< Previous10 NEWS UPDATE oilandgasmiddleeast.com APRIL 2020 #TRENDING The top stories from our website and its associated social media channels, where the latest upstream news appears first FACEBOOKTWITTERLINKEDIN Kuwait and Iraq lower their oil prices, following KSA lead Iraq and Kuwait have decided to cut prices for April crude sales, following Saudi Arabia’s lead following unsuc- cessful OPEC+ meetings. ADNOC could increase supply to over 4 mn barrels per day in April ADNOC Group CEO Dr. Sultan Al Jaber noted that the company would accelerate its 5 million barrel per day capacity target. Business continuity guidelines for UAE firms during coronavirus The National Emergency Crisis and Disaster Management Authority pub- lished business continuity readiness guidelines during coronavirus. How PDO plans to transform its business Demo: What is prescriptive maintenance? Saudi Aramco releases 2019 results Aramco reported $88.2 bn net in- come for 2019, down from $111.1 bn in 2018. It attributed the decrease to lower crude oil prices and produc- tion, as well as declining refining and chemical margins. Oil & Gas Middle East Oil price war unlikely to have quick end Following the news that Saudi Arabia is responding to Russia’s refusal to a new oil production cut agreement by cutting oil prices and boosting supply, GlobalData said it was a risky strategy that will take months to play out. TechnipFMC puts split on hold TechnipFMC is pausing plans to split in two because of the coronavirus outbreak. TechnipFMC planned to separate its engineering arm from its upstream oil services business in the first half of 2020. YOUTUBE CONNECT WITH US @OilandGas_ME Oil & Gas Middle East Oil & Gas Middle East OILANDGASMIDDLEEAST.COM YOUTUBEExperience the Progress. The Safe Alternative: Liebherr Rough Terrain Cranes LRT 1090-2.1: 47 m / 154 ft full power boom LRT 1100-2.1: 50 m / 164 ft pinned boom Safe & Strong High lifting capacities with a maximum of safety due to VarioBase® Globally uniform load charts conform to ANSI, EN and further standards Safe access points and flat deck Comfortable Simple and easy to operate Operator friendly, extra wide and tiltable cabin Sales and service directly from the manufacturer Liebherr-Werk Ehingen GmbH P.O. Box 1361 89582 Ehingen/Do., Germany Phone: +49 7391 502 0 E-mail: info.lwe@liebherr.com www.facebook.com/LiebherrConstruction www.liebherr.comNEWS ANALYSIS 12 oilandgasmiddleeast.com APRIL 2020 KSA SETS STAGE FOR HIGH STAKE MARKET SHARE BATTLE since 2015 has ranged from 61% to a max of 78%. The reliance on oil exports and the resultant income is signifi cant for Saudi and Russia. Following Russia’s decision to not participate in further supply cuts, KSA has announced to increase their production. With the ensuing battle for opening up the cap on production, other key OPEC producers who have been limited by the quotas and compliance over the past three years are also likely to increase production and cut prices in a bid to maintain market share. Besides Saudi Arabia - Iraq, UAE and Kuwait are the three key exporters from the Middle East who have spare capacity and the potential to ramp up production when the supply cut agreement ends in March. Of these three countries, Iraq has the least spare capacity and has been prone to internal confl icts which reduces the reliability of spare capacity, while Kuwait and the UAE can be expected to ramp up production with a high degree of confi dence. It may be noted that Kuwait and Saudi Arabia have also restarted production from the Neutral Zone area in February which is expected to have the potential to reach 500 kbpd by the end of this year and could cater to refi neries that have specifi c demand for heavy sour crude oil. Refi nitiv Oil Research has analysed the potential increase in exports that could be added to the market based on three scenarios – (i) Low Case: Lowest exports to production ratio since 2015; (ii) Base Case: Exports to production ratio since 2019; (iii) High Case: Highest exports to production ratio since 2015. Libya, Iran and Venezuela were exempted from the earlier supply cuts on account of struggling production and exports, sanctions and internal strife. While Iran and Venezuela are under sanctions, Refi nitiv Oil Research does not foresee an immediate reversal on these decisions and thereby little or no possibility of a ramp in exports from these countries. Libya on the other hand has seen exports dropping in February, largely on account its key export terminals being blocked by rebel forces. The exports from the country have fallen by nearly 700,000 bpd from January levels. This is a potential volume that can be brought back to the market should the disruptions end. With demand uncertain considering the economic impact of the coronavirus, any signifi cant increase in supply would mean producers have to compete amongst each other to retain/increase