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Last Updated: June 7, 2019
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Market Watch

Headline crude prices for the week beginning 3 June 2019 – Brent: US$61/b; WTI: US$53/b

  • With the US opening up new fronts in its trade war – now featuring Mexico, India and Turkey – crude oil prices have tumbled over fears that President Donald Trump’s moves will spark a significant economic slowdown
  • Worldwide manufacturing indices and consumer sentiment have turned negative recently, bringing back the spectre of a global recession that was first raised earlier this year, but abated as trade talks between the US and China appeared to progress
  • Those talks have now collapsed, with the US and China trading barbs; and now the US is slapping a 5% duty on all Mexican imports that will rise to a maximum of 25% in October if the flow of illegal immigration continues
  • This has major implications on the US refining industry, which takes up to 800,000 b/d of Mexican crude for processing along the Gulf Coast
  • The US also removed preferential trading status for India; although the total number of Indian imports involved is far smaller than China or Mexico, the threat of reprisals is high, particularly targeting US energy and soybeans
  • On the supply side, US temporary waivers on Iranian crude export sanctions expired, although in practice the 8 countries that received waivers had already stopped purchases of Iranian crude in April
  • Iran’s loss is Saudi Arabia’s benefit, as the Kingdom ramped up crude production in May to fill the vacuum left by Iranian crude – leaving the overall output across OPEC members unchanged month-to-month
  • Russia’s adherence to the current OPEC+ supply pact reached expected levels in May, not through intention but because of contaminated crude flowing through a Baltic pipeline that triggered a regional oil crisis
  • After declining for three consecutive weeks, US drillers added a modest three new rigs in the past week, with the loss of two gas sites offset by a gain of three oil rigs; the total US active rig count now stands at 984
  • Expect oil prices to remain depressed, as traders worry about the state of the global economy over American belligerence; crude oil prices should steady up in the US$62-64/b range for Brent and the US$53-55/b range for WTI

Headlines of the week

Upstream

  • After Total’s major discovery at Brulpadda, upstream focus in Africa is now on South Africa with Shell looking to acquire a stake in OK Energy’s deepwater licence off the west coast Orange Basin that would complement its existing deepwater Blocks 5, 6 and 7 offshore Cape Town in the Atlantic
  • Ithaca Energy Limited will be acquiring Chevron’s UK North Sea assets for some US$2 billion, adding ten fields to its current portfolio
  • Israel has expressed its willingness to enter into US-mediated talks with Lebanon on a permanent maritime border, which would provide delineation on competing claims over a disputed area thought to be rich in oil and gas
  • Although oil sands are out-of-vogue, Canadian Natural Resources has purchased Devon Energy’s Canadian operations for US$2.8 billion, gaining heavy oil assets in Alberta that have synergistic locations with CNR’s own areas
  • Sierra Leone has re-opened its 4th Licensing Round and extended the deadline to September 20, providing acreage in little-explored offshore regions
  • Total is pulling out of exploration in the Democratic Republic of Congo, with search efforts in Block 3 since 2011 turning up empty in discoveries
  • Marathon Oil is exiting Iraq fully, following the sale of its 15% interest in the Atrush Block in Kurdistan that is part of a wider pullback for the company
  • Eni’s chief upstream officer Antonio Vella, who oversaw a dramatic surge in the Italian major’s upstream fortunes, has been succeeded by Alessandro Puliti
  • Eni’s Africa push continues as Eni Mozambico acquires rights to three offshore blocks (A5-B, Z5-C and Z5-D) in Mozambique’s Angoche and Zambezi basins

