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Oil traders warn of oversupply, Conoco Philips sells oil sands assets
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The Bulls Are Back: Oil Rebounds On OPEC Optimism
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Greetings from London.
Oil prices rose this week as markets are more optimistic about an extension of the OPEC output deal and falling gasoline inventories.
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Friday, March 31, 2017
Oil prices rebounded at the end of the week on news that a growing number of OPEC countries are supporting an extension of their cuts for another six months. Kuwait is lending its weight to the cause and so are a half dozen other members. Of course, the official decision won’t come until May, but the markets are growing confident in an extension. Meanwhile, the EIA reported a solid drawdown in gasoline inventories even as crude stocks saw a slight uptick. The data is being interpreted as a sign of solid demand. Oil prices jumped to three-week highs on the news.
ConocoPhillips to sell $13.3 billion in oil sands. ConocoPhillips (NYSE: COP) announced a deal to sell most of its oil sands assets to Cenovus Energy (NYSE: CVE), a deal worth as much as $13.3 billion. The sale reflects a remarkable difference in opinion between the two companies. Conoco wants to offload highly costly oil sands that are much less competitive in a world of cheap oil. Cenovus is so optimistic about the assets that it was willing to take on a massive amount of debt to secure the deal. The stock markets appeared unanimous in their belief that Conoco got the better of this deal – Conoco’s stock jumped on the news while Cenovus’ sank more than 13 percent on Thursday.
Fracking techniques continue to improve. The WSJ reports that shale drillers such as EOG Resources (NYSE: EOG) continue to tweak their drilling techniques, finding ways to become more efficient. EOG is using software that gathers data while drilling a well, which can be used to make directional drilling much more precise. The upshot is that shale drillers could end up producing more oil at lower prices, and could do so for years to come. That would undermine the influence of OPEC over the long-term and make global supplies more flexible to marginal changes in prices and demand.
Oil traders warn of oversupply. Even as some argue that shale could be a long-term phenomenon, some of the world’s largest oil traders are cautioning against too much reliance on short-cycle projects in Texas. At the FT’s Commodities Global Summit, two executives from Mercuria Energy Group and Trafigura Group said that the market could see a supply crunch towards the end of the decade because of a shortage of investment today. That echoes a warning from the IEA in early March. “The low-hanging fruit on the short-cycle projects are being used now so I am more in this camp that says we are starting to see potential issues three or four years down the track,” co-head of group market risk and former head of crude trading at Trafigura Group Ltd., told the audience.
IEA: price rally not significant even with OPEC extension. The head of the IEA cautioned investors against expectations of a substantial price rally even if OPEC extends its cuts for another six months. Huge inventories will weigh on the market and new non-OPEC supply would come online if prices moved too high.
PetroChina to increase spending. One of China’s oil giants will increase spending for the first time in five years. PetroChina said it would increase spending by 11 percent this year in a bid to boost production. China’s state-owned oil companies have been hit hard by the oil price downturn, with a few of them posting record low levels of profit. China’s oil production has declined as a result of the downturn in spending, with output down more than 5 percent last year.
Russia to comply with OPEC agreement. Russia along with a handful of other non-OPEC countries, pledged to cut their output by nearly 600,000 bpd between January and June, with Russia accounting for about 300,000 bpd of cuts. Russia reiterated its intentions to meet those promises. "The decrease in production in January and February were ahead of tempo with regards our initial plans. Currently, in March we have already reached a reduction level of 200,000 barrels a day. We anticipate complying with the figure set forth in the agreement by the end of April," Russian energy minister Alexander Novak told CNBC. Meanwhile, the minister said that Russia’s long-term production profile will increasing come from the Arctic – Russia gets 17 percent of its output from the Arctic, but that figure will rise to 26 percent in 20 years.
Permian pipeline constraints. Output in the Permian Basin is rising so quickly that the region could bump against a shortage of pipeline capacity. As a result, the discount between Midland oil, a benchmark for oil from West Texas, and WTI, has widened. Permian production is expected to rise to 2.65 million barrels per day (mb/d) by the end of the year, but pipeline capacity might only reach 2.54 mb/d.
2016 record year for renewables. The world saw the installation of 161 GW of renewable energy last year, according to new figures from the International Renewable Energy Agency (IRENA). Solar alone accounted for 71 GW of that total.
