NrgEdge Staff

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Last Updated: December 7, 2016
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Last week in the world oil:

Prices

- Though unexpected, the OPEC deal reached last week is certainly welcome news for the oil markets, sending crude oil rising to its highest level in nearly two years, reaching US$55/b today. OPEC producers agreed to shave 1.2 mb/d from January onwards, with non-OPEC contributing an additional 600 kb/d of cuts, numbers that could (if adhered to) reduce considerably the current global supply glut.

Upstream & Midstream

- Justin Trudeaus administration in Canada has been delicately maintaining a balance between the environmental and energy lobbies. His decision to approve the Kinder Morgan pipeline expansion is an example of this. While Kinder Morgan will be allowed to build a second pipeline as an upgrade to the existing Trans Mountain pipeline to bring more oil to the West Coast to send to Asia, Trudeau has also blocked Enbridge from moving ahead with the Northern Gateway pipeline that would transport oil sands to the Pacific Coast directly through pristine rainforest.

- Japans Mitsui has agreed to buy Shells stakes in four US Gulf of Mexico oil blocks. The deal, for an undisclosed amount, will see the Japanese trading house acquire 20% stakes in four Mississippi Canyon blocks, which have an estimated recoverable volume of 100 million barrels of oil equivalent. The move represents bold steps for Mitsui, after it signed off on developing the Greater Enfield reserves in Western Australia and the third train of Tangguh LNG in Indonesia earlier this year.

- Supermajor ExxonMobil has relinquished 60 deepwater blocks in the Gulf of Mexico, including 20 that were part of a joint venture with Russias Rosneft, citing disappointing exploration results alongside persistent low crude oil prices. The two companies joined forces in 2013, when Rosneft bought a 30% stake in the 20 blocks.

- The US rig count is up again. Three new oil rigs and one new gas rig was added last week, bringing the total up to 477 and 119, respectively, as US oil players saw the OPEC decision as a lead-in to higher prices.

Downstream

- Brazil wants to further reduce its gasoline imports by stimulating domestic ethanol production. Sugar (from sugarcane) is the main source of biofuels in Brazil, but mills have been prioritising sugar production over ethanol owing to the tight global supply of sugar. All gasoline sold in Brazil now contains 27% sugarcane-derived ethanol, and the proposed new ethanol program is aimed to stimulating output to increase this.

Natural Gas & LNG

- Nigeria and Morocco has signed an agreement that could see a gas pipeline built linking Africa to Europe. The joint venture was reached as the Moroccan King visited Nigeria, with the project aimed at linking the gas resources of Nigeria and surrounding West African nations, and piping it north to Morocco with the intent of connecting to European demand centres via Spain or Portugal.


Last week in Asian oil:

Upstream & Midstream

- Less than a year after re-joining OPEC, Indonesia has once again suspended its membership in the cartel, as it was unable or unwilling to agree to a supply cut. Though its crude output is dwindling, Indonesia still depends heavily on oil to fund its government and the proposed 37 kb/d cut in Indonesian production was unacceptable, leading to the countrys second withdrawal from OPEC.

- India has invited initial bids to begin filling its Karnataka strategic petroleum storage facility. The Padur facility will be the third such site in India, and is the largest with 2.5 million tons of storage space. If experience at the previous two facilities in Vizag and Mangalore are to go by, then the crude oil sources are likely to be Iraq and Iran, which have helped India boost its strategic reserves to 10 days a small number by global standards of at least 50 days, but far better than the precariously tight position the country was in previously.

- Just months after Shell cancelled its US$4.6 billion order for three FLNG vessels, Samsung Heavy Industries has been hit with another major cancellation, this time for a US$777 million FLNG substructure for a European firm. The order was cancelled as the client did not issue a work order, with the low crude oil price environment possibly being the main concern. South Korean shipbuilders have been in trouble recently, and will be hoping that the recent upswing in prices will continue.

Downstream & Shipping

- The cheap price environment of LPG is causing a few Asian petrochemical crackers to turn to propane as a feedstock. Idemitsu in Japan is embarking on an expansion to boost propane processing by up to four times at its joint venture with Mitsui Chemicals in Q317, relying on imported LPG brought into the neighbouring LPG facility at the Chiba refinery.

Gas & LNG

- Chinas CNPC the parent company of PetroChina will separate its natural gas sales and transportation divisions. CNPC currently supplies nearly 80% of Chinas gas market, and the Chinese government wants to open the sector up to more competition, compelling CNPC to separate its gas sales and transportation arms, which should encourage investment in areas that were previously monopolised by CNPC.

- BP has acquired Repsols 3.06% stake in the Tangguh LNG project for US$313 million, bringing the UK operators stake to just over 40%. This consolidates BPs control over Tangguh, which has been given the go-ahead for the US$8 billion expansion of the Tangguh third LNG train.

Corporate

- The Azerbaijan state oil company SOCAR is beefing up its crude trading division in London, targeting China. Specifically, Socar wants to sell crude directly to the independent Chinese refiners the so-called teapots that were given licences to import crude directly this year.

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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.

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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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