It was a week where oil prices ended at their highest settlement since July 10, while natural gas futures topped the psychologically important $3 level.
On the news front, Royal Dutch Shell plc’s (RDS.A - Free Report) C$40 billion LNG Canada project is expected to get approved shortly following final investment decisions by two co-owners, while oil majors swarmed the deepwaters of Brazil as the country strives to attract investment before the presidential election in October.
Overall, it was another good week for the sector. West Texas Intermediate (WTI) crude futures rose 3.5% to close at $73.25 per barrel, while natural gas prices gained 1.1% to $3.008 per million Btu (MMBtu). (See the last ‘Oil & Gas Stock Roundup’ here: TOTAL's Acquisition, Cheniere's LNG Supply Deal & More)
The U.S. crude benchmark gained for the fifth time in six weeks after major producers refused to boost output despite pressure from President Trump amid tightening global supplies. At a meeting in Algeria recently, OPEC and its allies did not commit to any output increase to compensate for the anticipated supply disruptions ahead of the U.S. sanctions on Iran’s energy sector on Nov 4. Data showing drillers in the United States cutting oil rigs for second consecutive week brought further upside.
Meanwhile, natural gas hit a 14-month high after the EIA reported a smaller-than-expected increase in natural gas supplies. The headline beat further widened the storage deficit ahead of the upcoming winter.
Recap of the Week’s Most Important Stories
1. Cashing in on the improving energy landscape and booming demand for liquefied natural gas (LNG), it seems that Royal Dutch Shell’s LNG Canada project, located in Kitimat, is anticipated to see the light of day soon. In a recent development regarding the multi-billion mega projects, two of the other co-owners including Chinese energy giant PetroChina Company Limited and South Korea's state-run Korea Gas Corporation have given their final investment decision on their share of the project. Notably, PetroChina has approved C$4.5 billion share of the project, while Korea Gas also officially green-lit its part of financing.
The LNG Canada project, located in Kitimat, British Columbia, is estimated to cost C$40 billion and marks the nation’s largest infrastructure project ever. The first phase of the project, which is likely to cost around $30 billion of investment, incorporates the construction of two LNG processing units and facilities for export, with a shipping capacity of around 26 million tons of LNG a year. The second phase comprises construction of two train units.
The sanction of the LNG Canada project will reflect the turnaround of the LNG market, after years of supply glut and weak gas prices that had significantly reduced investments in the industry. In fact, the oversupplied LNG market is likely to be faced with a looming deficit by 2022, in case there is absence of new projects.
2. Brazil’s oil regulator ANP recently unveiled the results of the fifth pre-salt auction rounds, wherein supermajors including Exxon Mobil Corporation (XOM - Free Report) , Chevron Corporation (CVX - Free Report) , Royal Dutch Shellalong with state-controlled Petrobras emerged as big winners.
This round provided a major opportunity for oil companies to secure a stake in Brazil’s coveted pre-salt areas, prior to the presidential election in October, which can transform the rules for future auctions.
The government auctioned off four blocks — namely Saturno, Tita, Pau-Brasil and Sudoeste de Tartaruga Verde — under production sharing agreements (PSAs) in the pre-salt layer of the Campos and Santos basins. All the four blocks were successfully sold off, with the government of President Michel Temer raking in more than $1.71 billion or 6.82 billion reais. Bids were made by pledging a percentage of profit oil to the government and paying a fixed signing bonus.
3. TOTAL S.A. (TOT - Free Report) has entered in an agreement with Chevron Corporation to acquire all the share capital of its arm Chevron Denmark Inc., which holds 12% interest in the Danish Underground Consortium (“DUC”), 12% interest in Licence 8/06, and 7.5% interest in the Tyra West pipeline.
The deal is subject to approvals from other existing partners of DUC and from the relevant authorities. Other partners of the consortium are Royal Dutch Shell, having 36.8% interest and Nordsofonden (20%, owned by the Danish State).
Post completion of the transfer of interest TOTAL will be the holding 43.2% interest in DUC, up from its existing share of 31.2%. Acquisition of interest will further increase TOTAL’s presence in the Danish Shelf and allow it to operate a consortium that controls majority of Danish oil and gas production.
TOTAL is the largest oil operator in Denmark and has expanded its operation in Denmark through the acquisition of Maersk Oil, which held 31.2% interest in the DUC. The decision to acquire Chevron arm will help it to control 43.2% of DUC, which manages 85% of the oil and 97% gas exports of Denmark. (Read more TOTAL Set to Acquire Chevron's Interest in Danish Shelf)
4. Petrobras (PBR - Free Report) recently agreed to pay a fine of $853.2 million to the government bodies of Brazil and United States, effectively ending the long-running Lava Jato (Car Wash) scandal investigation.
Per the settlement, the U.S. Justice Department (DOJ) and the Securities and Exchange Commission (SEC) will each receive 10% ($85.3 million) of the settlement amount. The remaining 80% ($682.6 million) will go in a special fund in Brazil, which will be allocated toward social causes by the federal prosecutors. Notably, the company’s third-quarter 2018 financial statement will incorporate the $853.2 million (around R$3.6 billion) settlement, including taxes.
Earlier this year, Petrobras agreed to pay $2.95 billionto settle class-action lawsuits filed by investors. The payout marked the biggest payment in the United States by a foreign entity and one of the largest securities class action settlements in the country’s history. (Read more Petrobras to Pay $853.2M to Settle Car Wash Probe)
5. BP plc (BP - Free Report) recently secured approval for developing the Vorlich oil field, located in the central North Sea, from the U.K. Oil and Gas Authority (OGA). The development project is expected to cost £200 million (around $262 million).
The oilfield is expected to witness a peak production level of 20,000 barrels of oil equivalent per day (Boe/d). The company plans to produce 30 million barrels of oil equivalent from the field, once developed. Discovered in 2014, the Vorlich oil field flowed at 5,350 Boe/d during the test period. Majority of the production during the test period comprised oil (80%).
P anticipates the Vorlich field, which is part of its “refreshed North Sea portfolio”, to come online in 2020. The OGA is of the view that production from the field will support its Maximising Economic Recovery UK (MER UK) strategy. By using the existing infrastructure, production from the Vorlich field will increase and help generate maximum value from the Greater Stella Area hub, wherein the FPF-1 floating production facility is positioned.
The following table shows the price movement of some the major oil and gas players over the past week and during the last 6 months.
Last 6 Months
Reflecting the week’s positive oil market sentiment, the Energy Select Sector SPDR – a popular way to track energy companies – generated a +0.9% return last week. The best performer was oil and gas explorer Occidental Petroleum Corporation (OXY - Free Report) whose stock rose 3.2%.
Longer-term, over six months, the sector tracker is up 14.7%. Offshore drilling contractor Transocean Ltd. was the major gainer during this period, experiencing a 44.9% price appreciation.
What’s Next in the Energy World?
As usual, market participants will be closely tracking the regular releases i.e. the U.S. government statistics on oil and natural gas - one of the few solid indicators that comes out regularly. Energy traders will also be focusing on the Baker Hughes data on rig count.
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