Trump’s policies can scale up oil market volatility

In Oil & Companies News 14/11/2016

When the final result of the US elections was announced and Donald Trump won, markets around the world went into a tailspin where commodities and stock markets fell precipitously.

But the market meltdown soon fizzled out and prices recovered to near previous levels regardless of the election result. Brent crude prices fell to $43 (Dh158) a barrel on November 9, but recovered to $45.5 a barrel the next day as the focus shifted from Trump’s victory to expectations from Opec.

Here we have to remember that oil prices have been under pressure for some time now, with Brent prices close to $54 a barrel around mid-October but falling to $44.68 a barrel as I write. At the same time, Opec’s basket of crude oil prices fell from $49.06 a barrel on October 19 to $42.67 on November 10.

After the initial knee-jerk reaction, analysts realised that Trump’s energy policy promises are unlikely to affect the markets in the short term as many of them may take years to materialise if ever implemented. Others may be implemented soon as he takes office in just over a couple of months’ time, but their impact will take much longer to become noticeable.

And let no one forget that Trump’s election campaign is like any other politician’s in exuding showmanship rather than being well-thought out policies. So it remains to be seen if he can make the US free from Opec or if he will occupy Iraq and take its oil as the cost of its liberation or make Gulf countries pay for their protection.

Trade deal

Even if US imports from Opec turn to zero, Opec’s policy would still affect oil prices internationally and the US can never be isolated from the international market. The promise to make the US energy independent has been almost the promise of every president since 1973. Trump is no different and it remains to be seen if he will succeed and whether this independence is actually in favour of the US economy, which is a major player in the energy markets by way of its imports and exports.

Cancelling NAFTA is off the table now as Trump’s demands for renegotiation is likely to be positively met by Canada and Mexico. The agreement has stood the test of time for decades and is unlikely to be folded up easily, especially as it has a large energy element and many arteries through oil and gas pipelines.

Unlike Obama, Trump has promised to approve the Keystone XL pipeline, which will open the route for more Canadian crude oil to refining centres in Texas and then exports.

On Iran, Trump’s promise to throw out the nuclear agreement is unlikely to come to fruition because that was an international agreement approved and guaranteed by the UN Security Council. However, Trump can certainly make a lot of trouble throughout the implementation. Oil companies who were considering deals with Iran are probably having second thoughts.

This may make Iran more cooperative with other Opec members in the upcoming meeting at the end of this month.

Coal industry

Trump is expected to rein in the Environmental Protection Agency (EPA) to support his promises regarding the oil, gas and coal industries. Nick Cunningham of oilprice.com said recently that Trump “is widely thought to staff the agency with oil-friendly free-market types.”

This will invigorate the shale oil and gas production, especially if oil prices appreciate. It will also breathe life into a declining coal industry as regulation on clean coal is relaxed.

How this would affect the US climate change policy and its international agreements remains to be seen. Trump promised to “cancel” the Paris Climate Accord. While he can’t actually do that, he can simply not adhere to US commitments.

This may make other countries follow suit and bring more uncertainties about the whole climate change outlook.

Guesswork

“Trump wants to end public spending on renewable energy” and “the production tax credit, which subsidises wind and solar, is something that could be on the chopping block,” writes Cunningham. This could “mean a much greater dependence on oil, and higher demand will lead to higher prices.”

Cunningham ends up by saying that “in short, oil and gas are potentially huge winners from Tuesday’s results. But all of this is just guesswork. Trump has been notoriously vague on policy details, so we will just have to wait and see.”

But there is fear of an economic downturn and some analysts have already reduced their forecasts for economic growth fearing a Trump trade war with major economic powers. This would pressure oil demand and prices and dent an already fragile market.

There is no doubt then that the next few months and beyond would be an interesting time in the oil market and we better hold on to our seats and watch the show.

Source: Gulfnews

Trump presidency bullish long term for oil and gas, energy CEO says

In Oil & Companies News 14/11/2016

While there are some specifics about President-elect Donald Trump’s energy policy to be worked out, overall his presidency is “very bullish long term for oil and gas,” Warwick Energy CEO Kate Richard told CNBC on Thursday.

Trump has said he wants to roll back regulations and produce more energy, which he believes will create more wealth for America.

Richard thinks Trump’s economic plan could probably spur economic growth and demand for oil.

“I think the market loves Republican administrations and infrastructure is very bullish for crude and natural gas demand,” she said in an interview with “Power Lunch.”

Trump has promised a massive infrastructure spending program, saying in his victory speech early Wednesday morning he’s going to fix highways bridges, tunnels, airports, schools and hospitals — and put millions of people to work to get it done.

While Richard believes Trump’s energy policy is “interesting,” she noted the whole story can’t be put together yet.

For one, she said talk about repealing Environmental Protection Agency regulations are a little hard to understand.

“We haven’t seen a decline in drilling in this country because of EPA regulations. We’ve seen a decline in drilling in this country because of two years of low prices,” she said.

Right now, Richard thinks there are other things that are more important for the energy industry.

