OPEC leaves output ceiling at current level
Uncertainty surrounding Iran’s re-entry into the oil market as the world remains awash in oil pushed OPEC deeper into a “wait-and-watch” mode, unmoved by tough commodity conditions that have left some of its own members in pain.
The much-anticipated meeting in December ended without the ofﬁcial statement unveiling an agreed-upon production ceiling. The cartel essentially decided to keep producing at current levels—which was about 31.3 million barrels a day (MMbbl/d) in October, more than 1 MMbbl above the ceiling it set last year. Members did not go into speciﬁcs given the large volumes of oil being produced world-wide but could meet again between January and June to review the situation.
The move, or lack thereof, could mean continued pressure on oil prices—at least for the ﬁrst half of the year, analysts say. But changes in demand and global production, including from non-OPEC members, will be major factors as the downturn marked by lower commodity prices lingers impacting revenue of oil-producing countries and companies alike.
OPEC has had meetings with non-OPEC members in hopes of reaching an agreement on cutting production to raise prices. But cooperation is not at 100%, although Secretary General Abdalla Salem El-Badri mentioned that some non-members are trying to determine how they can contribute to the effort.
It might be an uphill battle, considering OPEC members are not even on the same page.
“In our view, the lack of guidance on a production quota underlines the discord among members,” Barclays said in an analyst note. “Past communiques have at least included statements to adhere, strictly adhere, or maintain output in line with the production target. This one glaringly did not. For OPEC, managing the impossible trinity of achieving higher market share, higher prices and higher demand through a nominal target which members continue to breach continues to be difﬁcult.”
Iran intends to raise its production by up to 1 MMbbl/d when sanctions are lifted, and Reuters reported that Iraq has vowed to further increase output in 2016. Yet the cartel’s biggest member, Saudi Arabia, has expressed a willingness to cooperate with a big caveat—others must cut production, too.
Interest was high going into the meeting, but some consultants—including those at Stratas Advisors— predicted OPEC production and strategy, including that of Saudi Arabia, would go unchanged.
“Iran and Russia are saying they are not cutting, so Saudi Arabia is not going to cut either,” said John Paisie, executive vice president of Stratas Advisors, noting there was no real change. “We see for the next couple of quarters prices remaining under pressure, but we do see prices starting to come up in the second or third quarter of the year.”
Stratas’ latest forecast shows an average oil price of about $56 for Brent and about $52 for WTI in 2016. Further improvements are expected as demand could grow 1 to 1.2 MMbbl/d as production falls in some areas. Supply and demand are going to come closer, Paisie said, but it’s going to take a few more quarters to rebalance the world.
OPEC leaders also voiced an uncertainty about the impact of Iran’s return to the oil market.
The country, which has been shackled due to illicit nuclear activity, is set to return after sanctions are lifted. But it is unknown exactly when that will happen. When it does, OPEC will accommodate Iran “one way or the other,” El-Badri said.
Watch the pump, count the votes
How is buying gasoline like voting? The price of one usually predicts the outcome of the other, according to a leading Washington, D.C., policy strategist.
Daniel Clifton, partner and head of policy research for Strategas Research Partners, a brokerage ﬁrm that provides research, advisory and capital market services to institutional investors and executive management, told the annual Energy IR conference of the National Investor Relations Institute to watch fuel prices closely in the new year.
“Gas prices nationwide average about $2 a gallon now,” Clifton said in his presentation. “If they’re at $2.50 next summer, that will seem high to motorists and we could see another anti-incumbent election.”
He said a rise in fuel prices in the months preceding a presidential election has been a good indicator that there will be a change—whichever political party controls the White House.
Any uptick in pump prices will only add to voters’ current angst, Clifton added.
“We have had sustained, low economic growth and voters feel there is something wrong,” he said, adding the economic malaise of the past few years resembles the sluggish economy of the late 1940s and early 1950s. That period led to Republicans gaining control of Congress after World War II and the election of the ﬁrst Republican president, Dwight Eisenhower, in 24 years in the 1952 election.
