Wednesday, March 31, 2021
Tuesday, March 30, 2021
Monday, March 29, 2021
PDVSA's Bonaire Oil Terminal Declares Bankruptcy, Citing U.S. Sanctions on Venezuela
Nicolas Maduro
[Reuters] A unit of Venezuelan state oil company PDVSA on the Dutch Caribbean island of Bonaire has declared bankruptcy, citing the impact of U.S. sanctions on Venezuela, a court filing showed.
In a March 9 filing published last week by the Court of First Instance of Bonaire, Sint Eustatius and Saba, PDVSA-owned Bonaire Petroleum Corporation (BOPEC) said it could no longer pay its debts because sanctions had cut off its “access to international trade,” as well as cash held in bank accounts.
The court granted BOPEC’s request for a moratorium on creditor payments in a filing that noted BOPEC said it was negotiating with “a party that may make the necessary liquid assets available” to allow the company to “satisfy its preferred creditors and offer a settlement to its unsecured creditors.”
Neither PDVSA nor Venezuela’s oil ministry immediately responded to requests for comment.
At its peak, BOPEC had the capacity to store some 10 million barrels of oil and load large vessels from its deep water docks. The company last year was ordered to remove stored oil due to the risk of leaks from its tanks.
The bankruptcy filing is the latest blow to PDVSA’s key network of refining and logistics assets in the Caribbean. The company is struggling to pay debts and maintain basic operations in Venezuela amid U.S. sanctions aimed at ousting President Nicolas Maduro. The sanctions have added to the impact of years of low investment and mismanagement.
PDVSA’s contract to operate Curacao’s 335,000 barrel-per-day Isla refinery and a neighboring storage terminal ended in December 2019, and PDVSA unit Citgo Petroleum Corp – now under the control of the U.S.-backed opposition to Maduro – last year transferred control of Aruba’s San Nicolas refinery to the island’s government.
Last year, Refineria de Korsou – which owns the Isla refinery – had sought to seize BOPEC to collect on debts owed by PDVSA.
Oil Giant Saudi Aramco Sees 2020 Profits Drop to $49 billion
Crown Prince of Saudi Arabia Mohammad bin Salman (Photo: Bandar Algaloud via Getty)
DUBAI, United Arab Emirates (AP) — Saudi Arabia’s state-backed oil giant Aramco announced Sunday that its profits nearly halved in 2020 to $49 billion, a big drop that came as the coronavirus pandemic roiled global energy markets.
Saudi Arabian Oil Co. released its annual financial results a year after the pandemic sent the price of oil crashing to all-time lows as people stopped moving around the world to stem the spread of the virus. In recent weeks, however, the price has edged up as movement restrictions ease, commerce increases and more people get vaccinated against COVID-19. Still, analysts caution that a peak in demand may still be far off.
Despite the 44% drop in net income, Aramco said it would stick to its promise of paying quarterly dividends of $18.75 billion — $75 billion a year — due to commitments the company made to shareholders in the run-up to its initial public offering. Nearly all of the dividend money goes to the Saudi government, which owns more than 98% of the company. Aramco’s policy to pay dividends significantly higher than its 2020 free cash flow of $49 billion stands in sharp contrast to other oil giants that have cut payouts. Seeking a cash infusion to pay the billions of dollars in the face of dwindling revenue, Aramco recently has issued international bonds.
The public figures, obligatory ever since the mostly state-owned company listed a sliver of its worth on Riyadh’s Tadawul stock exchange in 2019, offer valuable insight into the health of the region’s largest economy. Despite Saudi Crown Prince Mohammed bin Salman’s efforts to diversify the economy away from oil, the kingdom remains heavily dependent on oil exports to fuel government spending.
Saudi Aramco profit of $49 billion in 2020 is down from $88.2 billion in 2019 and $111.1 billion in 2018. Still, Aramco remains one of the world’s most valuable companies.
“In one of the most challenging years in recent history, Aramco demonstrated its unique value proposition through its considerable financial and operational agility,” President and CEO Amin H. Nasser said in a statement. “As a result, our financial position remained robust.”
The company produced the equivalent of 9.2 million barrels per day of crude oil over the course of the year, its annual results said. Capital expenditure was down in 2020 to $27 billion compared to $32.8 billion the year before. Aramco expects to spend $35 billion this year, some $5-10 billion lower than previous estimates.
