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Last Updated: September 1, 2017
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Overview

Oman is the largest oil and natural gas producer in the Middle East that is not a member of the Organization of the Petroleum Exporting Countries.

Located on the Arabian Peninsula, Oman’s proximity to the Arabian Sea, Gulf of Oman, and Persian Gulf grant it access to some of the most important energy corridors in the world, enhancing Oman’s position in the global energy supply chain (Figure 1). Oman plans to capitalize on this strategic location by constructing a world-class oil refining and storage complex near Ad Duqm, Oman, which lies outside the Strait of Hormuz (an important oil transit chokepoint).

Like many countries in the Middle East, Oman is highly dependent on its hydrocarbons sector. The Oman Ministry of Finance stated that finances have been severely affected by the decline in oil prices since mid-2014. In 2016, Oman lost more than 67% of its oil and natural gas revenues compared with oil revenue the country earned in 2014, despite achieving record production.1 Oil revenue accounted for 27% of Oman’s gross domestic product (GDP) in 2016, a decrease from 34% of GDP in 2015 and 46% in 2014, according to the Central Bank of Oman.2

The ninth iteration of the Oman 5-Year Plan (2016-2020) released in 2016, created in the context of sustained low oil prices, aims to enhance the country’s economic diversification by adopting a set of sectoral objectives, policies, and mechanisms that will increase non-oil revenue. Oman’s diversification program is largely aimed at expanding industries such as fertilizer, petrochemicals, aluminum, power generation, and water desalination. Concerted efforts to develop these sectors would also accelerate non-oil job growth in coming years.3However, with rising production levels and a growing petrochemical sector–which relies on liquefied petroleum gases (LPG) and natural gas liquids (NGL)–the country is unlikely to significantly alter its dependence on hydrocarbons as a major revenue stream in the short term.

Figure 1. Map of Oman

Map of Oman

Source: Central Intelligence Agency World Factbook

Petroleum and other liquid fuels

Oman’s petroleum and other liquids production averaged more than 1 million barrels per day in 2016, its highest production level ever. Oman was on track to maintain this production level in 2017, but it reduced production to approximately 970,000 barrels per day in early 2017 to meet the production cut it agreed to, along with members of the Organization of the Petroleum Exporting Countries (OPEC).

Sector organization

The Ministry of Oil and Gas coordinates the government’s role in Oman’s hydrocarbon sectors. Final approval on policy and investment, however, rests with the Sultan of Oman. The majority state-owned Petroleum Development Oman (PDO) holds most of Oman’s oil reserves and operates the Sultanate’s largest block, Block 6. PDO is responsible for more than 70% of the country’s crude oil production.4 In addition to the government’s 60% ownership stake in PDO, Shell (34%), Total (4%), and Portugal’s Partex (2%) also own stakes.5 In addition to the PDO, the Oman Oil Company (OOC) is responsible for energy investments both inside and outside of Oman. The OOC is fully owned by the government. The Oman Oil Refineries and Petroleum Industries Company (ORPIC) is owned by the Government of the Sultanate of Oman and by the OOC. It controls the country’s refining sector and owns both of Oman’s operating refineries, Sohar and Mina al-Fahal.6

The U.S. firm, Occidental Petroleum (Oxy), is the second-largest operator after PDO and has the largest presence of any foreign firm in Oman. Oxy operates mainly in northern Oman at Block 62 and Block 9, along with the Mukhaizna field in the south. Lebanese independent, Consolidated Contractors Energy Development (CCED), operates Blocks 3 and 4 with a 50% stake alongside Sweden’s Tethys Oil (30%) and Japan’s Mitsui (20%). Daleel Petroleum is a 50:50 joint venture between Omani private firm Petrogas and Chinese state firm China National Petroleum Corporation (CNPC) and operates Block 5.

Upstream

According to the Oil & Gas Journal, Oman had 5.4 billion barrels of estimated proved oil reserves as of January 2017, ranking Oman as the 7th largest proved oil reserve holder in the Middle East and the 22nd largest in the world.7 The majority of the fields are located within PDO’s concession area.

