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Last Updated: February 13, 2018
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Oil investors rattled by the threat of U.S. output can find some cheer from diesel demand in Asia.


Strong consumption of the fuel -- used to power everything from trucks to ships and factories -- underpinned crude’s bull run last year, a rally that’s now being threatened by surging American production. Still, while the risk of a crude glut looms, refineries being shut for spring-season maintenance is set to squeeze diesel supplies in the Asian market at a time when demand is being boosted by healthy economic growth.

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U.S. natural gas exports to Mexico set to rise with completion of the Wahalajara system

Exports of natural gas to Mexico by pipeline are the largest component of U.S. natural gas trade, accounting for 40% of all U.S. gross natural gas exports in 2019. EIA expects these exports to increase with the completion of the southern-most segment of the Wahalajara system, the Villa de Reyes-Aguascalientes-Guadalajara (VAG) pipeline. VAG began operations in June 2020, connecting new demand markets in Mexico to U.S. natural gas pipeline exports.

The Wahalajara system is a group of new pipelines that connects the Waha hub in western Texas, a major supply hub for Permian Basin natural gas producers, to Guadalajara and other population centers in west-central Mexico. The Wahalajara system provides U.S. natural gas to meet growing demand from Mexico’s electric power and industrial sectors. With the 0.89 billion cubic feet per day (Bcf/d) VAG pipeline entering service, EIA expects utilization of the Wahalajara system to quickly ramp up, resulting in increased U.S. natural gas exports to Mexico out of western Texas and additional takeaway capacity out of the Permian Basin.

Since 2016, Mexico has been expanding its natural gas pipeline system, which has supported continual growth in U.S. natural gas exports. Most of this growth has been in U.S. natural gas exports from southern Texas after the existing U.S. pipeline infrastructure was expanded and the Los Ramones Phase II pipeline in central Mexico was completed.

Since the Sur de Texas-Tuxpan pipeline was completed in September 2019, U.S. natural gas exports to Mexico reached a record 5.5 Bcf/d in October 2019. U.S. natural gas exports from the border at Brownsville, Texas, to the southeastern state of Veracruz in Mexico averaged 0.6 Bcf/d during the last quarter of 2019, or about 20% of the pipeline’s capacity.

Overall, U.S. natural gas exports from this region have only increased by 0.2 Bcf/d from 2016 to 2019 because of delays in pipeline construction in Mexico. In particular, two regional pipelines were completed in 2017 but have not been used near their capacity:

  • The 1.1 Bcf/d Comanche Trail pipeline, which delivers natural gas to Mexico from San Elizaro, Texas
  • The 1.4 Bcf/d Trans-Pecos pipeline, which crosses the border at Presidio, Texas 

U.S. monthly natural gas exports to Mexico by region

Source: U.S. Energy Information Administration, Natural Gas Monthly

The Comanche Trail pipeline has been delivering an average of 0.1 Bcf/d of natural gas to Mexico since the San Isidro-Samalayuca pipeline entered service in June 2017. Pipeline operators do not expect flows to rise until the 0.47 Bcf/d Samalayuca-Sásabe pipeline is completed in either late 2020 or early 2021 in Mexico.

The Trans-Pecos pipeline, the U.S. segment of the Wahalajara system, did not transport significant volumes of natural gas until October 2018; it is currently only operating at 10% to 15% of its total capacity. Most of the demand centers are in southern Mexico, waiting to be connected to the VAG pipeline. Three of the project’s four pipelines in Mexico that are currently in-service include

  • Ojinga-El Encino: 1.4 Bcf/d, entered service in June 2017
  • El Encino-La Laguna: 1.5 Bcf/d, entered service in January 2018
  • La Laguna-Aguascalientes: 1.2 Bcf/d, entered service in December 2019

Before the economic impacts and uncertainty associated with COVID-19 mitigation efforts and declining crude oil prices, S&P Global Platts expected U.S. natural gas exports to Mexico to increase immediately by 0.3 Bcf/d to 0.4 Bcf/d on the Wahalajara system. However, given the decreased demand for natural gas in Mexico in response to the economic impact of COVID-19 mitigation efforts, growth is likely to be slower than expected. Beyond these volumes, additional export volumes will be limited by how quickly customers in Mexico can be connected to the pipeline system.

