Last week in world oil
-International crude prices started the year off a bit weaker than in its ended in December, with prices hovering around the US$52-53/b on the New Year, as the US dollar rallied to its highest levels against major currencies since 2002. January is when OPEC members are expected to make major cuts to their collective supply, and the oil markets will be hoping that the quotas will stick to lift prices.
Upstream & Midstream
-BP and Azerbaijans Socar have agreed to terms governing the developing of the giant Azeri-Chirag-Gunashi (ACG) field in the Caspian Sea through 2050. BP is the lead in the AIOC consortium that comprises international presence in ACG, with other partners being Chevron, Inpex, Statoil, Itochu, ONGC Videsh and ExxonMobil. The super-giant ACG currently produces 620 kb/d of oil equivalent, beginning in 1997 with estimated recoverable reserves of 5-6 billion, with more gas reserves yet untapped.
-Peruvian President Pedro Pablo Kuczynski is threatening to terminate the US$5 billion Southern Peruvian Natural Gas Pipeline if evidence of bribery surfaced. News that Brazilian builder Odebrecht had admitted to bribing officials in Peru from 2005 to 2014 triggered the investigation, with some US$29 million allegedly distributed to gain access to Peruvian energy projects. Under the graft investigation, Odebrecht is required to divest its 55% stake inproject, with Brookfield Asset Management a likely buyer. Chinas CNPC has also been named as a possible contender.
-The US rig count might have ended just under the year-end rig count for 2015, but it is up significantly since mid-2016, with signs that the count will improve further over the first half of 2017. The final week of 2016 saw only 2 new rigs being added both oil during the quietest period of the year, bringing the total to 525, just under 536 on December 30, 2015. Since May 2016, American drillers have started/restarted over 209 oil and gas rigs domestically as prices improved over the second half of 2016.
-After being idled in 2012 by Valero, the 225 kb/d refinery in Aruba will be restarted in 2017. The process will take over 18 months, with Citgo appointing a consortium of Frances Technip, Venezuelas Tecnoconsult and Y&V Group to refurbish the site in a US$700 million project. The would give Venezuelas PDVSA a continued presence in the Caribbean through its US subsidiaryCitgo,after the Curacao refinery now appears to be in Chinese hands.
Natural Gas & LNG
-Malaysias Petronas is aiming to move ahead with its US$27 billion LNG project in western Canada by identifying a new site that would reduce cost and quell local opposition, which had dogged the Pacific Northwest LNG project previously. The processing site will remain on Lelu Island, but the docking facilities moved to theneighbouringRidley Island, eliminating the need for an expensive suspension bridge that was part of the original plan that cut through an environmentally sensitive area.
Last week in Asian oil:
Upstream & Midstream
-Iran has named 29 companies from over a dozen countries that will be allowed to bid for oil and gas projects under its new Iran Petroleum Contract (IPC) model. Though not exhaustive, the pre-qualification list includes Shell, Total, Eni, Petronas,Gazpromand Lukoil, but not BP, which opted out of participating out of fears of renewed American hostility when Donald Trump enters the White House.
-In a move that acknowledges that domestic Chinese upstream production is hitting a wall,Petrochinawill slash capital spending at the Daqing field the countrys largest by 20% in 2017. The aim is to now keep output steady instead of boosting production, keeping output steady at 40 million tons of oil and gas by 2019, in line with 2015 figures.
Downstream & Shipping
-Australian grocery retailer Woolsworth is selling its national fuel station network to BP for A$1.8 billion, claiming that it didnt understand the fuel business. The deal marks BPs second major foray back into downstream in the last two months, after agreeing to partner with Reliance in India.Woolworthsfuel stations are currently being supplied by CaltexAustralia,and will be transitioned to be part of the BP network gradually.
-Chinas Sinopec has begun supplying Beijing Six grade gasoline and diesel to the capital, as the city battles the persistent smog that blankets Beijing. Beijing Six is a stricter standard than even the National Five (equivalent to Euro V) that will be rolled out across China over 2017, with the same 10ppmsulphurlimit and a lower nitrogen oxide and olefins spec. All 562 of Sinopec fuel stations in Beijing will sell the new standard, supplied mainly by SinopecsCangzhou, Yangshan and Qilu refineries.