Figure 2. Oman major oil and natural gas infrastructure

Map of Oman major oil and natural gas infrastructure

Source: U.S. Energy Information Administration, IHS EDIN

Exploration and production

Enhanced oil recovery techniques helped Oman’s oil production rebound from a multi–year decline in the early 2000s.

Oman’s petroleum and other liquids (total oil) production ranks 7th in the Middle East and ranks among the top 25 oil producers in the world. Oman is the largest oil producer in the Middle East that is not a member of the Organization of the Petroleum Exporting Countries (OPEC). Oman’s annual petroleum and other liquids production peaked at 972,000 barrels per day (b/d) in 2000, but dropped to 715,000 b/d by 2007. Oman successfully reversed that decline, and total oil production has risen, hitting a new peak of a little more than 1 million b/d in 2016 (Figure 3). Enhanced Oil Recovery (EOR) techniques helped drive this production turnaround, along with additional production gains as a result of previous discoveries.

Several recent developments could contribute to future oil production growth in Oman. The major oil discoveries of 2016 were in north Oman (Figure 2, Table 1).

Enhanced oil recovery

Oman’s ability to increase its oil and natural gas production relies heavily on innovative extraction technologies, such as EOR. Several EOR techniques are already used in Oman, including polymer, miscible, and steam injection techniques.8 Because of the relatively high cost of production in the country, Oman’s government offers incentives to international oil companies (IOCs) for exploration and development activities related to the country’s difficult-to-recover hydrocarbons. The government enlists foreign companies in new exploration and production projects, offering generous terms for developing fields that require the sophisticated technology and expertise of the private sector. Given the technical difficulties involved in oil production, the contract terms for IOCs have become more favorable in Oman than in other countries in the region, with some allowing significant equity stakes in certain projects.

Block 6, located in central and southern Oman and operated by PDO, is the center of current EOR operations, using all four of the EOR techniques with the Marmul field (polymer), Harweel field (miscible), Qarn Alam field (steam), and Amal-West field (solar). Solar EOR at Alam-West in southern Oman was the first solar EOR project in the Middle East, completed by GlassPoint Solar in 2012 and commissioned in early 2013. This project uses the production of emissions-free steam that feeds directly into current thermal EOR operations, reducing the need to use natural gas in EOR projects.9

In partnership with PDO, GlassPoint Solar is currently building the Miraah solar thermal plant to improve recovery of heavy and viscous crude oil from Amal oil field. The plant is expected to produce 1,021 megawatts (MW) of peak thermal energy in the form of 6,000 tons of solar steam each day (no electricity is produced). Construction on the project began in October 2015, with steam generation from the first glasshouse module expected in 2017.10

However, in 2016, because of relatively low crude oil prices and the resource-intensive nature of EOR, PDO announced it was placing more emphasis on accelerating conventional oil and gas opportunities instead of short-term expansion of EOR projects.11

Oman petroleum and other liquids production and consumption

Table 1: New oil discoveries, 2016ProjectFieldCompanyContingent Reserves, million barrels*ShammarLekhwairPDO40Qarn Alam-RabaQarn AlamPDO27Total  67The Society of Petroleum Engineers separates the term contingent from the term reserves. “Contingent resources are less certain than reserves. These resources are potentially recoverable but not yet considered mature enough for commercial development due to technological or business hurdles.” 
Source: Oman Ministry of Oil and GasConsumption and refining

Oman consumed 186,000 b/d of petroleum and other liquids in 2016 (Figure 4), most of which were petroleum products refined at Oman’s refineries and a small amount that was imported.

Oman is not a major refined petroleum product producer, although it has plans to expand the country’s refining and storage sectors. Oman aims to capitalize on its strategic location on the Arabian Peninsula by expanding its refining capabilities.

