Last week in the world oil
It’s happier days for crude prices, as OPEC’s upcoming meeting in Algeria has triggered speculation that the organisation will finally agree to a production freeze not only within its members, but also with non-OPEC producers like Russia. Brent closed above US$50/barrel last week, and WTI just a shade below the mark, but analysts are warning that the rally is based on optimism and not fundamentals.
With Iran engaging in a mild price war with Saudi Arabia over crude market share in Asia, buyers are welcoming the challenge. Japan tripled its crude imports from Iran in July, while South Korea has quadrupled its Iranian crude liftings y-o-y. The lifting on sanctions on Iran has been a boon for Asian refiners, benefiting from lower prices as Iran and Saudi Arabia jostle for position to supply crude, scrambling with Russia as well. India’s July imports from Iran also leapt, even as total imports fell slightly.
A Malaysian oil tanker reported as missing and possibly hijacked early last week has instead been taken to Indonesia over an ‘internal dispute’ between the crew and the ship’s operator.
India’s growing appetite for natural gas is currently fed by imports, but BP India believes that the country has the potential to unlock gas reserves of at least 10-15 trillion cubic feet (tcf) by 2022, which would halve imports. The announcement came as part of a push to stimulate investment and simplify rules to revitalise the country’s existing and upcoming natural gas fields in line with increasing the gas share of energy mix from 8% to 15% by 2030.
With its once prodigious local fields faltering, Thailand is preparing to expand its LNG import capacity to feed its vast network of gas-fed infrastructure that came about from the discovery of domestic sources. State oil firm PTT announced plans to nearly double LNG imports to 5 million tons in 2017, aiming to source LNG from Shell, BP and Qatar.
Just next to Thailand, Australia’s Woodside is preparing to begin its drilling campaign in Myanmar next year, to commercialise its Shwe Yee Htun-1 and Thalin-1a discoveries with 2.4 tcf of gas reserves. Long isolated due to the ruling military junta, Myanmar has tremendous reserves of natural gas, traditionally exploited by Thailand’s PTT, but the thawing of international relations after political developments have now brought up plenty of foreign investors eager to capitalise on the country.
Two Australian upstream giants – Santos and Woodside – have reported disappointing results for the first half of 2016. Santos recovered a loss of US$1.1 billion, while Woodside’s profits halved to US$340, as weak oil and gas prices offset gains in production. Woodside is in a better position, given its low holdings of debt, but Santos is in a trickier position scrambling to slash costs and reduce debts.
The oil debt malaise hitting Singapore that claimed Swiber is spreading to Malaysia, with offshore rig contractor Perisai Petroleum Teknology likely to miss a US$125 million securities payout due in October, triggering a fall in its bonds to distressed levels. Expect the contagion to keep spreading, as offshore contractors in Singapore and Malaysia combat mounting debts amidst a stagnant market.
After a year of delay, Iran will begin exporting natural gas to Iraq via pipeline in September, beginning with a contract to supply 7 million cubic metres a day to a power plant in Baghdad. A second route to Basra will be added next year, with the long-term goal of reaching 70 million cubic metres per day. The move will help Iraq to free up crude supplies for export, with fields in Kurdistan resuming pumping last week after a dispute between the government and the Kurdish regional authorities was settled.
The number of oil and gas rigs operating in the US rose for an eighth-consecutive week, up by 10 to 491. Oil rigs were up by ten, as producers came in to capitalise on rising crude prices ahead of OPEC’s September meeting.
Saudi Arabia’s combined crude and product exports reached 8.83 million barrels in June 2015, 450,000 barrels higher y-o-y and 1.1 million barrels higher than June 2014. The uptick comes during a period when the Kingdom traditionally exports less to divert fuel to local power stations for cooling during its scorching summers, indicating the level of aggression Saudi Arabia is taking to maintain and combat Russia and Iran over oil market share, particularly in Asia.
