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Platts oilgram news juio 21 2014 Page 9 Colombia’s Cano Limon line bombed in latest attack
1. Volume 92 / Number 141 / Monday, July 21, 2014
[OIL ]
www.platts.com
OILGRAM NEWS
Top stories
Asia Pacific
Japan’s refiners adopt new price formulas 2
Australian minister overturns
offshore visa vote 2
PNG LNG helps boost Santos output 3
China refiners lower July
crude run rate to 79% 3
KNOC to cut stake in
Iraqi Kurdistan oil block 3
Europe, Middle East & Africa
Rosneft says sanctions won’t derail strategy 4
Rosneft claims Kiev blew up Ukraine refinery 4
Slump in UK drilling activity deepens 5
Libya calls on UN to help protect oil fields 5
The Americas
Port Arthur rail terminal
to start in 2016-2017: KCS 7
Indian refineries want
more Canada crude 8
US approves seismic
testing off Atlantic Coast 8
The Column
Petrodollars 9
Colombia’s Cano Limon line
bombed in latest attack 9
Markets & Data
Iran’s oil earnings plunge
on sanctions hit 10
Libyan exports hampered by
prices, quality concerns 10
Crude futures dip ignoring
Middle East, Ukraine 11
Brazil’s gasoline price cap
hinders ethanol demand 11
EU push for US crude exports meets indifference
Washington—Despite increasing pressure from
the European Union for the US to allow unfet-
tered crude oil exports to Europe, the US has
shown no willingness to ease energy export
restrictions as part of a developing trade deal,
US and EU trade officials said last week.
On Friday, EU and US chief negotiators
said both sides discussed a number of
issues as part of a sixth round of talks on
the transatlantic trade accord, but reached no
decision on a separate energy chapter.
The two sides are discussing “all the dif-
ferent energy issues and the degree to which
they may be addressed in other parts of the
agreement, in the various services chapters,
in the goods chapter and in other chapters,
and the extent to which some may require
some special treatment [e.g. in a separate
chapter],” US chief negotiator Dan Mullaney
told reporters in Brussels.
The EU’s recent push for the change in
US crude export policy may have more to do
with gaining a competitive advantage over
Asian markets than meeting free trade com-
mitments, according to Alan Dunn, a former
senior US trade negotiator.
Current US policy restricting nearly all
crude exports is inconsistent with several
international trade commitments, primarily a
prohibition on quantitative export restraints
within the General Agreement on Tariffs and
Trade, the formative agreement of the World
Trade Organization, Dunn said.
“I’ve had talks with the senior most [EU]
trade officials and there’s not a single one of
them who imagines for a second that the US
position is consistent with WTO obligations,”
(continued on page 7)
South Stream faces new political hurdles
Russian gas plans seen surviving Ukraine turmoil
Moscow—New sanctions against Russian oil
giant Rosneft this week have raised further
concerns over the impact on long-term energy
cooperation between Russia and its Western
partners, in particular its major energy con-
sumer, Europe.
But despite relations between Russia
and the West hitting a new low and amid
few hopes that the conflict in Southeastern
Europe will be resolved in the near future,
many believe long-standing plans for a new,
$22 billion line to ship Russian gas to South-
ern Europe will ultimately prove too attractive
to European consumers.
Although the EU is set to announce more
measures against Russia by the end of the
month, Gazprom and its CEO Alexei Miller
have so far been significant absences from
lists of those sanctioned by both the EU and
US. Analysts speculate that Europe’s depen-
dence on the Russia gas giant is just too
great to risk any move which could threaten
gas deliveries.
Still fears persist that the company’s
plans to develop the 63 Bcm/year South
Stream project will not go ahead. The line is
designed to ship Russian gas via the Black
Sea to Southern Europe, which is heavily
dependent on Russian gas supplies, and
currently exposed to risks linked to possible
interruption of transit through Ukraine.
Gazprom has made some progress in
recent months, most notably luring Austria
back to the project, despite the worsening
relationship between Russia and the EU and
calls from some European politicians for the
project to be stopped.
Some analysts have said that the cri-
sis has even helped Gazprom to make the
case that the project, which would allow it to
(continued on page 6)
ANALYSIS
„„ Gazprom not sanctioned yet
„„ EU yet to grant Gazprom exemption to
Energy Package
„„ First deliveries set for late 2015
FEATURE
„„ EU wants US to drop crude export limits
„„ US unwilling to address in ongoing
trade talks
„„ Push may be about EU energy edge
on Asia
2. 2 Oilgram News / Volume 92 / Number 141 / Monday, July 21, 2014
Asia Pacific
Australian minister overturns offshore visa vote
London—Australia’s government has resorted
to a little-used legislative tool to cancel a
Senate vote changing visa terms for some
foreign offshore workers.
Assistant minister for immigration
Michaelia Cash on Thursday issued a rarely
used Legislative Instrument overturning
amendments relating to foreign offshore
workers’ visas approved by the Senate
Wednesday.
On Wednesday the opposition Labor and
Greens parties had voted in the Senate to
scrap several types of foreign worker visas
used in the country’s offshore sector.
The Maritime Union of Australia had been
lobbying for the changes, arguing that the
coalition’s offshore visa regime threatened
Australian jobs.
Cash’s measure means non Australian
staff working on fixed offshore installations
will need to hold an appropriate work visa
and foreign workers on ships will need a
maritime crew visa.
“The Legislative Instrument effectively
restores the situation that existed prior to
June 29 2014—which was in place for the
entire duration of the former Labor Govern-
ments,” Cash said in a statement.
Cash said the Senate vote, known as a
Disallowance Motion, had plunged the coun-
try’s oil and gas industry “into an avoidable
state of uncertainty.”
“Therefore we have moved swiftly to rec-
tify the state of uncertainty deliberately cre-
ated by the Disallowance Motion,” she said.
— James Bourne
Tokyo—Since April of this year three of
Japan’s big refinery groups began to adopt
new pricing systems, which alongside capacity
cuts has helped increase margins.
Although exact details of the new pric-
ing mechanisms have not been disclosed,
several sources said they now reflect, to a
larger degree than before, recent movements
in international crude benchmarks such as
Dubai, rather than being mainly indexed to
domestic oil product benchmarks as before.
The wholesale pricing systems apply to
the refiners’ weekly changes in prices of gas-
oline, kerosene, gasoil and A-fuel oil, a blend
of gasoil and fuel oil in a 90:10 ratio.
The pricing changes differ among Cosmo
Oil, Showa Shell and JX Nippon Oil & Energy,
which adopted new systems in April, May
and June, respectively, according to industry
sources and company officials.
In April, Cosmo Oil launched its own
benchmark, comprising crude and domestic
and overseas oil product prices, with an
option to include Japan’s monthly average CIF
crude import prices, sources said. The new
pricing structure replaced its previous reliance
on domestic oil products benchmarks.
In May, Showa Shell moved to a system
with a greater linkage to crude oil prices to
reflect its crude costs more accurately, from a
previous system that looked at various bench-
marks including domestic and overseas oil
products, a company official said.
JX Nippon Oil & Energy’s new president
Tsutomu Sugimori told Platts earlier this
month that its weekly changes to wholesale
oil product prices under a new system intro-
duced in June were linked to “recent crude
prices,” instead of linked to “a certain” oil
products benchmark.
The changes to the wholesale pricing
formulas are expected to help refiners secure
better margins in the domestic market, but
it is hard to predict how much the refiners’
margins will rise because different compa-
nies adopted slightly different formulas, one
source at a refinery said.
The recent pricing moves are likely to help
refiners improve their accounting of refining
margins, following similar reforms by other
Japanese refiners several years ago, industry
sources said.
“We have to accept what they [JX] are
doing [in the domestic market]. Others have to
follow to maintain their sales,” one Japanese
refiner source said, adding “There should be
no change in crude buying patterns.”
The previous pricing system “didn’t always
bring good margins, so they moved to cost-
based pricing. They get good margins with
this new method,” the source said.
First change since 2009
The changes represent the first big
adjustment in Japanese refiners’ wholesale
pricing formulas since October 2008-July
2009, when the industry introduced weekly
wholesale product pricing linked to quotes
by local pricing agencies such as RIM Intel-
ligence and oil products futures on the Tokyo
Commodity Exchange.
The latest changes were spurred by Japa-
nese refiners’ deteriorating margins in fiscal
2013-14 (April-March), industry sources said.
