NOPEC legislation is a dangerous provocation. Passed by a Senate panel on Thursday after being bandied about for some 20 years and rejected time and again, it’s suddenly gained more impetus because of soaring oil prices and pain at the American gas pumps. The legislation, if signed into law by Biden (which is far from a certainty) would give the U.S. a pathway to sue the cartel for price-fixing and market manipulation. That may have made more sense back in the days before American shale burst on the scene to become, by some metrics, the world’s top oil producer in 2018.
It is hardly appropriate anymore to suggest that foreign producers - even OPEC - can assert full influence over the oil markets. In fact, it could be argued that America’s biggest producers are complicit in refusing to ramp up production (as asked to) because they are considering their shareholders instead, maintaining spending discipline in order to reward those who invested their money during the boom times and never got payback until now. While the Saudis are unwilling to significantly increase their output quotas in order to bring oil prices down, so, too, are American shale producers. The White House appears to understand and is concerned about the implications of the NOPEC legislation. This legislation could have serious blowback for U.S. producers through retaliatory measures. Thus, in many ways, American shale can behave like a “cartel”. Releasing reserves from the SPR is also a form of market manipulation when you get right down to it.
At the same time, we are witnessing a sharp deterioration in relations between the U.S. and Saudi Arabia. The Saudis have spent the past couple of weeks hitting the airwaves in any publication that will listen to air their grievances about Biden’s lack of support for the threat to Saudi oil facilities emanating from Iran-backed Houthis in Yemen. The lack of support has been blatant and certainly hasn’t gone unnoticed. The message is clear. The Saudis refuse to ramp up production to bring oil prices down, so support against the Houthi threat is not forthcoming. This is also a holdover of the Biden administration’s decision to disengage with the Saudis over the murder of Khashoggi. Biden has somewhat overplayed this disengagement in light of the Russian war on Ukraine but, if it wasn't for the war, he would have gotten away with it. Russia’s war on Ukraine has given the Saudis a tit-for-tat retaliation by strategically withholding support for Western efforts to help Ukraine against Russia.
The White House's reaction to the Senate panel’s NOPEC vote so far has been extremely cautious and cognizant of the implications, so there is a fair amount of optimism that it will not go further than the panel.
Some 550,000 bpd of Libyan oil production remains offline, despite a temporary lifting of force majeure at the Zueitina export terminal earlier this week just to run damage control and free up some storage space. But what we found particularly interesting this week was an odd op-ed that appeared in The Times allegedly penned by prime minister-designate Fathi Bashagha. In it, Bashagha (who claims he did not author this piece), criticizes General Haftar, a former enemy-turned-ally. More to the point, in the letter he denies having written, Bashagha criticizes Russia’s Wagner mercenaries (who back Haftar on the ground) and says he stands “with Britain against Russian aggression” in Libya. When Bashagha tweeted a day later that he did not write the article and called on The Times to denounce it, The Times suggested that the prime minister-designate’s social media accounts had been hacked (in other words, that he did not write the tweet). They also said they had repeated confirmation from Bashagha’s staff that he did, in fact, pen the op-ed. This is some very interesting back-door propaganda that could suggest that Western forces are interfering to force Bashagha to back down against current interim prime minister Dbeibah, who has refused to resign creating a rival government situation that could lead to another civil war and is the cause of Libya’s oil production shutdown (again). If Russia had not invaded Ukraine, chances are that Bashagha would have backing at least from the United States, which has in the past quietly supported Haftar.
Markets on Wartime Footing
Russian nat gas exports to China increased by 60% in the first four months of this year, compared to the same period in 2021, with new information showing over $117B in oil and gas deals signed between the two countries in February, when Russia launched its war on Ukraine. At the same time, this is somewhat dulled by the fact that nat gas sales overall for the first four months of this year to non-CIS countries dropped by nearly 27%. The 12 countries of the CIS (Commonwealth of Independent States) include: Armenia, Azerbaijan, Belarus, Georgia, Kazakhstan, Kyrgyzstan, Moldova, Russia, Tajikistan, Turkmenistan, Ukraine, and Uzbekistan.
