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Last Updated: October 19, 2018
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Market Watch

Headline crude prices for the week beginning 15 October 2018 – Brent: US$81/b; WTI: US$71/b

  • After settling lower on promises of increased supply, the crude oil markets were rocked this week as it became clearer and clearer that the Saudi Arabian state was involved in the disappearance and alleged assassination of prominent Saudi critic Jamal Khashoggi in Istanbul
  • Internal condemnation has been loud, but US President Donald Trump has ruled out trade sanctions and cancelling of defense contracts with Saudi Arabia; the Kingdom issued veiled threats to use its vast oil reserves as a political weapon if punitive measures are taken against it – the first time it has made such a threat since the 1973 Arab oil war.
  • Grapevine chatter suggests that Saudi Arabia is preparing to admit its involvement of Khashoggi’s disappearance as the result of an ‘investigation gone wrong’, and has activated its diplomatic network to push back against criticism
  • This comes at a fragile time, with Saudi Arabia required to play a key role in balancing the market ahead of the new American sanctions on Iran and the upcoming OPEC meeting on December 3
  • Meanwhile, global oil demand and supply have risen to new records according to the International Energy Agency, with global supply rising to 100.3 mmb/d and demand very close to the 100 mmb/d level, implying a very narrow level of spare supply in the market
  • Fears of the removal of Iranian crude from the market continue to haunt prices, but Saudi Arabia did state that the Kingdom was ready to absorb the shock and supply additional to India to counter their loss of Iranian volumes
  • The level of crude prices is expected to persist at their current levels for a while, with BP now looking to sanction projects that would require crude oil prices at the US$60-65/b level, up from US$50-55/b last year
  • While China hasn't imposed sanctions on US crude imports yet, Chinese importers have largely halted all imports of American crude since August, moving to using West Africa and also tapping into cheap Canadian oil sands crude, which is currently selling for under US$50/b
  • With the American EIA reporting an unexpected decline in US crude inventories, crude prices also got a boost from that early this week
  • After weeks of caution, American drills boosted active rig numbers last week, adding 8 new oil rigs and 4 new gas rigs for a net gain of 11 sites, with all new rigs being onshore ones; this comes as signs are showing that mature wells in the Permian are showing high decline rates
  • Crude price outlook: The Saudi scandal over Jamal Khashoggi is concerning, but there is resistance to taking too harsh an action on the fear that it could lead to a deliberate supply shock. As the market settles, we think Brent and WTI will trend downwards to the US$79-80/b and US$69-70/b this week


Headlines of the week

Upstream

  • BP, Eni and Libya’s National Oil Corporation have agreed to work towards resuming exploration activities on the EPSA production contract in Libya, covering the onshore Ghadames basin and the offshore Sirt basin, with Eni acquiring 42.5% interest in the contract
  • Chevron is fully exiting the Norwegian portion of the North Sea Basin, transferring its 20% stake in the PL859 licence in the Barents Sea to DNO ASA, part of the plan to completely exit the area in search of higher returns elsewhere
  • While others are exiting the North Sea, others are still keen; RockRose Energy has sanctioned FID on the Arran field, expecting to produce 100 mscf/d and 4,000 b/d of condensate at peak production
  • Murphy Oil and Petrobras’ American subsidiary have agreed to enter into a joint venture merging their Gulf of Mexico, with Murphy holding 80% and Petrobras the remaining 20% of a JV covering the St. Malo field and other assets
  • ConocoPhillips has achieved first oil at the Greater Mooses Tooth#1 site on the Alaskan North Slope, with peak output expected to be 25-30,000 b/d

Downstream

  • Hammered by the recent rise in crude prices, India is taking a commercial model for its strategic petroleum reserves, inviting global oil producers and traders to invest US$1.5 billion in storing some 6.5 million tons of crude at two sites
  • Saudi Aramco and Total have signed a new joint development agreement for engineering and design of the giant 1.5 mtpa petrochemicals plant in Jubail, located next to the SATORP refinery and now scheduled for start-up in 2024
  • Fresh off signing an MoU with Italy’s Eni on developing bio-refineries, Indonesia is mulling plans to convert two of its aging refineries – Plaju and Dumai – into biofuels plants producing 100% biodiesel from palm oil
  • The new 200 kb/d SOCAR Star refinery in Turkey – the first in the country in 30 years – will be starting up this month, boosting Turkish capacity by 30%
  • Total has opened up a new state-of-the-art 40,000 tpa lubricants blending plant in Russia’s Kaluga region, aimed at localising production to feed Russia’s growing hunger for top quality lubricants

