Easwaran Kanason

Co - founder of PetroEdge
Last Updated: September 16, 2016
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Business Trends
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A date has been set. On April 1, 2017, Shell and Saudi Aramco will part ways over their Motiva joint venture, an almost two decades old collaboration that was itself the culmination of several separate agreements with Texaco, Equilon and Chevron. A messy start precedes a messy divorce, perhaps, but for the past two decades, Motiva has been fairly successful, operating the single largest refinery in the US. But Saudi Aramco and Shell, both equal partners in Motiva, are driven by differing motives and the time has come to admit that and pursue separate interests.

And the core of the divorce is differing business objectives. Motiva has its roots in a 1988 agreement between Texaco and Saudi Refining (part of Saudi Aramco) for the latter to buy a stake in Texaco’s eastern and Gulf Coast US refining network. Saudi Arabia was, at the time, the main supplier of crude in the world and the US, the largest market. The desire on the part of the Saudis was not only to control crude supply, but diversify into refining to exert additional power over the American oil products system. That objective hasn’t changed for Saudi Aramco. But objectives have changed for Shell, which is largely moving away from refining into chemicals, and also needs to sell off assets – mainly in downstream – to finance its US$54 billion acquisition of the BG Group. 

Saudi Aramco and Shell have a long history of working together, from the SASREF refinery in Jubail, Saudi Arabia to the Showa Shell venture in Japan, but tensions at Motiva between the two have been growing since a major upgrade at the Port Arthur refinery spiralled into a series of setbacks and doubled costs to US$10 billion. But despite the tensions, the split is not particularly acrimonious – despite Shell asking for US$1-2 billion in cash due to the lop-sided split of assets. 

Under the terms of the divorce, Saudi Aramco will control the 600 kb/d Port Arthur refinery, the largest in the US, as well as 26 distribution terminals and retail infrastructure licensed under the Shell brand in Texas, the Mississippi Valley and the Southeast and Mid-Atlantic markets. Shell will get the retail network in Florida, Louisiana and the North-east US, as well as the Convent and Norco refineries in Louisiana that it aims to merge into a single 500 kb/d complex. To the public, there will be little sign of the divorce, as all retail stations will still be under the Shell brand, with the division going on behind the scenes.

This will allow Shell to further optimise its downstream network in the US, while Saudi Aramco controls Port Arthur, which processes mainly Saudi crude. And the Saudis are looking ahead as well, with Motiva named as the leading candidate to purchase the Lyondell Basell refinery in Houston, a 263 kb/d site used to produce feedstock for petrochemicals production that gives a hint to where the Saudis’ American ambitions lie. The Houston refinery is geared towards processing high-sulfur crude oils, running mainly Canadian crude recently, but could be reconfigured to accept Saudi crude, expanding and retaining the Saudi Arabian footprint in the US at a time when it is battling for market share with Russia and Iran elsewhere in the world. 

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January, 17 2019
EIA forecasts world crude oil prices to rise gradually, averaging $65 per barrel in 2020

monthly Brent and WTI crude prices

Source: U.S. Energy Information Administration, Short-Term Energy Outlook, January 2019

EIA’s January Short-Term Energy Outlook forecasts that world benchmark Brent crude oil will average $61 per barrel (b) in 2019 and $65/b in 2020, an increase from the end of 2018, but overall it will remain lower than the 2018 average of $71/b. U.S. benchmark West Texas Intermediate (WTI) crude oil prices were $8/b lower than Brent prices in December 2018, and EIA expects this difference to narrow to $4/b in the fourth quarter of 2019 and throughout 2020.

EIA expects U.S. regular retail gasoline prices to follow changes to the cost of crude oil, dipping from an average of $2.73/gallon in 2018 to $2.47/gallon in 2019, before rising to $2.62/gallon in 2020. Because each barrel of crude oil holds 42 gallons, a $1-per-barrel change in the price of crude oil generally translates to about a 2.4-cent-per-gallon change in the price of petroleum products such as gasoline, all else being equal.

EIA estimates that global petroleum and other liquid fuels inventories grew by an average rate of 0.4 million barrels per day (b/d) in 2018 and by an estimated 1.0 million b/d in the fourth quarter of 2018. EIA expects growth in liquid fuels production in the United States and in other countries not part of the Organization of the Petroleum Exporting Countries (OPEC) will contribute to global oil inventory growth rates of 0.2 million b/d in 2019 and 0.4 million b/d in 2020.

Although EIA forecasts that oil prices will remain lower than during most of 2018, the forecast includes some increase in prices from December 2018 levels in early 2019 in order to keep up with demand growth and support the increased need for global oil inventories to maintain five-year average levels of demand cover. EIA expects crude oil prices to continue to increase in late 2019 and early 2020 because of an increase in refinery demand for light-sweet crude oil, which is the result of regulations from the International Maritime Organization that will limit the sulfur content in marine fuels used by ocean-going vessels.

world liquid fuels production and consumption balances

Source: U.S. Energy Information Administration, Short-Term Energy Outlook, January 2019

EIA expects global oil production growth in 2019 to be led by countries that are not part of OPEC, particularly the United States. EIA expects non-OPEC producers will increase oil supply by 2.4 million b/d in 2019 which will offset forecast supply declines from OPEC members, resulting in an average of 1.4 million b/d in total global supply growth in 2019.

