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Page 1: Platts oilgram news juio 21 2014 Page 9 Colombia’s Cano Limon line bombed in latest attack

Volume 92 / Number 141 / Monday, July 21, 2014

[OIL ]

www.platts.com OILGRAM NEWS

Top stories

Asia Pacific

Japan’s refiners adopt new price formulas 2

Australian minister overturns offshore visa vote 2

PNG LNG helps boost Santos output 3

China refiners lower July crude run rate to 79% 3

KNOC to cut stake in Iraqi Kurdistan oil block 3

Europe, Middle East & Africa

Rosneft says sanctions won’t derail strategy 4

Rosneft claims Kiev blew up Ukraine refinery 4

Slump in UK drilling activity deepens 5

Libya calls on UN to help protect oil fields 5

The Americas

Port Arthur rail terminal to start in 2016-2017: KCS 7

Indian refineries want more Canada crude 8

US approves seismic testing off Atlantic Coast 8

The Column

Petrodollars 9

Colombia’s Cano Limon line bombed in latest attack 9

Markets & Data

Iran’s oil earnings plunge on sanctions hit 10

Libyan exports hampered by prices, quality concerns 10

Crude futures dip ignoring Middle East, Ukraine 11

Brazil’s gasoline price cap hinders ethanol demand 11

EU push for US crude exports meets indifferenceWashington—Despite increasing pressure from the European Union for the US to allow unfet-tered crude oil exports to Europe, the US has shown no willingness to ease energy export restrictions as part of a developing trade deal, US and EU trade officials said last week.

On Friday, EU and US chief negotiators said both sides discussed a number of issues as part of a sixth round of talks on the transatlantic trade accord, but reached no decision on a separate energy chapter.

The two sides are discussing “all the dif-ferent energy issues and the degree to which they may be addressed in other parts of the

agreement, in the various services chapters, in the goods chapter and in other chapters, and the extent to which some may require some special treatment [e.g. in a separate chapter],” US chief negotiator Dan Mullaney told reporters in Brussels.

The EU’s recent push for the change in US crude export policy may have more to do with gaining a competitive advantage over Asian markets than meeting free trade com-mitments, according to Alan Dunn, a former senior US trade negotiator.

Current US policy restricting nearly all crude exports is inconsistent with several international trade commitments, primarily a prohibition on quantitative export restraints within the General Agreement on Tariffs and Trade, the formative agreement of the World Trade Organization, Dunn said.

“I’ve had talks with the senior most [EU] trade officials and there’s not a single one of them who imagines for a second that the US position is consistent with WTO obligations,”

(continued on page 7)

South Stream faces new political hurdlesRussian gas plans seen surviving Ukraine turmoil

Moscow—New sanctions against Russian oil giant Rosneft this week have raised further concerns over the impact on long-term energy cooperation between Russia and its Western partners, in particular its major energy con-sumer, Europe.

But despite relations between Russia and the West hitting a new low and amid few hopes that the conflict in Southeastern Europe will be resolved in the near future, many believe long-standing plans for a new, $22 billion line to ship Russian gas to South-ern Europe will ultimately prove too attractive to European consumers.

Although the EU is set to announce more measures against Russia by the end of the

month, Gazprom and its CEO Alexei Miller have so far been significant absences from lists of those sanctioned by both the EU and US. Analysts speculate that Europe’s depen-dence on the Russia gas giant is just too great to risk any move which could threaten gas deliveries.

Still fears persist that the company’s plans to develop the 63 Bcm/year South Stream project will not go ahead. The line is designed to ship Russian gas via the Black Sea to Southern Europe, which is heavily dependent on Russian gas supplies, and currently exposed to risks linked to possible interruption of transit through Ukraine.

Gazprom has made some progress in recent months, most notably luring Austria back to the project, despite the worsening relationship between Russia and the EU and calls from some European politicians for the project to be stopped.

Some analysts have said that the cri-sis has even helped Gazprom to make the case that the project, which would allow it to

(continued on page 6)

ANALYSIS

�� Gazprom not sanctioned yet�� EU yet to grant Gazprom exemption to Energy Package�� First deliveries set for late 2015

FEATURE

�� EU wants US to drop crude export limits�� US unwilling to address in ongoing trade talks�� Push may be about EU energy edge on Asia

Page 2: Platts oilgram news juio 21 2014 Page 9 Colombia’s Cano Limon line bombed in latest attack

2 Oilgram News / VOlume 92 / Number 141 / mONday, July 21, 2014

ASIA PACIFIC

Australian minister overturns offshore visa voteLondon—Australia’s government has resorted to a little-used legislative tool to cancel a Senate vote changing visa terms for some foreign offshore workers.

Assistant minister for immigration Michaelia Cash on Thursday issued a rarely used Legislative Instrument overturning amendments relating to foreign offshore workers’ visas approved by the Senate Wednesday.

On Wednesday the opposition Labor and Greens parties had voted in the Senate to scrap several types of foreign worker visas used in the country’s offshore sector.

The Maritime Union of Australia had been lobbying for the changes, arguing that the coalition’s offshore visa regime threatened Australian jobs.

Cash’s measure means non Australian staff working on fixed offshore installations will need to hold an appropriate work visa and foreign workers on ships will need a maritime crew visa.

“The Legislative Instrument effectively restores the situation that existed prior to June 29 2014—which was in place for the entire duration of the former Labor Govern-ments,” Cash said in a statement.

Cash said the Senate vote, known as a Disallowance Motion, had plunged the coun-try’s oil and gas industry “into an avoidable state of uncertainty.”

“Therefore we have moved swiftly to rec-tify the state of uncertainty deliberately cre-ated by the Disallowance Motion,” she said. — James Bourne

Tokyo—Since April of this year three of Japan’s big refinery groups began to adopt new pricing systems, which alongside capacity cuts has helped increase margins.

Although exact details of the new pric-ing mechanisms have not been disclosed, several sources said they now reflect, to a larger degree than before, recent movements in international crude benchmarks such as Dubai, rather than being mainly indexed to domestic oil product benchmarks as before.

The wholesale pricing systems apply to the refiners’ weekly changes in prices of gas-oline, kerosene, gasoil and A-fuel oil, a blend of gasoil and fuel oil in a 90:10 ratio.

The pricing changes differ among Cosmo Oil, Showa Shell and JX Nippon Oil & Energy, which adopted new systems in April, May and June, respectively, according to industry sources and company officials.

In April, Cosmo Oil launched its own benchmark, comprising crude and domestic and overseas oil product prices, with an option to include Japan’s monthly average CIF crude import prices, sources said. The new pricing structure replaced its previous reliance on domestic oil products benchmarks.

In May, Showa Shell moved to a system with a greater linkage to crude oil prices to reflect its crude costs more accurately, from a previous system that looked at various bench-marks including domestic and overseas oil products, a company official said.

JX Nippon Oil & Energy’s new president Tsutomu Sugimori told Platts earlier this month that its weekly changes to wholesale oil product prices under a new system intro-duced in June were linked to “recent crude prices,” instead of linked to “a certain” oil products benchmark.

The changes to the wholesale pricing formulas are expected to help refiners secure

better margins in the domestic market, but it is hard to predict how much the refiners’ margins will rise because different compa-nies adopted slightly different formulas, one source at a refinery said.

The recent pricing moves are likely to help refiners improve their accounting of refining margins, following similar reforms by other Japanese refiners several years ago, industry sources said.

“We have to accept what they [JX] are doing [in the domestic market]. Others have to follow to maintain their sales,” one Japanese refiner source said, adding “There should be no change in crude buying patterns.”

The previous pricing system “didn’t always bring good margins, so they moved to cost-based pricing. They get good margins with this new method,” the source said.

First change since 2009The changes represent the first big

adjustment in Japanese refiners’ wholesale pricing formulas since October 2008-July 2009, when the industry introduced weekly wholesale product pricing linked to quotes by local pricing agencies such as RIM Intel-ligence and oil products futures on the Tokyo Commodity Exchange.

The latest changes were spurred by Japa-nese refiners’ deteriorating margins in fiscal 2013-14 (April-March), industry sources said.

Stripping out inventory evaluations, JX, Idemitsu Kosan and Cosmo Oil together report-ed accumulated ordinary losses of around Yen 140 billion for the fiscal year ended March 31, according to company statements.

Industry sources said changes to whole-sale pricing mechanisms will make refiners’ weekly changes less transparent because they will be considering more factors than just weekly changes in benchmark crude oil prices.

