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The U.S. Production Boom Is Becoming A Problem

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U.S. energy demand shot up by half a million barrels daily last year, BP said in its latest annual review of the industry out this week, adding this was the highest annual increase in a decade, coming on the back of rising shale oil and gas production that was soaked up by a slew of new petrochemicals plants. Production of oil, however, rose much more substantially, at 2.2 million bpd in the shale patch alone.

In an ironic twist, changing weather patterns have contributed greatly to this trend in energy demand on a global level, BP said, and have fed a continued rise in oil, gas, and coal production as well in what the supermajor called a vicious circle.

The outlook in the near-term does not hold any surprises. EIA’s latest Short-Term Energy Outlook, published a couple of days after BP’s statistical review, sees U.S. oil production growth at 1.4 million bpd this year and 900,000 bpd in 2020.

Shale oil production is rising and petrochemical plants are churning out more ethylene that the U.S. is now exporting at rates overtaking the world’s only other exporter of ethylene - Norway. Yet U.S. refiners are finding it hard to accommodate the shale oil boom. Most of the oil produced in the shale patch is light while Gulf Coast refineries need a mix of light and heavy to operate. Converting the equipment to only work with light oil would cost tens of billions.

Exports are the natural outlet for the extra light oil but the world remains well supplied in that segment, unlike in heavy crude. It seems the growing U.S. oil production will continue to act as a price depressor in the immediate term given this context of demand and supply.

Deals, Mergers & Acquisitions

- Shell and Gazprom Neft have set up a JV for the exploration and development of oil fields in Western Siberia, a legacy oil and gas producing region in Russia. The fields the JV will target hold combined reserves estimated at 1.1 million tons of crude oil. The deal should close by early 2020 contingent on obtaining all necessary regulatory approvals. Gazprom Neft also has further plans for cooperation with Shell, not restricted to Russia.

- Aramco has not dropped its bid for a stake in Novatek’s Arctic LNG 2 project it emerged this week after Energy Minister Khalid al-Falih said Aramco had in fact extended its offer for an interest in the facility. So far, Total and CNPC have bought into Arctic LNG 2. Novatek has reserved a 60% stake in the project, so there is 10% left for Aramco if it decides to go through with the offer.

- Phillips 66 and Plains All American have set up a joint venture for the development of the Red Oak pipeline system project. The system will add oil transportation capacity to the most prolific shale play in the U.S.—the Permian—and carry the crude to various destinations across Texas. The cost is seen at $2.5 billion and the pipelines should be operational in the first quarter of 2021.

- Comstock Resources will acquire Texas-based natural gas producer Covey Park in a $1.1-billion deal. Covey park has assets in the Haynesville and Bossier shale plays with the Haynesville net production alone averaging 1.1 billion cu ft daily. The acquisition will boost Comstock’s resources to some 13 trillion cu ft of natural gas.

- Brazil’s Petrobras announced the sale of 90 percent of its stake in gas pipeline system TAG for $8.7 billion to the French Engie SA and Canada’s CDPQ after the Supreme Court cleared the deal.

Tenders, Auctions & Contracts

- Cyprus has inked a new gas exploration deal with Shell, Noble Energy, and Israeli Delek Group that will see the island nation earn more than $9 billion over 18 years, according to its energy minister. The deal is a rework of an earlier exploration contract for the Aphrodite offshore field, which is among the largest recent gas finds globally, with reserves estimated at 127 billion cubic meters. First production under the updated contract is scheduled for 2024 or 2025.

- Israel has extended the deadline for an offshore oil and gas tender to July 15 acting on a request from companies that took part in the tender. It offered 19 offshore oil and gas blocks amid rising interest in the Eastern Mediterranean, which has seen several large discoveries, two of them—Tamar and Leviathan—in Israeli waters. The winners of the tender will be announced in early August.

- Somalia has tendered offshore oil and gas blocks that lie in disputed waters between Somalia and Kenya, according to leaked government documents. The news will in all likelihood increase already tense bilateral relations. These soured last year after Kenya accused Somalia of offering up oil and gas blocks that belonged to it.

- Mexico will cancel auctions scheduled for October, where they would have chosen JV partners for Pemex in 7 onshore areas in three states. This is the third time this auction is being postponed and it has investors worried that President Obrador will make good on his threat to disallow further oil JV between foreign companies and Pemex.

- Egypt is launching a new license round for offshore blocks in the western Mediterranean. The auction will take place later this year (no exact date yet) and should include 11 blocks.

- In Russia, Putin has approved the government's proposal to support Rosneft's shale gas projects in Venezuela (the Patao and Mejillones offshore gas fields), which were granted to Rosneft by Maduro in 2017 under a 30-year license. Total estimated reserves at the two fields are 180 billion cubic meters (bcm) of gas, demonstrating the sizable stake Russia has in Maduro’s longevity.

Discovery & Development

- Total announced the start of production from the Culzean gas condensate field in the North Sea. At peak production—100,000 barrels of oil equivalent daily—the field will satisfy 5% of the UK’s gas consumption. The field, discovered in 2008, holds an estimated 250-300 million barrels of oil equivalent. Total is the operator with a 49.99% interest, with BP holding a 32% stake and JX Nippon the other minority partner with 18.01%.

- Exxon and Sabic have received a series of permits for their $10-billion petrochemical complex in Corpus Christi that will process crude oil from the Eagle Ford and the Permian into chemicals that are then used in plastics production. The companies are facing opposition from some local communities that are now expected to request a hearing on the matter, which means the complex is not yet a done deal.

- Vietnam could become a regional leader in renewable power with onshore wind capacity expected to reach 1 GW by 2021. The country’s government is so ambitious in this respect, in fact, it may increase its wind energy capacity target for 2030 to 6 GW. To date, Vietnam has 228 MW of onshore wind power capacity as well as 99 MW of offshore capacity.

Regulatory Updates

- Brazil’s Supreme Court has cleared Petrobras’ divestment of subsidiaries after it ruled state companies did not need the approval of Congress to do so. The decision reversed an earlier ruling by one Supreme Court judge who suspended Petrobras’ sale of its pipeline business TAG to Engie for US$8.6 billion. Now, the energy major can get on with its divestment program aimed at shrinking its still sizeable debt pile.

- Husky Energy will pay a fine of $3.8 million for an oil spill that occurred in 2016 on a pipeline operated by the company. The spill contaminated a section of the Saskatchewan River with 225,000 liters of crude oil and other liquids. Most of the sum is a fine that will go into state coffers but some of the money would be used for conservation projects in the area.

Politics, Geopolitics & Conflict

- President Trump has threatened Germany with sanctions for its continued support of the Nord Stream 2 pipeline expansion, which would increase natural gas flows from Russia to Germany. The companies under target here would be Shell, Austria’s OMV, German Wintershall and Uniper, and French Engie.

- Norway’s sovereign wealth fund may have to divest its stakes in Glencore and BHP after parliament tightened coal investment rules targeting the largest producers of the commodity. This comes after the pension fund (GPFG) was given the green light to divestment more than $13 billion in investments, including eight coal companies and 150 oil producers, while maintaining stakes in companies that invest in clean energy technologies.

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