Friday, July 29, 2016

Hess Wants Compensation from Schlumberger

 Hess Completes Sale of Natuna A to PTTEP

Hess Corp. could pursue legal action against Schlumberger over a defective valve for one of its GoM oilfields. The company is looking for as much as $40 million as recompense for the bad valve that led to three wells being shut in, lowering its production flows from the field.

Hess announced its litigation plans in its quarterly earnings conference call, publicly mentioning Schlumberger and decrying the quality of service and parts provided.

“It’s extremely disappointing,” Greg Hill, COO at Hess said on the earnings call of the alleged defective valve.

Hess claims it is owed between $30 million and $40 million in remediation fees, attorney fees and lost profit from the shutdown of some wells at its Tubular Bells field. Originally only two were shut in but during a routine maintenance check a third was shut in.

As a result, Hess slashed its production outlook from the Tubular project to about 10,000 boepd for the year, down from previous estimates for at least 25,000 boepd.

“It relates to some quality control and some of the components of the valve,” Hill said in the conference call.

Iran threatens to close Strait of Hormuz if it faces military action from 'enemies'

One of the five military vessels from Iran's Revolutionary Guard Corps that approached a U.S. warship hosting one of America's top generals on a day trip through the Strait of Hormuz is pictured in this July 11, 2016 handout photo. 
One of the five military vessels from Iran's Revolutionary Guard Corps that approached a U.S. warship hosting one of America's top generals on a day trip through the Strait of Hormuz is pictured in this July 11, 2016 handout photo. (Reuters/US Navy)

Iran is threatening again to close the Strait of Hormuz – a key Persian Gulf shipping route – “if the enemy makes a small mistake” and threatens the Islamic Republic, one of its generals boasted Tuesday.

The oil shipping waterway has frequently been the subject of diplomatic clashes between Tehran and Washington.

“If the enemy makes a small mistake, we will shut the Strait of Hormuz, kill their sedition in the bud and endanger the arrogant powers’ interests,” Iranian army’s Deputy Chief of Staff Brigadier General Ali Shadmani said, according to the Fars news agency.

Iran has used the Persian Gulf as a test site for rocket launches, the Times of Israel reports.

In January, Iran detained 10 American sailors whose patrol boats were traveling inside Iranian territorial waters near Farsi Island. Multiple defense officials told Fox News that a “multitude of errors” led to the incident and that the sailors violated the Navy’s longstanding "code of conduct."

Secretary of State John Kerry had thanked the Iranians for their treatment of the Navy sailors before video emerged showing some of the Americans apologizing and crying.

The sailors were released after about 16 hours.

Thursday, July 28, 2016

Russia and OPEC: Key Bearish Catalysts for 2016

Crude oil production 

Russia’s energy minister reported that Russia is targeting to produce ~10.9 MMbpd (million barrels per day) of crude oil in 2016 compared to 10.7 MMbpd in 2015. It’s the highest in 30 years.

Russia’s crude oil production rose to 10.8 MMbpd in June 2016 compared to May 2016, according to the Russian Energy Ministry. For more information, read Russia’s Crude Oil Production Will Pressure the Crude Oil Market.

Russia and OPEC: Key Bearish Catalysts for 2016
OPEC’s (Organization of the Petroleum Exporting Countries) monthly report highlighted that OPEC crude oil production rose by 264,100 bpd (barrels per day) to 32.9 MMbpd in June 2016 compared to the previous month. Production rose 0.8% month-over-month and 2.6% year-over-year. Read How Will the Crude Oil Market React to OPEC’s Crude Oil Production? for more information. The expectation of a production rise should have a negative impact on crude oil prices.OPEC’s monthly report added that Saudi Arabia’s crude oil production rose by 66,500 bpd to 10.3 MMbpd in June 2016 compared to the previous month. Market surveys project that crude oil production in Saudi Arabia could rise to 10.5 MMbpd in the short term. 
OPEC’s monthly report stated that Iran’s crude oil production rose by 77,800 bpd to 3.6 MMbpd in June 2016 compared to the previous month. Iran has almost doubled its exports since early 2016.
OPEC didn’t cap its production at its meeting on June 2, 2016. The failure of the Doha meeting on April 17 also put a lid on crude oil. Read Hopes for Oil Producer Meeting Boosted Prices for Last 2 Months and Why Did the Doha Oil Producer Meeting Fail? to learn more. 

Impact on crude oil prices, producers, and ETFs 

The above bearish drivers could pressure crude oil prices. Slowing global demand after the Brexit vote are also pressuring crude oil prices.

Lower crude oil prices impact the profitability of US and international oil producers such as PetroChina (PTR) and Halcon Resources (HK). The roller coaster ride in crude oil prices also affects ETFs and ETNs such as the United States 12 Month Oil ETF (USL) and the PowerShares DWA Energy Momentum ETF (PXI).

For ongoing analysis, visit Market Realist’s Upstream Oil and Gas page.

Tuesday, July 26, 2016

Ship hits wall of Panama Canal renewing design concerns

The MOL Benefactor is unloaded at the Global Terminal in Bayonne, NJ, 8 July 2016
The MOL Benefactor was one of the first mega-vessels to pass through the Panama Canal since its widening

A Chinese container ship has hit a wall of the recently-widened Panama Canal, amid concerns that it has less space for manoeuvres and could be unsafe. 

It is the third accident of this kind since the multi-million dollar expansion opened a month ago. 

Workers' groups say the new locks are too small for safe operations now that the canal can take ships three times larger than before. 

The Panama Canal authority says it is investigating the incidents.

The Xin Fei Zhou, owned by China Shipping Container Lines, suffered a large gash in its hull and is now undergoing repairs.

The new locks are designed for ships to use tugboats to guide them through the canal. 

In the old canal locomotives (known as "mules") would keep the ships correctly aligned as they passed through. 

A study for the International Transport Workers' Federation released earlier this year concluded that the new lock chambers were too small for the tugboats to be able to manoeuvre properly. 

Work on the expansion began in September 2007 and was originally planned to finish in 2014.

Following delays caused by construction workers' strikes and disputes over cost overruns, the date for completion was pushed back to April 2016.

The first voyage through the new expanded canal was on 26 June.

Preserving Pemex reforms in the post-Peña Nieto era of Mexico: Fuel for Thought

Felipe Calderon

Enrique Peña Nieto is scrambling to save the legacy of his much-lauded reform of Mexico’s oil industry as the doors of Mexico’s political cycle close on the president amid electoral defeats, political violence and a tough global environment for the oil industry. 

