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Last Updated: July 25, 2016
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Oil Prices

Crude oil continues to trade in the US$45/b range, as a strong dollar and high stockpiles weighed on the market, while there was a sense of pessimism permeating out of the G20 meeting in Chengdu on Sunday over the health of the global economy.

 

Last week in Asian oil:

Upstream & Midstream

-          Saudi Arabian exports to China are on the increase, out-supplying Russia in June. Since 2008, Russia has been the main supplier of crude to China, but Saudi Arabia has closed the gap significantly this year. Iran, too, is aiming to increase its crude shipments to the Middle Kingdom, focusing on supplying independent teapot refineries together with trader Trafigura.

-          Iran continues to come out of the cold, now re-forging ties with Sri Lanka. Sri Lanka, which traditionally depended entirely on Iranian crude for its sole refinery, had stopped ties due to the US-led sanctions, but has now reached out to Iran to sign its first oil sale contract since 2011.

-          Singapore’s Keppel Corp sees little improvement in global oil demand as the worldwide glut continues to weigh on the market. Keppel is the world’s largest builder of oil rigs, and is mulling significant further cuts in its workforce as fewer newer contracts for rigs come in, if at all. Keppel has already shrunk its workforce by some 11,000 since 2015.

-          Emerging from its civil war, Libya’s hopes to normalise its crude export volumes took another blow last week as the Libya National Oil Corporation objected to a government deal with the Petroleum Facilities Guard to re-open key ports for exports after the latter blockaded facilities at Ras Lanuf, Es Sider and Zueitina. NOC had originally declared force majeure due to the blockade, but is dissatisfied with the terms given to the Guard and vows to continue the force majeure.

Downstream

-          Indonesia has (suddenly) switched to Platts Dated Brent as the basis for its Indonesian Crude Price (IPC) calculation effective July. Previously calculated as 50% Platts and 50% spot assessment of various Indonesian crudes, the switch to 100% Dated Brent echoes Petronas’ similar decision in 2011, but the swift switchover has ruffled feathers in the trading community, left exposed by the sudden change.

-          Saudi Arabia reports that its planned 400 kb/d Jizan refinery is expected to come online 2018, while ironing out kinks on its clean fuels project at Ras Tanura, which will increase the amount of oil products coming out of the Kingdom, destined for Asia and Europe.

Natural Gas

-          Chevron has signed an agreement with China’s JOVO Group through its Singapore subsidiary Carbon Hydrogen Energy Pte Ltd to supply LNG from its global portfolio. The deal involves 500,000 metric tons of LNG per year over five years, with the first cargo scheduled for 2018.

Corporate

-          India is reviving a plan to merge most, or all of the country’s state oil companies, to create a giant integrated corporation in hopes of generating efficiency through consolidated operations and distributions. The plan was first mooted in 2005, but rejected as ‘unworkable; the new plan would bring together entities like ONGC, IndianOil, HPCL and BPCL together with federal bodies like the Oil Industry Development Board.

-          ExxonMobil has won the bidding war for InterOil after Oil Search pulled out of the competition last week. The US giant will now pay US$2.5 billion for InterOil and its vast gas reserves in Papua New Guinea, with the long-term ambition of turning PNG into a vast LNG exporter. The deal is expected to be finalised in September, pending regulatory review.


Other International Updates

Upstream & Midstream

-          The US rig count has risen for the fourth consecutive week, adding 15 rigs to a total of 462. Fourteen oil rigs were added to the total – all onshore – placing downward pressure on prices as the development means US output will stem its decline, and possibly begin to rise again.

-          A pipeline spill on Husky Energy’s Saskatchewan Gathering System in western Canada has spilled some 1,500 barrels of heavy oil, with Husky rushing to contain and clean the spill before it moves further down the North Saskatchewan River.

Downstream

-          BP is continuing its retreat from downstream operations, planning to sell off much of its UK fuel terminal assets, as well as its stake in the onshore United Kingdom Oil Pipeline. The shake-up in the British entity’s UK operations leaves its portfolio further skewed towards upstream, which it views as more profitable and strategic.

Natural Gas

-          The first US LNG cargo crosses through the Panama Canal this week, slashing the journey time from the US Gulf of Mexico to the LNG-hungry demand centres of Asia. Expect more cargos to follow suit, as US Gulf producers join Canada’s LNG exporters in BC and Australia is competing for Asian contracts.

 

 

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The New Wave of Renewable Fuels

In 2021, the makeup of renewables has also changed drastically. Technologies such as solar and wind are no longer novel, as is the idea of blending vegetable oils into road fuels or switching to electric-based vehicles. Such ideas are now entrenched and are not considered enough to shift the world into a carbon neutral future. The new wave of renewables focus on converting by-products from other carbon-intensive industries into usable fuels. Research into such technologies has been pioneered in universities and start-ups over the past two decades, but the impetus of global climate goals is now seeing an incredible amount of money being poured into them as oil & gas giants seek to rebalance their portfolios away from pure hydrocarbons with a goal of balancing their total carbon emissions in aggregate to zero.

Traditionally, the European players have led this drive. Which is unsurprising, since the EU has been the most driven in this acceleration. But even the US giants are following suit. In the past year, Chevron has poured an incredible amount of cash and effort in pioneering renewables. Its motives might be less than altruistic, shareholders across America have been particularly vocal about driving this transformation but the net results will be positive for all.

