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Global Energy Advisory Friday 20th October, 2017


Russia’s largest oil company, Rosneft, has signed production-sharing agreements for five oil blocks in the Kurdistan Autonomous Region of Iraq. Any other week this would have been nothing more than a business-as-usual piece of news, but this week saw Baghdad retake control of Kirkuk from the Kurds – the hub of northern Iraq’s oil industry.

Along with the city, the Iraqi forces also took over several oil fields, according to reports from the region. Exports of crude oil from Kurdistan to Turkey have fallen by about 50% but most observers seem to believe that the cut is temporary.

What’s more, the Rosneft announcement comes after Iraq’s PM Haidar al-Abadi said, amid the advance on Kirkuk, that the central government will establish federal control of all parts of the country, including Kurdistan. This means the autonomy of the region might be squeezed tighter, curbing the Kurdistan Regional Government’s (KRG) capacity to close oil production deals.

Yet Rosneft seems to be unfazed by the possibility of unfavorable developments or perhaps it believes that developments can’t become as bad as Baghdad seizing all oil fields in the autonomous region. For now, there is no talk of such a possibility: the Iraqi forces have focused their blow on Kirkuk and the fields around it. The five blocks that the Russian company will develop contain an estimated 670 million barrels of crude.

There is reason for such optimism as displayed by Rosneft. Iraq and the Kurdish autonomous region need each other to make the best of the oil. The only pipeline carrying crude oil from the fields around Kirkuk is the one from Kurdistan to Turkey’s Ceyhan port. Despite talk about reopening a decades-old pipeline that bypasses the autonomous region on its way to Turkey, the move has not been made yet.

It may very well be that now is exactly the right time to close deals with the KRG, before it starts negotiating with Baghdad on how things will proceed now that Baghdad crushed all hopes of accepting the Kurdish independence drive.

Deals, Mergers & Acquisitions

• Canadian Pengrowth Energy has announced plans to sell its non-core oil and gas assets in Alberta for a nominal price and the assumption of abandonment and reclamation costs related to the assets. The assets produce about 5,500 barrels of oil equivalent daily, with about 80% of this in the form of natural gas. Remaining proven and probable reserves across the fields were calculated at 21.3 million barrels of oil equivalent at end-2016.

• Vitol’s negotiations for the acquisition of Noble Group’s oil trading business have become very complicated, according to the commodity trader’s CEO. In fact, Ian Taylor said, the talks may not result in a deal. Although Taylor did not elaborate on the reasons why the negotiations have become strained, he did say it was not one single issue but rather the terms and conditions of the deal generally. For Hong Kong-based Noble Group, the sale is crucial for its survival as it faces debt repayments of $1 billion.

Tenders, Auctions & Contracts

• Japan will allocate $10 billion in financial support for LNG supply and distribution infrastructure in Asia. The money will be invested in both public and private projects in the upstream, midstream, and downstream segments to stimulate regional LNG demand, the country’s Economy Minister told media. The announcement follows a bilateral agreement with the U.S. to work to expand LNG demand in Asia, which is a primary export market for U.S. gas producers.

• Statoil has become the first company to sign up for Mexico’s Round 3 oil and gas tender, to take place next year. The tender will cover 35 shallow water blocks in the Gulf of Mexico and contain some 1.988 billion barrels of crude oil in prospective resources, with the remaining proven volume estimated at 290 million barrels of oil. Norway’s state energy company is on the hunt for new discoveries after a disappointing Arctic drilling season at home.

Discovery & Development

• Australian Woodside Petroleum reported a 5-million-barrel annual production drop for the third quarter of 2017, to 20.3 million barrels of oil equivalent. The company also revised downwards its full-year production guidance, now expecting to pump 84 million barrels of oil equivalent, versus a range expectation of 84-90 million boe. Woodside, which is a partner of Chevron in the Wheatstone LNG project that started production earlier this month, booked a 7% decline in quarterly revenues, to $914 million.

• The Nigerian National Petroleum Corporation plans to start exploring for oil in seven onshore basins. The announcement comes despite security risks in some of the basins from terrorist group Boko Haram.

• Chevron has quit its exploration project in the Great Australian Bight citing the low oil price environment, which has compromised the project’s commercial viability. The Great Bight is notoriously challenging for oil and gas exploration because of its rough waters and it is also home to diverse marine life that has spurred a lot of environmental opposition to any hydrocarbon exploration activities in the area. This opposition drove BP out of the Bight.

• South Korean SK Innovation said it plans an investment of $655 million in the expansion of a refinery by more than a third. The investment will be made jointly with SK’s partner in the refinery, China’s Sinopec. The output capacity increase was motivated by growing demand for fuels in South Korea, one of the world’s top importers of crude.

• BHP Billiton reported a decline in its crude oil production to 50 million barrels of oil equivalent in the third quarter of the year. This is 8% less than in the comparable period of 2016. The Australian miner maintained its full-year petroleum production projection at 180-190 million barrels of oil equivalent.

Company News

• BP Midstream partners LP announced this week the terms of its initial public offering, which include issuing 42.5 million units at a price ranging between $19 and $21. The proceeds BP Midstream expects to pocket are around $850 million although at the midpoint of the price range, the company would be worth $2.1 billion. The company will list its stock on the NYSE.

• Shell has launched fast-charging stations for EVs at three filling stations in the UK and plans to expand the network into the Netherlands, too. The move is part of Shell’s shift into greener energy, which also recently included the acquisition of NewMotion, the largest EV recharging network in Europe.

Politics, Geopolitics & Conflict

• The chances of the UK leaving the European Union without a trade deal remain high after yet another fruitless negotiation session. The likelihood of this happening actually rose this week, after PM Theresa May said that no deal would be better than a bad deal. The country’s oil industry stands to suffer several hundred million in additional trade costs in the no-deal scenario.

• President Trump has passed his proposal to decertify the Iran nuclear deal over to Congress. In case the legislators approve the proposal, the U.S. could re-impose sanctions against Iran only this time it would be the only one: European government have made it clear they would not join another sanction round on the grounds that Iran was sticking to its word of not developing nuclear capabilities for military purposes.

• The biggest opposition party in Venezuela, MUD, lost the regional elections that took place last week, while the ruling USP won 18 out of 23 governor seats. A former MUC leader blamed the party’s current leadership for the loss of the vote. However, the opposition coalition refused to recognize the result of the elections and have demanded a complete audit. On Thursday, 18 newly elected socialist governors were sworn in, but give governors from the MUD coalition boycotted.

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