Colonial pipeline restarts, SEC investigating ExxonMobil
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OPEC Deal Looks Bleak After Saudi Comments

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Oil prices fell fast on Friday afternoon after Saudi Arabia claimed that "doesn't expect any decision" next week at OPEC’s unofficial meeting in Algiers.

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Friday, September 23, 2016

Oil prices jumped in the second half of this week on larger-than-expected drawdowns in U.S. crude oil and gasoline inventories. The record drawdown a few weeks ago due to storms in the Gulf of Mexico was thought to be a one-off. But last week’s drop adds more momentum to the narrative that the oil market is adjusting. Crude oil inventories are now at their lowest level since the beginning of 2016 and more declines are expected. Crude prices, however, crashed on Friday, aided by Saudi comments that a decision will not be forthcoming from next week's OPEC meeting in Algiers. And things got worse for crude after the Federal Reserve confirmed it is looking to restrict bank involvement in physical commodities... 

Saudi Arabia offers to curb output if Iran accepts ceiling. The latest news on the Algeria meeting set to take place this weekend and into the early part of next week is that Saudi Arabia
reportedly sent an offer to Iran, proposing a cut to its output if Iran agreed to limit production at its current level of 3.6 million barrels per day. "They (the Saudis) are ready for a cut but Iran has to agree to freeze," a source told Reuters. Discussion took place in Vienna at OPEC headquarters this past week, but so far reports suggest there has been no agreement. Bloomberg surveyed oil analysts and 21 out of 23 respondents said that there would be no agreement in Algeria. 

Meanwhile, rising output in Nigeria and Libya make the production freeze negotiations look even less important. Several hundred thousand barrels per day from the two troubled OPEC members would more than outweigh any effect from an output cap. 

Russia invests in brownfields, expects output to climb. The FT published a
must-read article on Russia’s campaign to boost oil production from aging oil fields in Siberia. Ramping up drilling in existing brownfield sites, as opposed to drilling in frontier regions like the Arctic, is a shift of focus for Russia’s oil industry. But the more aggressive approach to maintaining and even increasing oil flows from some of Russia’s old but still massive oil fields could allow it to increase output in the next few years, defying expectations of steady declines. Rosneft will more than double its drilling rate from 750 wells in 2014 to 1,700 per year beginning in 2017. It is also improving its drilling techniques, incorporating fracking and horizontal drilling. But the quest also raises questions about the wisdom of elevating production at all costs, which could damage long-term output. In any event, Russia’s need for tax revenue has it going down this path, but that could also make it difficult for Russia to sign on to any OPEC production freeze agreement. 

Total SA slashes spending. French oil giant Total (NYSE: TOT) outlined
deeper cuts to spending on September 22, hoping to improve profitability. The moves call for sharper cuts to spending, boosting operational efficiency, and increase oil and gas production. Spending for 2017 will drop to between $15 billion and $17 billion, down from $18 billion to $19 billion this year. The adjustments will allow Total to cover capex, dividends, and resource renewal with cash flow, assuming an oil price of $55 per barrel in 2017. Total’s share price jumped by 3.7 percent on the news. 

SEC investigating ExxonMobil. The probe into ExxonMobil’s (NYSE: XOM) accounting practices is widening, and federal regulators from the SEC are now looking into the oil major to see if it is guilty of any wrongdoing. Exxon dismisses the investigation as politically-motivated, but the SEC inquiry mirrors investigations underway by several Attorneys General led by New York AG Eric Schneiderman. The question is whether or not Exxon is defrauding its investors by overstating the value of its assets. Exxon is probably not too worried about the direct investigation itself, but the probe illustrates the dangerous future for the oil major: governments and regulators are taking serious the possibility that the oil industry will be unable to produce all of the oil and gas reserves on their books, whether because of peak demand or because climate regulation will prohibit them from drilling. 

China’s renewables installations to fall next year. Bloomberg New Energy Finance
predicts that China’s pace of solar and wind installations will decline by 11 percent next year, which could be the first decline in the history of the business. To be fair, installations will fall to 41.8 GW from a peak of more than 46.9 GW this year, both of which are staggering figures. But China’s central government is looking at paring back subsidies for renewables as the economy slows. China’s demand for renewables, which is still the largest in the world, will have an enormous impact on the global solar and wind industries. 

Maersk to split up, focus on North Sea. The Danish shipping company is
set to split up its shipping interests from its energy business. The energy arm will rein in its global ambitions and focus its efforts on the North Sea. New investments going forward will also be limited. The move is a sign that Maersk has been hit hard by poor market conditions in both shipping and oil. 