Meanwhile, Pemex chief Jose Antonio Gonzalez Anaya seeks to defend the formerly invulnerable castle of the state oil company from what some fear could be imminent collapse.

Right behind him is Isaac Volin, head of PMI International, the state company’s international trading arm, and the company’s second in command in practical terms.

Gonzalez Anaya was appointed in February. Volin followed in June. Neither had previous experience in the oil business.

On his appointment, Volin was described by Pemex as a person “with extensive experience in the restructuring of companies and business units in order to raise their profitability and reposition them strategically.”

Volin is also likely to further broaden the client-base for Mexican crude as a hedge for expectations of US self-sufficiency.

Pemex’s domestic product monopoly is tumbling down as US companies develop rail routes, pipelines and terminals to target northern Mexico with oil and gas products.

There may not be much Pemex can do to defend that market segment but it could look to develop other regions of the country.

Pemex would be much more likely to concentrate in the markets in southern and central Mexico.
“It’s a big country,” said Arturo Carranza, of Mexico’s National Institute of Public Administration. “There’s room for everyone.”

There is plenty of room, but very little time for Gonzalez Anaya and Volin.

“I’d not give them much more than a year in order to make the necessary changes,” said Mexico City-based independent analyst Dwight Dyer.

One term presidency limits reform efforts

The reason lies in the political system. Each presidential administration lasts for six years, and there is no re-election. Many of the major policy decisions and projects by the previous administration are quietly shelved, among them those of Pemex with price tags of billions of dollars. And only rarely have Pemex chiefs survived the transition between one administration and the other.

The 2018 presidential election will almost certainly be hotly contested, but one candidate in particular will be watched by the oil industry. The early front-runner in the polls, Andres Manuel Lopez Obrador is aiming for a third attempt to win the presidency in 2018, after having been runner-up twice.

Lopez Obrador is a firm opponent of the energy reform, with a political constituency similar to that of Brexit in the United Kingdom.

“Even if he wins in 2018,” said a political adviser in Mexico to one of the majors, “it’s not at all likely that he could achieve a majority in Congress to overturn the reform.

“But what could be very likely is that he could simply sit on his hands rather than advance what has already been achieved. That could be just as harmful as an outright rejection.”

There is precedent for new leaders to let a previous administration’s projects be laid to waste.

In 2000, the first really free and fair elections in Mexico gave victory to the pro-business National Action Party, the PAN, led then by Vicente Fox, who made an ambitious development plan with Central American countries.

The central project was to have been a $10 billion-plus refinery with Mexican crude as the main feedstock. Tenders were invited and a pre-qualification process was launched. Then the Fox administration ended. His successor, Felipe Calderon, never said the refinery project was cancelled, but simply didn’t do anything else with it.

Then Calderon announced a $10 billion-plus new Pemex refinery. The location was decided during a two-day “beauty pageant” of presentations by about half a dozen rival state governors. Before Calderon left office, tenders were invited, but in the end only the perimeter fence for the refinery was built.

Lopez Obrador came to prominence last century as a popular leader among peasant farmers and fishermen who claimed that their livelihoods were damaged by the excesses of Pemex.

Those excesses and the corruption that accompanied them were regarded by Lopez Obrador as an affront to the very spirit of the nation. As a result he’s no friend of Pemex, and it remains to be seen how he would approach managing the state company.

If he wins, and history is any indication, the country’s ambitious plans for the future of the oil industry could end not with a bang but a whimper.

Ronald Buchanan, Mexico correspondent
Ronald is S&P Global Platts' correspondent in Mexico, covering the country's energy and metals industries. As a freelance writer, he contributes to the Financial Times and Sunday Times; and daily web editing for República Media Group (San José, Costa Rica).

Monday, July 25, 2016

Throughput of Port Ust-Luga up 5% to 44.86 mln t in HY2016

In January-June 2016, the port of Ust-Luga handled 44,864,300 t of cargo (+5%, year-on-year), says Baltic Sea Ports Administration.

Transshipment of dry bulk cargo climbed by5% to 12,497,400 including 9,736,800 t (-3%).

Transshipment of 7% to 30,748,300 t including 14,617,600 t of cude oil (+9%) and 15,348,000 t of oil products (+4%).

Transshipment of general cargo fell by 12%, year-on-year, to 356,200 t.

Transshipment of cargoes carried by ferries totaled 749,000 t (-24%).

The port’s container throughput fell by 6.9% to 37,818 TEUs.

In 2015, the port handled 87.86 mln t of cargo, container throughput totaled 89,820 TEUs.

Ust-Luga port is situated practically at the border of the Russian Federation and the European Union. The deep water area of the port (17.5 m) together with the approach channel (3.7 km) make Ust-Luga port the only Russian port on the Baltic Sea capable of admitting dry-cargo vessels with the deadweight of up to 75,000 tonnes and liquid cargo carriers with the deadweight of up to 160,000 tonnes. 

Throughput of Port Primorsk up 9% to 32.50 mln t in HY2016

In January-June 2016, the port of Primorsk handled 32,503,200 t of cargo (+9%, year-on-year).

According to the port authority, crude oil transshipment climbed 11% to 24,953,100 t.

Transshipment of oil products increased by 2%, year-on-year, to 7,550,100 t.

Port Primorsk is Russia’s largest oil port in the Baltic Sea. It is the final stage of the Baltic Pipeline System (BPS).

Kinder Morgan Sees Products Pipeline Volumes Drop on East Coast Import Hike


Kinder Morgan Inc. (KMI) reported its total refined products volumes in the Products Pipelines segment were down 1% for the second quarter versus the same period in 2015, reflecting a decrease in East Coast volumes due to increased imports, partially offset by increased throughput on its West Coast assets.

"The Products Pipelines segment was favorably impacted by higher volumes on the Kinder Morgan Crude and Condensate pipeline (KMCC), the startup of the second petroleum condensate processing facility along the Houston Ship Channel during 2015 and favorable performance on our Cochin system compared to 2015 due to third-party operational constraints downstream of the pipeline which occurred during the second quarter of 2015," said Steve Kean, CEO of Kinder Morgan.

NGL volumes were flat with the same period last year. Crude and condensate pipeline volumes were up 11% from the second quarter of 2015 primarily due to higher volumes on KMCC.

KMI reported stronger year-on-year earnings contributions from its Terminals, Products Pipelines and Canadian business segments in the second quarter, but it saw lower earnings from its CO2 and Natural Gas Pipelines divisions.

The Terminals segment experienced strong performance at KMI's liquids terminals, which comprise more than 75% of the segment's business.

