LONDON (Reuters) - Energy giants such as Royal Dutch Shell and Total are looking to build terminals and power plants in new markets to soak up the industry's rapidly burgeoning supply.
Companies have invested billions in plants to produce liquefied natural gas (LNG) in places such as Australia and the United States.
But gas demand growth is slowing, prices are down and the LNG volumes companies are set to produce will exceed those even major buyers such as China and Japan can absorb.
That has turned attention to the downstream market and opportunities to create new markets from Ivory Coast to remote Indonesian islands by building gas-fired power plants, pipelines, regasification and storage terminals.
"We are ready to go downstream as much as it takes to unlock gas demand," said Laurent Vivier, president for the gas division at Total. "We need to be present in downstream ourselves, to create demand and unlock bottlenecks along the chain including regasification, pipelines and power plants." Total aims to triple the number of its gas and power markets and raise its annual LNG output to 20 million tonnes and its trading to 15 million tonnes by 2020.
The company is taking part in LNG infrastructure tenders, including several gas-fired power plants, in countries including Indonesia, Chile, Ivory Coast, Ghana and Morocco, Vivier said.
Shell believes the number of markets buying LNG could double, according to its chief financial officer, Simon Henry.
"From around 20 to 30 ...we can see potential for
around 50 different markets if you look out to 2030," Henry said.
"Our aim is to capture the best share of those who are looking now to
start or grow." The focus on
downstream mimics a model that companies such as Shell, Total, Exxon Mobil
But some analysts question how easily that model can be reproduced.
"Whether they succeed in this is another story, whether they have the mindset for this type of work is also another story," said Thierry Bros, senior gas analyst at French bank Societe Generale.
"It will be a painful test for these companies who are not that experienced in building small downstream demand," he said.
New technologies are helping speed development, with floating terminals, for example, offering a cheaper alternative to onshore units that cost more than $1 billion.
"We are looking at multiple markets around the world in terms of potential to regas," said Shell's Henry. "Quite a lot of it is floating regasification because it is quick and you can develop (a market) in stages."
Shell, the world's top LNG trader after buying BG Group, expects to produce around 30 million tonnes of LNG this year and trade nearly 50 million tonnes, accounting for about a sixth of global trading volume.
Global output capacity is expected to rise by half by 2020, potentially adding some 150 million tonnes of LNG to the market.
However, overall gas demand growth is expected to slow to 1.5 percent a year to 2021 from the 2.5 percent rate seen recently, the International Energy Agency has forecast.
In step with oil and gas, LNG prices have also struggled in the last two years. That has prompted traders to offer more single cargoes for immediate delivery on the spot market, making it easier for smaller buyers to find supply.
By Ron Bousso and Oleg Vukmanovic
(Editing by Jason Neely)
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Supply chains are currently in crisis. They have been for a long time now, ever since the start of the Covid-19 pandemic reshaped the way the world works. Stressed shipping networks and operational blockages – coupled with China’s insistence on a Covid-zero policy – means that cargo tanker rates are at an all-time high and that there just aren’t enough of them. McDonalds and KFCs in Asia are running out of French fries to sell, not because there aren’t enough potatoes in Idaho, but because there aren’t enough ships to deliver them to Japan or to Singapore from Los Angeles. The war in Ukraine has placed a particular emphasis on food supply chains by disrupting global wheat and sunflower oil supply chains and kicking off distressingly high levels of food price inflation across North Africa, the Middle East and Asia. It was against this backdrop that Indonesia announced a complete ban on palm oil exports. That nuclear option shocked the markets, set off a potential new supply chain crisis and has particular implications on future of crude oil pricing and biofuels in Asia.
A brief recap. Like most of Asia, Indonesia has been grappling with food price inflation as consequence of Covid-19. Like most of Asia, Indonesia has been attempting to control this through a combination of shielding its most vulnerable citizens through continued subsidies while attempting to optimise supply chains. Like most of Asia, Indonesia hasn’t been to control the market at all, because uncoordinated attempts across a wide spectrum of countries to achieve a similar level of individual protectionism is self-defeating.
