Turkey Agrees To Pay For Russian Gas With Rubles
Turkey’s President Tayyip Erdogan and Russia’s President Vladimir Putin agreed on Friday to bolster cooperation after a four-hour meeting, a joint statement from the two nations has revealed as cited by Reuters. As part of the deal, which would increase cooperation in the transportation, agriculture, finance, and construction industries and present a seemingly united front against “terrorist organizations” in Syria, Turkey agreed to change how it pays Russia for natural gas. Under the new agreement, Turkey has agreed to pay Russia partially in rubles, Deputy Prime Minister Alexander Novak said after the meeting. Russian President Vladimir Putin announced months ago that unfriendly nations would be required to pay for Russian energy through a rubles account to insulate Russia from the effects of Western sanctions. While Russia would not consider Turkey an unfriendly nation, Turkey’s payment in rubles for Russia’s natural gas would protect those payments from sanctions, and could smooth things over with Moscow, who might otherwise frown on Turkey’s activities in Syria. Last month, Turkey also helped broker a deal to ship grain between Russia and Ukraine, further strengthening ties between Russia and Turkey. Turkey opposes the Kurdistan Workers’ Party (PKK) and its affiliate, YPG—long considered by Turkey, the United States, and the EU to be a terrorist group—which has waged an insurgency for decades against the Turkish government in support of Kurdish minorities in Turkey. Russia has strong ties with Syrian President Bashar al-Assad, who controls most of the airspace in northern Syria. Erdogan, facing an election next year, is in a complicated situation, with Turkey experiencing skyrocketing annual inflation of nearly 80%. This economic crisis would no doubt intensify without Russian gas supplies. Turkey imports nearly half of the gas it uses from Russia.
Dodgy Demand Data? The Oil Price Collapse Conspiracy
WTI crude oil prices fell to their lowest point since early February on Thursday, giving up virtually all gains since Russia invaded Ukraine. WTI crude for September delivery tumbled -1.5% to close at $89.26/bbl while Brent crude for October delivery fell -2.1% to $94.71/bbl. WTI crude has lost ~9.5% over the course of the week, marking the largest one-week percentage decline since April amid growing fears that oil demand will collapse when western nations descend into a full-blown recession. While oil producers are certainly beginning to feel the heat, it’s refiners like Valero Energy (NYSE: VLO), Marathon Petroleum Corp.(NYSE: MPC), and Phillips 66 (NYSE: PSX) who have been hardest hit by the pullback thanks to a sharp decline in their refining margins aka crack spreads. For months, refiners have been enjoying historically high refining margins, with the profit from making a barrel of gasoil, the building block of diesel and jet kerosene, hitting a record $68.69 in June at a typical Singapore refinery. The margin later settled in the high 30s a few weeks later, a level still nearly four times higher than the $11.83 at the end of last year, and some 550% above the profit margin at the same time in 2021. But crack spreads have now gone into full reverse: according to Refinitv data, Asian gasoline margins plunged more than 102% in July to a discount of 14 cents a barrel to Brent crude, a far cry from a premium of $38.05 a barrel they reached in June. Asian refining margins have now crashed to just 88 cents a barrel over Dubai crude, from a record $30.49 in June. The effect: a sharp rise in inventories from the United States and Singapore to Amsterdam-Rotterdam-Antwerp. Refiners are being forced to cut gasoline output to minimize losses and switch to producing more profitable fuels. Indeed, Taiwan’s Formosa Petrochemical Corp. (6505.T), Asia’s top fuel exporter, is planning to reduce operating rates at its residue fluid catalytic cracking (RFCC) units by 5% in the coming weeks, with a Formosa spokesman telling Reuters that the company plans to sell more very low sulphur fuel oil (VLSFO) due to higher margins for those products. The Big Conspiracy The collapse in oil prices has been so epic and unexpected that some oil pundits are now accusing the Biden administration of fabricating low gas demand data in a bid to hammer oil prices. To wit, in late June the EIA shut down reporting for several weeks, ostensibly due to a server malfunction. But as ForexLive has pointed out, gasoline demand data has been consistently bad ever since the EIA returned: “Maybe there’s an issue with reporting or maybe it’s a conspiracy”, ForexLive has declared. Even Wall Street has begun questioning the EIA data. Bank of America energy strategist Doug Legate has published a note titled the “fall of gasoline demand appears grossly exaggerated.’’ “For the week ending July 22nd, implied gasoline demand rebounded to 9.2 million b/d – a 1 million b/d increase vs the last two week average, and the second highest level of 2022,” BofA wrote in the note to clients. Curiously, the EIA reported a steep drop in gasoline demand shortly thereafter, prompting Piper Sandler global energy strategist to label the data “crooked”, saying the methodology left “significant room for error”. Related: What’s Really Happening With Gasoline Demand? “We are supposed to believe that in July, in the middle of driving season we are only using 8.6 million barrels per day. That would be down half a million barrels a day from May of this year; that would be below the Covid low of 2020,” Sandler noted. “So we ask all the refiners, we ask all the retailers, we ask everybody that reported earnings this season. Every single one of them tells you that their sales are not down materially from even pre-covid days. Some report record high sales,” he added. Piper