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.
Something interesting to share?
Join NrgEdge and create your own NrgBuzz today
U.S. petroleum and natural gas production increased by 16% and by 12%, respectively, in 2018, and these totals combined established a new production record. The United States surpassed Russia in 2011 to become the world's largest producer of natural gas and surpassed Saudi Arabia in 2018 to become the world's largest producer of petroleum. Last year’s increase in the United States was one of the largest absolute petroleum and natural gas production increases from a single country in history.
For the United States and Russia, petroleum and natural gas production is almost evenly split; Saudi Arabia's production heavily favors petroleum. Petroleum production is composed of several types of liquid fuels, including crude oil and lease condensate, natural gas plant liquids (NGPLs), and bitumen. The United States produced 28.7 quadrillion British thermal units (quads) of petroleum in 2018, which was composed of 80% crude oil and condensate and 20% NGPLs.
Source: U.S. Energy Information Administration, based on International Energy Statistics
Note: Petroleum includes crude oil, condensate, and natural gas plant liquids.
U.S. crude oil production increased by 17% in 2018, setting a new record of nearly 11.0 million barrels per day (b/d), equivalent to 22.8 quadrillion British thermal units (Btu) in energy terms. Production in the Permian region of western Texas and eastern New Mexico contributed to most of the growth in U.S. crude oil production. The United States also produced 4.3 million b/d of NGPLs in 2018, equivalent to 5.8 quadrillion Btu. U.S. NGPL production has more than doubled since 2008, when the market for NGPLs began to expand.
U.S. dry natural gas production increased by 12% in 2018 to 28.5 billion cubic feet per day (Bcf/d), or 31.5 quadrillion Btu, reaching a new record high for the second year in a row. Ongoing growth in liquefied natural gas export capacity and the expanded ability to reach new markets have supported increases in U.S. natural gas production.
Russia’s crude oil and natural gas production also reached record levels in 2018, encouraged by increasing global demand. Russia exports most of the crude oil that it produces to European countries and to China. Since 2016, nearly 60% of Russia’s crude oil exports have gone to European member countries in the Organization for Economic Cooperation and Development (OECD). Russia’s crude oil is also an important source of supply to China and neighboring countries.
Russia’s natural gas production increased by 7% in 2018, which exceeded the growth in exports. The Yamal liquefied natural gas (LNG) export facility, which loaded its first cargo in December 2017, can liquefy more than 16 million tons of natural gas annually and accounts for almost all of the recent growth in Russia’s LNG exports. Since 2000, more than 80% of Russia’s natural gas exports have been sent to Europe.
Saudi Arabia’s annual average crude oil production increased slightly in 2018, but it remained lower than in 2016, when Saudi Arabia’s crude oil output reached a record high. Saudi Arabia’s crude oil production reached an all-time monthly high in November 2018 before the December 2018 agreement by the Organization of the Petroleum Exporting Countries (OPEC) to extend production cuts.
In addition to exporting and refining crude oil, Saudi Arabia consumes crude oil directly for electricity generation, which makes Saudi Arabian crude oil consumption highest in the summer when electricity demand for space cooling is relatively high. Since 2016, Saudi Arabia’s direct crude oil burn for electric power generation has decreased for a number of reasons, including demand reductions from a partial withdraw of power subsidies, greater use of residual fuel oil, and increased availability of domestic natural gas.
Crude oil exports account for about 60% of Saudi Arabia’s total economic output. China, along with Japan, South Korea, Taiwan, and the United States remain critical markets for Saudi Arabia’s petroleum exports.
Headline crude prices for the week beginning 12 August 2019 – Brent: US$58/b; WTI: US$54/b
Headlines of the week
The momentum for crude prices abated in the second quarter of 2019, providing less cushion for the financial results of the world’s oil companies. But while still profitable, the less-than-ideal crude prices led to mixed results across the boards – exposing gaps and pressure points for individual firms masked by stronger prices in Q119.
In a preview of general performance in the industry, Total – traditionally the first of the supermajors to release its earnings – announced results that fell short of expectations. Net profits for the French firm fell to US$2.89 billion from US$3.55 billion, below analyst predictions. This was despite a 9% increase in oil and gas production – in particularly increases in LNG sales – and a softer 2.5% drop in revenue. Total also announced that it would be selling off US$5 billion in assets through 2020 to keep a lid on debt after agreeing to purchase Anadarko Petroleum’s African assets for US$8.8 billion through Occidental.
As with Total, weaker crude prices were the common factor in Q219 results in the industry, though the exact extent differed. Russia’s Gazprom posted higher revenue and higher net profits, while Norway’s Equinor reported falls in both revenue and net profits – leading it to slash investment plans for the year. American producer ConocoPhillips’ quarterly profits and revenue were flat year-on-year, while Italy’s Eni – which has seen major success in Africa – reported flat revenue but lower profits.
After several quarters of disappointing analysts, ExxonMobil managed to beat expectations in Q219 – recording better-than-expected net profits of US$3.1 billion. In comparison, Shell – which has outperformed ExxonMobil over the past few reporting periods – disappointed the market with net profits halving to US$3 billion from US$6 billion in Q218. The weak performance was attributed (once again) to lower crude prices, as well as lower refining margins. BP, however, managed to beat expectations with net profits of US$2.8 billion, on par with its performance in Q218. But the supermajor king of the quarter was Chevron, with net profits of US$4.3 billion from gains in Permian production, as well as the termination fee from Anadarko after the latter walked away from a buyout deal in favour of Occidental.
And then, there was a surprise. In a rare move, Saudi Aramco – long reputed to be the world’s largest and most profitable energy firm – published its earnings report for 1H19, which is its first ever. The results confirmed what the industry had long accepted as fact: net profit was US$46.9 billion. If split evenly, Aramco’s net profits would be more than the five supermajors combined in Q219. Interestingly, Aramco also divulged that it had paid out US$46.4 billion in dividends, or 99% of its net profit. US$20 billion of that dividend was paid to its principle shareholder – the government of Saudi Arabia – up from US$6 billion in 1H18, which makes for interesting reading to potential investors as Aramco makes a second push for an IPO. With Saudi Aramco CFO Khalid al-Dabbagh announcing that the company was ‘ready for the IPO’ during its first ever earnings call, this reporting paves the way to the behemoth opening up its shares to the public. But all the deep reservoirs in the world did not shield Aramco from market forces. As it led the way in adhering to the OPEC+ club’s current supply restrictions, weaker crude prices saw net profit fall by 11.5% from US$53 billion a year earlier.
So, it’s been a mixed bunch of results this quarter – which perhaps showcases the differences in operational strategies of the world’s oil and gas companies. There is no danger of financials heading into the red any time soon, but without a rising tide of crude prices, Q219 simply shows that though the challenges facing the industry are the same, their approaches to the solutions still differ.
Supermajor Financials: Q2 2019