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Last Updated: September 13, 2019
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Headline crude prices for the week beginning 9 September 2019 – Brent: US$61/b; WTI: US$56/b

  • Hope reigns as the market banks on signs that the US and China could reach a trade deal would eliminate one of the largest risks to current oil prices: a full-blown global recession
  • However, this is merely the latest in a series of dashed hopes that has seen the trade war between the US and China – using tariffs as weapons – escalate dramatically over the year; new tariffs entered play September 1 and more could come, with both sides already feeling the pinch
  • But crude prices did get a lift from EIA data showing that US crude stockpiles fell far more than expected, down by 4.8 million barrels to its lowest level since October 2018 – an indication of strong demand, with US refinery utilisation at 94.8%
  • However, there are fissures appearing on the supply side that could trigger some risk premiums; in Venezuela, the upstream crisis continues with the latest blow being a Chinese contractor halting work over claims over non payment
  • More importantly, Saudi Oil Minister – or rather former Saudi Oil Minister Khalid al-Falih – was dismissed from the government; after initial reports suggested that al-Falih would focus on energy policy after the oil ministry was split, a royal decree issued days later confirmed his sacking
  • Saudi Arabia and its allies have been at pains to re-assure the market that the dismissal of al-Falih – who is respected around the world – will not impact Saudi production or the current OPEC+ supply pact
  • This will be confirmed at the upcoming OPEC+ meeting this week, which will be the first under Saudi Arabia’s new Energy Minister, one of the King’s sons Prince Abdulaziz bin Salman
  • Against this backdrop of turmoil, the active US rig count fell yet again; after two weeks of double-digit losses, US drillers lost four oil and two gas rigs, with losses seen once again in the Permian
  • Power moves within Saudi Arabia may have sent some tremors to the market, but it is likely that OPEC+ will stick to its commitments; with no signs that the US and China were doing anymore more than talking about talking, crude prices will remain rangebound – US$59-61/b for Brent and US$54-56/b for WTI

Headlines of the week

Upstream

  • Total has suspended plans for the US$3.5 billion crude export pipeline that would connect Ugandan oilfield to port facilities in Tanzania after a failure to buy a stake in Tullow Oil’s upstream assets in Uganda linked to tax negotiations; this will require a complete restart for the Uganda project
  • With other supermajors pulling out, Total remains committed to the North Sea, with CEO Patrick Pouyanne looking to invest up to US$10 billion over the next five years but cautions that Total maintain strict cost discipline
  • The Norwegian Petroleum Directorate (NPD) has consented to the startup of the giant Johan Sverdrup field, a potential 660,000 b/d resource that has been called the North Sea’s ‘last hurrah’
  • Permian-focused player Concho Resource has agreed to sell its assets in the New Mexico Shelf to Spur Energy Partners for US$925 million, continuing a wave of consolidation in the US shale arena
  • Shell has announced plans to start drilling in the offshore Saturno field in Brazil, becoming one of the first private players tapping the pre-salt Santos Basin

Midstream/Downstream

  • Sinopec’s new 160 kb/d Yangzi refinery has begun production of Europe-standard gasoline, providing an outlet for Chinese fuel products amid a domestic glut that has seen refiners look overseas for sales
  • Petrobras is extending the deadline for interested parties for its four refineries on sale from September 16 to September 27, citing high investor interest for the refining assets that represent 37% of Brazilian capacity
  • Saudi Aramco continues its downstream push in China, signing an MoU with the Zhejiang Free Trade Zone that could pave the way for further investments beyond current plans to acquire 9% of the Zhejiang Petrochemical refinery
  • Russia’s Sibur will be cutting back LPG exports to Europe to some 2 million tons from a typical 3.5-4 million tons per year, redirecting the LPG to be used as feedstock for its ZapSibNefteKhim petrochemicals plant in Western Siberia

Natural Gas/LNG

  • Months of uncertainty have been put to rest as the government of Papua New Guinea endorsed the US$13 billion Papua LNG project, following some new commitments by project leader Total – primarily on local content
  • Also in PNG, the government has approved Australian independent Twinza Oil’s Pasca gas/condensate project - the country’s first offshore gas project
  • ExxonMobil and its partners have sanctioned plans for the 6.2 mtpa Sakhalin 1 LNG plant on Sakhalin Island in Russia’s far east, with easy access to Japan
  • Argentina’s YPF is pushing ahead with plans to build a US$5 billion LNG export terminal – tapping into the Vaca Muerta shale basin – despite continued domestic political and financial chaos hanging over the project
  • Petronas has agreed to purchase natural gas that is set to produced from the Gorek, Larak and Bakong fields in the SK408 area in Sarawak, jointly operated by SapuraOMV Upstream, Petronas Carigali and Shell
  • Qatar Petroleum has booked 100% of regasification capacity at the Fluxys Zeebrugge LNG terminal until 2044, consolidating Qatar’s hold on one of Northwest Europe’s important gas entry nodes
  • Equinor has brought the Snefrid Nord gas field online, which is the first of several planned projects related to the Aasta Hansteen field to begin production, with an initial output of 4 mcm/d

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Saudi Aramco Moves Into Russia’s Backyard

International expansions for Saudi Aramco – the largest oil company in the world – are not uncommon. But up to this point, those expansions have followed a certain logic: to create entrenched demand for Saudi crude in the world’s largest consuming markets. But Saudi champion’s latest expansion move defies, or perhaps, changes that logic, as Aramco returns to Europe. And not just any part of Europe, but Eastern Europe – an area of the world dominated by Russia – as Saudi Aramco acquires downstream assets from Poland’s PKN Orlen and signs quite a significant crude supply deal. How is this important? Let us examine.

