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Hess turns to VLCCs for temporary storage
US
US independent Hess announced last week that it had chartered three very large crude carriers (VLCCs) to temporarily store a combined 6mn barrels of its production from the Bakken play. The move comes as producers across the US – and globally – are looking at new ways of max- imising volumes in storage in order to avoid “tank tops” amid rising inventories and low global demand.
Hess’ announcement was included in its esti- mated first-quarter results, released on May 7. In line with numerous other producers that are scaling back spending and activity in response to the coronavirus (COVID-19) pandemic, Hess said it was further reducing its capital budget for 2020 to $1.9bn, down 37% from original guid- ance of $3.0bn. The company warned that the “unprecedented” demand in reduction brought about by COVID-19 meant that commercial storage in the US was expected to reach capacity in the second quarter of this year. As a result, the industry is required to shut in and curtail output, it added. Hess noted that its move to charter the VLCCs was aimed at maximising the value of its production at this time.
The VLCCs will store 2mn barrels each of Hess’ Bakken output in May, June and July, which is then expected to be sold in the fourth quarter of the year to Asian customers. Hess will ship its output to the Gulf of Mexico to be loaded onto the VLCCs. Bloomberg cited a company executive as saying the VLCC that would store Hess’ May Bakken output had already arrived in the Gulf.
“We have hedged the contango in the
forward Brent curve for these barrels,” Hess’ senior vice-president and chief financial officer, John Rielly, said on the company’s earnings call. “We do not expect to shut in any of our operated production due to our marketing arrangements and our VLCC storage.” He added that sales volumes would be underlifted by roughly 4mn barrels of oil in the second quarter and 2mn bar- rels in the third quarter as a result of using the VLCCs.
Hess’ net production – excluding Libya, where unrest has led to major disruption – was 344,000 barrels of oil equivalent per day in the first quarter of 2020, up 24% year on year from 278,000 boepd. The growth was primarily attrib- uted to a 46% y/y increase in Bakken output and the first full quarter of production at the Liza Field, offshore Guyana, which came online in December 2019.
The company’s net Bakken production rose to 190,000 boepd in the first quarter of the year, up from 130,000 boepd. Within this, oil out- put grew to 114,000 barrels per day (bpd), up from 85,000 bpd a year ago, largely as a result of increased drilling activity and improved well performance, Hess said.
Based on these figures, the company will be storing about 56% of its Bakken output on VLCCs over the next three months.
Hess reported a net loss of $2.4bn in the first quarter of 2020, which included impairment and other after-tax charges of $2.3bn that stemmed from the collapse in oil prices in March. This compares with a net profit of $32mn in the first quarter of 2019.™
Hess noted that its move to charter the VLCCs was aimed at maximising the value of its production at this time.
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