British voters surprise the world with a leave vote, oil feels the consequences
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What Are The Long Term Consequences Of The Brexit

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This week’s key data for the oil and gas industry shows the impact that the Brexit vote has had on oil prices, falling significantly on the back of market uncertainty. Gasoline prices also dipped while refinery runs began to move upwards once again. 

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Friday, June 24, 2016

British voters shocked the world with yesterday’s vote to leave the European Union, thrusting the global financial markets into turmoil. British Prime Minister David Cameron said that he would step down later this year. The “Leave” decision also presents enormous political, economic, and legal questions in Europe, all bad news for commodity markets. The campaign to exit Europe centered largely on immigration, but the fallout will be felt across many sectors of the global economy. In the short run, the dollar is appreciating as a safe haven asset and the British pound is suffering a large sell off. The pound was down more than 11 percent after the result of the vote was tallied, trading at its lowest level to the dollar since 1985, although it has clawed back some of the losses. 

The result will be lower oil prices, at least in the immediate aftermath of the vote. WTI and Brent briefly plunged more than 5 percent in early market trading on Friday, but have regained some lost ground. Major oil companies also saw their share prices dive, both because of the broader financial turmoil and because of the huge drop in oil prices. North Sea oil producers suffered worse than others: In early trading Royal Dutch Shell (NYSE: RDS.A) was down 5.35 percent, Statoil (NYSE: STO) was off 6.15 percent, and BP (NYSE: BP) dropped 4.13 percent. The silver lining for these companies could be cheaper costs in the North Sea from a weaker British pound, but that may not provide much solace to many oil executives today. 

The fundamentals of supply and demand for crude oil will not appreciably change due to a Brexit. Unless the UK’s decision to leave Europe sparks wider economic malaise or lasting financial turmoil, the effects on oil could be fleeting. On the other hand, it is entirely possible that the UK’s decision to leave Europe leads to more votes in other European countries to follow in Britain’s footsteps, which will spark more economic volatility. “This could be a new Lehman moment,” Saker Nusseibeh, chief executive at Hermès Investment Management, told
The Wall Street Journal. “If other European countries start talking about referendums, all bets are off.” Stock indices in southern Europe suffered even worse than the UK’s FTSE 100 (-3.66 percent) – in Greece the markets were down 13.8 percent, Spain’s were off 12 percent, and Italy’s stock market was down 11 percent. At a minimum, the divorce between Britain and Europe will take some time, perhaps as long as two years, so market uncertainty will not be abated anytime soon. 

Scotland independence? The Brexit vote increases the chances that we will see a rerun of the campaign for Scottish independence. The June 23 Brexit vote showed overwhelming support in Scotland to remain in the EU, so Scottish politicians have a strong case to breakup from the UK in order to remain in Europe. Of course, if Scotland were to breakup with the UK, it would have massive ramifications for North Sea oil, arguably more so than the Brexit. The separation of the UK from Europe won’t have significant regulatory or contractual impacts on oil projects in the North Sea, although international companies could have more trouble moving non British workers in and out of the region. But Scottish independence would mean a change of sovereignty of the oil fields themselves. In this sense, the Brexit vote is a massive turn of events for companies operating in the North Sea. 

No Fed rate hike. Another consequence of the Brexit vote will be the U.S. Federal Reserve’s decision not to raise interest rates anytime soon. The Fed had already deferred on a rate hike in June, but was considering an increase in the near future. Now, with the dollar appreciating, financial turmoil in Europe, and weak jobs data in the U.S., there are fewer reasons for the Fed to increase interest rates in the near-term. Looser monetary policy will provide a bit of a countervailing force to the stronger dollar and falling oil prices. 

Volkswagen agrees to pay $10.2 billion for U.S. emissions scandal. Moving on from Brexit news… Volkswagen
agreed to settle claims related to the emissions scandal in the U.S. that emerged in 2015. The German automaker will pay $10.2 billion to compensate the 482,000 owners of diesel cars that had software programmed to cheat emissions tests. The settlement does not resolve all claims against the company, but only those for two-liter cars. There is still the issue of three-liter cars as well as potential fines from U.S. regulators. 

Credit harder to find in the oil patch. U.S. regulators estimate that the value of bad energy loans from major U.S. banks has reached $34.2 billion. Banks are increasingly turning away from the energy sector when issuing loans, making credit harder to come by for U.S. drillers. Distressed companies are all but locked out of the debt markets, and for companies that still can obtain financing, credit lines are significantly reduced from years past. For example, according to a top executive at JP Morgan’s commercial banking business, large banks would have easily issued a $3 billion credit line to an oil driller back when oil prices were $100 per barrel. But a similar arrangement would be topped off at $600 million to $1 billion today, the Houston Chronicle
reported in mid-June. Stingier lines of credit could prevent a rush to new drilling even if oil prices rise, making a sharp resurgence in shale production unlikely. 

