Energy

Global Energy Advisory 1st June 2018

The controversial Trans Mountain pipeline expansion project just got delayed for an indefinite period after the federal Canadian government announced it would buy it from Kinder Morgan for $3.5 billion and seek other investors to take it on.

This basically means that the bulk of Canadian heavy crude production from Alberta will continue to go into U.S. refineries at a substantial discount to the West Texas Intermediate (WTI) benchmark—the result of pipeline and rail car capacity bottlenecks.

The amount of heavy crude from Canada could increase if the U.S. imposes more sanctions on Venezuela after the re-election of Nicolas Maduro for another term as president. Washington has already condemned the election results but with other things on President Trump’s mind, namely the North Korea issue, any new moves with regard to Venezuela will have to wait.

Benchmark Western Canadian Select was trading at a discount of more than US$26 per barrel at the end of May. That sort of discount, according to PM Trudeau, is costing Canada about C$14 billion annually; but it seems that options are limited in the face of tough opposition from the British Columbia government to the expansion project, which ultimately led to Kinder Morgan’s decision to drop the project.

Deals, Mergers & Acquisitions

• Mubadala Petroleum has agreed to acquire, jointly with Russia’s sovereign wealth fund, a 49% interest in Gazprom Neft-Vostok, a subsidiary of the oil division of Russia’s state oil giant. Gazprom Neft-Vostok operates fields in Western Siberia with combined proven and probable reserves of 300 million barrels of crude. Production from the fields as of last year averaged 33,000 bpd.

• Malaysia’s Petronas will buy a 25% stake in Canada LNG, a project led by Shell, for an undisclosed sum. The acquisition should close within several months and follows Petronas’ decision to shelve its $28-billion Pacific NorthWest LNG project, also in Canada, following a slump in international LNG prices due to an influx of supply. Canada LNG is worth $31.1 billion and will have an export capacity of 13 million tons of LNG annually.

Tenders, Auctions & Contracts

• Saudi Aramco has awarded Halliburton a contract for unconventional gas recovery services including hydraulic fracturing technology as the Kingdom seeks to boost its natural gas production, including from unconventional deposits. The goal of this pursuit is to reduce domestic oil consumption, so more crude gets exported, and increase gas feedstock for petrochemical operations.

• A Russian company has expressed interest in taking part in the construction of an oil export pipeline from Uganda, the East African nation’s Foreign Affairs Ministry said, without naming the company, which would partner with UAE’s GCC Services if Uganda approves its proposal. The pipeline will run from Uganda’s oil fields to the coast in Tanzania and will cost an estimated $ 3.5 billion.

• India has refused to pay for Venezuelan crude in the South American country’s cryptocurrency, the Petro, despite an offer of a 30% discount from Caracas. Foreign Minister Sushma Swaraj told media this week India’s central bank does not allow trading in cryptocurrencies, after a policy update in April, which banned Indian banks from working with companies dealing in cryptos.

Discovery & Development

• Australia’s Santos said it will pour more than $300 million into a coal seam gas project in Queensland that will increase gas supply for the Gladstone LNG project. The Arcadia project will add to both local and export supplies from the Gladstone LNG, with production slated to begin late in 2019. GLNG has been suffering from insufficient gas supplies but, according to some researchers, the launch of Arcadia could change the game for the project.

• Iran’s Pars Oil and Gas Company plans to set up six new rigs at the giant South pars gas field by late March 2019, the end of Iran’s fiscal year. The platforms are already under construction and will be added as part of the Phase 22-24 development of the field. After the completion of these phases, South pars will produce 56 million cubic meters daily of sour gas, 50 million cubic meters of methane, 2,900 tons of LPG, and 75,000 barrels daily of gas condensate.

• ConocoPhillips has inked a three-year master service agreement with Ocean Rig, which includes a contract for the immediate start of drilling of a well offshore Norway plus an option for drilling another two in the same region. The drilling of the first well should start in the second half of 2019.

Company News

• Exxon has sent a 12-strong team of oil marketers and traders to scout the Chinese independent refinery market in the latest indication of how important this market has become in the last couple of years. The team represented Exxon at an oil trade show in the epicenter of the Chinese teapot refinery industry, in the province of Shandong. The move has surprised industry observers as it is distinctly different from Exxon’s usual approach to new partners, which is much less public.

• Media reports in India have suggested conglomerate Reliance Industries may suspend oil imports from Iran from October or November, when U.S. sanctions against Tehran should kick in. Reliance operates one of the largest refineries in the world, in Gujarat, which has a capacity of 1.4 million tons of crude daily. However, the company is apparently worried about potential problems with international financing like many others doing business with Iran and the U.S.

Regulatory Updates

• Gazprom has appealed the decision of a Swedish arbitration court in its long-running gas transit dispute with Ukraine’s Naftogaz on the grounds that solid portions of the arbitration award for Naftogaz was written by a person other than the arbitrators, which, according to the Russian company, stands in violation of the arbitration agreement. The court awarded Naftogaz $2.56 billion for shortfalls in gas supplies and unpaid transit fees.

Politics, Geopolitics & Conflict

• President Trump may announce painful tariffs on European steel and aluminum exports to the U.S. by the end of the week after the EU failed to offer the concessions sought by Washington. This will further alienate the two geopolitical partners.

• Russia’s top diplomat Sergey Lavrov is in North Korea to meet with Kim Jong Un while a high-ranking North Korean official met with Secretary of State Mike Pompeo in New York a day earlier. Both visits are part of preparations for a historical summit between President Trump and Kim Jong Un next month.

• Gaza is on the brink of war, the UN’s envoy to the Middle East has warned the Security Council, which convened for an emergency meeting earlier this week. A heat-up in the conflict between Israel and the Palestinians prompted the meeting, with President Trump demanding that the Security Council condemn the attacks by Hamas and Islamic Jihad on Israel. The council, however, has not reached unanimity on who is to blame for the latest flare-up of violence.

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