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Last Updated: July 5, 2017
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Last week in the world oil:

Prices

  • After a week of gains, crude oil started the week on a weaker note ahead of America’s Independence Day. Crude prices have been gaining recently as signs that the relentless rise in US production might be slowing down, with Brent is trading at nearly US$50/b and WTI at the US$47/b level.

Upstream & Midstream

  • Investment in the North Sea appears to be paying off. First oil from EnQuest’s Kraken development has begun to flow, the first in a phased schedule that will bring together 13 wells comprising seven producers and six injectors. Under budget and on schedule, the achievement comes as EnQuest director Dr Philip Nolan stepped down to assume his new role as Chairman of Associated British Ports. Else in the North Sea, Repsol announced that first gas has been delivered from its Cayley field in the major Montrose Area redevelopment project. With an expected peak of 40,000 boe/d, this is the sixth major North Sea development to deliver first production in 2017, extending the life of the field to beyond 2030.
  • Nigeria’s state oil company NNPC has signed a tripartite deal with domestic firm First Exploration and Petroleum Development Company and US oil service firm Schlumberger to develop new oil fields in the southern Niger Delta. The deal targets the Anyala and Madu fields, falling under the Oil Mining Licence 83 and 85, with Schlumberger providing the financial investment necessary to begin work.
  • After 23 consecutive weeks of additions, the US oil rig complex finally snapped gains, cutting two rigs from service to bring the total American active oil rig count to 756. A single gas rig entered service, leaving the net loss in total rig count to one, down to 941. Don’t expect this trend to continue, but the pace of additions should slow down.

Natural Gas and LNG

  • ConocoPhillips is selling its assets in the Texan Barnett shale field to Miller Thomson & Partners for US$305 million, another in a series of natural gas-heavy assets to be sold by the US major. After selling assets in the San Juan basin to Hilcorp for US$3 billion and its Canadian natural gas assets to Cenovus for US$17.7 billion (along with oil sands acreage), ConocoPhillips is attempting to reduce its exposure to this sector of the business. This comes as BHP Billiton admitted that its US$20 billion investment during the height of the US fracking boom was ‘a mistake.’
  • As the European Commission attempts to deal directly with Russia over the Nord Stream 2 gas pipeline project, six European gas transmission operators have sounded alarm. Austria’s Gas Connect, Czech Republic NET4Gas and Germany’s Fluxys, ONTRAS, GAscade and Gasunie – representing the major demand centres– are alarmed by the move, aimed at representing the geopolitical concerns of the countries the pipeline flows through, arguing that it creates legal uncertainty for future projects.
  • While Rosneft and ExxonMobil’s LNG project in Sakhalin-1 LNG project continues, the Russian giant is also considering building its own LNG plant, independent of other partners involved in the vast Sakhalin development. Closer in proximity to the main LNG markets of East Asia, Sakhalin gas will be joining a hugely competitive Pacific rim LNG race.

Last week in Asian oil

Downstream

  • Abu Dhabi’s plans to restart its gasoline-focused RFCC unit at its Ruwais refinery has been delayed a year. Now expected only in early 2019, South Korea’s GS Engineering and Construction has been appointed to work on the secondary unit, which was hit by fire earlier this year. Repairs at the 800 kb/d Ruwais site were planned to be completed by 1Q2018, but the delay means that Abu Dhabi will remain short of gasoline and dependent on imports of the fuel, while producing excess amounts of fuel oil.
  • Construction of a crude pipeline in China’s eastern Shandong province has been completed, providing a boost to the country’s independent teapot refineries. Linking crude facilities operated by Mercuria in Qingdao port to the city of Weifang, where several teapots are located, the 608 kb/d pipeline will ease crude distribution bottlenecks for the increasingly important network of refiners. The pipeline will also be expanded into several other branches connecting the central and southern parts of the province, eventually increasing capacity to 1.2 mmb/d.