Stripping out inventory evaluations, JX,
Idemitsu Kosan and Cosmo Oil together report-
ed accumulated ordinary losses of around Yen
140 billion for the fiscal year ended March 31,
according to company statements.
Industry sources said changes to whole-
sale pricing mechanisms will make refiners’
weekly changes less transparent because
they will be considering more factors than just
weekly changes in benchmark crude oil prices.
In fact, most Japanese refiners raised or
held their weekly wholesale gasoline prices
from February through to mid July, even
though crude benchmarks fluctuated signifi-
cantly in that period, industry sources said.
Japan’s average retail regular gasoline
price stood at Yen 169.9/liter July 14, up Yen
0.2/liter from the previous week, marking the
12th consecutive week-on-week rise, accord-
ing to the Oil Information Center.
Given the peak summer driving season
of July-August and the recent capacity cuts,
Japanese refiners are approaching a key
moment, when will the see if they can sustain
Q2’s higher margins after current turnaround
end and about 1 million b/d refinery capacity
comes back online, industry sources said.
Margins improve
At a time when average refining margins
in the rest of Asia have sunk to their low-
est levels in four years, Japan’s refiners are
benefiting from recent capacity cuts, ongoing
maintenance turnarounds as well as pricing
formula changes.
Although official June figures are not yet
available, industry estimates suggest margins
in the month followed the upward trend seen
in April and May, signaling a profitable second
quarter for the country’s refiners.
Japan’s refining margins started showing
an improvement in April after the March 31
deadline for a government-backed round of
cutbacks which saw the domestic refining sec-
tor’s combined capacity fall 12% year on year
to 3.95 million b/d.
Scheduled turnarounds in May and June
then took out another 900,000 b/d-1.2 mil-
lion b/d capacity.
In April, Japan’s average refining mar-
gin for regular gasoline was Yen 16.9/liter
($0.17/l at current conversion), up 36% from
Yen 12.4/l a year earlier, according to the Oil
Information Center. The gasoline refining mar-
gin improved further to Yen 18.4/l in May, up
70% from Yen 10.8/l a year earlier.
“From April onwards, refining margins
have been normalized and improved from
miserable situations a year ago,” Petroleum
Association of Japan President Yasushi
Kimura said Thursday.
Kimura attributed the improved refining
margins to the mandated capacity cuts and to
Japanese refiners’ tighter control of output to
meet actual demand.
Japan’s improved refining margins stand in
stark contrast to the rest of Asia, where refin-
ers are, on average, seeing the worst margins
in four years, according to Platts data.
The Singapore cracking margin for a typical
refinery using Dubai crude, a proxy for Asian
refinery profit margins, has averaged $1.917/
barrel through the first six months of the year,
the lowest level since H1 2010, when it aver-
aged 35 cents/b. — Takeo Kumagai, with Su
Yeen Cheong, Gurdeep Singh and Christian
Schmollinger in Singapore
Japan’s refiners adopt new price formulas
Move toward international benchmarks helps boost margins
3. 3 Oilgram News / Volume 92 / Number 141 / Monday, July 21, 2014
Asia Pacific
China refiners lower July crude run rate to 79%
Singapore—China’s state-owned refineries
planned to lower run rates in July to an aver-
age of 79% capacity, slightly down from 83%
in June, Platts’ monthly survey showed Friday.
The 24 surveyed refineries plan to pro-
cess a combined 18.56 million mt of crude
in July. Last month, the 24 surveyed refiner-
ies processed a combined 19.06 million mt
of crude.
The drop in the overall run rates in July
was mainly driven by maintenance work
at two of PetroChina’s major refineries in
north China.
The average run rate at PetroChina’s
10 surveyed refineries is around 70% in
July, down from the average run rate of 84%
surveyed in June. It is also down from 80%
last July.
The 10.5 million mt/year Lanzhou refin-
ery only planned to process 100,000 mt of
crude in July, or 11% of capacity, down from
98% last month. Both crude distillation units
at the refinery were shut down in late June.
The 5 million mt/year CDU will restart from
July 23 and the 5.5 million mt/year CDU
from July 27.
Meanwhile, PetroChina’s 7.5 million mt/
year Jinzhou refinery has trimmed its average
crude runs to 41% of capacity in July from
81% in June, due to a month-long mainte-
nance at a 3 million mt/year CDU and a 1.6
million mt/year fluid catalytic cracking unit.
The average run rate at Sinopec’s surveyed
refineries was stable at 82% of capacity.
Its largest refinery, the 23.8 million mt/
year Zhenhai plant, restarted a 6 million mt/
year CDU and a 3 million mt/year FCC unit in
early July, lifting its run rates to 90% of aver-
age capacity, up from 65% in June.
But this was offset by the 5 million mt/
year Qingdao refinery, which cut crude runs to
270,000 mt in July, or 64% of capacity, down
from 73% in June.
CNOOC, meanwhile, plans to maintain
run rates at its 12.5 million mt/year Huizhou
refinery at 101%. — Staff Reports
Sydney—Australian exploration and produc-
tion company Santos produced 12.8 million
barrels of oil equivalent in the second quar-
ter of 2014, up 3% year on year, following
the startup in April of the Papua New Guinea
LNG project.
Santos holds 13.5% of the ExxonMobil-
operated PNG LNG project, which has a
capacity of 6.9 million mt/year at two
production trains. The $19 billion project
began producing well ahead of its scheduled
October startup date and had shipped seven
cargoes by the end of the quarter, Santos
said Friday.
Santos’ Q2 production compared with an
output of 12.4 million boe in the correspond-
ing period of 2013 and was 5% higher than
the 12.2 million boe pumped in the first three
months of this year.
In the first half of 2014, Santos’ output
totaled 25 million boe, up 2% from 24.5 mil-
lion boe in the corresponding period of 2013.
The company’s sales revenue was A$974
million ($910.36 million) for the second quar-
ter and A$1.89 billion for the first half of the
year, up 22% and 25% respectively compared
with 2013.
“Delivery of the PNG LNG project is an
important milestone for Santos in our journey
to becoming a major LNG supplier to Asia,”
Managing Director and CEO David Knox said.
“This project will significantly lift Santos’ LNG
production once the project reaches full out-
put, and we are already seeing the contribu-
tion it is making.”
Santos also holds a 30% operating stake
in the 7.8 million mt/year Gladstone LNG proj-
ect in eastern Australia. The coalseam gas-to-
LNG project is budgeted to cost $18.5 billion
from the final investment decision to the end
of 2015, when the second train is expected
to be ready for startup.
“GLNG continues to make good progress,
it remains on budget and we are on track
to deliver first LNG in 2015,” Knox said.
First commissioning gas is expected to be
delivered to the LNG plant on Curtis Island,
Queensland, in the fourth quarter of 2014.
“GLNG project guidance on cost and
schedule remains unchanged, but we continue
to be skeptical on the project given our cau-
tious view on coalseam gas well deliverability
and reserves,” Hong Kong-based analysts with
Bernstein Research said in a note Friday.
Santos drilled 42 coalseam gas wells in
Queensland as part of the GLNG project dur-
ing the second quarter, taking its total to 827,
according to Bernstein. The company needs
to drill 173 more wells before GLNG startup
to achieve its estimated target of 1,000 wells,
the analysts added.
“During the quarter, GLNG executed two
third-party gas supply agreements for an
aggregate quantity of 85 petajoules (1.5 mil-
lion mt),” Bernstein said. The analysts added
that given the forecast reserves shortfall,
Santos was “increasingly likely to be forced
into purchasing more third-party gas to meet
contractual obligations.”
Santos expects to produce between 52
million and 57 million boe in 2014. The com-
pany is Australia’s third-largest oil and gas
producer behind BHP Billiton and Woodside
Petroleum. — Christine Forster
PNG LNG helps boost Santos output
Australian company lifts Q2 production 3% on year
KNOC to cut stake in
Iraqi Kurdistan oil block
Seoul—South Korea’s state-run oil developer
Korea National Oil Corp. plans to sell down its
stake in the Sangaw South block in the semi-
autonomous Kurdish region of northern Iraq
and terminate oil exploration in the Bazian
block there, a company source said.
The board of directors has approved
a plan to transfer part of its 60% stake in
Sangaw South, the source told Platts. The
company has yet to decide how much it would
transfer, but it could be the 30% KNOC has
recently purchased, he said.
