Shipping, rather than commodity prices, can often be a good barometer of the overall health of China’s manufacturing and of international trade, so it was quite a surprise to see a large number of empty container berths in the vast, sprawling container terminals of Singapore last week.
When driving in from Changi airport at night, the first indicator was the large number of container gantry cranes with their booms up, rather than down and working cargo. It may have been dark, but each crane is lit, so as not to be a hazard to aviation, so they were clear to see.
As my taxi drew nearer to the Tanjong Pagar, Keppel and Brani terminals, my eyes were not deceiving me and it was crystal clear that there were few ships in port. As we drove further west towards my final destination, near the new Pasir Panjang terminal, capable of handling the largest container ships in the fleet, the skyline was filled with upward pointing container crane booms.
Normally in Singapore, as soon as a ship comes off a berth, another is in place to quickly move alongside to take its place; but not so in the third week of March.
A large percentage of the container traffic in Singapore carries manufactured goods from China. The big ships come in, discharge thousands of containers that are destined to be transshipped onto smaller vessels better suited for trading to the Indian subcontinent and parts of the Middle East. Singapore also handles a large volume of empty containers on their way back to China.
Nowadays, when the bigger ships do come in, it is clear they are carrying far fewer containers than usual. Some say the high rates charged by the Port of Singapore are to blame, but several sources in the container business argue that Singapore has little competition as such a major transshipment point in southeast Asia and can, therefore, justify charging high rates compared with many other large, mainline container ports.
The statistics speak for themselves and confirm what the eye sees. In January, Singapore handled 2.49 million containers, down 10.4% from the 2.78 million that passed through the port in January 2015, according to the port’s own data. In February, Singapore handled 2.41 million containers, down 7.3% from 2.6 million a year earlier.
While Lunar New Year was in the first week of February, shipping is a 24/7 business, 365 days a year, and this year is a leap year, meaning that February had one more day compared with February 2015, yet the throughput still fell.
Given that we know China’s real slowdown began in late 2014 and gathered pace in 2015, it is not surprising that we see this reflected in the annual container throughput in Singapore in 2015 compared with 2014. In 2015 Singapore handled a total of 30.92 million containers, down 8.7% from 33.87 million in 2014. The 2014 total is clearly the high-water mark over the last 10 years and was up from 32.6 million mt in 2013.
With data in for just two months of 2016 so far, it is too early to tell whether this downward trend will continue. In the first two months of this year, throughput is down 8.85% year on year. If the trend continues, total throughput could fall to around 28.1 million containers, making 2016 the slowest year since 2010, when Singapore handled 28.43 million containers.
Some analysts argue that China is transitioning from being a manufacturing economy to one based on services and consumerism. If true, it implies the port throughput figures in Singapore could be in long-term decline, unless it becomes an import-dependent economy. But it is highly unlikely China as a service economy will succeed in keeping hundreds of millions of people employed. Only manufacturing can do that, which suggests that, at some point, Chinese manufacturing and exports will recover, and the container throughput in Singapore will also.
Given China’s demand for raw materials has such a significant bearing on the price of industrial commodities from crude oil to base metals, a visible recovery in international trade will be of interest to the broader commodities complex.
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Headline crude prices for the week beginning 18 March 2019 – Brent: US$67/b; WTI: US$58/b
Headlines of the week
Midstream & Downstream
Risk and reward – improving recovery rates versus exploration
A giant oil supply gap looms. If, as we expect, oil demand peaks at 110 million b/d in 2036, the inexorable decline of fields in production or under development today creates a yawning gap of 50 million b/d by the end of that decade.
How to fill it? It’s the preoccupation of the E&P sector. Harry Paton, Senior Analyst, Global Oil Supply, identifies the contribution from each of the traditional four sources.
1. Reserve growth
An additional 12 million b/d, or 24%, will come from fields already in production or under development. These additional reserves are typically the lowest risk and among the lowest cost, readily tied-in to export infrastructure already in place. Around 90% of these future volumes break even below US$60 per barrel.
2. pre-drill tight oil inventory and conventional pre-FID projects
They will bring another 12 million b/d to the party. That’s up on last year by 1.5 million b/d, reflecting the industry’s success in beefing up the hopper. Nearly all the increase is from the Permian Basin. Tight oil plays in North America now account for over two-thirds of the pre-FID cost curve, though extraction costs increase over time. Conventional oil plays are a smaller part of the pre-FID wedge at 4 million b/d. Brazil deep water is amongst the lowest cost resource anywhere, with breakevens eclipsing the best tight oil plays. Certain mature areas like the North Sea have succeeded in getting lower down the cost curve although volumes are small. Guyana, an emerging low-cost producer, shows how new conventional basins can change the curve.
3. Contingent resource
These existing discoveries could deliver 11 million b/d, or 22%, of future supply. This cohort forms the next generation of pre-FID developments, but each must overcome challenges to achieve commerciality.
Last, but not least, yet-to-find. We calculate new discoveries bring in 16 million b/d, the biggest share and almost one-third of future supply. The number is based on empirical analysis of past discovery rates, future assumptions for exploration spend and prospectivity.
