UPSTREAM NEWS
CRUDE OIL SOARS AS FOCUS SWITCHES FROM OPEC TO THE US
The following is excerpted from a June 10 research note from Ole Hansen, Head of Commodity Strategy at Saxo Bank
A few days is a long time in crude oil markets these days. Crude oil weakened following OPEC's recent decision to maintain current production targets. Since then WTI crude oil has rallied by 8% as the focus quickly has reverted back to price supportive developments in the US.
Reports about a continued fall in shale oil production from the EIA and expectations that US inventories has fallen for a sixth consecutive week have both helped trigger a change in focus from an oversupplying OPEC to falling production in the US.
In its latest "Drilling Productivity Report" the US Energy Information Administration (EIA) said it expected production from the major US shale oil regions to fall by 92,000 barrels in July - the lowest since January. For the first time it also forecast an actual drop in production for 2016, which would be the first in eight years. This, combined with a dollar that has struggled to resume its strength and the outlook for another drop in weekly inventories, has helped drive both Brent and WTI crude oil back towards the higher end of the ranges which have prevailed since April.
Meanwhile, further price-supportive news came earlier today in the form of OPEC's monthly market report which forecast unchanged global demand at 1.18m b/d and noted that "oversupply is likely to ease in coming quarters" because of a pick-up in demand and slower non-OPEC supply growth.
During this time, the price response has all been favorable apart from last week when the market was preoccupied with the upcoming OPEC meeting.
It seemed the world was running out of space to stash all that oil. Happily, OPEC now tells us the glut will ease off.
Surveys have put the reduction at between 1.5 and 1.8 million barrels and this should leave the overall inventory level around 476 million barrels, which is still some 100 million barrels above the five-year average.
For now the technical picture remains bullish and fundamentals such as the risk of increased - not lower - US production should the price move higher from here is not something that short-term traders would be that concerned about.
Oil hovering comfortably around $60. For now.
CONOCOPHILLIPS ACHIEVES FIRST STEAM AT SURMONT 2
ConocoPhillips has reached a milestone at its Surmont oil sands project in Canada with the on-schedule start of first steam at phase 2 on May 29. Surmont uses steam-assisted gravity drainage to recover the bitumen. First oil is expected by third quarter 2015. Production will ramp-up through 2017, adding approximately 118,000 bo/d gross capacity. Total gross capacity for Surmont 1 and 2 is expected to reach 150,000 bo/d. The Surmont project is located in the Athabasca Region of northeastern Alberta, Canada, approximately 35 miles southeast of Fort McMurray. Surmont is operated by ConocoPhillips under a 50/50 joint venture agreement with Total E&P Canada.
TX AUTHORIZES SEISMIC MONITORING
Texas Gov. Greg Abbott signed legislation authorizing funding of $4.47 million for the TexNet Seismic Monitoring Program, an initiative led by the Bureau of Economic Geology - the State Geologic Survey of Texas - at The University of Texas at Austin. The mission is to provide transparent access to data and information regarding the understanding of earthquake activity in Texas, both natural and potentially induced by human activity. TexNet will acquire and install at least 22 permanent seismometers, augmenting the 16 existing seismometers currently in place in Texas. Another 36 portable seismometers will be staged in Bureau of Economic Geology facilities across the state.
TexNet has two primary goals: to monitor, locate and catalog seismic activity with magnitudes of 2.0 and larger, and to improve the state's ability to rapidly investigate ongoing earthquake sequences in Texas. Of particular importance are those earthquakes larger than magnitude 3.0 in or near urban areas, or in locations where ongoing human activities might be influencing earthquake activity.
OPEC CONCLUDES MEETING, MAINTAINING PRODUCTION CEILING JUNE 8, 2015
At OPEC's June 5 conference in Vienna, Austria, the organization's membership reviewed the oil market outlook, in particular the demand and supply projections, and the outlook for the second half of 2015. The conference noted that the global economic recovery had stabilized, albeit with growth at moderate levels. In the current year, GDP growth is projected at 3.3%, with this expected to be at a slightly higher level of 3.5% for 2016.
Recording its continued concern over market volatility and the challenges faced by the global oil industry as a whole, the conference observed, further, that the sharp decline in oil prices witnessed at the end of last year and the start of this year - caused by oversupply and speculation - had now abated, with prices moving slightly higher in recent months.
OPEC noted that world oil demand is forecast to increase in the second half of 2015 and in 2016, with growth driven by non-OECD countries. On the supply side, non-OPEC growth in 2015 is expected to be just below 700,000 barrels per day, which is only around one-third of the growth witnessed in 2014.
The conference participants also observed the recent build in stocks and the surplus of oil in both OECD and non-OECD countries, which has resulted in stock levels that lie well above the five-year average in terms of absolute volumes, indicating that the market is comfortably supplied.
In view of the foregoing, the conference resolved to maintain the 30 mb/d ceiling and urged member countries to adhere to it. Member countries, in agreeing to this decision, confirmed their commitment to a stable and balanced oil market, with prices at levels that are suitable for both producers and consumers. Nonetheless, the conference stressed that, given the current market uncertainties, close monitoring of developments over the coming months was necessary.
OPEC members will meet again on Dec. 4 in Vienna.
STATOIL MAKES THIRD AASTA HANSTEEN GAS DISCOVERY IN THREE MONTHS
Statoil and PL602 partners have made a gas discovery in the Gymir prospect. The find marks the third discovery in the Aasta Hansteen area in three months.
