Producers turn to hedging as shelter against oil market turmoil

MOSCOW (MRC) -- US shale oil producers have moved in droves during the last couple of months to protect themselves from current market turmoil by hedging, using a variety of derivative instruments to protect against exposure to volatile oil prices, according to S&P Global.

As crude prices plunged from low demand as the coronavirus pandemic ravaged the globe, producers cut 2020 capital budgets in half and released huge numbers of drilling rigs. They also shut-in their lower-margin production.
Many also used a variety of contractual arrangements to assure their oil and gas output – and therefore, their revenues –weren't roughed up too badly during a period of dismally low oil prices and near-term cloudy visibility.

"They want to be able to stop the bleeding" or at least minimize it, Thomas Watters, a managing director at S&P Global Ratings, said.

After the end of the first quarter, upstream operators hedged their 2020 estimated oil production at the highest levels in at least five years, investment bank Goldman Sachs said in a recent investor note.

The producers Goldman Sachs covers have hedged 66% of their projected oil production for the rest of this year, a "sharp increase in oil hedged," which was 48% pre-downturn, the bank said.

Also, "we saw a sharp pick-up in 2021 hedging for oil and natural gas," Goldman Sachs said. "Producers have 14% of 2021 estimated oil production hedged (versus 2% post Q4 2019 earnings) and 28% of 2021 estimated gas production hedged (versus 15% post Q4 2019 earnings)."

That puts 2021 hedging at slightly above-average levels seasonally for liquids and above-average levels seasonally for gas, said Goldman Sachs, adding that as of Wednesday, current hedged 2020 oil prices of USD44.19/b, assuming roughly USD31.77/b WTI for collars, were "well above" strip prices of USD33.57/b.

Pioneer Natural Resources, a large Permian Basin producer, said early in April that it enhanced protection of its output through derivative positions for Q2 - forecast as the most volatile for oil prices - with an assortment of swaps and collars.

Those positions would provide a forecasted cash uplift to Pioneer of around USD280 million if Brent prices averaged USD25/b during the quarter.

What that basically means, according to Shane Randolph, managing director at energy financial services firm Opportune, is that if prices rise, Pioneer "would make less money (or lose money) on the hedges depending on the instruments, and they would make more money on the physical commodity."

As of May 29, ICE front-month Brent has averaged USD29.57/b in Q2.

A swap is an agreement whereby a "floating" (i.e., market) price is exchanged for a fixed price over a specified time period. Collars protect against downside risks while maintaining some exposure to upside prices.

Pioneer has historically hedged a large chunk of its oil output, which is currently over 220,000 b/d. That has cushioned the company against price crashes and allowed double-digit percentage oil output growth in recent years.

Pioneer also has 135,000 b/d of oil production protected at $43/b Brent with upside for 2021, company officials said.

Midsized Permian Basin producer Laredo Petroleum said 100% of its oil output for 2020, or about 7.178 million barrels (30,700 b/d) is hedged, as is 5.603 million barrels (15,350 b/d) for 2021 so far.

Laredo produced 29,200 b/d of oil in Q1 and expects to average 26,000-27,000 b/d of output for 2020, including about 30,000 b/d in Q2.

Laredo "significantly" added to its 2021 hedges in recent months, CFO Michael Beyer said. Added were 8,750 b/d of Brent-linked hedges - 6,750 b/d of puts and 2,000 b/d of swaps.

Laredo bought the hedges with $50 million of expected free cash flow this year, resulting in a total 2021 Brent hedge position at a weighted average floor price of roughly USD53/b, Beyer said.

"(That move) secures significant cash flows in 2021, supporting a potential capital program that could keep average daily oil production in 2021 flat with the fourth-quarter 2020 exit rate while generating free cash flow" at WTI prices of USD30/b to USD35/b, he added.

EOG Resources, a large operator which historically hasn't been a large hedger, nonetheless did so as oil headed south over the last few months.

The company has now hedged more than 95% of its Q2 2020 oil production at an average price of $48/b and more than 50% of its Q3 output at USD47/b.

"This mirrors how we view the periods of greatest price risk," Tim Driggers, EOG's chief financial officer, said on its Q1 call. "We will begin to look at adding additional 2021 hedges later in the year if prices look attractive."

Midsized Parsley Energy also restructured existing 2020 hedge positions to secure cash flows and protect not only its 127,000 b/d of output for this year but even 2021 production, CEO Matt Gallagher said.

