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Last Updated: October 26, 2017
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Last week in the world oil:


Prices

- There are no clear trends in crude prices, with Brent and WTI stuck in

their respective ranges of US$57/b and US$52/b. Reductions in US

drilling rates were offset by Iraqi supply disruptions, while OPEC’s hints

that the supply freeze will persist did little to move the market.


Upstream

- Mexico is planning a third auction in 2018, hiking up the pace as the

country seeks to exploit new-found private interest in its hydrocarbons in

a election year. The auction will focus on conventional onshore oil and gas

blocks, with terms to be announced early 2018 and awarded by mid-

2018. This joins the planned deepwater Gulf auction scheduled by

January 2018 and a shallow water auction in March 2018.

- BP and SOCAR will sign a new production-sharing agreement for a new

block, D-230, in the North Absheron basin of the Caspian Sea. With equal

stakes, this cements BP as the main international player in Azerbaijan,

with existing stakes in the Azer-Chirag- Guneshli and Shah Deniz fields.

- Thailand’s PTTEP is delaying the FID for the Mariana Oil Sands project in

Canada, the latest holdup in the region’s once booming oil sands sector.

There is a high likelihood that the project, 100% owned by PTTEP, may be

dropped, given the company’s recent focus on midstream and gas.

- The US active rig count dropped by 15 last week – 7 oil and 8 gas – as

drilling activity retreats against stagnant oil prices. All rig losses were

onshore, with the most declines in the Haynesville and Permian basins.


Downstream & Midstream

- Nigeria has announced that the planned 650 kb/d Dangote refinery, being

built by Africa’s richest man Aliko Dangote, will come onstream by end-

2019, which would help ease the country’s growing dependence on

imports. Envisioned as Nigeria’s own Jamnagar refinery, an operational

Dangote refinery will also ease the pressure on NNPC, which has been

struggling to find partners to help revamp its three existing refineries.


Natural Gas and LNG

- Natural gas action in the Eastern Mediterranean is heating up. With Egypt,

Israel, Greece and Cyprus already exploiting resources, Energean Oil &

Gas is backing a new player: Montenegro. Two blocks explored by the

Greek company hold an estimated 1.8 trillion cubic feet of recoverable gas

reserves, with Energean CEO Mathios Rigas saying that Montenegro is

sitting in the ‘sweet spot of untapped potential in the eastern Adriatic.’

Energean was awarded a 30-year licence for the blocks in March 2017.

- Russia’s Novatek is planning to expand the Yamal LNG by one more train.

With an additional capacity of 1 mtpa, the smaller fourth train is planned

for end-2019, with Yamal Trains 2 & 3 tracking ahead of schedule.


Corporate

- BP’s Chariman Carl-Henric Svanberg has announced his retirement after

steering the supermajor through the Deepwater Horizon disaster just

months after he assumed his position. Svanberg will remain in his

position until a successor is identified.


Last week in Asian oil


Upstream

- China will continue to be more and more dependent on imported crude,

as domestic production fell by 2.9% y-o- y to 3.78 mmb/d in September.

Low oil prices have made some marginal and ageing fields uneconomic,

exacerbating the country’s declining trend. Domestic natural gas output,

however, was up 10.7% y-o- y to 11.15 bcm, bringing YTD gas production

up by 9.1% y-o- y. With China’s private sector shying away from

developing the country’s ast shale oil and gas reserves after yeas of

limited success, the outlook is poor. Which makes recent deals like CEFC

China Energy’s US$9.1 billion investment in Rosneft more important, as it

gives China access to up to 260,000 bpd of Russian oil. China has also

apparently offered to purchase outright 5% of Saudi Aramco, potentially

circumventing the Saudi Arabian firm’s IPO ambitions.

