Volume 92 / Number 248 / Wednesday, December 17, 2014

[OIL ]

www.platts.com OILGRAM NEWS

Top stories

Asia Pacific

Teapots face deteriorating financial conditions 2

Woodside reshapes LNG growth prospects 4

India’s state refiners unconvinced about hedging 4

Europe, Middle East & Africa

Iran slams Arab states for plunging prices 5

Iran’s North Azadegan field on track for 2015 start-up 5

Novatek, Gazprom double capacity at Siberian field 5

Nigerian oil workers’ strike continues after talks fail 6

Total-led venture postpones Bulgaria drilling 6

The Americas

Encana to hike tight oil output in 2015 7

Colombia’s Ecopetrol cuts 2015 output target 7

Markets & Data

Top oil producers expect market to stabilize 8

Group suggests reforms to US biofuels mandate 8

Crude futures recover from intraday lows, settle mixed 9

US Senate’s first vote in 2015 to be on Keystone XL 9

From teapot to China’s largest independent refinerShandong—If the local government in Shan-dong had its way, all teapot refiners in the province would emulate Shandong Dong-ming Petrochemical.

According to a policy document released by the provincial government in October, Dongming Petrochemical is listed as the 18th “most developed” refiner in the country, with modern units and sophisticated technology.

The company is headquartered in Dongming, a county in western Shandong described by the government as a shining pearl embedded in the Yellow River.

This area has been promoted by the local tourism board as the land of peonies, although all flora lies eclipsed by factories, refineries and power plants. The heavy

smog in the air has turned the skies grim and murky.

Along the brand-new asphalt lined S32 highway leading to Dongming, traffic is scant, save for heavy oil trucks moving to and from the refineries.

Dongming Petrochemical has three refiner-ies in the area with a total capacity of 12 mil-lion mt/year. It also has a fourth refinery with capacity of 3 million mt/year in the neighbor-ing Jiangsu province.

The company has been lauded as the only independent refiner with the scale to compete against China’s powerhouse state-owned refineries.

Despite current overcapacity in China’s refining sector, Dongming Petrochemical is still rated highly by domestic credit agencies, which cite its superior scale and a stable pool of downstream customers as key to keeping the company competitive in the cur-rent landscape. The company’s operating income has increased steadily since the start

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Repsol snaps up Talisman for $13 billionPrice tag questioned as oil prices pummel asset values

Barcelona—Repsol’s acquisition of Canadian producer Talisman Energy will allow the Span-ish major to put its troubled Argentinean chapter behind it and make good on a prom-ise to rebalance its upstream assets in more stable regions.

But the $13 billion price tag for the debt-laden producer may have been overly generous, particularly as global asset values continue to tumble in line with sliding crude prices, according to analysts.

In one of the biggest M&A deals since the global oil price began its plunge in mid-June, Repsol said Tuesday it had agreed to buy out Talisman for cash and assumed debt in what the Spanish company’s chairman called a “transformative” deal.

The takeover, which was approved by the boards of both companies, will boost Repsol’s

output by two-thirds to 680,000 boe/d and create a 1 million b/d refiner.

But Repsol conceded that it would con-tinue the process of disposing of some of Talisman’s less lucrative assets—including in the North Sea where analysts have question the value of Talisman’s upstream portfolio.

The transaction, which is expected to complete in the second quarter of next year, will mean North America’s weight in the result-ing company increasing to almost 50% of capital employed in exploration. Latin America will represent 22%.

Repsol said the deal would “improve its competitiveness, increase and balance its exploration portfolio, reinforce the Upstream business unit and provide a strong growth platform.” Besides upstream production assets in the US and Canada, Talisman also operates in Indonesia, Malaysia and Vietnam as well as the UK and Colombia, among others.

In 2013, its production averaged 373,000 b/d of oil equivalent, company data showed. Production in 2014 is estimated to

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Platts Special Report

This is the third in a five-part in-depth series looking at China’s teapot refineries

�� Repsol to continue Canada growth strategy�� Looks to make $1 billion disposals�� To sell Talisman’s North Sea assets

2 Oilgram News / VOlume 92 / Number 248 / wedNesday, december 17, 2014

of this decade and reached Yuan 46.4 billion ($7.5 billion) last year, with profit of Yuan 5.3 billion. It is also tipped to be the next in line to receive new highly-anticipated crude oil import quotas from the government.

The company came from humble begin-nings, starting with a small refinery with just 150,000 mt/year of processing capacity in 1987. It became China’s largest independent refiner in 2012 after commissioning its 6 mil-lion mt/year Runze refinery.

Today, it is helmed by Li Xiang Ping, a patriotic and enterprising businessman in his fifties. An accountant by training, Li was appointed chairman of the company in 2001, at a time when it was losing money. He quickly turned around its fortunes by adopting a more capitalist model—”market-oriented approach” in Chinese parlance—and focusing on strategic planning. Dong-ming Petrochemical even took a step toward internationalization by listing its petrochemi-cals subsidiary Sinostar PEC on the Singa-pore bourse in 2007.

Dispels stereotypesDongming Petrochemical has largely man-

aged to upend the stereotypes most common-ly associated with teapot refineries—small scale and running on fuel oil.

Yet the company owes a lot of its good fortune to a joint venture formed with state-owned PetroChina in 2007 to collaborate on crude supplies, oil storage and a pipeline.

PetroChina has said in the past that working with the independent refiner was its social responsibility as Dongming was one of Shandong’s most impoverished counties. More astute observers however, noted that PetroChina was more likely concerned about getting a foothold in the downstream market in Shandong, where Sinopec already had three large refineries—Jinan in the provincial capital, Qingdao on the coast and Qilu in Zibo, one of Shandong’s refining hubs.

The refiner’s monthly feedstock require-ments are now roughly 800,000 mt every month, or 9.6 million mt/year.

Aside from buying domestic grades Changqing and Tuha from PetroChina, the company also has domestic crude oil

quotas from Sinopec, which amount to between 30,000 mt and 50,000 mt of crude a year.

Lacking the right to import crude at the moment, Dongming Petrochemical relies on PetroChina to purchase foreign supplies on its behalf.