Sandler’s allegations are buttressed by U.S. refining giant Valero. Asked about falling gasoline demand at the company’s earnings call last week, CEO Gary Simmons had this to say: “I can tell you, through our wholesale channel there is really no indication of any demand destruction… In June, we actually set sales records. We read a lot about demand destruction and mobility data showing in that range of 3% to 5% demand destruction. Again, we’re not seeing it in our system.” Further, alternate demand data from GasBuddy deviates considerably from EIA’s. GasBuddy tracks retail gasoline demand at the pumps in the U.S. According to GasBuddy, there was a 2% rise in gasoline demand last week, making it the strongest demand of the year. In sharp contrast, the EIA reported a 7.6% drop in demand for the same time period. The Biden administration certainly is gunning for even lower fuel prices. In an interview with Bloomberg on Tuesday, Amos Hochstein, the White House’s senior adviser for global energy security, said that gas and oil prices need to go even lower while U.S. producers and OPEC+ need to raise output. But as Adam Button, chief currency analyst at Forexlive, notes, it’s the Biden administration calling the shots now, and “at the end of the day, traders have to trade what’s in front of them”. “Right now it’s a crude chart that’s breaking support after a major period of consolidation — that’s not good. The calls for a recession are growing louder crude demand has a long history of following global growth. There are supply factors that will eventually be bullish — like the SPR releases ending in October — but that’s months away and OPEC is still adding some barrels,” he said.
How India is gravitating towards a gas ecosystem
India has been a predominantly fuel economy. The country’s current energy mix is characterized by low domestic production, high dependence on coal imports, and growing use of natural gas along with renewable energy for electricity. In 2020, the country imported crude oil worth $59 billion, which is, by far, the largest item of its total import bill. Natural gas is an essential energy source in many parts of the world because it emits almost 50% less carbon dioxide than other forms like coal or diesel when burned for power generation or vehicles, respectively. Thus, making it more environmentally friendly than conventional sources such as diesel or coal-fired thermal plants used across sectors. The country is now rapidly moving towards a gas-based economy. This shift will lead to greater competition, enhanced flexibility and transparency, modern and improved processes, ease of doing business, and investor confidence. Such measures will also encourage import substitution through local manufacturing by MSMEs. In such a scenario, where India is moving towards becoming an exporter of energy sources such as crude oil and natural gas, it will become an important stepping stone towards the vision of ‘Make in India.’ The recent changes in the Petroleum and Natural Gas Regulatory Board Act The Petroleum and Natural Gas Regulatory Board Act initiatives have increased private players’ participation in natural gas. The government has developed policy guidelines for onshore and offshore exploration, production, and testing under the New Exploration and Licensing Policy (NELP) Blocks. • The revenue sharing model adopted by the government has helped monetize marginal fields of National Oil Companies (NoCs) under Discovered Small Fields (DSF) Policy, with policy for grant of extensions to medium fields. • The policies for uniform licensing in hydrocarbon exploration and marketing freedom for gas produced from deep water are significant steps towards a sustainable future. • Significant progress has been made in operationalizing stranded R-LNG power plants and developing gas-consuming markets for a cheap supply of raw materials such as fertilizers to the farmers. • In a rare scenario, the government has also decided to give a capital grant as VGF to GAIL for pipeline infrastructure development. This will help connect the eastern parts of India with the National Gas Grid. These reforms come as a part of the series of new policy initiatives such as LPG cylinders subsidy, EoI to procure Compressed Bio Gas (CBG), and the recently announced policy for exploration of coal bed methane resources to leverage India’s potential. Consequently, India’s primary energy mix is expected to comprise approximately 15% natural gas by 2030, as per “Vision 2030: Natural Gas Infrastructure in India” of the Petroleum & Natural Gas Regulatory Board. The greater economic impact of the shift The government has been trying to make the economy more efficient, reduce India’s dependence on fossil fuels, prevent pollution, and increase employment opportunities. Import substitution and job creation are some of the significant benefits that would be derived from a move toward natural gas as an alternate fuel source, the share of which has averaged 6% of India’s total primary energy supply (TPES) in the last decade. Natural gas is being adopted rapidly by sectors for power generation, especially heavy industries like steel production, because it’s cheaper than diesel and can be used in industrial processes incompatible with the fuel. India is aiming to be self-sufficient in energy products, in addition, to becoming a net exporter of other commodities. Final thoughts India’s natural gas Exploration and Production (E&P) industry has evolved phenomenally since the 2000s, with the capacity to trap reserves up to 3 km below sea level. The government has also approved 100% FDI in the E&P efforts. With the government trying to make the process of bidding and marketing for natural gas more transparent and accessible, it is a matter of time before India completely shifts towards a gas ecosystem.
