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Last Updated: August 24, 2017
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Last Week in World oil:

Prices

  • Last week’s price rally sputtered out at the start of the week, with Brent at nearly US$52/b and WTI at US$48/b. However, with signs that the global market was rebalancing from chronic oversupply, oil prices have been edging upwards, though a rally towards US$60/b is unlikely.

Upstream

  • American offshore upstream is back. Bids at the recent deepwater Gulf of Mexico auction attracted bids totalling US$121 million, almost seven times the US$18 million generated at the Outer Continental Shelf auction last year. Shell and Chevron led the way, placing US$25.1 million on 19 high bids and US$27.9 million on 15 high bids, respectively. It is a sign that the moribund atmosphere in the Gulf may be lifting, as aggressive cost-cutting lifts projects back towards necessary profitability levels.
  • Energy reforms in Mexico have not only succeeded in inviting foreign investment, but is also stimulating domestic business as well. Mexico’s Cotemar, an oilfield services provider, is making the move to operate fields on its own, as Pemex’s decades-long production monopoly fades. Cotemar has announced plans to invest at least US$200 million in the Paso de Oro and Cuichapa onshore blocks in Veracruz state, eventually bringing them to output levels of 20,000 bpd. Originally discovered by Pemex, the fields remained unexploited due to the state firm’s chronic budget constraints, but have now had new life breathed into them.
  • The US lost another 3 rigs last week, with two gas gains offsetting a loss of five oil rigs. The losses have been taken as a sign that American production is rebalancing in the face of stubborn oil prices.

Downstream & Midstream

  • Canada’s Husky Energy is buying the 50 kb/d Superior refinery in Wisconsin from Calumet Specialty Products for US$435 million. The all-cash deal, which includes the refinery’s associated logistics assets, will increase Husky’s refining capacity to 395 kb/d as it seeks to diversify downstream away from Western Canada, as well as manage exposure to depressed global crude prices from its heavy oil sands assets. In other North American consolidation news, pipeline operator Andeavor Logistics (formerly Tesoro) has bought Western Refining Logistics for US$1.5 billion as it makes a further push into the Permian Basin.
  • Chevron has announced plans to enter Mexican downstream, planning to open its first retail station in Hermosillo in the northwest, fed by imported products. The move will be in partnership with a local network, rolling out to the states of Sonora, Sinaloa, Baja California and Baja California Sur over the rest of 2017. Glencore also clarified its plans for Mexico fuel retailing, importing fuel through a terminal in Tabasco to be distributed by 1,400 fuel stations operated by the Corporacion G500.

Natural Gas and LNG

  • Egypt is hungry for foreign gas no more. As it prepares for a domestic flood of natural gas, the Egyptian government announced that it will be reducing LNG imports from 118 to 80 cargoes for the 2017/18 financial year. Imports were originally projected at 154 cargoes for 2016/17, but was reduced to 118 as domestic production growth accelerated.


Last Week in Asian oil

Downstream & Midstream

  • Puma Energy, partially owned by Trafigura, is planning to acquire a stake in Pakistan’s Admore Gas, a fuel retailer with 471 stations in the fast-growing country. Trafigura’s entrance into Pakistan via Puma Energy will the second by a major trader, after Vitol acquired a 10% stake in Hascol Petroleum in 2015 and increased it to 25% last month. The appeal of the deal is to feed Pakistan’s rising consumption – gasoline demand more than tripled between 2010 and 2016 – and the appalling state of local refining infrastructure means most of those volumes have to be imported.
  • In a sign of how Asian refiners are overcoming OPEC’s supply freeze, Thai Oil has purchased 1 million barrels of North Sea Forties crude to replace volumes that used to come from Saudi Arabia and Abu Dhabi. It is also an indication that the build up in North Sea oil in storage may have reduced the differential between the Brent and Dubai benchmark to make Atlantic-Asia arbitrage viable, which would be an unusual occurrence.
  • A fire at PetroChina’s 410 kb/d Dalian refinery has been extinguished with no casualties. The refinery’s crude distillation units were not affected, but gasoline production may be reduced for a short time while repairs at the 1.4 mtpa catalytic cracking unit are completed.