Natural Gas/LNG

  • The first cargo at Inpex’s Ichthys LNG export project in Australia is ready for loading this week, finally bringing to a fruition a much-delayed project
  • Qatar Petroleum has signed a new mid-term supply agreement with China’s Oriental Energy, providing 600,000 tpa of LNG over a five year period
  • Egypt’s plan to import natural gas from Israel is accelerating, with partners now evaluating the condition of the East Mediterranean Gas pipeline, expecting the first gas to flow in March 2019 at 100 mscf/d
  • Shell is reportedly dropping plans to purchase a stake in Kazakhstan’s KazMunayGas National Co, after the results of a due diligence study into the role of the Kazakh state in the natural gas firm
  • ExxonMobil has signed a long-term, 20-year deal to supply Zhejiang Provincial Energy Group with LNG, as the Chinese power utility player expands on its role in energy after agreeing to a joint venture with Glencore this year
  • Novatek has made a massive 11 tcf gas discovery in the Ob Bay area of the North Obsk licence area, expected to feed into a future Arctic LNG project

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M & A in the US Shale Patch

It is only 5 months into 2021, and already Bloomberg estimates that merger and acquisition (M&A) activity in the US shale patch has more than doubled over the equivalent period in 2020 to over US$10 billion. Given that Covid lockdowns sapped energy from shale drilling from March 2020 and what was left was decimated again in April 2020 when US WTI prices (briefly) collapsed into negative territory. From this point onwards, it may not take much to maintain this doubling of M&A activity in the US shale patch over the next 7 months. But don’t call this a new trend; call it what it is: the inexorable centralisation of US shale as the long freewheeling Wild West years give way to corporate consolidation.

Even before Covid had been unleashed upon an unsuspecting world, this consolidation was already in full swing. When the US shale revolution first began accelerating in the early 2010s – when crude oil prices were high and acreage was cheap – there were thousands, maybe even tens of thousands, of small independent drillers vying alongside medium and large upstreamers busy striking riches across American shale basins such as Bakken, Eagle Ford, Marcellus and, of course, the Permian. But too many cooks spoiled the soup. The US shale drillers who were acting capitalistically without concern for discipline incurred the wrath of OPEC and caused the oil price bust in 2014/2015. For larger players were deep pockets and wide portfolios, the shock could be absorbed. But for the small, single field or basin players, it was bankruptcy staring them in the face. The sharp natural productivity dropoff of shale fields after initial explosive output meant profits had to be made super quick and super fast; if debt kept mounting up, then drillers must keep pumping to merely stay alive. But there is another option: merge or acquire. And so those thousands of players started dwindling down to hundreds.

But it wasn’t enough. Even though crude prices began to recover from 2016, it never again reached the dizzying levels of the boom years. Debt accumulated turned into debt to be repaid. And the financial community got wiser. Instead of being blinded by the promise of shale volumes, investors and shareholders started demanding value and dividends. Easy capital was no longer available to a small shale driller. And because of that no new small shale drillers emerged. Instead, the big boys arrived. Because shale oil and gas still held vast potential, the likes of ExxonMobil, Shell and Chevron started moving in. ExxonMobil went as far as calling the Permian its ‘future’ (though this was in the days before its super discoveries in Guyana were announced). With consolidation came cohesion. Instead of a complicated patchwork of small plots, a US shale operator’s modus operandi was now to look to its left or right for land that someone else owned which could be stitched up into its own acreage forming a contiguous asset. And so those hundreds of players started becoming dozens.

In late 2020, this drive ratcheted up as the prolonged Covid-caused fuels depression freed up plenty of candidates for deep-pocketed players. ConocoPhillips bought Concho Resources for US$9.7 billion. Pioneer Natural Resources snapped up Parsley Energy for US$4.5 billion. Chevron closed its US$5 billion acquisition of Noble Energy (after failing to acquire Anadarko after being outbidded by Occidental Petroleum in 2019), while Devon Energy snapped up WPX Energy for US$2.56 billion. All four were driven by the same motive – to expand foothold and stitch up shale assets (particularly in the Permian). This series of M&As rejigged the power balance in the Permian, propelling the four buyers into the top eight producers in the basin, joining Occidental, EOG, ExxonMobil and Chevron. These top eight Permian producers now have output of over 250,000 b/d, accounting for nearly 60% of the basin’s 4.5 mmb/d output.

