With OPEC Delivering on Cuts, Prices to Move HigherReflation backdrop together with OPEC cuts are very bullish for oil prices. OPEC cuts and the momentum of supply losses will make it difficult for the supply chain to turnaround fast enough to avoid very low oil inventories in second half 2017. Geopolitical risks suggest downside to PIRA’s supply forecast. Refining margins to stay relatively healthy with help from increased light product pull by Latin America. Global bunker spec changes will be a game changer in three years, but will affect investment plans long before then.
Cash prices this month have been whipsawed by exaggerated NYMEX volatility, with abnormally mild weather the driving force. Yet, colder forecast changes on the horizon have restored a bid under cash prices, with further price appreciation waiting on December storage withdrawals.
There’s historical context attached to every comment in today’s report, and here’s one more. An old CBOT saying goes “Bulls feast on Thanksgiving, Bears feast on Christmas”. This year the bulls had a good Turkey Run in corn and beans while wheat lagged, setting up the possibility of the old adage coming true again.
Prices were supported by robust exports resulting in a large drop in stockpile. Manufacturing margins increased as product prices rose faster than corn costs. The EPA set the final biofuels mandates and standards for 2017. RIN prices soared.
The November U.S. payroll report was constructive for the economic outlook, as most industries reported solid job growth. A separate household survey of the labor market, however, was potentially worrisome: the unemployment rate fell sharply, as a result of unemployed people dropping out of the labor force in significant numbers. How Fed policymakers assess this development will have a large bearing on monetary policy in the coming periods. In emerging economies, India reported solid GDP growth for the third quarter. Brazil’s activity data disappointed. China’s industrial confidence indicators continued to improve.
Coal pricing was mixed this week, with the bullish rally that prevailed last week extended into Monday/Tuesday, although prices then moved lower over the balance of the week. The news that several major Chinese coal producers were signing term deals with consumers at the coal trade fair in Hebei this week gave the market a bearish push. Additionally, the chairman of the China National Coal Association stated this week that China's coal prices will stabilize in the 550-600 yuan/mt range ($80-$87/mt), further underscoring the push from China to deflate high coal prices. 1Q17 FOB Newcastle prices declined by the largest extent, falling by over $2.00/mt while API#2 and API#4 prices managed slight week-on-week increases despite downward pressure over the second half of the week. Looking forward, coal demand is on firm fundamental footing with recent cold weather boosting electricity demand and with hydro generation likely to remain soft into 1Q17. Additionally, seasonal risks to coal production and transportation have not yet peaked, which should prevent much further price erosion and may foster a pricing rebound.
The Obama Administration is finalizing regulations, despite threats of Congressional Review Act repeal. EPA continues to work on the Clean Power Plan’s FIP and the model trading rules. Amendments to the Regional Haze Rule, are being finalized. Final GHG emission standards for heavy-duty vehicles were published, along with the CSAPR rule impacting power plant NOx emissions. RFS standards for 2017 and 2018 have been finalized but not yet published. EPA released a proposed determination not to revise CAFE standards for 2022-2025. DOI regulation of venting and flaring on federal lands has been published. Final rules after May 30, 2016, may fall under CRA review. Since mid-May, 49 "major" rules and 973 non-major rules have been received by GAO.
Downside risks noted last month came to fruition in November, but they quickly dissipated as gas prices reversed course during the second half of the month and precipitation declined to below-normal levels. Precipitation above The Dalles averaged 56% of normal through November 25; the water year to date remains above normal, but runoff projections have been trimmed. Although implied heat rates remain down year-on-year through the first half of 2017 as the market digests solar capacity additions, higher gas prices, and increases in hydro supply (even after the markdown), we expect a rebound during the second half of the year.
