Today’s oil and gas environment has been impacted by a myriad of issues including restrained capital spending, curtailed investment and employment cuts for struggling companies across the supply chain. Recovery from current market conditions is expected to be slow, with oil prices likely not to return to pre-crash levels in the near term. However, such conditions are likely to prove beneficial for those private equity firms and strategic investors prepared to take a long-term view of the current downturn.

Constricted capital expenditure is directing Operator attention to maximizing efficiencies of their existing assets. Field redevelopment and production optimization of brownfield assets offers a comparatively low cost option to increase production. For example, Douglas-Westwood research shows that global offshore maintenance, modifications & operations (MMO) spend will decline by at least 12% in 2015 – driven by a combination of delayed projects and pricing. However, the underlying long-term trends remain favorable for brownfield developments – the need to ensure continued production levels holds strong and increased levels of spend are expected to return by 2017. This is recently illustrated by BP’s $1 billion investment into the Eastern Trough Area Project (ETAP). Further brownfield investment will be essential if the industry is to create a competitive cost base and sustain production.

Whilst not subject to the same magnitude of orderbook reduction as Capex-focussed businesses, service firms that cater to ongoing operations have not been immune to implications stemming from low oil price. Virtually all have initiated cost reduction processes to cater for reduced activity and margin pressure. This includes the implementation of downsizing measures.

Our recent discussions with the investment community show an increased focus on brownfield-leveraged companies, for whom margin levels are typically lower, but are not subject to the same risk of backlog collapse. The growing trend towards improving efficiency in the current oil price environment will benefit brownfield focussed firms in the years ahead. Furthermore, long-term investment in the MMO sector may also provide an upside in transferable skills to a potential decommissioning market; should this occur before oil prices rebound to field-prolonging levels.

MMO providers offer an improved investment case, particularly as we settle in for what could be an extended period of low oil price.

NYC-based PIRA Energy Group reports that crude prices plunged in July, with the WTI price averaging just over $50/Bbl. In the U.S., stocks are flat but excess widens. In Japan, crude runs moved higher, with still higher crude stocks. Specifically, PIRA’s analysis of the oil market fundamentals has revealed the following:

North American Midcontinent Oil Forecast

Crude prices plunged in July, with the WTI price averaging just over $50/Bbl – down $9/Bbl from June. Canadian prices fell even more, some $12-15/Bbl. In early August, prices were continuing to slide, with WTI falling to the mid-$40s. Heavy Canadian grades have fallen below $30/Bbl, implying bitumen values approaching $20/Bbl.

U.S. Stocks Flat but Excess Widens

This past week's crude stock draw offset a product build leaving inventories flat for the week. Year-on-year the stock excess widened to 153 million barrels, up 8 million barrels on the week. The largest portion and bulk of the excess is in crude while the smallest excess is in gasoline.

Japanese Crude Runs Move Higher, with Still Higher Crude Stocks

Crude runs surged as maintenance wound down and storm impacts faded. Crude imports remained high and stocks built despite the run increase. Finished product stocks drew slightly, mostly on lower naphtha inventory and a slight draw on gasoline. Finished product demands were, on balance, higher. The indicative refining margin has come well off its June peak and continues to soften.

Aramco Differential Adjustments for September — Clearly Not Incentivizing Liftings

Saudi Arabia's formula prices for September were just released. The adjustments indicate no effort to incentivize increased liftings, even though there will be more avails as summer domestic crude burn begins to ease. Differentials to Asia were raised, Europe cut, and the U.S. were raised for the lightest and heavies grades. The Asian increase was against a backdrop of weaker refining margins and an eroding Saudi advantage against competing African crude for Asian refiners.

Asian LPG Prices Plumb New Lows

Propane futures in the Far East tumbled to $406/MT, the lowest price since March 2009. Saudi CP futures, instruments designed to hedge and speculate on the future direction of contract prices set by Aramco, fell to $326/MT – the lowest level since contract inception in Jan 2009.

Ethanol Prices and Margins Increase

Most U.S. ethanol prices managed small gains the week ending July 31 as production hit a ten-week low. Manufacturing margins improved for the second straight week because of lower corn costs.

Ethanol Output Reaches 11 Week Low

The U.S. ethanol industry reached several extremes the week ending July 31, with ethanol stocks dropping to a 2015-low and ethanol-blended gasoline production climbing to a record high.

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 almost eight decades of Pemex monopoly, the Mexican energy sector is entering a new era of foreign oil company participation. A decade of steady decline in domestic oil & gas production has incentivized the Mexican government to lift the regulations and allow international companies to start developing offshore projects in Mexican waters. The government is keen to attract private investors to its energy sector with the hope of kick starting its struggling economy.

Over the last decade Mexico’s oil production decreased at a compound annual growth rate (CAGR) of -3.3%. This was driven by a drop in drilling activity, which declined at a CAGR of -2.7% 2005-2014. In spite of the country’s offshore potential, DW continues to take a conservative view on the country’s future oil production. Whilst the drilling activity is expected to soar over the balance of the decade at a CAGR of 13.3% (as a function of Pemex offshore projects that are expected to come on stream in next years) Mexican production is expected to grow only at a modest CAGR of 0.3% through to 2020. Operating fields are mature and additional drilling activity is only expected to offset the loss in production.

Despite the low oil price environment, the government has remained committed to auctioning its offshore blocks, keen to drive international investment. Recent tenders failed to meet government expectations; out of 14 shallow water exploration blocks only 2 were awarded to a consortium of Sierra Oil & Gas, Talos Energy and Premier Oil, leaving the pre-qualified majors without new acreage despite previous recorded successes and infrastructure already in place.

Following a disappointing result in the first upstream tender for shallow water exploration, lessons have been learned. Raising the domestic flagging oil output is President Peña Nieto’s key economic target. The Mexican government will need to revise its expectations if it is to see more success for its subsequent auctions. Although it has been reported that the contract terms and requirements for future tenders have been improved, it remains to be seen if those are attractive enough for operators to splash their exploration budgets in Mexican offshore projects.

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