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Last Updated: January 26, 2017
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Last week in the world oil:

Prices

-News of a strong recovery in US oil drilling offset optimism that OPEC and its non-OPEC allies were on track to meet their output reduction goals, leading oil prices to start the week slightly lower after gains last week. Saudi Arabia notched up its highest exports in 13 years in November, but numbers are expected to fall by nearly 400 kb/d in January as the supply cuts kick in. The push-pull relationship between OPEC and free market producers in the US highlights the difficulties in the race to raise prices.

Upstream & Midstream

-In a move that could potentially revolutionise oil trading, Mercurialis testing out an oil cargo contract sale based on the digital blockchain technology. Working together with banks ING and Societe Generale, the cargo of African crude sold to ChemChina is based on the technology that powers bitcoins a permanent digital ledger of all transaction history known as a blockchain that could replace the current complex system of clearing and settlement that require massive amounts of paperwork.

-The US oil rig count leapt by 35 last week, the largest rise since 2011, as US drillers responded to price signals, potentially hampering OPECs attempt to strengthen prices. Some 29 new oil rigs and 6 new gas rigs were restarted, and more additions are expected.

Downstream

-A fire has halted output at Adnocs Ruwais refinery in Abu Dhabi, shutting down half of the sites 800 kb/d capacity. The outage at the newer section, is expected to be short, with production resuming next week.

Natural Gas & LNG

-In an attempt to reduce heavy reliance on Russian natural gas, Serbia and Bulgaria are cooperating on a natural gas pipeline project. The 150km pipeline is scheduled to begin construction in May 2019 and operational by the end of 2020, linking Sofia with the Serbian city of Nis. This could draw supplies from pipelines in Greece and Turkey, and possibly volumes from Israels Leviathan field. Poland, too, is plotting reducing dependence on Russia, aiming to have a gas pipeline to Norway in place by 2022.

-Brazil's Odebrecht group, embroiled in the country's largest ever graft scandal, has missed a financing deadline that will see it exit a US$5 billion natural gas pipeline in Peru, potentially derailing the entire project. The bribery scandal has brought the once powerhouse to its knees, which will now see it focus on divesting assets in all but two sectors to survive, retaining only its construction arm and petrochemical producer Braskem.

Corporate

-Frances Technip and FMC Technologies have completed their merger, now operating as unified service provider TechnipFMC. The merger comes partially due to the slump in upstream investment, but also to consolidate developing technology to access hard-to-reach assets.

-Shell will have a new Head of Exploration next month, with current upstream strategy vice president Marc Gerrits taking over the role from Ceri Powell, who moves on to become the managing director of Brunei Shell Petroleum. The move is part of a broader reshuffle of executives following the acquisition of the BG Group, with upstream moving away from risky frontier areas like Alaska to existing production sites like Brunei and Malaysia.

Last week in Asian oil:

Upstream & Midstream

-Indonesia's Pertamina has unveiled an ambitious plan to invest US$54 billion in upstream production through 2025, aiming to raise its oil, gas and geothermal output by 185% to 1.91 million barrels. Pertamina's upstream output has slumped over the last decade, hitting its lowest point of 670 kb/d in November 2016, with the company struggling to acquire even domestic fields. The goals are at odds with OPECs wider objectives, leading Indonesia to withdraw temporarily from the organisation in November to focus on an upstream spending spree.

-A week after extending a storage deal with Saudi Aramco, Japan has done the same with the UAEs Adnoc. The two-year extension will allow Adnoc to continue storing up to 6.29 million barrels of crude oil in theKiireterminal in Kagoshima until 2019 at no cost in return for first dibs on the supplies in the case of emergencies. Adnoc uses the storage facilities as a convenient way to distribute crude across East Asia.


Downstream & Shipping

-Iran and China have agreed to a US$3 billion deal that will see China support Iran financially as its moves to upgrade its ailing oil refining infrastructure. The agreement will focus on the 430 kb/d Abadan refinery, Irans largest, that is in dire need of upgrades after years of sanctions prevented access to parts and new technology. It is an indication that the rest of the world is still prepared to deal with Iran, even as the new American administration is prepared to be more hostile.

