Energy Prospectus

By John White at Roth Capital - Crude Oil/Macro:

Late Sunday afternoon Bloomberg reported that oil producers pledged to consider extending their pact limiting supply, as half a dozen nations said more time was needed to drain swollen stockpiles. Five OPEC members and Oman backed an extension, with Kuwait saying it should be for six months. The ministers met this weekend in Kuwait City and asked the Organization of Petroleum Exporting Countries to make a recommendation in a month on the possibility of prolonging the supply curbs.

As jointly reported by Reuters and the Voice of America on 3/23/2017, grumbling Venezuelans were lining up for scarce gasoline across the OPEC nation on 3/22/2017, due to mounting oil industry woes in a country with some of the world's largest crude oil reserves. Venezuela, which also has the world's cheapest gasoline, has wrestled with intermittent gasoline shortages in recent months, especially in the central coastal area. Long lines were reported in the capital, Caracas, which is unusual and the eastern city of Puerto Ordaz on Wednesday. As of 3/22/2017 about a dozen tankers were waiting around PDVSA ports in Venezuela and the Caribbean to discharge refined products and other components crucial for oil blending. Backlogs and payment delays to PDVSA's suppliers, which are now demanding to be prepaid, sometimes mean shippers wait weeks to deliver oil products.

Bloomberg reported on 3/21/2017 that Saudi Aramco is seeking to raise about $2 billion in its debut bond offering, the first step of a plan by the energy giant to tap markets for $10 billion, according to people familiar with the matter. Saudi Aramco will sell riyal-denominated Islamic bonds, or sukuk, as early as 2Q 2017, the people said, asking not to be identified as the discussions are private. The sukuk may be privately placed with investors, they said. The company hired HSBC PLC and Riyad Capital to handle the transaction.

Also on 3/21/2017 Bloomberg intoned that the rally in oil prices has stalled at the worst possible time for E&P companies, just as banks reassess credit lines crucial to their growth. A drop below $45 would likely spur credit-line reductions, raising the specter of cuts that crippled E&P companies a year ago, said Kraig Grahmann, a partner in Houston for law firm Haynes & Boone LLP. Between the end of 2015 and October, when credit lines were last reassessed, the average borrowing base for U.S. E&Ps fell 16%, according to data compiled by Bloomberg. Lenders can also be reluctant to cut credit lines if it would mean mortally wounding a borrower and raising the risk of default.

Reuters reported on 3/23/2017 that three of Asia's top buyers of LNG have agreed to work together to secure more flexible contracts when buying the commodity. Korea Gas Corp (036460.KS-NC) said in a statement on Thursday that it had signed a memorandum of understanding in mid-March with Japan's JERA and China National Offshore Oil Corp (CNOOC-NC) to exchange information and "cooperate in the joint procurement of LNG". The alliance comes as LNG buyers around the world push to move away from contracts that restrict them from reselling or swapping excess cargoes. South Korea, Japan and China accounted for over half of global LNG trade in 2015, according to the BP Statistical Review of World Energy (BP-NC).

On March 24, the pipeline-related topic moves to the grandaddy of all the conflict lobby's boogeymen — the Keystone XL pipeline — and the Trump Administration's announcement that the State Department has issued the cross-border permit necessary for Trans-Canada to proceed with completion of the northern leg of the Keystone system. Friday's announcement states that the State Department "considered a range of factors including, but not limited to, foreign policy; energy security; environmental, cultural and economic impacts; and compliance with applicable law and policy." The decision by the State Department comes as no surprise, given that it follows an executive order issued by President Trump in January, which instructed State to make a decision on whether to issue the permit after a study period to last no more than 60 days. It is also in line with Trump's "America First Energy Plan" which focuses on ways to make the U.S. less dependent on imports of oil from the Middle East. Keystone XL, if completed, will carry large volumes of Canadian oil sands crude into the United States to be refined and consumed.

Green groups promise guerrilla warfare tactics to stop Keystone pipeline. Environmental activists vowed over the weekend to fight the Keystone XL oil pipeline to the bitter end, insisting the Trump administration’s approval of the long-delayed project will not be the final word. Powerful green groups are launching a two-pronged strategy to block the pipeline in the streets and in the courts. First, they intend to use a state review process in Nebraska — where Keystone still does not have a legal route, despite federal approval of the project — to delay any movement forward. Nebraska state officials charged with approving the pipeline’s path say a decision shouldn’t be expected until September at the earliest, and environmentalists could drag that process out even longer. The second piece of their plan centers on the kind of guerrilla warfare tactics seen throughout last year during the fight over the Dakota Access pipeline. Activists say they’ll organize protests and even set up camps along Keystone’s proposed route, potentially blocking construction of the project if and when it’s set to begin.

FWIW: Transporting oil by pipeline is MUCH SAFER than moving it by rail.

Schlumberger Ltd. and Weatherford International Plc are forming a joint venture aimed at taking on the king of fracking, Halliburton Co. Schlumberger, the world’s biggest oil-field service provider, will own 70 percent and be the operator of the hydraulic fracturing partnership, to be known as OneStim, the two companies said Friday in a joint statement. Weatherford, the No. 4 oil-field servicer, will own 30 percent and receive a one-time cash payment of $535 million. Halliburton is the world’s largest provider of fracking services. Fracking, in which service companies blast water, sand and chemicals underground to release trapped hydrocarbons, has been one of the most battered businesses in the oil patch during the two-year market downturn. Weatherford said in February it had shut down its fracking unit and would sell the business after profits evaporated. The new joint venture, expected to close in the second half of the year, will bring Schlumberger closer to its chief rival, Halliburton, which has a total fleet of fracking pumps that add up to 3 million horsepower, according to Spears & Associates, a Tulsa-based oil-field consultant. Schlumberger currently has about 2 million horsepower, while Weatherford has an estimated 800,000 to 1 million.

Canadian drilling activity dropped sharply this week, according to Baker Hughes’ (ticker: BHI) weekly rig count for March 24, 2017. Canada lost 91 rigs to end the week at 185, down from 276 active rigs last week. This is the largest single-week drop seen in Canada since 2014, when 135 rigs came offline at the end of December.

This drop is most likely an expected seasonal adjustment, as the number of active rigs in Canada typically drops sharply in March.

The Canadian rig count is in general much more variable than the U.S. rig count. Since 1998, the earliest Canadian data published by Baker Hughes, Canada has added or lost more than 100 rigs in a single week 64 times. The number of active rigs has doubled in a single week twice, once in 2016 and once in 2013. By contrast, while the U.S. rig count has always been higher than the Canadian count, U.S. rigs have never added or lost 100 in a single week.