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Last week in the world oil:

Prices

  • Brent crude surged to US$64/b and WTI to US$57/b as instability in Saudi Arabia – ranging from royal arrests of 11 princes, missiles launched from Yemen and a Saudi prince killed as his helicopter crashed – rattled the market. Also supporting stronger prices is Nigeria’s pledge to limit its output, despite being exempt from OPEC’s freeze due to insurgent attacks.

Upstream

  • The hits keep coming in Mexico. State oil firm Pemex announced the country’s largest onshore oil discovery in 15 years, with the Ixachi well in Veracruz estimated to have some 350 million barrels of proven, probable and possible reserves. Exploiting the light crude resource should prove straightforward, given that it is located near existing onshore drilling infrastructure.
  • Papua New Guinea’s Oil Search is expanding into (very) different territory that the equatorial island. The company has bought stakes in Alaska’s North Slope for some US$400 million, acquiring Nanushuk and surrounding fields that are estimated to contain up to 500 million barrels.
  • The acquisition of the Forties Pipeline System (FPS) by INEOS from BP has been completed, with INEOS now having complete ownership and operation of the FPS, Kinneil gas processing plant, Kinneil oil terminal, Dalmeny storage and export facility, infrastructure sites in Aberdeen and the Forties Unity Platform - a key part of the British North Sea industry.
  • Greenland will hold an oil and gas concession auction in offshore west coast areas in Davis Strait and Baffin Bay next year in a bit to get its moribund upstream exploration programme back on track. Estimates have suggested Greenland holds some 17 billion barrels of oil equivalent off its west coast, and 32 billion boe off its east coast, but accessing those reserves has been hampered by weak crude prices over the past 3 years.
  • Insurgent sabotage could be returning to Nigeria as the Niger Delta Avengers issued a ‘bloody and brutal’ warning to energy firms operating in the region, with a specific mention of Total’s Engina FPSO system.
  • The US lost another eight oil rigs last week, the largest drop since May 2016, causing the overall active American oil and gas rig count to slip below 900. Languishing in the face of recent crude price stagnation, the recent rally in WTI prices may tempt some drillers to restart sites soon.

Downstream & Midstream

  • Much like US LNG, American crude is starting to pop up in new places. PKN Orlen – Poland’s largest refiner – received its first American crude shipment last week. It adds another dimension to eastern Europe’s desire to wean itself off Russian oil and gas, as a vast majority of crude oil refined in Poland currently comes from Russia.

Natural Gas and LNG

  • Greece’s Energean has signed three new deals to sell natural gas from Israel’s offshore Karish and Tanin fields to Israeli energy firms Dorad Energy, Ashdod Energy and Ramat Negev Energy. Expected to start production in 2020, gas from the Karish and Tanin fields will be piped onshore to the customers – amounting to 6.75 bcm over 14 years for Dorad, and 2.65 bcm for Ashdod and Ramat Negev over the same period.

Last week in Asian oil

Upstream

  • As pipeline shipments from Iraq’s Kurdish region resume to Turkey, Baghdad is moving to impose federal will on Kurdistan’s oil assets. Iraq state-oil marketer SOMO is attempting to convince Turkey to see SOMO as the sole seller of Kurdish crude that arrives at Ceyhan. Currently, Turkey recognises independent exports by the Kurdish Regional Government (KRG) as well as SOMO volumes that piggyback on the pipeline.
  • As Pertamina takes over the Mahakam block from Total and Inpex on January 1, 2018, the Indonesian state oil firm announced plans to spend US$700 million to maintain production levels at the block. Production at Mahakam has been dipping recently, projected to fall to 53,000 bpd of oil and 1.43 bcf/d of gas in 2017, and even maintaining current output levels will require significant investment on Pertamina’s part.
  • SOCO International has picked up two new offshore blocks in Vietnam. The PSCs for the blocks, located in moderate-to-deepwater in the Phu Khanh Basin, north of the prodigious Cuu Long Basin, are with PetroVietnam and SOVICO Holdings, with SOCO holding 70%.

