Easwaran Kanason

Co - founder of NrgEdge
Last Updated: September 19, 2016
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Business Trends
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Last week in the world oil

Oil prices started the week on a stronger note, as Venezuela dropped a hint that OPEC and non-OPEC producers were close to a deal that would reduce crude oil output across both producer blocks. The ‘informal’ talks in Algiers, which begin September 26, may lead to a formal meeting for official decision making if the consensus can be reached.

With the Niger Delta Avengers’ saboteur acts receding, ExxonMobil is preparing to re-start its exports of Qua Iboe crude from Nigeria. A temporary pipeline has been prepared, which could load Qua Iboe cargo as early as late September, while repairs on the main pipe continue. 

The US oil rig count rose by two last week to 416 operating sites, the tenth increase in eleven weeks as producers maintain a sense of optimism that prices will recover, betting that OPEC will be able to reach some form of agreement with non-OPEC producers, mainly Russia, over a supply freeze. In particularly, two of the restarts last week were offshore, signaling longer-term optimism over production.

Shell is exiting the Danish downstream market, selling its 70 kb/d Fredericia refinery and associated infrastructure to Denmark’s Dansk Olieselskab for US$ 80 million. The Anglo-Dutch supermajor will be retaining its upstream interests in the Scandinavian country, diverting its attention towards gas-rich Australia and shale opportunities in the US worldwide while exiting as many as ten countries over the next year. 

Shell has officially started up its new aromatics unit at its Pernis refinery in Rotterdam, the Netherland. The unit is a heart cut splitter that will produce feedstock, primarily benzene, which will be sent to Shell’s Moerdiik Chemical Plant, a major petrochemicals unit 35km away. Pernis is a 404 kb/d site, Shell’s largest in Europe, and part of its strategy to move away from pure downstream to integrated refining/chemicals production globally. 

Canada’s BlackPearl resources has received approval to go ahead with its 80 b/d Blackrod oil sands thermal project, a rare glimmer of positivity in Alberta’s oil sands industry, battered terribly by low oil prices. The power generation projects is aimed at utilising oil sands within Alberta, now that shipping it south to the US is no longer feasible, but BlackPearl itself cautions that it will only move ahead with the project with a partner and if oil prices return to US$60/b levels and higher. 

Statoil will begin supplying the three Baltic nations with natural gas through Lithuania’s Klaipeda LNG terminal, a floating storage terminal that started up in 2014 to reduce dependence of Russian gas. Statoil is currently the only supplier to the terminal, and eventually hopes to supply LNG to Estonia and Latvia as well. 

UK-based Andalas Energy and Power is tying up with Indonesia’s Pertamaina to focus on monetising marginal gas fields across the archipelago. Andalas has experience in this strategy, something that would be a welcome boon to Pertamina, which is struggling to meet official targets for oil and gas production. The partnership will focus on five stranded gas fields in Riau, Jambi and South Sumatrra that are suitable for sub-100MW gas-to-power independent power projects (IPP). 

Malaysia’s Petronas has agreed with partner with Azerbaijan’s SOCAR to develop the offshore Goshadash hydrocarbon block in the Caspian Sea. The deal deepens Petronas’ presence in Central Asia, where it has substantial assets obtained as part of its strategy to diversify beyond Malaysia, focusing particularly on the former Soviet republics of Central Asia. Petronas already has a presence in Azerbaijan, owning a 15.5% interest in the Shah Deniz gas field that was purchased from Statoil in 2014. 

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. 

After Zhejiang Rongsheng announced plans to add 400 kb/d more petrochemical capacity by 2020, Sinochem) announced it would add an ethylene complex to its Quanzhou oil refinery, underscoring an improvement in sentiment for Chinese petrochemicals producers.

BP’s decision to sell its stake in its Chinese petrochemicals joint venture SECCO has triggered a race between South Korea’s SK Chemicals, Austria’s Borealis and Switzerland’s Ineos to purchase the departing British company’s stake. The deal could fetch up to US$2 billion, and would partner the winning bidder with Sinopec, who has right of first refusal over BP’s equity. 

India is in talks with Russia to build an ‘energy bridge’ between the two countries. This will involve pipelines linking Russia to the energy-deficient India that will have to cross through politically-sensitive territory: either the western regions of China or through Kashmir, which would draw the irritation of Pakistan.

Have a productive week ahead!
 

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High Oil Prices and Indonesia’s Ban on Oil Palm Exports

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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Market Outlook:

  • Crude price trading range: Brent – US$110-1113/b, WTI – US$105-110/b
  • As the war in Ukraine becomes increasingly entrenched, the pressure on global crude prices as Russian energy exports remain curtailed; OPEC+ is offering little hope to consumers of displaced Russian crude, with no indication that it is ready to drastically increase supply beyond its current gentle approach
  • In the US, the so-called NOPEC bill is moving ahead, paving the way for the US to sue the OPEC+ group under antitrust rules for market manipulation, setting up a tense next few months as international geopolitics and trade relations are re-evaluated

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