Finance News

15DWMondayAs strained negotiations between the Greek government and European financial ministers enter the end-game, the impact on energy markets remains uncertain. Setting aside both the deeply troubling social impact for Greek citizens and other major forces – from Chinese equities to an Iranian nuclear deal – the threat of Greece leaving the Euro is already dampening crude prices. The concern for oil markets centers around two factors: the consequences for economic stability and growth in Europe, and strengthening of the US dollar.

Greece herself consumes less than 0.4% of global crude, produces fewer than 9,000 barrels per day and had an economy of $240bn last year – around 0.3% of the global total. An exit from the Euro, however, threatens the breakup of the Eurozone itself, a major global economy and consumer of 9.7 million barrels of oil per day. Should Greece ‘walk away’ from her debts, exposure to the debt in other member states, coupled with premiums for borrowing (particularly in Southern Europe) could be expected to usher in another period of recession. Estimates from the IMF suggest a contraction of between 2% and 5% is possible. While this picture remains highly uncertain, historical linkage of oil consumption and GDP growth would imply a potential reduction of 360 kboe/d per year in consumption. Tiny indeed, but in an over-supplied market, every portion of demand is important.

Ever-deeper uncertainty within Eurozone economies however, is likely to increase the flight of capital to dollar-based equities, The Euro has already fallen 18% against the dollar in the past 12 months and a Greek exit would likely dampen this significantly as investors look nervously at other debt-laden Euro members. A strong dollar weakens international oil demand as the commodity, traded in USD, is more expensive on a relative basis.

If ‘Grexit’ becomes a reality it will serve to further dampen the recovery in oil price – It will be interesting to see the impact of the weekend’s ‘In-Out’ meetings in Athens and Brussels on oil prices in the week ahead.

Matt Loffman, Douglas-Westwood Houston
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14DWMonday copyBetween 2009 and 2014, refining margins rarely exceeded $5/bbl in Europe and $8/bbl in Asia, whilst the USA was the only safe-haven, averaging $15/bbl. In 2015, however, the game changed as the global oversupply triggered a crude price collapse, resulting in healthier refining margins – year-to-date averages in Europe are $9, $12 in Asia and the in USA $20.

This plot is not new and many would expect that in markets geared heavily towards light/sweet oil the premium for processing lower quality crude – the ‘complexity advantage’ – should tighten in a low oil price environment. However, this is not happening. Since early 2015, a barrel of Russia’s Urals trades at a discount to Brent of $1.5, oscillating in a -$1/-$2 range. Nigeria’s Bonny Light, arguably one of the highest quality crudes, traded last week at a 10-year low premium to Brent of $0.23, vs. +$2 in early 2014.

Many factors are at work here. Firstly, the downstream supply chain is rather rigid, as refineries are designed and located for ease of supply and so process specific crude grades, making switching uneconomical. But the primary driver of reduced premiums is now the level of oversupply of crude. Spectacular growth in US light oil production has squeezed output of light/sweet West African, and heavy/sour South American crude grades. Meanwhile, the Middle East maintains production and becomes the reference for Asian buyers, leaving European refineries with a steady Russian output supplied through pipelines.

Recent history teaches the virtues of composure. Following the US fracking revolution, Gulf Coast refineries freshly upgraded to process anticipated heavy/sour foreign crude have not seen returns on their investments, while those who passed on costly upgrades are now well positioned to process booming domestic light/sweet production. However, refiners shouldn’t be banking on sustained high margins. As the market works through an enduring supply glut, and grapples with the prospect of renewed Iranian output, the complexity advantage is likely to prove as volatile as crude prices.

Antoine Paillat, Douglas-Westwood London
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14DWMondayA sustained supply glut has maintained Brent oil prices through the first five months of 2015 at some 47% lower than the same period in 2014. Industry observers expect low oil prices to eventually take supply out of the market and drive a price correction.

So, when will this happen? To-date, supply appears unaffected – latest figures from the EIA indicate that US production has risen almost 13% in the last 12 months. Saudi Arabia is much the same, production has hit a record rate of 10.3 mb/d. Many of the projects committed to over the 2011-2014 period (where we saw record levels of E&P Capex) are only just starting to come into production due to the long lead-times.

Returning off-market crude has further boosted supply. Political disruption notwithstanding, Iraqi oil production has hit new highs in 2015, while recent announcements by the Ministry of Oil (MOO) show crude exports in May hit record levels for the second consecutive month. What with OPEC’s 5th June meeting reaffirming the cartel’s decision to hold crude production at 30 mb/d, it is hard to see a supply-led oil price recovery any time soon.

Oil price recovery will instead hinge on growth in energy demand and, by association, economic growth. However, in April this year the IMF reported an expectation for 2015 of ‘moderate’ growth of 3.5% with “weaker prospects for some large emerging market economies”.

According to BP’s Energy Outlook 2035, liquids demand growth to 2020 will be focused outside of Europe and North America, with China playing a large part. Total growth in oil demand is expected to be 6%, while DW’s D&P forecast indicates supply growth of 5% over the same period. It follows logically that prices will recover, but that recovery is likely to be slow and gradual.