"The estimated total volumes in the three discoveries, Snefrid Nord, Roald Rygg and Gymir, amount to 75-120 million barrels of recoverable oil equivalent, corresponding to about 1/3 of the Aasta Hansteen recoverable volumes. The discoveries will now be further evaluated for future tie-in to the Aasta Hansteen facilities in order to optimise utilisation of the infrastructure and prolong the production plateau," said Dan Tuppen, vice president exploration Norwegian and Barents Sea in Statoil.
The well 6706/11-2, drilled by the Transocean Spitsbergen rig in the Gymir prospect, proved a gross 70-meter gas column in the Nise Formation with good reservoir qualities. Statoil estimates the volumes in Gymir to be in the range of 6-19 million barrels of recoverable oil equivalent. Gymir is located eight kilometers away from Roald Rygg and 14 kilometers away from Snefrid Nord.
Aasta Hansteen will be the largest SPAR platform in the world and is the biggest ongoing field development project in the Norwegian Sea. It is one of the main projects in Statoil's portfolio. The plan for development and operations (PDO) was approved by the Norwegian Ministry of Petroleum and Energy in 2013. Production start-up is expected in 2017.
The drilling operations in all three wells have been extremely efficient, making them the fastest deep-water wells ever drilled on the Norwegian continental shelf. The deepwater Gymir well was completed in 13 days.
"The total savings achieved in the three wells amount to 50 days or 360 MNOK compared to the initial plan. This is a result of STEP (Statoil technical efficiency program) within drilling and well, and the ability of the onshore planning team and the Transocean Spitsbergen crew to take out the full potential of the drilling process. The efficiency gains were achieved while keeping high HSE standards," says Thor Emil Bensvik, head of Statoil exploration drilling operations on the NCS.
QUESTERRE SIGNS MOU TO APPRAISE, DEVELOP SHALE BLOCKS IN JORDAN
Canada's Questerre Energy Corp. has entered into a memorandum of understanding (MOU) with the Ministry of Energy and Mineral Resources of the Hashemite Kingdom of Jordan for the appraisal and development of oil shale acreage in Jordan.
The MOU encompasses two blocks covering 150 square miles (388 square kilometers) in the Isfir-Jafr area, approximately 124 miles (200 kilometers) south of the capital, Amman. To date, a total of 35 core holes have been drilled on these two blocks by the Natural Resources Authority of Jordan. The company is analyzing available data from these wells to develop its work program.
The primary objective of the work program will be to assess the acreage for potential oil shale development. The assessment will include economic viability, geologic, geophysical, and hydrological studies, as well as the feasibility of internal project electrical generation using oil shale. The initial term of the MOU is two years and may be extended. The company estimates its commitments could range between $2.4 million (CAD 3 million) to $4.1 million (CAD 5 million) over the two-year initial term of the MOU. Subject to results, the company intends to develop a subsequent work program that would be conducted during the initial phase of a future concession agreement.
In Canada, Questerre Energy has base production and reserves in the tight oil Bakken/Torquay shale play of southeast Saskatchewan, and is also bringing on production from its lands in the high-liquids Montney shale fairway.
S&P: US OILFIELD SERVICES SECTOR OUTLOOK LOOKS BLEAK AS E&P COMPANIES TIGHTEN SPENDING
US exploration and production (E&P) companies are tightening their capital spending belts, and the US oilfield services and equipment sector is getting pinched. In the past year, oil prices dropped to a six-year low (though West Texas Intermediate has rallied a bit to just below $60 per barrel) and natural gas prices have also been hit, leading oil producers to pull back on drilling activity in the Lower 48, according to a report published June 8 by Standard & Poor's Ratings Services.
The report says that oil and gas E&P companies are delaying and halting some drilling projects, decreasing the number of opportunities for oilfield services companies. As a result, business rivals are cutting prices on existing and new contracts to maintain or improve market share, among other competitive tactics. The end result is that many oilfield services companies will display weaker financial performances and credit quality in 2015, despite layoffs and other cost-cutting measures.
"The bigger, more geographically diverse service providers with multiple business lines and stronger balance sheets will likely outperform smaller, more focused competitors," said Christine Besset, Standard & Poor's credit analyst. "And we believe that market conditions for the US oilfield services industry will remain weak overall for the rest of the year and won't likely recover before the first half of 2016. As such, we are maintaining an overall negative outlook on the sector."
As market conditions deteriorated quickly over the past couple of quarters, Standard & Poor's has lowered more ratings than raised ratings. The downgrade-to-upgrade ratio was 11 to three between June 30, 2014, and May 5, 2015. The negative rating actions have largely reflected Standard & Poor's lower EBITDA and cash flow generation expectations, leading to higher estimates of debt leverage for the next three years. Most negative rating actions were on speculative-grade companies, according to the report.
Given the bleak industry outlook, Standard & Poor's believes that it is likely that downgrades will continue to exceed upgrades over the next year. As of May 1, Standard & Poor's maintained negative outlooks or negative CreditWatch placements on about 25% of the issuers the company rates in the sector. In terms of ratings distribution, Standard & Poor's rates approximately 80% of issuers "BB" or below, reflecting the limited size and scale of most companies in this fragmented industry. Large companies such as Schlumberger and the-soon-to-be-merged Halliburton/Baker Hughes entity have significant product diversity, exposure to international markets, and economies of scale that should help buffer the downturn in the North American market in 2015.
Smaller companies remain the most vulnerable to downgrades because they will struggle to maintain market share and margins vis-à-vis the larger competitors this year. Standard & Poor's also believes increased merger and acquisition activity is possible because companies might be forced to reorganize in response to a shrinking market. Standard & Poor's expects shareholder-oriented activity and capital spending to moderate this year, with companies preserving cash to weather the downturn.