Postcards sent from China will show iconic landmarks like The Forbidden Palace and The Temple of Heaven in Beijing standing proud against a bright blue sky. Visitors to the Chinese capital only have a 10% chance of viewing these monuments in such circumstances. Instead, they are most likely to face a city drenched in gloomy smog. The red level alert for smog was breached twice in the last week, with visibility down to 50m in most areas. Part of this is geographical; Beijing is surrounded by the Hebei province, an industrial zone that pumps out plenty of emissions to the skies, but the other part is self-inflicted by Beijingers and a population of cars that is reaching 6 million.
The government has tried many ways to reduce the pollution, famously
banning cars leading up to the 2008 Beijing Olympics. It worked for a while.
But when the eyes of the world are away, Beijing cars get back on the road,
despite rules to minimise use – eg. driving permitted only on certain days
depending on the car licence plates. So instead, the Chinese government is
tackling the issue at the source, enacting the most rapid ramp-up in fuel
standards in all of Asia.
As of January 2017, gasoline and diesel sold in Beijing will be of
the Beijing Six standard. Retailers Sinopec and PetroChina have been preparing
for this move, upgrading their refineries for the new standards, which comes
three years after Euro V-equivalent levels were introduced in Beijing. This
brings Beijing almost on par with the European Union in terms of implementing
the strictest fuel emission standards in the world, where Euro VI was
introduced in late 2015. With sulfur levels capped at 10ppm, Beijing Six also
has strict levels for particulate matter, nitrogen oxide, carbon monoxide and
If history serves as an indication, the Beijing Six standard will go national in three years time. Over 2017, the rest of China will adopt the National Five specification, a Euro V-equivalent that was introduced in Beijing in 2013. This was originally scheduled for 2020, but brought forward due to the horrific levels of pollution – Hebei is home to six of China’s most polluted cities, and China home to seven of the world’s most polluted cities.
All will take China to the top of the gasoline and diesel fuel specification list in Asia, together with Japan. This has implications for trade. Refineries elsewhere in Asia are ill-equipped to produce fuel to the standard demanded by Beijing, and eventually the rest of China. So if Asian refiners in South Korea and Japan wish to keep exporting to China, they too will have to upgrade their refineries just like Sinopec and PetroChina have; a costly consideration in these trying times. But China as an export destination has lost a lot of its lustre over the last decades, thanks in no small part to the massive build up in domestic capacity. To the extent that China is now a net exporter of key products. But if the rest of Asia lags behind China in fuel specifications, that complicates the issue for Chinese refiners planning to export product, particularly the independent teapots.
China’s move to embracing tighter fuel standards must be applauded,
but it also makes the Asian fuel trading market more fragmented than it already
is. The beauty of Euro standards was that they were applicable across the EU
and its 27 members; Asia has no such unity but one would hope that China’s move
will encourage other countries like India and Indonesia to increase their
current low fuel standards.
Something interesting to share?
Join NrgEdge and create your own NrgBuzz today
Headline crude prices for the week beginning 11 February 2019 – Brent: US$61/b; WTI: US$52/b
Headlines of the week
Midstream & Downstream
Global liquid fuels
Electricity, coal, renewables, and emissions
2018 was a year that started with crude prices at US$62/b and ended at US$46/b. In between those two points, prices had gently risen up to peak of US$80/b as the oil world worried about the impact of new American sanctions on Iran in September before crashing down in the last two months on a rising tide of American production. What did that mean for the financial health of the industry over the last quarter and last year?
Nothing negative, it appears. With the last of the financial results from supermajors released, the world’s largest oil firms reported strong profits for Q418 and blockbuster profits for the full year 2018. Despite the blip in prices, the efforts of the supermajors – along with the rest of the industry – to keep costs in check after being burnt by the 2015 crash has paid off.
ExxonMobil, for example, may have missed analyst expectations for 4Q18 revenue at US$71.9 billion, but reported a better-than-expected net profit of US$6 billion. The latter was down 28% y-o-y, but the Q417 figure included a one-off benefit related to then-implemented US tax reform. Full year net profit was even better – up 5.7% to US$20.8 billion as upstream production rose to 4.01 mmboe/d – allowing ExxonMobil to come close to reclaiming its title of the world’s most profitable oil company.
But for now, that title is still held by Shell, which managed to eclipse ExxonMobil with full year net profits of US$21.4 billion. That’s the best annual results for the Anglo-Dutch firm since 2014; product of the deep and painful cost-cutting measures implemented after. Shell’s gamble in purchasing the BG Group for US$53 billion – which sparked a spat of asset sales to pare down debt – has paid off, with contributions from LNG trading named as a strong contributor to financial performance. Shell’s upstream output for 2018 came in at 3.78 mmb/d and the company is also looking to follow in the footsteps of ExxonMobil, Chevron and BP in the Permian, where it admits its footprint is currently ‘a bit small’.
Shell’s fellow British firm BP also reported its highest profits since 2014, doubling its net profits for the full year 2018 on a 65% jump in 4Q18 profits. It completes a long recovery for the firm, which has struggled since the Deepwater Horizon disaster in 2010, allowing it to focus on the future – specifically US shale through the recent US$10.5 billion purchase of BHP’s Permian assets. Chevron, too, is focusing on onshore shale, as surging Permian output drove full year net profit up by 60.8% and 4Q18 net profit up by 19.9%. Chevron is also increasingly focusing on vertical integration again – to capture the full value of surging Texas crude by expanding its refining facilities in Texas, just as ExxonMobil is doing in Beaumont. French major Total’s figures may have been less impressive in percentage terms – but that it is coming from a higher 2017 base, when it outperformed its bigger supermajor cousins.
So, despite the year ending with crude prices in the doldrums, 2018 seems to be proof of Big Oil’s ability to better weather price downturns after years of discipline. Some of the control is loosening – major upstream investments have either been sanctioned or planned since 2018 – but there is still enough restraint left over to keep the oil industry in the black when trends turn sour.
Supermajor Net Profits for 4Q18 and 2018
- 4Q18 – Net profit US$6 billion (-28%);
- 2018 – Net profit US$20.8 (+5.7%)
- 4Q18 – Net profit US$5.69 billion (+32.3%);
- 2018 – Net profit US$21.4 billion (+36%)
- 4Q18 – Net profit US$3.73 billion (+19.9%);
- 2018 – Net profit US$14.8 billion (+60.8%)
- 4Q18 – Net profit US$3.48 billion (+65%);
- 2018 - Net profit US$12.7 billion (+105%)
- 4Q18 – Net profit US$3.88 billion (+16%);
- 2018 - Net profit US$13.6 billion (+28%)