Last Updated: February 10, 2020
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The final set of financial numbers for 2019, and for an interesting decade in terms of oil prices, came to an end as a tale of two parts. With the quarter characterised by stubborn crude prices despite OPEC+’s efforts and slumping gas prices amid a global glut, it was always going to be a challenging quarter. Most numbers from supermajors and majors came in as disappointing, but there were several bright spots where even the most optimistic expectations were exceed.

Shell, the first to report, set the tone for the cycle, showing a 48% fall in net profits from a 19% y-o-y drop in revenue. Citing weaker refining and chemical margins from slowing global growth with China and the US still locked in a trade war, the weaker results led Shell to scale back the pace of its US$25 billion share buyback programme. With only US$1 billion of shares to be bought back in Q12020 – down from the regular US$2.75 billion per quarter. Shell warned that the programme’s schedule was still at risk due to the softening global economy. It is likely that Shell will miss its deadline of completing the buyback by end-2020; investors were not impressed, and sent Shell’s share prices down to a two-year low in response.

The US supermajors came next, with both ExxonMobil and Chevron failing to meet market expectations. For ExxonMobil, revenue and net profits were both down by 5%, with the company blaming the ‘tough environment’ and depressed margins for its oil, gas, refining and chemicals businesses that will spill into 2020. Its financials, however, were boosted by the sale of its non-strategic assets in Norway, and noted that its oil extraction in Guyana was going ahead of schedule and could have a positive impact on Q1 financials. Unlike ExxonMobil, Chevron did not have strategic asset sales to fall back on. In fact, it went the opposite way. Having warned investors that it was preparing to take a major write-down on a collection of assets, including shale gas production in Appalachia and deepwater projects in the Gulf of Mexico, the final charge came in at US$10.4 billion. That wiped Chevron’s profits out, reporting a net loss of US$6.6 billion for Q419. Segment performance was stable, beating analyst expectations in some cases. But the pressure of low oil and gas prices will persist.

Things then got better. In the final results for retiring CEO Bob Dudley, who will be replaced by Bernard Looney, BP reported net profits of US$2.57 billion, exceeding even then highest analyst estimate. With a solid upstream performance and boosted by its in-house trading arm, BP bucked the negative trend, allowing it to raise its dividend level, a notion that it had rejected in the last quarter, while also completing a US$1.5 billion share buyback programme. Rounding off the quintet, Total also exceed the expectations of the market. Although the French company was also affected by slumping natural gas prices, along with strikes at its French refineries, record production boosted net profits to US$3.17 billion, almost unchanged y-o-y. The ramp-up of key natural gas projects, Yamal in Russia and Ichthys in Australia, along with the start of the Egina and Kaombo crude oil projects in West Africa, raised upstream output by 9% over a quarter where all other rivals saw their production decline.

When the decade started in 2010, crude oil prices were riding high at US$80/b. It would soon peak at nearly US$120/b in 2011, stay elevated for 3 years, halving by end-2014, slumping down to US$30/b in 2016 before beginning a gradual recovery. This 10-year see-saw ride has been mirrored in the financial performance of the energy supermajors. With a new decade starting with plenty of uncertainty, the fiscal discipline adopted since 2015 by the supermajors will be key to supporting their business activities going forward in troubled times.

Supermajor Financials Q4 2019:

  • ExxonMobil – Revenue (US$67.2 billion, down 5% y-o-y), Net profit (US$5.69, down 5% y-o-y)
  • Shell - Revenue (US$85.1 billion, down 19% y-o-y), Net profit (US$2.93 billion, down 48% y-o-y)
  • Chevron – Revenue (US$36.4 billion, down 14% y-o-y), Net profit (-US$6.6 billion, down 300% y-o-y)
  • BP - Revenue (US$72.2 billion, down 6% y-o-y), Net profit (US$2.57 billion, down 26% y-o-y)
  • Total - Revenue (US$43.4 billion, down 6% y-o-y), Net profit (US$3.17 billion, unchanged y-o-y)

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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.

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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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