Colonial pipeline restarts. The main gasoline line of the Colonial Pipeline has
restarted, which should ease the sudden shortage of gasoline in the U.S. southeast. The pipeline suffered a leak two weeks ago, and the outage led to a spike in prices at the pump for the east coast and southeast. 

Donald Trump promises to revive coal and eliminate regulations and taxes on the energy industry. The Republican nominee
said he will unleash “a treasure trove” of coal, oil and natural gas by cutting regulations and taxes. "You will like me so much," Trump told natural gas executives at the Shale Insight 2016 conference in Pittsburgh on Thursday. His comments were characteristically short on details, but he did say he would cut corporate taxes to 15 percent and restrict the efforts of the EPA. 

Exxon considers selling $1 billion in Norway assets. Bloomberg says that the oil major has had discussions on
selling Norwegian oil fields that produce around 65,000 barrels per day, but the company has declined to confirm the news reports. 

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

P.S. – Uncertainty in the E&P patch has raised questions about the valuation of certain shale companies. In his never ending quest for value in the oil patch, veteran Trader Dan Dicker is looking into downstream players. Dan mentions gasoline exports as a growth opportunity for big refiners. Find out which companies have caught Dan’s eye by claiming your risk-free 30 day trial to
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What's in Oil & Energy Premium this week:
Inside Investor
• These Refiners Could See Some Healthy Returns
Inside Opportunities:
• How To Trade The OPEC Meeting
Executive Report:
• OPEC Sets the Stage for A Price Crash
Inside Markets:
• Why There’s More Upside For Natural Gas
Inside Intelligence:
• Global Energy Advisory September 23rd 2016
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Global Energy Advisory September 23rd 2016

Politics, Geopolitics & Conflict

•    The Iraqi-U.S. coalition is advancing on Mosul, the northern Iraqi city that is one of the few remaining strongholds of Islamic State. Before the final advance, the coalition launched an attack on Shirqat, a town they will use as a stepping stone to Mosul. ISIS is preparing for the fight by digging a moat around Mosul, along with channels within its walls and setting up oil-filled tankers around it, to turn into a wall of fire to stop the advance of the coalition, according to local sources. The start of the attack is planned for next month. Should it be successful, it could mark a turning point in the fight against ISIS. Meanwhile, however, foreign oil companies operating in the country are finding it hard to stick to their production expansion plans. They were already forced by the Iraqi government to severely cut their budgets as Baghdad was unable to continue paying them for developing its oilfields. A substantial part of Iraq’s oil revenues were used for the army and the war with ISIS. Against this background, the taking of Mosul could optimistically be seen as the beginning of the end for IS, allowing Iraq to redirect funds to its oil industry, on which the country is heavily dependent. For oil speculators, a victory over ISIS could add to the existing oil supply glut unless OPEC decides not only on a freeze, but a production cut. 

•    Kenya has been dragged to the UN International Court of Justice by Somalia, which is seeking a redrawing of the maritime border between the two countries that could see Kenya lose three of its 20 offshore oil and gas blocks. According to Somalia, its neighbor has tried to steal oil and gas belonging to it. Somalia insists that the maritime border with its southern neighbor should follow the line of their land border. Kenya, however, sees the maritime border as a straight line, which has given it access to more oil and gas offshore. Kenya, along with other African states where oil was only discovered recently, is eager to develop the reserves it has. Kenya is also arguing that it’s military efforts against Al-Shabaab militants in Somalia should give it carte blanche over this issue. 

•    Libya’s oil exports are again flowing, and there is every indication that there will be a successful ramp-up of production. General Haftar’s move to secure the country’s ports to the dismay of the now-weakened and most likely irrelevant UN-backed Government of National Accord (GNA). At this point, it appears that Ibrahim Jadran, who controlled the Petroleum Facilities Guard (PFG) is now weakened beyond return and will not be able to push Haftar back, so the oil should continue to flow. We do caution that some attacks intended to thwart the resumption of oil exports could take place, but they are likely to be minor given the power of Haftar compared to Jadran at this point. While Jadran is making an attempt to regroup with a new militia group, so far his attacks have been pushed back and Haftar’s Libyan National Army (LNA) has gained more territory. At the end of the day, it’s going to mean less lucrative oil contracts for international companies who thrive on chaos for deals that would not be approved under the same terms in the absence of chaos. 

Deals, Mergers & Acquisitions

•    Phillips 66 has finalized the sale of its Whitegate refinery in Ireland to Irving Oil. The buyer will continue the refinery’s operation as before keeping the workforce unchanged. Whitegate is Ireland’s only refinery.

