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Last Updated: October 11, 2018
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Market Watch

Headline crude prices for the week beginning 8 October 2018 – Brent: US$84/b; WTI: US$74/b

  • Oil prices are retreating from recent highs as a rush of pronouncements to mollify the market over concerns of a supply crunch were issued
  • President Donald Trump continues to berate OPEC over high oil prices and the US State Department took the unusual step of issuing a demand to OPEC, requesting that it raise collective output by 1.4 mmb/d
  • Saudi Arabia responded by saying that it is fulfilling promises made to America to replace lost Iranian crude supplies, boosting its current output to 10.7 mmb/d and the ability to add another 1.3 mmb/d if needed; Iraq is also benefitting as it chalked a second consecutive month of exports exceeding 4 mmb/d
  • Russian production also rose to a record 11.356 mmb/d in September, raising worries about shrinking spare capacity in oil markets as producers up output; Russian Premier Vladimir Putin fired back at Trump’s tantrums, stating ‘Donald should look in the mirror’ when complaining about high oil prices
  • There continue to be varying responses to the looming American sanctions against Iran; the UAE – which usually talks tough but still accepts Iranian oil – appears to be taking steps to reduce its purchases, with Dubai imports of Iranian condensate dropping by half in September and customs officials at Fujairah now asking for certification of origins for oil tankers docking there
  • Meanwhile, despite overtures to reduce Iranian imports by India to qualify for mooted American waivers, India is planning to purchase some 9 million barrels of Iranian oil in November, with liftings past the US deadline of November 4
  • On another battlefront, China is sticking to its guns and shunning purchase of American crude over the boiling trade war, boosting its imports of West African crude to their highest level in seven years
  • American oil prices are also drawing strength after falling last week on swelling stockpiles as Hurricane Michael heads inland towards Florida after shutting down some 19% of oil production in the Gulf of Mexico
  • Surprisingly, despite prices being attractive, American drillers remain cautious over introducing new rigs; the active US rig count actually lost two sites last week – both oil rigs – a second week of decline in the US oil rig count
  • Crude price outlook: Evidence that OPEC+ is responding with increased supply should pressure prices downwards this week, but a longer term risk remains of US$100/b crude oil, especially if Saudi Arabia and Russia run out of capacity to turn their taps on. We see Brent trading in the US$81-83/b and WTI in the US$70-73/b range.


Headlines of the week

Upstream

  • Equinor will take over Chevron’s 40% operating interest in the UK’s Rosebank project, one of the largest undeveloped fields on the UK Continental Shelf, with potential volumes of some 300 million barrels recoverable
  • Equinor has also confirmed a boost in its Norwegian assets, with the Cape Vulture discovery adding some 50-70 million barrels of recoverable oil, doubling the remaining oil reserves at the aging Norne field
  • Savannah Petroleum has made a fifth discovery in Zomo-1 well, locating in the R3 portion of the R3/R4 Adaem Rift Basin area in southeast Nigeria
  • Chevron will be proceeding with drilling a test well at the Mississippi Canyon Block 607, hoping to add to the deepwater Ballymore discovery that it made in the same area last year
  • Saudi Arabia’s crown prince hopes to be able to resolve an impasse with Kuwait over the Khafji and Wafra fields in the Neutral Zone ‘soon’, an area along the border that has been undefined for near a hundred years, which could unlock up to 500,000 b/d of crude production

Downstream

  • Pakistan will be building a new oil refinery at its deepwater Gwadar port, part of an ‘oil city’ project that Saudi Aramco is expected to invest in
  • Saudi International Petrochemical Co (Sipchem) has acquired fellow Saudi Arabian firm Sahara Petrochemical in a deal worth US$2.2 billion
  • Vietnam’s Petrolimex wants to halt the US$5 billion, 200 kb/d Nam Van Phong refining and petrochemical project with Japan’s JXTG Holdings to ‘focus its resources on executing other projects’
  • ExxonMobil is considering a multi-billion dollar investment at its 592 kb/d Singapore refinery – the largest in its system – to meet demand for low sulphur shipping fuels as the IMO’s strict new rules on marine fuels starts in 2020
  • India is reducing the pump prices of gasoline and diesel by 2.50 rupees (US$0.03 per litre) to ease the pain of rising crude prices and a weak rupee; this includes a reduction in excise duty of 1.50 rupee per litre

