Energy Industry Trends Review

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European crude refining runs estimates are largely unchanged at 12.2 million b/d for the fourth quarter of 2011 (down from 12.4 million b/d in the third quarter). Regional runs rose 165,000 b/d in August to 12.6 million b/d, 325,000 b/d below a year earlier. Refinery stoppages continue to be heavier than in 2010 so far this year, in part due to economic and some unforeseen shutdowns. While the loss of Libyan supplies since February has prompted several refiners to undertake turnarounds earlier than planned, several plants are currently reducing runs or shutting altogether due to poor margins. In terms of scheduled maintenance, the main contributors are the Netherlands, with both Shell’s Pernis and BP’s Rotterdam undertaking work in October. In Germany, Gelsenkirchen was down for most of October and in Greece, Petrolas Elefsis was also undertaking work. Also notable is the 49-day partial shutdown of Statoil’s 120,000 b/d Kalundborg refinery in Denmark from late September. European refining margins were depressed by weakening gasoline crack spreads in September, but also a widening fuel oil discount contributed, pressuring margins at simple refineries in particular. Toward the end of the quarter, crack spreads improved both due to weaker crude prices and the fire at the Pulau Bukom refinery in Singapore. In addition, the Urals oil price weakened relative to Brent giving extra support to Urals margins. 60 US crude runs were lower in September, falling some 300,000 b/d from a month earlier, mostly due to lower Gulf Coast runs. September runs were nevertheless stronger than expected, and were in part supported by the lack of any hurricanerelated shutdowns on the Gulf Coast. By the end of September, however, refining margins decreased both on the Gulf and West Coasts following a sharp deterioration in gasoline cracks and this, combined with an increase in maintenance shutdowns, will further reduce runs over the balance of the year (however overall runs are forecast to remain above 2010 levels on an annual basis). 61 12 The IEA has revised non-OECD refinery throughputs lower for both the third quarter and fourth quarters of 2011 following weaker-than-expected runs in China in August and disruptions to refinery operations in other parts of Asia (primarily due to the fire and closure of Shell’s refinery in Singapore). Total non-OECD runs are expected to increase to 39 million b/d for the fourth quarter of 2011 (an increase of 675,000 b/d year on year) with China also showing higher runs toward the end of 2011 due to the restart of PetroChina’s Dalian refinery in early September, as well as the start up of new capacity. In Asia, Singapore refining margins fell even though product cracks improved toward month-end due to the fire at the Singapore refinery. Weak fuel oil product cracks at the beginning of the month depressed margins as did relatively stronger Tapis crude prices. 62 Observation This quarter, any boost in refining throughputs and margins were due to short-term outages and maintenance rather than any endemic changes in the industry outlook for refining. There is still significant rationalization underway globally in the industry focused on OECD markets. ConocoPhillips announced at the end of September it had idled its Trainer refinery on the US East Coast and that the refinery would permanently shut if no buyer is found within six months. The announcement comes only weeks after Sunoco said it would also sell or shut its two East Coast plants. In Europe, Eni idled its Venice refinery on poor margins, while LyondellBasel announced the French Berre l’Etang refinery will close permanently. Finally, in Japan, Showa Shell completed the shutdown of the Oghimachi factory, in line with previously announced plans. OPEC has announced in its 2011 World Oil Outlook that the global refining surplus might reach 10 million b/d by 2015 unless some refining capacity is closed and such overcapacity will continue to depress refining margins. OPEC estimates that around 6.8 million b/d of new crude distillation capacity is expected to be added globally in 2011-2015, half of which will be in the Asia-Pacific region, mainly in China and India. 63 Refiners are also struggling to cope with developments underway in key markets, which will affect their operations and margins. On the negative side, in the United States, the decision by Enbridge to reverse the flow in the Seaway pipeline starting next year will begin to end the advantaged feedstock position that Midwest refiners have been enjoying in that market. The glut of crude in the market, which could not find an outlet to the US Gulf Coast refiners, has depressed prices for WTI crude and helped create a record spread between the price of WTI crude and Brent Crude. It will mean that Midwest refining margins are likely to decline, along with the profits of some refiners in that region. 64 On a more positive note, changes to fuel taxation in the European Union is likely to have a positive effect on refining margins here, according to analysis by OPEC’s 2011 World Oil Outlook, by increasing diesel demand. An EU proposal to remove diesel tax advantages and put the fuel on par with gasoline would mean that diesel taxes would have to rise in more than half of the European Union’s 27 member states, helping redress the balance of refined product needs in the region by encouraging more use of gasoline, stimulating European output. “The (current directive) has led to a situation in which the open market diesel price is higher than that for gasoline due to greater diesel demand, but retail prices for final consumers are reversed at the pump because of lower taxation rates—this creates even more demand for diesel, despite EU shortages. This proposal could also be viewed as a signal to EU member states to reverse unwarranted tax advantages to diesel and to steer toward a more balanced future demand pattern which is sustainable for the refining industry.” OPEC expects that diesel’s tax could go up to 0.41 euros per liter from 0.33 euros per liter while gasoline would stay roughly unchanged at 0.36 euros per liter. 65
