With cold weather spreading over the northern hemisphere, natural gas and LNG prices will be starting 2018 in a healthy environment. In Europe and the US, natural gas prices have been gaining recently in response to the cold weather demand. In northeast Asia, which does not have the luxury of extensive gas pipelines, LNG prices have been marching up as well. Natural gas/LNG demand should see another year of strong growth – especially with India and China ramping up infrastructure – which bodes well for prices in 2018.
2018 will be the year that the existing hierarchy of major LNG buyers see a reshuffling for the first time in more than a decade. China will overtake South Korea to be the second-largest LNG importer in the world. Chinese demand has been growing strongly in recent years – 2017 imports are expected to have increased by over 50% to 38 million tons – and there is still a lot of room to grow. South Korea, with some 37 million tons, falls to third place, but China still has a ways to go to catch up to Japan and its demand of some 83.5 million tons. That, however, is fundamentally changing the way the LNG business operates in Asia. Unlike Japan and South Korea, Chinese buyers are more reliant on short-term purchases, rather than long-term contracts. This will makes the Asian spot market, and the burgeoning trading hub in Singapore, more important. Asian spot LNG prices ended 2018 at some US$11/mmBtu – their highest level since November 2014 – and should grow even more as the winter season unfolds. China’s level of growth is necessary to erode the current and project LNG supply glut; but will also necessitate a change in how major LNG exporters – Qatar, Australia, Malaysia and now the US and Canada – do business in Asia.
On the oil product side, it will be a year of more additions in Asia as key markets aim for energy security. China has added nearly 500 kb/d of new refining capacity over the second half of 2017, and there is more to come. Vietnam’s long-delayed Nghi Son refinery will start up in mid-2018 and even Indonesia has made progress on its planned new Tuban refinery with Rosneft. With China recently issuing its 2018 crude import quotas – with increases for key teapot refineries - more and more oil products will be swirling around Asia, placing even more pressure on aging refineries in Europe, which are vulnerable to closure from a combination of tightening fuel standards and a shrinking of export options. With crude prices on the rise – WTI exceeded US$60/b for the first time since mid-2015 – refining margins are healthy; but the upcoming IMO regulations will be pushing refiners to invest heavily in upgrading capacity as fuel oil’s role in bunkering diminishes.
Key figures for 2018
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Headline crude prices for the week beginning 7 January 2019 – Brent: US$57/b; WTI: US$49/b
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At some point in 2019, crude production in Venezuela will dip below the 1 mmb/d level. It might already have occurred; estimated output was 1.15 mmb/d in November and the country’s downward trajectory for 2018 would put December numbers at about 1.06 mmb/d. Financial sanctions imposed on the country by the US, coupled with years of fiscal mismanagement have triggered an economic and humanitarian meltdown, where inflation has at times hit 1,400,000% and forced an abandonment of the ‘old’ bolivar for a ‘new bolivar’. PDVSA – once an oil industry crown jewel – has been hammered, from its cargoes being seized by ConocoPhillips for debts owed to the loss of the Curacao refinery and its prized Citgo refineries in the US.
The year 2019 will not see a repair of this chronic issue. Crude production in Venezuela will continue to slide. Once Latin America’s largest oil exporter – with peak production of 3.3 mmb/d and exports of 2.3 mmb/d in 1999 – it has now been eclipsed by Brazil and eventually tiny Guyana, where ExxonMobil has made massive discoveries. Even more pain is on the way, as the Trump administration prepares new sanctions as Nicolas Maduro begins his second term after a widely-derided election. But what is pain for Venezuela is gain for OPEC; the slack that its declining volumes provides makes it easier to maintain aggregate supply levels aimed at shoring up global oil prices.
It isn’t that Venezuela doesn’t want to increase – or at least maintain its production levels. It is that PDVSA isn’t capable of doing so alone, and has lost many deep-pocketed international ‘friends’ that were once instrumental to its success. The nationalisation of the oil industry in 2007 alienated supermajors like Chevron, Total and BP, and led to ConocoPhillips and ExxonMobil suing the Venezuelan government. Arbitration in 2014 saw that amount reduced, but even that has not been paid; ConocoPhillips took the extraordinary step of seizing PDVSA cargoes at sea and its Caribbean assets in lieu of the US$2 billion arbitration award. Burnt by the legacies of Hugo Chavez and now Nicolas Maduro, these majors won’t be coming back – forcing Venezuela to turn to second-tier companies and foreign aid to extract more volumes. Last week, Venezuela signed an agreement with the newly-formed US-based Erepla Services to boost production at the Tia Juana, Rosa Mediano and Ayacucho 5 fields. In return, Erepla will receive half the oil produced – generous terms that still weren’t enough to entice service giants like Schlumberger and Halliburton.
Venezuela is also tapping into Russian, Chinese and Indian aid to boost output, essentially selling off key assets for necessary cash and expertise. This could be a temporary band-aid, but nothing more. Most of Venezuela’s oil reserves come from the extra-heavy reserves in the Orinoco Belt, where an estimated 1.2 trillion barrels lies. Extracting this will be extremely expensive and possibly commercially uneconomical – given the refining industry’s move away from heavy grades to middle distillates. There are also very few refineries in the world that can process such heavy crude, and Venezuela is in no position to make additional demands from them. In a world where PDVSA has fewer and fewer friends, recovery will be extremely tough and extremely far-off.
Infographic: Venezuelan crude production:
Headline crude prices for the week beginning 31 December 2018 – Brent: US$54/b; WTI: US$46/b
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