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Global Energy Advisory – 21st September 2018

Tanker

This week saw the latest exchange of tariffs between Washington and Beijing, and this time there is a likely to be a tangible negative impact on the U.S. LNG industry.

Following President Trump’s approval of tariffs on $200 billion worth of Chinese goods, China retaliated with its own list containing goods worth US$60 billion. The list included LNG, which will be subject to a 10% import tariff.

Now, while some in the industry breathed a sigh of relief that the tariff rate is much lower than the initially threatened 25%, the news is not exactly good. The U.S. is certainly one of the focal points of the LNG industry right now, but it’s worth noting that it is not the only such focal point.

Qatar is expanding its production capacity, for one thing. For another, one more megaproject in Australia started operation earlier this year—Inpex’s Ichthys—and another, Shell’s Prelude FLNG, is scheduled to launch before the year’s end. Meanwhile in Russia, Novatek is gearing up for the start of construction of its second LNG facility in the North.

U.S. LNG producers have a lot of planned capacity but building it requires money, most of which is secured via long-term LNG purchase commitments. Unsurprisingly, Chinese LNG buyers are among the top picks for such projects given projections that China will be the biggest driver behind LNG demand in Asia and globally in the coming years. From this perspective, the worsening bilateral relations are not helping U.S. LNG makers, even if the tariff is 10% instead of 25%.

On the flip side, U.S. producers may start exporting LNG to Germany within the next four years, challenging Russia’s gas dominance on the largest European energy market. That’s according to Deputy U.S. Energy Secretary Dan Brouilette. Germany does not seem so excited, however: a spokesperson for the German government said Germany operates an open market and all suppliers are welcome as long as the price is right.

Deals, Mergers & Acquisitions:

• Shell has begun the sale process for an oil block in Nigeria anew after the preferred bidder for the asset, Oil Mining Lease 25, lost the rights to develop it. Crestar Energy offered $53 million for OML 25 back in 2014 but as the sale got delayed it lost its exploration rights. Shell holds 45% in OML 25, and shares the block with Eni and Total.

• Canadian Natural Resources has acquired Laricina Energy Ltd., an oil sands operator from Alberta, for $35.9 million. The target company has two oil sands projects in the West Athabasca basin but both were suspended in the early stages of development as the 2014 oil price collapse hit.

• Kosmos Energy this week completed the acquisition of Deep Gulf Energy Cos—a portfolio company of private equity firm First Reserve—for a total $1.23 billion, which will give the exploration company its first footprint in the Gulf of Mexico. This is the largest acquisition in the history of Kosmos and will give it exposure to the deepwater segments of the GOM.

Tenders, Auctions & Contracts:

• Cheniere Energy signed a 15-year LNG supply contract with global commodity trader Vitol. The contract is for supplies of 700,000 tons annually of the liquefied fuel beginning this year. The price of the gas will be pegged to the Henry Hub monthly average benchmark plus a fee. This is Cheniere’s second LNG supply deal of this magnitude, after earlier this year it inked a contract with Trafigura for annual supplies of 1 million tons of LNG.

• Shell and Petronas signed a deal with the government of Egypt for oil and gas exploration in the West Delta sector of Egypt’s continental shelf. Under the contract, Shell and Petronas will drill eight wells in the deepwater block, investing as much as $1 billion in this phase of exploration.

• Argentina has scheduled its much-anticipated offshore oil and gas tender for October. The results of the tender will be announced in early 2019. Argentina’s energy ministry first announced plans for the tender last year, hoping to replicate the success of Brazil’s offshore auctions on the grounds that its now notorious presalt zone extends into the Argentine shelf.

Discovery & Development:

• Petrobras plans to increase its crude oil production by a tenth to 2.3 million bpd next year and also reduce its debt load by $10 billion, with the former contributing to achieving the latter. The Brazilian state firm hopes the recovery in oil prices will help it in this respect, boosting revenues from oil.

• There is $405 billion worth of ongoing and planned oil and gas projects in the countries from the Gulf Cooperation Council, a recent Middle East Economic Digest report has revealed. That’s out of a total $662 billion in oil and gas projects in the wider MENA region.

• Shale oil driller Cuadrilla has received the green light from the British government to start fracking two wells at its site in Preston New Road, in Lincolnshire. Estimates suggest that shale formations in northern England could contain up to 1,300 trillion cubic feet of natural gas. A tenth of this amount would satisfy the country’s gas demand for a period of four decades. However, there has been strong opposition to fracking after earlier fracking activities caused quakes in the country, which prompted the temporary ban on the extraction technology.

• Libya has restarted oil exports to the United States after a temporary suspension in August due to port closures in the North African country. So far, some 2.7 million barrels of Libyan crude have arrived or are en route to the United States, according to Reuters shipping data.

Company News:

• Spain’s energy major Cepsa plans to go public, listing 25% of its stock in an IPO that could put the value of the company at up to $11.6 billion. This would make Cepsa’s listing one of the largest for the last decade. Cepsa is wholly owned by Emirati state investment firm Mubadala, which said the listing will take place by the end of the year and could expand to more than 25% of the stock in case there is sufficient interest.

Regulatory Updates:

• A Dutch district court will hear a Petrobras shareholders case against the Brazilian energy giant. The hearing is scheduled for December. A group of Petrobras shareholders are demanding compensation for losses they had suffered from the corruptions scandal that erupted a few years ago and that revealed senior Petrobras executives had been involved in graft schemes that drained cash from the company. Petrobras already settled one such case, with U.S. investors, agreeing to pay $3 billion.

Politics, Geopolitics & Conflict:

• China plans to cut import tariffs on some goods as part of its pledge to open up its economy. However, U.S. goods are not as likely to find a place on this list as the tariff exchange between Beijing and Washington continues.

• A far-right candidate for the Brazilian presidential office gained a lead over rivals ahead of the October 7 elections. It remains unclear, however, who will be Jair Bolsonaro’s opponent.

• Iran has asked the UN to condemn Tel Aviv’s threats against Tehran and to start supervising Israel’s nuclear program, which is something of a public secret. Tehran also called on the UN to make Israel join the Nuclear Non-Proliferation Treaty, by force, if necessary.




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