Easwaran Kanason

Co - founder of NrgEdge
Last Updated: January 2, 2018
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Business Trends
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Part Two

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

  • Asian LNG spot price range: US$11-13 mmBtu
  • Projected China LNG demand 2018: 48 million tons
  • China crude import quotas 2018: 121.32 million tons (2.8 mmb/d)
  • Estimated Asian refinery capacity additions 2018: +600 kb/d
  • Estimated Asian refinery capacity additions 2019: +900 kb/d (including Malaysia’s RAPID and Brunei’s Hengyi refinery)

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September, 21 2019
Your Weekly Update: 16 - 20 September 2019

Market Watch  

Headline crude prices for the week beginning 16 September 2019 – Brent: US$69/b; WTI: US$63/b

  • Global crude oil prices surged at the start of the week as news that a successful drone strike on the Abqaiq processing plant and the Khurais oil field in Saudi Arabia took out over half of the Kingdom’s crude production capacity
  • Brent prices jumped above US$70/b at one point on fears on global supply disruption, but abated as President Donald Trump authorises the release of US strategic petroleum reserves to cover the market
  • Initial fears that the Saudi Arabian crude output would be crippled for months proved to be extreme, with Saudi Aramco announcing that some 70% of capacity at Abqaiq had been restored within days
  • But more worryingly is that this incident escalates the risk of a full-blown military confrontation with Iran; the US was quick to accuse Iran of the attack, citing data on the attack, which was denied by Iran
  • Yemen’s Iran-backed Houthi rebels claimed responsibility for the attack, although initial results of a Saudi investigation pointed to the weapons originating from Iran
  • For now, crude oil prices have retreated as the risk of widespread supply disruption abated, but tensions are still high in the region
  • This comes after President Trump signals that he was considering easing sanctions in an apparent thaw in the US-Iran relationship; this opportunity now appears to have evaporated
  • Saudi Arabia’s new oil energy minister, Prince Abdulaziz bin Salman, made a positive impression at the recent OPEC+ meeting, with errant members of the group signalling that they were now ready to adhere to the supply deal
  • In Venezuela, the oil crisis continues as ongoing US sanctions now mean that the country cannot find enough vessels to transport its crude, as shippers fear losing insurance coverage if they transport Venezuelan oil
  • Iran has released the UK-flagged Stena Impero vessel that it had impounded, a lone bright spot in a region now clouded by geopolitical tensions
  • Against this backdrop, the US active rig count recorded yet another fall, losing five oil and seven gas rigs for a net drop of 12 to a new total of 886 rigs
  • With the shock of the Saudi drone attacks abating, crude oil prices are retreating back to their previous range – US$60-63 for Brent and US$56-59/b for WTI – as the impact of global supply was minimised; another attack, however, might cause a more permanent shift in prices


Headlines of the week

Upstream

  • Equinor has received consent from the Norwegian Petroleum Directorate to continue operations at the Tordis and Vigdis fields through 2036 and 2040, respectively, extending the life of the North Sea fields by 34 years
  • BP has announced that it will deploy continuous measurement of methane emissions for all future oil and gas projects in a bid to reduce emissions
  • CNOPC and Niger have agreed to collaborate on a 1,892km pipeline to carry oil from Niger’s Agadem rift basin to port facilities in Benin
  • The South African government is tabling a new law that will allow the state to take a free stake of up to 10% in all new oil and gas ventures, hoping to capitalise on a surge in upstream interest after Total’s Brulpadda discovery

Midstream/Downstream

  • As the IMO deadline for low-sulfur marine fuels approaches, refiners have begun stockpiling supplies of very low-sulfur fuel oil to ensure adequate supply; this includes Japan’s Cosmo Oil that aims to begin supplying VLSFO to the domestic marine market by October 2019
  • IndianOil’s Gujarat refinery stated it ready to produce 12,900 b/d of VLSFO by October while its Haldia refinery will start producing 5,500 b/d of VLSFO by December; this should be adequate to cover the India’s marine fuel demand
  • India is considering selling a stake in BPCL, the country’s second largest refiner, to an international firm to boost competition in downstream fuel retailing that has historically been dominated by state firms
  • Valero Energy and Darling Ingredients are launching the first renewable gasoil plant in Texas, focusing on producing renewable diesel and naphtha
  • In the UK, Essar Oil’s Stanlow refinery aims to increase its diet of US crude from a current 35% to 40%, leveraging on cheaper American oil
  • The after-effects of Russia’s contaminated crude through the Druzhba pipeline continues as Total issues a tender to sell 1.3 million barrels of tainted Ural crude through Rotterdam after failing to process it

Natural Gas/LNG

  • Poland has won a ruling from the EU courts to reduce Russian control over the key EU Opal pipeline that carries Russian gas from the Nord Stream link to Germany, preventing Gazprom from using most of Opal capacity in a bit to increase energy security for Eastern European countries
  • Vitol and Mozambique’s state player ENH have set up a new joint venture in Singapore to capitalise on trading opportunities for LNG, LPG, and condensate
  • Australia’s Liquefied Natural Gas Ltd and Delta Offshore Energy will supply gas from the Magnolia fields to an LNG-to-power project in Bac Lieu, Vietnam
  • Eni’s Baltim South West gas field offshore Egypt has started up production, only 3 years after discovery, producing an initial 100 mscf/d of gas
  • US gas player Sempra is looking to take FID on its Energia Costa Azul LNG project in Mexico’s Baja California region by the end of 2019
  • Egypt has announced that it expects to receive first natural gas from Israel by end-2019 through the East Mediterranean Gas pipeline, with initial supplies of 200 mscf/d that will rise to 500 mscf/d by 2020
  • The Independence floating LNG terminal in Lithuania – built to reduce the Baltic region’s dependence on Russian gas – is set to receive its first-ever cargo from Siberia, likely from Novatek’s LNG projects in Yamal
September, 20 2019
Financial Review: Second-Quarter 2019
Key findings
  • Brent crude oil daily average prices were 9% lower in second-quarter 2019 than in second-quarter 2018 and averaged $68 per barrel
  • The 117 companies in this study increased their combined liquids production 4.6% in second-quarter 2019 from second-quarter 2018, and their natural gas production increased 5.0% during the same period
  • Nearly half of the companies were free cash flow positive—that is, they generated more cash from operations than their capital expenditures
  • Dividends plus share repurchases were nearly one-third of cash from operations, slightly lower than the six-year high set in first-quarter 2019

Distributions to shareholders via dividends and share repurchases amounted to nearly 33% of cash from operations


See entire second-quarter review

September, 20 2019