Easwaran Kanason

Co - founder of NrgEdge
Last Updated: November 1, 2016
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Last week in world oil

After oil prices rose from optimistic news that OPEC could at last focus on the bigger picture and agree to a supply cut, the latest measure now appears dead in the water as Iran and Iraq are now refusing to participate, citing erroneous data. A failure of OPEC to agree internally will kill an attempt to negotiate a freeze with non-OPEC members, which left oil falling below the psychological US$50/b barrel. 

ExxonMobil may have to write down almost 20% of its proven oil and gas reserves as part of an assessment of major long-lived assets, owing to the persistent low prices of crude. The amount that could be de-booked could be as much as a billion oil equivalent barrels. 

For the first time in 17 weeks, the US oil rig count has fallen. The US shed 2 oil rigs, bringing the total operating number down to 441, as uncertainty over OPEC’s ability to implement a freeze dominated. However, six more gas rigs were added, bringing the total count to 557. 

The main three contenders for Chevron’s South African downstream assets are Total, Glencore and Gunvor. With an estimated price tag of US$1 billion, the assets include Chevron’s fuel retail network in South Africa and Botswana, as well as a75% stake in the 110 kb/d Cape Town refinery. The leading contenders do indicate the possible evolution of the global downstream industry: France’s Total would like to strengthen its portfolio to rank among the Big Four, while Gunvor and Glencore represent the willingness of energy traders to move into areas like refining and storage, to complement their trading activities. 

Croatia is faced with the decision of shutting down, or modifying, one of the country’s two oil refineries as it faces the same problem most European economies are facing – declining oil demand leading to poor utilisation of overcapacity. There are two oil refineries currently operating in the country, both owned by state energy firm INA and Hungary’s MOL, one in Sisak and one in the port city of Rijeka.

General Electric, together with Endeavor Energy and Sage Petroleum, has received approval from the Ghanaian government to proceed with the construction of the world’s largest LPG powered-electricity plant in Tema. 

Israel’s natural gas ambitions are now taking shape. With the option of either LNG or a physical pipeline, either Egypt, Turkey or Cyprus, Israel appears to have chosen the more politically-benign option, aiming to send the gas by pipeline first to Cyprus, then to Greece, before moving to Western Europe through Italy. The estimated cost of the pipeline project is €5 billion, allowing Israel to finally monetise its two giant natural gas discoveries after legal and regulatory issues have been settled.

ExxonMobil is reportedly considering building a full-scale trading division to buy, sell and trade oil products, including its own.  The move would allow some diversification of ExxonMobil’s operations, to counter prolonged depressed oil prices.

China imported more crude from Angola than any other country in September. Typically, China’s main supplier is Russia, but imports from Angola have jumped by 45.8% y-o-y, reaching 1 mb/d, just under the record 1.11 mb/d in August. This is the second consecutive month that Angola has been China’s top exporter, and volumes are expected to increase with the end of refinery maintenance season in October.

Indonesia is expected to harmonise the gasoline and diesel prices across the far-flung archipelago next year. The move is part of the government’s efforts to overhaul the downstream retail industry, which started in 2014 with an overhaul of the fuel subsidy scheme. Currently, there is a reference price for subsided gasoline and diesel across Indonesia – which accounts for over 90% of demand – but the price varies by region, with surcharges on remote regions to account for transportation. The new rules will eliminate this, requiring the single price to be valid across the country, with any distribution costs by incurred by the fuel retailers.

Aiming to become the Asian trading hub for LNG to complement its status as the oil trading hub, Singapore has picked Shell and Pavilion Gas to be its next suppliers of LNG. The two companies will be granted exclusive rights to sell up to 1 million mtpa of LNG annually for three years beginning 2017, as well as the option for spot trading. Singapore has encouraged firms to open LNG trading desks in bid to become Asia’s LNG hub – an ambition also shared by Japan and South Korea – and in 2013, named the BG Group as its first supplier, for 3 mtpa of LNG over 10 million. That contract is considered separate from the new agreement with Shell, which took over the BG Group last year. 