Oman has two refineries, Mina al Fahal and Sohar. As of early 2017, Minal al Fahal was operating at 106,000 b/d and Sohar at 116,000 b/d.12 Plans are underway to upgrade the facility at Sohar as part of the ORPIC-led Sohar Refinery Improvement Project (SRIP), scheduled for completion in 2017.13 Sohar’s capacity is expected to expand to 197,000 b/d from 116,000 b/d. In February 2017, ORPIC announced the mechanical completion of all Sohar units as part of the expansion project. A major bunkering and storage terminal near Sohar is scheduled to be completed in 2017, and the facility’s location outside the Strait of Hormuz could make it an attractive option for international crude oil shippers.14

The OOC and Kuwait Petroleum International (KPI) have signed a partnership agreement for their Ad Duqm Refinery and Petrochemical Industries Company (DRPIC) joint venture to build a 230,000 b/d export refinery in a special economic zone under development at Ad Duqm on the Arabian Sea coast of central Oman and a 200 million barrel crude oil storage terminal at Ras Markaz.15 The storage terminal, with phase one estimated to be complete in 2019, will be one of the world’s largest crude oil storage facilities.16 The Ad Duqm refinery could be operational by 2022, with most of the plant’s output to be exported.17 According to the OOC, the cost of developing the refinery will be $6 billion–$7 billion. Both Oman and Kuwait will provide crude feedstock.

Oman does not have any international oil pipelines, although plans are in place to expand the country’s domestic pipeline infrastructure. The Muscat Sohar Pipeline Project (MSPP), built by ORPIC and scheduled to be completed in 2017, is a 180-mile refined product pipeline that will connect the Mina al-Fahal and Sohar refineries with a new storage terminal near Muscat airport and reduce tanker traffic between the two coastal facilities.18 

Oman petroleum petroleum and other liquids consumption, 2016

Exports

Oman is an important oil exporter, particularly to Asian markets. In 2016, virtually all of the country’s crude oil exports went to countries in Asia, with 78% going to China.

Oman’s only export crude oil stream is the Oman blend, with an API gravity of 32, medium-light and sour (high sulfur- 1.33%) crude. Oman is an important crude oil exporter, particularly to Asian markets (Figure 5). In 2016, Oman exported 912,500 b/d of crude oil and condensate, its highest level since 1999.19

China is Oman’s largest export market, and that country received 78% of Oman’s crude oil exports in 2016, while Taiwan received the second-highest volume, despite falling by almost one-third from 2015 levels. Thailand, which had previously been a consistent purchaser of 40,000 to 50,000 b/d of Omani exports, bought only two small cargoes in 2016.20

Oman crude oil exports by destination, 2016

Natural gas

The greatest growth potential for Oman’s natural gas production is in the Khazzan-Makarem field, Block 61. The planned start–up of that field in late 2017 could significantly ease pressure on Oman’s natural gas supplies.

Sector organization

PDO has an even greater presence in the natural gas sector than it does in the oil sector, accounting for nearly all of Oman’s natural gas supply, along with smaller contributions from Occidental Petroleum, Oman’s largest independent oil producer, and Thailand’s PTTEP. The Oman Gas Company (OGC) directs the country’s natural gas transmission and distribution systems. The OGC is a joint venture between the Omani Ministry of Oil and Gas (80%) and OOC (20%). Oman Liquefied Natural Gas (Oman LNG)–owned by a consortium including the government, Shell, and Total–operates all liquefied natural gas (LNG) activities in Oman through its three liquefaction trains in Qalhat near Sur.21

Exploration and production

Oman’s potential for natural gas production growth may be substantial, supported by promising developments in several new projects.

