OPEC reaches historic deal, Canada approves two major oil pipelines
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Oil Gains 14% On OPEC Deal – Analysts See Further Gains

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Oil prices inched up on Friday as a result of a positive U.S. jobs report after rallying 14 percent in two days.

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Friday, December 2, 2016

The two-and-a-half-year oil bust could be coming to an end, thanks to OPEC. The oil cartel pulled off a surprise agreement, snatching victory from the jaws of defeat. The deal calls for collective cuts from 13 members (Indonesia suspended its membership), reducing output by 1.2 million barrels per day to 32.5 mb/d. Also, non-OPEC countries will cut output by 600,000 barrels per day, including 300,000 bpd from Russia. The deal will take effect in January.

Oil prices surge. WTI and Brent shot up on the news, rising by more than 14 percent since Tuesday. On Friday, investors took a breather, pocketing some profits. WTI and Brent hovered at $51 and $53 per barrel, respectively, during early trading hours. Brent crude is on track for its biggest weekly increase since 2009. Oil analysts around the globe see further price gains in the next few months. 

OPEC deal almost didn’t happen. Bloomberg
reports that the negotiations came down to the wire. With a gulf still between several OPEC members, the breakthrough came from a 2 a.m. phone call on the eve of the final meeting from Russian energy minister Alexander Novak to Saudi energy minister Khalid al-Falih. Novak told his Saudi counterpart that Russia was not only willing to freeze but to actually cut output, a surprise concession that jolted the talks back to life. Al-Falih then went to his colleagues in OPEC and demanded concrete reductions. With Russia on board, others were willing to play ball. 



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Saudis need higher oil prices. The WSJ reports on Saudi Arabia’s motivation for departing from its strategy over the past two years and deciding to pursue a production cut. Saudi Arabia needs oil prices to average $70 per barrel for its budget to breakeven. With prices much lower, Riyadh is running large budget deficits and burning through cash reserves. Meanwhile, the oil kingdom is trying to diversify its economy to develop non-oil sources of revenue. But in the interim, it needs oil revenues to make the necessary investments. 

Banks are also happy with OPEC. Another constituency pleased with higher oil prices is the banking sector, which will benefit from improved prospects of loan repayment to energy companies. Banks have had to set aside cash reserves to cover from expected defaults on their loans. Earlier this year, 15 of the largest U.S. banks stockpiled $6 billion in cash to cover energy losses, however, as the WSJ
reports, defaults have not been as bad as expected. Higher oil prices will likely mean that most banks will emerge in decent shape from the two year oil bust. 

BP greenlights deepwater project. The timing might have been mere coincidence, but a day after OPEC agreed to cut production, which saw oil prices shoot up more than 8 percent, BP (NYSE: BP) gave the go-ahead to a major deepwater drilling project in the Gulf of Mexico. The
Mad Dog phase 2 is a $9 billion project could add 140,000 barrels per day in output to the project that is already producing 80,000 barrels per day. It could begin operations in 2021. Mad Dog Phase 2 is one of a handful of major final investment decisions from the oil industry during the past year. BP says that it has more than halved the price tag for the project from an original estimate of $20 billion. The greenlight is a sign that the oil majors could begin to cautiously return to some high-profile drilling projects, especially now that oil prices are on the upswing. 

Canada approves two major oil pipelines. Canadian Prime Minister Justin Trudeau tried to split the difference between industry demands and environmental opposition, approving two major oil pipelines this week while rejecting another. He gave the OK to the Trans Mountain Expansion Project, a Kinder Morgan (NYSE: KMI) pipeline that will run from Alberta to the Pacific Coast and triple the system’s capacity from 300,000 barrels per day up to 890,000 barrels per day. Also, he approved Enbridge’s (NYSE: ENB) Line 3 replacement, a more than 1,000 mile replacement for an existing line that runs from Alberta to Wisconsin in the U.S. Together, the pipelines could add almost 1 million barrels per day of pipeline capacity when completed. Trudeau also rejected the Northern Gateway Pipeline, which would run through sensitive rainforest in British Columbia. The multiple decisions could put years of conflict to rest, throwing an enormous lifeline to Alberta oil sands producers. But environmentalists were not mollified, and vowed to oppose construction of the Trans Mountain expansion. The controversy surrounding long distance oil pipelines is long from over. 

U.S. renewables 15 percent of electricity in 2016. New data from the EIA
shows that renewable energy accounted for 15 percent of total U.S. electricity generation in the first three quarters of this year, up substantially from just 13 percent last year. Solar in particular rose from less than 1 percent in 2015 to 1.4 percent this year – still a small share, but growing quickly. Renewables have been capturing the majority of new generation capacity added in the U.S. for the better part of two years; it remains to be seen if that continues in the Trump administration. 

ExxonMobil’s Tillerson to U.S. State Department? Rumors should always be taken with a grain of salt, especially in the theatrical atmosphere that President-elect Donald Trump has created around his transition, but
news reports surfaced that Trump is considering ExxonMobil’s CEO Rex Tillerson for U.S. Secretary of State. The search for Sec. of State has been one of the most lengthy and circuitous efforts of all of Trump’s selections, with a long list of candidates in the running. Exxon declined to comment on the news.  

