OPIS Headlines

December 6, 2016
Mexican Energy Reform Goes into High Gear

The auction yesterday of Mexican deepwater blocks in the Gulf of Mexico is the capstone of the massive restructuring of Mexico's petroleum industry launched three years ago in the Energy Reform legislation of December 2013.

Pemex summed up its view of the auction's results in a news release: "Today is a historic day for Mexico and for Petroleos Mexicanos. After 78 years operating by itself, Pemex will carry out an E&P project through a farmout, as a result of the new business framework established by President Pena Nieto's Energy Reform."

The big winner at the auction, conducted under the auspices of the Comision Nacional de Hidrocarburos (CNH), was Australia's BHP Billiton, the world's largest mining company and also a major petroleum producer. BHP offered a bonus payment of $624 million for a 60% interest in the Trion field, the crown jewel of the auction thought to contain 485 million bbl of oil equivalent (boe). BHP will also be the operator of Trion field.

BHP offered an additional royalty of 4% over the 7.5% base royalty. In the bidding, BHP narrowly beat out BP Plc, which bid $606 million as the bonus payment for the operating interest.

Pemex drilled the discovery well at Trion in 2012 in the Perdido Fold Belt, a production area about 120 miles east of the Rio Grande mouth at Brownsville, Texas. Trion itself sits 24 miles south of the international border out in the Gulf of Mexico. On the U.S. side of the line, Shell, Chevron and BP already have producing platforms making a combined 65,000 b/d.

In addition to Trion, yesterday's auction included 10 unexplored blocks. Four of them abut the international border in the Perdido Belt and are considered highly prospective.

More of a wildcat prospect are six blocks down in the southern elbow of the Gulf of Mexico north of Coatzacoalcos, Veracruz and Villahermosa, Tabasco. In advance of the auction, analysts were speculating on how strong the interest would be in this unexplored area.

In the event, results were much stronger than almost anyone anticipated. The big bidder for two of the four Perdido blocks was state-run China National Offshore Oil Co. CNOOC offered some of the highest royaty payments, committing to pay 15.01% of its gross revenue on one block, and 17.01% on the other.

Energy Minister Pedro Joaquin Coldwell, head of Mexico's Secretaria de Energia (SENER), commended China's boldness. "We salute the Chinese business that has come to compete in Mexico and to win. When we talk about diversification [of participating companies], we're not referring only to company sizes but also to the range of nationalities."

In all, eight of the 10 exploration blocks were snapped up in competitive bidding between ExxonMobil, a consortium made up of France's Total, Norway's Statoil and BP, another group including Pemex partnered with Chevron and Japan's Inpex Corp., and a group made up of Murphy Oil, Malaysia's Petronas Carigali, and London-based Ophir Energy.

Bringing Trion on production does not offer a quick fix to the relentless decline in Pemex production, from a peak of 3.4 million b/d in 2004 to 2.17 million b/d currently. Pemex expects to sign a Joint Operations Agreement with BHP and a license contract with the CNH within 90 days. But field development costs are expected to total $11 billion, with the first tranche of production expected in 2023, and the field reaching full production potential of 120,000 b/d by 2025.

It's interesting to see BHP take position as the lead horse in developing Mexico's deepwater oil. In fiscal 2015, year ended June 30, 2015, BHP had $44.6 billion consolidated revenue, including 25.6% from petroleum, 25.7% from copper, 33% from iron ore and 13% from coal. But its net operating assets of $97 billion were 35% petroleum, 25% copper, 25% iron.

The company has just gone through fiscal 2016, arguably the worst year in the last 20 across the entire slate of commodities. Prices for all four of their major business lines collapsed, but nowhere was it worse than in oil and gas. They took a $7.2 billion charge against the huge position they took in U.S. shale properties back during the boom. Accordingly, global petroleum assets shrank from $33.6 billion in 2015 (35% of total) to $25.2 billion in 2016 (30.4% of total).

In spite of the nightmare results in 2016, BHP obviously is not giving up on oil and gas. And in light of how sunk its other three major business lines are, it made sense, on Dec. 5, 2016, to take a favorable view of oil and gas, especially in light of OPEC's agreement last week. And they're bringing the right set of technical skills to the Mexico deepwater task, since deepwater work in the GOM has been a focus of the company's E&P efforts in the U.S. since well before they took the big shale position.

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October 27, 2016
Discounts Widen for some Midcontinent Crude Blends

As hard as it may be to believe, some companies are again talking about railing heavy Canadian crude from Alberta to points in the United States, including the Gulf Coast. And meanwhile, discounts for Bakken crude have widened as environmental protests make it more difficult to get that material to refiners via pipeline.