Chevron announced a huge US$5 billion cost overrun at its Wheatstone LNG project, blamed on cost underestimation and tardiness of third-party module contractors. The giant Wheatstone project, developed with Woodside Petroleum, will now cost a total of US$34 billion.

Japan’s Inpex has struck gas in offshore wells not explored since the 1980s. Test drills revealed natural gas indications offshore the Shimane and Yamaguchi prefectures, but early signs are that the discoveries will not be significant enough to make a dent in Japan’s huge gas appetite. 

All three Chinese state oil firms have dramatically scaled back their capital expenditure for this year, grappling with uncertainty over oil prices and growth in the domestic market. Sinopec reported capex for the first ninth months of 2016 that was 75% below projected levels, while PetroChina’s is down 23% and CNOOC’s down 50% from their respective projected 2016 budgets. The slashing of spending shows the great change in Chinese optimism for oil and gas, preferring to hoard cash instead of continue on freewheeling investing.

Following Keppel’s recent report of weak financials and job-cutting, rig builder Sembcorp Marine has followed suit, reporting a 53% fall in Q3 profits, necessitating a further 8000 job cuts. 

GE and Baker Hughes merge their respective oil & gas business to create a "new" Baker Hughes, a GE company. With a combined revenue of $32 billion, the new company will have operations in over 120 countries in oil field equipment, technology and services.  As always this transaction will be subject to approval by the sharholders and regulators.  

ConocoPhillips reported a smaller loss in Q3, amounting to USD1 billion, compared to USD1.1 billion loss in the same quarter in the previous year. However, Statoil reported a wider loss of USD431 million quarterly loss, at increase of 41% from a year ago.  Better news from Total, it posted USD2.1 billion profit due to its aggressive reduction in operating costs. 

ExxonMobil makes a big discovery in Nigeria, with an estimated recoverable resources of 500 million to 1 billion barrels of oil offshore Nigeria. ExxonMobil holds a 27% stake in this venture with other local and international partners.

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OPEC And The Current State of Oil Fundamentals

It was shaping up to yet another dull OPEC+ meeting. Cut and dry. Copy and paste. Rubber-stamping yet another monthly increase in production quotas by 432,000 b/d. Month after month of resisting pressure from the largest economies in the world to accelerate supply easing had inured markets to expectations of swift action by OPEC and its wider brethren in OPEC+.

And then, just two days before the meeting, chatter began that suggested something big was brewing. Whispers that Russia could be suspended made the rounds, an about-face for a group that has steadfastly avoided reference to the war in Ukraine, calling it a matter of politics not markets. If Russia was indeed removed from the production quotas, that would allow other OPEC+ producers to fill in the gap in volumes constrained internationally due to sanctions.

That didn’t happen. In fact, OPEC+ Joint Technical Committee commented that suspension of Russia’s quota was not discussed at all and not on the table. Instead, the JTC reduced its global oil demand forecast for 2022 by 200,000 b/d, expecting global oil demand to grow by 3.4 mmb/d this year instead with the downside being volatility linked to ‘geopolitical situations and Covid developments.’ Ordinarily, that would be a sign for OPEC+ to hold to its usual supply easing schedule. After all, the group has been claiming that oil markets have ‘been in balance’ for much of the first five months of 2022. Instead, the group surprised traders by announcing an increase in its monthly oil supply hike for July and August, adding 648,000 b/d each month for a 50% rise from the previous baseline.

The increase will be divided proportionally across OPEC+, as has been since the landmark supply deal in spring 2020. Crucially this includes Russia, where the new quota will be a paper one, since Western sanctions means that any additional Russian crude is unlikely to make it to the market. And that too goes for other members that haven’t even met their previous lower quotas, including Iraq, Angola and Nigeria. The oil ministers know this and the market knows this. Which is why the surprise announcement didn’t budge crude prices by very much at all.

