Crude oil continues to trade in the US$45/b range, as a strong dollar and high stockpiles weighed on the market, while there was a sense of pessimism permeating out of the G20 meeting in Chengdu on Sunday over the health of the global economy.
Last week in Asian oil:
Upstream & Midstream
- Saudi Arabian exports to China are on the increase, out-supplying Russia in June. Since 2008, Russia has been the main supplier of crude to China, but Saudi Arabia has closed the gap significantly this year. Iran, too, is aiming to increase its crude shipments to the Middle Kingdom, focusing on supplying independent teapot refineries together with trader Trafigura.
- Iran continues to come out of the cold, now re-forging ties with Sri Lanka. Sri Lanka, which traditionally depended entirely on Iranian crude for its sole refinery, had stopped ties due to the US-led sanctions, but has now reached out to Iran to sign its first oil sale contract since 2011.
- Singapore’s Keppel Corp sees little improvement in global oil demand as the worldwide glut continues to weigh on the market. Keppel is the world’s largest builder of oil rigs, and is mulling significant further cuts in its workforce as fewer newer contracts for rigs come in, if at all. Keppel has already shrunk its workforce by some 11,000 since 2015.
- Emerging from its civil war, Libya’s hopes to normalise its crude export volumes took another blow last week as the Libya National Oil Corporation objected to a government deal with the Petroleum Facilities Guard to re-open key ports for exports after the latter blockaded facilities at Ras Lanuf, Es Sider and Zueitina. NOC had originally declared force majeure due to the blockade, but is dissatisfied with the terms given to the Guard and vows to continue the force majeure.
- Indonesia has (suddenly) switched to Platts Dated Brent as the basis for its Indonesian Crude Price (IPC) calculation effective July. Previously calculated as 50% Platts and 50% spot assessment of various Indonesian crudes, the switch to 100% Dated Brent echoes Petronas’ similar decision in 2011, but the swift switchover has ruffled feathers in the trading community, left exposed by the sudden change.
- Saudi Arabia reports that its planned 400 kb/d Jizan refinery is expected to come online 2018, while ironing out kinks on its clean fuels project at Ras Tanura, which will increase the amount of oil products coming out of the Kingdom, destined for Asia and Europe.
- Chevron has signed an agreement with China’s JOVO Group through its Singapore subsidiary Carbon Hydrogen Energy Pte Ltd to supply LNG from its global portfolio. The deal involves 500,000 metric tons of LNG per year over five years, with the first cargo scheduled for 2018.
- India is reviving a plan to merge most, or all of the country’s state oil companies, to create a giant integrated corporation in hopes of generating efficiency through consolidated operations and distributions. The plan was first mooted in 2005, but rejected as ‘unworkable; the new plan would bring together entities like ONGC, IndianOil, HPCL and BPCL together with federal bodies like the Oil Industry Development Board.
- ExxonMobil has won the bidding war for InterOil after Oil Search pulled out of the competition last week. The US giant will now pay US$2.5 billion for InterOil and its vast gas reserves in Papua New Guinea, with the long-term ambition of turning PNG into a vast LNG exporter. The deal is expected to be finalised in September, pending regulatory review.
Other International Updates
Upstream & Midstream
- The US rig count has risen for the fourth consecutive week, adding 15 rigs to a total of 462. Fourteen oil rigs were added to the total – all onshore – placing downward pressure on prices as the development means US output will stem its decline, and possibly begin to rise again.
- A pipeline spill on Husky Energy’s Saskatchewan Gathering System in western Canada has spilled some 1,500 barrels of heavy oil, with Husky rushing to contain and clean the spill before it moves further down the North Saskatchewan River.
- BP is continuing its retreat from downstream operations, planning to sell off much of its UK fuel terminal assets, as well as its stake in the onshore United Kingdom Oil Pipeline. The shake-up in the British entity’s UK operations leaves its portfolio further skewed towards upstream, which it views as more profitable and strategic.
