Easwaran Kanason

Co - founder of NrgEdge
Last Updated: September 13, 2016
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Business Trends
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Last week in the world oil

Oil prices fell on Friday but finished higher for the week as traders hoped for some form of agreement between OPEC and Russia on supply curbs to tackling the long-standing glut. Prices briefly topped US$50 as US crude inventories fell by 14.5 million barrels, but the plunge was a one-off due to Hurricane Hermine ploughing through the Gulf of Mexico, retreating back to the US$48/b level.
 
After a spat of asset sales, including fields in Argentina, oil and natural gas output at Brazil’s Petrobras fell by 1.42% in August m-o-m. This will continue as Petrobras continues its asset sales, with include its 67% stake in Petrobras Argentina to Argentina’s Pampa Energia in May and its gas pipeline network to Canada’s Brookfield Asset Management last week. 

The operating rig count in the US increased by 11 last week, but the gains are masked by the rigs that were temporarily shut by Hurricane Hermine coming back online. The number of rigs reached 508, the highest in seven months, as some onshore sites restarted on positive price signals. 

Despite its impending divorce, Saudi Aramco is aiming to buy the LyondellBasell Houston refinery through its Motiva joint-venture with Shell. The LyondellBasell site is primarily a petrochemicals-focused operation, generate feed for petchems that would fit in synergistically with Motiva’s operations. 

Total has shut down some units at its 247 kb/d Gonfreville refinery following a technical incident as a precautionary measure. The outage is expected to be resolved within a week. 

Poland’s Lotos Group is aiming to ink a long-term oil deal with Iran to reduce its dependence on Russia. Lotos took first develiery of Iranian crude in August and aims to establish a longer-term deal, after its rival PKN Orlen signed a similar deal with Saudi Aramco. 

Yemen’s 150 kb/d Aden refinery has restarted after being shut for more than a year as the civil conflict in the country worsened. With a lull in the hostilities, officials at the refinery has indicated the site has restarted and operating at 40% capacity. This follows a resumption of production and exports from the Masila fields in August, after being shut for 16 months. 

Qatar Petroleum is reportedly interest in buying Eni’s stake in its giant Mozambique gas acreage, which would bring it in co-operation with ExxonMobil. The US supermajor has already bought into the country’s planned export plant, and is now in talks with Eni to acquire stakes in the offshore gas fields that Qatar Petroleum is also interested in. 

Korea’s Kogas has signed a memorandum of understanding (MoU) with the Brazilian state of Ceara to develop a LNG import terminal. The plan will involve converting an existing Floating Storage Re-gasification unit (FSRU) at the port of Pecem into an onshore LNG import terminal that is part of Korea’s attempt to share its LNG import expertise with countries seeking to import LNG. 
India’s Petroleum Minister expects demand for crude oil to rise by more than 11% this year, attributing the growth to ‘better monsoon rains and growth in economic activity’. This would make India the fastest growing crude oil importer in the world, eclipsing China. This would entail greater dependence on imports, a development that India is trying to counter by offering enticing terms to foreign investors to invest in the country’s newly-discovered small oil fields in a roadshow in London. 

Sri Lanka will be introducing a new Petroleum Resources Act soon, likely ahead of the country’s third offshore licensing round due early 2017. The Act will set out the structure and policy of national energy resource, aimed at generating investor interest in the offshore blocks on offer. 

Chinese teapot refineries have reportedly received their crude import quotas for 2017, amounting to 1.5 mb/d across 19 teapots. Chinese independent refineries were first allowed to import crude this year, partially responsible for a spurt of import growth, and the development indicates that the government is not planning to reverse this policy.

After IndianOil and BPCL outlined their investment plans for the next decade, HPCL has followed suit. India’s third largest refinery is planning to expand its refining capacity to 1.2 mb/d by 2030 to bridge the gap between its refining and sales volumes, as well as meet India’s growing demand. HPCL current only refines half of the oil products it sells. 

China’s Zhejiang Rongsheng is planning to double its petrochemicals-focused refining project to 800 kb/d in 2020, with the first phase scheduled to start in 2018. The move might be a sign that Chinese petrochemicals producers are newly optimistic about the health of petrochemicals, manufacturing and trade in China, which has been slowing down recently. 

Tokyo Gas has received it first LNG shipment from Chevron’s Gorgon facility in Australia, the first of an annual 1.1 million tons of LNG headed to Japan’s largest city gas supplier over 25 years. Much of the supply from Gorgon, which cost US$54 billion, is earmarked for Japan, with Chubu Electric having already received its first Gorgon cargo in April. 

Australia Pacific LNG has signed a 20-year Gas Transportation Agreement with the APA Group that will see the two collaborate on a pipeline from Australia Pacific LNG’s network to connect to the Wallumbilla Gas Supply Hub in Queensland. The 50km bi-directional pipeline will start from the Reedy Creek site, aimed at direct access to market. 

Have a productive week ahead!

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OPEC And The Current State of Oil Fundamentals

It was shaping up to yet another dull OPEC+ meeting. Cut and dry. Copy and paste. Rubber-stamping yet another monthly increase in production quotas by 432,000 b/d. Month after month of resisting pressure from the largest economies in the world to accelerate supply easing had inured markets to expectations of swift action by OPEC and its wider brethren in OPEC+.

