Easwaran Kanason

Co - founder of PetroEdge
Last Updated: July 24, 2017
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Business Trends
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The International Energy Agency recently revealed that global investment in energy fell for a second consecutive year, by 12%, in 2016 across all energy types. The largest driver of that decline falls in the arena of fossil fuels – unsurprising, given the low price environment since 2015, dissuading any appetite for big budget spending. Instead, the world is moving towards clean energy investment – hitting 43% of total supply investment, a record high – while the energy sector is increasing focusing on power transmission and distribution, which exceeded spending on oil, gas and coal for the first time.

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China, unsurprisingly, remains the largest energy investor. But it too is spending less on oil, gas and coal, and more on power and clean energy. It is also investing a lot on energy efficiency, now ranking only behind Europe in terms of percentage spent. Investment in the US saw a sharp drop – prices were too low for even nimble shale operators to thrive – while the report singles out India as the fastest-growing major market, as it plays catch-up with China in implementing necessary infrastructure to support a billion-plus people.

The drop in spending is, according to the IEA, worrisome. If the trend continues, depressed investment could lead to inadequate supply in the future – triggering another price boom, which will inevitably be followed by another bust, leading to another boom-bust cycle. It isn’t just oil and gas affected; although the share of investment rose, actual spending on global electricity only increased marginally in 2017 (to US$718 billion), while spending on renewable power fell by 3% (to US$297 billion). The shift in percentages largely because spending on upstream hydrocarbons and coal fell to only US$40 billion – half the annual spending for 2011-2015 and a third of the spending for 2006-2010. Only energy efficiency investment rose, to US$231 billion, contributed mainly by the large rise in China.

The outlook for the oil industry 2017 however is projected to be rosier if compared to 2016. With indications that crude prices are stabilising, range bound within US$45 – 55, investments into upstream are being revived selectively. The supermajors have all sanctioned multiple big budget projects this year – ExxonMobil has doubled it acreage in the Permian Basin earlier this year, BP is expanding its upstream spending notably in the US Gulf while Total signed off on the group’s first deepwater projects since 2014. The prospect of LNG in Africa is heating up, with groups like Eni capitalising. Meanwhile, the restructuring of the industry in Brazil following the Petrobras scandal could unlock acreage for foreign investment, finally fulfilling Brazil’s deepwater pre-salt potential. In the Middle East, Qatar wants to expand its natural gas and LNG production as a long-term security measure against touchy geopolitics, and Iran has every bit of ambition to reclaim its oil riches by drilling more.

In some cases, this mood has been offset by pullouts elsewhere – Chevron in Bangladesh and Thailand, ConocoPhillips along with others in Canada’s oil sands region – but the sort of pessimism that clouded the industry in 2016 has been slightly lifted.

In its place is a sort of cautious optimism that the future is brighter. This move to strategic investments than the wanton, mammoth projects of old seems to be the flavour of the day. Spend wisely and spend smartly, as they say. But as the industry refocuses on projects with shorter cycles, instead of projects taking multiple decades, there will be a need to pay important attention to the long-term adequacy of sustained energy supply, noting the recent warning from IEA. For now, at least, it seems like 2017 will be a better year for energy investment.

Easwaran Kanason, Co-founder of NrgEdge

P.S. For continuity of investments in the energy industry, making the right choices is key for future success. Good templates for decision making processes exist that will allow arriving at such a choice in an orderly and structured manner. Although decisions can even be challenging in the context of limited uncertainty. Read more about “Uncertainty and the art of decision making” a recent blog post by Henk Krijnen. 

Henk Krijnen will be in Kuala Lumpur this October 2017, presenting a very timely "Masterclass on Scenario Planning for Decision Making in the Energy Industry". Find out more https://goo.gl/tauq5x. If you are too busy during this period, check out our training series on Training to Navigate Uncertainty in Oil & Gas 

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BP & The Expansion of the Caspian

The vast Shah Deniz field in Azerbaijan’s portion of the South Caspian Sea marked several milestones in 2018. It has now produced a cumulative total of 100 billion cubic metres of natural gas since the field started up in 2006, with daily output reaching a new peak, growing by 12.5% y-o-y. At a cost of US$28 billion, Shah Deniz – with its estimated 1.2 trillion cubic metres of gas resources – has proven to be an unparalleled success, being a founding link of Europe’s Southern Gas Corridor and coming in relatively on budget and on time. And now BP, along with its partners, is hoping to replicate that success with an ambitious exploration schedule over the next two years.

Four new exploration wells in three blocks, along with a seismic survey of a fourth, are planned for 2019 and an additional three wells in 2020. The aggressive programme is aimed at confirming a long-held belief by BP and SOCAR there are more significant pockets of gas swirling around the area. The first exploratory well is targeting the Shafag-Asiman block, where initial seismic surveys suggest natural gas reserves of some 500 billion cubic metres; if confirmed, that would make it the second-largest gas field ever discovered in the Caspian, behind only Shah Deniz. BP also suspects that Shah Deniz itself could be bigger than expected – the company has long predicted the existence of a second, deeper reservoir below the existing field, and a ‘further assessment’ is planned for 2020 to get to the bottom of the case, so to speak.

Two wells are planned to be drilled in the Shallow Water Absheron Peninsula (SWAP) block, some 30km southeast of Baku, where BP operates in equal partnership with SOCAR, with an additional well planned for 2020. The goal at SWAP is light crude oil, as is a seismic survey in the deepwater Caspian Sea Block D230 where a ‘significant amount’ of oil is expected. Exploration in the onshore Gobustan block, an inland field 50km north of Baku, rounds up BP’s upstream programme and the company expects that at least one seven wells of these will yield a bonanza that will take Azerbaijan’s reserves well into the middle of the century.

