ExxonMobil to sell Torrance refinery, M&A activity increasing across the sector
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U.S Production Data Doesn't Tell The Whole Story

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Despite the volatility, which has become the norm, oil prices close out the week not much changed from Monday. After growing evidence that U.S. supply was contracting, the EIA reported that U.S. oil production rose in July (the latest month for which data is available) by 94,000 barrels per day, compared to June. The monthly figures are much more reliable than the weekly estimates, so the increase can be considered more of a solid barometer of where the U.S. supply picture has been heading, although only in retrospect. 

However, the uptick needs some context. The increases came exclusively from the Gulf of Mexico where output jumped by 147,000 barrels per day. The Gulf of Mexico has entirely different time horizons for projects than U.S. shale. Projects take years to develop, so increases are coming from projects planned before the crash in oil prices. 

The production gains blur what is actually going on in the U.S., which is ongoing decline in output. 

Without the Gulf of Mexico, U.S. output would have dropped by another 53,000 barrels per day in July from a month earlier. And in the key shale states, which are garnering much of the attention in terms of trying to figure out how quickly U.S. output will adjust to lower prices, the drop offs continue. Texas lost 12,000 barrels per day; North Dakota lost 3,000 barrels per day, and Oklahoma lost 17,000 barrels per day. Only Colorado saw a decent increase in production. Still, even when leaving out the gains in the Gulf of Mexico, a decline of 53,000 barrels per day is a slower decline than the 115,000 barrels per day lost between May and June. That, coupled with the
news that the U.S. saw another uptick in the level of crude oil in storage, was bearish for oil this week. 

As everyone watches and tries to pinpoint the bottom for the oil markets, many have maintained that a flurry of mergers and acquisitions would signal that the market is turning. But according to the
Wall Street Journal, there has been $323 billion of M&A activity announced or proposed so far this year. That compares to a previous record for a comparable period of time of just $100 billion. 

In other words, the M&A activity has been explosive, even if only a few individual deals splash across the headlines (the Shell-BG purchase comes to mind). The Shell-BG deal accounted for $70 billion; Schlumberger (NYSE: SLB) announced in August its decision to purchase of Cameron International (NYSE: CAM) for $12.7 billion; and earlier this week Energy Transfer Equity LP (NYSE: ETE) finally sealed a deal with the pipeline operator Williams Companies (NYSE: WMB) for $32.6 billion. The M&A activity suggests that larger firms sense an opportunity to grow during the downturn, and while it may seem like a lot of companies are sitting on the sidelines, deals are getting done. 

ExxonMobil (NYSE: XOM)
announced this week its decision to sell its troubled Torrance refinery in Southern California. The refinery, which has been offline since February due to an explosion, will be sold to PBF Energy (NYSE: PBF), a New Jersey-based downstream company. PBF agreed to pay $537.5 million, and the deal is expected to close in the second quarter of 2016. The Torrance refinery produces about 10 percent of California’s gasoline supply, and 20 percent of supply in Southern California. Gasoline prices within the state have spiked because of the outage. ExxonMobil will maintain liability for the accident. 

A slew of regulatory news from Washington DC came out this week. The Obama administration released new rules on ozone emissions from industrial sources,
lowering limits to 70 parts per billion (ppb) from the current 75 ppb set under former President George W. Bush in 2008. The limits were criticized by the industry, but the EPA decided on the softest approach under consideration, with many expecting the agency to issue tighter limits. The EPA says the regulations will cost the industry $3.9 billion by forcing companies to install scrubbers, but the agency says it will prevent hundreds of thousands of childhood asthma attacks each year by reducing toxic emissions.

Separately, a U.S. District Court shot down a rule from the Department of Interior that sought to set standards on hydraulic fracturing. The judge said Interior lacked the authority to regulate fracking. The rules intended to put standards on well casing and other drilling techniques, as well require operators to disclose the chemicals used in their fracking processes. Interior is weighing whether or not to appeal the judge’s decision. 

The U.S. Senate Banking Committee
passed legislation to repeal the ban on oil exports, as efforts in both houses of Congress gain steam. But even though the movement is picking up momentum, it is also at risk of getting bogged down in partisan politics. The Senate bill that passed out committee included a provision that would require Iran to use any proceeds gained as a result of the nuclear deal to compensate victims of terrorism. Just as the movement appeared to be picking up Democratic support, even if only slightly, the provision will guarantee the bill won’t pass in the full Senate. The oil export debate appears to be hardening along partisan lines, with President Obama coming out against any efforts to lift the ban. Any hope of actually repealing the export ban will have to somehow bring some Democrats on board, and that will necessarily mean removing the provision on Iran. 