Natural Gas/LNG

  • After PetroChina and Korea Gas gave their blessing last week, Shell and its remaining partners have given the go-ahead for Kitimat LNG project in Canada, bucking trends by sanctioning construction without having signed any long-term LNG sales deals
  • G3 Exploration has been given approval to proceed with the development of the Chengzhuang Block in Shanxi, splitting the estimated recoverable gas volumes of 176 bcf with its partner CNPC
  • Qatar Petroleum will continue to supply the United Arab Emirates with piped natural gas, shunning bringing ‘politics into commercial business’ as the standoff between Qatar against Saudi Arabia and its allies continues

Corporate

  • Saudi Arabia’s crown prince is insisting that Saudi Aramco’s planned IPO will go ahead by 2021, after the sale was put on hold by Aramco’s plan to purchase a controlling stake in SABIC
  • BP and Norway’s Aker BP have signed a new cooperation agreement to explore development and deployment of advanced technologies in their businesses
  • Ensco and Rowan Companies have agreed to a US12 billion merger that will create a global powerhouse offshore drilling company covering 82 rigs

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This Week in Petroleum
Despite crude oil production cuts, Saudi Arabian crude oil exports to some Asian countries have increased

The U.S. Energy Information Administration (EIA) estimates that during May 2019, Saudi Arabia’s crude oil production approached a four-year low, averaging an estimated 9.9 million barrels per day (b/d). Production declined more than 1 million b/d since its estimated all-time high production levels in October and November 2018 (Figure 1). Although the country’s total crude oil exports are also lower than recent highs, its crude oil exports to some Asia Pacific countries actually increased during the period of declining production. China in particular has increased its crude oil imports from Saudi Arabia, which is partially a result of new Chinese refining capacity. In contrast, U.S. crude oil imports from Saudi Arabia reached a 31-year low in February, with weekly estimates for April, May, and June suggesting even further declines.

Figure 1. Monthly Saudi Arabia crude oil production and exportsMonthly Saudi Arabia crude oil production and exports

Four Asia Pacific countries that publish crude oil imports by country of origin—China, Japan, South Korea, and Taiwan—collectively imported an average of 3.5 million b/d of crude oil from Saudi Arabia in 2018 (Figure 2). Chinese and Japanese 2019 year-to-date crude oil imports from Saudi Arabia are higher than their 2018 annual averages, whereas Taiwan’s are flat and South Korea’s have declined slightly. China’s crude oil imports from Saudi Arabia, in particular, have increased by 0.4 million b/d year-to-date through April compared with the 2018 annual average, significantly higher than Japan’s increase of less than 0.1 million b/d.

Monthly crude oil imports from Saudi Arabia for select Asia Pacific countries

In contrast, U.S. crude oil imports from Saudi Arabia have declined year-to-date through March 2019 compared with the 2018 average by more than 0.2 million b/d, averaging 0.6 million b/d for the first quarter of 2019. Weekly estimates through June 14 of this year show continued declines, indicating that imports from Saudi Arabia averaged less than 0.5 million b/d in May and the first half of June. As a result of these shifts in crude oil flows, the U.S. share of total Saudi Arabian crude oil exports fell to 9% in March, and China’s share increased to 24% (Figure 3). Collectively, the United States, China, Japan, Taiwan, and South Korea historically accounted for about 60%–65% of total Saudi Arabian crude oil exports.

Figure 3.Monthly share of Saudi Arabian crude oil exports

These recent changes in crude oil trade patterns are partially because of long-term structural trends within China and the United States, but they are also a result of recent oil market dynamics. From 2010 through 2018, EIA estimates total Chinese petroleum consumption has increased from 9.3 million b/d to 13.9 million b/d, whereas Chinese domestic production has increased from 4.6 million b/d to 4.8 million b/d. As a result, China’s need to meet incremental oil consumption has come primarily from imports. China’s crude oil imports from Saudi Arabia have gradually increased in recent years, and in March 2019 reached the highest level for any month since at least 2004, at 1.7 million b/d. Other countries, including Russia and Brazil, have had larger increases in crude oil export growth to China, however, with Russia overtaking Saudi Arabia as the largest source of crude oil on an annual average basis in 2016.