In fact, most Japanese refiners raised or held their weekly wholesale gasoline prices from February through to mid July, even though crude benchmarks fluctuated signifi-cantly in that period, industry sources said.

Japan’s average retail regular gasoline price stood at Yen 169.9/liter July 14, up Yen 0.2/liter from the previous week, marking the 12th consecutive week-on-week rise, accord-ing to the Oil Information Center.

Given the peak summer driving season of July-August and the recent capacity cuts, Japanese refiners are approaching a key moment, when will the see if they can sustain Q2’s higher margins after current turnaround end and about 1 million b/d refinery capacity comes back online, industry sources said.

Margins improveAt a time when average refining margins

in the rest of Asia have sunk to their low-est levels in four years, Japan’s refiners are benefiting from recent capacity cuts, ongoing maintenance turnarounds as well as pricing formula changes.

Although official June figures are not yet available, industry estimates suggest margins in the month followed the upward trend seen in April and May, signaling a profitable second quarter for the country’s refiners.

Japan’s refining margins started showing an improvement in April after the March 31 deadline for a government-backed round of cutbacks which saw the domestic refining sec-tor’s combined capacity fall 12% year on year to 3.95 million b/d.

Scheduled turnarounds in May and June then took out another 900,000 b/d-1.2 mil-lion b/d capacity.

In April, Japan’s average refining mar-gin for regular gasoline was Yen 16.9/liter ($0.17/l at current conversion), up 36% from Yen 12.4/l a year earlier, according to the Oil Information Center. The gasoline refining mar-gin improved further to Yen 18.4/l in May, up 70% from Yen 10.8/l a year earlier.

“From April onwards, refining margins have been normalized and improved from miserable situations a year ago,” Petroleum Association of Japan President Yasushi Kimura said Thursday.

Kimura attributed the improved refining margins to the mandated capacity cuts and to Japanese refiners’ tighter control of output to meet actual demand.

Japan’s improved refining margins stand in stark contrast to the rest of Asia, where refin-ers are, on average, seeing the worst margins in four years, according to Platts data.

The Singapore cracking margin for a typical refinery using Dubai crude, a proxy for Asian refinery profit margins, has averaged $1.917/barrel through the first six months of the year, the lowest level since H1 2010, when it aver-aged 35 cents/b. — Takeo Kumagai, with Su Yeen Cheong, Gurdeep Singh and Christian Schmollinger in Singapore

Japan’s refiners adopt new price formulasMove toward international benchmarks helps boost margins

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3 Oilgram News / VOlume 92 / Number 141 / mONday, July 21, 2014

ASIA PACIFIC

China refiners lower July crude run rate to 79%Singapore—China’s state-owned refineries planned to lower run rates in July to an aver-age of 79% capacity, slightly down from 83% in June, Platts’ monthly survey showed Friday.

The 24 surveyed refineries plan to pro-cess a combined 18.56 million mt of crude in July. Last month, the 24 surveyed refiner-ies processed a combined 19.06 million mt of crude.

The drop in the overall run rates in July was mainly driven by maintenance work at two of PetroChina’s major refineries in north China.

The average run rate at PetroChina’s 10 surveyed refineries is around 70% in July, down from the average run rate of 84% surveyed in June. It is also down from 80% last July.

The 10.5 million mt/year Lanzhou refin-ery only planned to process 100,000 mt of crude in July, or 11% of capacity, down from 98% last month. Both crude distillation units at the refinery were shut down in late June.

The 5 million mt/year CDU will restart from July 23 and the 5.5 million mt/year CDU from July 27.

Meanwhile, PetroChina’s 7.5 million mt/year Jinzhou refinery has trimmed its average crude runs to 41% of capacity in July from 81% in June, due to a month-long mainte-nance at a 3 million mt/year CDU and a 1.6 million mt/year fluid catalytic cracking unit.

The average run rate at Sinopec’s surveyed refineries was stable at 82% of capacity.

Its largest refinery, the 23.8 million mt/year Zhenhai plant, restarted a 6 million mt/year CDU and a 3 million mt/year FCC unit in early July, lifting its run rates to 90% of aver-age capacity, up from 65% in June.

But this was offset by the 5 million mt/year Qingdao refinery, which cut crude runs to 270,000 mt in July, or 64% of capacity, down from 73% in June.

CNOOC, meanwhile, plans to maintain run rates at its 12.5 million mt/year Huizhou refinery at 101%. — Staff Reports

Sydney—Australian exploration and produc-tion company Santos produced 12.8 million barrels of oil equivalent in the second quar-ter of 2014, up 3% year on year, following the startup in April of the Papua New Guinea LNG project.

Santos holds 13.5% of the ExxonMobil-operated PNG LNG project, which has a capacity of 6.9 million mt/year at two production trains. The $19 billion project began producing well ahead of its scheduled October startup date and had shipped seven cargoes by the end of the quarter, Santos said Friday.

Santos’ Q2 production compared with an output of 12.4 million boe in the correspond-ing period of 2013 and was 5% higher than the 12.2 million boe pumped in the first three months of this year.

In the first half of 2014, Santos’ output totaled 25 million boe, up 2% from 24.5 mil-lion boe in the corresponding period of 2013.

The company’s sales revenue was A$974 million ($910.36 million) for the second quar-ter and A$1.89 billion for the first half of the year, up 22% and 25% respectively compared with 2013.

“Delivery of the PNG LNG project is an important milestone for Santos in our journey to becoming a major LNG supplier to Asia,” Managing Director and CEO David Knox said. “This project will significantly lift Santos’ LNG production once the project reaches full out-put, and we are already seeing the contribu-tion it is making.”

Santos also holds a 30% operating stake in the 7.8 million mt/year Gladstone LNG proj-

ect in eastern Australia. The coalseam gas-to-LNG project is budgeted to cost $18.5 billion from the final investment decision to the end of 2015, when the second train is expected to be ready for startup.

“GLNG continues to make good progress, it remains on budget and we are on track to deliver first LNG in 2015,” Knox said. First commissioning gas is expected to be delivered to the LNG plant on Curtis Island, Queensland, in the fourth quarter of 2014.

“GLNG project guidance on cost and schedule remains unchanged, but we continue to be skeptical on the project given our cau-tious view on coalseam gas well deliverability and reserves,” Hong Kong-based analysts with Bernstein Research said in a note Friday.

Santos drilled 42 coalseam gas wells in Queensland as part of the GLNG project dur-ing the second quarter, taking its total to 827, according to Bernstein. The company needs to drill 173 more wells before GLNG startup to achieve its estimated target of 1,000 wells, the analysts added.

“During the quarter, GLNG executed two third-party gas supply agreements for an aggregate quantity of 85 petajoules (1.5 mil-lion mt),” Bernstein said. The analysts added that given the forecast reserves shortfall, Santos was “increasingly likely to be forced into purchasing more third-party gas to meet contractual obligations.”

Santos expects to produce between 52 million and 57 million boe in 2014. The com-pany is Australia’s third-largest oil and gas producer behind BHP Billiton and Woodside Petroleum. — Christine Forster

PNG LNG helps boost Santos outputAustralian company lifts Q2 production 3% on year

KNOC to cut stake in Iraqi Kurdistan oil blockSeoul—South Korea’s state-run oil developer Korea National Oil Corp. plans to sell down its stake in the Sangaw South block in the semi-autonomous Kurdish region of northern Iraq and terminate oil exploration in the Bazian block there, a company source said.

The board of directors has approved a plan to transfer part of its 60% stake in Sangaw South, the source told Platts. The company has yet to decide how much it would transfer, but it could be the 30% KNOC has recently purchased, he said.

Earlier this year, KNOC bought a 30% share at Sangaw South, doubling its share to 60%.

KNOC would seek to transfer the stake to private South Korean developers so that the country’s combined interest remains unchanged, the source said.

“This is part of our efforts to share upstream know-how with [South Korea’s] private firms and provide them with opportuni-ties for overseas oil development,” he said.

The source declined to disclose potential buyers and the financial value of the equity for sale.

The source also said KNOC has decided to terminate its project for the Bazian block by returning the exploration rights to the Kurdis-tan Regional Government. As the exploration right expires in November this year, KNOC would not renew it due to the reduced possi-bility of commercially viable crude oil deposits there, he said. KNOC won the right in 2007 and has conducted exploration since 2009, the source said.

KNOC has been currently involved in three exploration projects in Iraq—Hawler, Sangaw South and Bazian—all in the Kurdish region. KNOC would focus on Hawler and Sangaw South after leaving the Bazian project, the source said.

