12th October 2023

Good morning team. This is Both Barrels, your daily dose of all things oil, gas, and energy, without the hot air. Today’s highlights:

• 🔁 Exxon’s short-cycle strategy

• 👀 BIG build in US crude stocks

• 🇵🇸 Saudi & Iran’s rare common ground

• ⚠️ NATO’s “determined” response to Baltic mischief

plus a lot more. Let’s get to it…

📈 THE NUMBERS

🗞️ WELL-HEADLINES

 🗽 North America

• Exxon’s doubling down on short-cycle - Exxon has confirmed its big money acquisition of Pioneer. Some highlights:

  • The all-stock purchase values Pioneer at $59.5bn ($253/share), an 18% premium to Pioneer’s share price before the news broke.

  • Exxon’s Permian production will more than double to 1.3 mmboe/d, increasing to 2 mmboe/d by 2027, and Exxon will now operate ~15% of all production in the Permian.

  • Notably, Exxon highlighted how the acquisition will increase its short cycle volumes and capital flexibility “to more quickly respond to demand changes”. A sign of the times in an era of volatility and long term demand uncertainty. Does this mean less focus on investment in much needed long-term conventional production?

  • Exxon expects to unlock $2bn per year in synergies, primarily by applying its technology to Pioneer’s acreage to enhance resource recovery.

  • The Pioneer board still needs to accept the offer…

• BIG build in inventories - API calculations have shown a massive 12.9 mmbbls build in US crude stocks, compared with an expectation of a 1.3 mmbbls build. Gasoline stocks rose by 3.6 mmbbls.

• Calcasieu Pass LNG nearing operations - Venture Global has asked regulators for permission to start operations at its Calcasieu Pass LNG in Louisiana. The start of commercial services at the plant is the subject of several disputes between Venture Global and customers who claim Venture didn’t deliver them cargoes they were owed.

• Kosmos strikes lucky in GoM - the US indy has made an oil discovery in the U.S. Gulf of Mexico at the Tiberius exploration well.

🏰 Europe

• BP’s solid portfolio - in an investor presentation, the company said it had 18 bnboe, ~20 years worth of production, in its portfolio that met its investment return criteria. The company has an investment hurdle rate of 15-20%, and payback periods of 10 years for oil and 15 years for gas.

• Poland pushing Russia out - Polish state-owned Orlen Group is taking over the Polish section of the 33 bcmpa Yamal gas pipeline (which runs from Siberia into Germany, via Poland), removing Russia’s Gazprom from the 48% stake it owns in Europol Gaz, which owns the Polish section of the pipeline.

⛩️ Asia & Oceania

• India’s SPR - India is looking for Saudi investment to develop the next 50 mmbbls phase of its strategic petroleum reserve. India imports over 80% of its oil needs and has built strategic storage at three locations in southern India for 35 mmbbls of crude to protect against supply disruption.

• SK thirsty for gas - South Korea’s Komipo has issued an LNG tender for six cargoes a year for 2027-2035, and four cargoes for 2035-2041. Pricing should be based on Henry Hub rather than oil-linked, which fits with the trend in LNG markets of moving away from traditional oil-linked LNG pricing.

🦁 Africa

• First oil in Namibia in 2030 - the emerging hydrocarbon basin offshore Namibia is expected to start production by the end of the decade, according to the country’s oil minister. Large offshore discoveries by IOCs like Total and Shell have put Namibia on the hydrocarbon map, and the country is believed to hold 11 bnbbls of reserves.

🌍 GEOPOLITICS & MACRO

• Rare common ground - Saudi Crown Prince MBS and Iranian President Raisi have held their first ever call to discuss the conflict between Israel and Palestine. The pair reportedly spoke for 45 mins and agreed on “maximum effort to deescalate” the situation, and the need to “end war crimes against Palestine…Islamic unity was stressed & both believed the regime's crimes & the US green light will cause destructive insecurity for the regime & backers.” Despite US efforts to rebuild relations with Saudi, it’s clear where MBS’ priorities ultimately lie.

• Whodunnit? - NATO has promised a “determined” response if it’s confirmed that the damage of the Balticconnector pipeline was deliberate. Repairs are expected to take 5 months. Meanwhile, Norway has stepped up security at their offshore oil & gas installations in the region. With pipelines and clandestine sabotage now apparently fair game, it’s anyone’s guess what happens next. Crazy times.

• Saudi and Russia still in control - Saudi’s energy minister, in a joint TV interview with Russia’s energy minister, commented that OPEC+ needed to be “proactive” to stabilize a market that “cannot be left alone”. He likened the market to a yo-yo, while Putin suggested that oil prices would be $50/bbl if it wasn’t for OPEC+. Putin also commented that OPEC+ cuts would “most likely” be extended into 2024.

💨 CARBON, CLIMATE, & OTHER ENERGY STUFF

• Global energy demand has plenty more room to run - the EIA forecasts that new energy demand, especially from growing populations and living standards in developing economics, will more than offset energy efficiencies, and result in global energy demand growth of ~30% by 2050.

• 40 years of household energy costs - here’s an interesting piece from Forbes looking into how US household energy costs have changed over the years. While energy costs have risen by 166% since 1982, rising incomes have offset the impact. The average US household spends about 10% of its expenditure on energy.

🛢️ BOTTOM OF THE BARREL

While Exxon’s big money buy of Pioneer - it’s largest deal since the Mobil merger back in 1999 - is a clear show of faith in the future of oil, it’s notable that the company has decided short-cycle, flexible volumes and capex are a better use of funds than long-term conventional projects.

Exxon clearly sees a volatile future ahead, and the ability to ramp up and down its operations to match the whims of the market is a valuable proposition.

It’s not just market risk that the Pioneer acquisition mitigates: a larger share of Exxon’s production is now on home soil, helping to reduce geopolitical risk at a time when “energy security” is on everyone’s lips.

The next question is: will Exxon’s buy kick off a wave of consolidation in the US shale patch? And, if so, who’s next?

👋 BEFORE YOU GO 

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Thanks for reading. Have a day out there. 🛢️🛢️