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Global Energy Advisory March 23rd 2018

Venezuela

China is preparing to challenge the reign of the U.S. dollar as the ultimate petrocurrency by launching much-delayed yuan-denominated oil futures next Monday. The contracts should start trading on the Shanghai International Energy Exchange on Monday, after several years of postponements.

China is being very careful with the futures, seeking to avoid excessive price volatility, which was what led to the end of the short life of Beijing’s first attempt at these contracts back in the 1993. Now, regulators have set strict trading bands of 5% on either side, except the first day of trading when the band will be 10% to allow for the initial excitement to drive more trade in the contracts.

Beijing has also considered discouraging speculators from flocking into the first Asian oil benchmark by setting storage capacity prices significantly higher than the international average. Still, not all analysts and industry observers are convinced the Chinese oil futures will become a success.

The main reason is that foreign investors are wary of trading in China although the country’s commodity markets are certainly attractive with bustling activity that makes ICE, for example, look slow. Yet this activity could also discourage traders who remember the 2008 stock market meltdown in China. Also, all these safeguards against excessive volatility could turn away some genuine traders seeking to tap China’s commodity markets.

The country’s regulators have addressed this issue by earlier this week announcing a three-year income tax waiver for foreign traders in the new futures.

If the yuan oil futures are a success, they will constitute a major stepping stone on Beijing’s way to boosting the country’s international influence by making the yuan an international currency, which is the ultimate goal of the futures launch.

Deals, Mergers & Acquisitions

• The world’s top oil trader, Vitol, and French Total are competing for the acquisition of Brazilian fuel distributor Alesat Combustiveis. Besides them, there is a third suitor as well, an unnamed American commodities trading firm. Last year, Brazilian regulators blocked Alesat’s takeover by another local company, Ultrapar, forcing the target to seek other ways to grow its presence at home.

• Shell will sell its New Zealand assets to Austrian OMV for $578 million as part of its $30-billion divestment program that followed its $50-billion acquisition of BG Group. The assets OMV will receive include the Maui and Phokura gas fields, as well as the Tank Farm condensate and naphtha transportation system, and a project in the Great South Basin that includes a drilling commitment worth $50 million.

• South Korea’s SK Innovation struck a deal to acquire U.S. shale oil and gas driller Longfellow Nemaha LLC as part of a $453-million investment plan focused on U.S. shale oil. SK Innovation is the parent of South Korea’s largest refiner. Longfellow Nemaha has production assets in the STACK play in Oklahoma.

Tenders, Auctions & Contracts

• Iran will sign oil and gas field development contracts worth $6 billion with local exploration and production companies, with the funding coming from Iranian banks through the National Iranian Oil Company. The companies will partner with international majors in the development of some of these fields. There are more than 100 underdeveloped oil and gas deposits in the country, according to oil minister Bijan Zanganeh.

• CNPC was awarded 10% interests in two offshore concessions in Abu Dhabi, Lower Zakum and Umm Shaif and Nasr. CNPC’s listed business PetroChina paid $600 million for the Lower Zakum stake and $575 million for the Umm Shaif and Nasr concession. Among the Chinese company’s partners in the two concessions are Eni, Total, Inpex, and India’s ONGC Videsh. Local state energy company Adnoc will be operator of both concessions.

Discovery & Development

• Eni and Rosneft have failed to find crude oil in the Maria-1 well in the Black sea they started drilling in December. Eni is one of the few Western companies still active in the Russian oil industry amid EU and U.S. sanctions and the Black Sea was seen as a very promising reservoir by Rosneft. Yet exploration there is challenging because of the significant depths at which wells need to be drilled.

• Australia’s environmental regulator has greenlit a ConocoPhillips-led gas and condensate project offshore Australia. The Barossa field development will involve the deployment of a floating production, storage, and offloading vessel, with the annual output seen at 3.7 million tons of LNG and 1.5 million barrels of condensate.

• Shell plans to build 10,000 new fuel stations by 2025, doubling down on its downstream plans that seek to increase the share of these operations in the company’s overall revenues while cutting its carbon footprint. Geographically, Shell will prioritize emerging economies, including Russia, India, China, Mexico, and Indonesia.

• Eni will invest $30 million in a research center in the Republic of Congo that will explore for oil and renewable energy sources. The center will also help oil companies that win the rights to develop any oil and gas blocks in the country. Eni has the rights to develop an onshore block in the Republic of Congo but is still negotiating the production sharing agreement on the project with the local government.

• BP plans to start drilling the first well in an offshore oil and gas block in Mexico’s Gulf section in 2020, according to a development plan recently approved by Mexico’s oil and gas regulator. Total investments over the 4-year exploration plan are estimated at $199.5 million.

Company News

• Saudi Arabia has shelved its plan for an international listing of its state oil giant Aramco, sticking to only a local listing on Riyadh’s Tadawul. The decision was not a huge surprise given the number of challenges around an international listing and the uncertainty about whether the company will fetch the proceeds Aramco is eyeing, which are $200 billion for 5% of the company.

• The Asian Development Bank has provided Sinopec Green Energy Geothermal Co a $250-million loan that the Chinese company will share with Iceland’s Arctic Green Energy Corp. to develop geothermal energy solutions in northern China, where pollution levels are particularly high.

• Essar Oil will receive a $1-billion oil-for-cash loan with one of its majority owners, Trafigura, and supermajor BP. This is the first step in Essar’s funding diversification after its takeover by Rosneft and Trafigura.

Politics, Geopolitics & Conflict

• The U.S. government banned trade in Venezuela’s new oil-backed cryptocurrency, the Petro, whose initial public offering took place on Wednesday.

• Separately, Washington officials are negotiating with British, French, and German officials on amendments to the Iran nuclear deal to discourage it from seeking to increase its regional influence, one of the officials told media. Worries over the future of the Iran deal pushed oil prices up this week.

• The UN Security Council has threatened South Sudan with an arms embargo unless the country puts an end to the civil war that has been ravaging it since its secession from Sudan. The move follows fresh U.S. sanctions against South Sudanese oil companies.




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