Growth in the liquids business during the quarter versus the second quarter of 2015 was driven by various expansions across its network, including contributions from new operations at its Edmonton Rail, Galena Park, Pasadena and Deer Park Rail terminals.

Contributions from KMI's interest in the newly formed refined products terminals joint venture with BP, its Vopak terminals acquisition and the Jones Act tankers also contributed significantly to growth in this segment, Kean said. The Lone Star State and Magnolia State tankers were delivered in December 2015 and May 2016, respectively.

Growth from the liquids terminals was partially offset by a decline in the bulk terminals as compared to the same period in 2015. This reduction was driven by the bankruptcies of coal customers Arch Coal, Alpha Natural Resources and Peabody Energy, which had a negative year-over-year impact of approximately $19 million for the quarter.

Kinder Morgan Canada experienced high demand for capacity on the Trans Mountain pipeline system in the second quarter, with mainline throughput into Washington state up 25% from the same period last year. This was partially offset by an unfavorable foreign exchange rate, as the Canadian dollar declined in value against the U.S. dollar by approximately 5% since the second quarter of 2015.

KMI reported second-quarter net income available to common stockholders of $333 million, unchanged from the second quarter of 2015, and distributable cash flow of $1,050 million versus $1,095 million for the comparable period in 2015.

The decrease in distributable cash flow for the quarter was primarily attributable to lower contributions from the CO2 segment primarily due to lower commodity prices, higher preferred stock dividends and higher cash taxes, partially offset by increased contributions from the Products Pipelines and Terminals segments as well as lower interest expense.

Net income available to common stockholders was also impacted by a positive $31 million change in total certain items for the quarter from the second quarter of 2015, including a $39 million payment received for early termination of a customer storage contract in the Texas Intrastate Natural Gas Pipeline Group.

KMI expects to generate excess cash sufficient to fund its growth capital needs without needing to access capital markets and, after taking into account efforts to improve the balance sheet, expects to end the year with a net debt-to-adjusted EBITDA ratio of approximately 5.3 times, below the budgeted ratio of 5.5 times. KMI's growth capital forecast for 2016 is approximately $2.8 billion, a reduction of $500 million from its budget of approximately $3.3 billion.

The overwhelming majority of cash generated by KMI is fee-based and therefore is not directly exposed to commodity prices. The primary area where KMI has commodity price sensitivity is in its CO2 segment, and KMI hedges the majority of its next 12 months of oil production to minimize this sensitivity.

Additionally, KMI continues to closely monitor counterparty exposure and obtain collateral when appropriate. However, the company has operations across a broad range of businesses and has a large customer base, with its average customer representing less than one-tenth of 1% of annual revenues.

About two-thirds of KMI's business is conducted with customers who are end-users of the products KMI transports and stores, such as utilities, local distribution companies, refineries and large integrated firms. 

Friday, July 22, 2016

First foreign tanker to load Alaskan crude in 30 years


A foreign flag tanker is due to load a cargo of Alaska North Slope (ANS) crude next week for the first time in more than 30 years.
Tanker Investments’ Bahamas-flagged Suezmax ‘Tianlong Spirit’, is due to load a 136,000-tonne cargo around 25th July from Alaska bound for the Far East, according to Bloomberg.

“This would be the first time since the mid-1980s that a foreign-flagged ship would have loaded ANS crude for shipment,” David St Amand, president of Navigistics Consulting in Boxborough, Massachusetts, told Bloomberg.

When the US changed the law, which restricted most domestic crude exports, the end of a ban on foreign-flagged tankers shipping crude from Alaska was included. That opened markets in Asia and Europe to US oil, offering Alaskan producers another destination besides the US West Coast.

“BP chartered a foreign flag vessel for the transport of ANS crude for commercial and operational reasons,” BP spokeswoman Dawn Patience said in an e-mail to Bloomberg. “BP will receive all the needed approvals from the State of Alaska and USCG before sailing.”

Since the 40-year ban was lifted late last year, there has been one ANS crude export. BP delivered 1 mill barrels of ANS crude to JX Nippon in Japan last June, using a US-flagged tanker, Bloomberg said.

Thursday, July 21, 2016

Nigeria Launches $100 Million Oil Fund

 Nigerian Content Development & Monitoring Board

Nigeria’s government has launched a special fund worth US$100 million to take care of securing the credit that the oil industry of the country needs. Called a Nigerian Content Intervention Fund, the vehicle will be managed by the Nigerian Content Development and Monitoring Board and the Bank of Industry.

Until now, Nigerian oil service companies could benefit from a 50 percent interest rebate on loans from commercial banks plus partial security. These were provided by the Nigeria Content Development Fund, which was launched in 2012.

The Acting Executive Secretary of the NCDMB said the new fund was set up in response to difficulties cited by local oil industry players in obtaining borrowed funds for their operations. Patrick Obah added that the board and the Bank of Industry were dedicated to providing assistance to oil services companies that wanted to create more jobs locally, retain their revenues in-country and add value to the economy.

Nigeria’s oil sector has been deeply troubled by falling oil prices, and more recently, by a long string of attacks on oil production and transport infrastructure. Some of these attacks, though not targeting people, have ended with human casualties. The groups taking responsibility for the attacks have stated that their aim is to redirect a bigger portion of state oil revenues from Lagos to the impoverished region of the Niger Delta, where the country’s oil industry is concentrated.

Just the other day, senior government officials from the two southern provinces of Nigeria urged the central government to revise the oil well ownership regulations in such a way as to give Niger Delta communities a bigger share of the profits. “The people of the Niger Delta region should possess at least 65 percent of the oil wells contrary to the present ownership structure where less than 10 percent of the oil blocks belong to our people,” the legislators said.

By Irina Slav for

Wednesday, July 20, 2016

Russia's energy minister: No discussions about coordination with OPEC on oil output


Russian Energy Minister Alexander Novak attends a session of the St. Petersburg International Economic Forum 2016 (SPIEF 2016) in St. Petersburg, Russia June 16, 2016.
Reuters/Kirill Kukhmar/TASS/Host Photo Agency/Pool

Russian Energy Minister Alexander Novak said in an interview there were no discussions about possible coordination with OPEC on oil output after a failed attempt to jointly maintain production levels earlier this year.

"We do not discuss the issues of coordination of actions between Russia and OPEC... We can't agree on production cuts as we don't have such tools and mechanisms," Novak told Reuters in interview cleared for publication on Wednesday.

The Organisation of the Petroleum Exporting Countries and other big oil producers, including Russia, were not able to reach a deal in Doha in April on freezing oil production in order to support falling oil prices.

Global crude oil prices reached a 13-year low of $27 per barrel in January due to oversupply, but have recovered since then to around $50.

