What Brexit Means for Oil and Gas

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Nearly a week after the UK voted in favor of leaving the European Union, the post-Brexit hangover has begun to sink in: the sterling is at a 30-year low, the country’s credit rating has been bumped down, and the overall financial and political future of a Britain outside of the EU remains uncertain.

Here at Neftianka, we are more concerned about the ramifications for the oil and gas industries, which incidentally, are closely linked to the economic and financial situation in Great Britain. Here are observations on how Brexit will affect oil and gas

Cheaper oil for the rest of the world, more expensive for Britain

Crude oil prices plunged more than 7% in the past week since the referendum. Brent slipped down to $48.41 per barrel and WTI towards $47.00.

Cheaper crude prices usually translate to less expensive petrol a the pump, but UK residents won’t get to cash in.

Brexit sent the British pound into a tailspin, losing more than 10% of its value on June 25, 2016, when final results from the previous day’s referendum came in. The British pound is seen as an unknown risk, so investors are stashing their money in traditional safe investments such as the U.S. dollar or gold.

Since oil is bought and sold in dollars, a stronger greenback (which increased by more than 1.5% in the last week) means that British oil traders and retailers need more pounds to buy one dollar. Analysts believe that petrol prices in the UK will increase to £ £1.25 per liter, a 2p to 3p price increase.

Bad for consumers, but good for producers

While an average Brit suffers from higher petrol prices, oil and gas companies may feel some relief from the Brexit and weakened sterling.

A weaker pound is good for the energy sector. The weaker UK currency will reduce costs since operation costs, such as labor, are paid out in pounds, but oil is sold in US dollars.

Russian oil companies were able to weather the oil price crisis for the very same reason: the weak ruble significantly lowered costs in dollar terms.

Perhaps the weakened sterling will slow down the layoffs of oil industry jobs, which have been aggressively slashed since oil prices began collapsing in mid-2014. By the end of this year, an estimated total of 120,000 jobs will have been lost due to the pricing rut.

North Sea oil and gas

The majority of the UK’s offshore oil and gas fields are territorially part of Scotland, which after the pro-Brexit vote, pledged to hold a second independence referendum in order to remain part of the EU.

This would give Scotland 96 percent of annual oil production and 47 percent of natural gas production, according to Bloomberg.

The North Sea represents a large source of oil output at roughly 1 million barrels per day, however, fields are drying up which makes extraction more costly (but a weaker pound could help with this). According to the latest (June 2016), BP Statistical Review of World Energy, the UK currently has 0.2 trillion cubic meters (7.3 trillion cubic feet) of recoverable gas and 2.8 billion barrels of recoverable oil reserves.

Newfound independence wouldn’t be an overnight success for the new Scottish oil industry: the political uncertainty would make investors uneasy about projects in the region.

Kashagan Oil Field: What Went Wrong

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Kazakhstan’s largest oil project Kashagan, scheduled to come online three years ago, still hasn’t produced a single barrel of oil. Now officials say production will begin in October, with the potential to double the country’s oil output. A successful launch could turn around the nation’s economy, another failure would be the latest blow to the slowing oil industry. 

The world’s tenth largest country by land mass, Kazakhstan is a land of contradictions: snow-capped mountains that stretch to China, arid steppe where only horses and their herders roam, oil-rich, yet less than a fourth of the population own a car that runs on the oil extracted from the ground.

After Russia, Kazakhstan is home to the largest volume of liquid hydrocarbons in the former Soviet Union. According to Kazakhstan’s energy ministry, prove oil and gas condensate reserves total nearly 39.8 billion barrels (about 5.3 billion tons).

Oil production has tripled since Kazakhstan achieved independence from the Soviet Union in 1991, and since 2010, Kazakhstan has been producing around 80 million tons of oil per year. This helped the Central Asian country to become the world’s 18th largest oil producer, behind Algeria but ahead of Colombia.

Kazakhstan ships its crude to neighboring Russia and China, as well as to the Netherlands, France, and Italy. However, the country is not yet self-sufficient, and doesn’t produce enough to cover domestic market demand for oil products.

While Kazakhstan has no dearth of extractable hydrocarbons, its aging and depleting fields threaten a dramatic drop in production.

