Fractured worldUS president Donald Trump has decided to impose tariffs on imported solar panels, highlighting the divergent energy pathways envisaged by the world’s largest energy users. China plans to become a global leader in renewable energy technology at home and abroad, as it reduces its dependence on domestic coal. But the US aims to become a net energy exporter, as it exploits its shale reserves to reinforce its position as the world’s biggest oil and natural gas producer.
Investment in renewable energy could soon rival upstream spending on oil and gas. Global clean energy investment — mainly solar and wind power — reached $334bn last year, consultancy Bloomberg New Energy Finance says. This was around three-quarters of the amount spent on upstream oil and gas, after the oil price slump in 2014-16 spurred an unprecedented decline in investment.
China’s investment in clean energy is now at parity with US upstream oil and gas spending. China leads the world in clean energy investment, spending $133bn, or 40pc of the global total, in 2017. A surge in solar power investment accounted for two-thirds of the country’s clean energy total last year. US upstream spending tumbled by 40pc to just $81bn in 2015-16, the IEA says. Higher oil prices are spurring a second year of revived US upstream investment, but China’s ambitious spending plans for clean energy are expected to keep pace.
Energy companies face a dilemma as they try to make investment decisions. New technology is transforming energy supply and demand, giving consumers more control and choice. But the rate of change is uncertain and energy infra-structure is designed to last, perpetuating current patterns. “Some facts are stubborn in the absence of government policies driving change,” IEA chief economist Fatih Birol recently told the World Economic Forum in Davos, Switzer-land. “The share of fossil fuels was 81pc 30 years ago. Many things have changed in technology and the share is still 81pc today.”
Some embrace change. French energy firm Engie last year sold upstream LNG assets to Total. It plans to focus on low-carbon electricity production, gas infrastructure and downstream energy. “New technology is distributed,” Engie chief executive Isabelle Kocher told a Davos panel. “Consumers become ‘prosum-ers’, producing part of the energy themselves.” The European majors are taking tentative steps in the same direction, with small but growing investments in renewables and low-carbon technology.
Boom and bustBut others are concerned that under-investment in oil and gas will soon trigger another damaging boom and bust cycle for the industry. “Demand is growing strongly, many fields are declining,” Birol says. “How are we going to meet the peak in demand if we are not investing today?”
Cost is key. Rapidly falling costs will make new energy technologies more affordable, as manufacturers innovate and scale up output, giving consumers control over investment decisions and accelerating change. But suppliers of existing capital-intensive energy sources, such as oil and gas, still face critical investment decisions. Without clearer policy signals from governments, energy companies will have to keep their costs down and their options open.
Oil minister Khalid al-Falih refuses to provide a date for the state-owned company’s planned initial public offering
aramco iPO still in uncharted territoryMarket forces will determine the value of state-owned Saudi Aramco for the purpose of its planned initial public offering (IPO), Saudi Arabian oil minister Khalid al-Falih says.
Crown price Mohammad bin Salman and “everyone else involved realise that this will be a market-determined process”, al-Falih told the World Economic Forum (WEF) in Davos, Switzerland, on 24 January. Prince Mohammad is the driving force behind Riyadh’s Vision 2030 economic diversification plan, of which Aramco’s partial privatisation forms a central part. “We cannot set Aramco’s share price,” al-Falih says. “Every IPO is a process of discovery.” Proposed figures for the company’s valuation are “just speculation”.
Aramco’s concession to manage and process most of Saudi Arabia’s oil is the main factor that will determine the firm’s value, al-Falih says. He estimates the country’s oil reserves at 261bn bl, and its natural gas deposits at several hundred trillion ft³. Riyadh is interested in “optimising the value” of the resources, al-Falih says. “I predict that these estimates will rise in time. This will hopefully be taken into account — against some ill-advised commentary about oil nearing its end.”
Prince Mohammad expects Aramco’s valuation to be at least $2 trillion — the government would generate around $100bn through its sale of a 5pc stake. The shares were originally scheduled to float on Saudi Arabia’s Tadawul stock exchange and 2-3 other international platforms in the second half of this year. But al-Falih refuses to provide a date for the IPO, saying the firm will be listed “when the time is right” — although it is ready “from a corporate standpoint”. The non-elected Shura advisory council has asked securities regulator the CMA to study the effect of partially listing Aramco on Tadawul.
The government has converted Aramco into a joint stock company, replacing its previous bylaws with new ones that enable private-sector investors to hold shares. But full control of the country’s oil and gas reserves remains in Riyadh’s hands under the new structure. The government is “solely responsible” for making final decisions on production and sustainable capacity. And the new bylaws allow the oil ministry to formulate strategies and national policies covering the oil and gas sector.
Aramco’s partial privatisation is the centrepiece of a wider government plan to offload state assets, as Riyadh seeks to diversify the economy away from its overwhelming dependence on oil. The government wants the private sector to be the main source of new job creation. Proceeds from Aramco’s IPO will be trans-ferred to the PIF sovereign wealth fund, which will act as a catalyst for domestic and foreign private-sector investment in the country.
Riyadh wants small and medium firms to account for a third of the economy by 2030, compared with 20pc last year, commerce minister Majid al-Qasabi says.
Scare tacticsThe arrests of more than 200 princes and high-net worth individuals in November as part of a corruption crackdown initially scared Saudi stock market investors. But the dip was only temporary, as people realised that the campaign was intended to create a level playing field, finance minister Mohammed al-Jadaan says. Riyadh has so far recovered only part of the $100bn that attorney-general Saud al-Mojeb said had been misappropriated, and much of what can be retrieved will be in assets, rather than cash, al-Jadaan says.
The recovered cash will be used to fund a government package unveiled earlier this month, to offset the effects of financial reforms. Riyadh has intro-duced a 5pc value-added tax and raised diesel and gasoline prices.
Full control of the country’s oil and gas reserves remains in Riyadh’s hands under the company’s new structure
West africa reboots exploration driveThe prospect of a resurgence in exploration activity in west Africa has emerged in recent months, bolstered by a recovery in crude prices and renewed interest among the majors.