Russia Becomes Second-Biggest Crude Oil Supplier To India, Surpasses Saudi Arabia
In order to increase the market share amid competition, Russia is now offering oil to India cheaper than Saudi Arabia. During April-June, Russian crude was cheaper than Saudi Arabia with the discount widening to almost $19 per barrel in May. Russia surpassed the kingdom as the second-biggest supplier to India in June, ranked just behind Iraq, according to a report by Bloomberg. India is dependent on imports to meet 85 per cent of its oil needs. After Russia’s invasion in Ukraine, the Russian oil prices fell as most countries shunned it. During the period, India and China have become willing consumers. According to official data, India’s crude import bill increased to $47.5 billion in the second quarter after a surge in global prices coincided with rebounding fuel demand. That compares with $25.1 billion in the same period last year, when prices and volumes were lower. Oil has tumbled recently on concerns over an economic slowdown, offering some respite to consumers. “Indian refiners are going to try and get their hands on the cheapest crude possible that works with their refinery and product configurations… Russian crude fits that bill for now. The Saudis and Iraqis are not entirely losing out because they are directing more supply to Europe,” said Vandana Hari, founder of Vanda Insights in Singapore, according to the Bloomberg report. While the discount of Russian oil to Saudi crude narrowed in June, barrels were still around $13 cheaper, averaging about $102. India increased Russian oil imports by 4.7 times in April-May, or by more than 400,000 barrels per day (bpd), year-on-year, thanks to a price discount, the Russian central bank said on Tuesday. Indian refiners have been snapping up relatively cheap Russian oil, shunned by Western companies and countries since sanctions were imposed against Moscow for what it calls a “special military operation” in Ukraine. The central bank also said that China increased Russian oil purchases by 55 per cent in May as Russia surpassed Saudi Arabia as the top oil seller to China. India and China have bought oil, gas and coal worth $24 billion from Russia in only three months after its invasion of Ukraine. Out of this, India spent $5.1 billion on Russian oil, gas and coal, more than five times the value of a year ago. China spent $18.9 billion in the three months to the end of May, almost double the amount a year earlier. The $24 billion is an extra $13 billion in revenue for Russia from both countries compared to the same months in 2021. Russia has been offering big discounts on its energy exports, which prompted India to buy more from the country. Russian oil arrivals into India for May were at 740,000 barrels a day, up from 284,000 barrels in April and 34,000 barrels a year earlier, according to data from Kpler.
Prices At The Pump Continue To Plunge, But Stronger Demand Could Halt The Trend
The national average for a gallon of gas at the pump in the United States fell to $4.139 on Thursday, the 51st consecutive day the country has seen a price drop for gasoline, according to AAA. The month-ago average for American drivers was $4.807, representing a 16% reduction at the pump over the past 30 days and a sustained break in the upward trend that saw prices peak at $5.02 on June 14th. Whether the downward price trend will continue will depend on the demand situation, says AAA, noting that the steady drop in gasoline prices could reverse with a “slight uptick” in demand. “We know that most American drivers have made significant changes in their driving habits to cope with high gas prices,” AAA spokesperson Andrew Gross said. “But with gas below $4 a gallon at nearly half of the gas stations around the country, it’s possible that gas demand could rise.” On Wednesday, the Energy Information Administration (EIA) recorded a slight increase in gasoline inventories of 200,000 barrels in the week ending July 29th, with production averaging 9.3 million barrels daily. That increase compares to a 3.3-milllion-barrel draw the previous week. Earlier this week, the EIA noted that gasoline demand had risen from 8.52 million barrels per day to 9.25 million barrels per day the previous week, but still 80,000 bpd lower than for the same period last year. However, the AAA notes that if that demand rise continues, we could see a slowing of price reductions at the pump. The EIA’s Wednesday inventory report is more conducive to continued price decreases for American drivers. While the previous week’s report showed a large decrease in stockpiles, this week’s report shows a slight increase, indicating more available supply.
