As OPEC Cuts Back, U.S. Shale Fills Void
Friday March 3, 2016
In the latest edition of the Numbers Report, we’ll take a look at some of the most interesting figures put out this week in the energy sector. Each week we’ll dig into some data and provide a bit of explanation on what drives the numbers.
Let's take a look.
1. Saudi Aramco worth $2 trillion? Or 1/5th of that?
- Saudi Arabia plans on putting up 5 percent of Aramco for an IPO, a move that could generate cash that the government wants to use to diversify the economy.
- Saudi officials say that the company is worth $2 trillion. If true, the 5 percent IPO could generate $100 billion.
- Wood Mackenzie thinks that is vastly overstating the case. The consultancy predicts Aramco is worth only $400 billion. The IPO, then, would only generate around $20 to $25 billion.
- Some Aramco officials agree that the company is worth less. Bloomberg says some insiders think the company is worth around $500 billion.
- Since the company’s assets are a state secret, it is difficult to know. But Aramco will have to disclose a lot of information ahead of the IPO.
2. U.S. oil production growing quickly
- Bloomberg Gadfly makes the case that the latest rebound in shale drilling could result in faster production growth than the first shale boom years ago.
- The 2016-2017 growth period (red line in chart above) is moving higher than the 2011-2014 growth period did in its first few months (dark blue line).
- Since September when U.S. oil production bottomed out, total production has climbed by roughly 125,000 bpd each month. U.S. production is now above 9 mb/d for the first time in almost a year.
- The original shale boom between 2011-2014 only grew in its first few months at a pace of 93,000 bpd.
- It should be noted that some of the growth is coming from offshore projects that recently came online. But Bloomberg Gadfly argues that that was also the case in the original shale boom.
- The data should worry oil bulls. The OPEC agreement could be undermined by a swift rebound in shale.
3. How much new production will shale bring back?
- The U.S. rig count is up 90 percent since bottoming out last May. So far this year, an estimated 77 new rigs have been added back into operation.
- There is a lag time between new rigs and new production, but with so much additional drilling taking place, U.S. oil production is set to rise. But by how much?
- Estimates vary, ranging from 400,000 bpd this year (JP Morgan) to 900,000 bpd (Macquarie and Rystad Energy).
- If that higher end of the range is closer to reality then the OPEC deal will be largely offset. The prospect of much more shale production is also pushing OPEC into considering an extension of its deal by another six months.
4. U.S. exports surging
- U.S. exports topped 1.2 million barrels per day for the week ending on February 17, the largest weekly volume on record dating back to the early 1990s.
- The sharp rise in exports this year is occurring for a few reasons. OPEC flooded the market at the end of 2016 ahead of its production cut deal. Some of that oil is showing up in the U.S., pushing up inventories.
- The temporary glut is pushing down WTI relative to Brent. The differential is making U.S. crude (linked to cheaper WTI prices) more attractive abroad. So exports have climbed.
- It is not clear if this trend will continue, however.
5. OPEC achieves 93% compliance rate
- OPEC surprised and impressed the oil markets in January with a greater than 80 percent compliance rate. In February, they upped their game, logging a 93 percent compliance rate, according to Reuters estimates.
- Saudi Arabia has picked up a lot of the slack leftover by Iraq, cutting deeper than its pledged 10.06 mb/d.
- Still, oil prices have not gained much on the news, as much of the price gains are already priced in, according to analysts.
- OPEC has used up much of its firepower. The only thing left now that they can do is extend the deal, a potential move that the markets are now closely watching.
6. Tesla’s cash problem
- Tesla plans on introducing its mass market Model 3 in July, a vehicle that it has bet its future on.
- But the automaker is burning through cash quickly, posting negative free cash flow of almost $1 billion in the fourth quarter of 2016.
- That means Tesla might need to go back to the equity markets, and could raise as much as $3 billion in cash to finance the rollout of the Model 3. Tesla’s stock sank 6.4 percent on the news.
- Production of the Model 3 will hit 5,000 vehicles per week by the fourth quarter, and will double next year.
- The company’s fortunes depend on the successful rollout of the Model 3. After repeatedly missing deadlines, shareholders are anxious about Tesla’s cash burn and are closely watching 2017 as a pivotal year.