- The first US LNG cargo crosses through the Panama Canal this week, slashing the journey time from the US Gulf of Mexico to the LNG-hungry demand centres of Asia. Expect more cargos to follow suit, as US Gulf producers join Canada’s LNG exporters in BC and Australia is competing for Asian contracts.
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Headline crude prices for the week beginning 20 May 2019 – Brent: US$73/b; WTI: US$63/b
Headlines of the week
Midstream & Downstream
At first, it seemed like a done deal. Chevron made a US$33 billion offer to take over US-based upstream independent Anadarko Petroleum. It was a 39% premium to Anadarko’s last traded price at the time and would have been the largest industry deal since Shell’s US$61 billion takeover of the BG Group in 2015. The deal would have given Chevron significant and synergistic acreage in the Permian Basin along with new potential in US midstream, as well as Anadarko’s high potential projects in Africa. Then Occidental Petroleum swooped in at the eleventh hour, making the delicious new bid and pulling the carpet out from under Chevron.
We can thank Warren Buffet for this. Occidental Petroleum, or Oxy, had previously made several quiet approaches to purchase Anadarko. These were rebuffed in favour of Chevron’s. Then Oxy’s CEO Vicki Hollub took the company jet to meet with Buffet. Playing to his reported desire to buy into shale, Hollub returned with a US$10 billion cash infusion from Buffet’s Berkshire Hathaway – which was contingent on Oxy’s successful purchase of Anadarko. Hollub also secured a US$8.8 billion commitment from France’s Total to sell off Anadarko’s African assets. With these aces, she then re-approached Anadarko with a new deal – for US$38 billion.
This could have sparked off a price war. After all, the Chevron-Anadarko deal made a lot of sense – securing premium spots in the prolific Permian, creating a 120 sq.km corridor in the sweet spot of the shale basin, the Delaware. But the risk-adverse appetite of Chevron’s CEO Michael Wirth returned, and Chevron declined to increase its offer. By bowing out of the bid, Wirth said ‘Cost and capital discipline always matters…. winning in any environment doesn’t mean winning at any cost… for the sake for doing a deal.” Chevron walks away with a termination fee of US$1 billion and the scuppered dreams of matching ExxonMobil in size.
And so Oxy was victorious, capping off a two-year pursuit by Hollub for Anadarko – which only went public after the Chevron bid. This new ‘global energy leader’ has a combined 1.3 mmb/d boe production, but instead of leveraging Anadarko’s more international spread of operations, Oxy is looking for a future that is significantly more domestic.
The Oxy-Anadarko marriage will make Occidental the undisputed top producer in the Permian Basin, the hottest of all current oil and gas hotspots. Oxy was once a more international player, under former CEO Armand Hammer, who took Occidental to Libya, Peru, Venezuela, Bolivia, the Congo and other developing markets. A downturn in the 1990s led to a refocusing of operations on the US, with Oxy being one of the first companies to research extracting shale oil. And so, as the deal was done, Anadarko’s promising projects in Africa – Area 1 and the Mozambique LNG project, as well as interest in Ghana, Algeria and South Africa – go to Total, which has plenty of synergies to exploit. The retreat back to the US makes sense; Anadarko’s 600,000 acres in the Permian are reportedly the most ‘potentially profitable’ and it also has a major presence in Gulf of Mexico deepwater. Occidental has already identified 10,000 drilling locations in Anadarko areas that are near existing Oxy operations.
While Chevron licks its wounds, it can comfort itself with the fact that it is still the largest current supermajor presence in the Permian, with output there surging 70% in 2018 y-o-y. There could be other targets for acquisitions – Pioneer Natural Resources, Concho Resources or Diamondback Energy – but Chevron’s hunger for takeover seems to have diminished. And with it, the promises of an M&A bonanza in the Permian over 2019.
