Oil prices took a bit of a hit this week, but the overriding sentiment is that we’ve got at least two more quarters of strong prices, though it may hit a snag near the end of the year. Keeping prices relatively high right now are OPEC cut commitments and blackouts in Venezuela that have even shut down all operations at the country’s key oil export port, Jose. High inventories in the US, though, continue to rain on the price parade to some extent. The most attention this week has been on the spending habits of the supermajors, who are focusing primarily on share buybacks and increasing dividends for shareholders who were forced to be extra patient during the first phase of the shale boom. The contrasts sharply with what is going on in China, where state-run companies are being ordered to produce more, even if the cost makes it questionably economic.
Take Sinopec, for example--China’s largest refiner and one of the two largest oil and gas producers. For this year, Sinopec has announced a fourfold increase in capital spending. This is a direct response to Beijing’s call for oil and gas companies to boost domestic production to feed local demand at a time when the country’s fields are maturing or becoming more difficult to develop. The alternative is far too much dependence on imports. When it comes to gas, Beijing’s priority is shale--and there’s a lot of it in the Sichuan province. They’re also developing their own fracking tech, and Sinopec is the leader here. Now, it’s pledged to tap into a new field--Weirong--that contains an estimated 124.7 billion cubic meters of gas, which Sinopec is hoping will give it 1 billion cubic meters of output annually. This mandatory output increase will come at a huge price that investors will of course question, but this is a longer-term Chinese end game...
Meanwhile, Russia is gearing up to start pipeline exports via the new trans-Siberian pipeline to China and U.S. LNG producers are probably keeping their fingers crossed Beijing and Washington reach a trade deal so they can go ahead with their planned production projects.
And this is exactly where the tide is turning ... from a trader’s perspective, the profits are to be made in LNG, not big oil.
This Week In Oil: Why We’re Excited About the Tellurian FDI
We’re excited, in general, about LNG--not least because margins in big oil are squeezed and even the world’s biggest trading houses are hitting up LNG hard. They’re not just trading LNG, either--they’re investing in it from all angles, and with all that money pumping into the sector, it’s going to getting significantly bigger.
At the same time, the playing field here in the US is rather crowded, but the Tellurian deal stands out because it’s integrated: it’s not just about building an export terminal; it’s about owning every aspect of it, from the infrastructure to the gas to the sale of gas. What we’re waiting for is Tellurian’s final investment decision on the $30-billion Driftwood LNG project in Louisiana. The company said this week that they plan to make this decision in the first half of this year, and its CEO has indicated that a handful of deals have already been cut with global players (customers and partners), and that it’s only a matter of finalizing the paperwork.
There are at least a dozen of these big LNG projects in the pipeline, but the integrated nature of this one stands out so we’re watching what happens closely.
Shell’s Big Rebrand
From Big Oil to Big Energy, Shell is trying to rebrand itself, and it’s starting in the UK, through a utility company it acquired a year ago. First Utility has disruptive potential, says Shell, and now it’s offering its customers 100% renewable energy, with all electricity coming from wind, solar and biofuels. To win over more customers, it’s also offering a 3% discount on fuel at its chain of petrol stations across the UK.
Can Shell compete on this level? Yes, and no. It’s more a question of whether renewable energy can compete with the dominant six on the British retail energy market. Shell isn’t one of them, but it’s banking on brand, and on the UK consumer’s desire to go clean. It’s also committed to investing up to $2 billion annually on renewables--a figure that represents about 5 percent of its total spending.
The Big Rebrand also comes as the International Energy Agency (IEA) releases data showing that global carbon dioxide emissions reached record-high levels in 2018, particularly from the generation of energy, which has seen global demand surge.
Deals, Mergers & Acquisitions
• Murphy Oil has agreed to sell its oil and gas assets in Malaysia to Thailand’s state energy company, PTTEP, as it seeks to refocus on its domestic operations and shrunk its debt load. The deal is worth $2.1 billion plus an additional $100 million of certain new projects yield the expected results before October next year.