Clifton told the audience of energy firm investor relations professionals the likelihood of new energy legislation coming out of Congress, such as repeal of the crude oil export ban, before the November election, is unlikely. Also currently, the Syrian refugee issue has the attention of elected ofﬁcials. However, he noted a compromise on crude exports might allow oil sales to nations participating in the proposed Trans-Paciﬁc Partnership trade agreement that will go to the Senate for approval.
Rather, watch for efforts by regulatory agencies to impose signiﬁcant regulatory changes on the oil and gas business, he said. President Obama’s regulatory leaders in multiple agencies with power over the energy industry are aware that the next administration, even if a Democrat wins, will not be as strongly focused on climate change and renewable energy.
LNG players be nimble, LNG players be quick …
The global LNG market outlook is fraught with uncertainty but opportunities exist, a new report concludes. Players simply need the ﬂexibility and foresight to act counter-cyclically, create and maximize markets and identify and exploit long-term trends driving demand.
Among other conclusions by the KPMG Global Energy Institute, in its recent report, “Uncharted waters: LNG demand in a transforming industry,” is that the need for ﬂexibility extends to both buyers and sellers. LNG producers and traders must be on the lookout for new markets, and buyers should focus on taking advantage of their current strong position while exploring new strategies like creating buyer alliances.
KPMG analysts noted that the massive build-up of LNG supply was based on the assumption that Asian demand would grow and be sustained by high prices. That has not worked out as expected.
“Asian LNG demand is more price-sensitive than recent experience had suggested, because of fuel competition,” they wrote in the report, noting that it must compete against pipeline gas imports to China from central Asia and anticipated imports from Russia. Domestic gas is also available below market rates in much of the Middle East and Indian subcontinent.
LNG is under pressure in Japan from the restart of the country’s nuclear industry, as well as from coal and renewable energy. While Japan leads the world in LNG imports, 89 million tonnes per year (mtpa) in 2014, that country’s Ministry of Economy, Trade and Industry expects the ﬁgure to dwindle to 62 mtpa by 2035 as a result of increased energy efﬁciency and greater reliance on coal and renewable sources.
Another factor in Japan’s market is JERA Co., a joint venture (JV) of Tokyo Electric Power and Chubu Electric Power. This buyer alliance expects to pass Korea Gas Corp. next year as the world’s largest single buyer of LNG. JERA is bolstering its trading staff in Houston in anticipation of Freeport LNG’s start of exports in 2018.
Buyer alliances like JERA “will consolidate buyer demand, eliminating redundant purchases and increasing pricing power,” the analysts wrote.
While China is still primed for a great leap in growth, its economy is sluggish at the moment and it’s unclear how much of a role LNG will play even after the market picks up. India, however, remains a bright spot as long as LNG remains competitive against coal and government-encouraged renewable sources.
The long-term outlook for LNG carries both more uncertainty and more promise, KPMG said in the report. The analysts identiﬁed ﬁve major trends that will shape demand to 2030 and beyond:
• Asian economic growth and environmental pressures: climate change commitments will reshape the entire energy sector, but it’s unclear how they will play out;
• Supply diversification: LNG will be available from more sources, but those sources also will have to compete against proposed pipelines;
• Commoditization: greater diversity of supply will push LNG to be considered a commodity like oil;
• New markets: geographic niches include the Middle East, Latin America and island markets in Southeast Asia and the Caribbean. Sector niches include transport, especially as bunker fuel for shipping;
• Geopolitics: wars, environmental disasters and political upheavals threaten LNG exports, but political transformations and technological breakthroughs offer opportunities for development.
U.S. gasoline demand key to global crude rebalancing
While an enormous supply growth from the U.S., compounded by a massive competitive surge from OPEC, have been primary culprits behind the oil-price collapse, little attention has been given to the demand side of the equation.
In fact, market observers believe that stronger-than-expected global oil demand growth is considered to be the most underappreciated and most important driver for bullish outlooks from 2017 to 2018. In particular, massive U.S. oil demand growth—especially for gasoline—represents the biggest year-over-year move on the demand side.
“The bottom line for energy investors is that a combination of modestly lower U.S. oil supply growth coupled with a huge surge in U.S. oil demand has set the stage for a rebalancing of global crude markets by mid-2016 and supports an eventual recovery in oil prices,” analysts at Raymond James & Associates Inc. observed in a note to clients recently.