Natural Gas & LNG

  • South Korea’s Kogas has inked three separate agreements in participate in LNG projects across three states in the USA. In Alaska, Kogas will cooperate on the development of Alaska Gasline’s Alaska LNG project aimed at moving North Slope gas to LNG-hungry markets in Asia. In Port Arthur, Texas, Kogas is teaming up with Sempra LNG and Australia’s Woodside Energy on a new LNG terminal on the Houston Ship Channel, which is planned to house two LNG trains. In Lousiana, after receiving its first LNG cargo from Cheniere’s Sabine Pass, Kogas will be conducting feasibility studies at Energy Transfer’s Lake Charles LNG project. It marks the growing participation of Asian LNG buyers in American LNG projects.
  • As China’s appetite for LNG grows – Chinese demand could triple by 2030 – China is pouring resources into securing future supply. While supply from US, Canada, Australia and Qatar will remain plentiful, China is aiming to lock in its own captive supply by planning to invest almost US$7 billion into FLNG projects in Africa. There are several reasons for this – investment and exploration has unlocked great volumes of natural gas off both coasts of Africa; with little domestic demand, much of this will have to be exported – and by investing money, China secures supplies. FLNG is a nascent technology as well, and by investing en masse, it hopes it lower the cost of the complex floating plants in time for the energy markets to recover when the FLNGs enter production in the early 2020s.
  • Speaking of FLNG, the world’s first FLNG facility– Shell’s Prelude – has set sail from its shipyard in South Korea, heading on a month-long journey to the Browse basin in northwest Australia, where it will pioneer a new, more versatile future for LNG production. Roughly twice the size of the largest aircraft carrier, Prelude is a joint venture between Shell, Overseas Private Investment Corporation, Kogas and Taiwan’s CPC. Capable of producing, liquefying, storing and transferring LNG at sea, Prelude is versatile enough to travel around, with capacity for 5.3 mtpa of liquids and 3.6 mtpa of LNG. Production is expected to begin in early 2018.

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June, 12 2022
OPEC And The Current State of Oil Fundamentals

It was shaping up to yet another dull OPEC+ meeting. Cut and dry. Copy and paste. Rubber-stamping yet another monthly increase in production quotas by 432,000 b/d. Month after month of resisting pressure from the largest economies in the world to accelerate supply easing had inured markets to expectations of swift action by OPEC and its wider brethren in OPEC+.

And then, just two days before the meeting, chatter began that suggested something big was brewing. Whispers that Russia could be suspended made the rounds, an about-face for a group that has steadfastly avoided reference to the war in Ukraine, calling it a matter of politics not markets. If Russia was indeed removed from the production quotas, that would allow other OPEC+ producers to fill in the gap in volumes constrained internationally due to sanctions.

That didn’t happen. In fact, OPEC+ Joint Technical Committee commented that suspension of Russia’s quota was not discussed at all and not on the table. Instead, the JTC reduced its global oil demand forecast for 2022 by 200,000 b/d, expecting global oil demand to grow by 3.4 mmb/d this year instead with the downside being volatility linked to ‘geopolitical situations and Covid developments.’ Ordinarily, that would be a sign for OPEC+ to hold to its usual supply easing schedule. After all, the group has been claiming that oil markets have ‘been in balance’ for much of the first five months of 2022. Instead, the group surprised traders by announcing an increase in its monthly oil supply hike for July and August, adding 648,000 b/d each month for a 50% rise from the previous baseline.

The increase will be divided proportionally across OPEC+, as has been since the landmark supply deal in spring 2020. Crucially this includes Russia, where the new quota will be a paper one, since Western sanctions means that any additional Russian crude is unlikely to make it to the market. And that too goes for other members that haven’t even met their previous lower quotas, including Iraq, Angola and Nigeria. The oil ministers know this and the market knows this. Which is why the surprise announcement didn’t budge crude prices by very much at all.