Matt Adams, Douglas-Westwood London

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Apparently undeterred by low oil prices, oil & gas output from ultra-deepwater (>1,000m water depth) fields will continue the relentless growth seen in recent years. In the latest World Drilling & Production Forecast, DW predict combined oil & gas production from such fields will grow 7.7% year-on-year over 2015-2021 from 6.5 mboe/d to 10.2 mboe/d. This will come from the drilling of 1,470 ultra-deepwater wells, an increase of 68% on the seven years prior. A key factor is that at these water depths, only the most highly productive plays are being targeted. Additionally, deepwater projects typically have funding secured several years ahead of first production – hence the projected medium term growth.

Leading the way with increased production will be the historically big deepwater producers – Angola, Brazil, Nigeria and the US. The latter will see the strongest growth of the four with ultra-deepwater oil output set to climb from 1.5 mboe/d in 2015 to 2.1 mboe/d in 2021. This will be the result of 11 floating production platforms being brought online, including the recent additions of Anadarko’s Lucius spar, Llog’s Delta House and Chevron’s Jack/St. Malo (both floating production semisubmersibles). This, combined with Petrobras’ continuing success in Brazil’s pre-salt reservoirs and West Africa’s ultra-deepwater plays apparent resilience to the oil price downturn, global ultra-deepwater production will rise from 6.5 mb/d in 2015 to 10.1 mboe/d in 2021.

It must be noted, however, that such projects will be vulnerable to cancellation and delay in the long term should the current low oil price situation be sustained. Operators may look to improve the economics of projects currently in the pipeline by boosting reserve bases through conducting additional appraisal activity – well demonstrated by Statoil’s recent gas discoveries in the area around the site of the future Aasta Hansteen spar.

DW anticipate $378 billion will be spent on floating production platforms and subsea hardware over the next seven years. Forty-five percent of this will be spent on ultra-deepwater fields, reflecting their importance in the global oil & gas supply picture.

Matt Cook, Douglas-Westwood London
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13piranewlogoNYC-based PIRA Energy Group believes that crude stock draws have already begun and will pick up momentum in the third quarter. In the U.S., crude and products stocks showed builds. In Japan, crude runs fell marginally and imports dropped back such that crude stocks corrected lower. Specifically, PIRA’s analysis of the oil market fundamentals has revealed the following:


World Oil Market Forecast

Wage gains in developed world to drive faster second half global economic growth with Greece risks muted by potential aggressive ECB/Fed action if needed. The worst of oil market imbalance is over with inventory overhang being much less than generally expected. Crude stock draws have already begun and will pick up momentum in the third quarter. Longer-term supply/demand fundamentals are bullish. The United States is becoming a big factor in the NGL market. MENA geopolitical risks to supply remain substantial, and while an Iranian nuclear deal looks more likely than not, oil markets are expected to have to wait until 2016 for more Iranian oil, and by that time it will need it.

Robust U.S. Stock Build

Commercial stocks built this past week, as both crude and products showed builds. This reversed eight consecutive weeks of crude stock draws, but we expect the crude draws to continue next week. Total demand growth remains strong, including gasoline and distillate. We think the April and current weekly reported crude production values are too high, most likely driven by an overstatement of Texas production.

Japanese Crude and Finished Product Stocks Draw

Crude runs fell marginally and imports dropped back such that crude stocks corrected lower. Major product demand performance was much stronger, up nearly 0.5 MMB/D. All the major finished product stocks levels declined. The indicative refining margin remains very good, though softer on the week as all the major cracks gave ground.

Freight Market Outlook

Tanker markets have been counter-seasonally strong in all size groups during May and June. OPEC and Saudi crude production are near record levels, while refiners are reaping stellar margins across the globe and are more than willing to process (and ship) the additional barrels. Unintended floating storage has also provided support as international markets are struggling with surplus barrels. As a containment step while seeking a buyer, these unplaced cargoes are being slowed down while in-transit or delayed upon arrival resulting in substantial opportunity and demurrage costs well in excess of current contango credits. The recent surge in rates is not likely to persist unless floating storage expands further, which is unlikely in PIRA’s view.

U.S. NGL Field Production Soars

U.S. NGL field production has been increasing at accelerating rates. New data from the EIA show that at 3,314 MB/D, April total NGL field production was nearly 14% higher than a year ago. Year-on-year production increases have been running between 13-15% for each month of this year thus far. PIRA had expected to see field production increases begin to abate due to lower drilling and investment activities; however, this has yet to occur in any meaningful way.

Ethanol Prices Increased

Ethanol prices strengthened during the last half of June as stocks drew and the production of blended gasoline hit record levels. Assessments were also supported by rising raw material costs.

U.S. Output and Stocks Lower

U.S. ethanol production dropped to a six-week low 968 MB/D the week ending June 26 as heavy rain and flooding disrupted operations at some Midwestern plants. Inventories have plummeted by nearly 1.2 million barrels over the past two weeks as ethanol-blended gasoline production soared to a near-record 9,106 MB/D last week.

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.