At least two VLCCs arrive every month at the Huangdao port and are then piped via the Ridong pipeline to Dongming Petrochemi-cal’s refineries. This translates to a minimum

From teapot to China’s largest independent refiner...from page 1

48 million barrels of imported crude every year, quite possibly exceeding the foreign crude requirements of state-owned refineries in the region, including Sinopec’s 13 million mt/year Qilu refinery.

Li has referred to the Ridong pipeline as the company’s lifeline. Completed in late 2012, it is jointly owned by Dongming Petro-chemical and PetroChina and a plan is under-way to double capacity from a current 10 million mt/year (200,000 b/d). It stretches 462 km (286.44 miles) from Rizhao port in Lanshan along the coast, to Dongming.

Teapots face deteriorating financial conditionsShandong—China’s teapot refiners have had to deal with deteriorating operational and financial conditions this year. Chinese banks have tightened lending, continuing a trend that began after the steel and coal sectors started underperforming in 2012. The impact has now visibly spilled over into the oil sector, particularly since the middle of the year.

“Getting loans for projects is really difficult at the moment, and it’s hard to get govern-ment approval for projects,” said Cao Yuanxiang, a supply manager at Zibo Xintai Petro-chemical, which has a refinery with two crude distillation units—one at 1.5 million mt/year and another with 500,000 mt/year capacity. The refinery could also be targeted for closure by the Shandong government due to its small size.

A similar sentiment was echoed by other refiners, who also said it had become much harder to secure lines of credit as well as longer-term financing.

“There is no way the government can close refineries by force. But because the credit situation is so tight at the moment, that would be one way in which companies are forced out of the business,” said Wang Zichao, vice-general manager at Hengrunde Petrochemical, tucked away in Shandong’s Guangrao county with a 1 million mt/year refinery.

The refiner currently in the worst shape is Tianhong New Energy Petrochemical, which has a 1.5 million mt/year (30,000 b/d) refinery in Binzhou.

Tianhong was also a regular fuel oil trader. The first sign of trouble for the company came when Tianhong used short-term bank loans to invest in its refinery expansion and dabbled in overseas swaps. It spiraled into debt in the middle of the year after banks pulled their credit.

Market sources said Tianhong likely has debt exceeding Yuan 7 billion ($1.14 billion), while its viable assets amount to only Yuan 3 billion. An ongoing project to upgrade the refinery, including installation of a new 3.5 million mt/year CDU, has been halted.

Until earlier this year, banks still held refiners in high regard but the Tianhong debacle highlighted the risks in the sector, which now face tighter scrutiny and stricter conditions when seeking credit.

White knightsEven in such dire circumstances, Tianhong has been saved for now by white knights,

mainly because the local government refused to let it fail, sources said.The company’s trading division has received cash injections from Shandong Hi-Speed

Group, an expressway company backed by the local government, according to a source with intimate knowledge of the matter. Shandong Hi-Speed Group now controls 45% of Tianhong’s trading subsidiary Daxin. Tianhong retains 40% while the remainder is held by a trading subsidiary of PetroChina in Beijing. In addition, sources also said Tianhong’s refinery has now been taken over by its original guarantors, although the identity of these entities is not clear.

A company source declined to comment on the current situation but confirmed that the refinery remains shuttered.

While state-owned giants Sinopec, China National Petroleum Corp. and China National Offshore Oil Corp. have been able to cope with the domestic surplus by exporting more oil products, particularly middle distillates, teapot refiners have no export quotas and can only further reduce their already low run rates.

“Before 2008, there was rapid expansion and everyone made money. In the last few years other sectors have foundered so more have become involved in oil refining, but with all this over expansion and intense competition, some will eventually die,” Wang said. — Song Yen Ling, Daisy Xu, Oceana Zhou

Dongming Petrochemical has largely managed to upend the stereotypes most commonly associated with teapot refineries—small scale and running on fuel oil

ASiA PACiFiC

(continued on page 3)

3 Oilgram News / VOlume 92 / Number 248 / wedNesday, december 17, 2014

Dongming Petrochemical relies heav-ily on PetroChina to buy its imported crude, but there doesn’t appear to be a cohesive strategy driving its crude pro-curements. It currently buys a variety of grades from the Middle East, West Africa and even Latin America.

“Sulfur content is not so important, we look at price,” said Chen Yunling, head of the company’s crude department and a senior executive at the refining division. This is an illustration of the versatility and flexibility of tea-pot refiners—many were designed to process a multitude of feedstocks. Chen conceded that while his team monitors prices, it is not familiar with the intricacies of global oil trading.

Hit by slowing demandAcross from Chen, in a large but spartan

and drafty conference room at the com-pany’s headquarters, is a large photograph of Li, who is smiling broadly as he shakes hands with China’s President Xi Jinping, a picture of success.

But China’s refining sector has fallen on hard times of late and Dongming Petro-chemical has not been immune to slower economic growth.

“Oil demand this year was worse than last year. Everyone is suffering now,” Chen says candidly.

Liu Asi, manager in charge of international feedstock procurement, is tasked with show-ing us around two refineries, both a stone’s throw away from each other and a 10-minute

drive from the company headquarters.Four massive 100,000 cubic meter crude

oil tanks and a phalanx of other product tanks are located at the eastern end of the Runze refinery—the company’s largest and newest. Cluster after cluster of towering steel columns, some enmeshed in webs of inter-connected metal frames, take up the vast space. Liu gives a running commentary of each shiny unit, including the 6 million mt/year CDU, a 2 million mt/year coking unit and a 1 million mt/year continuous reformer.

“There was no choice but to expand, otherwise we cannot survive,” Liu says as he

From teapot to China’s largest independent refiner...from page 2

gamely poses with us for a photo about 100 feet in front of the fluid catalytic cracker.

Gasoil demand in China has been hit significantly because of the economic slowdown, but the company still produces two and a half times more of the fuel than gasoline. It has achieved the capability to produce National Phase 5 fuels, although its average yields for gasoline and gasoil are relatively low at between 30% and 40%. In comparison, for every barrel of crude state-owned refiners process, gasoil and gasoline account for over 50% of the output.

Like many other teapot refiners, Dongming Petrochemical does not produce jet fuel/kero-sene, a regulated fuel which has to be sold to state-owned China National Aviation Fuel.

