Easwaran Kanason

Co - founder of NrgEdge
Last Updated: August 30, 2019
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Business Trends
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After over 60 years of operating in the frigid but productive wilderness of Alaska, oil supermajor BP has decided to call it quits. The entirety of its Alaskan assets and operations have been sold to Hilcorp Energy for US$5.6 billion. Why Alaska and why now? Well, that’s just a natural consequence of looking for the next big thing. Once home to the largest crude oil field in America, BP’s departure from Alaska is not a surprise but a trend of things to come. 

What Hilcorp purchases from BP includes the Prudhoe Bay oil field, which produced 1.5 mmb/d per day in the late 1980s as well as BP’s stake in the Trans-Alaskan Pipeline, which moves oil from the North Slope to the Port of Valdez for export. These were once crown jewels of American upstream, but are now tarnished after years of consistent production have dwindled resources. From peak production of over 2 mmb/d in the late 1980s, Alaskan crude output is now under 500,000 b/d. What oil is left is getting harder to extract, and what new oil is being found isn’t nearly enough to justify long-term investment. Particularly when cheaper alternatives that bring quicker returns – ie. shale

BP isn’t the only firm to exit Alaska, but it certainly is the largest so far. In fact, it had already halted exploration in Alaska years ago, maintaining its portfolio of existing assets only. Marathon Oil and Anadarko have already fled southwards to the shale fields in Texas and Mexico. But BP’s history with Alaska is deep, and therefore its departure is a psychological blow. Following the news, there is now already talk that ExxonMobil might be the next to leave. If it did, it would be a disappointment to the state but certainly not a surprise; oil production in the Last Frontier is projected to hit a 42-year low this year. What is BP’s loss is Houston-based Hilcorp’s gain – Hilcorp’s Alaskan operation will double in size after the deal, placing it just behind ConocoPhillips as the largest operators in the state.

Of course, this phenomenon isn’t just limited to Alaska. The North Sea, once crucial to the global crude supply chain has seen similar declines. And, consequently, the departure of once major players. Taking their place are smaller, more nimble players with a bigger risk appetite, seeking to eke out the last few drops of oil available in these maturing areas.

So where does BP and the other majors considering moving out go? The answer is predictable: shale. BP already has a toehold in US shale, purchasing BHP’s shale operations in July 2018 for US$10.5 billion its largest deal in 19 years. With assets in the Permian through the deal, BP returns once again to the US shale frontier, after being forced to leave the then-promising Permian in 2010 in the wake of the Deepwater Horizon disaster. BP CEO Bob Dudley called the Alaska deal a move to ‘steadily reshaping BP with opportunities that are more closely aligned with our long-term strategy and more competitive for our investment.’ In other words, once precious strongholds like Alaska, the North Sea and even Alberta oil sands are old hat. The cool new kid on the block is shale and, despite the challenges it faces in long term sustainability of production, all the majors and supermajors want to get into club. Well, maybe except Total and (to a lesser extent) Shell. 

For all the talk of individual strategies and characteristics, the industry is still governed by a herd mentality. And the herds are migrating away from drying old pastures in search for fresh new grass elsewhere. Where they will go once the new grass dries up will be anyone’s guess.

BP’s main upstream assets in Alaska

  • Prudhoe Bay Oil Field (Operator, 26% share)
  • Point Thomson Gas Field (32% share, operated by ExxonMobil)
  • Trans-Alaskan Pipeline (49% share)

Read more:
Alaska BP Hillcorp USA Permian Shale Oil field
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September, 21 2019
Your Weekly Update: 16 - 20 September 2019

Market Watch  

Headline crude prices for the week beginning 16 September 2019 – Brent: US$69/b; WTI: US$63/b

  • Global crude oil prices surged at the start of the week as news that a successful drone strike on the Abqaiq processing plant and the Khurais oil field in Saudi Arabia took out over half of the Kingdom’s crude production capacity
  • Brent prices jumped above US$70/b at one point on fears on global supply disruption, but abated as President Donald Trump authorises the release of US strategic petroleum reserves to cover the market
  • Initial fears that the Saudi Arabian crude output would be crippled for months proved to be extreme, with Saudi Aramco announcing that some 70% of capacity at Abqaiq had been restored within days
  • But more worryingly is that this incident escalates the risk of a full-blown military confrontation with Iran; the US was quick to accuse Iran of the attack, citing data on the attack, which was denied by Iran
  • Yemen’s Iran-backed Houthi rebels claimed responsibility for the attack, although initial results of a Saudi investigation pointed to the weapons originating from Iran
  • For now, crude oil prices have retreated as the risk of widespread supply disruption abated, but tensions are still high in the region
  • This comes after President Trump signals that he was considering easing sanctions in an apparent thaw in the US-Iran relationship; this opportunity now appears to have evaporated
  • Saudi Arabia’s new oil energy minister, Prince Abdulaziz bin Salman, made a positive impression at the recent OPEC+ meeting, with errant members of the group signalling that they were now ready to adhere to the supply deal
  • In Venezuela, the oil crisis continues as ongoing US sanctions now mean that the country cannot find enough vessels to transport its crude, as shippers fear losing insurance coverage if they transport Venezuelan oil
  • Iran has released the UK-flagged Stena Impero vessel that it had impounded, a lone bright spot in a region now clouded by geopolitical tensions
  • Against this backdrop, the US active rig count recorded yet another fall, losing five oil and seven gas rigs for a net drop of 12 to a new total of 886 rigs
  • With the shock of the Saudi drone attacks abating, crude oil prices are retreating back to their previous range – US$60-63 for Brent and US$56-59/b for WTI – as the impact of global supply was minimised; another attack, however, might cause a more permanent shift in prices