In April, KNOC had said that a joint oil exploration project confirmed that the Hawler block’s Demir Dagh structure holds crude reserves of more than 258 million barrels. KNOC controls 15% of the Hawler block, with Oryx Petroleum holding 65%. The remaining 20% is controlled by the KRG.

KNOC has recently announced a set of plans to sell its stakes in overseas projects to reduce its huge debts. In its latest divest-ment plan, KNOC said in May that it plans to sell off its 8.91% of Indonesia’s offshore South East Sumatra block. The state-run com-pany purchased the stake in 2002.

KNOC is also seeking to terminate a proj-ect to develop Peru’s northern onshore Block 115 in which it holds 30%, the source said, without elaborating.

KNOC is spearheading upstream oil proj-ects abroad for South Korea, the world’s fifth-largest crude buyer which imports almost all of its requirements. — Charles Lee

Page 4: Platts oilgram news juio 21 2014 Page 9 Colombia’s Cano Limon line bombed in latest attack

4 Oilgram News / VOlume 92 / Number 141 / mONday, July 21, 2014

Rosneft claims Kiev blew up Ukraine refineryMoscow—Russian state-run oil giant Ros-neft accused Ukrainian government forces Friday of “provocation” by shelling its Lisi-chansk refinery in eastern Ukraine, drawing parallels with an apparent attack on the Malaysian jet which crashed in the country’s rebel-held east.

The 160,000 b/d Lisichansk refinery, the second-largest refinery in Ukraine, has been shut down since March 2012, when the then-owner of the unit, TNK-BP, said it was unprofitable because of imports of cheaper fuel.

Rosneft, which took control over the refin-ery after the purchase of TNK-BP in 2013, previously said it was planning to restart the refinery this summer.

“As a result of repeated attacks by Ukrainian law-enforcement forces at the Lisichansk refinery, several fires broke out across the facility and some of its equip-ment and infrastructure was destroyed,” Rosneft said in a statement.

Earlier in the day, a government official in the city said that the Lisichansk refinery has been set on fire after being hit by a rocket.

Irina Verigina, acting head of the regional administration, claimed on her Facebook page that the rocket was fired from a Grad multiple launcher by pro-Russian separat-ists. Verigina wrote that a sulfur storage facility had been set on fire in the attack. At

the same time, the pro-Russian separatists said the shelling was carried out by govern-ment forces, according to a report by Rus-sia’s Prime Tass news agency.

Rosneft said in the statement it “sees the targeted shelling of our Ukrainian asset as provocation and crime on a par with the destruction of the Malaysia Airlines passenger airliner over Ukraine on July 17.” The Lisi-chansk refinery lies near the city of Lugansk, where there is fighting between pro-Russian separatists and government forces.

The development came as Russia warned Friday it may respond if cross-border shooting from Ukraine continues, sharply raising ten-sions over the crisis a day after a Malaysian jet crashed, killing all 298 people aboard.

“We already warned that if this continues then we will take measures. At least if it is clear that this has been done deliberately I am convinced that such a firing position should be neutralized as a one-off measure,” Russian Foreign Minister Sergei Lavrov told Rossiya 24 state television.

“We have delivered a serious warning to our Ukrainian colleagues,” he was quoted as saying by Russian news agencies.

A US official said Friday an initial review of US intelligence suggests pro-Russian separat-ists likely shot down the Malaysian airliner over Ukraine but Washington is still examining the evidence. — Nadia Rodova

Moscow—Russia’s biggest oil producer Ros-neft said Friday it sees no threat from the latest US sanctions to its projects and agree-ments as it has sufficient liquidity to service its debts and pay shareholder dividends.

Calling the new sanctions “illegitimate and groundless,” Rosneft said its current financial position is “robust” as it is able to count on operating cash flows to maintain its current strategy.

The US imposed the most recent round of sanctions on Russian companies late Wednesday over the Ukraine crisis, with the list including Rosneft, Russia’s largest gas independent Novatek, as well as two banks and several arms companies.

The sanctions prohibited US persons and entities from providing mid- and long-term financing for Rosneft and Novatek.

“Rosneft’s operating cash flows allow us to carry on with our current projects,” it said in a statement, adding its liquidity is sufficient to meet debt payments and honor contractual obligations.

Commenting on the potential impact of the sanctions, Rosneft CEO Igor Sechin said Thursday they would not affect the company’s financial position.

“[Rosneft’s financial standing] allows us to implement our projects for a long time with-out getting access to any urgent credit lines,” Sechin told reporters in Brazil, in a broadcast by state-owned Russia 24 TV channel.

Rosneft is in the process of a legal review of the sanctions and is consulting its interna-tional partners, it said.

Rosneft has strategic cooperation agree-ments with a number of international majors, including ExxonMobil, Shell, Statoil and Eni. Oil major BP with a 19.75% stake in Rosneft, is its second-largest shareholder after the Russian state.

Chinese financingThe short-term effect of the US sanction

is insignificant for the oil major, according to analysts, as Rosneft may use pre-payment for its crude supplies to China to cover refinanc-ing needs.

Rosneft will likely be able to fully meet its mid-term refinancing needs thanks to multi-bil-lion dollar prepayments from China, analysts at Citi said in their research note Friday.

“The Chinese prepayment deal covers medium-term refinancing needs, [and] stabi-lizes the cost of debt,” they said.

Between the last nine months of this year and end-2016, Rosneft needs to pay a total of around $40.5 billion in mature debt, the Citi analysts said.

“While that total... may sound significant in the face of the announced sanctions, it is more than covered by the significant pre-payment deal struck with China last year,” the analysts said, adding that in their estimation Rosneft has an effective line of credit of $75-$80 billion.

As of end-March, Rosneft has drawn around $25 billion of that, leaving some $50 available, they said.

Interest under the credit line is tied to LIBOR rates, so the sanctions will have no effect on Rosneft’s refinancing costs, the ana-lysts added.

“That credit is reported to be tied directly to LIBOR 6-month rates plus circa 2.5%, the sanctions should have no effect on the cost of financing,” they said.

Analysts at Russia’s Sberbank said Ros-neft is likely to use the Chinese pre-payment for its financial needs, potentially apply to the state for additional help, and use its cash pile.

“The company is likely to try to get more pre-payments from Chinese banks under its long-term supply contracts and at some point in time may receive “anti-crisis” funding from the government, as it did in 2008. In the mean-time, it is likely to use its $20 billion cash pile for debt servicing,” Sberbank analysts said.

Russian President Vladimir Putin said last year Rosneft is to receive around $70 billion in prepayment under a 25-year crude supply deal with China National Petroleum Corporation.

Under the deal, Rosneft’s total crude exports to China are set to gradually grow to 31 million mt/year, or 620,000 b/d by 2018.

Rosneft sends 300,000 b/d of crude to CNPC under a 20-year contract signed in 2009, which commenced in January 2011. — Dina Khrennikova

Rosneft says sanctions won’t derail strategySays committed to projects, will honor obligations

“The ... sanctions are illegitimate and groundless.” — Rosneft

EUROPE, MIDDLE EAST & AFRICA

Platts Podcast

West African overhang brings down European crude market amidst poor marginsPlatts editors discuss the biggest slide in Brent crude prices this year, including the impact of Chinese de-stocking on West African exports and the fragile recovery in European refining margins.

http://www.platts.com/podcasts-detail/oil/2014/july/crude-oil-africa-north-sea-071614

Page 5: Platts oilgram news juio 21 2014 Page 9 Colombia’s Cano Limon line bombed in latest attack

5 Oilgram News / VOlume 92 / Number 141 / mONday, July 21, 2014

Libya calls on UN to help protect oil fieldsLondon—Libya has called on the United Nations to set up a mission to help the local authorities protect oil fields and airports, as the security situation in the North African country continues to deteriorate.

On Thursday, Tarek Mitri, Special Represen-tative of the Secretary-General for Libya, told the UN Security Council that it was important for the UN to take the case of Libya seriously “before it is too late.” Mitri said Libya was suf-fering from both civil and economic deteriora-tion “due in large part to the decline in oil pro-duction and exports,” according to a statement posted on the Security Council website.

“Oil fields have been controlled by armed groups for almost a year, resulting in the loss of 30 billion barrels of oil,” Mitri said in the statement.

He added that the government did not have the military means to resolve that situ-ation and was “instead pursuing dialogue.” Calling on the Security Council to live up to Libya’s expectations, he said he was not calling for military intervention, “but for a mission—whose duties would differ from the political Mission now in place—focused on stabilization, institution-building, and an effec-tive security sector.”