Venezuela political crisis deepens. The Venezuelan Supreme Court, effectively an arm of the Maduro government, moved to defang the National Assembly. Provoking both a national and international outcry, the move is being criticized as a decisive step towards a full-on dictatorship. The political and economic crisis has steadily worsened in the past two years, but things could come to a head this year.
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,
Tom Kool
Editor, Oilprice.com
P.S. – Market opportunities usually arise when either technicals or fundamentals reflect a change, but when both fundamentals and technicals point at the same, a trade becomes particularly interesting. In this week’s Oil & Energy Insider, expert energy trader Martin Tillier recommends a beaten down oil major. Find out which oil major by claiming your risk free 30 day trial on Oil & Energy Insider
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What's in Oil & Energy Premium this week: |
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Inside Investor |
• A Rising Star In U.S. Shale? |
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Inside Opportunities: |
• However You Look At It Petrobras Is A Buy |
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Executive Report: |
• Terrible Timing For An OPEC Failure |
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Inside Markets: |
• Are Crude Inventories On The Cusp Of Decline? |
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Inside Intelligence: |
• Global Energy Advisory - 31st March 2017 |
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Global Energy Advisory - 31st March 2017 |
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Politics, Geopolitics & Conflict
• Brexit could be good for the UK’s oil and gas industry, according to some observers. The reason is that unlike the financial industry, which is much more globally interconnected, the oil and gas industry’s chief business is extracting commodities from reserves still abundant in the country. According to an expert from oil technology services firm Petrotechnics, Brexit will not be a big headache for UK oil and gas as the industry not only has the resources to develop but also the talent and skilled workforce to enable its development. This could prove to be true especially against the background of last year’s central government decision to allow fracking projects to proceed in Lancashire, despite local opposition, effectively pressing the start button of the shale oil and gas industry in the country.
• And Syria goes to … Russia (and Iran, with Turkey scrabbling for scraps in the background). The White House—via U.S. Ambassador to the UN, Nikki Haley—has indicated that pursuing the ouster of Bashar Assad is no longer on the agenda.
• If you think the long running saga of Russian-U.S. relations has dried up and died, it hasn’t. It’s not always making headlines because it’s too complicated for much of the mainstream media, but it’s come up again in the U.S. House Intelligence Committee hearing on alleged Russian interference in the U.S. presidential elections. The FBI was questioned about the role of Trump advisor Carter Page in the Rosneft privatization deal. Ousted national security advisor General Michael Flynn—who has apparently been kept in a closet of late—is back in the spotlight as reports emerge that he’s seeking immunity from prosecution for secretive talks with Russian diplomats about sanctions, in return for testimony against Trump.
Deals, Mergers & Acquisitions
• Italian gas infrastructure operator Snam plans to invest $2 billion in Ukraine’s gas transmission network and also provide gas for it, sources from the country’s state oil and gas company were quoted by Ukrainian media as saying. While on the one hand the news is good, providing Ukraine with much needed feed for the network if Gazprom pulls the plug on transit through Ukraine, on the other it has raised concern that Snam could become a Trojan horse for the Russian gas giant, since it also has relations with it.
• Clayton Williams shareholders are challenging an acquisition deal agreed with Noble Energy in court, claiming that the offered price undervalues the stock. Noble struck a deal with Clayton Williams in January to buy it for $2.7 billion in cash and stock. The disgruntled shareholders, led by Alan Sobel, note that Clayton Williams’ stock went up from $29.53 to $103.98 in the second half of 2016, which makes Noble’s offer “unfair and inadequate.”
• The shareholders of Tesoro Corporation and Western Refining have greenlit the $6.4-billion merger between the companies and the deal should wrap up by the end of June. Under the terms of the deal Western Refining shareholders will receive $37.30 per share or 0.435 shares of Tesoro. The tie-up should bring in some $325-425 million in synergies.
• Weatherford and Schlumberger have agreed to form a JV, to deliver products and services to the U.S. and Canadian unconventional oil industry, the two companies announced. Schlumberger will have a 70% share in the venture, which should be competed in the second half of the year. The two will contribute to the venture their relevant fracking businesses and assets. In addition, Schlumberger will make a one-time payment of $535 million to Weatherford.