The weak price for oil, Moscow's chief export commodity, hit the Russian economy, which shrank by 3.7 percent last year.

In the interview with Reuters, Novak said Russia sees its cooperation with OPEC focussing on the exchange of information and analysis on the global oil market, rather than on coordinating production.

Russian companies have been increasing oil production this year. Novak said he expects domestic oil output at 542-544 million tonnes this year after it hit 534 million tonnes (10.73 million barrels per day), a 30-year high, in 2015.

Novak said he will likely meet new Saudi energy minister Khalid al-Falih at a conference in Algeria at the end of September. It will be their first meeting since Falih was appointed in May, taking over from veteran minister Ali al-Naimi.

"Obviously, we will discuss the situation on the (global) oil market," he said, adding that they will also look into the possibility of joint energy projects in Russia, Saudi Arabia and third countries.

Last week, Falih said that the oil industry needs a price above $50 per barrel to sustain investments, adding that downward pressure on prices would prevail because of a huge stocks overhang.

Novak said Russia is sticking to its forecast that the oil price will average between $40 and $50 this year. He said though there are risks that it could be lower due to seasonal decline in demand.

Trading houses across the globe are betting on oil markets remaining oversupplied for at least two more years even as crude prices stage a recovery driven by early signs of falling production.

The Russian minister said he expected global oil markets would balance out by mid- or end-2017, with a lot depending on Saudi Arabia's policy. He said he saw demand rising by at least 0.8-1 percent per year, or by 0.7-1.0 million barrels per day.

Novak added that global oil stockpiles have reached 3 billion barrels, of which 500 million barrels he called "excessive" and warned that it will take a long time before they leave the market.

"In general, this is almost 1.5 million bpd, meaning that if nothing in addition will be produced (globally) and output is maintained at current levels, this overhang will still cover for the annual increase in demand," Novak said.

(This version clarifies in headline and paragraph 1 that there are no discussions about output coordination now, the minister did not say it will never happen in the future)

(Reporting by Vladimir Soldatkin, Katya Golubkova, Oksana Kobzeva, Denis Pinchuk, Alexander Ershov, Natalia Chumakova, Darya Korsunskaya and Anastasiya Lyrchikova, editing by David Evans)

Monday, July 18, 2016

Magellan to Build New $335MM Marine Terminal Along Houston Ship Channel

Magellan Midstream Partners said on Thursday that its plans to construct a new marine terminal along the Houston Ship Channel in Pasadena, Texas, to handle refined petroleum products, including various grades of gasoline and diesel fuel and renewable fuels.

The project is currently estimated to cost approximately $335 million, including the acquisition of land.

Subject to receipt of necessary permits and regulatory approval, Magellan expects its new Pasadena terminal to be operational in early 2019.

The new terminal will be built on nearly 200 acres of recently acquired land.

Supported by a long-term customer commitment, Magellan initially plans to build approximately 1 million bbl of refined products and ethanol storage and a new marine dock capable of handling Panamax-sized ships or barges with up to a 40-foot draft.

Magellan is also constructing a 36-inch pipeline between the partnership's existing Galena Park, Texas, terminal and this new Pasadena terminal.

In addition, Magellan is connecting its existing 18-inch Texas City-to-Pasadena pipeline to the new facility. Magellan is developing opportunities for additional connections to third-party refineries, pipelines and terminals within the Gulf Coast region.

"Demand for refined products export capabilities from the Gulf Coast continues to grow, and Magellan is well-positioned to take advantage of these opportunities due to our extensive pipeline and terminals network," said Michael Mears, chief executive officer.

If warranted by additional demand, the new Pasadena facility could be expanded to include up to 10 million bbl of storage and up to five docks, including the potential for Aframax-sized vessels with a draft up to 45 feet. 

Qua Iboe Force Majeure and NDA Threats

Qua iboe

A force majeure has been called on exports of Nigeria’s Qua Iboe crude by ExxonMobil subsidiary Mobil Producing Nigeria (MPN). The latest suspension of exports punches a hole in Nigeria’s export revenue.

MPN declared the force majeure after observing what is termed as a “system anomaly” during a check on its loading facility on July 14.

“We are working to ensure loading activities at the facility return to normal. We cannot speculate on any timeline for repairs,” the spokesman told Reuters. “Qua Iboe Terminal is operating and production activities continue.”

There were claims last week by Nigerian militant group, the Niger Delta Avengers (NDA), that they had blown up one of ExxonMobil’s Qua Iboe pipelines; the US supermajor denied the NDA claims and said there was no connection between the force majeure and the militant attacks.

While ExxonMobil may not have been hit by the NDA, the militant group has warned the company not to carry out any repairs. On its website the group said “If ExxonMobil fails to listen to us (Niger Delta Avengers), your personnel are going to be our next casualties not pipelines.”

Friday, July 15, 2016

Venezuela - a double edged sword

Venezuela in Turmoil

Venezuela has arguably suffered the most from the crash in crude oil prices, as the country’s heavy grades tend to be priced at a notable discount to Brent. 
Despite a recent rise in oil prices, the country remains in economic turmoil. The IMF forecasts 2016 GDP at minus 8% and an inflation rate of 500%. To compound these issues, the country is running short of basic foodstuffs, working weeks have been cut and power outages remain commonplace, with oil operations (both upstream and downstream) suffering as a result, Gibson Research said in a report.

Official Venezuelan crude production was reported at about 2.37 mill barrels per day in May, down from a 2.65 mill barrels per day in 2015. However, many analysts dispute the official figures, arguing that actual production is likely to be lower at around 2.18 mill barrels per day in May.

Whatever the amount, production appears to be falling and could fall below 2 mill barrels per day later this year, as the country struggles to cover the costs associated with sustaining output, in particular paying foreign oilfield services companies.

In the downstream refining sector, disruptions are frequent, owing to power outages and lack of maintenance/investment. Despite having a sizeable refining capacity, utilisation is said to be much lower with many key refineries, such as the 955,000 barrels per day Paraguaná complex suffering from major outages, often running at less than 50% of capacity.

Such disruptions have forced the authorities at times to source additional products from overseas. At the same time the government must continue to import light oils to dilute its heavy grades.

To make fuel supply matters worse, issues such as accessing US dollars have prevented payment for imported cargoes and caused discharge delays, as suppliers hold off unloading until payment has been made.

So what are the implications for the tanker market? For products, more imports to Venezuela comes at the expense of less exports, whether this is bullish of bearish really depends on the net effect, which is hard to gauge, although lower refining runs are likely to support imports from the US and Europe, Gibson said.

