When oil prices dramatically dropped in the fall of 2014, operators began to significantly alter their plans. As months passed, many thought service providers would gain clarity on the upstream situation and begin to develop their own strategic plans. However, as we have progressed toward mid-2015, as answers have been obtained, many new questions have arisen.
Conoco CEO Ryan Lance said many producers were trading at valuations that still reflected a price closer to US$80 per barrel while Private Equity executives have mentioned to DW that many bid-ask spreads are too wide on transactions for E&P producers, particularly U.S. unconventional shale players. This is inhibiting some of the necessary revaluation and consolidation that will lead to a more normalized market environment. So oilfield service providers remain in limbo and investors struggle to mark them to market. Until management of service companies can assess market pricing, future activity levels and an understanding of which of their customers are going to be active, short term strategic plans remain fluid and long term strategies in jeopardy.
So how have service companies and manufacturers managed the situation? Schlumberger, for instance, have been very proactive and cut jobs and capital spending relative to projected activity declines. Others are betting on a stronger and quicker recovery, have less aggressively cut, and hope to be well positioned for a market resurgence – which could lead toward greater cuts if the environment doesn’t rebound accordingly.
Strategic planning is crucially important to the investor community and will be scrutinized in critical moments. It will also be an indicator for how in-touch leaders of oilfield service providers are with their businesses. It will be nearly impossible for managers to make unanimously popular decisions, but they will be expected to make the right ones. Time will tell on what companies managed the uncertainty most appropriately.
Andrew Meyers, Douglas-Westwood Houston
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NYC-based PIRA Energy Group believes that the vast majority of the bearish news is already out and that the price lows for global crude oil markers are in. In the U.S., stocks build but surplus to last year narrows. In Japan, crude and finished product stocks build, amid higher demands. Specifically, PIRA’s analysis of the oil market fundamentals has revealed the following:
Asia-Pacific Oil Market Forecast
PIRA believes that vast majority of the bearish news is already out and that the price lows for global crude oil markers are in. The current trajectory to crude stocks peaks in May, and then draws commence June-August. Supply disruptions, while having come off in March, will remain high for the foreseeable future. Any final deal with Iran will not result in significantly higher volumes until much later in 2015 at the earliest. Meanwhile, Saudi Arabia’s production is making new historic highs and the Kingdom is raising prices to Asian customers. The magic of price is working to tighten oil markets and higher oil prices are in the offing. PIRA has once again revised its 2015 crude oil price outlook higher.
U.S. Stocks Build but Surplus to Last Year Narrows
The United States had another hefty stock build this past week. Last year’s overall build in the same week was even larger leaving the year-on-year inventory excess modestly down. Over half of the year-on-year increase is in crude oil, while the bulk of the rest is in other products. Gasoline and distillate stocks are each 15-17 million barrels above last year, but since gasoline inventories are nearly double those of distillate the year on year excess is a smaller 7%.
Build, Amid Higher Demands
Crude runs increased slightly and crude imports rose such that stocks built. Finished product stocks also built. Gasoline and gasoil demands were higher, but with a slight stock build for gasoline and a more significant stock build for gasoil. Kerosene demand rose and stocks drew 30 MB/D, similar to the rate drawn in the previous week. The indicative refining margin eased on the week but still remains statistically strong.
Freight Market Outlook
Thus far in 2015 spot tanker markets have eluded the seasonal decline generally experienced during the second quarter of the year. Firm spot tanker rates helped by rising OPEC output and cheap bunkers combined to propel first-quarter vessel earnings to their best showing since 2008, and this momentum has continued in April. Although floating storage has not yet materialized to any significant degree, a current overhang of West African crude could produce some floating stocks.
High U.S. LPG Stocks to Keep Building
Propane inventories continue to climb in the offseason, with stocks adding 1.99 million barrels in the latest week, matching the previous week’s build. Propane inventories are currently 57.5 MMB, 31 million barrels higher than a year ago. Inventories of other NGLs and LRGs (excluding propane) increased by 2.7 million barrels last week, climbing to the 85.2 MMB level. The surplus to a year ago expanded to 12.6 MMB.
Ethanol Prices Rise
U.S. ethanol prices gained the week ending April 17 as petroleum values surged. Demand was strong as blenders prepare for the peak driving season. 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.
2015 may well be remembered as the year when natural gas truly announced itself as the major energy fuel source. With the announcement that Shell are targeting a $70bn deal for BG Group, and in doing so increasing their current LNG capacity to around 33 million tons per annum, the big dollars to secure gas capacity are coming into sharp focus. Should the acquisition complete, Shell will have access to gas resources from Trinidad & Tobago to Tanzania. BG’s Queensland Curtis LNG project could also provide a viable option to develop the major Arrow coal-seam gas development in Australia.