Downstream

  • South Korea’s SK Energy will be building a new US$900 million 40 kb/d desulfurisation unit at its 840 kb/d Ulsan refinery, in an attempt to boost its production of low-sulphur fuels. International sanctions on sulphur emissions in the marine section are scheduled to take effect in 2020, pushing refiners to invest in upgrade units. The new unit at Ulsan will also boost production of gasoil and naphtha through reprocessing of fuel oil.
  • It appears that Saudi Aramco’s involvement in Petronas’ RAPID refinery project is not yet set in stone. Some technical issues are holding up final agreements, which will see Aramco pump in US$7 billion into the refinery in Johor, but the Malaysian government expects things to be smoothed over soon. It is likely to, given that Aramco just bought a US$900 million stake in RAPID-associated petrochemical projects last month.
  • India’s BPCL has completed the expansion of its Kochi refinery, bringing its capacity up from 190 kb/d to 310 kb/d. A new CDU and coking unit was installed as part of the expansion, delayed from its original projected date of late-2016, with BPCL now ramping up production. The Kochi refinery is currently running at some 84% utilisation, and BPCL intends to move to full capacity over the next two years.

Natural Gas & LNG

  • As Petronas announced that it will no longer include resale destination clauses in its new Japanese LNG contracts as required by the Japan Fair Trade Commission, Osaka Gas announced plans to raise its LNG resale volumes significantly by 2020. One of the few buyers with some looser clauses, Osaka Gas has been reselling LNG since 2006 – hitting 1.1 mtpa in resales last year – and is pushing to increase that. It targets annual trading volumes of 10 mtpa, of which 3 mtpa would be from resales.

Chevron has exported its first LNG cargo from its Wheatstone project in Australia. Production at the mega-LNG facility started up in early October, with shipments targeted at markets in northeast Asia. The inaugural cargo goes to Japan’s JERA, the world’s largest buyer of LNG.

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Indonesia’s Abadi LNG Project Sees Movement

It has been 21 years since Japanese upstream firm Inpex signed on to explore the Masela block in Indonesia in 1998 and 19 years since the discovery of the giant Abadi natural gas field in 2000. In that time, Inpex’s Ichthys field in Australia was discovered, exploited and started LNG production last year, delivering its first commercial cargo just a few months ago. Meanwhile, the abundant gas in the Abadi field close to the Australia-Indonesia border has remained under the waves. Until recently, that is, when Inpex had finally reached a new deal with the Indonesian government to revive the stalled project and move ahead with a development plan.

This could have come much earlier. Much, much earlier. Inpex had submitted its first development plan for Abadi in 2010, encompassing a Floating LNG project with an initial capacity of 2.5 million tons per annum. As the size of recoverable reserves at Abadi increased, the development plan was revised upwards – tripling the planned capacity of the FLNG project to be located in the Arafura Sea to 7.5 million tons per annum. But at that point, Indonesia had just undergone a crucial election and moods had changed. In April 2016, the Indonesian government essentially told Inpex to go back to the drawing board to develop Abadi, directing them to shift from a floating processing solution to an onshore one, which would provide more employment opportunities. The onshore option had been rejected initially by Inpex in 2010, given that the nearest Indonesian land is almost 100km north of the field. But with Indonesia keen to boost activity in its upstream sector, the onshore mandate arrived firmly. And now, after 3 years of extended evaluation, Inpex has delivered its new development plan.

The new plan encompasses an onshore LNG plant with a total production capacity of 9.5 million tons per annum. With an estimated cost of US$18-20 billion, it will be the single largest investment in Indonesia and one of the largest LNG plants operated by a Japanese firm. FID is expected within 3 years, with a tentative target operational timeline of the late 2020s. LNG output will be targeted at Japan’s massive market, but also growing demand centres such as China. But Abadi will be entering into a far more crowded field that it would have if initial plans had gone ahead in 2010; with US Gulf Coast LNG producers furiously constructing at the moment and mega-LNG projects in Australia, Canada and Russia beating Abadi’s current timeline, Abadi will have a tougher fight for market share when it starts operations. The demand will be there, but the huge rise in the level of supplies will dilute potential profits.

It is a risk worth taking, at least according to Inpex and its partner Shell, which owns the remaining 35% of the Abadi gas field. But development of Abadi will be more important to Indonesia. Faced with a challenging natural gas environment – output from the Bontang, Tangguh and Badak LNG plants will soon begin their decline phase, while the huge potential of the East Natuna gas field is complicated by its composition of sour gas – Indonesia sees Abadi as a way of getting its gas ship back on track. Abadi is one of Indonesia’s few remaining large natural gas discoveries with a high potential commercialisation opportunities. The new agreement with Inpex extends the firm’s licence to operate the Masela field by 27 years to 2055 with the 150 mscf pipeline and the onshore plant expected to be completed by 2027. It might be too late by then to reverse Indonesia’s chronic natural gas and LNG production decline, but to Indonesia, at least some progress is better than none.

