Hurricane Harvey Wreaks Havoc on Oil Prices, Offshore Platforms, and Refineries

hurrican harvey picture
On Friday, August 25, Hurricane Harvey, one of the worst tropical storms to hit the US in twelve years, touched down on land. By then, it had gathered the strength of a category 4 hurricane on a 5 point scale.

The oil refinery industry was inadequately prepared. According to data from the International Energy Agency (IEA), daily oil production from US companies in the Gulf of Mexico decreased by 21.64%, down from 1.75 million to 1.31 million barrels per day.

The supply decrease hasn’t led to an increase in oil prices, as basic economics would lead us to believe. In its path, Harvey has destroyed crucial infrastructure centers that normally order and buy crude oil from Gulf Coast refineries. As long as bad weather conditions continue, most businesses (and their demand for energy) will stay closed. The millions of resident’s in greater Houston have been advised to stay off the roads, a factor which also cuts the demand for refined oil products such as gasoline. Goldman Sachs estimates that demand for oil will be reduced by 2 million barrels per day.

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IEA map showing major offshore oil platforms. The fluorescent lines show the intensity of the hurricane storm. From


Harvey’s effect on oil prices is less obvious.

First, the storm has caused a larger spread between WTI oil prices (trading at roughly $46 per barrel) and Brent (at about $50 per barrel). On Monday, the spread between the US-based benchmark and the European grew to more than $5 per barrel. Brent prices have not taken a hit from the storm.

The primary reason Harvey isn’t destroying WTI prices is due to the recent diversification of the US oil industry into shale, or tight oil.

The US offshore hydrocarbon fields in the Gulf of Mexico produce only about 17% of the country’s total oil output, whereas 48% of the nation’s crude production came from shale reserves. When Hurricane Katrina hit in 2005, it wasn’t the same story, and energy prices, especially for natural gas and gasoline, soared.

CNN reported that Hurricane Harvey has forced 10 oil refineries along the Gulf Coast to shut down. About half of US petroleum and natural capacity is located along the gulf coast in the states of Texas, Louisiana, Mississippi, Alabama, and Florida.

Oil and gas companies began evacuating platforms and rigs before the storm hit. Personnel were evacuated from 98 production platforms (there are a total of 737 in the Gulf of Mexico, both in US and Mexican waters).

Harvey passed through the second largest refinery (600,000 bpd capacity) in Port Arthur, which is owned by Saudi Arabian Oil. Several other companies, such as Shell, confirmed they have closed down their refineries in areas that are in the hurricane’s path. ExxonMobil has closed their Baytown refinery (560,000 bpd capacity), which supplies fuel and petroleum products to the southern and eastern states.

Some refineries continued to operate, but have reduced output. As a result, on Monday, gasoline prices in the US rose by 5% to $1.76 per gallon (before tax). For comparison, gasoline increased by more than 40% following Hurricane Katrina in 2005.

According to investment bank notes from Bank of America and Goldman Sachs, the closure of refineries will lead to a collapse in demand. Goldman Sachs noted that the closure of refineries will translate into 3 million barrels of oil per day not being refined into gasoline and other petroleum products, or about 16% of US refining capacity.

Yamal LNG Commissions First Train

Image courtesy of Novatek
Image courtesy of Novatek

Novatek, the pioneer of Russian LNG in the Arctic, has started commissioning activities on the first liquefaction unit, and the company announced the train will be put into production by December 2017, when the first carrier is scheduled to be delivered to international markets.

The first train (there are a total of three trains at Yamal LNG) will have a capacity of 5.5 million tons of liquefied natural gas, once in full production. The second train is scheduled to start up in 2018, and the third in 2019. When all three trains are active by 2019, the operation will have a capacity of 16.5 million tons of LNG.

The three-train Yamal LNG plant sources natural gas from the South Tambey field on the Yamal Peninsula in Russia’s West Siberia, and the liquefies the gas, and ships it off by boat.

