“Confidence is Preparation. Everything Else is Beyond Your Control” ~ Richard Kline

A tremor ran through the oil & gas industry last week. It wasn’t a by-product of fracking activity, but it is certainly linked. Supermajor Chevron agreed to purchase US independent Anadarko Petroleum for US$33 billion, a 39% premium to Anadarko’s last traded price. It’s the largest industry deal since Shell’s US$61 billion takeover of the BG Group in 2015. That deal catapulted Shell to become the world’s largest LNG trader, expanding its reach in the fast-evolving industry. Chevron will be looking to do the same.

The purchase of Anadarko gets Chevron into two prolific areas: the Permian Basin in the US and LNG. Chevron is already one of the largest supermajors operating in the Permian, with 2.3 million acres in the area. In this respect, the purchase is strategic. Combined with Anadarko’s assets, Chevron would now have a 120 sq.km corridor in the sweet spot of the shale basin –  Delaware, which straddles the Texas-New Mexico border. It’s a major salvo fired and a great boost to Chevron’s ambitions, which named investment in the Permian as its major focus last year. But more than just extracting oil, the purchase plugs a hole in Chevron’s portfolio. Through Anadarko, Chevron will gain major US midstream space, including a 55% stake in the Western Midstream Partners whose pipelines crosses all over Texas, linking the Permian to the processing and exporting base on the Gulf.

Internationally, the acquisition also boosts Chevron’s presence in LNG, which had recently  lagged behind other supermajors like Shell, ExxonMobil and Total. Anadarko’s Mozambique LNG project is neck-in-neck to become the African nation’s first LNG project with ExxonMobil. Drawing on Mozambique’s prolific Rovuma basin, the LNG export project has a nameplate capacity of 12.88 mtpa, of which 8.5 mtpa has already been committed through sales and purchase agreements. With FID scheduled for this year and operations expected in the 2023/24 timeframe, it complements Chevron’s current LNG portfolio – including the massive projects in Western Australia – nicely.

Together with recent investments in the upper echelon of energy companies, it seems the moniker supermajor may not be enough. Within the supermajor category, there was already a hierarchy, with ExxonMobil and Shell outpacing the rest. With this Anadarko apurchase, Chevron leaps into that tier, which analysts are calling ultramajors. That is, if there isn’t a spanner in the works. Occidental Petroleum, which is also focused on the Permian, had previously made a US$70 per share bid for Anadarko. It is now considering a counter proposal. The battle for Anadarko will go on, but we expect that Chevron will prevail, seeing how Anadarko’s operations fit so neatly into its own portfolio.

But more than just Chevron, could this be a preview of the future? The US shale revolution was kickstarted by plucky companies and ambitious independents, while the majors lost out. With this Chevron deal – along with ExxonMobil’s expansion and BP’s recent purchase of BHP assets – this could kick off another round of industry consolidation, centred around buying the way into the Permian and other shale basins. This might be a major purchase that shakes up the status quo, but if the signs are correct, there is more of this to come.

Infographic: The Chevron-Anadarko deal

• US$33 billion 25% cash- 75% stock deal
• Chevron to acquire Anadarko shares for US$65 per share
• Chevron will assume net debt of US$15 billion
• Chevron will sell some US$15 billion of assets to offset the purchase

Market Watch

Headline crude prices for the week beginning 15 April 2019 – Brent: US$71/b; WTI: US$63/b

• Crude oil futures could be on the verge of snapping its longest weekly rally since 2016, as the market continues to balance managed crude supply from the OPEC+ nations with accelerating American output
• Analysts are predicting that things could be coming to a head, which might see OPEC+ abandon its plans to stabilise supply and prices for an intense battle for market share with American shale producers instead
• This seems to be echoed by comments from Saudi Arabia, hinting at a U-turn in OPEC+’s dedication to extending the current supply quota agreement
• Russian Premier Vladimir Putin also chimed in, saying that he was ‘keeping his options open’ on the cuts and that he does not support an ‘uncontrollable’ increase in oil prices
• Ongoing concerns in Libya, Venezuela and Iran are giving other OPEC nations some room to breathe in their supply deal, with the organisation reporting that its output plunged in March to 758,000 b/d below the expected Q2 average
• After Japan reported it would hold back on resuming Iranian crude imports, India is now doing the same until clarification of American waivers on the sanctions is received
• The International Energy Agency reports that it sees global oil markets tightening, warning that this could lower actual demand and forecasts
• After a large 19 rig gain last week, the US reversed gear to lose 3 rigs, adding two oil sites while dropping five gas rigs, bringing the total active count to 1022
• Rumbles of a shale slowdown in the US could keep crude prices on a gentle upward curve, with Brent likely to trade at US$71-72/b and WTI and US$63-64/b

Headlines of the week

Upstream

• Shell has sold its 22.45% non-operating interest in the US Gulf of Mexico Caeser-Tonga asset to the Delek Group for some US$965 million in cash
• US President Donald Trump is aiming to limit state powers over cross-border pipeline to promote projects stalled by state regulators over permit and environmental concerns through the issuance of Executive Orders
• CNOOC has signed a new PSC with Smart Oil Investment for the Bohai 09/17 block in the shallow-water Qikou area of the Bohai Bay Basin in China
• Also in the Bohai Bay, CNOOC and ConocoPhillips are planning to double production from the Penglai 19-3 field over the next few years
• Shell has partnered with Sinopec in a maiden exploration of China’s shale oil potential, targeting the Dongying trough in Shengli in eastern China
• Shell has also announced an ambitious drilling programme in Brazil, targeting the Argonauta pre-salt areas in the Santos Basin
• Petrobras and the Brazilian government have settled a deepwater contract dispute for US$9.06 billion, paving the way for Petrobras and its partners to begin development of the crude deposits under the 2010 Transfer of Rights

