oil and gas (2) june briefing

Oil & Gas Issue (2) 06-2016Briefing

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Orient Oil and Gas

Orient Research Centre - Washington, D.C

Issue (2) 06-2016

Briefing


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Energy Policy’s Differences between Hillary Clinton and Donald Trump

We have to admit that the US presidential elections will impact the global en-ergy market, as any change in oil and gas production level in the world will be reflected proportionally on this market.The expected impact will depend on the new president either Mrs. Clinton or Mr. Trump and what will be the energy policy of the new white house boss.As of now, no clarity in both candidates speeches in this field.

Mr. Trump seems to be pro production increase in all sectors of energy especially now where the US reserve is very high.He declared that he want independency from OPEC & world, he might decrease the Taxes and other obstacles to do so.

Mrs. Clinton vision is still not clear, she mentioned that Americans must start acting as Americans in going more effectively in innovation in a sign to the clean energy, but she seems to be more encour-aged to increase oil and gas production, more than Mr. Obama at least but still less than Mr. Trump.Whatever was the policy after elections and however was the president, it seems that energy market will be impacted.

The Art of Turning a Giant into a Dwarf

We can say that the days when OPEC was the giant how control the oil price are ended for good.Today it is only the market economy are vindicated.It was once upon a time when Saudi Arabia and Russia could plan their budgets based on a desired barrel price, and we are not very far from the 80s where oil price was doubled to a level which made oil a special commodity.Now days, oil became only a commodity, for which the price is ruled by seasonality of demand and supply economy, competing new entries like shale oil production and the immerging clean energy.The price today is calculated simply as follows:Summer: demand is high, price will be set by the marginal production cost in US shale basins and the Canadian tar sands.Winter: Demand is low, price will set by marginal of cheap but less accessible oil in Asia and Africa.The low cost producers can still pump (Iran, KSA, Russia) but the price will be always under free econ-omy rules, and when the demand is covered the price will go down.OPEC is now more a giant, it became mostly a dwarf.

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Russia, Saudi Arabia and Iran: The First Oil World War

We are witnessing now days the first oil world war, this war is between KSA, Iran and Russia.The target of this war is Europe and tactical weapon is discount, and the winner will be the one how take higher market share for his oil.After the failure of two OPEC`s meetings in production freeze the 3 top players are now willing to give more discounts on their oil especially after lifting the sanctions on Iran.Iran is willing to sell all its production a bit over the cost of production, and they did for some quantity to Europe by selling at 17$ when BP was 39 to 40$.Sure the KSA oil quality is the best and despite this fact they are keeping to give discounts to attract the European companies as this companies are seeing no harm of taking low quality oil from Russia or even lower quality from Iran with low price at the short term.

Iraq: Political Crisis? ISIL? No Problema

Iraq is pumping more oil than ever before, even as ISIS-fueled chaos grips parts of the Middle Eastern country and certainly before the acute political crisis in Baghdad.

This historic level of production is up by 100,000 barrels a day from April and helps fill the void left by big outages in Nigeria and Canada. It's also about 2 million barrels a day more than what Iraq was pumping before the 2003 U.S. invasion.

Iraq’s production capacity is said to be up to 4.9 million barrels per day, and by 2020 it’s hoping to boost that capacity to 6 million bpd. Some 175,000 bpd has been lost and would normally have come out of Kirkuk, which lies in the northern territory disputed between the central government of Iraq and Kurdistan Regional Government (KRG) and has also been under threat by the Islamic State (ISIS).Of course, the Iraqi military's advance on Fallujah wouldn't be possible without oil revenue, which, according to the IMF, made up 94% of Iraq's 2014 federal revenue. These days, oil makes up 99% of Iraq's exports and about 90% of all federal revenue, according to the Brookings Institute.

Iraq's oil infrastructure has held up reasonably well lately after suffering from sabotage last year.

Analysts said there are no current reports of major production outages caused by security issues. That's because much of Iraq's oil facilities are clustered in the southern part of the country away from much of the fighting.

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Iraq's oil output is also subject to the whims of the shaky power grid and rolling blackouts that still impact daily life there. The power headaches highlight the long-term challenge facing Baghdad. The country needs to attract investment from foreign oil companies to maintain aging oil fields and search for new ones. Yet the humanitarian crisis in Fallujah and more basic problems like rolling blackouts make that difficult. Iraq continues to face headwinds in terms of stability. If there was greater stability and more invest-ment into the country they could increase production volumes.But this instability seems sometimes to be happening in a different planet than that of the well-fenced territories of oil companies working in Iraq. We may have heard of ISIL and Fallujah more than some people working in those territories.

