‘Cash-all-gone’ project and [Too Much] Oil and [Less] Money Conference

After billions of dollars being spent, delays and pipeline leaks, Kazakhstan's offshore Caspian Sea located Kashagan oilfield – often dubbed ‘cash-all-gone’ by the wider energy industry – is back onstream with its first cargo having been dispatched and a gradual uptick in production to 370,000 barrels per day (bpd) expected by the fourth quarter of 2017.

Discovered at the turn of the millennium, the much maligned Kashagan has cost at least $50 billion so far. A report by CNN Money back in 2012 claimed a staggering $116 billion had been spent, something that those involved hotly contest. Deemed the main source of supply for the Kazakhstan-China Oil pipeline, the field also has a $5 billion stake in it owned by China.

While its good news all around, the only issue is that one of the most expensive offshore oil projects in the world is coming onstream at a time when the oil price is lurking around $50 per barrel and the market is wishing there were fewer barrels of the crude stuff rather than more.

With all gathering and processing infrastructure in place for a 2013 start, including 20 pre-drilled production wells, Kashagan could have captured the upside of record high oil prices if had production continued as planned back then, say the good folks at research and consulting outfit GlobalData. However, a pipeline leak scuppered it all back then and triggered another protracted delay.

Anna Belova, GlobalData’s Senior Oil & Gas Analyst, says,"Instead, the project has restarted in today's oversupplied market, and while the oil price has rebounded, the current levels would not justify Kashagan's full cycle capital expenditure (capex), which exceeds $47 billion to date."

One thing is all but guaranteed; more oil barrels are on their way to the global supply pool. Belova adds: "Current processing capacity for Kashagan’s Phase 1 with all three lines online targets 370,000 bpd, potentially increasing to 450,000 bpd but under the 495,000 bpd capacity.

"With a large number of pre-drilled wells and a multi-stage processing build-up, Kashagan is well positioned to reach its targeted capacity for Phase 1 by 2018. This paves the way for negotiations on full-field development that has a potential bring over 1.1 million bpd to global crude markets."

Wonder if someone has sent the projections to Russia and OPEC? For a real-terms cut of say 1.5 million bpd – should there by one from the first quarter of 2017 onward coordinated by Riyadh and Moscow – would be more or less made up by Kashagan alone within 12 months, forget other non-OPEC producers. What's more, much of it would be going straight via pipeline to China, currently the world's largest importer of crude.

As for the oil price, despite net-shorts being at their lowest in weeks, if US Commodity Futures Trading Commission (CFTC) data is anything to go by, we are still stuck pretty much either side of $50 per barrel. Here's the Oilholic’s latest take in a Forbes post.

Meanwhile, a veritable who’s-who of oil and gas industry arrived in London last week for the Oil and Money Conference 2016, an industry jamboree that could well have been renamed – "Too Much Oil and Less Money" Conference for its latest installment. Beyond the soundbites and customary  schmoozing, this year's Petroleum Executive of the Year was Khalid Al-Falih, who has been in his job as Saudi Energy Minister for a really long five months, but the accolade one suspects was for his role as Chairman of Saudi Aramco.

However, the good thing about these annual industry shindigs is that you get to meet old friends, among whom the Oilholic counts Deborah Byers, EY’s Oil & Gas Leader and Managing Partner of its Houston Practice as one.

While EY is not in the business of price forecasting, Byers suggests the industry is adjusting to a new normal in the $40-60 per barrel range, one that would be hard to shake-off over the short-term barring a high magnitude geopolitical event.

“Even if OPEC cuts production in November, I believe market rebalancing in its wake would only last for a little while, with non-OPEC production also benefitting from any decision taken in Vienna.”

The pragmatic EY expert also doesn’t buy the argument made in certain quarters that the US either is or could be a swing producer. "In a classic sense, Saudi Arabia is the only global swing producer – it has significant reserves, the tapping of which it can turn up or down at will. You cannot replicate that scenario in non-OPEC markets, including the US. What the American shale sector can do is put a ceiling on the oil price and keep the market in check."

