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Global Energy Advisory June 2, 2017


Goodbye Paris—Hello Syria, Nicaragua

U.S. President Donald Trump has announced that the U.S. will leave the Paris Agreement on climate change. This aligns the U.S.—on this particular playing field--with two other countries, Syria and Nicaragua, outside the agreement. Odd fellows, indeed. As a reason for withdrawing from the agreement, Trump said that it aimed to hobble, disadvantage and impoverish the U.S., citing the cost of $3 trillion in lost GDP and 6.5 million jobs. He also stressed that rival economies such as China and India were treated more favorably. Though Trump said he was not unwilling to negotiate more favorable terms for the U.S., everything remains uncertain. Key signatories to the accord have ruled out any negotiations. In December 2015, United States and 187 other countries signed onto the 2015 agreement to curb carbon emissions worldwide, including the world’s top polluters – China, Russia and India. As its commitment, the Obama administration set the goal of reducing greenhouse gas emissions by 26% to 28% by 2025. Obama signed an executive order confirming the adoption of the agreement, but did not submit it to Congress for approval, leaving the door open for Trump to withdraw.

Saudi Cuts in Crude Exports to U.S., Not Really Game-Changing

Saudi Arabia is cutting its crude oil exports to the U.S. in a bid to swing the market into a more optimistic mood in the aftermath of the OPEC oil production cut extension, which failed to generate the market flurry the Saudis had hoped for. Until now, the Saudis have been sacrificing some of their market share in Asia as they cut more than half a million barrels per day from production to help bring down excessive global supplies. Meanwhile, U.S. weekly oil inventory reports have played a lead role in fueling pessimistic sentiment, with major builds for most of the year to date. Saudi exports to the U.S. in the period were the highest for that time of year since 2014, as Bloomberg notes, at over a million barrels daily. These imports may or may not have contributed significantly to the persistent weekly builds, interspersed here and there with declines. Saudi Arabia, however, is not taking any chances, with two unnamed sources telling Bloomberg that June shipments of Saudi crude will be less than a million bpd. The effect of the reduction should be felt in July but it may—again—go relatively unnoticed because seasonal changes in domestic Saudi demand usually lead to lower U.S. exports at this time of year anyway. In addition, the start of the key driving season in the U.S. is upon us and stockpiles traditionally decline now. On the other hand, the average drop in Saudi exports to the U.S. at this time of year has been 5% over the last five years and the cut this time will be deeper. On the off chance that it is noticed, it’s not going to be breathtaking.

Deals, Mergers & Acquisitions

• Five bidders have emerged so far for Australia’s Origin Energy’s portfolio of gas fields across Australia and New Zealand, to be spun off and listed or sold later this year. Among the interested parties is China’s Fosun. The assets, grouped in a unit dubbed Lattice Energy, have been estimated by banks to be worth somewhere around US$1.5 billion. If Origin decides to sell them, the deal would be the biggest asset sale in Australian oil and gas for the last two years.

• Iraqi Basra Oil Co. has taken over Occidental Petroleum’s stake in the Zubair oil field, which is operated by Italy’s Eni. Eni will remain the operator of the field, which has reserves of around 4.2 billion barrels of oil equivalent, which makes it one of the largest in Iraq. No background to the takeover has been made public.

• Shell and ConocoPhillips’ divestment plans for Canada’s oil sands industry could flood the country’s equity markets with oil sands stock, which will further undermine investor confidence in the industry. The two Big Oil majors earlier this year announced plans to offload stakes in Canadian Natural Resources (Shell) and Cenovus (Conoco) together worth $6.8 billion. The announcements came just months after Shell and Conoco bought the stakes.

• Chevron will sell its gas assets in Trinidad and Tobago to Shell’s unit BG International for $250 million. The assets include stakes in three offshore blocks, one of them already producing gas at a daily rate of 74 million cubic meters.

• The European Commission has greenlit the merger of GE’s oil and gas business with Baker Hughes. Now the deal, worth around $32 billion, could be finalized early next month, giving GE 62.5% in the larger Baker Hughes.

