Easwaran Kanason

Co - founder of PetroEdge
Last Updated: September 26, 2016
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Business Trends
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Last week in the world oil

Oil Prices. Tensions between Iran and Saudi Arabia threatening to scupper any deal tabled at the OPEC meeting in Algiers caused crude prices to weaken last week, though a comment from Algeria’s energy minister that ‘all options were are open’ for an output cut or freeze lifted prices slightly today. 

ExxonMobil is reportedly selling some of its Norwegian North Sea oil fields in a deal worth more than US$1 billion. The supermajor currently operates the Ringhorne, Balder, Sigyn and Jotun fields in the North Sea, producing some 64 kb/d, but with the fields maturing, it may be on the look out for greener pastures, as Norway falls down the priority list. 

With US crude oil inventories falling sharply last week, a signal that might push up prices to trigger more supply, more US oil rigs are coming back into production. Two more rigs started up again, bringing the total operating count to 418 oil rigs, with an additional 92 gas rigs operational. 

The government of Curacao has reportedly signed an agreement with China’s Guangdong Zhenrong Energy allowing the latter to operate and upgrade the island’s aging Isla refinery. Opened in 1918 and operated by Venezuela’s PDVSA for decades under a lease agreement as a strategic site to store and ship crude to Asia on VLCCs, the deal appears to phase out PDVSA’s involvement after the Curacao Prime Minister stated that ‘all efforts to reach a new contract with Venezuela did not yield positive results.’ PDVSA has hit back with a statement that its refinery lease was not yet up for negotiation, though the company does not have the pockets to invest the US$1.5 billion required to modernise the 335 kb/d facility. 

France’s Technip has been awarded the contract to increase ENOC’s Jebel Ali refinery capacity by 50%. The project is budgeted at US$1 billion, and will increase the UAE site’s refining capacity to 210 kb/d from 140 kb/d when completed in late 2019. 

Petrobras is planning to exit the biofuels sector as part of a sweeping suite of asset sales aimed at paring down the company’s swelling debt, which would allow it to focus on investing in its core business of oil and gas. Petrobras has a significant biofuels portfolio, including three biodiesel plants  and stakes in several mills, all in Brazil. 

Upstream giant ConocoPhillip’s Alaskan unit has entered into an agreement with the Alaskan state government to form a venture to market Alaskan LNG to global markets. Given the geography of the state, the venture would be focusing on shipping LNG to East Asia, focusing on North Slope gas suppliers in co-operations with other producers. 

In a sign that the oil majors is expecting oil prices to remain in prolonged weakness, France’s Total is cutting back its expenditure by US$2 billion, now aiming to spend only US$15-17 billion from 2017 to 2020. The firm is also targeting cost savings of US$2-4 billion by 2018, most of which will come from upstream. 

India’s BPCL is changing the way it approaches upstream investment, moving away from focusing on new sites to buying more stakes in existing, producing assets. Having just spent US$1.5 billion in overseas exploration assets, the Indian major is now looking at buying into operating oilfields in Russia to speed up investment returns. BPCL was the first Indian state refiner to venture into upstream, buying stakes in Brazilian and Mozambique oil and gas blocks in 2007 and 2008, but returns have been slow and the company has now earmarked US$2-3 billion to speed up the buildup of its upstream portfolio.
 
Indonesia will eliminate taxes on oil and gas exploration immediately in an effort to stimulate investment in the country’s waning upstream industry. Once a production powerhouse with some of the largest oil and gas fields in the world – Duri, Minas, Natuna – enthusiasm for upstream has been flagging in Indonesia over a combination of few significant discoveries and a fiscal/policy framework unfriendly to foreign investors. State oil company Pertamina cannot bear the burden of increasing oil and gas output alone, though it is bravely trying to, so the government must now improve the investment environment to attract foreign companies. 

A new giant refinery in China may be taking shape. Rongsheng Petrochemical Co. has cleared more than 10,000 acres of land in Zhoushan island in Zhejiang to build a 400 kb/d refinery that is budgeted at US$24 billion. Ambitiously slated for completion by 2018, with capacity doubling in 2020, the project is aimed at plastics rather than petrol, maximising the naphtha yield to produce petrochemicals over oil products. The project is one of several petrochemical-focused ones announced in recent weeks, signalling a renewed confidence in the manufacturing industry in China that will consume growing amounts of petrochemicals like paraxylene and ethylene. 