Away from oil prices, one final snippet before the Oilholic takes your leave; Moody's has upgraded all ratings of the beleaguered Petrobras, including the company's senior unsecured debt and corporate family rating (CFR), to B2 from B3, given "lower liquidity risk and prospects of better operating performance" in the medium term.

In a move following the close of markets on Friday, the ratings agency said that Petrobas' liquidity risk has declined over the last few months on the back of $9.1 billion in asset sales so far in 2016 and around $10 billion in exchanged notes during the third quarter, which extended the company's debt maturity profile

However, Moody’s cautioned that plenty still needs to be resolved. For instance, sidestepping existing financial woes, low oil prices, a class action lawsuit, the US Securities Exchange Commission (SEC)'s civil investigation and the US Department of Justice (DoJ)'s criminal investigation related to bribery and corruption will negatively affect the company's cash position. Afterall, ascertaining the settlement amount remains unclear, and won't be known for some time yet. That’s all for the moment folks! Keep reading, keep it ‘crude’! 

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© Gaurav Sharma 2016. Photo: Abandoned petrol station in Preston, Connecticut, USA ©

Todd Gipstein/National Geographic.

OPEC’s cut is not an oil market panacea

Manic few weeks of travel and speaking engagements meant the Oilholic could not pen his thoughts on the Saudi-Russian agreement over the need to lower oil production, and other OPEC shenanigans sooner. 

Plus the last fortnight has given much food for thought news-wise, with the oil price registering a noticeable uptick (see chart left, click to enlarge).

Forget, the world’s two leading producers, it appears all of unruly OPEC is onboard for a production cut too, going by recent soundbites. But is it? Really?

For starters, while the market has been told there is consensus among the cartel's members about the need to cut oil production; details on how OPEC would go about it would only be provided on 30 November, after the conclusion of it’s next ordinary meeting. 

It implies that until December, everyone within OPEC can keep pumping regardless, ahead of its pledge to limit “production to a range of 32.5m to 33m barrels per day (bpd).” Seeing is believing, as the old saying goes.

Secondly, how is OPEC going to enforce the quota? That's something it has been particularly poor at going by recent form. The market has not been given individual members’ quotas since 2008, and OPEC's latest monthly report acknowledges the prospect of rising production from Libya and Nigeria. 

So assuming Libya, Nigeria, Iraq and Iran would not partake in either cutting or freezing production – will it be left to Gulf oil exporters, led by the Saudis, to cut production? The Oilholic finds that very difficult to believe, but stranger things have happened. 

Thirdly, will the latest attempt succeed and are the Russians really in agreement this time around? That is anybody’s guess, but if it fails – OPEC and Russia will have a serious credibility problem for the future, as it would be the third attempt at capping crude production this year alone to falter. 

For all intents and purposes, it appears both OPEC and Russia are aiming for a $60 per barrel oil price. If that is their aspiration, it would suit North American players just fine, whose pain threshold - in the Oilholic's opinion - happens to be around $30 per barrel. 

Anyway you look at it, non-OPEC production will rise. So such short-term overtures, should they materialise, are bound to reap only short-term rewards. That's all for the moment folks! Keep reading, keep it 'crude'!

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On the Firth of Forth with an ethane tanker

As a mad month of travelling nears its end, the Oilholic was up earlier today in the small hours of the morning sailing on the Firth of Forth, Scotland, observing Panamax tankers load up Forties crude from the North Sea at the Hound Point Terminal at sunrise (see left). 

If you are lucky enough to catch the morning din with the weather holding up, it is quite a sight. However, the main purpose of being anchored in the middle of the Firth of Forth so early was not to see Panamax tankers fill-up, but rather to take a peek at the Ineos Insight; a ship carrying ethane sourced from the Marcellus shale stateside to British waters. Lo and behold she surfaced soon enough too (see below right).

