The first quarter of 2018 has proven to be a continuation of an upswing that settled in over 2017, at least according to the financial results of the supermajors. Aggressive cost-cutting from the past paired with a consistent rise in crude prices over the first quarter has contributed to revenue and net profit gains across the board.
In London, BP announced its highest profits in years, with net profits jumping to US$2.59 billion, even as the company continues to be burdened by payments over the Deepwater Horizon catastrophe from 2010. But investors still reacted well to the numbers, with BP’s share price reaching its highest levels since 2010 and it named a new chairman – Statoil’s Helge Lund – who will be tasked to continue this streak of growth. Fellow European supermajor Total continued its winning streak, beating expectations in both revenue and net profits, as did Shell, where net profits jumped 42% to US$5.32 billion. In fact, Shell has beaten the industry’s behemoth – ExxonMobil – in net profits for the past three quarters. ExxonMobil missed analyst expectations narrowly once again in the first quarter, although its US$4.7 billion net profit is nothing to be sniffed at. Yet, ExxonMobil shares remain on the downswing, with industry perception that new CEO Darren Woods have overseen a recovery that remains weaker than Shell’s and even Chevron’s.
The rise continues across the rest of the industry. Profits at Schlumberger are up 88%, promising a recovery in the service sector. Even Pemex, that beleaguered Mexican state oil firm, reported a 29% jump in net profits to US$6 billion. The impetus for the improvement has been rising crude prices, which averaged US$63/b over Q118 compared to US$53/b over Q117. In most cases, the magnitude of net profit increase has been matched by similar growth in revenue – which is a sign that the crude price rally is behind much of the profit gains. With crude prices trending even higher in Q218, industry financials are due for an even better quarter, though it is still too early to declare that the good times have come back for good.
Still, with numbers firmly in the black, analysts and investors are turning their eye towards more granular data to gauge performance. In this case, cash flow. Hoping that the increased profits will be passed on to shareholders through share buybacks, investors have rewarded firms that are embarking on buybacks – BP, Total – and punished those that have shied away. Shell’s share prices were hammered after it announced it was not proceeding with a US$25 billion stock repurchase program yet, and ExxonMobil still has no intention of returning to generous buybacks as of yet. The latter two argue that more work needs to be done to fortify operational foundations, but it seems that investors are getting impatient and want to be rewarded for their patience since 2015.
From a long term investment perspective, Reuters reports that “ investors remain wary that oil demand may peak due to eventual mass adoption of battery-powered cars and more curbs on fossil fuel emissions by industry to meet environmental targets. Some are hedging their bets, buying shares in battery companies and chipmakers involved in making electric cars while lessening their exposure to pure oil plays. But the shift to cleaner energy doesn’t necessarily mean investors are dumping the oil majors. Many are sticking with them but favouring companies which put more emphasis on renewables”. This seems to indicate that investors are still keen a growth story, that is sustainable from a long term perspective.
Something interesting to share?
Join NrgEdge and create your own NrgBuzz today
Less than two weeks ago, the VLCC Navarin arrived at Tanjung Pengerang, at the southern end of Peninsular Malaysia. It was carrying two million barrels of crude oil, split equally between Saudi Arab Medium and Iraqi Basra Light grades.
The RAPID refinery in Johor. An equal joint partnership between Malaysia’s Petronas and Saudi Aramco whose 300 kb/d mega refinery is nearing completion. Once questioned for its economic viability, RAPID is now scheduled to start up in early 2019, entering a market that is still booming and in demand of the higher quality, Euro IV and Euro V level fuels RAPID will produce.
Beyond fuel products, RAPID will also have massive petrochemical capacity. Meant to come on online at a later date, RAPID will have a collective capacity of some 7.7 million tons per annum of differentiated and specialty chemicals, including 3 mtpa of propylene. To be completed in stages, Petronas nonetheless projects that it will add some 3.3 million tons of petrochemicals to the Asia market by the end of next year. That’s blockbuster numbers, and it will elevate Petronas’ stature in downstream, bringing more international appeal to a refining network previously focused mainly on Malaysia. For its partner Saudi Aramco, RAPID is part of a multi-pronged strategy of investing mega refineries in key parts of the world, to diversify its business and ensure demand for its crude flows as it edges towards an IPO.
