The Middle East will be one of the key markets for oilfield services companies for decades to come as countries across the region seek to maximize recovery from maturing assets and bring new fields into production, according to leading energy specialist corporate advisory firm Simmons & Company International Ltd.
Speaking at ADIPEC in Abu Dhabi, Nick Dalgarno, co-head of eastern hemisphere corporate finance at Simmons, said there is an increasing willingness amongst governments and the national oil companies to build relationships with foreign companies to bring know how and technology into the region.
The oil and gas and wider energy factors driving this include the accelerating need for enhanced oil recovery, sour gas, heavy oil, tight gas, LNG, GTL, "clean fuels" refineries, carbon capture and storage, nuclear and solar technologies.
Just over half of the world's proven conventional oil reserves and 42 percent of the world's proven conventional gas reserves are located in the Middle East and North Africa (MENA). The region has 13 of the world's 20 giant oilfields as well as the largest gas field in the world. There is an estimated US$3 trillion of projects underway or planned in the six Gulf Cooperation Council countries (Saudi Arabia, United Arab Emirates, Kuwait, Oman, Bahrain and Qatar) plus Iraq and Iran. The majority of these relate to upstream oil and gas, downstream (including refineries, LNG and GTL), petrochemicals and related infrastructure projects.
Projects with values in excess of US $10 billion include the Jubail, Yanbu and Petrorabigh refineries and petrochemicals schemes in Saudi Arabia; the Rumaila, West Qurna and Majnoon field development in Iraq; Zadco Upper Zakum artificial islands field development, ADCO onshore field development programmes, ADMA-OPCO offshore field developments and Shah/Bab sour gas field developments in Abu Dhabi; Khazzan deep/tight gas project in Oman; and the Barzan gas development in Qatar.
The need for nuclear power and renewables, especially solar, waste to energy, desalination, and IT and communications security and asset protection technologies is also increasing.
Simmons' international practice spans offices in Dubai, London and its eastern hemisphere headquarters in Aberdeen. Earlier this year, it advised on one of the biggest oilfield services deals in the Middle East, playing a key role in the acquisition of National Petroleum Services (NPS) by a consortium of investors led by sovereign-backed investment firm Fajr Capital. The deal, which completed in June, was valued in excess of $500 million and is believed to be the biggest oil services M&A transaction in the region to date.
The involvement of the Simmons' Dubai and Aberdeen teams on this high profile deal marked their growing presence in the region, where they have now been involved in several notable transactions including the sale of Lamprell subsidiary Inspec to Intertek, the disposal of Al Mansoori's Thailand business and the sale of Clough's marine construction business to Sapura.
Nick Dalgarno said: "The Middle East is becoming an increasingly important region for international oilfield services businesses and the expertise of our Aberdeen and Houston teams combined with our local presence in Dubai make a compelling proposition for companies in the sector looking to buy, sell or secure investment.
"Involving our UK and US teams in Middle East transactions brings a wider international perspective and insight to our local presence in Dubai which, when combined with our network and market knowledge, is of real added value to industry in the region.
"No oilfield services company can afford to ignore the market in the Middle East due to its sheer scale and variety. The region is increasingly receptive to bringing in skills and technology from outside to support its E&P activity and EOR requirements and indigenous businesses are also seeking opportunities to grow internationally. The new relationships resulting from this are creating opportunities for mergers and acquisitions.
"Iran is also an enormous untapped market which, when it is eventually rehabilitated into the international community, will have to address decades of underinvestment in its oil and gas industry," said Mr Dalgarno.
NYC-based PIRA Energy Group believes that the oversupply of crude will grow into 2015. In the U.S., seasonal low in runs leads to large U.S. product stock decline. In Japan, crude runs ease back, but crude stocks still draw. Specifically, PIRA's analysis of the oil market fundamentals has revealed the following:
Asia-Pacific Oil Market Forecast
Oil prices are likely to remain soft, even assuming a substantial cut at the November 27th OPEC meeting, though there would be a psychological bounce if cuts are enacted as PIRA assumes. The oversupply of crude will grow into 2015, with stock-building forecast for each of the first three quarters. Without an OPEC cut by year-end, the market would deteriorate further as the imbalances would be that much greater.
Seasonal Low in Runs Leads to Large U.S. Product Stock Decline
Overall inventories fell this past week, 2.7 million barrels more than the decline last year for the same week. Products led the inventory decline, the largest weekly decline this year as refinery runs hit their seasonal low and reported demand surged on the week. A large chunk of this demand increase was in distillate largely because of peaking harvest demand and in propane because of downstream movements in preparation for the winter. Compared to last year, the stock excess narrowed.
Japanese Crude Runs Ease Back, but Crude Stocks Still Draw
Crude runs eased back, while crude imports rose from the low level seen the previous week, building crude oil stocks. Gasoline demand was slightly weaker and stocks built modestly. Gasoil demand rebounded from a low level and stocks drew slightly. Refining margins remain soft but all the major product cracks improved on the week.
Refinery to Restart in U.S. Virgin Islands
The government of the U.S. Virgin Islands announced that it had reached an agreement with Atlantic Basin Refining (a U.S. firm) to restart the Hovensa refinery on St. Croix. That refinery operated on imported crude and primarily supplied the U.S. marketplace until its closure in 2011 – a time when all Atlantic Basin refining was under pressure. Those economics have since changed with the U.S. shale crude revolution because the refinery is in the United States and as such can use U.S. crude without any regulatory restrictions. Furthermore, the Virgin Islands have a blanket exemption from the Jones Act.