In the short term by 2025, once Novatek’s projects Yamal LNG (16.5 million tons) and Arctic LNG 2 (16.5 million tons) reach full capacity, the company predicts Russia will be the world’s 5th largest producer of LNG. The Arctic LNG 2 project, located on Russia’s Gydan Peninsula, is slated to be completed by 2023. Through auctions and licencing awards, Novatek has amassed a significant amount of bloc holdings in the Russian arctic, which will enable the company to start and complete several more projects like Yamal and Arctic 2.

In the long term, Novatek has ambitions to topple Qatar as the largest LNG producer worldwide (Novatek has said it plans to be producing 100 million tons of LNG in the near future).

Novatek’s plans are not limited to the Arctic. Just recently the company closed a deal to acquire 51% of Gazprombank’s shares in the Cryogas-Vysotsk project in the Baltic Sea. The project includes the construction of an LNG plant with 660,000 tons of capacity per year, as well as an export terminal in the Vysotsk area on the border of Russia and Finland. This project will help Novatek break into LNG marine fuel market. On July 14, a subsidiary of Novatek Gas and Power joined the Society for Gas as a Marine Fuel (SGMF) and SEA \ LNG, an industry coalition that lobbies for LNG as a marine fuel. According to SGMF, already 45 ports worldwide are set up for LNG refueling.

Novatek Secures LNG Position with New Arctic Field

Icebreaker ship, Beaufort Sea, U.S.A.

NOVATEK’s subsidiary company Arctic LNG-1 won an auction for the right to explore and produce hydrocarbons in the subsoil area of the Gydan Peninsula of the coast of the Kara Sea in northern Siberia. The acquisition will help NOVATEK secure its foothold in the Russian LNG market, as the Gydan Peninsula license will boost the resource base for large-scale LNG projects in the Yamal region.

The company bought the rights in an auction for $38 million (2.262 billion rubles) for a 27-year lease.

The Gydan site is located in close proximity to the Utrenno field, which is the resource base of Novatek’s Arctic LNG-2 project. The area is estimated to have a total resource potential of 4.74 billion barrels of oil equivalent. Together, the Gydan and Yamal peninsulas are comparable to LNG production in Qatar, NOVATEK has said.

The Arctic LNG 2 project will nearly match Yamal’s production capacity of 16.5 million tons (21 billion cubic meters) per year once it begins operating in 2022-2023. The plant will draw from a resource base of 1.2 trillion cubic meters of proven gas reserves in addition to 50.5 million tons of liquid hydrocarbons.

The addition of Arctic LNG 2 to the Yamal LNG project will significantly reduce the cost of producing LNG in Russia’s Arctic seas, and a liquefaction hub will be set up in Murmansk. Arctic LNG 2 is planned to cost $10 billion and produce 16.5 million tons (21 billion cubic meters) per year once it is in operation starting in 2022 or 2023.

NOVATEK CEO Leonid Mikhelson has said that Russia will soon occupy a quarter of the global LNG market, since the country’s share in world gas reserves is 22-24%. According to Mikhelson, Russia’s vast reserves give the country and obvious competitive advantage in the emerging LNG market.

By the end of this year, NOVATEK’s Yamal LNG project will be commissioned, and eventually production will reach 16.5 million tons per year.

According to NOVATEK, the company already has a significant raw material base on the Gydan Peninsula, including the Utrennoye, Geophysical and Ladderoyskoye fields, as well as the Trekhbogorny, Niavayakhsky, Zapadno-Solpatinsky, Tanamsky, and Severo-Tanamsky fields.

Iran’s Gas Future

South Pars field

Tehran has announced that gas production at South Pars, the country’s and world’s largest gas field, has doubled in the last four years, and  the launch of five new gas platforms has put Iran in reach of surpassing neighboring Qatar’s gas production capacity level.

Iranian President Hassan Rohani, who is up for re-election next month, delivered the good news in April.

According to a statement by the National Iranian Gas Company (NIGC), with the start-up of the five gas platforms has put Iran’s gas production capacity level on par with neighboring Qatar.

