Fitch: Long Production Cut Biggest MENA Threat

By OGJ editors, OGJ, Mar 3, 2011
Long interruption of production represents the largest threat from political turmoil to the financial stability of oil and gas companies with operations in the Middle East and North Africa (MENA) but remains unlikely, an international credit-reporting agency says.

A secondary risk, nationalization of assets by successor regimes in countries now experiencing unrest, is a “remote scenario,” although contract renegotiations by successor regimes remains possible, according to Fitch Ratings, New York and London.

A recent Fitch report covering North American companies with operations in the MENA region said credit pressures from unrest in Egypt, Libya, and other countries of concern are manageable.

Credit ratings are most sensitive to “widespread and long-lasting production” upsets, which Fitch doesn’t expect “due to the importance of oil revenues to the region’s economies.”

Most North American producers in the MENA region are large, integrated companies for which production in countries experiencing unrest is small in relation to total. Oil price increases mitigate the elevated risks of production losses and contract renegotiation.

Company exposures

Apache Corp. has the highest exposure among North American producers to any single country experiencing turmoil, Fitch said. Apache’s 163,300 boe/d of output in Egypt is 24% of Fitch’s assessment of the company’s recent total production.

Exposure levels in Libya include Marathon, 12% of total production; Suncor Energy Inc., 8%; Hess Corp., 5%; ConocoPhillips, 3%, and Occidental Petroleum Corp., 1%.

Fitch called Algeria “the other North African country that could present the largest concerns for North American-based upstream companies.” There, sizable exposure levels include Anadarko Petroleum Corp., 7% of total production, and Hess, 3%. ConocoPhillips produced 14,000 boe/d in Algeria in the third quarter last year, less than 1% of total production, according to Fitch estimates.

North American companies with production in restive Yemen include Nexen Inc., 11% of estimated total production, and Oxy, 6%.

Among European oil and gas companies tracked by Fitch, four have production in Libya or Egypt, the firm said in a separate report.

Eni, OMV, and Repsol have production exposure of 9-14% in Libya, “with Eni as the most exposed,” Fitch said. About one fourth of BG Energy Holdings Ltd.’s total oil and gas output is in Egypt.

“There could be a more pronounced impact on European oil and gas companies’ operations and financials if the political unrest spreads across Africa and/or the Middle East,” Fitch said, adding it “does not currently view this scenario as very likely.” [Full story]

Saudi Arabia Pledges To Fill Oil Supply Gap amid Libyan Unrest

By Takeo Kumagai, Platts blog - The Barrel, Feb 24, 2011
Seeing is believing. That was the first that thought came to my mind when I visited the onshore Khurais oil field in Saudi Arabia's vast desert this week [please see map of oil and gas fields in Saudi Arabia, below -- D.R.].

Located some 150 km (100 miles) [sic] southeast of the capital Riyadh, the Khurais oil field began pumping 1.2 million b/d in 2009 [sic; Khurais reached its maximum sustainable capacity in 2010 -- D.R.], the largest single increment from any single oilfield in the kingdom's history.

As an energy correspondent visiting from Japan, which imports 1.1 million b/d of crude from Saudi Arabia, seeing a production facility that can alone meet 30% of my country's total imports is mind boggling. The Khurais field's production capacity alone is higher than the output capacities of several oil producing countries in Asia and elsewhere.

Saudi Aramco achieved production of 1.2 million b/d at Khurais a month after it was commissioned in May 2009 [sic] and was one of several mega projects designed to take the company's total production capacity to its current 12 million b/d.

The Khurais oil field currently produces around 1 million b/d of Arabian Light crude oil with a gravity of around 32 API, reflecting current demand patterns for lighter grades, Saudi Aramco officials said.

The Khurais field can sustain production at current levels for 30 years, they added.

Output capacity from Khurais could be taken up to between 1.4 million to 1.5 million b/d, should the need arise, by adding another production line to its existing 14 lines, they said, adding that water processing units and other infrastructure can accommodate this increase.

Saudi Arabia, which has total production capacity of 12.5 million b/d if output from the partitioned neutral zone with Kuwait is included, has some 4 million b/d of spare production capacity. Currently [i.e., Jan 2011 data -- please see my post here -- D.R.], Saudi Arabia's crude oil output is 8.4 million b/d. [Also, please see here -- D.R.]

The volume of spare capacity held by Saudi Arabia and a few other members of OPEC was the focus of discussions at an extraordinary meeting of the International Energy Forum held in Riyadh on February 22 amid fears that unrest in Libya might disrupt supply.

Saudi Arabian Oil Minister Ali Naimi told reporters after the oil producers and consumers forum ended that he did not expect the price spike of 2008 to be repeated and that recent market volatility was unlikely to last because current oil markets were well supplied, spare capacity was plentiful and there was no shortage of supply.