The Occidental-Anadarko deal:
Source: U.S. Energy Information Administration, Short-Term Energy Outlook
In April 2019, Venezuela's crude oil production averaged 830,000 barrels per day (b/d), down from 1.2 million b/d at the beginning of the year, according to EIA’s May 2019 Short-Term Energy Outlook. This average is the lowest level since January 2003, when a nationwide strike and civil unrest largely brought the operations of Venezuela's state oil company, Petróleos de Venezuela, S.A. (PdVSA), to a halt. Widespread power outages, mismanagement of the country's oil industry, and U.S. sanctions directed at Venezuela's energy sector and PdVSA have all contributed to the recent declines.
Source: U.S. Energy Information Administration, based on Baker Hughes
Venezuela’s oil production has decreased significantly over the last three years. Production declines accelerated in 2018, decreasing by an average of 33,000 b/d each month in 2018, and the rate of decline increased to an average of over 135,000 b/d per month in the first quarter of 2019. The number of active oil rigs—an indicator of future oil production—also fell from nearly 70 rigs in the first quarter of 2016 to 24 rigs in the first quarter of 2019. The declines in Venezuelan crude oil production will have limited effects on the United States, as U.S. imports of Venezuelan crude oil have decreased over the last several years. EIA estimates that U.S. crude oil imports from Venezuela in 2018 averaged 505,000 b/d and were the lowest since 1989.
EIA expects Venezuela's crude oil production to continue decreasing in 2019, and declines may accelerate as sanctions-related deadlines pass. These deadlines include provisions that third-party entities using the U.S. financial system stop transactions with PdVSA by April 28 and that U.S. companies, including oil service companies, involved in the oil sector must cease operations in Venezuela by July 27. Venezuela's chronic shortage of workers across the industry and the departure of U.S. oilfield service companies, among other factors, will contribute to a further decrease in production.
Additionally, U.S. sanctions, as outlined in the January 25, 2019 Executive Order 13857, immediately banned U.S. exports of petroleum products—including unfinished oils that are blended with Venezuela's heavy crude oil for processing—to Venezuela. The Executive Order also required payments for PdVSA-owned petroleum and petroleum products to be placed into an escrow account inaccessible by the company. Preliminary weekly estimates indicate a significant decline in U.S. crude oil imports from Venezuela in February and March, as without direct access to cash payments, PdVSA had little reason to export crude oil to the United States.
India, China, and some European countries continued to receive Venezuela's crude oil, according to data published by ClipperData Inc. Venezuela is likely keeping some crude oil cargoes intended for exports in floating storageuntil it finds buyers for the cargoes.
Source: U.S. Energy Information Administration, Short-Term Energy Outlook, and Clipper Data Inc.
A series of ongoing nationwide power outages in Venezuela that began on March 7 cut electricity to the country's oil-producing areas, likely damaging the reservoirs and associated infrastructure. In the Orinoco Oil Belt area, Venezuela produces extra-heavy crude oil that requires dilution with condensate or other light oils before the oil is sent by pipeline to domestic refineries or export terminals. Venezuela’s upgraders, complex processing units that upgrade the extra-heavy crude oil to help facilitate transport, were shut down in March during the power outages.
If Venezuelan crude or upgraded oil cannot flow as a result of a lack of power to the pumping infrastructure, heavier molecules sink and form a tar-like layer in the pipelines that can hinder the flow from resuming even after the power outages are resolved. However, according to tanker tracking data, Venezuela's main export terminal at Puerto José was apparently able to load crude oil onto vessels between power outages, possibly indicating that the loaded crude oil was taken from onshore storage. For this reason, EIA estimates that Venezuela's production fell at a faster rate than its exports.
EIA forecasts that Venezuela's crude oil production will continue to fall through at least the end of 2020, reflecting further declines in crude oil production capacity. Although EIA does not publish forecasts for individual OPEC countries, it does publish total OPEC crude oil and other liquids production. Further disruptions to Venezuela's production beyond what EIA currently assumes would change this forecast.