AG&P to launch Philippines LNG terminal this year, eyes Asia expansion
AG&P aims to commission the Philippines’ first liquefied natural gas (LNG) import terminal this December as part of the company’s strategy to operate five LNG regasification facilities across Asia by 2025. The import facility being developed in the Philippines was scheduled to start operating in September, but commissioning has been delayed to December 2022, Karthik Sathyamoorthy, president, AG&P LNG Terminals & Logistics, told Energy Voice. “Like other mega projects, we had supply chain issues from China, due to the lockdowns. However, we are still very much on track for this year’s start,” he said. AG&P, whose LNG business is headquartered in Singapore, is backed by several major shareholders, the largest being a Kuwaiti fund called Asiya, followed by Japan’s Osaka gas and Japan Bank for International Cooperation (JBIC). However, from an operational perspective, AG&P has over 8,000 employees in the Philippines and Manilla remains its largest operational location. It is currently building a 3 million tonnes per year (t/y) capacity LNG import terminal in the Philippines that will eventually be expanded to handle 5 million t/y. “The onshore site for the terminal is pretty much done and offshore jetty works are in the final stages. We should be finished by October. Then we can start testing and commissioning with actual commissioning in December,” said Sathyamoorthy. “The capacity will be up to 5 million t/y. We have started construction for two onshore tanks that will be integrated as part of the main terminal in 2024. Until then the floating storage unit (FSU) acts as the only storage, during that period it will be a 3 million t/y terminal,” he added. The Philippines, which is facing a looming gas supply crunch, as domestic production from Malampaya – the country’s sole field – is forecast to decline rapidly in the coming years, desperately needs LNG import capacity to improve its energy security. The AG&P-led terminal is a tolling facility and the initial capacity will supply its anchor customer San Miguel Corporation that operates the 1200MW Ilijan power plant. San Miguel is also adding another 1200MW generation capacity. The combined 2400MW at peak would use almost all the 3 million t/y LNG terminal capacity, said Sathyamoorthy. According to Sathyamoorthy, San Miguel has secured a short-term LNG supply contract and a medium-term contract from a portfolio player starting 2023. To make LNG more affordable for the Philippines, the import prices of LNG will be blended with the price of domestic gas. The extra 2 million t/y terminal capacity will be used by AG&P to aggregate downstream demand from industrial, residential, transport and city-gas customers. The terminal can be expanded further as the market evolves, both by adding additional storage and regasification capacity.
