Last week in world oil:
- Oil prices started the week on a stronger note, as new tensions between the US and Iran raised fears that crude supplies could be affected. The spat has escalated recently with the US re-imposing sanctions in response to Iranian ballistic missile tests. This will colour crude prices over the rest of the quarter, with Brent currently at US$56/b and WTI at US$54/b.
Upstream & Midstream
- Defying protest attempts, Energy Transfer Partners Dakota Access crude oil pipeline linking Bakken shale oil to terminals in Illinois will begin pumping crude as early as June 2017, barring any new legal obstacles. None are anticipated, with President Trump already signalling his support, moving the US$3.8 billion pipeline ahead after it was stalled last September by the Obama administration for environmental review.
- The US oil and gas rig count has exceeded 700 for the first time since December 2015, as strength in oil prices prompted 17 new oil rigs to start up, bringing the total to 729. All but one of the rigs were onshore, with shale plays in Oklahoma, Texas and New Mexico comprising the bulk of the additions.
- Perhaps a little too late, Algeria is attempting to ape its OPEC allies in the Middle East by expanding into petrochemicals. It has launched tenders to build four large petrochemical plants linked to state firm Sonatrachs four existing refineries in Tiaret, Hassi Messaoud and Skikda. The investment plans, valued at up to US$6 billion, includes a fuel oil cracking plant and a naphtha processing plant, with a planned petrochemical capacity exceeding 10 million tons per year.
Natural Gas and LNG
- Despite wariness over Russias ambitions, the town of Karlshamn in southern Sweden has agreed to let Russias Gazprom use its port for the construction of the Nord Stream 2 gas pipeline. The decision is supported by the Swedish government after the island of Gotland rejected hosting the pipeline last year, despite lingering national security concerns. The Nord Stream 2 pipeline is Russias latest way of feeding Western Europes appetite for natural gas, running from Russia through the Baltic Sea. Some resistance has been mounted over Russian dependence, and Ukraine has also objected over the possible loss of transit revenues from existing pipelines that run through the country.
- Germanys Uniper is selling its stake in the OLT offshore LNG Toscana terminal in Italy, divesting its 48.24% share in a deal that could value the entire business at 1 billion. The other stakeholders in OLT are Italian utility group Iren (49.07%) and US shipping group Golar LNG (2.69%).
- After disappointing results from Chevron and ExxonMobil, Anglo-Dutch supermajor Shell reported its results for 2016, with full year profits down by 37% to US$7.185 billion, but 2H16 profits exceeded ExxonMobils, a rare occurrence. Its debt-to-equity ratio fell from 29.2% to 28%, as it makes progress in its post-BG Group acquisition debt reduction program, with assets sales of some US$3 billion in 4Q16.
Last week in Asian oil:
Upstream & Midstream
- One of the drawbacks of a free market is that it can undermine efforts to influence prices. OPECs supply cut has lifted prices over the past two months, but its power is muted as suppliers from the rest of the world rush to fill the gap left by OPEC members in Asia. Crude from the North Sea and the US Gulf Coast is making their way to Asia already, and some 2.19 million barrels of West African crude is scheduled for delivery to Asia in February, the highest level since August 2011. Meanwhile, Saudi Arabia has raised prices for March crude shipments across the board, including Asia, as it follows through on supply cuts to boost crude prices. It had previously refrained from raising prices to Asian buyers in January and February, limiting its price hikes to Europe and North America.
Downstream & Shipping
- After the departure of Saudi Aramco, Indonesias Pertamina has decided to proceed on its own to upgrade the Balongan refinery. The company, however, warned that the investment will be less than initially planned, with Pertamina lacking the financial muscle to juggle the project along with its wider goals of boosting upstream production. The Balongan upgrade was originally meant to double capacity to 240 kb/d, and expand the refinerys crude diet to include medium sour grades.
Natural Gas & LNG
- Iraq is aiming to up its capacity to process gas by-products from its oil sites in the southern fields, recovering natural gas liquids that would otherwise be flared. State player South Gas Co already runs one gas processing ventures in Basra with Basrah Gas Co (a joint venture between Shell and Mitsubishi), which began in 2013. That venture recovers some 700 cubic feet of gas per day, and competition rules requires that South Gas Co find new partners for the second gas processing venture, which would help reduce the current estimated flared amount of 600 million cubic feet per day. This would increase Iraqs exports of LPG and condensates, but current tensions with the US over President Trumps Muslim ban could see US players frozen out of the venture.
- Italys Eni has struck gas in Indonesia, moving a step closer to developing its Merakes discovery. Successful drills and tested at the Merakes-2 well indicate the excellent gas deliverability of the Merakes reservoir, discovered in October 2014 with estimated recoverable reservers of 2 Tcf of natural gas. Merakes is also just up the street from the another Eni-operated field, the Jangkrik field that began production in Q216, potentially maximising production synergies between the two fields through shared infrastructure. The Merakes field is in the prolific offshore Kutei Basin, led by Eni under the East Sepinggan Production Sharing Contract (PSC).
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Headline crude prices for the week beginning 12 August 2019 – Brent: US$58/b; WTI: US$54/b
Headlines of the week
The momentum for crude prices abated in the second quarter of 2019, providing less cushion for the financial results of the world’s oil companies. But while still profitable, the less-than-ideal crude prices led to mixed results across the boards – exposing gaps and pressure points for individual firms masked by stronger prices in Q119.
In a preview of general performance in the industry, Total – traditionally the first of the supermajors to release its earnings – announced results that fell short of expectations. Net profits for the French firm fell to US$2.89 billion from US$3.55 billion, below analyst predictions. This was despite a 9% increase in oil and gas production – in particularly increases in LNG sales – and a softer 2.5% drop in revenue. Total also announced that it would be selling off US$5 billion in assets through 2020 to keep a lid on debt after agreeing to purchase Anadarko Petroleum’s African assets for US$8.8 billion through Occidental.