The inauguration of South Pars phases 17 through 21 completes the country’s biggest investment, amounting to around $20 billion over the past ten years.

South Pars, which is the world’s largest gas field, has some 230 billion barrel of oil equivalent recoverable hydrocarbons. Two-thirds of the field is located in Qatar, and the other third in Iran. At present, Qatar produces more than 590 million cubic meters of natural gas per day from the field and has plans to boost production by 2022. Iran is trying to catch up in production. Iranian authorities have said that by 2018, gas production from the South Pars field (3,700 sq. km) will exceed that of Qatar’s in the North Field (6,000 sq. km), which is the geological continuation of South Pars.

In total, Iran’s gas production has reached 540 million cubic meters, up from just 240 million when Rohani was elected in 2013, according to Iran’s Ministry of Energy.

Production was curbed by sanctions against Iran, which made it impossible for foreign companies to invest in infrastructure to bring the product to market. As a result, most of Iranian gas produced is used for domestic consumption.

Most of the gas produced is used for domestic consumption, and exports are focused on delivering natural gas via already-existing pipelines to Oman, Pakistan, Iraq, and Kuwait. Tehran relies on oil, not natural gas, for main export revenues.

Iran has not yet been able to replicate Qatar’s successful LNG model, due to a lack of investment as a result of sanctions, and now, an over-supplied market. Qatar is currently the world’s LNG exporter, and ships natural gas to both Europe and Asia, where the product fetches higher market prices.

Iran has signed memorandums of understanding agreements with Gazprom Neft, Lukoil, Tatneft, and Zarubezhneft to jointly develop and operate oil fields.

The Future of Russian LNG: Thierry Bros

thierry bros pic

Thierry Bros, a senior research fellow of The Oxford Institute for Energy Studies sat down with Neftianka to discuss Russia’s future prospects in the LNG market.

Neftianka: You’ve been an analyst on both Russia and LNG markets for decades. You tell us, is LNG Russia’s top energy priority right now?

Bros: The government wants to be a decent player in the LNG world, and again, if you are the government, you have to address the question if you want to be a major LNG player, and ten years later you are a small player, but nowhere near where you wanted to be. It is difficult and risky for companies, therefore we need to partner one way or another.

Today we are in a world where there is too much LNG, other sources are drastically changing merit order system. The Russian government needs to answer one very simple question, is LNG strategic or not? It will need to adapt model to produce. If it decides that the project isn’t strategic, then the market can do it.

We are seeing a relaxed LNG world. I think companies have to think that its still a capitalist world, so you have to think about what type of strategy you want. If you have depletion of historical fields, then you need to find new fields.

You’ve been in the analyst trenches for quite some time now. What do you think about the current slump in LNG prices? Will Russia be able to influence LNG pricing the same way they were able to play with European gas pricing?

I think the Russian state will never be able to control the LNG price, it will be like Brent for oil. The question is, “Do we have sufficient market power LNG to understand the mechanics?” And right now the answer is no. The way to better understand the mechanics is to do more projects.

In order to better understand the LNG market, this means more Russian players and better reporting to the government. In a world where pipeline gas is going to be connected with LNG, Russia has an interest in understanding, but not necessarily controlling, the mechanics of LNG.

There is a very simple question if you are Russia is pipeline gas at discount to LNG, and if so, how can I price this?

The LNG “success” story that everyone is talking about these days is Yamal, an LNG plant with16.5 mtpa that looks like it can break even at $30/barrel prices, even though the area is remote and the technology advanced.

Novatek succeeded in understanding, thanks to Total [partner in Yamal LNG] that costs and CAPEX can’t go through the roof. They understood making it profitable from day one. We can’t twist the spreadsheet, the only way for this to go ahead is for the Russian government to take control, to provide tax holidays, port infrastructure, etc. Novatek and the Russian government definitely came out with a win/win situation.