market share. This has historically led to price cuts and the fi rst semblance of price cuts returning to the market was witnessed over the weekend when Saudi Arabia cut the Offi cial Selling Prices for April sales of crude oil to all key demand markets in the range of $5-8/ bbl. This has led to reported interest from a few Asian buyers who are looking at the possibility of increasing sourcing of crude oil from the region as prices are set to fall. Russia, with pipeline access to China and USA with the advantage of trade deal negotiations have a competitive advantage for supply into the key Chinese market and hence Middle Eastern producers need to be extremely competitive on their pricing while also focusing on other key Asian consumers. Other regional producers are expected to follow suit on their pricing and target market. Benchmark crude prices went into a tailspin following OPEC and its allies including Russia failing to agree on extending and deepening the output cut. Oil prices closed on Friday with Brent down by 10.4% and WTI down by 7.8% w-o-w. As of writing, Brent crude was at $33.93/MT, down by 25%, the largest single day drop since the Gulf War in 1991, while WTI was down by 26.8% at $30.22/MT. On market opening, prices dropped to an intraday low of $31.29/MT for Brent and $27.37/MT for WTI. Saudi Arabia, Russia and USA contribute more than 30% of global oil supply and in terms of exports while Saudi Arabia and Russia have had signifi cant control on the market, USA backed by growing shale oil production has seen a surge in exports. In 2019, USA exported on an average 24% of every barrel of oil produced. Russia on the other hand exports on an average 40%, while KSA seaborne exports typically range around 70% of production although the export ratio By: Ranjith Raja, oil research mananger for MENA, RefinitivNEWS ANALYSIS 13 oilandgasmiddleeast.com APRIL 2020 OFS COMPANIES PREPARE FOR PRICE WAR IMPACT shock by taking as much as $65 billion of the $100 billion spending reduction expected globally. The service sector that will feel the pain the most in absolute terms in 2020 is likely to be the well stimulation market, which is estimated to come down by $25 billion. Fracking and proppant companies will have a hard time securing any new work besides already contracted deals and some work related to completing drilled but uncompleted (DUC) wells. The second-most impacted segment will be other well-related work such as drilling tools, oil country tubular goods (OCTG), rigs, completion and intervention work. If prices stay low at $30 in both 2020 and 2021 due to a volume war, which Rystad Energy fi nd less likely, the biggest losers will be stimulation service and seismic companies which will see two years of annual market declines of 30% to 40% respectively. Engineering work would be limited too, as few new fi eld developments will be planned and inventories would be emptied for OCTG in an attempt to limit costs. “Unfortunately, this volume war, if it continues throughout 2020 and 2021, will lead to a massive wave of bankruptcies and consolidation in the service market, whose debt obligations are set to grow 27% into 2021. Companies with low leverage and with healthy order books from past wins in 2018 and 2019 will be able to steer through the storm,” says Martinsen. There is, however, a hope that a deep downturn could fi nally complete the much-needed consolidation in the market and create a healthier supply chain in the recovery. Finally, from the $191 billion worth of greenfi eld projects that were forecast to be sanctioned in 2020, the ones that will actually see the green light if oil prices average at $40 or less are below $100 billion, with the impact distributed across regions and resource types. The total capital and operational expenditure of exploration and production companies (E&Ps) is now likely to be cut by $100 billion in 2020 and another $150 billion in 2021 if oil prices remain on a $30 level, a Rystad Energy impact analysis revealed – a development that will heavily impact service company revenues, driving some out of the market. Russia’s decision to walk away from the suggested OPEC+ deal is sending shivers down the spine of the service industry, which had already been troubled by the new coronavirus. Aft er Saudi Arabia started to fl ood the market, oil prices were sent down to $31 per barrel of Brent and are currently trading at $35 per barrel. It will likely be a volume war until the next scheduled OPEC+ meeting in June. If no agreement is reached then, E&P companies are likely to slash capital and operational budgets to make up for signifi cantly lower cash fl ows that are expected this year and the next. Overall oilfi eld service (OFS) purchases, which Rystad Energy previously expected to remain fl at year-on-year, are now forecasted to drop by 8% this year if oil averages $40 per barrel