According to the Oil & Gas Journal, Oman held 23 trillion cubic feet (Tcf) of proved natural gas reserves in 2016.22 Oman’s natural gas production grew to 1.16 Tcf in 2016, turning around a recent decline and surpassing the previous high of 1.15 Tcf in 2013. Approximately 80% of production was from non-associated fields.23

Consumption more than doubled from 2006 to 2016, increasing from 380 billion cubic feet (Bcf) in 2006 to 820 Bcf in 2016 (Figure 6). Oman consumes slightly more than 70% of the natural gas it produces. Natural gas is becoming a key source of energy to the Omani economy with its increased focus on economic diversification away from oil.24 The Central Bank of Oman estimates that demand for natural gas will continue to rise going forward with the number of energy-intensive industries coming online combined with rising demand in the electric power sector.25 The concern over rising natural gas consumption prompted the Oman LNG company to announce in 2015 that it would divert all its exported volumes of natural gas away from foreign markets and toward domestic consumers by 2024.26

The greatest growth potential for Oman’s natural gas production is in the Khazzan-Makarem field in BP’s Block 61. The field is a tight gas formation, and BP proposed two phases to develop the 10.5 Tcf of recoverable gas resources. Combined plateau production from Phases 1 and 2 is expected to total approximately 1.5 billion cubic feet per day (Bcf/d), equivalent to about 40% of Oman’s current total domestic gas production.27 This project will involve construction of a three-train central processing facility with associated gathering and export systems and drilling about 325 wells over a 15-year period.28 BP estimates that Phase 1 of the project is more than 80% complete29 and will be online by the end of 2017.30 The start-up of the Khazzan tight gas field will significantly ease the pressure on Oman’s natural gas supplies.

The Rabab Harweel integrated project (RHIP), located in Block 6, is PDO’s largest capital project underway. The project integrates sour miscible gas injection (MGI) in multiple oil reservoirs with production and pressure maintenance of a government gas condensate field, and it will also contribute to easing Oman’s overall natural gas demand. The RHIP is slated for completion in 2019.31

Oman natural gas flows and net exports, 2000-2014

Exports

Oman is a member of the Gas Exporting Countries Forum (GECF) and exports natural gas as LNG through its Oman LNG facilities near Sur, in the Gulf of Oman. In 2016, Oman exported 358 Bcf of natural gas (Figure 7).32 Nearly all of Oman’s natural gas exports go to South Korea and Japan, accounting for 80% of exports in 2016.33

Oman’s natural gas sector grew in importance over the past two decades, largely the result of two LNG trains that opened in 2000 at the LNG complex at Qalhat, near Sur, operated by Oman LNG (a joint venture between PDO and other shareholders). The third LNG train, operated by Qalhat LNG SAOC and built alongside the two existing trains, entered into production in 2005. Qalhat merged into Oman LNG in 2013. Its main shareholders are the Omani state (51%) and Shell Gas B.V (30%).

South Korea is Oman LNG’s primary buyer. Oman’s LNG exports have increasingly been under pressure as rising domestic consumption has cut into volumes available for export. LNG supplies received a boost last year with lower consumption from power stations, and these supplies will see a further boost from new production when the Khazzan gas field comes online in 2017. Khazzan volumes are primarily designated for domestic consumption, with excess volumes exported from Oman’s LNG facilities.

The Sultanate has been focused on diversifying its LNG export destinations because regional demand for LNG is growing. Oman LNG’s 2016 Annual Report reported the first-ever sales of two spot cargoes to Kuwait and Jordan as representing “new departures for our company” by exporting to new geographic destinations.34

Oman LNG exports

Imports

Oman has one international natural gas pipeline–the Dolphin Pipeline–that runs from Qatar to Oman through the United Arab Emirates (UAE). Oman is not a major importer of natural gas, although the country imported approximately 74 Bcf of natural gas in 2016 from Qatar through the Dolphin Pipeline.35 According to the Omani government, the imports through the Dolphin Pipeline are necessary to meet the rising level of domestic natural gas consumption (including re–injection in oil wells).

In March 2014, Oman signed a memorandum of understanding with Iran on a natural gas import contract. The deal will deliver approximately 353 million cubic feet of natural gas per year through a new pipeline under the Gulf of Oman, much of which is slated to be re-exported as LNG. A new route was agreed upon in February 2017 to avoid UAE waters, and Iran is expecting natural gas to begin flowing in 2020.36

Electricity

Oman’s electricity sector relies heavily on domestic natural gas to fuel electricity generation.

