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Last Updated: November 3, 2017
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Last week in the world oil:

Prices

  • As signs points to OPEC and Russia extending their production cuts beyond March 2018, crude oil prices surged to their highest level since July 2015, with Brent hitting, and staying above, US$60/b. WTI remains strong as well, as American crude exports hit an all-time high.

Upstream

  • Brazil has allowed private companies to operate pre-salt acreage for the first time, handing out eight offshore blocks to international supermajors and their partners. Previously, Petrobras was required to participate in all pre-salt blocks, but reforms have allowed private companies to lead searches. Shell walked away with three blocks, BP two and ExxonMobil one, with two more blocks yet to be awarded.
  • With the situation in Kirkuk now largely settled, Iraq’s North Oil Co is now working with the Kurdish Kar Group to resume production at two oil fields. Lying within disputed areas, the Bai Hassan and Avana oil fields halted production during the Baghdad-led offensive to retake Kirkuk from Kurdish troops. This could restore some 275,000 barrels of production, which might dent OPEC’s current efforts to bolster crude prices.
  • Canada’s Suncor reports that it was making progress in resolving a dispute with Total over their joint venture Fort Hills oil sands project in Alberta. Total has refused to provide more funding for Fort Hills, the last of the major oil sands projects to be developed, and resolving the dispute paves the way for the 190 kb/d project to start up in Q418.
  • The US lost another four active rigs last week, with a lone oil addition outweighed by the loss of five gas rigs. Rigs have been on a declining trend, but with crude prices rising, some additions are expected.

Downstream & Midstream

  • The US Commerce Department confirmed that it would be moving ahead with anti-dumping duties on biodiesel imports from Argentina and Indonesia, recommending import taxes of up to 70.05% for Argentina and 50.71% for Indonesia. Argentina has already indicated that it is opening up negotiation channels to suspend the duties in favour of a mutual deal.

Natural Gas and LNG

  • More delays are expected at Algeria’s southern Touat gas field, with startup delayed until Q118. Sonatrach reports that only 3 of 21 wells are ready to come online, hampering the country’s goal to boost annual gas production to 95 bcm, of which more than half is targeted as exports.
  • As it prepares for startup of commercial deliveries, Russia’s Yamal LNG project announced that its debut cargo would be sent to China as a ‘symbolic point’. CNPC bought a 20% stake in the project last year, putting it back on track after US sanctions. Novatek has also signed an MoU with China Development Bank to develop the Arctic LNG 2 project – which will develop the Utrenneye field on the Gydan Peninsula in West Siberia.
  • Dominion’s Cove Point LNG terminal on the US East Coast is expected to start production next month, becoming the second official American LNG exporter after Cheniere. The Maryland terminal has long-term supply agreements with India’s GAIL and a joint venture between Sumitomo and Tokyo Gas, which will leave little room for spot cargo sales.

Last week in Asian oil

Upstream

  • Singapore’s KrisEnergy will be moving ahead with Phase 1A of the Apsara oil field in Cambodia, signing off on the FID last week. The offshore field in the Gulf of Thailand will be Cambodia’s first oil-producing asset, with KrisEnergy planning a single, unmanned facility with processing capacity for 30,000 b/d of fluids. KrisEnergy holds a 95% stake in Block A, with the Cambodian government holding the remaining 5%.

Downstream

  • As India continues to vastly expand energy capacity, Kuwait’s Al Arfaj Group has announced plans to build a 600 kb/d oil refinery in the coastal state of Andra Pradesh. An MoU has been signed with Andhra Pradesh’s Economic Development Board, which will also include a petrochemical complex. A mega 10 mtpa LNG terminal is also being planned within the same energy complex. A timeline has not yet been announced, but the scale of the project suggests a provisional startup date beyond 2022.
  • India’s HPCL-Mittal is planning to start its naphtha cracker in 2021, part of a US$3 billion plan to set up a petrochemical complex at the joint venture’s refinery in Bhatinda, Punjab. HPCL and Mittal Energy Investments each own 49% in the project, with capacity at the refinery recently raised by 28% to 230 kb/d. The cracker will have an initial capacity of 1.2 mtpa, and is planned to absorb all naphtha output from the refinery, halting further naphtha exports.

Natural Gas & LNG

  • In an unusual reversal, Chevron has decided to stay in Bangladesh. The US supermajor had originally planned to sell its three subsidiaries to China’s Himalaya Energy and exit natural gas production in Bangladesh, prompting state energy firm PetroBangla to demand the gas blocks be handed over to it. No reason was given for the reversal, and instead Chevron has pledged to invest some US$400 million in Bibiyana, Bangladesh’s largest gas field, and will remain the country’s largest gas producer, at some 58% of domestic output.
  • In an echo of its oil industry, Pertamina now projects that Indonesia will become a net importer of LNG in 2020. This will expand to a deficit of 4 billion bcf/d by 2030, as population increases and industrial expansion boost gas demand, particularly in Java, where most of the population resides. Efforts to introduce flexibility and more investor-friendly terms for upstream production have failed to boost upstream oil and gas production; Indonesia became a net importer of oil in 2008, forcing it to leave OPEC, and that has now spread to gas – see the protracted development of East Natuna and Masela-Abadi LNG projects. The key point that scuppers many potential deals is Indonesia’s DMO (Domestic Market Obligation) that channels oil and gas output to domestic use, but is generally set at levels that dissuade international investors.
  • Petronas has signed a new LNG supply agreement with JERA, the fuel purchasing joint venture between Tokyo Electric Power and Chubu Electric Power. But instead of the previous 15-year contract, which expires next year, JERA has opted for a three-year contract for 2.5 mtpa, foretelling the advent of shorter and smaller contracts. This is the first LNG contract signed by JERA since the Japan Free Trade Commission ruled destination clauses to be anti-competitive in July this year.

State energy firm Indian Oil announced plans to develop 13.5 mtpa of LNG import capacity by 2021, in line with the government’s goal of raising natural gas share in the national energy mix to 15%, from a current 6.5%. IndianOil currently imports LNG through the Petronet LNG Dahej terminal in western Gujarat, and has plans to build its own regasification facility and invest in others.

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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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