Easwaran Kanason

Co - founder of NrgEdge
Last Updated: November 7, 2016
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Business Trends
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Last week in world oil:

OPECs internal squabbling has erased all its efforts to raise oil prices from languishing in the US$40/b range, as hope fades that the quixotic supply cut could be engineered. In fact, whispers suggest that Saudi Arabia is mulling punishing the rest of the organisation by pumping more oil to cause prices to free fall in a harsh attempt to get the other members in line. The next OPEC meeting begins November 30. Analysts remain split about   its success.

Venzuelas PDVSA has completed deals with Delta Petroleum and Indias ONGC totalling US$1.45 billion to raise production at their joint venture operations. The Delta Petroleum deal will see US$1.13 billion pumped in to raise production at Petrodelta from 40 kb/d to 110 kb/d, while the ONGC agreement will inject US$318 billion into Petrolera Indovenezolana to double production at the Cristobal field to 40 kb/d.

After a brief break, the operating oil rig count in the US resumed its climb, adding nine new oil and three new gas rigs, bringing the total up to 450 and 117, respectively, even as oil prices retreated from recent highs over uncertainty in OPEC and a massive crude build reported by the EIA.

Curacaos divorce with Venezuela over the Isla refinery now seems imminent, with Chinas Guangdong Zhenrong Energy now moving to secure funds for its US$5.5 billion plan to upgrade the refinery, a strategic spot in the Caribbean that serves as a oil hub for the Atlantic. PetroChina, Sinopec and CNOOC are expected to collaborate with the state-owned firm in the project, which now includes plans for the natural gas terminal.

Just weeks after announcing a new retail fuel pricing plan, Petrobras is now changing its pricing for LPG. Aimed to eliminating indirect subsidies by charging more for distributors using its facilities, it is the latest in Petrobras attempt to bolster earnings to pare down debt.

Canada has approved the C$1.3 billion expansion of the NOVA Gas Transmission natural gas gathering pipeline. The project by TransCanada will streamline some 75% of natural gas (some 11.3 bcf) in western Canada, including the Montney and Duverney shale fields in BC and Alberta, with completion expected in Q2 2018.

Shell and BP have both reported higher-than-expected earnings for Q316, with Shell reporting a rare instance of higher revenue than ExxonMobil. Much of the improvement in earnings comes from the supermajors sustained cost cutting, their adaptation strategy to low prices.

General Electric will merge its oil and gas business with Baker Hughes to create the second-largest oilfield services company in the world, behind Schlumberger. To be known as Baker Hughes, A GE Company, the new US$32 billion company will combine GEs equipment expertise with Baker Hughes speciality in drilling and fracking, as the industry responds to the prolonged slump in crude oil prices.

Italys ENi has signed four agreements with Bahrain to move into onshore and offshore upstream activities in Bahrain. The agreements were signed by Bahrain Petroleum Company (Bapco) and Tatweer Petroleum, representing a preliminary step in evaluating selected E&P assets in Bahrain that may eventually led to asset stakes for Eni if viable.

Malaysias Petronas is stoking some interest in the battered offshore contracting industry by requesting submissions for its K5 sour gas project off Sarawak in Malaysia. If the project, with its 4 tcf of recoverable gas, moves ahead, it will require a large production facility, and the possibility of Petronas moving ahead with the project has whet the appetite for a industry currently starved of projects.

In a bid to spur Chinas oil exports given that the country is now swamped with an oversupply of oil products the export tax rebate for gasoline, diesel and jet fuel has been raised to 17% effective November 1. The rebate, which eliminates double taxation for exported goods, comes as China is swamped by an oversupply of oil products, owing to vast expansions of refining capacity by the state players and a flood of products coming from independent teapot refiners after crude imports were deregulated last year. Unable to the consumed domestically, the products must now head out, contributing to the continued glut in Asia.

ExxonMobils acquisition of InterOil central to its plans to exploit the vast natural gas potential of Papua New Guinea has hit a snag. An objection by InterOils founder filed in Canada has moved to the appeals court, which overturns approval of the US$2.5 billion sale, potentially derailing the deal. The Canadian approval is the sole remaining hurdle to the completion of the deal, and now ExxonMobil must move to appease InterOil founder Phil Mulacek to salvage its plans.

