Energy Markets on War Footing
Russia has choked throughput on a Caspian Sea pipeline carrying crude oil from the Tengiz fields in Kazakhstan to Russia’s Black Sea coast. Russian officials say they were forced to throttle throughput in the 1.4M bpd capacity pipeline after a related port was severely damaged due to weather conditions. They also said it could take up to 2 months to repair the damage, seemingly blaming Western sanctions for that in another veiled threat to energy markets. This pipeline pushes over 60% of Kazakhstan’s oil exports, whose target market is partly composed of Western European refiners.
While Russian refiners are said to be cutting back on production, there is no intra-agency consensus on how much Russian oil output could decline. Estimates are vastly different, leaving us none the wiser. Russian oil is still being traded by plenty, though shipping companies are self-sanctioning and making physical trade difficult. India is still scooping up discounted Russian Urals crude. Most likely, private Chinese refiners are, as well, though data is limited.
The Iranian-backed Houthis on Friday morning bombarded Saudi Arabia in a multi-pronged missile attack. One missile reportedly hit a Saudi Aramco storage facility, the North Jeddah Bulk Plant. While official confirmation of the extent of damage caused by the Houthi missile barrage has yet to come, social media sources say this particular facility is used for storage and distribution…
Energy Markets on War Footing
Russia has choked throughput on a Caspian Sea pipeline carrying crude oil from the Tengiz fields in Kazakhstan to Russia’s Black Sea coast. Russian officials say they were forced to throttle throughput in the 1.4M bpd capacity pipeline after a related port was severely damaged due to weather conditions. They also said it could take up to 2 months to repair the damage, seemingly blaming Western sanctions for that in another veiled threat to energy markets. This pipeline pushes over 60% of Kazakhstan’s oil exports, whose target market is partly composed of Western European refiners.
While Russian refiners are said to be cutting back on production, there is no intra-agency consensus on how much Russian oil output could decline. Estimates are vastly different, leaving us none the wiser. Russian oil is still being traded by plenty, though shipping companies are self-sanctioning and making physical trade difficult. India is still scooping up discounted Russian Urals crude. Most likely, private Chinese refiners are, as well, though data is limited.
The Iranian-backed Houthis on Friday morning bombarded Saudi Arabia in a multi-pronged missile attack. One missile reportedly hit a Saudi Aramco storage facility, the North Jeddah Bulk Plant. While official confirmation of the extent of damage caused by the Houthi missile barrage has yet to come, social media sources say this particular facility is used for storage and distribution of domestic refined products and thus we are not expecting any impact to exports at this time of tight supply. Oil prices immediately reacted by climbing upwards but then took a pause to assess the damage to markets, if any. The wider concern is the increased momentum of Houthi attacks. This attack follows a similar one last week when another refinery was. That attack prompted Riyadh to adamantly maintain that it is not responsible in any way for high oil prices. This comes in advance of next week’s planned OPEC+ meeting where the cartel was set to decide whether or not to raise oil output faster than called for in the current agreement. The Saudi statement suggests that we can expect OPEC to remain firm in its resistance to U.S. calls to increase oil output further. The Saudis will, however, increase CAPEX for Saudi Aramco for 2022 for new investments into oil production over the next five years after Aramco reported a doubling of oil profits.
Likewise, the UAE has set a plan in motion to speed up its process of expanding production capacity from 4M bpd to 5M bpd. The original plan was to achieve this by 2030, now the target date is prior to this, though we have no strong indication of the new timeframe.
U.S. energy firms are looking for regulators to forego new greenhouse gas emissions rules that would retroactively apply to pending gas pipeline applications, which in turn could make it more difficult for critical nat gas pipeline projects to obtain approval. The new rules increase the requirements with regards to environmental impact statements–a laborious and pricey process. Energy firms argue that now is the time to hasten nat gas pipeline projects, with Europe in the midst of an energy crisis that was exacerbated by Russia’s invasion of Ukraine. FERC, however, has said that the new rules would indeed apply to pending gas pipeline applications.
Germany will fast-track the construction of two LNG terminals as part of its deal with Qatar in hopes of speeding its decoupling from Russia’s gas supplies. Until now, Germany’s dealings with Qatar have spanned years because it was not clear what role nat gas would play in Germany’s energy future, and Qatar requires long contracts to insulate itself from cost-intensive projects–not to mention Germany’s lack of LNG infrastructure. Those negotiations between Germany and Qatar will now take place in earnest as the need for alternate LNG supplies is clear.
Spain’s fuel protests are now bleeding into supply chains. As truckers bemoan the high price of fuel and turn to burning vehicles and tires, blocking highways, Spain’s economy has been severely disrupted, with supply chains at a near standstill. Food supplies in grocery stores are running out of products, and manufacturers are slowing production because they cannot obtain materials. Produce that can’t find its way to market is being discarded. Spain’s government is now forced to deal with the protests before it spreads into its third week.
Big Oil’s Response to Russia
French TotalEnergies is halting all Russian oil and petroleum products purchases by the end of 2022 in a gradual suspension.
