Gazprom Neft gains access to Sakhalin

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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

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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

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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.

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Nenets Autonomous region

On November 11, 2016, Rosneft ordered pre-design work on the feasibility study phase of the project Pechora LNG; oilcapital.ru 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

Low Oil Prices, Taxes, and the Russian Budget

In ruble terms, the oil collapse has been less severe and has resulted in windfall profits for Russian oil and gas companies, but not a proportionate amount of revenues for the state budget.
In ruble terms, the oil collapse has been less severe and has resulted in windfall profits for Russian oil and gas companies, but not a proportionate amount of revenues for the state budget. Source: EIA

The US Energy Information Administration published the report “Low oil prices have affected Russian petroleum companies and government revenues”.

According to the report, low oil prices are having a significant affect on the Russian state budget due to lower tax revenues from the oil and gas companies. However, the oil companies themselves aren’t feeling the squeeze, since the design of the Russian tax system allows for companies to pay lower taxes amidst lower oil prices. Therefore, the companies, which have their operations denominated in local currency and revenues in dollars, can keep a larger share of revenues, and continue to increase their spending in ruble terms.

In Russia, oil and gas companies pay a mineral extraction and export tax, but there is no profit-based taxation.

“The favorable tax structure and exchange rate for Russian oil companies, the subsequent continued high investment levels at Rosneft, Lukoil, and other Russian oil and natural gas companies,” the report published on October 20, said.

The Russian government is expected to overhaul the tax scheme, but is met with opposition from the energy companies, who argue more taxes will stunt investment.

In June 2014, oil prices hit a record high of $114, and just six months later, a barrel of crude traded for $50 per barrel in January 2015. About a year later, a new nadir was reached: both Brent and WTI benchmarks fell below the $30 per barrel threshold.

Russia’s Central Bank preemptively switched the ruble to a free-float regime in November 2014, which helps offset losses from the collapse in oil prices.

So while Brent (which Russia uses to price its main export blend Urals) declined by 47% in 2015 versus 2014, and then another 31% in the first half of 2015, Russian federal budget revenues from oil and gas only fell by 21% and 29, respectfully.

Rosneft and Lukoil are two of the largest Russian oil companies, and together account for about half of the 11 million barrels of crude oil that Russia produces per day. Following the oil price crash, in 2015 Rosneft increased capital expenditures for exploration and production by 30% compared to the previous year. On the contrary, Lukoil’s expenditures on exploration and production projects fell by 11% in the same time period (see figure below).

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Source: EIA

The EIA notes that the favorable tax structure and exchange rates are responsible for bringing production to record highs.

With the exception of independent producers such as Lukoil and Novatek, the majority of Russian oil and gas companies are state-owned, and the Russian government, as the main stakeholder, collects dividends. In April 2016, the Russian government ordered state-controlled companies to pay 50% of 2015 net income out as dividends, nearly double the dividends companies would normally pay, according to the EIA report.

Low oil prices and Western sanctions hit Russia just as the economy was losing steam and heading into a recession. At present, Russia has a budget deficit of 3.3% of total economic input, and many ministers are pushing for higher taxes for the oil and gas industry to fill the gap.

Louise Dickson

Gazprom announces new daily export record

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On October 18th, Russia’s largest natural gas producer and exporter Gazprom announced that exports to Europe and Turkey reached an absolute daily high of 578.9 million cubic meters. The increase reflects Gazprom’s intensified struggle to gain market share in non-CIS countries. In order to achieve this, Gazprom is implanting new export plans and increasing investment in long-term projects.

By the end of the year, total investments will have amounted to 853 billion rubles (about $1.37 billion USD), an 11 billion ruble increase (about $176 million) from investments in 2015.

“Winter hasn’t started yet, but the demand for Russian gas in non-CIS countries is if as if it is bitter cold in Europe. This demonstrates that Russian gas is highly competitive and in high demand on the European market,” Gazprom CEO Alexey Miller said in a statement by the company’s press service.

He added that the increased demand also verified the need for new Nord-Stream 2 and Turkish Stream to deliver gas to foreign customers.

Traditional Russian gas exports via pipeline must now compete with shale oil from the US, as well as the rapidly developing LNG market. The emergence of both have made the global gas market more liquid, and prices more competitive.

Before, Gazprom held a monopoly on the European market, and was able to index gas prices to oil. With more players on the market that offer greater delivery flexibility, prices move towards spot indexation. In order to stay competitive with lower oil prices, Gazprom has had to negotiate its contracts with European customers and offer lower prices.

Gazprom says that it is closely following trends in foreign markets. The company believes that the US will remain a major producer of shale gas in the mid to long term future. Gazprom doesn’t believe that development of Russian shale gas is necessary since reserves and the traditional extraction method will last into the foreseeable future.