Cooking oil is a major product of sensitive importance in Indonesia, and one that it is self-sufficient in as a result of its status as the world’s largest palm oil producer. So large is Indonesia in that regard that its excess palm oil production has been directed to increasingly higher biodiesel mandates, with a B40 mandate – diesel containing 40% of palm material – originally schedule for full implementation this year. But as palm oil prices started rising to all-time highs at the beginning of January, cooking oil started becoming scarcer in Indonesia. The government blamed hoarding and – wary of the Ramadan period and domestic unrest – implemented a Domestic Market Obligation on palm oil refineries, directing them to devote 20% of projected exports for domestic use. Increasingly stricter terms for the DMO continued over February and March, only for an abrupt U-turn in mid-March that removed the DMO completely. But as the war in Ukraine drove prices even further, Indonesia shocked the market by announcing an total ban on palm oil exports in late April. Chaotically, the ban was first clarified to be palm olein only (straight refining cooking oil), but then flip-flopped into a total ban of crude palm oil as well. Markets went haywire, prices jumped to historical highs and Indonesia’s trading partners reacted with alarm.
Joko Widodo has said that the ban will be indefinite until domestic cooking oil prices ‘moderate’. With the global situation as it is, ‘moderate’ is unlikely to be achieved until the end of 2022 at least, if ‘moderate’ is taken to be the previous level of palm oil prices – roughly half of current pricing. Logistically, Indonesia cannot hold out on the ban for more than two months. Only a third of Indonesia’s monthly palm oil production is consumed domestically; the rest is exported. An indefinite ban means that not only fill storage tanks up beyond capacity and estates forced to let fruit rot, but Indonesia will be missing out on crucial revenue from its crude palm oil export tax. Which is used to fund its biodiesel subsidies.
And that’s where the implications on oil come in. Indonesia’s ham-fisted attempt at protectionism has dire implications on biofuels policies in Asia. Palm oil prices within Indonesia might sink as long as surplus volumes can’t make it beyond the borders, but international palm oil prices will remain high as consuming countries pivot to producers like Malaysia, Thailand, Papua New Guinea, West Africa and Latin America. That in turn, threatens the biodiesel mandates in Thailand and Malaysia. The Thai government has already expressed concern over palm-led food price inflation and associated pressure on its (subsidised) biodiesel programme, launching efforts to mitigate the worst effects. Malaysia – which has a more direct approach to subsidised fuels – is also feeling the pinch. Thailand’s move to B10 and Malaysia’s move to B20 is now in jeopardy; in fact, Thailand has regressed its national mandate from B7 to B5. And the reason is that the differential between the bio- and the diesel portion of the biodiesel is now so disparate that subsidy regimes break down. It would be far cheaper – for the government, the tax-payers and consumers – to use straight diesel instead of biodiesel, as evidenced by Thailand’s reversal in mandates.
That, in turn, has implications on crude pricing. While OPEC+ is stubbornly sticking to its gentle approach to managing global crude supply, the stunning rebound in Asian demand has already kept the consumption side tight to match that supply. Crude prices above US$100/b are a recipe for demand destruction, and Asian economies have been preparing for this by looking at alternatives; biofuels for example. In the past four years, Indonesia has converted some of its oil refineries into biodiesel plants; in China, stricter crude import quotas are paving the way for China to clamp down on its status of a fuels exporter in favour of self-sustainability. But what happens when crude prices are high, but the prices of alternatives are higher? That is the case for palm oil now, where the gasoil-palm spread is now triple the previous average.
Part of this situation is due to market dynamics. Part of it is due to geopolitical effects. But part of it is also due to Indonesia’s knee-jerk reaction. Supply disruption at the level of a blanket ban is always seismic and kicks off a chain of unintended consequences; see the OPEC oil shocks of the 70s. Indonesia’s palm oil export ban is almost at that level. ‘Indefinite’ is a vague term and offers no consolation to markets looking for direction. Damage will be done, even if the ban lasts a month. But the longer it lasts – Indonesian general elections are due in February 2024 – the more serious the consequences could be. And the more the oil and refining industry in Asia will have to think about their preconceived notions of the future of oil in the region.
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