Earlier this year, KNOC bought a 30% share
at Sangaw South, doubling its share to 60%.
KNOC would seek to transfer the stake
to private South Korean developers so that
the country’s combined interest remains
unchanged, the source said.
“This is part of our efforts to share
upstream know-how with [South Korea’s]
private firms and provide them with opportuni-
ties for overseas oil development,” he said.
The source declined to disclose potential
buyers and the financial value of the equity
for sale.
The source also said KNOC has decided
to terminate its project for the Bazian block by
returning the exploration rights to the Kurdis-
tan Regional Government. As the exploration
right expires in November this year, KNOC
would not renew it due to the reduced possi-
bility of commercially viable crude oil deposits
there, he said. KNOC won the right in 2007
and has conducted exploration since 2009,
the source said.
KNOC has been currently involved in three
exploration projects in Iraq—Hawler, Sangaw
South and Bazian—all in the Kurdish region.
KNOC would focus on Hawler and Sangaw
South after leaving the Bazian project, the
source said.
In April, KNOC had said that a joint oil
exploration project confirmed that the Hawler
block’s Demir Dagh structure holds crude
reserves of more than 258 million barrels.
KNOC controls 15% of the Hawler block, with
Oryx Petroleum holding 65%. The remaining
20% is controlled by the KRG.
KNOC has recently announced a set of
plans to sell its stakes in overseas projects
to reduce its huge debts. In its latest divest-
ment plan, KNOC said in May that it plans
to sell off its 8.91% of Indonesia’s offshore
South East Sumatra block. The state-run com-
pany purchased the stake in 2002.
KNOC is also seeking to terminate a proj-
ect to develop Peru’s northern onshore Block
115 in which it holds 30%, the source said,
without elaborating.
KNOC is spearheading upstream oil proj-
ects abroad for South Korea, the world’s fifth-
largest crude buyer which imports almost all
of its requirements. — Charles Lee
4. 4 Oilgram News / Volume 92 / Number 141 / Monday, July 21, 2014
Rosneft claims Kiev blew up Ukraine refinery
Moscow—Russian state-run oil giant Ros-
neft accused Ukrainian government forces
Friday of “provocation” by shelling its Lisi-
chansk refinery in eastern Ukraine, drawing
parallels with an apparent attack on the
Malaysian jet which crashed in the country’s
rebel-held east.
The 160,000 b/d Lisichansk refinery,
the second-largest refinery in Ukraine, has
been shut down since March 2012, when
the then-owner of the unit, TNK-BP, said it
was unprofitable because of imports of
cheaper fuel.
Rosneft, which took control over the refin-
ery after the purchase of TNK-BP in 2013,
previously said it was planning to restart the
refinery this summer.
“As a result of repeated attacks by
Ukrainian law-enforcement forces at the
Lisichansk refinery, several fires broke out
across the facility and some of its equip-
ment and infrastructure was destroyed,”
Rosneft said in a statement.
Earlier in the day, a government official in
the city said that the Lisichansk refinery has
been set on fire after being hit by a rocket.
Irina Verigina, acting head of the regional
administration, claimed on her Facebook
page that the rocket was fired from a Grad
multiple launcher by pro-Russian separat-
ists. Verigina wrote that a sulfur storage
facility had been set on fire in the attack. At
the same time, the pro-Russian separatists
said the shelling was carried out by govern-
ment forces, according to a report by Rus-
sia’s Prime Tass news agency.
Rosneft said in the statement it “sees
the targeted shelling of our Ukrainian asset
as provocation and crime on a par with the
destruction of the Malaysia Airlines passenger
airliner over Ukraine on July 17.” The Lisi-
chansk refinery lies near the city of Lugansk,
where there is fighting between pro-Russian
separatists and government forces.
The development came as Russia warned
Friday it may respond if cross-border shooting
from Ukraine continues, sharply raising ten-
sions over the crisis a day after a Malaysian
jet crashed, killing all 298 people aboard.
“We already warned that if this continues
then we will take measures. At least if it is
clear that this has been done deliberately
I am convinced that such a firing position
should be neutralized as a one-off measure,”
Russian Foreign Minister Sergei Lavrov told
Rossiya 24 state television.
“We have delivered a serious warning to
our Ukrainian colleagues,” he was quoted as
saying by Russian news agencies.
A US official said Friday an initial review of
US intelligence suggests pro-Russian separat-
ists likely shot down the Malaysian airliner
over Ukraine but Washington is still examining
the evidence. — Nadia Rodova
Moscow—Russia’s biggest oil producer Ros-
neft said Friday it sees no threat from the
latest US sanctions to its projects and agree-
ments as it has sufficient liquidity to service
its debts and pay shareholder dividends.
Calling the new sanctions “illegitimate
and groundless,” Rosneft said its current
financial position is “robust” as it is able to
count on operating cash flows to maintain its
current strategy.
The US imposed the most recent round
of sanctions on Russian companies late
Wednesday over the Ukraine crisis, with the
list including Rosneft, Russia’s largest gas
independent Novatek, as well as two banks
and several arms companies.
The sanctions prohibited US persons and
entities from providing mid- and long-term
financing for Rosneft and Novatek.
“Rosneft’s operating cash flows allow
us to carry on with our current projects,” it
said in a statement, adding its liquidity is
sufficient to meet debt payments and honor
contractual obligations.
Commenting on the potential impact of
the sanctions, Rosneft CEO Igor Sechin said
Thursday they would not affect the company’s
financial position.
“[Rosneft’s financial standing] allows us
to implement our projects for a long time with-
out getting access to any urgent credit lines,”
Sechin told reporters in Brazil, in a broadcast
by state-owned Russia 24 TV channel.
Rosneft is in the process of a legal review
of the sanctions and is consulting its interna-
tional partners, it said.
Rosneft has strategic cooperation agree-
ments with a number of international majors,
including ExxonMobil, Shell, Statoil and Eni.
Oil major BP with a 19.75% stake in Rosneft,
is its second-largest shareholder after the
Russian state.
Chinese financing
The short-term effect of the US sanction
is insignificant for the oil major, according to
analysts, as Rosneft may use pre-payment for
its crude supplies to China to cover refinanc-
ing needs.
Rosneft will likely be able to fully meet its
mid-term refinancing needs thanks to multi-bil-
lion dollar prepayments from China, analysts
at Citi said in their research note Friday.
“The Chinese prepayment deal covers
medium-term refinancing needs, [and] stabi-
lizes the cost of debt,” they said.
Between the last nine months of this year
and end-2016, Rosneft needs to pay a total
of around $40.5 billion in mature debt, the
Citi analysts said.
“While that total... may sound significant in
the face of the announced sanctions, it is more
than covered by the significant pre-payment deal
struck with China last year,” the analysts said,
adding that in their estimation Rosneft has an
effective line of credit of $75-$80 billion.
As of end-March, Rosneft has drawn
around $25 billion of that, leaving some $50
available, they said.
Interest under the credit line is tied to
LIBOR rates, so the sanctions will have no
effect on Rosneft’s refinancing costs, the ana-
lysts added.
“That credit is reported to be tied directly
to LIBOR 6-month rates plus circa 2.5%, the
sanctions should have no effect on the cost
of financing,” they said.
Analysts at Russia’s Sberbank said Ros-
neft is likely to use the Chinese pre-payment
for its financial needs, potentially apply to the
state for additional help, and use its cash pile.
“The company is likely to try to get more
pre-payments from Chinese banks under its
long-term supply contracts and at some point
in time may receive “anti-crisis” funding from
the government, as it did in 2008. In the mean-
time, it is likely to use its $20 billion cash pile
for debt servicing,” Sberbank analysts said.
Russian President Vladimir Putin said last
year Rosneft is to receive around $70 billion in
prepayment under a 25-year crude supply deal
with China National Petroleum Corporation.
Under the deal, Rosneft’s total crude
exports to China are set to gradually grow to
31 million mt/year, or 620,000 b/d by 2018.
Rosneft sends 300,000 b/d of crude
to CNPC under a 20-year contract signed in
2009, which commenced in January 2011.
