U.S. shale producers are raising their capital spending, encouraged by price optimism amid returning sanctions against Iran. Prices are likely to strengthen further in the coming months as well, after a fresh round of sanctions against Russia that could see a suspension of Russian crude oil and oil product imports into the United States.
Investors may not be particularly happy with oil companies’ spending plans but they have less reason to be unhappy with West Texas Intermediate at $67 a barrel, and many, including Continental Resources’ Harold Hamm, expecting a further price rise as Iranian sanction begin to bite.
But shareholders must also be satisfied by the share buyback programs and higher dividends oil companies began paying out after prices started improving. With these higher shareholder returns, they are now in a better position to focus on production growth.
So what we’re seeing is capex plans being expanded by hundreds of millions of dollars, with ConocoPhillips boosting its capex for 2018 by $500 million to $6 billion and Continental is adding $400 million to its already approved budget, with $200 million slated to be invested in more rigs and well completions. Pioneer will add $450 million to its 2018 capex plan but the company noted that some of the additional spending will go towards covering higher cost.
This sheds light on the dark side of the oil industry recovery: Service providers are charging more for their services, as demand begins to outstrip supply, which effectively interferes with the drillers’ ability to make the most of cost cuts achieved during the downturn and higher prices.
Deals, Mergers & Acquisitions
• Noble Energy, Delek Group, and Egyptian East Gas are close to finalizing a deal that will give the three control over a natural gas pipeline between Israel and Egypt, advancing a $15-billion gas export deal between the operators of the Tamar and Leviathan offshore gas fields, and the Egyptian company. The companies already have a deal for the gas exports but it had been blocked by four arbitration lawsuits against Egypt regarding an older gas supply deal. The new three-way deal will see the three set up joint ventures through which they will acquire the share in the pipeline project held by the authors of the lawsuits.
• Apache Corp has teamed up with investment company Kayne Anderson on a pipeline joint venture that will provide a partner to Apache for the operation of its West Texas pipeline assets. These assets include a fully owned pipeline in the Permian, stakes in five other pipelines, and several processing plants. The tie-up will see Apache bring in $1 billion in assets to a new company to be named Altus Midstream Co., while the investment firm will provide $900 million after a share placement. Apache will be majority shareholder with a stake of 71.1%.
Tenders, Auctions & Contracts
• The Mozambican government this week approved contracts that will grant several foreign companies exclusive rights to developing oil fields in an area dubbed Block 5. The contracts follow four years of negotiations that not everyone had the patience to complete: Norway’s Equinor dropped out of the talks this January and Singapore-based Delonex Energy also quit after failing to reach an agreement on terms with the government. This means Block 5 will be shared by Eni, Exxon, Sasol, and the local, national oil company, ENH.
• Aramco has signed a contract with Mazda for research in engine efficiency. The deal is part of Aramco’s attempts to pursue a more environmentally responsible business model, focusing on improving fuel efficiency in internal combustion engines. Aramco already operates a research center in Detroit and now the Mazda deal highlights its interest in fuel efficiency. The JV will seek to provide drivers with low-carbon fuels from Aramco and a new, more efficient engine from Mazda.
Discovery & Development
• Plains All American has accelerated two pipeline projects as capacity bottlenecks in the Permian force producers to sell their crude at a discount to the WTI benchmark. The first of these, the Sunrise pipeline extension, will begin partial service in the final quarter of the year, and the Cactus II pipeline will start operating—again at partial capacity—in the third quarter of 2019. The Sunrise extension will boost the original pipeline’s capacity by half a million barrels daily and the Cactus II will have a total capacity of 670,000 bpd.
• Exxon may be close to making a significant discovery in Pakistan that could see the country enter the top 10 list of oil producers in the world. The Pakistani Foreign Minister said if the discovery lives up to expectations, Pakistan could even overtake Kuwait in terms of oil reserves. Kuwait boasts 101.5 billion barrels of oil reserves, which makes it the seventh-largest producer in terms of reserves.
• Tullow Oil and the Kenyan government have agreed on a resumption of oil production at fields operated by the UK-based company. Work at these fields was suspended amid protests from the local communities insisting on better security in the region. The protests blocked oil trucks that transport the crude from the fields to the coast. Before that, the fields in Turkana produced some 2,000 bpd.
• Occidental Petroleum reported a 66% improvement in its net profit for the second quarter to $848 million thanks to higher oil prices and despite a dip in production to 639,000 bpd.
• Rosneft reported a record-high net result of $3.6 billion for the second quarter on the back of the price improvement and a weaker ruble, which reduces production costs.
• Aramco and Petronas have approached banks with a request to restructure a short-term loan to the tune of $8 billion with a long-term facility. The companies took the loan from an international banking consortium to help finance the $27-billion RAPID petrochemical project, to be built in Malaysia. The consortium includes Standard Chartered, ING Bank, BNP Paribas, and Citibank.
• The Bureau of Land Management may offer more oil and gas drilling leases in public land in California after the end of a five-year moratorium. This could open as much as 1.6 million acres of land to drillers. The move has naturally sparked a strong response from environmentalists who are particularly concerned about the potential increase in fracking activity in the state.
Politics, Geopolitics & Conflict
• Saudi Arabia cut off diplomatic ties with Canada following criticism from the Canadian Foreign Ministry of the Kingdom’s human rights policies: Minister Chrystia Freeland called on Riyadh to free several women’s rights activists from prison. However, Saudi Arabia said the diplomatic row will not have any impact on Saudi oil supplies to Canada. Canada gets some 10 per cent of its oil imports from Saudi Arabia. Bilateral trade between the two nations is US$3 billion a year.
• China has threatened a 25% tariff on some $60 billion worth of U.S. imports, including LNG. If imposed, these tariffs could lead to a major shift in global LNG markets, hurting the budding U.S. LNG export industry. China was the world's second-largest importer of LNG last year and expected to be number one in 2019. Last year, about 15 percent of U.S. LNG exports went to China.