- As Iraq’s strife with its rebel Kurdish province wanes following the

capture of Kirkuk, the country has wasted no time in making plans to

exploit the region’s large oil reserves. Iraqi Oil Minister announced plans

to collaborate with international investors to double oil production at the

northern Kirkuk fields to exceed one mmb/d. However, Iraq is unlikely to

work with Rosneft – as the Russia producer announced a deal with Iraqi

Kurdistan authorities to operate an oil export pipeline and purchase

stakes in five oil blocks for up to US$400 million. It may have lost Kirkuk,

but Iraqi Kurdistan still controls three northern provinces, and its only

outlet to export its crude is through a pipeline through Turkey, which is

under jeopardy from the recent independence referendum. The Rosneft

pipeline project, together with current Kurdish pipeline operator Kar

Group, would provide an alternative supply route… but continue to stoke

domestic tensions with the central Iraqi government.

- As Shell finalises its exit from the Iraqi upstream oil sector, Total is

gunning to fill the void left by the supermajor, which is focusing on

natural gas production in Basra. Total is reportedly aiming for the

Majnoon oilfield as well as the Nassiriya oil and gas project, both in the

south, signalling its interest to the Iraqi Oil Minister.

- Indonesia will be launching its second oil and gas licenceround for 2017

in November, despite the first auction’s deadline having been pushed

back twice. Acreage to be offered in the second round will comprise both

conventional and unconventional blocks. Delays are expected, given that

the government is still fine-tuning new upstream regulations that will

govern the gross split mechanism applicable to new E&P contracts – the

cause of the first 2017 round’s repeated postponements.


Natural Gas & LNG

- Indonesia has agreed to extend Inpex’s contract to operate the Masela

natural gas field by up to 27 years once the current contract expires in

2028. This comes after Inpex lobbied for the extension, given that

President Joko Widodo’s decision to reject a planned US$15 billion FLNG

facility in favour of an onshore facility had pushed anticipated start of

production by several years to the late 2020s. The extension – a standard

20-year extension and an additional seven years as compensation for

changing the LNG refinery development plan – was necessary assurance

for Inpex and its partner Shell to proceed with the project.

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Natural gas inventories surpass five-year average for the first time in two years

Working natural gas inventories in the Lower 48 states totaled 3,519 billion cubic feet (Bcf) for the week ending October 11, 2019, according to the U.S. Energy Information Administration’s (EIA) Weekly Natural Gas Storage Report (WNGSR). This is the first week that Lower 48 states’ working gas inventories have exceeded the previous five-year average since September 22, 2017. Weekly injections in three of the past four weeks each surpassed 100 Bcf, or about 27% more than typical injections for that time of year.

Working natural gas capacity at underground storage facilities helps market participants balance the supply and consumption of natural gas. Inventories in each of the five regions are based on varying commercial, risk management, and reliability goals.

When determining whether natural gas inventories are relatively high or low, EIA uses the average inventories for that same week in each of the previous five years. Relatively low inventories heading into winter months can put upward pressure on natural gas prices. Conversely, relatively high inventories can put downward pressure on natural gas prices.

This week’s inventory level ends a 106-week streak of lower-than-normal natural gas inventories. Natural gas inventories in the Lower 48 states entered the winter of 2017–18 lower than the previous average. Episodes of relatively cold temperatures in the winter of 2017–18—including a bomb cyclone—resulted in record withdrawals from storage, increasing the deficit to the five-year average.

In the subsequent refill season (typically April through October), sustained warmer-than-normal temperatures increased electricity demand for natural gas. Increased demand slowed natural gas storage injection activity through the summer and fall of 2018. By November 30, 2018, the deficit to the five-year average had grown to 725 Bcf. Inventories in that week were 20% lower than the previous five-year average for that time of year. Throughout the 2019 refill season, record levels of U.S. natural gas production led to relatively high injections of natural gas into storage and reduced the deficit to the previous five-year average.

The deficit was also decreased as last year’s low inventory levels are rolled into the previous five-year average. For this week in 2019, the preceding five-year average is about 124 Bcf lower than it was for the same week last year. Consequently, the gap has closed in part based on a lower five-year average.

Lower 48 natural gas inventories, difference to five-year average

Source: U.S. Energy Information Administration, Weekly Natural Gas Storage Report

The level of working natural gas inventories relative to the previous five-year average tends to be inversely correlated with natural gas prices. Front-month futures prices at the Henry Hub, the main price benchmark for natural gas in the United States, were as low as $1.67 per million British thermal units (MMBtu) in early 2016. At about that same time, natural gas inventories were 874 Bcf more than the previous five-year average.

