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Last Updated: March 8, 2018
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Market Watch

Headline crude prices for the week beginning 5 March 2017 – Brent: US$65/b; WTI: US$62/b

  • Crude oil prices began the week on a stronger note, bouncing back from market jitters of American plans to impose steep tariffs on steel and aluminium imports to trade on indications that US crude inventories continue to fall.
  • Tanks at the important storage hub in Cushing, Oklahoma are at their lowest levels since 2014, as a booming American economy and backwardisation structure in futures trading encouraging drawdowns.
  • However, despite the fall in Cushing, overall US crude stockpiles rose more than expected – up by a preliminary estimate of 5.66 million barrels - providing some drag to the market.
  • The US is expected to become the world’s largest oil producer in 2019, overtaking Russia, with Saudi Arabia remaining the world’s largest exporter for the foreseeable future.
  • The upward march of American output remains the single largest drag on crude prices, and a key variable in determining direction, as the EIA confirmed that American production shattered a 47-year old output record last November, hitting 10.044 mmb/d.
  • OPEC commented that while it was committed to ensuring the market was rebalance by mid-2018, it warned that there was a risk of an ‘upcoming energy crisis’, sown by the current seeds of under-investment.
  • The US active oil rig count hit 800 for the first time in almost three years, gaining a single site. Along with 2 new gas rigs, the US rig count stands at 981 as of last Friday.
  • Crude price outlook: Crude prices should stay steady this week, with prices in the US$65-66/b range for Brent and US$62-63/b for WTI.

Headlines of the week

Upstream

  • The hits keep coming for ExxonMobil in Guyana, as it and partner Hess made a seventh major offshore discovery in two years in the Pacora-1 well. Development will be folded into the plans for the Payara field, which should bring Guyanese output up to a potential 500,000 bpd.
  • While Turkey squabbles with Cyprus over gas fields, Greece is hoping to make its own discoveries, sanctioning development of four blocks in the west of the country by Total, Italy’s Edison and Hellenic Petroleum.
  • Mexico will be hoping that the shale revolution can begin within its borders, as it offers up nine onshore areas in Tamaulipas state that will be awarded to private firms for the first time in September.
  • Thawing relations with China, The Philippines has identified two offshore sites – SC-57 and SC-72 at Reed Bank – which could be prototypes for proposed joint upstream activities with China.
  • Bolivia’s YPFB has reportedly signed an MoU with Dubai’s Kampac Oil and London’s Milner Capital to jointly invest US$2.5 billion to developing the Madre de Dios oil and gas basin in northern Bolivia.
  • Japan’s Inpex has been awarded a 10% interest in Abu Dhabi’s Lower Zakum concession for 40 years; separately, Inpex’s stake in the Satah and Umm al Dalkh concession has also been extended for 25 years.

Downstream

  • After years of delays, Vietnam’s second oil refinery in Nghi Son is ready for commercial startup in April, processing Kuwaiti crude. The country’s third refinery, in Long Son, also broke ground last week.
  • Total is aiming to build and operate a 150 kb/d greenfield refinery in Iraq, which would be linked to the Nassirya oilfield. Originally planned for 300 kb/d, PetroChina and Lukoil are also reportedly interested.
  • Poland’s plan to push for a merger of its two state oil refiners – PKN Orlen and Lotos – has met with intense political opposition once again.
  • Tullow Oil and its partners expects to finalise the construction of an export pipeline – linking the inland Amosing and Ngamia fields to the port of Lamu – by mid-2018, clearing the way for output to begin in 2022.

Natural Gas/LNG

  • While there has been no damage to ExxonMobil’s gas pipeline in Papua New Guinea after a 7.5 magnitude quake, it will take 8 weeks to repair and restore production at the PNG LNG plant, with ExxonMobil declaring force majeure on all exports as it continues to assess damage to gas fields.
  • Dominion Energy’s Cove Point export terminal in Maryland, USA has been cleared for commercial startup, shipping its first LNG cargo to Europe, becoming the second American LNG export facility to operate.
  • Timor Leste and Australia are on the verge of agreeing on a permanent maritime border at the Permanent Court of Arbitration, paving the way to develop the Greater Sunrise offshore gas field that had been shelved previously due to disputed oceanic borders. 
  • There may finally be some movement in the Philippines’ planned LNG import facility, as four potential investors – including Tokyo Gas and domestic power player First Gen – have reportedly expressed interest.
  • Japan’s Jera and Marubeni are reportedly teaming up with Australia’s Fortescue Metals to build a 2 mtpa LNG import terminal in New South Wales, which would help ease the east coast natural gas crunch.
  • India has begun to receive its first US LNG as Cheniere begins its 20-year contract with GAIL, supplying 3.5 mtpa of LNG per year.

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Saudi Aramco Moves Into Russia’s Backyard

International expansions for Saudi Aramco – the largest oil company in the world – are not uncommon. But up to this point, those expansions have followed a certain logic: to create entrenched demand for Saudi crude in the world’s largest consuming markets. But Saudi champion’s latest expansion move defies, or perhaps, changes that logic, as Aramco returns to Europe. And not just any part of Europe, but Eastern Europe – an area of the world dominated by Russia – as Saudi Aramco acquires downstream assets from Poland’s PKN Orlen and signs quite a significant crude supply deal. How is this important? Let us examine.