Tokyo Gas, the largest city gas supplier in Japan, has signed an MoU with Malaysias Petronas that will see the two companies co-operating over existing and future natural gas and LNG projects in Southeast Asia. Tokyo Gas has worked with Petronas LNG for over 33 years, buying LNG from three Petronas projects, and the agreement will deepen the ties as Tokyo Gas seeks to secure more supply to feed Japans appetite for natural gas.

Indias Reliance has been slapped with a US$1.55 billion fine by the Indian government for allegedly extracting and selling gas belonging to ONGC in the KG basin of the Bay of Bengal over the last seven years. It is claimed that up to 11 bcf of gas seeped from ONGCs blocks to the adjacent block held by Reliance, BP and Niko Resources. Reliance will contest the fine

Keppel Corp had agreed to purchase bonds offered by struggling oil and gas explorer KrisEnergy, raising its stake in the company to as much as 67.33%. Much of the offshore marine contracting and engineering industry in Singapore is withering, with smaller firms unable to service debt, raising that possibility that the government may officially step in to offer direct aid, as well as through government-linked companies.

Have a productive week ahead!

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The Strait of Hormuz and Oil Prices

The UK has just designated the Persian Gulf as a level 3 risk for its ships – the highest level possible threat for British vessel traffic – as the confrontation between Iran with the US and its allies escalated. The strategically-important bit of water - and in particular the narrow Strait of Hormuz – is boiling over, and it seems as if full-blown military confrontation is inevitable.

The risk assessment comes as the British warship HMS Montrose had to escort the BP oil tanker British Heritage out of the Persian Gulf into the Indian Ocean from being blocked by Iranian vessels. The risk is particularly acute as Iran is spoiling for a fight after the Royal Marines seized the Iranian crude supertanker Grace-1 in Gibraltar on suspicions that it was violating sanctions by sending crude to war-torn Syria. Tensions over the Gibraltar seizure kept the British Heritage tanker in ‘safe’ Saudi Arabian waters for almost a week after making a U-turn from the Basrah oil terminal in Iraq on fears of Iranian reprisals, until the HMW Montrose came to its rescue. Iran’s Revolutionary Guard Corps have warned of further ‘reciprocation’ even as it denied the British Heritage incident ever occurred.

This is just the latest in a series of events around Iran that is rattling the oil world. Since the waivers on exports of Iranian crude by the USA expired in early May, there were four sabotage attacks on oil tankers in the region and two additional attacks in June, all near the major bunkering hub of Fujairah. Increased US military presence resulted in Iran downing an American drone, which almost led to a full-blown conflict were it not for a last-minute U-turn by President Donald Trump. Reports suggest that Iran’s Revolutionary Guard Corps have moved military equipment to its southern coast surrounding the narrow Strait of Hormuz, which is 39km at its narrowest. Up to a third of all seaborne petroleum trade passes through this chokepoint and while Iran would most likely overrun by US-led forces eventually if war breaks out, it could cause a major amount of damage in a little amount of time.

The risk has already driven up oil prices. While a risk premium has already been applied to current oil prices, some analysts are suggesting that further major spikes in crude oil prices could be incoming if Iran manages to close the Strait of Hormuz for an extended period of time. While international crude oil stocks will buffer any short-term impediment, if the Strait is closed for more than two weeks, crude oil prices could jump above US$100/b. If the Strait is closed for an extended period of time – and if the world has run down on its spare crude capacity – then prices could jump as high as US$325/b, according to a study conducted by the King Abdullah Petroleum Studies and Research Centre in Riyadh. This hasn’t happened yet, but the impact is already being felt beyond crude prices: insurance premiums for ships sailing to and fro the Persian Gulf rose tenfold in June, while the insurance-advice group Joint War Committee has designated the waters as a ‘Listed Area’, the highest risk classification on the scale. VLCC rates for trips in the Persian Gulf have also slipped, with traders cagey about sending ships into the potential conflict zone.

This will continue, as there is no end-game in sight for the Iranian issue. With the USA vague on what its eventual goals are and Iran in an aggressive mood at perceived injustice, the situation could explode in war or stay on steady heat for a longer while. Either way, this will have a major impact on the global crude markets. The boiling point has not been reached yet, but the waters of the Strait of Hormuz are certainly simmering.