-Bangladesh has reversed its decision to slash fuel prices as global crude prices rise. The phased prices cuts which would reduce the controlled prices of gasoline, diesel and LPG began in April 2015, after a two-year freeze to help state-owned player Bangladesh Petroleum Corp recover losses and were meant to be extended over 2017. However, the government has now decided that raising oil prices pose too much of a risk to move ahead with another 10% cut, freezing gasoline prices at around 86 taka (US$1.10) per litre.

-Singapore's struggling Jurong Aromatic Corp (JAC) might have found a buyer in South Koreas Lotte Chemical Corp. After going into receivership in September 2015 due to debt issues as global commodity prices were routed, JAC also had to deal with an 18-month outage as its petrochemical complex to fix issues and has been searching for a possible suitor. Lotte, which currently operates two naphtha crackers in Daesan and Yeosu along with a condensate splitter shared with Hyundai Oilbank, has been looking at potential overseas assets and JAC would be a suitable target to establish itself as one of Asia's largest condensate buyers.

Natural Gas & LNG

-Pakistan is in need of natural gas, a reason why Asian LNG prices have spiked over the last two weeks. While there is no short-term solution, it has secured some long-term security with a Gunvor deal to receive 60 LNG cargoes over the next five years and an Eni deal for 180 cargoes over the next 15 years. More tenders are expected, as Pakistan works towards bringing two more LNG terminals online over the next two years.

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China’s Strategic Petroleum Reserves

After the OPEC+ club met on September 1st,  and confirmed that it would be sticking to its plan of increasing its crude supply by 400,000 b/d a month through December, China made a rather unusual announcement. It announced that it was going to release some crude oil from its strategic petroleum reserves, selling it to domestic refiners that were grappling with crude’s heady price rise over 2021. The release of strategic oil reserves isn’t news in itself. What is news is that the usually secretive China did it and did it publicly.

And it did it to send a message to OPEC+: attempts to create artificial scarcity to maintain crude prices will not be tolerated. China has a right to feel that way. Even though great strides have been made to ease the effects of the Covid-19 pandemic worldwide, the virus is still exerting major effects on the global economy. Not least a massive ripple through the health of global supply chains that has seen the price of almost everything – plastics, semiconductors, agricultural commodity, lumber, steel – spike due to supply issues. In some cases, the prices of raw materials are at historic highs. Crude oil is still nowhere near its peak of above US$100/b, but it is high enough to be concerning, especially since it is happening within a major inflationary environment. And for a manufacturing-heavy economy like China, that matters. That matters a lot. So China’s National Food and Strategic Reserves announced that it would be releasing some of the country’s crude stocks to ‘better stabilise domestic market supply and demand, and effectively guarantee the country’s energy security’, a month after the country’s producer price inflation – ie. the cost of manufacturing – hit a 13-year high.

China made good on that promise, releasing 7.38 million barrels from its stockpile to domestic bidders on September 24 with more tranches expected. This was the first ever recorded release from China’s Strategic Petroleum Reserves (SPR), which began back in 2009 in serendipitous response to crude oil prices exceeding the US$100/b mark for the first time in 2008. But curiously, it may not have been the first ever release. So secretive is the SPR that China does not reveal the size of the reserve, although analysts have estimated it at some 300-400 million barrels with total capacity of 500 million barrels using satellite imaging. It has been speculated that batches of crude from the SPR have been released before on the quiet. But this is the first time China has gone public. Compared to the country’s overall oil consumption, 7.38 million barrels is small, almost tiny. And even if additional supplies are released, it will not make a major impact on China’s oil balances. But the message is what is important.

It is a message that China is not alone in sending. US President Joe Biden has already called on OPEC+ to accelerate its supply easing plans, given indications that the crude glut built up over 2020 has been all but erased. It is a notion that would be supported by some OPEC+ members – Russia, Mexico, the UAE – but so far, the discipline advocated by Saudi Arabia has held. The US too has attempted to release of its own crude reserve stocks – the largest in the world with a capacity of 727 million barrels – but this was also in response to the devastating impact of Hurricane Ida. India, China’s closest analogue to size and stage, has been complaining too. As a major oil importer and with a shakier economic situation, India is particularly sensitive to oil price swings. US$70/b is way above what New Delhi is comfortable with. But since India’s appeals to OPEC+ have fallen on deaf ears, it is attempting domestic directives instead. India’s state refiners have been ordered to reduce crude purchases from the Middle East, but with supply tight, there aren’t many other people to buy from. India has also been selling oil from its strategic reserve – officially stated to be for clearing space to lease storage capacity to refiners – although since India is more transparent about these announcements, the announcement isn’t as surprising.