Elsewhere in Australia, Chevron is expecting to see first production from the defining Gorgon project by Q3 this year. A massive LNG project with estimated capacity of 15.6 million tons per annum, Gorgon is expected to boost the company balance sheet for 40 years. Described as a black hole for Capex following well known cost overruns – expected to approach 50% of the initial $37bn budget – safe and timely execution this year will be critical not only for the company but for the future of Australian supply capacity. Similarly, 2015 is a big year for the Wheatstone LNG sister project as major modules are completed and project integration continues prior to 2016 operation.
After much anticipation, the world’s first floating LNG vessel is also expected to begin operations for Petronas in Q4. The FLNG 1 represents a major technological advancement in the monetization of offshore gas assets. The success or otherwise of this unit, along with that of the under-construction Prelude (to begin operations for Shell in 2016), could signal the beginning of an era where stranded gas, marginal fields and major offshore gas discoveries can be processed offshore.
Acquisitions, major capital projects and large-scale technical developments suggest that 2015 is a fulcrum year for global gas supply.
Matt Loffman, Douglas-Westwood Houston
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NYC-based PIRA Energy Group believes that the positive impact of lower oil prices on global economic growth is beginning to be seen but oil markets remain oversupplied. In the U.S., oil inventories built this past week. In Japan, turnarounds gear up, but crude and product stocks draw. Specifically, PIRA's analysis of the oil market fundamentals has revealed the following:
World Oil Market Forecast, March 2015
The positive impact of lower oil prices on global economic growth is beginning to be seen but oil markets remain oversupplied with a 2 MMB/D surplus in the second quarter, which will continue to negatively impact physical markets. New price lows for Brent are unlikely and WTI is not expected to go below $40/Bbl. Both prices are anchored by the back of the market and available storage capacity, even if it is floating. The magic of price is working to tighten oil markets but it takes time. Gasoline season looks healthy but new refinery capacity will pressure distillate. Political uncertainties are on the rise with this weekend's Nigerian elections, Saudi Arabia's direct military involvement in Yemen, and turmoil in Libya, among other things.
U.S. Inventories Lead the March Surge
U.S. oil inventories built this past week, bringing the March stock build to nearly 1 MMB/D. Relative to last year U.S. inventories are 164 million barrels, or nearly 16% higher than last year. Over half of the excess is in crude oil.
Japanese Turnarounds Gear Up, but Crude and Product Stocks Draw
Crude runs eased again as maintenance continues to pick up pace. Crude stocks drew to a record low on a low import figure, while finished product stocks also drew on higher demands and lower runs. The indicative refining margin remained strong.
LPG Stocks Building from Record Base
U.S. propane inventories increased by 638 MB, the second consecutive weekly build - signaling that the bottom for stocks has likely been put in, and that stocks will continue to build thru September from this high base level of 50.3 MMB. Stocks of NGLs and LRGs (excluding propane) more than doubled their prior week's gain to 1.1 MMB, bringing inventories to 77.3 million barrels, 15.2 MMB above the year ago volume.
Ethanol Stocks Decreased for Third Consecutive Week
U.S. ethanol prices declined at the beginning of the week ending March 20, but strengthened after the DOE reported an inventory draw for the third consecutive week. The output of ethanol-blended gasoline rose to a twelve-week high.
Biofuels Programs Continue in Over 60 Countries
Canada imported 1.2 billion liters (318 million gallons) of ethanol in 2014 to help satisfy its 5% ethanol mandate. Essentially all imports come from the U.S. In Mexico, PEMEX awarded contracts for the supply of up to 123 million liters (32.5 million gallons) per year from locally sourced sugarcane and sorghum.
Yemen: Saudi Intervention Adds $3-$5 Risk Premium Only Temporarily Because Of Low Physical Supply Risks
Saudi Arabia's intervention in Yemen with Kuwait, Qatar, the UAE, Bahrain and Egypt contributes to growing instability and unpredictability in the region, but poses little direct threat to oil and gas supplies. While the physical supply risks are low at this point, Saudi's decision does add $3-$5/Bbl to the risk premium, which began to be priced in late yesterday. This premium will gradually erode over time if large supply disruptions do not materialize (which is what we expect).
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.
