Spending Cuts in Oil and Gas Industry

OilPrice Intelligence Report: Oil Majors Taking Ruthless Measures To Survive Across the board, many oil majors are taking the butcher’s knife to operations, cutting jobs and capex in unprecedented numbers. Spending on global exploration and production could fall over 30 percent this year, the greatest drop since 1986, should markets remain depressed.  Bank of America are predicting Brent futures to fall to $31 by the end of the first quarter this year, over $5 below the lows of the 2008 financial crisis, citing rapidly growing global inventories as the cause of such a substantial drop.  News such as this has spurred the latest round of massive cutbacks across most sectors in the oil and gas industry.   BP will cut 300 jobs in Scotland with ConocoPhillips cutting 230 in Britain overall, Suncor Energy will reduce staff by 1000, while Schlumberger expects to axe over 9000 jobs in total this year. Continental Resources slashed its spending for 2015 by 41 percent last month, while Range Resources Corp. reduced theirs by 33 percent. Shell has cancelled a $6.5 million project in Qatar and Statoil has shelved exploration plans in Greenland. However, it’s not all bad news, at least for one major oil producer.   In other news, one major producing nation that suffers from the oil price crisis more than most may have been caught red-handed this week. Reports are emerging from the U.A.E. that Iran is attempting to disguise crude export shipments destined for countries that are prohibited from receiving Iranian oil under U.S-led sanctions.  Global ship insurers are claiming that sophisticated operations have been ongoing offshore that involve the transfer of cargoes between tankers.  If these reports are confirmed, this will do Iran no favors in its ongoing negotiations with the P5+1 regarding its nuclear energy program. It is unclear whether the news would have impacted a meeting between U.S. Secretary of State John Kerry and the Iranian Foreign Minister Mohammad Javad Zarif in Paris this morning, which lasted only an hour, but Iran is already treading on thin ice as U.S lawmakers consider a new wave of sanctions against the nation. Finally, Venezuelan President Nicolas Maduro is continuing his efforts to rally both OPEC and Non-OPEC producers to take action to resolve the current precipitous oil price slide.  His worldwide tour brought him to Russia this week, where he received support from Vladimir Putin as well as from several Russian companies, who have agreed to increase investment in joint venture companies based in Venezuela’s Orinoco oil region, though by how much is as yet unclear.  Venezuela is one of the top ten producing nations in the world and is estimated to have the largest crude reserves in the world. It relies on oil exports for approximately 90 percent of its foreign currency earnings and as a result of this, the state oil company Petroleos de Venezuela has announced plans to invest $302 billion over the next five years in the hopes of reaching output levels of 6 million barrels a day.  However, the cash-strapped country’s financial burdens and the ever-present threat of default, may mean that such ambitious plans to double its output may never come to fruition especially in light of the carnage wreaked by falling oil prices.

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Global Energy Advisory - 16th January 2015

