Easwaran Kanason

Co - founder of NrgEdge
Last Updated: October 3, 2016
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Last week in the world oil

Oil Prices. After a burst of optimism following last weeks informal OPEC agreement to cut output, cynicism and doubt over the organisations power and will to enforce the new quotas have shaved prices somewhat, with crude prices starting this week near US$50/b for Brent and US$48 for WTI. (Read about this - https://www.nrgedge.net/article/1475125708-opec-shows-its-fangs-finally)

With rising oil prices comes more US oil rigs. The number of operating US oil rigs rose by seven to 425, with gas rigs also rising, by four to 96. Two of the additions were offshore rigs, which could be taken as a sign of optimism for prices, which touched US$50/b after the OPEC meeting.

BPs head of refining economics has warned that the downstream industry is evolving in a way to slash the need for oil products produced in refinery. Richard de Caux expects a significant portion of the worlds expanding energy demand to be for petrochemicals, which will progressively be supplied directly by natural gas liquids (NGLs) production from US shale gas, with ethane, propane and butane replacing naphtha as petrochemicals feed. Last week, the first US ethane cargo arrived in Europe, at Scotland, with BP calls a harbinger of supply to come that will further depress margins of refineries worldwide.

Finland has proposed that the five Nordic countries including Sweden, Norway, Iceland and Denmark set a joint target on biofuelds. All five countries have a similar strategic outlook for the adoption of biofuels, in line with Finlands target of 20% of all transport fuel by 2020 and 40% by 2030, though without a legally binding target. The Nordic target is far higher than the broader EU target, which is a minimum of 10% by 2020.

Theres movement in the Caribbean. After news that Curacao might be handing operation of its Isla refinery away from PDVSA to China, Aruba has now moved to restart its 235 kb/d refinery, previously operated by Citgo, PDVSAs US arm. The refinery was shut in 2012 over low margins, but the new development suggest that there is interest in reviving operations at a site previously aimed at supplying American demand.

The consortium behind Israels massive Leviathan natural gas field has secured its first customer, signing a US$10 billion deal to supply 1.6 tcf of gas to Jordans National Electric Power Company over 15 years beginning 2019 or 2020. Israels neighbours are natural outlets for its natural gas, but geopolitical tensions prevents many deal, leading Israel to look further to Turkey and Western Europe, so the Jordan deal is a major step forward for economic cooperation in the Levant.

The future of Russian LNG production in Sakhalin is taking shape. Shell has agreed on the marketing strategy for the additional five million tons coming from the planned Sakhalin-2 third train with its partners Gazprom, Mitsui and Mitsubishi, while Rosneft will take a final investment decision on its Far East LNG project in 2017 or 2018, with production at the joint project with ExxonMobil, Sodeco and ONGC starting in 2023

The territorial dispute between minnow Timor-Leste and Australia will move to the permanent court of arbitration in The Hague, after Australia failed to have the case dismissed over non-jurisdiction. The dispute centres on the Sunrise and Greater Sunrise fields in the Timor Sea. Timor Leste argues that the Australia-Timor Leste maritime boundary should be equidistant between the two countries, supported by international law precedent, which would put most of the exploitable territory in its territory. Australias counter-argument hinges on the 2006 treaty that divides the revenues from the joint development era, but places most of the Sunrise fields under its control that is a parallel to Chinas claims in the South China Sea. Australia will appear at the court under compulsary conciliation after it was revealed that Australian intelligence officers placed bugs in the Timor Leste government cabinet room to spy on internal discussions and negotiations.

Chinas Wison Offshore & Marine has successfully completed tested of the worlds first natural gas floating liquefaction unit (FLNG). The Caribbean FLNG vessel is meant for Exmar, which will moored it at the Creciente gas field offshore Colombia, and successful completion heralds a promising new future for offshore LNG projects, as they moves into deeper, more challenging offshore territory.

Shell has declared force majeure on base chemicals supplied from its Bukom plant in Singapore. The disruption to supply comes as Shell had to shut down the Pulau Bukom ethylene cracker to repair a compressor. Repairs are underway, with no set date for operations to resume. Pulau Bukom has significant ethylene capacity, producing more than 900,000 tons of product each year.