You would think that this trend would continue until the Permian Big Eight became the Permian Big Four for Five. And this could still happen. But the latest M&A activity from a major Permian player suggests that the ambition may well be too constrained. Cimarex Energy, the tenth largest player in the Permian with output of some 100,000 b/d, just entered into a merger to create a US$17 billion Houston-based shale driller. But its partner was not, say, fellow Permian buddy SM Energy (80,000 b/d) or Ovintiv (75,000 b/d). Instead, Cimarex chose Cabot Oil & Gas, a gas-focused player that operates almost entirely in the Marcellus shale basin in Appalachia, over 1500km away from the Permian.

In response to the merger, share prices of both Cimarex and Cabot fell. Analysts cited a dilution of each company’s core focus (along with the meagre premium) as concerns; implying that investors would be happier if Cimarex stayed and grew in the Permian, and Cabot did the same in Marcellus. But that’s a narrow way of thinking that both Cimarex and Cabot were happy to refute. “This is a long term move,” said Cimarex CEO Tom Jorden. “This combination allows us to be ready for those (swings in commodity prices)”.

While pursuing in-basin opportunities could make shareholders happy in the short-term, a multi-basin deal might be a surprise but is also a canny long-term move. After all, at some point the Permian will run out of oil. And so will gas in Marcellus. Or the US government could accelerate its move away from fossil fuels. If an energy company puts all of its eggs into one basket – or basin, in this case – then when the river runs dry, the company’s profits evaporate. It is a consideration that other single-basin focused players like Pioneer, EOG and Diamondback will need to start thinking about, which is a luxury that other integrated players with Chevron and ExxonMobil already have. Consolidation in American shale basins is inevitable. But what is far more interesting is the new potential of cross-basin consolidation.

Market Outlook:

  • Crude price trading range: Brent – US$67-69/b, WTI – US$64-66/b
  • Global crude oil prices remain locked in their current ranges, with bullish signs of fuels demand recovery in North America, Europe and China offset by signs that the Iranian nuclear deal could be revived, which would lead increase OPEC supply
  • Iran, if reports are accurate, has already been preparing for this, establishing contact with former clients to gauge interest and pave way for its re-entry to the global oil markets, which could swell OPEC production by nearly 4 mmb/d
  • This will be a point of contention within the OPEC+ supply deal framework, since Iran would argue for exemptions (as Russia, Kazakhstan and Libya have) from official quotas; although the latest rhetoric from Iran suggests there are still plenty of gaps to restore the original 2015 nuclear agreement, allaying fears of a quick ramp-up
June, 08 2021
The Power of the Shareholders in Climate Change

The battle for the future of humanity is moving from the oceans and the rainforests of the world into the board rooms of the world’s largest energy companies. On a single day in late May, shareholders and courts delivered a decisive twist in the drive for the oil and gas industry to ‘go green’. Shell was ordered to cut its emissions by far more than it already plans to. Chevron’s stock holders defied the company’s recommendation by directing it to slash emissions. And ExxonMobil’s CEO went head-to-head with a small activist investor, which resulted in an embarrassing show for Darren Woods as he lost two seats on the Board of Directors. Serious and stoic newspapers called it ‘Black Wednesday for Big Oil’, representing a shift in the way the industry engages climate change: doing something just isn’t enough, and activists are ready to use the world’s courts and the companies’ own AGMs to force a change if none is coming.

In the Netherlands, a court ruled that Shell must slash its greenhouse gas emissions by 45% by 2030 (compared to 2019 levels) to bring it in line with the goals of the Paris Agreement. The case, by Friends of the Earth Netherlands, argues that Shell violates fundamental human rights by not accelerating its plans to slash emissions, jeopardising the Agreement’s target of limiting the average increase in global temperatures to less than 1.5 degrees Celsius. Not that Shell was a laggard in that arena. Like its other European energy peers, Shell has embarked on a strategy to reduce net emissions by 25% through 2030, and then to net-zero by 2050. That, the court said, is not enough. Shell needs to slash its emissions harder and faster than planned. And not just in the Netherlands, since the ruling applies to the entire Royal Dutch Shell Group, from Mexico to Malaysia. Shell will be appealing the ruling, potentially dragging the case through years of continued litigation, but the landmark decision will embolden more environmental groups to push for judicial action. There are currently some 1800 lawsuits related to climate court pending globally; prior to the Shell ruling, many were ruled in favour of energy companies, but this case could have a powerful ripple effect. At risk will be oil and gas companies in North America and Europe, but even national oil firms or players in developing countries are not safe, with cases also being filed in India, South Africa and Argentina.

