Painfully Slow Growth Expected For Canada's Oil Sector

Market Movers

• Russian oil production dipped in September to 11.24 million bpd, down from 11.29 million bpd--a figure that is still above its agreed upon quota that it forged together with OPEC and its other allies of 11.18 million bpd. September's production fails to live up to Moscow's insistence earlier this month that it would be in full compliance with the quota through the end of September.

• The EIA is predicting that Canadian oil production will spike between 2040 and 2050, after a painful stretch of slow-going between now and 2040. Canadian oil and condensate production is expected to grow from 4.1 million bpd in 2019 to 6.1 million bpd in 2040 and 9.6 million bpd in 2050 on the back of oilsands development as global resources begin to deplete, raising the price of oil and consequently allowing Canada to profitably increase production of oilsands. The EIA also expects Canada to continue its sizable natural gas production, increasing 20% by 2050 to reach 6.8 tcf.

Deals, Mergers & Acquisitions

• ConocoPhillips has finalized the sale of its North Sea assets to Chrysaor for $2.675 billion. The deal includes operatorship of the Greater Britannia Area and J-Area in the Central North Sea and a 7.5% stake in the BP-operated Clair field. The assets produced 72,000 boed last year. The acquisition makes Chrysaor the biggest producer in the region this year. The expected production of the company for the next year is between 180,000 to 190,000 boed.

• ADNOC is looking to sell a $5 billion minority stake in its $15 billion natural gas pipeline infrastructure. It has sent information on the assets to potential bidders, with an agreement expected to be reached in H1 2020. Interested parties will likely include infrastructure funds and private equity firms. The deal is expected to fulfill some of the UAE's appetite for fresh cash. In a possibly related development, ADNOC is looking to invest $5 billion in an oil refinery project in Pakistan that should begin by the end of 2019.

• Indian oil and gas major ONGC will invest $1.83 billion to ramp up production in the north-eastern state of Assam. ONGC will drill more than 220 oil and gas wells across the state over the next five years. The investment in drilling is designed to help India reduce its oil imports by 10% by 2022. The move to increase its own oil production capacity is critical to India who is one of the largest oil importers in the world and as such, is exposed to the risk of volatile oil prices as well as sanctions, which India has experienced since the sanctions were levied on Iran.

• French Total has signed a cooperation agreement with German cleantech company Sunfire to produce hydrogen fuels at the Leuna refinery in Germany, where Total is the majority shareholder. Production is expected to start in 2021, generating 500 tons of green methanol in the first three years.

• Norway's Equinor has agreed to sell a 25% stake in Germany's Arkona offshore wind farm for around $550 million to Credit Suisse Energy Infrastructure Partners. The Norwegian company will retain a 25% share in the wind farm, alongside RWE Renewables, which will own the remaining 50%.

Discovery & Development

• Occidental (NYSE:OXY) has started up its first solar facility, which will power an enhanced oil recovery field operation in the Permian with its 120-acre Goldsmith field solar facility and 174,000 photovoltaic panels that provide 16MW of energy--enough to power all of the operations at Goldsmith. Its subsidiary, Oxy Low Carbon Ventures, has signed a purchase agreement for 109 MW of solar energy beginning in 2021.

• Russia's Rosneft has announced a discovery with its first prospecting and appraisal well on the Vostochno-Pribrezhny license block offshore Sakhalin Island. Early analysis suggests a resource of up to 2 MM metric tons of oil. Last month, the company said it would build its own LNG plant in the Pacific port of De Kastri to supply gas to Japan.

Legal, Regulatory Alerts

• The newly passed Washington state crude-by-rail law is forcing Phillips 66 to significantly cut shipments of Bakken crude to its Ferndale Refinery. The company claims to have drastically reduced the scheduled deliveries of crude oil to be unloaded at the Ferndale Refinery rail rack for the remainder of the year, including a 30-day period when no barrels of crude oil will be unloaded at the crude oil rail facility. Phillips 66, which operates a 121,000 b/d refinery in Ferndale, Washington, said that because of the restrictions under the law, its off-loadings since the law went into effect in July have dropped dramatically. The state of North Dakota is preparing to file a federal lawsuit against Washington state.

• East Timor authorities have launched a licensing round for 11 offshore and seven onshore exploration blocks following some closure on its dispute with Australia over the sea borders and earnings from nearby oil and gas claims. Under a July settlement with Australia, East Timor will get a bigger share of the Greater Sunrise oil and gas fields.