Aramco facilities have come under increasing attack as Yemen’s Iran-backed Houthi rebels across the southern border target the kingdom’s oil refineries and export terminals. In an interview with Saudi-owned al-Arabiya TV on Sunday, Nasser said an Aramco facility in the capital of Riyadh struck by drones days before “has started to return to service,” adding that the company “has contingency plans to deal with any assault.”
In recent months, oil prices have made a major comeback from April 2020, when the price of international benchmark Brent crude dipped below $20 a barrel. For the first time in a year, the price of Brent surpassed $60 a barrel last month and traded over $64 a barrel Sunday.
The price increase has come as Saudi Arabia seems determined to curb output and support crude markets even as demand rises, with nations lifting lockdowns and accelerating vaccination campaigns.
Nasser struck an optimistic note about the year ahead, saying that Aramco is “seeing a pick-up in demand in Asia and also positive signs elsewhere.”
“We remain confident that we will emerge on the other side of this pandemic in a position of strength,” he added.
Earlier this month, the kingdom said it would extend its voluntary production cut of 1 million barrels a day through to April. Most OPEC oil cartel and allied countries likewise left their production cuts in place — in stark contrast to March of last year when a price war between Saudi Arabia and Russia prompted the two oil giants to unleash an onslaught of crude on the market as demand dipped. Saudi officials have urged caution, arguing that global economic recovery may still be undermined by new coronavirus restrictions and fast-spreading virus variants.
Before December of 2019, when Aramco floated 1.5% of its shares on the stock exchange, the firm was owned directly by the Al Saud ruling family and didn’t need to announce results. Initially, Aramco listed at 32 riyals ($8.53) a share, becoming the world’s most valuable listed company, with a market valuation of $1.7 trillion. Since then, however, Aramco lost its stock exchange crown to Apple as its value declined. On Sunday it traded around 35 riyals ($9.30) a share.
As oil prices fell and the virus coursed across the world, the Saudi economy has shown signs of strain. It shrank more than 4% last year, according to the government statistics agency. Despite spending cuts and efforts to ramp up non-oil revenue — including by tripling the value-added tax to 15% — the government deficit widened. Last year, Saudi Arabia needed an oil price of more than $76 a barrel to balance its budget.
Friday, March 26, 2021
14 states sue Biden administration over oil, gas lease pause
"By executive fiat, Joe Biden and his administration have single handedly driven the price of energy up -- costing the American people where it hurts most, in their pocketbooks." Landry said in a statement. "Biden's Executive Orders abandon middle-class jobs at a time when America needs them most and put our energy security in the hands of foreign countries, many of whom despise America's greatness."
During a press conference
Wednesday, Landry described their lawsuit as "an opening salvo against
Joe Biden's declared war on America's oil and gas workers."
"By executive fiat, Joe Biden and his administration have single handedly driven the price of energy up -- costing the American people where it hurts most, in their pocketbooks." Landry said in a statement. "Biden's Executive Orders abandon middle-class jobs at a time when America needs them most and put our energy security in the hands of foreign countries, many of whom despise America's greatness."
During a press conference Wednesday, Landry described their lawsuit as "an opening salvo against Joe Biden's declared war on America's oil and gas workers."
The 54-page lawsuit argues the orders Biden signed to ban new leases on federal land violate the Outer Continental Shelf Lands Act and the Mineral Leasing Act that direct executive agencies to further oil and gas development.
The attorney generals argue Biden's order undercuts his own intention to protect the environment as leases signed under these two acts return billions of dollars to coastal states for reclamation and environmental restoration projects.
"Executive Order 14008 glistens with irony," the Louisiana suit states. "It purports to protect the environment but it constitutes what is likely the single-largest divestment of revenue for environmental protection projects in American history."
During the press conference, Landry also accused Biden's executive order of picking "winners and losers" as it bans new leases on federal lands while allowing Native Americans to conduct such energyextraction on their own land.
The lawsuit also accuses the Biden administration of failing to adhere to rule-making procedures by bypassing comment periods and other such steps prior to the pauses going in to effect.
Landry during the press conference called the moves by Biden an
"aggressive, reckless abuse of presidential powers that threaten our
families, livelihoods and our national security."
When asked about the lawsuit Wednesday, Jen Psaki, the White House press secretary, told reporters that oil and gas jobs "aren't going anywhere" as existing leases will continue.