•    An adviser to the Japanese Prime Minister said the government has no intention of taking part in the much-publicized partial privatization of Saudi Arabia’s state oil company Aramco. Yasutoshi Nishimura told Reuters, however, that Japan might make some joint investments with the kingdom’s government in business initiatives outside the oil and gas industry.

•    Eni has postponed the sale of its Italian retail business because of the political situation in the country. A referendum on constitutional reform is due to take place in November or December. The sale, which is expected to generate $3 billion, was supposed to take place by the end of the year but has now been moved to next year. The referendum has temporarily put on hold all major business deals in financially troubled Italy.

Tenders, Auctions & Contracts

•    Egypt is putting up for sale stakes in state-owned oil companies in a bid to fill up a budget deficit gap. The revenues eyed with the privatization initiative are $10 billion, to be generated within the next 3-5 years. Within its first year, the privatization drive, which will take the shape of initial public offerings, will see two or three companies listed on the local stock exchange.

•    Azerbaijan’s state oil company SOCAR and Malaysia’s Petronas have teamed up on the exploration of the Goshadash field in the Azeri section of the Caspian Sea. This will be the second Caspian project for Petronas, which bought a 15.5 percent stake in the huge Shah Deniz gas field from Statoil back in 2014.

•    Venezuela’s PDVSA has awarded drilling contracts worth $3.2 billion for its oil deposits in the Orinoco belt. The company expects the 480 wells to be drilled there to add 250,000 bpd of crude to its overall production. However, there is controversy around the contracts as some of PDVSA’s foreign partners question the qualifications of some of the winning bidders. These include Schlumberger, Horizontal Well Drillers from Oklahoma, and Venezuelan Y&V.

Discovery & Development

•    Shell is preparing to start exploratory drilling off the Tanzanian coast under a $20-million investment program to unlock reserves of an estimated one trillion cubic feet of natural gas. The first phase of the program will see Shell and its local partner Ophir Energy drill two wells in two offshore blocks. The 1-trillion-tcf estimate is conservative, factoring in a 40 percent success rate for the two wells. Shell became the operator of the project after its takeover of BG Group last year.

•    France’s Total is prepared to begin the second phase of development at its Incahuasi gas project in Bolivia next year, should the economic environment allow it. The first phase of the project was completed in August, when gas started flowing from three wells. The project is worth $1.2 billion and production is scheduled to reach 7 million cubic meters daily by the end of September, which would represent a tenth of Bolivia’s gas output.

•    Gazprom Neft plans to start commercial-scale development at the Arctic oilfield Messoyakha within a few weeks. The field should produce 600,000 tons of crude by the end of the year, targeting output of 3 million tones by the end of 2017 and 5.5 million tons by 2020. This will help Russia maintain its new post-Soviet record of around 11 million bpd, with total annual output for 2016 seen at 547 million tons. Gazprom Neft is expected to book oil and condensate production of 59 million this year, eyeing an increase to 62 million tons in 2017.

•    Tullow Oil has struck oil and gas in the Cara block off the Norwegian coast. The local unit of the British company is partnering on the exploration of the Cara block with the Norwegian unit of French Engie, with the latter being the operator. Engie E&P Norge has estimated that the reserves of the deposit are between 25 and 70 million barrels of oil equivalent.

•    Lukoil has started preliminary drilling operations at the Filanovsky field in the Russian section of the Caspian Sea. This is the first oil and gas project in Russia’s Caspian waters. The company has slated $13.5 billion for the development of the field until 2045. Filanovsky is estimated to hold recoverable reserves of around 1.1 billion barrels of crude and 1.1 trillion cubic feet of gas.

Company News

•    French gas utility Engie plans to lay off 1,150 people as its LNG business booked a loss for full-2016 after falling into the red in the first half. The job cuts will constitute a fifth of Engie’s support functions, including at call centers, sales, IT, and trading.

•    Petrobras will cut its budget for the next five years by a quarter and put more effort into its asset sale program as it struggles with the biggest debt pile in the global oil and gas industry. Between 2-17 and 2012 the Brazilian giant will spend $74.1 billion, down from $98.4 billion, invested in the five years to 2016.

Regulatory updates

•    Mexico’s finance ministry wants to delay the liberalization of the country’s fuels market until the end of 2018, which will bring it fuel tax revenues of some $15 billion in 2017. The goal of the proposed delay seems to be to make up for lower oil income caused by the international price rout and is just one of several aspects of the comprehensive energy sector reform that aimed to do away with Pemex’s monopoly on the local market and encourage competition to improve returns. It’s election year in Mexico in 2018, which is the most likely reason for the Finance Ministry’s proposed timeframe.
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