Last week in world oil:
- With news that US drilling was rising at its fastest pace in two years and Asian buyers turning to avenues such as North Sea oil counteracting the (thus-far) effective OPEC supply cut, crude prices have not budged much from their positions around US$55/b for Brent and US$52/b for WTI.
Upstream & Midstream
- One of Donald Trump’s first executive orders as President of the USA has been a chaotic ban on citizens of seven Muslim countries entering the USA. This has prompted tit-for-tat measures by Iraq and Iran, moving to ban entry to Americans to their countries. For Iran, this could effectively freeze out American firms from participating in the revitalisation of Iran’s oil and gas industry, ceding ground to European and Chinese players. For Iraq, this complicates the matters as US army personnel as vital to Iraq’s fight against ISIS and poses a question mark on American participation (particularly ExxonMobil’s) in the Iraqi energy industry.
- The Keystone XL and Dakota Access oil pipelines are back in business, with President Donald Trump signalling support but demanding renegotiation to ‘secure a better deal for the US’. Some of the new caveats include the use of US-made products – difficult to achieve as the US steel industry isn’t up to par – and reducing environmental reviews.
- Shell is preparing a sale of its North Sea oil and gas assets to area specialist Chrysaor for US$3 billion, as it continues its divestment drive to pay for its acquisition of the BG Group. The package of assets will be a mix of older fields, new developments and infrastructure, which could inject new blood into an area in steady decline.
- Some 15 oil rigs started up last week, joined by 3 gas rigs, to raise the number of operational oil and gas rigs in the US to 712. This is the monthly fastest pace of additions in over three years, as US drillers capitalise on stronger oil prices as well as indications by the new Trump administration that they will support expansion in domestic upstream and reduce restrictions.
- Despite a USD415 million net income reported in Q4 2016, Chevron posted a USD497 million loss for 2016 as the slump in refining earnings outweighed recovering oil prices in H2 2016. The company replaced 95% of its production with new oil and gas reserves mostly from Kazakhstan, the US, and Australia
- The oilfield services company, Baker Hughes announced a USD417 million net loss on revenue of USD2.41 billion for Q4 2016. For the same quarter last year, the company lost more than USD1 billion on revenue of USD3.39 billion
- In 2012, Turkey referred Iran to the International Court of Arbitration for overpricing gas sales to Turkey between 2011 and 2015. The court ruled in favour of Turkey in February 2016, and as a result, Iran will pay Turkey USD1.9 billion in compensation and discount gas price by 13.5%.
- With BP’s annual forecast calling for energy demand to grow by a third through 2035, driven by demand in Asia and Africa, global players have turned their attention to African infrastructure. In Nigeria, General Electric has proposed a plan to revamp the country’s three ailing refineries, potentially creating a consortium with NNPC, which is in the process of being privatised. Italy’s Eni, as well, has announced plans to deepen Nigerian participation, both upstream and downstream.
- An explosion at the Tema refinery, the only processing site in Ghana, has caused the entire facility to be shut. The blast came upon the installation of a crude oil heating unit, destroying the new furnace; the plant will be restarted after reconfiguration but operating capacity will drop by a third.
- In more Shell divestment news, the supermajor is selling its 50% stake in petrochemical player Saudi Petrochemical (SADAF) to Saudi Basic Industries (SABIC) for US$820 million, the third Saudi Arabia-Shell ventures to be killed since 2014, after a natural gas ventures and US-based Motiva. Debt paring following the BG acquisition is the motive.
Last week in Asian oil:
Upstream & Midstream
- India has signed a deal with ADNOC to fill half of its new Mangalore crude oil storage facility. Up to 6 million barrels of UAE crude, mainly the Murban grade, will be stored at Mangalore, with the other half of storage already occupied by Iranian crude. It is a big step towards achieving India’s goal of increasing energy security through strategic reserves, but at only 10 days of oil demand, it is woefully behind other major oil consumers, with China aiming for 90 days and Japan having 160 days.
- The governments of Australia and Timor-Leste have given themselves a deadline of September 2017 to agree on a permanent maritime border between the two nations, settling once and for all the ownership of the Greater Sunrise field, with the results likely to benefit Timor-Leste.
Downstream & Shipping
- Despite Saudi Aramco’s decision to pull out of the massive RAPID refining and petrochemical hub in Johor, Malaysia’s Petronas has reaffirmed its plans. It remains on track internally for a 2019 start-up, though the departure of Saudi Aramco may force Petronas to secure another crude-rich partner to support the US$27 billion, 300 kb/d refinery. Iran is a possibility, with Petronas unlikely to go ahead alone due to its capex cuts.