Iraq has started up its Misan natural gas processing plant in its southeastern region to capture gas that was previously flared for power generation purposes. Iraq currently flares some 70% of its gas output, a tremendous waste that it is aiming to rectify, ordering that all fields coming onstream in Misan, including Fakka and Bazargan, be connected to the plant.
Russia’s Yamal LNG project led by Novatek has received some €780 million in funding from China to help move to project ahead. The Yamal project in Siberia is remote and costly, and with Western powers cutting off Russia’s access to funds over its role in the Ukrainian crisis, China through the China Development Bank and Export-Import Bank of China has stepped in filled the gap, and no doubt enable China to demand more offtake of Yamal LNG when it starts up in 2017.
If the oil industry has taken a battering from low prices, it is worst in shipping. Danish shipping giant AP Moller-Maersk has been badly hit by the slump in shipping, raising the option of the company being split into two: one focusing on shipping and transport, and one focusing on energy.
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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
Source: U.S. Energy Information Administration, CEDIGAZ, Global Trade Tracker
Australia is on track to surpass Qatar as the world’s largest liquefied natural gas (LNG) exporter, according to Australia’s Department of Industry, Innovation, and Science (DIIS). Australia already surpasses Qatar in LNG export capacity and exported more LNG than Qatar in November 2018 and April 2019. Within the next year, as Australia’s newly commissioned projects ramp up and operate at full capacity, EIA expects Australia to consistently export more LNG than Qatar.
Australia’s LNG export capacity increased from 2.6 billion cubic feet per day (Bcf/d) in 2011 to more than 11.4 Bcf/d in 2019. Australia’s DIIS forecasts that Australian LNG exports will grow to 10.8 Bcf/d by 2020–21 once the recently commissioned Wheatstone, Ichthys, and Prelude floating LNG (FLNG) projects ramp up to full production. Prelude FLNG, a barge located offshore in northwestern Australia, was the last of the eight new LNG export projects that came online in Australia in 2012 through 2018 as part of a major LNG capacity buildout.
Source: U.S. Energy Information Administration, based on International Group of Liquefied Natural Gas Importers (GIIGNL), trade press
Note: Project’s online date reflects shipment of the first LNG cargo. North West Shelf Trains 1–2 have been in operation since 1989, Train 3 since 1992, Train 4 since 2004, and Train 5 since 2008.
Starting in 2012, five LNG export projects were developed in northwestern Australia: onshore projects Pluto, Gorgon, Wheatstone, and Ichthys, and the offshore Prelude FLNG. The total LNG export capacity in northwestern Australia is now 8.1 Bcf/d. In eastern Australia, three LNG export projects were completed in 2015 and 2016 on Curtis Island in Queensland—Queensland Curtis, Gladstone, and Australia Pacific—with a combined nameplate capacity of 3.4 Bcf/d. All three projects in eastern Australia use natural gas from coalbed methane as a feedstock to produce LNG.
Source: U.S. Energy Information Administration
Most of Australia’s LNG is exported under long-term contracts to three countries: Japan, China, and South Korea. An increasing share of Australia’s LNG exports in recent years has been sent to China to serve its growing natural gas demand. The remaining volumes were almost entirely exported to other countries in Asia, with occasional small volumes exported to destinations outside of Asia.
Source: U.S. Energy Information Administration, based on International Group of Liquefied Natural Gas Importers (GIIGNL)
For several years, Australia’s natural gas markets in eastern states have been experiencing natural gas shortages and increasing prices because coal-bed methane production at some LNG export facilities in Queensland has not been meeting LNG export commitments. During these shortfalls, project developers have been supplementing their own production with natural gas purchased from the domestic market. The Australian government implemented several initiatives to address domestic natural gas production shortages in eastern states.
Several private companies proposed to develop LNG import terminals in southeastern Australia. Of the five proposed LNG import projects, Port Kembla LNG (proposed import capacity of 0.3 Bcf/d) is in the most advanced stage, having secured the necessary siting permits and an offtake contract with Australian customers. If built, the Port Kembla project will use the floating storage and regasification unit (FSRU) Höegh Galleon starting in January 2021.