"This will not affect oil and gas production or jobs for years to come," she said.
The Department of Interior explained the day the executive orders were signed that existing oil and gas operations would not be impacted nor does it restrict energy activities on private or state lands.
The order, the department said, will provide a time to review oil and gas programs after the former Trump administration "conducted a fire sale of public lands and waters."
Thursday, March 25, 2021
Time is of the essence in restoring Suez Canal oil flows
Energy intelligence firm Vortexa has so far identified ten tankers carrying around 13mn bbl of Middle East crude that could be affected by the blockage of the Suez Canal - caused by a container ship accident in the narrow waterway.
Wednesday, March 24, 2021
Tuesday, March 23, 2021
Monday, March 22, 2021
Oil Firms Discuss Return To Venezuela As Maduro Promises Monopoly
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Managers of foreign oil companies have been visiting Caracas recently to negotiate a possible return of international firms to Venezuela’s embattled oil industry after Nicolas Maduro began promising earlier this year he would end the monopoly of state oil firm PDVSA, Bloomberg reported on Friday, citing sources familiar with the talks.
Venezuela is opening up to foreign investment in its oil industry, Maduro said in January, in a bid to reverse a catastrophic drop in its output under the weight of U.S. sanctions. PDVSA already has overseas partners, but foreign investments in Venezuela’s oil industry are capped at 49 percent of any given project to protect state control of the sector.
Now, with the industry—and Venezuela’s whole economy—in tatters, this may have to change.
Venezuela’s crude oil and refined product exports plummeted in 2020 to their lowest level in 77 years, as the U.S. continued to step up sanctions against Maduro’s regime and anyone found dealing with it. Last year, Venezuela’s oil exports plunged by 37.5 percent, reaching just 626,534 barrels per day (bpd), the lowest level since the early 1940s, according to data from Refinitiv Eikon and internal documents from PDVSA, cited by Reuters.
Earlier this month, Maduro said the Venezuelan National Assembly would consider reforms to the country’s oil law that would open the door to “new business models.”
Foreign companies have expressed interest in getting their hands on some of Venezuela’s massive oil reserves, the biggest crude reserves in the world. But most international oil firms, especially the biggest ones with exposure to the U.S. stock and banking markets, will wait for U.S. sanctions to potentially ease before trying to enter the Venezuelan oil sector again.
“There is some easy potential to increase production if sanctions enforcement declines,” Francisco Monaldi, an expert on Venezuela’s oil sector and a lecturer in energy economics at Rice University’s Baker Institute for Public Policy, told Bloomberg.
A massive rebound in Venezuela’s oil industry, however, would only occur—if ever—with tens of billions of U.S. dollars of additional investment.
By Charles Kennedy for Oilprice.com
Friday, March 19, 2021
Thursday, March 18, 2021
Sharp rise in gas prices due to Biden's energy actions: Florida Sen. Rick Scott
Senator Rick Scott, R-Florida
Sen. Rick Scott, R-Fla., blamed Joe Biden for the sudden and sharp increase in gas prices nationwide, telling “Varney & Co.” on Wednesday that the president is “not thinking about the poor families in this country” with his energy actions.
The Florida senator argued on Wednesday that Biden’s energy policies will lead to an “unbelievable increase in costs for poor families.”
Scott pointed to Biden’s energy actions, including the cancelation of the Keystone XL oil pipeline project and temporarily suspending the issuance of oil and gas permits on federal lands and waters in a series of orders aimed at combating climate change.
President Biden revoked the permit for the 1,700-mile pipeline on his first day in office, ending a project that was expected to employ more than 11,000 Americans this year.
In remarks made by Biden in January before signing executive actions on tackling climate change, the president pointed to “a key plank” of his Build Back Better Recovery Plan, which he noted “is building a modern, resilient climate infrastructure and clean energy future that will create millions of good-paying union jobs.”
Speaking on “Varney & Co.” Scott asked, “If you’re in that [the energy] industry do you want to invest more dollars when the president says he wants to get rid of you?”
On Wednesday, West Texas Intermediate crude oil, the U.S. benchmark, lost 67 cents to $64.13 per barrel.
The recent rally in oil markets has pushed crude prices to their highest levels since near the start of the coronavirus pandemic, fueled by recovering gas demand and production cuts.