• The Saudi Fund for Development has struck a $300-million financing deal with the national Oil and Gas Authority of Bahrain. The money will be used for export credit and insurance for Saudi oil and gas equipment manufacturers in a bid to liven up this segment of exports.
• Venezuela’s PDVSA is looking to hire tankers as U.S. sanctions have cost it the loss of vessels. Right now, the company is in urgent need of three LPG tankers, two Aframaxes, two Panamaxes, and one long-range tanker, a source from the company has told media.
• Kinder Morgan has sold its holding in a planned offshore crude oil terminal in Texas. The buyer is Enbridge but the size of the deal remained undisclosed. The COLT terminal will be built to accommodate Very Large Crude Carriers, which only the Louisiana offshore oil port can currently handle.
• Saudi Arabia is in need of cash, and right now, Aramco is that cash cow. That’s why Aramco has just announced that it will issue a $10-billion bond (it’s first ever), possibly next week, to fund its acquisition of a majority stake in the Sabic petrochemical firm--a $69-billion acquisition that doesn’t make sense at all for Aramco. But when you need cash, you need cash …
• Norway’s state-run oil giant, Equinor (Statoil), will invest $180 million into an investment fund for research on battery and related technologies to boost the renewables industry from a storage perspective.
Tenders, Auctions & Contracts
• Petrobras will spend $320 million on put options on part of its crude oil output to hedge the output at a price of $60 per barrel in a bid to take advantage of the recent improvement in international benchmark prices. The hedge will help Petrobras protect its operational cash flow.
• South Sudan and Qatar are in oil and gas cooperation talks, including with respect to enhanced oil recovery technology and new resource exploration. Africa’s newest country has been struggling to restart its oil and gas industry in the wake of a devastating civil war that has still not really ended. At the same time, Qatar has been looking for expansion opportunities abroad. Now South Sudan hopes to boost production to 270,000 bpd from the current 180,000 bpd and eventually reach a peak of 350,000 bpd.
• Shell and Energy Transfer Partners have settled their differences regarding the planned Lake Charles LNG project and now the companies could continue working on the project. The final investment decision has been scheduled for the first half of 2020. The project will have a processing capacity of 2 billion cu ft daily.
• US-based Noble Energy has acquired a 40% participation stake in two offshore oil exploration and production contracts in Colombia from Shell. The contracts are for the Col-3 and Gua-3 blocks, which cover an area of 2,175 acres in the Caribbean Sea. The first phase of exploration is expected to see the companies invest $100 million.
Discovery & Development
• China and Cuba have signed an MOU for geological research for oil exploration in Cuba, in both deep and shallow waters. This is another Chinese soft power foray into Latin America.
• Petrobras has launched production from a fourth floating production, storage and offloading vessel at the Buzios field. The vessel has a daily oil processing capacity of 150,000 barrels and natural gas compression capacity of up to six million cu m. The recoverable reserves of Buzios are estimated at more than 3 billion barrels of oil equivalent. Petrobras also said this week that it was planning to spend $320 million on put options to hedge its Brent oil output.
• Venezuela’s oil production slumped by another 142,000 bpd in January following the introduction of more severe U.S. sanctions targeting specifically the country’s oil industry. As a result, the country was producing around 1 million bpd in February, down from more than 1.2 million bpd just five months earlier.
• A 3.6 MW solar farm made up of 10,000 panels is planned to turn a Dutch village into a carbon-neutral community by 2030. Construction work on the facility is scheduled to begin this June, at an old landfill site. When completed, the farm will produce enough electricity to power 900 households.
• Crude oil production in the North Sea could see a decline in May and June, to the tune of more than 400,000 when fields in the Greater Ekofisk Area close for maintenance. That’s according to Rystad Energy, which added the production decline will be temporary.