For the crude market, a reduction in exports from Venezuela would initially appear negative, reducing the number of Aframax cargoes in the Caribbean/US Gulf region, as well as threatening long haul VLCC exports to the East.

However, at present the impact on crude exports is limited, due to lower refinery runs. In addition, in reality much would depend from where replacement cargoes to US are sourced. One obvious choice is heavy Canadian grades; but refiners may also look to Middle East producers, such as Iraq or Saudi Arabia, with Iran currently off limits.

Thus the overall effect could boost tonne/mile demand, providing increased support to the VLCC sector in particular.

Furthermore, it may prove likely that Venezuela prioritises shipments to China over other customers, given the oil for loans programme that exists between the two nations. So on the one hand, lower exports from Venezuela, would be bearish, but higher import to the US from further afield, notably the Middle East would be supportive for tonne/mile demand, Gibson concluded.

Floating storage making a come back?

Keeping count of floating storage

An increasing amount of spot fixtures have been negotiated using so called ‘disadvantaged’ tankers thus far this year (see Tanker Operator Aug/Sept issue). 
In addition, several older tankers have also been fixed for operational floating storage in the timecharter market this year, due to a lack of onshore storage facilities.

However, over the last few weeks, a notable shift toward inventory drawdowns from refiners has been observed, reducing the need for this type of floating storage, McQuilling Services reported in an industry note.

As one cause for floating storage is abating, a new one may be emerging: the recent strengthening of the US dollar amid ‘Brexit’ has pressured spot crude prices more than forward levels, revealing short-term arbitrage opportunities conducive to floating storage.

According to McQuilling’s daily analysis of remotely-sensed vessel position data, a marked build-up of offshore floating storage was seen in April and May. For example, the average number of anchored VLCCs with cargo on board reached 51 per day in May, compared to only 21 in the beginning of the year.

The Middle East and Southeast Asia remained the top anchorage zones, accounting for 88% of the VLCC floating storage fleet throughout 2016 to date.

In the Middle East, the number of Iranian VLCCs storing oil remained steady at around 18 tankers during the year, and for the time being, they have not significantly impacted on tanker freight rates, since they are not actively participating in the spot market.

Not surprisingly, we’ve witnessed a very active short-term timecharter market for VLCCs this year, McQuilling said. Thus far in 2016, around 13 tankers have been fixed for less than three months, compared to only two in the first half of last year.

As the majority of these VLCCs have been deployed or geared for deployment in the Arabian Gulf and Singapore regions, their use for storage purposes is probable.

Similar to the larger tankers, the number of Suezmaxes involved in floating storage also experienced an increase from the beginning of April. The most significant rise was in Southeast Asia, where the number of floating tankers climbed to six by the end of April.

In addition, McQuilling recorded five Suezmaxes anchored with cargo on board off West Africa and the Mediterranean during the same period.

However, the situation has changed notably since the start of June, as the total number of floating storage tankers dropped around 32% within 30 days. By the end of June, the consultancy counted 37 VLCCs and seven Suezmaxes operating as storage facilities.

This decline could be partly due to the crude price increases since the third week of May when Brent rose to over $50 per barrel. Charterers are likely to prioritise offloading crude from floating storage or drawdown land-based inventories to mitigate against rising crude prices.

As a result, there was a slowdown in cargo demand and continuous oversupply of VLCC tonnage throughout June.

During this period, the AG/Far East and AG/Southeast Asia spot fixture activity saw a significant decline from 83 in May to 69 in June. The average freight rates for VLCC AG/Far East also dropped nearly WS8 points month-on-month.

Timecharter rates followed the spot market, with VLCCs falling to their lowest level since March, 2015.

By the end of June, one year VLCC timecharter rates had dropped to $38,000 per day, a 32.7% decline since January 2016, while recently, the 1999-built ‘Plata Glory’ was fixed for 30 days at $22,000 per day, with an option to extend the period twice at $26,000 per day and $29,000 per day, respectively.

Taking into consideration the falling timecharter rates and the short term pressure on spot crude prices, McQuilling believed that this recent fixture may be a prelude to more deals. Supporting this view is the widening short-term contango.

According to JBC energy, the one month spread for Brent crude reached $0.56 per barrel on 5th July, more than double the figure seen at the beginning of June. The two month spread also widened to $1.08 per barrel.

Quantifying the incentive to currently employ floating storage, the ‘Plata Glory’s’ charterer is probably earning a net income of nearly $9,300 per day for 30 days if the cargo owner brought M1 Brent and sold M2 Brent futures on 5th July, or $6,150 per day for 60 days if sold M3 Brent futures.

Given that a VLCC can load around two million barrels of crude oil and consume an average of $2,500 worth of bunkers each day, the breakeven price to timecharter a VLCC will be around $34,800 per day for 30 days and $33,500/day for 60 days of current contango levels.

Assuming that tax and other expenses represent an additional 10% of the overall costs, the breakeven price was adjusted to around $31,300 per day for 30 days and $30,150 per day for 60 days.

In July month-to-date, the VLCC weighted TCE average stands at only $23,400 per day, a 60% decline compared to the same period last year. This figure is also much lower than the current breakeven price to conduct offshore floating storage, thereby solidifying expectations for an increase in short-term timecharters.

As a number of VLCCs (likely ‘disadvantaged’) may be removed from the available tonnage list, McQuilling believed that the VLCC spot market may have bottomed out and could benefit from the possible offshore floating storage prospect.

If indeed charterers act upon this opportunity, we are likely to see steady or slightly increasing VLCC spot rates in July. However, with a steady flow of newbuildings entering the trading fleet and limited exits, this support may only keep rates from sliding further, the consultancy concluded.

2020 sulphur cap report gives clear signal

  Logo CE Delft

A Netherlands research institute CE Delft report into the forthcoming 0.5% IMO sulphur cap published today (Friday) claimed there will be sufficient refining capacity by 2020 to produce compliant marine fuels.
This is primarily due to the slowing of demand for distillates from other industry sectors, the report said.

The Exhaust Gas Cleaning Systems Association (EGCSA) welcomed the institute’s findings. EGCSA director, Donald Gregory, said, “The report of CE Delft commissioned by the IMO plainly shows that availability of marine fuels is not a reason for the IMO to delay introduction of the 2020 global sulphur emissions limit. The independent assessment comes to the conclusion that there will be sufficient low sulphur marine fuel available by 2020 and that any regional shortcoming can be met by interregional transport.”

The IMO had appointed CE Delft to assess worldwide low sulphur fuel supply and demand, fuel oil market trends and any other relevant issues, as required under MARPOL Annex VI in the run-up to a ruling on the adoption of a global limit on fuel oil sulphur emissions in October, 2016.