Yamal has strong state support, provide LNG on time and on budget, a new thing in the LNG world these days. Russian LNG provided by different actors. Remember no monopoly in LNG world. Not enough to put Russia on the LNG map. Still second class player when it comes to LNG. Policy makers would like LNG to become more relevant in Russia.

Conversely, the Shtokman LNG project was thought to be risky, and was postponed. You cant say on your spread sheet you’ll add it up later, it has to be adapted from day one.

Gazprom’s Sakhalin, Russia’s first LNG project, had problems in term of CAPEX during the building phase, but now it operates perfectly fine.

We’ve seen LNG projects on maps for many years, but so far there are only two in Russia [Sakhalin and Yamal].

And what about Gazprom’s Vladivostok LNG project that has been officially shelved since late 2015?

If you are Gazprom, it makes sense to expanding Sakhalin because its cheaper.

Gazprom has never built an LNG liquefaction plant [their partner on the project, Shell, was the operator up until 2009].

Gazprom is extremely good at pipes and conventional upstream. LNG is challenging for them. I think Vladivostok LNG was on the map back many years ago because it was a hedge to Power of Siberia, but with Power of Siberia going ahead, they don’t need

Vladivostok LNG would in theory involve an undersea pipeline from Sakhalin to Vladivostok. Is it really profitable to use pipelines in an LNG project?

Gazprom is used to doing pipelines. They can do the profitability analysis and decide yes or no.

How do energy companies become more vertically integrated? What’s Gazprom’s future in an LNG world?

These big companies have the challenge to adapt – Exxon has the same problem with oil: Their mantra will be “oil, oil, oil” for how long? Gazprom has an advantage as a gas company, its one step ahead in the energy transition. This is why Rosneft is so pushy in breaking into the gas market. Gazprom understands there is a huge risk of unbundling, and for it to try and avoid it, in needs to be profitable day in and day out.

If you are Gazprom, you have to make your case stronger, and that means delivering what the state is expecting.

Gazprom will have a duty to do LNG projects in Russia. If your shareholders ask you do to something that isn’t profitable, you can come back and negotiate.

Of course it is easier to do in Europe, because Gazprom has a long history there, and Asians are tough bargainers. And when we compare this move to what’s going on in Europe, we see it’s a good for Gazprom. They are going to have a tendency to move towards Asia due to financing, sanctions, etc.

Will the Russian government support future LNG projects? How does this change with the 2013 law to “liberalize” the market, letting in new players Novatek and Rosneft to export abroad?

My understanding is that the Russia is creating competition between two national companies, Rosneft and Gazprom, and now Novatek.

It could be a good start. If you want liberalization of markets, this may be a good tool to use later on to move away from regulatory price. If you want to have a price of Russia that is reflective of the market.

Interestingly enough, the Russian government has opened the market to all the companies, and since this law, only one project. Did I pass a law for only one project, or am I going to tell the other companies that its time to deliver?

OK, last question. Do you think that St. Petersburg has the potential to be an LNG pricing hub?

Right now it is for a few players, but you have to start somewhere. You can use a hub as a pricing tool.

The World in 2035: BP Economist Delivers Outlook

Spencer Dale, Chief Economist at BP was in Moscow in mid-February to deliver BP’s most recent Energy Outlook. The report forecasts the upcoming trends in the oil and gas industry in the coming decades. Dale’s presentation focused on global growth, the trend towards decarbonization, and the increasing demand for electricity.

Dale spoke at the Institute of World Economy and International Relations in Moscow, part of his global tour to present this year’s report.

“Do we have a crystal ball that somehow means that can we forecast perfectly for 20 years ahead? Of course not. We now know that any forecast will inevitably be wrong. But I don’t think we should think about forecasting as being right or wrong. The value of forecasting is to better understand the nature of the uncertainty we face.”

The energy demand forecasts are based on the assumption that GDP will grow by 3.4% on average over this period. While some of the growth is driven by an increase in population, a majority will come from productivity growth, led by China and India. More than 2 billion people will shift from “lower income” to middle class, creating more demand for energy.