The Strait of Hormuz:

  • Connects the Persian Gulf to the Gulf of Oman/Indian Ocean
  • Length: 167km
  • Width: 96km (widest) to 39km (narrowest)
  • Controlled by Iran, the UAE and Musandam (Oman)
  • The conduit for 33% of all LNG trade and 20% of total crude oil demand
July, 16 2019
Your Weekly Update: 8 - 12 July 2019

Market Watch 

Headline crude prices for the week beginning 8 July 2019 – Brent: US$64/b; WTI: US$57/b

  • Bolstered by the renewed OPEC+ supply pact but rattled by increasing tensions between Iran and the US, oil prices started the week steady after gaining over the previous week
  • With the OPEC+ supply deal extended to March 2020, focus will now shift to adherence and in particular, Russian commitments to the agreement that previously wavered over 1H19
  • More critical to the market is the escalating standoff between the US and Iran around the Straits of Hormuz and even beyond; British forces seized an oil tanker off Gibraltar that was suspected to carrying Iranian crude to Syria, drawing share criticism from Iran
  • Iran itself confirmed that it was raising its level of nuclear enrichment above levels agreed to in the 2015 deal that ended sanctions, and accused European signatories to the deal of ‘not doing enough’
  • Iranian forces also confronted a British tanker escorted by a warship in the Persian Gulf, with the narrow channel now a flashpoint for action
  • As a recipient of Middle Eastern crude, China has also raised security levels for its vessel passing through the Straits of Malacca after doing the same for the Straits of Hormuz, raising some eyebrows
  • While the confrontation – or lack of – between the US and Iran will be the main driver behind oil prices movement in the second half of 2019, the trade policies of the Trump administration that may now hit secondary Asian manufacturing nations such as Vietnam is also leaving the global economy increasingly fragile
  • Against this backdrop, the US active oil and gas rig count fell again, dropping five oil sites and gaining one gas site for a net loss of four rigs
  • As the Iranian situation deteriorates, the market will be pricing more risk premiums into traded prices, which should inch up towards the US$65-67/b range for Brent and US$59-61/b for WTI

Headlines of the week

Upstream

  • Marathon Oil has completed the sale of its UK businesses to RockRose Energy, handing over the Brae and Foinaven area fields for US$345 million
  • Despite pulling out from the UK North Sea, ConocoPhillips is still active in Norway, recently submitting a new plan to re-develop the Tor field in Great Ekofisk, which was shut down in 2015 despite only 20% of resources extracted
  • In a bit to boost national production, Nigerian independent Aiteo Eastern E&P has announced plans to spend up to US$15 billion over the next five years to drill new wells and re-visit existing assets
  • Eni and Vitol have been awarded rights to Block WB03 in the offshore Tano basin in Ghana, with Eni holding 70% and expanding its presence in the country
  • Total has approved Phase 3 development at the onshore Dunga field in Kazakhstan that will increase capacity by 10% to some 20,000 b/d by 2022
  • Eni has launched production from the Mizton field in Mexico’s Bay of Campeche Area 1 – the first new offshore new field development by an international firm since reforms in 2008
  • Halliburton and Kuwait Oil have signed an agreement to explore for oil offshore Kuwait which makes Kuwait’s first foray in offshore upstream services
  • Energean Oil & Gas has purchased Electricite de France’s Italian unit for US$850 million, gaining assets in Egypt, Italy, Algeria, Croatia and the North Sea to complement its existing fields in Israel and Greece

Midstream/Downstream

  • China will be launching a new low-sulfur bunker fuel oil contract on the Shanghai Futures Exchange by the end of 2019, just as new IMO regulations on marine fuel oil sulfur content caps kick into effect in 2020
  • Just as American crude production hits new highs, American refining capacity has also reached a new record high of 18.8 million b/d
  • China has issued a new round of crude oil import quotas for private oil refiners, allowing them to bring in an additional 56.85 million tonnes (~1 mmb/d) over the remainder of 2019
  • In the fallout over the contaminated crude scandal at the Druzhba pipeline, Russian pipeline operator Transneft has capped volumes of Rosneft crude that can be transported to Germany and Poland on the pipeline
  • The US Environmental Protection Agency (EPA) has proposed an increased biodiesel mandate to 20.04 billion gallons in 2020 up from 19.92 billion gallons in 2019, but may not extend the hardship waiver program which drew criticism
  • Iraq and Oman have signed a new MoU to cooperate in the oil and gas sector which includes plans for a shared Omani refinery processing Iraqi crude