By the winter of 2018–19, natural gas front-month futures prices reached their highest level in several years. Natural gas inventories fell to 725 Bcf less than the previous five-year average on November 30, 2018. In recent weeks, increasing the Lower 48 states’ natural gas storage levels have contributed to lower natural gas futures prices.

Lower 48 natural gas inventories and Henry Hub futures prices

Source: U.S. Energy Information Administration, Weekly Natural Gas Storage Report and front-month futures prices from New York Mercantile Exchange (NYMEX)

October, 21 2019
Your Weekly Update: 14 - 18 October 2019

Market Watch  

Headline crude prices for the week beginning 14 October 2019 – Brent: US$59/b; WTI: US$53/b

  • Crude oil prices remain stubbornly stuck in their range, despite several key issues that could potentially move the market occurring over the week
  • The sudden thawing of the icy trade relations between the US and China last week – announcing a partial trade deal where new tariffs would be halted – was a positive for the waning health of the global economy; this, however, failed to send prices any higher as previous optimism has always been dashed
  • The trade spat has already caused fears of an economic recession and tumbling global oil demand, with the IEA projecting yet another drop in the demand that has neutralised another possible ‘geopolitical premium’ on prices
  • That geopolitical premium focuses on the fragile situation in the Middle East, with risk spiking up as Iran announced that one of its tankers in the Red Sea – far away from the Persian Gulf - had been struck by missiles; an initial accusation that Saudi Arabia was behind the attack was later withdrawn
  • Meanwhile, news emerged that Nigeria had been quietly handed an increased quota under the OPEC+ supply deal, from 1.685 mmb/d to 1.774 mmb/d, in July, which would help it meet compliance under the deal
  • After more than two months of continuous declines, the US active rig count increased for the first time, but not by much; two oil rigs were added, offset by the loss of a gas rig, but a net gain of 1 to a total of 856
  • We expect prices to remain entrenched as it displays resilience against political and economic factors, with Brent hovering in the US$58-60/b area and WTI at the US$52-54/b range


Headlines of the week

Upstream

  • The US Department of the Interior will be opening up 722,000 acres of federal land along California’s central coast near Fresno, San Benito and Monterey for oil and gas leasing – the first sale in the state since 2013
  • Alongside the lease sale in California, the US will also be opening up some 78 million acres in Gulf of Mexico federal waters for sale in 2020, covering all available unleased areas not subject to Congressional moratorium
  • Santos has confirmed oil flows at the Dorado-3 well in the Bedout Basin offshore Western Australia, with some 11,1000 b/d in place
  • After having exited Norway, ExxonMobil is now reportedly looking into selling its Malaysian offshore upstream assets as part of its divestiture programme, fetching up to US$3 billion for assets including the Tapis Blend operations
  • Equinor has won a new exploration permit – WA-542-P – in the offshore Western Australia Northern Carnarvon Basin, located new the Dorado well
  • Nigeria is looking to settle a US$62 billion income-sharing dispute with international oil firms such as ExxonMobil, Shell, Chevron, Total and Eni operating in the country, with hopes of reaching a settlement
  • Barbados is looking to emulate its nearby neighbour Guyana as it gears up for its third offshore bid round that will launch in early 2020
  • Petroecuador has been forced to declare force majeure on its crude exports, as widespread protests over the removal of fuel subsidies have led to the shutdown of some oilfields
  • Abu Dhabi is looking to create a new benchmark price for Middle Eastern crude based on its Murban grade that could compete with Brent and WTI

Midstream/Downstream

  • Aruba has ended its contract with Citgo – PDVSA’s US refining arm – to operate its 209,000 b/d refinery that is currently idled; a new operator is being sought, paralleling the situation over Curacao’s Isla refinery and PDVSA
  • Poland’s crude pipeline operator expects to only be able to clear its system of contaminated Russian oil from the Druzhba incident by July 2020
  • Gunvor’s Rotterdam refinery will only be able to produce low sulfur fuel oil by March 2020, part of a larger planned overhaul of the 88,000 b/d site

