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Last Updated: October 29, 2018
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Market Watch

Headline crude prices for the week beginning 26 October 2018 – Brent: US$79/b; WTI: US$69/b

  • Crude prices retreated from their highs to below psychological thresholds, as the threat of Saudi Arabia retaliation to criticism of its role in the assassination of Jamal Khashoggi by using its oil wealth abated
  • As Saudi Arabia sounds more contrite after evidence emerged that the murder of Khashoggi was state-sanctioned, the Saudi Energy Minister said the Kingdom has no intention of triggering a repeat of the 1973 oil crisis
  • While most executives and firms have shied away attending an investment conference in Riyadh dubbed ‘Davos in the Desert’ due to the scandal, Total boss Patrick Pouyanne will be attending, underscoring the continual dependence of the oil world on the Kingdom
  • However, international tensions over the Khashoggi scandal still remain, with President Donald Trump now acknowledging that Saudi Arabia is ‘tainted’ and other Western powers threatening sanctions, with Germany stopping all defence and arm sales to Saudi Arabia
  • Over the same period, American shale oil production was expected by the EIA to grow to 7.71 mmb/d, up 100,000 b/d m-o-m, with the Permian Basin contributing to half of the expected net gains
  • The Saudi Energy Minister’s pronouncement – if true – removes the risk of Saudi Aramco pulling back on crude supply just before sanctions on Iran kick in next week, although jitters over the eventual impact of the sanctions will keep crude prices above US$70/b
  • After weeks of caution, American drillers continued a streak of active rig gains, adding 4 new oil rigs and 1 new gas rig last week, bringing the total number of operational rigs to 1,067 – the highest since March 2015
  • Crude price outlook: With the threat of a Saudi embargo retreating and the market now beginning to fret about demand destruction, it looks like crude prices will continue their downward trend towards US$75-77/b for Brent and US$65-67/b for WTI

 

Headlines of the week

Upstream

  • BP has started up its Thunder Horse Northwest expansion in the Gulf of Mexico ahead of schedule and under budget, which will boost output at the Thunder Horse field by 30,000 b/d to 200,000 b/d
  • Equinor has started up its Oseberg Vestflanken 2 field in the North Sea, using the first unmanned platform on the Norwegian Continental Shelf to oversee an operation for the recovery of some 110 million barrels of oil
  • Eni has won the rights for the offshore Block A5-A in Mozambique, bolstering its position in the African nation that include some giant gas discoveries
  • Shell continues the trend of supermajors exiting Denmark, selling its upstream assets in Danish territory to Norwegian Energy Company (Noreco) for US$1.9 billion, which includes some 67,000 b/d of production in 2017

Downstream

  • Turkmenistan’s Turkemgaz has started up its new US$3.4 billion NGLs-based petrochemicals plant in Kiyanly, converting LPG and condensate from Petronas’s Block 1 to some 450 ktpa of olefins
  • The expansion of ThaiOil’s Sriracha refinery has begun, with engineering and construction beginning soon which will increase capacity from 275 to 400 kb/d
  • A month after signing a crude oil supply deal with Zhejiang Rongsheng, Saudi Aramco is going a step further to invest in the Chinese textile giant’s planned 400 kb/d integrated petrochemical refinery, its third such investment in China
  • After years of squabbling with its founding family, Japanese refinery Idemitsu Kosan has finally finalized a deal to buy out fellow refiner Showa Shell Sekiyu for US$5.6 billion, consolidating the Japanese refining industry further

Natural Gas/LNG

  • Production at Inpex’s Ichthys LNG project is progressing, having sold its second condensate cargo to Trafigura a week after selling its first
  • Aker BP has purchased Equinor’s 77.8% stake in the Norwegian North Sea King Lear gas/condensate discovery for US$250 million
  • More activity from Equinor, as it sells its 42.38% interest in the Tommeliten Unit and 30% stake in PL 044, gas/condensate fields that are both in the Norwegian Continental Shel, to Poland’s PGNiG for US$220 million
  • After purchasing American LNG on the spot market earlier this year, Polish Oil and Gas (PGNiG) has signed a long-term 20-year LNG contract with Venture Global, who will begin delivering 2 mtpa of LNG from the Calcasiue Pass and Plaquemines LNG plant in Louisiana when they are completed in 2022
  • Shell and Equinor have reaffirmed their commitment to the proposed US$30 billion LNG export plant in Tanzania, overcoming concerns that the government’s new mining legislation allows it to renegotiate contracts
  • NextDecade is advancing with its planned 27 mtpa Rio Grande LNG project in the US Gulf Coast after the FERC issued a draft environment impact statement
  • Cuadrilla has begun hydraulic fracking at the Preston New Road shale gas site in the UK, overcoming opposition to tap into some 200 tcf of gas in place
  • Argentina may be closing its floating LNG import facility regasification ship, as development of Vaca Muerte shale turns it into a natural gas exporter