Naimi said that, in the event of a supply disruption, Saudi Arabia and OPEC would be ready to step in and use their spare capacity to balance markets. He put global spare capacity at 5 million to 6 million b/d.

"Let me emphasize that this is not 2008...it is an extremely different situation from 2008," Naimi said of the year that saw oil prices soar to a record above $147/barrel, some $38/barrel shy of the current value of Brent crude oil futures.

OPEC insisted at the time that there was no shortage of oil and that the rocketing prices were due less to high demand than to excessive speculative activity.

But it is Saudi Arabia's ability to ramp up production quickly to meet any supply disruption that holds the key to oil market stability [i.e., Saudi Arabia's role as world's unofficial swing producer -- D.R.] and this was reflected in remarks by several officials representing the interests of the world's major oil consuming nations.

The Executive Director of the consumer watchdog the International Energy Agency, Nobuo Tanaka, told Platts in an interview in Riyadh that he had been assured by both the OPEC secretary general and Naimi that any supply gap would be filled.

"There is ample spare capacity. We should not panic," Tanaka said, adding that OPEC members, particularly kingpin Saudi Arabia, were producing "more than they say."

With 260 billion barrels of crude oil reserves lying beneath the sands of this desert kingdom [please see figures here -- D.R.], Khurais is a vital component of the global oil supply chain. [Full story]
                [Click on map to enlarge]

                                                    Source: Saudi Aramco via EIA, here.

World Watch -- Comment & Interpretation on Today's News [Libyan Crisis -- Saudi Oil: European Refiners May Prefer Swap Arrangements]

by David Knapp, New York, EI
Saudi Arabia is working hard -- in its typically understated fashion -- to soothe market concerns about possible oil shortages. Last week, the Saudis took a group into the control room of the newly refurbished Khurais field northwest of the giant Ghawar deposit to suggest it could provide higher capacity and higher production than was commonly thought [for information on Khurais, please see my post here -- D.R.]. Riyadh has repeatedly said the kingdom will meet any demand for extra barrels from refiners to replace Libyan outages. Interestingly, however, there does not currently seem to be much demand for Saudi barrels from European refiners who are expected to bear the brunt of the Libyan shortfall. Quality is an issue: spare Saudi Arab "Light" is more of a medium, sour crude compared with Libya's predominantly light, sweet menu. Swaps for Libya-similar West African grades have been suggested, with Saudi barrels instead going to Asian customers. In general, however, the current lack of European interest likely reflects ample stock levels.

OPEC's Top Crude Oil Producers, 2010-Jan. 2011

by Aaron and David Rachovich

OPEC Crude Oil Production* 2010-Jan.2011 (thousand barrels per day)

Rank	Country	Full Year 2010	Nov 2010	Dec 2010	Jan 2011
1.	Saudi Arabia	8,208	8,266	8,361	8,433
2.	Iran	3,708	3,678	3,679	3,658
3.	Iraq	2,397	2,405	2,448	2,706
4.	Kuwait	2,307	2,314	2,336	2,354
5.	UAE	2,305	2,268	2,340	2,375
6.	Venezuela	2,281	2,228	2,243	2,256
7.	Nigeria	2,064	2,143	2,204	2,172
8.	Angola	1,787	1,665	1,576	1,618
9.	Libya	1,560	1,568	1,572	1,574
10.	Algeria	1,270	1,268	1,270	1,276
11.	Qatar	804	806	816	813
12.	Ecuador	473	472	476	481
Total OPEC**		29,163	29,081	29,320	29,717

*Based on secondary sources.

**Totals may not add up due to independent rounding.

Source: OPEC, Monthly Oil Market Report, February 2011, Table 5.4, here

(According to the U.S. Energy Information Administration, Saudi Arabia produced on average 8.4 million barrels per day of crude oil, including about one-half of the production in the Kuwait-Saudi Arabia Neutral Zone, in 2010---please see here and here. Also, please see our post "World's Top 20 Crude Oil Producers, Nov. 2010," here. Update: please see my post "OPEC's Top Crude Oil Producers, 2011-Jan. 2012." -- D.R.)

BOEMRE Approves First Deepwater Drilling Permit since Accident

by Nick Snow, OGJ, Feb 28, 2011
The US Bureau of Ocean Energy Management, Regulation, and Enforcement [the former Minerals Management Service] approved the first deepwater drilling permit on Feb. 28 since the Macondo well accident and crude oil spill. BOEMRE said Noble Energy Inc.’s application for a permit to bypass was for Well No. 2 in Mississippi Canyon Block 519 about 70 miles southeast of Venice, La.