According to OPEC, output declined to an average of 1.34 million barrels a day in March, compared to 1.61 million bpd in January and February, or 1.72 million bpd in 2014. The oil cartel (to which Kazakhstan does not belong) estimates overall production in 2016 will average 1.56 million barrels per day.

Standing alone, 1.56 million barrels per day is an impressive figure, but with proven oil reserves nearly as large as the U.S. – it is less so. In comparison, the US produces 8.68 million bpd, and Russia 10.6 million bpd.

Waiting for a Kashagan Miracle

Astana is placing its hopes to increase production Kashagan, the second largest field in the world with recoverable reserves estimated at 10-13 billion barrels, and over one trillion cubic meters of natural gas reserves.

Located 80 kilometers off the coast of Kazakhstan in the Caspian Sea, ground was broken on the Kashagan project more than 15 years ago with the expectation it would produce at least 90,000 barrels per day. So far it produces zero.

Kashagan oil field, the biggest energy discovery in the past 30 years
Kashagan oil field, the biggest energy discovery in the past 30 years

At more than 2.5 miles below the seabed under very high pressure (770 pounds per square inch), the oil isn’t easily accessible, and presents a magnitude of complicated engineering challenges.

The field has the potential to produce more than 58 million barrels of oil per year, which would more than double the country’s crude production, making it a top 10 global oil exporting nation.

The sheer potential attracted an array of foreign oil giants: Italy’s Eni, Royal Dutch Shell, Total, ExxonMobil (16.8% share each) Japan’s Inpex (7.6%), and China’s CNPC (8.4%). ConocoPhillips sold its 8.33% stake to KMG for $5.4bn in 2013, which in turn sold it to China’s CNPC. Kazakhstan holds a 16.81% stake in the project through KazMunayGas and the national sovereign wealth fund Samruk-Kazyna. In total, more than $50 billion has been invested into the project, compared to the original estimated cost of $10 billion.

The cold climate freezes the shallow water in the winter season, which makes conventional drilling practices impossible. To add to that, the reservoir contains a highly toxic, corrosive hydrogen sulfide.

After more than eight years in delays, drilling finally began on September 11, 2013. Production was halted 13 days later, after cracked pipelines that running to the onshore caused a gas leak. After a leak on the gas pipeline running to the Bolashak onshore processing facility. The Kazakh government has said that produced will start again this October.

For the last three years, Kazakhstan has been missing out on billions in oil revenue.

Soviet and Post-Soviet Fields

Other oil fields in Kazakhstan are unable to make up for the lost oil production at Kashagan.

Out of the 15 sedimentary basins on the Kazakh territory, only 5 are used for commercial purposes. The two biggest oil and gas fields, Tengiz and Karachaganak (with an estimated 1.35 trillion cubic meters of gas and 1.2 billion tons of oil and liquid condensates) account for about half of the country’s oil production. Discovered in 1979, these two fields have been developed by western investors over the last 20 years. But as the fields’ resources dry up, it becomes more expensive to extract the remaining crude from the ground.

Kazakhstan’s oil industry runs on increasingly costly and aging infrastructure built during the Soviet Union.

1987: Workers celebrate the first million tons of oil produced from the Kumkol field.
1987: Workers celebrate the first million tons of oil produced from the Kumkol field.

Post-Soviet discoveries such as Kumkol North and South are estimated to collectively hold 300 million barrels of proven oil reserves, however, Wood Mackenzie believes that production at these fields reach will their peak of 72,500 bpd in 2017.

The Zhambyl field, which is located in the northern section of the Caspian Sea, is estimated to contain more than 880 million barrels of oil.

The View Forward

Kazakhstan first discovered oil in 1988, first producing the product as an independent nation, then under the Soviet Union, and now again in its own right. With over 30 billion barrels of recoverable crude, it’s unlikely the current Kashagan problem and production rut will spoil long-term prospects.

Wealth from energy has significantly boosted the country’s economy under the leadership of President Nursultan Nazarbayev, who has ruled the country with an authoritative, yet benevolent, manner since independence (last 25 years).

Nursultan Nazarbayev, at the time the Secretary of the Communist Party of the Kazakh SSR, visiting a refinery in the Caspian Sea port city of Guriev (now Atyrau) in 1984.
Nursultan Nazarbayev, at the time the Secretary of the Communist Party of the Kazakh SSR, visiting a refinery in the Caspian Sea port city of Guriev (now
Atyrau) in 1984.