Corporate

  • Mubadala Investment has shelved a planned IPO offering up 25% in Spanish oil refiner Cepsa over the recent turmoil in global stock markets, but the Abu Dhabi state-linked firm said it may revive the IPO in the future

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Your Weekly Update: 11 - 15 February 2019

Market Watch

Headline crude prices for the week beginning 11 February 2019 – Brent: US$61/b; WTI: US$52/b

  • Oil prices remains entrenched in their trading ranges, with OPEC’s attempt to control global crude supplies mitigated by increasing concerns over the health of the global economy
  • Warnings, including from The Bank of England, point to a global economic slowdown that could be ‘worse and longer-lasting than first thought’; one of the main variables in this forecast are the trade tensions between the US and China, which show no sign of being solved with President Trump saying he is open to delaying the current deadline of March 1 for trade talks
  • This poorer forecast for global oil demand has offset supply issues flaring up within OPEC, with Libya reporting ongoing fighting at the country’s largest oilfield while the current political crisis in Venezuela could see its crude output drop to 700,000 b/d by 2020
  • The looming new American sanctions on Venezuelan crude has already had concrete results, with US refiner Marathon Petroleum moving to replace Venezuelan crude with similar grades from the Middle East and Latin America
  • While Nicolas Maduro holds on to power, Venezuela’s opposition leader Juan Guaido has promised to scrap requirements that PDVSA keep a controlling stake in domestic oil joint ventures and boost oil production through an open economy when his government-in-power takes over
  • Despite OPEC’s attempts to stabilise crude prices, the US House has advanced the so-called NOPEC bill – which could subject the cartel to antitrust action – to a vote, with a similar bill currently being debated in the US Senate
  • The see-saw pattern in the US active rig count continues; after a net loss of 14 rigs last week, the Baker Hughes rig survey reported a gain of 7 new oil rigs and a loss of 3 gas rigs for a net gain of 4 rigs
  • While demand is a concern, global crude supply remains delicate enough to edge prices up, especially with Saudi Arabia going for deeper-than-expected cuts; this should push Brent up towards US$64/b and WTI towards US$55/b in trading this week


Headlines of the week

Upstream

  • Egypt is looking to introduce a new type of oil and gas contract to attract greater upstream investment into the country, aiming to be ‘less bureaucratic and more efficient’ with faster cost-recovery, ahead of a planned Red Sea bid round encompassing over a dozen concession sites
  • Lukoil has commenced on a new phase at the West Qurna-2 field in Iraq, with 57 production wells planned at the Mishrif and Yamama formation that could boost output by 80,000 boe/d to 480,000 boe/d in 2020
  • Aker BP has hit oil and natural gas flows at well 24/9-14 in the Froskelår Main prospect in the Alvheim area of the Norwergian Continental Shelf
  • Things continue to be rocky for crude producers in Canada’s Alberta province; production limits were increased last week after being previously slashed to curb a growing glut on news that crude storage levels dropped, but now face trouble being transported south as pipelines remain at capacity and crude-by-rail shipments face challenging economics

Midstream & Downstream

  • The Caribbean island of Curacao is now speaking with two new candidates to operate the 335 kb/d Isla refinery after its preferred bidder – said to be Saudi Aramco’s American arm Motiva Enterprises – withdrew from consideration to replace the current operatorship under PDVSA
  • America’s Delta Air Lines is now reportedly looking to sell its oil refinery in Pennsylvania outright, after attempts to sell a partial stake in the 185 kb/d plant failed to attract interest, largely due to its limited geographical position

Natural Gas/LNG

  • Total reports that it has made a new ‘significant’ gas condensate discovery offshore South Africa at the Brulpadda prospect in Block 11B/12B in the Outeniqua Basin, with the Brulpadda-deep well also reporting ‘successful’ flows of natural gas condensate
  • Italy’s Eni and Saudi Arabia’s SABIC have signed a new Joint Development Agreement to collaborate on developing technologies for gas-to-liquids and gas-to-chemicals applications
  • The Rovuma LNG project in Mozambique is charging ahead with development, with Eni looking to contract out subsea operations for the Mamba gas project by mid-March and ExxonMobil choosing its contractor for building the complex’s LNG trains by April
February, 15 2019
SHORT-TERM ENERGY OUTLOOK