Developments in the Caspian are key, as it is the starting node of the Southern Gas Corridor – meant to deliver gas to Europe. Shah Deniz gas currently makes its way to Turkey via the South Caucasus Gas pipeline and exports onwards to Europe should begin when the US$8.5 billion, 32 bcm/y Trans-Anatolian Pipeline (TANAP) starts service in 2020. Planned output from Azerbaijan currently only fills half of the TANAP capacity, meaning there is room for plenty more gas, if BP can find it. From Turkey, Azeri gas will link up to the Trans-Adriatic Pipeline in Greece and connect into Turkey, potentially joined by other pipelines projects that are planned to link up with gas production in Israel. This alternate source of natural gas for Europe is crucial, particularly since political will to push through the Nordstream-2 pipeline connecting Russian gas to Germany is slackening. The demand is there and so is the infrastructure. And now BP will be spending the next two years trying to prove that the supply exists underneath Azerbaijan.

BP’s upcoming planned exploration in the Caspian:

  • Shafag-Asiman, late 2019, targeting natural gas
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  • ‘Onshore gas project’, end 2019, targeting natural gas’
  • Block D230, 2019 (seismic assessment)/2020 (drilling), targeting oil
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RAPID Rises

When it was first announced in 2012, there was scepticism about whether or not Petronas’ RAPID refinery in Johor was destined for reality or cancellation. It came at a time when the refining industry saw multiple ambitious, sometimes unpractical, projects announced. At that point, Petronas – though one of the most respected state oil firms – was still seen as more of an upstream player internationally. Its downstream forays were largely confined to its home base Malaysia and specialty chemicals, as well as a surprising venture into South African through Engen. Its refineries, too, were relatively small. So the announcement that Petronas was planning essentially, its own Jamnagar, promoted some pessimism. Could it succeed?

It has. The RAPID refinery – part of a larger plan to turn the Pengerang district in southern Johor into an oil refining and storage hub capitalising on linkages with Singapore – received its first cargo of crude oil for testing in September 2018. Mechanical completion was achieved on November 29 and all critical units have begun commissioning ahead of the expected firing up of RAPID’s 300 kb/d CDU later this month. A second cargo of 2 million barrels of Saudi crude arrived at RAPID last week. It seems like it’s all systems go for RAPID. But it wasn’t always so clear cut. Financing difficulties – and the 2015 crude oil price crash – put the US$27 billion project on shaky ground for a while, and it was only when Saudi Aramco swooped in to purchase a US$7 billion stake in the project that it started coalescing. Petronas had been courting Aramco since the start of the project, mainly as a crude provider, but having the Saudi giant on board was the final step towards FID. It guaranteed a stable supply of crude for Petronas; and for Aramco, RAPID gave it a foothold in a major global refining hub area as part of its strategy to expand downstream.

But RAPID will be entering into a market quite different than when it was first announced. In 2012, demand for fuel products was concentrated on light distillates; in 2019, that focus has changed. Impending new International Maritime Organisation (IMO) regulations are requiring shippers to switch from burning cheap (and dirty) fuel oil to using cleaner middle distillate gasoils. This plays well into complex refineries like RAPID, specialising in cracking heavy and medium Arabian crude into valuable products. But the issue is that Asia and the rest of the world is currently swamped with gasoline. A whole host of new Asian refineries – the latest being the 200 kb/d Nghi Son in Vietnam – have contributed to growing volumes of gasoline with no home in Asia. Gasoline refining margins in Singapore have taken a hit, falling into negative territory for the first time in seven years. Adding RAPID to the equation places more pressure on gasoline margins, even though margins for middle distillates are still very healthy. And with three other large Asian refinery projects scheduled to come online in 2019 – one in Brunei and two in China – that glut will only grow.

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RAPID Refinery Factsheet:

  • Ownership: Petronas (50%), Saudi Aramco (50%)
  • Capacity: 300 kb/d CDU/3 mtpa olefins plant
  • Other facilities: 1.22 Gigawatt congeneration plant, 3.5 mtpa regasification terminal
  • Expected commissioning: March 2019
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Forecasting Bangladesh Tyre Market | Zulker Naeen

Tyre market in Bangladesh is forecasted to grow at over 9% until 2020 on the back of growth in automobile sales, advancements in public infrastructure, and development-seeking government policies.

The government has emphasized on the road infrastructure of the country, which has been instrumental in driving vehicle sales in the country.

The tyre market reached Tk 4,750 crore last year, up from about Tk 4,000 crore in 2017, according to market insiders.

The commercial vehicle tyre segment dominates this industry with around 80% of the market share. At least 1.5 lakh pieces of tyres in the segment were sold in 2018.

In the commercial vehicle tyre segment, the MRF's market share is 30%. Apollo controls 5% of the segment, Birla 10%, CEAT 3%, and Hankook 1%. The rest 51% is controlled by non-branded Chinese tyres.

However, Bangladesh mostly lacks in tyre manufacturing setups, which leads to tyre imports from other countries as the only feasible option to meet the demand. The company largely imports tyre from China, India, Indonesia, Thailand and Japan.

Automobile and tyre sales in Bangladesh are expected to grow with the rising in purchasing power of people as well as growing investments and joint ventures of foreign market players. The country might become the exporting destination for global tyre manufacturers.

Several global tyre giants have also expressed interest in making significant investments by setting up their manufacturing units in the country.

This reflects an opportunity for local companies to set up an indigenous manufacturing base in Bangladesh and also enables foreign players to set up their localized production facilities to capture a significant market.

It can be said that, the rise in automobile sales, improvement in public infrastructure, and growth in purchasing power to drive the tyre market over the next five years.

January, 18 2019