The analysts suggest that U.S. oil demand is actually more important than ever, with the U.S. accounting for an impressive 20% of total global oil demand. While the U.S. represents a massive one-ﬁfth of total global oil consumption, demand has actually declined by nearly 1% annually over the past decade.
“Since gasoline represents about half of U.S. oil consumption (or about 9 MMbbl/d in 2014), a 3% surge in U.S. gasoline represents a big change to global oil demand growth factors. Speciﬁcally, U.S. gasoline demand growth in 2015 represents about a 400,000-bbl/d upswing in oil demand growth relative to the last decade average,” according to the analysts.
2016 to be pivotal in Mexico’s gas business
A key date in the reform of Mexico’s natural gas transmission system was Jan. 1. That’s the day the new CENEGAS (Centro Nacional de Control de Gas Natural) organization took control of the 5,400-mile gas pipeline system formerly a part of Pemex, which has a rated capacity of 5 billion cubic feet per day. More change is ahead.
David Madero, CENEGAS director general, outlined the progress on system transfer for U.S. gas transmission executives at the INGAA Foundation’s annual meeting in Key Biscayne, Fla.
“2016 will be very challenging for us,” Madero said, outlining the series of steps that have impacted the nation’s gas business since the constitutional amendments in 2013 that broke up the 75-year-old Pemex energy monopoly. The most recent step was the sign-off on the Pemex-to-CENEGAS transfer at the end of October, Madero said.
One challenge will be establishing a stage-zero report on the integrity of the system, he added. “Parts of the system are 30 to 55 years old and there are operating and maintenance problems. The initial report will benchmark an integrity management process.
“Our objective is to achieve a natural gas system that operates in the most safe and efﬁcient manner,” Madero said. The agency will start to implement a ﬁve-year plan in 2016 that calls not only for operation and maintenance to the existing system, but a major expansion.
The world-class gas transmission systems of the U.S. and Canada are beyond reach of Mexico at this point, he said, so CENEGAS has studied existing national gas networks of several countries. In particular, it has found Spain and France have model systems that are “business friendly” and worthy of modeling.
CENEGAS’ expansion of its system will allow Mexico “to back out fuel oil, diesel and some hydropower in use,” he said. That may create bottlenecks in the system as new customers come online in 2016 and beyond “and we may begin to see some yellow lights.” That will require changes in existing operating procedures.
U.S.-produced gas will be an important supply source for the foreseeable future, he noted, as Mexico seeks new crew oil production.
“We’re getting involved north of the border, especially in Texas,” Madero said, adding that the Waha Hub in West Texas will be an important supply point for gas that will move under the Rio Grande to Mexican consumers. CENEGAS is reviewing some 3,300 miles of new pipelines proposed in 14 projects valued at more than $10 billion. One of its biggest projects will move U.S. gas south from Arizona down Mexico’s west coast as far as Mazatlán.
Another large supply source is the Los Ramones system, which will extend about 650 miles from the South Texas border into northeastern Mexico. Asset manager BlackRock Inc. and U.S. private equity ﬁrm First Reserve have taken a joint stake worth around $900 million in the second phase of the project, the partners announced earlier this year.
Souki: Global gas markets to mirror U.S. model
The emergence of the U.S. as a major producer and exporter of low-cost natural gas will force the global market to adjust its traditional business model, Charif Souki, Cheniere Energy Inc.’s former chairman, CEO and president, told the November Houston Producers’ Forum.
“I think we’re going to see an evolution of the global markets toward the American model, in other words, gas-on-gas competition—a very liquid market where you can make decisions on whatever you need to do on an economic basis,” said Souki, who also told producers that he expects the price of oil to return to $100 per bbl “pretty soon.”
“I think we’re going to see an evolution of the global markets toward the American model, in other words, gas-on-gas competition—a very liquid market where you can make decisions on whatever you need to do on an economic basis,” said Souki, whSouki, whose company’s Sabine Pass, La., LNG facility is on schedule to begin exports this month, bases his outlook on global market developments over the next ﬁve years, particularly the massive supply ramp-up in the U.S., Australia and Qatar.o also told producers that he expects the price of oil to return to $100 per bbl “pretty soon.”