Cameroon has become the latest to join the hunt for exploration partners, after state-owned SNH formally opened a licensing round for six offshore and two onshore blocks on 15 January. The country is offering improved commercial terms, the company says. But political instability threatens to undermine the investment drive. A year-long government crackdown on protests in Cameroon’s English-speaking regions has fuelled support for armed separatists, raising tensions ahead of a presidential election later this year.
Yaounde has launched the round amid intense competition from regional rivals. Ghana scored a notable victory this month, securing ExxonMobil as the new operator of a deepwater exploration block that Russia’s Lukoil relinquished in 2015. ExxonMobil previously made an unsuccessful attempt to gain access to Ghana’s deepwater sector — the government blocked its $4bn bid to buy US independent Kosmos Energy’s assets in 2010.
The firm’s renewed interest partly reflects its drilling success across the other side of the Atlantic, offshore Guyana, where it has discovered more than 3.2bn bl of oil equivalent in the past three years. South America’s Guyana basin — which spans French Guiana, Guyana and Suriname — shares many geological similarities with west Africa’s transform margin, including offshore Ghana. This stems from when the two continents separated millions of years ago.
ExxonMobil’s entry into Ghana marks the country’s first licence award since the International Tribunal for the Law of the Sea settled a maritime border dispute with Ivory Coast last year, in Accra’s favour. Ivory Coast has since shrugged off the adverse ruling with a flurry of its own exploration deals. London-listed Tullow Oil — the operator of two of Ghana’s three producing offshore oil projects — has secured eight blocks in Ivory Coast since September, seven of them onshore. The offshore licence is adjacent to the Ghanaian acreage that contains Tullow’s 80,000 b/d Tweneboa-Enyenra-Ntomme development.
Offshore for sureBP and Kosmos obtained five offshore blocks in Ivory Coast last month, consoli-dating the partnership that they have built up in west Africa over the past year. The companies are already working together offshore Mauritania and Senegal. And they have just won a tender for two exploration blocks off the coast of Sao Tome and Principe in the Gulf of Guinea.
BP and Kosmos have had mixed results since they teamed up. Drilling at the Hippocampe and Lamantin prospects offshore Mauritania proved unsuccessful last year. But the firms made a significant natural gas discovery in Senegal’s Cayar Profond block in May, which could pave the way for a second LNG hub in the area. They are targeting a final investment decision this year on a floating LNG project based on the 15 trillion ft³ (425bn m³) Tortue field.
BP is not the only major that has taken an interest in Mauritania and Senegal. ExxonMobil secured three deepwater exploration blocks in Mauritania in Decem-ber, while Total picked up offshore licences in both countries last year. The deals form part of the companies’ wider drive to reinforce their west African portfolios. ExxonMobil signed a contract for a deepwater exploration block offshore Equato-rial Guinea in June 2017. And Total finalised a technical evaluation agreement to study deepwater and ultra-deepwater areas off Guinea in October, followed by a deal to explore Angola’s block 48 last month.
Higher crude prices and renewed corporate interest bode well for the region, particularly Ghana and Ivory Coast
South America’s offshore Guyana basin shares many geological similarities with west Africa’s transform margin
Riyadh seeks ‘permanency’ as rebalancing slowsOpec and non-Opec oil ministers concede that a full rebalancing of supply and demand may not occur before the start of next year.
“We realise that we are heading into a soft period… and have seen IEA data indicating that the rebalancing will slow,” Saudi Arabian oil minister Khalid al-Falih says. “The IEA predicts a stockbuild, despite the high level of compliance [with pledged output reductions] and our commitment to maintain what we achieved in 2017. We not only have to stay the course this year, but consider rolling [the cuts] into 2019,” he says.
The IEA forecasts oil consumption growth of 1.3mn b/d this year, a more conservative estimate than Opec’s 1.53mn b/d. And the agency is more optimistic about non-Opec supply growth, compared with Opec. It expects demand for Opec crude to ease in 2018 as a result.
Al-Falih puts adherence by Opec and its non-Opec partners to the supply restraint deal at 129pc in December, the highest since the agreement entered into force. “This is reflected in global fundamentals,” he says. The producers aim to reduce supply by a combined 1.7mn b/d. “The overhang in excess OECD reserves has declined by two-thirds from 330mn bl,” al-Falih says. “The remainder has to be cleared this year.” OECD stocks are around 118mn bl above their five-year average range.
But expected weaker consumption in the first and second quarters of this year — because of planned refinery maintenance — could prevent inventories from dropping at the same pace. “Hope for the best, but be prepared to deal with a slow rebalancing,” al-Falih says.
There is “no reason” why compliance with the Opec and non-Opec output cut accord will not remain strong in 2018, al-Falih says. “The overperforming coun-tries continue to do better, while the underperformers have improved signifi-cantly.” Al-Falih points to Iraq and Kazakhstan’s weak adherence to the produc-tion agreement last year. But he has recently received “very reassuring responses” from Baghdad and Astana.
Ministers convened in Muscat, Oman, on 21 January for a meeting of the joint ministerial monitoring committee, which oversees compliance with the deal. Participants may seek to retain some form of Opec and non-Opec partnership when the programme ends on 31 December, they say.
Balance of powerUniting 24 countries to curb output has “created such momentum” that al-Falih is “driving towards permanency”, he says. “I mean permanency of the framework, of co-operation, of having mechanisms to call for meetings between Opec and non-Opec to propose solutions to any market imbalances.”
UAE oil minister Suhail Mohamed Faraj al-Mazrouei hopes that Opec can submit a proposal to non-Opec countries over how the groups can work together in the future. The framework must be accepted by all non-Opec producers, particularly Russia, al-Falih says.
Moscow faces mounting pressure from state-controlled oil companies to rethink its 300,000 b/d commitment to the output cut deal. But energy minister Alexander Novak lauds the agreement. “I personally look with great optimism to the future of the deal,” he says. “The monthly dynamics speak for themselves.”
Opec and non-Opec collaboration has been a “great success” over the past year, helping to stabilise the market and benefiting all participants, Novak says. “But we will have to analyse the necessity and need for any action with our partners,” he says.