Natural Gas & LNG
- Already facing cost spirals that have ballooned to over US$35 billion, Australia’s massive Ichthys LNG export project has been dealt another blow as engineering contractor CIMIC pulled out of the facility’s associated power plant. With the power plant – which would supply the site with electricity – touted at 89% completion, this suggest major disagreement within the consortium, which will only add to costs and delays, though Ichthys will still go ahead. It is not alone though; Chevron’s Gorgon and Shell’s floating Prelude projects are also facing major budget and timeline problems, delaying Australia’s gigantic LNG ramp up.
- Commercial operations have officially started at the Petronas LNG ninth liquefaction train in Bintulu, Sarawak. The site is a joint venture between Petronas and Japan’s JX Nippon Oil & Energy Corp, and the ninth train brings the total capacity of the Bintulu LNG plant to 30 million tons per year, much of which is destined to go north to Japan.
- PTTEP, the upstream arm of Thailand’s PTT Group has returned to the black, posting a net profit of US$372 million for 2016 after a loss of US$854 million in 2015, attributed to strong operational performances and cost control. Back on stronger financial footing, PTTEP plans to spend US$4 billion to investment, which will mainly focus on securing natural gas and LNG supplies to offset the decline in Thai gas production.
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Headline crude prices for the week beginning 10 June 2019 – Brent: US$62/b; WTI: US$53/b
Headlines of the week
Midstream & Downstream
A month ago, crude oil prices were riding a wave, comfortably trading in the mid-US$70/b range and trending towards the US$80 mark as the oil world fretted about the expiration of US waivers on Iranian crude exports. Talk among OPEC members ahead of the crucial June 25 meeting of OPEC and its OPEC+ allies in Vienna turned to winding down its own supply deal.
That narrative has now changed. With Russian Finance Minister Anton Siluanov suggesting that there was a risk that oil prices could fall as low as US$30/b and the Saudi Arabia-Russia alliance preparing for a US$40/b oil scenario, it looks more and more likely that the production deal will be extended to the end of 2019. This was already discussed in a pre-conference meeting in April where Saudi Arabia appeared to have swayed a recalcitrant Russia into provisionally extending the deal, even if Russia itself wasn’t in adherence.
That the suggestion that oil prices were heading for a drastic drop was coming from Russia is an eye-opener. The major oil producer has been dragging its feet over meeting its commitments on the current supply deal; it was seen as capitalising on Saudi Arabia and its close allies’ pullback over February and March. That Russia eventually reached adherence in May was not through intention but accident – contamination of crude at the major Druzhba pipeline which caused a high ripple effect across European refineries surrounding the Baltic. Russia also is shielded from low crude prices due its diversified economy – the Russian budget uses US$40/b oil prices as a baseline, while Saudi Arabia needs a far higher US$85/b to balance its books. It is quite evident why Saudi Arabia has already seemingly whipped OPEC into extending the production deal beyond June. Russia has been far more reserved – perhaps worried about US crude encroaching on its market share – but Energy Minister Alexander Novak and the government is now seemingly onboard.
Part of this has to do with the macroeconomic environment. With the US extending its trade fracas with China and opening up several new fronts (with Mexico, India and Turkey, even if the Mexican tariff standoff blew over), the global economy is jittery. A recession or at least, a slowdown seems likely. And when the world economy slows down, the demand for oil slows down too. With the US pumping as much oil as it can, a return to wanton production risks oil prices crashing once again as they have done twice in the last decade. All the bluster Russia can muster fades if demand collapses – which is a zero sum game that benefits no one.
Also on the menu in Vienna is the thorny issue of Iran. Besieged by American sanctions and at odds with fellow OPEC members, Iran is crucial to any decision that will be made at the bi-annual meeting. Iranian Oil Minister Bijan Zanganeh, has stated that Iran has no intention of departing the group despite ‘being treated like an enemy (by some members)’. No names were mentioned, but the targets were evident – Iran’s bitter rival Saudi Arabia, and its sidekicks the UAE and Kuwait. Saudi King Salman bin Abulaziz has recently accused Iran of being the ‘greatest threat’ to global oil supplies after suspected Iranian-backed attacks in infrastructure in the Persian Gulf. With such tensions in the air, the Iranian issue is one that cannot be avoided in Vienna and could scupper any potential deal if politics trumps economics within the group. In the meantime, global crude prices continue to fall; OPEC and OPEC+ have to capability to change this trend, but the question is: will it happen on June 25?
Expectations at the 176th OPEC Conference
Global liquid fuels
Electricity, coal, renewables, and emissions