Midstream & Downstream

• Continuing on its diversification strategy, Saudi Aramco is now looking to double its global refining network to some 10 mmb/d by 2030 as a means of locking in buyers for its crude amidst intense competition, which would see Aramco to continue investing in key global refining centres
• Shell is aiming to complete the overhaul of its RCCU at the 218 kb/d Norco refinery in Louisiana by May, ahead the US summer driving gasoline demand
• Sinopec reports that its Jinling refinery in Jiangsu has sold its first 4,200-ton cargo of low-sulfur marine fuel ahdad of the new IMO standards kicking in
• Saudi Aramco has signed an agreement with Poland’s PKN Orlen to trade Arabian-grade crude to the refiner in exchanges for high-sulfur fuel oil

Natural Gas/LNG

• Total has been awarded an exploration licence for Block 12 in Oman, with the onshore 10,000 sq.km asset near the gas-rich Greater Barik area that is expected to hold ‘significant prospective gas resources’
• Saudi Aramco is planning to move into LNG for first time ever, offering to supply Pakistan with cargos on a spot or short-term basis, even though it does not produce LNG and has only just begun developing an LNG trading desk
• First feed gas has begun to flow at Sempra Energy’s Cameron LNG Train 1 in Louisiana, the final commissioning phase for the project
• Keppel Gas in Singapore has imported its first 160,000 cbm cargo of US LNG under the country’s Spot Import Policy, its first from outside Southeast Asia and the first trickle in an exported flood of American LNG into the region

Corporate

• Saudi Aramco has issued its first global bond, raising US$100 billion from the sale, above and beyond the initial expectations of US$10-15 billion
• Abu Dhabi’s Mubadala Investment Company has sold a ‘significant minority interest’ of 30-40% in Spanish energy firm Cepsa to investment group The Carlyle Group, but will retain majority shareholder
• Canadian player Africa Oil has acquired 18.8% of fellow Canadian upstream firm Eco (Atlantic) Oil and Gas, but stressed that the acquisition was for investment purposes with no intention of exercising control

Source: U.S. Energy Information Administration, Monthly Energy Review

Primary energy consumption in the United States reached a record high of 101.3 quadrillion British thermal units (Btu) in 2018, up 4% from 2017 and 0.3% above the previous record set in 2007. The increase in 2018 was the largest increase in energy consumption, in both absolute and percentage terms, since 2010.

Consumption of fossil fuels—petroleum, natural gas, and coal—grew by 4% in 2018 and accounted for 80% of U.S. total energy consumption. Natural gas consumption reached a record high, rising by 10% from 2017. This increase in natural gas, along with relatively smaller increases in the consumption of petroleum fuels, renewable energy, and nuclear electric power, more than offset a 4% decline in coal consumption.

Source: U.S. Energy Information Administration, Monthly Energy Review

Petroleum consumption in the United States increased to 20.5 million barrels per day (b/d), or 37 quadrillion Btu in 2018, up nearly 500,000 b/d from 2017 and the highest level since 2007. Growth was driven primarily by increased use in the industrial sector, which grew by about 200,000 b/d in 2018. The transportation sector grew by about 140,000 b/d in 2018 as a result of increased demand for fuels such as petroleum diesel and jet fuel.

Natural gas consumption in the United States reached a record high 83.1 billion cubic feet/day (Bcf/d), the equivalent of 31 quadrillion Btu, in 2018. Natural gas use rose across all sectors in 2018, primarily driven by weather-related factors that increased demand for space heating during the winter and for air conditioning during the summer. As more natural gas-fired power plants came online and existing natural gas-fired power plants were used more often, natural gas consumption in the electric power sector increased 15% from 2017 levels to 29.1 Bcf/d. Natural gas consumption also grew in the residential, commercial, and industrial sectors in 2018, increasing 13%, 10%, and 4% compared with 2017 levels, respectively.

Coal consumption in the United States fell to 688 million short tons (13 quadrillion Btu) in 2018, the fifth consecutive year of decline. Almost all of the reduction came from the electric power sector, which fell 4% from 2017 levels. Coal-fired power plants continued to be displaced by newer, more efficient natural gas and renewable power generation sources. In 2018, 12.9 gigawatts (GW) of coal-fired capacity were retired, while 14.6 GW of net natural gas-fired capacity were added.

Source: U.S. Energy Information Administration, Monthly Energy Review

Renewable energy consumption in the United States reached a record high 11.5 quadrillion Btu in 2018, rising 3% from 2017, largely driven by the addition of new wind and solar power plants. Wind electricity consumption increased by 8% while solar consumption rose 22%. Biomass consumption, primarily in the form of transportation fuels such as fuel ethanol and biodiesel, accounted for 45% of all renewable consumption in 2018, up 1% from 2017 levels. Increases in wind, solar, and biomass consumption were partially offset by a 3% decrease in hydroelectricity consumption.

Source: U.S. Energy Information Administration, Monthly Energy Review

Nuclear consumption in the United States increased less than 1% compared with 2017 levels but still set a record for electricity generation in 2018. The number of total operable nuclear generating units decreased to 98 in September 2018 when the Oyster Creek Nuclear Generating Station in New Jersey was retired. Annual average nuclear capacity factors, which reflect the use of power plants, were slightly higher at 92.6% in 2018 compared with 92.2% in 2017.

More information about total energy consumption, production, trade, and emissions is available in EIA’s Monthly Energy Review.