“For natural gas: winter. And for crude: OPEC and the OPEC meeting at the end of November. And both of those are bullish for the commodities which are probably bullish for the equities.”

Source: CNBC

Oil And Gas Industry Buoyed By Trump Election

In Oil & Companies News 14/11/2016

After nearly two years of depressed commodity prices and a host of regulations and activist opposition, the U.S. oil and gas industry is hopeful a Donald Trump administration can help re-ignite growth in the sector, said industry sources.

The 45th president will likely remove regulatory impediments imposed by the Obama administration that have stymied oil and gas drilling and infrastructure buildout, said Frank Murphy, managing director, RW Baird.

One area of likely change is the opening up of more federal lands to drilling activities, said Murphy. A Trump administration is also added insurance against a general ban on fracking, said a midstream investor.

Trump’s election will put more emphasis on expanding U.S. oil and gas production, an industry banker said. The banker did not see Trump as being particularly helpful in the big-ticket offshore drilling projects. Yet the Trump administration could positively impact bonding in the offshore oil and gas sector, an industry lawyer said. The amount and type of bonding companies need to operate in the arena was set to rise under Obama administration efforts and a Trump administration could change that.

Key takeaways

Industry observers believe a Trump administration represents a friendlier environment for the building of pipeline projects, which has the potential to improve the economics of numerous plays that are constrained by lack of takeaway capacity.

Both Murphy and the midstream investor believed more friendly federal agencies could benefit midstream players in the Bakken, such as Dakota Access-owner Energy Transfer Partners, said Murphy and the midstream investor. The Dakota Access Pipeline requires the input of the Army Corps of Engineers, for example, noted Murphy.

More broadly, Trump is seen as reducing the risk premium investors are imposing on midstream companies seeking to build a pipeline, said the midstream investor. In recent months, sector observers have been noting that pipe in the ground is worth more than a large inventory of organic growth projects.

Improving infrastructure will enhance economics for upstream operators like Hess Corp, which owns a substantial Bakken position, said Murphy. It could also help Hess’s plans to take public Hess Midstream, its Bakken-focused subsidiary, as an MLP, said Murphy and the midstream investor. Takeaway capacity alone will not push forward an IPO, however, and rising oil prices will play a critical role in showing the viability of Hess’s drilling, and by extension its midstream operations, said Murphy.

Harold Hamm, CEO of Bakken and Midcontinent operator Continental Resources, is in the running for Secretary of Energy in a Trump Administration, noted the midstream investor. Such an appointment is seen as benefitting the Bakken and helping operators there.

The Marcellus is another play with infrastructure constraints that could benefit, said Murphy, highlighting the Atlantic Coast Pipeline by Dominion Resources and Duke. It would help move gas south out of the southern Marcellus to the U.S. Southeast but is being held up by the U.S. Forest Service, said Murphy. The planned Constitution pipeline, backed by Williams, that could relieve congestion in the northern Marcellus by transporting gas into New England is stymied by state agencies, but could get a new look in a different regulatory environment, he said.

The Keystone project, owned by TransCanada could also receive a new lease of life as Trump is on record as being in support of the crude pipeline to move Canadian oil south to the United States, though Trump made comments about taking a cut of profits from the pipeline that have befuddled some in industry, according to published reports.

There will be no “free for all” where pipeline companies will be allowed to build wherever they want, however, said the industry lawyer. While a Trump administration would be “more accommodating,” pipeline opponents will likely redouble efforts to use lawsuits to slow down or kill pipeline projects now that they won’t have support from a friendly executive branch, said the industry lawyer.

Midstream companies should still expect a lengthy permitting and building process, said the industry lawyer.

What’s good for coal is bad for natural gas

With control of the House and Senate, Trump will likely be able to appoint a conservative Supreme Court Justice that will be “predisposed” to ruling against the Clean Power Plan, said the industry lawyer. The Clean Power Plan is being fought in federal courts and is expected to make its way to the Supreme Court next year.

Rolling back the Clean Power Plan would make coal more competitive with natural gas, however, which could negatively impact the oil and gas industry. Eliminating regulations that force the shut down or conversion of coal-fired power plants to natural gas could hurt natural gas demand, and natural gas prices.

Other areas of potential concern for oil and gas under a Trump administration include his protectionist stance with regards to American products, said the industry lawyer. Now that U.S. crude can be exported to other countries, it could be targeted by other nations in retribution for tariffs imposed on imported products, said the industry lawyer. The midstream investor shared concerns over potential global trade issues, but thought Trump would be open to trade that supports development of oil and gas.

Wilson Chu, an M&A lawyer with McDermot Will and Emery, thought Trump’s protectionist stance is overstated, noting that Trump is in favor of “fairer trade” and is expected to be “more practical than ideological.”

Source: Forbes

China Oil Companies’ Push Into U.S. Faces Uncertainty With Trump Victory

In Oil & Companies News 14/11/2016

China’s beleaguered oil sector could face fresh challenges following Donald Trump’s election as president, with some in the industry warning that a harder U.S. line toward China could stymie potential investment in the U.S. energy patch.