and by 15% in a $30 per barrel scenario. If OPEC+ continues the volume war and the countries do not agree on cuts in 2020, and this lasts into 2021, we could see additional 2021 spending reductions of 7% at $40 oil and 11% at $30 oil. “Now the E&Ps will turn every stone and cancel every single non-revenue-generating activity. In the US shale industry as many as 5,800 horizontal wells could be cut in 2020, which would more than halve the number of wells from the 10,900 planned for 2020,” says Audun Martinsen, Rystad Energy’s Head of Oilfi eld Service Research. This means that the shale industry would carry the biggest burden of this supply By: Rystad EnergyANALYSIS 14 oilandgasmiddleeast.com APRIL 2020 Oil prices could fall into the low $20s for the global market to rebalance, as Rystad Energy expects an increase in global supplies in the next three months. OPEC+ countries are locked and loaded to add between 1.5 million and 2.5 million barrels per day (bpd), which we estimate is their realistic short-term capability. Aft er the breakdown in OPEC+ negotiations and subsequent oil price free-fall, Saudi Arabia and the UAE have both signaled their intention to fl ood the market with additional oil production starting next month. “Without OPEC+, the global oil market has lost its regulator and now only market mechanisms can dictate the balance between supply and demand,” says Espen Erlingsen, Rystad Energy’s Head of Upstream Research. Rystad Energy estimates that global liquids demand was reduced by around 4 OIL AT $20? Rystad Energy writes that $20 oil is possible as OPEC+ could unleash an extra 2.5 million barrels per dayANALYSIS 15 oilandgasmiddleeast.com APRIL 2020 of the short-run marginal (SRM) cost for the global liquids market. For conventional fi elds, the SRM only includes transportation costs, eff ects of gross taxes and price diff erentials to Brent. All other costs, such as production cost and investments, are excluded, as Rystad Energy believes that these costs will not aff ect production levels from producing fi elds in the short term. For tight oil assets, producing wells include the same costs as conventional fi elds, while the drilled uncompleted wells (DUC wells) also include the costs for completing the wells. For not yet drilled tight oil wells, both drilling and completion costs are included. The shape of this curve is rather fl at, as the SRM for the majority of the oil fi elds is below $5 per barrel. In fact, around 92 million bpd of production has an SRM below $5 per barrel. Total production with an SRM cost above $15 per barrel is around 4 million bpd. Rystad Energy estimates that the total demand for liquids will be around 100 million bpd in June 2020, assuming no coronavirus impact. The cost of supply curve moves to the right if OPEC+ increases production. The equilibrium price moves from around $25 per barrel (no additional OPEC+ supply) to $19 per barrel in the modest 1.5 million bpd increase scenario and $14 per barrel in the large 2 million bpd increase scenario. If demand weakens by 2 million bpd in June (total demand of 98 million bpd), the equilibrium oil price moves from around $19 per barrel to around $11 per barrel in the modest OPEC+ increase scenario. If demand weakens by 4 million bpd in June (total demand of 96 million bpd), the equilibrium oil price moves down to around $9 per barrel in the modest OPEC+ increase scenario. million bpd in February, primarily driven by the coronavirus. Over the next months, demand might be weakened by between 2 million to 4 million bpd due to the virus. The cost of supply curves can be a good barometer to gauge how the market will react to various scenarios, says Erlingsen. Rystad Energy has updated its estimates 16 FACE TO FACE oilandgasmiddleeast.com APRIL 2020 Tell me about the gas discovery. This is a wildcat exploration well and it was successful, which is a good thing considering that the rate of success of wildcats is somewhere in the range of 5 to 20 percent, so we are happy we made a discovery on our first attempt. Some of it might be luck, but I think a lot of it was due to the extensive pre-work to choose the location of the well and the seismic work and also the work of the drilling team to overcome all the technical obstacles that they have met during the drilling of the well. At the end of the day, it was a discovery based on the zone that we have encountered, and the gas rates that we have seen during the test. will be able to start production from this well. Once it is tied into the plants, we can start producing. What are the next steps with SNOC’s wider exploration efforts? We are reinterpreting the seismic data based on what we have learned from this well, and the vertical seismic shocks that we did in the well to recalibrate the seismic data in the area. Based on this reinterpretation, we will choose where the next well in Mahani