Natural Gas & LNG

  • China is making a fresh attempt to unlock shale gas volumes in the country, hoping that growing demand will induce gas players to overcome high costs and geological complexities. The development rights for the 695 sq.km Zheng An block in Guizhou was awarded to Guizhou Industry Investment for CNY1.29 billion (US$193 million), in an auction that only attracted four local firms. Guizhou Industry Investment is an industrial conglomerate with no major gas expertise, which highlights the challenges China faces in attracting investment in its shale gas arena. China’s Ministry of Land Resources has stated that more shale gas block auctions outside of Guizhou will be take place over the next few years, while the provincial governments of Xinjiang and Sha’anxi are preparing to auction off some natural gas blocks and coal-bed methane blocks.
  • Petronas is not letting the collapse of its LNG export project in Canada deter it from making strategic investments in LNG. Indian Oil announced that Petronas is seeking a stake in its Ennore LNG import terminal in Tamil Nadu, a 5 mtpa terminal that should begin operations by 2019. Petronas has quietly built a large LNG portfolio, aided by the arrival of its FLNG unit earlier this year, and this investment would be in line with its stated objective to grow LNG sales to South Asia.
  • Cheniere has set up an office in Beijing in an attempt to clinch supply deals. This would be a first for a US LNG player, aided by an agreement in May to boost LNG trade between the two countries. Cheniere’s direct presence in China may now give it more leverage to embark on long-term deals beyond its current shorter-term contract focus.
  • Petronas is committed to lead the Block CA-2 deepwater gas development in Brunei, which would bring it and its partners Shell, ConocoPhillips, Murphy Oil and PetroleumBrunei new LNG riches. Tying together the Kelidang, Keratau, Kempas and Keratau SW discoveries, the project is in very early days, with Petronas aiming to tie it with a projected upswing in LNG prices in 2021.

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The Battle for Anadarko

At first, it seemed like a done deal. Chevron made a US$33 billion offer to take over US-based upstream independent Anadarko Petroleum. It was a 39% premium to Anadarko’s last traded price at the time and would have been the largest industry deal since Shell’s US$61 billion takeover of the BG Group in 2015. The deal would have given Chevron significant and synergistic acreage in the Permian Basin along with new potential in US midstream, as well as Anadarko’s high potential projects in Africa. Then Occidental Petroleum swooped in at the eleventh hour, making the delicious new bid and pulling the carpet out from under Chevron.

We can thank Warren Buffet for this. Occidental Petroleum, or Oxy, had previously made several quiet approaches to purchase Anadarko. These were rebuffed in favour of Chevron’s. Then Oxy’s CEO Vicki Hollub took the company jet to meet with Buffet. Playing to his reported desire to buy into shale, Hollub returned with a US$10 billion cash infusion from Buffet’s Berkshire Hathaway – which was contingent on Oxy’s successful purchase of Anadarko. Hollub also secured a US$8.8 billion commitment from France’s Total to sell off Anadarko’s African assets. With these aces, she then re-approached Anadarko with a new deal – for US$38 billion.

This could have sparked off a price war. After all, the Chevron-Anadarko deal made a lot of sense – securing premium spots in the prolific Permian, creating a 120 sq.km corridor in the sweet spot of the shale basin, the Delaware. But the risk-adverse appetite of Chevron’s CEO Michael Wirth returned, and Chevron declined to increase its offer. By bowing out of the bid, Wirth said ‘Cost and capital discipline always matters…. winning in any environment doesn’t mean winning at any cost… for the sake for doing a deal.” Chevron walks away with a termination fee of US$1 billion and the scuppered dreams of matching ExxonMobil in size.

And so Oxy was victorious, capping off a two-year pursuit by Hollub for Anadarko – which only went public after the Chevron bid. This new ‘global energy leader’ has a combined 1.3 mmb/d boe production, but instead of leveraging Anadarko’s more international spread of operations, Oxy is looking for a future that is significantly more domestic.

The Oxy-Anadarko marriage will make Occidental the undisputed top producer in the Permian Basin, the hottest of all current oil and gas hotspots. Oxy was once a more international player, under former CEO Armand Hammer, who took Occidental to Libya, Peru, Venezuela, Bolivia, the Congo and other developing markets. A downturn in the 1990s led to a refocusing of operations on the US, with Oxy being one of the first companies to research extracting shale oil. And so, as the deal was done, Anadarko’s promising projects in Africa – Area 1 and the Mozambique LNG project, as well as interest in Ghana, Algeria and South Africa – go to Total, which has plenty of synergies to exploit. The retreat back to the US makes sense; Anadarko’s 600,000 acres in the Permian are reportedly the most ‘potentially profitable’ and it also has a major presence in Gulf of Mexico deepwater. Occidental has already identified 10,000 drilling locations in Anadarko areas that are near existing Oxy operations.

While Chevron licks its wounds, it can comfort itself with the fact that it is still the largest current supermajor presence in the Permian, with output there surging 70% in 2018 y-o-y. There could be other targets for acquisitions – Pioneer Natural Resources, Concho Resources or Diamondback Energy – but Chevron’s hunger for takeover seems to have diminished. And with it, the promises of an M&A bonanza in the Permian over 2019.

