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Category: OilGas

U.S. Record-Breaking Oil Output One More Blow to OPEC

Record crude oil production in the United States is serving a fresh blow to oil bulls and OPEC, just as the cartel was trying to push benchmarks higher by adopting deeper production cuts. The EIA reported last week that average daily production in September had remained unchanged from August when it hit the record-high rate of 13.24 million barrels. This is happening despite cost inflation and lower international oil prices. And U.S. shale drillers have no plans to drill less. The situation is perhaps worryingly similar to 2014-2016 when oil prices took a dive, falling by 70% when the Saudi-led OPEC hit back at U.S. shale by boosting production to tank prices and sink as many U.S. producers as possible. At the same time, however, the situation is markedly different in several ways. U.S. producers have consolidated and this has made many more resilient to price wars. At the same time, Saudi Arabia and its Gulf allies are probably more risk-averse than they were back in 2014: that oil price crisis prompted Gulf governments to adopt austerity measures for probably the first time in their history. They did not like it. One analyst has already suggested that the Saudis’ only move in the current situation is to open the taps and try to kill U.S. shale all over again. However, this is a sort of a nuclear option that would hurt Saudi Arabia and its OPEC friends as well. But they do have another option: keep cutting. The market did not react to the latest production cut announcement because it was expected. Indeed, it was so copiously reported on, nothing short of a massive production cut would have impressed traders—especially when most of them are computers. The oil market is distorted right now, with the link between futures benchmark prices and physical supply and demand quite broken. Given time, however, this link will reestablish itself as it has always done. And then U.S. shale might become a bigger problem for OPEC. Then again, it might not. U.S. drillers have demonstrated in the past couple of years that the days of “Drill, baby, drill” are over. Discipline and caution in production growth are the new leading themes in the industry. Indeed, much of the increase in production this year, according to executives, is due to better well productivity and not more drilling. All this suggests that production growth is no longer the end goal of the industry. Longevity is, as suggested by the wave of large-scale acquisitions in the shale patch, focusing on the Permian. And longevity does not go hand in hand with constantly growing production. Longevity goes hand in hand with improved long-term planning, which the leaders in the industry are no doubt doing. OPEC will survive lower prices until the realization that there is less physical oil on global markets kicks in. And it will kick in as it always does. Because something many often forget is that not all oil is made equal. Record U.S. production could—and does—affect benchmark prices but that does not mean that U.S. oil can fully replace OPEC—and Saudi—oil. The market wants both, and it still wants a lot of both. Meanwhile, however, OPEC is not just sitting and watching how U.S. shale drillers boost output. It just accepted Brazil as a member, although the Brazilian side made sure to note it will not be a full member and will not take part in production cuts. Maybe not now but at some later point, as Reuters’ John Kemp suggested in a recent column detailing OPEC’s track record of seeking greater clout over global oil markets through expansion among non-U.S. producers.

LNG consumption, imports seeen rising

Not just analysts see a rise in the LNG consumption but also in its imports in order to fulfill the rising demand from various sectors. India’s consumption of Liquified Natural Gas (LNG) is expected to rise further in the coming months on the back of growing demand from the fertiliser and power industries, analysts say. Anticipated lower spot LNG prices will further add to this growth. “Our current forecast for December, January, and February averages at 76 MMcm/d, with an upside risk of 4 MMcm/d to this forecast, as spot prices are now expected to average around $16/MMBtu for the next three months, incentivizing spot buying for the industrial sector,” S&P Global said in a note.

Is A New Oil Price War Looming?