Chevron’s recent efforts have focused on biomethane, through a partnership with global waste solutions company Brightmark. The joint venture Brightmark RNG Holdings operations focused on convert cow manure to renewable natural gas, which are then converted into fuel for long-haul trucks, the very kind that criss-cross the vast highways of the US delivering goods from coast to coast. Launched in October 2020, the joint venture was extended and expanded in August, now encompassing 38 biomethane plants in seven US states, with first production set to begin later in 2021. The targeting of livestock waste is particularly crucial: methane emissions from farms is the second-largest contributor to climate change emissions globally. The technology to capture methane from manure (as well as landfills and other waste sites) has existed for years, but has only recently been commercialised to convert methane emissions from decomposition to useful products.

This is an arena that another supermajor – BP – has also made a recent significant investment in. BP signed a 15-year agreement with CleanBay Renewables to purchase the latter’s renewable natural gas (RNG) to be mixed and sold into select US state markets. Beginning with California, which has one of the strictest fuel standards in the US and provides incentives under the Low Carbon Fuel Standard to reduce carbon intensity – CleanBay’s RNG is derived not from cows, but from poultry. Chicken manure, feathers and bedding are all converted into RNG using anaerobic digesters, providing a carbon intensity that is said to be 95% less than the lifecycle greenhouse gas emissions of pure fossil fuels and non-conversion of poultry waste matter. BP also has an agreement with Gevo Inc in Iowa to purchase RNG produced from cow manure, also for sale in California.

But road fuels aren’t the only avenue for large-scale embracing of renewables. It could take to the air, literally. After all, the global commercial airline fleet currently stands at over 25,000 aircraft and is expected to grow to over 35,000 by 2030. All those planes will burn a lot of fuel. With the airline industry embracing the idea of AAF (or Alternative Aviation Fuels), developments into renewable jet fuels have been striking, from traditional bio-sources such as palm or soybean oil to advanced organic matter conversion from agricultural waste and manure. Chevron, again, has signed a landmark deal to advance the commercialisation. Together with Delta Airlines and Google, Chevron will be producing a batch of sustainable aviation fuel at its El Segundo refinery in California. Delta will then use the fuel, with Google providing a cloud-based framework to analyse the data. That data will then allow for a transparent analysis into carbon emissions from the use of sustainable aviation fuel, as benchmark for others to follow. The analysis should be able to confirm whether or not the International Air Transport Association (IATA)’s estimates that renewable jet fuel can reduce lifecycle carbon intensity by up to 80%. And to strengthen the measure, Delta has pledged to replace 10% of its jet fuel with sustainable aviation fuel by 2030.

In a parallel, but no less pioneering lane, France’s TotalEnergies has announced that it is developing a 100% renewable fuel for use in motorsports, using bioethanol sourced from residues produced by the French wine industry (among others) at its Feyzin refinery in Lyon. This, it believes, will reduce the racing sports’ carbon emissions by an immediate 65%. The fuel, named Excellium Racing 100, is set to debut at the next season of the FIA World Endurance Championship, which includes the iconic 24 Hours of Le Mans 2022 race.

But Chevron isn’t done yet. It is also falling back on the long-standing use of vegetable oils blended into US transport fuels by signing a wide-ranging agreement with commodity giant Bunge. Called a ‘farmer-to-fuelling station’ solution, Bunge’s soybean processing facilities in Louisiana and Illinois will be the source of meal and oil that will be converted by Chevron into diesel and jet fuel. With an investment of US$600 million, Chevron will assist Bunge in doubling the combined capacity of both plants by 2024, in line with anticipated increases in the US biofuels blending mandates.

Even ExxonMobil, one of the most reticent of the supermajors to embrace renewables wholesale, is getting in on the action. Its Imperial Oil subsidiary in Canada has announced plans to commercialise renewable diesel at a new facility near Edmonton using plant-based feedstock and hydrogen. The venture does only target the Canadian market – where political will to drive renewable adoption is far higher than in the US – but similar moves have already been adopted by other refiners for the US market, including major investments by Phillips 66 and Valero.

Ultimately, these recent moves are driven out of necessity. This is the way the industry is moving and anyone stubborn enough to ignore it will be left behind. Combined with other major investments driven by European supermajors over the past five years, this wider and wider adoption of renewable can only be better for the planet and, eventually, individual bottom lines. The renewables ball is rolling fast and is only gaining momentum.

End of Article

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Market Outlook:

  • Crude price trading range: Brent – US$71-73/b, WTI – US$68-70/b
  • Global crude benchmarks have stayed steady, even as OPEC+ sticks to its plans to ease supply quotas against the uncertainty of rising Covid-19 cases worldwide
  • However, the success of vaccination drives has kindled hope that the effect of lockdowns – if any – will be mild, with pockets of demand resurgence in Europe; in China, where there has been a zero-tolerance drive to stamp out Covid outbreaks, fuel consumption is strengthening again, possibly tightening fuel balances in Q4
  • Meanwhile, much of the US Gulf of Mexico crude production remains hampered by the effects of Hurricane Ida, providing a counter-balance on the supply side

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