Such a mission, he said, should contrib-ute to the protection of oil fields and airports “through training of personnel and should support capacity-building with anti-corruption mechanisms, in order to empower the state

to meet the challenges, in close cooperation with all regional and international partners.”

Fighting between powerful militias battling for control of Tripoli’s airport broke out again on Friday, just hours after they had agreed a truce, AFP reported. The violence erupted when Islamist gunmen from the city of Mis-rata attacked anti-Islamist fighters from the city of Zintan who have been controlling the airport for the past three years, AFP said.

Despite restarts at key oil fields and the reopening export ports in recent weeks, persistent violence across Libya has sparked fears of all-out civil war and Foreign Minister Mohamed Abdelaziz told the Security Council his country could become a “hub for attract-ing extremists”.

The London P&I Club, one of the leading insurers for the global shipping industry, said Friday members calling at Libyan ports should “carefully assess” their contractual obliga-tions in light of the ongoing instability in the North African country.

“Members considering fixing vessels to call in Libya should also give due consider-ation to contractual measures that might be taken to try to avoid and/or negate future issues arising out of such instability,” it said in a circular.

The Club said that all oil terminals in Libya were currently working, with the excep-tion of Brega, which is shut due to a strike by workers. — Stuart Elliott

London—UK exploration and appraisal drill-ing activity continues to fall, according to new data from financial services firm Deloitte, even as the industry says that the country’s upstream output decline is bottoming out.

In a new report Deloitte says just seven exploration and appraisal wells were initi-ated in the second quarter of this year offshore the UK, down from 17 in the same period a year earlier and 12 in the first quar-ter of this year.

The numbers suggest a continuation of the fall in exploration-related activity seen in recent years, which has fueled fears about the decline of the North Sea.

Lobby group Oil and Gas UK has said 15 exploration wells were drilled offshore the UK in 2013, a near-record low. At the same time some in the industry, including BP, have said they see signs of a recovery in UK out-put this year.

Deloitte also reported a reduction in cor-porate and asset deals in the UK offshore sector, saying it was aware of five deals in the second quarter, down from 12 in the same period a year earlier.

Norway has seen a less pronounced drop-off in drilling activity, the Deloitte sur-vey found.

“The decrease in drilling and deal activ-ity in the UK may be a result of uncertainty in the industry caused by possible changes to the fiscal regime and the introduction of a new regulator...” Deloitte said.

“In addition, rising costs to operate in the North Sea and a tighter rig market are making companies more reluctant to commit to long term exploration investment and a general ‘wait and see’ approach seems to have been adopted before making any fur-ther investment decisions.”

Reform or upheaval?The decline in UK drilling has prompted

some in the industry to call for Norway-style tax incentives for exploration. But others argue that it is not the number of wells drilled that is important, but the accuracy of drilling,

which requires better information and analysis of past failures.

The UK government is setting up a new regulator outside the Department of Energy and Climate Change to oversee such improve-ment and revive the offshore sector and is also carrying out a review of the tax regime.

The industry has welcomed both moves, but the Deloitte report highlighted the risk that they could be adding to uncertainty.

Other analysts have pointed to Scot-land’s independence referendum on Septem-ber 18 as creating uncertainty on whether to invest.

The Deloitte report highlighted a cau-tious attitude to deal-making on the part of the generally smaller companies now active in the North Sea. It described a tendency to favor farm-in deals rather than more costly corporate mergers and acquisitions.

“The low deal figures across northwest Europe may be due to the increasing operat-ing costs, which may make companies reluc-tant to commit to drilling activities...” it said.

“Due to the maturity of the region, the buyers tend to be smaller players with smaller budgets so the higher costs are muting the ability to secure deals.”

Europe-wide declineNorthwest Europe as a whole saw a 37%

year-on-year fall in exploration and appraisal drilling in the second quarter, with 22 wells initiated, Deloitte found.

For Norway, 13 exploration and appraisal wells were initiated in the second quarter, down from 15 a year earlier.

Deloitte said it was aware of 16 asset or corporate deals in the northwest Euro-pean oil and gas sector, all but two of them offshore Norway and the UK, compared with a total of 30 deals in the second quarter a year earlier.

However the number of Norwegian deals rose to nine, from five a year earlier.

Drilling activity also fell offshore the Neth-erlands in Q2, with just one well initiated, compared with a usual rate of three per quar-ter, Deloitte said.

No drilling activity has been seen in Ire-land since the ExxonMobil-operated Dunquin well disappointed last year.

There was no drilling offshore Denmark, Greenland or Germany in the second quarter, while one well was initiated offshore the Faroe Islands by Norway’s Statoil. — Nathan Richardson, Nick Coleman

Slump in UK drilling activity deepensStudy points to uncertainties over offshore tax review

�� Well completions dive in Q2�� Costs, rig markets hitting offshore budgets�� Scotland’s independence vote key

EUROPE, MIDDLE EAST & AFRICA

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bypass Ukraine in shipping to Europe, is the most effective way to guarantee secure deliv-eries to Europe going forward.

“Russia has made it clear that new pipe-line projects like Nord Stream and South Stream are supposed to be aimed at ensuring that Russia’s relations with transit countries like Ukraine will not affect reliability of west-bound gas supplies,” Kyle Davis, partner, Goltsblat BLP, said.

Furthermore, he added that Russia has never explicitly threatened gas supplies to Europe as a pressure point in East-West relations, and Russia has always tried to maintain a reputation as a reliable energy supplier for Europe.

Analysts also believe that Russia is in a good position to undercut any rival gas suppliers to Europe on price, mitigating the potential damage of LNG projects that will come on stream towards the end of the decade, and European consumers’ attempts to diversify their supply channels as much as possible.

“Putting in place the infrastructure and agreements that it would take for Europe, particularly Eastern Europe, to get by with-out Russian gas will be an expensive and time-consuming endeavor. Ultimately the costs of the additional pipelines, LNG import terminals and regasification plants that are required to diversify away from Russian gas will be borne by European businesses and citizens,” Davis said.

“Either gas prices will increase, or taxes will be used to subsidize the development of new supply, or both. And then the gas that comes through the new import chan-nels could itself be more expensive than Russian gas.”

Potential problemsThere are grounds for concern over

whether the project will proceed on schedule, however, the most serious of which predate the current political crisis in Ukraine.

For some analysts, the biggest threat remains the fact that the project is not com-patible with the EU’s Third Energy Package, which aims to unbundle production, supply and marketing of gas in Europe, and stipu-lates that 100% of a pipeline’s capacity must be offered to the market.

“Of course Gazprom is not prepared to allow third party suppliers access to South Stream. Considering the scale of investment required for construction guarantees on filling the pipeline backed up with long-term supply contracts are necessary. Otherwise it does not make sense for Gazprom to invest in the project,” analysts at Invest Cafe said in a research note released in late June.

South Stream is expected to cost Gaz-prom an estimated $20 billion, and a further

South Stream faces new political hurdles...from page 1

$15 billion in expanding the Russian pipe-line network.

There are already signs that the EU may move to block the project. Late last year the EU said that all intergovernmental agree-ments signed between Russia and South Stream host countries violate EU rules and must be renegotiated. A working group which had been set up to deal with the issue was suspended in March by EU Energy Commis-sioner Guenther Oettinger, as the crisis in Ukraine unfolded. Then, in early June Bul-garia, an EU member state, suspended work on the project on Bulgaria territory, citing a recommendation from the EC.

Furthermore, Gazprom has already been forced to withdraw from Lithuanian companies Lietuvos Dujos and Amber Grid, which carry out transportation and marketing of gas in Lithuania, as a result of court rulings which upheld Lithuanian legislation passed in line with the Third Energy Package.

Any serious deterioration in the situation in Ukraine could harm Gazprom’s chances of securing the necessary exemption from the EC. Some analysts have also questioned whether the pipeline is necessary at all.

“It is debatable whether it makes sense for Russia to further expand its gas trans-portation capacity, when Nord Stream has a capacity of 55 Bcm/year, and the Ukrainian transportation network 140 Bcm/year, which

are only half full and the EU is constantly expressing its desire to reduce its depen-dence on Russian gas,” Investcafe said.

EU policyMuch will also depend on policy deci-

sions taken by the EU in coming months, as a new commission comes into operation. Some analysts have said that there is an underlying lack of clarity in the EU’s position.