In fact, there are only two countries within OPEC+ that have enough spare capacity to be ramped up quickly. The United Arab Emirates, which was responsible for recent turmoil within the group by arguing for higher quotas should be happy. But it will be a measure of backtracking for the only other country in that position, Saudi Arabia. After publicly stating that it had ‘done all it can for the oil market’ and blaming a lack of refining capacity for high fuel prices, the Kingdom’s change of heart seems to be linked to some external pressure. But it could seemingly resist no more. But that spotlight on the UAE and Saudi Arabia will allow both to wrench some market share, as both countries have been long preparing to increase their production. Abu Dhabi recently made three sizable onshore oil discoveries at Bu Hasa, Onshore Block 3 and the Al Dhafra Petroleum Concession, that adds some 650 million barrels to its reserves, which would help lift the ceiling for oil production from 4 to 5 mmb/d by 2030. Meanwhile, Saudi Aramco is expected to contract over 30 offshore rigs in 2022 alone, targeting the Marjan and Zuluf fields to increase production from 12 to 13 mmb/d by 2027.

The UAE wants to ramp up, certainly. But does Saudi Arabia too? As the dominant power of OPEC, what Saudi Arabia wants it usually gets. The signals all along were that the Kingdom wanted to remain prudent. It is not that it cannot, there is about a million barrels per day of extra production capacity that Saudi Arabia can open up immediately but that it does not want to. Bringing those extra volume on means that spare capacity drops down to critical levels, eliminating options if extra crises emerge. One is already starting up again in Libya, where internal political discord for years has led to an on-off, stop-start rhythm in Libyan crude. If Saudi Arabia uses up all its spare capacity, oil prices could jump even higher if new emergencies emerge with no avenue to tackle them. That the Saudis have given in (slightly) must mean that political pressure is heating up. That the announcement was made at the OPEC+ meeting and not a summit between US and Saudi leaders must mean that a façade of independence must be maintained around the crucial decisions to raise supply quotas.

But that increase is not going to be enough, especially with Russia’s absence. Markets largely shrugged off the announcement, keeping Brent crude at US$120/b levels. Consumption is booming, as the world rushes to enjoy its first summer with a high degree of freedom since Covid-19 hit. Which is why global leaders are looking at other ways to tackle high energy prices and mitigate soaring inflation. In Germany, low-priced monthly public transport are intended to wean drivers off cars. In the UK, a windfall tax on energy companies should yield US$6 billion to be used for insulating consumers. And in the US, Joe Biden has been busy.

With the Permian Basin focusing on fiscal prudence instead of wanton drilling, US shale output has not responded to lucrative oil prices that way it used to. American rig counts are only inching up, with some shale basins even losing rigs. So the White House is trying more creative ways. Though the suggestion of an ‘oil consumer cartel’ as an analogue to OPEC by Italian Prime Minister Mario Draghi is likely dead on arrival, the US is looking to unlock supply and tame fuel prices through other ways. Regular releases from the US Strategic Petroleum Reserve has so far done little to bring prices down, but easing sanctions on Venezuelan crude that could be exported to the US and Europe, as well as working with the refining industry to restart recently idled refineries could. Inflation levels above 8% and gasoline prices at all-time highs could lead to a bloody outcome in this year’s midterm elections, and Joe Biden knows that.

But oil (and natural gas) supply/demand dynamics cannot truly start returning to normal as long as the war in Ukraine rages on. And the far-ranging sanctions impacting Russian energy exports will take even longer to be lifted depending on how the war goes. Yes, some Russian crude is making it to the market. China, for example, has been quietly refilling its petroleum reserves with Russian crude (at a discount, of course). India continues to buy from Moscow, as are smaller nations like Sri Lanka where an economic crisis limits options. Selling the crude is one thing, transporting it is another. With most international insurers blacklisting Russian shippers, Russian oil producers can still turn to local insurance and tankers from the once-derided state tanker firm Sovcomflot PJSC to deliver crude to the few customers they still have.

A 50% hike in OPEC’s monthly supply easing targets might seem like a lot. But it isn’t enough. Especially since actual production will fall short of that quota. The entire OPEC system, and the illusion of control it provides has broken down. Russian oil is still trickling out to global buyers but even if it returned in full, there is still not enough refining capacity to absorb those volumes. Doctors speak of long Covid symptoms in patients, and the world energy complex is experiencing long Covid, now with a touch with geopolitical germs as well. It’ll take a long time to recover, so brace yourselves.

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June, 12 2022