Easwaran Kanason

Co - founder of NrgEdge
Last Updated: October 11, 2016
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Business Trends

Last week in the world oil

Optimism that oil producers will be able to sustain a supply freeze has lifted prices over last week, reaching US$50/b and exceeding that level at the beginning of the week as Russias Vladimir Putin indicated his support for OPECs production freeze at the World Energy Congress in Turkey.

Taking cues from rising oil prices, the US rig count rose for the 14th time in 15 weeks, up by 2 to 524. Three new oil rigs started up (and one gas rig halted), bringing the number of operating oil rigs in the US to its highest level in almost two years. Expect this number is continue rising as oil prices appear to be on an ascending trajectory for the next month.

Saudi Arabia has halted the supply of refined oil products shipped to Egypt, triggering a scramble by the Egyptian General Petroleum Corporation to seek necessary volumes for October. No reason or timeline was given for the suspension, but it is likely that is likely to be political. Saudi Arabia agreed to supply refined oil products to Egypt for five years under a US$23 billion deal between Saudi Aramco and EGPC earlier this year, part of an aid package to shore up the Egyptian economy that is suffering from a huge budget deficit. Egypt may very well have to devalue or float its currency now, to qualify for an IMF loan.

The Ivory Coast is planning to create the largest fuel hub in sub-Saharan Africa within its borders, investing up to US$1 billion to create a Rotterdam of Africa that will become the shipping, delivery, storage and distribution point for West Africa. With demand rising, most oil products consumed in the region are imported, and the project (which has backing from Frances Total and Bollore) with its 1.2 million tons storage capacity could ensure a steady supply of oil products to West Africa

It appears that UK shale gas is now a go, as the new UK government under Theresa May signalled its support for shale gas exploration to move ahead at the Preston New Road and Roseacre Wood sites in Lanchasire. Despite protests by the local authority and residents, the decision is a tentative step forward to exploit shale gas in the UK, particularly relevant as the UK government attempts to stimulate the economy post-Brexit.

With shipping companies moving away from burning dirty fuel oil to power ships, Carnival Corporation has struck a deal with Shell to use LNG in its cruise ships. The first two Carnival LNG-powered ships will launch in 2019, running on LNG supplied by Shell Western LNGs portfolio.

Mozambique and Italys Eni have inked a deal to supply LNG from the Coral South field to BP under a 20-year deal. The deal secures the project a long-term customer, which is necessary to get the long-delayed export project with 3.3 million tons capacity off the ground.

The Ivory Coast and Frances Total agreed to build an LNG import terminal to feed the countrys growing demand for power. The FSRU project will be designed for an initial 0.1 bcf, rising up to 0.5 bcf, with first gas shipments aimed at 2018.

BP has axed its plans to drill in the Great Australia Bight, an offshore upstream project in South Australia that has the potential to rival production from the North West Shelf but also raised significant environmental concerns. After investing in a new oil rig built for the site, BP has withdrawn from the project citing competitive concerns over capital investment ie. the project would not be profitable under current crude oil prices. The cancellation was welcomed by environmental activists, but BP may very well revisit the project in the future if prices settle at a level that make the deepwater project viable.

Indonesias thwarted ambitions to raise its refining capacity got a boost as Russias Rosneft and Pertamina appear to agree on terms to build a 300 kb/d refinery in Tuban. Indonesia also has a refinery planned with Saudi Arabia, but all of its previous projects have been dashed by poor economics over the past decade. The Rosneft deal will involve the Russian firm taking up to a 45% in the refinery, while Pertamina may gain stakes in Rosnefts upstream projects in Russia, including up to 20% in the offshore Northern Chayvo and up to 37.5% in the Russkoye field, in line with Pertaminas aim to boost its overseas production.

In a surprising move, BP announced its intent to set up a network of up to 3,500 fuel stations in India. Shell is the only other supermajor currently present in Indian downstream, with a network size of less than a hundred, in a market where competition is fierce and dominated by the state refiners IOC, HPCL and HPCL. The move is surprising given BPs reluctance to invest in downstream in recent yeas, having focused its investment on upstream projects, but the rapid growth of fuel demand in India appears to have tempted BP to go retail again.

Sri Lanka will tie up with Indias IOC to build a 100 kb/d refinery in Triconmalee, the countrys second refining site. The announcement is part of a raft of Indian investment projects in Sri Lanka as Colombo aims to diversify its investment sources away from being dominated by China.

Thailands state power company EGAT is preparing to develop an FSRU to receive LNG imports as part of the governments plan to liberalise the LNG sector in Thailand. PTT is currently Thailands sole gas and LNG supplier, and though it works well with other state run energy companies, the Thai government wants to open up the sector to new firms.

Abu Dhabis ADNOC is merging the operations of two of its subsidiaries Abu Dhabi Marine Operating Co and Zakum Development to create a more profitable upstream business. The merger will consolidate the concessions held by both companies into a more streamlined structure that will also benefit ADNOCs partners in both companies, which include BP, ExxonMobil, Japan Oil Development Company and Total.

Brazil is to open up the countrys pre-salt oil fields to foreign investors. Its not the exclusive domain of Petrobras to hold 30% in partnership anymore. However Petrobras will have right of first refusal to control and drill before the fields are auctioned off. Desperate times, desperate measures.

Saudi Aramco announced that the company will now instead allow shares to be sold in ALL operations of the business, no longer limited to the downstream segments. The IPO is projected to take place in 2018, hoping to raise about USD100150 billion at a USD23 trillion valuation.

John Fredriksen, the chairperson and largest shareholder of Seadrill is planning to inject USD1.2 billion into the company. Saving Seadrill from bank maturies till 2020, as part of its re-structuring plan.

Surprisingly worldwide investment in clean energy is down 43% year-on-year and the lowest since the first quarter of 2013. The dip reflects a slowdown in spending on renewables in China, Japan and Europe. Indicating that slowing economies dont really need that much new energy, clean or otherwise.

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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Only the most enthusiastic dry herb advocates will, in any case, contend that smoking has never been proven to cause lung cancer. In case we are being reasonable, we would all agree that smoking anything isn't great for your health wellbeing. When you consume herbs, it combusts at more than 1000 °C and produces more than 100 cancer-causing agents. Over the long run, this causes the development of tar in the lungs and will conceivably prompt chronic bronchitis. Vaporizers take care of this problem which can be found in a good       online vaporizer store.

Rather than consuming dry herbs, vaporizers work by warming them to a point where it is sufficiently hot to evaporate the active ingredients. In particular, the temperatures from vaping are sufficiently cool to stay away from the actual burning of the plant matter which contains the cancer-causing agents. Accordingly, people who vape either dry herbs or e-fluids are less likely to be exposed to the toxins that are found in smoke. 

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Vaping herbs actually creates a scent, obviously. Nonetheless, the plant matter stays in the oven. Thus, the little from vaping tends to not stick to the wall and clothes due to there being no real smoke. A decent dry herb vaporizer makes it simpler to enjoy your herbs when you're out and about, however, you don't want everyone to know what you're doing! 

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