— Dina Khrennikova
Rosneft says sanctions won’t derail strategy
Says committed to projects, will honor obligations
“The ... sanctions are illegitimate
and groundless.” — Rosneft
Europe, Middle East & Africa
Platts Podcast
West African overhang brings down
European crude market amidst poor
margins
Platts editors discuss the biggest slide in
Brent crude prices this year, including the
impact of Chinese de-stocking on West
African exports and the fragile recovery in
European refining margins.
http://www.platts.com/podcasts-detail/
oil/2014/july/crude-oil-africa-north-
sea-071614
5. 5 Oilgram News / Volume 92 / Number 141 / Monday, July 21, 2014
Libya calls on UN to help protect oil fields
London—Libya has called on the United
Nations to set up a mission to help the local
authorities protect oil fields and airports, as
the security situation in the North African
country continues to deteriorate.
On Thursday, Tarek Mitri, Special Represen-
tative of the Secretary-General for Libya, told
the UN Security Council that it was important
for the UN to take the case of Libya seriously
“before it is too late.” Mitri said Libya was suf-
fering from both civil and economic deteriora-
tion “due in large part to the decline in oil pro-
duction and exports,” according to a statement
posted on the Security Council website.
“Oil fields have been controlled by armed
groups for almost a year, resulting in the
loss of 30 billion barrels of oil,” Mitri said in
the statement.
He added that the government did not
have the military means to resolve that situ-
ation and was “instead pursuing dialogue.”
Calling on the Security Council to live up to
Libya’s expectations, he said he was not
calling for military intervention, “but for a
mission—whose duties would differ from the
political Mission now in place—focused on
stabilization, institution-building, and an effec-
tive security sector.”
Such a mission, he said, should contrib-
ute to the protection of oil fields and airports
“through training of personnel and should
support capacity-building with anti-corruption
mechanisms, in order to empower the state
to meet the challenges, in close cooperation
with all regional and international partners.”
Fighting between powerful militias battling
for control of Tripoli’s airport broke out again
on Friday, just hours after they had agreed
a truce, AFP reported. The violence erupted
when Islamist gunmen from the city of Mis-
rata attacked anti-Islamist fighters from the
city of Zintan who have been controlling the
airport for the past three years, AFP said.
Despite restarts at key oil fields and
the reopening export ports in recent weeks,
persistent violence across Libya has sparked
fears of all-out civil war and Foreign Minister
Mohamed Abdelaziz told the Security Council
his country could become a “hub for attract-
ing extremists”.
The London P&I Club, one of the leading
insurers for the global shipping industry, said
Friday members calling at Libyan ports should
“carefully assess” their contractual obliga-
tions in light of the ongoing instability in the
North African country.
“Members considering fixing vessels to
call in Libya should also give due consider-
ation to contractual measures that might be
taken to try to avoid and/or negate future
issues arising out of such instability,” it said
in a circular.
The Club said that all oil terminals in
Libya were currently working, with the excep-
tion of Brega, which is shut due to a strike by
workers. — Stuart Elliott
London—UK exploration and appraisal drill-
ing activity continues to fall, according to new
data from financial services firm Deloitte,
even as the industry says that the country’s
upstream output decline is bottoming out.
In a new report Deloitte says just seven
exploration and appraisal wells were initi-
ated in the second quarter of this year
offshore the UK, down from 17 in the same
period a year earlier and 12 in the first quar-
ter of this year.
The numbers suggest a continuation of
the fall in exploration-related activity seen in
recent years, which has fueled fears about
the decline of the North Sea.
Lobby group Oil and Gas UK has said 15
exploration wells were drilled offshore the
UK in 2013, a near-record low. At the same
time some in the industry, including BP, have
said they see signs of a recovery in UK out-
put this year.
Deloitte also reported a reduction in cor-
porate and asset deals in the UK offshore
sector, saying it was aware of five deals in the
second quarter, down from 12 in the same
period a year earlier.
Norway has seen a less pronounced
drop-off in drilling activity, the Deloitte sur-
vey found.
“The decrease in drilling and deal activ-
ity in the UK may be a result of uncertainty
in the industry caused by possible changes
to the fiscal regime and the introduction of a
new regulator...” Deloitte said.
“In addition, rising costs to operate in
the North Sea and a tighter rig market are
making companies more reluctant to commit
to long term exploration investment and a
general ‘wait and see’ approach seems to
have been adopted before making any fur-
ther investment decisions.”
Reform or upheaval?
The decline in UK drilling has prompted
some in the industry to call for Norway-style
tax incentives for exploration. But others
argue that it is not the number of wells drilled
that is important, but the accuracy of drilling,
which requires better information and analysis
of past failures.
The UK government is setting up a new
regulator outside the Department of Energy
and Climate Change to oversee such improve-
ment and revive the offshore sector and is
also carrying out a review of the tax regime.
The industry has welcomed both moves,
but the Deloitte report highlighted the risk
that they could be adding to uncertainty.
Other analysts have pointed to Scot-
land’s independence referendum on Septem-
ber 18 as creating uncertainty on whether
to invest.
The Deloitte report highlighted a cau-
tious attitude to deal-making on the part of
the generally smaller companies now active
in the North Sea. It described a tendency to
favor farm-in deals rather than more costly
corporate mergers and acquisitions.
“The low deal figures across northwest
Europe may be due to the increasing operat-
ing costs, which may make companies reluc-
tant to commit to drilling activities...” it said.
“Due to the maturity of the region, the
buyers tend to be smaller players with smaller
budgets so the higher costs are muting the
ability to secure deals.”
Europe-wide decline
Northwest Europe as a whole saw a 37%
year-on-year fall in exploration and appraisal
drilling in the second quarter, with 22 wells
initiated, Deloitte found.
For Norway, 13 exploration and appraisal
wells were initiated in the second quarter,
down from 15 a year earlier.
Deloitte said it was aware of 16 asset
or corporate deals in the northwest Euro-
pean oil and gas sector, all but two of them
offshore Norway and the UK, compared with
a total of 30 deals in the second quarter a
year earlier.
However the number of Norwegian deals
rose to nine, from five a year earlier.
Drilling activity also fell offshore the Neth-
erlands in Q2, with just one well initiated,
compared with a usual rate of three per quar-
ter, Deloitte said.
No drilling activity has been seen in Ire-
land since the ExxonMobil-operated Dunquin
well disappointed last year.
There was no drilling offshore Denmark,
Greenland or Germany in the second quarter,
while one well was initiated offshore the
Faroe Islands by Norway’s Statoil. — Nathan
Richardson, Nick Coleman
Slump in UK drilling activity deepens
Study points to uncertainties over offshore tax review
„„ Well completions dive in Q2
„„ Costs, rig markets hitting offshore budgets
„„ Scotland’s independence vote key
Europe, Middle East & Africa
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AND INFORMATION FROM PLATTS
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6. 6 Oilgram News / Volume 92 / Number 141 / Monday, July 21, 2014
bypass Ukraine in shipping to Europe, is the
most effective way to guarantee secure deliv-
eries to Europe going forward.
“Russia has made it clear that new pipe-
line projects like Nord Stream and South
Stream are supposed to be aimed at ensuring
that Russia’s relations with transit countries
like Ukraine will not affect reliability of west-
bound gas supplies,” Kyle Davis, partner,
Goltsblat BLP, said.
Furthermore, he added that Russia has
never explicitly threatened gas supplies to
Europe as a pressure point in East-West
relations, and Russia has always tried to
maintain a reputation as a reliable energy
supplier for Europe.
Analysts also believe that Russia is in
a good position to undercut any rival gas
suppliers to Europe on price, mitigating the
potential damage of LNG projects that will
come on stream towards the end of the
decade, and European consumers’ attempts
to diversify their supply channels as much
as possible.
“Putting in place the infrastructure and
agreements that it would take for Europe,
particularly Eastern Europe, to get by with-
out Russian gas will be an expensive and
time-consuming endeavor. Ultimately the
costs of the additional pipelines, LNG import
terminals and regasification plants that are
required to diversify away from Russian gas
will be borne by European businesses and
citizens,” Davis said.
“Either gas prices will increase, or taxes
will be used to subsidize the development
of new supply, or both. And then the gas
that comes through the new import chan-
nels could itself be more expensive than
Russian gas.”
Potential problems
There are grounds for concern over
whether the project will proceed on schedule,
however, the most serious of which predate
the current political crisis in Ukraine.