“The world continues to electrify, with the share of energy used for power continuing to increase,” the economist said.

By 2035, the global demand for energy will increase by 30%, with virtually all growth coming from developing economies.

While oil demand will continue to rise, the real winner will be natural gas with the expansion of LNG, the report says. Coal is expected to see its peak in the mid-2020s. Overall, the three fossil fuels will only make up 77% of the energy mix in 2035, compared to the current 86%.

According to the forecast, in the decades to come, Russia will continue to be the world’s biggest exporter, and in particular, has the potential to increase gas production by 28%.

BP, which recently launched a market campaign to rebrand itself as Beyond Petroleum, is very much oriented towards the role non-carbon sources of energy will play in the future.

“Non-fossil fuels provide almost half of the increase in primary energy in the next 20 years,” Dale said.

Rosneft and Transneft Make Peace

Source: TASS/A. Kolbasov
Nikolai Tokarev and Igor Sechin. Source: TASS/A. Kolbasov

Russia’s largest oil company Rosneft and oil pipeline monopoly Transneft have reached a compromise on the transport of oil and oil products for 2017. Rosneft had held out on signing a contract for 2017, which would have left Rosneft without a means to ship their product and Transneft with billion of lost revenue from transport fees.

The dispute between the two power players is longstanding, and stems from the disagreement over compensation payments.

Novatek CEO Nikolai Tokarev and Rosneft head Igor Sechin are both long-time Putin allies, having worked under the President in the 1990s for the city of Saint Petersburg. The two bosses recently met with Russian Energy Minister Alexander Novak and presented the final resolution.

Under the agreement, Rosneft will transport 180,346 million tons of oil via Transneft pipelines, and will ship oil and petroleum products from its recently acquired company Bashneft. The amount of Rosneft will pay to use Transneft’s infrastructure was defined vaguely as “depending on the tariff, amount of oil, and transportation routes.”

Transneft enjoys a monopoly on the transport of Russian oil, shipping more than 90 percent. Rosneft is Russia’s largest producer of oil, accounting for about 40% of the country’s total output.

In December, the pipeline operator, threatened halt pipeline shipments of Rosneft’s oil if a contract wasn’t signed before the end of the year, but this move was blocked by the courts.

With more than 70,000 of kilometers of pipelines, Transneft is the world’s largest oil pipeline company. The company’s monopolistic position makes it a target of not only Rosneft, but also small independent oil producers vying for access to pipelines.

Louise Dickson

Gazprom Neft gains access to Sakhalin


Gazpromneft-Sakhalin, a subsidy of Gazprom Neft (itself the oil division of state-owned Gazprom) has received a license to explore and drill on Sakhalin Island, Russia’s budding LNG hub situated north of Japan.

The company got permission to drill and produce hydrocarbons from the Ayashsky shelf, part of the Sakhalin-3 project. The other two blocs in the Gazprom-operated project are Kirinsky and Vostochno-Odoptinsky.

The first exploration well is to be drilled oil going this summer and a 3D seismic survey has already been carried out over a 2.15 square kilometer area.

Gazprom Neft joins Russian energy giants Rosneft and Gazprom on the remote island in the Okhotsk Sea, where the companies respectively head up the Sakhlin-1 and Sakhalin-2 projects. Gazprom Neft’s first exploration well will be drilled this summer. The license, granted by Russia’s state subsurface agency, Rosnedra, is valid through July 2039.

The Ayashsky bloc, which Gazprom Neft estimates contains more than 100 million tons of oil or oil equivalent, is sandwiched between the already operating Sakhalin-1 and Sakhalin-2 fields.

This is the first time Gazpromneft-Sakhalin received a license in the Sea of Okhortsk. Previously, the company had only obtained licenses to drill in Arctic blocs.

Russia considers increasing oil exports to Cuba

cuba plates

The Russian government is discussing the possibility of increasing supplies of Russian oil and oil products to Cuba. Russian oil giants Rosneft and Lukoil would carry out the deliveries of oil and petroleum products and are reportedly working on contracts, but no prices have been discussed.