If the current trends continue alongside higher crude prices, “drivers can expect incremental price increases — of at least nickel — at their local gas stations in March,” according to a AAA news release.
Gas prices have been increasing at the pump for the past few weeks, reaching a national average of $2.88 a gallon as of Wednesday, which is 64 cents higher than the same time in 2020, according to AAA.
GAS PRICES WILL BE NEGATIVELY IMPACTED BY 'HOSTILE' BIDEN ADMINISTRATION: FORMER SHELL OIL PRESIDENT
“This is an unbelievable increase in costs for poor families, for people on fixed income,” Scott said, noting that “their gas is way up in the last month” and “on top of that the utility rates are going up” because “so much of our utilities are done by natural gas.”
“It’s an unbelievable cost increase on our poorest families and Joe Biden, his rhetoric, his actions are causing this to happen so he needs to figure this out,” he continued.
Scott said that he “asked the White House what they’re going to do about it,” but got no response.
A White House spokesperson did not immediately respond to FOX Business’ request for comment.
Scott also argued on Wednesday that Democrats in general “want big government,” warning that “they are out to raise your taxes.”
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“It’s like they’re trying to hurt all Americans,” he continued, adding that Democrats are not “helping people” rather they’re “hurting people.”
Wednesday, March 17, 2021
Oil Prices Retreat As Biden Plans Major Federal Tax Hike
https://oilprice.com/Energy/Oil-Prices/Oil-Prices-Retreat-As-Biden-Plans-Major-Federal-Tax-Hike.html
Despite optimism from Chinese data overnight, forecasts for lower OPEC+ output, and a weaker dollar, oil prices are tumbling this morning with WTI back below $64.50...
Some have suggested the drop is due to investors also considering the potential impact of higher taxes and how that could affect corporate profit growth. President Joe Biden is planning the first major federal tax hike since 1993 to help pay for a long-term economic program, according to people familiar with the matter. The White House is expected to propose a suite of tax increases, mostly mirroring Biden's 2020 campaign proposals, according to four people familiar with the discussions.
We do note that as prices tumble 'mysteriously', that WTI swap dealer shorts are at their highest since 2018...
And WTI's nearest timespread flipped into a bearish contango structure - signaling oversupply - after stockpiles in the U.S. grew in recent weeks.
The silver lining, if this trend reversal holds, is we may avoid $3.000 gas at the pump becoming the norm.
By Zerohedge.com
Tuesday, March 16, 2021
Shell's Oil Trading Profit Doubled in 2020
southeastpetro.com
[Argus Media] – Shell almost doubled its profit from crude and oil products trading to $2.6bn last year, helped by increased market volatility caused by the Covid-19 pandemic.
Trading firms and the trading divisions of large integrated companies such as Shell, BP and Total all benefited from extreme oil market volatility in the second quarter of last year, driven by unprecedented developments in both supply and demand. At the time, Shell talked about the “very strong contributions” made by crude and oil products trading.
The firm was not alone in profiting from the market volatility. Trafigura, which also trades metals, said it had the best year in its history in the 12 months to 30 September, with its oil and petroleum products division accounting for 75pc of gross annual profit, or $5.3bn.
BP has not revealed its oil trading profits for last year, but chief executive Bernard Looney said last September that the company’s total trading activities tend to boost its return on average capital employed (Roace) by close to 2 percentage points. The firm’s average capital employed was about $124bn in 2015-19, suggesting returns from trading averaged about $2.5bn/yr.
Monday, March 15, 2021
A Surge in Iranian Oil Exports Is Clogging Up Chinese Ports
[Bloomberg] China is gorging on sanctioned Iranian oil – with imports forecast to more than double this month from February – as other countries hold off purchases for fear of incurring the wrath of the U.S.
Iranian shipments to the province of Shandong, home to a quarter of China’s refining capacity, have surged so much this month they’re causing congestion at ports and filling up storage tanks, traders and analysts said.
Oil from the Persian Gulf nation is heavily discounted due to the American sanctions that were first imposed in mid-2018. In China, it usually goes for $3 to $5 barrel less than benchmark Brent crude, according to traders, who say that’s prompting some local companies to stock up as global prices rise and economic activity picks up following the Lunar New Year holidays.
