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Last Updated: November 9, 2017
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Last week in the world oil:

Prices

  • Brent crude surged to US$64/b and WTI to US$57/b as instability in Saudi Arabia – ranging from royal arrests of 11 princes, missiles launched from Yemen and a Saudi prince killed as his helicopter crashed – rattled the market. Also supporting stronger prices is Nigeria’s pledge to limit its output, despite being exempt from OPEC’s freeze due to insurgent attacks.

Upstream

  • The hits keep coming in Mexico. State oil firm Pemex announced the country’s largest onshore oil discovery in 15 years, with the Ixachi well in Veracruz estimated to have some 350 million barrels of proven, probable and possible reserves. Exploiting the light crude resource should prove straightforward, given that it is located near existing onshore drilling infrastructure.
  • Papua New Guinea’s Oil Search is expanding into (very) different territory that the equatorial island. The company has bought stakes in Alaska’s North Slope for some US$400 million, acquiring Nanushuk and surrounding fields that are estimated to contain up to 500 million barrels.
  • The acquisition of the Forties Pipeline System (FPS) by INEOS from BP has been completed, with INEOS now having complete ownership and operation of the FPS, Kinneil gas processing plant, Kinneil oil terminal, Dalmeny storage and export facility, infrastructure sites in Aberdeen and the Forties Unity Platform - a key part of the British North Sea industry.
  • Greenland will hold an oil and gas concession auction in offshore west coast areas in Davis Strait and Baffin Bay next year in a bit to get its moribund upstream exploration programme back on track. Estimates have suggested Greenland holds some 17 billion barrels of oil equivalent off its west coast, and 32 billion boe off its east coast, but accessing those reserves has been hampered by weak crude prices over the past 3 years.
  • Insurgent sabotage could be returning to Nigeria as the Niger Delta Avengers issued a ‘bloody and brutal’ warning to energy firms operating in the region, with a specific mention of Total’s Engina FPSO system.
  • The US lost another eight oil rigs last week, the largest drop since May 2016, causing the overall active American oil and gas rig count to slip below 900. Languishing in the face of recent crude price stagnation, the recent rally in WTI prices may tempt some drillers to restart sites soon.

Downstream & Midstream

  • Much like US LNG, American crude is starting to pop up in new places. PKN Orlen – Poland’s largest refiner – received its first American crude shipment last week. It adds another dimension to eastern Europe’s desire to wean itself off Russian oil and gas, as a vast majority of crude oil refined in Poland currently comes from Russia.

Natural Gas and LNG

  • Greece’s Energean has signed three new deals to sell natural gas from Israel’s offshore Karish and Tanin fields to Israeli energy firms Dorad Energy, Ashdod Energy and Ramat Negev Energy. Expected to start production in 2020, gas from the Karish and Tanin fields will be piped onshore to the customers – amounting to 6.75 bcm over 14 years for Dorad, and 2.65 bcm for Ashdod and Ramat Negev over the same period.

Last week in Asian oil

Upstream

  • As pipeline shipments from Iraq’s Kurdish region resume to Turkey, Baghdad is moving to impose federal will on Kurdistan’s oil assets. Iraq state-oil marketer SOMO is attempting to convince Turkey to see SOMO as the sole seller of Kurdish crude that arrives at Ceyhan. Currently, Turkey recognises independent exports by the Kurdish Regional Government (KRG) as well as SOMO volumes that piggyback on the pipeline.
  • As Pertamina takes over the Mahakam block from Total and Inpex on January 1, 2018, the Indonesian state oil firm announced plans to spend US$700 million to maintain production levels at the block. Production at Mahakam has been dipping recently, projected to fall to 53,000 bpd of oil and 1.43 bcf/d of gas in 2017, and even maintaining current output levels will require significant investment on Pertamina’s part.
  • SOCO International has picked up two new offshore blocks in Vietnam. The PSCs for the blocks, located in moderate-to-deepwater in the Phu Khanh Basin, north of the prodigious Cuu Long Basin, are with PetroVietnam and SOVICO Holdings, with SOCO holding 70%.

Downstream

  • South Korea’s SK Energy will be building a new US$900 million 40 kb/d desulfurisation unit at its 840 kb/d Ulsan refinery, in an attempt to boost its production of low-sulphur fuels. International sanctions on sulphur emissions in the marine section are scheduled to take effect in 2020, pushing refiners to invest in upgrade units. The new unit at Ulsan will also boost production of gasoil and naphtha through reprocessing of fuel oil.
  • It appears that Saudi Aramco’s involvement in Petronas’ RAPID refinery project is not yet set in stone. Some technical issues are holding up final agreements, which will see Aramco pump in US$7 billion into the refinery in Johor, but the Malaysian government expects things to be smoothed over soon. It is likely to, given that Aramco just bought a US$900 million stake in RAPID-associated petrochemical projects last month.
  • India’s BPCL has completed the expansion of its Kochi refinery, bringing its capacity up from 190 kb/d to 310 kb/d. A new CDU and coking unit was installed as part of the expansion, delayed from its original projected date of late-2016, with BPCL now ramping up production. The Kochi refinery is currently running at some 84% utilisation, and BPCL intends to move to full capacity over the next two years.

Natural Gas & LNG

  • As Petronas announced that it will no longer include resale destination clauses in its new Japanese LNG contracts as required by the Japan Fair Trade Commission, Osaka Gas announced plans to raise its LNG resale volumes significantly by 2020. One of the few buyers with some looser clauses, Osaka Gas has been reselling LNG since 2006 – hitting 1.1 mtpa in resales last year – and is pushing to increase that. It targets annual trading volumes of 10 mtpa, of which 3 mtpa would be from resales.

Chevron has exported its first LNG cargo from its Wheatstone project in Australia. Production at the mega-LNG facility started up in early October, with shipments targeted at markets in northeast Asia. The inaugural cargo goes to Japan’s JERA, the world’s largest buyer of LNG.

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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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