Last Week in World Oil:
- Oil prices inched up at the start of the week, buoyed by the effective implementation of the OPEC producer cuts. However, the rising prices have also encouraged rising production in the US, keeping gains in check along with stubbornly high US stockpile levels.
- The Brent crude benchmark, which forms the bulk of global oil trade, is being overhauled for the first time in a decade to account for declining production in the North Sea. Effective immediately, pricing agency Platts has added the Norwegian Troll crude grade to the basket of four British and one Norwegian crudes (Brent, Forties, Oseberg and Ekofisk) that form Brent to expand the physical volume of crude underpinning the benchmark, making it less vulnerable to manipulation.
Upstream & Midstream
- TransCanada has re-filed an application with Nebraska to route the proposed Keystone XL pipeline through the state. The original application was withdrawn after President Obama vetoed the pipeline project, but with a friendlier administration in the White House, this brings Keystone XL one step closer to implementation and operational reality.
- Iraq and Iran have agreed to explore the possibility of a pipeline linking the two nations, expanding export options for Kirkuk crude in northern Iraq as well as provide crude for the Abadan refinery in Iran. Currently Kirkuk crude is transported through Kurdish territory, complicating matters as the Kurds have interrupted Kirkuk transit in the past.
- Thirteen new onshore oil and gas rigs were added to the US rig count last week, offsetting a loss of three offshore rigs to bring the total active rig count up to 751. It is the fifth consecutive week of rises, leading to the EIA forecasting a rise in domestic oil output to 4.87 mbpd in March, which would be the fastest rise since October, underpinned by shale oil plays.
- The Ras Laffan Refinery 2, which began production in late 2016, will be geared towards producing aviation fuel, with a dedicated pipeline connecting it to the Doha International Airport expected to be completed in 2018. Ras Laffan 2 runs on condensate, with a capacity of 146 kb/d, and will also produce naphtha for petrochemical processing and ultra low-sulphur diesel for export to Europe.
Natural Gas and LNG
- Petronas and the government of British Columbia are offering an additional C$145 million to two First Nation groups that would allow a US$27 billion LNG project to go ahead. Federal approval for the project was given last September for the Pacific Northwest LNG, but additional amendments are proposed to quell environmental and native group opposition to the project. Politics is now also in the fray, with the opposition candidate for the BC premiership opposing the current site of the planned facility, with elections due in May 2017.
Last Week in Asian oil:
Upstream & Midstream
- Petronas may be selling a large minority stake in a prized upstream gas asset in Sarawak, to raise cash and cut development costs as the Malaysian state player seeks to improve its financials. Petronas will retain a majority stake in the SK316 offshore gas block, but up to 49% of the asset may be sold off. The block is currently home to the NC3 field, which feeds the LNG9 joint venture export project with JX Nippon, as well as the Kasawari field. Likely buyers would be Japanese and Korean gas importers.
- Chevron has secured an offshore permit in Western Australia for AUS$3 million, the first cash bid permit to be awarded since 2014. The cash bid permit was reintroduced to drive interest‘in mature areas or areas known to contain petroleum accumulations’, essentially a cost-effective way of driving interest in areas that have a high percentage of recoverable resources. The WA-526-P permit is in a gas-rich area of the Northern Carnarvon basin close to the Gorgon and Pluto LNG projects, and is the first success of a series of disappointing cash bid auction results.
Downstream & Shipping
- Thailand’s largest oil refiner ThaiOil set out its operational plans for 2017 last week, aiming to runs its 275 kb/d refinery at within 100-103% capacity with no major maintenance shutdowns planned. Productivity rates exceeding 100% are common in Thailand where official refinery capacity is underestimated, with the Sriracha refinery reaching rates of 108% last year, almost all of which was consumed domestically.
Natural Gas & LNG
- More LNG will be entering Singapore as natural gas contracts supplied via pipeline from Malaysia and Indonesia near expiration. To mitigate this, Shell and Pavilion Gas will deliver their first LNG cargoes to Singapore later this year, under contracts awarded in October 2016 for three years or a maximum of 1 million tons per year. Singapore will also be allowing for up to 10% of imports coming from the spot market, to even out supply and bolster its ambitions of becoming the LNG trading hub for Asia
- Weak LPG prices are boosting demand in South Korea. Traditionally used as a transport fuel, LPG consumption in South Korea has declined significantly since 2010 as vehicles switched to gasoline and diesel, leaving major importers SK Gas and E1 scrambling for new customers. With a glut in natural gas liquids leading to low prices and a recovery in consumer plastics strengthening Asian petrochemical margins, LPG demand has jumped, benefitting American exporters. In 2016, South Korea’s LPG demand rose to 9.4 million tons while imports jumped to 7 million tons, more than half of which was supplied by US Gulf exporters. LPG usage in petrochemicals more than doubled to 3.3 million tons.
- The Elk-Antelope LNG project in Papua New Guinea is now targeted at the end of 2018, a delay from its original date of late 2017. One of the largest undeveloped gas assets in Asia, the Elk and Antelope fields are operated by Total, partnering with InterOil on the LNG export project. The ExxonMobil acquisition of InterOil would have streamlined the natural gas scene in PNG, but some ownership quibbles have delayed the acquisition until the Supreme Court of Yukon confirmed that the sale could go ahead on Sunday.
