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An Iranian professor said Tuesday that the Organization of Petroleum Exporting Countries (OPEC) is doomed, because of power struggles between Iran and Saudi Arabia that have created serious political fallout.

“OPEC’s power is not waning — I’m sorry, OPEC is finished,” Hossein Askari, an Iranian professor of business at George Washington University who studies the oil industry, told USA Today. “OPEC is just powerless. They cannot agree to anything, both for political reasons and economic realities.”

Saudi Arabia has kept oil prices low to hurt Iran, causing prices to remain low since mid-2014. Iran hasn’t produced much oil recently after seriously investing in its oil sector for years due to sanctions. Simply restoring previous oil production levels is estimated to require a minimum $150 billion of new investment and could cost Iran up to $500 billion over the next five years, according to reports by the country’s state-run news agency. Iran desperately needs the kind of quick cash that only selling oil on the global market can provide.

Since Saudi Arabia refused to slash production at a critical OPEC meeting last November, the price of oil has plunged and is currently below $50 per barrel. These low prices and lack of coordination between the countries weakens OPEC’s power as a cartel.

Conflict between the major oil producers of Saudi Arabia and Iran is escalating, as the Saudis banned ships carrying Iranian crude oil from entering the country’s waters or utilizing its infrastructure in April. The ban has escalated the conflict between the countries and made Iran even more unwilling to cooperate. The Saudi’s have even threatened to increase production by up to a million barrels a day which would vastly lower the price of oil simply to hurt Iran.

So far, OPEC’s power is weakening because Russia has supported Iran’s position, likely to protect its political interests elsewhere. “Iran has a special situation as the country is at its lowest levels of production. So I think, it might be approached individually, with a separate solution,” Aleksander Novak, Russia’s energy minister, told the state media company Russia Today in March.

However, this will only work to a point. If the Saudis continue increasing oil production to keep the prices low, it could be devastating to Russia. Low oil prices caused the Russian economy to contract by 3.7 percent in 2015. Russia’s economy will keep shrinking unless oil prices recover to at least $80 per barrel, according to the Energy Research Institute of the Russian Academy of Sciences.

Saudi Arabia can increase production because it can likely handle cheap oil better than other OPEC countries, but even it is expecting a budget deficit of $140 billion — roughly 20 percent of the Saudi economy. When compared to 2013’s surplus of $48 billion, the fiscal outlook for the Kingdom looks so dire that the International Monetary Fund warned it could go through its fiscal reserves within five years. Saudi oil export revenues dropped 46 percent in just the last year and the country is selling bonds for the first time since 2007.

Saudi Arabia and Iran have a long-running rivalry, with its roots in religion. Saudi Arabia is a Sunni Islam country, whereas Iran is the home of Shia Islam. The two countries have been engaged in proxy power struggles over the last year, but the Saudi execution of a popular cleric in January immeasurably worsened diplomatic relations.

Cheap oil is good news for America and other net oil importers, especially for the poorest members of society who spend a larger proportion of their incomes buying oil products.

Posted by The Daily Caller.

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August, 26 2019
Your Weekly Update: 19 - 23 August 2019

Market Watch 

Headline crude prices for the week beginning 19 August 2019 – Brent: US$58/b; WTI: US$55/b

  • Although oil prices are still depressed over concerns on long-term health and the global economy, the market received an uptick as the situation in the Middle East continues to remain tense
  • Oil and gas facilities in Shaybah, Saudi Arabia, were attacked by Yemeni rebels over the weekend; although no disruption to production was reported, the attack does illustrate how fragile the Middle East condition is right now, even if confrontations have simmered down
  • The crude tanker seized by British authorities in Gibraltar was released, but the US sought the block the release and has threatened sanctions on any country that aids the ship; Greece has said that it will refuse to help the tanker as it makes its way to the East Mediterranean, with Iran saying it could send a naval escort
  • In the ongoing US-China trade war, the US has delayed sanctions on China’s Huawei Technologies and new tariffs on Chinese imports to mid-December, a sign that the US expects some progress in current trade talks
  • But we have been here before, and the delays do not represent any concrete movement on diffusing the trade tensions between the world’s two largest economies; the trade situation remains volatile and subject to Trump’s whims
  • Also supporting prices are signs that the world’s major economies are moving to stave off the effects of a possible recession, with Germany reporting that it was preparing a package of fiscal stimulus measures
  • The US active rig count managed to finally snap six weeks of consecutive losses, gaining six new oil rigs but losing four gas rigs for a net gain of two; the current total active rigs in the US stand at 935, down 122 y-o-y
  • With the market relatively calm, crude prices will likely stay rangebound in the US$58-60/b space for Brent and US$54-56/b for WTI; the focus will still remain on the long-term health of global oil demand, but intermittent short-term supply issues could swing prices up or down


Headlines of the week

Upstream

  • After ExxonMobil and its series of blockbuster discoveries in Guyana, Tullow Oil joins the race as the Jethro-1 well in the Orinduik license confirms the presence of oil with estimates exceeding pre-drill forecasts
  • The US$7.7 billion Mariner field in the UK North Sea has produced its first oil, with operator Equinor expecting the field to produce over 300 million boe over 30 years, an initial output of 50,000 b/d and 70,000 b/d at peak production
  • Angola will launch a new licensing round, focused on 10 offshore blocks, including frontier areas in the Namibe and the Benguela basins
  • The Hibernia platform in Canada’s Newfoundland and Labrador has been granted permission to resume production after an oil spill in mid-July
  • Kenya has made its first-ever crude oil export as Tullow Oil sold a shipment to ChemChina UK; initial crude shipments are expected to be small-scale until a pipeline connecting Mombasa to the Turkana onshore fields is completed
  • Start-up of Petrobras’s Mero-2 pre-salt project in the Santos basin has fallen behind schedule, with first oil from the Sepetiba FPSO now expected in 2023
  • Joining the trend of other US upstream producers exiting the UK North Sea, ExxonMobil is reportedly considering a sale of its UKNS portfolio, which would be valued at some US$2 billion
  • Repsol has been granted permission by Norway to extend the life of the Rev field in the North Sea past April 2021, which started operations in 2009

