The subsea sector is highly consolidated with just five players servicing the $12billion annual requirements of the global E&P community. The two largest, FMC and OneSubsea, account for approximately two-thirds of the market but despite this, have shown no signs of resting on their laurels, forging strategic partnerships to reshape and redefine the commercial landscape. This has become increasingly critical as projects have grown in scale and complexity.
Recent years have seen a shift in focus from mechanical tree designs towards value added instrumentation, monitoring and processing technologies. The joint venture between Cameron and Schlumberger to form OneSubsea in 2013 is a deliberate attempt to unite the former’s subsea skill with the latter’s downhole and processing expertise. Likewise, the recent partnership between FMC and Technip to form Forsys Subsea, combines subsea production, processing and installation capabilities, minimising both supply chain and technological interfaces for the end user.
Ultimately, E&P companies have been gradually moving from a ‘pick and choose’ approach, to procuring systems from a single vendor. DW data suggests that 15 years ago, nearly a fifth of subsea wells installed had different manufacturers for the trees and controls. In 2015 it is expected that over 95% of subsea trees installed will have wellheads and controls from the same manufacturer. This trend is set to develop further with an appetite for standardisation of subsea equipment that has been driven by cost pressures, lower oil prices and the subsequent need to deliver projects on-budget, on-time.
Global upstream oil and gas deal activity, including capital markets and Mergers and Acquisitions (M&A), totaled $19.3 billion from 125 transactions in June 2015, marking a $4.3 billion decrease in value from the $23.6 billion across 119 deals posted in May 2015, says research and consulting firm GlobalData.
According to the company’s latest monthly upstream deals review*, upstream M&A accounted for $8.8 billion from 18 transaction announcements in June 2015. While this was a significant drop from $11.7 billion in May 2015, the number of M&A transaction announcements increased from 13 in the previous month.
Matthew Jurecky, GlobalData’s Head of Oil & Gas Research and Consulting, states: “Capital raising continues at the healthy clip seen in 2015, driven by debt offerings in the US almost a year from prices collapsing. Companies continue to seek financial flexibility and restructure short- and reserves-based capital to avoid bankruptcy.”
GlobalData’s report says that Europe, the Middle East and Africa (EMEA) led the global acquisitions market in terms of value in June 2015, with a 39% regional share totaling $4 billion. This came from 18 deals, of which 14, with a combined value of $4 billion, were announced, and four, with an undisclosed value, were completed. The majority of M&A activity in EMEA was centered on offshore assets, which delivered the greatest share of deal volume with 10 deals in June 2015.
Jurecky comments: “M&A momentum continued in June with Emirates National Oil Company proposing a buy-out of Dragon Oil, BP buying a stake in one of Rosneft’s Siberian fields, and Wintershall selling a package of North Sea assets to Tellus Petroleum (Tellus).”
Other significant transaction announcements include a proposed $2.3 billion merger between Vedanta and Cairn India, as well as an acquisition of royalties from Cenovus for $2.67 billion by the Ontario Teachers' Pension Plan.
Jurecky concludes: “Market conditions will continue to fuel a desire for M&A. After a failed attempt years ago, Emirates National Oil Company is another case of a company taking advantage of depressed asset values to consolidate ownership in one of its positions, Dragon Oil.
“On the other hand, Wintershall is disposing of lower growth assets, which for Tellus is an opening into a stable and dependable production base.”
NYC-based PIRA Energy Group believes that pessimism about oil prices because of the Iran nuclear deal and economic concern about China and Europe are overdone. In the U.S., the stock excess modestly widens. In Japan, crude runs continue to rise while product stocks rise on lower demand. Specifically, PIRA’s analysis of the oil market fundamentals has revealed the following:
European Oil Market Forecast
Brent crude prices lost ground over the last few weeks with bearish news/sentiment leading to a selloff of non-commercial (financial) net length in oil. However, pessimism about oil prices because of the Iran nuclear deal and economic concern about China and Europe are overblown. Under the Iranian nuclear agreement, incremental Iranian oil will not likely hit the market until the second quarter 2016. The ECB and Chinese authorities have enough levers to pull to maintain economic growth momentum, and there has been enough stimulus injected into the financial system to provide uplift to global growth in second half 2015. Near-term crude oil fundamentals have been tightening with high refinery runs this summer and sequentially flat/declining U.S. crude production. With crude stock declines, prompt prices have strengthened as expected. Gasoline cracks are very strong and should remain healthy for the next few weeks at least but will continue to decline from their seasonal peak earlier this month. For middle distillates, with high refinery production in the Atlantic Basin and new distillate-oriented refineries ramping up in the Middle East, stocks will build. Diesel cracks will continue to erode over the next one to two months before seeing some seasonal recovery. Recent European refinery margin strength, the best in many years, will fall below last year’s levels by 4Q15.
U.S. Stock Excess Modestly Widens
This past week’s 2.8 million barrel inventory increase was 1.6 million barrels larger than the build last year for the same week, slightly widening the year-on-year inventory excess to almost 147 million barrels, or 13%. The product excess narrowed by 1.6 million barrels, but the crude excess widened by 3.2 million barrels despite this past week’s substantial crude inventory decline.