Better late than never as India is starting to fill up its strategic crude storage in Mangalore. Most large crude-consuming countries in the world have a strategic storage capacity of at least 50 days, with China aiming for 90 days, but India has a mere 10 days. Only the Vizag storage site is currently operational, with 1.33 million tons of capacity, though Mangalore (1.5 million tons) and Padur (2.5 million tons) are on the horizon. India has begun talks with Iran, Saudi Arabia and the UAE to secure supplies for Mangalore, with Vizag being filled with Basra crude from Iraq. Iran is expected to contribute half of the supply required for Mangalore, with the other half expected from ADNOC and Saudi Aramco. 

Papua New Guinea has laid out its vision for its LNG industry, now backing a new export facility by Total to operate alongside the existing PNG LNG project led by ExxonMobil, which will undergo a US$19 billion expansion. The fate of the second project was up in the air when ExxonMobil conclude a sale to buy InterOil, whose Elk-Antelope gas field was meant to feed to second project, but the PNG government is confident that it has enough reserves to support both export sites. 

Have a productive week ahead!

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Your Weekly Update: 13 - 17 May 2019

Market Watch

Headline crude prices for the week beginning 13 May 2019 – Brent: US$70/b; WTI: US$61/b

  • Crude oil prices are holding their ground, despite the markets showing nervousness over the escalating trade dispute between the USA and China, as well as brewing tensions in the Middle East over the Iranian situation
  • China retaliated against President Trump’s decision to raise tariffs from 10% to 25% on US$200 billion worth of Chinese imports by raising its own tariffs; crucially, China has also slapped taxes on US LNG imports at a time when American export LNG projects banking on Chinese demand are coming online
  • In the Middle East, Saudi Arabia reported that two of its oil tankers were attacked in the Persian Gulf, with the ‘sabotage attack’ near the UAE speculated to be related to Iran; with the US increasing its military presence in the area, the risk of military action has escalated
  • The non-extension of US waiver on Iranian crude is biting hard on Iran, with its leaders calling it ‘unprecedented pressure’, setting the stage for a contentious OPEC meeting in Vienna
  • In a move that is sure to be opposed by Iran, Saudi Arabia has said it is willing to meet ‘all orders’ from former Iranian buyers through June at least; Saudi Aramco is also responding to requests by Asian buyers to provide extra oil
  • The see-saw trend in US drilling activity continues; after a huge gain two weeks ago, the active US rig count declined for a second consecutive rig, with the loss of two oil rigs bringing the total site count to 988, below the equivalent number of 1,045 last year
  • There is considerably more upside to crude prices at the moment, with jitters over the health of the global economy and a delicate situation in the Middle East likely to keep Brent higher at US$71-73/b and WTI at US$62-64/b


Headlines of the week

Upstream

  • Occidental Petroleum and Warren Buffet have triumphed, as Chevron bowed out of a bidding war for Anadarko Petroleum; Occidental will now acquire Anadarko for US$57 billion, up significantly from Chevron’s US$33 billion bid
  • The deal means that Occidental’s agreement to sell Anadarko’s African assets to Total for US$8.8 billion will also go through, covering the Hassi Berkine, Ourhoud and El Merk fields in Algeria, the Jubilee and TEN fields in Ghana, the Area 1 LNG project in Mozambiuqe and E&P licences in South Africa
  • BP has sanctioned the Thunder Horse South Expansion Phase 2 deepwater project in the US Gulf of Mexico, which is expected to add 50,000 boe/d of production at the Thunder Horse platform beginning 2021
  • Africa is proving to be very fruitful for Eni, as it announced a new gas and condensate discovery offshore Ghana; the CTP-Block 4 in the Akoma prospect is estimated to hold some 550-650 bcf of gas and 18-20 mmbl of condensate
  • In an atypical development, South Africa has signed a deal for the B2 oil block in South Sudan, as part of efforts to boost output there to 350,000 b/d
  • Shell expects to drill its first deepwater well in Mexico by December 2019 after walking away with nine Mexican deepwater blocks last year