Prices will move higher with ongoing rebalancing. Demand growth is healthy. Relatively firm gasoline cracks support margins. Light product stock levels are still high but declining. Product price spreads shift from favoring gasoline toward distillate but gasoline comes back quickly in 2017. Global bunker sulfur limits drop to 0.5%beginning in 2020. No near term impact on prompt prices, but it will affect forward curves and investment decisions; European sour crude refiners will need to adapt.
European gas markets are demand focused at the moment — focusing on increasing gas-to-power demand and cooler-than-normal temperatures. Power demand across Central and Western Europe is up 70 mmcm/d year-on-year; however, the big shift, really happened in September. Much of the current increases in demand are seasonal. At the same time, heating demand for residential and commercial sectors is seeing the first higher-than-normal numbers in consecutive months for six years. The last time we saw this sort of continued cold was in 2010, which coincidentally was also a La Nina year.
Global equity markets posted a degree of consolidation from record highs. In the U.S., among the key tracking indices, energy performed the best on the back of higher oil prices in the wake of the OPEC agreement to cut output. Banking and materials also outperformed, while housing was the weakest performer. Internationally, the tracking indices were mostly lower, with Latin American displaying the greatest retrenchment. Japan was modestly higher.
U.S. LPG prices mostly rose in line with the broader energy markets. January Mt Belvieu propane prices gained 7.4¢ to settle at 62¢/gal Friday, the highest level yet in 2016. Similarly, n-butane at the market center gained 12.7% to 83.6¢. Cash isobutane continued to rally last week, encouraged higher by the latest EIA inventories, which for September put iC4 stocks at 8.3 MMB vs 9.5 in the year ago period. Isobutane prices ended the week at a strong 19¢ premium to normal. Ethane prices rose faster than Henry Hub natural gas, and thus C2’s premium to gas in BTU terms gained to 26¢ from 12¢ a week ago.
The week ending November 25, U.S. ethanol stocks dropped to the lowest level since October 2015. Ethanol production decreased by 2 MB/D to a still-high 1,012 MB/D. Ethanol-blended gasoline manufacture fell to 8,998 MB/D, dipping below 9 MMB/D for only the second time over the last six months.
4Q16 Latin American gasoline demand is set to decrease by ~10 MB/D year-on-year while diesel consumption declines by ~50 MB/D year-on-year. 4Q16 Latin American crude runs are forecast to fall 335 MB/D year-on-year. Petrobras’ Brazilian automotive fuel pricing policy changed and will drive domestic ex-refinery prices to converge towards their respective opportunity costs. In the U.S., gasoline cracks have weakened but remain healthy for the season. Distillate cracks remain relatively soft but should rise in the short term as the heating season progresses.
The OPEC production cut has sent Brent crude screaming up more than $11/bbl ($1.88/MMBtu) higher than recent lows. This increase will have strong implications for gas flows in the coming months due to the relative value of spot versus oil-indexed gas. Recently, the latter had been selling well under hub pricing in certain markets, enjoying a significant price advantage for many buyers — something that has never in modern times been consistently enjoyed by major supply contract holders. This advantage is withering quickly and the price response to the OPEC meeting will extend the effect well into 2017.
French nuclear availability for December has been further downgraded. While the outlook for nuclear in January and February 2017 is very similar to our prior monthly report, we still see risks of further outage extensions. This is to say that France will remain heavily dependent on imports to balance the system at on-peak hours during December and, almost certainly, January. The partial cut-off of France-U.K. interconnector availability through February/March enhances the risks of exceptional measures and/or systemic balancing failures on both sides. As French and U.K. prices will remain even more weather-driven, German peak prices are already factoring in a bullish market context, with price upsides only emerging under a scenario of poor wind availability for extended periods.
The rally in coal pricing continued into the early stages of November, although on news of supply contracts being signed in China, pricing dropped significantly. Prices have recovered in recent days, although remain well below last month’s peaks. Sort-term fundamentals remain strong, particularly with asymmetrical pricing risks to the upside from the potential of winter weather boosting demand and curtailing supply (production and transportation). PIRA remains bullish into 2017, although we note that some of the frictional factors boosting prices (misaligned supply/demand domestically in China) will evaporate over 2017, and 2018 will be a more bearish picture, particularly if the supply side cannot hold discipline.