13piranewlogopngNYC-based PIRA Energy Group believes that the peak in the crude oil surplus has passed. In the U.S., commercial stocks reach new record level, as surplus falls again. In Japan, crude runs rebounded, imports were low and stocks drew. Specifically, PIRA’s analysis of the oil market fundamentals has revealed the following:

Asia-Pacific Oil Market Forecast

The peak in the crude oil surplus has passed. Products stocks, on the other hand, which had been near multi-year norms in the three major OECD markets, will grow in coming months, despite rising demand. The transition from crude surplus to more of a product surplus will begin to pressure refinery margins lower. Gasoline cracks should remain healthy for the next several months due to declining inventories and increasing coverage requirements in the Atlantic Basin. Middle distillate cracks will ease, with new refinery startups in the Middle East, Turkey, and Latin America ramping up and supplies increasing ahead of demand growth.

U.S. Commercial Stocks Reach New Record Level, As Surplus Falls Again

Total commercial stocks built last week to a new record high level. However, last week’s stock build was less than half of last year’s build, as the total commercial stock surplus versus last year narrowed to the lowest excess since January. June of last year is when commercial stocks began to approach the top of the five-year range.

Japan Crude Runs Rebounded, Imports Were Low and Stocks Drew

Crude runs recovered almost one third of the drop from the previous week despite the ongoing outage at Kashima. Crude imports were very low and crude stocks drew 4.1 MMBbls. Finished product stocks drew 1.4 MMBbls. There were draws on all the major products other than kerosene. Demand performance was mixed across products, but aggregate demand was higher. The indicative refining margin remains very good. Gasoline and naphtha cracks firmed, while middle distillate and fuel oil cracks eased.

Tight Oil Operator Review

Operators focused on the direct and indirect effects of the lower price environment on their production profiles for 2015. Drastically lower rig counts have started to make a dent in production growth, but the bulk of the effect will not be felt until 2Q15. Most operators predict that their 2015 exit rate will be lower than 1Q15 production, indicating a relatively weak 2H15, unless prices improve. The outlook for 2016 remains uncertain, but most operators appear upbeat for 2016, expecting prices to rise and claiming to be ready to ramp up activity.

U.S. Octane Values Spike Higher

Octane values have recently spiked. This follows a pattern that has prevailed since 2012 of rising octane values during spring turnaround season and the transition period between summer and winter grade gasoline. There is a confluence of factors that led to this increase, notably increased premium gasoline demand and changes in refinery and petrochemical operations.

El Niño's Impact on Distillate Demand in the U.S. and Europe

PIRA analyzed the 5 strongest El Niño's measured over the October through March period for the last 20 years. For the U.S. only the strongest El Niño impacted distillate demand. For Europe, 3 out 5 El Niño's had an impact on distillate demand.

Waterborne LPG Freight Leaps Higher

Spot VLGC freight rates are soaring at the highest levels of the year. The cost of freight on the benchmark Ras Tanura to Chiba route jumped 5% to just below $120/MT. Meanwhile the cost of freight from the USGC to Japan continues to be quoted above $250/MT and around $90 for shipments from the U.S. Gulf to NW Europe.

Ethanol Prices plunge

U.S. ethanol prices plummeted the week ending June 12 due to near record production and rising inventories. Manufacturing margins fell for the fourth consecutive week as co-product DDG prices decreased to the lowest level of the year.

Ethanol Output Falls

U.S. ethanol production fell for the first time in six weeks during the week ending June 12, dropping to 980 MB/D from 992 MB/D in the preceding week. Despite the decline, output was still at the second highest rate of the year.

Biofuels Programs Continue in Over 60 Countries

Although about 80% of the biofuels are produced or consumed in the U.S., Europe and Brazil, more than 60 countries have biofuels programs.

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.

13piranewlogopngNYC-based PIRA Energy Group reports that May WTI price rises as Cushing crude stocks fall. In the U.S., commercial stocks reach another new record level, even as surplus falls. In Japan, crude runs continue dropping with higher stocks. Specifically, PIRA’s analysis of the oil market fundamentals has revealed the following:

May WTI Price Rises as Cushing Crude Stocks Fall

The rebound in crude prices continued in May, with WTI averaging nearly $60/Bbl and exceeding that level on several occasions. Crude balances remained tight in Canada and West Texas, and stocks began to decline from record high levels in Cushing and the Rockies. Most price differentials were little changed, remaining near or slightly above pipeline parity, except for heavy Canadian grades, which continued to strengthen on heavy demand and late-month wildfires.

U.S. Commercial Stocks Reach Another New Record Level, Even as Surplus Falls

Total commercial stocks built a combined 7.4 million barrels this week, but still built less than this week last year, so the year-over-year surplus narrowed. Demand fell about 1.1 million barrels a day this week, reflecting a similar fall last year, most likely influenced by the Memorial Day holiday. The total commercial stock level was a new record high.

Japanese Crude Runs Continue Dropping with Higher Stocks

Crude runs dropped another 89 MB/D, with a big reduction in the crude import rate such that the crude stock build was limited to 1.6 MMBbls. Finished product stocks rose primarily due to builds in naphtha and fuel oil with a lesser rise in kerosene. Gasoline stocks built slightly and gasoil stocks drew. The indicative refining margin remains good but slightly lower on the week due to narrower light product cracks but better fuel oil cracks.