"Over 80% of our hedges in the second quarter are (now) swaps or two-way collars with unlimited downside protection," Gallagher said.

Also, Parsley moved "aggressively" to protect 2021 cash flow by adding swaps, he said: "(Those are) well in the money based on today's strip," he said.

The company now expects net settlement gains of nearly USD650 million during second-quarter 2020 through fourth-quarter 2021 under a go-forward USD30 WTI oil price and current basis differentials, company officials said.

That is an increase of over USD350 million in total downside protection from its hedge position as of February 19.

Among a handful of non-hedgers is Canada's Husky Energy. Rob Peabody, Husky's CEO, doesn't think it is wise to lock in futures prices amid what he called a "train wreck" market of severe oil price volatility.

But Husky, which has refining assets, is different from independent oil companies since it can run its oil through its own facilities, which cushions it some against price turbulence.

"Our investments have really been focused on that to get us to where we're breakeven ... sort of in the mid-USD30/bs now on a cash basis," Peabody said. "That feels in a pretty good place," he said.

As MRC informed previously, in late September 2019, Husky Energy continued to make steady progress towards a return to full operations at the Superior Refinery. The company received the required permit approvals to begin reconstruction activities at the site and work began immediately. Demolition of damaged equipment resulting from a fire in April of 2018 was largely complete then and the rebuild will take place over the next two years with an expected return to full operations in 2021.

We remind that global oil consumption cut by up to a third in Q1 2020. What happens next in the oil market depends on how quickly and completely the global economy emerges from lockdown, and whether the recessionary hit lingers through the rest of this year and into 2021.

Earlier this year, BP said the deadly coronavirus outbreak could cut global oil demand growth by 40 per cent in 2020, putting pressure on Opec producers and Russia to curb supplies to keep prices in check.

We also remind that, in September 2019, six world's major petrochemical companies in Flanders, Belgium, North Rhine-Westphalia, Germany, and the Netherlands (Trilateral Region) announced the creation of a consortium to jointly investigate how naphtha or gas steam crackers could be operated using renewable electricity instead of fossil fuels. The Cracker of the Future consortium, which includes BASF, Borealis, BP, LyondellBasell, SABIC and Total, aims to produce base chemicals while also significantly reducing carbon emissions. The companies agreed to invest in R&D and knowledge sharing as they assess the possibility of transitioning their base chemical production to renewable electricity.

Ethylene and propylene are feedstocks for producing polyethylene (PE) and polypropylene (PP).

According to MRC's ScanPlast report, Russia's estimated PE consumption totalled 557,060 tonnes in the first three month of 2020, up by 7% year on year. High density polyethylene (HDPE) and linear low density polyethylene (LLDPE) shipments rose because of the increased capacity utilisation at ZapSibNeftekhim. Demand for LDPE subsided. At the same time, PP shipments to the Russian market was 267,630 tonnes in January-March 2020, down 20% year on year. Homopolymer PP and PP block copolymers accounted for the main decrease in imports.
MRC

MOSCOW (MRC) -- Saudi Arabia, the world's largest crude exporter, has taken steps to revive economic growth hurt by the COVID-19 pandemic and oil price crash, including making an unprecedented transfer of government funds to the sovereign wealth fund, reported S&P Global.

The country's economy has been severely hit this year. Saudi Arabia's budget for 2020, announced in December, assumed an oil price of USD60/b, and the country's fiscal breakeven price is USD80/b, according to the International Monetary Fund. That compares with a front-month Brent crude price of USD37.84 at the end of May.
The government made two exceptional payments to the country's Public Investment Fund, its sovereign wealth fund, totaling USD40 billion in March and April. They were made due to a noticeable decline in foreign exchange reserves, according to a statement by Minister of Finance Mohammad bin Abdullah al-Jadaan.

Although it was not disclosed how the PIF would deploy the capital, the returns of investments would be made available to support public finances when needed, Jadaan said.

The PIF, which is chaired by Saudi crown prince and de facto leader Mohammed bin Salman, has already deployed at least USD8 billion on investments this year, according to filings with the US Securities and Exchange Commission. They include stakes in Facebook, Boeing and oil and gas majors Shell, BP and Total.

The transfer of public funds to the PIF comes as Saudi Arabia is implementing certain austerity measures, including tripling the value added tax to 15% and scrapping a cost of living allowance for public sector workers.

Additionally, the kingdom has embarked on gradually reopening its economy, including lifting a night-time curfew and allowing gatherings of 50 people that were imposed to keep the virus from spreading.