The development was reported by Russian business daily Vedomosti on Friday, citing a letter from the Deputy Minister of Economic Development Alexey Gruzdev dated January 11.

Between 2010 and 2015, Russia delivered $11.3 million worth of oil products, according to Rosstat data. In 2016, Russia exported just shy of $1 million of oil and oil products.

Cuba’s oil supplies from neighboring Venezuela have been disrupted due to the political crisis. Venezuela is Cuba’s top energy supplier, but as the country teeters on an economic and humanitarian crisis, it has failed to keep up oil production. Reuters reported that in in the first half of 2016 Cuba received 40% fewer barrels of crude oil from PDVSA, Venezuela’s national oil company, than in the same six-month time period in 2015.

In September of last year, Prime Minister Raul Castro asked President Putin to increase oil supplies, but Russia wasn’t actively receptive of the idea due to its doubts about the small Caribbean island nation’s ability to pay up, RBC reported.

The two Cold War allies have collaborated on a number of strategic issues. In October 2015, Russia issued Cuba a $1.3 billion loan to build two nuclear power plant facilities. In 2014, Russia forgave more than $32 billion in Cuba’s Soviet-era debt.

“From our standpoint, the successful completion of negotiations on delivering Russia oil to Cuba will not only increase trade but also have a positive socio-political and humanitarian impact on Russian-Cuban relations,” Gruzdev is quoted by Vedomosti as saying.

Rosneft and LNG


Russia’s largest oil company Rosneft is making more definitive moves in developing the Pechora LNG project in northern Russia off the Barents Sea coast. When complete, it will produce have the capacity to produce 10 million tons of natural gas per year. The project will help the state-owned oil behemoth get a foot in the natural gas industry, as well as in liquified natural gas (LNG).

Pechora will develop the Kumzhinskoe and Korovinskoye fields in Russia’s Nenets Autonomous region, and will include the construction of an LNG as well gas transport infrastructure, gas treatment plant, and a sea shipping port. At full capacity the Pechora project could reach production of 10 million tons of natural gas per year. Total reserves are more than 174 billion cubic meters of gas and 6 millions tons of condensate.

Nenets Autonomous region

On November 11, 2016, Rosneft ordered pre-design work on the feasibility study phase of the project Pechora LNG; reported, citing a company statement.

Initially, the project was going to be run by Alltech, but the ownership had to change since Rosneft is one of three Russian companies permitted by law to export LNG (the other two are Gazprom and Novatek). Up until 2013, only Gazprom had the right to export.

Pechora LNG was established in 2015 as a joint venture of Rosneft and Alltech Group, the owner of the licenses. Rosneft tried and failed to buy the surrounding Layavozhsky and Vaneyvissky fields in order to expand the project. It lost the auction to rival Gazprom.

Now Rosneft is looking at the option of slashing LNG capacity in favor of refining the product at a gas chemical facility and producing methanol and urea. Rosneft also isn’t ruling out transporting the natural gas it extracts via Gazprom pipelines. Instead of producing up to 10 million tons of natural gas per day, will reduce LNG to 4.3 million tons and a mix of the above stated gas chemicals. So instead of sending LNG to Western markets, it would send oil and chemical products to Russian consumers.

Analysts aren’t sold on the viability of the project, due to some very complex logistics. Putting too much LNG on the market, especially amid a global slump in pricing, would be risky. At the same time, putting less on the market may mean that Pechora is unprofitable.

Despite the slump in crude oil prices, Rosneft has been increasing assets and ramping up its international activities in Iran, China, and Central America.

In Russia, Rosneft has been focusing on diversifying into other non-crude oil markets, putting pressure on Gazprom, which has long had both a domestic and foreign monopoly on natural gas and natural gas exports.

If successful, Pechora will be Rosneft’s second LNG project after Sakhalin-1, a joint venture between Rosneft, Japan’s Sodeco, and Indian state-owned oil company ONGC Videsh Ltd.

Louise Dickson