UPSTREAM NEWS

JOHAN SVERDRUP DEVELOPMENT APPROVED

The plan for development and operation (PDO) for Johan Sverdrup, phase one, was approved by the Ministry of Petroleum and Energy Thursday, 20 August.

The oil field will be developed in several phases. Phase one consists of four bridge-linked platforms, in addition to three subsea water injection templates.

The phase one development has a production capacity in the range of 315,000-380,000 barrels per day. First oil is planned for late 2019.

The Johan Sverdrup partnership consists of Statoil, Lundin Norway, Petoro, Det norske oljeselskap and Maersk Oil.

SURGING SAUDI OIL PRODUCTION DRIVING OIL PRICES LOWER

Since June 23, when West Texas Intermediate (WTI) crude closed at $61/bbl, oil prices have been in meltdown mode, said Raymond James analysts, who, in a recent report, commented on effects of the current surging supply of oil from Saudi Arabia, Iran, and Iraq.

The analysts regard current oil market sentiment to be "as ugly as it's been since January." While there is no single culprit for this latest selloff, they believe there are four fundamental oil model concerns that have contributed to lower oil prices over the past six weeks:

• Saudi oil production is at record-high levels as it continues its (increasingly irrational) price war with non-OPEC producers.
• With the Iranian nuclear agreement having been finalized, there is greater visibility on recovery in Iranian oil exports.
• Iraqi production has seen substantial and inexplicable surge over the past two months.
• Collapsing Chinese stock market headlines (and to a lesser degree the Greece/Eurozone issues) have intensified concerns about global oil demand, even though Raymond James believes these concerns are more sentiment than substance.

"Bottom line: Even if we exclude the potential (and premature) negative impact of rising Iraqi supply and uncertain Chinese demand, our 2016 oil model is substantially more bearish today than a few months ago. That means we no longer believe that oil prices should rebound to $65/bbl in 2016.

"Our new WTI forecast is $50 for 2015, rising slightly to $55 in 2016. For Brent, we are at $56 for 2015 and $62 for 2016. Our new 2016 forecast is $10 lower than our previous $65 estimate. This means the industry is set for a second straight year of painful austerity, with 2016 capital spending likely to average flat to down vs. 2015," the analysts said.

The "silver lining" of these reduced estimates is that low oil prices cure low oil prices, the report noted. Specifically, the flood of large oil project cancellations and delays has set the stage for a potentially undersupplied oil market in 2017/2018, "which leads us to maintain our long-term (2017+) price forecast ($70 WTI/$77 Brent). We should also note that these new oil price forecasts do not include any unforeseen Middle East outages. Oil prices at current levels are clearly pricing in minimal risk of future supply disruptions. That means energy stocks still hold substantial 'Middle East unrest' option value for investors."

DRILLINGINFO: 4% INCREASE IN OVERALL NEW US PRODUCTION CAPACITY

There was a 4% increase in overall new US production capacity (NPC*) to 805 Mboe/d, according to the August Drillinginfo Index. Last month's index showed US production capacity of 751 Mboe/d. The August Index is reflective of the wells drilled in July, and, as noted by Drillinginfo, is usually a 5-6 month forward indicator of what production might be. Percentages are also normalized for length of months.

New US oil production capacity increased by 9% from June, to 398 Mbbl/d, while US gas production capacity decreased by 1% from June, to 2.44 bcf/d.

According to the index, while rig count and permits have declined, production capacity has continued to increase, "indicating that higher grade locations and better practices are yielding substantively better wells month over month per rig/month."

The Permian continues to be the largest play in North America. Despite the decline, the index showed active working rigs in the Permian Basin increased between July 1 and July 31 to 254 from 236. Production capacity in the Permian Basin also increased, up 25% from May through July, despite the drop in oil prices from $62 to $42 per barrel.

Top operators

Overall, the top three operators in July 2015 in terms of new oil production were EOG Resources (52 Mbbl/d), Pioneer Natural Resources (20 Mbbl/d), and BHP Billiton (17 Mbbl/d).

The top three operators in July 2015 in terms of new gas production were RVR Operating (195 MMcf/d), EQT (148 MMcf/d) and Chesapeake Energy (135 MMcf/d).

The top three counties in terms of new oil production in July 2015 were McKenzie, ND (30 Mbbl/d), Karnes, TX (29 Mbbl/d), and DeWitt, TX (29 Mbbl/d).

The top three counties in terms of new gas production in July 2015 were Lincoln, LA (253 MMcf/d), Susquehanna, PA (191 MMcf/d), and Sublette, WY (132 MMcf/d).

*The NPC number is based on the number of wells at each rig (not just the number of rigs, since they can have multiple wells at each rig) and the productivity of each well to more accurately estimate the combined peak production rate of the new wells.