However, the judicial process is a long and complicated one. Sometimes, it is faster than change things from the inside. And that is exactly what Chevron’s shareholders did at its recent AGM. Going against recommendations by Chevron’s own board, some 61% of investors voted for a proposal to reduce its Scope 3 greenhouse gas emissions – which is pollution caused by third-party use of its products. A sober CEO Mike Wirth went on Bloomberg to state that ‘interests in these (climate change) issues has never been higher and I think the votes reflects that.’ He shouldn’t have been surprised; a week earlier, 58% of ConocoPhillips shareholders also rejected company recommendations to vote for a similar full-scope emissions reduction target.

But even this pales in comparison to the drama that took place in the (virtual) boardroom of the world’s largest supermajor. It was a drama that began back in December 2020, when a small activist investor with only a 0.02% stake in ExxonMobil began lobbying the firm to take the fight against global warming more seriously. Initially dismissed, Engine No. 1 eventually proposed four of its own candidates to sit on ExxonMobil’s 12-strong Board of Directors, which includes CEO Darren Woods. ExxonMobil reportedly refused to meet with any of the 4 nominees, calling them ‘unqualified’ and that the activist’s goals would ‘derail our progress and jeopardise your dividend.’ That imperious approach rankled. Two prominent shareholder-advisory firms – Institutional Shareholder Services Inc and Glass Lewis & Co – then provided the activist partial support. ExxonMobil retaliated by stating that it would name two new directors, one with energy industry and one with climate experience, to quell dissent.

It was not enough. With ExxonMobil’s top three investors (Vanguard Group, BlackRock Inc and State Street Corp, collectively holding more than 21% of shares) wavering, the company made an unprecedented last-ditch attempt to prevent a defeat. Individual calls were made in a targeted manner to persuade a changing of votes, up until the virtual meeting started. After the AGM began, there even was a 60-minute pause citing volumes of votes incoming, during which some shareholders were contacted again to change their votes. In the words of one major executive, the move was ‘unprecedented’. Engine No. 1 publicly complained of the ‘banana republic tactic’ on television. But, in the end, two of its nominees – former CEO of refiner Andeavor Gregory Goff and environmental scientist Kaisa Hietala – were nominated to the Board. Two seats remain undecided, potentially granting Engine No. 1 a third director.

This rebuff was particularly painful for ExxonMobil and Chevron, who (along with other American majors) have been dragging their feet on climate change. Their gamble to focus on shorter-term profits generated by higher crude prices and prodigious production, while only evolving their sustainability position gradually, had long been thought to please shareholders. Apparently not. Climate change affects all, including some of the world’s largest investors like BlackRock Inc, which has been very vocal about its climate position. So if ExxonMobil’s executives won’t take climate change seriously, then change must be forced at the Board level. This may put Darren Woods in a wobbly position; but so far Engine No. 1 has not shown signs of wanting to oust Woods, they just want climate change to be a stronger item on his agenda.

But even if climate change is already a major item, that might not be enough, as seen in the ruling against Shell. Even the most ambitious of the supermajors like BP and Total (which was just rebranded to TotalEnergies) might not be safe from litigation, even though their decarbonisation plans were rated as the best by financial thinktank Carbon Tracker. Which could be the reasoning behind some recent moves by the supermajors to start shedding traditional assets and acquiring renewable ones: ExxonMobil has decided to pull out of a deepwater oil prospect in Ghana, Shell has decided to sell its Mobile Chemical LP refinery in Alabama to Vertex Energy Operating and its Deer Park Refining stake to Pemex, while BP has just acquired 9GW of renewable energy capacity in the USA from 7X Energy as its chases a global 50GW goal by 2030. Taken together, these moves are creating a narrative. Boardrooms and AGMs are generally safe places for energy executives, but not anymore. The new era is upon the energy industry. And the definition of ‘good enough’ has just changed.

End of Article

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Market Outlook:

  • Crude price trading range: Brent – US$69-71/b, WTI – US$66-68/b
  • Brent crude prices topped the US$70/b mark, signalling strength in oil with consumption in the US, Europe and China rebounding strongly and OPEC+ signalling that the supply side was beginning to tighten
  • That declaration by OPEC+ will undoubtedly lead to a further easing of the club’s supply quotas from July onwards, as it aims to balance stable oil prices with steady supply that will not overwhelm the market, even with Iran’s possible return
  • The timeline and momentum for Iran to restore production – potentially to 4-5 mmb/d from a current 2.5 mmb/d – will depend on ongoing talks to revive the 2015 nuclear accord, but Iran has already started laying the groundwork for an inevitable return 

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June, 02 2021
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May, 25 2021