Midstream & Downstream

  • As the dirty oil fiasco at Russia’s Druzhba pipeline winds down – with Total joining the chorus of clients demanding compensation – deals have been struck with refineries including Germany’s Leuna, as well as Poland’s Plock, Gdansk and PCK, to process the contaminated crude after blending with clean oil
  • Russia is also looking to ship the contaminated crude from the Belarus portion of the Druzhba pipeline to be processed by Russian refineries after dilution with clean oil to reduce the organic chloride down from unusable 300ppm levels
  • Following the start-up of its 400,000 b/d refinery in Dalian, Hengli Petrochemical is aiming to become China’s first private exporter of jet fuel, a move that will require a litany of red-tape bureaucracy, licensing and approvals
  • State oil firm Petroperu is looking at selling off units in its 95,000 b/d Talara refinery to raise up to US$1 billion to finance a massive planned expansion
  • Despite protests from farmers, Total’s 500,000 tpa palm oil-based biodiesel refinery will be starting up in early June, completing the turnaround for the La Mede site from loss-making oil refinery to a competitive biodiesel plant
  • Azerbaijan’s SOCAR is looking to list its Turkish subsidiary and the 215 kb/d STAR refinery in the London, Hong Kong and Istanbul stock exchanges in 2021

Natural Gas/LNG

  • Venture Global LNG’s Calcasieu Pass export project in Louisiana’s 10 mtpa Cameron Parish has received a US$1.3 billion equity injection from Stonepeak Infrastructure Partners
  • Argentina’s first LNG shipment is reading for loading, with state oil firm YPG preparing the first 30,000 cbm shipment from the Vaca Muerta shale play
  • American LNG is going places, with Bulgaria agreeing to take two US LNG cargoes this year – one from Cheniere and one from BP’s US trading unit

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U.S. Federal Gulf of Mexico crude oil production to continue to set records through 2020

U.S. crude oil production in the U.S. Federal Gulf of Mexico (GOM) averaged 1.8 million barrels per day (b/d) in 2018, setting a new annual record. The U.S. Energy Information Administration (EIA) expects oil production in the GOM to set new production records in 2019 and in 2020, even after accounting for shut-ins related to Hurricane Barry in July 2019 and including forecasted adjustments for hurricane-related shut-ins for the remainder of 2019 and for 2020.

Based on EIA’s latest Short-Term Energy Outlook’s (STEO) expected production levels at new and existing fields, annual crude oil production in the GOM will increase to an average of 1.9 million b/d in 2019 and 2.0 million b/d in 2020. However, even with this level of growth, projected GOM crude oil production will account for a smaller share of the U.S. total. EIA expects the GOM to account for 15% of total U.S. crude oil production in 2019 and in 2020, compared with 23% of total U.S. crude oil production in 2011, as onshore production growth continues to outpace offshore production growth.

In 2019, crude oil production in the GOM fell from 1.9 million b/d in June to 1.6 million b/d in July because some production platforms were evacuated in anticipation of Hurricane Barry. This disruption was resolved relatively quickly, and no disruptions caused by Hurricane Barry remain. Although final data are not yet available, EIA estimates GOM crude oil production reached 2.0 million b/d in August 2019.

Producers expect eight new projects to come online in 2019 and four more in 2020. EIA expects these projects to contribute about 44,000 b/d in 2019 and about 190,000 b/d in 2020 as projects ramp up production. Uncertainties in oil markets affect long-term planning and operations in the GOM, and the timelines of future projects may change accordingly.

anticipated deepwater Federal Gulf of Mexico field starts

Source: Rystad Energy

Because of the amount of time needed to discover and develop large offshore projects, oil production in the GOM is less sensitive to short-term oil price movements than onshore production in the Lower 48 states. In 2015 and early 2016, decreasing profit margins and reduced expectations for a quick oil price recovery prompted many GOM operators to reconsider future exploration spending and to restructure or delay drilling rig contracts, causing average monthly rig counts to decline through 2018.

Brent crude oil price and U.S. Gulf of Mexico rig count

Source: U.S. Energy Information Administration, Thompson Reuters, Baker Hughes

Crude oil price increases in 2017 and 2018 relative to lows in 2015 and 2016 have not yet had a significant effect on operations in the GOM, but they have the potential to contribute to increasing rig counts and field discoveries in the coming years. Unlike onshore operations, falling rig counts do not affect current production levels, but instead they affect the discovery of future fields and the start-up of new projects.