These connections include new natural gas-fired combined-cycle generators and the scheduled 2020 completion of the 0.89 Bcf/d Tula-Villa de Reyes pipeline, which will deliver natural gas to central Mexico. Deliveries from the Wahalajara network are likely to partially displace higher-cost liquefied natural gas (LNG) imports into Mexico’s Manzanillo terminal, which serves markets in Guadalajara and Mexico City.

As U.S. natural gas exports on the Wahalajara system rise and crude oil prices remain low, EIA expects the price at the Waha hub in the Permian Basin, which had been steeply discounted to the Henry Hub national benchmark, to continue to strengthen.

July, 07 2020
The Oil World’s Ongoing Impairments

Officially, we are past the half point of 2020 and with that the end of the second quarter. And what a quarter it has been. WTI prices plunged into negative territory (as low as -US$37/b) then recovered to US$40/b as OPEC+ moved from infighting to coordinating the largest crude production cut in history. In between, the Covid-19 pandemic wreaked havoc with the global economy, setting off a chain reaction within the oil world whose full impact is still unknown.

Opinions on a post-Covid oil world are divided. Some voices, the more optimistic ones, think that oil demand could recover to pre-Covid levels within a year or two. The more pessimistic ones think that this will never happen, that Covid-19 has hastened the trend away from fossil fuels to sustainable energy against the backdrop of climate change. Either way, this has thrown a spanner in the works of the giant, multi-billion oil and gas projects that were announced over the past two years as the energy world began to wake up from its post-2015 price crash investment hibernation. Those projects were made at a time when oil prices were at US$50-60/b. Since oil prices are now only at US$40/b, the current value and the future worth of these assets have now declined. Energy companies account for this by adjusting the value of their portfolios in accordance to the projected value of crude: an upward adjustment is known as a revaluation, and a negative one is known as an impairment.

This is a term that will crop up many times over 2020, as energy companies close their quarterly financial books and report their results to shareholders. The plunge in crude oil prices and the uncertain outlook for oil demand means that publicly-traded companies must account for this to their shareholders. Chevron was the first supermajor to book an impairment, in late 2019 when it took a US$10 billion hit to its oil and gas assets. It wasn’t the only one: firms all across the oil chain also reduced the value of their assets, from Repsol to Equinor.

Further impairments were made in April 2020 when the Q1 financial results were announced, mainly in response to the triggering of the OPEC+ price war (which saw crude prices halve from US$60/b to US$30/b) and the Covid-19 pandemic accelerating to a point where over half of the world’s population went into lockdown. But the major impact will come in Q2 2020, when the roil in the oil markets truly began to boil uncontrollably. BP has announced that it may take up to a US$17.5 billion impairment in its Q2 2020 financial results, while Shell has just admitted that it may have to shave US$22 billion from its asset value.

This has roots not just in the depressed demand for energy due to Covid-19, but also the ongoing conversation on climate change. Almost all supermajors have announced intentions to become carbon neutral by the 2050 timeframe. That may be good news for the planet, but it is bad news for the companies’ portfolio. Put simply, it means that some of the assets that they have invested billions in are now not only worth a lot less (due to Covid-19) but they may in fact be worth nothing at all, because climate change considerations mean that they will never be exploited. Challenging projects such as Total’s deepwater Brulpadda discovery in turbulent South African waters or Pertamina/ExxonMobil/Total/PTTEP’s beleaguered and complicated East Natuna sour gas asset in Indonesia may never be commercialised, either because of uneconomic prices or because they run counter to the goal of becoming carbon neutral. The Financial Times estimates that the amount of unviable or stranded hydrocarbon assets could reach as much as US$900 billion; that figure is pre-Covid, and could now become even higher.