GAIL faces profit hit over gas supply cut – finance chief
Profit at GAIL (India) Ltd GAIL.NS will be hit as it rations gas sales after supplies are cut under its long-term deal with a former unit of Russian energy giant Gazprom amid high spot prices, its head of finance Rakesh Kumar Jain said on Thursday. GAIL, India’s largest gas distributor and operator of pipelines, imports 14 million tonnes per annum (mtpa) of liquefied natural gas (LNG) under various long term deals. Of this about 2.5 mtpa, or up to 39 LNG cargoes, were to be supplied this year by Gazprom Marketing and Trading Singapore (GMTS), now a unit of Gazprom Germania. Since the end of May, GMTS has missed delivery of 8 LNG cargoes to GAIL and is not certain about future supplies as it is securing the fuel for Europe, Jain said in an analyst call. He said GMTS has not declared force majeure, but “they are not scheduling (LNG cargoes supplies) at the moment. “Profitability certainly will be hit if the situation remains as it is today…There is a challenge in this quarter,” he said, adding GAIL’s gas marketing and transmission business will be hit due to lower supplies. GAIL has cut supplies to fertiliser and industrial clients besides reducing operations at its petrochemical plant at Pata, northern India, by over 50% to avoid purchase of costly spot LNG, Jain said, confirming a Reuters report. The state-run firm is also advancing delivery of some of its overseas LNG cargoes through time swaps and has chartered ships to bring in some of its U.S. LNG that it was planning to trade. GAIL has deals to import 5.8mtpa LNG from the US. Jain said GAIL is also scouting for long term LNG deals to secure supplies, although its previous tender for a 10-year 0.75mtpa deal failed. The company agreed a 20-year deal with Russia’s Gazprom in 2012 for annual purchases of an average 2.5 million tonnes of LNG. Supplies under the contract began in 2018. GMTS had signed the deal on behalf of Gazprom. At the time, Gazprom Germania was a unit of the Russian state firm. However, following Western sanctions against Russia over its invasion of Ukraine, Gazprom gave up ownership of Gazprom Germania in early April without explanation and placed parts of it under Russian sanctions. (Source: Reuters) GAIL Q1 net profit rises 51% to Rs 21.57 bilion on marketing margin boost August 5, 2022: GAIL (India) Ltd, the nation’s largest gas utility, on Thursday reported a 51 per cent jump in its June quarter net profit on the back of bumper margins from gas marketing. GAIL posted a consolidated net profit of Rs 3,250.95 crore, or Rs 7.34 per share, in April-June compared to Rs 21.5715 billion, or Rs 4.81 a share, net profit in the same period a year back, the company said in a regulatory filing. Sequentially, the profit was lower than Rs 34.7377 billion net earnings in the January-March quarter. The rise in year-on-year profit for the nation’s largest gas transporter and seller was on the back of bumper earnings from natural gas marketing. The firm reported a pre-tax profit of Rs 23.1791 billion from natural gas marketing in the first quarter of the current fiscal, as compared to Rs 4.4984 billion pre-tax profit a year back and Rs 19.7623 billion in the preceding quarter. The margin on gas marketing made up for a 12.5 per cent decline in earnings from the gas transportation business and a 74 per cent drop in petrochemicals earnings. Turnover more than doubled to Rs 380.3330 billion in the April-June quarter, from Rs 177.02.43 billion a year back, the filing showed. GAIL said the earnings per share have been adjusted on account of a buyback of 1.28 per cent shares by the company. Last month, the board of directors of the company had recommended the issue of one bonus share for two existing equity shares. Later in a press statement, GAIL said standalone net profit rose 91 per cent to Rs 29.15 billion in Q1 FY23 (April 2022 to March 2023 fiscal) as against Rs 15.30 billion in the corresponding quarter of last fiscal. “The positive results were mainly on account of increased gas marketing and transmission volumes, better marketing spread and higher product prices,” it said. Manoj Jain, Chairman & Managing Director, GAIL, said the company has successfully registered a healthy growth in the overall performance despite turbulent times in the gas business. GAIL has incurred a capital expenditure of about Rs 19.75 billion during the quarter mainly on pipelines, petrochemicals and equity contribution to joint ventures, he said. GAIL has commissioned the 533-kilometre Bokaro (in Jharkhand) to Angul (in Odisha) pipeline section of the Jagdishpur-Haldia & Bokaro-Dhamra natural gas pipeline (JHBDPL) during the quarter. With this, 1,642 kilometres of JHBDPL, popularly known as Pradhan Mantri Urja Ganga, has been commissioned while the remaining sections are expected to be completed by June 2023, Jain said. The pipeline travels from Uttar Pradesh to West Bengal with spur lines to Jharkhand and Odisha. He further added that to provide a thrust to the government’s focused initiatives to increase the share of natural gas in the primary energy basket, the company has approved the setting up of a Small Scale LNG (SSLNG) plant on a pilot basis and orders for two small-scale liquefaction skids has been placed. This will help in providing natural gas to areas not connected to the main pipeline, facilitate LNG as transport fuel and help monetize stranded/isolated upstream gas assets, the statement added.
