Easwaran Kanason

Co - founder of NrgEdge
Last Updated: November 15, 2016
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Business Trends
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Last week in world oil:

Oil markets have largely shrugged off the victory of Donald Trump in the US presidential elections and instead focused on tangible numbers – that OPEC output rose in September, with a 200 kb/d leap in Iran alone. With oversupply on the market, and the likelihood of a supply freeze slim, prices are now in the US$43-44/b range. 

The opening of the Brazil’s upstream industry is opportunity enough for Shell to commit US$10 billion towards over the next five years. Although it has been shying away from investment elsewhere, Brazil is enough of a jewel to warrant funding, with Shell particularly interest in the country’s vast offshore subsalt reserves, which will be opened up to foreign investment after being previously monopolised by Petrobras. 

Another week and the operating US oil rig count have risen again, up by 2 to 452 sites, although the pace of expansion has slowed down markedly. The gas rig count fell by 2, leaving the total number unchanged 

China’s Guangdong Zhenrong Energy has signed an agreement with the UK’s BP on supply and offtake at the Isla refinery in Curacao, once the Chinese commodity trader completes its takeover and planned upgrade of the aging refinery. Under the terms of the agreement, BP will supply crude to the 335 kb/d refinery, currently leased by Venezuela’s PDVSA, and take all of the refined products produced, which will be marketed in the Americas. PDVSA will likely not be sidelined completely; it remains the most logical, and closest, crude oil supplier to the site. 

Mexico’s national oil company PEMEX is aiming to establish a network of partners that help it reconfigure and upgrade its refinery network in the country, which is ailing and inefficiently. The Bank of America has been hired to lead Pemex’s search for joint ventures to upgrade the Tula, Salamanca and Salina Cruz refineries. Priority will be given to the Tula refinery’s aging coking unit, currently operating at minimum levels, contributing to disappointing national output in September, at less than 50% of the total Mexican refinery capacity. 

France’s Total has signed the first post-sanction deal by a western energy company in Iran, confirming its participation in the South Pars Phase 11 development with NIOC in the world’s largest natural gas field. The field, which extends in Qatari waters as the North Field, will cost US$2 billion to develop, with the gas earmarked for Iran’s gas and power grid. Total was heavily involved in Phases 2 and 3 of South Pars in the 2000s, but exited in 2010 after sanctions was slapped over Iran’s nuclear programme. 

Nigeria is aiming to overhaul its state oil company NNPC from a lumbering, bureaucratic behemoth into a modern, streamlined company to minimise graft and mismanagement. Possibly using Malaysia’s Petronas as a blueprint, the goal is to eventually list NNPC on the stock exchange and separate the cumbersome regulatory and policy tasks it is currently responsible for to focus entirely on commercial activity. 

After hitting a record high in September, Chinese crude oil imports fell to its lowest level since January this year as independent teapot refiners cut back on purchases over higher crude prices and dwindling import quotas. Imports are still significantly higher on annual basis, but it appears that the teapots’ ravenous appetite for processing over summer have left them with little room to import as the country moves into winter heating mode. 

With Chevron looking to exit the upstream industry in Bangladesh, the country’s government is aiming to keep Chevron’s assets – which include three gas productions fields (Jalalabad, Moulavi and Bibiyana) with a collective output of 720 million cubic feet a day – in its own hands by directing state-owned Petrobangla to acquire them. With a value of US$2-3 billion, the government is hoping to settle for a price of US$1.5 billion.

Oman Oil Company is switching partners for its Duqm refinery from Abu Dhabi’s International Petroleum Investment Co to Kuwait Petroleum Corporation after it failed to reach an agreement with the former. The 230 kb/d Duqm refinery is part of a massive industrial zone meant to diversify Oman’s economy away from upstream oil. Under the new partnership, Duqm will now process a mix of Omani and Kuwaiti crude. 

While Australia is on course to become the world’s top exporter of LNG, the status pulls natural gas supply in the sparsely-populated west away from the main population centres in the east. This creates a hole in east Australia which may have to be plugged by imports, as AGL Energy considers building a LNG terminal somewhere along the country’s southeast coast by 2021. Currently, domestic gas supply in the southeast is dominated by ExxonMobil, BHP Biliton, Origin Energy and Santos, which hiked up prices in July almost sixfold during a winter cold snap.

The Japanese parliament has passed a bill that will allow the state-run Japan Oil, Gas and Metals National Corp (JOGMEC) to participate on foreign acquisitions. Previously restricted to purchases of foreign natural gas assets, the change in the law allows JOGMEC to work with Japanese firms, or on its own, in acquiring foreign state or private firms, as the government seeks to expand the financial muscle for Japanese companies in the race with China and India to acquire energy assets. 

Chevron has been slapped with a US$200 million tax bill by the Thai government over shipments of oil to its offshore facilities in the Gulf of Thailand. The issue centres on the interpretation of customs legislations; Chevron believes that the law classifies shipments of oil exceeding the 12 nautical mile limit to be exports and therefore exempt from customs duties. However, the Customs department believes that since the destination falls within Thai waters, it should be subject to excise tax, oil fund levy and a 7% VAT, backdated to 2001. Discussion between Chevron and the Thai government continue over the issue. 

Have a productive week ahead!

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May, 20 2022
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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