Last week in the world oil:
- Persistently high US crude stockpiles continue to put pressure on global oil prices, overshadowing a high compliance rate within OPEC in meeting the organisation’s agreed cuts. Resurgence in American shale production has kept inventories high as demand flags, raising the possibility that OPEC may have to extend its supply freeze to have any impact.
Upstream & Midstream
- ConocoPhillips has reduced its Canadian oil sand reserves by over a billion barrels, as low global crude prices are forcing it to write down resources previously flagged as recoverable. From 2.4 billion barrels of developed and undeveloped bitumen reserves in Alberta at the end of 2015, the number was revised down to 1.2 billion barrels in the company’s annual financial filings for 2016.
- The active US rig count inched up again by 3 last week, as five additional oil rigs offset a loss of two gas rigs. All gains were on land or in inland waters, with the additions being in the Permian and Eagle Ford basin.
- The UAE’s Adnoc has secured a deal with trader Vitol to supply 528,000 tons of LPG per year over the next 10 years. Beginning January 2017 and lasting through December 2026, it is an attempt to pioneer long-term LPG contracts to deal with an oversupplied market, the additional volumes will likely head to Asia where LPG is fast becoming a new petrochemical feedstock due to the sharp rise in NGL supplies from the US Gulf.
Natural Gas and LNG
- Shell, now the world’s largest LNG trader following its acquisition of the BG Group, has set out its vision for the future of LNG contracts. Instead of multi-decade, mass volume contracts common from the 1980s and 1990s, clients will instead begin to demand shorter, smaller contracts to give themselves flexibility in a competitive market that now favours buyers. Shell also predicts that the bulk of new LNG growth will come from countries aiming to replace declining domestic gas production, like Egypt, Thailand and Pakistan, or where demand is growing strongly, like China.
- The Interconnector Greece-Bulgaria (IGB) natural gas pipeline will begin construction at the beginning of 2018, eventually delivering a billion cubic metres of Azeri gas from the Shah Deniz 2 field to Bulgaria. The project is part of a wider EU vision of a Southern Gas Corridor that will bring gas from the Middle East and Caspian region to reduce dependency on Russia natural gas.
- Under its new CEO, Darren Woods, ExxonMobil looks to continue the supermajor’s stance of promoting energy efficiency and discouraging polluting fossil fuels. Succeeding Rex Tillerson, who led the same stance as CEO before he joined the Trump administration as Secretary of State, Woods has called for a carbon tax to incentivise low-carbon energy solutions for the future. This would put ExxonMobil at odds with the White House, which views a resurgence in fossil fuel exploitation as central to its plan to boost the American economy.
Last week in Asian oil:
Upstream & Midstream
- Iran may be getting in on the shale oil revolution, reporting that it has struck a two billion barrel find in the western province of Lorestan. The area is thought to hold major reserves of shale oil and gas, and the Ghali Koh field discovery confirms it. Iran has rapidly ramped up its crude production levels to pre-sanction levels, and the find signals that it still has room to grow, as it competes with rival Saudi Arabia.
Downstream & Shipping
- After reportedly close to pulling out of the Petronas RAPID refinery project in January, Saudi Aramco is now back on the project. Announced by Malaysian Prime Minister Najib Razak, Aramco will now partner with Petronas on the project as originally planned, investing up to US$7 billion and securing the refinery’s vital crude supply.
- After years of delays, Vietnam’s second refinery – Nghi Son – is finally ready to begin production. First crude oil deliveries are expected at the 200 kb/d site in May, the second of three planned refineries that will serve Vietnam’s south, central and north regions. Nghi Son is designed to process Kuwaiti crude, with Kuwait Petroleum international and Japan’s Idemitsu Kosan being major stakeholders with 35.1%. PetroVietnam, which operates the country’s first refinery Dung Quat, has 25.1%, while Mitsui Chemicals has 4.7% of the integrated refining project.
- Taiwan’s Formosa Plastics Group, hampered at home at its attempts to grow, has applied to the US state of Louisiana to invest up to US$9.4 billion to build petrochemical plants. With the amount of natural gas liquids coming out of the shale revolution, petrochemical feedstock in the US are plentiful (and cheap) at the moment, with Formosa aiming to move production over to the US instead of bringing the NGLs over to Taiwan.
Natural Gas & LNG
- China’s LNG imports rose by nearly 40% in January to 3.44 million tons, providing an opportunity in an oversupplied market. It is the second-highest figure on record behind December 2016, as China imports the fuel for winter heating, and providing hope that continued Chinese demand may lift the slump in LNG prices triggered by fears of a supply overhang.