2015 Iraq Oil Monitor

Rhetoric is escalating between Baghdad and the KRG over alleged noncompliance with the export- and revenue-sharing agreement. The need for revenue is expected to drive cooperation for now, but risks to the deal are rising. The fight against ISIS does not present an imminent danger to Baghdad or southern production, but the growing role of Shiite militias in Anbar province threatens to exacerbate sectarian tensions. Investment cuts could endanger anticipated production ramps, but new infrastructure and segregation of crude grades at Basrah should facilitate higher exports starting in June.

EIA’s Upwardly Revised U.S. Monthly Crude Production Not Necessarily Bearish

The recent upward revisions to monthly and weekly crude production data caught analysts off guard. We do not think this is a bearish development, however, because the offsetting decline to the crude balance item, following the upward revisions to crude production, minimizes the bearish impact of the higher reported production numbers. March crude stocks and stock change were revised down, not up, in spite of the highest reported monthly crude production since 1970.


OPEC met to roll over the existing agreement. Efforts to have a non-OPEC/OPEC output cut have been thwarted by Russia’s unwillingness to participate. The recent strength in oil prices over the last month has reduced pressure for this initiative. The Gulf OPEC members see strong demand for their crude and expect prices to strengthen to end year with $75/Bbl Brent a distinct possibility.

Ethanol Prices Fall

U.S. ethanol prices tumbled the week ending May 29 pressured by higher production and lower corn values. The EPA's bearish announcement of proposed biofuel mandates added to the decline.

Ethanol Output Increases

U.S. ethanol production continued to advance the week ending My 29, rising to a four-month high 972 MB/D from 969 MB/D in the prior week. Inventories were essentially flat, declining by only 29 thousand barrels to 20.1 million barrels.

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.

13piranewlogopngNYC-based PIRA Energy Group reports that Basrah Heavy enters the market. In the U.S., another counter-seasonal U.S. stock draw. In Japan, crude runs decline, with much lower crude stocks. Specifically, PIRA’s analysis of the oil market fundamentals has revealed the following:

Basrah Heavy Enters the Market

Basrah Heavy, a new Iraqi crude grade, will begin loading in June 2015. The crude is quite heavy (23.5° API) and high in sulfur (4.2 wt. %), and is more similar to Mexican Maya crude than most other Middle East grades. SOMO, the Iraqi oil marketing authority, has introduced this crude because the average quality of Basrah production from southern Iraq has been declining over the last several years due to inclusion of new production from heavier fields including West Qurna 2, Missan and Halfaya. PIRA believes SOMO has crafted a sensible marketing strategy to deal with changing production quality and capture high value for their sales.

Another Counter-Seasonal U.S. Stock Draw

Overall commercial oil inventories fell 2.1 million barrels this past week following the week earlier stock decline of 5.5 million barrels as product demand remained very strong. Year to date, the DOE weekly demand data adjusted for normal degree days and actual product exports (versus the DOE assumptions) is up 440 MB/D. Sixty percent of this increase is in gasoline certainly suggesting price matters despite a weak U.S. economy. The latest four week average adjusted demand is running 740 MB/D, or 4.0%, higher than last year.

Japanese Crude Runs Decline, with Much Lower Crude Stocks

Crude runs dropped 174 MB/D with low imports such that crude stocks drew strongly. Finished product stocks rose modestly. Gasoline demand fell back after the holiday, while gasoil demand rebounded. Kerosene demand was moderately strong and the stock build rate fell back. The indicative refining margin remains good with all the major product cracks firming on the week.

U.S. Shale Oil Independents Also Winning Reserves Additions Battle

For the period between 2010 and 2014, the average reserves replacement ratio of a group of U.S. independents has been twice as high compared to Big Oil (216% versus 105%). However, a large portion of these newly added reserves are associated with future shale oil/gas drilling locations that may need to be drilled within a five year period or be taken off the books. If drilling activity stays at the current low level due to sustained low crude prices, it may be a challenge for the independents to keep all those reserves in the proved category. For independents, this can affect their ability to get favorable financing or issue equity.

Asian Arbitrage Hampered by Soaring Freight

Saudi CP Propane futures languished as soaring spot freight continued to make the arbitrage East unworkable. June CP futures lost 7% to $407/MT, approaching the low levels plumbed in January. Meanwhile, the Far East Index dipped 2.6% to near $500 while butane prices were steady at $542/MT. LPG prices in Asia remain in tight competition with naphtha for petrochemical use, necessitating lower source pricing for triggering incremental demand.

U.S. Ethanol Prices and Margins Increase

Chicago ethanol prices rose the week ending May 15, supported by robust demand in the domestic markets, as well as the third straight week of stock draw. Manufacturing margins improved for the ninth consecutive week to levels not experienced since December.

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.

14DWMonday copyPetrobras has long been a pioneer in the adoption and deployment of deepwater technology. This has enabled them to build huge reserves of some 16 billion barrels of oil. Converting these reserves to production, however, is another matter and Petrobras has a history of setting ambitious targets, with a poor record of meeting them.