The study was intended to evaluate the likely availability of compliant fuel, rather than consider fuel purchase price, as the critical determining factor when deciding whether or not to introduce the global 2020 sulphur emission limit.

Unease over fuel price fluctuations and unwillingness to invest make some parties want to put off introduction of sulphur emission limits until 1st January, 2025, the EGSA said. However, the association and its members expressed concern that any delay in the introduction of the 2020 sulphur emissions limit will allow the shipping industry to continue to cause health problems and damage to the environment from harmful SOx air emissions.

The group said that is was also worried that a delay would penalise early adopters of clean fuels and exhaust gas cleaning systems, as well as heighten insecurity and costs for the shipping industry, as patchwork local ECAs pre-empt the delayed global one.

Gregory said,“Putting off a decision on the 2020 global sulphur cap until another MEPC meeting in 2017 or 2018 will end up affecting introduction of the cap and is likely to lead to a delay until 2025. Without a firm decision now, the shipping industry is set to suffer from uncertainty and the world from emissions that pose a risk to health and the environment.”

Given adequate supply of 0.5% sulphur marine fuels and, as previously claimed by EGCSA, ample capacity for the manufacture and installation of marine scrubbers, the association believes shipowners have access to the necessary resources and systems to meet the 2020 limit cost-effectively.

Gregory added, “A decision in principle on introduction of the 2020 cap at MEPC 70 in October, 2016 is imperative to allow shipowners to mobilise investment and make strategic decisions in good time for 1st January, 2020 implementation. In line with MARPOL Annex VI, Regulation 14, the CE Delft study assumes that ships will use fuels with a maximum sulphur content of 0.1% in emissions control areas (ECAs) or for smaller engines, and fuels with a sulphur content of up to 0.5% outside these areas from 1st January, 2020.

“The study further presumes that roughly 3,800 ships will have installed exhaust gas cleaning systems (EGCS or scrubbers) by 2020. Capacity is expected to grow as new vendors entering the market increase the installation capability year-on-year from 2020. Our members have ample capacity to meet the numbers predicted in the CE Delft report with capacity rising with demand. The use of scrubbers will allow shipowners to be immune to low sulphur fuel market price volatility,”he concluded.

Wednesday, July 13, 2016

The Oil and Gas Industry in Cuba


The island of Cuba had proven oil reserves of 124 million barrels according to 2013 figures. There are varied estimates of total crude oil reserves that rely mainly on estimations of as-yet undiscovered offshore oil deposits in the North Cuba Basin. Cuba is one of three locations in the Caribbean (Barbados and Trinidad and Tobago are the other locations) which possess oil and natural gas reserves.

In 2008 Cuba announced its reserves of crude oil amounted to approximately 20 million barrels, mostly offshore in the Cuban shelf. If these estimates prove to be accurate, then Cuba potentially has one of the top 20 crude oil reserves in the world. The country currently has three producing oil fields offshore within five kilometers of its northern coast.

Cuba’s Oil Industry

Cuba Petróleo Union, known by the trade name CUPET, is the state-owned Cuban oil company responsible for the country’s oil and gas industry. In addition to operating a chain of filling stations that sell gasoline, the company is involved in refining and distributing the country’s petroleum products. It also takes part in the exploration for and development of new oil fields, including extraction of crude oil petroleum deposits. They are working on increasing their refining capacity plus reworking currently suspended wells.

Cuba’s Oil Production

The northern region of Havana to Villa Clara provinces is where current extraction is based. CUPET jointly produces crude oil through agreements with companies from Spain and Canada as well as with the People’s Republic of China plus others. As Cuba’s state oil company, CUPET has already signed contract agreements with ten countries for further oil exploration and development. Canada’s Sherritt International produced about 20,000 barrels of oil a day with total annual revenue of $269.2 million in 2014.  Of 59 available licensed blocks, almost half are already contracted by companies from Australia, Brazil, Canada, China, India, Malaysia, Norway, Spain, Venezuela and Vietnam.

Currently about 80,000 barrels of heavy crude oil are produced daily by Cuba. Several companies have initiated oil exploration in Cuba over the last 15 years, discovering new deposits along the 80 mile stretch of coast in the provinces of Havana and Matanzas in the northwest. CUPET also has a cooperation agreement to import oil with the Venezuelan government. In exchange for Cuban doctors and “missions”, Venezuela provides Cuba with cheap oil.

Cuba’s Oil Exploration

CUPET began partnerships with Repsol-YPF of Spain when both parties determined that the island’s off-shore reserved should be able to produce a minimum of 4.6 billion barrels of oil. By 2010 Cuba’s leasing program for the north and west ocean floor blocks began. This leasing is taking place regardless of the fact that these fields are near the tourist areas of both Cuba itself and Florida.  Cuba has no capability to handle a major oil spill and nobody wants another disaster like the BP spill of 2010.

Three deep-water exploratory wells were drilled in 2012 by the platform Scarabeo 9 from Italy for various oil companies, one of which was Spain’s Repsol. These test wells were completed in May, August and October of that year and all, to everyone’s disappointment, none discovered a commercial quantity of gas or oil. Due to this, Repsol relinquished its Cuban concessions. The deep-water drilling rig they were using was removed, postponing more detailed exploration programs for several years.
Both state-owned firms and private companies from Vietnam, Venezuela, Spain, Russia, Norway, India and Brazil have obtained leases. Due to their country’s current embargo against Cuba, no companies from the United States have participated.

New Partnerships and Future Exploration

Though Cuba’s deep-water exploration was halted in 2012, interest has never waned. MEO Australia qualified as a shallow water and on shore operator in Cuba in early 2013 and has been working to secure a Production Sharing Contract with Cuba since then. In mid 2015 MEO Australia obtained an agreement for Block 9 which covers 2,380 square kilometers (919 square miles) of northern coast farmland about 130 kilometers (81 miles) to the east of Havana. Australian incorporated company Petro Australis acquired a back-in option on the same block last September. This contracted Block is close to the vast Varadero oil field. These companies have committed to an initial exploration sub-period of 18 months to examine existing data on Block 9. Depending on what’s discovered, the company will decide whether or not to continue oil exploration.

The French oil and gas company Total signed a deal with Cuba in May of 2015 to explore for offshore oil with CUPET.

In late 2015 Leni Gas Cuba Limited (London Ticker: ISDX:CUBA), a business incorporated in the British Virgin Islands, acquired 15 percent of Petro Australis Limited as an entry point for the company into the Cuban oil and gas industry.  Leni Gas Cuba signed a Cuba Block 9 Production Sharing with CUPET in September 2015.  These companies all feel that Cuban oil is a good investment though current prices are depressed.

