Last week in the world oil:
* With an extension of the OPEC supply cuts seemingly imminent, as Saudi Arabia and Russia agreed that the freeze must last until early 2018, crude oil prices have gained ground. Brent topped US$52/b for the first time in three weeks, while WTI is inching up towards US$50/b again.
Upstream & Midstream
* France’s Total has signed a deal with Mauritanian state oil firm SMHPM to explore for offshore oil and gas, as the action in West Africa swings north to the new deepwater basins off Mauritania and Senegal. Total will take a 90% operating stake in the 7,300 sq.km 7,300 Block C7, just a week after it bought a 90% stake in the Rufisque Offshore Profond Block in Senegal.
* First oil has begun to flow at the Repsol Sinopec Resources’ Shaw field, part of the major redevelopment of the Montrose Area in the Central North Sea. Aiming to integrate new and existing infrastructure in the UK’s North Sea, the Shaw, Godwin and Cayley fields will add some 100 million boe to the reserves in Montrose.
* The recent razor-thin victory of Canada’s Liberal Party in British Columbia puts the Kinder Morgan Trans Mountain oil pipeline expansion and the US$27 billion Petronas LNG export projects at risk. Reduced to a minority government, the Liberals will require support from the Green Party to govern, and the Greens are vehemently opposed to both projects, despite the BC and Federals governments already approving them.
* American oilrigs added another nine to their number, reaching 712. It has been 17 consecutive weeks of rises in the US overall rig count, marching towards 900 as raising doubts about the effectiveness of more OPEC cuts.
* Italy’s Eni will be building a new 150 kb/d refinery in Nigeria. Part of the country’s drive to boost downstream investment to reduce reliance on imported oil products – despite being a crude exporter – the refinery will be built by Eni’s downstream subsidiary Agip, replacing the chronic aging existing refineries of NNPC.
* Venezuela’s refining woes continue, as aging units and manpower shortages reduce utilisation at the Paraguna Refining Center to 43%, with multiple units at the Cardon and Amuay refineries out of service.
Natural Gas and LNG
* As East Europe looks to assert a measure of energy independence away from Russia, Romania’s state gas producer Romgaz announced that production at the domestic Caragele field will start in 2019. With an estimated 25-27 bcm of gas, the field in Buzau could supply the entire country for three years. Romgaz is hoping to up that figure, sanctioning more tests and drilling in the area, with an eye toward becoming a net gas exporter through the impending Bulgarian-Romanian gas pipeline.
* From being desperate for oil and gas, Egypt is now talking to its LNG suppliers to defer shipments as its domestic gas production surges. Long seen as a reliable sink for LNG shipments, Cairo reportedly aims to scale back LNG purchases in 2018 from 70 to 30 cargoes, as production surges from BP’s Tauros and Libra fields in West Nile Delta, as well as Eni’s Zohr and giant Nooros field, which has hit 900 million cubic feet/d of output.
Upstream & Midstream
* Saudi Aramco will ship some 7 million barrels of crude oil less to Asia in June. Part of its commitment to the OPEC pact, the reduction also comes as the country hoards crude for domestic power demand during the searing summer, especially with the festive Ramadhan period beginning in late May. The nomination plans for June indicate a million barrel cut to Southeast Asia, China and South Korea each, slightly less than a million barrels for Japan and a whopping 3 million barrels for India. Expect the countries to turn to America and Africa to make up the shortage.
* Total and Japan’s Inpex are proposing to the Indonesian government take a 39% stake in the new Production Sharing Contract (PSC) at the Mahakam block. Under the current contract that began in 2015, the two companies – which operate the oil and gas block – have a smaller stake of 30%, with Pertamina taking the rest. Pertamina will be the operator of Mahakam under the new PSC, with Total and Inpex asking for new clauses in compensation, including 17% investment credit for developing the block and selling gas to domestic buyers at market prices.
* IndianOil has opened up talks with Saudi Aramco to build a mega refinery on India’s west coast. The project would be one of mutual benefit. India is aspiring to be self-sufficient in oil product demand, which would require that it vastly expand refining capacity. The project, which has a mammoth planned capacity of 1.2 mmbpd will also have a petrochemicals portion, to feed the country’s growing manufacturing sector. For Saudi Arabia, it locks in India as a top customer amid a growing oil supply glut. It also represents a strategic downstream move, with Aramco also involved in the RAPID project in Malaysia and pushing ahead with its American Motiva subsidiary after a divorce from joint venture partner Shell.
* ExxonMobil has agreed to buy the Jurong Aromatics refinery and petrochemical plant, outbidding South Korea’s Lotte Chemical by offering a price of US$1.7 billion. The JAC plant will now be integrated with ExxonMobil’s existing complex on Jurong, expanding the firm’s largest refining complex even further.
Natural Gas & LNG
* Malaysia’s Petronas is looking to expand its status as the third-largest LNG exporter by tapping new market in South and Southeast Asia. India, Pakistan, Bangladesh and Myanmar have been identified as avenues of growth for the Malaysian state oil firm, while new sectors such as LNG fuel for commercial ships are also being tested.
* Without changing existing rules for American LNG exports, Donald Trump’s administration has clarified that current trade rules allow American shale gas producers to target China directly to sell LNG. Currently, American LNG heads to China under spot contracts, with Cheniere already shipping nine cargoes from its Sabine Pass facility. The clarification is expected to trigger a wave of long-term contracts with Chinese buyers, rather than prompt spot purchases.
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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