Saudi oil minister Khalid al-Falih has raised the possibility of glob-al producers co-operating beyond the expiry of agreed output cuts
The IEA forecasts oil demand growth of 1.3mn b/d this year, a more conservative estimate than Opec’s 1.53mn b/d
The supply and demand balance should stabilise this year, energy minister Alexander Novak says, citing ‘significant improvement’
Moscow mulls deal futureRussia’s government is taking a cautious approach to the possibility of crude production cuts beyond the end of this year under the Opec and non-Opec supply restraint deal.
Moscow is ready to continue “informal interaction of a consultative nature” with participants in the agreement, after it expires in December, energy minister Alexander Novak says. This is “even if co-ordinated market actions are no longer required”, he told delegates at the World Economic Forum in Davos, Switzerland, on 24 January. Saudi Arabia’s alliance with Russia will last for “decades and generations”, Saudi oil minister Khalid al-Falih says.
Russia’s participation in the deal is key to the success of the reductions. But Moscow now appears to have a more optimistic view than Riyadh on the outlook for oil markets. The supply and demand balance should stabilise this year, Novak said at a 21 January meeting of the joint ministerial monitoring committee in Oman. There has been a “significant improvement” in the past few months, which he expects to continue throughout 2018. Al-Falih is more circumspect, saying another extension of the accord may be necessary before the market rebalances.
The uncertainty has left Russian oil companies pondering their investment plans. “We will have to review our programme if the [output cut agreement] is prolonged for another year,” private-sector firm Lukoil’s president, Vagit Alek-perov, says. “It does not make sense to prepare potential producing fields that will not be in commercial use.”
Lukoil is still investing in new complexes where output is climbing, but expects overall crude production to remain unchanged in 2018. Reduced brown-field output will offset greenfield growth. Lukoil has cut supply only from its least efficient brownfields — in west Siberia, Timan-Pechora and the Volga-Urals region — like most of Russia’s leading crude producers. It has not revised its develop-ment plans for new projects, for now.
Other Russian oil companies have yet to comment on the possibility that the production cut deal could be extended beyond this year. Most suppliers kept output in check in 2017, allowing Russia to more or less fulfil its commitment to keep supply 300,000 b/d below its October 2016 baseline of 11.18mn b/d. But most had expected the agreement to last no longer than the initially proposed six months. They were unenthusiastic when the accord was extended for a second time, to the end of this year.
Green about the gillsState-controlled Rosneft may have to postpone at least one large greenfield project — the 3.7bn bl Russkoye field in Yamal-Nenets — and possibly others, if the restrictions become a long-term phenomenon. The firm should reveal its plans regarding potential upstream delays in the first quarter, first vice-president Pavel Fyodorov said last month.
The possibility of the output constraints rolling into 2019 would certainly be bad news for state-controlled Gazpromneft. The company has invested heavily in new projects in recent years and was reluctant to slow the pace of growth in 2017. The firm has exhausted the potential to curb production, it says, implying that it may find it difficult to keep output stable.
Gazpromneft operates a number of greenfields, including the 1.8bn bl Novoportovskoye and 1.5bn bl East Messoyakh complexes in Yamal-Nenets, and the 511mn bl Prirazlomnoye in the Pechora Sea. Growth at the sites drove an increase in the company’s overall production last year, despite cuts at established fields. Gazpromneft forecasts output to climb by 30pc in 2018.
‘We will have to review our programme if the agreement is prolonged for another year,’ private-sector firm Lukoil says
The market for North American completions remains tight, with Halliburton highlighting strength-ening demand for equipment
Service providers eye exciting 2018Leading oil service firms expect North American drilling activity to climb robustly this year, as higher crude prices raise investment.
Increased regional output will balance out declines in the rest of the world, where the production base is showing fatigue after three years of unprecedented under-investment, Schlumberger chief executive Paal Kibsgaard says. Halliburton echoes the sentiment, saying it plans to hike the prices that it charges for services in the first half of this year, boosted by higher drilling activity in North America. US service costs are expected to rise by at least 10pc in 2018, with consultancy Rystad Energy attributing some of the inflation to mergers and acquisitions, stronger demand and bankruptcies.
“I am excited about 2018,” Halliburton chief executive Jeff Miller says. “The supply and demand dynamic is correcting and commodity prices are improving, supporting activity around the globe.”
Baker Hughes’ international revenue reached $1.7bn in the fourth quarter, up by 6pc from July-September. Weaker activity in Europe and sub-Saharan Africa only partially offset a rise in the Middle East, Latin America and Asia-Pacific, the company says. But US shale remains the firm’s main focus for growth.
Halliburton’s North American revenue was 89pc higher than a year earlier in October-December, at $3.4bn, owing to increased US onshore drilling and higher completion tool sales in the Gulf of Mexico. The market for North American completions remains tight, with Halliburton highlighting strengthening demand for equipment. The US has an inventory of almost 7,500 drilled but uncompleted wells across its major shale formations, a record high, government agency the EIA says. More than 2,700 are located in Texas’ Permian basin.
Shale oil producers have learned to pare costs and boost efficiency since oil prices started to fall in mid-2014. But service providers have reconfigured their shale sector portfolios to bolster profitability. Schlumberger has completed its purchase of rival Weatherford’s US fracking business for $430mn, possibly setting the stage for further industry consolidation. And Halliburton is using local sand in fracking in the Permian — this will become a trend as additional capacity starts up, the company says. Sand costs should drop this year as mines come on stream in the region.
Baker Hughes’ North American oil service revenue stood at $1.1bn in the fourth quarter, up by 4pc compared with July-September, despite a lower rig count. Demand for all product lines strengthened, including artificial lift and completions, it says. Halliburton’s oil service segment achieved “solid growth” of 5pc in October-December, driven by well constructions in North America, the Middle East and Latin America. But the sub-sea market remains challenging, with service contract pricing under pressure.
Fees and caracasSchlumberger made a $2.3bn loss in the fourth quarter, as a tax charge and write-downs offset a 15pc year-on-year increase in revenue. But recent changes in the US fiscal code will be a “big positive” for Halliburton’s future financial performance, the firm says. It incurred an impairment of $882mn related to the alteration in October-December — the figure is subject to revision as Halliburton analyses the impact of the new law.