U.S. crude oil imports, on the other hand, have steadily decreased during this period as domestic crude oil production has increased. In addition, U.S. crude oil imports from members of the Organization of the Petroleum Exporting Countries (OPEC) have declined, in particular, following increases from other countries such as Canada. Canadian crude oil can substitute for certain OPEC grades and have lower transportation costs when shipped by available pipeline capacity.

Saudi Arabian crude oil exports to China increased recently at least in part as a result of the startup of a new 0.4 million b/d refinery in Dalian, Liaoning Province, which has a supply agreement with Saudi Aramco, Saudi Arabia’s national oil company. Saudi Aramco also has a supply agreement with another 0.4 million b/d refining and petrochemical complex in Zhejiang Province, which started trial operations this year.

Other near-term developments, however, could reduce the volume of Saudi Arabian crude oil headed to China for May, June, and through the summer. Saudi Arabia typically increases domestic crude oil consumption in the summer months because the country directly burns the fuel for power generation. Although Saudi Arabia has gradually been increasing the use of fuel oil and natural gas instead of crude oil for power generation, the seasonal increase is dependent on the weather and can still amount to several hundred thousand barrels per day in additional domestic consumption during summer months. The five-year (2014–18) average crude oil burn for electric power generation peaks in July at 0.7 million b/d, an increase of 0.3 million b/d from the April average. In addition, Chinese crude oil refinery demand could be lower in the second quarter of 2019 than in the first quarter of 2019. Bloomberg data suggest that Chinese refinery outages in May and June month-to-date were 2.1 million b/d and 1.7 million b/d, respectively, 0.5 million b/d and 0.6 million b/d higher than their respective five-year averages for those months.

Recent global oil supply issues could keep Saudi Arabian crude oil exports to China, Japan, South Korea, and Taiwan relatively high in the coming months, however, in spite of the previously mentioned seasonal factors. These four countries were all initially granted Iranian sanctions waivers through May 2019. However, because waivers were not renewed, each country will likely need an alternative to Iranian crude oil. This development could keep their crude oil imports from Saudi Arabia near first-quarter 2019 levels for the coming months as a partial substitute for Iranian barrels. Saudi Arabia’s support of maintaining current OPEC production cuts or increasing output levels in the upcoming late-June or early-July OPEC meeting will be a critical determinant for future export flows.

U.S. average regular gasoline and diesel prices fall

The U.S. average regular gasoline retail price fell more than 6 cents from the previous week to $2.67 per gallon on June 17, 21 cents lower than the same time last year. The Midwest price fell nearly 8 cents to $2.54 per gallon, the West Coast price fell nearly 7 cents to $3.45 per gallon, the East Coast price fell more than 6 cents to $2.56 per gallon, the Rocky Mountain price fell nearly 4 cents to $2.91 per gallon, and the Gulf Coast price fell nearly 3 cents to $2.34 per gallon.

The U.S. average diesel fuel price fell nearly 4 cents to $3.07 per gallon on June 17, more than 17 cents lower than a year ago. The West Coast and Midwest prices each fell nearly 5 cents to $3.67 per gallon and $2.96 per gallon, respectively, the Rocky Mountain price fell more than 4 cents to $3.07 per gallon, the East Coast price fell nearly 3 cents to $3.10 per gallon, and the Gulf Coast price fell more than 2 cents to $2.82 per gallon.

Propane/propylene inventories rise

U.S. propane/propylene stocks increased by 3.3 million barrels last week to 74.5 million barrels as of June 14, 2019, 10.7 million barrels (16.8%) greater than the five-year (2014-2018) average inventory levels for this same time of year. East Coast, Midwest, and Gulf Coast inventories each increased by 1.1 million barrels. Rocky Mountain/West Coast inventories fell slightly, remaining virtually unchanged. Propylene non-fuel-use inventories represented 6.6% of total propane/propylene inventories.

June, 20 2019
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