State-owned giants such as PetroChina Co. and China Petroleum & Chemical Corp. long viewed the U.S. as the golden egg of their global deal making ambitions, with its huge oil-and-gas reserves and a stable regulatory and political climate.

Now Mr. Trump’s election is brewing new uncertainty in the energy patch as experts see an inherent contradiction between Mr. Trump’s pledge to promote oil-and-gas drilling and his campaign rhetoric decrying globalization.

“Nobody knows what he’ll do,” said a person with ties to China’s top oil executives who has promoted the idea of more Chinese energy investment in the U.S.

An attorney who works with Chinese energy clients and others across Asia said he began fielding questions soon after Mr. Trump was declared victor.

It has been “a constant barrage of questions about what does this really mean,” said David Wochner, who leads the policy and regulatory practice at law firm K&L Gates.

On one hand, Mr. Trump and his team could likely be convinced of the value to the U.S. economy of exporting more energy, he said.

“But as you start to think about Asian investment—Chinese or otherwise—into U.S. energy infrastructure, and taking a stronger role perhaps in the U.S. energy market, and then having the ability to export the commodity to their home country, I think it becomes a bit of a guessing game at this point,” he said.

As a candidate, Mr. Trump pledged to slap a 45% tariff on Chinese imports and to brand China a currency manipulator. Either one would likely trigger retaliation by China’s government, and sour bilateral ties between the countries.

In many ways, the U.S. and China are natural partners when it comes to oil and gas. The U.S. has significant export ambitions—particularly of liquefied natural gas that increasingly is made from abundant shale reserves. At the same time, China is already a huge importer, and continues to grow each year.

As a result, its companies have been scoping out potential investment in everything from stakes in U.S. oil and natural gas fields to energy infrastructure such as pipelines and export terminals on the Gulf of Mexico coast. That includes big state-owned energy giants and a host of smaller companies that are eager to cement their footprints abroad, say people who advise the companies.

No doubt, getting a foot in the door in the U.S. has never been particularly easy for China’s energy companies. Most notably is the failed takeover attempt of U.S. oil producer Unocal Corp. by China’s state-owned Cnooc Ltd. in 2005. Cnooc’s bid at the time suffered from a wave of anti-China sentiment on a wide range of issues including China’s trade practices—closely mirroring what Mr. Trump says today.

Under the Obama administration, Chinese companies found greater footing. They successfully completed a number of deals, including with U.S. shale pioneer Chesapeake Energy Corp. and others.

Today Mr. Wochner advises China’s energy companies to engage early with the new administration to form a better sense of how regulations may change. Political analysts say the uncertainty will spur much consternation in Beijing.

Mr. Trump’s victory likely increases the “level of political risk associated with investing in the United States in the eyes of many Chinese energy executives,” said Erica Downs, a China energy expert at the consultancy Eurasia Group. “This will be a disappointment because of the good investment opportunities here.”

Source: Wall Street Journal

Oil taking on green sheen

In Oil & Companies News 14/11/2016

The companies that drill black gold are going a little bit green: taking stakes in renewable energies that are growing rapidly, enabling oil firms to diversify revenue and show commitment to fighting climate change.

In the past, such swings have been written off by environmental campaigners as greenwash, and just as likely to be reversed once low oil prices go up again.

But analysts say that, even though only a tiny percent of oil majors’ investment goes into renewables, the interest this time seems to be sustained, and underpinned by solid profit.

“It is not a purely economic trend” driven by low crude prices, said Francis Perrin, president of SPE, which publishes a number of energy-related publications.

“It’s more profound: it’s the adaption of certain oil industry majors to a certain number of energy and economic upheavals.”

Perrin suggested oil companies were more cognisant of the threat posed by climate change and the potential that renewable energy will become big business.

Already present in the manufacturing of solar panels via its unit Sunpower, France’s Total earlier this year invested in a US company that installs mini wind turbines for homes and businesses.

Italy’s ENI plans to invest 1 billion euros ($1.1 billion) over the next three years in solar projects, while Shell, BP and Statoil are concentrating on wind power.

In the US, Chevron is switching its bets from geothermal to biofuels, although ExxonMobil remains lagging in the green energy field.

– Profitable = sustainable –

With the price of crude in the doldrums, “the priority for oil companies is creating value” said Jerome Sabathier, head of the economics department at IFPEN, a French government body that supports research into the renewable energies, the environment and transportation.

Most oil companies are trying to cut costs and reduce their debts, selling off non-strategic assets.

Interestingly, though, they have been loath to sell off renewables, which have been a source of growth.

Perrin said the interest isn’t only due to low crude prices, however.

“The trend started before oil prices began to tumble in the summer of 2014 and will continue if they rebound,” he said.

While oil companies have been slashing investment as they seek to cut costs, the chief executive of Total, Patrick Pouyanne, noted the company has continued to allocated $500 million per year on renewable energies.