TRACS Urges Energy Sector to ‘Take Control’ of Its Global Assets Ahead of OTC
TRACS Assets, the Aberdeen-based leading asset tracking and rental management software firm on Wednesday 29th April 2015, announced the launch of ‘TRACS Mobile’ ahead of May’s Offshore and Technology Conference (OTC) 2015 in Houston, Texas. Thanks to a new strategic partnership between ecom instruments and Samsung, leading to their development of the world’s first ATEX Zone 1/Division 1 tablet, TRACS mobile application can now be brought into hazardous areas in the oil and gas sector around the world.
TRACS Mobile is a workflow application, which drives improved visibility of assets, facilitates stock movement in the field, reduces costs, enables more efficient workflow and enhances performance.
Jennifer Hall, Business Development Manager for TRACS, Assets, and Derek Austin, managing director of TRACS Assets, look forward to showcasing ‘TRACS Mobile’ at May’s Offshore and Technology Conference (OTC) 2015 in Houston.
Dr. Derek Austin, former student of Professor Higgs, of Higgs Boson God particle fame, and managing director of TRACS Assets says, “TRACS Mobile was a natural evolution for our software as it enables our customers to take control when in the field and in hazardous areas, thus simplifying the still common pen and paper reporting process and reducing human error. We recognized the future importance of hand held devices for the oil and gas sector and how this would impact on the use of our software, so looked to form a partnership with a leader in industrial hand held devices.”
Derek continues, “The strategic partnership formed with ecom instruments UK made complete sense in that we provide pioneering technology/software and they provide cutting edge devices, which can be used in even the most hazardous of areas. There was a definite synergy between both companies. We will be attending OTC and look forward to showing the benefits and usability of TRACS software to our clients, and the global energy sector. When coupled with the innovative handheld device from ecom, our software really does come into its own.”
Carl Henderson, managing director of ecom instruments UK, says, “We immediately saw the potential when running the TRACS Mobile application on our latest hardware. This powerful application, twinned with our latest device will be an effective tool for engineers and mobile workers in the oil and gas industry.”
Carl continues, “Innovation is not about invention, innovation is about taking existing components and bringing them together to create something greater than the sum of its parts. A prime example is the smartphone; operating systems, touchscreens, Gorilla Glass and integrated cameras all existed previously but when combined in the form of a smartphone, the results were breathtaking. The combination of ecom’s hardware and TRACS’ software solutions are extremely innovative and powerful and are certain to unlock the door to large cost savings across the industry.”
“With rapidly changing market conditions, there is an ever-growing need to become more productive and efficient while increasing the life-span of assets and equipment, all the while maintaining exceptional levels of safety. With a built-in camera and a full range of wireless capabilities, the Tab-Ex®, when used with TRACS software, enables equipment defects to be captured at the point of inspection, while maintenance work is executed, and made instantly visible to those who need to diagnose the issue and determine follow-on actions. We look forward to having the Tab-Ex® showcased at OTC, which will show end users the functionality of our device and its ease of use when combined with the TRACS Mobile software.”
The industrial revolution and ensuing growth of the great cities of the western world some 200 years ago was enabled by a change in primary energy supply – from wood to coal. Today it is said we are at the beginning of another period of change, from fossil fuels to sustainable energy – the move from black to green. However, this cannot be achieved all at once, it is a long journey and the first step is to change from burning highly polluting coal to cleaner natural gas.
Indeed to some extent this is already happening; coal-fired power generation in the US provided 39% of electricity production in 2014, down from 53% 1997, mainly as a result of the move to lower cost natural gas. In the European Union between 2000 and end 2013 coal consumption fell by 11%. However, the world still burns huge amounts of coal, accounting for some 30% of global fuel consumption. Even in the UK, where the industrial revolution began, on Christmas day 2014, 38% of electricity still came from burning coal.
In the run-up to the United Nations Climate Change Conference ‘COP21’ in Paris in December 2015, green activists are already embarked on a campaign calling for disinvestment from the oil & gas industry. In April the Guardian Media Group announced it will divest from fossil fuel companies. Academia has joined the campaign with sit-ins underway in a number of universities.
Much of this rhetoric is misdirected. There is a major gap between the realities of oil & gas and the public understanding of its fundamental importance to society. To many, filling the car tank is just a tax on driving and natural gas a monthly charge on home ownership. Few realise the sheer scale and importance of the oil & gas industry, not just in the supply of fuels but also its role as a provider of a huge range of products essential to our daily lives, from plastics to pharmaceuticals, from fertilisers to house paint.
The industry should be recognised a part of the solution in providing the natural gas that can enable step one of the journey, to stop burning coal.
