp Marine have settled corruption allegations over drillship and rig contracts, a merger is now increasingly likely. It would sort of backtrack from Temasek’s recent direction in steering away from fossil fuel investments (it had decided to not participate in the upcoming Saudi Aramco IPO for environmental concerns) but strengthening the Singaporeans O&M industry has national interest implications. As a representative of Temasek said of its portfolio – ‘(we are trying to) re-purpose some businesses to try and grasp the demands of tomorrow.’ So, if there is to be a tomorrow, then Singapore’s two largest offshore players need to start preparing for that now in the face of tremendous competition. And once again it will fall on the Singaporean government, through Temasek, to facilitate an arranged marriage for the greater good.

Keppel and Sembcorp O&M at a glance:

Keppel Offshore & Marine, 2018

  • Revenue: S$1.88 billion (up from S$1.80 billion)
  • Net Profit: -S$109 million (up from -S$826 million)
  • Contracts secured: S$1.7 billion

Sembcorp Marine, 2018

  • Turnover: S$4.88 billion (up from S$3.03 billion)
  • Net Profit: -S$48 million (down from S$157 million)
  • Contracts secured: S$1.2 billion
October, 22 2019