This week saw the European Commission publish the Winter Package, a set of proposals that aims at delivering on the global climate deal reached with the 2015 Paris Agreement. The package details the vision of the EC regarding the decarbonization of the energy sector with the integration of renewables, outlines energy efficiency targets by 2030 and 2050, and discusses the potential effects on the security of supply in the transition phase. While these may be seen as long-term issues, nevertheless we thought the documents offer some important medium-term implications for coal and other higher emitting capacities.
This week’s OPEC meeting reminds us that while Saudi Arabia does not control the price of global crude markets, its underlying influence on the price of Brent and WTI is without question. And so it goes with Qatar and its influence on LNG prices. Qatari prices do not play an active role in the price of NBP or JKM, but without question, Qatari prices reflect the state of the market.
The equity market eased slightly off its record close from last Friday. Volatility increased, and debt performance weakened. All of the adjustments are seen as within the bounds of consolidation. Fears of the outcome of the Italian referendum over the past weekend did not appear to have rattled the markets too badly this past week. The big winner of the week was energy, due to the OPEC agreement to cut output and the subsequent rise in oil prices.
Total commercial stocks only added 0.5 million barrels for the latest week. Crude stocks drew by 0.9 million barrels as crude imports were flat. The four major products experienced a 7.6 million barrel stock build, led by distillate’s nearly 5 million barrel increase. The major product build was partly offset by the large declines in NGL storage. The net total product inventory gain was 1.4 million barrels. Next week’s EIA data is expected to see another crude stock draw. The three major light products are anticipated to build by 5.8 million barrels, led by a build in gasoline stocks.
A rather abrupt change in the weather forecast has unleashed heavy natural gas futures buying, with the current week on track to add yet another ~0.25¢ to the Jan 2016 contract. Since establishing a near-term low of $2.88/MMBtu back on November 17, the Jan 2016 contract has since recovered ~0.60¢ to ~$3.50/MMBtu as the forecast (initially heralding a warmer-than-normal start to December) has given way to a much cooler outlook. Yet, with the front of the curve now closing in on the calendar-year high established mid-October, there is a risk that these newly minted wagers on winter-time rebalancing could likewise prove premature.
Pakistan’s Economic Coordination Committee (ECC) of the cabinet approved a nearly 33% cut in prices of natural gas, the first such slash this year, for the industrial sector. A statement said that Ishaq Dar, minister for finance, chaired the ECC meeting, which “… approved reduction of gas price for industry. In accordance with Fertilizer Policy 2001, the industrial sector's gas sale price will also be applicable to the fertilizer sector and only for fuel and not feed stock,” it added.
EIA data estimates for electric power sector stockpiles as of end-September came in at 158.2 MMst, slightly higher than PIRA expected, but 4.4 MMst lower than August and 4.5 MMst lower than last September. As stocks generally build in September due to shoulder season weather, news of a September drawdown is positive for stockpile normalization. We maintain that U.S. power sector coal burn will rise year-on-year steadily through June 2017, and we will see stockpiles descend further toward normal levels.
Crude runs rose with turnarounds winding down. Crude imports fell back such that crude stocks corrected back down 2.4 MMBbls. Finished products built 1.1 MMBbls off their cyclical low. Compared to year-ago, the deficits on crude, finished products and total commercial stocks narrowed a bit. Both gasoline and gasoil stocks built, while the draw rate on kerosene stocks was cut from 72 MB/D to 31 MB/D. Margins and cracks eased slightly on the week, but remain statistically very good and still holding above averages seen in September and October.