And often their efforts are supported by public funds.

“There are a certain number of financing mechanisms and subsidies for renewable energy that create a real financial interest for companies,” said IFPEN’s Sabathier.

But Total’s CEO said that the key to sustainability is profit.

“You will not build sustainable business just because its green, you will build it because it will be profitable and because ecology meets economy,” said Pouyanne at a recent conference.

Even if they are not initially profitable, renewable investments also provide an enormous public relations benefit to oil companies.

“It’s the cherry on the cake,” said Perrin.

– Still marginal –

Shareholders, including big investment funds, have also been keeping a close eye that oil companies correctly evaluate the financial risks posed by measures that may be adopted by countries as the global community aims to keep global warming limited to 2 degrees Celsius.

The OPEC oil cartel, even with limited implementation of climate change mitigation efforts, sees oil demand growing at a much slower rate than natural gas over the next 25 years.

But an expected near doubling of passenger cars on the roads as consumers in developing countries purchase vehicles should drive demand for oil higher.

However, if countries fully honour their pledges to cut down on the use of fossil fuels which cause global warming, OPEC believes oil demand could begin declining by 2030.

In any case, oil companies are not turning their backs on their main business for the moment.

Investments in renewable energies remain marginal — less than 3 percent of the billions pumped into oil and gas projects every year, according to a recent report by the Sia Partners consulting firm.

The interest by oil firms in natural gas is understandable as it is seen by the International Energy Agency as the only fossil fuel whose share in the energy mix is to increase in the coming decades as electricity producers switch from coal, which causes far more pollution.

Ten oil majors, members of the Oil and Gas Climate Initiative, also want to continue research into the development of carbon capture technologies.

“If you advance in that area, you can develop in the long term fossil fuels without these energy sources contributing to climate change as in the past,” said Perrin.

Source: AFP

Oil Is Heading Back To $20s

In Oil & Companies News 14/11/2016

Oil bulls had a good ride in the last eight months. The black gold rallied, from mid-$20s in January to the mid-$50s in late October. But economic fundamentals have turned bumpy for oil bulls in the last couple of weeks, with oil heading towards the $40-mark rather than the $60-mark as some had expected.

And things will continue to be bumpy in the near future. Oil is heading back to the January lows, as hopes of an OPEC output freeze have been fading. In fact, OPEC members like Iran, Libya, Iraq, and Nigeria have been raising rather than cutting oil output since the Algiers meeting, according to recent industry reports.

Then there are American frackers, the new “swing producers” in the oil market—a role previously played by Saudi Arabia. And they are ready to fill in any supply slack, as soon as prices head north, by bringing oilrigs back on line.

That’s what happened back in July, as oil prices hovered near the $50 mark. Oil rigs were up for four weeks, according to Baker Hughes, which keeps a weekly tally on the number of rigs in operation—a trend that accelerated as oil continued to trade around $50 in September and October. Overall, 165 oil rigs came back to operation since the late January, helping raise US output and cut foreign oil imports in recent weeks.

American frackers’ role as swing producers will become even more important under the new administration, which is expected to ease fracking regulations.

To make matters worse for the bulls, global oil demand remains sluggish at best. The world economy continues to grow at a slow pace under an increasing debt burden.

We’re talking about debt accumulated in the aftermath of 2008-9 financial crisis (Great Recession), on top of debt that had been accumulated before the crisis with the help of the Federal Reserve and other central bankers.

And things may get worse on this end of the market, too. US long-term interest rates have been heading sharply higher recently—the US Treasury note yield reached 2.13%. And short-term rates are expected to follow suit, as the Fed is expected to raise the Federal Funds rate in the December FOMC meeting.

Source: Forbes

Oil pinned near three-month lows as gloom grows over OPEC

In Oil & Companies News 14/11/2016

Oil held steady around three-month lows on Monday, as the prospect of another year of oversupply and weak prices overshadowed chances that OPEC will reach a deal to cut output.

Donald Trump’s surprise victory in last week’s U.S. presidential election has boosted stocks and the dollar, but undermined much of the commodities complex, including oil, which has sagged as expectations that the world’s largest exporters will agree to reduce output this month have waned.

Brent crude futures <LCOc1> were down 2 cents on the day at $44.73 a barrel by 1005 GMT, while NYMEX crude futures <CLc1> were down 6 cents at $43.35 a barrel.

“In the same way that a strong OPEC agreement was needed to continue the rally above $55, a lack of agreement will be needed to break below $40 and right now, we’re at $45,” Petromatrix strategist Olivier Jakob said.

“So I think on a risk basis, we’re starting to be a bit more concerned about the upside price risk, than about the downside.”

OPEC plans to cut or freeze output, but analysts doubt the group’s ability to reach an agreement at its meeting on Nov. 30.

The Organization of the Petroleum Exporting Countries said on Friday its output hit a record 33.64 million barrels per day (bpd) in October, and forecast an even larger global surplus in 2017 than the International Energy Agency on Thursday. [IEA/M]

Yet, Saudi Energy Minister Khalid al-Falih has said it was imperative for OPEC members to reach a consensus on activating a deal made in September in Algiers to cut production.