Halliburton made a loss of $824mn in the fourth quarter, because of the charge and write-downs on Venezuelan assets. Oil service providers have strug-gled to secure payments from Caracas and Venezuela’s state-owned PdV, with crude and natural gas output in sharp decline and political turmoil escalating.
‘The supply and demand dynamic is correcting and commodity prices are improving, supporting activity around the globe’
ImF tweaks growth forecastThe IMF has revised up its forecast for global economic growth this year, partly because of the projected near-term effects on the US economy of recent corpo-rate tax reductions.
The fund now expects global economic growth of 3.9pc this year, compared with its previous guidance of 3.7pc, given in October (see table). And it has increased its 2019 projection by 0.2 percentage points to 3.9pc. The IMF’s forecasts are widely used in the modelling behind key oil demand projections, including the IEA’s.
The US economy should grow by 2.7pc this year, up by 0.4 percentage points relative to the previous estimate, the IMF says in its latest World Economic Outlook (WEO). Most of the growth will stem from cuts enacted under a fiscal overhaul in late December. The changes allow companies to immediately write off new capital investment to 2022, which may encourage refiners and oil service providers to expand their operations.
“This short-term boost will have positive — albeit short-lived — output spillovers for US trade partners, especially Canada and Mexico,” IMF research director Maurice Obstfeld says.
The fund forecasts Mexico’s economy to expand, with the US tax changes helping to offset uncertainty surrounding the future of the Nafta free trade agreement. And Brazilian economic growth will climb this year, the IMF says. But the organisation’s overall projection for Latin America and the Caribbean region remains unchanged at 1.9pc, with Venezuela’s economic collapse taking a toll.
The rise in US economic growth will probably strengthen the dollar and widen the country’s trade deficits — an outcome contrary to Washington’s drive to address substantial imbalances. “Trade is again growing faster than global revenue, partly driven by higher investment”, despite concerns over the rise of populist measures in the US and elsewhere, Obstfeld says.
An increase in crude prices has prompted the IMF to revise its projections for oil exporters, notably Saudi Arabia. It expects the Saudi economy to grow by 1.6pc this year, reversing from a contraction of 0.7pc in 2017. And growth fore-casts for Russia and Nigeria are marginally higher than in October. “Commodity prices have gained ground, benefiting countries that depend on commodity exports,” Obstfeld says.
But the IMF again warns oil-rich economies to reduce their reliance on crude and refined products. “Fuel exporters face particularly bleak prospects,” Obstfeld says. “They must find ways to diversify.”
West meets eastThis year’s expected global economic growth is unusually broad based. The economies of almost 120 countries — accounting for three-quarters of world GDP — expanded last year, the IMF says. And the upward revision affects advanced and emerging economies alike. The fund forecasts Chinese GDP to grow by 6.6pc in 2018, up from its previous projection of 6.5pc.
But the growth is unlikely to be maintained, Obstfeld says. “The two largest national economies driving present and near-term expansion are predictably heading for slower growth.”
China will eventually conclude the stimulus package that it has touted in the past few years and rein in credit growth. And US GDP growth will decelerate, “whatever impacts the tax cuts have on an economy so close to full employ-ment”, the IMF says. The positive effects of the US tax reductions will dissipate by 2020, it says.
The fund expects the world econ-omy to expand by 3.9pc, with US and Chinese GDP projected to grow at a faster pace
ImF GDP growth forecastsJan 18 Weo
update % ± oct 17 Weo*
Region 2018 2019 2018 2019
World 3.9 3.9 0.2 0.2
US 2.7 2.5 0.4 0.6
Eurozone 2.2 2.0 0.3 0.3
UK 1.5 1.5 0.0 -0.1
China 6.6 6.4 0.1 0.1
India 7.4 7.8 0.0 0.0
Japan 1.2 0.9 0.5 0.1
Russia 1.7 1.5 0.1 0.0
LatAm-Caribb 1.9 2.6 0.0 0.2
Mena-Af-Pak† 3.6 3.5 0.1 0.0
Crude $/bl ‡ 59.90 56.40 9.73 na
*percentage points †Middle East, north Africa, Afghani-stan and Pakistan ‡average of Brent, WTI, Dubai crude, change in $/bl
‘Fuel exporters face particularly bleak prospects. They must find ways to diversify,’ IMF research director Maurice Obstfeld says
Fuel blending battle enters new chapterUS refiners insist that federal fuel blending mandates must change to prevent the closure of a major employer in the political battleground of Pennsylvania.
Philadelphia Energy Solutions (PES) recently filed plans to operate under bankruptcy protection as it seeks a buyer, and separation from about $350mn in environmental compliance costs. Fellow independents and importers have rallied round the firm, frustrated with the mandates, which require a minimum quantity of renewable fuel to enter the US transport system. PES operates the largest refinery on the east coast, the 330,000 b/d Philadelphia plant, alongside asset management company Carlyle.
Merchant refiners — which sell only blended fuel to consumers — usually purchase renewable identification numbers to comply with the Renewable Fuel Standard (RFS). They buy the credits from blenders, including competitors. PES, which can distribute just 80,000 b/d from the Philadelphia facility through a truck-rack blending operation, owes $350mn to cover its RFS obligations in 2016-17, it estimates.
Refiners have spent a number of months tying the mandates to the fate of blue-collar workers in Pennsylvania. Attempts to broker a peace agreement between the oil sector and agribusiness firmly in favour of the law increased in Congress last year. “It is long past time for policy makers to provide immediate RFS relief and a long-term solution that protects US motorists and workers,” trade association AFPM says.
The refining and petrochemical industries expect a new legislative proposal that would revise the programme to emerge within weeks. Texas senator John Cornyn is leading the efforts — negotiators are approaching consensus, according to his office.
No other east coast refiner faces bankruptcy. Georgia-based Delta Air Lines has consistently supported its 185,000 b/d downstream subsidiary in Trainer, Pennsylvania. The firm took control of the unit in 2012, around the same time that Carlyle purchased its 50pc interest in the Philadelphia complex. PBF Energy — a vocal critic of the mandates — has sought to expand its blending business, diversifying into most other US regions. And Phillips 66 is investing in gasoline unit upgrades at its 250,000 b/d Bayway refinery in Linden, New Jersey.
