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Oil Market Update: $2.1 Billion Noble Deal Could Start A Trend In Shale Sector

Oil Market Update: $2.1 Billion Noble Deal Could Start A Trend In Shale Sector

The U.S. government conditionally approved Royal Dutch Shell’s (NYSE: RDS.A) Arctic drilling plan, a major victory for the Anglo-Dutch company. Although Shell still needs to receive a few more permits, the approval from the Interior Department over its drilling plan was the biggest outstanding hurdle. Shell has plans to drill several wells in the Chukchi Sea, returning to the region after three years since its last drilling campaign. Shell has said the plan includes spending $1 billion on the Arctic this year, adding to the $6 billion tab it has already accumulated. This return to the Arctic will also mark the first drilling that will take place since the federal government imposed specific regulations on drilling in the far north.

With the greenlight from Interior, Shell is gearing up for the beginning of the drilling season – a short one that runs from July to October. Shell is moving several ships to the port of Seattle, where it has run into environmental opposition. Most recently, city regulators have said that Shell needs to obtain an additional permit in order to dock its ships. Also, environmental activists have promised to protest, and potentially blockade the Seattle port with kayaks when Shell’s ships arrive. Shell’s vessels are scheduled to be towed from Port Angeles to Seattle this week. Related: Saudis Snub Obama Over Iran Deal

U.S. Secretary of State John Kerry arrived in Russia on May 12 for a visit with Russian President Vladimir Putin, the first direct discussions in over two years. There is a range of geopolitical issues on which the U.S. and Russia are currently facing off, so there should be no shortage of topics to discuss. Despite the fact that Russo-American relations have hit rock bottom since the Ukraine crisis last year, the two sides hope to find some common ground. At the top of the list is Syria. A civil war that is nearly a half-decade old shows little sign of easing. Sec. Kerry wants Russia to stop propping up Syrian President Bashar al-Assad. Kerry and Putin will also discuss the ongoing conflict in Ukraine, but it is hard to see where they will agree. The two rivals may also cover the Iran negotiations, where the U.S. is trying to hold together the international community.

One subject that Kerry and Putin will likely not broach is the dueling pipeline projects that will run through Turkey to Europe. The U.S. sent a top diplomat to Greece this past week to convince the Greek Prime Minister to support a western-backed project that would bring Azeri natural gas to Europe. Russia, on the other hand, has proposed a rival project that would connect Russian gas fields to Europe via a pipeline through Turkey and Greece. The western project is a little further along in the planning phase, but neither is a done deal. The U.S. and Russia (and the former Soviet Union) have a long history of playing pipeline politics across the Eurasian continent, and that evidently continues to this day. Related: California’s Climate Goals: Realistic Or Just Wishful Thinking?

At the same time that Kerry will be trying to bring Putin back into the fold, U.S. President Barack Obama will be trying to convince skeptical Arab allies of the merits of the nuclear deal with Iran. Obama is hosting nations from the Arabian Peninsula at his private retreat just outside of Washington DC. The Camp David summit will be conspicuous in who is absent, however. The Saudi King, along with the heads of state from Bahrain, Oman, and the UAE, will not be making the trip. The cancellation from Saudi Arabia’s King Salman was the most notable. It came just a few days after he confirmed that he would be in attendance. His refusal to attend the summit is widely seen as a rebuke to the Obama administration for its failure to offer enough in terms of security assurances. Saudi Arabia is a hostile rival of Iran, and the nuclear deal has been met with skepticism in Riyadh. Obama will have his work cut out for him trying to bring nations from the Gulf on board for the final approval of the nuclear arrangement.

Speaking of Saudi Arabia, Chevron (NYSE: CVX) announced through its subsidiary operating along the Saudi-Kuwaiti border that it would be idling a major project. The Wafra field produces 250,000 bpd, which will now be taken offline for maintenance. But Chevron has struggled to get enough permits and materials, and the company is short staffed as well. The Wafra project is expected to be offline for a few weeks, but the outage could drag on if the issues are not resolved. The loss of a quarter of a million barrels per day in production could put a dent in the global oversupply of oil. Related: Which Nation Just Became The World's Top Crude Importer?

Noble Energy (NYSE: NBL) announced its plans to purchase Rosetta Resources (NASDAQ: ROSE) this week; a $2.1 billion deal that marks the first major American energy company to make an acquisition since the oil bust began last year. Despite the fact that the collapse in oil prices is nearing the one-year mark, American shale companies have been slow to make a big splash. With many drillers damaged from the fall in oil prices, their low share prices offer enticing takeover targets. But up until now, larger firms have taken a conservative approach. The Noble purchase, which is also being called a merger, could mark a change in direction for the energy sector. Oil prices have rallied in the last two months, potentially indicating that there is not a lot of room left for drillers to fall. With Noble making the first move, more deals in the U.S. shale patch could be in the offing.

The Energy Information Administration predicts that the U.S. will see oil production decline by 54,227 barrels per day (bpd) for the month of May. But the drop off will pick up pace in June, falling by an additional 86,000 bpd. Out of that 86,000 bpd figure, 47,000 bpd will be lost in the Eagle Ford, 31,000 bpd in the Bakken, and 16,000 in the Niobrara. The Permian and the Utica could see modest increases. As we have been saying for weeks, the falling rig count over the last seven months points to a contraction in the future. It takes some time, and there is a lag effect, but the sharp drop in the rig count is beginning to translate into lower production.

By Evan Kelly of Oilprice.com

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