The Authority for Electricity Regulation Oman (AER Oman) regulates the country’s electricity and associated water sectors. Its primary functions include implementing general policy from the state, licensing, compliance, and coordination between the various ministries, organizations, and stakeholders in the sector. The Oman Power and Water Procurement Company (OPWP) is the planning body for power supplies in Oman, and the Oman Electricity Transmission Company (OETC) is in charge of the country’s transmission networks.

Oman’s electricity sector has two major networks–the Main Interconnected System (MIS) and the Salalah system. The MIS, the larger of the two, covers most of the northern area of Oman. The Dhofar Power System (DPS) covers the city of Salalah and surrounding areas in the Governorate of Dhofar in the south. Areas outside both networks get electricity from the Rural Areas Electricity Company (RAECO), primarily from diesel generators.37 The Sultanate’s power plants are almost entirely natural gas-fired, and OPWP expects peak demand from power plants connected to each of Oman’s two main power grids to rise by 6% per year through 2023.38

Oman’s electric generation more than doubled between 2006 and 2016, from 13 billion kilowatthours (kWh) to 33 billion kWh. Electricity consumption over the same period also grew at a fast rate, tripling from 10 billion kWh to 30 billion kWh.39 Oman generates electricity primarily from natural gas, although it also has some generation from diesel/distillate.

Oman is a part of the Gulf Cooperation Council’s (GCC) grid interconnection system, which allows for electricity transfers between the six connected countries (Kuwait, Saudi Arabia, Qatar, Bahrain, the United Arab Emirates, and Oman).

OPWP plans to raise electricity generating capacity by 51% from 7.77 gigawatts (GW) at the end of 2016 to 11.7GW in 2023 to meet rising demand. OPWP’s 2017 Seven-Year Plan sees peak power demand rising by 53%, from 6.52 GW in 2016 to 9.96 GW in 2023.40 Eleven firms have submitted applications to develop a 750–850 MW capacity power plant at Misfah for start-up in 2022. Misfah will be the first conventional large-scale power plant for which Oman’s Ministry of Oil and Gas will not guarantee a supply of natural gas fuel.41

Oman has a growing renewable energy sector, with several projects making progress. RAECO plans to install 90 MW of renewable capacity by 2020. UAE’s Masdar was awarded a contract to build the 50 MW wind farm at Harweel in the Dhofar region, estimated to start-up in 2017.42 In July 2015, Oman’s first commercial solar power project, with a 307 kilowatt-capacity, started generating electricity. RAECO will purchase electricity for 20 years from this plant operated by Bahwan Astonfield Solar Energy Company.43 Although Oman does not currently have a nuclear energy program, the country joined the International Atomic Energy Agency in 2009. Currently, the country has no plans to construct any nuclear generating facilities.

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EIA forecasts the U.S. will import more petroleum than it exports in 2021 and 2022

Throughout much of its history, the United States has imported more petroleum (which includes crude oil, refined petroleum products, and other liquids) than it has exported. That status changed in 2020. The U.S. Energy Information Administration’s (EIA) February 2021 Short-Term Energy Outlook (STEO) estimates that 2020 marked the first year that the United States exported more petroleum than it imported on an annual basis. However, largely because of declines in domestic crude oil production and corresponding increases in crude oil imports, EIA expects the United States to return to being a net petroleum importer on an annual basis in both 2021 and 2022.

EIA expects that increasing crude oil imports will drive the growth in net petroleum imports in 2021 and 2022 and more than offset changes in refined product net trade. EIA forecasts that net imports of crude oil will increase from its 2020 average of 2.7 million barrels per day (b/d) to 3.7 million b/d in 2021 and 4.4 million b/d in 2022.