Shale Companies in the US are Facing their Moment of Truth

Like their OPEC competitors, a number of shale producers still in the game, with the ability to last longer than many of their heavily indebted peers, are making decisions based upon a market that no longer exists.

They have more cash on hand and financing available to stick it out a little longer, but how demand is met by the increased shale production, along with the additional supply coming from OPEC, makes this a roll of the dice as to long-term survival and profitability.

With 2017 being a watershed moment for debt maturing, it will eliminate many of those not able to service it. If the price of oil remains in the range it is now, which is very possible, it will trigger a lot more bankruptcies; more than likely far more than the 100 or so currently being looked for.

Russia Takes the Title of the World Largest Oil Producer from Saudi Arabia

Russia became the world's leading oil and natural gas exporter last year, according to BP's annual statistical review of world energy. The country has overtaken Saudi Arabia in crude exports, and retained the top spot in exports of natural gas. Three-quarters of Russia's oil production went for export in 2015. The country also exported 41.8 per-cent of its coal."Russia is the leading oil and gas supplier to Europe, accounting for 37 percent and 35 percent of Eu-ropean respective consumption,” said the report.

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Russia’s oil production increased for the seventh consecutive year growing 1.2 percent in 2015 and reaching a new post-Soviet high of 11 million barrels per day.Energy production grew by 0.7 percent and the country accounted for 10 percent of the global pri-mary energy output.Energy consumption in Russia fell by 3.3 percent last year, yet it remained the fourth-largest energy consumer, behind China, the US and India.Gas remained Russia’s leading fuel, with 52.8 percent of primary energy consumption, followed by oil (21.4 percent) and coal (13.3 percent).

Increasing US Rig Count Expresses a Steady Trend

Every Friday, Seeking Alpha provides a roundup of insightful opinion and analysis articles in the energy sector.In this edition, we highlight articles on peak oil demand and offshore drillers' earnings, as well as ask for your take on what's happening in the energy sector.If you'd like to contribute to the energy conversation on Seeking Alpha, you can leave a comment below or submit your own article.As a reminder, the Seeking Alpha Energy Recap will now be published every Friday. If you'd like to contribute to the energy conversation on Seeking Alpha, you can leave a comment below or submit your own article.This week, the energy sector saw several names report earnings, an announcement from Suncor Energy that "Canadian oil sands outages caused by the recent wildfires are slowly coming to an end," and claims of new attacks on Nigeria's oil infrastructure by the Niger Delta Avengers.

Uphill Challenge for Saudi ARAMCO IPO

Serious questions and concerns are rising on a number of different fronts regarding the IPO. Aramco’s Chairman Khalid al-Falih confirmed that the IPO would fulfill the “company’s long term vision of becoming the world’s leading energy and chemical enterprise.” According to Fortune, the chairman made it a point to refute MBS’ statement to the Economist that the IPO was part of an effort to increase transparency and reduce corruption.Importantly, the IPO has a broad impact on Saudi Arabia’s neighbors. According to a GCC official, the kingdom’s IPO threatens other GCC states and allies on two fronts: “First, other energy companies will be forced to open their books too, which, for these countries, is a national security secret. Second, countries are going to have to also come clean on proven and estimated reserves. The exact geology of major fields is also considered to be a state secret.” This sentiment is widespread in major Gulf Arab cities.To be sure, the Saudis must engage in clearer thinking on key aspects of transparency and regional impact. When MBS was asked, as a member of the 70 percent of Saudis under the age of 39, for his vi-

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sion of the future, he said that he hopes for a “Saudi Arabia that is not dependent on oil, has a growing economy, and a Saudi Arabia with transparent laws.” The deputy crown prince also mentioned that he envisions a “Saudi Arabia that guarantees the participation of everyone in decision-making.” Earlier in the interview he repeatedly dodged a question about the fairness of introducing a VAT without repre-sentation. Even the younger generation in Saudi Arabia struggles with transparency.

Russia Targets Kyrgyz Gas

Russian gas giant Gazprom is set to invest 100 billion rubles ($1.5 billion) in Kyrgyzstan’s gas pipelines by 2030, the Interfax news agency reported Monday. One third of the 100 billion would be invested within the next two years in a significant boost to the Kyrgyzstan’s gas infrastructure, said Russian Prime Minister Dmitry Medvedev, following high-level talks in the country’s capital of Bishkek. Alexei Miller, head of the Russian state energy company Gazprom, said earlier this year that the company was planning to invest more than $758 million into different projects in Kyrgyzstan. The move was hoped to increase Kyrgyzstan's access to gas from 20 percent of the country to 60 percent, the Vedomosti newspaper reported.