7. Exxon betting future on shale
- ExxonMobil’s (NYSE: XOM) new CEO Darren Woods laid out a new strategy this week that puts shale drilling at the core of its strategic focus.
- Exxon plans on spending a quarter of its 2017 budget on shale drilling, and it recently spent $6.6 billion on doubling its Permian acreage.
- The oil company expects to post a 20 percent compound annual growth rate in its production from the Permian and the Bakken. That will take output up to 750,000 bpd by 2025, accounting for about one fifth of the major’s total production.
- After years of low oil prices, rising debt and mistakes with megaprojects, Exxon is hoping to undertake a dramatic pivot towards lower-risk, short-cycle shale.
- The move highlights the ascendancy of shale, which is now one of the most prized investment opportunities in the upstream sector.
That’s it for this week’s Numbers Report. Thanks for reading, and we’ll see you next week.
Global Energy Advisory - 3rd February 2017
Politics, Geopolitics & Conflict
• The Philippines is cozying up to China, which could have implications for geopolitical dynamics in the South China Sea and for Beijing’s claims on about 90 percent of the basin. Rodrigo Duterte’s government seems to be willing to play down a case it won against China in an international court concerning a disputed part of the sea. Foreign Minister Perfecto Yasay said this week that the disputed area “had never belonged to anyone,” suggesting Manila is offering China an olive branch. Some argue that this statement is an indication of Duterte’s intentions to pitch China and the U.S. against each other and reap potential benefits. Others see it as a dangerous game that could end badly for Duterte, inciting a coup. The South China Sea is believed to hold significant reserves of oil and gas. Exploration in the Philippine sector is suspended, awaiting a clarification over bilateral relations with China, according to Energy Secretary Alfonso Cusi.
• Nigeria’s President continues to be on medical leave in London, and while last month tensions were high due to his absence, sparking protests, the situation appears to have stabilized—for now. Acting President Yemi Osinbajo met with protesters seeking answers to the economic recession, rather than unleashing security forces on them. Osinbajo has continued Buhari’s efforts to negotiate peace with the Niger Delta communities to stop the violence that crippled Nigeria’s oil industry and economy. This suggests continuity of Buhari’s rule and even an improvement: besides the progress in the Delta, Osinbajo has made visa rules laxer to encourage foreign investors. Osinbajo has also openly admitted that the government’s fight against graft has not been particularly fruitful. According to diplomats, the change at the helm is welcome news.
• The Syrian army has apparently retaken Palmyra, the ancient city that ISIS has taken control of twice in the past few years. According to military sources cited by Iranian media on Wednesday, the day the offensive started, the troops were waiting for fresh enforcements, which should join them in the coming days. The ground operation was to be aided by aerial cover from Syrian and Russian bombers. At the same time, the army has blocked Turkey’s advance on Raqqa, the IS stronghold, possibly in a bid to maintain the current balance of power in the country, but also because Turkey’s advance on Raqqa could lead to clashes with the Kurd-dominated Syrian Democratic Forces: Turkey has no interest in a unified Kurdish territory and is eager to take Al-Bab from ISIS before the SDF does.
• Iraq's Kurdistan region has boosted its loans guaranteed by future oil sales to US$3 billion in new deals. Something which the Iraqi Kurds desperately need. New deals have been negotiated with Russian Rosneft and trading houses. This comes a day after Kurdish forces took control of Iraq’s North Oil Company in Kirkuk, and the Nigata and Taza Tarkiza oilfields under the pretense of combing the area for ISIS bombs. Crude oil was temporarily halted in the chaos, but started flowing again just hours later. This is another power play by the Kurds in Kirkuk, and it was a clear message—which even the Kurds concede—to Baghdad about the distribution of Kirkuk’s oil revenues.
Deals, Mergers & Acquisitions
• Total has struck a deal to sell oil and gas assets in Gabon for $350 million to Anglo-French Perenco. The assets include 15 fields with a combined daily output of 13,000 barrels and a pipeline network. The deal, which is subject to local government approval, will see Perenco buy 100 percent in a local Total subsidiary that operates 10 of the fields, and the direct acquisition of Total’s Gabon’s interests in another five.
