A possible escalation of tensions between the United States and Iran has been by far the most intriguing development of the past week. Drones being shot down, military strikes called off by President Trump followed by another round of sanctions and escalating verbal altercations between the two. Concurrently, the US-China trade conflict has deteriorated amid threats from the Trump Administration of imposing tariffs on $300 billion worth of Chinese imports, including drilling components et al. (the media has already picked up the story of how these tariffs would backfire on the US oil industry).
The upcoming G20 Summit in Osaka, Japan will focus on the security of global crude supply and might even bring about a breakthrough in US-China trade talks (or at least dent the enthusiasm of those advocating further tariff hikes). The OPEC/OPEC+ meeting on July 01-02 will then provide the ultimate pricing cue for oil in the coming months. As of Wednesday afternoon, global benchmark Brent traded at $65 per barrel, whilst WTI was in the $59-59.2 per barrel interval.
1. Latin America’s Economy Malaise Brings Refining Down
- The economic fragility of leading Latin American nations is depressing product markets in Brazil and Argentina, despite both having avowedly pro-business leaders at the helm.
- President Jair Bolsonaro’s pre-election zeal has quickly evaporated as Brazil’s GDP is currently expected to grow by a mere 1 percent this year, compared to the Q1 estimates of a 3-3.5 percent y-o-y rise.
- As a consequence, Brazil’s refining market has been shrinking for the third consecutive month which would not be tragic, were it not for the fact that April-May have generally been the most robust months in terms of oil product demand.
- Weak demand for products in Brazil has been further buttressed by heavy rains (no need to burn fuel oil) and the tapering of diesel subsidies.
- Argentina’s May-June 2019 refinery runs are 5 percent lower year-on-year, freeing up additional volumes of crude for exports as Buenos Aires struggles with economic growth, inflation and unemployment.
- The last time Brazil witnessed a refinery utilization rate above 80 percent was October 2015, and the last time Argentina carried out the same feat was in February 2018.
2. Nigerian OSPs Continue Record-Breaking Climb
- Nigerian national oil company NNPC hiked official selling prices (OSPs) for all major Nigerian grades to historic highs amid heated demand for Nigerian crudes in NW Europe.
- With field outages and maintenances exasperating North Sea producers in June, Qua Iboe and Brass River became the main replacements for UK and Dutch refiners.
- Interestingly, Forcados, which only 2 years ago still traded at a discount to Brent, has crept up to a $2.24 per barrel premium, making it the most expensive out of the flagship grades.
- Qua Iboe, Bonny Light, Escravos, Pennington, Brass River all saw 40-50 cent per barrel month-on-month increases, with almost all of them now above the $2 per barrel premium threshold.
- As President Buhari is carrying out his second-term government reshuffling, NNPC’s top management has been replaced - with former trading head Mele Kolo Kyari elevated into top position at the company.
3. Guyana Future Jeopardized by Court Ruling
- Guyana’s bright oil future was jeopardized by the Caribbean Court of Justice’s (CCJ) ruling that the December 2018 no-confidence vote against David Granger’s government was within the bounds of law.
- The CCJ’s decision has prompted a general election to be held in November 2019, pitting the ruling APNU party against the opposition People’s Progressive Party-Civic (PPP-C).
- PPP-C has repeatedly claimed that it seeks to review oil contracts, including even the ExxonMobil Stabroer block, because they were not consulted throughout their adoption process.
- At the same time, PPP-C tries to present itself as a political force that is resolutely pro-investment, most probably meaning that reviews would not be systemic in case they win the elections.
- The news comes against the background of ExxonMobil edging closer to the commissioning of Lisa-1, having already dedicated a South Korean-built VLCC, Tina, as the first-phase FPSO.
- The 1st phase production of the Lisa field would see Guyanese output rise to 120kbpd by 2021-2022, only to surpass 0.5mbpd by 2025 with the addition of 2nd phase and the Payara field.