Petrobras, the besieged state-owned oil firm in Brazil, has
announced its plans to raise fuel prices across the country, as it struggles with sky-high debt and a widening corruption investigation. Petrobras will raise gasoline prices by 6 percent and diesel prices by 4 percent at its downstream assets. It is unclear how that will trickle down to the price at the pump. The move comes after a November 2014 decision to hike prices by 3 percent for gasoline and 5 percent for diesel. Petrobras has to sell fuel at a regulated price, as the government tries to keep prices affordable for consumers. However, that saddles the company with debt as it takes in less revenue than it otherwise would if it could sell its product at market rates. Petrobras also has to import fuels because of shortages, and the plummeting value of the country’s currency has made imports much more expensive. The company had over $100 billion in debt as of June 30, an increase of 18 percent since the end of 2014.

Tensions are heating up in the Middle East as Russia has begun conducting air strikes on targets in Syria. Russian President Vladimir Putin says Russia is targeting ISIS, but the U.S. is skeptical, suggesting Russia is merely trying to prop up Syrian President Bashar al-Assad by striking his rebel opponents. The involvement of Russia and the growing international attention on the ceaseless conflict in Syria is not directly affecting oil markets at this point, but is one to keep an eye on. 

Meanwhile, ISIS attacks in Libya could have a much more direct impact. On October 1, ISIS militants
attacked one of Libya’s main oil ports, Es Sider. The port is under the control of the recognized government and has been closed since December 2014, preventing Libya from reviving oil exports. One guard at Es Sider was reportedly killed but the attack was repelled. Still, Libya has been torn apart by conflict, and the two warring factions are at a stalemate, with a security vacuum across most of the country. Libya is producing less than 400,000 barrels per day, far below the 1.6 million barrels per day it produced during the Gaddafi era. 

In our Executive Report (below), we take a look at one area of Eastern Europe that could see an increase in natural gas production. The country’s yet-to-be-developed natural gas reserves could be instrumental in breaking their dependence on Russian gas imports. The gas is there, and so is the political will. Find out more by reading below. 

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

Best Regards,

Evan Kelly

Deputy Editor, Oilprice.com

P.S. – In our Inside Markets this week, our expert Jim Hyerczyk provides a technical analysis of the short-term oil market movements. Oil prices have stayed steady in the mid-$40s, despite daily volatility. That suggests the market could break either up or down, with certain resistance points. While that may not seem like a very satisfying analysis, Jim offers a few clues to watch for over the next several weeks that could allow investors to get a head start. Find out what is going on the trading floors
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Black Sea Oil And Gas Could Break Russia’s Energy Monopoly

Even after the breakup of the Soviet Union in the early 1990s, Eastern Europe still remained under the sphere of influence of Russia, although these newly independent countries were no longer officially controlled by Moscow. The West tried to peel off Russian-oriented countries in Eastern Europe, enlarging NATO by admitting former Soviet-bloc countries. But as the 1990s gave way to the 2000s, oil prices rose and so did the influence and power of Russia. Vladimir Putin’s Russia in the 21st century attempted to regain lost ground in Eastern Europe, and the former Soviet satellites have never been able to really break free of Russian control.

One of the central problems is energy. Eastern Europe is wholly dependent on Russia for natural gas and oil supplies. Ukraine has suffered more than most, but many other former Soviet satellites are also at the mercy of Russia because of their energy dependence. 

The EU antitrust case against Gazprom illuminates this dependence. The EU Commission alleges that Gazprom charged different prices to different countries, depending on their willingness to do Moscow’s bidding. The EU antitrust case could start to break the stranglehold that Russia has over its neighbors if Gazprom is forced into a settlement with European regulators. 

However, what will truly start to cut into Russian influence is new sources of supply in Eastern Europe itself. With several prospects in the Black Sea gaining attention, such a development could soon get underway. 

Black Sea

Eastern Europe is not blessed with large reserves of oil and gas. But there is a growing sense of possibility offshore in the Black Sea. Romania has been one such nation that has been able to significantly reduce its natural gas imports by developing its domestic resources. In 2014, Romania’s gas imports from Russia
dropped by 61 percent, an enormous achievement. 

