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Last Updated: March 22, 2017
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Last Week in World Oil:

Prices

  • Despite a midweek bounce in prices last week on an unexpected fall in US stockpiles, oil prices started the week on a weaker note. WTI is now at US$48/b and Brent at US$51/b, as disrupted Libyan port shipments resume after insurgent activity and US data continues to show rising drilling.

Upstream & Midstream

  • BP and Ineos are in talks over the Forties pipeline. Comprising pipelines that transports over 450 kb/d of oil, Forties is the largest constituent of Dated Brent, the international crude benchmark. After selling its stake in the Central Area Transmission System for £324 million in 2015, BP is now mulling selling some or the entirety of Forties, which it owns outright, to pare down debt acquired over the Deepwater Horizon spill. BP has already sold to Forties field to Apache and the Grangemouth refinery to Ineos over the last decade, so a sale would continue the ongoing trend of BP withdrawing from its aging North Sea assets.
  • Production at Total’s Moho Nord site in the Republic of Congo has started up, after repeated delays. The field has estimated output of some 100 kb/d per day, shared between operator Total (53%), Chevron (31.5%) and Societe Nationale des Petroles du Congo (15%).
  • The US active rig count is now at an 18-month high, with 14 new oil rigs, 6 new gas rigs and 1 miscellaneous site starting up last week.

Downstream

  • Russian will be increasing their production of high-octane gasoline this year, when five refineries complete upgrades that could add up to 4.5 million tons of production capacity. Given that domestic consumption is relatively flat, the gasoline will likely be exported – probably to Central Asia and East Europe – up existing imports of some 3.4 million tons.
  • After suddenly halting oil product shipments to Egypt last October, Saudi Aramco has announced that it will resume the agreed shipments of 700,000 tons of oil products per month, signalling a thawing of relations between both countries after Egypt voted in favour of a UN resolution on Syria, which was opposed by Saudi Arabia.
  • ExxonMobil is reportedly selling half of its 2,500 strong fuel station network in Italy. With an estimated price of €500 million, the company joins Shell and Total in exiting the oversupplied Italian market. Private equity firm Apollo is the frontrunner to acquire the Esso-branded stations, possibly combining it with Total’s stations for rationalisation.

Natural Gas and LNG

  • Shell’s divestment drive continues and the latest target for sale appears to be the gas-rich Haynesville Shale portfolio, acquired during its purchase of the BG Group and now ironically identified for sale to pay for that buy.

Corporate

  • The John Wood Group will acquire engineering service provider Amec Foster Wheeler for £2.23 billion (US$2.7 billion), continuing a trend of service providers merging to combat the weak environment in the industry, including GE’s merger with Baker Hughes in October 2016.


Last Week in Asian Oil:

Upstream & Midstream

  • China’s YTD crude oil production slipped by 8% y-o-y to 31.44 million tons as upstream companies scale back operations at aging fields over rising costs, preferring instead to import more crude oil. Crude oil imports over January and February 2017 was up 12.5% while crude processing volumes were up by 4.3%, as both the Chinese majors and independent teapot refiners raise production runs.
  • Iran is now India’s second-largest supplier of crude, leapfrogging India in February. Iranian volumes rose by nearly 17%, as OPEC producers Saudi Arabia and Iraq sent less crude to India as part of the organisation’s production cuts, returning Iran to the position it occupied pre-sanctions.

Downstream & Shipping

  • Sinopec may be acquiring its first major African downstream assets, as it nears buying Chevron’s South African oil assets for US$1 billion. The assets include fuel retail and storage terminals, as well as the 110kb/d Cape Town refinery. Sinopec was one of the few parties that expressed interest in keeping the refinery running instead of converting it into a storage terminal, though talks on that with the government may still fail.
  • BP has sold half of its 20% stake in the New Zealand Refining Company for US$56.2 million. Part of its global portfolio review, the buyer was not identified and BP will be continuing its processing arrangement with New Zealand Refining, along with ExxonMobil and Z Energy.

Natural Gas & LNG

  • The beleaguered US$37 billion Ichthys LNG project in Australia, led by Japan’s Inpex, has hit another snag. More than 600 workers of a subcontractor were terminated over a contractual dispute regarding the building of LNG storage tanks near Darwin. Despite this, Inpex states it is sticking to the massive project’s expected start up of Q32017.
  • Total is seeking up to a 50% stake in the US$4 billion South Pars gas field project in Iran, after becoming the first Western oil major to sign preliminary energy pacts with Iran as it came in from the cold. If finalised, Total would be the operator of South Pars with 50.1%, with China’s CNPC (30%) and Iran’s Petropars (19.9%) being the other shareholders.

Corporate

  • Commodities trader Cargill is selling its petroleum business to Australian investment bank Macquarie Group, as it admits defeat after the prolonged slump in oil prices saw Cargill struggling. Macquarie has an existing global oil business and the Cargill deal will add operations in Geneva and Minneapolis, Minnesota to its portfolio.
  • Singapore’s offshore industry was hit with another blow last week as oilfield services firm Ezra Holdings filed for Chapter 11 bankruptcy in the US. The company said it had been trying to restructure over the last year in the face of challenging conditions, and it is joined by Emas Chiyoda Subsea, an affiliate that has also filed for bankruptcy for which Ezra has provided guarantees on nearly US$900 million in loans and liabilities. In another sign of the tough environment in Singapore, Keppel Offshore and Marine CEO Chow Yew Yuen announced a surprise step-down last week, with Chris Ong appointed as his acting replacement.

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May, 24 2022
Where to buy your Gun Parts from?

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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.

End of Article

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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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May, 09 2022