will be, to delineate the reservoir. Of course, in order to delineate it we expect that we will need more than one extra well. But you work one well at a time, then you do Sharjah strikes gas Sharjah National Oil Company CEO Hatem El Mosa discusses the company’s first gas discovery in more than three decades, its next steps, and how low oil prices could impact Sharjah. INTERVIEW We do not really know what the reserves are at this moment. The only way you can tell what the reserves are with accuracy is after you have produced for a while and then conduct pressure testing after some production to determine how much the pressure was impacted to estimate the reserves, so it takes a significant amount of time before you can get to that point. Until you get to that point, you are only counting on this well and the seismic reinterpretation of the area, and so far they look positive. For the next steps, of course, we are going to connect the well to the plants, and the plan is to complete this work by the end of this year. And hopefully we 17 FACE TO FACE oilandgasmiddleeast.com APRIL 2020 further reinterpretation, choose another location and so on and so forth. And at the same time, we will be producing Mahani-1, so that after some period of production, that would give us an indication of what the potential reserves could be in the reservoir. In terms of drilling new wells, we are still at the drawing board, but we expect that a minimum of two wells will be drilled next year; one in Mahani discovery and an exploration well to be drilled by ENI in block A, that would be again a wildcat exploration and hopefully they could also have a discovery. ENI is the operator of area A, we are the operator of area B, where the discovery has happened. That is the minimum that we would expect next year, and I expect following that, and depending on the success of the drilling next year, the following year hopefully would even have more activity than that. In addition to that, Sharjah, SNOC, and the SPC (Sharjah Petroleum Council) are planning to launch future bids rounds in other areas in Sharjah, which at the moment are at the drawing board, but we expect that you will hear more about them within the next year or so. The timing to start, I would say it is within the next six to 24 months. How did you overcome complex geology to make this discovery? Whatever we have said about the complexity of the geology in the northern emirates, this project proved that it is even worse. If I were to summarize the main factor for the success of this well, it was perseverance. The number of difficulties we encountered in drilling this well because of the geology was unprecedented. I have had some people say ‘I would have quit a lot earlier than that’, just because of the number of difficulties we encountered. But we persevered. We kept re- evaluating every step of the way. What is the next step? How we can overcome the problems during the drilling until we reach the payload? We could see the light at the end of the tunnel, but it was a very difficult tunnel. We shot the seismic at least two years before the signing of the concession agreement with the ENI. At that time, SNOC decided to go on its own expense, with the blessing of the Sharjah government, to conduct the seismic, which is not common in our region. Typically, national oil companies depend on the [international oil companies] to do this kind of work. But we decided to do it ourselves at our expense. It was a significant amount of money, because we knew that by doing so, we significantly enhanced the possibility of exploration success and the possibility of a big draw success and definitely paid off in both aspects. How do you expect this discovery to impact Sharjah? This is not a mega reservoir for sure. For Sharjah, the immediate impact would be a very significant increase in our own current production, only from this well, and hopefully that the delineation of the reservoir and the drilling of further wells will significantly increase production above that amount. That is for SNOC. For Sharjah, this will contribute to filling gas demand, but it would not be the only supplier of gas to Sharjah. Sharjah will continue to depend on a basket of options for gas, many of which are already available, and some of them we are introducing as SNOC to the picture. Where will SNOC send gas supply from this discovery? The main customer for the gas we produce from this well will be SEWA. However, SNOC is targeting the full industrial sector of Sharjah and it will also be targeting the industrial sector in the northern emirates at large. Historically, in the past 15 years or so, there has been a shortage of availability of gas in Sharjah and the northern emirates in general. Even when you wanted gas it was not available, regardless of the price. Now the situation is different, now gas is available and we are preaching