There is one supermajor bucking the trend though. The biggest supermajor of all, in fact. Unlike its peers, ExxonMobil has not yet succumbed to impairments. If fact, it has not announced any negative revaluations at all over the past decade, even during the 2015 oil price crash. ExxonMobil claims that this is because it books the value of new assets ‘very conservatively’ and does not ‘adjust values to short-term price trends’, but critics say that it has an ongoing history of vastly overestimating its assets’ value. Along with Chevron, ExxonMobil does not disclose price assumptions in its financials. But unlike Chevron, ExxonMobil has not yielded to climate change through an official emissions target or asset revaluations.

On paper, that will make ExxonMobil look better than its supermajor brothers. But behind the scenes, this reluctance to admit that the future is less rosy than expected could be trouble waiting to be unleashed. Impairments are a necessary reality check: an admission by a company that things have changed and it is starting to adapt. Most have accepted that reality. ExxonMobil seems to be resisting. But even it is not immune. In pre-Q2 2020 results guidance that was just announced, ExxonMobil admitted that it expects to take a hit of some US$3.1 billion and slump to a second straight quarterly loss. In terms of Covid-19 impairments, that’s small. But it is, at least, a start.

Market Outlook:

  • Crude price trading range: Brent – US$40-44/b, WTI – US$38-42/b
  • A swathe of positive economic data is supporting oil prices within its current range, with US light crude settling above US$40/b for the first time in four months
  • The relaxation of Covid-19 restrictions has led to improvements in most economic indicators, but the risk of the situation reversing is also higher, given the accelerating cases being reported in part of the USA, South America and India
  • On the supply side, OPEC+ is making adherence a priority, with lagging members now bucking up and swing producer Saudi Arabia also keeping its promises by throttling crude exports in June to some 5.7 mmb/d

End of Article

In this time of COVID-19, we have had to relook at the way we approach workplace learning. We understand that businesses can’t afford to push the pause button on capability building, as employee safety comes in first and mistakes can be very costly. That’s why we have put together a series of Virtual Instructor Led Training or VILT to ensure that there is no disruption to your workplace learning and progression.

Find courses available for Virtual Instructor Led Training through latest video conferencing technology.


July, 04 2020
Changing Investment Winds In The Middle East

The sale of a mere 5% stake in the oil world’s crown jewel, Saudi Aramco had captured the attention of the entire investment community last year. Pushing through after years of debate and delays, the sale on the Tadawul stock exchange valued Aramco at a whopping initial US$1.6 trillion. Investors were mainly connected Saudi individuals and wealthy families, with international buy-in limited as a planned parallel listing on the London or New York Stock Exchange fell through. Still, the deal was enough to unleash several thousand pages of speculation and opinion over potential liberalisation of the oil and gas complex in the Middle East, especially the upcoming post-oil and carbon-neutral environment.

Aramco may have captured all the main headlines, especially with its huge acquisition of fellow Saudi jewel SABIC but the true entity pushing the boundaries of privatisation and deregulation in the Middle East is elsewhere. Specifically, just east of Saudi Arabia, in Abu Dhabi – the largest and most influential of the seven emirates that make up the UAE.

The latest headline involving ADNOC, Abu Dhabi’s state oil firm, hasn’t really made the rounds beyond the industry’s eyes but it is crucial to understanding how the Middle East oil sector could adapt to the changing industry over the next few decades. Partnering with a consortium of six investors, ADNOC has sold a 49% stake in its ADNOC Gas Pipeline Assets subsidiary, retaining a 51% majority stake and control. The sale had been bandied around for over a year, seen as a sign of a gradual opening of a tightly controlled oil and gas region, and follows three other significant sales involving ADNOC. The first was in 2017, when ADNOC raised nearly a billion US dollars through an IPO of its fuels distribution unit on the Abu Dhabi Securities Exchange, offering up 10% of its shares. Then late 2019, ADNOC partnered with Italy’s Eni and Austria’s OMV to nearly double oil refining capacity in Abu Dhabi to 1.5 mmb/d – the largest foreign participation in the Middle East downstream industry since the Shell Pearl GTL project in Qatar and Total’s Jubail refining and petrochemicals push over a decade ago. Around the same time, ADNOC also pocketed US$4 billion from US investment giants BlackRock and KKR through the sale of a 40% stake in its ADNOC Oil Pipelines subsidiary. And now it is the turn of ADNOC’s gas pipelines.