“OPEC know what needs to be done but too few members will agree to take the production pain for the price gain, knowing also that the price gain incentivizes non-OPEC to produce more, lengthening the rebalancing process,” PVM Oil Associates analyst David Hufton said.

“OPEC are facing insurmountable problems to which the election of Donald Trump has added.”

The dollar index <.DXY> hit an 11-month peak on Monday, driven by an aggressive sell-off in bonds that has pushed Treasury yields <US10YT=RR> to their highest since January.

Ordinarily, a strong dollar would push oil lower, but the correlation between the two is at its most positive in two months, suggesting they are more likely to move in lockstep with one another than in opposite directions.

Source: Reuters (By Amanda Cooper; Additional reporting by Osamu Tsukimori in TOKYO; Editing by Dale Hudson)

OPEC’s Oil Production Cut in Doubt as Output Flows

In Oil & Companies News 14/11/2016

The Organization of the Petroleum Exporting Countries pumped more crude oil last month even as the group geared up to complete a plan to cut output at its meeting at the end of this month in an effort to stabilize oil prices.

OPEC’s crude oil output increased by 240,000 barrels a day in October to 33.64 million barrels a day, the group said in its monthly oil market report Friday, with Nigeria, Libya and Iraq driving the supply boost.

OPEC’s October production is now well in excess of the high-end of the output range the group agreed to at a meeting in Algiers in September, highlighting the challenge members will face implementing that deal at its next meeting in Nov. 30 in Vienna. According to the report, the group was pumping almost 1 million barrels a day more than what is expects demand for its crude to be next year.

The countries driving the bulk of the increase—Nigeria, Libya and Iraq—are those seeking exemptions from the cut.

Without a cut, the world’s oil stockpiles are likely to keep building, putting further pressure on oil prices, which are still trading below $50 a barrel, down from the more than $100 levels seen in mid-2014.

“Looking ahead, it is important to consider the immediate impact that the assumed global supply/demand balance has on inventories, given the expected demand for OPEC crude in 2017 of 32.7 million barrels a day,” OPEC said in its report.

“Adjustments in both OPEC and non-OPEC supply will accelerate the drawdown of the existing substantial overhang in global oil stocks and help bring forward the rebalancing of the market,” the report said.

OPEC’s task of trimming global oil supplies is further challenged by producers outside the cartel, such as Russia, Brazil, Canada and Kazakhstan, which are also ramping up the amount they produce.

The potential for increased oil supplies comes as OPEC kept its outlook for world oil demand growth next year unchanged at 1.15 million b/d as economic activity has been muted, despite the more than two-year slump in oil prices.

The collapse in oil prices from over $100 a barrel in mid-2014 to below $50 currently has roiled the oil sector, forcing companies to cut spending and jobs and hammering the economies of OPEC producers, notably Venezuela, that rely on oil revenues.

Source: Wall Street Journal

Saudi Oil Minister says OPEC production cut ‘imperative’

In Oil & Companies News 14/11/2016

Saudi Arabia’s oil minister said it was “imperative” that OPEC nations finalize an agreement over a cut in oil production aimed at boosting crude prices, Algerian media said Sunday.

Khaled al-Faleh met his Algerian counterpart on Saturday and called on cartel members to stick to the surprise cut deal, reached in Algiers in September.

“In this period marked by unstable oil prices it is imperative to reach a consensus between OPEC nations and to agree on an effective mechanism and precise figures to activate the historic Algiers accord,” al-Faleh was quoted as saying by Algeria’s APS news agency.

The September meeting of OPEC members produced an agreement to cut the cartel’s output by 750,000 barrels per day, according to Bloomberg News.

Oil rose on news of the deal, but crude prices are still more than 50 percent lower than their mid-2014 levels.

Vienna meet

The accord still needs finalizing by November 30, when OPEC nations will meet in Vienna.

Faleh said he was “optimistic” that the agreement would come into effect.

OPEC officials said in September that the group would aim for a combined output of 32.5-33 million barrels per day.

Source: AFP

Iran Pumps More Oil as Saudi Minister Calls for OPEC Output Cuts

In Oil & Companies News 14/11/2016

Iran boosted oil output at three western fields faster than it expected as rival OPEC producer Saudi Arabia called for a collective output cut later this month to help rebalance the market.

Output at the fields west of the Karoun River, near Iran’s border with Iraq, rose to about 250,000 barrels per day from 65,000 barrels in 2013, the Oil Ministry’s news service Shana reported Sunday, citing President Hassan Rouhani at a ceremony to formally open the project. Iran had expected to reach that output target by the end of the year, Mohsen Ghamsari, director for international affairs at the National Iranian Oil Co., said in September.

Saudi Arabia’s Energy Minister Khalid Al-Falih said OPEC must agree to implement a proposed cut in crude production for OPEC countries, Saudi Press Agency reported Sunday. OPEC members will meet on Nov. 30 to discuss a plan to limit the group’s output to a range of 32.5 million to 33 million barrels a day, compared with 33.64 million in October. That target has become harder to reach as several members boosted output.