Midstream & Downstream

  • China’s domestic crude imports surged to a record 10.64 mmb/d in April, as refiners stocked up on an Iranian crude bonanza due to uncertainty over US policy, which has been confirmed as crude waivers were not renewed
  • Having had to close the Druzhba pipeline and Ust-Luga port for contaminated crude, Russia says it will fully restore compliant crude by end May shipments, including cargoes to Poland and the Czech Republic
  • Mexico’s attempt to open up its refining sector has seemingly failed, with Pemex taking over the new 340 kb/d refinery as private players balked at the US$8 billion price tag and 3-year construction deadline
  • Ahead of India’s move to Euro VI fuels in April 2020, CPCL is partially shutting down its 210 kb/d Manali refinery for a desulfurisation revamp
  • China’s Hengli Petrochemical is reportedly now stocking up on Saudi Arabian crude imports as it prepares to ramp up production at its new 400 kb/d Dalian refinery alongside its 175 kb/d site in Brunei
  • South Korea’s Lotte Chemical Corp expects its ethane cracker in Louisiana to start up by end May, adding 1 mtpa of ethylene capacity to its portfolio
  • Due to water shortage, India’s MRPL will be operating its 300 kb/d refinery in Katipalla at 50% as drought causes a severe water shortage in the area

Natural Gas/LNG

  • Partners in the US$30 billion Rovuma LNG project in Mozambique now expect to sanction FID by July, even after a recent devastating cyclone
  • Also in Mozambioque, Anadarko is set to announce FID on its Mozambique LNG project on June 18, calling it a ‘historic day’
  • After talks of a joint LNG export complex to develop gas resources in Tanzania, Shell and Equinor now appear to be planning separate projects
  • Gazprom has abandoned plans to build an LNG plant in West Siberia to compete with Novatek, focusing instead on an LNG complex is Ust-Luga
  • First LNG has begun to flow at Sempra Energy’s 13.5 mtpa Cameron LNG project in Louisiana, with exports expected to begin by Q319
May, 17 2019
Shell Eclipses ExxonMobil Once Again

The world’s largest oil & gas companies have generally reported a mixed set of results in Q1 2019. Industry turmoil over new US sanctions on Venezuela, production woes in Canada and the ebb-and-flow between OPEC+’s supply deal and rising American production have created a shaky environment at the start of the year, with more ongoing as the oil world grapples with the removal of waivers on Iranian crude and Iran’s retaliation.

The results were particularly disappointing for ExxonMobil and Chevron, the two US supermajors. Both firms cited weak downstream performance as a drag on their financial performance, with ExxonMobil posting its first loss in its refining business since 2009. Chevron, too, reported a 65% drop in the refining and chemicals profit. Weak refining margins, particularly on gasoline, were blamed for the underperformance, exacerbating a set of weaker upstream numbers impaired by lower crude pricing even though production climbed. ExxonMobil was hit particularly hard, as its net profit fell below Chevron’s for the first time in nine years. Both supermajors did highlight growing output in the American Permian Basin as a future highlight, with ExxonMobil saying it was on track to produce 1 million barrels per day in the Permian by 2024. The Permian is also the focus of Chevron, which agreed to a US$33 billion takeover of Anadarko Petroleum (and its Permian Basin assets), only for the deal to be derailed by a rival bid from Occidental Petroleum with the backing of billionaire investor guru Warren Buffet. Chevron has now decided to opt out of the deal – a development that would put paid to Chevron’s ambitions to match or exceed ExxonMobil in shale.

Performance was better across the pond. Much better, in fact, for Royal Dutch Shell, which provided a positive end to a variable earnings season. Net profit for the Anglo-Dutch firm may have been down 2% y-o-y to US$5.3 billion, but that was still well ahead of even the highest analyst estimates of US$4.52 billion. Weaker refining margins and lower crude prices were cited as a slight drag on performance, but Shell’s acquisition of BG Group is paying dividends as strong natural gas performance contributed to the strong profits. Unlike ExxonMobil and Chevron, Shell has only dipped its toes in the Permian, preferring to maintain a strong global portfolio mixed between oil, gas and shale assets.

For the other European supermajors, BP and Total largely matched earning estimates. BP’s net profits of US$2.36 billion hit the target of analyst estimates. The addition of BHP Group’s US shale oil assets contributed to increased performance, while BP’s downstream performance was surprisingly resilient as its in-house supply and trading arm showed a strong performance – a business division that ExxonMobil lacks. France’s Total also hit the mark of expectations, with US$2.8 billion in net profit as lower crude prices offset the group’s record oil and gas output. Total’s upstream performance has been particularly notable – with start-ups in Angola, Brazil, the UK and Norway – with growth expected at 9% for the year.