U.S. crude oil production broke another record in September, putting additional pressure on the OPEC+ group, which looks to keep oil prices above $80 per barrel by controlling “market stability.” The underwhelming OPEC+ meeting last week showed that there is dissent within the group about deeper cuts and production quotas. The Saudis rolled over their extra voluntary cut of 1 million barrels per day (bpd) and Russia – the leader of the non-OPEC allies in OPEC+ – pledged to deepen its supply cut to 500,000 bpd from 300,000 bpd. Some other OPEC+ producers announced additional voluntary cuts, which brings the total OPEC+ supply cut to 2.2 million bpd for the first quarter of 2024. That’s in addition to Russia’s 500,000 bpd cut via export reductions of 300,000 bpd of crude and 200,000 bpd of refined petroleum products, OPEC said. The OPEC+ supply decision, which the market found unconvincing, will likely erase the expected deficit early next year but leaves the question ‘what’s next’ unanswered, analysts say. Non-OPEC+ supply is growing at a faster pace than previously forecast and is being led by record U.S. crude oil production, which continued to soar despite a flat or falling rig count compared to this time last year. OPEC+ and its leader, Saudi Arabia, face the same oil dilemma – how to counter surging U.S. production and prevent it from unraveling the efforts of the alliance to prop up prices. Record-high U.S. oil production is a “huge problem” for OPEC+, Paul Sankey at Sankey Research told CNBC after last week’s OPEC+ meeting. The solution for Saudi Arabia could be to just flush the soaring non-OPEC+ output out by flooding the market with crude and thus sinking oil prices to levels below the U.S. profitability threshold, Sankey said. “We’ve more or less been saying potentially Saudi needs to just flush this thing out,” he told CNBC. The Kingdom is believed to have a production capacity of around 11.5 million bpd, and it’s currently producing around 9 million bpd. So Saudi Arabia could ramp up its oil output by around 2.5 million bpd – if it decided to – within six months, according to Sankey. The Saudis flooding the market with oil wouldn’t be all that surprising – they did so in 2014 and again in the price war in the early Covid days in 2020 when WTI oil prices went negative. Soaring U.S. oil production is becoming a “real problem for OPEC,” Sankey told CNBC. U.S. crude oil production hit a new monthly record of 13.236 million bpd in September, according to the latest data from the EIA released on Thursday. “The growth has not just been a Permian story. We’re seeing many shale basins that were flattish experiencing a revival,” Francisco Blanch, Head of Global Commodities and Derivatives Research at BofA, said on a call to discuss the bank’s energy outlook, as quoted by Reuters. BofA Global Research said last week in its 2024 outlook that “Recession, faster-than-expected US shale growth, and lack of OPEC+ cohesion are downside risks to oil prices.” Other non-OPEC+ producers are also ramping up production – including Guyana, Canada, and Brazil. Brazil was invited to join the OPEC+ alliance as of January 2024, but the biggest oil producer in South America will not have any quota and will not take part in oil production cuts. The lack of a unanimous group-wide cut with all members contributing is a concern about the OPEC+ unity, analysts say. “With the cuts only being supported by a handful of producers and with no additional cuts from Saudi Arabia, the failure to secure a group-wide agreement does not bode well for the group’s unity going forward – especially if demand continues to slow, forcing more unpopular and economically challenging decisions,” Ole Hansen, Head of Commodity Strategy, at Saxo Bank, wrote in a weekly note on Friday.

Saudi Prince Says Oil Output Cuts Could Extend Beyond March

Saudi Energy Minister Prince Abdulaziz bin Salman told Bloomberg on Monday that OPEC+ production cuts could extend beyond March 2024 if the market requires it, criticizing commentators for failing to understand the output deal. On November 30, eight members of the expanded cartel announced voluntary cuts of around 2.2 million barrels per day for the first-quarter of next year, including Saudi Arabia’s current voluntary cuts of 1 million barrels per day, as well as Russia’s 500,000 bpd voluntary cuts. That leaves us with “additional”, “voluntary” cuts of less than 900,000 bpd not already been priced in. Additional voluntary cuts were pledged from Iraq, UEA, Kuwait, Kazakhstan, Algeria and Oman. The market’s reaction to the OPEC+ voluntary cuts announcement was a further decline in oil prices. According to Reuters, investors were bearish on the crude ahead of the OPEC+ meeting and had already priced in their anticipation that cuts would not be enough to move prices higher. The Saudi energy minister has criticized the market’s response to the OPEC+ announcement, accusing commentators of wanting to be “conspiratorial” and failing to understand the deal. The Saudi prince suggested that this would change once “people see the reality of the deal”. The prince emphasized that the 2.2 million in output cuts would be delivered. “I honestly believe that the 2.2 million will overcome the usual inventory build that usually happens in the first quarter,” he told Bloomberg, noting that “we wanted the market to know there would be a phased-in approach” because the cartel does cannot predict what the market situation will be in the first three months of the New Year. That required the cartel to “be careful about what language we use”. In other words, curbs on OPEC+ production will be phased out only after consideration of market conditions.