The Abadi LNG Project:

  • Reserves: 10 tcf of natural gas
  • Field: Estimated production of 1.2 bcf/d gas and 24,000 b/d condensate for 24 years
  • Operations: Inpex (65%), Royal Dutch Shell (35%)
  • LNG Plant: 9.5 mtpa capacity, estimated start date in 2027
June, 18 2019
Your Weekly Update: 10 - 14 June 2019

Market Watch

Headline crude prices for the week beginning 10 June 2019 – Brent: US$62/b; WTI: US$53/b

  • With US’s trade and tariff assault abating for the moment, crude oil prices have consolidated their trends to steady up as OPEC+ nations signal their desire to continue stabilising the oil market ahead of a June 25 meeting in Vienna
  • Despite some background squabbles between Russia and Saudi Arabia – with Russia at pains to emphasise its position regarding lower oil prices – the group has seemingly come together
  • Saudi Arabia has reportedly corralled the OPEC group to agreeing to extending the current supply deal to December, even Iran, but convincing Russia has been a harder task and adherence may continue to be an issue
  • Meanwhile, the US continues to tighten the screws on Venezuela and Iran, announcing sanctions on Iranian petrochemicals exports and targeting Venezuela’s trade in diluents that are used to blend heavy crude down
  • With reports that Iranian crude exports were down to an estimated 400 kb/d in May, tensions in the Persian Gulf continue with the latest incident being attacks on tankers; this risk factor will lift the floor for oil prices for now
  • After a brief rise last week, American drillers dropped 11 oil rigs but added 2 gas rigs according to Baker Hughes for a net loss of 9 active sites, bringing the total active rig count down to 975
  • As OPEC prepares to meet, the market has seemingly locked in an extension of the supply deal into projections, which will leave little room for gains; expect Brent to fall to the US$60-62/b range and WTI to trade at US$51-53/b

Headlines of the week

Upstream

  • BP is selling its stakes in its Egyptian concessions in the Gulf of Suez to Dubai-based Dragon Oil (a subsidiary of ENOC), which do not include BP’s core production assets in the West Nile Delta production area
  • Eni’s African streak continues with its fifth oil discovery in Angola’s Block 15/06 at the Agidigbo prospect, bringing total resources to 1.8 billion barrels
  • Also in Angola, ExxonMobil and its partners are looking to invest further in offshore Block 15 that will see Sonangol take a 10% interest in the PSA
  • Russia’s Lukoil has inked a deal with New Age M12 Holding to acquire a 25% interest in the offshore Marine XII licence in the Republic of Congo for US$800 million, covering the producing Nene and Litchendjili fields
  • Buoyed by recent discoveries in the Caribbean, the Dominican Republic is launching its first licensing round in July, offering 14 blocks in the onshore Cibao, Enriquillo and Azua basins and the offshore San Pedro basin
  • W&T Offshore and Kosmos Energy have struck oil in the Gladden Deep well in the US Gulf of Mexico, the first of a four-well programme that includes the Moneypenny, Oldfield and Resolution prospects with estimates of 7 mmboe

Midstream & Downstream

  • Shell is increasing storage capacity at its Pulau Bukom refinery in Singapore, adding two new crude oil tanks to increase capacity by nearly 1.3 million barrels
  • A new swathe of American sanctions against Iran is now targeting Iranian petrochemical exports, clipping a major regional revenue source for Iran
  • Angola is looking overhaul its refining sector, by attracting investment o overhaul facilities and building a new refinery in Soyo that will be the third ongoing refining project after the 200 kb/d Lobito and Cabinda plants
  • BP and Mexico’s IEnova have signed a deal allowing BP to use IEnova’s new gasoline and diesel storage and distribution facilities in Manzanillo and Guadalajara, allowing access to over 1 million barrels of storage
  • British petrochemicals firm INEOS has announced plans to invest US$2 billion in building three new petchem plants in Saudi Arabia that would form part of the wider Saudi Aramco-Total Project Amiral petrochemicals complex
  • The saga of Russia’s bankrupt 180 kb/d Antipinsky refinery continues, with SOCAR Energoresurs (a JV including Sberbank) acquiring an 80% stake in the refinery with the aim of restarting operations
  • Mexico has kicked off construction of its US$7.7 billion oil refinery, aimed to overhauling the Mexican refining industry after years of underperformance