PIRA assigns coefficients to measure the effect of Heating Degree Days on distillate demand in many regions of the world. There are, however, no comparable coefficients for residential demand only, nor are there any estimates of heating oil inventories held by U.S. households as is the case with German tertiary gasoil inventories. This note estimates HDD coefficients for U.S. residential consumers and derives the profile of additions and withdrawals from home heating oil storage tanks.
November weather for the three major OECD markets turned out to be 5% colder than the 10-year normal and the resulting oil-heat demand effects were 86 MB/D above normal. On a 30-year normal basis, the markets were 4% warmer.
EIA recently released their September oil balances. Domestic crude supply, which is domestic crude production plus the balancing item, fell sharply, month-on-month by -470 MB/D, the largest monthly drop since supply peaked in April 2015. The year-on-year decline accelerated from -500 MB/D in August to -950 MB/D in September, and steeper than the previous steepest decline of -932 MB/D seen in April 2016. The September declines, both month-on-month and year-on-year, were about 50 MB/D steeper than PIRA's initial estimates.
EIA recently released its final monthly September 2016 (PSM) U.S. oil supply/demand data. September 2016 demand came in at 19.864 MMB/D. Overall demand was revised lower by only 92 MB/D, compared to the weeklies. Total product demand increased 2.3% versus year-ago or 450 MB/D, compared to the September 2015 PSA data, doubling the growth seen in August. End-September total commercial stocks stood at 1,352.5 MMBbls. Compared to final September 2015 PSA data, total commercial stocks are higher than year-ago by 76.3 MMBbls, versus an excess of 101.2 MMBbls seen at end-August and a 123.2 MMBbls excess seen at end-July.
Chinese refiners have been exporting increasing volumes of key refined products such as gasoline, jet fuel and gasoil/diesel since 2012. However, it is important to note that Chinese refiners have also been importing increasing amounts of mixed aromatics and light cycle oil over the past two years, which are generally used as blending components for gasoline and gasoil/diesel, respectively. Taking these blending components into consideration, the product balance for total gasoline is more neutral (perhaps at times even bullish), and the product balance for total gasoil/diesel is only moderately bearish. PIRA expects China’s net exports of gasoil, jet fuel and gasoline (excluding blending components) to increase by another 10% in 2017.
Saudi Arabia's formula prices for January were just released. The adjustments were in alignment with what the pricing drivers would dictate. This means Saudi will resort to cutting allocations to refiners and let the market tighten that way, as opposed to initially tightening differentials and reducing the competitive attractiveness of Saudi crude. Consequently, Saudi crude remains priced competitively from an economic standpoint, but less avails will be released to the market as refiner's allocations will fall short of their nominations. Specifically, Asian terms were made more generous in line with the change in Dubai structure, while pricing into Northwest Europe was tightened in line with the narrower discount on Urals vs. Dated Brent.
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.
Eni has agreed to sell to BP a 10% participating interest in the Shorouk Concession, offshore Egypt, where the supergiant gas field Zohr is located. The deal was struck for 375 million USD and a 150 million USD pro-quota reimbursement of past capital expenditures.
Eni has agreed to sell to BP a 10% participating interest in the Shorouk Concession, offshore Egypt, where the supergiant gas field Zohr is located. Eni, through its subsidiary IEOC, currently holds a 100% stake in the block.
Egyptian offshore where Eni discovered Zohr. Image courtesy: Eniday
The agreed conditions include a consideration of 375 million US dollars and the pro-quota reimbursement of past expenditures, which amount so far at approximately 150 million US dollars. In addition, BP has an option to buy a further 5% stake under the same terms. This transaction is in line with the Eni’s “dual exploration model” aiming at an early monetization of the value through the dilution of recent huge exploration discoveries owned with high participating interests.
The completion of the transaction is subject to the fulfillment of certain standard conditions, including all necessary authorizations from Egypt’s authorities.
The Zohr field, located in the Shorouk Concession, was discovered by Eni in August 2015 and is the largest natural gas field ever found in the Mediterranean, with a total potential of 850 billion cubic meters of gas in place. On February 2016, the authorization process for the development of field was completed, while the first gas is expected by the end of 2017.
