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Last Updated: June 22, 2017
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Last week in the world oil:

Prices

  • All the progress achieved since the OPEC supply quotas were agreed on have been undone, as crude prices fell to a seven-month low. With Brent at US$47/b and WTI at US$43/b, traders are concerned that rising production in Libya and Nigeria (exempt from the freeze), as well as in the US, have undermined OPEC’s ability to influence prices. With the glut growing and news of tankers increasingly being used as storage, there is little upside for crude prices now, so expect the decline to continue.

Upstream & Midstream

  • Deepwater seems to be back, as ExxonMobil signed off on the Liza field in Guyana. Together with partners Hess and CNOOC, the US$4.4 billion offshore project is the fifth deepwater project to be sanctioned this year, in part due to the attraction of its lower production costs. It marks a cautious return to upstream megaprojects after the price crash in 2015, in parallel with majors developing lower-cost shale sites as well. The first phase of Liza should pump 120 kb/d when it comes online in 2020.
  • Uganda has signed two production sharing agreements with Nigeria’s Oranto Petroleum that will see the first crude flow by 2020. Oil from the Ngassa Shallow and Ngassa Deep plays in the Albertine rift basin forms part of gross national recoverable reserves of 1.4-1.7 billion barrels. Landlocked Uganda is already working with Tanzania to build a heated pipeline to ship its crude internationally through the port of Tanga.
  • Six new oil rigs started up in the US last week, bringing the total number of oil rigs to 747 and total rigs to 933. In Canada, 27 new rigs started up last week as well, arresting the long slide in Canadian drilling sites.

Downstream

  • Mexico’s Pemex has begun to restart its 330 kb/d Salina Cruz refinery after Tropical Storm Calvin flooded the plant, breaking containment dams and triggering spills that halted the entire refinery. A fire that broke out killed a firefighter and injured nine workers has also been put out, allowing startup procedures to begin restoring the refinery to operation.

Natural Gas and LNG

  • While some central and southern European countries plan alternative gas routes, Austrian energy group OMV is considering reviving a plan to build a Black Sea pipeline to connect Russian Gazprom natural gas with the region. The plan is merely an outline at the moment, but will be an extension of the TurkStream pipeline currently being built that will connect to OMV’s Baumgarten gas hub and its 57 bcm/y capacity. Further south, Greece, Cyprus and Israel have jointly agreed to speed up their plans to develop a pipeline connecting Israel and Cyprus’ gas fields to the Mediterranean through a 2,000km pipeline linked to Greece and Italy. The new target completion date of 2025.
  • Shell and Qatar Petroleum have signed an agreement to jointly develop global LNG bunkering facilities. Combining Qatar’s vast LNG capacity and Shell’s bunkering expertise, the aim of the plan is to meet increasing demand for LNG as a bunker fuel, with Qatar Petroleum estimating that demand will reach 50 million tons per annum by 2030.

Last week in Asian oil

Upstream

  • As Chinese producers try to strike a balance between raising capex to boost domestic crude production with declining reserves, Chinese oil production fell to its lowest level on record in May. Production fell 3.7% y-o-y to 3.83 mmb/d, the lowest since the National Bureau of Statistics began publishing records in 2011. Producers like PetroChina are having to choose between cutting spending at rapidly declining fields like Daqing and Shengli, while raising spending elsewhere to help ease China’s increasing reliance on imported crude.

Downstream

  • China has issued a second round of crude oil import quotas. The overall number is higher than the entirety of allowances in 2016, but crucially, the allowance for teapot refineries is lower by some 17%. This is seen as an attempt by Beijing to exert control over a section of the refining industry that exploded last year, flooding the country with fuel.
  • Saudi Aramco’s relentless march into downstream continues, trying to secure footholds in key Asian markets to ensure captive demand for its crude. After Malaysia and China, Aramco is now talking with the Indian government to purchase a stake in the planned 1.2 mmb/d megarefinery to be build by the trio of state oil firms – Indian Oil, HPCL and BPCL – on the west coast. With little of its own crude to feed this planned site, India will need crude to run the refinery; and Saudi Aramco is happy to oblige, demanding a stake in what would be the world’s largest refinery.