The Occidental-Anadarko deal:

  • US$38 billion cash-and-stock
  • Oxy will received a US$10 billion injection from Berkshire Hathaway
  • Oxy will sell US$8.8 billion of assets in Africa to Total
  • Chevron receives a US$1 billion break-up fee
May, 23 2019
Venezuelan crude oil production falls to lowest level since January 2003

monthly venezueal crude oil production

Source: U.S. Energy Information Administration, Short-Term Energy Outlook

In April 2019, Venezuela's crude oil production averaged 830,000 barrels per day (b/d), down from 1.2 million b/d at the beginning of the year, according to EIA’s May 2019 Short-Term Energy Outlook. This average is the lowest level since January 2003, when a nationwide strike and civil unrest largely brought the operations of Venezuela's state oil company, Petróleos de Venezuela, S.A. (PdVSA), to a halt. Widespread power outages, mismanagement of the country's oil industry, and U.S. sanctions directed at Venezuela's energy sector and PdVSA have all contributed to the recent declines.

monthly venezuela crude oil rig count

Source: U.S. Energy Information Administration, based on Baker Hughes

Venezuela’s oil production has decreased significantly over the last three years. Production declines accelerated in 2018, decreasing by an average of 33,000 b/d each month in 2018, and the rate of decline increased to an average of over 135,000 b/d per month in the first quarter of 2019. The number of active oil rigs—an indicator of future oil production—also fell from nearly 70 rigs in the first quarter of 2016 to 24 rigs in the first quarter of 2019. The declines in Venezuelan crude oil production will have limited effects on the United States, as U.S. imports of Venezuelan crude oil have decreased over the last several years. EIA estimates that U.S. crude oil imports from Venezuela in 2018 averaged 505,000 b/d and were the lowest since 1989.

EIA expects Venezuela's crude oil production to continue decreasing in 2019, and declines may accelerate as sanctions-related deadlines pass. These deadlines include provisions that third-party entities using the U.S. financial system stop transactions with PdVSA by April 28 and that U.S. companies, including oil service companies, involved in the oil sector must cease operations in Venezuela by July 27. Venezuela's chronic shortage of workers across the industry and the departure of U.S. oilfield service companies, among other factors, will contribute to a further decrease in production.

Additionally, U.S. sanctions, as outlined in the January 25, 2019 Executive Order 13857, immediately banned U.S. exports of petroleum products—including unfinished oils that are blended with Venezuela's heavy crude oil for processing—to Venezuela. The Executive Order also required payments for PdVSA-owned petroleum and petroleum products to be placed into an escrow account inaccessible by the company. Preliminary weekly estimates indicate a significant decline in U.S. crude oil imports from Venezuela in February and March, as without direct access to cash payments, PdVSA had little reason to export crude oil to the United States.

India, China, and some European countries continued to receive Venezuela's crude oil, according to data published by ClipperData Inc. Venezuela is likely keeping some crude oil cargoes intended for exports in floating storageuntil it finds buyers for the cargoes.

monthly venezuela crude oil exports by destinatoin

Source: U.S. Energy Information Administration, Short-Term Energy Outlook, and Clipper Data Inc.

A series of ongoing nationwide power outages in Venezuela that began on March 7 cut electricity to the country's oil-producing areas, likely damaging the reservoirs and associated infrastructure. In the Orinoco Oil Belt area, Venezuela produces extra-heavy crude oil that requires dilution with condensate or other light oils before the oil is sent by pipeline to domestic refineries or export terminals. Venezuela’s upgraders, complex processing units that upgrade the extra-heavy crude oil to help facilitate transport, were shut down in March during the power outages.

If Venezuelan crude or upgraded oil cannot flow as a result of a lack of power to the pumping infrastructure, heavier molecules sink and form a tar-like layer in the pipelines that can hinder the flow from resuming even after the power outages are resolved. However, according to tanker tracking data, Venezuela's main export terminal at Puerto José was apparently able to load crude oil onto vessels between power outages, possibly indicating that the loaded crude oil was taken from onshore storage. For this reason, EIA estimates that Venezuela's production fell at a faster rate than its exports.

EIA forecasts that Venezuela's crude oil production will continue to fall through at least the end of 2020, reflecting further declines in crude oil production capacity. Although EIA does not publish forecasts for individual OPEC countries, it does publish total OPEC crude oil and other liquids production. Further disruptions to Venezuela's production beyond what EIA currently assumes would change this forecast.