Forecast Highlights

Global liquid fuels

  • Brent crude oil spot prices averaged $59 per barrel (b) in January, up $2/b from December 2018 but $10/b lower than the average in January of last year. EIA forecasts Brent spot prices will average $61/b in 2019 and $62/b in 2020, compared with an average of $71/b in 2018. EIA expects that West Texas Intermediate (WTI) crude oil prices will average $8/b lower than Brent prices in the first quarter of 2019 before the discount gradually falls to $4/b in the fourth quarter of 2019 and through 2020.
  • EIA estimates that U.S. crude oil production averaged 12.0 million barrels per day (b/d) in January, up 90,000 b/d from December. EIA forecasts U.S. crude oil production to average 12.4 million b/d in 2019 and 13.2 million b/d in 2020, with most of the growth coming from the Permian region of Texas and New Mexico.
  • Global liquid fuels inventories grew by an estimated 0.5 million b/d in 2018, and EIA expects they will grow by 0.4 million b/d in 2019 and by 0.6 million b/d in 2020.
  • U.S. crude oil and petroleum product net imports are estimated to have fallen from an average of 3.8 million b/d in 2017 to an average of 2.4 million b/d in 2018. EIA forecasts that net imports will continue to fall to an average of 0.9 million b/d in 2019 and to an average net export level of 0.3 million b/d in 2020. In the fourth quarter of 2020, EIA forecasts the United States will be a net exporter of crude oil and petroleum products by about 1.1 million b/d.

Natural gas

  • The Henry Hub natural gas spot price averaged $3.13/million British thermal units (MMBtu) in January, down 91 cents/MMBtu from December. Despite a cold snap in late January, average temperatures for the month were milder than normal in much of the country, which contributed to lower prices. EIA expects strong growth in U.S. natural gas production to put downward pressure on prices in 2019. EIA expects Henry Hub natural gas spot prices to average $2.83/MMBtu in 2019, down 32 cents/MMBtu from the 2018 average. NYMEX futures and options contract values for May 2019 delivery traded during the five-day period ending February 7, 2019, suggest a range of $2.15/MMBtu to $3.30/MMBtu encompasses the market expectation for May 2019 Henry Hub natural gas prices at the 95% confidence level.
  • EIA forecasts that dry natural gas production will average 90.2 billion cubic feet per day (Bcf/d) in 2019, up 6.9 Bcf/d from 2018. EIA expects natural gas production will continue to rise in 2020 to an average of 92.1 Bcf/d.

Electricity, coal, renewables, and emissions

  • EIA expects the share of U.S. total utility-scale electricity generation from natural gas-fired power plants to rise from 35% in 2018 to 36% in 2019 and to 37% in 2020. EIA forecasts that the electricity generation share from coal will average 26% in 2019 and 24% in 2020, down from 28% in 2018. The nuclear share of generation was 19% in 2018 and EIA forecasts that it will stay near that level in 2019 and in 2020. The generation share of hydropower is forecast to average slightly less than 7% of total generation in 2019 and 2020, similar to last year. Wind, solar, and other nonhydropower renewables together provided about 10% of electricity generation in 2018. EIA expects them to provide 11% in 2019 and 13% in 2020.
  • EIA expects average U.S. solar generation will rise from 265,000 megawatthours per day (MWh/d) in 2018 to 301,000 MWh/d in 2019 (an increase of 14%) and to 358,000 MWh/d in 2020 (an increase of 19%). These forecasts of solar generation include large-scale facilities as well as small-scale distributed solar generators, primarily on residential and commercial buildings.
  • In 2019, EIA expects wind’s annual share of generation will exceed hydropower’s share for the first time. EIA forecasts that wind generation will rise from 756 MWh/d in 2018 to 859 MWh/d in 2019 (a share of 8%). Wind generation is further projected to rise to 964 MWh/d (a share of 9%) by 2020.
  • EIA estimates that U.S. coal production declined by 21 million short tons (MMst) (3%) in 2018, totaling 754 MMst. EIA expects further declines in coal production of 4% in 2019 and 6% in 2020 because of falling power sector consumption and declines in coal exports. Coal consumed for electricity generation declined by an estimated 4% (27 MMst) in 2018. EIA expects that lower electricity demand, lower natural gas prices, and further retirements of coal-fired capacity will reduce coal consumed for electricity generation by 8% in 2019 and by a further 6% in 2020. Coal exports, which increased by 20% (19 MMst) in 2018, decline by 13% and 8% in 2019 and 2020, respectively, in the forecast.
  • After rising by 2.8% in 2018, EIA forecasts that U.S. energy-related carbon dioxide (CO2) emissions will decline by 1.3% in 2019 and by 0.5% in 2020. The 2018 increase largely reflects increased weather-related natural gas consumption because of additional heating needs during a colder winter and for additional electric generation to support more cooling during a warmer summer than in 2017. EIA expects emissions to decline in 2019 and 2020 because of forecasted temperatures that will return to near normal. Energy-related CO2 emissions are sensitive to changes in weather, economic growth, energy prices, and fuel mix.

