It’s earnings seasons again and for oil firms, the numbers have not looked this good for some time. ExxonMobil, Shell and BP profits all surged, and Chevron moved back into the black. Elsewhere, profits have generally been up over the first three months of 2017, as firms reap the benefits of years of cost-cutting and, crucially, the OPEC supply freeze that lifted prices. There are arguments to be made on whether the OPEC cut has been successful or not, but at least from a Q12017 financial perspective, the answer is yes. Compared to the same period in 2016 average crude prices are up 50%.
Big daddy ExxonMobil more than doubled it profits to US$4.01 billion, even as its production fell by 4%. Chevron, which declared a rare loss in Q417, swung to a US$2.68 billion profit and turned its cash flow positive, beating all Wall Street expectations. Actual production at Chevron’s fields was weaker, so better performance is down to better prices. At both companies, American shale oil and LNG are characterising their growth over the rest of the year. Both expanded their shale portfolios in the Permian Basin, starting up low-cost fields in response to improving prices, while shying away from high-cost, challenging crude production. LNG marks the case forward for both as well, over the longer term. ExxonMobil sealed its purchase of Papua New Guinea’s InterOil for US$2.5 billion and bought a stake in a Mozambique gas field for US$2.8 billion. In Australia, Chevron brought its third Gorgon LNG facility online, and has the mammoth Wheatstone project coming up, delays nonewithstanding.
BP’s profit tripled to US$1.51 billion, and expects the good times to continue as the British supermajor starts up seven projects this year, including Oman and Azerbaijan, adding some 800 kb/d of new production by 2020. Shell’s profit rose to US$3.75 billion, with the firm saying that its upstream and chemicals arms – the area of concentration for Shell recently - performed particularly well. Both have had success in paring down debt in the quarter (BP for the Deepwater Horizon incident and Shell for its purchase of the BG Group). Last quarter’s best performer, France’s Total, reported first this time; its 56% jump in quarterly profits y-o-y previewing the bountiful season.
It isn’t just the private oil firms rejoicing. State oil players too are benefitting, with China’s PetroChina swinging back into profit and Sinopec and CNOOC reporting good figures. From Petronas to Tullow Oil, it has been a good quarter for almost all. This has created a mood to start cautiously spending again. After releasing its earnings, Total sanctioned its first project since 2014, approving the development of the Aguda Pinchana Este project in Argentina’s Vaca Muerta shale gas, while Shell had earlier announced a start to the Kaikias deepwater field in Mexico, it’s first since 2015
But while the mood to invest has picked up, long memories are applying caution. Oil sands, for example, fell out of favour over the quarter, with assets in Canada’s Alberta sold off en masse as firms retreat from the once promising developments. It may be years before they come back to look into them again.
For now, the industry is happy that days of red balance sheets are over, however they will be celebrating cautiously, as the market still remains oversupplied and prices are low for much longer.
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It has been 21 years since Japanese upstream firm Inpex signed on to explore the Masela block in Indonesia in 1998 and 19 years since the discovery of the giant Abadi natural gas field in 2000. In that time, Inpex’s Ichthys field in Australia was discovered, exploited and started LNG production last year, delivering its first commercial cargo just a few months ago. Meanwhile, the abundant gas in the Abadi field close to the Australia-Indonesia border has remained under the waves. Until recently, that is, when Inpex had finally reached a new deal with the Indonesian government to revive the stalled project and move ahead with a development plan.
This could have come much earlier. Much, much earlier. Inpex had submitted its first development plan for Abadi in 2010, encompassing a Floating LNG project with an initial capacity of 2.5 million tons per annum. As the size of recoverable reserves at Abadi increased, the development plan was revised upwards – tripling the planned capacity of the FLNG project to be located in the Arafura Sea to 7.5 million tons per annum. But at that point, Indonesia had just undergone a crucial election and moods had changed. In April 2016, the Indonesian government essentially told Inpex to go back to the drawing board to develop Abadi, directing them to shift from a floating processing solution to an onshore one, which would provide more employment opportunities. The onshore option had been rejected initially by Inpex in 2010, given that the nearest Indonesian land is almost 100km north of the field. But with Indonesia keen to boost activity in its upstream sector, the onshore mandate arrived firmly. And now, after 3 years of extended evaluation, Inpex has delivered its new development plan.
The new plan encompasses an onshore LNG plant with a total production capacity of 9.5 million tons per annum. With an estimated cost of US$18-20 billion, it will be the single largest investment in Indonesia and one of the largest LNG plants operated by a Japanese firm. FID is expected within 3 years, with a tentative target operational timeline of the late 2020s. LNG output will be targeted at Japan’s massive market, but also growing demand centres such as China. But Abadi will be entering into a far more crowded field that it would have if initial plans had gone ahead in 2010; with US Gulf Coast LNG producers furiously constructing at the moment and mega-LNG projects in Australia, Canada and Russia beating Abadi’s current timeline, Abadi will have a tougher fight for market share when it starts operations. The demand will be there, but the huge rise in the level of supplies will dilute potential profits.
It is a risk worth taking, at least according to Inpex and its partner Shell, which owns the remaining 35% of the Abadi gas field. But development of Abadi will be more important to Indonesia. Faced with a challenging natural gas environment – output from the Bontang, Tangguh and Badak LNG plants will soon begin their decline phase, while the huge potential of the East Natuna gas field is complicated by its composition of sour gas – Indonesia sees Abadi as a way of getting its gas ship back on track. Abadi is one of Indonesia’s few remaining large natural gas discoveries with a high potential commercialisation opportunities. The new agreement with Inpex extends the firm’s licence to operate the Masela field by 27 years to 2055 with the 150 mscf pipeline and the onshore plant expected to be completed by 2027. It might be too late by then to reverse Indonesia’s chronic natural gas and LNG production decline, but to Indonesia, at least some progress is better than none.
The Abadi LNG Project:
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