Chinese imports of Iranian crude will rise to 856,000 barrels a day in March, the most in almost two years and up 129% from last month, according to Kevin Wright, a Singapore-based analyst with Kpler. His estimates include oil that’s undergone ship-to-ship transfers in the Middle East or in waters off Singapore, Malaysia and Indonesia to obscure their origin.
Most refiners and traders are reluctant to purchase Iranian crude for fear of repercussions that can include being cut off from the American banking system and having cargoes seized. Tehran has used aggressive marketing as it tries to raise export income and boost an economy reeling from the sanctions.
“The surge is related to lower costs but also, politically, to a sense that this might be an interim period between the outgoing administration and the Biden administration figuring out its position on Iran,” said Michal Meidan, director of the China Energy Programme at the Oxford Institute for Energy Studies. “Iran is certainly part of the downside risks to oil prices, alongside Libya and shale to a certain degree.”
Relations between Washington and Tehran took a nosedive when former president Donald Trump pulled out of a nuclear accord with Iran. The country’s official oil exports have plunged to almost nothing from around 2.5 million barrels a day before the American sanctions. Iran still produces roughly 2 million barrels daily, however.
Tensions have remained high since Joe Biden came to power, although Iranian President Hassan Rouhani said this week his country was ready to revert to full or partial compliance with the nuclear deal if the U.S. did the same. Tehran has said Washington should lift the sanctions before the two sides start talks.
Powerful Rally
Oil prices have leapt from less than $40 a barrel at the end of October as major economies rolled out coronavirus vaccines and OPEC+ kept supply in check. Brent briefly topped $71 this week after a drone and missile attack on Saudi Arabia’s largest oil export terminal, which the kingdom blamed on Yemen’s Iran-backed Houthi rebels.
Chinese fuel consumption had already recovered to pre-virus levels last year, but dipped over the last few months amid a resurgence of Covid-19 in parts of the country. It’s now growing on the back of strong factory activity and infrastructure building that left Beijing blanketed in smog this week.
The waiting time for tankers looking to offload in Shandong was estimated at 12 days last week, compared with eight the week before, according to Kpler. Oil inventories at ports in the province climbed to a one-year high last month, data from industry researcher SCI99 showed.
China’s imports of crude oil climbed to an average of 11.1 million barrels a day in January and February, up more than 20% from December, according to Bloomberg calculations.
Iran-origin crude purchased by China is sometimes labeled Omani or Middle Eastern oil, or Malaysian Blend. China imported more than 12 million metric tons of crude from Malaysia in 2020 and 2019, around twice as much as in 2017 before the U.S. sanctions were imposed, customs data show.
Saturday, March 13, 2021
Friday, March 12, 2021
Thursday, March 11, 2021
Poten's Weekly Opinion: Not so fast!
https://www.tankeroperator.com/ViewNews.aspx?NewsID=12202
OPEC+ decision delays tanker market recovery.
Read Opinion Below:
Like most analysts, we thought that the OPEC+ oil producers group would decide to increase production by up to 500,000 barrels per day and that Saudi Arabia would reduce their voluntary cutbacks, if not eliminate them entirely. That is not what OPEC+ decided. Except for small allowances for Russia (+130,000 b/d) and Kazakhstan (+20,000 b/d), output was held steady. OPEC is concerned about the global recovery from Covid, based on new variants of the virus and the relatively slow vaccine rollout. OPEC+ will convene again in April.
Not surprisingly, oil prices moved up sharply. Brent prices have now recovered to the pre-pandemic levels of January 2020 and will face more upward pressure as long as the oil market is seen as undersupplied. What are the implications for the tanker market?
Wednesday, March 10, 2021
U.S. Senators Introduce Bipartisan Oil and Gas Leasing Reform Bill
(Reuters) - Two U.S. senators on Wednesday said they have introduced a bipartisan bill aimed at boosting taxpayer returns from federal oil and gas leasing, the latest in a string of moves in Washington seeking to reform drilling on public lands.
The bill, authored by Senators Jacky Rosen, a Democrat from Nevada, and Chuck Grassley, a senior Republican from Iowa, would increase the minimum bid price per acre during lease auctions and raise the royalty rate companies must pay on oil and gas produced from the leases.
The Biden administration said on Tuesday it would launch a review of federal oil and gas leasing later this month to address widespread criticism that the program is not yielding adequate public revenue as well as contributing to climate change.