OPEC reported last week that Iran raised its monthly output by the most since international sanctions were lifted in January. The Islamic Republic negotiated an exemption from the necessary production cuts at a meeting in Algiers in September, to compensate for the production capacity it lost when international sanctions targeted its oil industry. Iran has almost recovered that capacity, and plans to further increase output with the help of foreign investment.

“Oil production west of Karoun must reach one million barrels per day,” Rouhani said, referring to the North Azadegan, Yadavaran and Yaran fields. “This is a realistic goal, and we need investment and technology.”

Iran has approved a new oil contract model to lure foreign investors, although the details have not been made public. France’s Total SA reached an initial agreement to develop a natural gas field in Iran last week, becoming the first international oil company to sign a deal under the new energy contracts.

Source: Bloomberg

The upstream movement: Oil producers must invest to avoid another crisis

In Oil & Companies News 14/11/2016

Deal or no deal, oil producers must ramp up investment or risk a new “shock” by the end of the decade. That is the industry warning from analysts to oil ministers.

While bickering continues over a preliminary agreement to cut output, due to be confirmed at the next meeting of the Organization of Petroleum Exporting Countries (OPEC) on November 30, several of the 14 oil cartel members are refocusing on upstream capabilities to help counter a slide in crude exports.

UAE Energy Minister Suhail Bin Mohammed Al Mazrouei last week implored both OPEC and non-OPEC oil producers to increase investment in the industry to avoid another tumultuous hit to the global economy within two to three years.

“The world economy cannot face another shock. We need minimum investment in the industry as we don’t want to run out of supply,” the minister said during the Abu Dhabi International Petroleum Exhibition and Conference (ADIPEC).

“Yes, shale oil will re-bounce, but in how many days when you know that 450,000 people have been laid off from the services. Those people are not going to come back overnight to bring a million barrel per year in the US. It needs time and that shortage is there, [then] you will need someone to take action.

“Some of the responsible producers like us and Saudi Arabia have buffers; that is to ensure that we can attain to any crisis that happens due to geopolitics.”

OPEC statistics show investment in 117 upstream (exploration and production) projects worth a total of $270bn. It describes such investment as an “essential element to meet the expected demand growth and stem the decline of oil production from existing wells”.

Saudi Arabian Oil Company (Aramco), the world’s largest oil exporter, has boosted its spending in international upstream businesses and plans to use much of the proceeds of its upcoming initial public offering (IPO), which could be worth as much as $125bn.

“We have a lot of global investments in downstream. Post-initial public offering and even as we prepare for the IPO, you will find Aramco quite interested going into international upstream,” Saudi Energy Minister and Aramco Chairman Khalid Al Falih said in June.

Another dominant OPEC member, Iran, is investing $130bn in upstream industries as it ramps up its oil production capacity after the easing of international sanctions. The country’s Petroleum Minister, Bijan Zanganeh, says upstream operations are pivotal for Iran’s oil industry recovery.

In the UAE, state-owned Sharjah National Oil Corporation (SNOC) has commenced 3D-seismic onshore surveying to ascertain potential deep reservoirs of oil and gas. The study, covering an area of 500 sq km extending from Al Soyouh in the north to Al Madam in the south, is scheduled for completion by the end of the year.

“This is the first exploration activity since the company was established. We are mandated to identify and quantify all possible underground structures that may contain oil or gas in the emirate,” SNOC CEO Hatem Al Mosa says.

Abu Dhabi National Oil Company’s (Adnoc) updated 2030 strategy, released in the first week of November, states upstream will remain its most profitable business as the company continues to concentrate on new technologies to increase the quantity and efficiency of oil recovery.

London-based KBC principal consultant Ehsan Ul-Haq tells Arabian Business that OPEC countries cannot ignore investments in their upstream sector, as the world will continue to require oil in spite of growing investment in renewables.

“Many international oil companies believe that we might have a supply crunch by 2019 if not enough is invested in [upstream]. Saudi Arabia is a member of G20 countries and sees itself as responsible for ensuring enough supply, although other OPEC countries also need investment in the upstream sector for their revenue, as well as to guarantee supplies.”

Justin Dargin, a Middle East energy expert at the University of Oxford, says Saudi Aramco has a twofold interest in moving upstream.

“On one hand, Aramco and the Saudi government believe that due to global population increases, international oil demand is on a trend for long-term growth. Therefore, according to this logic, Saudi Arabia should continue to invest in domestic oil production to meet these demand increases, despite what it considers to be a temporary decrease in global oil prices over the past several years.

“Additionally, in terms of global upstream investment, Aramco is seeking to become a more flexible national oil company. With its investments overseas, it wants to be able to have a foothold in international gas production and other downstream ventures. One of the reasons Aramco is focussing on gas is that if it has more gas for domestic power production, then it is also able to export more oil to the global market,” he says.