The long delayed ‘2015-2019 Business and Management Plan’ released last week is a reflection of the new reality for Petrobras. With collapsed oil prices and unfavorable exchange rates, Petrobras has slashed their expenditure plans by 40% from the plans announced a year ago. Recognizing the upstream challenges, the company is now allocating 84% of its budget to E&P compared to 70% in the previous plan. The biggest cut goes to their refining and supply sector which has seen its budget reduced by 67% compared to last year’s plan.

Production decline from existing fields is a huge challenge with around 200,000 bpd of capacity eroded each year. Brazil’s huge deepwater potential remains constrained with Petrobras having to revise their production target for 2020, which now forecasts domestic oil output to increase to 2.8 million barrels per day – 40% lower than its projection 12 months ago. Douglas-Westwood predicts that over the forecast period, Brazil will need to drill around 300 development wells in deepwater, in order to sustain and reach its production target. However, of the 29 new rigs being built by the company, many are under threat from either funding problems or yards withdrawing from the contracts. Douglas-Westwood had already taken a conservative position on Brazil and the cut in production target now brings in line Petrobras’ expectations and our own ‘DW D&P’ forecast. The scale and importance of Brazil in the overall offshore sector means that the impact of the latest spending revisions will be felt throughout the oilfield service industry supply-chain.

Mark Adeosun, Douglas-Westwood London, This email address is being protected from spambots. You need JavaScript enabled to view it.

14DWMondayThe crash in oil prices has led to a dramatic decline in the number and value of awards for FPSO units. There have only been three contracts awarded this year; a conversion for the Sankofa-Gye Nyame development in Ghana, a small conversion in Iran and an upgrade in Indonesia. In total these awards account for around $1.5 billion.

By comparison, in the first half of 2014 there were six orders and crucially, the value of those six was 528% higher than the three this year – demonstrating the lack of high Capex orders in the current low oil price environment. H1 2014 saw two newbuild contracts worth over $1 billion each, in addition to the awarding of a $4 billion contract for two converted FPSOs on the Kaombo field in Angola. This demonstrates the current caution of operators at the moment as they aim to bring costs down and wait for a recovery in oil prices before commissioning major projects.

Expectations for the rest of this year are little-better. Many awards have been pushed into 2016, while Petrobras are rumoured to be considering cancelling two topside contracts for FPSOs planned on the Buzios field. Douglas-Westwood forecasts that four more awards are likely this year while a further five could potentially be awarded if there is an improvement in the oil price.

Whilst the immediate outlook may not be positive, the future of FPSOs is still considered encouraging. FPSO solutions will be vital for the development of oil and gas fields in deeper waters as well as for marginal fields in mature regions. The current low oil price may lead to a decline in orders that continues well into 2016. However, Douglas-Westwood still forecasts FPSOs with a total value of $60billion will be installed 2015-2019 and within our in-house data we are tracking over 130 potential future deployments.

14DWMondayDespite surging production from U.S. shale plays, the scale of long-term production remains uncertain, leading to the question of where will be the next major play? Attention is being focused on Arctic Alaska, where reserves are waiting to be exploited. Geologists estimate total Arctic oil reserves of nearly 134bn BOE, 28% of which lie in US territory, and some 39bn BOE of natural gas. So what’s the catch?

Early last week, hundreds of “kayaktavists” blocked the entrance to Seattle’s port where Shell docked its Arctic bound Polar Pioneer drilling rig. The activists are concerned with the environmental impact and risks of Arctic drilling. Wilderness experts say there is a 75 percent chance of at least one large spill occurring in the Chukchi Sea over the next six decades. Shell’s initial exploration attempts in 2012, ending with the Kulluk drilling rig running aground, increased concern over the safety and potential environmental impact of the drilling activity.

With high depletion rates and uncertainty around the long-term ability of unconventional production to meet growing demand, Alaska is of strategic importance. In the longer-term, Alaska has the production potential to maintain US crude supply for decades to come. And Alaska needs the revenues. This future supply, however, depends on decisions made now. It takes years to acquire a permit and begin production in Alaska due to difficult conditions and non-existent infrastructure. Shell expects environmental approvals will delay production till the 2030s.

Other nations, such as Russia are moving forward with Arctic drilling and China is ‘ready to assist’. U.S. reserves, however, remain untapped as the “Paddle in Seattle” protest attempts to derail Shell’s efforts for Alaska exploration. Shell has sunk over $6 billion in preparing to recover oil with plans to drill up to four exploratory wells over two years in the Chuchki Sea. Shell’s drilling program this year could determine the future of Alaskan and US crude supply over the coming decades.

Mitchell Zlotnik, Douglas-Westwood Houston
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14DWMondayFor the US energy industry, 2014 will be remembered as the year when crude oil prices fell below 50 $/bbl, resulting in significant realignments in the sector. Aside from the oil price collapse and the historic high of domestic natural gas production, several other energy records were set last year. Both solar and wind energy production reached an all-time high in the US, contributing to a record 9.8% of total primary energy supply.

