Easwaran Kanason

Co - founder of PetroEdge
Last Updated: November 7, 2016
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Business Trends
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Last week in world oil:

OPECs internal squabbling has erased all its efforts to raise oil prices from languishing in the US$40/b range, as hope fades that the quixotic supply cut could be engineered. In fact, whispers suggest that Saudi Arabia is mulling punishing the rest of the organisation by pumping more oil to cause prices to free fall in a harsh attempt to get the other members in line. The next OPEC meeting begins November 30. Analysts remain split about   its success.

Venzuelas PDVSA has completed deals with Delta Petroleum and Indias ONGC totalling US$1.45 billion to raise production at their joint venture operations. The Delta Petroleum deal will see US$1.13 billion pumped in to raise production at Petrodelta from 40 kb/d to 110 kb/d, while the ONGC agreement will inject US$318 billion into Petrolera Indovenezolana to double production at the Cristobal field to 40 kb/d.

After a brief break, the operating oil rig count in the US resumed its climb, adding nine new oil and three new gas rigs, bringing the total up to 450 and 117, respectively, even as oil prices retreated from recent highs over uncertainty in OPEC and a massive crude build reported by the EIA.

Curacaos divorce with Venezuela over the Isla refinery now seems imminent, with Chinas Guangdong Zhenrong Energy now moving to secure funds for its US$5.5 billion plan to upgrade the refinery, a strategic spot in the Caribbean that serves as a oil hub for the Atlantic. PetroChina, Sinopec and CNOOC are expected to collaborate with the state-owned firm in the project, which now includes plans for the natural gas terminal.

Just weeks after announcing a new retail fuel pricing plan, Petrobras is now changing its pricing for LPG. Aimed to eliminating indirect subsidies by charging more for distributors using its facilities, it is the latest in Petrobras attempt to bolster earnings to pare down debt.

Canada has approved the C$1.3 billion expansion of the NOVA Gas Transmission natural gas gathering pipeline. The project by TransCanada will streamline some 75% of natural gas (some 11.3 bcf) in western Canada, including the Montney and Duverney shale fields in BC and Alberta, with completion expected in Q2 2018.

Shell and BP have both reported higher-than-expected earnings for Q316, with Shell reporting a rare instance of higher revenue than ExxonMobil. Much of the improvement in earnings comes from the supermajors sustained cost cutting, their adaptation strategy to low prices.

General Electric will merge its oil and gas business with Baker Hughes to create the second-largest oilfield services company in the world, behind Schlumberger. To be known as Baker Hughes, A GE Company, the new US$32 billion company will combine GEs equipment expertise with Baker Hughes speciality in drilling and fracking, as the industry responds to the prolonged slump in crude oil prices.

Italys ENi has signed four agreements with Bahrain to move into onshore and offshore upstream activities in Bahrain. The agreements were signed by Bahrain Petroleum Company (Bapco) and Tatweer Petroleum, representing a preliminary step in evaluating selected E&P assets in Bahrain that may eventually led to asset stakes for Eni if viable.

Malaysias Petronas is stoking some interest in the battered offshore contracting industry by requesting submissions for its K5 sour gas project off Sarawak in Malaysia. If the project, with its 4 tcf of recoverable gas, moves ahead, it will require a large production facility, and the possibility of Petronas moving ahead with the project has whet the appetite for a industry currently starved of projects.

In a bid to spur Chinas oil exports given that the country is now swamped with an oversupply of oil products the export tax rebate for gasoline, diesel and jet fuel has been raised to 17% effective November 1. The rebate, which eliminates double taxation for exported goods, comes as China is swamped by an oversupply of oil products, owing to vast expansions of refining capacity by the state players and a flood of products coming from independent teapot refiners after crude imports were deregulated last year. Unable to the consumed domestically, the products must now head out, contributing to the continued glut in Asia.

ExxonMobils acquisition of InterOil central to its plans to exploit the vast natural gas potential of Papua New Guinea has hit a snag. An objection by InterOils founder filed in Canada has moved to the appeals court, which overturns approval of the US$2.5 billion sale, potentially derailing the deal. The Canadian approval is the sole remaining hurdle to the completion of the deal, and now ExxonMobil must move to appease InterOil founder Phil Mulacek to salvage its plans.

Tokyo Gas, the largest city gas supplier in Japan, has signed an MoU with Malaysias Petronas that will see the two companies co-operating over existing and future natural gas and LNG projects in Southeast Asia. Tokyo Gas has worked with Petronas LNG for over 33 years, buying LNG from three Petronas projects, and the agreement will deepen the ties as Tokyo Gas seeks to secure more supply to feed Japans appetite for natural gas.

Indias Reliance has been slapped with a US$1.55 billion fine by the Indian government for allegedly extracting and selling gas belonging to ONGC in the KG basin of the Bay of Bengal over the last seven years. It is claimed that up to 11 bcf of gas seeped from ONGCs blocks to the adjacent block held by Reliance, BP and Niko Resources. Reliance will contest the fine

Keppel Corp had agreed to purchase bonds offered by struggling oil and gas explorer KrisEnergy, raising its stake in the company to as much as 67.33%. Much of the offshore marine contracting and engineering industry in Singapore is withering, with smaller firms unable to service debt, raising that possibility that the government may officially step in to offer direct aid, as well as through government-linked companies.

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