This first consignment of US shale gas to the UK has given yours truly plenty of talking points for better parts of a fortnight. So here’s a take on its geopolitical significance for IBTimes UK, and a chat with Ineos director Tom Pickering. And well here is a spot report of the day’s event too, bagpipes, boat rides, canapes and all. 

However, if the back story is your thing, here it is as described for Forbes, and a more holistic account on this blog. 

With plenty of column inches dedicated to the event by yours truly to it, there’s little more to be done other than to pass on the links above to you and enjoy a view of oil and gas industry history in the making. That’s all from Scotland folks! It’s on to Edinburgh and then back to London. Keep reading, keep it crude!

Update 29/10/16: Furthermore, since this historic shale consignment arrived in Scotland, which has a moratorium on shale exploration, here is the Oilholic's IBTimes UK column touching on the hypocrisy of the Scottish Government’s stance on shale.

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© Gaurav Sharma 2016. Photo 1: Sunrise at Hound Point Terminal, Firth of Forth, Scotland, UK. Photo 2: Ineos Insight arrives in British Waters © Gaurav Sharma, September 2016 

Fujairah’s new VLCC jetty, oil benchmarks & more

The Oilholic finds himself roughly 3,500 miles south east of London, in Fujairah, United Arab Emirates, for a speaking engagement at the Gulf Intelligence Energy Markets Forum 2016. 

However, before proceedings began at the event, the Emirate’s administration took the occasion to launch its first Very Large Crude Carrier (VLCC) jetty, built at a cost of AED 650 million (£137m, $177m), with the construction of a second jetty already underway. In sync with the launch, VLCC Kelly, part of the Abu Dhabi National Oil Company fleet, moored at the jetty (see above left).

The move, a part of Fujairah’s drive to catch-up with Singapore as a major oil storage hub on the so-called South-South energy shipping corridor, was accompanied by global price aggregator Platts announcing it would publish independent, outright price assessments for a range of oil products for the Middle East market on a FOB [Free-On-Board] Fujairah basis starting on 3 October, 2016.

The Port, for its part, will also publish weekly inventory data to improve transparency. With the likes of Vitol and Gulf Petrochem bolstering their presence in Fujairah, private tank storage capacity is tipped to exceed 14 million cubic metres by 2020, from an expected 9 million cubic metres by the end of 2016. That’s definitely something to mull over in terms of the global oil storage stakes, considering the fact that less than two decades ago all people saw when it came to Fujairah was a bunkering hub.

The events preceding provided the perfect setting and plenty of talking points for the EMF itself, which is growing bigger with each passing year; a testament to the Gulf Intelligence team. Yours truly, moderated two panels on key subjects – including the crucial need for Middle Eastern benchmarks and strategies for securing oil and gas sector finance amid oversupply.

Of course in the current climate, market discourse would not be complete without touching on the direction of the oil price. Readers of this blog are familiar with the Oilholic’s belief that the oil price is likely to be stuck in the $40-50 per barrel range, and would be no higher than that come the end of the year.

Given the current set of circumstances, we could in fact be stuck either side of $50 for much of 2017; a point one made forcefully at a lively EMF debate. 

Constantly lurking in background is possible cooperation between OPEC and Russia over the issue of freezing and/or cutting oil production. According to Iraq's governor to OPEC Falah Alamri, a featured speaker at the EMF, circumstances were right for oil producers to seal an output freeze deal.

"There was no deal in earlier attempts [in February and April in Doha] because the circumstances weren't right for producers to strike a deal. This time things are different because circumstances are little bit better and would help in reaching a deal," he told the audience. 

However, it’s not reaching a deal that would be the problem. The real problem will arise when the powers that be sit down and try to work out how to implement the deal! Overall, some lively conversations were held about the market direction with a broad spectrum of views. It was great being back here, but that’s all from the UAE folks! Keep reading, keep it crude! 

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© Gaurav Sharma 2016. Photo 1: VLCC Kelly moored at the Port of Fujairah, UAE. © Gaurav Sharma, September 2016. Photo 2: Gaurav Sharma (left) with Matt Stanley, Fuel Oil Broker at Freight Investor Services at the Energy Markets Forum 2016 © Gulf Intelligence.

