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Midweek Sector Update: Iran Holding Up Its End Of The Bargain, So Far

Midweek Sector Update: Iran Holding Up Its End Of The Bargain, So Far

The International Atomic Energy Agency (IAEA) says that Iran is on track with its obligations under the landmark nuclear agreement reached in July. The head of the IAEA, Yukiya Amano, confirmed that the agency’s inspectors were in Iran and had access to the Parchin military site as part of its investigation into Iran’s past nuclear activities. Amano says that Iranian officials cooperated and granted access to investigators. IAEA personnel have long been barred from the Parchin facility, where the international community believes Iran worked on nuclear weapons research and technology. Up until now, the outside world has only observed the facility via satellite.

The announcement that Iran has given access to the IAEA puts Iran on course to meet its side of the nuclear deal reached with the P5+1 countries in July, a prerequisite to the removal of western sanctions. Also, with the deal free of attacks from the U.S. Congress, implementation is looking increasingly likely. The IAEA is set to release the results of its investigation by December 15 of this year, a pivotal event that will determine the next steps for Iranian sanctions. If removed, Iran could return a significant portion of its oil production capacity to market, adding to global supplies. Related: Can Brazil’s Oil Sector Make The Transformation Needed To Survive?

A new Wood Mackenzie report finds that an estimated $1.5 trillion worth of oil and gas investment is “out of the money” when oil prices trade at just $50 per barrel. If prices don’t rebound, a significant volume of oil projects may not move forward. In fact, the report finds that only around 10 or 11 new upstream projects could get the go-ahead in 2016, down from 50 to 60 in a normal year. Around $220 billion worth of investment has already been cancelled, with more cuts in spending programs not far off. The staggering sum will be felt disproportionately by North American shale, which suffers from higher costs. The oilfield service sector will also continue to get hit extremely hard, as drillers not only cutback on new projects, but are looking to squeeze costs out of service companies.

ExxonMobil (NYSE: XOM) is reportedly hunting for bargains in Texas as smaller companies are being crushed by the weight of low oil prices. Exxon’s subsidiary, XTO Energy, is holding meetings with executives from drilling companies in the Permian Basin in West Texas. For one of the largest oil companies in the world, the downturn offers opportunities to expand by purchasing smaller companies on the cheap. Any acquisitions would also offer a bit of evidence that the market has reached a bottom – as the industry consolidates and weaker companies are forced out, oil prices will rise as the market comes into balance.

CNBC pundit Jim Cramer called Brazil’s partially state-owned oil company Petrobras, the “number 1 problem” in the world right now, “because it has so much debt and people aren’t talking about it.” He has good reason to point the finger at Petrobras. The Brazilian oil company has more than $100 billion in debt and its bond yields are trading at 10.5 percent. The company admitted a few months ago that it would not meet its 2020 production target of 4.2 million barrels per day (mb/d), and instead predicts output to remain flat at just 2.8 mb/d by the end of the decade. Petrobras, of course, has been mired in a corruption scandal for the past year, and the massive probe has not only worsened the company’s financial position, but it has also dragged down the Brazilian economy and undermined the President’s government to the point of political crisis. Related: Can The Saudi Economy Resist ‘Much Lower For Much Longer’?

Cheniere Energy (NYSE: LNG) announced a new deal on September 21 with French energy company EDF (EPA: EDF). Cheniere will sell up to 24 cargoes of LNG to EDF between 2017 and 2018. The price will be linked to a trading hub in the Netherlands. Cheniere has lined up most of its export capacity under long-term contracts, but it does have some extra capacity that it is looking to secure. The new deal with EDF does allow Cheniere an out, however. If Cheniere can find buyers willing to pay more, it can cancel some of the deliveries to EDF. And that makes sense – LNG cargoes are selling for around $7 per million Btu (MMBtu) these days, dramatically lower than their peak of more than $20/MMBtu from a year and a half ago. It is not the best time to be lining up long-term deals.

The UK could open the door to China becoming an international exporter of nuclear technology. The UK Government announced that it favors China moving forward on building a nuclear power plant in Essex, in eastern England. If completed, it would be the first nuclear reactor constructed in the West based on Chinese technology. “They very much want to have their design up and running in the UK,” British energy secretary, Amber Rudd, told the FT in an interview. “That’s because we have such tough standards of regulation everyone can have confidence they are safe and show that they have a great operation to take elsewhere.”

Meanwhile, the UK is also guaranteeing £2 billion for the Hinkley Point C reactor, a separate project to be constructed in England that is backed by two Chinese companies, although it uses a French reactor design. The £24.5 billion power plant has been delayed, but the British government has been pushing hard to secure a final investment decision on the project ahead of a visit to London by Chinese President Xi Jingping. Related: The Clock Is Ticking On The U.S. Dollar As World’s Reserve Currency

Gazprom submitted its response to EU antitrust regulators, looking for an out-of-court settlement. The EU Commission has filed charges against Gazprom for violating the EU’s antitrust rules. Regulators claim that Gazprom charged unfair prices for its natural gas, charged different prices to different customers (especially in Eastern Europe), and hindered competition. Gazprom hopes to hold talks with the EU Commission “in the near future.” The Russian gas giant could face $8 billion in fines. The prospect of such a stiff penalty could force Gazprom to accept EU rules on competition. But a settlement is not inevitable – the EU Commission’s competition commissioner, Margrethe Vestager, “is reluctant to settle in landmark cases,” according to the FT.

Finally, EIA data shows that the shale gas revolution in the U.S. has peaked with production beginning to decline. However, investment bank Raymond James believes that the drop offs in production will be limited, due to ongoing cost-saving and efficiency measures by drillers. After prices rebound, production gains could follow. Raymond James predicts another boom in natural gas production in 2017 and 2018. And with so much natural gas already online, prices will likely remain low for the foreseeable future.


By Evan Kelly Of Oilprice.com:

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