Easwaran Kanason

Co - founder of PetroEdge
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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In 2018, the United States consumed more energy than ever before

U.S. total energy consumption

Source: U.S. Energy Information Administration, Monthly Energy Review

Primary energy consumption in the United States reached a record high of 101.3 quadrillion British thermal units (Btu) in 2018, up 4% from 2017 and 0.3% above the previous record set in 2007. The increase in 2018 was the largest increase in energy consumption, in both absolute and percentage terms, since 2010.

Consumption of fossil fuels—petroleum, natural gas, and coal—grew by 4% in 2018 and accounted for 80% of U.S. total energy consumption. Natural gas consumption reached a record high, rising by 10% from 2017. This increase in natural gas, along with relatively smaller increases in the consumption of petroleum fuels, renewable energy, and nuclear electric power, more than offset a 4% decline in coal consumption.

U.S. total energy consumption

Source: U.S. Energy Information Administration, Monthly Energy Review

Petroleum consumption in the United States increased to 20.5 million barrels per day (b/d), or 37 quadrillion Btu in 2018, up nearly 500,000 b/d from 2017 and the highest level since 2007. Growth was driven primarily by increased use in the industrial sector, which grew by about 200,000 b/d in 2018. The transportation sector grew by about 140,000 b/d in 2018 as a result of increased demand for fuels such as petroleum diesel and jet fuel.

Natural gas consumption in the United States reached a record high 83.1 billion cubic feet/day (Bcf/d), the equivalent of 31 quadrillion Btu, in 2018. Natural gas use rose across all sectors in 2018, primarily driven by weather-related factors that increased demand for space heating during the winter and for air conditioning during the summer. As more natural gas-fired power plants came online and existing natural gas-fired power plants were used more often, natural gas consumption in the electric power sector increased 15% from 2017 levels to 29.1 Bcf/d. Natural gas consumption also grew in the residential, commercial, and industrial sectors in 2018, increasing 13%, 10%, and 4% compared with 2017 levels, respectively.

Coal consumption in the United States fell to 688 million short tons (13 quadrillion Btu) in 2018, the fifth consecutive year of decline. Almost all of the reduction came from the electric power sector, which fell 4% from 2017 levels. Coal-fired power plants continued to be displaced by newer, more efficient natural gas and renewable power generation sources. In 2018, 12.9 gigawatts (GW) of coal-fired capacity were retired, while 14.6 GW of net natural gas-fired capacity were added.

U.S. fossil fuel energy consumption by sector

Source: U.S. Energy Information Administration, Monthly Energy Review

Renewable energy consumption in the United States reached a record high 11.5 quadrillion Btu in 2018, rising 3% from 2017, largely driven by the addition of new wind and solar power plants. Wind electricity consumption increased by 8% while solar consumption rose 22%. Biomass consumption, primarily in the form of transportation fuels such as fuel ethanol and biodiesel, accounted for 45% of all renewable consumption in 2018, up 1% from 2017 levels. Increases in wind, solar, and biomass consumption were partially offset by a 3% decrease in hydroelectricity consumption.

U.S. energy consumption of selected fuels

Source: U.S. Energy Information Administration, Monthly Energy Review

Nuclear consumption in the United States increased less than 1% compared with 2017 levels but still set a record for electricity generation in 2018. The number of total operable nuclear generating units decreased to 98 in September 2018 when the Oyster Creek Nuclear Generating Station in New Jersey was retired. Annual average nuclear capacity factors, which reflect the use of power plants, were slightly higher at 92.6% in 2018 compared with 92.2% in 2017.

More information about total energy consumption, production, trade, and emissions is available in EIA’s Monthly Energy Review.

April, 17 2019
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April, 17 2019
A New Frontier for LNG Pricing and Contracts

How’s this for a first? As the world’s demand for LNG continues to grow, the world’s largest LNG supplier (Shell) has inked an innovative new deal with one of the world’s largest LNG buyers (Tokyo Gas), including a coal pricing formula link for the first time in a large-scale LNG contract. It’s a notable change in an industry that has long depended on pricing gas off crude, but could this be a sign of new things to come?

Both parties have named the deal an ‘innovative solution’, with Tokyo Gas hailing it as a ‘further diversification of price indexation’ and Shell calling it a ‘tailored solutions including flexible contract terms under a variety of pricing indices.’ Beneath the rhetoric, the actual nuts and bolts is slightly more mundane. The pricing formula link to coal indexation will only be used for part of the supply, with the remainder priced off the conventional oil & gas-linked indexation ie. Brent and Henry Hub pricing. This makes sense, since Tokyo Gas will be sourcing LNG from Shell’s global portfolio – which includes upcoming projects in Canada and the US Gulf Coast. Neither party provided the split of volumes under each pricing method, meaning that the coal-linked portion could be small, acting as a hedge.

However, it is likely that the push for this came from Tokyo Gas. As one of the world’s largest LNG buyers, Tokyo Gas has been at the forefront of redefining the strict traditions of LNG contracts. Reading between the lines, this deal most likely does not include any destination restriction clauses, a change that Tokyo Gas has been particularly pushing for. With the trajectory for Brent crude prices uncertain – owing to a difficult-to-predict balance between OPEC+ and US shale – creating a third link in the pricing formula might be a good move. Particularly since in Japan, LNG faces off directly with coal in power generation. With the general retreat from nuclear power in the country, the coal-LNG battle will intensify.

What does this mean for the rest of the industry? Could coal-linked contracts become the norm? The industry has been discussing new innovations in LNG contracts at the recent LNG2019 conference in Shanghai, while the influx of new American LNG players hungry to seal deals has unleashed a new sense of flexibility. But will there be takers?

I am not a pricing expert but the answer is maybe. While Tokyo Gas predominantly uses natural gas as its power generation fuel (hence the name), it is competing with other players using cheaper coal-based generation. So in Japan, LNG and coal are direct competitors. This is also true in South Korea and much of Southeast Asia. In the two rising Asian LNG powerhouses, however, the situation is different. In China – on track to become the world’s largest LNG buyer in the next two decades – LNG is rarely used in power generation, consumed instead by residential heating. In India – where LNG imports are also rising sharply – LNG is primarily aimed at petrochemicals and fertiliser. LNG based power generation in China and India could see a surge, of course, but that will take plenty of infrastructure, and time, to build. It is far more likely that their contracts will be based off existing LNG or natural gas benchmarks, several of which are being developed in Asia alone.

If it takes off  the coal-link LNG formula is likely to remain a Asian-based development. But with the huge volumes demanded by countries in this region, that’s still a very big niche. Enough perhaps for the innovation to slowly gain traction elsewhere, next stop -  Europe?

The Shell-Tokyo Gas Deal:

Contract – April 2020-March 2030 (10 Years)

Volume – 500,000 metric tons per year

Source – Shell global portfolio

Pricing – Formula based on coal and oil & gas-linked indexes

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April, 15 2019