Last week in the world oil:
* With an extension of the OPEC supply cuts seemingly imminent, as Saudi Arabia and Russia agreed that the freeze must last until early 2018, crude oil prices have gained ground. Brent topped US$52/b for the first time in three weeks, while WTI is inching up towards US$50/b again.
Upstream & Midstream
* France’s Total has signed a deal with Mauritanian state oil firm SMHPM to explore for offshore oil and gas, as the action in West Africa swings north to the new deepwater basins off Mauritania and Senegal. Total will take a 90% operating stake in the 7,300 sq.km 7,300 Block C7, just a week after it bought a 90% stake in the Rufisque Offshore Profond Block in Senegal.
* First oil has begun to flow at the Repsol Sinopec Resources’ Shaw field, part of the major redevelopment of the Montrose Area in the Central North Sea. Aiming to integrate new and existing infrastructure in the UK’s North Sea, the Shaw, Godwin and Cayley fields will add some 100 million boe to the reserves in Montrose.
* The recent razor-thin victory of Canada’s Liberal Party in British Columbia puts the Kinder Morgan Trans Mountain oil pipeline expansion and the US$27 billion Petronas LNG export projects at risk. Reduced to a minority government, the Liberals will require support from the Green Party to govern, and the Greens are vehemently opposed to both projects, despite the BC and Federals governments already approving them.
* American oilrigs added another nine to their number, reaching 712. It has been 17 consecutive weeks of rises in the US overall rig count, marching towards 900 as raising doubts about the effectiveness of more OPEC cuts.
* Italy’s Eni will be building a new 150 kb/d refinery in Nigeria. Part of the country’s drive to boost downstream investment to reduce reliance on imported oil products – despite being a crude exporter – the refinery will be built by Eni’s downstream subsidiary Agip, replacing the chronic aging existing refineries of NNPC.
* Venezuela’s refining woes continue, as aging units and manpower shortages reduce utilisation at the Paraguna Refining Center to 43%, with multiple units at the Cardon and Amuay refineries out of service.
Natural Gas and LNG
* As East Europe looks to assert a measure of energy independence away from Russia, Romania’s state gas producer Romgaz announced that production at the domestic Caragele field will start in 2019. With an estimated 25-27 bcm of gas, the field in Buzau could supply the entire country for three years. Romgaz is hoping to up that figure, sanctioning more tests and drilling in the area, with an eye toward becoming a net gas exporter through the impending Bulgarian-Romanian gas pipeline.
* From being desperate for oil and gas, Egypt is now talking to its LNG suppliers to defer shipments as its domestic gas production surges. Long seen as a reliable sink for LNG shipments, Cairo reportedly aims to scale back LNG purchases in 2018 from 70 to 30 cargoes, as production surges from BP’s Tauros and Libra fields in West Nile Delta, as well as Eni’s Zohr and giant Nooros field, which has hit 900 million cubic feet/d of output.
Upstream & Midstream
* Saudi Aramco will ship some 7 million barrels of crude oil less to Asia in June. Part of its commitment to the OPEC pact, the reduction also comes as the country hoards crude for domestic power demand during the searing summer, especially with the festive Ramadhan period beginning in late May. The nomination plans for June indicate a million barrel cut to Southeast Asia, China and South Korea each, slightly less than a million barrels for Japan and a whopping 3 million barrels for India. Expect the countries to turn to America and Africa to make up the shortage.
* Total and Japan’s Inpex are proposing to the Indonesian government take a 39% stake in the new Production Sharing Contract (PSC) at the Mahakam block. Under the current contract that began in 2015, the two companies – which operate the oil and gas block – have a smaller stake of 30%, with Pertamina taking the rest. Pertamina will be the operator of Mahakam under the new PSC, with Total and Inpex asking for new clauses in compensation, including 17% investment credit for developing the block and selling gas to domestic buyers at market prices.
* IndianOil has opened up talks with Saudi Aramco to build a mega refinery on India’s west coast. The project would be one of mutual benefit. India is aspiring to be self-sufficient in oil product demand, which would require that it vastly expand refining capacity. The project, which has a mammoth planned capacity of 1.2 mmbpd will also have a petrochemicals portion, to feed the country’s growing manufacturing sector. For Saudi Arabia, it locks in India as a top customer amid a growing oil supply glut. It also represents a strategic downstream move, with Aramco also involved in the RAPID project in Malaysia and pushing ahead with its American Motiva subsidiary after a divorce from joint venture partner Shell.
* ExxonMobil has agreed to buy the Jurong Aromatics refinery and petrochemical plant, outbidding South Korea’s Lotte Chemical by offering a price of US$1.7 billion. The JAC plant will now be integrated with ExxonMobil’s existing complex on Jurong, expanding the firm’s largest refining complex even further.
Natural Gas & LNG
* Malaysia’s Petronas is looking to expand its status as the third-largest LNG exporter by tapping new market in South and Southeast Asia. India, Pakistan, Bangladesh and Myanmar have been identified as avenues of growth for the Malaysian state oil firm, while new sectors such as LNG fuel for commercial ships are also being tested.
* Without changing existing rules for American LNG exports, Donald Trump’s administration has clarified that current trade rules allow American shale gas producers to target China directly to sell LNG. Currently, American LNG heads to China under spot contracts, with Cheniere already shipping nine cargoes from its Sabine Pass facility. The clarification is expected to trigger a wave of long-term contracts with Chinese buyers, rather than prompt spot purchases.
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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