Analysts at the Oxford Institute for Energy Studies have said that if the EC’s key policy going forward will be to guarantee reli-able supplies above all else, issues of tran-sit will play a secondary role, and it would make sense to come to some sort of agree-ment with Russia and allow South Stream to go ahead.

However, if diversity of supply is to be the key driver behind EU energy policy, then it makes less sense to provide Gazprom with the necessary exemption.

There is also the possibility of some diver-gence in opinion within Europe, with those countries which would benefit from the project directly most likely to push for it to go ahead. This includes Hungary, Slovenia and Greece as well as Bulgaria and Austria, and non-mem-ber state Serbia.

Any measures introduced by the EU against Russia as a consequence of its role in Ukraine in the coming weeks could also prove to be significant, as Gazprom targets shipping first gas to Europe through the line in late 2015. — Rosemary Griffin

EMEA News Briefs

Shell employees on Malaysian plane downed in UkraineShell said Friday that a number of members of its staff were aboard the Malaysian Air-

lines flight that went down in eastern Ukraine in a suspected missile attack and said it was working to establish details of those lost.

Some media reports suggested three Shell Malaysia employees were on the flight that came down Thursday in separatist-controlled Ukrainian territory, but a Shell spokesman in London was unable to confirm the number of casualties.

“We now have confirmation from authorities and family members that Shell staff were aboard Malaysian Airlines flight 17,” Shell said in a statement.

“We are deeply saddened by this tragic loss of our colleagues and friends... Shell is pro-viding support to the families of our employees to help them through this time of grief.”

Ukraine’s oil, gas condensate output slips in JuneUkraine’s crude oil and gas condensate output decreased 8.1% year on year to 225,700

mt in June from 245,600 mt in June 2013 and fell from 235,700 mt in May, an energy and coal industry ministry official said Friday.

In January through June, Ukraine extracted 1.39 million mt of oil and condensate, down 7.5% from 1.503 million mt produced in the same period a year ago, the official said, citing preliminary figures.

Ukraine produced 1.031 million mt of crude oil and 358,000 mt of gas condensate in the period.

The national oil and gas company Naftogaz Ukrayiny produced 1.23 million mt of oil and condensate in January through June, down 9.4% from 1.36 million mt a year ago. Other companies extracted 157,600 mt of oil and condensate, up 10% from 143,200 mt.

The oil and gas condensate output figures do not include production of Chornomornaf-togaz, the country’s third largest producer of hydrocarbons, which was seized by separatist authorities in Crimea following Russia’s annexation of the Ukrainian peninsula in March.

In 2013, Ukraine extracted 3.051 million mt of oil and gas condensate, down 3.9% from 3.175 million mt in 2012.

EUROPE, MIDDLE EAST & AFRICA

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Port Arthur rail terminal to start in 2016-2017: KCSWashington—A planned Port Arthur, Texas, unit train terminal that will offload Western Canadian heavy crude will begin operations by late 2016 or early 2017, co-developer Kansas City Southern railroad said on Friday.

Railroad officials would not project poten-tial volumes or revenue from the project, but KCS and project co-developer Global Partners said earlier that the terminal will initially han-dle two unit trains a day and have the capac-ity to store 340,000 barrels of oil.

The 200-acre facility, which Global will design, build and operate and KCS will lease, will contain a double loop track and be capa-ble of handling trains of up to 120 cars, KCS officials said on an earnings conference call.

The terminal likely will take shipments originating from Canadian Pacific and Canadi-an National railroads over multiple KCS gate-ways, Pat Ottensmeyer, KCS’ executive vice president of sales and marketing, said.

It will also have waterfront access to the Gulf of Mexico for barge and vessel loading, he added.

Ottensmeyer said demand among US refin-ers for Western Canadian heavy sour crudes is “substantial” and that between now and the terminal’s opening, Global “will be aggressively pursuing business opportunities in this market and will be using other KCS terminals and facilities in the area to handle this business.”

US refiners have shown a preference recent-ly for Western Canadian heavy sour crudes shipped by rail because of their low diluent con-tent that ranges from close to zero up to 5%.

Canadian heavy sour crude shipments by pipeline require up to 15% diluent in the summer months and up to 33% diluent in winter, which costs refiners more to separate and process.

In addition, because the US has permit-ted re-exports of Canadian crudes, potential exporters prefer Canadian crudes received by rail because of the zero potential of commin-gling with US domestic crudes.

The US permits the re-export of Canadian crudes from US locations provided it is not commingled or blended with domestic US oil.

KCS and Global announced the planned Port Arthur terminal earlier this month.

KCS saw its revenues from crude oil ship-ments plunge 41% year to date, compared with the same period in 2013, with carloads dropping to 5,500 from 7,600 a year ago, a drop officials attributed to new pipeline capac-ity bringing light crudes to the Gulf Coast.

Officials said they expect their crude-by-rail shipments to pick up again later this year, as new terminals for heavy Canadian crude come online.

For example, Genesis Energy is scheduled to bring online soon its Scenic Station ter-minal in Louisiana that will be connected to KCS’ network and KCS is building new track to serve Jefferson Refinery’s new terminal in Beaumont, Texas.

“We expect to start delivering crude in the fourth quarter of the year,” KCS CEO David Starling said. “We could see a ramp up over the course of 2015, depending on the tim-ing of these openings. We’ll start with three to four trains per month and then grow from there. It’ll be a slow ramp.”

Overall, the company remains bullish on crude by rail, Starling said.

“I don’t see this railroad renaissance chang-ing,” he said. “This country is not investing in its highways. The railroads are going to be rewarded for the capacity they’re adding. We’re not going to slow down.” — Herman Wang

said Dunn, who is now a Washington-based trade attorney with the law firm Stewart and Stewart. “It’s abundantly clear to me that our major trading partners… like EU, Japan and a bunch of others all know that the US export control regimes on both oil and gas are WTO inconsistent. The oil one is the most seriously inconsistent at this point.”

But WTO members have not challenged the US crude export restrictions for a variety of reasons, Dunn said, pointing out that the US joined recent successful challenges in the WTO against export limits China placed on some of its raw materials.

China, for example, may not pursue a dis-pute settlement case against US crude policy since a successful case could strain an ener-gy partnership with Russia, which may see its oil earnings impaired by additional crude on the world market, Dunn speculated.

In addition, the EU may see WTO-inconsis-tent limits on US crude exports as a bargain-ing chip in its ongoing free trade agreement talks, which entered their sixth round in Brus-sels this week.

“They want to keep some coins in their pocket to give their negotiators more lever-age,” Dunn said.

Supply advantageAnd if they were to negotiate the free

trade of crude between the EU and US as part of the trade pact, formally known as the Transatlantic Trade and Investment Partner-ship, it would give European markets a dis-tinct supply advantage over Asia where US crude may have been otherwise marketed if restrictions were dropped entirely.

Crude oil exports are not being negoti-ated as part of the Trans-Pacific Partnership talks, a trade agreement the US is negotiat-ing with 11 Asia-Pacific countries, including Japan and Singapore.

The EU’s hopes for US exports were detailed in a recently leaked document by EU negotiators which called for a “strong and comprehensive chapter” in the US-EU trade agreement, which would include lifting bilat-eral restrictions on gas and crude oil. The EU is pressing for a process in which the US would automatically approve crude oil and gas exports to EU countries.

But the US has given no indication it is willing to even discuss such a chapter in any detail, an EU official told Platts.

A spokesman for the Office of the US Trade Representative declined to comment on the ongoing negotiations.

The EU and US have yet to agree wheth-er to include a specific chapter on energy, including crude oil and natural gas, in their TTIP free trade negotiations and European Commission trade spokeswoman Maria Lyra Traversa called the separate chapter

EU push for US crude exports meets indifference...from page 1

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on energy “one of the open issues,” in the ongoing talks.

In a formal update last week, the EU said that the two sides had discussed in detail the EU’s arguments for having a separate energy chapter, and had also had detailed exchanges on their respective regulatory frameworks.

Traversa said that the EU usually has a specific energy chapter in its free trade agree-ments with other countries.

At a Washington conference last week, Jason Bordoff, a former White House energy adviser for the Obama administration, said all energy issues, including crude oil and gas exports, were at the bottom of US priority lists in the trade agreement talks.