October, 17 2019
Crude oil used by U.S. refineries continues to get lighter in most regions

API gravity of U.S. refinery inputs by region

Source: U.S. Energy Information Administration, Monthly Refinery Report

The API gravity of crude oil input to U.S. refineries has generally increased, or gotten lighter, since 2011 because of changes in domestic production and imports. Regionally, refinery crude slates—or the mix of crude oil grades that a refinery is processing—have become lighter in the East Coast, Gulf Coast, and West Coast regions, and they have become slightly heavier in the Midwest and Rocky Mountain regions.

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, so light oils have high API gravities. Crude oil with an API gravity greater than 38 degrees is generally considered light crude oil; crude oil with an API gravity of 22 degrees or below is considered heavy crude oil.

The crude slate processed in refineries situated along the Gulf Coast—the region with the most refining capacity in the United States—has had the largest increase in API gravity, increasing from an average of 30.0 degrees in 2011 to an average of 32.6 degrees in 2018. The West Coast had the heaviest crude slate in 2018 at 28.2 degrees, and the East Coast had the lightest of the three regions at 34.8 degrees.

Production of increasingly lighter crude oil in the United States has contributed to the overall lightening of the crude oil slate for U.S. refiners. The fastest-growing category of domestic production has been crude oil with an API gravity greater than 40 degrees, according to data in the U.S. Energy Information Administration’s (EIA) Monthly Crude Oil and Natural Gas Production Report.

Since 2015, when EIA began collecting crude oil production data by API gravity, light crude oil production in the Lower 48 states has grown from an annual average of 4.6 million barrels per day (b/d) to 6.4 million b/d in the first seven months of 2019.

lower 48 states production of crude oil by API gravity

Source: U.S. Energy Information Administration, Monthly Crude Oil and Natural Gas Production Report

When setting crude oil slates, refiners consider logistical constraints and the cost of transportation, as well as their unique refinery configuration. For example, nearly all (more than 99% in 2018) crude oil imports to the Midwest and the Rocky Mountain regions come from Canada because of geographic proximity and existing pipeline and rail infrastructure between these regions.

Crude oil imports from Canada, which consist of mostly heavy crude oil, have increased by 67% since 2011 because of increased Canadian production. Crude oil imports from Canada have accounted for a greater share of refinery inputs in the Midwest and Rocky Mountain regions, leading to heavier refinery crude slates in these regions.

By comparison, crude oil production in Texas tends to be lighter: Texas accounted for half of crude oil production above 40 degrees API in the United States in 2018. The share of domestic crude oil in the Gulf Coast refinery crude oil slate increased from 36% in 2011 to 70% in 2018. As a result, the change in the average API gravity of crude oil processed in refineries in the Gulf Coast region was the largest increase among all regions in the United States during that period.

U.S. refinery inputs by region

Source: U.S. Energy Information Administration, Monthly Imports Report and Monthly Refinery Report

East Coast refineries have three ways to receive crude oil shipments, depending on which are more economical: by rail from the Midwest, by coastwise-compliant (Jones Act) tankers from the Gulf Coast, or by importing. From 2011 to 2018, the share of imported crude oil in the East Coast region decreased from 95% to 81% as the share of domestic crude oil inputs increased. Conversely, the share of imported crude oil at West Coast refineries increased from 46% in 2011 to 51% in 2018.

October, 14 2019
Your Weekly Update: 7 - 11 October 2019

Market Watch  

Headline crude prices for the week beginning 7 October 2019 – Brent: US$58/b; WTI: US$52/b