Frost & Sullivan associate director and regional head of Middle East energy and environment Abhay Bhargava says there are some obvious benefits for many of the oil-producing countries to continue investing in their upstream assets.

“This is more [of] a function of their ability to produce crude at reasonable prices, and the fundamental value it can create for their economy, either in the form of exports in a competitive environment, or downstream value generation through refining and petrochemical activities. An additional factor that can govern a country’s decision to continue or not with investments will be the rate of decline in their existing assets,” he says.

The optimism of looking upstream is also reflected in International Energy Agency’s (IEA) comments. The Paris-based organisation, created after the 1973 oil crisis, says in its recent report that upstream oil investment remains robust in the Middle East and Russia.

“The relatively low cost of developing reserves in these regions and currency movements that mitigated the fall in the dollar oil price helped to support investment there. While the Middle East produces over one-third of the world’s oil, it accounted for only 12 percent of global upstream investment due to exceptionally low drilling costs. In Russia, capital spending even increased in Ruble terms, helping to stabilise Russian production at a post-Soviet high,” the IEA report says.

Dargin believes the financial gains from upstream industries will assist OPEC nations to build up their secondary and tertiary industries, leading to economic diversification.

“Additionally, the OPEC member states, particularly in the Gulf, are facing demographic increases and per annum domestic oil and gas demand growth. Therefore, they need to not only export more oil for foreign revenue to maintain budgetary outlays but to provide more gas and oil for domestic consumption,” he says.

UK-based Wood Mackenzie, a global energy research and consultancy group, has sketched a gloomy outlook. It expects global upstream development spending to fall 22 percent, or $740bn, between 2015 and 2020. However, the Middle East will be less impacted as several countries in the region spend to maintain their market share.

“Saudi Arabian investment, for example, will not decline during 2016-17,” Wood Mackenzie says in a recent report.

IEA agrees investment in the oil sector has declined in 2015 and 2016 — the first consecutive annual drop in three decades — by more than $300bn. US-based consultancy Deloitte says the industry will need a minimum investment of $3 trillion, or $600bn a year, between 2016 and 2020, to maintain the current reserve levels.

Bhargava says: “We have seen a very restrained approach towards new oil investments from the GCC region in the past. Going forward, we expect to see a mixed bag of sorts, with different methods and plans expected from the different countries.

“Key aspects that will define the intent and extent of investments would be the OPEC decision on production cuts, the economic situation each of the GCC countries are in, and the extent to which these countries can improve production through the brownfield route, thereby reducing capital outlay.”

Aramco as an example of a GCC-based oil firm moving against the flow, Bhargava says, citing the oil giant’s recent signing of contracts for the $13bn Fadhili Gas project, due to be completed in 2019. Others are conducting efficiencies in parallel with new investments, in an indication of the importance of upstream operations, he says.

“We have seen Abu Dhabi National Oil Company focus on bringing efficiencies in the organisation, and yet go ahead with an offshore field exploration plan, like with companies such as OMV and Occidental. Other GCC countries are expected to move at a slower pace, though,” Bhargava says.

The International Monetary Fund (IMF) projects oil prices to barely reach $60 a barrel by 2021, but the impact of the sharp decline in prices has left oil companies, particularly state-owned, to embrace austerity measures, primarily through layoffs. But now experts believe stable oil prices will create more employment opportunities.

Bhargava says a price greater than $50 per barrel will have a stabilising effect on the GCC countries and can bring in adequate investments from the national oil companies to result in job creation.

“However, regional operating companies will first focus on streamlining the existing workforce, before heading out for new recruitments,” he adds.

Institute of International Finance chief economist for the Middle East and North Africa Garbis Iradian says if prices of crude remain above $50 per barrel, then gradually the energy sector will stabilise and job cuts may come to an end, particularly if investment in the energy industry improves.

But for prices to remain steady, OPEC needs to reach a consensus on a production cut on November 30. In Algeria in September, the group agreed to a preliminary cut in output to between 32.5 and 33 million barrels per day (bpd), from 33.39 million bpd.

Saudi Arabia and the rest of the GCC will need to be ready to bear the biggest burden of any production cut. Iran, Libya and Nigeria have been promised special conditions, while Iraq is requesting either a higher quota or an exemption and others such as Algeria and Venezuela are not financially able to contribute to a production cut.

Doubts resurfaced at the end of October after reports that Riyadh had said it could raise oil output steeply to bring down prices if Tehran refused to limit its supply. Iran has said it would only cap its output at 4.2 million bpd, while Riyadh is insisting on 3.6-3.7 million bpd.

Riyadh-based Jadwa Investment raised questions in its October report over whether a production cut would benefit OPEC producers. It expected a reduction in crude would encourage shale producers — who have been hard hit by the lower price of oil because of higher costs – to increase output. Already in the US, oil rig counts have rebounded and production forecasts have been revised upwards even before OPEC’s production cut has been confirmed.