Taiwans Formosa Chemicals will shut down its Changhua petrochemical plastics plant indefinitely as it negotiates with the country-level government over operating permits. The Changhua local government has declined to renew permits for the plants cogeneration equipment, insisting that new permits be applied for over changes in the plants power mix. Formosa claims that its permit renewal applications were rejected 37 times, with the government playing hardball over a closure that will affect over a thousand workers and 3% of the groups revenues.

After receiving approval by the Canadian government last week, Petronas may now exit the US$27 billion Canadian LNG export plant in British Columbia. In the intervening years between 2014 and now, the slide in crude and LNG prices have called into question the logic of the project, particularly for Petronas, which is still struggling to adapt to the new price environment. A sale may be difficult in the current market conditions, given that other BC projects have also faced delays over the same concerns, including Chevrons Kitimat project. An exit from the project, which has not received its FID, would highlight the financial situation of Petronas and be a blow to its ambitions of becoming a global power in natural gas.

Have a productive week ahead!

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Your Weekly Update: 9 - 13 September 2019

Market Watch  

Headline crude prices for the week beginning 9 September 2019 – Brent: US$61/b; WTI: US$56/b

  • Hope reigns as the market banks on signs that the US and China could reach a trade deal would eliminate one of the largest risks to current oil prices: a full-blown global recession
  • However, this is merely the latest in a series of dashed hopes that has seen the trade war between the US and China – using tariffs as weapons – escalate dramatically over the year; new tariffs entered play September 1 and more could come, with both sides already feeling the pinch
  • But crude prices did get a lift from EIA data showing that US crude stockpiles fell far more than expected, down by 4.8 million barrels to its lowest level since October 2018 – an indication of strong demand, with US refinery utilisation at 94.8%
  • However, there are fissures appearing on the supply side that could trigger some risk premiums; in Venezuela, the upstream crisis continues with the latest blow being a Chinese contractor halting work over claims over non payment
  • More importantly, Saudi Oil Minister – or rather former Saudi Oil Minister Khalid al-Falih – was dismissed from the government; after initial reports suggested that al-Falih would focus on energy policy after the oil ministry was split, a royal decree issued days later confirmed his sacking
  • Saudi Arabia and its allies have been at pains to re-assure the market that the dismissal of al-Falih – who is respected around the world – will not impact Saudi production or the current OPEC+ supply pact
  • This will be confirmed at the upcoming OPEC+ meeting this week, which will be the first under Saudi Arabia’s new Energy Minister, one of the King’s sons Prince Abdulaziz bin Salman
  • Against this backdrop of turmoil, the active US rig count fell yet again; after two weeks of double-digit losses, US drillers lost four oil and two gas rigs, with losses seen once again in the Permian
  • Power moves within Saudi Arabia may have sent some tremors to the market, but it is likely that OPEC+ will stick to its commitments; with no signs that the US and China were doing anymore more than talking about talking, crude prices will remain rangebound – US$59-61/b for Brent and US$54-56/b for WTI

Headlines of the week

Upstream

  • Total has suspended plans for the US$3.5 billion crude export pipeline that would connect Ugandan oilfield to port facilities in Tanzania after a failure to buy a stake in Tullow Oil’s upstream assets in Uganda linked to tax negotiations; this will require a complete restart for the Uganda project
  • With other supermajors pulling out, Total remains committed to the North Sea, with CEO Patrick Pouyanne looking to invest up to US$10 billion over the next five years but cautions that Total maintain strict cost discipline
  • The Norwegian Petroleum Directorate (NPD) has consented to the startup of the giant Johan Sverdrup field, a potential 660,000 b/d resource that has been called the North Sea’s ‘last hurrah’
  • Permian-focused player Concho Resource has agreed to sell its assets in the New Mexico Shelf to Spur Energy Partners for US$925 million, continuing a wave of consolidation in the US shale arena
  • Shell has announced plans to start drilling in the offshore Saturno field in Brazil, becoming one of the first private players tapping the pre-salt Santos Basin