Eni has been present in Egypt since 1954 where it operates through IEOC Production BV. The equity production was about 200,000 barrels of oil equivalent per day in 2015.
Asia's Refinery Cracking Capacity Additions Slowing, but India Continues to UpgradeOil rebalancing is slowing due to higher October OPEC output and lower China demand, but supply creation will become the market’s focus in 2017 as the market tightens. Asia’s refinery cracking additions are slowing, but India continues to upgrade and catch up with China's cracking capability. China’s crude imports are expected to recover from the low in October for the next two months as refineries return from maintenance to meet seasonal demand and utilize unused product export quotas. PIRA expects Asian cracking margins to stay healthy for the next couple of months, with prospects for better margins in 1Q17 assuming normal winter weather.
The mild weather that has unfolded this month that extended the traditional injection season has placed an even larger premium on weather demand in the months ahead to help work off the expanding inventory overhang. Moreover, much is riding on conditions during December in particular. On that front, even if the industry manages to pull working gas in storage toward 3.4 TCF before exiting 2016, a more convincing stock reduction will still be required early in 1Q17 to propel prices decidedly into new high ground.
As French nuclear availability remains at historically lower levels, French total commercial flows collapsed by 94% year-on-year to a mere 420 MW so far in the fourth quarter. The impact of lower French nuclear to flows toward Italy is particularly interesting. Italian PUN prices have been settling only about €4 below France in October and November to date, although the NORD region has been coupling more often with France (45% of the hours in November to the 21, or about 227 hours, while in Oct. about 299 were coupled with France). More interestingly, the Italian forward curve is trading at a large discount relative to France for the balance of the winter, raising the broader question of whether this is really sustainable.
Forward coal prices had a volatile week this week, with the market posting several dollar moves on four out of five trading days. The net result was upward, with prices, particularly in the Pacific Basin, recovering a portion of the sizeable losses posted last week. The market continues to look for firm direction, with a bullish fundamental picture facing off against powerful interests (including the Chinese government and at least one major trading company) in keeping prices somewhat low. However, it appears as if the market, like PIRA, has become somewhat wary of such a downward move.
The November WCI current vintage auction saw a much-improved coverage ratio and participation (80 unique registered bidders vs. 51 in August). Secondary market pricing remains above the $12.73 auction reserve price, which is poised to increase at next February’s auction. If subsequent auctions are fully subscribed, there may be minimal potential supply implications for CP2 (if CARB adopts amendments to move unsold allowances to the reserve). Oral arguments will be held January 24th in the CA auction litigation, with a decision expected in spring 2017 and an appeal to follow. The November Election results help prospects for a legislative fix should the auction be invalidated, but are not a guarantee.
The equity market moved further into record territory, with the S&P 500 moving above 2,200. Volatility (VIX) continued to ease and the price of domestic high yield debt (HYG) rose. Emerging market debt (EMB) was little changed. The U.S. dollar remained strong, and commodities were higher. Bond yields continued to rise globally, particularly for longer-term maturities.
The EPA increased the mandate for biofuels to 19.28 billion gallons for 2017. The new mandate is up 6.5% from 8.11 billion in 2016. The total is also up from 18.8 billion proposed in May, but much less than the 24 billion gallons originally set forth in RFS2.
Last week’s “working theory” on soybean strength came from those who said there was very little confidence the Chinese would be able to halt their currency slide anytime soon. The theory went on that end users, who were afraid the Yuan would continue to decrease in value, were buying up soybean supplies before their currency became “worthless”.
U.S. adjusted oil demand continues to be relatively strong, up 3.6% or 680 MB/D year-on-year in the latest four weeks. Gasoline stocks are building seasonally despite robust demand because of high imports and high production, with the latter inflated by butane blending. Distillate stocks built just slightly as increased heating demand supplemented the last bit of harvest demand.