Oil Markets Balance by the End of this Year?

Taking a look at some of the critical data in the energy markets this week, which reveals that despite high levels of outages, oil prices fell as the rig count increased for the second consecutive week.

Oil supply outages are at their highest levels since 2011. In May 3.6 million barrels per day (mb/d) were knocked offline. Canada saw around 1 mb/d

disrupted from wildfires. Nigeria has lost over 1 mb/d because of sabotage from the Niger Delta Avengers. Bad weather in Iraq disrupted 50,000 barrels per day.

Canada’s production should start to come back online, but the disruptions elsewhere, particularly in Libya and Nigeria, seem less likely to return.

The outage of more than 3 mb/d may have pushed the global surplus into deficit, although estimates vary.Market Movers:

ConocoPhillips reportedly rejected a $2 billion bid for its North Sea assets from Ineos, a private chemicals company. The bid apparently occurred earlier this year and was just reported by the Sunday Times.

The value of Norway’s oil and gas fields under state control has fallen by roughly $50 billion over the past two years, or about one third. Half of the Norwegian government’s revenue comes from oil and gas.


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Venezuela’s PDVSA are close to a deal with Schlumberger) in order to bolster the company’s pres-ence in Venezuela.More rigs, more oil? The additional rigs suggest that some drillers find it profitable to return to drilling at $50 per barrel.OPEC sees oil market balancing. In its June Oil Market Report, OPEC left its forecast for the year largely unchanged, projecting that supply and demand will come into balance in the second half of the year. Demand should hold steady at 1.2 million barrels per day while non-OPEC supply continues to fall.Which way are oil prices going? Crude continues to back off of its 2016 highs hit last week, falling be-low $50 per barrel. Some see the rally as overdone, with supplies coming back online from disrupted sources. But Michael Rothman, president of Cornerstone Analytics and a top Wall Street energy ana-lyst, predicts that oil prices will surge above $85 per barrel before the year is out.Venezuela production could fall. Venezuela’s oil sector could start to deteriorate because of the eco-nomic, financial, and political chaos spreading across the country.Iran oil exports is near more than 4-year high. In June, Iran’s oil exports could hit a four and a half year high, according to Reuters. Oil exports have almost doubled since sanctions were removed at the start of the year. Exports are on track to reach 2.31 mb/d in June, the highest level since January 2012. Intriguingly, Iran is reclaiming some market share in Europe with exports up from 530,000 barrels per day in May to 580,000 barrels per day in June. Iran is battling for the European market against regional rival Saudi Arabia.

India Wants to Create a Cartel of Consumers of Natural Gas

The country is taking the lead for creating an alliance of gas importers across the world for "reasonable and affordable" pricing of the fuel.It is already in touch with companies in Japan and South Korea , the Minister said, adding that China can also be a partner in the future.As a potential beneficiary of the Turkmenistan-Afghanistan-Pakistan-India pipeline, New Delhi wants to expedite work on it faster but geopolitics is a concern.The current low prices of oil commodities is a "new normal" and the buyers will continue to have an upper-hand in deals.

China Stocking Oil in Huge AmountsChina’s potential oil reserves are up 64 percent since 2007 due to increased exploration activities, according to a new report from the Chinese Land and Resource Ministry.While potential reserves are up 64 percent, recoverable reserves were up only 42 percent, according to the report, cited by Xinhua News Agency. This now puts China’s potential oil reserves at 126 billion tons, with 30 billion tons of recoverable re-


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serves—up significantly since the last assessment nearly a decade ago.The report also puts the country’s estimated natural gas reserves up 158 percent, to 90 trillion cubic meters, with recoverable natural gas reserves up 127 percent, to 50 trillion cubic meters.The increased exploration activities are also being boosted, the report says, by technological ad-vancements.When it comes to shale, the Chinese government expects that its land holds around 122 trillion cubic meters of shale gas, though only 22 trillion cubic meters is expected to be recoverable.

