Friday, September 2 2016
In the latest edition of the Numbers Report, we’ll take a look at some of the most interesting figures put out this week in the energy sector. Each week we’ll dig into some data and provide a bit of explanation on what drives the numbers.
Let’s take a look.
1. Mexico steps up oil hedging
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- Mexico just announced that it has secured $9.5 billion in oil sales for 2017, hedging its bets at a shockingly low price of $38 per barrel.
- Mexico is the largest sovereign oil price hedger in the world, and has consistently locked in sales at fixed prices for the following year.
- Its 2017 hedges, at 250 million barrels, is the largest volume for the country since the aftermath of the financial crisis in 2009.
- While its strike price of $38 per barrel may raise some eyebrows, Mexico isn’t taking any chances. And it has history on its side: Mexico could take in as much as $3 billion this year because it hedged oil last year at prices just under $50 per barrel. At the time, that deal also turned some heads, but it has proved to be a smart move.
2. Fewer wells needed to keep Permian production flat
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- The Permian is attracting a greater share of interest and investment as shale companies focus their efforts on the West Texas shale basin.
- More than half of the value of the total volume of assets sales in the shale industry have…
Friday, September 2 2016
In the latest edition of the Numbers Report, we’ll take a look at some of the most interesting figures put out this week in the energy sector. Each week we’ll dig into some data and provide a bit of explanation on what drives the numbers.
Let’s take a look.
1. Mexico steps up oil hedging
(Click to enlarge)
- Mexico just announced that it has secured $9.5 billion in oil sales for 2017, hedging its bets at a shockingly low price of $38 per barrel.
- Mexico is the largest sovereign oil price hedger in the world, and has consistently locked in sales at fixed prices for the following year.
- Its 2017 hedges, at 250 million barrels, is the largest volume for the country since the aftermath of the financial crisis in 2009.
- While its strike price of $38 per barrel may raise some eyebrows, Mexico isn’t taking any chances. And it has history on its side: Mexico could take in as much as $3 billion this year because it hedged oil last year at prices just under $50 per barrel. At the time, that deal also turned some heads, but it has proved to be a smart move.
2. Fewer wells needed to keep Permian production flat
(Click to enlarge)
- The Permian is attracting a greater share of interest and investment as shale companies focus their efforts on the West Texas shale basin.
- More than half of the value of the total volume of assets sales in the shale industry have taken place in the Permian.
- Improved drilling techniques have made the average well more productive. For example, laterals can extend 7,000 feet in 2016 compared to just 4,000 feet five years ago.
- As a result, the implied number of horizontal wells needed to keep oil production flat in the Permian has declined to just 150 per month, down from over 200 last year, according to Bloomberg Gadfly.
- But the figures could be less impressive than they seem at first glance. The industry could simply be “high-grading,” or focusing capital and drilling in the best areas.
3. Oil discoveries at lowest level since 1947
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- New oil discoveries hit a 68-year low in 2015, falling to just 2.7 billion barrels for the year.
- The dramatic cutback in upstream exploration spending means that fewer companies are finding even fewer new barrels of oil.
- So far this year, the industry has only discovered 736 million barrels of oil from conventional drilling, putting it on track to come in under last year’s low.
- Companies are only replacing one out of every 20 barrels that they extract. ExxonMobil (NYSE: XOM) failed to replace all the oil it produced last year for the first time in 22 years.
- “That’s a scary thing because, seriously, there is no exploration going on today,” Per Wullf, CEO Seadrill Ltd. (NYSE: SDRL), told Bloomberg in an interview.
4. Iran closes in on pre-sanctions production levels
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- Iran has brought 700,000 barrels per day back online since the lifting of international sanctions at the beginning of the year.
- That brought output up to 3.5 million barrels per day in July, or about 80,000 barrels per day shy of its pre-sanctions level.
- Iran has already stated that it would not sign onto any deal with OPEC and/or Russia that would freeze production levels. But it also said that reaching pre-sanctions production levels would be a prerequisite. Since Iran is closing in on that threshold, it may be more willing to negotiate.
- On top of that, this year’s gains were the low-hanging fruit. More production gains from today’s levels will be difficult and will require international capital and technology.
- Nevertheless, for now, a deal seems like a reach, given the broader antipathy between Iran and Saudi Arabia and mutual suspicion within OPEC as a whole.
5. China’s SPR grows
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- China has moved quickly to build up its strategic petroleum reserve (SPR) over the past two years, a prudent move to stockpile crude while prices are at multiyear lows.
- China’s elevated purchases have also gone a long way to stabilizing the oil market, providing additional demand at a time when the market sorely needs it.
- The next steps are uncertain, however, and the ramifications could be significant for crude markets. Energy Aspects Ltd. expects China to continue to purchase oil for its SPR, but JP Morgan says the filling could soon end. As Bloomberg notes, the difference between those two forecasts is 1.1 million barrels per day.
- JP Morgan believes China has built up 400 million barrels in its SPR, with a target of 511 million barrels. That compares to the 695 million barrels in the U.S.’ SPR.
- China does not release data or details on its SPR plans. If it ends up cutting back on crude purchases, imports (and demand) could fall in the last quarter of this year.
6. Higher oil prices improve banks’ loan portfolios
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- Canada’s six largest banks earmarked C$1.99 billion (USD$1.5 billion) for bad energy loans in the third quarter, which was 11 percent less than what analysts had expected, according to Bloomberg.
- That was less than the C$2.64 billion that they reported in losses to energy loans in the second quarter.
- The improved outlook for Canada’s banks can be attributed to a sharp rise in oil prices, which rebounded from $26 in January and February to roughly $50 in June.
- “Energy losses have stabilized, impaired loan formations have slowed and the banks are benefiting from recoveries," Steve Belisle, a fund manager with Manulife Asset Management, told Bloomberg. "It seems like the worst is behind us regarding energy-related credit losses."
7. West Africa offshore drilling not profitable
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- Some of the most exciting offshore oil plays in the world are located off the coast of West Africa. The region is especially enticing for oil majors because West African nations are willing to partner with private industry.
- But the collapse of oil prices has pushed most oil drilling off the coast of West Africa into unprofitable territory.
- Angola has the lowest breakeven price out of its neighbors at $49.60 per barrel, according to Rystad Energy UCube and cited by Bloomberg.
- Nigeria is at the other end of the spectrum with a breakeven price of $81.80 per barrel.
- “In conventional oil projects, deepwater West Africa is a tough place to be. A number of projects in Angola and in Nigeria have been pushed out of our analysis,” Simon Flowers, Wood Mackenzie’s chief analyst, said in a separate analysis from July.
That’s it for this week’s Numbers Report. Thanks for reading, and we’ll see you next week.