A third of Dongming Petrochemical’s oil products are sold to state-owned companies and the rest to privately-owned retail stations, including those in neighboring provinces.

The company wholesales National Phase 4 RON 93 and RON 97 gasoline and Phase 3 and Phase 4 gasoil and its petrochemicals products include polypropylene, methyl ethyle ketone, ethyl benzene and styrene.

Future plansThe company’s larger goal is to strengthen

its oil and gas value chain through new invest-ments, acquisitions and mutual cooperation.

It has set its sights on developing 10 new storage facilities and a chain of up to 1,000 retail stations within a 300 kilometer radius of Dongming—stretching across 25 cities in surrounding Hebei, Henan, Anhui and Jiangsu provinces. This is a capital-intensive undertaking but one that will give it secure access to market outlets.

Clearly, expansion has so far ensured the company’s survival. But given the chal-lenges ahead, including slowing oil demand, and tightening credit conditions, it remains to be seen if Dongming Petrochemical will indeed be the shining pearl on the horizon. — Song Yen Ling, Daisy Xu, Oceana Zhou

Dongming Petrochemical has three refineries in Shandong Province with a total capacity of 12 million mt/year. (Platts photo)

ASiA PACiFiC

China’s teapot refineries get creative to survive, even as the broader economy faces oil supply/demand challenges

In this video, Platts editors discuss China’s shift to being a net oil product exporter and its strategic move to guard against market volatility, as well as the challenges being faced by teapot refiners due to slumping domestic demand.

http://www.platts.com/videos/2014/december/china-exports-teapot-refiners-1212

COMMODITY PULSE VIDEO

4 Oilgram News / VOlume 92 / Number 248 / wedNesday, december 17, 2014

ASiA PACiFiC

india’s state refiners unconvinced about hedgingMumbai—A changing landscape in India’s refining sector and falling crude oil prices have prompted the Indian government to revis-it its hedging policy, but the country’s state-owned refiners are not convinced and are highly unlikely to hedge their crude oil imports and inventories given the risks involved.

The prime minister’s office recently said the country’s central bank, the Reserve Bank of India, and the Department of Eco-nomic Affairs in the finance ministry will prepare a discussion paper on fine-tuning the existing policy.

“Let us wait and watch what the policy has to say,” said a senior official at one of the state-owned companies that has decided against hedging despite having the expertise to do so.

India has always had a hedging policy.According to RBI guidelines, domestic

refining and oil marketing companies are “permitted to hedge their price risk on crude oil and petroleum products on overseas exchanges, markets to modulate the impact of adverse price fluctuation.”

The guidelines say oil companies can hedge up to 50% of their import volume in the previous year. Companies are also allowed to hedge some of their inventory levels.

Despite this permission, Indian state-owned refiners rarely hedge, fearing possible repercussions from the government and the federal audit agency, the Comptroller and Auditor General of India, or CAG, in the event of a loss.

“It is a difficult decision to take. It [hedging] looks good and lucrative, but it can be a double-edged sword,” said an official with another state-owned refinery. He said the company’s board of directors has decided not to hedge even though the framework is available.

“It is not that we do not have the exper-tise, but who will answer losses, face queries from the CAG,” he said, adding that if the oil

ministry comes up with clear guidelines with regard to risk management, the company might reconsider.

Another official suggested the government look to practices of some multinational com-panies for ideas of what state-owned Indian refiners could be doing.

Of India’s three state-owned refiners, Indi-an Oil Corp. is the only one that hedges.

IOC has its own policy on hedging and operates within the confines of that, Chair-man B. Ashok said recently. IOC’s board has allowed the refiner to hedge 10% of its total exposure, but the company does not even reach 5%.

India imported crude and oil products worth $155 billion for the fiscal year ended March 31, of which $143 billion was spent on crude oil.

Falling crude prices led Indian refiners to report inventory losses over July-September, another reason that prompted the government to revisit its hedging policy to cushion inven-tory losses.

IOC, for instance, suffered an inventory loss of Rupees 42.72 billion in the July-Sep-tember quarter, compared with an inventory gain on crude and products of Rupees 46.53 billion in the same period of 2013.

As state-owned refiners face increasing competition from their more sophisticated private counterparts in the Indian retail oil market, it has become even more imperative for the government to arm them with tools to minimize losses and exposure from volatile markets. — M.C Vaijayanthi

Sydney—Australia’s Woodside Petroleum has reshaped its LNG growth prospects with an agreement to acquire Apache Energy’s stakes in the Wheatstone and Kitimat projects, at the same time delaying the schedule for its pro-posed Browse floating development.

In a deal announced in the US by Apache on Monday, Woodside agreed to pay $2.75 billion for Apache’s 13% stake in Wheatstone LNG in Western Australia and 50% of Kitimat LNG in British Columbia. Included in the purchase is Apache’s 65% of the Julimar-Brunello gas field, which is being developed to provide 20% of Wheatstone’s natural gas supply, and 65% of the producing Balnaves oil field in Western Australia.

In addition, Apache will be reimbursed for its net expenditure, expected to be around $1 billion, on the Wheatstone and Kitimat LNG projects between June 30, 2014, and the closing of the deal, targeted for the end of the first quarter of 2015.

The acquisition of Kitimat includes around 320,000 acres in the Horn River and Liard Basins, “adding a growth option in an emerging LNG province to Woodside’s development portfolio,” Woodside said in its own statement.

Woodside dubbed the acquisition a “counter-cyclical, value-adding growth oppor-tunity” which would be immediately accretive to net profit.

“We have taken a disciplined and patient approach to identifying the right growth invest-ment,” said Woodside CEO Peter Coleman. “We are now in a position to take advantage of challenging market conditions and use cash reserves and existing debt facilities to acquire very high quality assets.”

The acquisition is subject to regulatory approvals, pre-emption for both the Balnaves and Kitimat projects and joint venture consent at Kitimat LNG.

Apache put the assets up for sale in July, after coming under pressure to focus on its North American unconventional operations from activist shareholder Jana Partners.

Wheatstone is being developed by opera-tor Chevron at a cost of $29 billion. The foun-dation project, expected to start up in late 2016, includes two LNG production trains with a combined capacity of 8.9 million mt/year and a domestic gas plant.

