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 11 March 2019 – Brent: US$66/b; WTI: US$56/b
Headlines of the week
Midstream & Downstream
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In 2017, Norway’s Government Pension Fund Global – also known as the Oil Fund – proposed a complete divestment of oil and gas shares from its massive portfolio. Last week, the Norwegian government partially approved that request, allowing the Fund to exclude 134 upstream companies from the wealth fund. Players like Anadarko Petroleum, Chesapeake Energy, CNOOC, Premier Oil, Soco International and Tullow Oil will now no longer receive any investment from the Fund. That might seem like an inconsequential move, but it isn’t. With over US$1 trillion in assets – the Fund is the largest sovereign wealth fund in the world – it is a major market-shifting move.
Estimates suggest that the government directive will require the Oil Fund to sell some US$7.5 billion in stocks over an undefined period. Shares in the affected companies plunged after the announcement. The reaction is understandable. The Oil Fund holds over 1.3% of all global stocks and shares, including 2.3% of all European stocks. It holds stakes as large as of 2.4% of Royal Dutch Shell and 2.3% of BP, and has long been seen as a major investor and stabilising force in the energy sector.
It is this impression that the Fund is trying to change. Established in 1990 to invest surplus revenues of the booming Norwegian petroleum sector, prudent management has seen its value grow to some US$200,000 per Norwegian citizen today. Its value exceeds all other sovereign wealth funds, including those of China and Singapore. Energy shares – specifically oil and gas firms – have long been a major target for investment due to high returns and bumper dividends. But in 2017, the Fund recommended phasing out oil exploration from its ‘investment universe’. At the time, this was interpreted as yielding to pressure from environmental lobbies, but the Fund has made it clear that the move is for economic reasons.
Put simply, the Fund wants to move away from ‘putting all its eggs in one basket’. Income from Norway’s vast upstream industry – it is the largest producing country in Western Europe – funds the country’s welfare state and pays into the Fund. It has ethical standards – avoiding, for example, investment in tobacco firms – but has concluded that devoting a significant amount of its assets to oil and gas savings presents a double risk. During the good times, when crude prices are high and energy stocks booming, it is a boon. But during a downturn or a crash, it is a major risk. With typical Scandinavian restraint and prudence, the Fund has decided that it is best to minimise that risk by pouring its money into areas that run counter-cyclical to the energy industry.
However, the retreat is just partial. Exempt from the divestment will be oil and gas firms with significant renewable energy divisions – which include supermajors like Shell, BP and Total. This is touted as allowing the Fund to ride the crest of the renewable energy wave, but also manages to neatly fit into the image that Norway wants to project: balancing a major industry with being a responsible environmental steward. It’s the same reason why Equinor – in which the Fund holds a 67% stake – changed its name from Statoil, to project a broader spectrum of business away from oil into emerging energies like wind and solar. Because, as the Fund’s objective states, one day the oil will run out. But its value will carry on for future generations.
The Norway Oil Fund in a Nutshell