Angola thinks in the same vein as the above mentioned companies. Its state-run company Sonangol is working with the Cuban oil company to restart deep-water exploration in Cuba. Sonangol contracted for four blocks close to the United States’ maritime border in the Gulf of Mexico. The two countries will begin work on two of them in 2016.

Until Congress lifts the US Cuban embargo, American companies are not interested and cannot participate. Cuba has extended “an open invitation” to the US.  Irregardless, there is sure to be heightened interest when the embargo is over.

Nigerian Oil Militants Claim 5 Attacks in Blow to Cease-Fire

www. upstreamonline com

Niger Delta Avengers, a militant group operating in Nigeria’s southern oil-producing region, said it attacked five crude-pumping facilities overnight Sunday, dealing a blow to the government’s effort to enforce a cease-fire.

The targets included Chevron Corp.’s oil wells 7 and 8 and three trunk lines belonging to Nigerian Petroleum Development Corp., the exploration unit of the state oil company, according to tweets from an account claiming to represent the militants. The Twitter account hasn’t been verified.

“As a matter of long-standing policy, we do not comment on the safety and security of our personnel and operations,” Isabel Ordonez, a Chevron spokeswoman based in Houston, said in an e-mailed response to a request for comment. Garba Deen Muhammad, the spokesman of the state-owned Nigerian National Petroleum Corp., didn’t answer two calls made to his mobile telephone.

Attacks on oil facilities this year helped to cut Nigeria’s monthly oil production to about 1.4 million barrels a day in May, the lowest in almost three decades, according to the International Energy Agency. The supply interruptions have contributed to an increase of more than 80 percent in oil prices since benchmark Brent crude slid to a 12-year low in January. Brent ended 64 cents higher at $50.35 a barrel on Friday in London trading.
Petroleum Minister Emmanuel Kachikwu said on June 27 that a cease-fire agreement reached with the group has allowed repairs and restoration of output to about 1.8 million barrels a day.

Monday, July 11, 2016

Oil Trader Trafigura Profits From Growing U.S. Crude Exports

[Bloomberg] - Over nearly 45 years, the oil tanks at Milford Haven on the U.K. west coast have stored dozens of crude varieties: from North Sea Brent to Nigeria’s Bonny Light and almost everything in between. Now, for the first time, they are holding U.S. crude too.

Trafigura Group Pte. is using Milford Haven, which can hold about 9 million barrels of crude and refined products in its 54 tanks, as a back-stop in a supply chain stretching about 8,000 kilometers (5,000 miles) from the oil ports of Texas to the refineries in north-west Europe, including the Rotterdam trading hub.

Since Washington lifted a 40-year-old ban on U.S. crude overseas sales in late 2015, Trafigura has been sending tankers across the Atlantic. Its recent pace of two to three 700,000-barrel-capacity Aframax tankers a month makes the trader one of the top exporters alongside BP Plc.

"It’s a growing business for Trafigura," Ben Luckock, the company’s global head of crude-oil trading, said in an interview at the terminal in southwest Wales. "We are in further discussions with a number of refiners for more U.S. crude."

Atlantic Crossing

The Advantage Avenue was the latest Aframax to make the Atlantic crossing, arriving in Milford Haven on July 8 with about 750,000 barrels of Eagle Ford shale oil loaded in Corpus Christi, Texas, according to ship-tracking data compiled by Bloomberg.

Its journey is only possible because the shale boom reversed decades of decline in American oil output. The U.S. imposed a ban on most crude exports after the 1973 to 1974 oil embargo by Arab members of the Organization of Petroleum Exporting Countries stoked fears about the nation’s growing dependence on imports. Those concerns have eased as a new generation of drillers used hydraulic fracturing to blast apart shale rocks, lifting the nation’s output to a 30-year high in June 2015.

Although output has dropped 12 percent in the past year as the industry was hit by the global price slump, U.S. exports rose to a record 660,000 barrels a day in May. Crude is flowing into Canada, China, Curacao, France, the Netherlands and the U.K., according to data from U.S. Census and the Energy Information Administration.

In addition to Trafigura, other independent traders such as Vitol Group BV and Gunvor Group Ltd. have exported U.S. crude. Gunvor used a similar technique to Trafigura for the export, relying on a terminal in Panama it co-owns as a back-stop for the shipment.

Milford Haven

The Milford Haven site started life as an Amoco refinery in the 1970s, receiving shipments of crude and selling refined fuels into the local market. Puma Energy BV, in which Trafigura owns a 49 percent stake, purchased the facility a year ago, shut down the crude-processing plant and transformed it into a storage terminal. Trafigura also has a Mediterranean hub -- nearly 6 million barrels of crude-storage capacity under long-term lease in tank farms operated by the Eilat Ashkelon Pipeline Co. Ltd in Israel.

The terminals allow cargoes to make a temporary stop if Trafigura doesn’t immediately have a buyer. When future prices are higher than current levels -- a structure called contango -- a brief period of storage can even boost profits because the final value of the sale increases. The facilities also allow the trader to blend high-quality U.S. oil with other grades, tailoring the crude to meet the exact needs of refiners, or split cargoes into smaller batches.

Cheaper Pipelines

Trafigura is benefiting from two trends to build its U.S. crude-export business. First, pipeline and railway fees to move oil from fields in Texas and Oklahoma to the ports of the U.S. Gulf of Mexico have become cheaper as U.S. production fell following the global price slump. The second is the discount of U.S. crude futures to international prices, which allows traders to make a profit moving oil from one shore of the Atlantic to the other.

"The level that seems to open the U.S.-to-Europe export arbitrage is about $1 a barrel between Brent and West Texas Intermediate,” Luckock said.

Brent futures for September delivery traded 69 cents a barrel above the same contract for West Texas Intermediate at 8:07 a.m. Monday on the London-based ICE Futures Europe exchange. The price difference, which reached a peak of $27.81 a barrel in late 2011, has narrowed as U.S. production declines. While the WTI discount has averaged 73 cents this year, it was wider than $1 for much of February and April.

The shipments from the U.S., together with an alliance with Russian state-owned Rosneft, have helped Trafigura to become the world’s second-largest independent oil trader, handling 4 million barrels a day of crude and refined products.