Compared with crude oil trade, net exports of refined petroleum products did not change as much during 2020. On an annual average basis, U.S. net petroleum product exports—distillate fuel oil, hydrocarbon gas liquids, and motor gasoline, among others—averaged 3.2 million b/d in 2019 and 3.4 million b/d in 2020. EIA forecasts that net petroleum product exports will average 3.5 million b/d in 2021 and 3.9 million b/d in 2022 as global demand for petroleum products continues to increase from its recent low point in the first half of 2020.

U.S. quarterly crude oil production, net trade, and refinery runs

Source: U.S. Energy Information Administration, Short-Term Energy Outlook (STEO), February 2021

EIA expects that the United States will import more crude oil to fill the widening gap between refinery inputs of crude oil and domestic crude oil production in 2021 and 2022. U.S. crude oil production declined by an estimated 0.9 million b/d (8%) to 11.3 million b/d in 2020 because of well curtailment and a drop in drilling activity related to low crude oil prices.

EIA expects the rising price of crude oil, which started in the fourth quarter of 2020, will contribute to more U.S. crude oil production later this year. EIA forecasts monthly domestic crude oil production will reach 11.3 million b/d by the end of 2021 and 11.9 million b/d by the end of 2022. These values are increases from the most recent monthly average of 11.1 million b/d in November 2020 (based on data in EIA’s Petroleum Supply Monthly) but still lower than the previous peak of 12.9 million b/d in November 2019.

February, 18 2021
The Perfect Storm Pushes Crude Oil Prices

In the past week, crude oil prices have surged to levels last seen over a year ago. The global Brent benchmark hit US$63/b, while its American counterpart WTI crested over the US$60/b mark. The more optimistic in the market see these gains as a start of a commodity supercycle stemming from market forces pent-up over the long Covid-19 pandemic. The more cynical see it as a short-term spike from a perfect winter storm and constrained supply. So, which is it?

To get to that point, let’s examine how crude oil prices have evolved since the start of the year. On the consumption side, the market is vacillating between hopeful recovery and jittery reactions as Covid-19 outbreaks and vaccinations lent a start-stop rhythm to consumption trends. Yes, vaccination programmes were developed at lightning speed; and even plenty of bureaucratic hiccoughs have not hampered a steady rollout across the globe. In the UK, more than 20% of adults have received at least one dose of the vaccines, with the USA not too far behind. Israel has vaccinated more than 75% of its population, and most countries should be well into their own programmes by the end of March. That acceleration of vaccinations has underpinned expectations of higher oil demand, with hopes that people will begin to drive again, fly again and buy again. But those hopes have been occasionally interrupted by new Covid-19 clusters detected and, more worryingly, new mutations of the virus.

Against this hopeful demand picture, supply has been managed. Squabbling among the OPEC+ club has prevented a more aggressive approach to managing supply than kingpin Saudi Arabia would like, but OPEC+ has still managed to hold itself together to placate the market that crude spigots will remain restrained. And while the UAE has successfully shifted OPEC+ quota plan for 2021 from quarterly adjustments to monthly, Saudi Arabia stepped into the vacuum to stamp its authority with a voluntary 1 million barrels per day cut. The market was impressed.

That combination of events over January was enough to move Brent prices from the low US$50/b level to the upper US$50/b range. However, US$60/b remained seemingly out of reach. It took a heavy dusting of snow across Texas to achieve that.

Winter weather across the northern hemisphere seemed harsher than usual this year. Europe was hit by two large continent-wide storms, while the American Northeast and Pacific Northwest were buffeted with quite a few snowstorms. Temperatures in East Asia were fairly cold too, which led to strong prices for natural gas and LNG to keep the population warm. But it was a major snowstorm that swept through the southern United States – including Texas – that had the largest effect on prices. Some areas of Texas saw temperatures as low as -18 degrees Celsius, while electricity demand surged to the point where grids failed, leaving 4.3 million people without power. A national emergency was declared, with over 150 million Americans under winter storm warning conditions.