The project is owned by Chevron (64.14%), Kufpec (13.4%), Apache (13%), and Kyushu Electric Power Co. (1.46%), and PE Wheatstone, which is part owned by Tepco (8%).

The Kitimat LNG project is also oper-ated by Chevron, with a 50% stake, and is expected to comprise two liquefaction trains with capacity of 10 million mt/year. Front-end engineering and design is currently underway

for the project, with a final investment deci-sion possibly targeted for 2015, after the securing of long-term sales contracts.

Browse FLNG FEED delayedMeanwhile, Woodside and its partners in

the Browse floating LNG project off Western Australia have delayed the planned start of front-end engineering and design work to mid-2015, from late 2014. The company said it had completed basis of design and key pre-FEED work for the project and was currently undertaking additional strategic activities.

Coleman said the substantial shift in mar-ket conditions had presented an opportunity

to seek “significantly lower cost outcomes” for the FLNG development, drawing on les-sons learned from other projects.

“The changes we are experiencing in our industry are starting to flow through our sup-ply chain,” he said. “We will use the time we now have to maximize long-term economic benefits for the development.”

A final investment decision on the project has been pushed back from the second half of 2015 and is now targeted for mid-2016.

The Browse project involves the develop-ment of 14.9 Tcf of gas in the Brecknock, Calliance and Torosa fields using three float-ing production facilities, each with capacity of about 3.9 million mt/year of LNG and 22,000 b/d of condensate. Woodside’s partners in the project are Shell, BP, Japan Australia LNG and PetroChina. — Christine Forster

Woodside reshapes LNG growth prospectsAcquires Apache’s stake in Wheatstone, Kitimat projects

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5 Oilgram News / VOlume 92 / Number 248 / wedNesday, december 17, 2014

Novatek, Gazprom double capacity at Siberian fieldMoscow—Russia’s Novatek and Gazprom Neft have launched the second stage development of their Urengoyskoye field in West Siberia to nearly double its capacity, the two companies said Tuesday.

The move will raise output from the field to about 13 billion cubic meters of gas and more than 4.7 million mt/year gas conden-sate and comes shortly after the two brought first-stage capacity to a planned 7 Bcm/year of gas and 2.5 million mt of gas condensate.

Production at the field, which the two com-panies are developing through the SeverEner-gia joint venture, was halted in late April after a fire broke out and then restored at a limited level in July.

Production at Urengoyskoye is targeting the Achimov deposits in relatively deep loca-tions (at a depth of around 3,700 meters) and which contain a high share of gas con-densate in the hydrocarbon flow, according to the companies.

As of December 31, 2013, proved reserves at Urengoyskoye within the Samburg-sky license area were estimated at 214 Bcm of natural gas and 52 million mt of gas con-densate under US SEC standards.

After a number of shareholding reshuf-fles, Novatek as of end-May held 54.9% in SeverEnergia, with the rest controlled by Gaz-prom Neft. — Nadia Rodova

iran’s North Azadegan field on track for 2015 start-upTehran—Iran’s North Azadegan oil field, under development by China’s CNPC, has reached close to 90% progress and is on track for its first phase of production by Sep-tember next year, oil ministry news service Shana reported Tuesday.

“Based on the announced timetable we will reach the 75,000-barrel [per day of oil production] target of the first phase in the first half of the next Iranian year,” Abdolreza Haji-Hosseinnejad, managing director of the Petroleum Engineering and Development Co., or PEDEC, was quoted as saying.

The first half of the next Iranian year ends September 22, 2015.

The development project was awarded to CNPC in 2009. The leading Iranian contractor involved in the project is PEDEC.

Despite having been kicked out of the South Azadegan development after years-long delays in delivering the job, CNPC was kept for develop-ment of North Azadegan, with warnings that Iran will closely watch the Chinese company’s perfor-mance in the northern part of the field.

“At the moment, from 58 wells, 56 are fully drilled and the two remaining wells are being handled according to the schedule,” Haji-Hosseinnejad said.

“If the [master development plan] is deliv-ered [by CNPC] by the end of December, the implementation of the second phase will be decided,” the PEDEC official said.

North Azadegan holds 6.5 billion barrels of oil in place, of which 330 million barrels are recoverable. In the second phase, the

field expects to double its output to a total production of 150,000 b/d of crude oil plus more than 78 million cubic feet of gas on a daily basis.

This shared field with Iraq covers an area of about 460 km.

Iran is pressing to raise its oil production capacity in three years by 700,000 b/d from more than 3 million b/d currently from the western Karoun river area, basically the lands that straddle border with Iraq.

To this end, Iran has been moving forward to develop the North and South Azadegan, Yada-varan, and North and South Yaran oil fields. The major plan requires more than $7 billion.

Because Iran’s energy sector is momen-tarily deprived of appropriate foreign invest-ment due to international sanctions related to its disputed nuclear program, the plan will be funded from its limited oil revenues and domestic bank loans.

On Sunday, a National Iranian Oil Co. offi-cial said a significant part of the investment will come from a coffer that saves oil incomes.

“Based on the plans made, $6 billion will be allocated to these fields within the next three years from the National Development Fund. This [Iranian] year’s share is $2 bil-lion,” Moshtaghali Gohari, deputy director for incorporated planning at NIOC, was quoted as saying on PEDEC’s website.

The Islamic republic, hit by banking restric-tions as part of the sanctions, has limited access to the crude sales income. Based on arrangements with the West that have eased the strict sanctions during the ongoing nuclear talks with Tehran, Iran receives $700 million of the petrodollars on a monthly basis. Each year, Iran puts more than 20% of its total oil money in the National Development Fund, with the percentage due to go higher every year. Given the plummeting oil price, Iran has decided to suffice with the minimum 20% for the fund in its next year. — Aresu Eqbali

Tehran—Iranian Foreign Minister Mohammad-Javad Zarif criticized regional countries Tuesday for taking no measures to help boost falling oil prices, the official IRNA news agency reported.

“It is deplorable that the countries in the region do not cooperate regarding the decrease of oil prices and its negative impacts,” Zarif was quoted as saying in a meeting with Iraq’s parliament speaker Salim Abdullah al-Jabouri in Tehran.

The oil producers club, OPEC, at its November meeting in Vienna, decided to leave intact the 30 million b/d output ceiling in place since late 2011.