“Such an agreement will underline OPEC’s intention to limit further rises in production and help stabilise oil prices at current levels [around $50 per barrel]. At this price level, OPEC members facing more acute financial pressure will be provided with some relief, but, prices would not be high enough to encourage too strong a supply response from US shale oil,” Jadwa says.

Stabilising oil prices also will depend on how Russia, the largest non-OPEC oil producer, plays its cards. Though it has so far shown interest in reaching a deal with OPEC, experts remain doubtful, given the country’s history of not backing such deals.

“A Russian freeze at record levels [11 million bpd] will do nothing to accelerate the rebalancing. Given the country’s lack of compliance with previous agreements with OPEC to curtail production, many remain dubious that Russia will provide any meaningful cut,” S&P Global Platts OPEC Specialist Herman Wang says.

Regardless of what transpires at Vienna later this month, a separate verdict is in — oil producing countries must invest and build upstream competencies to ensure they are equipped to meet the demand when the global economy is back on the recovery mode.

Source: Arabian Business

Fujairah Oil Industry Zone appoints S&P Global Platts to distribute weekly inventory storage data

In Oil & Companies News 14/11/2016

Fujairah, which hosts the Middle East’s largest commercial storage capacity for refined oil products, on Sunday appointed S and P Global Platts to distribute the Emirate’s weekly inventory data starting in early 2017 as part of its effort to position the Indian Ocean port-city as a global oil trading and storage hub.

The Fujairah Oil Industry Zone (FOIZ) and S and P Global Platts signed a Memorandum of Understanding (MoU) in which the independent data agency was awarded the mandate to distribute weekly inventory storage data and support the emirate in its outreach to those outside the Gulf region without an appreciation of Fujairah’s ever-growing capabilities.

The published data will include an aggregate breakdown of fuel oil, middle distillates and light ends.

Visibility provided by regular and publically available data is a key ingredient of successful liquid trading centers around the world. Publishing data reduces market opacity and enables traders and investors to see opportunities and risks more clearly, thus enabling them to develop cohesive risk-aware strategies and ultimately lock in greater profits.

The Fujairah Oil Industry Zone recently established the Fujairah Data Committee, known as FEDCOM, to collect, verify and distribute inventory data to replicate the data sets that are provided in other global trading centers, such as Singapore and Rotterdam.

“S and P Global Platts is the leading independent provider of information and benchmark prices for the commodities and energy markets, and their partnership is another step forward in the right direction towards transforming Fujairah into a major global hub for the storage and trading of petroleum products,” Dr. Sheikh Rashid bin Hamad Al Sharqi, Vice Chairman of FOIZ and Chairman of Fujairah Culture and Media Authority, said today at the signing of the agreement with S and P Global Platts.

The idea of establishing a benchmark pricing index for the Emirate of Fujairah has been contemplated for many years, and is supported by a range of considerations that qualify the Emirate to be a regional pricing center for the petroleum products that are traded in the Gulf, he added.

The main advantage of Fujairah, he noted, is its strategic geographic location outside the Straits of Hormuz, while bridging the time gap between the East and the West. Furthermore, the vast amount of oil products stored and traded through Fujairah warrants the establishment of its own price benchmark which will add depth and stability to the regional and global markets.

“We are confident that the regular provision of inventory data by an independent third party will increase Fujairah’s level of transparency and credibility, which in turn will improve investor confidence and reflect positively on the Emirate’s storage and trading industry,” Dr. Sheikh Rashid added.

The UAE’s only emirate on the Indian Ocean, Fujairah, is accelerating its strides towards becoming a critical node on the international energy markets map. This is most evident by the Port of Fujairah’s continued infrastructure investment and the expansion of its capacity to process petroleum products, which now amounts to 100 million tons per year of crude oil and refined products. Fujairah is also maintaining its commitment to expand storage capacity in the Emirate, from the existing 10 million metric tons to more than 14 million metric tons over the coming few years. The majority of storage private companies operating in Fujairah are currently involved in projects to increase storage capacity, including VTTI, owned by the Vitol Group. Other projects underway include plant expansions by Fujairah Oil Terminal and Gulf Petrochem, and land allocation to Concord Crude Oil Terminal Company for a 1 million cubic meter crude and products storage terminal.

“We are honored to be chosen by Fujairah to be its partner as it takes the next steps in its development towards its destination as a global trading hub,” said Dave Ernsberger, Head of Energy Pricing, S and P Global Platts. “Fujairah 2.0 is a very timely initiative as there is growing demand to see the Gulf’s trading ecosystem develop, as the region’s domestic downstream markets report some of the strongest growth figures in the world.” Founded in 1909, S and P Global Platts provides insights to help customers make better informed trading and business decisions with confidence. The company is the leading independent provider of information and benchmark prices for the commodities and energy markets. With over 1,000 people in more than 15 offices worldwide, customers in over 150 countries look to S and P Global Platts expertise in news, pricing and analytics to deliver greater transparency and efficiency to markets. S and P Global Platts coverage includes oil and gas, power, petrochemicals, metals, agriculture and shipping.

Source: WAM