First, the deal itself and its history. As part of the current Polish government’s plan to strengthen its national ‘crown jewels’ in line with its more nationalistic stance, state energy firm PKN Orlen announced plans to purchase its fellow Polish rival (and also state-owned) Grupa Lotos. The outright purchase fell afoul of EU anti-competition rules, which meant that PKN Orlen had to divest some Lotos assets in order to win approval of the deal. Some of the Lotos assets – including 417 fuel stations – are being sold to Hungary’s MOL, which will also sign a long-term fuel supply agreement with PKN Orlen for the newly-acquired sites, while PKN Orlen will gain fuel retail assets in Hungary and Slovakia as part of the deal. But, more interestingly, PKN Orlen has chosen to sell a 30% stake in the Lotos Gdansk refinery in Poland (with a crude processing capacity of 210,000 bd) to Saudi Aramco, alongside a stake in a fuel logistic subsidiary and jet fuel joint venture supply arrangement between Lotos and BP. In return, PKN Orlen will also sign a long-term contract to purchase between 200,000-337,000 b/d of crude from Aramco, which is an addition to the current contract for 100,000 b/d of Saudi crude that already exists. At a maximum, that figure will cover more than half of Poland’s crude oil requirements, but PKN Orlen has also said that it plans to direct some of that new supply to several of its other refineries elsewhere in Lithuania and the Czech Republic.

For Saudi Aramco, this is very interesting. While Aramco has always been a presence in Europe as a major crude supplier, its expansion plans over the past decade have been focused elsewhere. In the US, where it acquired full ownership of the Motiva joint venture from Shell in 2017. In doing so, it acquired control of Port Arthur, the largest refinery in North America, and has been on a petrochemicals-focused expansion since. In Asia, where Aramco has been busy creating significant nodes for its crude – in China, in India and in Malaysia (to serve the Southeast Asia and facilitate trade). And at home, where the focus has on expanding refining and petrochemical capacity, and strengthen its natural gas position. So this expansion in Europe – a mature market with a low ceiling for growth, even in Eastern Europe, is interesting. Why Poland, and not East or southern Africa? The answer seems fairly obvious: Russia.

The current era of relatively peaceful cooperation between Saudi Arabia and Russia in the oil sphere is recent. Very recent. It was not too long ago that Saudi Arabia and Russia were locked in a crude price war, which had devastating consequences, and ultimately led to the détente through OPEC+ that presaged an unprecedented supply control deal. That was through necessity, as the world faced the far ranging impact of the Covid-19 pandemic. But remove that lens of cooperation, and Saudi Arabia and Russia are actual rivals. With the current supply easing strategy through OPEC+ gradually coming to an end, this could remove the need for the that club (by say 2H 2022). And with Russia not being part of OPEC itself – where Saudi Arabia is the kingpin – cooperation is no longer necessary once the world returns to normality.

So the Polish deal is canny. In a statement, Aramco stated that ‘the investments will widen (our) presence in the European downstream sector and further expand (our) crude imports into Poland, which aligns with PKN Orlen’s strategy of diversifying its energy supplies’. Which hints at the other geopolitical aspect in play. Europe’s major reliance on Russia for its crude and natural gas has been a minefield – see the recent price chaos in the European natural gas markets – and countries that were formally under the Soviet sphere of influence have been trying to wean themselves off reliance from a politically unpredictable neighbour. Poland’s current disillusion with EU membership (at least from the ruling party) are well-documented, but its entanglement with Russia is existential. The Cold War is not more than 30 years gone.

For Saudi Aramco, the move aligns with its desire to optimise export sales from its Red Sea-facing terminals Yanbu, Jeddah, Shuqaiq and Rabigh, which have closer access to Europe through the Suez Canal. It is for the same reason that Aramco’s trading subsidiary ATC recently signed a deal with German refiner/trader Klesch Group for a 3-year supply of 110,000 b/d crude. It would seem that Saudi Arabia is anticipating an eventual end to the OPEC+ era of cooperative and a return to rivalry. And in a rivalry, that means having to make power moves. The PKN Orlen deal is a power move, since it brings Aramco squarely in Russia’s backyard, directly displacing Russian market share. Not just in Poland, but in other markets as well. And with a geopolitical situation that is fragile – see the recent tensions about Russian military build-up at the Ukrainian borders – that plays into Aramco’s hands. European sales make up only a fraction of the daily flotilla of Saudi crude to enters international markets, but even though European consumption is in structural decline, there are still volumes required.

How will Russia react? Politically, it is on the backfoot, but its entrenched positions in Europe allows it to hold plenty of sway. European reservations about the Putin administration and climate change goals do not detract from commercial reality that Europe needs energy now. The debate of the Nord Stream 2 pipeline is proof of that. Russian crude freed up from being directed to Eastern Europe means a surplus to sell elsewhere. Which means that Russia will be looking at deals with other countries and refiners, possibly in markets with Aramco is dominant. That level of tension won’t be seen for a while – these deals takes months and years to complete – but we can certainly expect that agitation to be reflected in upcoming OPEC+ discussions. The club recently endorsed another expected 400,000 b/d of supply easing for January. Reading the tea leaves – of which the PKN Orlen is one – makes it sound like there will not be much more cooperation beyond April, once the supply deal is anticipated to end.

End of Article

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Market Outlook:

-       Crude price trading range: Brent – US$86-88/b, WTI – US$84-86/b

-       Crude oil benchmarks globally continue their gain streak for a fifth week, as the market bounces back from the lows seen in early December as the threat of the Omicron virus variant fades and signs point to tightening balances on strong consumption

-       This could set the stage for US$100/b oil by midyear – as predicted by several key analysts – as consumption rebounds ahead of summer travel and OPEC+ remains locked into its gradual consumption easing schedule 

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