While the bill proposed on Wednesday would not deliver on President Joe Biden’s campaign promise to stop issuing new leases to fight global warming, it could be applied to existing leaseholders if passed into law.
The legislation's backing by Grassley could be critical to winning support for the reforms in the closely-divided Senate. Similar bills introduced in the House last week did not include any Republican sponsors.
Like the House bills, the Senate bill would increase royalty rates for onshore development for the first time in a century to 18.75% from 12.5%, bringing them in line with those paid by offshore drillers. It would also raise the minimum bid for federal acreage to $5 an acre from $2 and lift other fees and costs.
"Big Oil continues to take advantage of low royalty rates on federal lands," Grassley said in a statement. "Congress has not addressed this issue for over 100 years and since then, these oil companies have deprived the Treasury and the American people of billions of dollars."
Oil and gas production on public lands accounts for nearly a quarter of all U.S. greenhouse gas emissions.
(Reporting by Nichola Groom; Editing by Sonya Hepinstall)
Copyright 2021 Thomson Reuters.
Tuesday, March 9, 2021
Monday, March 8, 2021
Oil Optimism Unwinding Market's Mad Dash for Storage
Dutch company Vopak, which claims to be the world's largest independent tank storage provider, operates a large tank farm, rail, and ship dock terminal here on the south side of Houston's Ship Channel, for storing and shipping petrochemical products entering and leaving through this - the heart of the nation's largest petrochemical corridor. Vopak operates 80 terminals in 28 nations (seven are to be found in the U.S.), and employs over 6,000 people. The terminal is adjacent to the Mitsui & Co. (USA) owned Intercontinental Terminals Company, which operates 239 storage tanks, loading and unloading racks for both rail cars and tank trucks, and five tanker berths.
LONDON/NEW YORK/SINGAPORE – When the world economy slammed on the
brakes last year, there was a rush to store a wave of unwanted crude and
products, but rising prices and optimism about demand is spurring a
swift unwinding of storage contracts.
At the end of February, the volume of refined products held on stationary tankers for over 10 days stood at 19.2 million barrels, down 77% from a peak of 84 million last May, IHS Markit estimates show.
The Organization of the Petroleum Exporting Countries and its allies, a group known as OPEC+, closely monitors global inventories, and the rate of drawdowns will be a major factor discussed when it meets on output policy on Thursday.
A year ago, traders were struggling to find storage capacity, and prices for it surged as fuel consumption plummeted. Earnings for product tankers surged to record highs above $100,000 a day last May versus less than $10,000 currently.
Remote salt caverns in Scandinavia and unused U.S. pipelines and railcars were pressed into service.
But now, capacity is again becoming available, in Northwestern Europe, the Mediterranean, Middle East and North America, brokers said.
“Parties are giving notice to terminate contracts by April-May,” said Krien van Beek, a broker at ODIN-RVB Tank Storage Solutions in Rotterdam.
Brokers in the United States are also seeing lower prices offered for storage of crude and products.
“In January the unrelenting price run-up (in oil futures) commenced, and
that scared people away who had been considering taking on storage
positions,” Ernie Barsamian, chief executive of the Tank Tiger, a U.S.
terminal storage clearinghouse.
“We are now in full backwardation and we are seeing contracts expire without renewals,” he added.
Backwardation, where spot prices are higher than for later delivery, encourages traders to draw down oil supplies and sell promptly.
In Europe, the six-month diesel spread reached $8 a tonne on February 19 in its biggest backwardation in 13 months, Refinitiv data showed.
The spread was as low as minus $92 a tonne last April, when the world population went under strict lockdowns.
Storage capacity is expected to become available in the second quarter, especially in Scandinavia, according to ODIN-RVB Tank Storage.
Friday, March 5, 2021
Thursday, March 4, 2021
Wednesday, March 3, 2021
Privately-held shale drillers poised to create headaches OPEC
HOUSTON (Bloomberg) --The battered and bruised U.S. shale industry is finding a resurgence in one of the most unlikely places: private operators most investors have never heard of.
Take the case of little known, closely held DoublePoint Energy. It’s now running more rigs in the Permian Basin than giant Chevron Corp. Meanwhile, family-owned Mewbourne Oil Co. has about the same number of rigs as Exxon Mobil Corp.
That’s emblematic of what’s happening across the industry. Once minor players, private drillers held half the share of the horizontal rig count as of December. It’s the first time in the modern shale era that they have risen to the level of the supermajors.