John Westwood, Douglas-Westwood London
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NYC-based PIRA Energy Group reports that Cushing stocks hit a record high in March. In the U.S., the crude stock surplus hits a new high. In Japan, crude runs ease with higher maintenance and crude and finished product stocks post slight builds. Specifically, PIRA’s analysis of the oil market fundamentals has revealed the following:
Cushing Stocks Hit Record High in March
Cushing crude stocks rose to record levels in March, causing the NYMEX WTI contango to widen and strengthening most onshore crude differentials, as Cushing WTI prices weakened relative to regional grades. Outright prices weakened through the first half of March, but began to recover by month end, helped by improved refining margins and geopolitical risks. Stocks at Cushing are expected to peak just above 60 million barrels in April or May. But WTI will remain in contango until stocks fall toward the 30-35 million barrel level — not likely until at least mid-2016.
U.S. Stock Surplus Hits New High
With the largest weekly inventory increase of the year, the year-on-year inventory surplus swelled to 177 million barrels, or 17%. Crude stocks are almost 100 million barrels higher than last year. Gasoline and distillate inventories are a combined 33 million barrels higher.
Japanese Crude Runs Ease with Higher Maintenance; Crude and Finished Product Stocks Post Slight Builds
Crude runs eased and remain in good alignment with our turnaround schedules. Crude imports also declined, but crude stocks still posted a modest build. Gasoline and gasoil stocks drew slightly despite falling demands. Kerosene stocks built as demand seasonally ebbed. The indicative refining margin remained strong, though major product cracks softened on the week.
Aramco Differentials Announced, Asia Raised
Saudi Arabia's formula prices for May were just released. U.S. and European differential adjustments were mixed and seen as minor. European differentials were tweaked, higher on the lightest and heaviest grades, and cut marginally on Arab Light. U.S. differentials were lowered on Arab Extra Light and Light and lowered on Arab Medium and Heavy. Differentials to Asia, however, were raised more significantly and across the board. The adjustments for all regions are seen as keeping in step with refiner demand for crude and downstream profitability.
Saudi Arabia Producing 10.3 MMB/D: Bullish or Bearish?
On balance, Saudi Arabia producing 10.3 MMB/D in March 2015 is bullish. Incremental Saudi crude burn demand could push its volume this summer to levels that would substantially reduce global spare capacity, at a time when oil markets will be tighter and geopolitical risks to supply are growing. Look for Saudi Arabia to continue to increase prices to restrain demand as it has done the last two months. All of this will be supportive to higher oil prices in second-half 2015.
Asian Steam Cracker Margins at 2015 Highs
Asian steam cracker margins have been in a broad upswing since January of this year. Margins improved yet again last week and continue to make new 2015 highs. Naphtha cracks added 2¢ to 53¢/lb, but they look increasingly challenged by LPG in the coming weeks as heating demand deteriorates and prices weaken. Butane margins jumped 14% to 51¢/lb while propane cracks added 5¢ to 49¢/lb.
U.S. Ethanol Prices and Margins Increase
The week ending April 3, U.S. prices advanced to the highest levels of the year. Rising petroleum prices and robust demand for ethanol-blended gasoline were the main drivers. Margins also reached a 2015 high last week, as corn prices fell after bearish USDA reports.
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.
Deepwater expenditure is expected to increase by 69%, compared to the preceding five-year period, totaling $210 billion (bn) from 2015 to 2019. This is the headline finding from Douglas-Westwood's (DW) World Deepwater Market Forecast 2015-2019. Report author, Mark Adeosun, commented, "As production from mature basins onshore and in shallow water declines, development of deepwater reserves has become increasingly vital, particularly to the world's oil majors. However, the recent oil price decline has intensified pressure on operator budgets. Consequently, numerous operators have deferred sanctioning of capital intensive developments.
"DW has identified a trough in global expenditure in 2015 and 2016 primarily driven by delays to delivery of FPS units in Latin America. We expect deepwater Capex to rise post-2016, driven by the continued development of deepwater fields off Latin America and West Africa, as well as new developments off East Africa. However, in the short-term, delays as a result of the oil price are causing significantly slower growth than was expected a year ago."
Assistant report editor, Balwinder Rangi, continued, "Africa, Latin America and North America will continue to dominate deepwater Capex, with $173bn set to be spent over the next five years with Africa forecast to experience the greatest growth. The development of East African natural gas basins has not been aided by the plunge in Asian gas prices; however, the development of these gas basins is inevitable. The expected recovery of oil prices will spark a revival in LNG-related activities in the region towards the end of the forecast period. Latin America will, however, remain the largest market and North America is expected to experience the least growth.