Shale gale blows from Appalachian fields to Grangemouth refinery

The Oilholic has bid farewell to the Big Apple, and finds himself visiting a shale gas drilling site in Switzerland Township, Eastern Ohio, via Pittsburgh, where there is something rather unique going on from a European perspective. 

It seems Ineos, the very Alpine and European Switzerland-headquartered petrochemicals firm, and Consol Energy (which owns several Marcellus hale drilling sites), have come together to dispatch shale gas from the US of A to the old continent.

Given serial British industrialist and founder of Ineos Jim Ratcliffe is involved in the enterprise – there are no half measures.

The company has commissioned eight-dragon class ships, with an investment of $2bn (£1.54bn) towards shipping more than 800,000 tonnes a year of ethane from Pennsylvania to Grangemouth (UK) and Rafnes (Norway). 

Each of the ships is capable of carrying over 27,500 cubic meters of gas sourced from the Marcellus shale. Norway has already received its first consignment with the UK tipped to receive its first one on September 27th. 

Ratcliffe’s petrochemicals business needs steady, reliable feedstock and exporters such as Consol, need buyers offering better proceeds than currently on offer stateside. So natural gas from Ohio and Pennsylvania is finding its way via a physical pipeline to Marcus Hook Terminal in Philadelphia, from where it gets dispatched via a virtual pipeline of these eight ships constantly moving the gas to Europe, providing Ineos with gas for the foreseeable future.

While implications for Europe are huge, what it means for US exporters is no less significant. Take Consol itself, a company moving away from its coal mining heritage dating back over 150 years, to natural gas exploration and production. 

It has one of the largest acreage in the Appalachian, and is slowly divesting coal assets, delving deeper into gas exploration. In more ways than one, Pennsylvania itself appears to be going through an economic renaissance along with much of the Rustbelt courtesy of shale gas exploration. 

Moving on from Eastern Ohio, and before hopping on the flight back home, the good folks at Consol took also yours truly to an onstream shale gas extraction facility actually on Pittsburgh airport land (see above right). Process refinements, extraction techniques and automation needed to drill such wells is also moving up in leaps and bounds. Compared to the Oilholic’s last visit to a shale gas extraction facility in 2013, drilling times have halved.

Automation also enables drilling to continue 24 hours a day, seven days a week with fewer personnel. Of course, the basics remain the same – i.e. drillers often drill vertically down 8,000 to 10,000 feet before horizontal drilling commences, followed by fracking.

As for the controversy that almost inevitably accompanies fracking, Tim Dugan, chief operating officer of Consol, says a well planned and thought out fracking process “does not cause earthquakes” with bulk of what's in the fracking fluid being water and rest of the materials fully revealed.

Dugan also says seismic studies have improved in step with the shale gas industry, helping drillers avoid faultlines that could potentially cause tremors.

Ineos is hoping to relay Dugan’s message, and the economic transformation shale has brought to the rustbelt, back to the UK.

Not only is Ineos instrumental in exporting US shale gas, it also holds 30 shale exploration licences in UK that it hopes will one day revive the British oil and gas industry. There's much promise, but its early days yet. That’s all from the USA for the moment folks, its been a memorable visit to another shale extraction site; one's first outside of Texas.

However, just before one takes your leave, a special shout out to Mike Fritz of Consol Energy, who accompanied this blogger over two days with various stopovers from Eastern Ohio to Pennsylvania, enduring traffic jams, pesky questions, site visits and information requests – all of which were met with a friendly smile. Keep reading, keep it crude! Next stop London Heathrow.

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© Gaurav Sharma 2016. Photo 1: Consol Energy's shale gas drilling site in Switzerland Township, Ohio, USA. Photo 2: Consol Energy's shale pad on Pittsburgh Airport Land, Pennsylvania. Photo 3: The Oilholic at a Shale drilling site, Ohio, USA © Mark Simpson, September 2016