  • As Saudi Arabia confirms that it has ‘fully restored’ its crude output, the effects of the attack on the Abqaiq facilities has faded, with the market now turning its focus to the restarted US-China trade talks in hope that a deal can be reached
  • Optimism is not high that a deal can be struck, and the spill over effects on global oil demand and the global economy high, with the IMF having downgraded its projections for global economic growth five times in the last 18 months
  • In OPEC, another blow has been dealt, as Ecuador will quit the organisation in January 2020; linked to ongoing economic unrest, Ecuador states that it is being ‘honest with itself’ over its ability to adhere to the supply deal, prioritising increasing revenue over membership of the oil group
  • There is every chance that Ecuador may return to OPEC once the political situation calms down, with previous members Gabon and Indonesia having also withdrawn and re-entered the club; however, this symbolic exit will raise questions about OPEC’s ability to control and balance supply
  • Given this, Nigeria has reiterated that OPEC is ready to make deeper cuts if necessary if crude oil prices continue to tumble, prioritising market stability
  • The persistent decline of the US active rig count continues, as Baker Hughes data shows the net loss of another five rigs last week; all losses were inland rigs, pointing to consolidation and improved productivity in the sector
  • Rangebound trading should be expected in the short-term, unless an unlikely breakthrough in the US-China trade war happen; Brent should continue to trade in the US$58-60/b range, while WTI maintains its discount at US$53-55/b


Headlines of the week

Upstream

  • Brazil’s planned offshore auction for November is already attracting major attention, with 14 companies registered for acreage in the Buzios, Atapu, Itapu and Sepia blocks that contain proven reserves of at least 5 billion barrels, with the potential for at least 6 billion barrels more
  • Aker BP’s Valhall West Flank platform in the North Sea – tapping into 60 million barrels - will start up this year after approval by the watchdog
  • Angola will be offering nine blocks – 11, 12, 13, 27, 28, 29, 41, 42 and 43 – in the Namibe basin and one in Benguela basin on November 12
  • Iran is going ahead with a US$1.8 billion oil pipeline to the port of Jask, which will bypass the Persian Gulf with its position on the Gulf of Oman, possibly shielding crude exports away from military action as well as boost shipments of Caspian Sea oil through the country
  • Norway’s Petroleum Fund has been given the go-ahead to sell oil and gas stocks worth US$5.9 billion as it moves to focus on cleaner energies, gradually exiting upstream stocks but maintaining downstream ones
  • Africa-focused Delonex Energy announced that it had made four oil discoveries in Chad’s frontier Termit basin, with drilling starting in 2020

Midstream/Downstream

  • LyondellBasell and China’s private petchems player Bora Enterprise has started building their US$2.5 billion petrochemicals plant in Liaoning, the largest petchems investment by a Chinese ‘teapot’ refiner thus far
  • Husky has begun reconstruction activities at the Superior Refinery in Wisconsin, after acquiring the site in 2017 and after a fire that damaged most of the site in 2018, with an expected return in 2021
  • Pertamina and Saudi Aramco’s long-running talks to collaborate on the upgrade of the Cilacap refinery in Java continues to roll on, with the latest delay linked to disagreements over the valuation of the refinery
  • Venezuela’s 955 kb/d Paraguan Refining Center has partially restarted after being knocked out of operation by a lightning storm in early September

Natural Gas/LNG

  • Total has completed its acquisition of Anadarko’s 26.5% operated interest in the Mozambique LNG project for US$3.9 billion, part of its deal with Occidental Petroleum to acquire Anadarko’s assets in Africa
  • After failing to renegotiate the Papua LNG plan with Total, the government of Papua New Guinea has now turned the P’nyang deal, hoping to seek better terms from project operator ExxonMobil
  • Abu Dhabi’s ADNOC has started accepting bids for stakes in its natural gas pipelines system, a move that could potentially bring in US$5 billion
  • Petronas has signed a deal with Korea Midland Power (Komipo) to supply 240,000 tpa of LNG over five years beginning 2020
  • The first liquefaction unit at the US$2 billion, Elba Island LNG plant in Savannah, Georgia has reached commercialisation stage, the first of 10 planned units that will have a production capacity of 2.5 mtpa of LNG
  • The Venture Global Plaquemines LNG project Louisiana will be going ahead after receiving regulatory clearance from the US FERC

Corporate

  • After nearly a decade at the reins, BP’s CEO Bob Dudley will step down in Q1 2020, to be succeeded by the current upstream CEO Bernard Looney
October, 14 2019