For some analysts, the biggest threat
remains the fact that the project is not com-
patible with the EU’s Third Energy Package,
which aims to unbundle production, supply
and marketing of gas in Europe, and stipu-
lates that 100% of a pipeline’s capacity must
be offered to the market.
“Of course Gazprom is not prepared to
allow third party suppliers access to South
Stream. Considering the scale of investment
required for construction guarantees on filling
the pipeline backed up with long-term supply
contracts are necessary. Otherwise it does
not make sense for Gazprom to invest in the
project,” analysts at Invest Cafe said in a
research note released in late June.
South Stream is expected to cost Gaz-
prom an estimated $20 billion, and a further
South Stream faces new political hurdles
...from page 1
$15 billion in expanding the Russian pipe-
line network.
There are already signs that the EU may
move to block the project. Late last year the
EU said that all intergovernmental agree-
ments signed between Russia and South
Stream host countries violate EU rules and
must be renegotiated. A working group which
had been set up to deal with the issue was
suspended in March by EU Energy Commis-
sioner Guenther Oettinger, as the crisis in
Ukraine unfolded. Then, in early June Bul-
garia, an EU member state, suspended work
on the project on Bulgaria territory, citing a
recommendation from the EC.
Furthermore, Gazprom has already been
forced to withdraw from Lithuanian companies
Lietuvos Dujos and Amber Grid, which carry
out transportation and marketing of gas in
Lithuania, as a result of court rulings which
upheld Lithuanian legislation passed in line
with the Third Energy Package.
Any serious deterioration in the situation
in Ukraine could harm Gazprom’s chances
of securing the necessary exemption from
the EC. Some analysts have also questioned
whether the pipeline is necessary at all.
“It is debatable whether it makes sense
for Russia to further expand its gas trans-
portation capacity, when Nord Stream has a
capacity of 55 Bcm/year, and the Ukrainian
transportation network 140 Bcm/year, which
are only half full and the EU is constantly
expressing its desire to reduce its depen-
dence on Russian gas,” Investcafe said.
EU policy
Much will also depend on policy deci-
sions taken by the EU in coming months, as
a new commission comes into operation.
Some analysts have said that there is an
underlying lack of clarity in the EU’s position.
Analysts at the Oxford Institute for
Energy Studies have said that if the EC’s key
policy going forward will be to guarantee reli-
able supplies above all else, issues of tran-
sit will play a secondary role, and it would
make sense to come to some sort of agree-
ment with Russia and allow South Stream to
go ahead.
However, if diversity of supply is to be
the key driver behind EU energy policy, then
it makes less sense to provide Gazprom with
the necessary exemption.
There is also the possibility of some diver-
gence in opinion within Europe, with those
countries which would benefit from the project
directly most likely to push for it to go ahead.
This includes Hungary, Slovenia and Greece
as well as Bulgaria and Austria, and non-mem-
ber state Serbia.
Any measures introduced by the EU
against Russia as a consequence of its role
in Ukraine in the coming weeks could also
prove to be significant, as Gazprom targets
shipping first gas to Europe through the line
in late 2015. — Rosemary Griffin
EMEA News Briefs
Shell employees on Malaysian plane downed in Ukraine
Shell said Friday that a number of members of its staff were aboard the Malaysian Air-
lines flight that went down in eastern Ukraine in a suspected missile attack and said it was
working to establish details of those lost.
Some media reports suggested three Shell Malaysia employees were on the flight that
came down Thursday in separatist-controlled Ukrainian territory, but a Shell spokesman in
London was unable to confirm the number of casualties.
“We now have confirmation from authorities and family members that Shell staff were
aboard Malaysian Airlines flight 17,” Shell said in a statement.
“We are deeply saddened by this tragic loss of our colleagues and friends... Shell is pro-
viding support to the families of our employees to help them through this time of grief.”
Ukraine’s oil, gas condensate output slips in June
Ukraine’s crude oil and gas condensate output decreased 8.1% year on year to 225,700
mt in June from 245,600 mt in June 2013 and fell from 235,700 mt in May, an energy and
coal industry ministry official said Friday.
In January through June, Ukraine extracted 1.39 million mt of oil and condensate, down
7.5% from 1.503 million mt produced in the same period a year ago, the official said, citing
preliminary figures.
Ukraine produced 1.031 million mt of crude oil and 358,000 mt of gas condensate in
the period.
The national oil and gas company Naftogaz Ukrayiny produced 1.23 million mt of oil and
condensate in January through June, down 9.4% from 1.36 million mt a year ago. Other
companies extracted 157,600 mt of oil and condensate, up 10% from 143,200 mt.
The oil and gas condensate output figures do not include production of Chornomornaf-
togaz, the country’s third largest producer of hydrocarbons, which was seized by separatist
authorities in Crimea following Russia’s annexation of the Ukrainian peninsula in March.
In 2013, Ukraine extracted 3.051 million mt of oil and gas condensate, down 3.9% from
3.175 million mt in 2012.
Europe, Middle East & Africa
7. 7 Oilgram News / Volume 92 / Number 141 / Monday, July 21, 2014
Port Arthur rail terminal to start in 2016-2017: KCS
Washington—A planned Port Arthur, Texas,
unit train terminal that will offload Western
Canadian heavy crude will begin operations by
late 2016 or early 2017, co-developer Kansas
City Southern railroad said on Friday.
Railroad officials would not project poten-
tial volumes or revenue from the project, but
KCS and project co-developer Global Partners
said earlier that the terminal will initially han-
dle two unit trains a day and have the capac-
ity to store 340,000 barrels of oil.
The 200-acre facility, which Global will
design, build and operate and KCS will lease,
will contain a double loop track and be capa-
ble of handling trains of up to 120 cars, KCS
officials said on an earnings conference call.
The terminal likely will take shipments
originating from Canadian Pacific and Canadi-
an National railroads over multiple KCS gate-
ways, Pat Ottensmeyer, KCS’ executive vice
president of sales and marketing, said.
It will also have waterfront access to the
Gulf of Mexico for barge and vessel loading,
he added.
Ottensmeyer said demand among US refin-
ers for Western Canadian heavy sour crudes
is “substantial” and that between now and the
terminal’s opening, Global “will be aggressively
pursuing business opportunities in this market
and will be using other KCS terminals and
facilities in the area to handle this business.”
US refiners have shown a preference recent-
ly for Western Canadian heavy sour crudes
shipped by rail because of their low diluent con-
tent that ranges from close to zero up to 5%.
Canadian heavy sour crude shipments
by pipeline require up to 15% diluent in the
summer months and up to 33% diluent in
winter, which costs refiners more to separate
and process.
In addition, because the US has permit-
ted re-exports of Canadian crudes, potential
exporters prefer Canadian crudes received by
rail because of the zero potential of commin-
gling with US domestic crudes.
The US permits the re-export of Canadian
crudes from US locations provided it is not
commingled or blended with domestic US oil.
KCS and Global announced the planned
Port Arthur terminal earlier this month.
KCS saw its revenues from crude oil ship-
ments plunge 41% year to date, compared
with the same period in 2013, with carloads
dropping to 5,500 from 7,600 a year ago, a
drop officials attributed to new pipeline capac-
ity bringing light crudes to the Gulf Coast.
Officials said they expect their crude-by-
rail shipments to pick up again later this year,
as new terminals for heavy Canadian crude
come online.
For example, Genesis Energy is scheduled
to bring online soon its Scenic Station ter-
minal in Louisiana that will be connected to
KCS’ network and KCS is building new track
to serve Jefferson Refinery’s new terminal in
Beaumont, Texas.
“We expect to start delivering crude in the
fourth quarter of the year,” KCS CEO David
Starling said. “We could see a ramp up over
the course of 2015, depending on the tim-
ing of these openings. We’ll start with three
to four trains per month and then grow from
there. It’ll be a slow ramp.”
Overall, the company remains bullish on
crude by rail, Starling said.
“I don’t see this railroad renaissance chang-
ing,” he said. “This country is not investing
in its highways. The railroads are going to be
rewarded for the capacity they’re adding. We’re
not going to slow down.” — Herman Wang
said Dunn, who is now a Washington-based
trade attorney with the law firm Stewart and
Stewart. “It’s abundantly clear to me that our
major trading partners… like EU, Japan and a
bunch of others all know that the US export
control regimes on both oil and gas are WTO
inconsistent. The oil one is the most seriously
inconsistent at this point.”
