The Oil & Gas Consequences Of COVID-19

COVID Market Update

- Continental Resources - the largest producer in the Bakken - has shut in production, sounding alarms across the entire U.S. shale patch. It has also notified several of its clients that it will suspend deliveries. Continental is thought to have shut in about one-third of its production. Unlike some other shale companies in the United States, Continental has not hedged its 2020 production and is floundering as Bakken crude trades around $3 per barrel, compared to WTI’s $17.

- Oil ETFs and ETNs went for a wild ride this week, with front-month WTI futures contracts trading in the red on Monday. Barclays OIL ETN, iPath S&P GSCI Crude Oil Total Return Index ETN is being liquidated. The USO ETF has escaped this liquidation fate, but narrowly. OIL ETN holders will receive a portion - a tiny portion - of what they had invested in their unsecured ETN. The payout to holders will be based on the valuation of the ETN as of April 23rd closing.

- Marathon Petroleum - the largest U.S. refiner - warned this week that it was expecting a $7.8 billion writedown as fuel demand crashed. The loss before charges is expected to be $250 million for Q1. As stay-at-home orders in the US continue, Marathon has tapped a $3.5 billion credit facility and is also looking at taking out a $1 billion 1-year loan.

- Mexico’s famous oil hedge, which likely cost the country slightly north of $1 billion, is expected to produce a $6B windfall for the state. Hedging - at great cost - at $49 per barrel when the Mexican basket hovers around $7 has once again paid off for Mexico. The banks on the other end of the hedge, who at this point are unknown, will see a significant impact on their bottom line.

- The US is investigating suspected insider trading from non-American actors, who allegedly had inside information as to Russia’s dealings with OPEC regarding the production cuts in March before it was made known to the public. The traders reportedly had ties to people in the Kremlin.

- The Texas Railroad Commission has delayed its vote on instituting a mandatory 20% oil production cut in the state, with one of the commissioners, Ryan Sitton, vehemently pursuing his quest to remedy the situation in the oil markets. Other commissioners were more hesitant, citing concerns that acting hastily to force productions to curb production would open up the Commission to legal action. The group will now check with the Texas Attorney General and will vote on May 5.

Politics, Geopolitics & Conflict

- In an entirely unexpected move, Iraq’s Ministry of Electricity has moved to reduce its electricity and natural gas imports from Iran by 75%. This has been a major geopolitical issue, with Washington pressuring Baghdad immensely to reduce its dependence on Iran for electricity. It’s a surprise move given the fact that American missteps in Iraq have emboldened pro-Iranian forces there. But backdoor dealings are likely at play here. Washington is holding leverage over Baghdad in the form of a waiver that it has granted Iraq to continue to import natural gas and electricity from Iran despite U.S. sanctions, and that waiver may not be extended past the end of this month.

- Chevron is finally getting cut out of Venezuela, with the U.S. Dept of Treasury ruling that the company will no longer be able to drill, sell or buy crude, or transport crude in the country. The same goes for the oil service providers, Halliburton, Schlumberger, Baker Hughes, and Weatherford. This is part of Trump’s campaign of pressure on the Maduro regime, hitting it further while it’s reeling even more from the coronavirus pandemic. More important to Chevron than the 1% of the oil it’s been getting out of Venezuela is the untapped potential of reserves that are now out of reach, and which will likely be gifted to Chinese and Russian players. If regime change doesn’t work out in Washington’s favor, it will lose the oil game here.

Deals, Discovery, & Development

- While oil is in a holding pattern, the contest for Guyana’s first oil contracts is still in full force, with the government noting that more than 30 companies expressed interest in marketing the government’s share of this oil. The government will now shortlist 20 of those companies, launching a detailed proposal process that will take about two months.

- Shell is postponing investment in the North Sea Jackdaw natural gas development project, estimated at around $1 billion in value due to plunging oil prices. This is the second major investment decision the supergiant has postponed in as many months.

- Beleaguered Tullow Oil has sold the entirety of its Uganda assets to French Total SA (Total Uganda) in a bid to cut debt and with talk of the sale of its Kenyan assets coming next. The Uganda assets sold for $575 million and include its interest in four blocks in western Uganda and the proposed East African Crude Oil Pipeline.

- The world’s largest shipbuilding conglomerate, China State Shipbuilding Corporation (CSSC), has sealed a ~$2.8-billion deal with Qatar’s national oil company. This is the biggest export deal ever for Chinese shipbuilders, which will build LNG carriers for Qatar Petroleum.

- ExxonMobil has launched the construction of its $10 billion petrochemical complex in China, the first major petrochemical project built and wholly-owned by a US company in China.