The Saudi government still has measures in place to contain infections, according to a series of statements on the state-backed news service SPA. They include enforcing Riyals 1000 fines to people not wearing masks in public, temperature checks before entering shopping malls and the disinfection of carts and shopping baskets after each use.

The Saudi government last week announced that it intends to resume operations of all domestic flights and airports over a two-week period, beginning May 31. Preparations have been completed at King Abdulaziz International Airport in Riyadh. They include checking on airport visitors with thermal cameras, installing sterilizing devices for stairs, electric walkways with ultraviolet technology and floor stickers and waiting seats to urge social distancing while at the airport. Additionally, aircraft will be sterilized after each flight.

As of May 31, Saudi Arabia reported 83,384 confirmed cases of COVID-19, including 1,618 in the last 24 hours, and 480 deaths.

As MRC wrote earlier, in October 2019, McDermott International announced that it had been awarded a contract by Saudi Aramco and Total Raffinage Chimie (Total) for their joint venture (JV) Amiral steam cracker project at Jubail, Saudi Arabia. Amiral is a JV in which Aramco holds 62.5% and Total the rest. The plant, designed to produce 1.5 million metric tons/year (MMt/y) of ethylene, will be one of the world's largest mixed-feed crackers.

Aramco and Total launched their USD5-billion Amiral JV project in October 2018. The steam cracker will be fed with a mixture of 50% ethane and refinery off-gases. It will supply ethylene to a downstream 1 MMt/y polyethylene manufacturing complex and other petrochemical products. The project aims to fully exploit operational synergies with the adjacent refinery, owned by Satorp, another JV between Aramco and Total. Third-party investors, including Daelim and Ineos, will locate plants at the value park adjacent to Amiral with a combined investment of USD4 billion. A final investment decision is expected in 2021.

Ethylene and propylene are feedstocks for producing polyethylene (PE) and polypropylene (PP).

According to MRC's ScanPlast report, Russia's estimated PE consumption totalled 557,060 tonnes in the first three month of 2020, up by 7% year on year. High density polyethylene (HDPE) and linear low density polyethylene (LLDPE) shipments rose because of the increased capacity utilisation at ZapSibNeftekhim. Demand for LDPE subsided. At the same time, PP shipments to the Russian market was 267,630 tonnes in January-March 2020, down 20% year on year. Homopolymer PP and PP block copolymers accounted for the main decrease in imports.
MRC

MOSCOW (MRC) -- SIBUR Holding and NORCHEM LLC signed a long-term agreement for the supply of ethylene oxide to the NORCHEM Dzerzhinsk production site - Zavod sintanolov LLC, said the company.

The agreement provides for the supply of up to 150 thousand tons of ethylene oxide in the period of 2020-2024. In 2019 Zavod sintanolov LLC completed the first stage of a large-scale reconstruction of hydroxyethylation and oxypropylation capacities, which resulted in an increase in the production of alkoxylated products by 30%. It will also significantly expand the Company's assortment, including through innovative products.

Previously Zavod sintanolov LLC signed an agreement with LLC Gazprom neftekhim Salavat for the annual supply of at least 15 thousand tons of ethylene for its subsequent processing into ethylene oxide and glycol by 2027.

Thus, taking into account the diversification of the sources of supply of the main raw materials, as well as the new signed Agreement with SIBUR Holding, NORCHEM ™ will be able to process up to 70 thousand tons of Ethylene Oxide / Propylene Oxide per year by 2024. It will be possible to efficiently load the reconstructed production NORCHEM ™ facilities, to satisfy the growing needs of the Russian market for targeted petrochemical products and ensure export sales.

As MRC informed earlier, SIBUR Holdinghas shut its polyethylene (PE) plants for a planned maintenance since 23 May 2020. Based in Russia, the turnaround includes both old and new PE plants of SIBUR which consists of Tomskneftekhim with 270,000 tons/year of low density polyethylene (LDPE) unit, as well as ZapSibNeftekhim with a 700,000 tons/year high density polyethylene (HDPE) unit and 800,000 tons/year linear low density polyethylene (LLDPE)/HDPE swing plant. All PE plants are expected to remain off-stream for about 20 days.

According to MRC's ScanPlast report, Russia's estimated PE consumption totalled 557,060 tonnes in the first three month of 2020, up by 7% year on year. High density polyethylene (HDPE) and linear low density polyethylene (LLDPE) shipments rose because of the increased capacity utilisation at ZapSibNeftekhim. Demand for LDPE subsided. At the same time, PP shipments to the Russian market was 267,630 tonnes in January-March 2020, down 20% year on year. Homopolymer PP and PP block copolymers accounted for the main decrease in imports.