Offshore still moving forward. Major offshore oil projects in the Gulf of Mexico are coming online, helping to offset the production losses in the U.S. shale patch. The Wall Street Journal
estimates that about 500,000 barrels of oil from new offshore projects is set to come online in 2016 and 2017. These projects were planned years ago and are only now coming to fruition, so they do not necessarily reflect today’s market conditions. But they do help to stem the output losses, although, at the same time, new output could slow the adjustment to a market balance, helping to keep a lid on oil prices. 

In our Numbers Report, we take a look at some of the most important metrics and indicators in the world of energy from the past week. Find out more by
clicking here

Thanks for reading and we’ll see you next week.

Best Regards,

James Stafford


P.S. – In his column this week, long-time trader Martin Tillier discusses how best to find value in the oil markets in the wake of the Brexit, discussing what he believes are long and short term impacts of this major event. Find out where Martin belives the opportunities in today’s market are by taking a risk-free trial on
Oil & Energy Insider
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What's in Oil & Energy Premium this week:
Inside Investor
• What To Do Next?
Inside Opportunities:
• Thoughts On Brexit: Don’t Panic and Look for Value
Executive Report:
• Supply Risks Loom, Creating Potential for Higher Oil Prices 
Inside Markets:
• Is The Natural Gas Rally Over?
Inside Intelligence:
• Global Energy Advisory - 24th June 2016
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Global Energy Advisory June 24th 2016

Politics, Geopolitics & Conflict
Brazil: If you aren’t interested in what’s going there, you should be. It’s fascinating to the private intelligence world—and to geopolitical analysts in general—that the Western public is so unequivocally uninterested in Latin America. The imagination is instead only captured by jihadist movements that happen much, much further away, or by the Russian ‘bear’, which has not failed to tantalize and thrill for decades. But when major events are happening much closer to home, it fails to captivate. From a global economic and geopolitical perspective, you should be very concerned about what comes next in Brazil. But again, if there is no blood, no beheading, no pseudo-religious angle—major world developments fall on deaf ears. Let’s change that: Washington certainly has—even if it’s not obvious to you from media coverage. Nonetheless, this is our new strategic front line, and it’s not just about Brazil—please pay attention to what’s going on in Venezuela, as well. And it has as much to do with China as anything else. China is Brazil’s biggest trading partner, and it’s doubly important that this is in the U.S.’ back yard. What Washington definitely doesn’t want happening is China fully and irrevocably connecting up with South America, and the only way to ensure that does not happen is to make sure that Brazil (among others, but this is the lynchpin for now) is taken down a notch politically and regionally. 

But for the immediate term, if you’re an oil watcher or investor—Brazil should be furiously pinging your radar. It’s not necessary to follow every step in the Petrobras scandal—which the public has already made clear it’s not interested in—but you might want to take a closer look at the ongoing efforts to impeach the president. 

In the words of geopolitical analyst extraordinaire, Pepe Escobar: 

“So every coup is now literally allowed in South America; indirect attacks to the Brazilian currency, the real; bribing local comprador elites with the backing of the global financial system; a concerted attempt at the implosion, simultaneously, of the top three economies: Brazil, Argentina and Venezuela. SOUTHCOM went so far as to produce a report on “Venezuela Freedom” earlier this year, signed by commander Kurt Tidd, which proposes a ‘strategy of tension’, complete with ‘encirclement’ and “suffocation” techniques and allowing to mix street action with a ‘calculated’ use of armed violence. Echoes of Chile 1973 do apply.” 

The final ruling on the impeachment of Brazilian President Dilma Rousseff is probably going to be in mid-August. The coup plotters aren’t faring well, though, and the game is now anyone’s. They are implicated in scandal as well, and the tides are now shifting. August will determine what happens next in Brazil and it will have global political and economic repercussions.  

Other global developments: 

•    The UAE is withdrawing all of its active combat troops from the Saudi-Iran proxy war in Yemen, where the Gulf kingpins have been ‘defending’ the “internationally recognized government” of President Abed Rabbo Mansour Hadi. UAE troops have been guarding the southern port city of Aden, which is the stronghold of the Sunni government. Shi’ite Houthi rebels—Iran’s proxy force—control the Yemeni capital of Sana’a.
•    Iran has appointed itself a new OPEC envoy in the form of Oil Ministry senior analyst Behrouz Beik Anlizadeh, who will replace retiring Mehdi Asali. 

Discovery & Development

•    Angola’s state-run oil giant Sonangol has released new figures for a recent major oil and gas find in the Kwanza Basin, in partnership with U.S. Cobalt and British BP. The basin is now estimated to hold up to 813 million barrels of oil equivalent. According to Sonangol, Block 20/11 holds an estimated 313 million barrels of condensate and 2.8 trillion cubic feet of natural gas. 

•    Iran says it has increased capacity at its main crude export terminal on Kharg Island and can now handle eight simultaneous tanker loadings, while on additional vessel can load a ship-to-ship cargo. In all, the terminal can now store 30 million barrels of crude oil. Iran is hoping to eventually be able to handle 6 million barrels per day of exports at its terminals, and is producing now at 3.8 million barrels per day.  