The chronology and regional aspect of ADNOC’s moves is interesting. While Aramco looks local, Abu Dhabi went abroad. The refining expansion involved established oil market players, Eni and OMV – and parallels a gradual unbundling of Abu Dhabi’s upstream concessions, where stakes have been offered to Total, PetroChina, Eni, Cepsa and India’s ONGC over the past five years. But the choice of new investors are now not from the industry. After the deep-pocketed BlackRock and KKR, ADNOC has once against turned to institutional investors for its latest, and largest, sale, with the US$20.7 billion gas pipeline and infrastructure deal going to a consortium consisting of Global Infrastructure Partners (GIP), Brookfield Asset Management, Ontario Teacher’s Pension Plan Board, Singapore’s GIC sovereign wealth fund, NH Investment and Securities and Italy’s infrastructure operator SNAM. ADNOC called the deal a ‘landmark investment (that) signals continued strong interest in ADNOC’s low-risk, income-generating assets’. But it also illustrates two other points: institutional interest in strategic Middle East assets and the challenging environment within the industry because of Covid-19 that has led investment interest expanding to new capital that is currently reluctant to make risky bets in an unstable economic environment. So the choice of ADNOC’s safe assets and a captive domestic market is rather attractive.

ADNOC’s strategy differs from Aramco’s fundamentally. Where Aramco sold a stake of itself, ADNOC has parcelled out different parts of itself while keeping control of the main body intact. This is what Malaysia’s Petronas has done to a great degree of success, listing subsidiaries through IPOs and partnering with foreign investors on upstream/downstream projects, using the proceeds to finance a global expansion that now stretches across all continents. Replicating this strategy, as ADNOC looks to be doing, could pay dividends, particularly since ADNOC has a wider domestic base, as well as stronger export markets, than Petronas. Between Saudi Aramco and ADNOC, the OPEC duo seems to have kickstarted a liberalisation drive within the Middle East energy complex. Kuwait Petroleum and Bahrain’s BAPCO are already reported to be considering similar moves. Which model could this second wave follow: Aramco’s or ADNOC’s? Aramco’s is a shock-and-awe move, a potential wow factor at the size of any possible deal. But ADNOC’s more piecemeal approach could actually be far more stable and sustainable over time.

Market Outlook:

  • Crude price trading range: Brent – US$39-42/b, WTI – US$37-40/b
  • Signs that the oil demand recovery has been better-than-expected as economies re-open have been tempered by fears that a resurgence of Covid-19 infections is on the horizon
  • The US recorded its highest single-day case number this week, while Europe recorded its first increase in a month and cases in Latin America and India are accelerating, prompting fears that a second round of lockdowns was necessary
  • Economies will have more time to prepare for a second round of lockdowns, but the disruption will still snuff out any current nascent improvement in demand
  • This will weigh heavily on OPEC, as it now has to consider another extension beyond the end of July, although compliance has improved among the OPEC+ club as Iraq, Kazakhstan, Nigeria, Angola, Gabon and Brunei all submitted new output schedules

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End of Article

In this time of COVID-19, we have had to relook at the way we approach workplace learning. We understand that businesses can’t afford to push the pause button on capability building, as employee safety comes in first and mistakes can be very costly. That’s why we have put together a series of Virtual Instructor Led Training or VILT to ensure that there is no disruption to your workplace learning and progression.

Find courses available for Virtual Instructor Led Training through latest video conferencing technology.


June, 26 2020