SIBUR is the largest integrated petrochemicals company in Russia. The Group sells its petrochemical products on the Russian and international markets in two business segments: Olefins & Polyolefins (polypropylene, polyethylene, BOPP films, etc.) Plastics, Elastomers & Intermediates (synthetic rubbers, EPS, PET, etc.). SIBUR’s petrochemicals business utilises mainly own feedstock, which is produced by the Midstream segment using by-products purchased from oil and gas companies. More than 26,000 employees working in SIBUR contribute to the success of customers engaged in the chemical, fast moving consumer goods (FMCG), automotive, construction, energy and other industries in 80 countries worldwide. In 2018, SIBUR reported revenue of USD 9.1 billion and adjusted EBITDA of USD 3.3 billion.
MRC

MOSCOW (MRC) -- BASF kicked off the piling work of the first plants of its smart Verbund project in Zhanjiang, Guangdong, China, said the company.

This came as another important milestone in the development of the company’s USD10 billion investment project since its official commencement in November 2019. The first plants will produce engineering plastics and thermoplastic polyurethane (TPU) to serve the increasing needs of various growth industries in the southern China market and throughout Asia.

"It only took less than two years since the signing of the first Memorandum of Understanding to the official piling of our first plants. Thanks to the great support from government authorities and local communities, as well as to the continuous efforts of our employees and partners worldwide, the project has been progressing steadily,” said Haryono Lim, Senior Vice President, Senior Project New Verbund Site China, BASF. "We are confident to bring the first batch of ‘Made in Zhanjiang’ products to the market by the end of 2022 as planned."

BASF applies the highest safety standards and will implement a comprehensive smart manufacturing concept at the Verbund site based on cutting-edge technologies. As of today, the project has reached a record of 50,000 safe work hours without a lost time injury since commencement.

As MRC reported earlier, BASF has recently announced the commercial launch of Fourtune which is a new Fluid Catalytic Cracking (FCC) catalyst product for gasoil feedstock. Fourtune is the latest product based on BASF’s Multiple Framework Topology (MFT) technology. It has been optimized to deliver superior butylene over propylene selectivity while maintaining catalyst activity and performance.

We remind that BASF has restarted its No. 1 steam cracker following a maintenance turnaorund. Thus, the company resumed operations at the plant on September 30, 2019. The plant was shut for maintenance in mid-August, 2019. Located at Ludwigshafen in Germany, the No. 1 cracker has an ethylene production capacity of 235,000 mt/year and a propylene production capacity of 125,000 mt/year.

Ethylene and propylene are feedstocks for producing PE and polypropylene (PP).

According to MRC's ScanPlast report, Russia's estimated PE consumption totalled 557,060 tonnes in the first three month of 2020, up by 7% year on year. High density polyethylene (HDPE) and linear low density polyethylene (LLDPE) shipments rose because of the increased capacity utilisation at ZapSibNeftekhim. Demand for LDPE subsided. At the same time, PP shipments to the Russian market was 267,630 tonnes in January-March 2020, down 20% year on year. Homopolymer PP and PP block copolymers accounted for the main decrease in imports.

BASF is the leading chemical company. It produces a wide range of chemicals, for example solvents, amines, resins, glues, electronic-grade chemicals, industrial gases, basic petrochemicals and inorganic chemicals. The most important customers for this segment are the pharmaceutical, construction, textile and automotive industries. BASF generated sales of EUR59 billion in 2019.
MRC

MOSCOW (MRC) -- Kaofu Chemical has undertaken a planned shutdown at its polystyrene (PS) in Kaohsiung, according to Apic-online.

A Polymerupdate source in the Taiwan informed that the company started turnaround at the plant on May 28, 2020. The plant is expected to remain off-line for about 2-3 weeks.

Located in Kaohsiung, Taiwan, the plant has a production capacity of 100,000 mt/year.

As MRC reported before, Kaofu Chemical shut down its PS plant in Kaohsiung plant for approximately a one-month turnaround in June 2019. The exact date of shutdown was not available.

According to MRC's ScanPlast report, April estimated consumption of PS and styrene plastics in Russia was 36,170 tonnes, down by 12% year on year. Russia's estimated consumption of PS and styrene plastics totalled 157,110 tonnes in January-April 2020, down by 5% year on year.
MRC