Off the railsCarlyle hoped that the Philadelphia plant and natural gas from nearby shale formations would help transform the area into an energy hub. Shale output helped lift the refinery’s fortunes, but in the form of railed crude. Elevated production and limited export pipeline capacity drove Bakken crude prices to steep discounts to Atlantic basin imports, even when high rail transport costs were taken into account.
PES in 2014 completed a $130mn railed crude offloading facility that is able to satisfy 84pc of its demand. The facility offered a foundation for the establish-ment of a new master limited partnership. The firm in 2015 committed the Philadelphia refinery to receive 170,000 b/d from the terminal over 10 years, at $1.95/bl. But the entry of new companies has weighed on PES’ operations.
Gulf coast refiners have turned to PES’ home market in the past few years, eyeing low-priced gas, heavy crude and pipeline infrastructure. And midcontinent rivals have since intensified the competition, dampening PES’ Bakken windfall. Former president Barack Obama’s administration lifted a decades-long ban on US crude exports in December 2015, less than a year after the rail terminal contract entered into force.
Independent refiner PES is seeking bankruptcy protection, hamstrung by hefty environmental compliance costs
The oil industry expects a new legislative proposal that would revise the programme to emerge within weeks
delhi dithers on price hikesPolitical concerns are prompting India’s government to waver on fuel price reforms, heightening uncertainty for investors.
State-run refiners, which control most of the country’s 3.9mn b/d product market, have raised gasoline and diesel pump prices in the past few months. But crude values have increased at a faster pace. Imports meet more than 80pc of India’s crude requirements, at 4.65mn b/d. The country’s crude import basket price stood at $67.55/bl on 24 January, up by more than a fifth from October. Average retail gasoline prices rose by just 6pc over the period, albeit to a three-year high of 72.4 rupees/litre ($1.14/l) in Delhi, while diesel values gained 11pc to a record Rs63.4/l.
Oil companies are slowing product price hikes because of government pressure. The popularity of prime minister Narendra Modi’s BJP administration has waned, with two major economic policies backfiring over the past year. The government in November 2016 withdrew from circulation higher-value bank notes, in an attempt to crack down on tax evasion and corruption. And its adoption of a wide-ranging goods and services tax (GST) in mid-2017 has strained the economy, threatening jobs.
Delhi freed diesel prices in October 2014, four years after the deregulation of gasoline. The government initially revised prices every 15 days, in line with international values and the rupee-dollar exchange rate. But the oil ministry adopted a new system in June last year, updating prices daily to make them more market sensitive. State-controlled IOC, Bharat Petroleum and Hindustan Petro-leum operate almost all of India’s 61,380 retail fuel stations.
The liberalisation of transport fuel prices has attracted the attention of foreign oil firms. Shell, BP, Saudi Arabia’s state-owned Saudi Aramco and Total have all expressed an interest in marketing Indian fuel. BP has secured a licence to build more than 3,500 retail outlets, while Shell aims to broaden its marketing footprint to 1,500 units in a decade from 100 now. Private-sector domestic company Essar Oil has more than doubled its retail operations to 4,175 outlets, while rival Reliance Industries plans to expand its 1,400-strong network.
But it remains unclear how private-sector retailers will be able to compete. Delhi reimburses state-run refiners for some of the losses that they incur when diesel and gasoline sales are below international market levels.
Taxing timesThe government is largely to blame for the consumer resentment. Motorists will reap advantages when crude prices slide, the BJP had said. But Delhi exploited the crude price slump in 2014-16, increasing retail levies on automotive fuels on nine occasions. And the finance ministry refused to adjust the taxes, despite benchmark Brent crude rebounding to $70/bl from $52/bl in 2015.
The first sign of a change of heart in Delhi emerged in October, before elections in the key state of Gujarat. The government cut gasoline and diesel duties by Rs2/l and ordered state-run refiners to stop hiking subsidised LPG prices by Rs4/14.2kg cylinder a month. But the moves failed to prevent the BJP from posting its worst performance in Gujarat’s December ballot. Modi’s administration retained control of the state, but its margin of victory narrowed sharply. Federal elections are planned for next year.
Oil and gas products fall outside the GST, with states imposing their own taxes in addition to centralised levies. Indian fuel demand was 4pc higher than a year earlier in April-December, at 152.3mn t. Diesel use climbed by 5.6pc on the year to 1.64mn b/d, while gasoline consumption rose by 8.8pc to around 600,000 b/d.
Prime minister Narendra Modi’s popularity has waned, with two major economic policies backfiring in the past year
The liberalisation of gasoline and diesel prices has attracted the attention of foreign firms, including Shell, BP and Total
The government is struggling to contend with runaway inflation, plummeting crude output and a staffing crisis at state-owned PdV
‘Venezuela’s oil workers are starving, like everyone else in the country,’ union FUTPV director Ivan Freites says
International community turns on CaracasVenezuela faces growing international isolation, as it struggles to contend with runaway inflation, plummeting crude output and a staffing crisis at state-owned oil company PdV.
The Lima group — comprising 13 Latin American countries and Canada — has condemned Caracas’ decision to advance presidential elections, saying they cannot be held in a “democratic, transparent and credible” manner. The 10-point declaration, issued on 25 January, reiterates the group’s support for Venezuela’s democratically elected national assembly, criticises the imprisonment of political opponents and calls for international co-operation.
It came just days after the EU imposed travel bans and asset freezes on seven senior Venezuelan individuals, compounding US and Canadian measures against dozens of government and military officials. The ruling PSUV party’s executive vice-president, Diosdado Cabello, has urged President Nicolas Maduro to expropri-ate European assets in retaliation, starting with those that belong to Spanish firms. Spain’s Repsol is one of the leading foreign investors in Venezuela.