As with Total, weaker crude prices were the common factor in Q219 results in the industry, though the exact extent differed. Russia’s Gazprom posted higher revenue and higher net profits, while Norway’s Equinor reported falls in both revenue and net profits – leading it to slash investment plans for the year. American producer ConocoPhillips’ quarterly profits and revenue were flat year-on-year, while Italy’s Eni – which has seen major success in Africa – reported flat revenue but lower profits.
After several quarters of disappointing analysts, ExxonMobil managed to beat expectations in Q219 – recording better-than-expected net profits of US$3.1 billion. In comparison, Shell – which has outperformed ExxonMobil over the past few reporting periods – disappointed the market with net profits halving to US$3 billion from US$6 billion in Q218. The weak performance was attributed (once again) to lower crude prices, as well as lower refining margins. BP, however, managed to beat expectations with net profits of US$2.8 billion, on par with its performance in Q218. But the supermajor king of the quarter was Chevron, with net profits of US$4.3 billion from gains in Permian production, as well as the termination fee from Anadarko after the latter walked away from a buyout deal in favour of Occidental.
And then, there was a surprise. In a rare move, Saudi Aramco – long reputed to be the world’s largest and most profitable energy firm – published its earnings report for 1H19, which is its first ever. The results confirmed what the industry had long accepted as fact: net profit was US$46.9 billion. If split evenly, Aramco’s net profits would be more than the five supermajors combined in Q219. Interestingly, Aramco also divulged that it had paid out US$46.4 billion in dividends, or 99% of its net profit. US$20 billion of that dividend was paid to its principle shareholder – the government of Saudi Arabia – up from US$6 billion in 1H18, which makes for interesting reading to potential investors as Aramco makes a second push for an IPO. With Saudi Aramco CFO Khalid al-Dabbagh announcing that the company was ‘ready for the IPO’ during its first ever earnings call, this reporting paves the way to the behemoth opening up its shares to the public. But all the deep reservoirs in the world did not shield Aramco from market forces. As it led the way in adhering to the OPEC+ club’s current supply restrictions, weaker crude prices saw net profit fall by 11.5% from US$53 billion a year earlier.
So, it’s been a mixed bunch of results this quarter – which perhaps showcases the differences in operational strategies of the world’s oil and gas companies. There is no danger of financials heading into the red any time soon, but without a rising tide of crude prices, Q219 simply shows that though the challenges facing the industry are the same, their approaches to the solutions still differ.
Supermajor Financials: Q2 2019
Source: U.S. Energy Information Administration, CEDIGAZ, Global Trade Tracker
Australia is on track to surpass Qatar as the world’s largest liquefied natural gas (LNG) exporter, according to Australia’s Department of Industry, Innovation, and Science (DIIS). Australia already surpasses Qatar in LNG export capacity and exported more LNG than Qatar in November 2018 and April 2019. Within the next year, as Australia’s newly commissioned projects ramp up and operate at full capacity, EIA expects Australia to consistently export more LNG than Qatar.
Australia’s LNG export capacity increased from 2.6 billion cubic feet per day (Bcf/d) in 2011 to more than 11.4 Bcf/d in 2019. Australia’s DIIS forecasts that Australian LNG exports will grow to 10.8 Bcf/d by 2020–21 once the recently commissioned Wheatstone, Ichthys, and Prelude floating LNG (FLNG) projects ramp up to full production. Prelude FLNG, a barge located offshore in northwestern Australia, was the last of the eight new LNG export projects that came online in Australia in 2012 through 2018 as part of a major LNG capacity buildout.
Source: U.S. Energy Information Administration, based on International Group of Liquefied Natural Gas Importers (GIIGNL), trade press
Note: Project’s online date reflects shipment of the first LNG cargo. North West Shelf Trains 1–2 have been in operation since 1989, Train 3 since 1992, Train 4 since 2004, and Train 5 since 2008.
Starting in 2012, five LNG export projects were developed in northwestern Australia: onshore projects Pluto, Gorgon, Wheatstone, and Ichthys, and the offshore Prelude FLNG. The total LNG export capacity in northwestern Australia is now 8.1 Bcf/d. In eastern Australia, three LNG export projects were completed in 2015 and 2016 on Curtis Island in Queensland—Queensland Curtis, Gladstone, and Australia Pacific—with a combined nameplate capacity of 3.4 Bcf/d. All three projects in eastern Australia use natural gas from coalbed methane as a feedstock to produce LNG.
Source: U.S. Energy Information Administration
Most of Australia’s LNG is exported under long-term contracts to three countries: Japan, China, and South Korea. An increasing share of Australia’s LNG exports in recent years has been sent to China to serve its growing natural gas demand. The remaining volumes were almost entirely exported to other countries in Asia, with occasional small volumes exported to destinations outside of Asia.
Source: U.S. Energy Information Administration, based on International Group of Liquefied Natural Gas Importers (GIIGNL)
For several years, Australia’s natural gas markets in eastern states have been experiencing natural gas shortages and increasing prices because coal-bed methane production at some LNG export facilities in Queensland has not been meeting LNG export commitments. During these shortfalls, project developers have been supplementing their own production with natural gas purchased from the domestic market. The Australian government implemented several initiatives to address domestic natural gas production shortages in eastern states.
Several private companies proposed to develop LNG import terminals in southeastern Australia. Of the five proposed LNG import projects, Port Kembla LNG (proposed import capacity of 0.3 Bcf/d) is in the most advanced stage, having secured the necessary siting permits and an offtake contract with Australian customers. If built, the Port Kembla project will use the floating storage and regasification unit (FSRU) Höegh Galleon starting in January 2021.