Headlines of the week

Upstream

  • Equinor has received consent from the Norwegian Petroleum Directorate to continue operations at the Tordis and Vigdis fields through 2036 and 2040, respectively, extending the life of the North Sea fields by 34 years
  • BP has announced that it will deploy continuous measurement of methane emissions for all future oil and gas projects in a bid to reduce emissions
  • CNOPC and Niger have agreed to collaborate on a 1,892km pipeline to carry oil from Niger’s Agadem rift basin to port facilities in Benin
  • The South African government is tabling a new law that will allow the state to take a free stake of up to 10% in all new oil and gas ventures, hoping to capitalise on a surge in upstream interest after Total’s Brulpadda discovery

Midstream/Downstream

  • As the IMO deadline for low-sulfur marine fuels approaches, refiners have begun stockpiling supplies of very low-sulfur fuel oil to ensure adequate supply; this includes Japan’s Cosmo Oil that aims to begin supplying VLSFO to the domestic marine market by October 2019
  • IndianOil’s Gujarat refinery stated it ready to produce 12,900 b/d of VLSFO by October while its Haldia refinery will start producing 5,500 b/d of VLSFO by December; this should be adequate to cover the India’s marine fuel demand
  • India is considering selling a stake in BPCL, the country’s second largest refiner, to an international firm to boost competition in downstream fuel retailing that has historically been dominated by state firms
  • Valero Energy and Darling Ingredients are launching the first renewable gasoil plant in Texas, focusing on producing renewable diesel and naphtha
  • In the UK, Essar Oil’s Stanlow refinery aims to increase its diet of US crude from a current 35% to 40%, leveraging on cheaper American oil
  • The after-effects of Russia’s contaminated crude through the Druzhba pipeline continues as Total issues a tender to sell 1.3 million barrels of tainted Ural crude through Rotterdam after failing to process it

Natural Gas/LNG

  • Poland has won a ruling from the EU courts to reduce Russian control over the key EU Opal pipeline that carries Russian gas from the Nord Stream link to Germany, preventing Gazprom from using most of Opal capacity in a bit to increase energy security for Eastern European countries
  • Vitol and Mozambique’s state player ENH have set up a new joint venture in Singapore to capitalise on trading opportunities for LNG, LPG, and condensate
  • Australia’s Liquefied Natural Gas Ltd and Delta Offshore Energy will supply gas from the Magnolia fields to an LNG-to-power project in Bac Lieu, Vietnam
  • Eni’s Baltim South West gas field offshore Egypt has started up production, only 3 years after discovery, producing an initial 100 mscf/d of gas
  • US gas player Sempra is looking to take FID on its Energia Costa Azul LNG project in Mexico’s Baja California region by the end of 2019
  • Egypt has announced that it expects to receive first natural gas from Israel by end-2019 through the East Mediterranean Gas pipeline, with initial supplies of 200 mscf/d that will rise to 500 mscf/d by 2020
  • The Independence floating LNG terminal in Lithuania – built to reduce the Baltic region’s dependence on Russian gas – is set to receive its first-ever cargo from Siberia, likely from Novatek’s LNG projects in Yamal
September, 20 2019
Financial Review: Second-Quarter 2019
Key findings
  • Brent crude oil daily average prices were 9% lower in second-quarter 2019 than in second-quarter 2018 and averaged $68 per barrel
  • The 117 companies in this study increased their combined liquids production 4.6% in second-quarter 2019 from second-quarter 2018, and their natural gas production increased 5.0% during the same period
  • Nearly half of the companies were free cash flow positive—that is, they generated more cash from operations than their capital expenditures
  • Dividends plus share repurchases were nearly one-third of cash from operations, slightly lower than the six-year high set in first-quarter 2019

Distributions to shareholders via dividends and share repurchases amounted to nearly 33% of cash from operations


See entire second-quarter review

September, 20 2019