The US imposed financial sanctions on Caracas and PdV in August last year. Maduro’s administration has since defaulted on foreign debt, and Venezuela’s crude production is falling fast. An accelerated decline in the fourth quarter took output to its lowest since 1985, excluding a 2002-03 labour strike. The country produced just 1.62mn b/d last month, down by almost 400,000 b/d compared with a year earlier, oil ministry data show. And the outlook for 2018 is bleak. “It is possible that declines will be even steeper than the 270,000 b/d drop in 2017, given Venezuela’s astonishing debt and deteriorating oil network,” the IEA says.
The crisis is stoking labour unrest in the oil sector, where employees face record-low wages, dangerous working conditions and pressure to back Maduro. PdV was once considered the country’s most prestigious government employer. But the deepening economic and political turmoil has prompted many to leave their posts in recent months, according to a dozen of oil union officials consulted by Argus. More than 60 skilled workers at PdV’s 940,000 b/d CRP refining complex quit in early January, oil federation FUTPV’s director, Ivan Freites, says.
This time it’s personnelHundreds more employees have resigned from the company’s western division in Zulia state since the start of this year, Freites says. And at least a third of the firm’s skilled oil field, refinery and terminal workers have departed since January 2017. The exodus is crippling a company whose operations never recovered from Caracas’ dismissal of more than 20,000 employees in early 2003, after a failed strike that sought to oust then president Hugo Chavez.
PdV’s workers have little hope of a short-term reprieve. Negotiations with the firm over a new three-year collective contract resumed on 16 January, after a four-month hiatus, FUTPV president Wills Rangel says. He attributes the break in talks to disruption caused by a widespread corruption probe.
FUTPV wants the company to increase wages to 861,120 bolivars from Bs358,300. The current basic wage of just $1.79/month would climb to around $4.30/month, based on the black-market exchange rate of Bs200,000/$1. PdV’s blue-collar workers cannot secure food and medicine staples, amid acute supply shortages and quadruple-digit inflation.
The firm’s core oil field and refinery employees have “lost up to 12kg on average since the end of 2016, because they are not eating enough”, a union official says. “Venezuela’s oil workers are starving, like everyone else in the country,” Freites says.
Cairo faces watershed yearEgypt is looking forward to a watershed year for energy, as booming natural gas output helps it return towards self-sufficiency. But the country still faces eco-nomic and social challenges that may delay the realisation of key targets.
Cairo’s reform programme is largely on track, the IMF says. Egypt secured a three-year $12bn loan package from the fund in November 2016 to finance its economic recovery. The IMF expects the country to achieve most of its fiscal consolidation through adjustments to expenditure, following energy subsidy reforms. The government will increase fuel values and introduce an automatic fuel price indexation mechanism by December to eliminate most subsidies, excluding for LPG.
The IMF forecasts fuel subsidies to represent 2.4pc of Egypt’s GDP in the financial year to 30 June 2019, compared with 3.3pc a year earlier. Cairo aims to remove all fuel subsidies by the end of the IMF programme, in December 2019, it says. And it plans to repay its outstanding debts with foreign upstream operators by 30 June next year. State-owned oil company EGPC’s arrears declined by $1.3bn in the 2016-17 financial year to $2.3bn. The firm hopes to cut its debt load to around $1.2bn in 2017-18.
Most of the country’s economic potential lies in gas, with the IMF pointing to a possible resumption of exports in the next three years. Domestic output is expected to reach 7.7bn ft³/d (79.5bn m³/yr) by 2020, outpacing demand growth — Egypt consumes 5.2bn ft³/d of gas today. Oil minister Tarek el-Molla is confident that firms will develop new gas resources quickly this year.
Italy’s Eni started up the 850bn m³ Zohr field last month, while BP’s West Nile Delta project came on stream in March 2017. The complexes reduced Egypt’s LNG requirements by around 3.5mn m³/d last year. Aggregate gas output is expected to reach 7bn ft³/d by the end of the 2018-19 fiscal year, state-controlled Egas’ president, Osama al-Baqli, says.
The 7.2mn t/yr Idku and 5mn t/yr Damietta liquefaction plants should be able to handle the increase in output. The facilities have been largely idled in recent years, after the Egyptian revolution of 2011 forced Cairo to redirect supply to the domestic market.
The CRCICA tribunal has made a final ruling on the first of three arbitration cases between Spain’s Union Fenosa Gas (UFG) and the government over Egypt’s alleged breach of Damietta’s supply contract. UFG declines to provide further details. But consumption may now accelerate, particularly in light of Cairo’s plans to expand the local distribution network and hike gas-fired power generation.
Consolidate to accumulateBut higher global oil prices threaten Egypt’s financial recovery, the IMF says. “A sustained increase could significantly undermine fiscal consolidation goals and weaken the current account, requiring offsetting policy measures,” it says. Egypt still relies on imports to meet domestic demand. The country recently renewed a supply agreement with Iraq for 12mn bl of Basrah crude in 2018.
Structural reforms will help reduce the government’s costly subsidy bill and the budget deficit. But they are also likely to raise inflation, which peaked at 35pc in July, following the depreciation of the Egyptian pound. The IMF expects inflation to drop to around 12pc by mid-2018, although further planned increases in fuel prices will adversely affect households that are already struggling with soaring living costs.
The fund forecasts Egypt’s economy to expand by 4.8pc this fiscal year and by 6pc in the medium term, up from 4.2pc in 2016-17.
Most of the country’s economic potential lies in gas, with the IMF pointing to a possible re-sumption of exports
Structural reforms will help reduce the government’s costly subsidy bill and the budget deficit, but raise inflation
gasoline shortfall shakes NNPCA prolonged domestic fuel crisis is threatening Nigerian state-owned oil company NNPC’s profitability and political standing.
Nigeria’s largest cities have faced acute gasoline shortages since December. Politicians have grilled NNPC’s managing director, Maikanti Kacalla Baru, and oil minister Emmanuel Ibe Kachikwu, demanding answers. NNPC’s main product import contracts require reform to prevent future disruptions to gasoline and diesel receipts, industry observers say. Crude throughputs at the firm’s Port Harcourt, Warri and Kaduna refineries have dropped to less 10pc of the facilities’ 445,000 b/d combined capacity. Utilisation rates were as low as 6pc in November, because of unplanned shutdowns.