In 2020, EIA expects oil production to increase by 1.7 million b/d because of production growth in the United States, Canada, Brazil, and Russia, while overall OPEC crude oil production is expected to remain flat. EIA forecasts global oil demand to grow by 1.5 million b/d in 2019 and in 2020. In both 2019 and 2020, China is the leading contributor to global oil demand growth.

January, 17 2019
Your Weekly Update: 7 - 11 January 2019

Market Watch

Headline crude prices for the week beginning 7 January 2019 – Brent: US$57/b; WTI: US$49/b

  • Crude oil looks set to climb back to previous support levels as OPEC’s new supply deal kicks in and the US Federal Reserve sought to soothe investor confidence after initiating a surprise hike in interest rates that caused widespread global financial panic in December
  • Even as OPEC+ moves forwards with a planned 1.2 mmb/d cut in collective output, production across OPEC had already fallen over November and December as Saudi Arabia throttled production to support falling prices
  • Together with dwindling production in Venezuela, disruptions in Libya and losses in Iran, oil output from OPEC countries has already fallen by 530,000 b/d in December to 32.6 mmb/d, the sharpest pullback since January 2017
  • This has managed to re-assure the market that the global supply/demand balance is on firmer footing, even as Russian oil output reached a post-Soviet high of 11.16 mmb/d, just slightly off the all-time record of 11.42 mmb/d in 1987
  • With the recovery in prices, planned upstream projects will be back on firmer footing, with Rystad Energy expecting some US$123 billion of offshore projects to be sanctioned over 2019 if Brent crude averages US$60/b
  • Also supporting the upward momentum is the removal of 8 oil rigs from the active US rig count, as American drillers weighed up the risks of the fragile trajectory in WTI prices
  • Crude price outlook: Momentum is with crude oil prices this week, and we expect that to continue as OPEC+ implements its production plan, with Brent recovering to US$60-62/b and WTI to US$51-53/b


Headlines of the week

Upstream

  • Eni has acquired the remaining 70% of the Oooguruk field in Alaska from Caelus Natural Resources, bringing its stake to 100% to synergise with the nearby Nikaitchuq field, where Eni also owns a 100% interest interest
  • The deepwater Egina field in Nigeria, operated by Total through an FPSO, has started up production, with peak output expected at 200,000 b/d
  • Commercial production of crude at PAO Novatek/Gazprom’s Yaro-Yakhinskoye field has commenced, with output expected at 24,000 b/d
  • Total has sold a 2% interest in Oman’s Block 53 to Sweden’s Tethys Oil, bringing it into Occidental Petroleum’s 100,000 b/d Mukhaizna field
  • Brazil is preparing for its sixth round of upstream auctions, offering up pre-salt acreage in five areas expected to raise more than US$2 billion in sales
  • After recently making its 10th discovery in Guyana, ExxonMobil has its sights set on more as it drills two more exploration wells – Haimara-1 and Tilapia-1 – in the prolific Stabroek block, both close to existing discoveries
  • Ecuador is initiating a probe into some US$4.9 billion worth of oil-related infrastructure projects initiated by the previous administration on charges of corruption and looting

Downstream

  • China appears to be tempering crude demand, with the first batch of crude oil import quotas issued to state and private refineries at 26% lower than 2018, with quotas for teapots at some 78% of the 89.84 million tons approved
  • Saudi Aramco has acquired complete ownership of German specialty chemicals producers Lanxess AG by acquisition Dutch firm Arlanxeo’s 50% stake at €1.5 billion, strengthening its foray into petrochemicals
  • Iran will be investing some US$212 million into Chennai Petroleum’s 180 kb/d expansion of the Nagapatinam refinery on India’s east coast, as Iran looks for ways to ensure captive demand for its crude in one of its largest markets
  • The Mariner East 2 NGLs pipeline – transporting ethane, propane and butane over 560km to the Marcus Hook processing plant in Pennsylvania – has been completed, with the Mariner East 2X pipeline schedules for late 2019

Natural Gas/LNG

  • Shell’s 3.6 mtpa Prelude FLNG has finally started up initial production, the last of Australia’s giant natural gas projects to be completed
  • Brunei Shell Petroleum (BSP) has completed the onshore Darat Gas Project in Lumut, expanding LNG capacity in Brunei by 5% at the Rasau station
  • ExxonMobil’s Rovuma LNG project in Mozambique will be aiming to sanction FID in 2019 for its first phase, involving two trains with a combined capacity of 7.6 million tpa from the offshore Area 4 block
  • As LNG developments in Papua New Guinea move quickly to commercialisation, the PNG government has passed new laws to impose a domestic gas requirement and other provisions for new gas projects, to ensure adequate supply of resources for growing local demand
January, 11 2019