ONGC and OIL in talks with BAPCO, JAPEX, and Mitsui to boost oil and gas production

State-run ONGC and Oil India (OIL) are in talks with Japan Petroleum Exporation (Japex), Mitsui and Bahrain Petroleum Company (Bapco) to collaborate on enhancing domestic exploration and production (E&P) activities. “Indian National Oil Companies (NOCs) (ONGC and OIL) have executed several agreements with International Oil Companies (IOCs) (ExxonMobil, Chevron, TotalEnergies) for collaboration in E & P activities and are also in discussions with BAPCO, JAPEX and Mitsui,” Oil Minister H S Puri said in response to a starred question in Rajya Sabha on Monday. Detailing the efforts made by the government to enhance India’s production of crude oil and natural gas, the Minister said the government has increased the net geographical area under exploration from 2.5 lakh square kilometres (SKM) to 5 lakh SKM. Besides, the “No Go” areas in exclusive economic zones (EEZ) have been reduced by almost 99 per cent, so 10 lakh SKM areas are now accessible in EEZ for E&P activity. “Total operational area (active) under various licensing regimes is 3,27,456 SKM which includes exploration and exploitation of unconventional hydrocarbons like Coal Bed Methane (CBM),” he added. Scaling up production Last month, ONGC organised roadshows in Abu Dhabi and Singapore, eyeing partnerships with global oil and gas companies for 25 offshore facilities in the next three years. The Maharatna company is embarking on an expedited development of multiple offshore fields over the next three years. Its objective is to establish more than 25 offshore facilities, layover 1,000 km of sub-sea pipelines, and create associated infrastructure, requiring an investment of $11 billion. The CPSU has increased its capex on E&P activities during FY24 to around Rs 10,000 crore, which is around one-third of the E&P major’s total capex for the fiscal year. Besides, it will incur a capex of around 10,000 crore annually for the next five years on exploration. On the other hand, OIL has plans to increase E&P operations to drill more than 60 wells in the current financial year from 45 in FY23. The company, which was accorded the Maharatna status last month, aims to surpass 4 million tonnes (MT) in crude oil production and 5 billion cubic meters (BCM) of gas output by FY25. E&P activity Ministry of Petroleum & Natural Gas (MoPNG) has signed a total of 311 production sharing contracts (PSC) involving 29 discovered fields, which includes one PSC signed for Panna & Mukta fields and 28 blocks under pre-NELP exploration blocks as well as 254 under the NELP regime with national oil companies and Private (both Indian and Foreign)/ Joint Venture companies. Also, thirty Revenue Sharing Contracts (RSCs) have been inked under DSF (Discovered Small Field)-2016 involving 30 Contract Areas. Since 2017, seven Open Acreage Licensing Policy (OALP) rounds have been successfully concluded with the award of 134 exploration blocks covering 2,07,691 sq. km. area for E&P activities.

