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Last week in the world oil:

Prices

  • News that a group of non-OPEC producers would join OPEC in implementing a supply cut has jolted oil prices into optimism, rising to US$55/b, with producers hoping it will test the US$60 barrier soon. Mexico, Azerbaijan, Kazakhstan and Oman have joined Russia to agree to implement a 600 kb/d cut, with Russia contributing half of the total.

Upstream & Midstream

  • The rise in oil prices has revived interest in Canadian oil sands, moribund since the price slump. Cenovus Energy and Canadian Natural Resources have announced a go-ahead with their expansion projects, adding 50 kb/d to Christina Lake and 40 kb/d to Kirby North in capacity, respectively.
  • Despite a Brazilian court ordering Petrobras to halt the sale of its fuel distribution subsidiary over labour concerns, the Brazilian state giant says it is pushing ahead with its ambitious divestment program that includes inking some US$4 billion in asset sales this month. The apparent speed at which the deals are taking place has triggered legal concerns that rigging and bribery may have been part of the divestment negotiations.
  • It was to be expected. With prices rising, American producers are capitalising on the expectation of higher prices by restarting rigs. The US rig count jumped by 27 last week, with 21 of those being oil rigs. Last minute drilling to maintain leases may have also contributed to the spike, with the market largely shrugging off the increase.

Downstream

  • Saudi Arabia has begun telling its customers that they will receive reduced crude shipments beginning January, affecting refineries that have long-term contracts with the Kingdom. The curbs are focused on Europe and North America, with Asian refineries largely spared the cull, where Saudi Arabia is battling Iran and Russia for market share.
  • The EUs biofuels push is evolving to reduce dependence on crop-based feeds, aiming to reduce plant-based biofuels from 7% in 2021 to 3.8% in 2030 to assuage concerns of deforestation. Instead, the EU wants to focus on advanced biofuels, involving agriculture and forestry waste.
  • Once a major player in both upstream and downstream, Venezuelas PDVSA is facing trying times. Chronic underinvestment and low oil prices have slashed operating rates at its giant Paraguana, Amuay and Cardon refineries to some 40-45%, while it appears to have been elbowed out of its toll-refining arrangements in Curacao and possibly Aruba. Meanwhile, PDVSA is asking a US court for some US$600 million in compensation from a bribery scheme of two businessmen that bribed PDVSA officials over US$1 billion in supply contracts.

Natural Gas & LNG

  • Anadarko and Eni will now be allowed to sell the Mozambique governments share of gas from their projects in the Rovuma Basin. The countrys government has approved an amendment to its LNG contracts to relinquish its rights to natural gas quotas and gas production tax in an attempt to boost the viability of the projects in the coming era of LNG oversupply. The contracts involved are Anadarkos Dolphin Tuna and Enis South Coral sites, both due for FID next year.

Last week in Asian oil:

Upstream & Midstream

  • Japans state-run JOGMEC has extended its contract with Saudi Aramco to allow the latter to store up to 6.3 million barrels of crude oil in Okinawa for the next three years. Japan allows Saudi Aramco (as well as Abu Dhabis ADNOC) to store crude in Okinawa as a distribution hub for East Asia, in exchange for priority claims on the stock during emergencies.
  • Australias Origin Energy is spinning off its upstream oil and gas unit in an IPO worth at least US$1 billion. The new company, NewCo, has a upstream assets in Australia and the gas market in New Zealand, but will remain smaller than Santos and Woodside, triggering speculation that it could be acquired by an Asian producer, with an eye towards Origins stake in the APLNG plant as it returns to being a gas/power retailer.

Downstream & Shipping

  • Chinas independent teapot refineries are confident that Beijing will keep their 2017 import quotas steady at 2016 level or possibly just a little higher. The teapots were one of the brighter spots in Asia refining this year, sucking up large amounts of crude in the first year they were allowed to directly import crude, and are looking to import more in 2017, a move that would help ease the crude supply glut but contribute to the refined products oversupply in Asia.