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Headline crude prices for the week beginning 9 September 2019 – Brent: US$61/b; WTI: US$56/b
Headlines of the week
Detailed market research and continuous tracking of market developments—as well as deep, on-the-ground expertise across the globe—informs our outlook on global gas and liquefied natural gas (LNG). We forecast gas demand and then use our infrastructure and contract models to forecast supply-and-demand balances, corresponding gas flows, and pricing implications to 2035.Executive summary
The past year saw the natural-gas market grow at its fastest rate in almost a decade, supported by booming domestic markets in China and the United States and an expanding global gas trade to serve Asian markets. While the pace of growth is set to slow, gas remains the fastest-growing fossil fuel and the only fossil fuel expected to grow beyond 2035.Global gas: Demand expected to grow 0.9 percent per annum to 2035
While we expect coal demand to peak before 2025 and oil demand to peak around 2033, gas demand will continue to grow until 2035, albeit at a slower rate than seen previously. The power-generation and industrial sectors in Asia and North America and the residential and commercial sectors in Southeast Asia, including China, will drive the expected gas-demand growth. Strong growth from these regions will more than offset the demand declines from the mature gas markets of Europe and Northeast Asia.
Gas supply to meet this demand will come mainly from Africa, China, Russia, and the shale-gas-rich United States. China will double its conventional gas production from 2018 to 2035. Gas production in Europe will decline rapidly.LNG: Demand expected to grow 3.6 percent per annum to 2035, with market rebalancing expected in 2027–28
We expect LNG demand to outpace overall gas demand as Asian markets rely on more distant supplies, Europe increases its gas-import dependence, and US producers seek overseas markets for their gas (both pipe and LNG). China will be a major driver of LNG-demand growth, as its domestic supply and pipeline flows will be insufficient to meet rising demand. Similarly, Bangladesh, Pakistan, and South Asia will rely on LNG to meet the growing demand to replace declining domestic supplies. We also expect Europe to increase LNG imports to help offset declining domestic supply.
Demand growth by the middle of next decade should balance the excess LNG capacity in the current market and planned capacity additions. We expect that further capacity growth of around 250 billion cubic meters will be necessary to meet demand to 2035.
With growing shale-gas production in the United States, the country is in a position to join Australia and Qatar as a top global LNG exporter. A number of competing US projects represent the long-run marginal LNG-supply capacity.Key themes uncovered
Over the course of our analysis, we uncovered five key themes to watch for in the global gas market:
Challenges in a growing market
Gas looks the best bet of fossil fuels through the energy transition. Coal demand has already peaked while oil has a decade or so of slowing growth before electric vehicles start to make real inroads in transportation. Gas, blessed with lower carbon intensity and ample resource, is set for steady growth through 2040 on our base case projections.
LNG is surfing that wave. The LNG market will more than double in size to over 1000 bcm by 2040, a growth rate eclipsed only by renewables. A niche market not long ago, shipped LNG volumes will exceed global pipeline exports within six years.The bullish prospects will buoy spirits as industry leaders meet at Gastech, LNG’s annual gathering – held, appropriately and for the first time, in Houston – September 17-19.
Investors are scrambling to grab a piece of the action. We are witnessing a supply boom the scale of which the industry has never experienced before. Around US$240 billion will be spent between 2019 and 2025 on greenfield and brownfield LNG supply projects, backfill and finishing construction for those already underway.50% to be added to global supply
In total, these projects will bring another 182 mmtpa to market, adding 50% to global supply. Over 100 mmtpa is from the US alone, most of the rest from Qatar, Russia, Canada, and Mozambique. Still, more capital will be needed to meet demand growth beyond the mid-2020s. But the rapid growth also presents major challenges for sellers and buyers to adapt to changes in the market.
There is a risk of bottlenecks as this new supply arrives on the market. The industry will have to balance sizeable waves of fresh sales volumes with demand growing in fits and starts and across an array of disparate marketplaces – some mature, many fledglings, a good few in between.
India has built three new re-gas terminals, but imports are actually down in 2019. The pipeline network to get the gas to regional consumers has yet to be completed. Pakistan has a gas distribution network serving its northern industrial centres. But the main LNG import terminals are in the south of the country, and the commitment to invest in additional transmission lines taking gas north is fraught with political uncertainty.
China is still wrestling with third-party access and regulation of the pipeline business that is PetroChina’s core asset. Any delay could dull the growth rate in Asia’s LNG hotspot. Europe is at the early stages of replacing its rapidly depleting sources of indigenous piped gas with huge volumes of LNG imports delivered to the coast. Will Europe’s gas market adapt seamlessly to a growing reliance on LNG – especially when tested at extreme winter peaks? Time will tell.
The point-to-point business model that has served sellers (and buyers) so well over the last 60 years will be tested by market access and other factors. Buyers facing mounting competition in their domestic market will increasingly demand flexibility on volume and price, and contracts that are diverse in duration and indexation. These traditional suppliers risk leaving value, perhaps a lot of value, on the table.
In the future, sellers need to be more sophisticated. The full toolkit will have a portfolio of LNG, a mixture of equity and third-party contracted gas; a trading capability to optimise on volume and price; and the requisite logistics – access to physical capacity of ships and re-gas terminals to shift LNG to where it’s wanted. Enlightened producers have begun to move to an integrated model, better equipped to meet these demands and capture value through the chain. Pure traders will muscle in too.
Some integrated players will think big picture, LNG becoming central to an energy transition strategy. As Big Oil morphs into Big Energy, LNG will sit alongside a renewables and gas-fired power generation portfolio feeding all the way through to gas and electricity customers.
LNG trumps pipe exports...
...as the big suppliers crank up volumes