Midstream/Downstream

  • Sinopec’s new 160 kb/d Yangzi refinery has begun production of Europe-standard gasoline, providing an outlet for Chinese fuel products amid a domestic glut that has seen refiners look overseas for sales
  • Petrobras is extending the deadline for interested parties for its four refineries on sale from September 16 to September 27, citing high investor interest for the refining assets that represent 37% of Brazilian capacity
  • Saudi Aramco continues its downstream push in China, signing an MoU with the Zhejiang Free Trade Zone that could pave the way for further investments beyond current plans to acquire 9% of the Zhejiang Petrochemical refinery
  • Russia’s Sibur will be cutting back LPG exports to Europe to some 2 million tons from a typical 3.5-4 million tons per year, redirecting the LPG to be used as feedstock for its ZapSibNefteKhim petrochemicals plant in Western Siberia

Natural Gas/LNG

  • Months of uncertainty have been put to rest as the government of Papua New Guinea endorsed the US$13 billion Papua LNG project, following some new commitments by project leader Total – primarily on local content
  • Also in PNG, the government has approved Australian independent Twinza Oil’s Pasca gas/condensate project - the country’s first offshore gas project
  • ExxonMobil and its partners have sanctioned plans for the 6.2 mtpa Sakhalin 1 LNG plant on Sakhalin Island in Russia’s far east, with easy access to Japan
  • Argentina’s YPF is pushing ahead with plans to build a US$5 billion LNG export terminal – tapping into the Vaca Muerta shale basin – despite continued domestic political and financial chaos hanging over the project
  • Petronas has agreed to purchase natural gas that is set to produced from the Gorek, Larak and Bakong fields in the SK408 area in Sarawak, jointly operated by SapuraOMV Upstream, Petronas Carigali and Shell
  • Qatar Petroleum has booked 100% of regasification capacity at the Fluxys Zeebrugge LNG terminal until 2044, consolidating Qatar’s hold on one of Northwest Europe’s important gas entry nodes
  • Equinor has brought the Snefrid Nord gas field online, which is the first of several planned projects related to the Aasta Hansteen field to begin production, with an initial output of 4 mcm/d
September, 13 2019
Global gas and LNG outlook to 2035
Expansion in the gas and LNG markets continues, with LNG demand expected to increase 3.6 percent per year to 2035.

Detailed market research and continuous tracking of market developments—as well as deep, on-the-ground expertise across the globe—informs our outlook on global gas and liquefied natural gas (LNG). We forecast gas demand and then use our infrastructure and contract models to forecast supply-and-demand balances, corresponding gas flows, and pricing implications to 2035.

Executive summary

The past year saw the natural-gas market grow at its fastest rate in almost a decade, supported by booming domestic markets in China and the United States and an expanding global gas trade to serve Asian markets. While the pace of growth is set to slow, gas remains the fastest-growing fossil fuel and the only fossil fuel expected to grow beyond 2035.

Global gas: Demand expected to grow 0.9 percent per annum to 2035

While we expect coal demand to peak before 2025 and oil demand to peak around 2033, gas demand will continue to grow until 2035, albeit at a slower rate than seen previously. The power-generation and industrial sectors in Asia and North America and the residential and commercial sectors in Southeast Asia, including China, will drive the expected gas-demand growth. Strong growth from these regions will more than offset the demand declines from the mature gas markets of Europe and Northeast Asia.

Gas supply to meet this demand will come mainly from Africa, China, Russia, and the shale-gas-rich United States. China will double its conventional gas production from 2018 to 2035. Gas production in Europe will decline rapidly.

LNG: Demand expected to grow 3.6 percent per annum to 2035, with market rebalancing expected in 2027–28

We expect LNG demand to outpace overall gas demand as Asian markets rely on more distant supplies, Europe increases its gas-import dependence, and US producers seek overseas markets for their gas (both pipe and LNG). China will be a major driver of LNG-demand growth, as its domestic supply and pipeline flows will be insufficient to meet rising demand. Similarly, Bangladesh, Pakistan, and South Asia will rely on LNG to meet the growing demand to replace declining domestic supplies. We also expect Europe to increase LNG imports to help offset declining domestic supply.

Demand growth by the middle of next decade should balance the excess LNG capacity in the current market and planned capacity additions. We expect that further capacity growth of around 250 billion cubic meters will be necessary to meet demand to 2035.

With growing shale-gas production in the United States, the country is in a position to join Australia and Qatar as a top global LNG exporter. A number of competing US projects represent the long-run marginal LNG-supply capacity.

