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Last Updated: May 31, 2017
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Last week in the world oil:

Prices

  • As it turns out, an extension of the OPEC and non-OPEC supply cuts wasn’t enough, even if it ‘gave clarity until March 2018’ according to French major Total. Traders and investors were expecting deeper cuts to quotas, and when those failed to materialise, sent oil prices down by almost 5% to US$51/b for Brent and US$49/b for WTI.

Upstream & Midstream

  • Norway’s Statoil will start up its Gina Krog oil and gas field in June, after receiving consent from the Norwegian Petroleum Directorate. Originally expected to start up in April, Gina Krog is estimated to hold some 106 million barrels of oil, 11.8 bcm of natural gas and 3.2 million tons of NGLs. Operator Statoil owns 58.7% of the field, while Total’s 15% stake has been sold to Norwegian startup Okea for US$350 million. With new output expected, Norway has declined to enforce a cut in its output, despite being approached by Saudi Arabia to join in the OPEC-led freeze.
  • The worst disruption in Nigeria’s oil-producing Delta are over, with output expected to climb back to 2.2 mmb/d entering the second half of 2017 and Forcados expected back by end June. This would add pressure on global oil prices, as Nigeria is currently exempt from the OPEC supply freeze. This could be further exarcebated by the passing of the country’s Petroleum Industry Governance Bill, part of the Petroleum Industry Bill that will overhaul Nigeria’s upstream sector to boost investment.
  • With the OPEC cuts extended for another nine months, US drillers are sensing opportunity to sell more volumes, adding another seven new sites to bring the total up to 908. Last week, however, added only two new oilrigs, the slowest expansion rate in three months – perhaps a sign that US onshore shale drilling is reaching a ceiling.

Downstream

  • Saudi Aramco has been making major downstream steps recently, strengthening up its portfolio ahead of its planned IPO. Fresh from ending its partnership with Shell over its US refining subsidiary Motiva, Saudi Aramco has announced plans to spend some US$18 billion through 2022, investing in expanding Port Arthur – the largest refinery in America – adding new petrochemical capacity and expanding marketing operations.
  • Uganda and Tanzania have agreed to move ahead with the proposed US$3.55 billion crude pipeline that will bring landlocked Ugandan crude in the country’s west to Tanzania’s port of Tanga by 2020. Fiscal terms, timelines, routing and mechanical details of the pipeline have been agreed, with the 1,445km, 24inch pipeline being the longest electrically-heated crude pipeline in the world when operational.

Natural Gas and LNG

  • Another first for Cheniere, as the Netherlands received its first ever LNG cargo from the US, expanding Sabine Pass’ LNG footprint in Europe. Cheniere is currently the only company exporting large LNG cargoes from the US Gulf, and its increasing volumes sent to Europe proves the case for international viability of US LNG exports; and a boon to European countries keen to reduce their reliance on cunning Russia.

Last week in Asian oil

Upstream

  • Shell has been given the green light by Petronas to sell its 50% stake in the 2011 North Sabah Enhanced Oil Recovery PSC to Malaysian player Hibiscus Petroleum. The clears the way for the stake to exchange hands for US$25 million, with Petronas Carigali waiving it pre-emption rights. The PSC includes the Labuan Crude Oil Terminal and the offshore fields of St. Joseph, South Furious, SF30 and Barton, lumped together to eke additional production out of the aging fields. Petronas has 50% of the PSC, with Shell holding the remainder through two subsidiaries – split evenly between Sabah Shell Petroleum and Shell Sabah Selatan.

Downstream

  • China has signalled that private companies will eventually be allowed to invest in Chinese oil and gas storage sector, part of a larger plan to streamline the country’s complex and lumbering state players and stimulate competition. Foreign participation in upstream is also on the cards, filtering down to pipeline and other midstream distribution.
  • Vietnam’s sole operational refinery in Dung Quat will sell off 5-6% of its shares in late 2017 via an IPO aimed that reducing government ownership in state-run enterprises. An additional 36% is also earmarked to be sold to ‘strategic partners’ – which reportedly include Gazprom, PTT and Kuwait Petroleum – after flotation, as the refinery struggles to maintain consistent operations.

Natural Gas & LNG

  • The Philippine National Oil Company (PNOC) has established talks with Shell to build a grassroots LNG import plant in Batangas. It is the latest in a series of planned LNG import projects in the area, including one by Shell on its own, with Batangas being the main transmission point to Metro Manila. PNOC has been trying to establish an LNG terminal for almost a decade to cope with increasing power demands, but cannot handle the project alone, hence the need to seek out experienced partners.
  • The state government of Sarawak is negotiating with Petronas to acquire a 10% stake in the LNG Train 9 at the Petronas LNG complex in Bintulu. With a capacity of 3.6 million tons of LNG, Train 9 is the latest liquefaction facility in Bintulu, which began operations in January and raised total capacity at the site to 30 million tons per year. Petronas is the operator and main shareholder in Train 9, with Japan’s JX Nippon Oil & Energy also a significant stakeholder. The state government has been pushing to derive more direct revenues from Sarawak’s vast natural gas industry, and is also asking for a larger equity share in the operational Malaysian Liquefied Natural Gas (MLNG) Dua plant.

Corporate

  • China’s Sinochem and ChemChina are on the verge of merging. The deal would create the world’s largest industrial chemicals firm, dwarfing BASF, in the world’s largest chemicals market. Sinochem chief Ning Gaoning is earmarked to be the head of the new firm, which Beijing sees as a blueprint for streamlining its vast and complex state entreprises holdings, creating international champions in the process.

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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.

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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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