Natural Gas/LNG

  • Kosmos Energy has struck new gas at the Greater Tortue Ahmeyim-1 well in the Albian reservoir offshore Mauritania and Senegal, which will support the Greater Tortue Ahmeyim LNG project that is on track for a 2022 start
  • Kenya and Tanzania have entered into talks to explore cross-border natural gas trading, aimed at delivering Tanzanian natural gas to Kenya to bypass requiring and building facilities for LNG imports
  • Energean Oil & Gas is reportedly looking to sell its stake in the major Glengorn gas discovery in the UK once its acquisition of Edison E&P is completed
  • Saudi Aramco has started work on the Jafurah gas terminal that will take unconventional gas from the Ghawar oil field to the coast for processing
July, 12 2019
TODAY IN ENERGY: U.S. utility-scale battery storage power capacity to grow substantially by 2023

Utility-scale battery storage units (units of one megawatt (MW) or greater power capacity) are a newer electric power resource, and their use has been growing in recent years. Operating utility-scale battery storage power capacity has more than quadrupled from the end of 2014 (214 MW) through March 2019 (899 MW). Assuming currently planned additions are completed and no current operating capacity is retired, utility-scale battery storage power capacity could exceed 2,500 MW by 2023.

U.S. utility-scale battery storage capacity

Source: U.S. Energy Information Administration, Annual Electric Generator Report and the Preliminary Monthly Electric Generator Inventory

EIA's Annual Electric Generator Report (Form EIA-860) collects data on the status of existing utility-scale battery storage units in the United States, along with proposed utility-scale battery storage projects scheduled for initial commercial operation within the next five years. The monthly version of this survey, the Preliminary Monthly Electric Generator Inventory (Form EIA-860M), collects the updated status of any projects scheduled to come online within the next 12 months.

Growth in utility-scale battery installations is the result of supportive state-level energy storage policies and the Federal Energy Regulatory Commission’s Order 841 that directs power system operators to allow utility-scale battery systems to engage in their wholesale energy, capacity, and ancillary services markets. In addition, pairing utility-scale battery storage with intermittent renewable resources, such as wind and solar, has become increasingly competitive compared with traditional generation options.

The two largest operating utility-scale battery storage sites in the United States as of March 2019 provide 40 MW of power capacity each: the Golden Valley Electric Association’s battery energy storage system in Alaska and the Vista Energy storage system in California. In the United States, 16 operating battery storage sites have an installed power capacity of 20 MW or greater. Of the 899 MW of installed operating battery storage reported by states as of March 2019, California, Illinois, and Texas account for a little less than half of that storage capacity.

U.S. operating utlity-scale battery storage by state

Source: U.S. Energy Information Administration, Annual Electric Generator Report and the Preliminary Monthly Electric Generator Inventory

In the first quarter of 2019, 60 MW of utility-scale battery storage power capacity came online, and an additional 108 MW of installed capacity will likely become operational by the end of the year. Of these planned 2019 installations, the largest is the Top Gun Energy Storage facility in California with 30 MW of installed capacity.

As of March 2019, the total utility-scale battery storage power capacity planned to come online through 2023 is 1,623 MW. If these planned facilities come online as scheduled, total U.S. utility-scale battery storage power capacity would nearly triple by the end of 2023. Additional capacity beyond what has already been reported may also be added as future operational dates approach.

Of all planned battery storage projects reported on Form EIA-860M, the largest two sites account for 725 MW and are planned to start commercial operation in 2021. The largest of these planned sites is the Manatee Solar Energy Center in Parrish, Florida. With a capacity of 409 MW, this project will be the largest solar-powered battery system in the world and will store energy from a nearby Florida Power and Light solar plant in Manatee County.

The second-largest planned utility-scale battery storage facility is the Helix Ravenswood facility located in Queens, New York. The site is planned to be developed in three stages and will have a total capacity of 316 MW.

July, 11 2019