After years of unwieldy supply growth, the big guys are finally starting to show restraint. They’ve dialed back drilling after the pandemic sent oil prices into collapse. Now that the market is on the rise again, the majors and publicly-traded counterparts are mostly sticking to the mantra of discipline, all but ending shale’s decade-long assault on OPEC for market share.
But private operators’ ambitious growth plans present the cartel with a wild card as prices rebound and it attempts to lift its own production.
“It’s amazing on both fronts: private companies are getting so much bigger than we ever thought they would and the publics are drilling so much less than we ever thought they would,” said Wil Vanloh, co-founder of the private equity firm Quantum Energy Partners, whose portfolio companies have combined for 18 rigs, trailing only EOG Resources Inc. for most in the nation.
With oil prices up close to 30% in the past two months, traders and analysts are watching shale producers closely for signs that they’re opening the spigots. Most big publicly traded explorers are listening to investors’ pleas and planning to keep production flat. But the contrast in output strategy from the private companies underscores just how anarchic the oil market is.
America’s oil production currently stands at about 9.7 million barrels a day, about 3 million barrels a day less than a year ago before prices collapsed, according to the Department of Energy. That means the U.S. lost production equivalent to Iran and Angola combined, or two Gulf of Mexicos, in just 12 months.
The question is where does it go from here. A Bloomberg survey of major forecasters including Enverus and Rystad Energy showed a variance of 700,000 barrels a day, more than half of Nigeria’s production, indicating how much uncertainty surrounds large, private producers whose plans are mostly shielded from public view.
If private drillers keep expanding at their current pace, it could eventually mean that U.S. production ends up on the higher end of analyst forecasts. And that, of course, could weigh on prices.
“In a few months, a lot of private operators will return in an aggressive manner to add wells and rigs because they are able to realize returns faster as oil prices are improving,” said Artem Abramov, head of shale research at Rystad.
The private drillers are on pace to spend $3 billion in just the first three months of this year, doubling from their lowest levels of 2020, according to industry data provider Lium.
The spending spree is leading to a rig resurgence. The number of U.S. drilling rigs that can bore a hole a mile deep and turn sideways for another two miles has steadily improved since history’s worst crude-price crash forced a 15-year low in August. Most of that growth has come from the private companies.
The private drillers reached a record 50% share of the horizontal rig count in December, up from 40% a year earlier.
“We are expecting output to start growing from the second half of this year, and that will likely come more from drilling by private companies than public ones,” said Bernadette Johnson, vice president for strategy and analytics at Enverus.
DoublePoint Energy, backed by investors including Quantum, has doubled production to about 80,000 barrels a day in the past year and expects to increase to more than 100,000 barrels a day over the next few months, according to Co-Chief Executive Officer Cody Campbell.
“The publics are under a lot pressure to be disciplined with the capital they spend,” Campbell said in an interview. “They don’t have the freedom to go after returns like we can.”
That freedom means the private operators could also become more of a thorn in the side of OPEC+ if they keep expanding over the next six months to a year, said Daniel Cruise, a partner at Lium. The producer group, which meets on March 4 to discuss strategy, has been withholding barrels to support the market even as some key members disagree on the path forward.
“If these guys stay out in the field and keep pumping and shale goes up, then that presents a whole other thing for OPEC,” Cruise said.
Some of the discipline on the part of the publicly-traded independents comes from experience.
For years, companies pledged sky-high returns even when oil was as low as $50 a barrel. But those promises were never kept. Over the past decade, shale oil and gas producers burned through more than $300 billion in capital spending above the cash generated from oil revenues, according to Deloitte LLP. That resulted in massive flows of oil but little in the way of financial returns to investors.
Indeed, oil’s dizzying collapse last year is still fresh in the minds of many, and shareholders are quick to punish the producers they think are getting too aggressive. Matador Resources Co. was widely questioned when it recently announced plans to add one rig to its Permian Basin holdings. The stock fell as much as 10% after the announcement.
Meanwhile, private equity-backed companies are being driven to pump harder than ever before because of a more complicated exit strategy.
Many of these suppliers started up around 2014 to 2017. At the time, it was enough for a private driller to acquire some land, put in a few wells, and they’d quickly get bought up in a lucrative sale as the public producers tried to increase reserves.