India planning carbon credit market for energy, steel and cement
India is planning to start a carbon trading market for major emitters in the energy, steel and cement industries, as part of its efforts to hasten the transition to cleaner fuels. The platform is likely to be announced by Prime Minister Narendra Modi at Independence Day celebrations on August 15, according to people with the knowledge of the plan. It’s been in the works since March, when consultation with ministries and companies began, said the people who asked not be named because discussions are private. The Prime Minister’s Office and government think tank NITI Aayog didn’t immediately respond to emails seeking comment. The market would initially be limited to hard-to-abate sectors, allowing participants to trade credits earned from cutting emissions, the people said. One of the goals is to ensure state-owned energy firms like Oil & Natural Gas Corp., Indian Oil Corp. and NTPC Ltd., as well as steel and cement companies, can benefit from planned investments in carbon-capture projects, they said. India, the world’s third-biggest emitter, surprised pundits by announcing a plan to achieve net zero by 2070 at the COP26 summit in Glasgow late last year. While that’s a decade behind its fellow Asian behemoth China, the South Asian economy is less developed and faces greater climate challenges. The country is looking to cut 1 billion tons of emissions by 2030 as a first step in reaching its goal. India’s proposed market follows a similar one in China, which last year launched a mandatory trading system for all large power plants. But the market has been plagued by delays and problems with data collection, and has seen only lackluster buying and selling of allowances. A detailed plan for establishing the carbon market is likely to be ready in the fourth quarter, the people said. India is also looking to introduce methanol-blended fuels in land and marine transport, build more carbon capture projects, and encourage the adoption of electric vehicles as part of its climate goals, they said. The carbon-market plan was previously reported by the local Mint newspaper.
City gas distributors face uncertainty on high gas prices
Spiralling global prices of natural gas amid a surge in demand from Europe and lower supplies from Russia is posing a serious challenge for India’s gas industry. The industry was until now in a sweet spot with growth spurred by strong demand for the cleaner fuel and comparatively cheaper gas prices. However, the prevailing higher prices sparked by geopolitical issues since Russia’s invasion of Ukraine are now set to hit consumer demand as well as the profitability of Indian gas suppliers. US benchmark Henry Hub natural gas spot price at over $8 per mmBtu (million British thermal units) has more than doubled on a year-to-date basis. Prices are likely to stay elevated considering the squeeze in Russian supplies. Also, approaching winters and consequent spike in demand from Europe is likely to maintain pressure on spot gas prices, at least till the winter season recedes or till supplies from Russia improve, according to analysts. Analysts at Kotak Securities said Nymex natural gas price has managed to hold close to $8/mmBtu levels. With mixed factors in place, there might be some consolidation near $8/mmBtu before the next major move, the analysts said. The prevailing high international gas prices and consequent increase in domestic gas prices, as well as spot gas prices, are negative factors for city gas distribution (CGD) firms. These companies had continued benefiting from rising demand and volume growth in a lower gas price environment and enjoyed good margins, too. However, the latest scenario has raised concerns on their sales and profit margins. Price hikes taken by the companies to pass on the higher costs are, on one hand, likely to impact demand and hence, volume growth, said analysts. The strong high double-digit growth in volumes seen earlier may be difficult now, they added. “CGDs’ margins are likely to remain subdued sequentially, adversely impacted by the sustenance of higher spot LNG (liquified natural gas) prices in 1QFY23, despite price hikes by companies,” said analysts at Motilal Oswal Financial Services. For Mahanagar Gas Ltd and Indraprastha Gas Ltd, which derive higher contributions from the sale of CNG (compressed natural gas), increase in prices may hit their volume growth while volatility in blended gas prices means uncertainty on the margin front. The June quarter performance of Gujarat Gas will be affected by weak industrial PNG (piped natural gas) volume and moderation in margins on pass-through of lower spot LNG price, said Abhijeet Bora, research analyst for oil and gas at Sharekhan. For Gujarat Gas, industrial gas supplies hold importance. Current high gas prices leading to lower offtakes by industrial units is a key concern for the company. For Gail (India) Ltd, news flow on lower gas supplies from Russia proved to be a sentimental negative, said Avishek Datta, an analyst at Prabhudas Lilladher. Most analysts, however, expect the current scenario of lower supplies from Russia to be temporary. Further, Gail has long-term supply contracts with the US and many other sources. All companies with long-term contracts will stand to gain in the current volatile environment, said analysts. Analysts are optimistic about gas supplies from Russia to India normalizing over time. “We expect gas transmission to be better with pent-up demand, and the petchem business benefit from better utilization at the PATA plant (in Uttar Pradesh),” said Datta. “Gail has enjoyed the alignment of operational macros since the start of 2021, and we expect the macros to support it over the next couple of quarters as well,” he added.