"In addition to the low oil price environment and building oversupply, the lack of rig demand will impact Capex growth over the forecast period. Current, industry consensus indicates that an oil price recovery is expected in the mid-to-long term. Whilst the economic feasibility of deepwater fields varies, typically long-term oil prices of $80 per barrel would ensure the viability of the majority of developments."
NYC-based PIRA Energy Group believes that the current global setting as conducive to growth and expects a springtime rebound in economic activity. In the U.S., stock excess is about flat. In Japan, crude stocks draw and product stocks move higher. Specifically, PIRA’s analysis of the oil market fundamentals has revealed the following:
World Oil Market Forecast
While economic worries remain, PIRA judges the current global setting as conducive to growth and expects a springtime rebound in economic activity. The magic of price is working on both oil supply and demand; balances are tightening. This is occurring at the same time the Middle East is mired in sectarian conflict.
U.S. Stock Excess about Flat
This past week’s inventory build approximately matches last year’s build for the same week, leaving stocks 167 million barrels, or 15.5%, higher than last year. The overall composition of the build did not change relative to last year so products are still 75 million barrels higher (11%) while crude is 92 million barrels (23%) higher than last year. Some 61% of the product excess is in NGLs.
Japanese Crude Stocks Draw, Product Stocks Move Higher
Crude runs eased slightly and crude imports declined, producing a stock draw. Finished product stocks built mostly on a rise in naphtha stocks. Gasoline and gasoil demands were lower, with slight stock changes for each. Kerosene stocks drew again fractionally as the heating season closes out. The indicative refining margin remains good and was little changed on the week.
European LPG: Supply Weighs, Demand Wanes
European LPG prices were sharply lower as buyers remained quiet while supply continues to weigh on markets. Cash cargo sized lot prices lost 9% on the week to print near $380/MT, just $2 below June swaps, and at a $175 discount to regional naphtha. Butane prices were mixed, with coaster batch prices losing ground but larger cargoes improving to $445. Current LPG prices are now so attractive that petrochemical feedstock buyers will likely look to maximize runs in the coming weeks, wherever possible.
U.S. Ethanol Output Drops
Ethanol production dropped to a six-month low of 921 MB/D during the week ending April 24 as several plants were offline for spring maintenance. PADD II output declined to 834 MB/D while production outside of PADD II climbed to a record 87 MB/D.
U.S. Ethanol Prices and Manufacturing Margins Gained in April
Ethanol prices climbed during April, supported by rising petroleum values and robust demand in both the domestic and export markets. Manufacturing margins improved as corn costs fell.
The information above is part 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.
While the latest revisions to the terms for shallow water areas in Mexico’s first licensing round have increased the attractiveness of the Production Sharing Agreement terms by improving the contractor’s upside potential, the benefits remain significantly limited at higher prices compared to other fiscal regimes in the Americas, says an analyst with research and consulting firm GlobalData.
According to Will Scargill, GlobalData’s Senior Analyst covering Upstream Fiscal & Regulatory Regimes, even with revised terms, Mexico has yet to appease initial concerns that the adjustment based on pre-tax Internal Rate of Return (IRR), combined with royalty rates that adjust according to price, offers exploration and production companies too little upside.
Scargill explains: “The fact that royalties adjust to prices means the regime is relatively competitive in a low-price environment, insofar as a 30% bid for the state’s initial share of profit oil would be comparable to the fiscal regimes of Colombia and the US Gulf of Mexico at $50 per barrel (bbl).
“However, as prices rise, the royalty and profit oil adjustment mechanisms kick in at an increasing rate, meaning that in order to be comparably attractive to the Colombian and US regimes, the bid would have to be around 25% at $70/bbl, 15% at $90/bbl and 0% at $110/bbl.”
The analyst states that despite competitive economics at lower prices, companies will likely be reluctant to bid at levels that would give them little upside potential and the effect that the government can have with further revisions to the mechanism is limited.
Scargill continues: “Two possible options would be to base the mechanism on post-tax IRR rather than pre-tax, or to further increase the IRR thresholds by 5% each. However, the result of either of these options at a $90/bbl oil price would only be to increase the bid that is comparable to Colombia and the US to 20% rather than 15%.
“A 20% bid would mean that the state’s share of profit oil would range from 20–80% and contractors will pay royalties, taxes and fees on top of this. If the round is to be successful, the government will need to avoid setting an overly high minimum bid while striking a balance between market conditions and public sentiment,” the analyst concludes.
Despite major cost reduction measures, Q1 2015 earnings for supermajors are expected to be the weakest in recent memory. Operational and financial indicators for FY 2014, however, reveal that recent performance amongst the big 5 has been far from homogeneous.