But with the decline in prices, it takes a lot more for a private driller to look attractive enough to tempt the now more-disciplined majors. Many private companies have little choice but to expand output and increase cash flow in the hope that they can lure public companies down the line when oil markets and valuations improve.
“You’ve got Major League Baseball and you’ve got the minor leagues, and the private equity backed companies were kind of like the minors,” Vanloh of Quantum said. “They were serving up opportunity, aggregating land, drilling some wells, proving some things up, but they didn’t really want to run a large-scale drilling program.”
The private companies insist they won’t fall victim to shale’s past losses because all the operational difficulties have now been worked out of the major basins, making it easier to run large rig programs.
“The guesswork just isn’t there anymore, everything is just extremely repeatable,” DoublePoint’s Campbell said. “That’s a hard story to tell if you’re a public company and dealing with investors who have been burned."
Tuesday, March 2, 2021
OPEC+ Decision To Raise Output Could Keep U.S. Gasoline Under $3
Rallying oil prices in recent weeks have intensified speculation that this week the OPEC+ group will decide to put more oil on the market as of April to prevent an over-tightening of the market and preserve market share.
As tempting as high oil prices could be from a budget perspective for the biggest oil-exporting nations in the Middle East and Russia, oil at $70—as many banks now believe prices would reach as early as next quarter—would be a drag on the tentative demand recovery, with large importers such as India signaling they are not very happy with this year’s rally.
Rising oil demand amid expectations of a vaccine-assisted economic rebound in major economies and tightening oil supply, courtesy of the OPEC+ production cuts, have sent oil prices to their highest levels since January 2020, before the COVID-19 pandemic started eroding economies and demand.
The market fundamentals plus the Texas Freeze that curtailed U.S. crude oil production and refining operations in the middle of February have also sent the national U.S. average gasoline prices to their highest since August 2019.
“The national average continues to increase as crude prices march higher,” AAA said on Thursday last week, when the national average was $2.67 a gallon, up four cents in four days.
As of Sunday, the national average was just $0.27 a gallon from reaching $3 a gallon.
“Gas prices are coming into the month of March like a lion.. and might end up leaving the same way,” GasBuddy’s oil and refined products analyst Patrick de Haan says.
If OPEC+ decides this week to put more oil back to the market, it could cool off the rally in crude prices and, consequently, the continued rise in U.S. gasoline prices with the summer driving season approaching, Matt Egan at CNN Business argues.
The current oil market conditions look right for an increase of the OPEC+ production from April, and most analysts believe that the group will return some barrels on the market. But questions remain: how much, and how (and if) the two leaders of the group, Saudi Arabia and Russia, will compromise on who is pumping how much next month.
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Saudi Arabia has signaled it would be reversing its unilateral cut of 1 million barrels per day (bpd)—the world’s top oil exporter has not committed to keeping that cut beyond the promised period of February and March only.
Yet, because of the reversal of those barrels from April, the Saudis may not be too keen to let the entire OPEC+ group add another 500,000 bpd in production, which is the maximum rise in output that the alliance has vowed to put on the market each month.
OPEC+ will be discussing raising collective output, sources in the coalition say. But the group’s leaders are potentially headed to another clash over oil production policies, with Russia pushing for a more aggressive rise and the Saudis still cautioning against “complacency” and calling on producers to remain “extremely cautious.”
It is clear that there is room for more OPEC+ supply to return on the market, but the group will have to carefully weigh the short-term and medium-term prospects of the market and its share of that market at the virtual meeting on March 4.
Too little easing of the cuts risks overtightening the market in the short term and making oil more expensive for the global economic recovery and for large key growth drivers such as India. Higher oil prices could also incentivize more U.S. shale production eating up OPEC+ market share.
On the other hand, a too generous production increase could quickly reverse the oil price rally.
“The group will need to be careful, they will want to make sure they do not surprise the market by easing too much. There is a large amount of speculative money in oil at the moment, so they will want to avoid any action that will see them running for the exit,” ING strategists Warren Patterson and Wenyu Yao said on Monday.
Russia’s President Vladimir Putin and Saudi Arabia’s Crown Prince Mohammed bin Salman vowed last month to continue their countries’ close coordination “in the interests of maintaining stability in the global energy market,” but this coordination will be tested once again this week as OPEC+ is headed to another heated debate about oil supply policies.
By Tsvetana Paraskova for Oilprice.com