Latest Cuts Leave OPEC with Fewer Options

Last week, OPEC and its partners from OPEC+ agreed to deepen and extend their production cuts into the first quarter of 2024. The move, almost unanimously seen as a means to propping up oil prices, did not have the desired effect. After an initial jump, benchmarks slid again, with Brent crude dipping below $80 per barrel on Monday morning in Asia. So, it seems that the cuts have, at least for now, failed in their purpose. Of course, the tighter supply may yet be felt on the market, but in the meantime, OPEC—and OPEC+—seems to be running out of options. And those that are left are painful ones. “The market is going to test Opec+ and whether $80 a barrel is really a floor they can defend,” Raad Alkadiri, an analyst with Eurasia Group, told the Financial Times. “The cuts being billed as ‘voluntary’ undermines the psychological impact for the market a little, but if the full cut is realized, its impact on the market should not be discounted.” Indeed, part of the reason oil prices went lower rather than higher last week despite the OPEC+ announcement was the suspicion that some of the cuts will remain so only on paper. The suspicion emerged after reports that OPEC members had internal disagreements about the production level they should be free to pursue. The total cuts for the first half of 2024 are set at 2.2 million barrels daily, equal to about 2% of global supply. A few years ago, this would have been reason enough for traders to pile into oil futures. Now, this is not the case. Some, such as Reuters’ Clyde Russell, argue that this indicates that oil demand is not as strong as OPEC says it is. Others, such as energy analyst Paul Sankey, suggest OPEC could do a U-turn and sink prices to neutralize the rising output of U.S. drillers. Physical oil demand and its relation to the oil futures market are at the heart of it all. OPEC has been upbeat about that, just as the International Energy Agency has been increasingly pessimistic about it, recently forecasting peak demand growth before 2030. At the same time, there has been a multitude of reports and forecasts projecting weak economic growth for the world in the immediate future. With such projections, it is easy to understand why traders are turning bearish after the initial shock of the latest war in the Middle East wears out. It’s even easier to understand after Bloomberg reported that as much as a fifth of what we collectively think of as traders are actually computer algorithms. Commodity trading advisors use algorithms to track the market and place bets on various commodities. In oil, the trading volume of these algorithm-driven trades constitutes 70% of the total daily average volume on a given day, per data from JP Morgan and TD Bank, cited by Bloomberg. This means that the futures market has got even more divorced from the physical market for oil than before. And that, in turn, means that OPEC could be driven to desperation as algo traders, which Bloomberg notes are trend followers and trend exaggerators, ignore any attempt by the cartel to control oil supply, and, as a result, prices. This would prove a dangerous situation, especially for U.S. producers that have set another production record this year even though growth has been slower and more moderate than in previous growth years. Indeed, this is what Paul Sankey suggested to CNBC last week: that Saudi Arabia may simply decide to reverse course and open the taps to flood markets with oil. The question is whether it can afford to do so with all its expensive energy transition plans. On the other hand, OPEC in general, and Saudi Arabia specifically, can simply cut even deeper if the price of oil in the first quarter of 2024 comes across as unsatisfactory. It would be a risky move, given the market reaction to this latest cut. But it could be the less risky move compared to the above alternative. According to Reuters’ Russell, a big part of the market’s skeptical reaction to the cuts was the news about internal disagreements in OPEC. Apparently, these suggest that not all members of the group would actually follow through with their cuts. On the other hand, many OPEC members have been underproducing even with their original quotas—and prices have still declined. It is certainly a complicated situation for OPEC. The more often it cuts production, the more traders would question the outlook on oil demand, as suggested by the latest cuts. On the other hand, there is a divide between the physical market and the futures market. The physical market looks quite healthy based on seaborne oil volumes, which are up by 1.86 million bpd so far this year, per Kpler data cited by Russell. The futures market appears to be dominated by automatic trading, which affects prices in a major way. In any case, next year will be interesting to watch on the OPEC front.

India, China skip signing renewable power pledge at COP28, 118 countries sig

India and China have not signed the global renewable and energy efficiency pledge at this year’s Conference of Parties (COP28) climate summit, held in Dubai. The pledge was to triple the global renewable energy target by the year 2030. Meanwhile, a total of 118 nations have pledged to triple green energy. The Global Renewables and Energy Efficiency Pledge commits to tripling worldwide installed renewable energy generation capacity to at least 11,000 GW and to double the global average annual rate of energy efficiency improvements to more than 4 percent by 2030. Nearly 1,00,000 delegates from 198 countries are participating in the global conference, which commenced on Thursday and will run through December 12. On Friday, Prime Minister Narendra Modi proposed to host the UN climate conference in India in 2028. He also launched a ‘Green Credit Initiative’ focused on creating carbon sinks through people’s participation. Participating in multiple high-level events on the second day of the UN climate conference (COP28) in Dubai, the Prime Minister said rich nations should completely reduce their carbon footprint “well before” 2050 and give all developing countries their fair share in the global carbon budget. He also urged countries to deliver a concrete outcome on finance to help developing and poor nations combat climate change at COP28.