NGL Prices Rebound on Demand Jump
U.S. LPG prices rebounded this week on the first propane stock draw of the season. The sizable draw helped propel December NYMEX propane futures 3.4% higher on the week. Cold weather increased the need for heating fuels in the reference week with heating degree days growing by 54% week-on-week. Apparent demand jumped by 335 MB/D (28%) from the week earlier to 1.5 MB/D. Butane prices rose 4.6% to $1.12/gal, garnering strength from steadily decreasing weekly NGPL stocks in the EIA weekly data. Ethane prices bounced 1.8¢ higher with higher natural gas prices.
Ethanol Output Soars
Ethanol production spiked to a ten-week high 937 MB/D the week ending October 24, up from 896 MB/D during the preceding week. Inventories declined for the fourth consecutive week, dropping to a 5-month low 17.0 million barrels, led by a 670 thousand barrel draw in PADD I.
U.S. Cash Margins Rebound
Cash margins for ethanol manufacture in the U.S. rebounded during the end of October following eight straight weekly declines. Many mills in the South-Central region of Brazil will shut down four to six week early, lowering ethanol output for the season.
Probability of an Iranian Nuclear Deal Up to 50%, nut Iranian Politics Add Complications
Less than one month remains before the November 24th expiry of the interim nuclear deal and PIRA understands that talks are turning more creative. Discussions have reportedly shifted to the idea of disconnecting cascades of linked centrifuges that would reduce enriched uranium fuel output but avoids outright dismantling of individual centrifuges. PIRA believes the probability of reaching a final deal has moved up to 50% as U.S. President Obama and Iran President Rouhani, and Iran Foreign Minister Zarif are keen to do a deal. However, ultimately it is the Supreme Leader who approves the terms of any deal and his acceptance remains unclear.
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.
Exploring deep and ultra-deepwater areas could boost Trinidad and Tobago's (T&T) oil and gas industry, which has $6.2 billion of investment planned over the next two years, helping to offset the government's apparent move away from an energy-dependent economy, says an analyst with research and consulting firm GlobalData.
According to Effuah Alleyne, Senior Analyst for GlobalData, T&T's Budget Statement for the fiscal year 2015 revealed that the energy industry accounted for a 35% share of the country's anticipated revenue. This represents a significant decline since 2006, when the sector represented almost 53% of the budget.
While this move may imply trouble for T&T's oil and gas industry, Alleyne states that the emerging trend of deepwater exploration could help to revive the sector in a country where the majority of exploration and production (E&P) activity occurs in shallow waters of up to 250 meters (m) deep.
The analyst says: "T&T's competitive deepwater bidding round ended in March this year, with two of six blocks awarded to a consortium consisting of BHP Billiton and BG Group. These blocks are located in water deeper than 1,500m.
"As deep and ultra-deepwater is yet to be fully explored in T&T, these areas could represent vast potential, especially as there are over 15 open blocks. These lie in the Columbus Basin, an extension of the prolific Eastern Venezuelan Basin, where one of the world's largest reserves of 1 trillion barrels of heavy oil-in-place is located."
In addition to deepwater exploration, Alleyne notes that reassessing mature assets is another developing trend in T&T, with numerous recent discoveries being made in some of its established reserves.
The analyst explains: "Repsol's continued exploration activities in the mature Teak field revealed new oil accumulations this year through discovery well TB 14.
"Furthermore, this area, which has been producing since 1972, also has unexplored acreage onshore and offshore, similar to other mature assets in the country."
Alleyne concludes that T&T's planned oil and gas sector investment of $6.2 billion over the next two years reflects the confidence that untapped potential, both in existing fields and in under-explored deepwater and ultra-deepwater areas, could significantly boost the country's capital expenditure.
We all need to remember, but often choose to forget, that oil is a highly cyclical sector. There have been seven significant price cycles since 1970 and also a few minor ones between times, so yet another should come as no surprise. The reasons for the fall in Brent crude prices from $115.19 in June to below $85 last week are well documented, as is the realization that OPEC is now defending market share, rather than a minimum price. That said, the nature of the oil business is very different now compared to after the 2008 crash.
It should be noted that 70% of the additional production that has come onstream since 2005 is unconventional. Much of this, of course, is from US shales - this is not cheap oil (mostly needing prices of $60-80 to be commercially viable) and decline rates are rapid - without ongoing drilling the current production capacity will be quickly eroded.
As in the past, the present downturn could be a great buying opportunity. In global E&P the NOCs rule and they will continue to invest; China has been the high spender and India's ONGC now plans a huge $180 billion foreign production acquisition spree. Likewise in oilfield services - acquisition opportunities are likely to present themselves for strategic and PE buyers, as was the case in the last downturn. Even without oil demand growth, vast numbers of new wells will need drilling worldwide each year to counter natural decline rates, probably some 80,000 in 2014 and more as demand grows again, boosting the demand for oilfield services.
Recent history suggests that oil price downturns tend to be short and measured in months, not years. There is plenty to suggest that, this time, it could be even shorter: rapid supply erosion is likely along with a healthy boost to GDP for net importers. Both high and low oil prices present opportunities for well-managed, well-financed companies that have a long-term view, as the oil & gas industry is not a short-term game. But the window of opportunity may well be very short before the next cycle begins.
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