Now that the US has opened the Sabine Pass LNG port, it could, in theory, send natural gas all over the world. However, in practice, this product is mostly destined for Latin and South America, as it’s priced out on the European market by Gazprom and Australia and Qatar so far have a monopoly on the Asian market.

Saxo Bank: What to Watch for at the International Energy Forum in Algiers

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Head of Commodity Strategy Ole Hansen

 

In their latest research note, Saxo Bank speculates on the outcomes of the International Energy Forum to be held in Algiers on September 26-28. OPEC members will be in attendance, along with non-OPEC member Russia. Head of Commodity Strategy Ole Hansen writes that a deal to cut production could trigger a price surge in oil, but that the gains are unlikely to last as long as the supply glut remains worldwide.

Oil traders turn to Algiers

Just as with gold, the oil market remains locked in a range with the pressure from oversupply being offset by renewed hope that OPEC and Russia may reach an agreement to cut production. OPEC members will meet on the sidelines of the International Energy Forum, which groups producers and consumers in Algeria from September 26-28. Non-OPEC producer Russia will also attend the forum.

After recording four days of gains, both WTI and Brent crude oil succumbed to profit-taking ahead of the weekend. A third weekly reduction in US inventories, a weaker dollar, and renewed verbal intervention from producers ahead of the Algiers gathering helped offset bearish news on the supply front.

According to this Bloomberg article, September has seen a rise in production of more than 800,000 barrels/day from Nigeria, Libya, and not least Russia which said its reached a new record of more than 11 million b/d this month. Rising production into an already oversupplied market is the challenge that troubled oil producers have to address when they sit down face to face.

Back in April a meeting in Doha failed to curb supply, which was due in part to Saudi Arabia’s insisting that a deal could not be done without Iran also participating. Fast forward almost six months and Iran has now reached its pre-sanctions production levels and that has raised speculation that some kind of deal can be hammered out. Representatives from Saudi Arabia and Iran met in Vienna ahead of the meeting and it apparently resulted in Saudi Arabia offering to cut production in exchange for Iran promising to freeze output.

Saudi Arabia produced around 10.2 million b/d during the first five months only to see it surge to a record in July at 10.67 million b/d. Offering a cut from those elevated levels, at a time of year where the seasonal production tend to slow anyway, looks like a smart move, but it still needs the unlikely acceptance by Tehran.

With US production having stabilized during the past two months the pressure on OPEC to support the market has grown, particularly considering that the prolonged oversupply has been driven by rising production among its own members.

We maintain the view that the upside remains limited until we see clear signs of the glut being reduced. A deal to cut production may trigger a speculative rush of buyers but once again, the low 50s in Brent crude oil should once again provide strong resistance.

Failure to act would return the focus to the aforementioned jump in production which carries the risk of seeing Brent crude trade below recent support at $45/b, potentially targeting $40/b.

Brent crude has so far been averaging $47.70/b this quarter, more or less in the middle of our $45 to $50/b target range. A “no deal” in Algiers could see the range being extended to the downside while a deal, depending on the content, may prompt a short-term rally above $50/b.

Yamal is 63% complete – Total

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Russia’s ambitious Yamal LNG project in the Arctic is nearly two-thirds finished, Total’s Senior Vice President of Exploration & Production for Continental Europe and Central Asia Michael Borrell said. According to the top manager, 63% of construction will have been completed by the end of August (76% marks the first stage of readiness). The project is on schedule to open in 2017.

Borrell was speaking at the Offshore Northern Seas conference in Stavanger, Norway, which opened on August 29.

Once finished, the $27 billion Yamal LNG project will have a capacity of 16.5 million tons per year, which has been contracted to supply Asia and Europe (already 96% of liquefied natural gas has been contracted under the Yamal LNG framework). According to Borrell, a lot of that gas will supply European markets.

The project involves the construction of three LNG production lines. From the Tambeyskoye field, which has proven and probable reserves that were appraised at 926 billion cubic meters of natural gas in 2014.

To date, shareholders have managed to secure $18.4 billion in investment. According to the French gas major, $12 billion was provided by Chinese banks, $4 billion is sourced from Russian banks, and $2.4 billion is from Russia’s National Welfare Fund. Negotiations on raising more funds from Asian and Russian banks are underway. All tranches must be paid in rubles, euros, or yuan, due to the financial sanctions imposed on Russia by the United States.

Yamal is Russia’s first foray into Arctic LNG. Novatek, Russia’s second-largest natural gas producer, owns a 50.1% share in the project, along with Total (20%), China’s CNPC (20%), and the Silk Road Fund (9.9%).