Deals, Mergers & Acquisitions • Mexico's state-run Pemex is in talks with the US Commerce Department to import 100,000 barrels per day of light crude to raise Mexico's gasoline production and boost its refineries. In return, Pemex would send its heavy oil to US Gulf Coast refineries. This would represent another step towards subtly easing the US ban on oil exports. Pemex’s proposal could have the benefit of reducing transportation costs and improve refining margins—at the same time maximizing refining potential in both countries. • Egypt will seal a deal with Russia's Gazprom for the company to supply it with LNG shipments later this month. If successful, the Gazprom deal would be the second LNG import agreement since Egypt finalized a deal for the necessary import infrastructure in November. Egypt signed an agreement with Algeria for six LNG cargoes in late December. • Venezuelan President Nicolas Maduro is seeking several billion dollars from Qatari lenders to fill a budget gap created by slumping oil prices. This follows similar announcements of deals Venezuela made in recent weeks—most notably, $20 billion in Chinese investment and a deal with Iran to finance housing for the poor. • Malaysia’s Sona Petroleum Bhd has scrapped plans to buy a stake in two oil and gas blocks from London-listed oil exploration and production firm Salamander Energy Plc in the Gulf of Thailand for $280 million. Regulations & Litigation • Brazil’s state-run Petrobras has recently imposed a temporary ban on EPC majors engaged in kickback scandals. In a regulatory filing, Petrobras disclosed a blacklist of 23 companies that includes Brazil’s biggest contractors Odebrecht SA, Camargo Correa SA and Andrade Gutierrez SA. The measure aims to protect the state-run company’s image and finances, according to the Petrobras. OAS, one of the EPC majors in the scheme, has missed bond payments, prompting credit agencies to cut its rating. • Eight US Senators introduced legislation that would accelerate the approval process for LNG exports to countries that do not have free trade agreements with the US. It specifically requires the Secretary of Energy to make a decision on any LNG export application within 45 days after the environmental review document for the project is published. Three key components of the LNG Permitting Certainty and Transparency Act are: (1) The Secretary of Energy will be required to make a decision on any LNG export application within 45 days from the time FERC or the US Maritime Administration publishes the environmental review document for a project; (2) The bill would provide an applicant with expedited judicial review if the Energy Secretary does not act within 45 days or if the project is challenged on legal grounds; (3) The act would require LNG exporters to disclose the country or countries to which LNG has been exported and mandate that the Energy Secretary make this information publicly available. • The Indonesian Trade Ministry has issued a new regulation to enforce tighter control of oil and gas imports and exports as part of the government’s program to eliminate so-called mafia practices in the country’s oil and gas business. Under the new regulation, companies involved in oil and gas export and import activities should be registered with the ministry and will be subject to verification by an independent surveyor to be able to obtain export and import permits. The newly established Oil and Gas Management Reform Team recently recommended the government dismantle the authority given to Pertamina Energy Trading Ltd. (Petral) to handle the country’s oil and gas trade. The company is allowed to operate but is no longer allowed to handle oil and gas exports and imports. Petral has been accused of being an instrument of cartel-like operations in the oil and gas sector. Discovery & Development • Statoil has won approval from Norway’s Petroleum Safety Authority (PSA) to drill an exploration well named Knappen in the North Sea. The company is the operator for exploration licences PL 072 D in block 16/7 in the Central North Sea. Drilling of well 16/7-11 will begin in February and in the event of a discovery a sidetrack will also be drilled and the well will be production tested. The well will be drilled by the Songa Trym, which had been temporarily suspended by Statoil last year. The company had issued a postponement period for a number of contracts due to higher costs and low profitability. However the Norwegian company announced shortly after it would resume operations this month. It had been temporarily out of use at a suspension rate of $279,000 per day. • Serbia’s NIS oil company (majority owned by Gazprom) will invest $384 million this year in new projects, including refinery modernization. NIS has two refineries in Serbia and produces 1.7 million tons of oil equivalent per year, operating fields in Serbia, Angola and Bosnia. Gazprom Neft owns 56.15% of NIS, while 29.88% is owned by the Serbian government. • Lion Petroleum, a wholly owned Kenyan subsidiary of Canadian Taipan Resources, has begun drilling at its Badada-1 well in Block 2B of Kenya’s Mandera Basin, despite the slump in oil prices. We continue to maintain that Kenya is one of the venues that will withstand the oil price slump and prove to be a highly valuable strategic long-term play for investors. • Canadian pipeline giant Enbridge will build, own and operate a new crude oil pipeline in the Gulf of Mexico, which will connect the planned Hess-operated Stampede development to an existing third-party pipeline system. The pipeline will cost an estimated $130 million and is scheduled to be online in 2018. The Stampede development, which the pipeline will service, connects the Knotty Head and Pony developments in the US Gulf of Mexico’s Green Canyon area. The pipeline will be approximately 25 kilometers long and it will be approximately 3,500 feet below water. We are still not privy to its potential capacity. • UK-listed Afren’s shares have slumped after announcing that there are no proven or probably reserves at its Barda Rash oilfield in Iraqi Kurdistan. The company has essentially scratched 190 million barrels of oil of gross proven plus probable reserves from Barda Rash. It also had to cut Barda Rash contingent resources to around 250 mmbbls from 1,243 mmbbls. Company Updates • Texas oil firm WBH Energy announced it was filing for bankruptcy last week, and this is likely just the first of other small players to come in response to lower oil prices. WBH Energy cited debt of between $10 and $50 million and a lender who refused to advance the company more money as the principal reasons for its decision. Over 20,000 small and midsize companies drive the oil and gas production boom in the US, producing in excess of 75% of the US's O&G output, according to the Manhattan Institute for Policy Research's February 2014 Power and Growth Initiative Report. • Vietnamese oil and gas giant PetroVietnam is about to shrink production or even cease exploration at four of its oil fields as their expenses have already surpassed prices. The company announced it will lower or possibly halt exploitation of oil fields where expenses are greater than oil prices to avoid losses. The average extraction cost of PetroVietnam is $30-37 a barrel, whereas at four of its oil fields the figure is now more than $60 a barrel.        Source: http://oilprice.com/newsletters/free/opintel160115