“Since Qatar and Australia both have signiﬁcant demands ahead of them on a long-term basis, the U.S. is completely ﬂexible,” he said. “You will have American prices in effect on a global basis—on a long-term basis. On a short-term basis, you will have dislocations [areas in which prices are higher or lower depending on demand].”
Souki acknowledged that the sunny out-look is clouded by the current downcycle, in which it appears that markets face an oversupply of natural gas. He believes the demand is there, but is just not apparent yet.
“We see a huge hole after 2020 in the supply of LNG on a global basis,” he said. “I don’t think any other country can provide it any better than we can.”
Achieving the liquid global market requires construction of infrastructure, which becomes difﬁcult during a price downturn.
“All the production that is coming now is set for the next four years and after that it is on hold because nobody can [make final investment decisions on] additional projects on a long-term basis with current pricing,” he said. “Unlike building a pipeline or building a storage facility in this country, building an LNG facility is a five-year plan. It takes a lot of capital, and it takes a lot of time in order to move this.”
So how does a player gather in the investment needed to spend ﬁve years building a facility intended to last 20 years? Knowing what will happen in the next ﬁve years would be helpful, but the constantly evolving energy business doesn’t allow that luxury.
“You have to be very nimble, very quick and keep your optionality as much as you can,” Souki said. “We’re all familiar with this. We all know what we need to do in order to get there. It’s not easy to get it done.”
His theory on a relatively swift return to $100 oil is based on his perception of the market:
• U.S. upstream investment has virtually disappeared;
• Production has fallen in reaction to low prices; and
• Global spare capacity is at a minimum. “It’s only a matter of time before supply is less than demand,” he said. The rational price for a barrel of crude oil might be in the $75 per bbl to $80 per bbl range, but a lack of spare capacity will likely drive it higher.
“That’s why I think it’s going to happen,” he said. “It’s just a matter of when, and when it happens it will be more violent than everybody expects.”
Lithuanian ﬁrm creates LNG bunker division
Klaipėdos Nafta, the Lithuania state-owned oil and gas storage and transportation company, recently announced that it will create a subsidiary specializing in LNG bunkering.
The new company, SGD Logistika, is a JV between Klaipėdos and Bomin Linde LNG GmbH & Co. of Germany. Together the partners will construct an LNG bunkering ship to facilitate fueling services for marine vessels.
This bunkering vessel will add to Klaipėdos’ LNG infrastructure. The company currently owns and operates the Klaipėdos ﬂoating storage and regasiﬁcation unit and is planning to build an onshore LNG distribution station, which is expected to cost more than $28 million.
Although Bomin Linde is not directly involved in the construction of the distribution facility, it will support operations at the terminal, scheduled for completion by 2017.
While the Klaipėdos board has already agreed on the collaboration with Bomin Linde, the deal must still obtain the approval of shareholders, which was expected in late December.
Canada overtakes Australia for desired energy investment
Canada has marginally surpassed Australia to take the title of the second-most attractive region worldwide for oil and gas investment, pushing Australia into third place, while the U.S. has managed to come out on top again.
This is according to the Fraser Institute’s 2015 Global Petroleum Survey, which ranks 126 jurisdictions around the world based on their barriers to investment, including high taxes, costly regulatory obligations and uncertainty over environmental regulations, as well as the volume of oil and gas reserves.
A total of 439 managers and executives in the upstream petroleum industry responded to the survey, with the answers giving way to a Policy Perception Index (PPI) for which each jurisdiction is ranked by.
According to this year’s survey, the 10 most attractive jurisdictions for investment world-wide are offshore Netherlands, Alabama, Oklahoma, Texas, Mississippi, Kansas, Arkansas, Saskatchewan, North Dakota and Manitoba.
On the opposite scale, respondents voted Libya as the least attractive jurisdiction for oil and gas investment. This was followed by Venezuela, Syria, Ecuador, U.S. offshore Paciﬁc, Russia, Bangladesh, Quebec, Ukraine and Timor Gap.
Meanwhile, the U.S. continued to be the most attractive region in the world for investment, followed by Canada, which surpassed Australia to become the second-most attractive region in the world for upstream petroleum investment.