Proposed 5% Biogas Blending With Natural Gas Can Cut LNG Imports Worth USD 1.17 Billion: IBA

The proposed 5 per cent blending of biogas with natural gas supplies in the country can cut LNG imports worth USD 1.17 billion annually, says a study by the Indian Biogas Association (IBA). The study comes against the backdrop of the government’s recent mandate to blend one per cent biogas with piped natural gas (PNG) supplies in the country from April 1, 2025 under the compressed biogas blending obligation (CBO) scheme. The biogas blending is proposed to be further increased to 5 per cent by fiscal year 2028–29. According to the study, this blending initiative gels well with the government’s macro-level move to make India a gas-based economy, with a target to increase the current share of gas in the energy mix from 6 per cent currently to 15 per cent by 2030. The IBA estimates show that 5 per cent blending of biogas with natural gas can reduce LNG imports worth USD 1.17 billion. This can also bring down per capita CO2 emissions by two per cent, benchmarked to the 2019 figure, which was 1.9 metric tonne of CO2 per person in India. Additionally, the body says preventing organic waste going to landfills can bring innumerable benefits. The CBO scheme shall encourage investment of around Rs 375 billion and facilitate the establishment of at least 750 compressed bio gas (CBG) projects by 2028–29, as per government estimates. This is going to improve India’s energy security, as it is currently heavily reliant on imported natural gas to meet its energy needs. Blending biogas with PNG and CBG can help reduce this dependence, which is invaluable. Biogas blending has the potential to demonstrate a positive correlation with agricultural income growth too, which is the case with ethanol as well. Every additional large-scale plant can ensure that almost 1,000 acre of nearby biogas plant area can be converted into organic agriculture. Biogas can be produced from various organic waste sources, such as agricultural waste, municipal solid waste, and food waste. his can create new economic opportunities for farmers, waste management companies, and other stakeholders involved in biogas production. Blending of biogas with natural gas will streamline the market for biofuels, making it more investor-friendly by reducing capital and operational costs, the body says. It also needs to be emphasised that selling biofuels in the market will become smoother, and the ecosystem will benefit from increased investor confidence, IBA stated.

Govt’s green hydrogen push to cut fossil fuel imports by INR 1 trillion

The mission aims to reduce dependence on imported fossil fuels and feedstock and create export opportunities for Green Hydrogen and its derivatives to help the world fight climate change. Green Hydrogen is considered a promising alternative for enabling India’s transition to renewable energy and achieving Net Zero emissions by 2070. Hydrogen can be utilized for long-duration storage of renewable energy, replacement of fossil fuels in industry, clean transportation, and potentially also for decentralized power generation, aviation, and marine transport. The Mission outcomes projected by 2030 are: * Development of green hydrogen production capacity of at least 5 MMT (Million Metric Tonne) per annum with an associated renewable energy capacity addition of about 125 GW in the country * Over Rs. 8000 billion in total investments * Creation of more than 0.6 million jobs * Cumulative reduction in fossil fuel imports worth over Rs 1000 billion * Abatement of nearly 50 MMT of annual greenhouse gas emissions At present, India has only two hydrogen refuelling stations – one each at Indian Oil’s R&D Centre, Faridabad, and the National Institute of Solar Energy, Gurugram. NTPC is going to start the operations of India’s first public green hydrogen fuelling station this month in Ladakh, which will be used to supply fuel to five hydrogen fuel cell buses India’s first hydrogen fuel bus was launched in Ladakh in August this year and has been carrying out trial runs in the region. In January 2023, the Union Cabinet approved Rs 197.44 billion for the National Hydrogen Mission. The amount included Rs 174.90 billion for the Sustainable India Green Hydrogen and Technologies (SIGHT) programme, Rs 14.66 billion for pilot projects, Rs 4 billion for research and development, and Rs 3.88 billion for other mission components.