In short, the Americans outperformed the Europeans. Exxon and Chevron posted high net margins of 8.3% and 9.1%, respectively. Shell’s was a more modest 3.5%, whilst BP (1.1%) and Total (2.0%) struggled badly. Chevron and Total were the most aggressive risk takers, as their CAPEX-to-Sales ratios for the year stood at 19% and 14%, respectively, while the other majors conservatively avoided spending more than 10% of sales.
Among other factors, refining interests are a key driver of this disparate performance. While Exxon, Chevron and Shell refined broadly as many barrels as they extracted in 2014 (113%, 105% and 94%, respectively), BP and Total were much more exposed to upstream (55%, 83%) and have not benefitted from the traditional buffer effect of downstream activities in a low price environment.
Looking at the long-term indicators, not much change can be seen in the 2014 Proved Reserves-to-Production ratio – XOM 17.4, CVX 11.8, RDS 11.6, BP 15.2, TTA 14.7 (expressed in years). In an oversupplied market, the challenge is not to bring volumes, but value. In this respect, the Europeans looked to offset poor performance by building strong net cash positions – between $20-30 billion at year-end 2014 – to maintain dividends and shareholder confidence. However, while Exxon, Chevron and Shell managed to keep their Gross Debt-to-Equity ratio at around 20%, BP and Total ended the year with a degraded financial structure, at 47% and 62%, respectively.
Considering the above, Shell seems to be the healthiest among the European majors, but crucially lacking in long-term organic growth opportunities. In this light, the £47bn takeover of BG Group makes sense: it will boost Shell’s production by 20% and reserves by 25%, and also provides exposure to high-potential Brazilian assets. With similarly modest leverage and potential for quick cash generation, Exxon and Chevron are well positioned for their own M&A moves now the starting gun has sounded.
Antoine Paillat, Douglas-Westwood London
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NYC-based PIRA Energy Group reports that Long haul trucking has been losing market share to rail since 2002. In the U.S., there was another record U.S. commercial stock level. In Japan, crude stocks and finished product stocks built. Specifically, PIRA's analysis of the oil market fundamentals has revealed the following:
Lower U.S. Diesel Prices Should Limit Further Long Haul Trucking Loses to Rail
Long haul trucking has been losing market share to rail since 2002 when diesel prices averaged $1.75/gallon. This note estimates that diesel prices no higher than $3.25/gallon should stem any further erosion of long haul trucking's competitive position through 2016 even though momentum has set in for rail to displace long haul and possibly medium haul trucking on a long term basis.
Another Week, Another Record U.S. Commercial Stock Level
Total commercial stocks built last week to yet another new record high. With a small draw this week last year, the year-over-year surplus widened again. Crude built again this week. The four major refined products drew and all other oils were flat. The crude stock surplus versus last year stands at 82.7 million barrels. The four major refined products surplus widened to 30.3 million barrels, and the all other oils surplus widened to 45.8 million barrels above last year. Of that "other oil" excess, 43.7 million barrels is in propane & other NGL stocks.
Japanese Crude Stocks and Finished Product Stocks Build, Runs Ease
Crude runs eased again as maintenance continues to pick up its pace. Crude stocks built slightly due to a higher import figure. Finished product stocks also built, notably gasoil, naphtha, and fuel oil, though there was a strong end-of-season draw on kerosene. The indicative refining margin remained strong.
Tight Oil Operator Review
Weak oil prices dominated fourth quarter results and the outlook for 2015. The effect of falling prices rippled throughout the production chain, both on an operational and a financial level. For the companies covered, capex guidance for 2015 was 35% lower than 2014 capex on average. Simultaneously, technology and productivity improvements continued in 4Q14, and are expected to accelerate in 2015. The consensus seems to be a target of a 10% reduction in costs from efficiency gains, and a further 20% cost reduction from service price deflation. PIRA expects U.S. shale oil production to flatten out and slightly decline in 2Q15.
LPG Prices Drop with Season Change
LPG prices fell as U.S. inventories rose for the first time in 14 weeks. April propane futures for Mont Belvieu delivery fell to 50¢/gal, a 6.6% decrease on the week. Butane also lost ground as seasonal gasoline blending demand evaporates. LPG prices should remain under pressure as demand is set to continue decreasing as winter conditions continue to fade.
Manufacture of Ethanol- blended gasoline Jumps
Ethanol-blended gasoline manufacture soared to a 12-week high 8,676 MB/D the week ending March 13, from 8,434 MB/D in the previous week. Inventories declined for the third consecutive week, dropping 353 thousand barrels to 20.8 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.