In fact, there are only two countries within OPEC+ that have enough spare capacity to be ramped up quickly. The United Arab Emirates, which was responsible for recent turmoil within the group by arguing for higher quotas should be happy. But it will be a measure of backtracking for the only other country in that position, Saudi Arabia. After publicly stating that it had ‘done all it can for the oil market’ and blaming a lack of refining capacity for high fuel prices, the Kingdom’s change of heart seems to be linked to some external pressure. But it could seemingly resist no more. But that spotlight on the UAE and Saudi Arabia will allow both to wrench some market share, as both countries have been long preparing to increase their production. Abu Dhabi recently made three sizable onshore oil discoveries at Bu Hasa, Onshore Block 3 and the Al Dhafra Petroleum Concession, that adds some 650 million barrels to its reserves, which would help lift the ceiling for oil production from 4 to 5 mmb/d by 2030. Meanwhile, Saudi Aramco is expected to contract over 30 offshore rigs in 2022 alone, targeting the Marjan and Zuluf fields to increase production from 12 to 13 mmb/d by 2027.

The UAE wants to ramp up, certainly. But does Saudi Arabia too? As the dominant power of OPEC, what Saudi Arabia wants it usually gets. The signals all along were that the Kingdom wanted to remain prudent. It is not that it cannot, there is about a million barrels per day of extra production capacity that Saudi Arabia can open up immediately but that it does not want to. Bringing those extra volume on means that spare capacity drops down to critical levels, eliminating options if extra crises emerge. One is already starting up again in Libya, where internal political discord for years has led to an on-off, stop-start rhythm in Libyan crude. If Saudi Arabia uses up all its spare capacity, oil prices could jump even higher if new emergencies emerge with no avenue to tackle them. That the Saudis have given in (slightly) must mean that political pressure is heating up. That the announcement was made at the OPEC+ meeting and not a summit between US and Saudi leaders must mean that a façade of independence must be maintained around the crucial decisions to raise supply quotas.

But that increase is not going to be enough, especially with Russia’s absence. Markets largely shrugged off the announcement, keeping Brent crude at US$120/b levels. Consumption is booming, as the world rushes to enjoy its first summer with a high degree of freedom since Covid-19 hit. Which is why global leaders are looking at other ways to tackle high energy prices and mitigate soaring inflation. In Germany, low-priced monthly public transport are intended to wean drivers off cars. In the UK, a windfall tax on energy companies should yield US$6 billion to be used for insulating consumers. And in the US, Joe Biden has been busy.

With the Permian Basin focusing on fiscal prudence instead of wanton drilling, US shale output has not responded to lucrative oil prices that way it used to. American rig counts are only inching up, with some shale basins even losing rigs. So the White House is trying more creative ways. Though the suggestion of an ‘oil consumer cartel’ as an analogue to OPEC by Italian Prime Minister Mario Draghi is likely dead on arrival, the US is looking to unlock supply and tame fuel prices through other ways. Regular releases from the US Strategic Petroleum Reserve has so far done little to bring prices down, but easing sanctions on Venezuelan crude that could be exported to the US and Europe, as well as working with the refining industry to restart recently idled refineries could. Inflation levels above 8% and gasoline prices at all-time highs could lead to a bloody outcome in this year’s midterm elections, and Joe Biden knows that.

But oil (and natural gas) supply/demand dynamics cannot truly start returning to normal as long as the war in Ukraine rages on. And the far-ranging sanctions impacting Russian energy exports will take even longer to be lifted depending on how the war goes. Yes, some Russian crude is making it to the market. China, for example, has been quietly refilling its petroleum reserves with Russian crude (at a discount, of course). India continues to buy from Moscow, as are smaller nations like Sri Lanka where an economic crisis limits options. Selling the crude is one thing, transporting it is another. With most international insurers blacklisting Russian shippers, Russian oil producers can still turn to local insurance and tankers from the once-derided state tanker firm Sovcomflot PJSC to deliver crude to the few customers they still have.

A 50% hike in OPEC’s monthly supply easing targets might seem like a lot. But it isn’t enough. Especially since actual production will fall short of that quota. The entire OPEC system, and the illusion of control it provides has broken down. Russian oil is still trickling out to global buyers but even if it returned in full, there is still not enough refining capacity to absorb those volumes. Doctors speak of long Covid symptoms in patients, and the world energy complex is experiencing long Covid, now with a touch with geopolitical germs as well. It’ll take a long time to recover, so brace yourselves.

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June, 12 2022