Japan Crude Runs Continue to Rise, Post-Turnarounds, While Product Stocks Rise on Lower Demand
Crude runs posted a second straight significant rise as maintenance continues to wind down and unplanned outages have restarted. Crude imports fell back and crude stocks posted a 3 MMBbls draw. Finished product stocks built by a slightly lesser amount, with gasoline, gasoil, and kero demands falling and their stock levels rising. The indicative refining margin remained good and little changed. Stronger gasoline cracks offset declines in the other major cracks.
Fracking Policy Monitor
EPA's study thus far did not find evidence that fracking “led to widespread, systemic impacts on drinking water resources in the United States.” A judge in Wyoming has temporarily put a halt to the BLM’s rules for fracking on federal lands. Texas and Oklahoma passed laws that would prohibit local bans on fracking. Also in Oklahoma, a state Supreme Court ruling makes it easier for it to sue for damages resulting from earthquakes.
U.S. LPG Prices Outperform
Mont Belvieu LPG prices stood strong for a second weak despite sharply lower broader energy market pricing. August propane futures at the market center were mostly unchanged on the weak despite sharply lower crude oil, thus propane’s ratio to WTI strengthened yet again, to near 36% of US benchmark oil. Augy butane at MTB fell a fraction of a percent to settle just under 58¢/gal. Prompt ethane prices gained 1% with stronger natural gas prices.
Ethanol Manufacturing Margins Declined for the Eight Straight Week
Most U.S. ethanol prices rose slightly the week ending July 10, supported by higher corn costs. Manufacturing margins in Chicago have decreased for eight straight weeks, however, as recent increases in raw material costs could not be fully passed through.
U.S. Production of Ethanol-Blended Gasoline Decreases
Ethanol-blended gasoline production declined sharply to a six-week low 8,837 MB/D the week ending July 10 as total gasoline output dropped and ethanol made up a smaller percentage of the total pool. Ethanol output fell slightly to 984 MB/D, down 3 MB/D from the previous week, but up 41 MB/D year-on-year.
Incremental Iranian Oil Now Expected in 2Q16
PIRA updates its view on the return of Iranian oil given the timeframe laid out in the nuclear accord finalized on July 14. We now believe incremental Iranian oil will hit the market in the second quarter of 2016, likely April or May. Once sanctions are lifted, we expect Iranian crude production to rise rapidly, from 3.0 MMB/D currently to full capacity of 3.5 MMB/D by the end of 2016. Our forecast for 2016 Iranian production is close to PIRA's June Reference Case, although first half production is slightly lower and second half production slightly higher.
Finalized Nuclear Deal Confirms Incremental Oil Not Likely Until 2016
The final nuclear deal reached by Iran and the P5+1 is in line with PIRA's expectations that incremental Iranian oil will not hit the market until sometime in 2016. The deal is to be adopted within 90 days, perhaps sooner, but implementation is not likely to occur in less than four to six months. Sanctions relief is dependent upon IAEA verification that Iran has implemented specific nuclear-related measures, which will take time to establish, verify, and report. There is also still potential for delays or slow movement during the process. For now, PIRA assumes Iranian oil exports will increase by 300 MB/D in the first half of 2016. Increases are expected to slow thereafter, and we expect Iran to reach full crude productive capacity of 3.5 MMB/D in 2017.
The information above is part of PIRA Energy Group's weekly Energy Market Recap - which alerts readers to PIRA’s current analysis of energy markets around the world as well as the key economic and political factors driving those markets.
After 10 years of diplomatic negotiation, the UN P5+1 countries (the US, the UK, France, China, Russia and Germany) at last reached an agreement to unwind economic sanctions on Iran in return for significant international control and surveillance over its nuclear activities. The long-awaited deal will revive foreign investment in Iran, as Western IOCs renew pre-sanction projects. Brent dropped $1.15 to $56.70/bbl on the back of the announcement, with markets fearing a worsening of the global supply glut.
Iran holds the world’s fourth-largest oil reserves and second-largest gas reserves, whilst being the second largest OPEC producer after Saudi Arabia. In 2014 total Iranian production, heavily driven by gas and condensate production from the giant South Pars field, amounted to 6.7 mboe/d. During the sanction period, however, Iran had limited access to technology from the West and complex LNG export terminal projects stalled. Vast capital inflows will now be required to develop under-invested Iranian fields, however, due to the large reserves base, DW believes appetite to invest in Iran will be strong amongst major operators.
Whilst no sanctions will be lifted before December, DW believes that Iranian liquids production will rise to a 2015 average of 3.5mb/d, based on pre-sanction production levels and available oil currently stored in storage tankers off Iran. Further production gains are expected as additional development phases of South Pars come onstream, while the removal of sanctions will clear supply bottle necks out of the Persian Gulf. IOC investment in the country’s huge potential will further boost production as sanctions are rolled back, though any new projects will see a lag of several years from lease acquisition to production phases.
Global oil prices have been weighed down in recent months by resilient US production, record Saudi output, continued weakness on the demand side, and the Grexit prospect. Whilst commodity prices are unlikely to be aided by an opening of Iranian taps, the true tidal wave of Persian crude could be later rather than sooner.
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