The US is ranked the second largest producer of wind energy. With more than 65 GW installed capacity in 39 states, wind energy represented over 4% of national power generation in 2014. Annual installations peaked in 2012 when some 13 GW of new capacity came online. At the time of writing, onshore wind energy is approaching cost-competitive levels around the country. However, while the US is internationally recognized for its strong offshore energy operations, there has been no utility-scale offshore wind energy production in the country to date.

Several groups have been working on offshore wind project plans, but they have faced funding difficulties and public resistance, which have negatively impacted their ability to reach a final investment decision. Throughout two rounds, the US Department of Energy selected three Offshore Wind Advanced Technology Demonstration Projects which are expected to start their operation in 2017.

Ahead of the government supported projects, and after seven years of planning, the construction of the Block Island Wind Farm – the first US offshore wind plant – finally began in April 2015. The 30 MW farm which will be located 18 miles from the coast of Rhode Island, consists of five turbines and is expected to start its operation in Q4 2016. The feasibility of the project is secured by a 20-year power purchase agreement. Compared to the European sites, the Block Island project is tiny, but it could prove the commercial viability of such projects for policy makers, utilities and capital funds, boosting further investment in the US offshore wind energy sector.

Patrik Farkas, Douglas-Westwood Houston +1-832-591-0202 or This email address is being protected from spambots. You need JavaScript enabled to view it..



12DeloitteA new piece of research could help the oil and gas industry understand and implement greater collaboration in the North Sea, as the sector continues to manage lower oil prices.

Business advisory firm Deloitte launched its inaugural oil and gas collaboration survey, with support from Oil & Gas UK.

The research will assess the level and quality of collaboration currently taking place on the United Kingdom Continental Shelf (UKCS), as well as how companies across the supply chain could work together in new ways.

The research, which has comparisons with a Deloitte study carried out in the US looking at the automotive industry, will survey participants on:

  • What collaboration means;
  • What constitutes effective collaboration;
  • How companies view themselves and each other as collaborators.

Collaboration has been a consistent industry theme since the publication of Sir Ian Wood’s UKCS Maximising Economic Recovery Review. It was a core recommendation in Sir Ian’s report, but there is currently little data available on what it means and how it might benefit the upstream oil and gas industry on the UKCS.

Justin Watson, a partner in Deloitte’s consulting practice, said: “Collaboration has been the focus of many client conversations about how we take the industry forward. With subdued oil prices set to continue, it’s more important than ever that companies look at what could be gained by working more closely together to bring down costs, reduce complexity and boost efficiency.

“However, what collaboration means for the oil and gas industry is not well understood. Our research aims to help define what collaboration is, how it looks in practice and how companies can better collaborate with one another.

“We would encourage anyone operating in or providing services to the UKCS to take part in this research. We hope a better understanding of collaboration could help companies in the North Sea improve productivity and efficiency, cut costs, adopt new ways of working and make the most of what remains in the basin.”

Oil & Gas UK’s business development director, Stephen Marcos Jones, added:

“Whilst tough decisions on resources and projects are being taken by individual companies, there is a growing effort to work together to make the UKCS more efficient and attractive for investors in a world of $60 oil.

“Any work looking at collaboration in our sector, and specifically how companies can work together in new ways, is therefore of real benefit and will be warmly welcomed by the UK’s offshore oil and gas industry.”

This project builds on Deloitte’s previous work on ‘Making the Most of the UKCS’ – Cultural shift key to maximising economic recovery of oil and gas.

13piranewlogopngNYC-based PIRA Energy Group reports that Brent crude prices lost their earlier upward momentum over the last few weeks with on-going Atlantic Basin crude length. In the U.S., slight stock decline this past week further narrows stock excess. In Japan, runs drop Sharply and crude stocks surge. Specifically, PIRA’s analysis of the oil market fundamentals has revealed the following:


European Oil Market Forecast

Brent crude prices lost their earlier upward momentum over the last few weeks with on going Atlantic Basin crude length. But fundamentals are at an inflection point and will improve from here with high refinery runs this summer and sequentially declining U.S. crude production. As crude stocks erode, prices will gradually strengthen. Gasoline cracks are currently strong with declining inventories and increasing coverage requirements for local/export demand growth in the Atlantic Basin. Gasoline cracks should remain very healthy for the next few months. With high refinery production in the Atlantic Basin and new distillate-oriented refineries starting up in the Middle East, Turkey, and Latin America, middle distillate stocks will build. Diesel cracks will weaken, bottoming in July-August before seeing seasonal recovery. Recent European refinery margin strength, the best in many years, will gradually erode.

Slight U.S. Stock Decline this Past Week Further Narrows Stock Excess

The crude stock decline this past week more than offset the product inventory increase, leaving stocks slightly lower. This was the largest crude stock decline this year and it came as refiners ramped up runs to a weekly high for the year. For the same week last year, overall commercial stocks increased, resulting in the year-on-year stock excess narrowing. The bulk of this excess is in crude oil. Gasoline stocks are now just 1.8% higher than last year, and with recent demand up 4.6%, days supply forward inventory cover is a lot tighter than last year.