Refined product smuggling to neighbouring countries — such as Benin, where prices are higher — has contributed to the shortages. The Nigerian market received around 233,000 b/d of gasoline last month, up from 195,000 b/d in November, but still insufficient to satisfy demand. Even increased imports may not address the shortfalls, owing to the extent of the smuggling activity, NNPC officials say. Retail outlets and depots are hoarding supply, in anticipation of higher prices, while the 210,000 b/d Port Harcourt complex has suffered from pipeline vandalism and power disruptions.
Lingering uncertainty over future rules regarding the permitted sulphur content of gasoline and diesel has hampered imports further. NNPC will have to shoulder the cost of hiking fuel receipts, as President Muhammadu Buhari’s administration has earmarked no subsidies for this in its 2018 budget. Legisla-tors would have to approve any financial support mechanism. This would end the company’s attempts to liberalise the downstream market — a necessity if it is to attract private-sector investment.
Independent fuel marketers have halted gasoline imports, following delays in government payments for past supplies. Maintaining receipts costs NNPC close to 1bn naira/day ($2.8mn/d), Kachikwu estimates. Gasoline trades at N145/litre in Nigeria, compared with NNPC’s average import expenses of N175/l — the firm received around 233,000 b/d in the 12 months to November.
at a lossSupplying refined products at a loss could erase the positive effects of a recent rebound in global crude prices and higher Nigerian upstream production. NNPC made a loss of N6.8bn in November, compared with a N410mn loss a month ear-lier. The trend is expected to continue as the company’s import burden grows.
NNPC has made a number of commitments on future downstream investment since the fuel crisis surfaced. The firm has held negotiations with banks and other financial institutions to secure funding to revamp its refineries. “We are pushing towards the final selection of our financiers,” Baru says. “We will soon sign the agreements and present them at our board meeting this month.”
And NNPC aims to establish small-scale “modular” refineries, targeting the first in Bayelsa state. But rebel group the Niger Delta Avengers said in November that it would renew attacks on energy infrastructure in the region, vowing that the campaign would be “brutish, brutal and bloody”. NNPC has also secured the support of local authorities in Kaduna and Kano to construct plants that could process crude from Niger.
The company previously said it wanted to end product receipts by the end of next year. But the fuel crisis and the stalled development of domestic conglom-erate Dangote’s 650,000 b/d refining and petrochemical complex near Lagos risk the plan’s realisation.
The state-owned company’s product import contracts require urgent reform to prevent future supply disruptions
NNPC has made a number of ambitious commitments on downstream investment since the fuel crisis surfaced
OnGC to assume control of HPCLIndian state-controlled upstream company ONGC is buying a 51.1pc stake in refiner Hindustan Petroleum (HPCL). The deal is the first major transaction under the government’s programme to consolidate state-run firms. ONGC will pay 369bn rupees ($5.8bn) or Rs473.97/share, a premium of around 14pc to HPCL’s market price on 19 January, when the agreement was confirmed. Delhi launched its restructuring drive in February last year — it is intended to boost efficiency and create an integrated champion to rival the majors. The BJP government requires funds to raise social spending. Higher crude prices are pressuring state coffers, forcing Delhi to increase subsidies to protect consumers.
China awards Xinjiang licencesChina continues to open up oil and natural gas exploration, auctioning conven-tional blocks in the northwest autonomous region of Xinjiang on 23 January. Three new entrants — Shanghai-listed Shenergy, local government-owned Xinjiang Energy and private-sector firm Zhongman Petroleum — paid a combined 2.7bn yuan ($427mn) for exploration rights in the Tarim basin. The companies have secured five-year licences, which can be extended for two-year periods. Beijing in July 2015 allowed independents to explore and develop conventional blocks for the first time, without the participation of state-run CNPC, Sinopec, CNOOC or Shaanxi Yanchang.
Total expands US Gulf presenceTotal will make another addition to its deepwater US Gulf of Mexico assets. The company has agreed to buy a 12.5pc stake in the Chevron-operated Anchor oil discovery from US independent Samson Energy for an undisclosed sum. Chevron has conducted successful appraisal drilling at Anchor, but has not given a resource estimate. The project is due to begin initial engineering later this year. Chevron provides no guidance on when a final investment decision will be made. Total holds non-operating stakes in two producing fields in the Gulf of Mexico, Tahiti and Chinook. It secured six exploration licences in a lease sale in August, and entered a deal with Chevron a month later that gives it access to seven exploration prospects.
US M&A activity soarsThe number of mergers and acquisitions (M&A) in the US shale sector hit a record 106 last year, consultancy PwC says. The transactions were valued at a combined $66.6bn, the highest total since 2011. The Permian basin in west Texas and eastern New Mexico remained the most active area for M&A activity, attracting 39 deals worth $30.3bn. And interest in other formations rose, as oil prices surpassed $50/bl, PwC says.
Azerbaijan’s output dropsAzerbaijan’s crude and condensate production declined by 5.6pc last year to 785,700 b/d, while natural gas output slipped by 2.6pc to 78.4mn m³/d. State-owned Socar’s oil production fell by 1.4pc to 150,200 b/d, despite intensive drilling at its depleted fields. And a steady drop in output continued at Azerbai-jan’s main producing asset, the BP-led Azeri-Chirag-Guneshli (ACG) project, because of natural decline. ACG production data are not yet available for the whole of 2017, but output was 9.2pc lower than a year earlier in January-Septem-ber, at 585,000 b/d. Socar produced 16.7mn m³/d of gas last year, down by 3.3pc relative to 2016 — almost all its fields are now depleted.
Quito advances ITT development plansEcuadorean state-owned PetroAmazonas plans to drill 50 wells at the Ishpingo-Tambococha-Tiputini (ITT) complex this year, oil minister Carlos Perez says. ITT holds 1.7bn bl of heavy 14-15.5°API crude, but the estimate could increase as new wells come on stream. Output should almost double to 80,000 b/d by December from 44,000 b/d now, Perez says. Production is expected to reach at least 200,000 b/d by 2022, once PetroAmazonas completes its $5bn development of the block, he says. Higher global oil prices have allowed Quito to reduce its 2018 output target to around 520,000 b/d from close to 540,000 b/d.