But WTO members have not challenged
the US crude export restrictions for a variety
of reasons, Dunn said, pointing out that the
US joined recent successful challenges in the
WTO against export limits China placed on
some of its raw materials.
China, for example, may not pursue a dis-
pute settlement case against US crude policy
since a successful case could strain an ener-
gy partnership with Russia, which may see its
oil earnings impaired by additional crude on
the world market, Dunn speculated.
In addition, the EU may see WTO-inconsis-
tent limits on US crude exports as a bargain-
ing chip in its ongoing free trade agreement
talks, which entered their sixth round in Brus-
sels this week.
“They want to keep some coins in their
pocket to give their negotiators more lever-
age,” Dunn said.
Supply advantage
And if they were to negotiate the free
trade of crude between the EU and US as
part of the trade pact, formally known as the
Transatlantic Trade and Investment Partner-
ship, it would give European markets a dis-
tinct supply advantage over Asia where US
crude may have been otherwise marketed if
restrictions were dropped entirely.
Crude oil exports are not being negoti-
ated as part of the Trans-Pacific Partnership
talks, a trade agreement the US is negotiat-
ing with 11 Asia-Pacific countries, including
Japan and Singapore.
The EU’s hopes for US exports were
detailed in a recently leaked document by EU
negotiators which called for a “strong and
comprehensive chapter” in the US-EU trade
agreement, which would include lifting bilat-
eral restrictions on gas and crude oil. The
EU is pressing for a process in which the US
would automatically approve crude oil and gas
exports to EU countries.
But the US has given no indication it is
willing to even discuss such a chapter in any
detail, an EU official told Platts.
A spokesman for the Office of the US
Trade Representative declined to comment on
the ongoing negotiations.
The EU and US have yet to agree wheth-
er to include a specific chapter on energy,
including crude oil and natural gas, in their
TTIP free trade negotiations and European
Commission trade spokeswoman Maria
Lyra Traversa called the separate chapter
EU push for US crude exports meets indifference
...from page 1
The Americas
on energy “one of the open issues,” in the
ongoing talks.
In a formal update last week, the EU said
that the two sides had discussed in detail the
EU’s arguments for having a separate energy
chapter, and had also had detailed exchanges
on their respective regulatory frameworks.
Traversa said that the EU usually has a
specific energy chapter in its free trade agree-
ments with other countries.
At a Washington conference last week,
Jason Bordoff, a former White House energy
adviser for the Obama administration, said
all energy issues, including crude oil and gas
exports, were at the bottom of US priority lists
in the trade agreement talks.
In a detailed USTR paper on the US objec-
tives and benefits in the TTIP, the only mention
of energy is a broad commitment to eliminat-
ing trade barriers for clean energy technology
and the sole mention of oil is a commitment
to eliminate tariffs on US olive oil exports.
EU chief negotiator Ignacio Garcia Bercero
told reporters Friday that one of the energy
issues discussed this week was the EU and
US regulatory and legislative responses to
the 2010 Macondo oil spill accident in the
Gulf of Mexico.
“Without prejudice to whether there would
be at the end a chapter on energy and raw
materials, it’s very useful that we are hav-
ing these intense discussions between our
regulators to look into the different potential
[energy trade] elements,” he said.
The EU and US started talks on the agree-
ment in 2013, and could conclude it next
year, as such agreements usually take at
least two years, she said.
A seventh round of talks is planned for
after the summer.
US President Barack Obama said in March
that TTIP would make it easier to obtain
licenses to export LNG to the EU, and that this
could help strengthen the EU’s energy security.
— Brian Scheid, with Siobhan Hall in Brussels
8. 8 Oilgram News / Volume 92 / Number 141 / Monday, July 21, 2014
US approves seismic testing off Atlantic Coast
Washington—The Obama administration will
allow seismic testing off the East Coast to
update decades-old estimates of undiscov-
ered technically recoverable oil and natu-
ral gas along the south- and mid-Atlantic
coasts, the US Bureau of Ocean Energy
Management said Friday.
In a record of decision, BOEM said it will
allow permitting for seismic tests in federal
waters from the Delaware Bay to just south of
Cape Canaveral, Florida.
Acting BOEM Director Walter Cruickshank
said the decision does not authorize offshore
oil and gas drilling, adding that geologic and
geophysical companies would need to obtain
permits to conduct a seismic survey.
“We have several permit applications on
hand that we will be working on,” Cruickshank
told reporters.
These seismic surveys would update
40-year-old data on the East Coast’s off-
shore resources, which show that the Atlan-
tic Outer Continental Shelf has 3.3 billion
barrels of estimated recoverable oil, includ-
ing 1.42 billion barrels in the Mid-Atlantic
and 0.53 billion barrels in the South Atlan-
tic, well below what industry believes may
be recoverable.
The same data estimates there is 31.28
Tcf of gas in the Atlantic, including 9.87 Tcf in
the North Atlantic, 19.36 Tcf in the Mid-Atlan-
tic and 2.04 Tcf in the South Atlantic.
The administration is considering includ-
ing south and Mid-Atlantic drilling in its
next federal offshore leasing plan, which
will run from 2017 through 2022, but in a
recent interview then-BOEM Director Tommy
Beaudreau said the drilling decision will not
hinge of how much oil seismic tests find
may be recoverable.
Cruickshank said Friday’s decision
includes the “highest level of protection” for
environmental and marine life and includes
provisions to stop testing during migratory
periods for sea turtles and right whales.
But these protections were blasted both
by industry for exceeding legal requirements
and by environmentalists for allowing these
tests at all.
“We remain concerned by the lack of sci-
entific support for certain requirements the
administration wants to impose on seismic
surveys in the Atlantic,” American Petroleum
Institute Upstream Director Erik Milito said in
a statement.
“Operators already take great care to
protect wildlife, and the best science and
decades of experience prove that there is
no danger to marine mammal populations,”
he added.
But Claire Douglass, a director with envi-
ronmental group Oceana said the seismic
testing will put the health of marine life and
well as commercial and recreational fisheries
at risk.
US Senator Edward Markey, Democrat-
Massachusetts, said the planned seismic
survey would be “incredibly harmful to
whales and the marine habitats they inhab-
it.” — Brian Scheid
Calgary—India’s refinery operators are keep-
ing options open to secure more volumes of
Canadian crude as part of its efforts to widen
its import basket and take advantage of com-
petitively priced heavy crude grades, industry
sources said Friday.
Naduhatty Selai Raman, chief research
manager with Indian Oil Corp., said IOC is cur-
rently in negotiations with Canadian producers
to import feedstock crude for its refineries in
the coastal areas of India that are capable of
processing heavier grades of crude.
“Our imports are increasing and pricing
is a big aspect of any deal that we will make
to procure crude,” he said on the sidelines of
the India-Canada Energy Forum in Calgary.
“We will be looking at a price margin of at
least $5/barrel,” Raman said.
IOC has already lifted one cargo of light
crude oil from offshore Newfoundland and
Labrador that was produced by Husky Energy.
It has also signed a memorandum of under-
standing with the Alberta Petroleum Marketing
Commission for crude offtake.
Raman did not comment on whether IOC
was looking at importing more cargoes from
Husky.
“Our refineries can process heavy crudes,
and both the Cold Lake and Western Cana-
dian Select will be suitable,” Raman said.
Krishnamurthi Subramanyam, deputy gen-
eral manager of refinery coordination with Hin-
dustan Petroleum Corp., said Hindustan will
also be open to lifting Canadian crude.
“We import about 42 million barrels from
Iraq each year, and the recent violence there
has not as yet impacted our crude liftings,”
he said on the sidelines of the event. “How-
ever, we will always be looking at opportuni-
ties elsewhere.”
Anand Kumar, director of Petrotech, said
a game-changer for Canadian crude exports
will be the construction of pipelines from land-
locked Alberta.
“We are working on making a comprehen-
sive regulatory submission this summer for
the Energy East pipeline,” Paul Miller, execu-
tive vice president with TransCanada said at
the event, adding that the 1.1 million b/d
facility will potentially open up new channels
of exports to India.
Energy security
Deepak Obhrai, parliamentary secretary
to Canada’s Minister for Foreign Affairs, said
the expectation is for energy security to be a
“defining” element of Indo-Canadian relations.
“Under [Canada’s] new global action plan,
oil and gas has been identified as a priority
sector, and we see ourselves playing a major
role in meeting India’s demand to procure
more crude from global sources,” he said at
the event.