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,

Evan Kelly
Editor, Oilprice.com

P.S. – Expert energy trader Martin Tillier writes about the underestimated natural gas rally this week. Martin notes that while oil has been in the spotlight, natural gas posted extraordinary gains in recent weeks. Although Martin sees fundamentals pointing towards higher prices, he notes that markets might have gone up too fast too soon. See what trades Martin recommends by claiming your risk-free 30 day trial on
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What's in Oil & Energy Premium this week:
Inside Investor
• How To Trade The OPEC Deal
Inside Opportunities:
• Has The NatGas Rally Come To An End?
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• Why Shorting NatGas Makes Sense Now
Inside Intelligence:
• Global Energy Advisory December 2nd 2016
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Global Energy Advisory December 2nd 2016

The biggest news of the week, of course, is that OPEC reached an agreement to cut its output by over a million barrels per day, to a target level of 32.5 million bpd in a bid to support the rebalancing of international oil markets. The cut will take effect at the start of 2017 and will be in place for six months, under supervision from a monitoring committee comprised of OPEC oil ministers. Russia will join the effort, having pledged to reduce its output gradually over the six months by some 300,000 bpd. This will effectively mean delaying plans for production expansion rather than an actual cut.

The OPEC deal can be regarded as an indication of the shift in the balance of power in the Middle East because Saudi Arabia, the group’s unofficial leader and largest producer, was forced to make the biggest concession, at the same time yielding to Iran’s insistence to continue pumping at current rates, which are close to 4 million bpd. Saudi Arabia tried the peaceful way and then it resorted to threats, saying it could further increase production but Iran – and Iraq, for that matter – held their ground.

Despite the good news, which immediately boosted international crude benchmarks, skepticism remains rife, with some observers noting that a production cut does not equal an export cut, so OPEC, which has been amassing crude, could continue to export at current rates with a view to maintaining market share, effectively curbing the upward potential of oil prices. It’s worth noting that the post-announcement jump in Brent and WTI was nowhere near the $55 a barrel forecast by some analysts. In fact, the two main benchmarks did not even get to $53 a barrel before slipping back down to $50 and below.

One thing seems to be clear, though. Up until now Saudi Arabia has been able to lead OPEC in any direction it wants, but with a budget deficit the size of which has never been seen before in the desert kingdom, and with Iran back in the game, it might find itself following rather than leading. Also, the situation could deepen the political tension between the Middle East’s archrivals with unclear consequences. Throw a new U.S. president into the mix, and the uncertainty is palpable. 

Deals, Mergers & Acquisitions

•    Greece has failed to sell its gas grid operator DESFA to Azerbaijan’s state oil company SOCAR. The deal fell through after the prospective buyers asked for a lower price for the 66-percent stake in the company. The Greek government said anything less than 400 million euros would make the deal unfeasible legally.



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•    The owners of Russian oil company Russneft have sold 20 percent in the company at 550 rubles per share, valuing the whole business at around $2.5 billion. The majority of buyers were locals. According to the majority owner of Russneft, billionaire Mikhail Gutseriev, the issue was 30 percent oversubscribed. This is the first IPO of an oil company in Russia in a decade and the fact that 90 percent of the buyers were Russians highlights the difficult situation for foreign investment in the country, with EU and U.S. sanctions still in effect and President-elect Trump’s position on these sanctions unclear.

•    DONG Energy and Moller-Maersk are negotiating a $10-billion tie-up of their oil and gas operations. The Danish logistics giant was suggested as the most likely buyer of local DONG’s oil and gas business, after the company said it would prefer to focus on wind energy. Maersk, for its part, earlier announced it was considering a spinoff or a sale of its oil and gas operations in a bid to streamline its core business.

•    Shell is mulling over an exit from Iraq, as it seeks to offload $30 billion worth of assets to pay down debt accumulated with the acquisition of BG Group. Shell has had a presence in Iraq for over 100 years but the local government’s recent policy on royalties has seen its financial returns from this presence dwindle. Iraq operations accounted for 4.4 percent of Shell’s total oil and gas output last year. The company has no plans to sell its gas operations in the Middle Eastern country, however.

•    BP has bought two stakes in Statoil-operated oil and gas fields in the North Sea. The British major bought a 25 percent stake in two licenses that make up part of the Jock Scott prospect, and 40 percent in another two licenses in the neighboring Craster prospect. The Norwegian company will remain operator of the licenses. In addition to the acquisitions, BP said it planned to raise its UK production to 200,000 bpd over the next four years.

Tenders, Auctions & Contracts

•    Noble Energy and Delek Group, the operators of the giant Leviathan offshore gas field in Israel, have sealed a $2-billion deal with Or Energy, to supply the utility with 8.8 billion cu m natural gas over a period of 20 years. The gas will fuel Or Energy’s new power plant, soon to begin construction.

•    Thailand plans to hold a tender for several oil and gas license plots where current licenses are about to expire. The tender is scheduled for 2018, a postponement on the previous plans to start receiving bids in March 2017. The current holders of the expiring licenses are Chevron and PTTEP, a subsidiary of the local state-owned oil company, PTT Public Company Limited.

•    Canadian firm Africa Energy Corp has bought a 10 percent stake in an exploration license off the shore of Namibia. The seller is Pancontinental Oil & Gas NL, an Australia-listed exploration company with a focus on operations in Kenya and Namibia. The value of the deal is $6.5 million, of which $1.7 million to be paid upon the signing of the contract and the remainder when the first exploration well is spudded.

•    Greek Greka Drilling has been awarded a contract by PetroChina to drill five wells at a field in the Shanxi province in Northern China. The region is home to one of the biggest oil deposits in China, the Huabei Oil Field complex. Greka has already drilled 13 wells for the Chinese giant.

Discovery & Development

•    Statoil is moving forward with exploration at an offshore oil discovery in Canada, in the Bay du Nord. The Norwegian major plans to conduct a subsea and marine study of the plot, including a design of a floating production, storage and offloading vessel. This is encouraging for the local economy as the discovery could prove to be economical enough to motivate the start of commercial-scale production.

•    Greek Energean plans to spend $50 million on the development of an offshore oil and gas field near Thassos, the West Katakolon, raising its production from 5,000 to over 10,000 bpd by 2018. The investment is part of an ongoing $200-million investment program.
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