Easwaran Kanason

Co - founder of NrgEdge
Last Updated: September 26, 2016
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Business Trends
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Last week in the world oil

Oil Prices. Tensions between Iran and Saudi Arabia threatening to scupper any deal tabled at the OPEC meeting in Algiers caused crude prices to weaken last week, though a comment from Algeria’s energy minister that ‘all options were are open’ for an output cut or freeze lifted prices slightly today. 

ExxonMobil is reportedly selling some of its Norwegian North Sea oil fields in a deal worth more than US$1 billion. The supermajor currently operates the Ringhorne, Balder, Sigyn and Jotun fields in the North Sea, producing some 64 kb/d, but with the fields maturing, it may be on the look out for greener pastures, as Norway falls down the priority list. 

With US crude oil inventories falling sharply last week, a signal that might push up prices to trigger more supply, more US oil rigs are coming back into production. Two more rigs started up again, bringing the total operating count to 418 oil rigs, with an additional 92 gas rigs operational. 

The government of Curacao has reportedly signed an agreement with China’s Guangdong Zhenrong Energy allowing the latter to operate and upgrade the island’s aging Isla refinery. Opened in 1918 and operated by Venezuela’s PDVSA for decades under a lease agreement as a strategic site to store and ship crude to Asia on VLCCs, the deal appears to phase out PDVSA’s involvement after the Curacao Prime Minister stated that ‘all efforts to reach a new contract with Venezuela did not yield positive results.’ PDVSA has hit back with a statement that its refinery lease was not yet up for negotiation, though the company does not have the pockets to invest the US$1.5 billion required to modernise the 335 kb/d facility. 

France’s Technip has been awarded the contract to increase ENOC’s Jebel Ali refinery capacity by 50%. The project is budgeted at US$1 billion, and will increase the UAE site’s refining capacity to 210 kb/d from 140 kb/d when completed in late 2019. 

Petrobras is planning to exit the biofuels sector as part of a sweeping suite of asset sales aimed at paring down the company’s swelling debt, which would allow it to focus on investing in its core business of oil and gas. Petrobras has a significant biofuels portfolio, including three biodiesel plants  and stakes in several mills, all in Brazil. 

Upstream giant ConocoPhillip’s Alaskan unit has entered into an agreement with the Alaskan state government to form a venture to market Alaskan LNG to global markets. Given the geography of the state, the venture would be focusing on shipping LNG to East Asia, focusing on North Slope gas suppliers in co-operations with other producers. 

In a sign that the oil majors is expecting oil prices to remain in prolonged weakness, France’s Total is cutting back its expenditure by US$2 billion, now aiming to spend only US$15-17 billion from 2017 to 2020. The firm is also targeting cost savings of US$2-4 billion by 2018, most of which will come from upstream. 

India’s BPCL is changing the way it approaches upstream investment, moving away from focusing on new sites to buying more stakes in existing, producing assets. Having just spent US$1.5 billion in overseas exploration assets, the Indian major is now looking at buying into operating oilfields in Russia to speed up investment returns. BPCL was the first Indian state refiner to venture into upstream, buying stakes in Brazilian and Mozambique oil and gas blocks in 2007 and 2008, but returns have been slow and the company has now earmarked US$2-3 billion to speed up the buildup of its upstream portfolio.
 
Indonesia will eliminate taxes on oil and gas exploration immediately in an effort to stimulate investment in the country’s waning upstream industry. Once a production powerhouse with some of the largest oil and gas fields in the world – Duri, Minas, Natuna – enthusiasm for upstream has been flagging in Indonesia over a combination of few significant discoveries and a fiscal/policy framework unfriendly to foreign investors. State oil company Pertamina cannot bear the burden of increasing oil and gas output alone, though it is bravely trying to, so the government must now improve the investment environment to attract foreign companies. 

A new giant refinery in China may be taking shape. Rongsheng Petrochemical Co. has cleared more than 10,000 acres of land in Zhoushan island in Zhejiang to build a 400 kb/d refinery that is budgeted at US$24 billion. Ambitiously slated for completion by 2018, with capacity doubling in 2020, the project is aimed at plastics rather than petrol, maximising the naphtha yield to produce petrochemicals over oil products. The project is one of several petrochemical-focused ones announced in recent weeks, signalling a renewed confidence in the manufacturing industry in China that will consume growing amounts of petrochemicals like paraxylene and ethylene. 

Better late than never as India is starting to fill up its strategic crude storage in Mangalore. Most large crude-consuming countries in the world have a strategic storage capacity of at least 50 days, with China aiming for 90 days, but India has a mere 10 days. Only the Vizag storage site is currently operational, with 1.33 million tons of capacity, though Mangalore (1.5 million tons) and Padur (2.5 million tons) are on the horizon. India has begun talks with Iran, Saudi Arabia and the UAE to secure supplies for Mangalore, with Vizag being filled with Basra crude from Iraq. Iran is expected to contribute half of the supply required for Mangalore, with the other half expected from ADNOC and Saudi Aramco. 

Papua New Guinea has laid out its vision for its LNG industry, now backing a new export facility by Total to operate alongside the existing PNG LNG project led by ExxonMobil, which will undergo a US$19 billion expansion. The fate of the second project was up in the air when ExxonMobil conclude a sale to buy InterOil, whose Elk-Antelope gas field was meant to feed to second project, but the PNG government is confident that it has enough reserves to support both export sites. 

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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