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Last Updated: June 8, 2017
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Last week in the world oil:

Prices

  • President Trump’s decision to pull the US out of the Paris Climate Agreement may have sent prices down, but now a more serious rift has appeared. Saudi Arabia has cut off all diplomatic ties with Qatar, as well as its land border, joined by the UAE, Bahrain and Egypt. Crude prices tumbled in response, with Brent falling below US$50/b. The worry is long term; Qatar may be the smallest producer within the OPEC cartel, but these new tensions could unleash discontent within the cartel, potentially weakening its supply deal and derailing attempts to support oil prices.

Upstream & Midstream

  • Canada’s Husky Energy is proceeding with its C$2.2 billion (US$1.6 billion) West White Rose project off the country’s Atlantic coast, slated to begin production in 2022 and scale up to peak capacity of 75 kb/d by 2025. A new oil discovery has also been made at Husky’s Northwest White Rose production area, as it remains undeterred by the downturn.
  • Even as crude oil prices tumbled, American rig operators show no sign of slowing down. Eleven new oil rigs were started up last week, offsetting the loss of three gas rigs to bring the total number to 916.

Downstream

  • Nigeria’s parliament has halted an agreement with Eni that would have seen the Italian major takeover operations of the Port Harcourt refinery. The site, with capacity of 445 kb/d, has been languishing in disrepair, forcing Nigeria to import most of its oil products. Eni’s participation would be led to major repairs necessary, but the government has called off the deal with Nigerian company Oando, citing a ‘lack of transparency.’
  • Canada’s first new refinery since 1984 has started up, entering a field that has significantly changed since it was first approved. The Sturgeon plant in Alberta was designed to process oil sands into diesel, in response to a diesel shortage in 2012. The market, however, has already changed, with diesel now in oversupply and prices in challenging territory.

Natural Gas and LNG

  • BP has been busy in the Caribbean, signing off on its US$500 million Angelin offshore gas development in Trinidad & Tobago. The first major offshore project approved by BP this year, first gas is expected to flow in 2019. BP also announced two ‘significant’ gas discoveries in its Savannah and Macademia exploration wells offshore Trinidad, potentially holding 2 trillion cubic feet of gas. The finds will be significant for BP, which has faced declining production in Trinidad since 2010.
  • Italy’s Eni has sanctioned its Coral South LNG project in Mozambique, a US$8 billion gas development that will transform the African nation into a major supplier of LNG. Exports, which should number 3.4 million tons, are expected to begin in 2022, and additional LNG projects tapping into the 85 tcf Rovuma Basin are expected come onstream as well.
  • American regulators have cleared the way for the first floating LNG terminal in the Gulf of Mexico. The 13 mtpa Delfin project by Fairwood also received approval from the Energy Department to 1.8 bcf of LNG to countries with no free-trade agreements with the US, adding to permission to ship to countries already with trade pacts.

Last week in Asian oil

Upstream

  • BP expects to complete its production sharing deal extension in Azerbaijan by the end of the month. The deal, which involves the Central Asian nation’s largest oilfields, will extend the agreement between a BP-led consortium and Azeri state oil firm SOCAR from the original expiration date of 2024 to 2050. Other partners in the consortium include Chevron, Inpex, Statoil, ExxonMobil and Itochu.

Downstream

  • Binh Son Refinery, operators of Vietnam’s sole refinery in Dung Quat, announced that it had bee valued at 72.88 trillion dong (US$3.21 billion) at end-2015, which would be the basis of its planned IPO. Aimed to be launched by end 2017, the IPO will see 5-6% of the company’s shares sold publicly, which is part of a drive to reduce government ownership in Vietnamese state-run enterprises.
  • Pricing agency S&P Global Platts has added Indonesia’s Oiltanking Karimun Terminal to its Singapore prices for gasoil, jet fuel and gasoline, expanding the geographical reach of its Singapore price assessments. This will be the first Indonesian delivery point in the Platts assessment, which already includes several Malaysia terminals like Tanjung Langsat, Tanjung Bin, Pengerang and several floating storage units.

Natural Gas & LNG

  • As it is isolated politically and geographically by its neighbours, Qatar is facing challenges to its status as the world’s largest LNG exporter. Looking to the future, state-run Qatar Petroleum is now mulling over raising the capacity at Ras Laffan trains through debottlenecking, to prepare from additional gas that it expects to come from its new North Field project.
  • With a tsunami of LNG expected out of the US Gulf Coast, Japan has agreed in principal to help promote American LNG usage during a trip by US Energy Secretary Rick Petty to Tokyo. The agreement is in line with Japan’s ambitions to seek new outlets for natural gas consumption domestically and in Asia, as well as establish itself as the LNG trading hub in the region, which would depend on American spot cargoes.
  • PNOC has unveiled its plans for the Energy City in Limay, Bataan. Centred around an LNG receiving and regasification facility, as well as associated facilities, power generation plants and transmission infrastructure, the project is a step forward to implement the country’s decades-long ambition to build an LNG import plant to meet its growing power needs. Japan’s Osaka Gas and Mitsui will be partners in the US$2.4 billion project, with construction aimed to begin in 2020. Corporate

 Malaysia’s Petronas reported that its profits have more than doubled on a yearly basis. Revenue for the quarter ending March 31 was RM61.6 billion, up 25%, while net profit was up from RM4.6 billion to RM 10.3 billion (US$2.41 billion), as a cost-cutting drive helped trim operating expenses. Its conservative price expectations for the year are US$45/b, a level that crude prices are currently dangerously close to.

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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.

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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