In a separate report by oil ministry news service Shana, a senior official named Saudi

Arabia and pointed to three Arab countries as the main advocates of the decision.

“In the recent meeting of OPEC, most of the members believed that a price range of $80-$85 is good for oil,” Mehdi Asali, Iranian oil ministry general director for OPEC affairs and relations with energy communities, was quoted as saying Saturday.

Eight members of OPEC, including Iran, called for a 1.5 million b/d production cut from the current ceiling, he said.

“If Russia, Norway and Mexico had agreed with a 500,000 barrel [per day] cut from their production too, the market would completely become balanced,” Asali said.

“When Russia opposed to any [amount of]

decrease in its production, this demand of the most members of OPEC faced the objection of Saudi Arabia and three other oil exporters of the Persian Gulf coasts and the demand was not materialized,” Asali said. “OPEC’s production remained the same by opposition of Saudi Arabia and three Arab countries.”

The member of Iran’s OPEC team blamed Saudi Arabia for acting politically.

“The objection of some OPEC countries, at the head of them Saudi Arabia, against decreasing the production in order to balance the market comes from political motivations and has no economic justification,” he said.

Saudi Arabia’s proposal, he said, for retaining the output for the removal of shale oil was “highly risky.”

“This position can harm OPEC and it could have been designed based on political motiva-tions and in order to pressure Iran and some other countries,” Asali said.

He said production of shale oil would be unlikely to drop in 2015.

“Despite the claim by [Ali] al-Naimi, Saudi Arabia’s oil minister, the decrease in oil price will not increase demand in oil because importer countries will take advantage of the prices and cut oil subsidies and raise oil products prices to boost their incomes and prevent higher oil consumption,” he said. — Aresu Eqbali

iran slams Arab states for plunging pricesOPEC ministers see $80-$85/b ‘good’ for oil: official

EuRoPE, MiDDLE EAST & AFRiCA

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6 Oilgram News / VOlume 92 / Number 248 / wedNesday, december 17, 2014

While the deal is expected to create syn-ergies of $220 million per year, Repsol will continue to carry out Talisman’s proposed asset disposal plan, particularly in the UK North Sea, and look to optimize its portfolio with other possible disposals, Imaz said.

Repsol’s Imaz said that thanks to its com-paratively large balance sheet, Repsol would not face the same financial stress and pres-sure that Talisman has been facing recently.

“We will take our time and wait for the evolution in oil and gas prices,” he said.

Elsewhere, and particularly in its Asian explorations, the company would consider retaining the better opportunities but look to “rationalize” the more marginal ones, the company’s general director of exploration and production, Luis Cabra, said on the call.

Besides the upstream divestments, the company said it might still consider selling a “very, very small” stake in Spanish gas operator Gas Natural but said it had not yet reached a decision on the Canaport LNG ter-minal on Canada’s eastern coast.

Any discussion involving the facility was “an option, not a decision right now,” Imaz said.

In Latin America, Talisman’s Colombia oper-ations currently contribute a net 21,000 boe/d to its global output, and include the promising CPO-9 block that Talisman is developing as a 45% partner with operator Ecopetrol.

The block’s potential is such that Talisman country manager Chris Spaulding believes that once it is built out, it could end up con-tributing Colombia’s “biggest reserve addi-tions in the last 20 or 30 years.” Oil in place in Akacias, which is just one of five “struc-tures” in CPO-9 has been estimated at 2.5 billion barrels of heavy oil. — Luca Baratti, with Stuart Elliott and Robert Perkins in Lon-don and Chris Kraul in Bogota

Total-led venture postpones Bulgaria drillingLondon—Total said Tuesday the partners in the Khan-Asparuh deepwater exploration prospect in the Black Sea offshore Bulgaria have postponed drilling the two wells they had planned until 2016 due to the falling oil price.

Bulgaria’s government has said the block could hold three times more natural gas than neighboring Romania’s Neptun discov-ery. Neptun is thought to hold up to 3 Tcf (around 80 Bcm) of gas.

“Together with our partners OMV and Repsol we have decided to review the working schedule for 2015 and postpone the drilling program,” a spokeswoman for Total said. “We confirm our long-term commitment to com-plete the exploration of Khan-Asparuh, with drilling taking place in 2016.”

Five of the seven tenders envisaged as a requirement to drill are already being pro-cessed, with a contract for the provision of casing, tubing equipment and associated ser-vices awarded Tuesday, she said.

“One of the strengths of Total is its capac-

ity to react while ensuring continuity in terms of long-term strategy, despite the volatility of the barrel,” she said.

The partners in the project have been car-rying out seismic survey work prior to drilling this year.

Austria’s OMV has a 30% stake in the block and is operator, while Total holds 40% and Spain’s Repsol the remaining 30%.

The block covers 14,220 square km (5,490 square miles), with water depths up to 2,200 meters (7,217 feet). — Nick Coleman

fall to between 280,000 and 290,000 b/d, with 50% of that produced in North America, Repsol said.

Canada growthRepsol said it would continue with its

growth strategy in Canada, where it has upstream assets on the west coast as well as a majority stake in the Canaport LNG plant.

Canada and the US currently make up 10% of Repsol’s production, and the result-ing company will allocate 30% of its capital employed to the region, totaling approximately $15 billion, it added.

Repsol has an estimated cash pile of around $10 billion for investments following a near $5 billion settlement with Argentina in May over the expropriation of its stake in YPF and a $6.7 billion sale of LNG assets to Shell at the start of the year.

The offer for Talisman is equivalent to $8 per Talisman share, which was the upper end of a range forecast previously by analysts. The $13 billion is made up of $8.3 billion for the company plus $4.7 billion of debt.

But the purchase price represents a 75% premium to the seven-day volume weighted average share price and a 60%

premium to the 30-day volume weighted average price, prompting question over whether Repsol has overpaid.

Repsol’s shares fell by up to 4.6% in Madrid but recovered ground to close 0.3% weaker on the day at Eur15.64.

Analysts at Tudor, Pickering and Holt said Talisman had a “disparate asset base” that may be difficult to integrate.

“We don’t like the deal for Repsol—we think that Repsol overpaid given the current market,” they said. “Also there may be a dif-ficult cultural fit between the two firms.”