Tenders, Auctions & Contracts

• The National Iranian Gas Company and Gazprom are close to a deal for the joint construction of a gas compression plant in Iran. The report comes on the heels of an announcement that the Russian giant has inked a preliminary deal for the development of the Farzad-B gas field. Iran had for months negotiated the field’s development with an Indian energy company but the sides failed to come to an agreement on the size of investments into the field. During the dispute, India announced it would cut oil imports from Iran and now Indian media outlets are reporting that the awarding of the field to Gazprom came in response to the cut.

• Indonesia is planning to raise the amount of oil it imports from Nigeria, according to the Nigerian National Petroleum Corporation. The Asian nation’s crude oil demand is growing and it wants to start buying Nigerian oil directly from the producer instead of through third parties. At the moment, Indonesia imports around 30,000 bpd of Nigerian crude.

• Saudi Aramco has partnered with Hyundai Heavy Industries to build the largest shipyard in the Middle East, on its Gulf coast. The $5.2-billion facility will have the capacity to build four offshore rigs, three supertankers and 37 smaller vessels annually.

Company News

• Kinder Morgan is ready with the initial public offering of its Canadian subsidiary Kinder Morgan Canada Ltd., the proceeds from which will be used to fund the $5.5-billion expansion of the Trans Mountain pipeline. The expansion project aims to both expand the capacity of the existing pipeline by half a million barrels of crude daily and also extend it to Canada’s Pacific coast, opening up export opportunities for Asian markets – the most sought-after oil and gas markets.

• Exxon shareholders controlling 62.3% of the votes have obliged the company to report on the measures it is taking to address the requirements of the Paris Agreement on climate change. Under the agreement, the world needs to curb temperature increase rates to 2 degrees Celsius. Among the shareholders who most probably voted in favor of the change—and against Exxon’s management—were BlackRock, Vanguard, and State Street. The first two are the largest shareholders in the company, with 13% of the shares.

Discovery & Development

• Qatar Petroleum has commissioned a study of the expansion potential of its Ras Lafan LNG plant in preparation for additional output from the offshore North Field, which it shares with Iran. The plan to expand production from the North Field was announced last month, when Qatar Petroleum said it aimed to add some two billion cubic feet to Qatar’s daily LNG exports. This would maintain the emirate’s position as the #1 LNG exporter globally.

• Husky Energy has struck more oil in the White Rose block off the Newfoundland and Labrador shores and is now assessing it. The Canadian company also said it and its partners in the White Rose development, Suncor and Nalcor, are moving ahead with the exploitation of the West sector of the block, where first oil should flow in 2022. Peak production from West White Rose is estimated at 75,000 bpd, to be reached in 2025.

• Independent energy company Petro River has announced an oil discovery in its Osage County, Oklahoma, concession. The company said that it spud the Red Fork 1-3 well two weeks ago and drilled to a depth of 2,820 feet, striking up to 30 feet of oil-rich rock.

Politics, Geopolitics & Conflict

• The European Union and China will on Friday come out with a joint statement about their commitment to the full implementation of the climate agreement. In addition, the two will also pledge $100 billion a year to support poor countries trying to reduce their harmful emissions.

• A visit by Saudi Arabia’s Deputy Crown prince Mohammed to Russia to meet with President Putin has signaled a major turning point for both countries towards cooperation and away from hostility.

• Tension between India and Pakistan flared up this week after the Pakistani army said India had violated a ceasefire in Kashmir by firing arms and shooting mortars at villagers on the Pakistani side of the border.

• Clashes between an IS-affiliated militant group in the Philippines and government forces continued this week in the city of Marawi, with the terrorists using women and children as human shields.

• Egyptian air strikes over the Libyan city of Derna have resulted in the death of a terrorist group leader, abu Mus’ab al-Shaaria. The strikes specifically targeted positions of the group, the Shura Council of Mujahedeen.

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