And then, just two days before the meeting, chatter began that suggested something big was brewing. Whispers that Russia could be suspended made the rounds, an about-face for a group that has steadfastly avoided reference to the war in Ukraine, calling it a matter of politics not markets. If Russia was indeed removed from the production quotas, that would allow other OPEC+ producers to fill in the gap in volumes constrained internationally due to sanctions.

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The increase will be divided proportionally across OPEC+, as has been since the landmark supply deal in spring 2020. Crucially this includes Russia, where the new quota will be a paper one, since Western sanctions means that any additional Russian crude is unlikely to make it to the market. And that too goes for other members that haven’t even met their previous lower quotas, including Iraq, Angola and Nigeria. The oil ministers know this and the market knows this. Which is why the surprise announcement didn’t budge crude prices by very much at all.

In fact, there are only two countries within OPEC+ that have enough spare capacity to be ramped up quickly. The United Arab Emirates, which was responsible for recent turmoil within the group by arguing for higher quotas should be happy. But it will be a measure of backtracking for the only other country in that position, Saudi Arabia. After publicly stating that it had ‘done all it can for the oil market’ and blaming a lack of refining capacity for high fuel prices, the Kingdom’s change of heart seems to be linked to some external pressure. But it could seemingly resist no more. But that spotlight on the UAE and Saudi Arabia will allow both to wrench some market share, as both countries have been long preparing to increase their production. Abu Dhabi recently made three sizable onshore oil discoveries at Bu Hasa, Onshore Block 3 and the Al Dhafra Petroleum Concession, that adds some 650 million barrels to its reserves, which would help lift the ceiling for oil production from 4 to 5 mmb/d by 2030. Meanwhile, Saudi Aramco is expected to contract over 30 offshore rigs in 2022 alone, targeting the Marjan and Zuluf fields to increase production from 12 to 13 mmb/d by 2027.

The UAE wants to ramp up, certainly. But does Saudi Arabia too? As the dominant power of OPEC, what Saudi Arabia wants it usually gets. The signals all along were that the Kingdom wanted to remain prudent. It is not that it cannot, there is about a million barrels per day of extra production capacity that Saudi Arabia can open up immediately but that it does not want to. Bringing those extra volume on means that spare capacity drops down to critical levels, eliminating options if extra crises emerge. One is already starting up again in Libya, where internal political discord for years has led to an on-off, stop-start rhythm in Libyan crude. If Saudi Arabia uses up all its spare capacity, oil prices could jump even higher if new emergencies emerge with no avenue to tackle them. That the Saudis have given in (slightly) must mean that political pressure is heating up. That the announcement was made at the OPEC+ meeting and not a summit between US and Saudi leaders must mean that a façade of independence must be maintained around the crucial decisions to raise supply quotas.

But that increase is not going to be enough, especially with Russia’s absence. Markets largely shrugged off the announcement, keeping Brent crude at US$120/b levels. Consumption is booming, as the world rushes to enjoy its first summer with a high degree of freedom since Covid-19 hit. Which is why global leaders are looking at other ways to tackle high energy prices and mitigate soaring inflation. In Germany, low-priced monthly public transport are intended to wean drivers off cars. In the UK, a windfall tax on energy companies should yield US$6 billion to be used for insulating consumers. And in the US, Joe Biden has been busy.

With the Permian Basin focusing on fiscal prudence instead of wanton drilling, US shale output has not responded to lucrative oil prices that way it used to. American rig counts are only inching up, with some shale basins even losing rigs. So the White House is trying more creative ways. Though the suggestion of an ‘oil consumer cartel’ as an analogue to OPEC by Italian Prime Minister Mario Draghi is likely dead on arrival, the US is looking to unlock supply and tame fuel prices through other ways. Regular releases from the US Strategic Petroleum Reserve has so far done little to bring prices down, but easing sanctions on Venezuelan crude that could be exported to the US and Europe, as well as working with the refining industry to restart recently idled refineries could. Inflation levels above 8% and gasoline prices at all-time highs could lead to a bloody outcome in this year’s midterm elections, and Joe Biden knows that.

But oil (and natural gas) supply/demand dynamics cannot truly start returning to normal as long as the war in Ukraine rages on. And the far-ranging sanctions impacting Russian energy exports will take even longer to be lifted depending on how the war goes. Yes, some Russian crude is making it to the market. China, for example, has been quietly refilling its petroleum reserves with Russian crude (at a discount, of course). India continues to buy from Moscow, as are smaller nations like Sri Lanka where an economic crisis limits options. Selling the crude is one thing, transporting it is another. With most international insurers blacklisting Russian shippers, Russian oil producers can still turn to local insurance and tankers from the once-derided state tanker firm Sovcomflot PJSC to deliver crude to the few customers they still have.

A 50% hike in OPEC’s monthly supply easing targets might seem like a lot. But it isn’t enough. Especially since actual production will fall short of that quota. The entire OPEC system, and the illusion of control it provides has broken down. Russian oil is still trickling out to global buyers but even if it returned in full, there is still not enough refining capacity to absorb those volumes. Doctors speak of long Covid symptoms in patients, and the world energy complex is experiencing long Covid, now with a touch with geopolitical germs as well. It’ll take a long time to recover, so brace yourselves.

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June, 12 2022