India is the fourth-largest global consumer
of oil, and in 2012 it imported 73% of its total
demand. By 2035, India’s oil imports will rise
to 90%, and this will open up major export
opportunities for Canada’s oil sands produc-
ers, Obhrai said, referring to a memorandum
of understanding that both nations signed last
October in Ottawa setting the framework for
cooperation in crude oil and gas.
Obhrai did not give any figures, but Akhil
Verma, Canada country manager for ONGC
Videsh, or OVL, said at the event that India’s
demand for crude oil will reach 350 mil-
lion-486 million mt by 2031-2032.
“There is much to gain from that MOU.
India has a larger crude oil refining base,
compared to Canada, and our target will be
to emerge as a major supplier of crude,” Obh-
rai said, noting opportunities also lie in the
supply of LNG and green technology for new
power plants planned in India.
State-owned IOC already has an offtake
agreement with Vancouver-based Pacific
NorthWest LNG for 1.2 million mt/year of LNG
to be produced from that gas export facility.
— Ashok Dutta
Indian refineries want more Canada crude
Country looking for alternatives to Iraq as unrest escalates
US rig count falls by 4
Houston—The US rig count was 1,871 for the
week ended July 18, down by 4 from the prior
week, according to Baker Hughes.
The latest count includes 1,814 land and 57
offshore, with 315 assigned to gas, 1,554 to
oil and 2 to miscellaneous drilling. The rigs
were drilling 366 vertical, 217 directional and
1,288 horizontal wells.
Here are Baker Hughes’ latest figures for the
total number of active rigs in the US (with
selected states) and Canada, plus compa-
rable figures for a week ago and a year ago:
7/18/14 7/11/14 7/19/13
US 1,871 1,875 1,770
Alaska 8 12 8
California 42 44 41
Colorado 69 68 68
Kansas 30 31 28
Louisiana 113 107 103
New Mexico 90 92 80
North Dakota 178 172 174
Oklahoma 200 198 171
Texas 888 898 845
Wyoming 52 52 53
Canada 381 315 324
The Americas
9. 9 Oilgram News / Volume 92 / Number 141 / Monday, July 21, 2014
It’s nearing a now or never time for getting the much-touted grassroots LNG industry in
Western Canada’s British Columbia off the ground.
Home to 1,965 TCF of gas-in-place—located in some of the most prolific plays in North
America—there should never be any doubts about the prospects of success.
The National Energy Board has already granted export licenses for nine facilities, and
continues to evaluate applications for at least five more projects, yet no one has “shown
the money” in terms of a final investment decision.
Four of the nine green-lighted projects have the strong backing of Japanese utilities and
trading companies as either equity partners or offtakers, or both, but no FIDs.
The Japanese projects include: the 24 million mt/year Aurora LNG with Inpex and JGC
Corp as stakeholders; the 12 million mt/year Pacific Northwest LNG with Japan Petroleum
Exploration Company as 10% stakeholder and offtaker; the 12 million mt/year LNG Canada
facility with Mitsubishi Corp as founding partner; and the 2.3 million mt/year Triton LNG
with Idemitsu as 50% shareholder.
Interest is also growing from India, with its state-owned Indian Oil Corp., eyeing opportuni-
ties to further increase its upstream stake and offtake. The company already has a 10% footing
in the Pacific Northwest facility and has also put pen to paper for 1.2 million mt/year of LNG.
“For the first time, we have also had interests from European buyers who are looking
for stable and secure LNG supplies in the light of the geo-political issues between Russia
and Ukraine,” said Rich Coleman, British Columbia’s natural gas development minister.
Yet, like two other leading producing areas in Qatar and Australia, project proponents in Brit-
ish Columbia have the all-too-familiar hiccups that are coming in the way of FIDs being adopted.
In a multi-dimensional industry like LNG the right fiscal framework, cost of resource
development, market dimensions, project economics, construction costs and regulatory
issues need to be in place before projects can get going, said William Gwozd, senior vice-
president for gas services with Calgary-based Ziff Energy.
Another factor that delays financial commitments, typical to British Columbia, is the
need to invest in multi-billion dollar pipelines often more than 500 miles long to trans-
port feedstock gas from hinterland areas in the Western Canadian Sedimentary Basin to
planned LNG liquefaction terminals along the coastline. These projects almost require as
much legwork to get off the ground as the actual LNG plan.
And last, but not the least, is the inability of developers to sign more offtake deals that
will make their projects commercially viable.
Until now, Pacific Northwest has only been successful in signing offtake deals for about
7.5 million mt/year or 62% of its total planned capacity.
The delay in FIDs in British Columbia has become a cause of concern for several in
the industry.
Michal Moore, area director of energy and environment policy with the School of Public
Policy, University of Calgary, said if the province does not act quickly it could soon end up
losing out to other jurisdictions, like heavyweights Qatar and Australia and planned debu-
tants namely, the US and Mozambique.
“If BC [British Columbia] doesn’t have LNG plants under construction by 2018, it will
become increasingly difficult to get into the market because contracts will have locked up
the new demand for gas in Asia,” Moore said in an 86-page report.
“The market [for LNG] is large and it is growing, but there are a lot of countries and compa-
nies lined up to provide adequate supply to meet that demand in the short and long term. So,
to imagine the market is infinitely large and infinitely growing is simply a mistake,” said Moore.
Mary Hemmingsen, global LNG lead with KPMG, said in late June a “window” of oppor-
tunity for Canadian LNG producers will be available again from 2019 to 2022 when several
Asian buyers re-negotiate existing offtake deals they have with Middle Eastern suppliers.
At the core of that renewal will be a new form of pricing, with Japanese utilities seeking
a range from $10 to $12/MMBtu, Gwozd said, adding their target will be to link LNG pricing
with natural gas rather than crude oil.
“Their [Japanese buyers] aim is to link 100% to Henry Hub prices, rather than JCC
[Japan Customs Cleared],” said Jihad Traya, associate director at IHS CERA for North Ameri-
ca natural gas, but added that in reality it will likely be a cocktail of oil and gas pricing.
The sale price of Canadian LNG will be pitted against a production cost of nearly $10/
MMBtu, with little room being left for profits, which is another hurdle toward securing and FID.
In the 1980’s, construction costs for LNG facilities were around $350/mt, declining to
$200/mt in the early 2000s. Since then costs have surged to $1000 to $1,600/mt and
beyond, a Deloitte report said. — Ashok Dutta in Calgary
Petrodollars
Colombia’s Cano Limon
line bombed in latest attack
Bogota—Suspected rebels bombed Colom-
bia’s 220,000 b/d Cano Limon pipeline Thurs-
day, the latest in a series of attacks that have
stunted the country’s oil output, put its fiscal
goals in jeopardy and cast a shadow over an
upcoming bidding round in which the govern-
ment hopes to auction off dozens of blocks to
potential explorers.
Orlando Hernandez, a Bogota-based
security consultant and former Colombia
National Police officer who monitors guerrilla
attacks, said Friday the bombing occurred
near the 460-mile pipeline’s midway point in
North Santander province, near the guerril-
las’ favored encampments near the Venezu-
elan border.
The attack, which occurred in the Tibu
municipality, is thought to be the 28th such
bombing in 2014 of the Cano Limon line,
which connects the oil field of the same
name—operated by Occidental Petroleum in
eastern Arauca province—with the country’s
principal oil offloading depot at Covenas on
its Caribbean coast.
Earlier this year, the Cano Limon line was
shut down for 93 days, costing the country 5
million barrels in oil sales, Hernandez said.
State-controlled Ecopetrol was not imme-
diately available for comment on when the
pipeline might return to normal operations.
Ecopetrol’s Cenit pipeline subsidiary is the
owner of the pipeline.
Hernandez said rebel attacks have been
on the increase in recent weeks, possibly as
rebel groups seek to obtain leverage in peace
negotiations now under way in Havana.
The rebel group known as the FARC has
been in talks with the government since
November 2012, while another smaller insur-
gent band known by its Spanish initials ELN is
pressing to join the talks.
On July 11, the recently completed
110,000 b/d Bicentennial Pipeline was
bombed by suspected ELN fighters. The 230-
km Bicentennial line joins the Cano Limon
line at Banadia to transport heavy oil pumped
from the eastern Llanos region.
