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Global Energy Advisory – 13th April 2018

Syria

Brent crude this week broke the $72 barrier for the first time since 2014 on the latest developments in Syria. President Donald Trump earlier this week threatened Russia with missile strikes after an alleged chemical attack that the U.S. and UK were quick to blame on the Syrian army following reports from rebel-held Douma.

Despite some cooler heads noting that neither Washington nor Moscow really want to have a third world war on their hands, markets are more jittery than they have been for a long time, with the news from Syria overshadowing any other piece of news about the oil industry.

In fact, as Commerzbank’s chief of commodities Eugen Weinberg noted, oil’s fundamentals do not justify such a price jump and yet prices are jumping as the world watches the Middle East yet again. But it would all be short-lived, as Trump appeared to back down on a Syria strike with a ‘maybe yes, maybe no’ qualification that eased tensions and pushed equities markets back into rally mode.

Meanwhile, U.S. crude oil production rose further last week, hitting 10.525 million bpd, up from 10.46 million bpd a week earlier. This should have had a marked negative effect on prices, but it hasn’t because of the events in Syria, where Washington is effectively supporting the Jaish al-Islam (the Army of Islam) – a Saudi-backed rebel group that controlled Douma – the town where the alleged chemical attack occurred.

It seems that the heating-up in Syria is exactly what Saudi Arabia needs to get oil prices closer to its target level of $80 a barrel, so we expect more saber-rattling over Syria, even if only to raise the specter of tensions in appearance to help boost oil prices. This is the price that the Kingdom needs to break even and stimulate interest in the initial public offering of Aramco.

Deals, Mergers & Acquisitions

• Total and Aramco have inked a $5-billion deal for the expansion of their refining joint venture Jubail. The deal is for the construction of a petrochemicals complex at the site, which processes 440,000 barrels of crude per day. Work on the expansion will begin in the third quarter of 2018 and will feature a 1.5-million-tons ethylene cracker along with associated petrochemical production facilities. Aramco has a 62.5% interest in Jubail, with Total holding the remainder.

• Indonesia’s Pertamina has received a 56.96% stake in state gas peer PGN in the latest stage of a takeover that began five years ago with the aim of making the management of Indonesia’s gas network simpler. This was also the last stage of the state energy firm consolidation. The merger will be effective immediately, with Pertamina turning into a holding energy company.

• Aramco and a consortium of state Indian energy companies struck a deal to build a $44-billion oil refinery on India’s west coast, with a daily capacity of 1.2 million barrels of crude. Aramco and the Indian consortium hold equal 50% stakes in the project aimed to contribute to the satisfaction of India’s growing fuel hunger. Kuwait Petroleum Corp. is currently considering buying a stake in the project to secure a spot for its crude as well.

Tenders, Auctions & Contracts

• Abu Dhabi’s state oil company, Adnoc, earlier this week announced its first-ever tender of oil and gas blocks that will involve six blocks, of which two offshore and four onshore. The reserves of the blocks put up for auction have not been divulged with the company only saying they are “substantial”. Interested companies have until October to make a bid. Adnoc will have 60% interests in all projects that get to the phase of production.

• Aker BP has won a $1-billion contract from Norway for the development of the $1-billion Aerfugl field in the North Sea. Aerfugl is a gas condensate field and is located near an Aker BP-operated FPSO project. The first phase of development of the condensate field will include drilling three wells, with production slated to begin in late 2020.

• BP has picked Tesla to build an energy storage facility at its Titan 1 wind farm in South Dakota. For BP, this will be the first large-scale battery storage facility globally. For Tesla, it will be a relatively minor project, at 212 kW/840 kWh, compared with its South Australia 100 MW/129 MWh installation. The South Dakota facility will be commissioned in the second half of the year.

Discovery & Development

• BP has announced two new projects in the North Sea—Alligin and Vorlich—which it will develop in partnership with Shell and Ithaca Energy, respectively. The two fields will need investments estimated at almost $600 million. The combined production from the two fields at its peak will average 30,000 barrels of oil equivalent per day.

• Exxon plans to resume production at the Papua New Guinea LNG project early next month. Production was suspended following the devastating earthquake that hit Papua New Guinea in February. Parts of the infrastructure at the site of the project were damaged by the quake but there were no signs of damage on the 700-km pipeline that carries the gas from the field to the liquefaction plant.

• New Zealand has banned all offshore oil and gas exploration beginning this year. Onshore exploration will continue and so will exploration work on offshore licenses awarded previously. New Zealand is a minor oil producer, with the average daily production rate in five-digit territory but the local industry has slammed the move for not being made after consultation with it.

• Indian Gail Ltd., the country’s largest state gas supplier, said deliveries from Gazprom will begin next month. The planned annual from the Russian giant is set at half a million tons for 2018. The company has also planned the purchase of up to 5 million tons of LNG from the United States.

• California regulators have issued at $12.5 million fine to an oil company with a long history of safety violations and regulatory lapses. The Department of Conservation issued the fine Wednesday against Greka Oil & Gas for nearly 1,500 violations last year at its Richfield oil operation in Orange County.

• Looking to become less dependent on gas imports, China cut the resources tax levied on shale gas production by 30 percent on April 1. The tax was reduced to 4.2 percent from the previous 6 percent - and will be in place for the next 3 years.

Politics, Geopolitics & Conflict

• China is conducting a three-day naval drill near the coastal province of Hainan, on the disputed South China Sea. The drill is seen as the latest affirmation of China’s claim on almost all of the South China Sea.

• The Syrian army has taken complete control over the region of eastern Ghouta after it took over the town of Douma.

• Taliban militants have taken control over a district in an Afghanistan province that was considered one of the safest areas in the country. More than a dozen locals were killed.




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