Gas & LNG

  • As Papua New Guinea tries to figure out its LNG export strategy, the countrys Prime Minister is now leaning to a single export site, which would require Totals Papua LNG project to export its gas through ExxonMobils existing PNG LNG facility. The merits of having two or a single site have been debated extensively, but concerns over cost are pushing the stakeholders towards having a single large site.
  • The Thai energy policy committee has given its consent to a PTT proposal to acquire LNG from Malaysias Petronas over a 15 year period, beginning with 1 mtpa in 2017 and 2018, then rising to 1.2 mtpa from 2019. Thailand is highly dependent on natural gas for its power infrastructure, and declining domestic production is forcing it to turn to imports.
  • Indonesia has ordered natural gas contractors to cut prices in the fertiliser, steel and petrochemicals sectors beginning January, replacing oil with the more plentiful natural gas to boost economic growth.
  • Malaysias Petronas has inked a deal with Japans Hokuriku Electric Power to supply up to six cargoes of LNG per year to the power provider in northwestern Honshu. The contract will begin March 2018. Petronas is aiming to boost its LNG business, with its PFLNG Satu the first floating LNG unit in the world producing its first cargo last week.

Corporate

  • As part of Beijings attempt to reform the oil and gas industry in China to boost competitiveness, Sinopec has sold a 50% stake in its Sichuan-East China gas pipeline to China Life Insurance and SDIC for some US$6.6 billion. Sinopec will retain a stake in the pipeline, aiming to use proceeds from the sale to expand its other gas pipeline and storage infrastructure. Gas pipeline are increasing in importance in China, with CNPC recently starting up the eastern portion of its third East-West cross-country pipeline, eventually connecting to CNOOCs network in Fujian.

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Iran drives unplanned OPEC crude oil production outage to highest levels since late 2015

Unplanned crude oil production outages for the Organization of the Petroleum Exporting Countries (OPEC) averaged 2.5 million barrels per day (b/d) in the first half of 2019, the highest six-month average since the end of 2015. EIA estimates that in June, Iran alone accounted for more than 60% (1.7 million b/d) of all OPEC unplanned outages.

EIA differentiates among declines in production resulting from unplanned production outages, permanent losses of production capacity, and voluntary production cutbacks for OPEC members. Only the first of those categories is included in the historical unplanned production outage estimates that EIA publishes in its monthly Short-Term Energy Outlook (STEO).

Unplanned production outages include, but are not limited to, sanctions, armed conflicts, political disputes, labor actions, natural disasters, and unplanned maintenance. Unplanned outages can be short-lived or last for a number of years, but as long as the production capacity is not lost, EIA tracks these disruptions as outages rather than lost capacity.

Loss of production capacity includes natural capacity declines and declines resulting from irreparable damage that are unlikely to return within one year. This lost capacity cannot contribute to global supply without significant investment and lead time.

Voluntary cutbacks are associated with OPEC production agreements and only apply to OPEC members. Voluntary cutbacks count toward the country’s spare capacity but are not counted as unplanned production outages.

EIA defines spare crude oil production capacity—which only applies to OPEC members adhering to OPEC production agreements—as potential oil production that could be brought online within 30 days and sustained for at least 90 days, consistent with sound business practices. EIA does not include unplanned crude oil production outages in its assessment of spare production capacity.

As an example, EIA considers Iranian production declines that result from U.S. sanctions to be unplanned production outages, making Iran a significant contributor to the total OPEC unplanned crude oil production outages. During the fourth quarter of 2015, before the Joint Comprehensive Plan of Action became effective in January 2016, EIA estimated that an average 800,000 b/d of Iranian production was disrupted. In the first quarter of 2019, the first full quarter since U.S. sanctions on Iran were re-imposed in November 2018, Iranian disruptions averaged 1.2 million b/d.

Another long-term contributor to EIA’s estimate of OPEC unplanned crude oil production outages is the Partitioned Neutral Zone (PNZ) between Kuwait and Saudi Arabia. Production halted there in 2014 because of a political dispute between the two countries. EIA attributes half of the PNZ’s estimated 500,000 b/d production capacity to each country.

In the July 2019 STEO, EIA only considered about 100,000 b/d of Venezuela’s 130,000 b/d production decline from January to February as an unplanned crude oil production outage. After a series of ongoing nationwide power outages in Venezuela that began on March 7 and cut electricity to the country's oil-producing areas, EIA estimates that PdVSA, Venezuela’s national oil company, could not restart the disrupted production because of deteriorating infrastructure, and the previously disrupted 100,000 b/d became lost capacity.

July, 18 2019
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