• Qatar will merge two petrochemical businesses, Qatar Vynil and Qatar Petrochemical Co., their parent, Qatar Petroleum said. Both are parts of larger businesses, majority-owned by Qatar Petroleum – Mesaieed Petrochemical Holding Co. and Industries Qatar QSC. The two will now become part of Industries Qatar QSC, to reduce operating costs and boost their profitability.
• Indian energy major ONGC may acquire smaller local peer Hindustan Petroleum Corporation as part of a government plan seeking to merge a dozen state-owned oil and gas companies into a giant fit to compete with international Big Oil. Reports, which have not been confirmed, say that ONGC could take the government’s 51.11 percent interest in HPC plus another 26 percent from other shareholders. Such a deal would be worth around $6.6 billion based on HPC’s current stock price.
Tenders, Auctions & Contracts
• Gazprom’s Nord Steam 2 could only be stopped by political reasons, the company’s deputy chairman Alexander Medvedev said at an investor event in Singapore. The pipeline fulfills all EU technological standards, he said, so it could not be found wanting in any technological or safety aspect. Medvedev also said that Gazprom will be raising its prices for the European market, to between $180 and $190 per 1,000 cubic meters.
• Saudi Arabia will invest $7 billion in a refining complex in Malaysia, in partnership with the local state-owned energy company, Petronas. The refinery will make up part of a bigger, $27-billion refining and petrochemical project, to be built in the southern state of Johor.
Discovery & Development
• First oil in Mozambique should start flowing in two to three years, according to Sasol, the South African oil and gas operator exploring for hydrocarbons in Mozambique. Sasol has drilled four of 12 planned wells and the finds from them are promising, the company said. Mozambique, one of the poorest African countries, is believed to have huge offshore oil and gas reserves.
• Lundin Petroleum has announced a discovery in the Barents Sea, at its Filicudi field. The initial estimate for the find is between 5.5 and 16 million cubic meters of oil equivalents, the company said. Lundin will continue to drill wells in the Barents Sea, advancing its Arctic exploration agenda, along with other major local players such as Statoil. The Barents Sea is believed to hold around half of Norway’s still undiscovered oil and gas reserves.
• Iraq plans to begin offshore exploration for oil and gas in a bid to boost its reserves. Just last week the country’s Oil Minister announced several onshore discoveries that will add 10 billion barrels to Iraq’s total, bringing it to 153 billion barrels. Offshore exploration should further increase these considerably.
• Shell will not enter any new projects in the Canadian oil sands as it continues to keep tight reins on its costs, CEO Ben van Beurden said. Oil sands used to be attractive for Big Oil while crude traded above $100 a barrel, but now that prices have slumped about 80 percent from 2014 highs, the high-cost bitumen extraction process is being shunned by those who have other options.
• Nigeria’s Federal High Court will rule on a request from Eni and Shell to reverse a forfeiture order for the OPL 245 block on March 13. The request followed a temporary forfeiture in favor of the Nigerian government on several assets co-owned by the two companies. The OPL 245 is particularly controversial: prosecutors have alleged that Eni and Shell bought the field cheaply in exchange for a major bribe for then-Oil Minister Dan Etete. To make matters more challenging, Malabu, the company which won the license for the development of block OPP 245 initially, in 1998, also wants it back. In the meantime, earlier this week, Nigeria’s anti-graft agency filed new charges against Eni and Shell, accusing them of paying $801 million in 2011 to acquire the offshore oilfield.
• Texas legislators have called on the White House to roll back environmental regulations that during President Obama’s two terms harmed the state’s oil and gas industry. Two resolutions, drafted by the heads of the state House and Senate, address both the presidential administration and Congress, asking them to review the legislation and either revoke it, amend it, or leave the powers to do this to the state of Texas.
• The New Mexico Oil Conservation Division will once again be authorized to penalize oil and gas companies operating in the state for water pollution. Under a bill that was endorsed by a Senate panel this week, the OCD would have the powers to fine energy companies up to $10,000 a day if they spill oil in an aquifer or if their drilling operations near one threaten the quality of water. Since 2009, the OCD has been stripped of its powers to penalize oil and gas companies, after a decision by the state’s Supreme Court, which ruled the only way it could prosecute violators of the New Mexico Oil and Gas Act is through court.