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Global Energy Advisory – 10th July 2015


This week we turn our attention to Saudi Arabia, where a number of things are coalescing to further change the oil price environment and the wider geopolitical picture.

First, we note that Saudi Arabia is becoming increasingly desperate to retain its crude oil market share, and this is leading to some interesting deals with India and Russia. For India, the Saudis are offering to ship crude using their own tankers to Indian refineries, which would cut the costs significantly for India. Essentially, this is how it gets around discounting its crude selling price. Some say that using Saudi ships to transport crude to India would shave up to 30 cents off a barrel. The point of this is to secure market share at a time when Asian buyers are looking for better deals in a global glut.

Then we have a pending Saudi deal with the Russians. This is important also because Russia has now officially surpassed Saudi Arabia to become China’s top crude supplier in this battle to capture market share. But it’s not oil that the Saudi’s are dealing with Russia—for obvious reasons. Saudi Arabia has signed a deal to invest up to $10 billion in oil rival Russia, in the fields of agriculture, medicine, logistics, retail and real estate. So while the Saudis are busy trying to secure oil market share, the Russians are busy trying to make up for hits they’ve taken from Western sanctions. This has produced a fair amount of dramatic talk about Saudi Arabia and Russia joining forces in a new alliance. Overly dramatic or not, sentiments are turning against long-time unconditional U.S. ally Saudi Arabia. Washington is fed up with the beast for the most part.

The clincher here will be a deal with Iran over sanctions and its potential (note there is only potential, Iran doesn’t have nuclear weapons) to go nuclear. This would mean more geopolitical change than the faltering Saudi Arabia—which is fighting a war in Yemen that is leaking across its borders, among other things—can handle right now. The competition on the oil scene, though not immediate, would eventually hit Saudi Arabia hard, as the Kingdom is already scrambling to secure market share. The consequences would be immense, and this deal, more than anything, will define future relations. There are many who would like to see this final noose tighten around Saudi Arabia.

Regulations & Arbitration

• This week we’re back in Kurdistan, looking at the ongoing dispute between the Kurdistan Regional Government (KRG) and producers who are scrambling to get paid. The latest in this struggle is another arbitration court ruling in favor of Abu Dhabi’s Dana Gas, which is trying to get $2 billion in arrears. The London Court of International Arbitration has ruled that the Pearl Petroleum consortium--which includes partners Crescent Petroleum, OMV of Austria and Hungary’s MOL--has exclusive rights to develop the Khor Mor and Chemchema concession in the Kurdish region for at least 25 years. An additional court ruling said that the consortium was entitled to receive international prices for its output of liquefied petroleum gas and condensate, and that Dana Gas was solely entitled to the proceeds from selling stakes in the project to OMV and MOL. Dana Gas is not the largest, but it is one of the key players in this venue, having invested over $1.2 billion and having produced over 145 million boe of natural gas and petroleum liquids over almost seven years. And despite not being paid, the consortium continues to produce around 84,000 boe per day and 335 million cubic feet per day of gas. This is indeed good news for Dana, but it will still be a long road to recovering this money. However, we’ll be watching another judgement due in September in which Dana Gas will most likely be awarded entitlement for all outstanding arrears.

• In never-ending BP-Deepwater Horizon debacle, BP has agreed to a preliminary deal to pay a record $18.7 billion to settle claims by five Gulf of Mexico states and the U.S. government. Of that, $12.6 billion will go to the federal government and the remainder to Louisiana, Mississippi, Alabama, Florida and Texas, plus 400 local government entities. The settlement will cover the environmental and economic damage caused by the spill. Payments will be made in the form of $1 billion per year for 18 years. BP reportedly has $43.8 billion in reserves set aside already to cover spill-related costs and plans to add another $10 billion to that.

Discovery & Development

• On the LNG side, Quicksilver Resources Canada Inc. has received approval from the Canadian National Energy Board to export 20 million tons/year of LNG from a possible liquefaction plant near Campbell River. The license is still subject to the approval of the Governor in Council. Quicksilver produces natural gas in the Horn River basin of British Columbia, and the potential plan here is to build a plant on the site of a pulp and paper processing complex that closed down in 2009. Presently, they are studying the feasibility of this. The facility, Discovery LNG, would have four, 5-million-tpy trains. Export approval could be in place around 2021—assuming the facility is actually built.

• A 50-50 joint venture of Italy’s Eni and Spain’s Repsol has officially launched production from the giant Perla natural gas field in the shallow water offshore Venezuela. This is the largest offshore gas field in Latin America and is located in the Cardon IV Block some 50 kilometers offshore Venezuela. It is also the first gas field to be brought into production offshore Venezuela, making this a very significant debut. Perla holds an estimated 17 trillion cubic feet of gas in place at about 3,000 meters below sea level. Production is expected to reach 450 MMscfd by the end of this year. This is the first of three development phases. The next phase will see production rise to 800 MMscfd in 2017. In the third phase, we’re looking at a potential increase in production to 1.2 bscfd in 2020, which should be maintained through 2036. The JV has signed a gas sales agreement with state-run PDVSA for all three phases. PDVSA will mainly use the gas for the domestic market.

Deals, Mergers & Acquisitions

• Canada’s Cenovus Energy will sell its wholly owned subsidiary Heritage Royalty to the Ontario Teachers’ Pension Plan for gross cash proceeds of $2.7 billion. HRP holds 4.8 million gross acres of royalty interest and mineral fee title lands in Alberta, Saskatchewan, and Manitoba. The deal is expected to close by the end of month. The Toronto-based Teachers’ oversees more than $120 billion in assets and is pursuing the deal as a hedge against unexpected inflation.

Tenders & Licensing

• China's Ministry of Land and Resources will allow non-state companies to bid on six oil and gas blocks in the far-western region of Xinjiang. This area is believed to have proven reserves, according to the authorities, of 5.6 billion tons of oil and last year produced 540,000 bopd. This is a pilot program in this respect, but we warn investors that the area is very remote and commercial extraction is not for the faint of heart. This is some complex geology. The Ministry is hoping that bidders will recognize the need to partner up with state-owned companies with experience in the area. Again, this is a pilot project so it will be interesting to see how much this playing field is really opened up to private companies. So far, reforms have been slow.

• Mexican state oil regulator CNH says that four companies have withdrawn from the upcoming oil license tender process, including local subsidiaries of Glencore and Noble Energy, Colombia's state-run Ecopetrol and Thailand’s PTT. The bidding is for shallow water oilfields scheduled to be awarded next week. Left for the bidding are 18 companies prequalified as individual operators and seven prequalified consortia. Speculation is that the withdrawals were related to strict rescission clauses in the production-sharing contracts, but there has been no official reason given for the exits.

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