In a detailed USTR paper on the US objec-tives and benefits in the TTIP, the only mention of energy is a broad commitment to eliminat-ing trade barriers for clean energy technology and the sole mention of oil is a commitment

to eliminate tariffs on US olive oil exports.EU chief negotiator Ignacio Garcia Bercero

told reporters Friday that one of the energy issues discussed this week was the EU and US regulatory and legislative responses to the 2010 Macondo oil spill accident in the Gulf of Mexico.

“Without prejudice to whether there would be at the end a chapter on energy and raw materials, it’s very useful that we are hav-ing these intense discussions between our regulators to look into the different potential [energy trade] elements,” he said.

The EU and US started talks on the agree-ment in 2013, and could conclude it next year, as such agreements usually take at least two years, she said.

A seventh round of talks is planned for after the summer.

US President Barack Obama said in March that TTIP would make it easier to obtain licenses to export LNG to the EU, and that this could help strengthen the EU’s energy security. — Brian Scheid, with Siobhan Hall in Brussels

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US approves seismic testing off Atlantic CoastWashington—The Obama administration will allow seismic testing off the East Coast to update decades-old estimates of undiscov-ered technically recoverable oil and natu-ral gas along the south- and mid-Atlantic coasts, the US Bureau of Ocean Energy Management said Friday.

In a record of decision, BOEM said it will allow permitting for seismic tests in federal waters from the Delaware Bay to just south of Cape Canaveral, Florida.

Acting BOEM Director Walter Cruickshank said the decision does not authorize offshore oil and gas drilling, adding that geologic and geophysical companies would need to obtain permits to conduct a seismic survey.

“We have several permit applications on hand that we will be working on,” Cruickshank told reporters.

These seismic surveys would update 40-year-old data on the East Coast’s off-shore resources, which show that the Atlan-tic Outer Continental Shelf has 3.3 billion barrels of estimated recoverable oil, includ-ing 1.42 billion barrels in the Mid-Atlantic and 0.53 billion barrels in the South Atlan-tic, well below what industry believes may be recoverable.

The same data estimates there is 31.28 Tcf of gas in the Atlantic, including 9.87 Tcf in the North Atlantic, 19.36 Tcf in the Mid-Atlan-tic and 2.04 Tcf in the South Atlantic.

The administration is considering includ-ing south and Mid-Atlantic drilling in its next federal offshore leasing plan, which

will run from 2017 through 2022, but in a recent interview then-BOEM Director Tommy Beaudreau said the drilling decision will not hinge of how much oil seismic tests find may be recoverable.

Cruickshank said Friday’s decision includes the “highest level of protection” for environmental and marine life and includes provisions to stop testing during migratory periods for sea turtles and right whales.

But these protections were blasted both by industry for exceeding legal requirements and by environmentalists for allowing these tests at all.

“We remain concerned by the lack of sci-entific support for certain requirements the administration wants to impose on seismic surveys in the Atlantic,” American Petroleum Institute Upstream Director Erik Milito said in a statement.

“Operators already take great care to protect wildlife, and the best science and decades of experience prove that there is no danger to marine mammal populations,” he added.

But Claire Douglass, a director with envi-ronmental group Oceana said the seismic testing will put the health of marine life and well as commercial and recreational fisheries at risk.

US Senator Edward Markey, Democrat-Massachusetts, said the planned seismic survey would be “incredibly harmful to whales and the marine habitats they inhab-it.” — Brian Scheid

Calgary—India’s refinery operators are keep-ing options open to secure more volumes of Canadian crude as part of its efforts to widen its import basket and take advantage of com-petitively priced heavy crude grades, industry sources said Friday.

Naduhatty Selai Raman, chief research manager with Indian Oil Corp., said IOC is cur-rently in negotiations with Canadian producers to import feedstock crude for its refineries in the coastal areas of India that are capable of processing heavier grades of crude.

“Our imports are increasing and pricing is a big aspect of any deal that we will make to procure crude,” he said on the sidelines of the India-Canada Energy Forum in Calgary.

“We will be looking at a price margin of at least $5/barrel,” Raman said.

IOC has already lifted one cargo of light crude oil from offshore Newfoundland and Labrador that was produced by Husky Energy. It has also signed a memorandum of under-standing with the Alberta Petroleum Marketing Commission for crude offtake.

Raman did not comment on whether IOC was looking at importing more cargoes from Husky.

“Our refineries can process heavy crudes, and both the Cold Lake and Western Cana-dian Select will be suitable,” Raman said.

Krishnamurthi Subramanyam, deputy gen-eral manager of refinery coordination with Hin-dustan Petroleum Corp., said Hindustan will also be open to lifting Canadian crude.

“We import about 42 million barrels from

Iraq each year, and the recent violence there has not as yet impacted our crude liftings,” he said on the sidelines of the event. “How-ever, we will always be looking at opportuni-ties elsewhere.”

Anand Kumar, director of Petrotech, said a game-changer for Canadian crude exports will be the construction of pipelines from land-locked Alberta.

“We are working on making a comprehen-sive regulatory submission this summer for the Energy East pipeline,” Paul Miller, execu-tive vice president with TransCanada said at the event, adding that the 1.1 million b/d facility will potentially open up new channels of exports to India.

Energy securityDeepak Obhrai, parliamentary secretary

to Canada’s Minister for Foreign Affairs, said the expectation is for energy security to be a “defining” element of Indo-Canadian relations.

“Under [Canada’s] new global action plan, oil and gas has been identified as a priority sector, and we see ourselves playing a major

role in meeting India’s demand to procure more crude from global sources,” he said at the event.

India is the fourth-largest global consumer of oil, and in 2012 it imported 73% of its total demand. By 2035, India’s oil imports will rise to 90%, and this will open up major export opportunities for Canada’s oil sands produc-ers, Obhrai said, referring to a memorandum of understanding that both nations signed last October in Ottawa setting the framework for cooperation in crude oil and gas.

Obhrai did not give any figures, but Akhil Verma, Canada country manager for ONGC Videsh, or OVL, said at the event that India’s demand for crude oil will reach 350 mil-lion-486 million mt by 2031-2032.

“There is much to gain from that MOU. India has a larger crude oil refining base, compared to Canada, and our target will be to emerge as a major supplier of crude,” Obh-rai said, noting opportunities also lie in the supply of LNG and green technology for new power plants planned in India.

State-owned IOC already has an offtake agreement with Vancouver-based Pacific NorthWest LNG for 1.2 million mt/year of LNG to be produced from that gas export facility. — Ashok Dutta

Indian refineries want more Canada crudeCountry looking for alternatives to Iraq as unrest escalates

US rig count falls by 4Houston—The US rig count was 1,871 for the week ended July 18, down by 4 from the prior week, according to Baker Hughes.

The latest count includes 1,814 land and 57 offshore, with 315 assigned to gas, 1,554 to oil and 2 to miscellaneous drilling. The rigs were drilling 366 vertical, 217 directional and 1,288 horizontal wells.

Here are Baker Hughes’ latest figures for the total number of active rigs in the US (with selected states) and Canada, plus compa-rable figures for a week ago and a year ago:

7/18/14 7/11/14 7/19/13

US 1,871 1,875 1,770Alaska 8 12 8California 42 44 41Colorado 69 68 68Kansas 30 31 28Louisiana 113 107 103New Mexico 90 92 80North Dakota 178 172 174Oklahoma 200 198 171Texas 888 898 845Wyoming 52 52 53Canada 381 315 324

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It’s nearing a now or never time for getting the much-touted grassroots LNG industry in Western Canada’s British Columbia off the ground.

Home to 1,965 TCF of gas-in-place—located in some of the most prolific plays in North America—there should never be any doubts about the prospects of success.

The National Energy Board has already granted export licenses for nine facilities, and continues to evaluate applications for at least five more projects, yet no one has “shown the money” in terms of a final investment decision.

Four of the nine green-lighted projects have the strong backing of Japanese utilities and trading companies as either equity partners or offtakers, or both, but no FIDs.

The Japanese projects include: the 24 million mt/year Aurora LNG with Inpex and JGC Corp as stakeholders; the 12 million mt/year Pacific Northwest LNG with Japan Petroleum Exploration Company as 10% stakeholder and offtaker; the 12 million mt/year LNG Canada facility with Mitsubishi Corp as founding partner; and the 2.3 million mt/year Triton LNG with Idemitsu as 50% shareholder.

Interest is also growing from India, with its state-owned Indian Oil Corp., eyeing opportuni-ties to further increase its upstream stake and offtake. The company already has a 10% footing in the Pacific Northwest facility and has also put pen to paper for 1.2 million mt/year of LNG.