Natural Gas & LNG

  • BP and Reliance in India have agreed to jointly invest up to US$6 billion to restart work in the country’s east coast gas blocks, where eight years of inertia have led to curtailed production. The money will be poured into developing 3 trillion cubic feet of natural gas, boosting production at the D6 block in the Krishna Godavari basin by 30-35 mcf/d by 2020. The BP-Reliance partnership was resuscitated after the government relaxed rules last year, allowing freedom in pricing and marketing gas in an attempt to attract investment into India’s dormant deepwater gas fields.
  • Japan’s JX Nippon Oil & Gas Exploration has commenced commercial gas production from the Layang field in Malaysia. Initial production of natural gas and condensate from the field offshore Sarawak is estimated at 12 kb/d, which will be piped together with gas from the Helang field to Petronas’ MLNG Tiga LNG plant in Bintulu, in which JX Nippon has a stake.
  • Faced with the departure of Chevron from its gas fields, Bangladesh’ state energy firm PetroBangla has inked an agreement with Swiss trader AOT Energy to secure LNG for the power-hungry nation. The LNG will be directed at the country’s first LNG terminal being built as an FSRU at Moheshkali island by Excelerate Energy. Another LNG terminal is also being planned, at Kutubdia Island with India’s Petronet LNG.
  • The capacity for the Abadi LNG project in Indonesia appears to be settled at 9.5 mtpa, with partners Inpex and Shell nearing agreement with Indonesia’s Energy and Mineral Resources Ministry. This would leave some 150 mcf/d of natural gas available for the domestic market to meet Indonesia’s domestic market obligation requirements. This would be almost four times the initial planned LNG capacity of 2.5 mtpa for Abadi, as Inpex itches to commercialise a discovery made in 1992. A smaller capacity of 7.5 mtpa is also being considered, which would leave 500 mcf/d leftover.

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The New Wave of Renewable Fuels

In 2021, the makeup of renewables has also changed drastically. Technologies such as solar and wind are no longer novel, as is the idea of blending vegetable oils into road fuels or switching to electric-based vehicles. Such ideas are now entrenched and are not considered enough to shift the world into a carbon neutral future. The new wave of renewables focus on converting by-products from other carbon-intensive industries into usable fuels. Research into such technologies has been pioneered in universities and start-ups over the past two decades, but the impetus of global climate goals is now seeing an incredible amount of money being poured into them as oil & gas giants seek to rebalance their portfolios away from pure hydrocarbons with a goal of balancing their total carbon emissions in aggregate to zero.

Traditionally, the European players have led this drive. Which is unsurprising, since the EU has been the most driven in this acceleration. But even the US giants are following suit. In the past year, Chevron has poured an incredible amount of cash and effort in pioneering renewables. Its motives might be less than altruistic, shareholders across America have been particularly vocal about driving this transformation but the net results will be positive for all.

Chevron’s recent efforts have focused on biomethane, through a partnership with global waste solutions company Brightmark. The joint venture Brightmark RNG Holdings operations focused on convert cow manure to renewable natural gas, which are then converted into fuel for long-haul trucks, the very kind that criss-cross the vast highways of the US delivering goods from coast to coast. Launched in October 2020, the joint venture was extended and expanded in August, now encompassing 38 biomethane plants in seven US states, with first production set to begin later in 2021. The targeting of livestock waste is particularly crucial: methane emissions from farms is the second-largest contributor to climate change emissions globally. The technology to capture methane from manure (as well as landfills and other waste sites) has existed for years, but has only recently been commercialised to convert methane emissions from decomposition to useful products.

