Russia Reduces Natural Gas Exports To Europe

Politics, Geopolitics & Conflict

On the natural gas front, tit-for-tat measures between Ukraine, the European Union, and Russia led to a reduction in Russian natural gas to Europe this week, first via Ukraine after Kyiv shut down a key transit station, citing disruption by occupying Russian forces. Then, as a result of retaliatory sanctions Russians imposed on its own subsidiaries, flows were reduced along the Yamal-Europe pipeline, where Gazprom units are now not allowed to fulfill their obligations. Finally, vague Russian threats were issued to Finland over that country's decision to apply for NATO membership, with Moscow potentially gearing up to shut gas off as soon as Friday (today), but also threatening other potential "military-technical" measures.

The European Union made no discernible progress this past week towards implementing an embargo on Russian oil, with Hungary still holding out-essentially demanding hundreds of millions of dollars to sign on to an embargo. The impact of an EU embargo on Russian oil would be to reduce Russian supply by 3 million barrels a day, according to the IEA.

It's been difficult to follow the IEA's thinking lately. Just over a month ago, it was rallying the markets by dangling a global oil supply shock out there due to sanctions on Russia. This week, it's suddenly not worried in the slightest about declining Russian oil output-or even an EU embargo. Now, the IEA says that increased production from other corners, combined with China's COVID lockdowns that are chipping away at demand, will balance out earlier fears of a supply shock. And in the end, the IEA doesn't really see much negative impact on Russian oil and gas as a result of EU sanctions or an embargo. That, of course, is this week. The IEA (like the market) can be fickle. This is a situation, much like COVID-19, that no one seems to really have a handle on.

Back in Libya, there was talk this week of lifting force majeure on the key oil fields and export terminals, but nothing concrete materialized. Prime minister-designate Fathi Bashagha (backed by the eastern-based parliament) teased markets by saying that production and exports would be resumed, and the eastern forces largely control this. Because this did not happen, we can assume that nothing has been accomplished with regard to East vs West disputes over how to fairly distribute oil revenues, which go through the Central Bank in Tripoli, where incumbent prime minister Dbeibah retains power and refuses to step down.

A severe economic crisis and shortages of fuel, food, and medicine have led to protests in Sri Lanka that turned violent this week, leading to the resignation of Prime Minister Mahinda Rajapaksa and his replacement. The naming of a new prime minister has done nothing to quell the violence, with protesters now calling for the resignation of the president as well, as the country faces total economic collapse.

Amid a growing trend towards nationalization in Latin America, Brazil seemed to buck the trend this week when President Bolsonaro fired his energy minister and replaced him with an Economy Ministry official who immediately started talking about a study about the privatization of state-run Petrobras. Political turmoil exacerbated by Petrobras fuel price hikes is pushing more drastic action.

The Nigerian government is scrambling to forestall the grounding of airlines in the country as fuel prices soar above levels the airlines are refusing to pay. Local Nigerian airlines told the federal government this week that it would shut down all scheduled services indefinitely, effective this Monday, as fuel costs selling at N700 per liter were untenable. But the government was quick to respond with a deal for the airlines. The deal will see state-run NNPC supply aviation fuel to local airlines at a fixed price of N480 per liter for a period of three months.

Deals, Mergers & Acquisitions

China's Shandong Port International Trade Group has reached a rare deal to purchase 730,000 barrels of Russian crude. The oil will arrive in China later this month. The deal is a first for a private company in China. So far, only China's national oil companies have made purchases directly from a Russian crude oil supplier. The crude is believed to be ESPO blend. The company has declined to divulge which bank financed the purchase of the oil, which cost $85.5 million.

Shell's Russian subsidiary, Shell Neft, has reached a deal with Lukoil to sell its retail gas station chain in Russia. The deal will include 411 gas stations and a lubricants blending plant. Shell said in its Q1 report that pulling out of its Russian deals has cost it nearly $4 billion. The deal is still subject to regulatory approval in Russia.

In a ~$1-billion deal, Norwegian Equinor will sell its interest in the Greater Ekofisk Area and a stake in the Martin Linge field to Sval Energi.