To date, 57 out of 58 wells have been drilled as part of the first stage of the project. More than 17,000 people are currently working at the construction site, and an additional 24,000 are constructing equipment for a Chinese shipyard project

Total owns nearly 19 percent of Novatek.

The Price Factor: Oil and Terrorism

The entrance to the currently blockaded Zueitina oil terminal in Libya.
The entrance to the currently blockaded Zueitina oil terminal in Libya.

There is a general consensus among oil analysts: the excess supply of oil on the market will subside by the end of 2016. The global demand for oil will increase by 1.2-1.5 million barrels per day, according to BP, the International Energy Agency (IEA), and the Energy Information Administration (EIA). Since the beginning of this year, there has been a significant decrease in shale oil production in the United States. Oil deliveries to the world market are also affected by the militant attacks on production and transport facilities in Nigeria.

Alarming messages are coming from other corners of the world. In late July, ISIS seized two oil infrastructure sites in northern Iraq, killing five workers and destroying the largest oil station that pumped 55,000 barrels of oil to Northern Kurdistan. At the same time, the US resumed their bombing campaign of Libya. According to Pentagon press secretary Peter Cook, the US Air Force bombed Sirte, which has been controlled by ISIS since June. There are about 2,000 militia fighters concentrated in the area around Sirte. It is reported that the strikes are being carried out at the request of the US government.

Before the new bombing campaign, there had been several loud statements on building up Libya’s oil industry, increasing exports from 332,000 barrels per day in July to 900,000 barrels per day by the end of the year. However, Libya’s National Oil Company hasn’t been able to ramp up production since exports through the ports of Ras Lanuf, Zawiya, Zueitina, and Ed Sider have been blocked by militants and local rival groups since 2013.

Analysts estimate that the total export capacity of these ports to be 860,000 barrels per day. According to BMI Research, it is possible for Libyan oil ports to come back online, but they will require significant reconstruction. Maintenance work at Es Sider has already begun. In addition, the country has lost its biggest oil customers. In terms of increased competition between oil producing countries, at present it will not be easy for Libya to come back on the market.

However, before the military operations started again, Bank of America predicted that oil prices would return to between $35-40 per barrel if the conflict in Libya was settled and the country’s full production and export capacity resumed.

Prior to the overthrow and eventual killing of Muammar Gaddafi (coincidentally in the Libyan city of Sirte) and the ensuring civil war, the country was producing up to 1.65 million barrels of oil per day. According to Douglas Westwood, Libya is home to some of the world’s largest proven reserves of liquid hydrocarbons. Oil is the main source of income for countries in Northern Africa, and before the blockade of the ports and exports, contributed 97% of foreign exchange earnings and amounted up to 80% of GDP.

Maria Kutuzova

Did a Crude Oil Combustion Kill the Dinosaurs?

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Photo from CSMonitor

 

There has long been a consensus among palaeontologists that the mass extinction of the dinosaurs was triggered when a 6-mile wide asteroid hit the Earth 66 million years ago.

The narrative has been that the asteroid, slammed into the present day Yucatan Peninsula and set off volcanic eruptions, earthquakes, tidal waves, and eventually a large dust cloud that blocked the sun, ceasing photosynthesis, first killing off the herbivores dinosaurs, then the carnivores.

However, it has remained a scientific mystery why the cataclysmic event wiped out the dinosaurs, but not other animals, such as crocodiles and frogs.

Now, a new theory has emerged to explain the sudden and mass extinction, and it involved crude oil.

The study by Professor Kunio Kaiho and his team of researchers at Tohoku University, suggests that the extra-terrestrial object slammed into an oil reserve in the Yucatan, triggering a burning inferno that shot a massive amount of fine black carbon (also known as soot) into the atmosphere, forming a smoke cloud that plunged the Earth into darkness. The large dust cloud turned vast regions of the globe into deserts.

Both theories share the same “cloud of darkness” basis, but Kaiho’s study focuses less on Co2 spewing volcanoes and more on the sedimentary organic molecules.

The Japanese team examined the powdery black carbon substance, which is about a million times more light-absorbing than carbon dioxide.

Rocks at the impact site of the crater were already known to contain oil elements. In fact, a drilling expedition by the Mexican oil company Pemex in the 1950s helped lead to the discovery of the crater later in the 1980s. In present day Mexico, the region is still oil-rich.

To balance the study, Kaiho and co. took samples soot samples from rocks both nearby the impact site (in Haiti) as well as on the other side of the world (in Spain).

The chemical composition of both samples bore molecular similarities, indicating they originated from the same crude oil incineration.

Kaiho’s research suggests that the asteroid may have incinerated and sent up as much as three billion tons of soot into the sky, causing colder climates at mid-high latitudes, and drought and milder cooling at lower altitudes.

The findings were published in Scientific Reports.

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.