 

For the global oil complex, the effects of the storm were also direct. Some of the largest oil refineries in the world were forced to shut down due to the Arctic conditions, further disrupting power and fuel supplies. All in all, over 3 mmb/d of oil processing capacity had to be idled in the wake of the storm, including Motiva’s Port Arthur, ExxonMobil’s Baytown and Marathon’s Galveston Bay refineries. And even if the sites were still running, they would have to contend to upstream disruptions: estimates suggest that crude oil production in the prolific Permian Basin dropped by over a million barrels per day due to power outages, while several key pipelines connecting Cushing, Oklahoma to the Texas Gulf Coast were also forced to shutter.

That perfect storm was enough to send crude prices above the US$60/b level. But will it last? The damage from the Texan snowstorm has already begun to abate, and even then crude prices did not seem to have the appetite to push higher than US$63/b for Brent and US$60/b for WTI.

Instead, the key development that should determine the future range for crude prices going into the second quarter of 2021 will be in early March, when the OPEC+ club meets once again to decide the level of its supply quotas for April and perhaps beyond. The conundrum facing the various factions within the club is this: at US$60/b, crude oil prices are not low enough to scare all members in voting for unanimous stricter quotas and also not high enough to rescind controlled supply. Instead, prices are at a fragile level where arguments can be made both ways. Russia is already claiming that global oil markets are ‘balanced’, while Saudi Arabia is emphasising the need for caution in public messaging ahead of the meeting. Saudi Arabia’s voluntary supply cut will also expire in March, setting up the stage for yet another fractious meeting. If a snow overrun Texans was a perfect storm to push crude prices to a 13-month high, then the upcoming OPEC+ meeting faces another perfect storm that could negate confidence. Which will it be? The answer lies on the other side of the storm.

Market Outlook:

  • Crude price trading range: Brent – US$58-61/b, WTI – US$60-63/b
  • Better longer-term prospects for fuels demand over 2021 and a severe winter storm in the southern United States that idled many upstream and downstream facilities sent global crude oil prices to their highest levels since January 2021
  • Falling levels at key oil storage locations worldwide are also contributing to the crude rally, with crude inventories in Cushing falling to a six-month low and reports of drained storage tanks in the US Gulf Coast, the Caribbean and East Asia
February, 17 2021
The State of Industry: Q4 2020 Financials – A Fragile Recovery

Much like the year itself, the final quarter of 2020 proved to be full of shocks and surprises… at least in terms of financial results from oil and gas giants. With crude oil prices recovering on the back of a concerted effort by OPEC+ to keep a lid on supply, even at the detriment of their market share, the fourth quarter of 2020 was supposed to be smooth sailing. The tailwind of stronger crude and commodity prices, alongside gradual demand recovery, was expected to have smoothen out the revenue and profit curves for the supermajors.

That didn’t happen.

Instead, losses were declared where they were not expected. And where profits were to be had, they were meagre in volume. And crucially, a deeper dive into the financial results revealed worrying trends in the cash flow of several supermajors, calling into question the ability of these giants to continue on their capital expenditure and dividend plans, and the risks of resorting to debt financing in order to appease investors and yet also continue expanding.

Let’s start with the least surprising result of all. For months, ExxonMobil had been signalling that it would be taking a massive writedown on its upstream assets in Q4 2020, which could lead to a net loss for the quarter and the year. Unlike its peers, ExxonMobil had resisted making writedowns on the value of its crude-producing assets earlier in 2020. At the time, it stated that it had already built caution in the value assessments of those assets, reflecting ‘fair value’; not so long after that bold statement, ExxonMobil has been forced to backtrack and make a US$20.2 billion downward adjustment. Unusually, that meant that non-cash impairments aside, ExxonMobil actually eked out a tiny profit of US$110 million for the quarter on the strength of margins in the chemicals segment, but a full year loss of US$22.4 billion: the first ever annual loss since Exxon and Mobil merged in 1998. This was better than expected by Wall Street analysts, who would also be cheering the formation of ExxonMobil Low Carbon Solutions, in which the group would pump some US$3 billion through 2025 to reduce its greenhouse gas emissions by 20% from 2016 levels. That acknowledgement of a carbon neutral future is still far less ambitious than its European counterparts, but is a clear sign that ExxonMobil is starting to take the climate change element of its business more seriously.