Can yet-to-find deliver this much oil at reasonable cost? It looks more realistic today than in the recent past. Liquids reserves discovered that are potentially commercial was around 5 billion barrels in 2017 and again in 2018, close to the late 2030s ‘ask’. Moreover, exploration is creating value again, and we have argued consistently that more companies should be doing it.
But at the same time, it’s the high-risk option, and usually last in the merit order – exploration is the final top-up to meet demand. There’s a danger that new discoveries – higher cost ones at least – are squeezed out if demand’s not there or new, lower-cost supplies emerge. Tight oil’s rapid growth has disrupted the commercialisation of conventional discoveries this decade and is re-shaping future resource capture strategies.
To sustain portfolios, many companies have shifted away from exclusively relying on exploration to emphasising lower risk opportunities. These mostly revolve around commercialising existing reserves on the books, whether improving recovery rates from fields currently in production (reserves growth) or undeveloped discoveries (contingent resource).
Emerging technology may pose a greater threat to exploration in the future. Evolving technology has always played a central role in boosting expected reserves from known fields. What’s different in 2019 is that the industry is on the cusp of what might be a technological revolution. Advanced seismic imaging, data analytics, machine learning and artificial intelligence, the cloud and supercomputing will shine a light into sub-surface’s dark corners.
Combining these and other new applications to enhance recovery beyond tried-and-tested means could unlock more reserves from existing discoveries – and more quickly than we assume. Equinor is now aspiring to 60% from its operated fields in Norway. Volume-wise, most upside may be in the giant, older, onshore accumulations with low recovery factors (think ExxonMobil and Chevron’s latest Permian upgrades). In contrast, 21st century deepwater projects tend to start with high recovery factors.
If global recovery rates could be increased by a percentage or two from the average of around 30%, reserves growth might contribute another 5 to 6 million b/d in the 2030s. It’s just a scenario, and perhaps makes sweeping assumptions. But it’s one that should keep conventional explorers disciplined and focused only on the best new prospects.
Global oil supply through 2040
Things just keep getting more dire for Venezuela’s PDVSA – once a crown jewel among state energy firms, and now buried under debt and a government in crisis. With new American sanctions weighing down on its operations, PDVSA is buckling. For now, with the support of Russia, China and India, Venezuelan crude keeps flowing. But a ghost from the past has now come back to haunt it.
In 2007, Venezuela embarked on a resource nationalisation programme under then-President Hugo Chavez. It was the largest example of an oil nationalisation drive since Iraq in 1972 or when the government of Saudi Arabia bought out its American partners in ARAMCO back in 1980. The edict then was to have all foreign firms restructure their holdings in Venezuela to favour PDVSA with a majority. Total, Chevron, Statoil (now Equinor) and BP agreed; ExxonMobil and ConocoPhillips refused. Compensation was paid to ExxonMobil and ConocoPhillips, which was considered paltry. So the two American firms took PDVSA to international arbitration, seeking what they considered ‘just value’ for their erstwhile assets. In 2012, ExxonMobil was awarded some US$260 million in two arbitration awards. The dispute with ConocoPhillips took far longer.
In April 2018, the International Chamber of Commerce ruled in favour of ConocoPhillips, granting US$2.1 billion in recovery payments. Hemming and hawing on PDVSA’s part forced ConocoPhillips’ hand, and it began to seize control of terminals and cargo ships in the Caribbean operated by PDVSA or its American subsidiary Citgo. A tense standoff – where PDVSA’s carriers were ordered to return to national waters immediately – was resolved when PDVSA reached a payment agreement in August. As part of the deal, ConocoPhillips agreed to suspend any future disputes over the matter with PDVSA.
The key word being ‘future’. ConocoPhillips has an existing contractual arbitration – also at the ICC – relating to the separate Corocoro project. That decision is also expected to go towards the American firm. But more troubling is that a third dispute has just been settled by the International Centre for Settlement of Investment Disputes tribunal in favour of ConocoPhillips. This action was brought against the government of Venezuela for initiating the nationalisation process, and the ‘unlawful expropriation’ would require a US$8.7 billion payment. Though the action was brought against the government, its coffers are almost entirely stocked by sales of PDVSA crude, essentially placing further burden on an already beleaguered company. A similar action brought about by ExxonMobil resulted in a US$1.4 billion payout; however, that was overturned at the World Bank in 2017.
But it might not end there. The danger (at least on PDVSA’s part) is that these decisions will open up floodgates for any creditors seeking damages against Venezuela. And there are quite a few, including several smaller oil firms and players such as gold miner Crystallex, who is owed US$1.2 billion after the gold industry was nationalised in 2011. If the situation snowballs, there is a very tempting target for creditors to seize – Citgo, PDVSA’s crown jewel that operates downstream in the USA, which remains profitable. And that would be an even bigger disaster for PDVSA, even by current standards.
Infographic: Venezuela oil nationalisation dispute timeline