RAPID won’t be alone. Vietnam’s second refinery – the 200 kb/d Nghi Son – has finally started up this year after multiple delays. And in the same timeframe as RAPID, the Zhejiang refinery by Rongsheng Petro Chemical and the Dalian refinery by Hengli Petrochemical in China are both due to start up. At 400 kb/d each, that could add 1.1 mmb/d of new refining capacity in Asia within 1H19. And there’s more coming. Hengli’s Pulau Muara Besar project in Brunei is also aiming for a 2019 start, potentially adding another 175 kb/d of capacity. And just like RAPID, each of these new or recent projects has substantial petrochemical capacity planned.
That’s okay for now, since demand remains strong. But the danger is that this could all unravel. With American sanctions on Iran due to kick in November, even existing refineries are fleeing from contributing to Tehran in favour of other crude grades. The new refineries will be entering a tight market that could become even tighter. RAPID can rely on Saudi Arabia and Nghi Son can depend on Kuwait, both the Chinese projects are having to scramble to find alternate supplies for their designed diet of heavy sour crude. This race to find supplies has already sent Brent prices to four-year highs, and most in the industry are already predicting that crude oil prices will rise to US$100/b by the year’s end. At prices like this, demand destruction begins and the current massive growth – fuelled by cheap oil prices – could come to an end. The market can rapidly change again, and by the end of this decade, Asia could be swirling with far more oil products that it can handle.
Upcoming and recent Asia refineries:
Headline crude prices for the week beginning 8 October 2018 – Brent: US$84/b; WTI: US$74/b
Headlines of the week
Source: U.S. Energy Information Administration, Monthly Crude Oil and Natural Gas Production
As domestic production continues to increase, the average density of crude oil produced in the United States continues to become lighter. The average API gravity—a measure of a crude oil’s density where higher numbers mean lower density—of U.S. crude oil increased in 2017 and through the first six months of 2018. Crude oil production with an API gravity greater than 40 degrees grew by 310,000 barrels per day (b/d) to more than 4.6 million b/d in 2017. This increase represents 53% of total Lower 48 production in 2017, an increase from 50% in 2015, the earliest year for which EIA has oil production data by API gravity.
API gravity is measured as the inverse of the density of a petroleum liquid relative to water. The higher the API gravity, the lower the density of the petroleum liquid, meaning lighter oils have higher API gravities. The increase in light crude oil production is the result of the growth in crude oil production from tight formations enabled by improvements in horizontal drilling and hydraulic fracturing.
Along with sulfur content, API gravity determines the type of processing needed to refine crude oil into fuel and other petroleum products, all of which factor into refineries’ profits. Overall U.S. refining capacity is geared toward a diverse range of crude oil inputs, so it can be uneconomic to run some refineries solely on light crude oil. Conversely, it is impossible to run some refineries on heavy crude oil without producing significant quantities of low-valued heavy products such as residual fuel.
Source: U.S. Energy Information Administration, Monthly Crude Oil and Natural Gas Production
API gravity can differ greatly by production area. For example, oil produced in Texas—the largest crude oil-producing state—has a relatively broad distribution of API gravities with most production ranging from 30 to 50 degrees API. However, crude oil with API gravity of 40 to 50 degrees accounted for the largest share of Texas production, at 55%, in 2017. This category was also the fastest growing, reaching 1.9 million b/d, driven by increasing production in the tight oil plays of the Permian and Eagle Ford.
Oil produced in North Dakota’s Bakken formation also tends to be less dense and lighter. About 90% of North Dakota’s 2017 crude oil production had an API gravity of 40 to 50 degrees. The oil coming from the Federal Gulf of Mexico (GOM) tends to be more dense and heavier. More than 34% of the crude oil produced in the GOM in 2017 had an API gravity of lower than 30 degrees and 65% had an API gravity of 30 to 40 degrees.
In contrast to the increasing production of light crude oil in the United States, imported crude oil continues to be heavier. In 2017, 7.6 million b/d (96%) of imported crude oil had an API gravity of 40 or below, compared with 4.2 million b/d (48%) of domestic production.
EIA collects API gravity production data by state in the monthly crude oil and natural gas production report as well as crude oil quality by company level imports to better inform analysis of refinery inputs and utilization, crude oil trade, and regional crude oil pricing. API gravity is also projected to continue changing: EIA’s Annual Energy Outlook 2018 Reference case projects that U.S. oil production from tight formations will continue to increase in the coming decades.