This is an arena that another supermajor – BP – has also made a recent significant investment in. BP signed a 15-year agreement with CleanBay Renewables to purchase the latter’s renewable natural gas (RNG) to be mixed and sold into select US state markets. Beginning with California, which has one of the strictest fuel standards in the US and provides incentives under the Low Carbon Fuel Standard to reduce carbon intensity – CleanBay’s RNG is derived not from cows, but from poultry. Chicken manure, feathers and bedding are all converted into RNG using anaerobic digesters, providing a carbon intensity that is said to be 95% less than the lifecycle greenhouse gas emissions of pure fossil fuels and non-conversion of poultry waste matter. BP also has an agreement with Gevo Inc in Iowa to purchase RNG produced from cow manure, also for sale in California.

But road fuels aren’t the only avenue for large-scale embracing of renewables. It could take to the air, literally. After all, the global commercial airline fleet currently stands at over 25,000 aircraft and is expected to grow to over 35,000 by 2030. All those planes will burn a lot of fuel. With the airline industry embracing the idea of AAF (or Alternative Aviation Fuels), developments into renewable jet fuels have been striking, from traditional bio-sources such as palm or soybean oil to advanced organic matter conversion from agricultural waste and manure. Chevron, again, has signed a landmark deal to advance the commercialisation. Together with Delta Airlines and Google, Chevron will be producing a batch of sustainable aviation fuel at its El Segundo refinery in California. Delta will then use the fuel, with Google providing a cloud-based framework to analyse the data. That data will then allow for a transparent analysis into carbon emissions from the use of sustainable aviation fuel, as benchmark for others to follow. The analysis should be able to confirm whether or not the International Air Transport Association (IATA)’s estimates that renewable jet fuel can reduce lifecycle carbon intensity by up to 80%. And to strengthen the measure, Delta has pledged to replace 10% of its jet fuel with sustainable aviation fuel by 2030.

In a parallel, but no less pioneering lane, France’s TotalEnergies has announced that it is developing a 100% renewable fuel for use in motorsports, using bioethanol sourced from residues produced by the French wine industry (among others) at its Feyzin refinery in Lyon. This, it believes, will reduce the racing sports’ carbon emissions by an immediate 65%. The fuel, named Excellium Racing 100, is set to debut at the next season of the FIA World Endurance Championship, which includes the iconic 24 Hours of Le Mans 2022 race.

But Chevron isn’t done yet. It is also falling back on the long-standing use of vegetable oils blended into US transport fuels by signing a wide-ranging agreement with commodity giant Bunge. Called a ‘farmer-to-fuelling station’ solution, Bunge’s soybean processing facilities in Louisiana and Illinois will be the source of meal and oil that will be converted by Chevron into diesel and jet fuel. With an investment of US$600 million, Chevron will assist Bunge in doubling the combined capacity of both plants by 2024, in line with anticipated increases in the US biofuels blending mandates.

Even ExxonMobil, one of the most reticent of the supermajors to embrace renewables wholesale, is getting in on the action. Its Imperial Oil subsidiary in Canada has announced plans to commercialise renewable diesel at a new facility near Edmonton using plant-based feedstock and hydrogen. The venture does only target the Canadian market – where political will to drive renewable adoption is far higher than in the US – but similar moves have already been adopted by other refiners for the US market, including major investments by Phillips 66 and Valero.

Ultimately, these recent moves are driven out of necessity. This is the way the industry is moving and anyone stubborn enough to ignore it will be left behind. Combined with other major investments driven by European supermajors over the past five years, this wider and wider adoption of renewable can only be better for the planet and, eventually, individual bottom lines. The renewables ball is rolling fast and is only gaining momentum.

End of Article

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Market Outlook:

  • Crude price trading range: Brent – US$71-73/b, WTI – US$68-70/b
  • Global crude benchmarks have stayed steady, even as OPEC+ sticks to its plans to ease supply quotas against the uncertainty of rising Covid-19 cases worldwide
  • However, the success of vaccination drives has kindled hope that the effect of lockdowns – if any – will be mild, with pockets of demand resurgence in Europe; in China, where there has been a zero-tolerance drive to stamp out Covid outbreaks, fuel consumption is strengthening again, possibly tightening fuel balances in Q4
  • Meanwhile, much of the US Gulf of Mexico crude production remains hampered by the effects of Hurricane Ida, providing a counter-balance on the supply side

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