“For the first time, we have also had interests from European buyers who are looking for stable and secure LNG supplies in the light of the geo-political issues between Russia and Ukraine,” said Rich Coleman, British Columbia’s natural gas development minister.

Yet, like two other leading producing areas in Qatar and Australia, project proponents in Brit-ish Columbia have the all-too-familiar hiccups that are coming in the way of FIDs being adopted.

In a multi-dimensional industry like LNG the right fiscal framework, cost of resource development, market dimensions, project economics, construction costs and regulatory issues need to be in place before projects can get going, said William Gwozd, senior vice-president for gas services with Calgary-based Ziff Energy.

Another factor that delays financial commitments, typical to British Columbia, is the need to invest in multi-billion dollar pipelines often more than 500 miles long to trans-

port feedstock gas from hinterland areas in the Western Canadian Sedimentary Basin to planned LNG liquefaction terminals along the coastline. These projects almost require as much legwork to get off the ground as the actual LNG plan.

And last, but not the least, is the inability of developers to sign more offtake deals that will make their projects commercially viable.

Until now, Pacific Northwest has only been successful in signing offtake deals for about 7.5 million mt/year or 62% of its total planned capacity.

The delay in FIDs in British Columbia has become a cause of concern for several in the industry.

Michal Moore, area director of energy and environment policy with the School of Public Policy, University of Calgary, said if the province does not act quickly it could soon end up losing out to other jurisdictions, like heavyweights Qatar and Australia and planned debu-tants namely, the US and Mozambique.

“If BC [British Columbia] doesn’t have LNG plants under construction by 2018, it will become increasingly difficult to get into the market because contracts will have locked up the new demand for gas in Asia,” Moore said in an 86-page report.

“The market [for LNG] is large and it is growing, but there are a lot of countries and compa-nies lined up to provide adequate supply to meet that demand in the short and long term. So, to imagine the market is infinitely large and infinitely growing is simply a mistake,” said Moore.

Mary Hemmingsen, global LNG lead with KPMG, said in late June a “window” of oppor-tunity for Canadian LNG producers will be available again from 2019 to 2022 when several Asian buyers re-negotiate existing offtake deals they have with Middle Eastern suppliers.

At the core of that renewal will be a new form of pricing, with Japanese utilities seeking a range from $10 to $12/MMBtu, Gwozd said, adding their target will be to link LNG pricing with natural gas rather than crude oil.

“Their [Japanese buyers] aim is to link 100% to Henry Hub prices, rather than JCC [Japan Customs Cleared],” said Jihad Traya, associate director at IHS CERA for North Ameri-ca natural gas, but added that in reality it will likely be a cocktail of oil and gas pricing.

The sale price of Canadian LNG will be pitted against a production cost of nearly $10/MMBtu, with little room being left for profits, which is another hurdle toward securing and FID.

In the 1980’s, construction costs for LNG facilities were around $350/mt, declining to $200/mt in the early 2000s. Since then costs have surged to $1000 to $1,600/mt and beyond, a Deloitte report said. — Ashok Dutta in Calgary

PetrodollarsColombia’s Cano Limon line bombed in latest attackBogota—Suspected rebels bombed Colom-bia’s 220,000 b/d Cano Limon pipeline Thurs-day, the latest in a series of attacks that have stunted the country’s oil output, put its fiscal goals in jeopardy and cast a shadow over an upcoming bidding round in which the govern-ment hopes to auction off dozens of blocks to potential explorers.

Orlando Hernandez, a Bogota-based security consultant and former Colombia National Police officer who monitors guerrilla attacks, said Friday the bombing occurred near the 460-mile pipeline’s midway point in North Santander province, near the guerril-las’ favored encampments near the Venezu-elan border.

The attack, which occurred in the Tibu municipality, is thought to be the 28th such bombing in 2014 of the Cano Limon line, which connects the oil field of the same name—operated by Occidental Petroleum in eastern Arauca province—with the country’s principal oil offloading depot at Covenas on its Caribbean coast.

Earlier this year, the Cano Limon line was shut down for 93 days, costing the country 5 million barrels in oil sales, Hernandez said.

State-controlled Ecopetrol was not imme-diately available for comment on when the pipeline might return to normal operations. Ecopetrol’s Cenit pipeline subsidiary is the owner of the pipeline.

Hernandez said rebel attacks have been on the increase in recent weeks, possibly as rebel groups seek to obtain leverage in peace negotiations now under way in Havana.

The rebel group known as the FARC has been in talks with the government since November 2012, while another smaller insur-gent band known by its Spanish initials ELN is pressing to join the talks.

On July 11, the recently completed 110,000 b/d Bicentennial Pipeline was bombed by suspected ELN fighters. The 230-km Bicentennial line joins the Cano Limon line at Banadia to transport heavy oil pumped from the eastern Llanos region.

On July 8, Hernandez said suspected FARC guerrillas stopped 23 oil tankers haul-ing crude in southern Putumayo province for Vetra Colombia and forced them to dump an estimated 5,000 barrels of crude, caus-ing serious environmental damage to a nearby stream.

Several surrounding villages have since been without drinking water and members of some community groups have blockaded Vetra’s oil fields in protest at the damage.

Hernandez said, in addition, rebel groups on Thursday attacked Ecopetrol installa-tions in the Catatumbo municipality in North Santander province. No serious injuries or damage was reported. — Chris Kraul

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Libyan exports hampered by prices, quality concernsLondon—No Libyan crude cargoes have been scheduled to load as of Friday despite it being more than a week since Libya’s National Oil Corp. lifted its force majeure on loadings out of the 340,000 b/d Es Sider and 220,000 b/d Ras Lanuf terminals.

Sources said this was due to restrictive freight costs due to the risk premiums, uncom-petitive pricing and the need for quality and safety checks before any crude can be lifted likely to push the first loadings into August.

The announcement of an agreement between the government and protesters on July 8 was followed by news the next day that production had resumed at the 340,000 b/d Sharara field which feeds the Zawiya terminal and the 120,000 b/d Zawiya refinery. The lack of Sharara crude had meant that Zawiyah termi-nal could not export crude, despite being open for a number of months. As a result, NOC has been supplying the Zawiya refinery with crude supplies from other regions of the country.

Quality concernsProduction in Libya has jumped to

600,000 b/d as output at Sharara has gained traction, while NOC has stated that 10 million barrels is currently in Libyan storage facilities and ready for export.

Despite the large quantity of stored crude said to be ready for export, traders have expressed concerns regarding the unknown quality of the crude sitting in tanks due to potential settlement issues from being stored for a number of months, “there is a lot of oil there, but it’s not clear what the quality is,” a crude trader said. “It’s been more than a year that it’s been there in storage and it’s not easy to buy something without knowing what you’re buying.”

The length of time equipment at the ter-minals has been idle has meant that inspec-tion of key equipment needed to be carried

out according to traders, which was expected to push first loadings from the terminal into August. “We might see something loading in August as people need to check tanks, lines etc and with the expected quality of what’s stored I’m doubtful anything will load soon,” said one trader.

Despite reports of cargoes being offered and ships going on subjects at Es Sider and Ras Lanuf, shipping sources say no vessels have yet been fully fixed to load from the ports.

There have also been reports of ships going on subjects to load from Mellitah at high freight rates but sources say the majority have failed to get their subjects.

According to shipping sources, a 130,000 mt Suezmax cargo is currently being offered up by tender from Ras Lanuf, but a shipowner said that until the winners of the tender became clear they would not be interested in transporting the cargo.

“We will go to Libya under the right condi-tions and we have been approached about the Ras Lanuf tender. We won’t consider doing that though until we know for sure who is lift-ing the cargo,” said the shipowner.

The potential for an influx in Libyan cargoes into the market have been partly responsible for pushing up Black Sea-Mediterranean and Cross-Mediterranean Aframax rates, basis 80,000 mt, up Worldscale 42.5 to w130 this week.

Libya’s NOC issued an adjustment of its official selling prices for July on Thursday reducing levels of the selected crudes by between $0.20/b and $1.90/b.

The original OSPs, which saw levels for the country’s crudes fall by between $0.05/b and $0.10/b from June, were criticized by some traders as being “out of touch” with the broad-er Mediterranean sweet crude market, where differentials for other sweet crudes have come under significant pressure in recent weeks.— Alex Pearce, Paula VanLaningham, John Morley

London—The value of Iran’s petroleum exports plunged by almost 40% last year as US and European sanctions over the country’s nuclear program hit the producer’s oil earnings.