North American spare production capacity is light this winter with dry powder largely limited to the WCSB and Appalachia. The dearth of heating demand over the past month has meant that Canadian imports have had to more aggressively compete with Appalachian for the limited market opportunities. Moreover, TransCanada’s withdrawal of its Long Term Fixed Toll plan suggests that the challenge to find a home for surplus WCSB production will continue.
RGGI pricing declined sharply following the elections, with the next auction on Dec 7th. PIRA does expect the auction to be fully subscribed, helped by required annual bank draws resulting from banking adjustments to the cap. Given unclear signals from the Program Review process, PIRA does not see significant price recovery until a draft Model Rule is released next year that clarifies cap declines post-2020 and price support mechanisms, such as banking adjustments and the proposed soft price floor “Emissions Containment Reserve.” Longer term, the RGGI price signal appears likely to take a back seat to individual state/regional clean energy policy initiatives. RGGI could play a more significant role, however, should these complementary policies face implementation challenges.
Over the last month, eastern coal prices were pulled up by hot international markets for both metallurgical and thermal coal, a trend that is likely to remain in place in the near term and one factor leading us to adopt a bullish bias through 1H17. Even though natural gas prices have recently given back some gains, we still expect gas prices to rise over the heating season, tightening coal balances by mid-2017. Beyond that, our pricing views turn bearish as we forecast that gas prices will fall on increased drilling and we expect continued CCGT and renewables build out.
U.S. equity markets posted solid gains across the board and pushed into record territory. Among the tracking indices, retail, materials, and industrials did the best. Both growth and defensive tracking indices posted strong increases of about 2%. Internationally, those tracking indices also gained with emerging markets, Latin America, and China doing the best. Japan performance was the laggard and neutral.
Inventories grew by 1.8 MMB to 102.7 MMB, despite relatively high export volumes of 5.8 MMB for the week ending November 18. The deficit to last year narrowed slightly by 108 MB to nearly 3.5 MMB. Last year for this reference week, stocks rebounded by 1.7 MMB to 106 MMB. The following week, stocks declined by 2.1 MMB and largely continued drawing until mid-March.
U.S. ethanol stocks built the week ending November 18, following three consecutive weeks of decline. Production increased by 3 MB/D to 1,014 MB/D. Ethanol blended gasoline manufacture jumped to 9,100 MB/D from 8,955 MB/D the prior week.
The EPA’s announcement last Wednesday that the 2017 biofuel quota will be raised to 19.28 billion gallons, including 15 billion gallons of corn-based ethanol, was more dramatic for soybean oil, which traded limit up on the news, than corn. While widely hailed as a victory for the ethanol lobby and U.S. farmers, should gasoline consumption in 2017 match projected 2016 consumption of 144 billion gallons, the 15 billion gallons of ethanol still results in a blend rate of just 10.4%.
Crude runs eased slightly on the week and crude imports surged, thus building crude stocks 4.9 MMBbls. Finished products drew 1 MMBbls and set a new cyclical low. Gasoline demand was modestly higher. Stocks drew slightly. Gasoil demand was lower but a jump in exports left stocks little changed. Kerosene demand was little changed and remained seasonally normal.
U.S. ethanol prices rose the week ending November 18. Values were supported by higher corn and oil. Manufacturing margins increased, boosted by a strong demand for exports. RIN values rebounded in anticipation of final 2017 mandates and standards that were to be set by November 30.
Shipped LNG has eluded Northwest Europe to a great extent since 1Q, in favor of higher deliveries to Southern Europe. Price is the main driver. With much of the spiking risk ending up on the isolated southern shores of Southern Europe – these markets certainly have made the better case so far. Spanish, Italian, and Southern French gas prices have all, at one time or another, made themselves price competitive on a global scale to try and attract volumes and have succeeded at the expense of the U.K. Instead, N.W. Europe has relied on pipeline supplies. Opting for pipeline gas in N.W. Europe instead of LNG has highlighted just how much pipeline suppliers have done to make their gas attractive.