Natural Gas/LNG

  • Toshiba is exiting the Freeport LNG project in Texas, paying Total US$815 million and handing over its 20-year liquefaction rights by March 2020
  • China’s CNOOC has officially acquired a 10% stake in the Arctic LNG 2 project by Novatek, solidifying natural gas ties between Russia and China
  • Cheniere has taken FID to add a sixth liquefaction train to its Sabine Pass export project in Lousiaina, which would add 4.5 mtpa of capacity to the plant
  • Novatek, Sinopec and Gazprombank have created a China-focused joint venture to market LNG and natural gas from Novatek’s Arctic projects in China
June, 17 2019
Upcoming OPEC Meeting: What to Expect

A month ago, crude oil prices were riding a wave, comfortably trading in the mid-US$70/b range and trending towards the US$80 mark as the oil world fretted about the expiration of US waivers on Iranian crude exports. Talk among OPEC members ahead of the crucial June 25 meeting of OPEC and its OPEC+ allies in Vienna turned to winding down its own supply deal.

That narrative has now changed. With Russian Finance Minister Anton Siluanov suggesting that there was a risk that oil prices could fall as low as US$30/b and the Saudi Arabia-Russia alliance preparing for a US$40/b oil scenario, it looks more and more likely that the production deal will be extended to the end of 2019. This was already discussed in a pre-conference meeting in April where Saudi Arabia appeared to have swayed a recalcitrant Russia into provisionally extending the deal, even if Russia itself wasn’t in adherence.

That the suggestion that oil prices were heading for a drastic drop was coming from Russia is an eye-opener. The major oil producer has been dragging its feet over meeting its commitments on the current supply deal; it was seen as capitalising on Saudi Arabia and its close allies’ pullback over February and March. That Russia eventually reached adherence in May was not through intention but accident – contamination of crude at the major Druzhba pipeline which caused a high ripple effect across European refineries surrounding the Baltic. Russia also is shielded from low crude prices due its diversified economy – the Russian budget uses US$40/b oil prices as a baseline, while Saudi Arabia needs a far higher US$85/b to balance its books. It is quite evident why Saudi Arabia has already seemingly whipped OPEC into extending the production deal beyond June. Russia has been far more reserved – perhaps worried about US crude encroaching on its market share – but Energy Minister Alexander Novak and the government is now seemingly onboard.

Part of this has to do with the macroeconomic environment. With the US extending its trade fracas with China and opening up several new fronts (with Mexico, India and Turkey, even if the Mexican tariff standoff blew over), the global economy is jittery. A recession or at least, a slowdown seems likely. And when the world economy slows down, the demand for oil slows down too. With the US pumping as much oil as it can, a return to wanton production risks oil prices crashing once again as they have done twice in the last decade. All the bluster Russia can muster fades if demand collapses – which is a zero sum game that benefits no one.

Also on the menu in Vienna is the thorny issue of Iran. Besieged by American sanctions and at odds with fellow OPEC members, Iran is crucial to any decision that will be made at the bi-annual meeting. Iranian Oil Minister Bijan Zanganeh, has stated that Iran has no intention of departing the group despite ‘being treated like an enemy (by some members)’. No names were mentioned, but the targets were evident – Iran’s bitter rival Saudi Arabia, and its sidekicks the UAE and Kuwait. Saudi King Salman bin Abulaziz has recently accused Iran of being the ‘greatest threat’ to global oil supplies after suspected Iranian-backed attacks in infrastructure in the Persian Gulf. With such tensions in the air, the Iranian issue is one that cannot be avoided in Vienna and could scupper any potential deal if politics trumps economics within the group. In the meantime, global crude prices continue to fall; OPEC and OPEC+ have to capability to change this trend, but the question is: will it happen on June 25?

Expectations at the 176th OPEC Conference

  • 25 June 2019, Vienna, Austria
  • Extension of current OPEC+ supply deal from end-June 2019 to end-December 2019
June, 12 2019