• BP will continue to sell refineries and has no plans to replace them with new capacity. Instead, it will spend on modernizing the capacity it already has and growing its gas station network, eyeing additional cash flow of $3 billion. Last year, BP’s efforts in streamlining its refining and marketing business resulted in free cash flow of $5.6 billion.
• ConocoPhillips has agreed with Cenovus Energy to sell it most of its oil sands and conventional offshore gas assets for $13.3 billion. The deal will allow Conoco to cut its debt to $20 billion and buy back $6 billion worth of shares. The company will retain its interests in one oil sands project, Surmont, as well as some shale acreage in Canada. For Cenovus, the deal means doubling of its daily oil equivalent output, as it will add 298,000 bpd to its current production.
Tenders, Auctions & Contracts
• UK-based oilfield service provider Petrofac has struck a $1.3-billion engineering, procurement and construction deal with Kuwait Oil Company for the development of a gathering center in the Burgan oil field. The center will process crude oil and gas extracted from several neighboring fields. Work under the contract should be completed by 2020.
Company News
• Saudi Aramco has priced a $2-billion debt offering as part of a $10-billion Islamic bond program ahead of its initial public offering, scheduled for 2018. This is the first Sharia-compliant debt offering of the Saudi oil giant, coming on the heels of a Finance Ministry announcement that the tax load for the company will be reduced, in a bid to sweeten the IPO and attract more investors. The company is currently valued at between $1 trillion and $1.4 trillion by analysts.
• After months of protests and lawsuits, the Dakota Access pipeline is finally ready to start carrying crude from the Bakken shale to Illinois, Energy Transfer Partners, the company behind the $3.8-billion project, said. Crude has been collected in a reservoir under Lake Oahe and flow should start in days. Incidentally, Lake Oahe was at the center of local native American communities’ opposition, who argued the risk of a spill threatened their drinking water and religious rituals, which require clean water.
• PDVSA’s president Eulogio del Pino may leave the company later this year, according to insiders. Del Pino has been at the helm of Venezuela’s state oil company for three years, most of these also serving as oil minister. Expectations are that he will be replaced by the current Oil Minister, Nelson Martinez. Del Pino’s departure will be the biggest management change at PDVSA for the last few years as the company – and the government – grapples with a severe recession brought about by low oil prices and mismanagement.
Discovery & Development
• UK oil explorer Hurricane Energy has announced a major discovery in the North Sea, which could hold as much as 1 billion barrels of crude. If the reserves are proved, this would turn the discovery, in the Greater Lancaster Area off the coast of the Shetlands, could become the largest untapped deposit in the UK’s North Sea Shelf. The news comes on the heels of licensing round for new oil and gas blocks in the North Sea, in the so-called frontier areas, conducted by energy industry regulator the Oil and Gas Authority.
• Nigerian Oranto Petroleum will invest $500 million in the development of an oil block in war-torn South Sudan – the newest African nation, which is sitting on most of the old united Sudan’s oil reserves. Despite the ongoing conflict, Oranto seems certain that the war will end and South Sudan will become a lucrative oil investment destination. The country currently pumps around 130,000 bpd, down from 390,000 bpd before the 2013 war broke out.
• Argentina’s Tecpetrol has set aside $2.3 billion to invest in the Vaca Muerta shale formation in the next three years. Tecpetrol has a gas interest in the formation and plans to pump14 million cu m daily in 2019, which is half of Argentina’s current natural gas imports. Tecpetrol will start drilling in September.
Regulatory Updates
• Trump has struck down the Clean Power Plan adopted during Barrack Obama’s second term with the goal of reducing dependence on fossil fuels in a bid to fight climate change. True to his promise to help the energy industry become great again, Trump this week signed an executive order ordering the Environmental Protection Agency to begin a formal review of the steps needed to roll back the regulations stipulated in the Clean Power Plan. Environmental groups were outraged, with several of them planning to challenge the decision in court. Some energy industry insiders and analysts are meanwhile uncertain about the benefits a roll-back of the climate initiative would bring in, such as new jobs, for example. Still, the industry is happy about the relaxation of methane emission reduction rules and the removal of strict environmental requirements tied to drilling permits.
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