basically to the industrial sector that if you have demand, we will meet it, and we will commit to meet it, uninterrupted, according to the demand, based on the agreement. We are trying to basically bring the industrial sector back to understand that gas is available, abundant, and at a reasonable price. The industrial sector generally needs gas either for heating, like in furnaces and such, for example, the ceramics industry or the cement industry. In certain industrial places where power is not readily available, they use it also for power generation. In most cases, they use diesel or coal to meet demand. Now we are telling this sector that gas is available and it is competitive compared to other sources that they are already using. We are also open to any other opportunities with any other customers with gas demand, and we can “WE KEPT RE-EVALUATING EVERY STEP OF THE WAY… WE COULD SEE THE LIGHT AT THE END OF THE TUNNEL, BUT IT WAS A VERY DIFFICULT TUNNEL.”18 FACE TO FACE oilandgasmiddleeast.com APRIL 2020 meet with our supply. We are, of course, encouraging new industries to come to us, which have been discouraged in the past because they have needed energy that is not available. What we believe is that not only gas will be available and abundant, but we believe that power also will be available and abundant from SEWA, which also was a little bit more difficult in the past due to the same restrictions and issues in terms of the availability of gas. Will the coronavirus outbreak, low oil prices, and the price war impact SNOC? The instability is causing chaos in the market, and it is not good for anybody, not for the consumers, not the suppliers, not the economy, not the world in general. This instability is just simply that; instability. However, the impact of this instability on Sharjah is going to be very limited, if at all, and possibly even positive, because Sharjah is a net energy importer, so lower prices actually benefit Sharjah. But at the same time, SNOC is both an importer and an exporter, so one sector is benefiting, one sector is hurting. Overall, the impact to Sharjah is going to be minimal. We export condensate, which is like oil. And that is all going to the market, and the lower oil prices are going to hit this export very badly. The imports of gas are from Dolphin and other sources. And that is going to have a lower price because it is linked to oil. Our imports are a much bigger share than the export of condensate. At the same time, we also have an LPG market, we sell all of our LPG to the local market. And LPG generally follows oil prices, so with the lower oil prices, our LPG prices will also drop and we are going to lose revenue from the LPG as SNOC. But overall, it still remains profitable. All of our fields are conventional, so the cost of production is relatively low compared to unconventional. Our operation remains profitable. But yes, some sectors under SNOC will hurt, and some will benefit. This instability will have to be short lived because the market cannot tolerate it for a long period of time. Something will give, and prices are going to go back up. Shale oil in the US will give very badly because of this. Without shale oil in the US, the rest of the producers cannot meet the demands of the world. So prices are going to climb back up, shale oil is going to come back up, and things will go back to above $50 per barrel within a matter of months, no matter what coronavirus does or the big oil fight that is happening. This is not sustainable for the long term. I would say the longest that this instability could ever last would be six months with oil prices below $50 per barrel. From the fundamental point of view, prices below $50 are not sustainable, and above $70 are not sustainable, so it is going to go back up between $50 and $70 within a reasonable period of time. Until then, the whole world will be in chaos with energy. “THIS [INSTABILITY] IS NOT SUSTAINABLE FOR THE LONG TERM. I WOULD SAY THE LONGEST IT COULD EVER LAST WOULD BE SIX MONTHS BE- LOW $50 PER BARREL… UNTIL THEN, THE WHOLE WORLD WILL BE IN CHAOS WITH ENERGY.”BOOK YOUR TABLES TODAY Tuesday 30th June 2020 Visit www.oilandgasmiddleeast.com/energyawards for more information or contact one of our team today FOR SPONSORSHIP ENQUIRIES Mark Grennell Group Sales Manager Tel +971 4 444 3202 Email: mark.grennell@itp.com Pankaj Sharma Senior Sales Manager Tel: +971 4 444 510 Email: Pankaj.sharma@itp.com FOR NOMINATION ENQUIRIES Carla Sertin Editor, Oil and Gas Middle East Tel: +971 4 444 3265 Email: carla.sertin@itp.com Martin Menachery Editor, Refining & Petrochemicals Tel: +971 4 444 3192 Email: martin.menachery@itp.com FOR EVENT ENQUIRIES Teri Dunstan Events Manager Tel: +971 4 444 3227 E-mail: teri.dunstan@itp.com Anthony Chandran Table Sales Executive Tel: +971 4 444 3685 E-mail: anthony.chandran@itp.com #MEEner gyAwar ds Next >