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Last Updated: November 8, 2019
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Headline crude prices for the week beginning 4 November 2019 – Brent: US$62/b; WTI: US$56/b

  • Good broader economic data helped push crude prices up, as better-than-expected US job numbers and a big uptick in Chinese manufacturing orders allayed some fears over the health of the global economy
  • Those worries still persist, but the upbeat data does show that the slowdown might not be prolonged, especially if the US and China manage to hammer out a comprehensive trade deal that White House officials have hinted is in the works
  • The USA, under Trump, has formally withdrawn from the Paris climate accord, placing the USA as one of only 3 countries not to be a party to the comprehensive collection of emission reductions by country
  • OPEC production rebounded to 29.7 mmb/d in October, recovering from the 1.23 mmb/d drop in September caused by the attacks on Saudi crude facilities
  • Having recently lost Qatar and Ecuador, OPEC – via Saudi Arabia – has reportedly informally reached out to Brazil to join the oil club, highlighting the growing importance of Brazilian output; President Jair Bolsonaro has indicated that he would be ‘eager to accept’ the offer
  • Ahead of the OPEC meeting in Vienna on 5-7 December, Saudi Aramco is now scheduled for public listing on the Saudi stock exchange on December 11; this might lead to a push for a deeper or longer tenure for the current supply deal at the Vienna meeting, as Aramco seeks to bolster its valuation
  • The massacre in onshore drilling countries in the US, as the Baker Hughes index indicates that five oil and three gas rigs were dropped last week for a net loss of 8 and a total of 822, as bankruptcies increase in major shale areas
  • There isn’t much room for crude prices to grow in the current environment; indeed, prices are likely to trade with a downward bias at US$58-60/b for Brent and US$53-55/bd for WTI

Headlines of the week

Upstream

  • Total has chosen to sell off its 86.95% stake in Brunei’s offshore Block CA1 to Shell for some US$300 million in line with its global non-core asset divestment
  • Myanmar’s delayed upstream licensing round has now been set for early 2020, with the government aiming to pass a draft oil and gas bill before moving ahead
  • Apache expects to bring two ‘high volume’ wells in the North Sea online over the next two months, with Storr operating by November and Garten by the end of the year, which could double its current 54,000 b/d North Sea output
  • A new offshore oil discovery has been announced in Equatorial Guinea by Kosmos Energy, with the S-5 well in the Rio Muni Basin yielding crude flows

Midstream/Downstream

  • ExxonMobil has put its refinery in Billings, Montana up for sale once again, looking to fetch US$500 million for the 60 kb/d plant, with interested buyers including Valero and Marathon
  • Russia is moving ahead with settling the cases of contaminated crude oil transported via its Druzhba pipeline; Lukoil and Hungary’s MOL have signed a settlement deal, while Total has opted to sell its 720,000-barrel cargo on the open market at a discount of over US$25/b
  • Saudi Aramco may be gaining a bigger foothold in Africa, as NNPC announced plans to collaborate with the Saudi oil firm to revamp Nigeria’s four ailing state refineries that are buckling from age
  • Marathon has folded under pressure from activist investors, announcing that it will be spinning off its fuel retail business while also reviewing a future possibility to spin off its pipeline business as well
  • ALFA Mexico’s petchems subsidiary Alpek has agreed to acquire PET manufacturer Lotte Chemical UK from South Korea’s Lotte Chemical
  • Kuwait Petroleum has started up the 2,264 b/d LPG processing plant at its Mina al-Ahmedi refinery, focusing on delivering LPG for petchems usage

Natural Gas/LNG

  • Kosmos Energy has announced a ‘major’ gas discovery in Mauritania at its Orca-1 well; combined with the Marsouin-1 discovery in the BirAllah, Orca-1 is the largest deepwater oil and gas discovery so far in 2019 and could underpin standalone LNG development in the West African nation
  • BP has announced it is on track to start production from the deepwater Raven field in Egypt by end-2019 – the third stage of its West Nile Delta project that also encompasses the producing Giza and Fayoum developments
  • Denmark’s state energy regulator has given permission for the controversial Nord Stream 2 pipeline to be built in its waters to connect Russia to Germany
  • Plans to expand the Sakhalin-2 LNG plant in Russia’s far east have been put on hold, reportedly due to a lack of gas resources and international sanctions in place, with Gazprom also looking to pipe gas to China instead of liquefying
  • Cheniere expects its Corpus Christi LNG Train 3 in Texas to start-up ahead of its previous timeline of 2H2021, while also expecting to begin operations at the Sabine Pass LNG Train 6 in Louisiana by 1H2023
  • Turkey’s state energy firm Botas is accepting tenders for up to 70 cargoes of LNG for delivery over 2020-2023, as it aims to diversify its gas sources
  • Sempra Energy and Japan’s Mitsui & Co have signed a new MoU to collaborate on more LNG projects, including the Cameron LNG Phase 2 and the future expansion of the Energia Costa Azul project in Baja California

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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