Iran’s oil income fell by $39.5 billion in the year ending December 31, 2013, to $61.92 billion from $101.47 billion in 2012, data published Friday by OPEC, of which Iran is a founder member, showed.

The drop was the biggest among the oil producer group’s 12 members, whose collec-tive oil export earnings fell by 7.93% year on year to $1.112 trillion last year from $1.208 trillion in 2012.

Iran has been subject to US and European sanctions directly targeting its oil earnings since mid-2012. In 2011, Tehran’s oil export

revenues totaled $114.75 billion.Libya’s oil export earnings in 2013 also

plummeted, by 33.3% to $40.16 billion from $60.19 billion in 2012, the data, which was published in OPEC’s Annual Statistical Bul-letin, showed.

The North African country had succeeded in restoring crude production to around 1.4 million b/d early last year after the 2011 civil war, but a series of protests and strikes at oil facilities and ports that began in May 2013 reduced oil production once again to a fraction of the 1.58 million b/d level seen before the upris-ing against Moammar Qadhafi. In 2011, Libya earned just $18.6 billion from its oil exports.

Only Ecuador and the UAE reported increases in oil export revenues, to $14.1 bil-

lion from $13.75 billion in the case of Ecua-dor, and to $126.3 billion from $118.1 billion in the case of the UAE.

OPEC kingpin Saudi Arabia saw its oil export revenues drop by 4.28% to $321.7 billion in 2013 from $336.1 billion the previous year.

Iran’s total crude exports, meanwhile, dropped to 1.215 million b/d last year from 2.102 million b/d in 2012, with volumes to the Asia-Pacific region falling to 1.085 mil-lion b/d from 1.839 million b/d in 2012 as countries in the region were forced to reduce imports of Iranian oil in order to avoid US financial sanctions. The data showed volumes to Europe averaging 128,000 b/d in 2013, down from 162,000 b/d in 2012.

Nigerian impactAmong OPEC members, Nigeria in particu-

lar has suffered from the boom in US shale oil production, and it saw its crude exports to North America plunge to just 395,000 b/d last year from 1.224 million b/d in 2012, a year-on-year drop of 67.73% that the West African country partly compensated for by increasing exports to other regions. The data showed year-on-year increases in crude exports to all other key regions, resulting in an overall drop in Nigerian crude export vol-umes of 7.39%, to 2.193 million b/d in 2013 from 2.368 million b/d in 2012.

The biggest boost in terms of both volume and percentage for Nigeria was in exports to Asia-Pacific countries, with the 91,000 b/d exported to the region in 2012 more than tri-pling to 373,000 b/d last year.

Nigerian crude exports to Europe rose by 29.7%, or 221,000 b/d, to 965,000 b/d last year from 744,000 b/d in 2012, while exports to other African countries grew to 197,000 b/d from 103,000 b/d, a year-on-year increase of 94,000 b/d or 91.3%. Vol-umes to Latin America also rose, to 263,000 b/d from 206,000 b/d, an increase of 27.7%.

OPEC overall exported an average 24.054 million b/d of crude last year, 1.23 million b/d less than in 2012, the bulk of which—14.3 million b/d or 59.3%—moved to the Asia-Pacific Region. Crude exports to Europe averaged 4.1 million b/d, or 17.2% of the total, and those to North America 3.9 million b/d or 16.3% of the total.

Total production fell to 31.604 million b/d in 2013 from 32.425 million b/d the previous year, OPEC said, using figures provided direct-ly by members rather than the secondary source estimates it uses to monitor output.

Total proven crude oil reserves held by the 12 member countries rose by 0.4% to 1.206 trillion barrels in 2013 from 1.2 trillion bar-rels in 2012. The data showed year-on-year increases of 2.8% for Iraq and 0.3% for Iran, and decreases of 0.2% for Libya and Nigeria and 0.5% for Angola.

The figures published in the ASB are provided directly by member countries. — Margaret McQuaile

Iran’s oil earnings plunge on sanctions hitNigerian exports to US slump on shale boom: data

MARKETS & DATA

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11 Oilgram News / VOlume 92 / Number 141 / mONday, July 21, 2014

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Brazil’s gasoline price cap hinders ethanol demandLondon—Ethanol demand in Brazil could increase by 8 billion liters (2.11 billion gallons) to over 30 billion liters a year if the government were to allow state-owned oil major Petrobras to sell gasoline at market prices, Luiz Roberto Pogetti, president of the board of sugar and ethanol cooperative Copersucar said Friday.

Brazil is the world’s second largest etha-nol market behind the US. More than half of the South American country’s light vehicle fleet consists of so-called flex-fuel cars, which can run on either gasoline or ethanol.

Brazil’s policy of controlling gasoline pric-es as a way of curbing inflation means Petro-bras has to sell the fossil fuel below the cost it incurs to import additional supply, Pogetti said in an industry event in London.

This keeps a lid on how much the etha-nol price can rise at the pump, constraining demand and giving an artificial incentive for gasoline, according to industry experts.

Petrobras is estimated to be selling gaso-line at a 10-15% discount to international benchmark prices, according to analysts’ estimates. Subsidies on diesel and gasoline

have cost the oil major over $30 billion in the last three years, Citigroup said in a recent research note.

If Brazilian gasoline prices were aligned with international markets, ethanol prices could move up without hampering its competi-tiveness, unleashing latent demand for the sugarcane-based fuel, Pogetti said.

As a rule of thumb, ethanol has to cost less than 70% of the gasoline price to compensate for the renewable fuel’s lower energy content.

Ethanol prices in Sao Paulo, Brazil’s larg-est fuel user, have hovered around 66% of the gasoline price in the first week of July, accord-ing to a survey from think tank Fipe.

Apart from selling ethanol as a stand-alone road transport fuel, Brazil currently requires distributors to mix 25% ethanol into the country’s gasoline supply.

Pogetti said if the mix requirement were raised to 27.5%, a measure contemplated by the government earlier in the year, ethanol demand could increase by a further 1.5 billion liters. — Guilherme Kfouri

New York—Oil futures declined slightly Friday in tepid trading following a rally a day earlier on growing geopolitical tensions.

August crude settled 6 cents lower at $103.13/b; ICE September Brent settled 65 cents lower at $107.24/b.

In products, NYMEX August ULSD settled 1.4 cents lower at $2.8452/gal and August RBOB ended 2.14 cents lower at $2.8603/gal.

“Geopolitical tension remains at the fore after Israel launched a ground offen-sive into Gaza, while a downed passenger jet in Ukraine ratchets up tension between

Russia and the West. But for now, crude is calm,” said Matt Smith, commodity analyst at Schneider Electric.

The oil market reaction to the growing geopolitical tensions has been measured, said Mike Fitzpatrick of Kilduff Group.

“Prices had fallen prior to Thursday’s rally, as no oil supplies had been lost to the mar-ket, and that Libyan oil was beginning to flow. But Thursday was a reminder of the fragility of the overall situation,” Fitzpatrick said.

He added that record net length held by speculators in NYMEX crude at the end of June also enabled the decline from a recent nine-month high in mid-June, as length fled at the first sign of weakness.

“Still, the various situations are holding. And there is no rush to pick a larger fight with Rus-sia over the downed airliner,” Fitzpatrick said.

Commerzbank analysts said in a note that despite the plethora of crisis reports, including the tightening of sanctions against Russia on Wednesday, the shooting down of the Malaysian passenger aircraft over east Ukraine, Israel’s ground offensive against Hamas in the Gaza Strip and, last but not least, the unstable situation in the north of Iraq and in Libya—the market has not allowed itself to be knocked out of kilter.

“The extent to which this calm turns out to be deceptive is likely to depend not least on the ongoing investigations into who was responsible for the shooting down” of the air-plane, the analysts said. — Alison Ciaccio

Crude futures dip ignoring Middle East, Ukraine

MARKETS & DATA

NYMEX crude settle, �rst month

NYMEX natural gas settle, �rst month

($/bbl)

($/MMBtu)

99

100

101

102

103

104

100.91

99.96

101.2

103.19

103.13

18-Jul17-Jul16-Jul15-Jul14-Jul

July 18 settle: $103.13, down $0.06

3.900

3.975

4.050

4.125

4.2004.147

4.097

4.119

3.954 3.951

18-Jul17-Jul16-Jul15-Jul14-Jul

July 18 settle: $3.951, down $0.003

What crude & natural gas markets are doing...

Page 12: Platts oilgram news juio 21 2014 Page 9 Colombia’s Cano Limon line bombed in latest attack

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