The agreed price for Talisman fails to capitalize on the Canadian producer’s weak balance-sheet in a “deteriorating oil market”, Citi said. As a result, analysts at the bank estimated that the deal needs a low-70/b oil price and $4-4.50/Mcf US gas price to gener-ate an internal rate of return greater than the weighted average cost of capital for the deal.

Talisman Energy CEO Hal Kvisle said told investors on a conference call that the offer was a “compelling opportunity” for share-holders. Repsol, he said, was chosen after “considering alternative options.” He said the companies have “complimentary capabilities” to develop large undeveloped resources while helping deal with “legacy commitments” such as the North Sea assets.

North Sea disposalsTalisman has been looking to sell its

North Sea assets for some time, and Repsol CEO Josu Jon Imaz said on a conference call with analysts that the Spanish firm would target disposals of around $1 billion over the next 12 months.

EuRoPE, MiDDLE EAST & AFRiCA

Repsol snaps up Talisman for $13 billion...from page 1

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Nigerian oil workers’ strike continues after talks failLagos—A strike by oil workers in Nigeria over foreign companies’ labor practices will contin-ue on Wednesday after a meeting between the government and unions called to end the cri-sis was botched, union officials said Tuesday.

Although the workers’ strike, which began on Monday, has yet to have any impact on Nigeria’s oil exports, the Pengassan chief hint-ed that the action could hit crude loadings as senior employees in oil companies were now being mobilized for “full-scale action.”

The Nigerian government, concerned enough about the strike’s impacts, called for the talks with the Pengassan and Nupeng oil workers’ unions for Tuesday to address the oil workers’ demands, which include cutting domestic gaso-line prices in line with global slump in oil prices, repairing the four state-run refineries and pass-ing the long-delayed Petroleum Industry Bill.

A government official said that the meet-ing with the unions has now been resched-uled for Thursday.

Some West African crude trading sources said Monday that if the strike continued for a few days there could be potential crude load-ing delays.

The impact of the strike has already been felt in fuel supply and distribution in major cities in the West African country, after motor-ists formed long queues at the few filling sta-tions that still have fuel. — Staff reports

7 Oilgram News / VOlume 92 / Number 248 / wedNesday, december 17, 2014

Colombia’s Ecopetrol cuts 2015 output targetBogota—Colombian state-controlled oil com-pany Ecopetrol has slashed its 2015 produc-tion target and its capital expenditures, citing the sharp drop in global crude prices.

The company, Latin America’s second-larg-est producer, said in a late Monday statement it is planning to cut at least $3.565 billion in annual expenses from its operations and left the door open for further cuts.

In the statement, the company said it now is projecting average 2015 production at 760,000 b/d of oil equivalent. As late as Sep-tember, CEO Javier Gutierrez told reporters that 1 million boe/d in 2015 was still possible.

But like other companies operating in Colom-bia, Ecopetrol has been hurt by a number of operational problems, including permit delays, community blockades and rebel attacks on infrastructure. Technical issues also have slowed development of the Castilla-Chichimene heavy oil fields in eastern Meta province, its most promis-ing prospect for near-term output growth.

Now, the drop in global oil prices has reduced margins and altered the calculus of projects to the point that developing extreme-ly costly assets liked the Castilla-Chichimene heavy oil fields in eastern Meta province has become less economical, analysts said.

Colombian crude prices have fallen nearly 50% from the same time a year ago on the back of the much weaker benchmarks ICE Brent and WTI.

Colombia’s midgrade export crude Vasco-nia was assessed on Tuesday at the Latin ICE strip minus $6.30/b, or $54.360/b.

Vasconia was assessed on December 16, 2013, at the Latin ICE strip minus $7.70/b, or $100.07/b.

Colombia’s heavy sour export crude Castilla Blend was assessed on Tuesday at the Latin ICE strip minus $11.05/b, or $49.610/b. Castilla Blend was assessed on December 16, 2013, at the Latin ICE strip minus $13.70/b, or $95.07/b.

Vasconia is primarily exported to US Gulf Coast, South American and European refiners, while Castilla Blend is mostly bought by US Gulf Coast and Asian refiners.

For the first nine months of this year, Ecopetrol’s output averaged 752,000 boe/d, down 4.9% from the 791,000 boe/d pumped

over the same period last year. The company is likely to finish 2014 at about 750,000 boe/d, far below the 819,000 b/d it was pro-jecting at the start of the year.

The shortfall is one of the factors that apparently is costing Gutierrez his job. Ecopet-rol’s board confirmed last week that after seven years as CEO, Gutierrez is being replaced and that a search is on for his successor.

The company also on Monday said it board is overhauling Ecopetrol’s strategy to the year 2030 “in accordance with the current situation in international market prices.”

Ecopetrol said its 2015 exploration and production spending will total $4.64 billion, down 29% from the $6.6 billion budgeted for 2014. Exploration was especially hard hit, with only $503 million allocated for next year, less than half the $1.2 billion budgeted this year.

Overall capex investment next year will total $7.86 billion, down 25.8% from the $10.6 billion budgeted for 2014, it said.

The company also said that the financing of the capex budget would come partially from the sale “of non-strategic assets.” It did not say which of its holdings would be offered for sale.

Colombia’s overall crude production this year is expected to average 990,000 b/d, down from the 1.03 million b/d projected at the start of the year and off 1.7% from the 1.007 million b/d pumped in 2013. For the full year 2015, the finance ministry is now projecting 1.03 million b/d, down from 1.06 million b/d targeted earlier this year. — Chris Kraul, with Richard Capuchino in Houston

Calgary—Encana plans to significantly increase its tight oil and field condensate out-put in 2015, CEO Doug Suttles said Tuesday, and expects to boost its capital expenditure budget to between $2.7 billion and $2.9 bil-lion, most of which will be used in four growth plays in North America.

Encana is looking for its tight oil and field condensate output in 2015 to be 95,000- 105,000 b/d, compared with an anticipated 49,000-51,000 b/d this year, company spokesman Jay Averill said. The company’s 2014 capital expenditure guidance was $2.5 billion to $2.6 billion.

“The current oil prices will in no way come in the way of developing our high-margin growth assets and we remain on track for growth,” Suttles said on a webcast to discuss the company’s 2015 budget.