Japanese Crude Runs Drop Sharply, Crude Stocks Surge

Crude runs dropped sharply reflecting a major refinery fire and ongoing turnarounds. Crude imports rose and crude stocks surged 6.7 MMBbls. Finished product stocks drew 0.5 MMBbls. Gasoline demand rebounded with higher yield, and stocks posted a draw. Gasoil demand eased with a surge in yield and lower exports so stocks built. Kerosene demand was very low and the stock build rate came in at 41 MB/D, despite lower yield. The indicative refining margin remains very good.

Earthquakes in Oklahoma: Increased Costs Looming for Wastewater Disposal

The increasing frequency of earthquakes in Oklahoma is becoming a growing concern for the state’s fracking industry. While the causal link may not have been conclusively proven, regulators are already taking action to impose restrictions on the disposal of produced water. Additionally, insurance companies are denying coverage for "man-made" earthquakes, and lawsuits from parties suffering earthquake damage continue to increase in frequency. While we do not believe that production is threatened, costs are likely to rise. If shallower injection wells and lower pressures solve the problem, the cost impact will likely be minor. If water treatment is required, the costs would become meaningful, but we do not believe that is a likely case.

Propane Price Recovery Underway

U.S. NGLs prices were broadly higher last week as the plunge in propane over the past several weeks was seen as overdone. Market participants saw value at lower levels and scooped up length. Mt. Belvieu June NYMEX futures ripped 15% higher on conviction buying, with prices increasing every day of last week. Contango in the June-August propane spread has blown out to 6¢/gal, a price sufficient to make storage plays profitable in even the most expensive storage situations.

Manufacturing Margins Fell for the Third Straight Week

U.S. ethanol prices were slightly higher the week ending June 5, tracking corn values. Manufacturing margins fell for the third straight week as co-product DDG prices decreased.

U.S. D6 Values Plunge

U.S. ethanol production advanced to 992 MB/D last year matching the highest level ever reported in the DOE's weekly supply report. D6 RIN values plunged to the lowest levels in over a year.

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.

13piranewlogopngNYC-based PIRA Energy Group believes that monetary reflation is eliminating the risk of deflation, positively impacting financial assets and increasing economic growth. In the U.S., strong demand and high runs narrow stock surplus. In Japan, refiners continue maintenance, with higher crude stocks. Specifically, PIRA’s analysis of the oil market fundamentals has revealed the following:

World Oil Market Forecast, May 2015

Monetary reflation is eliminating the risk of deflation, positively impacting financial assets and increasing economic growth. Oil demand is strong but so is supply, with supply growth concentrated in first half 2015. Even with crude markets tightening in second half 2015, large volumes of crude in storage will require time spreads remunerating storage. There are very powerful pillars of support for oil prices from Middle East turmoil, current low spare capacity, an improving global economy and the magic of low prices. Actual supply disruptions have recently ticked higher. Financial length is particularly low from a value point of view and will likely continue to support prices. Strong refinery margins will face some pressure later in the third quarter. Gasoline should outperform distillate.

U.S. Strong Demand and High Runs Narrow Stock Surplus

This is the seventh consecutive week the stock surplus to last year has narrowed. Most of the excess inventory position remains in crude and other products. The excess gasoline position narrowed while the excess distillate position widened. Crude stocks fell largely related to low imports and high runs. Crude runs (4-week average) are about 400 MB/D higher (2.5%) than last year, and they are being supported by strong demand growth.

Japanese Refiners Continue Maintenance, with Higher Crude Stocks

Crude runs dropped another 61 MB/D, but imports surged and crude stocks built strongly. Finished product stocks fell modestly with draws in fuel oil and the jet-kero complex. Gasoline demand rose back after a post-holiday lull and stocks were modestly higher. Gasoil demand continued to gain, and despite higher yield and lower exports, stocks were little changed. Kerosene demand fell back, but yield was very low and stocks put in one last draw on this past heating season. The indicative refining margin remains good with all the major light product cracks firming on the week.

China Quarterly Oil Demand Monitor

China’s GDP growth is expected to decelerate gradually in 2015 and 2016. Though several recent data releases have disappointed, the government has been easing policy actively and will prevent a hard landing scenario from materializing. At the same time, the political leadership’s emphasis on the new economic normal paradigm will likely cap the upside surprise potential for GDP growth. Oil demand is projected to register constructive gains in both 2015 and 2016. Recent declines in retail energy prices are providing a boost for oil demand.

Maximizing Profits from Shale Oil in a Low Crude Price Environment

The industry keeps making remarkable improvements in the extraction of hydrocarbons from shale oil deposits, which, coupled with the recent reductions in service costs, continue to push down breakeven costs. However, we are not out of the barrel yet. The improvements and service cost reductions, likely to continue for some time at diminishing rates, are not sufficient to stop decline in U.S. shale oil production. Only an increase in crude prices will turn things around. PIRA forecasts continued decline in shale oil production until mid-2016, when Brent is expected to recover from the current $65/Bbl to around $75/Bbl. Until then, these continuous improvements and service cost reductions will permit production from new wells that would otherwise be uneconomic in the current low crude price environment. Reduced drilling times, higher well productivity and lower service costs can significantly improve profitability of new wells as illustrated in this analysis.