U.S. residential electricity price

  • West Texas Intermediate (WTI) crude oil price
  • World liquid fuels production and consumption balance
  • U.S. natural gas prices
  • U.S. residential electricity price
  • West Texas Intermediate (WTI) crude oil price
February, 13 2019
The State of the Industry: A Brightened 2018

2018 was a year that started with crude prices at US$62/b and ended at US$46/b. In between those two points, prices had gently risen up to peak of US$80/b as the oil world worried about the impact of new American sanctions on Iran in September before crashing down in the last two months on a rising tide of American production. What did that mean for the financial health of the industry over the last quarter and last year?

Nothing negative, it appears. With the last of the financial results from supermajors released, the world’s largest oil firms reported strong profits for Q418 and blockbuster profits for the full year 2018. Despite the blip in prices, the efforts of the supermajors – along with the rest of the industry – to keep costs in check after being burnt by the 2015 crash has paid off.

ExxonMobil, for example, may have missed analyst expectations for 4Q18 revenue at US$71.9 billion, but reported a better-than-expected net profit of US$6 billion. The latter was down 28% y-o-y, but the Q417 figure included a one-off benefit related to then-implemented US tax reform. Full year net profit was even better – up 5.7% to US$20.8 billion as upstream production rose to 4.01 mmboe/d – allowing ExxonMobil to come close to reclaiming its title of the world’s most profitable oil company.

But for now, that title is still held by Shell, which managed to eclipse ExxonMobil with full year net profits of US$21.4 billion. That’s the best annual results for the Anglo-Dutch firm since 2014; product of the deep and painful cost-cutting measures implemented after. Shell’s gamble in purchasing the BG Group for US$53 billion – which sparked a spat of asset sales to pare down debt – has paid off, with contributions from LNG trading named as a strong contributor to financial performance. Shell’s upstream output for 2018 came in at 3.78 mmb/d and the company is also looking to follow in the footsteps of ExxonMobil, Chevron and BP in the Permian, where it admits its footprint is currently ‘a bit small’.

Shell’s fellow British firm BP also reported its highest profits since 2014, doubling its net profits for the full year 2018 on a 65% jump in 4Q18 profits. It completes a long recovery for the firm, which has struggled since the Deepwater Horizon disaster in 2010, allowing it to focus on the future – specifically US shale through the recent US$10.5 billion purchase of BHP’s Permian assets. Chevron, too, is focusing on onshore shale, as surging Permian output drove full year net profit up by 60.8% and 4Q18 net profit up by 19.9%. Chevron is also increasingly focusing on vertical integration again – to capture the full value of surging Texas crude by expanding its refining facilities in Texas, just as ExxonMobil is doing in Beaumont. French major Total’s figures may have been less impressive in percentage terms – but that it is coming from a higher 2017 base, when it outperformed its bigger supermajor cousins.

So, despite the year ending with crude prices in the doldrums, 2018 seems to be proof of Big Oil’s ability to better weather price downturns after years of discipline. Some of the control is loosening – major upstream investments have either been sanctioned or planned since 2018 – but there is still enough restraint left over to keep the oil industry in the black when trends turn sour.

Supermajor Net  Profits for 4Q18 and 2018

1. ExxonMobil:

- 4Q18 – Net profit US$6 billion (-28%);

- 2018 – Net profit US$20.8 (+5.7%)

2. Shell:

- 4Q18 – Net profit US$5.69 billion (+32.3%);

- 2018 – Net profit US$21.4 billion (+36%)

3. Chevron:

- 4Q18 – Net profit US$3.73 billion (+19.9%);

- 2018 – Net profit US$14.8 billion (+60.8%)

4. BP:

- 4Q18 – Net profit US$3.48 billion (+65%);

- 2018 - Net profit US$12.7 billion (+105%)

5. Total: 

- 4Q18 – Net profit US$3.88 billion (+16%);

- 2018 - Net profit US$13.6 billion (+28%)

February, 12 2019