In 2015, the company is targeting overall production of 405,000 barrels of oil equiva-lent/day to 440,000 boe/d, compared with expected 2014 output of 468,000 boe/d to 489,000 boe/d.

Encana has tight oil properties in Eagle Ford and Permian Basin in the US that are spread over 45,500 acres and 145,000 acres, respectively, and were acquired earlier this year in two deals worth a total of about $10 billion.

The deals were part of efforts to move away from natural gas-centric shale assets to more profitable liquids projects in North America. The company also has gas and con-densate assets in the Montney and Duvernay shale plays in the Western Canadian Sedi-mentary Basin in excess of 611,000 acres.

“These four plays offer robust margins, low production costs and good market access. Operational excellence will continue to lie at the heart of all we do in 2015 and the current lower commodity price environment will create opportunities to drive further cost efficiencies throughout the supply chain,” Suttles said, not-ing the planned expenditure for next year is based on a WTI price of $70/b for crude and a NYMEX price of $4/MMBtu for gas.

Looking after the balance sheet will be top of the company’s priority, with no new debt to be added in 2015, Encana Chief Financial Officer Sherri Brillon said.

In the first quarter of 2015, the company expects to generate net proceeds of about $800 million through the sale of the Clear-water property in southern Alberta and other assets, she said, without elaborating.

Focus areasIn 2015, Encana plans to invest $650 mil-

lion to $750 million in its Eagle Ford assets, run three to five rigs and drill 75 to 85 net wells. With a supply cost of $30/boe to $50/boe, the company plans to produce 37,000 b/d to 41,000 b/d of crude oil and field condensates

and 7,000 to 8,000 b/d of NGL, Suttles said.Operational efficiencies will also be

sought in the Permian Basin, where Encana plans to spend $850 million to $950 mil-lion next year to operate as many as 13 rigs and drill 180 to 200 net wells. The company expects to produce 32,000 b/d to 35,000 b/d of crude oil and field condensates and 10,000 b/d to 14,000 b/d of NGL at a sup-

ply cost of $45 to $55/boe, Suttles said.Encana will also spend $600 million to

$700 million in the Montney play next year to grow its liquids and production to 19,000 b/d to 20,500 b/d and 580,000 Mcf/d to 620,000 Mcf/d, while in the Duvernay some $1 billion to $1.2 billion will be invested to produce 6,000 b/d to 7,000 b/d of liquids.

Encana has a joint venture with Mitsubi-shi Corp. for its Cutbank Ridge facility in the Montney. It also has a JV with Brion Energy, part of PetroChina, for its assets in Duvernay. — Ashok Dutta

Encana to hike tight oil output in 2015Capex spending plan up slightly from 2014

THE AMERiCAS

Capitol Crude Platts Podcast

Bakken oil producers face regulations that could rain on their paradeNorth Dakota oil producers are finding themselves in a tough spot, caught between calls for stabilizing crude for transportation safety and mandates to cut down on natural gas flaring in the Bakken. Platts senior oil editors Brian Scheid and Herman Wang explain the dilemma in the latest episode of Capitol Crude: The US Oil Policy Podcast:

http://plts.co/capitol-crude-121514

8 Oilgram News / VOlume 92 / Number 248 / wedNesday, december 17, 2014

Group suggests reforms to uS biofuels mandateWashington—A coalition of Renewable Fuel Standard stakeholders has developed a package of 40 potential reforms to the man-date that it hopes will win support in the new Congress.

Given the Environmental Protection Agen-cy’s repeated delays in setting the RFS biofu-els blending mandate each year, lawmakers are calling for the law to be overhauled.

The stakeholder group, organized by the Bipartisan Policy Center, said its suggested reforms could offer RFS participants more regulatory certainty, while better integrating renewable fuels into the US market.

“We do plan to roll this out on [Capitol] Hill and on the administration side so that this can be a good resource for them when

considering the future of the program,” said Scott McKee, a BPC senior policy analyst who spearheaded the group, which included repre-sentatives from ExxonMobil, Shell, BP, Phillips 66, Neste Oil, Amyris, Green Earth Fuels, Toy-ota, Boeing, the National Farmers Union and the Natural Resources Defense Council.

Among the group’s recommendations are creating a mandate for ethanol based on percentage of consumption, in addition to the volumetric RFS mandate categories; estab-lishing automatic consequences if the EPA fails to meet statutory deadlines for setting the annual blending volumes, and creating a longer period and increased allowance for banked and borrowed RINs, or compliance credits.— Herman Wang

Doha—World oil markets will stabilize eventu-ally, Qatari oil minister Mohammed al-Sada said Tuesday, even as oil prices registered falls to new five-year lows after a relentless plummet from mid-June levels of around $115/barrel.

Comments from Russian energy minister

Alexander Novak, Kuwaiti oil minister Ali al-Omair and Qatar’s Mohammed al-Sada follow other recent remarks from within OPEC that it is the market that will dictate prices.

“The market is very volatile,” Sada said Tuesday on the sidelines of the Gas Exporting Countries Forum in Doha.

“We need to watch it closely but it will sta-bilize eventually,” he said.

Asked how long it would take for market fundamentals to assert themselves, Sada replied: “Definitely it can take time to settle.” Global oil prices have fallen by almost 50% since mid-June, with ICE Brent futures trading on Tuesday below $60/b for the first time in five-and-a-half years.

Oil prices were hit in particular in late November following OPEC’s decision to roll

over its 30 million b/d output ceiling despite calls from some member countries for a cut in production.

“OPEC made their decision and OPEC is watching the market closely,” Sada said.

“The development of the oil price is being studied by the individual countries and by the secretariat. We should not pre-empt their con-clusions at this stage,” he added.

Kuwait’s Omair said OPEC should stick by its decision to maintain production levels despite sliding prices.

“There is no need for OPEC to change its decision,” AFP quoted him as saying.

“Kuwait believes the decision was correct and we should continue with it,” he said.

Market influenceAlso speaking on the sidelines of the

GECF summit in Doha, Russia’s Novak said oil markets had changed and that pacts between producers could no longer be counted on to influence the world market.