The permit represents a significant milestone for both the US Department of the Interior agency and the oil and gas industry since Interior Sec. Ken Salazar placed a moratorium on new deepwater drilling following the [BP's Macondo] well blowout and explosion which took 11 lives [please see my post here -- D.R.], BOEMRE Director Michael R. Bromwich said. [The moratorium was subsequently lifted in October 2010, but the department/agency has yet to approve any new deepwater exploration drilling permits. -- D.R.]

“This permit was issued for one simple reason: The operator successfully demonstrated that it can drill its deepwater well safely and that it is capable of containing a subsea blowout if it were to occur,” Bromwich told reporters during a teleconference. “We expect further deepwater permits to be approved in coming weeks and months based on the same process that led to the approval of this permit.”

In Houston, Noble Energy said it received permission to resume drilling its Santiago prospect in the deepwater Gulf of Mexico, which it described as a middle Miocene amplitude prospect in 6,500 ft of water where the independent producer is operator and holds a 23.25% working interest. The well was drilled to a 13,585 ft depth when operations were suspended on June 12, and Noble Energy said it expects to resume work in late March to a 19,000 ft targeted drilling depth, with results anticipated by the end of May.

David L. Stover, the company’s chief executive, said Noble Energy worked over several months with other operators and service providers to make deepwater drilling operations safer, including implementing third-party certification of well designs and blowout preventer testing.

Coordinated with BOEMRE

“Our partnership with others in the Helix Well Containment Group has increased the deepwater Gulf subsea control and containment capabilities,” he said. “The industry has improved its ability to respond to surface spills as well. Our teams have done an outstanding job of coordinating with the BOEMRE on these matters…. Noble Energy is proud to help lead the industry back to drilling in the deepwater gulf.”

Bromwich emphasized that no politics were involved in approving Noble Energy’s application, which he said had been working its way toward approval for several weeks. He noted that Helix Group has said that its system works to depths of 5,600 ft, but added that Noble Energy complemented that with additions which BOEMRE determined would effectively contain a blowout from 6,500 ft. The agency also has held several meetings with the Marine Well Containment Co., the group formed by four multinational oil companies operating in the gulf, and will approve that system if a producer demonstrates that it will work, he said.

“We are taking these applications to drill as they come in. Right now, a very small number are pending,” Bromwich said. “I expect industry has been waiting for a signal that deepwater drilling would be allowed to resume, and this could be the signal. I have no way of knowing how long it will take to approve the next one. It involves careful analysis of each application. Given the rigorous safety requirements, the public can be confident that the approved wells will be safe.”

Oil and gas industry trade associations welcomed the news. “The actual issuance of a permit for new deepwater drilling is long awaited and an important step forward in the wise development of energy off our shores,” said National Ocean Industries Association Pres. Randall B. Luthi. “With all the world-complicating factors, including rising oil prices, political turmoil in the Middle East, and the loss of jobs in the Gulf of Mexico, this decision offers hope that the United States is getting back in the energy and jobs market.”

He said taking DOI at its word that approval of Noble Energy’s application is not simply a token gesture, the action “sends a calming signal to operators, producers and service companies that the long drought is just about over,” adding, “It is also a compliment to Director Bromwich and a testament to the efforts of many within industry that the containment and safety issues can be resolved when industry and BOEMRE work together.” [Full story]

(For information on Noble Energy, in general, and its operations offshore Israel, specifically, please see my post here. Also, please read my post "National Commission Releases Final Report on Deepwater Horizon Oil Spill and the Future of Offshore Drilling," here. -- D.R.)

Asian LNG Outlook: The Evolution of a New Asian LNG Market

By Hong Chou Hui, Platts, Singapore, Feb 23, 2011
Asia's LNG market is set to come of age in 2011 as the volatility of the last few years has shaken up the region and increased players' appetite for a more sophisticated approach.

Demand in Asia bounced back in 2010 on the back of extreme cold and hot temperatures coupled with economic recovery across the region, after the global financial crisis at the end of 2008 curtailed LNG cargoes purchased in 2009.

Requirements for 2011 are expected to remain robust among traditional buyers, while a series of new players are also entering the fray.

The region continues to be the dominant force in LNG. Growing shale gas production in the US has reduced the need for imports there to virtually nil.

Europe's gas demand remains largely focused on pipeline imports, while the growth in LNG imports into the northwest of the continent has been offset by a decline in imports into the southwest.

While the final figures for 2010 have yet to be collated, the previous year saw Asia take 62.8% [please see table below -- D.R.], or 1.09 billion barrels of oil equivalent of the world's total imported LNG, according to data from independent LNG consultant Andy Flower. And the initial data for last year give every indication of repeating that pattern.