Natural Gas/LNG

  • After Total’s departure, it is now the turn of CNPC to quit the South Pars Phase 11 project in Iran, leaving Iran to go ahead alone its largest natural gas project ever as the threat of US sanctions bites down
  • CNPC has taken over operation of the Chuandongbei sour gas field in China’s Sichuan basin from Chevron, and will kick of Phase 2 development soon
  • Qatar has invited ExxonMobil, Shell, Total, ConocoPhillips and some other ‘big players’ to assist in the North Field expansion that will underpin its ambitions to boost gas output to 110 million tpa from a current 77 million tpa
  • The FID on the Rovuma LNG project in Mozambique has been pushed back by a year, with first production now expected by 2025 at the earliest
  • Pakistan has cancelled a ‘huge’ 10-year tender covering 240 LNG cargoes to its second LNG terminal, turning instead to spot cargoes due to inadequate demand
  • Inpex has formally received a 35-year extension for the PSC covering the Abadi LNG project in Indonesia, extending its operation of the Masela block to 2055
October, 18 2019
Ecuador Exits OPEC

Amid ongoing political unrest, Ecuador has chosen to withdraw from OPEC in January 2020. Citing a need to boost oil revenues by being ‘honest about its ability to endure further cuts’, Ecuador is prioritising crude production and welcoming new oil investment (free from production constraints) as President Lenin Moreno pursues more market-friendly economic policies. But his decisions have caused unrest; the removal of fuel subsidies – which effectively double domestic fuel prices – have triggered an ongoing widespread protests after 40 years of low prices. To balance its fiscal books, Ecuador’s priorities have changed.

The departure is symbolic. Ecuador’s production amounts to some 540,000 b/d of crude oil. It has historically exceeded its allocated quota within the wider OPEC supply deal, but given its smaller volumes, does not have a major impact on OPEC’s total output. The divorce is also not acrimonious, with Ecuador promising to continue supporting OPEC’s efforts to stabilise the oil market where it can. 

This isn’t the first time, or the last time, that a country will quit OPEC. Ecuador itself has already done so once, withdrawing in December 1992. Back then, Quito cited fiscal problems, balking at the high membership fee – US$2 million per year – and that it needed to prioritise increasing production over output discipline. Ecuador rejoined in October 2007. Similar circumstances over supply constraints also prompted Gabon to withdraw in January 1995, returning only in July 2016. The likelihood of Ecuador returning is high, given this history, but there are also two OPEC members that have departed seemingly permanently.

The first is Indonesia, which exited OPEC in 2008 after 46 years of membership. Chronic mismanagement of its upstream resources had led Indonesia to become a net importer of crude oil since the early 2000s and therefore unable to meet its production quota. Indonesia did rejoin OPEC briefly in January 2016 after managing to (slightly) improve its crude balance, but was forced to withdraw once again in December 2016 when OPEC began requesting more comprehensive production cuts to stabilise prices. But while Indonesia may return, Qatar is likely gone permanently. Officially, Qatar exited OPEC in January 2019 after 48 years of continuous membership to focus on natural gas production, which dwarfs its crude output. Unofficially, geopolitical tensions between Qatar and Saudi Arabia – which has resulted in an ongoing blockade and boycott – contributed to the split.

The exit of Ecuador will not make much material difference to OPEC’s current goal of controlling supply to stabilise prices. With Saudi production back at full capacity – and showing the willingness to turn its taps on or off to control the market – gains in Ecuador’s crude production can be offset elsewhere. What matters is optics. The exit leaves the impression that OPEC’s power is weakening, limiting its ability to influence the market by controlling supply. There are also ongoing tensions brewing within OPEC, specifically between Iran and Saudi Arabia. The continued implosion of the Venezuelan economy is also an issue. OPEC will survive the exit of Ecuador; but if Iran or Venezuela choose to go, then it will face a full-blown existential crisis. 

Current OPEC membership:

  • Middle East: Iran, Iraq, Kuwait, Saudi Arabia, UAE
  • Africa: Algeria, Angola, Equatorial Guinea, Gabon, Libya, Nigeria, Republic of Congo
  • Latin America: Venezuela
  • Total: 13
  • Withdrawing: Ecuador (January 2020)
  • Membership under consideration: Sudan (October 2015)
October, 18 2019