All in all, the volatile environment over the first quarter of 2019 has seen some shift among the supermajors. Shell has eclipsed ExxonMobil once again – in both revenue and earnings – while Chevron’s failed bid for Anadarko won’t vault it up the rankings. Almost ten years after the Deepwater Horizon oil spill, BP is now reclaiming its place after being overtaken by Total over the past few years. With Q219 looking to be quite volatile as well, brace yourselves for an interesting earnings season.

Supermajor Financials: Q1 2019

  • ExxonMobil – Revenue (US$63.6 million, down 6.7% y-o-y), Net profit (US$2.35 billion, down 49.5% y-o-y)
  • Shell - Revenue (US$85.66 billion, down 5.9% y-o-y), Net profit (US$5.3 billion, down 2% y-o-y)
  • Chevron – Revenue (US$35.19 billion, down 5% y-o-y), Net profit (US$2.65 billion, down 27.2% y-o-y)
  • BP - Revenue (US$67.4 billion, down 2.51% y-o-y), Net profit (US$2.36 billion, down 9.2% y-o-y)
  • Total - Revenue (US$51.2billion, up 3.2% y-o-y), Net profit (US$2.8 billion, down 4.0% y-o-y)
May, 15 2019
EIA revises its crude oil price forecast upward as supply expectations change

monthly average Brent crude spot price

Source: U.S. Energy Information Administration, Short-Term Energy Outlook, January, April, and May 2019 editions

In its May 2019 edition of the Short-Term Energy Outlook (STEO), EIA revised its price forecast for Brent crude oil upward, reflecting price increases in recent months, more recent data, and changing expectations of global oil markets. Several supply constraints have caused oil markets to be generally tighter and oil prices to be higher so far in 2019 than previous STEOs expected.

Members of the Organization of the Petroleum Exporting Countries (OPEC) had agreed at a December 2018 meeting to cut crude oil production in the first six months of 2019; compliance with these cuts has been more effective than EIA initially expected. In the January STEO, OPEC’s crude oil and petroleum liquids production was expected to decline by 1.0 million b/d in 2019 compared with the 2018 level, but EIA now forecasts OPEC production to decline by 1.9 million b/d in the May STEO.

Within OPEC, EIA expects Iran’s liquid fuels production and exports to also decline. On April 22, 2019, the United States issued a statement indicating that it would not reissue waivers, which previously allowed eight countries to continue importing crude oil and condensate from Iran after their waivers expired on May 2. Although EIA’s previous forecasts had assumed that the United States would not reissue waivers, the increased certainty regarding waiver policy and enforcement led to lower forecasts of Iran’s crude oil production.

Venezuela—another OPEC member—has experienced declines in production and exports as a result of recurring power outages, political instability, and U.S. sanctions. In addition to supply constraints that have already materialized in 2019, political instability in Libya may further affect global supply. Any further escalation in conflict may damage crude oil infrastructure or result in a security environment where oil fields are shut in. Either situation could reduce global supply by more than EIA currently forecasts.

In the May STEO, total OPEC crude oil and other liquids supply was estimated at 37.3 million b/d in 2018, and EIA forecasts that it will average 35.4 million b/d in 2019. EIA assumes that the December 2018 agreement among OPEC members to limit production will expire following the June 2019 OPEC meeting.

annual changes in global liquids production

Source: U.S. Energy Information Administration, Short-Term Energy Outlook, January, April, and May 2019 editions

U.S. crude oil and other liquids production is sensitive to changes in crude oil prices, taking into account a lag of several months for drilling operations to adjust. As crude oil prices have increased in recent months, so too have EIA’s domestic liquid fuels production forecasts for the remaining months of 2019.

U.S. crude oil and other liquids production, which grew by 2.2 million b/d in 2018, is forecast in EIA’s May STEO to grow by 2.0 million b/d in 2019, an increase of 310,000 b/d more than anticipated in the January STEO. In 2019, EIA expects overall U.S. crude oil and liquids production to average 19.9 million b/d, with crude oil production alone forecast to average 12.4 million b/d.

Relative to these changes in forecasted supply, EIA’s changes in forecasted demand were relatively minor. EIA expects that global oil markets will be tightest in the second and third quarters of 2019, resulting in draws in global inventories. By the fourth quarter of 2019, EIA expects that inventories will build again, and Brent crude oil prices will fall slightly.

More information about changes in STEO expectations for crude oil prices, supply, demand, and inventories is available in This Week in Petroleum.

May, 15 2019