PIRA is kicking off its global weather monitor, which will track weather anomalies in the U.S., Europe, Russia, and Asia. PIRA has analytically tabulated daily degree day data for key countries and for Europe and Asia; they have been aggregated into regional measures. We look at a cumulative comparison to last heating season, and the 10-year normal, expressed as a percent deviation. We also look at daily degree days, relative to a 10-year range, including the norm and last heating season. Charts will be issued regularly on a weekly basis during the heating season.
The recent run up in Asian spot prices appears to have crested, as buyers are done with their winter planning. Adding more length does not seem to be in the cards, although the myriad of nuclear problems among Japan, Korea, and Taiwan is giving LNG a second and third life in the power sector. Japan continues to be largely nuclear free, while South Korea and Taiwan have also seen nuclear load factors collapse largely due to natural disasters (storms & earthquakes). Korea is seeing significant gains for LNG and coal burn, and Taiwan’s reserve capacity margin is extremely tight.
The decline in gasoline prices since mid-2015 has given a significant boost to gasoline demand on both sides of the Atlantic. While the lagged effects of this decline are expected to provide further support through 2018, U.S. gasoline demand growth is expected to slow to 0.5% in 2017 as crude oil prices recover. Faster economic growth in 2018 should lead to a pick-up in demand growth to 0.9% in 2018. In Europe, the end to dieselization of the car fleet in addition to the lagged price effect causes gasoline demand growth to accelerate to 1-1.5% in 2017 and 2018.
State-owned energy giants PetroChina and China National Offshore Oil Corp. (CNOOC) have hiked their wholesale gas prices for non-residential users. The move reflects tighter supplies of the fuel and follows the end on Sunday of a one-year moratorium on price adjustments. PetroChina’s gas sales branch for northern China informed customers on 7 November that it would raise non-residential citygate prices by 15% from 20 November until 15 March 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.
E&P deepwater exploration and appraisal activity has dramatically declined. In line with falling E&A activity, Reserve Replacement Ratios (RRRs) have been declining for the majority of major E&P companies. This week, we highlight some of the positive newsflow from offshore E&A activity in recent times.
Myanmar, once impeded by political and economic trade embargoes, has seen a dramatic turnaround in fortunes since the lifting of international sanctions in 2012. A number of Western E&P players such as Shell, ENI and Chevron, as well as Independents including Reliance Industries and Oil India amongst others, have been drawn to the country’s gas potential, most notably in the deepwater Rakhine basin. Following the discovery of the Thalin-1 well in the AD7 block in Feb 2016, Woodside has shown significant commitment to exploring and developing acreage (up to 4-7 E&A drilling campaigns). The Australian operator has recently contracted the Dhirubhai Deepwater KG2 (a deepwater drillship), scheduled for a year-long campaign in 2017.
In June 2016, an Exxon-Hess alliance has upgraded the total reserves for its Liza field discovery offshore Guyana to 1.4 billion barrels; twice the size of previous estimates. The find represents the first commercial discovery in the country for the past 50 years. The success of the Liza field has injected strong enthusiasm for exploration activities offshore neighboring Suriname, where Petronas has begun an exploration drilling campaign in May 2016, while Apache has commenced seismic acquisition on block 58 in June 2016. Compared to the tepid reaction in 2015, the current round of acreage offered by Staatsolie, a state-owned oil company, has garnered widespread interest amongst the international E&P community.
Current oil prices do not support major stand-alone deepwater developments. All of the sanctioned deepwater projects in 2016 are subsea tie-backs to shore. However, it is evident that as the market recovers there are substantial reserves that can be brought into development as oil prices allow. We expect operators to develop these finds through conceptual / front-end engineering during the downturn if they wish to be a ‘first mover’ when the market conditions allow sanctioning.
Chen Wei, Douglas-Westwood Singapore
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