Some of the heavier blends of Western Canadian crude are now discounted by more than $15/bbl off of WTI futures, and even the more fungible WCS blend (Western Canadian Select) finds a price some $14.50/bbl off WTI or at less than $35/bbl. And with coiled railcars sitting idly all over the North American continent, sources say some deals can be worked to put unit trains together at freight rates in the high single digits or less. Some of the interest is in undiluted heavy crude that can be blended when it arrives on site at coastal destinations. If undiluted heavy crude can be moved for, say, a $6/bbl rail freight, it can work into several markets.

Bakken crude hardly fetched any discount to WTI in early autumn, but December barrels are now quoted around $2/bbl off WTI with the discount narrowing in 2017.

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October 4, 2016
EPA's Proposed Enhancements to RFS Program Not a Surprise: RFA

EPA's move Monday proposing enhancements to its Renewable Fuel Standards program was "not at all unexpected," according to a Renewable Fuels Association (RFA) official.

"EPA has been very transparent about this particular proposal," RFA Vice President Geoff Cooper told OPIS. "They have been talking with stakeholders about it for 18 months. So we weren't terribly surprised by anything we saw in that proposal."

RFA and Growth Energy indicated that they will be submitting comments to EPA after reviewing the proposed rule. Growth Energy noted that the proposal "intends to provide regulatory clarification for ethanol blends from 16% to 50% ethanol allowing blends such as E30 and E25 to be sold through blender pumps to flex-fuel vehicles."

"We see it as EPA sort of clarifying some gray areas that have been sitting out there for the past several years," Cooper said. "The proposal is really just cleaning up some areas where there were some questions and uncertainty and ambiguity about how various ethanol blends fit in with EPA's regulatory framework."

Cooper said the move "was never intended to address E15."

"It was always about everything else," he said. "There were questions about where those blends between 16% and 50% fall. Are they gasoline? Are they alternative fuels? That had always been a bit of a gray area.

"There really was no gray area about E15. When it got waiver approval from EPA, it was gasoline. So I think this rule was not expected to really address E15 Reid Vapor Pressure (RVP) in any meaningful way, and it doesn't really. EPA's goal with this rule is just kind of to clear the air on everything else -- E15 through E83."

Cooper indicated that it is too early to say for sure whether the move will turn out to be overly positive or negative for the biofuels industry.

"I think it is probably somewhere in the middle," he said. "It is probably net neutral, but time will tell if that is the case or not."

However, Cooper said that "by clarifying that E16 through E50 are not going to be treated as gasoline and they are going to be treating them as flex fuels, that is definitely a positive step."

"I don't think it makes sense to treat E16 thru E50 as gasoline when they are only intended for use in flex-fuel vehicles," he added. "They shouldn't be treated the same way as gasoline and held to the same regulations required as gasoline."

EPA's proposal to limit the amount of sulfur in ethanol flex-fuel blendstocks such as natural gasoline to 10 parts per million "could have some undesired impact on flex-fuel blending," according to Cooper.

"We are going to encourage EPA to take a really close look at natural gasoline and what is practical as to some of the parameters that they are putting on it," he said.

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August 17, 2016
Surging Mont Belvieu C5 Mystifies NGL Industry

One of the more baffling events in the Mont Belvieu spot market this month has been the rapid rise in natural gasoline prices, which, from an industry standpoint, doesn't appear tied to clear market fundamentals.

Front-month non-TET C5 prices were in contango most of the summer, meaning that the out month held a premium to the front month. That relationship flip-flopped Aug. 1, when a premium developed for August C5, versus September, creating a backwardated market, where the front month is stronger than the out month.

Initially, that premium was just 0.875ct. It widened to 7cts on Aug. 4, and -- stunningly -- to 14cts on Aug. 15 in some of the steepest front-month/out-month backwardation ever witnessed for the product.

Meanwhile, also in a rare development, wets, or dated barrels, have been trailing the front month since Aug. 3.

"I've never seen consistently negative premiums for ratable barrels," said one trader.

A sudden surge in front-month prices sometimes speaks to fundamentals such as tightening supply, but since overall C5 supplies are viewed as abundant, traders are left puzzled.

"There is plenty of C5, very little blending, and no cracking," said another trader. "If anything, due to fundamentals, the (C5) price should be much lower. The only demand out of (the) USGC is for some limited exports, yet there are two naphtha imports headed here."

The two imports are Mediterranean light naphtha cargoes (low sulfur) that are believed to be destined for the U.S., despite closed arbs. As one NGL broker put it: "...it's not bullish for the overall market."

One theory pointed to as a possible driver of front-month C5 prices, but unconfirmed: Some players with variable NGL storage contracts who opted to buy front-month ethane and sell it forward at big premiums (contango) may be lacking room for other products in their storage accounts and are having to buy any- month C5 to cover sales. "I think a lot of storage has been filled with ethane so, customers may not have any flexibility on moving other grades," the second trader said.

Front-month natural gasoline was again volatile on Aug. 17, trading from $1.06- $1.10375/gal. The backwardation had pulled in but was still comparatively hefty, gauged most recently at 7.5cts, and talked today between 5-12cts.

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