As American producers continue primarily to resist spending on production ramp-ups and instead are rewarding shareholders with dividends and buybacks, Chevron has bucked the trend, lifting its production target in the Permian Basin for this year by about 15% over 2021. Previously, the giant had targeted a 10% increase in Permian production for the year. Three other producers, Hess, Continental Resources, and Matador Resources have also indicated they will be boosting production. Deloitte is estimating $172 billion in free cash flow for American shale producers this year.
OPEC’s May 5th meeting concluded with no further increase in production quotes beyond the 432,000 bpd for June. OPEC has been falling short of meeting agreed-upon production increases, with the Saudis largely bearing the burden, while issues in Nigeria and force majeure in Libya make quotas challenging. For April, data shows that OPEC only produced 40,000 bpd more than it did in March, falling short over 200,000 bpd.
BP’s Tuesday earnings report stunned observers, with a more than doubling of profit from the same quarter last year. BP booked net profit of $6.25 billion, up from $2.63 billion for Q1 2021, while analysts were forecasting around $4.5 billion. Profits soared despite BP’s Russian Rosneft asset write-offs.
Another $7 billion in buybacks are now in store for U.S. refiner Marathon, which posted net profit for Q1 of $845 million, or $1.49 per share, up from a loss in the same quarter last year of $242 million. Revenues were up 68% from the same quarter a year ago.
Devon Energy beat Wall Street expectations with Q1 earnings reported on Monday, with earnings of $989 million, or $1.48 per share net income. Revenue was slightly short of expectations at $3.81 billion, while analysts had forecast around $4.02 billion.
Diamondback Energy also beat expectations with net income for Q1 of $779 million and profit of $4.36 per share. Revenue came in at $2.41 billion, also above analyst expectations.
Norway’s Equinor beat analyst expectations, reporting net income of $1.46 per share, and earnings adjusted for non-recurring costs at $1.60 per share. Q1 profits soared to $4.71 billion, with revenue of just over $36 billion.
Deals, Mergers & Acquisitions
Exxon has reached an agreement to sell its Romanian upstream affiliate, ExxonMobil Exploration and Production Romania to Romgaz for over $1 billion.
Discovery & Development
A total of six offshore oil projects in the Gulf of Mexico will come online within the next two years, with one already launching production in April this year. BP’s Argos floating production platform off the coast of Louisiana is scheduled to start pumping later this year, as is Shell’s Vito platform on the same coast. Murphy Oil started producing in April at Kings Quay, and three other projects one year out will add to the mix, putting over half a million barrels per day on the market, at least.
Australian Carnarvon Energy has completed its resource assessment for the Pavo-1 offshore oil discovery (operated by Santos) in Western Australia, saying that the March discovery significantly increases oil resources for its Dorado facilities. The Dorado is said to be one of the biggest offshore oil discoveries ever made on Australia’s North Western Shelf. Pavo-1 is estimated to hold some 43 million barrels of light oil, with additional prospective resources of 55 million barrels.
China’s state-run CNOOC this week started offshore production (FPSO/Subsea) at its Mero field in Brazil’s pre-salt Santos Basin. The Mero-1 project has six producing wells and an initial production capacity of 180,000 bpd.
Germany has launched construction on its first LNG import terminal to receive nat gas from the U.S. and the Middle East amid its scramble to reduce dependence on Russian gas. In the interim, Germany has now leased four floating LNG terminals to cover the gaps, with the first to be operational before the end of year (import capacity of 5 bcm/year). A second will be operational by early next year, and two others will come after that.
Pressure is mounting in the UK for the government to implement a windfall tax on energy firms that are raking in profits due to soaring prices as a result of Russia’s war on Ukraine. So far, Boris Johnson has resisted these calls, though BP’s impressive earnings report is adding to the pressure.