The oil & gas industry currently suffers a shortage of mid-career professionals primed for leadership & supervisory roles, the legacy of the last oil price downturn in the 1980s to mid-90s. At that time the industry endured significant job losses, and hiring came to a standstill. As a result of the limited talent added, the group of individuals advancing into supervisory or eventual leadership positions in the oil and gas industry is notably small.
Since oil price started declining late last summer, layoffs in today’s industry are nearing 100,000 worldwide. Oilfield service companies Schlumberger, Baker Hughes, and Halliburton announced layoffs of around 20,000, 10,500, and 9,000 employees respectively, while E&Ps BP and Chevron each announced layoffs approaching 10,000 of their employees. According to a survey completed in January 2015 by Rigzone, 44% of the surveyed companies indicated that they plan to hire fewer workers over the next six months while 5% indicated they plan to completely halt hiring efforts.
Although the oil & gas industry employs numbers of low-skilled workers, the lifeblood of the industry is the variety of specialized engineers, technicians and rig crews who boast years of involvement in the field along with formal training or university degrees. Continuing widespread layoffs, frozen or reduced pay checks and the effects a lengthy downturn will have on the industry can dissuade such individuals from pursuing careers in oil & gas and encourage college graduates to move into more stable industries.
Just as the legacy of the 1980s-90s created a shortage of experienced workers – contributing to rising costs, execution challenges, and safety concerns – the numbers of lost personnel, both current and future, threatens the long-term capacity of the industry. To many in the business it feels like history is repeating itself.
Katherine Dunn, Douglas-Westwood Houston
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NYC-based PIRA Energy Group reports that Saudi Arabia opts for market share over price. In the U.S., commercial stocks reach new record level even as surplus falls. In Japan, crude runs slightly higher, but lower crude and product stocks. Specifically, PIRA’s analysis of the oil market fundamentals has revealed the following:
Playing with Fire, Lessons from the 1980s
The recent decision by Saudi Arabia to opt for market share over price, at least temporarily, is similar in many ways to the decision reached in the mid-1980s. However, there are important differences as well, particularly with regard to the level of spare capacity. In the 80s the change in behavior was not instituted until spare capacity built to over 10 MMB/D. This time, the change was made in advance while spare capacity was still historically low. If the demand and non-OPEC supply responses to lower price are similar to what was experienced in the 80s, the very low level of spare carries a risk of a price spike in the not too distant future.
Commercial Stocks Reach New Record Level, Even as Surplus Falls
Total commercial stocks built last week to a new record high level. However, the stock build was half of last year’s, so the total commercial stock surplus versus last year narrowed for the first time during 2015. It was that week last year that U.S. commercial stocks started their long march up, from the low end of the range to the high end.
Japanese Crude Runs Slightly Higher, but Lower Crude and Product Stocks
Crude runs increased slightly, with crude imports staying low such that stocks drew modestly. Finished product stocks drew a similar amount. Gasoline and gasoil demands eased, with gasoline stocks modestly higher and gasoil stocks modestly lower. Kerosene demand rose and stocks drew 31 MB/D. The indicative refining margin eased on the week but still remains statistically strong.
Fracking Policy Monitor
BLM issued rules for fracking on federal lands, though unlikely to impact production. EPA methane rules are still awaiting proposal. Bottlenecks are possible: in the Bakken due the state’s crude processing standards; and in the Marcellus due to state and federal regs limiting options for wastewater disposal. Seismic events have caused restrictions on wastewater disposal, while also causing friction between the state government and the insurance industry in OK. The Denton, TX fracking ban seems destined to be overturned.
U.S. NGLs Follow Crude Prices Higher
Mt Belvieu LPG prices rose in line with WTI, with May propane prices increasing 7.2% to 57.5¢ and butane +6.6% to 68¢/gal. prices in Conway, KS also rose, but continue to be pressured by high stocks with discounts to Belvieu in May increasing to over 6¢ on both C3 and C4. Gulf coast ethane outperformed Henry Hub natural gas, increasing nearly 1¢ to 17.3¢/gal.
The EPA Will Issue the Proposed Mandates for 2015 by June 1
The EPA announced a proposed settlement with the API and AFPM regarding deadlines for issuing the annual requirements under the RFS program. The Agency will propose the mandates for 2015 by June 1.
U.S. Ethanol Output Drops to a 25-Week Low
U.S. ethanol production fell to a 25-week low 924 MB/D the week ending April 10 from 936 MB/D in the preceding week as several plants were down for spring maintenance. Inventories increased by 162 thousand barrels to 20.6 million barrels, with all of the build occurring in PADD I.