•    Indian giant Essar Oil says it has discovered 8 trillion cubic feet of original in-place shale gas resources underneath its coal-bed methane reserves in Raniganj (East) block in West Bengal. The evaluation comes from independent U.S. firm Invenire, with the support of the U.S. Trade and Development Agency. Essar Oil officials said that considering a 20-25 percent recovery factor, they should be looking at 1.6-1.7 trillion cubic feet of recoverable resources. Essar is the largest unconventional gas producer in India and is now producing over 1 million standard cubic meters per day from its CBM block. 

•    Total Exploration and Production Nigeria Ltd has completed the phase 2 wellhead platforms, which is expected to increase Ofon field oil production to 65,000 barrels per day, up from 25,000 barrels per day. The extra production should also include 3 million cubic meters of gas per day.
•    Rosneft and BP Plc this week signed “final binding agreements” to establish the new Yermak Neftegaz LLC joint venture. The new JV will explore onshore for oil and gas in Russia’s West Siberian and Yenisey-Khatanga basins. The exploration area of the two combined is about 100,000 square miles. The JV will be 51 percent owned by Rosneft, with a 49 percent share for BP. The first phase will see a deeper appraisal of Rosneft’s discovery in 2009 of the Baikalovsky field in the Yenisey-Khatanga basin, along with exploration in the West Siberian area. Field work should get under way in the coming winter season. Over two phases, BP will invest $300 million for exploration.  

•    MOL Group is saying it’s made its 8th discovery in Pakistan’s TAL Block at the Makori-Deep-1 exploration well. The well has reportedly flowed during testing at a rate of 2,020 barrels of oil per day. MOL says the find de-risks exploration in deeper fault blocks in this same play. Partners in the JV consortium are Oil and Gas Development Co. Ltd., Pakistan Petroleum Ltd., Pakistan Oilfields Ltd. and Government Holdings (Private) Ltd.

•    Enterprise Products Partners plans to build a new cryogenic natural gas processing facility and associated pipeline infrastructure in the Delaware Basin. The company said it will build a 300-MMcfd cryogenic gas processing plant and add more than 40,000 b/d of NGL extraction capability. The plant should begin operating in the second quarter of 2018, but the site has not yet been determined. The processing capacity will be 300 million MMcf/d with extraction capacity of more than 40,000 barrels per day of NGL.

Deals, Mergers & Acquisitions

•    Tokyo Gas Co. has acquired a 25 percent stake in an Eagle Ford Shale gas formation from VirTex Producing Co. for an undisclosed amount. Tokyo Gas Co. is the largest city gas supplier. Tokyo gas is expected to spend over $76 million for the stake and in drilling, though we do not have a breakdown here. The VirTex project is commercially producing and should supply 200,000 tons of LNG per year for 20 years. This is the second major Tokyo Gas acquisition in Texas in three years. In 2013, it scooped up a stake in Texas’ Barnett Basin from Quicksilver Resources for $485 million. 

•    Encana Corp. has agreed to sell its Canadian Gordondale oil and gas assets in northwestern Alberta to Birchcliff Energy Ltd for just over US$487 million. The assets include around 54,200 net acres and associated infrastructure and produced around 25,000 barrels of oil equivalent per day in the first quarter of this year. The breakdown is 35 percent liquids and 65 percent natural gas. In total, the estimated proved reserves here sit at 50 million barrels of oil equivalent. The deal should close this summer, pending regulatory approval. 

•    QEP Resources, through subsidiary QEP Energy Company, has inked a definitive agreement to acquire oil and gas assets in Texas’ Permian basin for some $600 million. The assets are in Martin County and would extend QEP’s Texas holdings in the northern Midland basin. The transaction is scheduled to close in September.  

•    As Moscow considers the sale of a 19.5 percent stake in state-run oil major Rosneft, it’s now hinting at what many have seen as the obvious for some time: it won’t be selling the company’s shares on the open market, but prefers selling them to a strategic partner to be chosen by Rosneft. That will be India or China. Rosneft could be valued at anywhere from $55 billion to $130 billion, depending on the market situation, according to the Rosneft CEO. Last week, Rosneft announced the sale of a 23.8 percent interest in Vankor to a consortium of India companies including Oil India, Bharat PetroResources and Indian Oil for $2.1 billion. This followed the sale of a 15 percent interest in the same field last month to India’s ONGC for $1.5 billion. In late May, Russian authorities greenlighted the sale of 50 percent of another state-run oil company, Bashneft after the government removed it from its list of strategically approved assets. Bashneft is Russia’s sixth largest crude oil producer, valued at $13 billion pre-oil slump. Another Russian state-owned oil-related company that is being considered for partial sale is pipeline Transneft. 

•     plc purchased the other 50 percent of the license covering Blocks 48/22b and 48/23a in the Southern North Sea from Alpha Petroleum Resources. As previously agreed, $2.2 will be payable to the seller on completion with deferred consideration of a further $5mn on first gas. Blythe requires no further appraisal and this transaction adds a further 17.2 BCF or 3 MMBOE to IOG's reserves.
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