Baker Hughes and Schlumberger, two oilfield service companies with significant exposure to Russia, have announced that while they aren’t withdrawing from Russia, they are suspending any future work and new investments. Halliburton, on the other hand, has announced a full suspension of both current operations and future investments. Baker Hughes’ exposure shows about 5% of total sales derived from Russia operations. Schlumberger’s exposure is higher, with up to 6% of revenue from Russia (estimated) and Halliburton’s is the lowest.
Biden will meet with America’s supermajor oil companies on Monday after calling on energy suppliers to boost production in an effort to control prices, criticizing them for prioritizing shareholder payouts.
An indirect effect of the Russian war on Ukraine and Western sanctions has led to a worker strike (500-strong) at a Chevron refinery in San Francisco. The strike began on Monday, March 21st, and while partly launched over safety concerns, rising inflation without a salary increase is a key issue. The strike remains ongoing and without resolution as of the time of writing.
Estonia could breathe new life into a decade-old plan to build an FLNG terminal at Paldiski harbor to import more LNG and reduce reliance on Russian gas supply. Alexela has been planning the floating LNG terminal for 10 years. Estonia says it could have it ready by the end of this year. Alexela is asking for a state guarantee as well as subsidies to move forward with the project. The government has not yet decided whether it will proceed with the project, nor whether it will halt all imports of Russian gas.
JPMorgan Chase CEO Jamie Dimon had a private meeting with Biden this week, during which he prompted the President to develop a Marshall Plan for developing more domestic natural gas. Dimon suggested a reduction in the time it takes to obtain a permit for renewable energy projects, including wind farms. The Marshall Plan was a provision that injected billions into Western Europe to help it rebuild post-WWII. Other people familiar with the discussions between Dimon and Biden said that the conversation wasn’t around producing more nat gas in the US, but on needing additional LNG facilities in Europe and more investments into hydrogen and carbon capture.
China has increased its imports of Russian LNG–nearly doubling in February 2022 from February of last year. China’s purchases of Russian LNG in February totaled 401,000 tons according to customs data. Meanwhile, China’s overall imports of total LNG from all suppliers decreased in February by 12 percent from last year.
India’s largest oil refinery purchased 3 million barrels of Urals on Wednesday for May loading. The Russian crude was purchased at a discount from Vitol and is IOC’s second Urals purchase since Russia invaded Ukraine–also from Vitol.
Geopolitical Update
Chevron is lobbying the Biden Administration hard for sanctions relief in Venezuela to pump more oil there. Since the sanctions were put in place in Jan 2019, Chevron has had to keep going back to the table for temporary waivers to maintain its presence in the country. But in 2020 Chevron’s restrictions were tightened, and it has only been allowed to maintain a minimal presence in Venezuela and not allowed to drill, lift, purchase or process Venezuelan crude oil or crude products. Now that gasoline prices have risen to uncomfortable levels in the United States, Chevron is sensing that it is time to ask again. Chevron has stated that it could help Venezuela to double its 0.8 million bpd crude oil production within just months. But the idea of working out a deal with the Maduro regime has been met with serious pushback from those who feel the United States is better suited to fill its own crude oil needs.
Nagomo-Karabakh has accused Azerbaijan of cutting off nat gas supplies to it for the second time in two weeks. Nagomo-Karabakh gets its gas from Armenia, but the pipeline runs through land that Azerbaijan has controlled since the 2020 war. The pipeline sustained damage after Russia’s invasion of Ukraine, and Nagomo-Karabakh has accused Azerbaijan troops of not letting them make the necessary repairs. It also accused Azerbaijan of installing a valve to deliberately cut off the flow of natural gas. This has led residents of Nagomo-Karabakh to search for alternate heating sources and has resulted in power outages.
Discovery & Development
Argentina’s state-run YPF claims it can boost its oil output by 100% over the next five years, to 450,000 bpd. YPF currently produces 220,000 bpd. YPF is the main operator in the giant Vaca Muerta shale play. It is planning $3.8 billion in investments this year alone–with $1.6 billion of it to be spent on shale projects.
BP is hoping to exit its Foinaven oilfield in the North Sea and is currently looking for buyers. BP ceased production in the field in 2021 and began the process of dismantling its FPV. There are reportedly still 200 million barrels of oil in the field, and BP is hoping that Britain’s recent desire to increase oil production will attract willing buyers.
Santos has confirmed a significant oil discovery 46 km east of the Dorado field at its Pavo-1 exploration well in Western Australia. Wireline data confirmed 46 m of net oil pay. Initial indications from a site analysis were for light sweet oil with low gas to oil ratio. 2C contingent resource for the northern culmination is assessed at 43 million barrels of oil gross. Santos said it would expect a breakeven of less than $10 per barrel and de-risks a number of nearby low-cost opportunities.
In light of increased oil prices and a sense of shifting priorities in the energy industry, Shell is rethinking its exit of the Cambo oilfield off the coast of Shetland. Shell decided in December that the economics of staying in the field was being evaluated. It also mentioned regulatory delays as a partial reason for reviewing a potential exit. But now with oil prices nearly doubling since then, and with the UK possibly being willing to fast-track projects, Shell is thinking it may stay with Cambo after all. Shell has found the regulator environment in the UK challenging.
Renewables
BP has entered into an agreement with Marubeni for a new offshore wind project in Japan. BP snagged a 49% stake in the project. The partnership could also expand to include hydrogen projects as well.