FITCH: RIG-LINKED US SHALE PRODUCTION DECLINE OF 7% POSSIBLE IN 2H15

The nearly 55% drop in US Lower 48 rig counts during the first half of 2015 is forecast to contribute to a second-half 2015 production decline of roughly 7% in tight oil and shale gas regions at June operating and activity levels, according to Fitch Ratings. This exit production rate would be around 3% lower than year-end 2014 levels. Further, Fitch anticipates that some of the productivity gains realized during the first half of 2015 will lead to a lower, longer-term US Lower 48 rig run-rate of 1,200-1,300.

Extrapolating from US EIA data, Fitch forecasts that, at June operating and activity levels, oil production, including crude and condensate, declines from tight oil and shale gas regions will outpace the fall in gas production. Fitch calculates that the 2015 exit oil production rate from tight oil and shale gas regions will be about 9% below the 5.5 MMboe/d June 2015 rate. The projected exit oil production rate would be nearly 6% lower than year-end 2014 levels.

The EIA's estimated new well production per rig and legacy well decline rates are key inputs for Fitch's second-half 2015 production forecasts in tight oil and shale gas regions. To account for movement in these operating metrics, Fitch conducted several sensitivity analyses. For example, a 15% improvement in new well production efficiency per rig, assuming rig counts and legacy well decline rates remain constant at June 2015 levels, second-half 2015 total production in tight oil and shale gas regions would decline by 3%. This would result in the total production exit rates being modestly higher year over year.

Fitch's longer-term US Lower 48 run-rate estimate is 1,200-1,300 rigs. This is 30%-35% below the recent peak US onshore Lower 48 rig count of 1,868 in mid-November 2014. Fitch believes that a key implication of this "new normal" run-rate for onshore drillers, such as Nabors Industries Ltd. (BBB/Stable), is likely to be the heightened importance of maintaining a US rig fleet weighted toward the most-efficient, highest-quality rigs. Fitch anticipates that these types of rigs are best positioned to work during and after the cycle.

Pricing support for a larger scale ramp-up in activity may be several years into the future. Fitch still views a longer, slower rig recovery profile as likely, based on Fitch's WTI price assumption of $60/bbl for 2016 and $70/bbl long-term. Historical down cycles suggest that trough-to-previous-peak-rig response (though tight oil and shale gas has likely created a new normal run rate) depends on the speed and intensity of the price recovery. Fitch notes that the 2001 U-shaped bear market recovery required about 35 months to return to peak levels, while the 2009 V-shaped bear market needed roughly 28 months.

MOODY'S: BRENT, WTI ASSUMPTIONS LOWERED ON HIGHER PRODUCTION, MUTED DEMAND

Moody's Investors Service has lowered its price assumptions for Brent crude and West Texas Intermediate (WTI) crude to reflect increases in oil production coupled with muted demand. The rating agency has maintained its price assumptions for North American natural gas, reflecting continued strong natural gas production and demand from electrical generation.

Moody's lowered its price assumption in 2015 for Brent crude oil, the international benchmark, to $55 from $60 per barrel and for WTI crude, the North American benchmark, to $50 from $55 per barrel.

"We expect prices to rise only gradually in 2016, but not enough to keep pace with rapidly expanding production," said Steve Wood, a Moody's managing director of corporate finance. "In addition, there is the risk that the recent deal between international parties and Iran could lead to an increase in the country's exports, which would further weigh on prices."

In Moody's Aug. 7 report, the service noted expectations for Brent crude to average $55/bbl in 2015, and WTI crude to average $50/bbl - both of which represent $5/bbl reductions from Moody's previous assumptions. These full-year prices assume second-half prices of about $47/bbl for WTI and $52/bbl for Brent.

Moody's expects prices to rise only gradually in 2016, with WTI to average $52/bbl and Brent to average $57. Moody's medium-term assumptions are unchanged at $75/bbl for Brent and $70/bbl for WTI. The medium-term price assumptions reflect Moody's view that supply/demand equilibrium will eventually be reached around $75/bbl for Brent. This price would support development of the world's most expensive oil - from oil sands and deepwater resources - in an environment of lower development costs than in recent years. However, Moody's now expects this price to be reached only at the end of the decade.

CNOOC SIGNS PSCS WITH ROC

CNOOC Ltd.'s parent company, China National Offshore Oil Corp. (CNOOC), has signed two production sharing contracts (PSCs) with Roc Oil (China) Co. for blocks 16/07 and 03/33 in the South China Sea.

The blocks are located in the Pearl River Mouth Basin in the South China Sea. Block 16/07 covers a total area of 2,743 square kilometers and has a water depth of 100 meters. Block 03/33 covers a total area of 2,367 square kilometers and has a water depth of 65-145 meters.

ROC will serve as operator during the exploration period and conduct exploration activities in the two blocks, in which all expenditures incurred will be borne by ROC. Once entering the development phase, CNOOC has the right to participate in up to 51% of the working interest in any commercial discoveries.