Politics, Geopolitics & Conflict

• Rosneft has decided to use euros for all of its new oil and oil product export contracts including LPG going forward in an attempt to ditch the dollar to insulate itself from additional US sanctions. The US has threatened to slap sanctions on Rosneft for its continued dealings with Venezuela in the form of accepting crude oil from Venezuela and reselling it to India, which is unwilling to purchase Venezuelan crude directly.

Venezuela's crude oil exports rose in September from August lows, reaching 845,000 bpd. Most of the increase went to Cuba, but a handful of those increased exports were finally released cargoes that had been sitting off the coast since sanctions were first levied. The minor increase in exports of less than 100,000 bpd was still not enough to change the state of Venezuela affairs--it is still sitting on a mountain of crude oil inventory with no means of exporting it all thanks to the sanctions that are keeping shippers skittish. With inventories spilling over, Venezuela is having to further curb its production and blending operations, which will cause its oil industry to spiral further. Still, Cuba is expected to continue to import Venezuelan oil for a song and in exchange for goods and services that it provides to Venezuela. Without Venezuela, Cuba would need to spend $5.2 million each day to import the oil it needs from elsewhere. Aside from Cuba, another support for Venezuela's oil industry is Rosneft, who continues to take shipments of Venezuelan oil before selling it onto India to avoid sanctions--ostensibly as a repayment of interest on loans that Rosneft extended to Venezuela. This practice has not drawn the ire of the US, unlike other Venezuelan oil shipments. Rosneft is in part owned by BP and Qatar, so any sanctions violation would impact these entities as well.

• Russia is gearing up to help Cuba to develop its oil and gas resources to promote energy security in the wake of a looming fuel crisis in the country. Cuba relies heavily on neighboring Venezuela for its crude oil, which it purchases at an unknown discount rate and through bartering of goods and services. Russian Prime Minister Medvedev is in Havana this week to discuss cooperation on many fronts.

• Following the attacks on Saudi Aramco that temporarily took offline almost 6 million bpd, critics of the Saudi Crown Prince (MBS) have become emboldened. Sources have suggested that some members of the 10,000-strong Al Saud family, as well as some in the business elite circle, have been critical of the Crown Prince's leadership style, with some expressing concern at his inability to anticipate and prevent the attacks on oil facilities, and other critical of his hardline stance on Iran in the wake of the attacks. For now, MBS' power is still fairly secure, although as the UAE bows out of the mess in Yemen, leaving Saudi Arabia holding the bag, suggests that Saudi Arabia's influence in the region stable may be waning. What MBS needs now is a successful IPO for Aramco to fund Vision 2030. MBS is working in the background to solicit a strong base of investors for the IPO, and is stubbornly stuck on the $2 trillion valuation, which is now even less likely.

• Greek Cypriot authorities awarded exploration rights to Eni and Total on September 18th, and Turkey is now responding by sending another drillship to the disputed waters, with a new round of drilling scheduled to start on October 7, according to Turkish authorities. The drillship, the Yavuz, is planning to drill a new well, Guzelyurt-1. This same drillship has been deployed earlier in June to Cyprus, but was withdrawn the day before the Eni and Total deal and returned to the Turkish port of Tasucu.

• Security forces in Baghdad have fired live rounds at civilians protesting against high unemployment, poor services, and corruption. At least 20 people have been killed since Tuesday in clashes with security forces in Baghdad and other cities. On Thursday, Iraqi Prime Minister Adel Abdul Mahdi declared a curfew as protesters demand his ouster. Protests have raised the prospect of further instability in a key oil-producing country in the Middle East. There is no sign that Iraq's massive oil operations in the south in and around Basra have been affected. Protesters have accused government forces of using disproportionate violence in Baghdad and the southern cities of Nassiriya, Amara, and Basra where demands for services and reforms have been met with sustained force.

• Unrest is intensifying in Ecuador, with President Moreno declaring a state of emergency as protestors rail against the end of decades-long fuel subsidies in clashes with police. The subsidies, deeply entrenched and in place for 40 years, were stopped in an effort to boost the economy, causing the worst unrest in the country in years. Ecuador also announced that it was quitting OPEC as of January 2020, as the production quotas are no longer tenable given the economic situation in the country.