Now Bulgaria is trying to do the same. Bulgaria
spends around $7 billion on energy from abroad, but has barely tapped its own gas reserves. It depends on Russia for 90 percent of its natural gas. The country has been trying to find alternative sources of gas, including from Greece or Azerbaijan, but recently has pushed much more earnestly to begin developing a domestic oil and gas industry. 

To that end, Bulgaria just completed an auction for several offshore blocks and could see some investment as a result. 

In one sense, the bids were disappointing. ExxonMobil (NYSE: XOM), Statoil (NYSE: STO), and Anadarko (NYSE: APC) all suggested that they were considering offering bids on the Silistar and Teres blocks. The Silistar and Teres, blocks that stretch 7,000 and 4,000 square kilometers, respectively, are located close to the Neptune Block in Romanian waters. 

And it is Neptune that is part of the reason for Bulgaria’s newfound enthusiasm. Austria’s OMV (VIE: OMV) and ExxonMobil drilled the Domino-1 well in the Neptune block back in 2012, making a potentially enormous discovery. The companies said it could hold up to
3 trillion cubic feet of natural gas, and it may amount to OMV’s largest ever natural gas discovery. That has raised expectations for Bulgaria’s offshore potential. 

But despite the excitement, the latest auction was somewhat of a disappointment. Royal Dutch Shell (NYSE: RDS.A) was the only bidder on the Silistar block. 

won a bid to conduct offshore exploration in the Black Sea, a five-year permit allowing it to explore the Silistar basin. Shell has promised to invest $21 million on seismic surveys, the initial step to see if there is enough oil and gas in place to warrant a large-scale investment. Shell and the Bulgarian government could ink a deal as soon as this month to make it official. 

But ExxonMobil, Statoil, and Anadarko declined to bid. And the Teres block received no bids at all. This was the second time that the Teres received no bids, so interest there is too low for any viable chance at development in the foreseeable future. 

Still, Shell is moving forward on the Silistar. 

There is a second block that could hold the key to Bulgaria’s energy independence. Total (NYSE: TOT), Repsol (BME: REP), and OMV all have plans to drill for oil and gas in another promising location: the Han Asparuh, Bulgaria’s largest offshore block. In 2012, the consortium won the rights to Han Asparuh (also spelled Khan Asparuh), a field that is only 25 kilometers from the successful Neptune find. Its close proximity to the huge Romanian gas discovery suggests that it too could be a large source of gas production in the future. 

Total is the operator with a 40 percent stake, and Repsol and OMV each have a 30 percent stake. The companies conducted 2D and 3D seismic surveys over the past few years, but
decided to delay drilling late last year because of the drop in oil prices. Despite the delay, they plan on drilling instead in the first half of 2016. 



The Trans-Anatolian Pipeline, which if constructed will bring natural gas from the Caspian Sea to Europe, could be a pivotal factor to investment in the Black Sea. The pipeline project is of high political importance for EU officials, who see it as a way of slashing dependence on Russian gas. 

In this sense, the pipeline, which is further along than Bulgaria’s offshore sector because it has ready-to-go gas supplies from the Caspian Sea, should be seen as a competitor project to Black Sea natural gas. The Trans-Anatolian Pipeline could be completed by the end of this decade, if political and economic hurdles can be overcome. If that occurs, there are plans to divert some gas flows to Bulgaria on its way to Western Europe. As such, Black Sea gas may not be needed nearly as much.

On the other hand, the political roadblocks are significant. If the iconic project is delayed or suspended for some reason, demand for Bulgarian gas will rise.

Moreover, other political forces are pushing Bulgaria forward. Russia’s intervention into Ukraine is a stark reminder that the country needs alternatives. Furthermore, the EU’s successful derailment of the South Stream Pipeline also highlights Bulgaria’s predicament. Although the project would not do anything to break Russian control – the pipeline would have sent Russian gas to Bulgarian shores via the Black Sea – and thus, would have at least increased available supplies. But that project is dead. 


In short, Bulgaria needs energy, and to the extent that outside pipeline projects are blocked, that raises the value and opportunity of domestic production, where companies like Shell, Total, OMV, and Repsol will benefit. Romania has proved that reducing Russian dependence is possible. Bulgaria now wants to follow in its footsteps.
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