First, the deal itself and its history. As part of the current Polish government’s plan to strengthen its national ‘crown jewels’ in line with its more nationalistic stance, state energy firm PKN Orlen announced plans to purchase its fellow Polish rival (and also state-owned) Grupa Lotos. The outright purchase fell afoul of EU anti-competition rules, which meant that PKN Orlen had to divest some Lotos assets in order to win approval of the deal. Some of the Lotos assets – including 417 fuel stations – are being sold to Hungary’s MOL, which will also sign a long-term fuel supply agreement with PKN Orlen for the newly-acquired sites, while PKN Orlen will gain fuel retail assets in Hungary and Slovakia as part of the deal. But, more interestingly, PKN Orlen has chosen to sell a 30% stake in the Lotos Gdansk refinery in Poland (with a crude processing capacity of 210,000 bd) to Saudi Aramco, alongside a stake in a fuel logistic subsidiary and jet fuel joint venture supply arrangement between Lotos and BP. In return, PKN Orlen will also sign a long-term contract to purchase between 200,000-337,000 b/d of crude from Aramco, which is an addition to the current contract for 100,000 b/d of Saudi crude that already exists. At a maximum, that figure will cover more than half of Poland’s crude oil requirements, but PKN Orlen has also said that it plans to direct some of that new supply to several of its other refineries elsewhere in Lithuania and the Czech Republic.

For Saudi Aramco, this is very interesting. While Aramco has always been a presence in Europe as a major crude supplier, its expansion plans over the past decade have been focused elsewhere. In the US, where it acquired full ownership of the Motiva joint venture from Shell in 2017. In doing so, it acquired control of Port Arthur, the largest refinery in North America, and has been on a petrochemicals-focused expansion since. In Asia, where Aramco has been busy creating significant nodes for its crude – in China, in India and in Malaysia (to serve the Southeast Asia and facilitate trade). And at home, where the focus has on expanding refining and petrochemical capacity, and strengthen its natural gas position. So this expansion in Europe – a mature market with a low ceiling for growth, even in Eastern Europe, is interesting. Why Poland, and not East or southern Africa? The answer seems fairly obvious: Russia.

The current era of relatively peaceful cooperation between Saudi Arabia and Russia in the oil sphere is recent. Very recent. It was not too long ago that Saudi Arabia and Russia were locked in a crude price war, which had devastating consequences, and ultimately led to the détente through OPEC+ that presaged an unprecedented supply control deal. That was through necessity, as the world faced the far ranging impact of the Covid-19 pandemic. But remove that lens of cooperation, and Saudi Arabia and Russia are actual rivals. With the current supply easing strategy through OPEC+ gradually coming to an end, this could remove the need for the that club (by say 2H 2022). And with Russia not being part of OPEC itself – where Saudi Arabia is the kingpin – cooperation is no longer necessary once the world returns to normality.

So the Polish deal is canny. In a statement, Aramco stated that ‘the investments will widen (our) presence in the European downstream sector and further expand (our) crude imports into Poland, which aligns with PKN Orlen’s strategy of diversifying its energy supplies’. Which hints at the other geopolitical aspect in play. Europe’s major reliance on Russia for its crude and natural gas has been a minefield – see the recent price chaos in the European natural gas markets – and countries that were formally under the Soviet sphere of influence have been trying to wean themselves off reliance from a politically unpredictable neighbour. Poland’s current disillusion with EU membership (at least from the ruling party) are well-documented, but its entanglement with Russia is existential. The Cold War is not more than 30 years gone.

For Saudi Aramco, the move aligns with its desire to optimise export sales from its Red Sea-facing terminals Yanbu, Jeddah, Shuqaiq and Rabigh, which have closer access to Europe through the Suez Canal. It is for the same reason that Aramco’s trading subsidiary ATC recently signed a deal with German refiner/trader Klesch Group for a 3-year supply of 110,000 b/d crude. It would seem that Saudi Arabia is anticipating an eventual end to the OPEC+ era of cooperative and a return to rivalry. And in a rivalry, that means having to make power moves. The PKN Orlen deal is a power move, since it brings Aramco squarely in Russia’s backyard, directly displacing Russian market share. Not just in Poland, but in other markets as well. And with a geopolitical situation that is fragile – see the recent tensions about Russian military build-up at the Ukrainian borders – that plays into Aramco’s hands. European sales make up only a fraction of the daily flotilla of Saudi crude to enters international markets, but even though European consumption is in structural decline, there are still volumes required.

How will Russia react? Politically, it is on the backfoot, but its entrenched positions in Europe allows it to hold plenty of sway. European reservations about the Putin administration and climate change goals do not detract from commercial reality that Europe needs energy now. The debate of the Nord Stream 2 pipeline is proof of that. Russian crude freed up from being directed to Eastern Europe means a surplus to sell elsewhere. Which means that Russia will be looking at deals with other countries and refiners, possibly in markets with Aramco is dominant. That level of tension won’t be seen for a while – these deals takes months and years to complete – but we can certainly expect that agitation to be reflected in upcoming OPEC+ discussions. The club recently endorsed another expected 400,000 b/d of supply easing for January. Reading the tea leaves – of which the PKN Orlen is one – makes it sound like there will not be much more cooperation beyond April, once the supply deal is anticipated to end.

End of Article

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Market Outlook:

-       Crude price trading range: Brent – US$86-88/b, WTI – US$84-86/b

-       Crude oil benchmarks globally continue their gain streak for a fifth week, as the market bounces back from the lows seen in early December as the threat of the Omicron virus variant fades and signs point to tightening balances on strong consumption

-       This could set the stage for US$100/b oil by midyear – as predicted by several key analysts – as consumption rebounds ahead of summer travel and OPEC+ remains locked into its gradual consumption easing schedule 

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