Freight Market Outlook

Tanker markets have thus far eluded the usual second quarter seasonal rate swoon. Record inventory builds seen over 1H 2015 have not translated into a steeper contango or significant floating storage, but tanker markets have been resilient nonetheless. While bullish market sentiment has contributed, the main drivers are related to positive global oil fundamentals. OPEC and Saudi crude productions are near record levels while refiners are reaping stellar margins across the globe and are more than willing to process (and ship) the additional barrels. Chinese imports hit record highs in April. Tanker operators have also helped themselves uncharacteristically by not over-building over the past several years and are purportedly maintaining operations in slowdown mode despite low bunker prices and high spot tanker earnings.

Volatile Week for U.S. NGLs

Rumor of propane containment issues at Mont Belvieu due to heavy rainfall sent cash and futures prices plunging to multi-year lows midweek. Cash non-LST propane lost 15% by Thursday but rebounded as concerns fizzled and on Friday’s broader energy complex rally. Week-on week June Mont Belvieu propane futures were 2.6% higher, while butane, which followed propane lower earlier in the week, ended 3.3% higher. Ethane was pulled 4.5% lower with the natural gas sell off.

Ethanol Production Increases

U.S. ethanol production rose for the third consecutive week the week ending May 22, after falling to a 29-week low at the end of April. Output increased to 969 MB/D last week from 958 MB/D in the prior week.

EPA Proposes Sharp Reduction to Biofuels Requirements

The EPA proposed biofuels requirements for 2014, 2015, 2016 and biodiesel for 2017. Ethanol RIN prices plummeted.

U.S. Ethanol Prices and Margins Fall

U.S. ethanol prices plunged during the second half of May. Manufacturing margins also declined.

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.

11piranewlogopngNYC-based PIRA Energy Group believes that Brent crude prices will continue to gradually strengthen for the next few months. In the U.S., commercial crude and product inventories both declined this past week. In Japan, crude runs decline while crude and product stocks rise. Specifically, PIRA’s analysis of the oil market fundamentals has revealed the following:

European Oil Market Forecast

Brent crude prices will continue to gradually strengthen for the next few months reflecting improving crude balances with higher refinery runs, increased shipments to Asia, flattening United States/non-OPEC crude production and rising geopolitical concerns. Refinery runs will ramp up as maintenance winds down, peaking in June-August in the Atlantic Basin.

First Major U.S. Stock Draw of 2015

U.S. commercial crude and product inventories both declined this past week. The strongest weekly product demand of the year combined with relatively low crude imports to push stocks lower. The year-on-year stock excess narrowed by 9 million barrels to 157 million barrels or to a still large 14.4%.

Japanese Crude Runs Decline, While Crude and Product Stocks Rise

Two weeks of data were released this past week covering the traditional May holiday period. Crude runs eased both weeks, while crude and finished product stocks rose both weeks. Gasoline demand was higher, while most other product demands eased. Kerosene stocks began to build seasonally. The indicative refining margin remains good, but it has been coming off its highs.

Asia-Pacific Oil Market Forecast

Oil balances are tightening. A global crude surplus has been built, but it is about to be reduced as runs continue to rise supported by healthy refining margins. The balances will be increasingly helped by slowing non-OPEC supply growth as 2015 plays out, and then outright year-on-year declines in non-OPEC supply as we move towards year-end. Over the summer, Middle East producers, particularly Saudi Arabia and Abu Dhabi, will have limited additional barrels for sale as new refineries continue their ramp up and increased summer burn absorbs supply. Strategic reserve purchases of crude oil in India and China will add to crude demand.

Energy Commodities Continue to Strengthen

On a weekly average basis the S&P 500 rose modestly, and closed at a record high on Friday. Emerging market debt prices fell slightly with higher yields. Bond yields on Greek debt eased modestly as a resolution to the Greek debt problem continues to be worked through. The total commodity index rose on the week, as did energy. The U.S. dollar has continued to weaken against many currencies with noted declines against the euro, British pound, and Russian ruble. The Shanghai Interbank Offer Rate eased for the tenth straight week. Bond yields for longer term maturities have risen in the U.S., Europe, Canada, UK and Japan. The Chinese policy interest rate (1-year banking lending rate) was cut again.

European LPG Imports Saturating Demand

Well supplied markets are facing limited incremental demand in Europe. Coaster sized lots of propane were called a significant $50/MT (13%) lower on the week near $320/MT while the spread to larger cargoes widened to $60, indicating that prices on the latter will face increasing pressure in the coming weeks. Large butane cargoes fell 7% to $399, while barges were little changed.

U.S. Ethanol Prices Higher

The rally in U.S. ethanol prices continued the week ending May 8 as many plants were shut down for spring maintenance. Higher petroleum values also provided support.

Ethanol Production Rebounds

U.S. ethanol production rebounded from a six-month low the week ending March 8 as several plants came back online following spring maintenance. Output rose to 912 MB/D from 887 MB/D in the previous week.

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.

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