- Bangladesh will be raising the state-controlled price for natural gas for the second time in under two years. Gas prices will be raised by some 23% in two phases over the year, in March and in June. It is an attempt to reduce the government’s burden over subsidised gas prices. Domestic natural gas is currently sold at half the imported price, and the hike raises fears of inflation across Bangladesh’s critical garment industry, as most of the gas used in the country goes to the power industry.
- Rumours that the Indian government was planning to merge all or most of the state oil firms into an energy titan may have gotten some credence with the announcement that upstream-focused ONGC may be acquiring downstream player HPCL. The deal apparently calls for the Indian government to transfer its majority 51.11% stake in HPCL to ONGC, and the purchase of an additional 26% from shareholders by ONGC, worth US$6.6 billion in total.
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Headline crude prices for the week beginning 11 February 2019 – Brent: US$61/b; WTI: US$52/b
Headlines of the week
Midstream & Downstream
Global liquid fuels
Electricity, coal, renewables, and emissions
2018 was a year that started with crude prices at US$62/b and ended at US$46/b. In between those two points, prices had gently risen up to peak of US$80/b as the oil world worried about the impact of new American sanctions on Iran in September before crashing down in the last two months on a rising tide of American production. What did that mean for the financial health of the industry over the last quarter and last year?
Nothing negative, it appears. With the last of the financial results from supermajors released, the world’s largest oil firms reported strong profits for Q418 and blockbuster profits for the full year 2018. Despite the blip in prices, the efforts of the supermajors – along with the rest of the industry – to keep costs in check after being burnt by the 2015 crash has paid off.
ExxonMobil, for example, may have missed analyst expectations for 4Q18 revenue at US$71.9 billion, but reported a better-than-expected net profit of US$6 billion. The latter was down 28% y-o-y, but the Q417 figure included a one-off benefit related to then-implemented US tax reform. Full year net profit was even better – up 5.7% to US$20.8 billion as upstream production rose to 4.01 mmboe/d – allowing ExxonMobil to come close to reclaiming its title of the world’s most profitable oil company.
But for now, that title is still held by Shell, which managed to eclipse ExxonMobil with full year net profits of US$21.4 billion. That’s the best annual results for the Anglo-Dutch firm since 2014; product of the deep and painful cost-cutting measures implemented after. Shell’s gamble in purchasing the BG Group for US$53 billion – which sparked a spat of asset sales to pare down debt – has paid off, with contributions from LNG trading named as a strong contributor to financial performance. Shell’s upstream output for 2018 came in at 3.78 mmb/d and the company is also looking to follow in the footsteps of ExxonMobil, Chevron and BP in the Permian, where it admits its footprint is currently ‘a bit small’.
Shell’s fellow British firm BP also reported its highest profits since 2014, doubling its net profits for the full year 2018 on a 65% jump in 4Q18 profits. It completes a long recovery for the firm, which has struggled since the Deepwater Horizon disaster in 2010, allowing it to focus on the future – specifically US shale through the recent US$10.5 billion purchase of BHP’s Permian assets. Chevron, too, is focusing on onshore shale, as surging Permian output drove full year net profit up by 60.8% and 4Q18 net profit up by 19.9%. Chevron is also increasingly focusing on vertical integration again – to capture the full value of surging Texas crude by expanding its refining facilities in Texas, just as ExxonMobil is doing in Beaumont. French major Total’s figures may have been less impressive in percentage terms – but that it is coming from a higher 2017 base, when it outperformed its bigger supermajor cousins.
So, despite the year ending with crude prices in the doldrums, 2018 seems to be proof of Big Oil’s ability to better weather price downturns after years of discipline. Some of the control is loosening – major upstream investments have either been sanctioned or planned since 2018 – but there is still enough restraint left over to keep the oil industry in the black when trends turn sour.
Supermajor Net Profits for 4Q18 and 2018
- 4Q18 – Net profit US$6 billion (-28%);
- 2018 – Net profit US$20.8 (+5.7%)
- 4Q18 – Net profit US$5.69 billion (+32.3%);
- 2018 – Net profit US$21.4 billion (+36%)
- 4Q18 – Net profit US$3.73 billion (+19.9%);
- 2018 – Net profit US$14.8 billion (+60.8%)
- 4Q18 – Net profit US$3.48 billion (+65%);
- 2018 - Net profit US$12.7 billion (+105%)
- 4Q18 – Net profit US$3.88 billion (+16%);
- 2018 - Net profit US$13.6 billion (+28%)