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Market Update: Oil & Gas - March 2017

Market Update: Oil & Gas - March 2017

Saudis move to protect Asian market share, both short-term and long-term


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UK Government announces review of North Sea tax rules

Earlier this month we saw the UK government announce a forthcoming review of the North Sea tax rules to help encourage fresh UK and international investment into the UK continental shelf (UKCS). The Government is focused on Maximising Economic Recovery (MER) of the remaining reserves in the North Sea, and it plans to create an expert panel to identify ways of making it easier to get North Sea assets into the hands of those operators that have experience of operating late life assets effectively. One issue that is potentially hampering deal activity around late life assets in the North Sea is the level of tax relief available on decommissioning once the asset ceases production. North Sea decommissioning costs are forecast to exceed £50bn during the next four decades, with almost half the liability to be met by the Treasury through tax relief, according to Wood Mackenzie. The value of the tax relief available on each asset for decommissioning will be dependent on the amount of tax the owner has paid during the life of the asset, and this currently can’t be automatically transferred to the new owner when the asset is sold. By looking at this potential issue, the UK Government is hoping to ensure the UKCS remains an attractive prospect for new entrants and MER can be achieved.

"The degree to which late life assets can find the right ownership and investment is a significant factor in the UK achieving the maximising economic recovery (MER) agenda. Government, companies operating in the North Sea and the Oil & Gas regulator (OGA) recognise there is a potential issue with the inability to transfer tax history. This month’s confirmation that there is potential for changes to the fiscal regime to overcome this is very welcome. Historically we have seen a number of positive moves by Her Majesty’s Treasury to support the competitiveness of the UK Continental Shelf (UKCS). The willingness to address this latest issue within a short timescale is a positive signal to the industry, which could ultimately unlock asset transfers and stimulate M&A interest in the basin from both UK and international investors."

– Mark Andrews, Head of Oil & Gas, KPMG in the UK

Saudis move to protect Asian market share, both short-term and long-term

Saudi Arabia is taking steps to shore up its market share and relationships with Asian refiners in the context of the current OPEC production cuts as well as over the longer term. Saudi Aramco has maintained full term contract volumes to most of its Asian customers even as it has invoked its right to make downward variances to refiners in other regions. It also has discounted its Official Selling Price (OSP) differentials to keep its barrels competitive in Asia, even as rising volumes of US light crude exports have required a significant discount for Arab Light relative to the Dubai/Oman benchmark, when it usually sells at a slight premium. Over the longer term, Saudi Aramco is keen to invest in joint ownership of downstream assets in growing markets in developing Asia as a means of cementing its supply relationships with those countries. King Salman’s recent visit to several countries in the region included this policy goal on the agenda, with the announcement of a $7 billion Saudi investment in 50% joint ventures for some components of Petronas’ $27 billion RAPID refining and petrochemical complex planned for Penang. This comes in the wake of Saudi Aramco’s losing out to Rosneft on the acquisition of India’s Essar Oil in October 2016. With the growth of Indian demand, Saudi Aramco will continue to seek equity in refining projects there despite this setback.

– Greg Priddy, Director, O&G, Eurasia Group* 


* Guest contributor to March edition

Analyst estimates: oil

  2017 2018 2019 2020
January Avg 57.9 65.5 71.3 76.7
February Avg 58.0 64.4 70.6 75.8
January Median 57.0 65.0 67.5 77.5
February Median 57.5 65.0 67.5 75.0

Analyst estimates: gas

  2017 2018 2019 2020
Min 3.1 2.9 3.0 3.2
Average 3.3 3.3 3.3 3.5
Median 3.3 3.2 3.2 3.4
Max 3.5 4.0 4.0 4.0
  2017 2018 2019 2020
January Avg 3.2 3.3 3.4 3.5
February Avg 3.3 3.3 3.3 3.5
January Median 3.2 3.2 3.2 3.4
February Median 3.3 3.2 3.2 3.4

Note: The forecasts/analyst estimates identified are an indication based on third party sources and information. They do not represent the views of KPMG.

The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.

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