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.
Diversification in to renewables and interconnector market rewarded Ecosse Subsea Systems Ltd (ESS) more than trebled profits to £3.4 million and increased revenue by 88% to £15.6 million according to its latest published accounts.
The Aberdeenshire-based subsea engineering specialist attributed the phenomenal growth to a diversification from its traditional oil and gas market in to renewables and interconnectors.
ESS has developed technologies which are in high demand for seabed clearance work, trenching and cable laying projects. In the past two years the company has made huge inroads in to the emerging renewables sector which now accounts for 55% of projects and builds upon an earlier focus on oil and gas contracts.
The accounts to March 2014 show turnover increased from £8.3 million to £15.6 million, while operating profit (EBITDA)* rose from £1.02 million to £3.4 million in the same period.
The drivers for ESS’s most successful trading year to date was a £5.4 million contract on the Baltic 2 windfarm offshore Germany and a multi-million pound cable-lay contract on behalf of an European utilities provider in the Humber Estuary.
Last month ESS also announced it had signed a Letter of Intent with ABB to provide seabed clearing and trenching services on the 100-mile £1.2 billion Caithness-Moray electricity transmission link project, which could end up as the company’s largest ever contract award.
The company employs 70 offshore and at its headquarters in Banchory near Aberdeen, which rose to 110 during the execution of offshore projects, and in the last year it has invested more than £1 million in research and development.
ESS managing director, Mike Wilson, said: “The results are extremely encouraging and confirm that our technologies are equally suited to and easily transferable between the oil and gas sector, which is where we cut our teeth, and the green energy market. Added to that, we have just won our first contract in the interconnector sector and we hope success on the Caithness-Moray project will lead the way to further awards in this field.”
Mr. Wilson said other parts of the business, including its engineering consultancy and personnel recruitment arms, had enjoyed a successful year and added significantly to the bottom line, while continued investment in new technologies was now bearing fruit.
He added: “We benefited greatly from research and development in our technologies starting to come through, and recognition from clients that we have developed a suite of tools which deliver measurable time and cost savings.
“Diversification is paying off for us as can be seen in these latest financial results and we will continue to look for new opportunities in other markets, including oil and gas and interconnector projects in Arctic waters where we have already received some interest.”
Mr. Wilson noted that ESS had already suffered from the effects of a low oil price with the cancellation of a number of oil and gas projects and said that while 2015 turnover would increase on the previous year, that margins would be tighter.
He added: “With a healthy balance sheet and debt-free status, we are in a strong position to counter the challenges facing the oil and gas industry while capitalizing on new opportunities in other markets.”
We're not competing with fixed foundations, we're just creating the future. And that future's not that far away." CEO, Principle Power, EWEA 2015
Several floating wind turbines have been installed in recent years, with operational turbines in Norway, Japan and Portugal. Floating turbines have several benefits over their conventional counter-parts – firstly, they are more economically efficient, as onshore assembly and the ability to tow them into place reduces the need for costly heavy-lift vessels or specialized WTIVs. Secondly, floating turbines can be installed in deeper water (often further offshore) alleviating concerns of visibility from the coast. Thirdly, greater offshore distance increases wind exposure, resulting in comparatively higher electricity generation. We ask, however, whether floating wind turbines will be utilized globally as governments seek to meet renewable energy quotas?
Successful installations provide hope to those championing floating wind turbines. The WindFloat project in Portugal, is a particularly interesting example – currently supporting a 2MW turbine, 6km from shore. WindFloat refers to the floating support structure, which allows wind turbines to be installed in water depths exceeding 40m. The structure comprises three columns, each is fitted with water entrapment plates at the base, resulting in improved motion performance and allowing the use of conventional wind turbines atop the structure. WindFloat has been operational for three years and by end-2014 had delivered 12GWh of renewable electricity to the Portuguese grid, with no issues to date. Other successful projects include Hywind and Sway prototype projects in Norway, and a number of pilot projects in Japan.
DW's Offshore Wind Database shows at least nine floating projects are likely to come online by 2020, totaling 225MW – a further six projects in the pipeline provide upside potential. However, these technologies require significant investment and cooperation (WindFloat involved 60 suppliers), and each project is unique – standardization is key if floating offshore wind turbines are to be rolled out on a large scale. However, with some predictions that floating wind turbines could cut offshore wind costs in half, there are huge incentives for increased use of the technology.
Rachel Stonehouse, Douglas-Westwood London
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