Japan's LNG imports in 2010 were up 8.6% year on year at 70.01 million mt, reaching a new record for annual volumes and surpassing the pre-financial crisis level seen in 2008 of 69.26 million mt, customs data from the Ministry of Finance show.

The figure looks all the more impressive when compared with 2009's dramatic drop in imports to 64.49 million mt. [Please see table below -- D.R.]

Similarly, South Korea's 2010 LNG imports were up 26.26% year on year at 32.6 million mt, from 25.82 million mt in 2009, according to the country's customs data compiled by Platts over the year.

Across the board, all [sic, please see bar chart below -- D.R.] Asian buyers imported more LNG in 2010 compared to the previous year.
             [Click on bar chart to enlarge]

Meanwhile, though the traditional buyers in Japan and South Korea, which currently have almost 180 million mt/year and 40 million mt/year of LNG import capacity respectively, will likely continue to remain the dominant force in the market, Asia's largest countries are beginning to make their presence felt.

China and India are building a further 20 million mt/year and 10 million mt/year of regasification capacity respectively.

Two Chinese LNG terminals, both being built by state-owned PetroChina, will startup this year -- the 3.5 million mt/year Rudong facility in April and the 3 million mt/year Dalian terminal in June -- bringing China's total import capacity to 18.8 million mt/year.

And a further three terminals are due for completion in the following few years. (See related chart: Asian terminal capacities (million mt/year)).
             [Click on bar chart to enlarge]

Meanwhile India has two terminals under construction, building on its existing import capacity of 13.6 million mt/year. And, like China, there are plans for a host of further regasification facilities in India in the years ahead.

China and India's GDPs are projected to grow by around 10% this year and in 2012 [sic, please see chart below -- D.R.], outperforming both Japan and Korea at 2% and 5% respectively over the same period, according to the IMF World Economic Outlook. Coupled with state support for gas use, there is significant potential for increased LNG imports into the two countries.
             [Click on chart to enlarge]

But despite their muscular economies and large populations, China and India have both faced constraints on their LNG imports in the last year or so, with the former's ability to bring in shipments curtailed by a small number of import terminals and limited storage facilities, while India is limited by the capacity of its downstream gas pipelines.

And any forecasts are further clouded by the potential for domestic production of unconventional gas -- coalbed methane and shale gas -- in both countries, which could limit the need for LNG purchases in the future. [Full story]

(Japan is the world's largest importer of liquefied natural gas---LNG---followed by South Korea and Spain, according to the 2008, 2009 and 2010 data. For information on Japan's, South Korea's and China's LNG imports in 2010, please see also my post "East Asian LNG Imports in 2010," including remarks, here. For major LNG exporters to Japan in 2010, please see bar chart here. Sustained oil prices over $100 a barrel, as a result of instability in the Middle East & North Africa, could also have a negative effect on economy of Asia. -- D.R.)

Gazprom Ups Italian Gas Supplies 30% Due to Libya Unrest: Source

Platts, Moscow, Feb 28, 2011
Gazprom has increased its daily Russian gas deliveries to Italy by around 30% after unrest in Libya led to the shutdown of the 11 billion cubic meter/year Greenstream pipeline [please see map below -- D.R.] last week, a source close to Gazprom said Monday.

The source told Platts it was unclear how long the gas supplies would remain at an elevated level.

Gazprom's deliveries reached 81.1 million cu m/day on Thursday, up from a daily average of 63 million-65 million cu m on weekdays and 54 million-55 million cu m at weekends, Russian news agency Interfax reported Friday, citing Italy's gas grid operator Snam Rete Gas.

Snam Rete Gas was not available for comment.

Last Tuesday Eni, Italy's main gas supplier and the parent of Snam Rete Gas, announced it had shut down Greenstream.

Greenstream, which is a joint venture between Eni and the National Oil Corporation of Libya, exported around 9.4 billion cu m of gas to Italy in 2010.

It runs from Mellitah in Libya to Gela in Sicily, Italy.

According to the European Commission, 30% of Italy's gas supplies come from Russia, with Libya typically supplying around 11%. Thirty-three percent of the country's gas imports come from Algeria and 9% from Norway.

The increase in Russian supplies to Italy is likely to be temporary, according to a research note by investment company Alfa Bank.

"There could be other positive implications for Russia, as the incident is likely to underscore the country's reputation as a reliable gas supplier and could ease concern over Russia's large share of European gas markets," the note said.

Within Europe, Libya only delivers gas to Italy and Spain [to Spain in the form of LNG -- D.R.]. Libyan gas represents 1.5% of Spanish [gas] imports. [Full story]

(The c. 520-kilometer---323-mile---Greenstream submarine pipeline came online in 2004. For information on Libya's oil and gas profile, please see my post here.)

                                                                       Source: ENI, here