It’s the ﬁrst time Canada has beaten Australia in the survey since 2013. While both countries PPI were under 40, Canada overtook Australia slightly with a score of 35 while Australia’s PPI was 37.
The U.S., which has remained the region with the lowest barriers to investment in the upstream sector since 2011, scored a PPI ranking of 36.
Of the Australian states, South Australia performed the best, taking out the eighth spot for the jurisdiction with relatively small proved oil and gas reserves out of a line-up of 66 regions. South Australia’s PPI score was 19.49 while Western Australia came in at 20 with a PPI score of 32.94.
This was followed by the Northern Territory which was given a score of 33.55. Queensland and Victoria scored lower, placing 26 and 34 respectively. Queensland garnered a PPI of 39.52 while Victoria was pushing 50 with a score of 48.57.
Industry must work with ‘engage me’ era
The expectations of communities and society about the oil and gas industry have changed dramatically in the past ﬁve to 10 years, according to Jill Cooper—health, safety and environment manager for reporting and accuracy at Anadarko Petroleum Corp. “Our industry is no longer just providing gasoline at the pump to put in your car. We are, literally, in some people’s backyards now, and we’ve learned a lot about working with communities in urban interface areas,” she said at the recent International Petroleum Environmental Conference.
“People are asking us a lot more questions about who what, why, where and when, and want to know about the impact we’re having on our community,” she said. “Back in the 1950s and early 1960s, people trusted what the government and big business told them. In the 1970s and 1980, they started asking to be told more information, and more laws and regulations were passed. And then in the 1990s, sustainability became a big deal.”
Nowadays, she said, we’re in the “engage me” period where industry can’t simply tell the public what they’re doing; the public wants its input considered.
Industry leaders must also be engaged with their own workforce and workforce management. “We’ve seen industry swings due to prices,” Cooper said. “We hire and train a lot of newer and younger people and then prices fall and our workforce is suddenly gone along with all of the training we gave them. I think it’s important to keep a balanced workforce.”
So how do leaders get younger people to come into the industry and keep them engaged? How do we motivate the more senior people to help younger people learn what we’ve learned through transitions periods of price swings?
“At Anadarko, we’ve made the commitment to keeping people employed,” Cooper said. “We try to move people around from once-busy areas to new areas and work with more senior people on projects and give them experience they might not have gotten if they only worked in the drilling and completion areas.”
Cooper said the industry should pat itself on the back for the strides it’s made in reducing its overall societal and environmental footprint.
“A few years ago, no one seemed to care about methane emissions,” she said. “Why are we focusing on that now?
“When you start focusing a bunch of scientists and engineers on that, you will ﬁnd out what your footprint is and you’re going to ﬁgure out how to ﬁx it.”
For that reason, Cooper said that the industry needs to keep funding research at universities, federal research organizations and private entities.
Crude export ban repeal looks likely
Never let it be said that anything is ever truly off the table in Washington, D.C., as a week after the White House stated it opposed lifting the 40-year-old ban on U.S. crude exports, there were strong indications that a deal to lift the ban was coming together as part of the Congressional budget proposal.
As Midstream Business went to press, John Kneiss, Stratas Advisors director, said it appeared very likely that a rider lifting the 1970s oil embargo-era ban would be included in the omnibus bill. He added that despite the rhetoric from the White House, a veto of such a bill would be highly unlikely since passage would require bipartisan support.
The $1.1 trillion omnibus being discussed is the result of new Speaker of the House Paul Ryan (R-Wis.) courting House Democrats to help secure passage as it is expected that the House Freedom Caucus, which is primarily comprised of members of the Tea Party, will vote against the bill.
In order to attract Democrat votes, Republicans are including a number of provisions, including the extension of child care tax credits and renewable energy subsidies. Besides passage of the budget itself, the major win for Republicans would be the lifting of the crude export ban.
In a year that’s largely consisted of bad news for the U.S. oil and gas industry, highlighted by OPEC’s refusal to curtail crude production, the formal blockage of the Keystone XL Pipeline by the Obama Administration and a warm fall and winter throughout the U.S. that has greatly reduced heating demand, this announcement could start 2016 on a high note.