4. Angola Allocates Ultra-Deepwater Block to Chevron
- Sidestepping a scheduled public tender, Angola allocated the ultra-deepwater Block 34 to one of its long-standing partners, the US oil major Chevron.
- Block 34, which was abandoned by Equinor in 2002 after its exploration well failed to discover any commercial hydrocarbon reserves there, was widely expected to be offered by means of a limited public tender in 2021.
- In the late 1990s Sonangol had high hopes for Block 34 as it lies just a couple dozen of kilometers from one of Angola’s major fields, 0.7 Bbbl Girassol (30-31 API, 0.3 percent Sulphur).
- The first instance of Angola settling matters via direct negotiations on new blocks, Angolan President has been advocating a three-pronged strategy of “public tenders, limited public tenders and direct talks”.
- Having been drilling in Angola since the 1950s, Chevron was the first to discover a deepwater field on Angola’s continental shelf in 1997.
- Chevron’s Angolan production currently amounts to some 300kbpd.
5. Gazprom Neft Seeks Larger Iraq Presence
- Gazprom Neft wants to build a larger presence in Iraq, building upon the success of its production entities in the Middle Eastern country.
- Being the operator of the 3 Bbbl Badra field, Gazprom Neft is courting Iraqi federal authorities to grant it control over the Mansuriya gas project.
- Mansuriya was awarded to Gazprom Neft’s partners in Badra – KOGAS, TPAO and Kuwait Energy – 8 years ago, however the Oil Ministry cancelled the contract after the consortium failed to carry out the required development steps.
- The field was then granted to local Iraqi companies to no tangible result, even though the proximity of Mansuriya to Baghdad might make it a valuable asset in setting up Iraq’s gas-powered electricity infrastructure.
- Located not too far from Badra, Gazprom Neft need not have to build a separate web of connections for Mansuriya (peak production expected at 100 MCfd) as it could simply tie it in to Badra.
- Gazprom Neft’s Middle East ambitions were very palpably cut short by the imposition of US sanctions on Iran as it was intent on developing (apart from 2 other Iranian fields) the 2 Bbbl barrel Azar field in Iran, assumed to be the geological extension of Badra.
6. India Steers Clear of Iran Sanctions Disobedience
- India has been steadfastly abiding by the US sanctions against Iran, dropping Iran imports, once its second-largest supplier, altogether in June 2019.
- Iraq has consolidated its standing as India’s prime supplier, with May exports raising to 1.2mbpd (up almost 0.3mbpd from April) with Saudi Arabia coming in second.
- In part, India’s task of replacing Iranian volumes was eased by the prospect of refinery maintenance, e.g.: Reliance imported 21 percent less month-on-month in May 2019 ahead of its planned Jamnagar shutdown.
- Along with Iraq, it was the United States that emerged as one of the main winners of Iran sanctions, with US imports jumping to 0.32mbpd, up more than fivefold year-on-year.
- Indian customs data also provides average monthly purchase values – US barrels cost an average of $78 per barrel in May, compared to an average of $66 per barrel on Iraqi barrels.
- Interestingly, private Indian refiners including Reliance still continue to purchase Venezuelan crude, averaging 0.22mbpd in May-June 2019.
7. ExxonMobil Seeks a Full Norway Exit
- Two years after it sold all its operating assets on the Norwegian part of the North Sea, ExxonMobil is seeking to get rid of its 20-odd stakes in Norway’s continental shelf (NCS).
- According to Norwegian media, the ExxonMobil portfolio might be worth 3-4 billion and Scandinavian upstream-focused firms Aker and DNO are perceived as top candidates for the purchase.
- In 2018, ExxonMobil’s Norwegian subsidiary produced 0.16mbpd of oil equivalent, of which 0.075mbpd was crude (primarily from the Snorre and Grane fields).
- The news came on the back of Norway reporting crude and condensate production dropping to a 30-year low at 1.28mbpd.
- Exxon’s announcement only exacerbates fears that oil majors might be generally on their way out of NCS, which would ramp up pressure on Equinor to decide either to mirror the trend or to remain even more focused on Norway.