Midstream/Downstream

  • After hosting its first-ever earning calls, Saudi Aramco reaffirms its desire to expand its downstream footprint further by taking a 20% stake in Reliance Industries for US$15 billion, which should secure regular sales of 500,000 b/d of Arabian crude to feed the Jamnagar refineries in India
  • First crude has been delivered from the Permian to Corpus Christi as Trafigura/Buckeye received a shipment through the Plains All American Cactus II pipeline that connects the Permian to the Gulf Coast
  • Malaysia is planning to develop the US$2 billion Bunker Island oil storage and ship refuelling site in Johor, which would provide competition to Singapore with capacity for 1.2 million cubic metres of fuel products
  • A group of American small fuel retailers is suing the US government over the move to lift the current ban on year-long E15 ethanol-gasoline sales, a move that was set to benefit the US farm lobby but place pressure on the oil lobby

Natural Gas/LNG

  • The EIA forecasts that Australia will surpass Qatar as the world’s largest LNG exporter by 2020, as data confirms that Australia shipments exceeded Qatar’s in November 2018 and April 2019
  • Equinor has been granted permission by the Norwegian Petroleum Directorate to start production at the Utgard field in the North Sea, with production focused on condensate, natural gas and NGLs
  • Cheniere is on track to become the world’s second-largest LNG operator by capacity in 2020, with an expected installed capacity of 31 million tons per annum through five trains at Sabine Pass and two trains at Corpus Christi
  • Guangzhou Gas is still reportedly looking for LNG supplies after walking away from a potential deal to purchase 1 mtpa of LNG for Canada’s Woodfibre LNG
  • ExxonMobil is gearing up for high-profile natural gas drilling campaign in Australia’s Gippsland basin offshore Victoria
August, 26 2019
New PNG Government Reviews Past Oil Agreements

A lot of complications arise when a government changes. Particularly if the new government comes in on a mandate to reverse alleged deficiencies and corruption of previous governments. This is amplified when significant natural resources are involved. It has happened in the past – when Iran nationalised its oil industry by kicking out BP – and it could happen again in the future – in Guyana where the promise of oil riches in the hands of foreign firms has already caused grumbles. And it is also happening right now in Papua New Guinea, as the new government led by Prime Minister James Marape took aim at the Papua LNG deal.

Negotiated by the previous government of Peter O’Neill, the state’s new position that is the current gas deal is ‘disadvantageous’ to country. A complex set of manoeuvres – accusing O’Neill of multiple levels of corruption – led to a proposed vote of no confidence and an eventual resignation. With the departure of O’Neill, public opinion on the Papua LNG project (as well as the PNG LNG project) switched from being viewed as a boon to the economy to one of unequal terms that would not compensate the nation fairly for its resources.

So, despite a previous assurance in early August that the new government of Papua New Guinea would stand by the previous gas deal agreed with the Papua LNG stakeholders in April, Marape sent a team led by the Minister of Petroleum Kerenga Kua to Singapore to renegotiate with the project’s lead operator Total.

As the meeting was announced, suggestions pointed to a hardline position by Papua New Guinea… that they could ‘walk away from a new deal’ if the new terms were not acceptable. In a statement, Kua stated that the negotiations could ‘work out well or even disastrously’. From Total’s part, CEO Patrick Pouyanne said in July that he expected the government to respect the gas deal while Oil Search stated that it was seeking ‘further clarity on the state’s position’. The gas deal covers framework of the Papua LNG project, which was scheduled to enter FEED phase this year with FID expected in 2020, drawing gas from the giant onshore Elk-Antelope fields ahead of planned first LNG by 2024. So, the stakes are high.

With both sides locked into their positions, reports from Singapore suggested that the negotiations broke down into a ‘Mexican standoff’. No grand new deal was announced, and it can therefore be inferred that no progress was made. There is a possibility that PNG could abandon the deal altogether and seek new partners under more favourable terms, but to do so would be a colossal waste of time, given that Papua LNG is nearing a decade in development. Total and ExxonMobil have already raised the possibility of legal moves if the deal is aborted, with compensation running into billions – billions that the PNG government will not have unless the Papua LNG project goes ahead.

But the implications of the deal or no-deal are even wider. The PNG state has already stated that it will look at the planned expansion of the PNG LNG project (led by ExxonMobil and Santos) next, which draws from the P’nyang field. Renegotiation of the current gas deals in PNG may have populist appeal but have serious implications – alienating two of the largest oil and gas supermajors and two of PNG’s largest foreign investors could lead to a monetary gap and a mood of distrust that PNG may be unable to ever fill. Hardline positions are a good starting position, but eventual moderation is required to ever strike a deal.

Papua LNG Factsheet:

  • Ownership: Total (31.1%), ExxonMobil (28.3%), Oil Search (17.7%), state (22.5%)
  • Feed: Elk-Antelope onshore fields,
  • Capacity: 5.4 million tons per annum
  • Structure: 2 trains of 2.7 mtpa capacity each
August, 22 2019