Energy drives the economy of the landlocked Central Asian country: oil alone accounts for 25% of GDP.

Situated between Russia and China, Kazakhstan is geographically surrounded by economic crisis. The recession in Russia, which really only began to fully manifest itself when oil prices began to slide in the second half of 2014, quickly spilled over to Kazakhstan as the two economies are closely linked. To the south of Kazakhstan is Uzbekistan, Kyrgyzstan, and Turkmenistan, all reeling from Russia’s rupture.

GDP, which only expanded 1.2 percent after 6 percent growth in 2013 and 4.1 percent in 2014. The spillover recession from Russia has also battered foreign investment to Astana by nearly half.

Photos from http://vasi.net/

Louise Dickson

Finding a Global Energy Balance – BP Economist

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BP Chief Economist Spencer Dale presented his company’s 65th edition of the Statistical Review of World Energy June 2016 in Moscow on June 10 at the Institute of World Economy and International Relations. BP has been producing the report since 1952, and the study has established itself as an authoritative source in the energy industry.

The report, which in its inaugural year, only reported on oil – now focused on the three primary global energy sources – oil, coal, and natural gas.

Oil remains the most widespread used energy in the world – in 2015 it accounted for 32.9% of total energy consumption. In 2015, it even saw its market share rise, for the first time since 1999. After oil, coal is the second biggest fuel, with 29.2% share in the energy balance, but it saw its market share decline in 2015. Natural gas made up 23.8%.

Dale’s main message for the upcoming year is to expect another year of strong growth in demand, and a continued shift towards low-carbon fuels, as well as renewables.

According to the report, global demand for primary energy only amounted to 1%, which is significantly lower than the average in the past decade (on average 1.9%).

Dale said this reflects an overall slowdown in the global economy and consequential slower growth in energy consumption, most notably in China.

Oil

“On the demand side, we are in a world where demand is in a period of transition. Over the last 10-15 years, we have seen very strong growth in global energy demand, much of that driven by China,” he said.

China’s economic boom days are over, and as Dale put it, “the days of double-digit growth and industrialization are behind us”.

Even if there is a massive increase in demand – from China or elsewhere – the massive amount of oil inventories will offset any oil price surges.

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For example, even if demand grows to a point where there is a shortage of oil, prices won’t suddenly snap back.

Dale explained: “If you have a shortage of a 1 million barrels per day, but we have a surplus of 500-600 million barrels, simple arithmetic tells you that it could easily take 12-18 months before stock levels are back to normal levels, and it’s only when you work off that significant stock overhang, will the oil market come back to balance.”

Technology is also changing the energy balance, the report says, referencing developments in both shale oil in the US, as well as renewable energy sources worldwide.

“On the supply side, we are surfing a technological wave. Over the last few years, we have seen rapid gains in technology advancements and productivity gains, which are increasing the types and abundance of energy supplies,” said Dale.

oil market

As our readers know very well, oil prices in 2015 dropped drastically. In dollar terms, the largest drop on record, and the sharpest fall in terms of percent since 1986. Prices rose slightly in early 2015 as US shale producers nixed production, but increased production by OPEC countries, especially Iraq and Saudi Arabia (account for ~90 percent of increase production) caused a sharp drop in prices overall.

We are “truly in an age of plenty in terms of supply,” Dale noted.

The growth rate of world oil production for the second year in a row outpaced global consumption growth. Production grew by 2.8 million barrels per day, or 3.2%, the highest rate since 2004. Production in Iraq (750,000 barrels per day) and Saudi Arabia (510,000 barrels per day) rose to record levels, which pushed OPEC production up 1.6 million barrels per day to 38.2 million barrels per day, even outpacing the previous record set in 2012.

“You do not need a PhD in economics to know if supply grows by 2 million barrels a day, and demand grows by 1 million barrels a day – what will happen with oil prices – and sure enough, prices fell,” said Dale.

Natural Gas

“The big picture story on natural gas is one where global production continued to grow strongly, but demand outside of the power sector was relatively muted, and these two things together causes gas prices to drop sharply around the world,” said Dale.

There is still a large variation across countries and markets.