Shale Companies Prepare For Their Best Quarter Ever
After a decade of losses and shareholder frustration, the U.S. shale patch is generating record amounts of cash flows and is earning record profits this year as oil prices soar while firms prioritize returns to investors. The public independent U.S. shale producers already had a blockbuster first quarter, with many generating record cash flows and profits and vowing to increase shareholder returns after years of corporate losses and little payback to investors. Moreover, analysts say the second quarter will be even better for the shale patch. The first earnings results announced at the end of last week and earlier this week suggest that Q2 will be the best quarter for shale profits ever. Independent producers are joining Big Oil—including U.S. supermajors ExxonMobil and Chevron—in reporting all-time high earnings and boosting payouts to shareholders through higher dividends and stepped-up share buybacks. The record cash flows and profits are unlikely to go unnoticed by the Biden Administration, which has been chastising domestic oil producers for rewarding shareholders instead of “lowering the costs at the pump for Americans.” Phenomenal Cash Flows Combined free cash flow at the top 28 independent U.S. oil producers is set to exceed $25 billion for the second quarter, estimates compiled by Bloomberg showed at the start of the shale earnings season. Free cash flow is set to be over $100 billion for the full-year 2022, more than double the FCF the shale patch generated last year. This year’s projected FCF will also be nine times higher than the combined annual cash flows between 2018 and 2020, per Bloomberg Intelligence data. “Even if the cost structure is trending higher, the amount of free cash flow generated will be phenomenal,” Paul Cheng, a New York-based analyst at Scotiabank, told Bloomberg. Production in the U.S. shale patch is also growing, but at a slower pace than in the 2018-2019 run-up to the pandemic. That’s due not only to spending discipline where firms prefer to trim debt and repay shareholders instead of growing production at all costs, as they did for nearly a decade before COVID created a new crisis and a new reality. Galloping costs, sold-out fracking equipment and crews, and supply-chain delays and bottlenecks are also reasons for slower U.S. shale production growth this year despite $100 a barrel oil. The latest Dallas Fed Energy Survey showed that the business activity index in the energy firms operating in Texas, northern Louisiana, and southern New Mexico jumped in the second quarter to the highest level in six years, but costs continued to escalate, and supply chain delays were worsening. Shale firms note that there is intense inflationary pressure on costs amid supply chain bottlenecks, high inflation, and growing wages in a tight market for skilled workers. “Those Returns Are Fantastic” Yet, some companies say that in terms of returns, the high oil prices more than offset inflation. “While we believe the industry is experiencing overall inflation of between 15% and 20%, our full year drilling and completion costs are forecast to increase by only about 8.5% year-over-year,” Hess Corporation’s chief operating officer Greg Hill said on the company’s earnings call last week. “If you look at our portfolio, we’ve got 2,100 or more drilling locations that generate great returns at a $60 WTI. So obviously, at current prices, those returns are fantastic, right? And so certainly, the movement in the oil price from a return standpoint is outstripping any inflationary effects,” Hill added. Hess Corp’s core shale operations in the Bakken are generating significant amounts of cash flow these days, the executive said. At $60 oil, the Bakken generates more than $1 billion of free cash flow for Hess, Hill said, noting that with current much higher oil prices, the company’s position in the North Dakota basin “becomes this massive cash annuity for the portfolio.” This week, Devon Energy and Diamondback Energy both reported on Monday solid Q2 earnings and increased returns to shareholders. Devon Energy raised its fixed-plus-variable dividend to $1.55 per share, up by 22 percent from the previous quarter, and raised its full-year 2022 production forecast by 3 percent to a range of 600,000 – 610,000 Boe per day due to “better-than-expected well performance year-to-date and the impact from a bolt-on acquisition in the Williston Basin.” The company raised its upstream capital guidance to a range of $2.2 billion to $2.4 billion for 2022, up from $2.1 billion, and expects its capital to be fully funded from operating cash flow, which is expected at nearly $9 billion at current strip pricing. Diamondback, for its part, generated a record $1.3 billion in free cash flow for Q2, exceeding last quarter’s prior FCF record by 35%. The Board approved a $2-billion increase to Diamondback’s share repurchase authorization to $4.0 billion. “Beginning this quarter, we have committed to return a minimum of 75% of our Free Cash Flow to stockholders,” chairman and CEO Travis Stice said. U.S. shale firms are finally reaping the benefits of triple-digit oil prices as they continue to prioritize returns to shareholders and reduction of debts to going into more debt in order to post production records.