• Citing a “marginal” improvement in rail economics, Canadian Imperial Oil has resumed crude oil shipping from its Alberta terminal after having cut shipments from 170,000 bpd in December to almost nothing in February. The resumed shipments are small, and the latest data on total Canadian rail shipments of crude are now only around 175,000 bpd--half of what they should be.
• Construction has officially begun on the largest lithium processing plant in Australia, backed by Albemarle. The plant, which came with a $700-million investment--has approval to produce 100,000 mt/year of premium battery grade lithium hydroxide. Commissioning is expected to begin in 2021.
Politics, Geopolitics & Conflict
• Brazil’s former president Michel Temer has been arrested on charges of leading a “criminal organization” that participated in a corruption ring.
• Sudan has accused Egypt of holding an oil and gas auction in waters that belong to its territory and has asked it to suspend the auction.
• Media reports say the Israeli Defense Forces are preparing for a ground operation in Gaza, and will be buoyed by Trump’s recognition of the Golan Heights.
• The US has cut a deal with a strategic port in Oman to reduce dependence on the Strait of Hormuz, which can in theory be cut off by Iran. This is a military deal, even if Oman doesn’t see it that way. It is using this fund economic development, but the fact is that this is a way for the US military to access the Gulf without going through the Strait of Hormuz.
• Keep a close eye on developments in oil-and-gas major Algeria as the opposition comes closer to the endgame of getting rid of President Bouteflika, whose days are now clearly numbered. The political unrest and what is to come in a transition should have oil watchers worried. The opposition did agree to a transition deal this week that would install a transitional government for six months, comprised of individuals who would not be able to run for president or back any candidate. Oil and gas production and exports have not been affected by the unrest, but are more likely to be affected by what comes next. Already, key figures have abandoned Bouteflika, hedging their bets that he has lost this game.
• Saudi Arabia’s King Salman has met with Libya’s General Haftar in a move that adds to Haftar’s alliance list ahead of his bit to take Tripoli. That leaves only Qatar on the sidelines.
• There is an interesting oil play in the Golan Heights that Trump’s recognition might boost somewhat. Genie Energy (board of advisors, Dick Cheney, Rupert Murdoch, and faces from the Foundation for the Defense of Democracies who have been advising Trump to recognize Golan as Israel’s, among other notables) was granted permission to drill for oil on the Golan Heights in 2013. They have exclusive rights, but “occupation” status was getting in the way. But there is also some suggestion that Genie has make a sizable find in Golan, and that drilling has been quite successful. The drilling is being done by Genie’s Israeli subsidiary, Afek, which was given approval in 2016 to conduct more drilling in the disputed territory based on the discovery of an oil reservoir.
• On Sunday, vessel tracking data showed that a large crude oil tanker left Venezuela’s key port, Jose, but by Monday, all activity had ground to a halt due to electricity blackouts. Operations had not yet resumed at the port as of Wednesday, though Madura said power had been restored. But amid these crippling blackouts, the Maduro camp is going after opposition ‘President-in-Charge” Guaido, head of the National Assembly. The country’s comptroller on Thursday said Guaido’s personal financial statements contained “inconsistencies”, and moved to bar him from holding office after his tenure as head of the National Assembly ends in 15 months. Guaido does not recognize the authority of the comptroller to make such a move.
• Jordanian lawmakers are calling for the cancellation of a $10 billion gas purchase deal signed with Israel in 2016--more specifically, with US-based Noble Energy, the operator of Israel’s giant Leviathan gas field. The deal was with Jordan's National Electric Power Company, and calls for the utility to purchase gas over a 15-year period. The deal, at the time, was rather a victory for potential Middle East peace (even if a small one). At the end of the day, oil and gas is what will resolve Middle East conflict. But it was a temporary victory, and this is really the first fallout from Trump’s recognition of the Golan Heights. Jordanian MP’s now say the deal threatens Jordan’s energy security and helps support Israel’s control of the West Bank. Jordan doesn’t really have much alternative to Israeli gas, however, so we will have to watch how this one plays out.