Key themes uncovered

Over the course of our analysis, we uncovered five key themes to watch for in the global gas market:

  1. Global LNG-price indicators have partially converged with the differentials among Asia, Europe, and the United States, falling to the smallest they have been in longer than a decade.
  2. Asia is leading a third wave of market liberalization after those in the United States and Europe, likely bringing fundamental changes to Asian markets.
  3. Long-term contract-pricing mechanisms are evolving in indexation and slope as gas and oil markets diverge, placing pressure on buyers to reshape their contract portfolios, with up to $15 billion per year at stake.
  4. Substantial new investment is necessary to deliver the infrastructure required to meet demand growth.
  5. Traditional, bilateral business models for LNG are being challenged today, and new business models with an increased focus on commercial and trading capabilities are emerging.
September, 13 2019
LNG – surfing the wave

Challenges in a growing market

Gas looks the best bet of fossil fuels through the energy transition. Coal demand has already peaked while oil has a decade or so of slowing growth before electric vehicles start to make real inroads in transportation. Gas, blessed with lower carbon intensity and ample resource, is set for steady growth through 2040 on our base case projections.

LNG is surfing that wave. The LNG market will more than double in size to over 1000 bcm by 2040, a growth rate eclipsed only by renewables. A niche market not long ago, shipped LNG volumes will exceed global pipeline exports within six years.

The bullish prospects will buoy spirits as industry leaders meet at Gastech, LNG’s annual gathering – held, appropriately and for the first time, in Houston – September 17-19.

Investors are scrambling to grab a piece of the action. We are witnessing a supply boom the scale of which the industry has never experienced before. Around US$240 billion will be spent between 2019 and 2025 on greenfield and brownfield LNG supply projects, backfill and finishing construction for those already underway.

50% to be added to global supply 

In total, these projects will bring another 182 mmtpa to market, adding 50% to global supply. Over 100 mmtpa is from the US alone, most of the rest from Qatar, Russia, Canada, and Mozambique. Still, more capital will be needed to meet demand growth beyond the mid-2020s. But the rapid growth also presents major challenges for sellers and buyers to adapt to changes in the market.

There is a risk of bottlenecks as this new supply arrives on the market. The industry will have to balance sizeable waves of fresh sales volumes with demand growing in fits and starts and across an array of disparate marketplaces – some mature, many fledglings, a good few in between.

Key LNG growth markets face teething problems

India has built three new re-gas terminals, but imports are actually down in 2019. The pipeline network to get the gas to regional consumers has yet to be completed. Pakistan has a gas distribution network serving its northern industrial centres. But the main LNG import terminals are in the south of the country, and the commitment to invest in additional transmission lines taking gas north is fraught with political uncertainty.

China is still wrestling with third-party access and regulation of the pipeline business that is PetroChina’s core asset. Any delay could dull the growth rate in Asia’s LNG hotspot. Europe is at the early stages of replacing its rapidly depleting sources of indigenous piped gas with huge volumes of LNG imports delivered to the coast. Will Europe’s gas market adapt seamlessly to a growing reliance on LNG – especially when tested at extreme winter peaks? Time will tell.

Established business models are changing

The point-to-point business model that has served sellers (and buyers) so well over the last 60 years will be tested by market access and other factors. Buyers facing mounting competition in their domestic market will increasingly demand flexibility on volume and price, and contracts that are diverse in duration and indexation. These traditional suppliers risk leaving value, perhaps a lot of value, on the table.

In the future, sellers need to be more sophisticated. The full toolkit will have a portfolio of LNG, a mixture of equity and third-party contracted gas; a trading capability to optimise on volume and price; and the requisite logistics – access to physical capacity of ships and re-gas terminals to shift LNG to where it’s wanted. Enlightened producers have begun to move to an integrated model, better equipped to meet these demands and capture value through the chain. Pure traders will muscle in too.

Some integrated players will think big picture, LNG becoming central to an energy transition strategy. As Big Oil morphs into Big Energy, LNG will sit alongside a renewables and gas-fired power generation portfolio feeding all the way through to gas and electricity customers.

LNG trumps pipe exports...


  

...as the big suppliers crank up volumes

September, 13 2019