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Headline crude prices for the week beginning 10 December 2018 – Brent: US$62/b; WTI: US$52/b
Headlines of the week
The Permian is in desperate need of pipelines. That much is true. There is so much shale liquids sloshing underneath the Permian formation in Texas and New Mexico, that even though it has already upended global crude market and turned the USA into the world’s largest crude producer, there is still so much of it trapped inland, unable to make the 800km journey to the Gulf Coast that would take them to the big wider world.
The stakes are high. Even though the US is poised to reach some 12 mmb/d of crude oil production next year – more than half of that coming from shale oil formations – it could be producing a lot more. This has already caused the Brent-WTI spread to widen to a constant US$10/b since mid-2018 – when the Permian’s pipeline bottlenecks first became critical – from an average of US$4/b prior to that. It is even more dramatic in the Permian itself, where crude is selling at a US$10-16/b discount to Houston WTI, with trends pointing to the spread going as wide as US$20/b soon. Estimates suggest that a record 3,722 wells were drilled in the Permian this year but never opened because the oil could not be brought to market. This is part of the reason why the US active rig count hasn’t increased as much as would have been expected when crude prices were trending towards US$80/b – there’s no point in drilling if you can’t sell.
Assistance is on the way. Between now and 2020, estimates suggest that some 2.6 mmb/d of pipeline capacity across several projects will come onstream, with an additional 1 mmb/d in the planning stages. Add this to the existing 3.1 mmb/d of takeaway capacity (and 300,000 b/d of local refining) and Permian shale oil output currently dammed away by a wall of fixed capacity could double in size when freed to make it to market.
And more pipelines keep getting announced. In the last two weeks, Jupiter Energy Group announced a 90-day open season seeking binding commitments for a planned 1 mmb/d, 1050km long Jupiter Pipeline – which could connect the Permian to all three of Texas’ deepwater ports, Houston, Corpus Christi and Brownsville. Plains All American is launching its 500,000 b/d Sunrise Pipeline, connecting the Permian to Cushing, Oklahoma. Wolf Midstream has also launched an open season, seeking interest for its 120,000 b/d Red Wolf Crude Connector branch, connecting to its existing terminal and infrastructure in Colorado City.
Current estimates suggest that Permian output numbered around 3.5 mmb/d in October. At maximum capacity, that’s still about 100,000 b/d of shale oil trapped inland. As planned pipelines come online over the next two years, that trickle could turn into a flood. Consider this. Even at the current maxing out of Permian infrastructure, the US is already on the cusp on 12 mmb/d crude production. By 2021, it could go as high as 15 mmb/d – crude prices, permitting, of course.
As recently reported in the WSJ; “For years, the companies behind the U.S. oil-and-gas boom, including Noble Energy Inc. and Whiting Petroleum Corp. have promised shareholders they have thousands of prospective wells they can drill profitably even at $40 a barrel. Some have even said they can generate returns on investment of 30%. But most shale drillers haven’t made much, if any, money at those prices. From 2012 to 2017, the 30 biggest shale producers lost more than $50 billion. Last year, when oil prices averaged about $50 a barrel, the group as a whole was barely in the black, with profits of about $1.7 billion, or roughly 1.3% of revenue, according to FactSet.”
The immense growth experienced in the Permian has consequences for the entire oil supply chain, from refining balances – shale oil is more suitable for lighter ends like gasoline, but the world is heading for a gasoline glut and is more interested in cracking gasoil for the IMO’s strict marine fuels sulphur levels coming up in 2020 – to geopolitics, by diminishing OPEC’s power and particularly Saudi Arabia’s role as a swing producer. For now, the walls keeping a Permian flood in are still standing. In two years, they won’t, with new pipeline infrastructure in place. And so the oil world has two years to prepare for the coming tsunami, but only if crude prices stay on course.
Recent Announced Permian Pipeline Projects
Headline crude prices for the week beginning 3 December 2018 – Brent: US$61/b; WTI: US$52/b
Headlines of the week