Merger and acquisitions Key trend—Oil price and market volatility has led to a decline in oil and gas M&A activity, which is now at its lowest level since 2008. North America continues to be the focus of the largest deals with midstream activity forecast to increase substantially. In 2010, there were a total of 1,717 M&A deals in the global oil and gas sector, with the total deal value at about $322 billion. This year (up to the end of October 2011), the sector has seen 1,508 mergers valued at around $211 billion. 66 In the third quarter of 2011, according to data from IHS Herold, upstream transaction values fell to $31.9 billion as compared to $77.6 billion in the third quarter of 2010. The deal count also witnessed a drop from 75 to 52 in the third quarter of 2011. A lot of the value in upstream M&A is still being driven by activity in the US shale gas sector. BHP’s all-cash $15 billion takeover of US shale-focused Petrohawk Energy was the largest global corporate deal in more than two years, accounting for nearly half of third-quarter 2011 worldwide deal value. BHP will pay $12.1 billion in cash, giving it access to shale oil and gas assets across one million acres in Texas and Louisiana. The deal comes just months after BHP agreed to buy Chesapeake Energy’s Arkansasbased gas business for $4.75 billion. Other significant deals this quarter also focusing on US shale basins included Statoil’s $4.4 billion bid for Brigham Exploration. Statoil is looking to enter the Bakken and Three Forks shale plays in North Dakota with its purchase of Brigham, which has current production of 21,000 b/d, potentially increasing to 100,000 b/d over the next five years. As part of its US shale play strategy, Statoil is looking to build more shipping capacity, with a focus on pipelines, but has not yet committed itself to any specific pipeline project. Hess Corporation has carried out a transaction in the Ohio Utica Shale (a $593 million cash-plus drilling carry joint venture with Consol Energy and the $750 million corporate acquisition of a privately held Marquette Exploration). The French major Total has also made it known that it is looking for further opportunities 13 in the US shale plays. Total currently has no operated production from US shale plays, but has been participating in a joint venture with Chesapeake Energy in the Barnett Shale in North Texas for nearly two years. 67 Downstream total transaction value for the third quarter of 2011 was down 36 percent compared to third-quarter 2010 and deal count was lower to 11 as compared to 13 for the same period in 2010. The natural gas distribution sector contributed more than one third of downstream total transaction value in the third quarter of 2011 driven by ATCO’s $1.1 billion acquisition of a natural gas network that serves Western Australia. Both refining transactions were sales of assets by Murphy Oil Co. in the United States. With these sales, Murphy Oil exits the refining business to focus on its E&P, service station and terminal businesses. 68 While the number of midstream transactions fell dramatically in the third quarter of 2011 to the lowest level since the first quarter of 2009, fourth-quarter 2011 activity is increasing and pipeline deals are starting to drive the market in North America. Kinder Morgan, the US oil and gas pipeline company, has agreed to a $38 billion deal (including debt) to buy El Paso Corporation, another pipeline operator, creating the fourth-largest energy company in North America by market value. The deal represents a bet by Houston-based Kinder Morgan on the future growth of North American natural gas supplies, giving it operations in all the leading areas for US shale gas production. Another significant transaction this quarter was Energy Transfer Equity’s most recent $9.5 billion offer to acquire Southern Union Group for $44.25 per share in cash. On the oil pipeline side, there was a significant deal this quarter with the $1.15 billion Enbridge has agreed to pay for ConocoPhillips’s half of the Seaway line which originally ran from the Gulf Coast to Oklahoma, serving Conoco’s Ponca City, Oklahoma, refinery. Because of the large amount of oil in the Midwest, the Seaway line has recently been running at very low capacity and its reversal looks like it will be the first pipeline online to be able to move enough crude out of the oil hub of Cushing, Oklahoma to the refineries along the US Gulf Coast, cutting into the price premium held by North Sea Brent blend against the price US benchmark West Texas Intermediate and avoiding the need to build completely new infrastructure. 69 Observation M&A deal volume and activity continues to be dominated by the US unconventional sector this quarter, where increasingly there are concerns that the growth picture might be constrained by infrastructure challenges. Total US oil production from shale plays is currently estimated at 700,000 b/d but is estimated to increase substantially, depending on access to pipeline shipping capacity. For example, in one key US shale production area, the Eagle Ford in South Texas (where there are still very few pipelines), companies continue to rely on trucks and railways to handle the increasing oil production output. 70 As shale gas production also increases, the US Interstate Natural Gas Association of America Foundation (a trade group) estimates that companies will need to build 35,600 miles of large scale natural-gas pipelines between 2011 and 2035 to meet market demands, at a cost of $178 billion. 71 As a result, the focus of M&A activity has now moved its focus to infrastructure deals, as companies seek to capitalize on this growth and as a result, the US pipeline market is undergoing a dramatic transformation. Deals like the Kinder Morgan acquisition of El Paso, or Enbridge’s deal for a 50 percent share of the Seaway pipeline, will change the way the US infrastructure market operates. These deals not only involve new projects to transport greater volumes of unconventional oil and gas to market, but are also bringing into focus pipeline companies that are all seeking greater consolidation and scale to grow their companies after years of operating in a market which up until a few years ago, showed few prospects for growth. Notably, many of the transformations underway are seeing companies divest riskier E&P operations (Williams, Kinder Morgan and Atlas Energy) to focus purely on their infrastructure businesses, broadening their operations and thereby realizing greater market value.
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