If ExxonMobil managed to surprise in a good way, then its closest American rival did the opposite. Chevron had been outperforming ExxonMobil in quarterly results for a while now, but in Q4 2020 retreated with a net loss of US$665 million. That was narrower than the US$6.6 billion loss declared in Q4 2019, but still a shock since analysts were expecting a narrow profit. Calling 2020 ‘a year like no other’, the headwinds facing Chevron in Q4 2020 were the same facing all majors and supermajors, despite gains in crude prices, refining margins and fuel sales were still soft. Chevron’s cash flow was also a concern – as was ExxonMobil’s – which prompted chatter that the two direct descendants of JD Rockefeller’s Standard Oil were considering a merger. If so, then there is at least alignment on the climate topic: Chevron is also following the trail blazed by European supermajors in embracing a carbon neutral future, with CEO Michael Wirth conceding that Chevron may ‘not be an oil-first company in 2040’.

On the European side of the pond, that same theme of lowered downstream performance dragging down overall performance continued. But unlike the US supermajors, the likes of Shell, BP and Total were somewhat insulated from the Covid-19 blows at the peak of the pandemic as their opportunistic trading divisions capitalised on the wild swings in crude and fuel prices. That factor is now absent, with crude prices taking on a steady upward curve. That’s good for the rest of their businesses, but bad for trading, which thrives on uncertainty and volatility. And so BP reported a Q4 net profit of US$115 million, Shell followed with a Q4 net profit of US$393 million and Total closed out the earning season with industry-beating Q4 net profit of US$1.3 billion, above market expectations.

The softness of the financials hasn’t stopped dividend payouts, but has also been used by Europe’s Big Oil to set the tone for the next few decades of their existence. Total and BP paid a hefty premium to secure rights to build the next generation of UK wind farms; Total joined the Maersk-McKinney Moller Center for Zero Carbon Shipping to develop carbon neutral shipping solutions and splashed out on acquiring 2.2 GW of solar power projects in Texas; BP signed a strategic collaboration agreement with Russia’s Rosneft to develop new low carbon solutions; and aircraft carrier KLM took off with the first flight powered by synthetic kerosene that was developed by Shell through carbon dioxide, water and renewables. That’s a lot of a groundwork laid for the future where these giants can be carbon neutral by 2050.

The message from Q4 seems clear. Big Oil has barely begun its recovery from the Covid-19 maelstrom, and the road to a new normal remains long and painful. But this is also an opportunity to pivot; to set a new destination that is no longer business-as-usual, but embraces zero carbon ambitions. Even the American supermajors are slowly coming around, while the European continues to lead. Will majors in Asia, Latin America and Africa/Middle East follow? Let’s see what that attitude will bring over this new decade.

Market Outlook:

  • Crude price trading range: Brent – US$60-62/b, WTI – US$57-59/b
  • The Brent crude benchmark rose above US$60/b level for the first time in over a year, as the demand outlook for fuels improves with the accelerating rollout of Covid-19 vaccines and tight stockpiles brush off worries of oversupply
  • On the latter, the IEA estimated that global stockpiles of crude and fuels in onshore and floating storage has shrunk by 300 million barrels since OPEC+ first embarked on its deep production controls in May; in China, stockpiles are at their lowest level over a 12-month period, with US crude stockpiles also fell by 1 million barrels
  • Despite a tenuous alliance, OPEC+ has continuously reassured the market that it will work to clear the massive oil surplus created by the pandemic-induced demand slump, signalling that despite its internal differences, a repeat of last March’s surprise price war is not on the cards

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February, 10 2021