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Last Updated: October 20, 2017
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Last week in World oil:

Prices

  • Crude prices remain stuck in their range – Brent at US$57/b and WTI at US$51/b – as swings in US inventories outweigh Middle Eastern geopolitical concerns, with little on to horizon to move the market. 

Upstream

  • Chinese major Sinopec is planning to exit Argentina, after losses and labour woes prompted it to put its oil assets on sale. Acquired in 2010 from Occidental Petroleum for US$2.45 billion, the acquisition was part of Sinopec’s drive to establish a portfolio of international upstream assets. However, a shaky political and economic situation in Argentina caused losses, and the oil and gas assets – mainly in the southern province of Santa Cruz – now have a price estimate of US$750 million-1 billion.
  • Uganda is quickly becoming a potential new African upstream bright spot, with Nigeria’s Oranto Petroleum recently signing two PSCs to explore around the Lake Albert basin. The Ngassa Shallow Play and Ngassa Deep Play are located within the Albertine rift basin where Uganda first struck oil in 2006; Uganda’s first domestic oil is expected in 2020.
  • Cote d’Ivoire has concluded four PSCs with Tullow Oil in a bid to jumpstart its fledgling upstream industry. Producing a mere 8 kb/d of oil and 200 mcf/d of gas, Cote d’Ivoire lags behind Senegal and Ghana, but is hoping that recent big finds in its neighbours hint at potential within its waters. State oil firm Petroci will hold 10% of each PSC.
  • US drillers cut active rig counts for the fourth time in five weeks, as price realities impact production plans. Eight rigs were removed from service last week – five oil and three gas – leaving the total active count at 928.

Downstream & Midstream

  • Another international joins the queue to exploit Mexico’s recently deregulated fuel retail industry, joining Shell, BP, ExxonMobil and Glencore. France’s Total is expanding its downstream presence in Mexico from specialty products to a full service station network, rebranding some 250 Mexico City-area GASORED group sites to the Total brand. The first site will be opened in late 2017, rolling out over 2018 and 2019. 

Natural Gas and LNG

  • More LNG this way comes. A week after Chevron began operations at Wheatstone, Russia’s Yamal LNG project in the Arctic confirmed that it will ship its first LNG cargo in November. Operated by Russia’s Novatek with France’s Total, China’s CNPC and the Silk Road Fund, Yamal will begin with two shipments in November, four in December, then ramp up to ten in 2018. The first cargoes were reportedly sold on the spot market.

Corporate

  • Indications are the Saudi Aramco’s planned IPO has hit some snags. Recent reports indicate that some delays are expected, with a two-stage IPO likely – floating in Riyadh by the end of 2018 and delaying the planned international portion until 2019. Some chatter on the market even suggests that Aramco may scrap the international portion altogether, replacing with a private share sale to select world sovereign funds and institutional investors.

Last week in Asian oil

Upstream

  • Malaysia’s Petronas has outlined its plans for the Bukit Tua field in Indonesia. Phase one of Bukit Tua came on stream in May 2015; phase two is currently underway and Petronas wants to expand into a phase three that will exploit the field’s Kujung horizon. Expansions will continue through July 2022, lifting production from its current peak rate of 20 kb/d of oil and 50 mmscf/d of gas. Petronas holds 80% of the PSC, with the remainder held by Pertamina.

Downstream & Midstream

  • CNOOC’s 200 kb/d refinery in Huizhou is ready for commissioning. Crude trial runs have been completed at the site in Guangdong, which is part of CNOOC’s Huizhou refining and petrochemical complex that represents the firm’s move downstream to compete with Sinopec and PetroChina. The focus of the complex is for both fuels and chemicals, with a 1.2 mtpa ethylene plant (a joint venture with Shell) due to be completed in Q12018.
  • From a loose and scrappy group, China’s independent refiners – the teapots – are increasing becoming more structured and united, as they face increasing criticism from Sinopec and PetroChina. After forming a crude buying alliance last year, six influential teapots – including Dongming, the country’s largest independent refiner – set up the Shandong Refining & Chemical Group last month, and has now bolstered it with a CNY33 billion (US$5 billion) fund. The joint fund will go to joint production, operation and investment plans, as well as lobbying efforts, to support the group’s refining capacity of 660 kb/d.
  • Once dismissed as a pipe dream, the private Pulau Muara Besar refinery planned by Hengyi Petrochemical in Brunei actually appears to be progressing to reality. The Chinese group has started up a trading office in Singapore, which will buy crude and trade fuel products produced at the 175 kb/d, US$3.4 billion project. Primarily a petrochemical play to support Hengyi’s fabric and industrial arms, the refinery will also produce a significant amount of gasoline, gasoil and jet fuel, which Hengyi has no internal use for. The company has also announced a US$12 billion second phase that will include expanding capacity to 280 kb/d and secondary units to produce some 1.5 mtpa of ethylene and 2 mtpa of PX.

Natural Gas & LNG

  • Bangladesh is striving ahead in its LNG ambitions, signing up for a third floating LNG project with Malaysia’s Petronas and China’s Hong Kong Manjala Power. Planned to be located at Kutubdia in Cox’s Bazaar, the 3.5 mtpa import terminal is planned for a 2019 start, just in time to replace Bangladesh’s dwindling natural gas production. The country’s first FSRU – a 3.75 mtpa facility off Moheshkhali in the Bay of Bengal – is expected to start up in 2018.
  • CNPC has started up its third natural gas pipeline servicing Shanghai, aiming to meet the growing demand for clean power generation fuel in the city. The new 88km pipeline connects the Rudong LNG receiving terminal in Jiangshu with Shanghai’s Chongming island, with a capacity of some 1.84 billion cbm per year.

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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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