Will it work? At least immediately, no. Crude prices did come under pressure in the wake of China’s announcement, but then recovered with Brent hitting US$75/b. But the fact that China timed the announcement of the September 24 auction to coincide with peak global trading time and with a lot of details (again an unusual move) shows that Beijing is serious about wielding its strategic reserves as weapons. If not to moderate crude prices, then to at least stabilise it. But this is a war of attrition. China may very well have a planned schedule to release more crude reserves over 2021 and 2022 if prices remain high, but its supplies are finite. And they will have to eventually be replenished, possibly at an even higher cost if the attempt to quell crude price inflation fails. Thus far, the details of the SPR release hint that this is a tentative dip in the pool: the volume of 7.38 million barrels was far lower than the 35-70 million barrels predicted by some market participants. And because successful bidders can lift the oil up to December 10, it seems unlikely that a second auction for 2021 is in concrete plans at this point.

But, at the very least, the message has been sent. Beijing has a tool that it can wield if crude prices get out of hand, and it is not afraid to use it. The first step might have been small, and it is a giant leap in what mechanics are available to influence crude prices. And as history has proven, China can be very quick to scale up and very single-minded in its approach. Over to you, OPEC+.

End of Article

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Market Outlook:

  • Crude price trading range: Brent – US$73-76/b, WTI – US$71-74/b
  • Global crude benchmarks retain their strength, with Brent zipping past US$75/b, as supply-side issues and healthy demand continue to reverberate
  • After Hurricane Ida, US upstream players have gradually brought back some 70% of Gulf of Mexico production, easing some supply concerns, but a standoff between Libya’s Ministry of Oil and National Oil Corp could disrupt Libyan output

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September, 23 2021
Chicago Cubs Shirts: Wear Style with Ultimate Comfort!

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September, 16 2021
The New Wave of Renewable Fuels

In 2021, the makeup of renewables has also changed drastically. Technologies such as solar and wind are no longer novel, as is the idea of blending vegetable oils into road fuels or switching to electric-based vehicles. Such ideas are now entrenched and are not considered enough to shift the world into a carbon neutral future. The new wave of renewables focus on converting by-products from other carbon-intensive industries into usable fuels. Research into such technologies has been pioneered in universities and start-ups over the past two decades, but the impetus of global climate goals is now seeing an incredible amount of money being poured into them as oil & gas giants seek to rebalance their portfolios away from pure hydrocarbons with a goal of balancing their total carbon emissions in aggregate to zero.

Traditionally, the European players have led this drive. Which is unsurprising, since the EU has been the most driven in this acceleration. But even the US giants are following suit. In the past year, Chevron has poured an incredible amount of cash and effort in pioneering renewables. Its motives might be less than altruistic, shareholders across America have been particularly vocal about driving this transformation but the net results will be positive for all.

Chevron’s recent efforts have focused on biomethane, through a partnership with global waste solutions company Brightmark. The joint venture Brightmark RNG Holdings operations focused on convert cow manure to renewable natural gas, which are then converted into fuel for long-haul trucks, the very kind that criss-cross the vast highways of the US delivering goods from coast to coast. Launched in October 2020, the joint venture was extended and expanded in August, now encompassing 38 biomethane plants in seven US states, with first production set to begin later in 2021. The targeting of livestock waste is particularly crucial: methane emissions from farms is the second-largest contributor to climate change emissions globally. The technology to capture methane from manure (as well as landfills and other waste sites) has existed for years, but has only recently been commercialised to convert methane emissions from decomposition to useful products.