What Brexit Means for Oil & Gas Markets

With the referendum rapidly approaching, the question of what Brexit could mean for the UK oil and gas industry has become increasingly intriguing.As a market broadly regulated in London, many argue that an exit vote would lead to no significant changes – at least in the short term. However, new uncertainties for the energy industry may emerge, should the UK decide to part ways with Europe.In 2013, the UK became a net importer of petroleum products. Traditionally the main sources of the UK imports are from EU countries including France and the Netherlands. An exit vote, along with increased economic instability could potentially lead to a sterling depreciation, resulting in higher import costs and increased uncertainty over future energy supply.Limited labour and capital mobility is another concern, which would arguably affect the UK’s ability to attract highly skilled oil and gas workers to the North Sea and potentially discourage foreign energy investment in the mid-to-long term.To ensure free movement of people and goods across borders, the UK could seek membership of the European Economic Area (similar to Norway) – a relatively favorable scenario when compared to the option of bilateral trade agreements (similar to Switzerland).There will undoubtedly be a number of “Brexit” implications for UK oil and gas, however, the current low oil price environment is likely to play a far larger role in shaping the form and structure of the UK energy industry over the coming years. Market recovery may be impacted in part by changes to the UK’s relationship with Europe. Yet, as a mature and expensive play, the future of the UK Continental Shelf will be largely decided by oil price.

New Technology Used by ARAMCO

Saudi Aramco made five new oil and gas field discoveries, including one offshore field, and continued its exploration in the Red Sea in 2015.In the Red Sea, Saudi Aramco continued to explore in shallow waters, complet-ing its largest single survey of the seabed, covering encompassing Saudi Arabian territorial waters.


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Last year also saw Saudi Aramco perform its largest offshore tie-in platform, at 6000-ton, at Safani-yah, using a float-over method. The platform serves as the main crude oil gathering and power supply hub for North Safaniyah and is powered through a 46km, 230vK submarine cable, which Saudi Aramco says it the longest of its kind in the world installed as a single piece without a field splice.In the Red Sea, Saudi Aramco continued to explore in shallow waters, completing its largest single survey of the seabed, covering encompassing Saudi Arabian territorial waters. Last year also saw Saudi Aramco perform its largest offshore tie-in platform, at 6000-ton, at Safani-yah, using a float-over method. The platform serves as the main crude oil gathering and power supply hub for North Safaniyah and is powered through a 46km, 230vK submarine cable, which Saudi Aramco says it the longest of its kind in the world installed as a single piece without a field splice.The firm has also continued its focus on computational technology, increasing the computing ca-pability at its Exploration and Petroleum Engineering Center Computer Center by 177% for reservoir simulations and by 76% in seismic capacity. The upgrades help it to perform significantly larger reservoir simulations and reduce data processing times by a factor of 10.Onshore, the firm has been trailing smart water and CO2 sequestration and EOR on its giant Ghawar field. Saudi Aramco also opened a Beijing Research Center with 42 staff by the end of the year. The Center conducts research on chemical enhanced oil recovery and advanced seismic imaging technologies, including automated fault detection and improvements in data quality through super resolution.

Hike in Demand? What Hike?BP’s compiled data from last year has revealed that global energy consumption has slowed further, with the mix of energy sources shifting towards lower-carbon fuels.This slow growth reflected continued weakness in the global economy and lower growth in Chinese energy consumption as the country shifts from an industrial to a service-driven economy.The world of energy is again going through a period of profound change.BP’s report reported a 1.9% or 1.9 MMb/d growth, nearly double the recent historical average (+1%) and significantly stronger than the increase of 1.1 MMb/d seen in 2014.The spike was driven by OECD countries, where consumption increased by 510,000 b/d or +1.1%, compared with an average decline of 1.1% over the past decade.Growth was well above recent historical averages in the US at a jump of 1.6%, or 290,000 b/d; and the EU’s increase of 1.5%, or 200,000 b/d.Energy consumption in China grew 1.5% in 2015, the slowest rate in almost 20 years. Despite this, China remained the world’s largest growth market for energy for the 15th consecutive year.Japan, however, recorded the largest decline in oil consumption of 3.9%, or 160,000 b/d.Global oil production increased even more rapidly than consumption for a second consecutive year, rising by 2.8 MMb/d or 3.2%, the strongest growth since 2004. Although emerging economies continued to dominate the growth in global energy consumption,

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growth in these countries in 2015 (at 1.6%) was again well below its 10-year average rate. Emerging economies now account for 58.1% of global energy consumption, BP revealed.Production in Iraq and Saudi Arabia rose to record levels, at 750,000 b/d and 510,000 b/d, re-spectively, driving OPEC production up by 1.6 MMb/d to 38.2 MMb/d, exceeding the previous record reached in 2012.Production outside OPEC slowed from last year’s record growth but still grew by 1.3 MMb/d, BP report-ed.The US, at 1 MMb/d, had the world’s largest annual growth increment and remained the world’s larg-est oil producer.Elsewhere, production growth in Brazil at 180,000 b/d, Russia at 140,000 b/d, the UK and Canada at 110,000 b/d each, was partly offset by declines in Mexico with a decrease of 200,000 b/d, Yemen with a decrease of 100,000 b/d, and elsewhere.

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