Infrastructure Investments Fund (backed by JP Morgan) has acquired Enstor Gas, the largest privately-owned U.S. gas storage company, along with its ~290 kilometers of pipeline as the perfect storm brews in the natural gas sector.

Discovery & Development

Energean has made a commercial discovery off the Israeli coast, although the natural gas find didn't live up to company expectations. The Athena exploration well's estimates now are for 8 billion cubic meters, compared to expectations for 21 bcm. The well could be linked to Energean's FPSO-to send gas to the Israeli market, or it could sell the gas to Egypt. Energean feels that the Olympus area could hold as much as 58 bcm.

In the wake of Exxon and Hess's most recent Guyana discovery, CGX Energy and Frontera Energy have confirmed a light oil and gas condensate discovery in their first exploration block from their Kawa-1 exploration well. Their well, on the Corentyne block, was spud last summer. The news comes as Exxon and Hess may be shut out of bidding on Guyana's future oil licensing auctions due to their already sizable holdings in the country.

Earnings

Occidental Petroleum reported Q1 net income of $4.88 billion, or $4.65 per share, exceeding analyst expectations. Revenue was $8.53 billion, a 55% increase from Q1 2021, also exceeding analyst expectations, while adjusted earnings were $2.12 per share. The increase in revenue is attributed to all business segments. Q1 total production was 1.079 million boepd, with Permian production accounting for 472,000 boepd. Sales volumes were down 3.5% in Q1 compared to the same quarter last year, but realized prices were up 72.1% to $91.91 per barrel.

Suncor Energy, battling an aggressive activist investor in Elliott Investment Management, reported $2.95 billion in profits for Q1 2022, an increase of $821 million from the same quarter last year. It also saw the highest quarterly cash flow in its history. Elliott has pressed Suncor to ditch its 1800-strong retail gas chain, but so far Suncor's CEO continues to resist those calls. Revenues came in at $13.5 billion for the quarter compared to $8.6 billion in the previous quarter, and it announced a 47-cent dividend per common share-the highest in its history.

Renewables

Despite materials costs and supply chain issues, new capacity for generating power from solar, wind, and other renewables hit a record last year globally and is set to continue that growth this year. IEA data shows that 295 GW of new renewable power capacity was added last year. This year, that figure of 320 GW is expected to be added. Solar is expected to account for 60% of that growth. The IEA stressed that renewables growth so far this year was driven by strong policy support in China, the EU, and Latin America, which more than compensated for the sluggish growth in the U.S.

Bidding for federal wind energy began this week for two areas off North and South Carolina, each attracting $2.7 million. It is the second offering this year. The sale has 16 registered bidders including BP, Duke Energy, Orsted, and Shell New Energies. The sale isn't expected to see bidding as aggressive as in the previous bidding in the New York Bight earlier this year due to the Carolinas not having as ambitious procurement targets as New York and New Jersey.

Regulatory

Canada's Supreme Court is set to hear a case over environmental approvals for oil and nat gas projects after an Alberta court determined that the Canadian government violated its constitution with its 2019 green new deal legislation. Ottawa has vowed to appeal the ruling over the legality of the "Impact Assessment Act". The Alberta top court ruled that the IAA was a "classic example of legislative creep". For the time being, the law hasn't been struck down, and all oil and gas projects will still be subject to the legislation.

California released its state pollution reduction plan this week, laying out its plan for reaching carbon neutrality by 2045 through an ambitious transition away from fossil fuels. The plan calls for California to cut the use of oil and gas by 91% by 2045, requiring all new homes to have electric appliances starting in just four years, and all new businesses by 2029. The plan also calls for all truck sales to be zero emissions by 2040.

Pelosi says Democrats will present their gasoline price-gouging bill next week, which would authorize the president to issue emergency declarations rendering it illegal to increase the price of gasoline. The bill isn't likely to make it into law because it won't have enough support, and it's also possible the Democrats don't even want it to progress and this is just a stunt more or less to give the impression that something is being done to lower record-high gas prices-though nothing can be done at this point.