Friday, July 8, 2016

Markets - VLCC soft sentiment continues

 Gulf Sheba VLCC arrested in Rotterdam

After the peak last week, the VLCC market saw rates drop by a point each day, as the softer sentiment continued. 
Charterers continued to drip feed the market, picking newbuilds and vessels coming out of drydock for their most recent requirements. With these vessels cleared out of the way, the list still looks ample for the current cargo flow, Fearnleys reported.

However, with more delays in China and a Typhoon due to hit South China next week, things might turn, but for now the summer months are really taking a toll on the market for the time being.

West African Suezmaxes saw activity easing off at the beginning of last week, with only a few ships being fixed.

At time of writing (Wednesday), we experienced steady cargo inquiry in the last couple of days for the 3rd decade out of WAFR, resulting in more tonnage getting absorbed without rates really going anywhere, due to the previous quiet period and tonnage build-up, Fearnleys said.

In the Med and Black Sea, last week proved to be busy with a combination of steady fixing and replacement jobs, which has pushed rates up in this area.

North Sea and Baltic both experienced another downward correction as the end/early rush came to a conclusion. Both markets seem to have bottomed out, and should be moving sideways at current levels for the week to come.

Med and Black Sea also saw a steady downward correction with rates bottoming at WS92.5. For the remainder of the week, it is likely that this rate will be repeated.

However, we expect that the market will firm up again, due to the number of cargoes scheduled to come out of CPC from the 20th of this month, the question is - when and who will start the race, Fearnleys queried.

Among the fixtures reported by brokers recently were the 2012-built Suezmax sisters ‘Densa Whale’ and ‘Densa Orca’ thought taken by Stena Bulk for 12 months at $23,000 per day each.

Hindustan Petroleum was said to have fixed the 2003-built LR1 ‘Jag Padma’ for 12 months at $17,150 per day, while ST Shipping was thought to have fixed the 2007-built LR1 ‘United Ambassador’ for six months at $19,000 per day and Shell was reported to have taken the 2016-built Aframax ‘Lyric Mongolia’ for two to six months at $18,500 per day.

In the MR sector, Frontline was believed to have taken the 2012-built ‘Miss Benedetta’ for six months at $14,750 per day, while STI was said to have fixed the 2013-built ‘Zefyros’ for 12 months, option 12 months at $14,500 per day for the first period.

Reliance was thought to have fixed the 2004-built Handysize ‘Hafnia Adamello’ for 12 months at $15,650 per day, while STI was said to have taken the 2011-built Handy ‘Atria’ for six months for $13,500 per day. 
In the S&P market, Winson was believed to have purchased the 2000-built VLCC ‘BW Ulan’ at an unknown level. New Shipping was said to have spent $26 mill on the 2008-built Aframax ‘TH Sonata’, while the 2011-built Aframax ‘Nissos Kythnos’ was said to be on subjects to unknown buyers at $39 mill. 

The 1995-built MR ‘Sriracha Trader’ was believed committed to Middle East interests for around $3-4 mill.

In the newbuilding sector, ‘K’ Line has ordered three VLCCs and two Aframaxes from domestic shipyards.

The company is to build two VLCCs at Kawasaki Heavy Industries with deliveries scheduled for 2017 and 2018, while Namura Shipbuilding is to construct the third VLCC and two Aframaxes, which are due for delivery in 2018 and 2019.

K Line said that the orders form part of its fleet upgrading plan and that the vessels have been designed to comply with forthcoming regulations, including the Ballast Water Convention.

Elsewhere, Stream Tankers has ordered two, plus two optional 19,900 dwt stainless steel IMO II chemical tankers at Fukuoka for 2018-2019 deliveries. No price was revealed. 

Thursday, July 7, 2016

Satellite photos show Islamic State installing hundreds of makeshift oil refineries to offset losses from airstrikes

Smoke rises from an oil refinery in Baiji, Iraq, in October 2015. (Reuters)

With its refineries mostly destroyed and its tanker fleet under constant attack, the Islamic State is increasingly turning to low-tech alternatives for processing oil, a vital source of revenue for the terrorist group, new satellite images reveal.

Aerial photos taken near the northern Iraqi city of Mosul show scores of tiny, makeshift refineries popping up in oil fields controlled by the Islamic State, evidence that the jihadists are finding workarounds after losing much of their oil infrastructure to airstrikes.

The micro-refineries — sometimes called “teapots” — consist of little more than a ditch or pit for storing crude and a portable metal furnace used to distill raw petroleum into fuel. Thousands of such systems have long been in operation in the Islamic State’s Syrian strongholds, but now they’re sprouting up around the more established, though heavily damaged, Iraqi oil fields, said Omar Lamrani, a senior analyst for Stratfor, a private, Texas-based intelligence company.

“In a single oil field there can be hundreds of these makeshift operations,” said Lamrani, citing aerial imagery showing a constellation of tiny furnaces around a Mosul field that was mostly just sand a year ago. “It’s not the ideal way to do it, so their revenue is going down. But it still works.” The images were provided to The Washington Post by Stratfor and AllSource Analysis, a Colorado firm that specializes in geospatial research.

The tiny refineries are partly offsetting huge losses in income resulting from the disruption of traditional oil production in northern Iraqi fields controlled by the Islamic State since mid-2014. After capturing the facilities, the group’s leaders initially attempted to run them as businesses, retaining enough workers to keep the refineries operating and hauling the finished products by tanker truck to independent dealers in Turkey, Syria and Iraq’s Kurdish provinces, U.S. officials say.

At its peak, the Islamic State’s oil operations were netting an estimated $50 million a month. But the group’s oil income has plummeted in recent months, through a combination of poor management and a steady drumbeat of airstrikes that have targeted refineries and storage depots as well as tanker convoys.

The proliferation of micro-refineries is the latest sign of strain in the group’s self-declared caliphate, which has lost half its territorial holdings in Iraq since late 2014. At the same time, the use of low-tech alternatives also reflects a certain resilience by an organization that also depends on self-generated oil to run its military operations and electric generators, Lamrani said. Stratfor estimates that oil contributed about $20 million a month to the Islamic State's coffers as recently as March, with much of the petroleum coming from makeshift facilities.

There are many drawbacks to the system. The small furnaces, which heat raw petroleum to a high temperature and then capture and cool the vapors to create gasoline, produce thick clouds of black smoke and leave pools of toxic byproducts on the surface. But because they are small and scattered, the "teapot" refineries are harder to destroy from the air. And any that are destroyed can be easily and cheaply replaced, oil industry experts say.

“This is very inefficient, dirty and creates lots of waste,” said Paul Bommer, a professor of petroleum engineering at the University of Texas at Austin. And yet, he said, “it is a way to make small amounts of product at isolated locations, which I suppose could make the sites harder to find.”