Almost 50% of U.S. large oil company executives are seeing their pay tied to shareholder returns as production growth relinquishes the top spot in the industry’s agenda. Shareholders have been making life difficult for E&Ps recently as they lose patience expecting to see sizeable returns on their investment in an industry that just recently began to emerge from one of the worst price crises in history.
A survey by Goldman Sachs among 39 sector players revealed that 19 of them, including Occidental Petroleum, EOG Resources, Anadarko Petroleum, and Hess Corporation have pegged the salaries and annual bonuses of their executives to shareholder returns. The immediate driver behind the moves is the fact that despite rising oil prices, the shares of oil companies have improved more moderately and not so consistently, undermining shareholder optimism.
Yet, the changes currently only target short-term remuneration, while long-term incentives such as stock options and restricted stock, which represent some 65% of executive pay packages have been left alone for the time being. Many other companies are in the process of reviewing the pay packages of their executives and more changes may follow.
Deals, Mergers & Acquisitions
• Enbridge has struck a deal to sell infrastructure including natural gas gathering pipelines and processing plants in Western Canada for a total $3.28 billion. The deal will allow the pipeline operator to reduce debt and fund the $6.85-billion Line 3 replacement project, which earlier this month got the green light from the Minnesota Public Utilities Commission. Since the start of 2018, Enbridge has divested assets worth some $5.71 billion.
• Alaska Gasline Development Corp. plans a stock placement to fund the development of its Alaska LNG project and is also open to joint ventures with large energy firms. The Alaska LNG project will cost an estimated $43 billion, which makes it one of the more expensive LNG projects in the United States. It will have an annual export capacity of 20 million tons of liquefied natural gas.
• Saudi Aramco has closed a joint venture deal with National Oilwell Varco that will build and operate a manufacturing facility for onshore oil rigs in the Kingdom. The size of the deal has not been disclosed but it is part of Riyadh’s diversification drive aimed at reducing the economy’s heavy reliance on crude oil exports.
• Eni has inked a joint venture agreement with Norwegian private equity firm HitecVision, in which the Italian major will hold 70% and the private equity firm will hold the rest. The new company, to be named Var Energi, will invest almost $8 billion in oil field development in Norway with plans to build a portfolio of operations with a combined production of 250,000 bpd by 2023.
Tenders, Auctions & Contracts
• Gail India Ltd., the country’s largest utility is seeking shorter-term LNG delivery contracts as demand for the fuel booms, with the peak in demand growth expected around 2023-2024. The chairman of the company says it has become difficult to plan for the long term and commit to the traditional 20-year contracts, so Gail India is looking for 10-year supply deals now. While shorter deals are better for buyers, they are not so good for LNG producers whose export facility projects normally cost billions of dollars to build.
• Nigeria’s National Petroleum Corporation and Schlumberger inked a $724-million deal for the development of two fields that will bring some $5.6 billion in taxes and royalties into Nigeria’s coffers. The $724 million is Schlumberger’s share in the financing of the projects, worth a total $1.08 billion. The rest will come from cash generated after the fields—located in the shallow waters off the coast in the Niger Delta—begin producing.
Discovery & Development
• Tellurian will make the final investment decision on the Driftwood LNG project in Louisiana in the first quarter of 2019, pending federal permits. Once the FID is made, Tellurian expects to start producing LNG at the $30-billion facility in 2023. The company has offered potential buyers to invest in the construction of the project in exchange for LNG supplies, at a rate of $1,500 per ton of gas delivered at a cost of $3 per million British thermal units.
• Italy’s Eni has warned that enthusiastic reports in Egyptian media about a huge discovery in the company’s Shorouk concession are premature. When the news broke, local media said the discovery could be up to three times as big as the Zohr discovery, which contains an estimated 30 trillion cu ft of natural gas. The Zohr discovery was made in the same block that the Shorouk concession is part of.
• BP has started gas production from the Shah Deniz 2 field in the Azerbaijan sector of the Caspian and has already made the first commercial delivery of gas from the field to Turkey. Shah Deniz is the first subsea development project in the Caspian, expected to reach a production peak of 16 billion cu m annually. A lot of the gas will be fed into the Southern Gas Corridor system to Europe.
• Libya’s oil production has taken a hit of 850,000 bpd after the National Oil Corporation declared force majeure on exports from four Oil Crescent ports held by the eastern-based NOC. Before clashes among militant groups last month Libya produced some 1 million bpd. Several pipeline blockades and field outages dented production temporarily but this is by far the biggest slump in production for the last three years at least.
• Seadrill has exited bankruptcy proceedings after it completed its reorganization. The company raised $200 million in new equity as part of the reorganization plan as well as $880 million in new secured bonds. Seadrill also renegotiated the maturity of $5.7 billion worth of bank loans and turned $2.4 billion worth of unsecured bonds into equity. The company was forced to enter Chapter 11 protection after the 2014 oil price collapse, which rendered it incapable of paying back its debt.
• A judge from Brazil’s Supreme Court suspended Petrobras’ asset sales ruling that any privatization deal had to be approved by Congress. This means Petrobras will have to cancel the planned sale of four refineries and a gas distribution company if the full court upholds the decision. This will put a spoke in the wheels of Petrobras’ divestment program that should bring in $21 billion in proceeds to help the company reduce its sizable debt pile.
Politics, Geopolitics & Conflict
• Presidential elections in Mexico produced no surprise, with Andres Manuel Lopez Obrador winning the vote. This has sparked concern in oil circles as Obrador has threatened to review all oil contracts signed by the previous administration. Our view, however, is that Obrador is highly pragmatic despite his “leftist” leanings, as indicated by the staying power of a number of the “old guard”.
• A general from the Iran Revolutionary Guards has warned that they may close the Strait of Hormuz if Washington continues to insist all importers of Iranian oil stop buying it.
• Venezuelan President Nicolas Maduro has ordered the army to be on guard after information surfaced that last year President Trump had considered an invasion of Venezuela.
• Environmental Protection Agency (EPA) Administrator Scott Pruitt has resigned after months of ethics controversies. Pruitt's recently Senate-confirmed deputy Andrew Wheeler will assume the duties of acting administrator of the EPA.