May, 21 2019
Your Weekly Update: 13 - 17 May 2019

Market Watch

Headline crude prices for the week beginning 13 May 2019 – Brent: US$70/b; WTI: US$61/b

  • Crude oil prices are holding their ground, despite the markets showing nervousness over the escalating trade dispute between the USA and China, as well as brewing tensions in the Middle East over the Iranian situation
  • China retaliated against President Trump’s decision to raise tariffs from 10% to 25% on US$200 billion worth of Chinese imports by raising its own tariffs; crucially, China has also slapped taxes on US LNG imports at a time when American export LNG projects banking on Chinese demand are coming online
  • In the Middle East, Saudi Arabia reported that two of its oil tankers were attacked in the Persian Gulf, with the ‘sabotage attack’ near the UAE speculated to be related to Iran; with the US increasing its military presence in the area, the risk of military action has escalated
  • The non-extension of US waiver on Iranian crude is biting hard on Iran, with its leaders calling it ‘unprecedented pressure’, setting the stage for a contentious OPEC meeting in Vienna
  • In a move that is sure to be opposed by Iran, Saudi Arabia has said it is willing to meet ‘all orders’ from former Iranian buyers through June at least; Saudi Aramco is also responding to requests by Asian buyers to provide extra oil
  • The see-saw trend in US drilling activity continues; after a huge gain two weeks ago, the active US rig count declined for a second consecutive rig, with the loss of two oil rigs bringing the total site count to 988, below the equivalent number of 1,045 last year
  • There is considerably more upside to crude prices at the moment, with jitters over the health of the global economy and a delicate situation in the Middle East likely to keep Brent higher at US$71-73/b and WTI at US$62-64/b


Headlines of the week

Upstream

  • Occidental Petroleum and Warren Buffet have triumphed, as Chevron bowed out of a bidding war for Anadarko Petroleum; Occidental will now acquire Anadarko for US$57 billion, up significantly from Chevron’s US$33 billion bid
  • The deal means that Occidental’s agreement to sell Anadarko’s African assets to Total for US$8.8 billion will also go through, covering the Hassi Berkine, Ourhoud and El Merk fields in Algeria, the Jubilee and TEN fields in Ghana, the Area 1 LNG project in Mozambiuqe and E&P licences in South Africa
  • BP has sanctioned the Thunder Horse South Expansion Phase 2 deepwater project in the US Gulf of Mexico, which is expected to add 50,000 boe/d of production at the Thunder Horse platform beginning 2021
  • Africa is proving to be very fruitful for Eni, as it announced a new gas and condensate discovery offshore Ghana; the CTP-Block 4 in the Akoma prospect is estimated to hold some 550-650 bcf of gas and 18-20 mmbl of condensate
  • In an atypical development, South Africa has signed a deal for the B2 oil block in South Sudan, as part of efforts to boost output there to 350,000 b/d
  • Shell expects to drill its first deepwater well in Mexico by December 2019 after walking away with nine Mexican deepwater blocks last year

Midstream & Downstream

  • China’s domestic crude imports surged to a record 10.64 mmb/d in April, as refiners stocked up on an Iranian crude bonanza due to uncertainty over US policy, which has been confirmed as crude waivers were not renewed
  • Having had to close the Druzhba pipeline and Ust-Luga port for contaminated crude, Russia says it will fully restore compliant crude by end May shipments, including cargoes to Poland and the Czech Republic
  • Mexico’s attempt to open up its refining sector has seemingly failed, with Pemex taking over the new 340 kb/d refinery as private players balked at the US$8 billion price tag and 3-year construction deadline
  • Ahead of India’s move to Euro VI fuels in April 2020, CPCL is partially shutting down its 210 kb/d Manali refinery for a desulfurisation revamp
  • China’s Hengli Petrochemical is reportedly now stocking up on Saudi Arabian crude imports as it prepares to ramp up production at its new 400 kb/d Dalian refinery alongside its 175 kb/d site in Brunei
  • South Korea’s Lotte Chemical Corp expects its ethane cracker in Louisiana to start up by end May, adding 1 mtpa of ethylene capacity to its portfolio
  • Due to water shortage, India’s MRPL will be operating its 300 kb/d refinery in Katipalla at 50% as drought causes a severe water shortage in the area

Natural Gas/LNG

  • Partners in the US$30 billion Rovuma LNG project in Mozambique now expect to sanction FID by July, even after a recent devastating cyclone
  • Also in Mozambioque, Anadarko is set to announce FID on its Mozambique LNG project on June 18, calling it a ‘historic day’
  • After talks of a joint LNG export complex to develop gas resources in Tanzania, Shell and Equinor now appear to be planning separate projects
  • Gazprom has abandoned plans to build an LNG plant in West Siberia to compete with Novatek, focusing instead on an LNG complex is Ust-Luga
  • First LNG has begun to flow at Sempra Energy’s 13.5 mtpa Cameron LNG project in Louisiana, with exports expected to begin by Q319
May, 17 2019