“On the supply side, the US remained the global powerhouse for natural gas, accounting for around half of the entire increase in global production last year,” according to the economist.

Overall, BP sees three general themes from the gas market:
1) A gas increase share within power sector, especially in the US, even pricing out coal;
2) LNG overall increased, though demand from Asia decreased, and increased in Europe, North Africa, and the Middle East;
3) In order to retain market share, Gazprom responded to increased competition by lowering European prices

The rise of LNG is increasingly influencing prices. For example, a drop in demand for LNG in Asia affected prices in natural gas in Europe.

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Other interesting points of the presentation:
– Gas overtook coal in US power sector – first time ever
– Renewable energy – solar energy has increased 60-fold in the last 10 years

Race to the Bottom: Forbes Top 25 Oil and Gas Companies

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Every year, Forbes magazine publishes an annual ranking of the 2000 biggest companies in the world based on four metrics: revenue, profits, assets, and market value.

This year’s list included energy majors such as ExxonMobil, PetroChina, Chevron, Total, as well as Russian state-owned giants Gazprom and Rosneft.

The majority of companies (500+) were from the USA, while Chinese companies occupied the top three places.

Oil and gas companies maintained their top places in the rating, despite a tumultuous year of oil prices and mass layoffs and bankruptcies in the energy industry in 2015.

ExxonMobil kept its title of largest oil and gas company worldwide. However, in April 2016, the energy giant lost its coveted AAA credit rating for the first time since the Great Depression due to the effects of low oil prices. This year, it slipped to 9th place in the Forbes 2000 ranking.

ExxonMobil held one of the top three spots since the poll was introduced in 1955 until at first sparring with General Motors and then later Wal-Mart for the top place. The last year that the Irving, Texas-based company was the biggest company was in 2012.

Despite the slowdown in the Chinese economy, the largest global corporations were Chinese banks: Industrial and Commercial Bank of China (ICBC), China Construction Bank, and Agricultural Bank of China, which have held the top three positions since 2014. Bank of China slipped to 6th on the list to 4th place, which it ceded to Warren Buffet’s Berkshire Hathaway, followed by American banks JPMorgan Chase in 5th and Wells Fargo in 7th. Apple secured 8th place, while Japan’s Toyota Motors held onto its 10th place position to break up the America-Chinese domination.

While Chinese and American banks topped this years’ list, oil and gas companies retreated in their ratings.

After ExxonMobil in 9th place, the next energy company was PetroChina (the second largest oil and gas company in the world) in 17th place, and US company Chevron in 28th place, dropping 12 spots since last year.

The list shows that both private and state-owned energy companies are feeling the burn from the oversupply in the world market in the last year. Private companies have been forced to delay projects as well as lay off thousands of staff, while state-owned companies in the so-called petrostates – those whose economy depends on the sale of hydrocarbons- also lost their leadings positions in the global economy.

As for Russian companies, Gazprom can be found in the 53rd spot, having dropped 26 positions, and Rosneft is in 75th place, having fallen 16 spots.

One oil and gas company that is notably absent from the top of the list is BP, which currently occupies the 370th place on the list. The spectacular drop is due to the massive fines the company paid following the Deepwater Horizon oil spill in 2010. In order to pay out more than $20 billion in a settlement, the company began to actively sell assets and cut spending.

Despite the downward trend in global oil prices, the oil and gas sector is still recording huge projects. Combined, the world’s top 25 oil and gas companies sold more than $2.6 trillion in products, and income revenues were $81 billion.

World’s Top 25 Oil and Gas Companies

Ranking Among Oil and Gas Companies Company Forbes Global 2000 Ranking
1 ExxonMobil 9
2 PetroChina 17
3 Chevron 28
4 Total 30
5 Sinopec 31
6 Shell 50
7 Gazprom 53
8 Rosneft 75
9 Reliance Industries 121
10 Lukoil 122
11 CNOOC 134
12 Phillips 66 141
13 Schlumberger 176
14 Valero Energy 182
15 ONGC 220
16 Marathon Petroleum 234
17 Surgutneftegaz 242
18 SK Holding 247
19 Gas Natural Fenosa 287
20 PTT PCL 337
21 Transneft 361
22 BP 370
23 Indian Oil 371
24 Eni 409
25 Petrobras 411

 

Data from Forbes Global 2000