“Separate countries and agreements between them can no longer impact the world oil market—this is going into the past,” Novak was quoted as saying by Russian news agency Prime.

Novak said fundamentals of supply and demand would dictate price movements in the future.

“Under high prices, a lot of upstream proj-ects appear and consequently there is a lot of crude,” Novak said.

“At low prices, the number of projects falls and crude volumes drop. The price will [find] a balance. Some projects are already being removed from the market under the current price,” he said.

Russia, still under Western sanctions for its role in the Ukraine crisis, saw the ruble crash to new record lows Tuesday despite drastic interest rate hikes by the central bank.

The central bank said Tuesday the ruble’s slide has created “critical situation”.

UAE oil minister Suhail al-Mazrouei said at the weekend that prices could fall further, but that OPEC’s late-November decision would stand.

“We are not going to change our minds because the prices went to $60/b or to $40,” Mazrouei told Bloomberg during a conference in Dubai.

OPEC secretary general Abdalla el-Badri, speaking in Dubai on Sunday, added that the sharp oil price drop was not justified by the current global supply increases.

Emergency OPEC meetingKuwait’s Omair, meanwhile, said there had

been no requests from any OPEC member country for an extraordinary meeting ahead of its scheduled June 2015 summit.

“No country [from OPEC] has so far called for an emergency meeting,” Omair was quoted as saying by AFP.

The minister hinted that oil prices could continue to slide.

“Undoubtedly many of the shale oil and oil sands companies are producing at a cost higher than current oil prices. It depends on the capability of these producers to continue pumping at such a low price,” Omair said.

He said OPEC could not cut its current output.

“We took the initiative of keeping produc-tion unchanged when we had the capability to produce more. Surplus crude supplies are dry-ing up...which shows that things will stabilize. It’s a matter of time,” he said. Qatar’s Sada said the recent fall in oil prices would also eventually have an impact on the price of gas.

Sada and Novak were in Doha for the GECF’s 2014 ministerial meeting.

Following the summit, the group pledged to keep a close watch on challenges facing the global gas industry as a result of the increased volatility in oil markets, as well as economic uncertainty. — Tamsin Carlisle and Adal Mirza with Stuart Elliott in London

Top oil producers expect market to stabilizeNo calls from OPEC members for emergency meeting: Kuwait

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9 Oilgram News / VOlume 92 / Number 248 / wedNesday, december 17, 2014

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uS Senate’s first vote in 2015 to be on keystone XLWashington—The first vote of the Republican-controlled US Senate next month will be to approve the Keystone XL pipeline, Senate Republican Leader Mitch McConnell told reporters Tuesday.

While the bill is expected to pass due to the new Republican majority set to take over the Senate in January, it is unclear if it has enough support to overcome a likely veto from President Barack Obama. It takes 67 votes to overcome a veto and there will be 54 Republi-cans, 44 Democrats, and two independents in the upcoming Senate.

Last month, a Keystone bill brought to the floor by Senator Mary Landrieu, a Louisiana Democrat who later lost her re-election cam-paign, failed by a 59-41 vote.

The bill would have immediately authorized the pipeline, which would bring 830,000 b/d of oil from Alberta, Canada, to the US Gulf Coast region.

Two segments of the pipeline totaling 783 miles and linking Steele City, Nebraska, and Nederland, Texas, have already been built. — Brian Scheid

New York—Crude futures rebounded from overnight lows, settling in mixed territory, after data revealed a contraction in China’s manufacturing sector and Kuwait’s oil minister pledged OPEC would refrain from holding an emergency meeting.

ICE January Brent settled down $1.20 at $59.86/b. The prompt contract fell below the $60/b mark at 3:42 pm in Singapore (0742

GMT) Tuesday for the first time since July 2009.ICE January Brent reached an intraday low

of $58.50/b, but managed to pare losses during New York trading. The January contract expired Tuesday.

NYMEX January crude finished the day in positive territory. The prompt contract settled up 2 cents at $55.93/b. The benchmark con-tract also fell sharply overnight, sinking as low as $53.60/b in electronic trading.

In refined products action, NYMEX prompt ULSD settled 4.17 cents lower at $1.9600/gal. NYMEX January RBOB settled 3.54 cents lower at $1.5410/gal.

“WTI’s rally seems limited to spread liqui-dation, so I wouldn’t read too closely into it,” Jim Ritterbusch, president at Ritterbusch and Associates, said.

“There was profit taking out of NYMEX crack spreads and buying of WTI, selling of Brent, ahead of expiry,” he said.

The early sell-off across the oil futures complex was led by signs of weak factory activity in China, analysts said.

HSBC said China’s preliminary Purchasing Managers’ Index in December fell to a seven-month-low of 49.5 in December. A score below 50 indicates a contraction.

Meantime, Kuwait’s oil minister said Tues-day that OPEC should keep its output target steady despite falling oil prices.

Ali al-Omair also told reporters outside parliament there was no need for an emergen-cy OPEC meeting before its next scheduled gathering in June, AFP reported.

Russia’s central bank raised its key interest rate by 6.5 percentage points to 17% in an over-night emergency hike. Despite the move, the ruble lost value against the US dollar Tuesday.

The eurozone’s composite flash PMI rose to 51.7 in December from November’s 16-month low of 51.1, reflecting a modest upturn in the rate of growth, according to Markit Tuesday.

A closely watched survey of German

investor confidence jumped by 23.4 points in December, the ZEW Institute said.

“While Europe’s manufacturing data and German sentiment came in better than expect-ed, overall the outlook remains dour,” Phil Flynn, analyst at Price Futures Group, said in an email.

On the supply side, Islamist militias, battling for control of Libyan government-held facilities, launched an air strike Tuesday near Es Sider, Ras Lanuf and Brega terminals, AFP reported.

Libya’s oil production is “significantly down” after state-owned NOC suspended exports from major eastern ports of Es Sider and Ras Lanuf due to the violence. The two ports have a combined capacity of 560,000 b/d. — Geoffrey Craig

Crude futures recover from intraday lows, settle mixed

MARkETS & DATA

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16-Dec2-Dec18-Nov5-Nov

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Source: Platts, prices are rounded

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Japan Korea Marker LNG spot price

Henry Hub

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55.93

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NYMEX WTI, ICE Brent crude oil front month daily settles

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