Acquisitions drive novatek’s reservesRussian independent Novatek delivered strong reserves growth last year, largely because of a string of acquisitions. The company’s total proven deposits increased by 13pc to 15.1bn bl of oil equivalent, based on US securities regulator the SEC’s standards. Novatek took stakes in the Gydanskoye, Verkhnetiuteiskoye and West Seyakhinskoye fields in 2017. The complexes could provide feedgas for the firm’s proposed new Arctic LNG projects, with Gydanskoye potentially producing enough for 12.2mn t/yr of LNG output. Novatek’s takeover of South Khadyryakhinskoye and Syskonsynyinskoye accounted for further reserves growth last year. Exploration at the 1.5 trillion m³ Utrenneye natural gas field on the Gydan peninsula and Kharbeiskoye in Nadym-Pur-Taz also contributed.
Lula’s re-election prospects dimBrazil’s business community is celebrating the almost certain barring of former president Luiz Inacio Lula da Silva from running for re-election. An appeals court has upheld his July 2017 conviction for passive corruption and money laundering. State-controlled Petrobras’ share price increased sharply as the three judges cast their votes condemning Lula, with the Sao Paulo stock exchange soaring to a record high. Lula, who served as president in 2003-11, is a central figure in a sweeping corruption probe centred on Petrobras. Foreign oil companies that have re-entered Brazil’s offshore sector feared that a ruling to quash the conviction would presage a return to his nationalist policies.
naftogaz seeks Kiev’s supportUkraine’s state-owned Naftogaz wants the government to cover losses — esti-mated at 110bn hryvnia ($3.8bn) — incurred through natural gas deliveries to regional distribution companies. Distributors are supposed to sell the gas to Ukrainian households, but some has been “fraudulently” sent to industrial consumers, at higher unregulated prices, Naftogaz says. The company has requested that its supply obligations to the distribution firms end. Kiev insists that prices will remain regulated. Ukraine has committed to end gas price regulation from April, as a condition of receiving financial assistance from international institutions, including the IMF.
Genel signals possible capex increaseLondon-listed independent Genel Energy expects its capital expenditure (capex) to total $95mn-140mn this year, compared with $95mn in 2017. The firm has earmarked $60mn-85mn for the Tawke and Taq Taq oil fields in northern Iraq’s semi-autonomous Kurdish region. But actual investment will depend on progress at Iraq’s Bina Bawi and Miran natural gas complexes, Genel says. It has set aside $25mn-40mn for the fields, which hold an estimated 14.8 trillion ft³ (419bn m³). The company expects to fund its capex from operating cash flow this year.
*complex yield for NWE and US, simple yield for Singapore
Late winter consumption and refinery maintenance have underpinned product prices and kept margins firm
Crude prices reboundCrude prices recovered to near three-year highs, on expectations of firm demand and falling inventories.
Atlantic basin benchmark North Sea Dated rose by $1.18/bl to $70.52/bl in the week to 25 January, not far off a three-year high of $70.67/bl recorded on 11 January. And US marker WTI firmed by $1.67/bl to $65.62/bl, just below a three-year high of $65.73/bl on 24 January.
Stronger economic growth forecasts are underpinning higher oil prices. The IMF has raised its 2018 forecast for global GDP growth to 3.9pc in its latest World Economic Outlook, up from 3.7pc previously. The fund’s estimates are widely used in the modelling behind key oil demand projections.
US inventories declined further, amid stronger exports, further supporting prices. US crude stocks dropped by 1.1mn bl in the week to 19 January, repre-senting a tenth straight week of declines, data from government agency the EIA show. And US crude exports climbed by 160,000 b/d to around 1.4mn b/d. But US shipments could soon dip, as WTI’s narrowing discount to North Sea Dated has made the various export arbitrages less workable. WTI’s discount to North Sea Dated has firmed to less than $5/bl for the first time since November.
The deteriorating arbitrage economics pushed US light sweet LLS and medium sour Mars to their lowest values to WTI since July. LLS slipped by almost $2.30/bl against the benchmark, while Mars fell by $1.90/bl. February WTI Houston’s premium to WTI priced at Texas’ Midland hub declined to its lowest since February last year. Some Gulf coast prices came under pressure from the unat-tractive export arbitrages. But the prospect of heavy sour supply tightness — because of pipeline congestion in Canada — bolstered Canadian heavy sour WCS priced in the Houston market.
Asia-Pacific refiners are still taking US cargoes, although they probably bought them when the arbitrages were more workable. Abu Dhabi’s state-owned Adnoc purchased Eagle Ford in a tender seeking condensate for March delivery to Ruwais. And Taiwan’s CPC again purchased WTI in its latest tender. The company has recently shunned west African grades in favour of WTI.
North Sea Dated-linked Atlantic basin crude has become more expensive for Asia-Pacific buyers, because of a widening Brent-Dubai exchange of futures for swaps (EFS) — or Ice Brent’s premium to Dubai swaps. The EFS hit a 22-month high of more than $3.90/bl on 25 January. This could curb Asia-Pacific refiners’ appetite for North Sea Dated-linked grades.
Demand for North Sea crude is faltering. The Bukha loaded 2mn bl of Forties on 12 January, but has since been waiting offshore. The Gene took 2mn bl of Forties in early January, but halted its voyage to South Korea off the Canary islands. And the Sea Amber set off for Canada carrying January Oseberg, before turning around in the Atlantic. It has yet to declare a destination.
winter keeps comingFirm winter consumption in north Asia supported jet-kerosine margins in Asia-Pacific. Japan — usually a middle distillate exporter — bought jet-kerosine for heating, amid unusually cold weather. Gasoil margins firmed in Asia-Pacific on Indonesian and Sri Lankan demand. And US Gulf coast heating oil and jet prices increased to three-year highs, spurred by below-average temperatures.
Late winter consumption and refinery maintenance have underpinned product prices and kept margins firm, but rising crude values could start to erode refiners’ profits. US gasoline and distillate stocks rose in the week to 19 January, indicating that the stockbuild may be shifting to products.
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