On July 8, Hernandez said suspected
FARC guerrillas stopped 23 oil tankers haul-
ing crude in southern Putumayo province for
Vetra Colombia and forced them to dump
an estimated 5,000 barrels of crude, caus-
ing serious environmental damage to a
nearby stream.
Several surrounding villages have since
been without drinking water and members
of some community groups have blockaded
Vetra’s oil fields in protest at the damage.
Hernandez said, in addition, rebel groups
on Thursday attacked Ecopetrol installa-
tions in the Catatumbo municipality in North
Santander province. No serious injuries or
damage was reported. — Chris Kraul
The Column
10. 10 Oilgram News / Volume 92 / Number 141 / Monday, July 21, 2014
Libyan exports hampered by prices, quality concerns
London—No Libyan crude cargoes have been
scheduled to load as of Friday despite it being
more than a week since Libya’s National Oil
Corp. lifted its force majeure on loadings out
of the 340,000 b/d Es Sider and 220,000
b/d Ras Lanuf terminals.
Sources said this was due to restrictive
freight costs due to the risk premiums, uncom-
petitive pricing and the need for quality and
safety checks before any crude can be lifted
likely to push the first loadings into August.
The announcement of an agreement
between the government and protesters on
July 8 was followed by news the next day that
production had resumed at the 340,000 b/d
Sharara field which feeds the Zawiya terminal
and the 120,000 b/d Zawiya refinery. The lack
of Sharara crude had meant that Zawiyah termi-
nal could not export crude, despite being open
for a number of months. As a result, NOC has
been supplying the Zawiya refinery with crude
supplies from other regions of the country.
Quality concerns
Production in Libya has jumped to
600,000 b/d as output at Sharara has gained
traction, while NOC has stated that 10 million
barrels is currently in Libyan storage facilities
and ready for export.
Despite the large quantity of stored crude
said to be ready for export, traders have
expressed concerns regarding the unknown
quality of the crude sitting in tanks due to
potential settlement issues from being stored
for a number of months, “there is a lot of oil
there, but it’s not clear what the quality is,” a
crude trader said. “It’s been more than a year
that it’s been there in storage and it’s not
easy to buy something without knowing what
you’re buying.”
The length of time equipment at the ter-
minals has been idle has meant that inspec-
tion of key equipment needed to be carried
out according to traders, which was expected
to push first loadings from the terminal into
August. “We might see something loading in
August as people need to check tanks, lines
etc and with the expected quality of what’s
stored I’m doubtful anything will load soon,”
said one trader.
Despite reports of cargoes being offered
and ships going on subjects at Es Sider and
Ras Lanuf, shipping sources say no vessels
have yet been fully fixed to load from the ports.
There have also been reports of ships
going on subjects to load from Mellitah at
high freight rates but sources say the majority
have failed to get their subjects.
According to shipping sources, a 130,000
mt Suezmax cargo is currently being offered
up by tender from Ras Lanuf, but a shipowner
said that until the winners of the tender
became clear they would not be interested in
transporting the cargo.
“We will go to Libya under the right condi-
tions and we have been approached about the
Ras Lanuf tender. We won’t consider doing
that though until we know for sure who is lift-
ing the cargo,” said the shipowner.
The potential for an influx in Libyan cargoes
into the market have been partly responsible for
pushing up Black Sea-Mediterranean and Cross-
Mediterranean Aframax rates, basis 80,000 mt,
up Worldscale 42.5 to w130 this week.
Libya’s NOC issued an adjustment of its
official selling prices for July on Thursday
reducing levels of the selected crudes by
between $0.20/b and $1.90/b.
The original OSPs, which saw levels for the
country’s crudes fall by between $0.05/b and
$0.10/b from June, were criticized by some
traders as being “out of touch” with the broad-
er Mediterranean sweet crude market, where
differentials for other sweet crudes have come
under significant pressure in recent weeks.—
Alex Pearce, Paula VanLaningham, John Morley
London—The value of Iran’s petroleum exports
plunged by almost 40% last year as US and
European sanctions over the country’s nuclear
program hit the producer’s oil earnings.
Iran’s oil income fell by $39.5 billion
in the year ending December 31, 2013, to
$61.92 billion from $101.47 billion in 2012,
data published Friday by OPEC, of which Iran
is a founder member, showed.
The drop was the biggest among the oil
producer group’s 12 members, whose collec-
tive oil export earnings fell by 7.93% year on
year to $1.112 trillion last year from $1.208
trillion in 2012.
Iran has been subject to US and European
sanctions directly targeting its oil earnings
since mid-2012. In 2011, Tehran’s oil export
revenues totaled $114.75 billion.
Libya’s oil export earnings in 2013 also
plummeted, by 33.3% to $40.16 billion from
$60.19 billion in 2012, the data, which was
published in OPEC’s Annual Statistical Bul-
letin, showed.
The North African country had succeeded in
restoring crude production to around 1.4 million
b/d early last year after the 2011 civil war, but
a series of protests and strikes at oil facilities
and ports that began in May 2013 reduced
oil production once again to a fraction of the
1.58 million b/d level seen before the upris-
ing against Moammar Qadhafi. In 2011, Libya
earned just $18.6 billion from its oil exports.
Only Ecuador and the UAE reported
increases in oil export revenues, to $14.1 bil-
lion from $13.75 billion in the case of Ecua-
dor, and to $126.3 billion from $118.1 billion
in the case of the UAE.
OPEC kingpin Saudi Arabia saw its oil export
revenues drop by 4.28% to $321.7 billion in
2013 from $336.1 billion the previous year.
Iran’s total crude exports, meanwhile,
dropped to 1.215 million b/d last year from
2.102 million b/d in 2012, with volumes to
the Asia-Pacific region falling to 1.085 mil-
lion b/d from 1.839 million b/d in 2012 as
countries in the region were forced to reduce
imports of Iranian oil in order to avoid US
financial sanctions. The data showed volumes
to Europe averaging 128,000 b/d in 2013,
down from 162,000 b/d in 2012.
Nigerian impact
Among OPEC members, Nigeria in particu-
lar has suffered from the boom in US shale
oil production, and it saw its crude exports
to North America plunge to just 395,000 b/d
last year from 1.224 million b/d in 2012, a
year-on-year drop of 67.73% that the West
African country partly compensated for by
increasing exports to other regions. The
data showed year-on-year increases in crude
exports to all other key regions, resulting in
an overall drop in Nigerian crude export vol-
umes of 7.39%, to 2.193 million b/d in 2013
from 2.368 million b/d in 2012.
The biggest boost in terms of both volume
and percentage for Nigeria was in exports to
Asia-Pacific countries, with the 91,000 b/d
exported to the region in 2012 more than tri-
pling to 373,000 b/d last year.
Nigerian crude exports to Europe rose
by 29.7%, or 221,000 b/d, to 965,000 b/d
last year from 744,000 b/d in 2012, while
exports to other African countries grew to
197,000 b/d from 103,000 b/d, a year-on-
year increase of 94,000 b/d or 91.3%. Vol-
umes to Latin America also rose, to 263,000
b/d from 206,000 b/d, an increase of 27.7%.
OPEC overall exported an average 24.054
million b/d of crude last year, 1.23 million
b/d less than in 2012, the bulk of which—
14.3 million b/d or 59.3%—moved to the
Asia-Pacific Region. Crude exports to Europe
averaged 4.1 million b/d, or 17.2% of the
total, and those to North America 3.9 million
b/d or 16.3% of the total.
Total production fell to 31.604 million b/d
in 2013 from 32.425 million b/d the previous
year, OPEC said, using figures provided direct-
ly by members rather than the secondary
source estimates it uses to monitor output.
Total proven crude oil reserves held by the
12 member countries rose by 0.4% to 1.206
trillion barrels in 2013 from 1.2 trillion bar-
rels in 2012. The data showed year-on-year
increases of 2.8% for Iraq and 0.3% for Iran,
and decreases of 0.2% for Libya and Nigeria
and 0.5% for Angola.
The figures published in the ASB are
provided directly by member countries. —
Margaret McQuaile
Iran’s oil earnings plunge on sanctions hit
Nigerian exports to US slump on shale boom: data
Markets & Data
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What are the impacts for key pricing areas such as
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treadmill, demand growth, constraints, and pricing
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production: can refiners handle it all?
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Mt. Belvieu respond?
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2014
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