This is an arena that another supermajor – BP – has also made a recent significant investment in. BP signed a 15-year agreement with CleanBay Renewables to purchase the latter’s renewable natural gas (RNG) to be mixed and sold into select US state markets. Beginning with California, which has one of the strictest fuel standards in the US and provides incentives under the Low Carbon Fuel Standard to reduce carbon intensity – CleanBay’s RNG is derived not from cows, but from poultry. Chicken manure, feathers and bedding are all converted into RNG using anaerobic digesters, providing a carbon intensity that is said to be 95% less than the lifecycle greenhouse gas emissions of pure fossil fuels and non-conversion of poultry waste matter. BP also has an agreement with Gevo Inc in Iowa to purchase RNG produced from cow manure, also for sale in California.

But road fuels aren’t the only avenue for large-scale embracing of renewables. It could take to the air, literally. After all, the global commercial airline fleet currently stands at over 25,000 aircraft and is expected to grow to over 35,000 by 2030. All those planes will burn a lot of fuel. With the airline industry embracing the idea of AAF (or Alternative Aviation Fuels), developments into renewable jet fuels have been striking, from traditional bio-sources such as palm or soybean oil to advanced organic matter conversion from agricultural waste and manure. Chevron, again, has signed a landmark deal to advance the commercialisation. Together with Delta Airlines and Google, Chevron will be producing a batch of sustainable aviation fuel at its El Segundo refinery in California. Delta will then use the fuel, with Google providing a cloud-based framework to analyse the data. That data will then allow for a transparent analysis into carbon emissions from the use of sustainable aviation fuel, as benchmark for others to follow. The analysis should be able to confirm whether or not the International Air Transport Association (IATA)’s estimates that renewable jet fuel can reduce lifecycle carbon intensity by up to 80%. And to strengthen the measure, Delta has pledged to replace 10% of its jet fuel with sustainable aviation fuel by 2030.

In a parallel, but no less pioneering lane, France’s TotalEnergies has announced that it is developing a 100% renewable fuel for use in motorsports, using bioethanol sourced from residues produced by the French wine industry (among others) at its Feyzin refinery in Lyon. This, it believes, will reduce the racing sports’ carbon emissions by an immediate 65%. The fuel, named Excellium Racing 100, is set to debut at the next season of the FIA World Endurance Championship, which includes the iconic 24 Hours of Le Mans 2022 race.

But Chevron isn’t done yet. It is also falling back on the long-standing use of vegetable oils blended into US transport fuels by signing a wide-ranging agreement with commodity giant Bunge. Called a ‘farmer-to-fuelling station’ solution, Bunge’s soybean processing facilities in Louisiana and Illinois will be the source of meal and oil that will be converted by Chevron into diesel and jet fuel. With an investment of US$600 million, Chevron will assist Bunge in doubling the combined capacity of both plants by 2024, in line with anticipated increases in the US biofuels blending mandates.

Even ExxonMobil, one of the most reticent of the supermajors to embrace renewables wholesale, is getting in on the action. Its Imperial Oil subsidiary in Canada has announced plans to commercialise renewable diesel at a new facility near Edmonton using plant-based feedstock and hydrogen. The venture does only target the Canadian market – where political will to drive renewable adoption is far higher than in the US – but similar moves have already been adopted by other refiners for the US market, including major investments by Phillips 66 and Valero.

Ultimately, these recent moves are driven out of necessity. This is the way the industry is moving and anyone stubborn enough to ignore it will be left behind. Combined with other major investments driven by European supermajors over the past five years, this wider and wider adoption of renewable can only be better for the planet and, eventually, individual bottom lines. The renewables ball is rolling fast and is only gaining momentum.

End of Article

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Market Outlook:

  • Crude price trading range: Brent – US$71-73/b, WTI – US$68-70/b
  • Global crude benchmarks have stayed steady, even as OPEC+ sticks to its plans to ease supply quotas against the uncertainty of rising Covid-19 cases worldwide
  • However, the success of vaccination drives has kindled hope that the effect of lockdowns – if any – will be mild, with pockets of demand resurgence in Europe; in China, where there has been a zero-tolerance drive to stamp out Covid outbreaks, fuel consumption is strengthening again, possibly tightening fuel balances in Q4
  • Meanwhile, much of the US Gulf of Mexico crude production remains hampered by the effects of Hurricane Ida, providing a counter-balance on the supply side

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September, 16 2021