Opinion

Your Weekly Update: 24 - 28 July


Last week in World oil:

Prices

-       Oil prices are showing some health, as US crude supplies seem to be moderating and the threat of renewed sanctions against Venezuela looms after a chaotic election there. Brent and WTI are clustering around the US$50/b mark, which seems to be the new support level, as signs are showing that US production may be shedding some optimism.

Upstream & Midstream

-       Shell has set out a schedule for eight upstream projects due for FID over the next 18 months, as it ramps up upstream investment that has been relatively stagnant since 2015. On the cards are the Bonga South West deepwater FPSO project in Nigeria and the Vito deepwater development in the US. The Val d'Agri onshore oilfield in Italy, Penguins FPSO in the UK and Libra FPSO in Brazil's pre-salt Santos basin are also listed as potential oil projects. On the gas side, China's Changbei 2 tight gas project and two LNG projects – Lake Charles in Louisiana and Canada LNG in Kitimat – are also being considered. Shell is looking to spend US$25 billion in 2017 on upstream capex, and a range of US$25-30 billion per year through 2020.

-       Pre-salt offshore production in Brazil has surpassed combined upstream output from all other fields for the first time. Output from Brazil's pre-salt areas grew by 6.4% to 1.353 mmbpd in June, underpinning a 0.8% jump in production. The Lula field is the main pre-salt production area, at 763,000 bpd on average, with Petrobras remaining Brazil's largest producer, ahead of Shell and Repsol Sinopec. Expect this trend to continue as Brazil attempts to stimulate investment in pre-salt basins by allowing more in more foreign competition to aid debt-stricken Petrobras.

-       Moderation in US drilling activity continues, with active oil rigs climbing only 2 to 766 last week. Six additional gas rigs were added, bringing the US total to 958, with signs pointing to active rig numbers plateauing as crude oil prices fail to break out from the stubborn US$50/b range.

Natural Gas and LNG

-       Output at Cheniere's Sabine Pass LNG facility keeps marching upwards, with the company beginning liquefaction at a fourth plant ahead of the schedule. Sabine Pass' fourth plant was scheduled to begin full service by end-2017, but appears to be starting up early in response to growing demand for Cheniere's LNG, which is opening up new markets in Europe, Latin America and Asia. Officially commissioning for the fourth plant has yet to be completed, with output aimed at fulfilling a 20-year supply contract with GAIL India. The first three trains at Sabine Pass are contracted to Shell, Spain's Gas Natural SDG and Korea Gas.

-       France's highest court has repealed the country's law on regulated gas, claiming that it flouted EU regulations. This might mean the end of regulated gas pricing in France, which would affect about half of French residential users and 11% of commercial users, weakening the entrenched position of energy group Engie and open up the market to smaller players like Direct Energy and foreign supplier like Italy's Eni. 

Last week in Asian oil

Upstream

-       Petronas has confirmed that it will be exiting Blocks 01 and 02 in Vietnam's Cuu Long basin once the current PSC ends in early September 2017. Likely linked to declining output at the blocks, which began production in September 1991 as one of the first international ventures in Vietnam, Petronas stresses that the exit does not mean that it is quitting Vietnam, and will remain the operator of Blocks 102 and 106 in the Song Hong basin under Petronas Carigali.

-       China's CNPC, together with partners Total, Petronas Carigali and Iraq's South Oil Company, have sanctioned the Phase 3 Halfaya oilfield project in southern Iraq after approving FID. The project will boost production at the Maysan province field from a current 200,000 bpd to 400,000 bpd.

-       After backing joint drilling operations in areas claimed by both China and the Philippines, China is now calling for Vietnam to halt oil drilling in a section of the South China Sea claimed by both Vietnam and China. Drilling at Block 136/3, licensed to Repsol and Mubadala, began in mid-June, with China calling for an immediate halt to activities as it infringes on its territory. This may be posturing by the Chinese government to bring Vietnam to the table for joint oil exploration operations as in the Philippines, but Vietnam is unlikely to acquiesce the way Duterte has, which may lead to inflamed tensions in the South China Sea at a time when US foreign policy under President Trump is unclear.

-       Abu Dhabi's Adnoc will make a decision on renewing the oil concessions held by Japanese companies in its oilfield by early next year, particularly Inpex's 12% stake in the massive offshore ADMA block that is set to expire in March 2018. Japanese companies are keen to extend the contracts – key to securing strategic supplies for its refineries – while Abu Dhabi is leaning towards roping in new partners from China and South Korea, as well as expanding the role of majors BP and Total.

Downstream

-       The UAE has bought its first oil cargo from the USA, as it seeks to replace Qatari condensate affected by the current diplomatic row in the Middle East. Qatari supplies to the UAE – used in petrochemical production in the UAE – were halted in June after a Saudi Arabia-led campaign to politically isolate Qatar. Adnoc must now compete with condensate clients in South Korea and Japan to supplies of the ultra-light crude, with condensate from Eagle Ford being the most immediate source.

Natural Gas & LNG

-        Indonesia is aiming to begin constructing on an LNG pipeline system to establish a comprehensive gas distribution network across its vast archipelago. To be undertaken by state firms Pertamina, PGS and PLN, Indonesia will also need to attract international investment for a project that may cost as much as US$48 billion, part of a national plan to boost power generation and energy security in Indonesia.


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