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Last Updated: January 11, 2018
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Market Watch

Headline crude prices for the week beginning 8 January 2017 – Brent: US$68/b; WTI: US$62/b

  • Oil prices continue their upward trend, hitting 3-year highs.
  • Ongoing unrest in Iran continues to worry the market, although the Iranian government claims that its oil output has not been affected.
  • Supply disruptions in Libya have been nipped, and Libyan production is estimated to have increased to 1 mmb/d after dropping to 950,000 b/d.
  • Data from the US EIA showed American oil production fell by 290,000 barrels for 9.5 mmb/d as the post-year end lull continues.
  • The EIA maintains that US crude production will rise over 2018, hitting 11 mmb/d by 2019. The target for Q118 is 10.4 mmb/d.
  • US crude inventories also fell, by also 5 million barrels, to 419.5 million barrels, a surprise drop not anticipated by the market.
  • The US$62/b WTI mark is seen as a post-shale tipping point, which could encourage new shale drilling. A consortium of shale drillers announced they expect major expansion if WTI hits and sustains at US$66/b.
  • Active US rig sites fell by a net five to 924 last week, with the losses mainly coming from onshore drilling sites. 
  • However, Asian refining margins are estimated to have dropped, with the Singapore average margin dropping below US$6/b in December, the lowest level in five years, which could affect Asian crude intake.
  • Crude price outlook: Some correction is expected in the oil markets, compounded by longer term expectations that US crude production will increase. Brent will have a floor of US$67/b this week, while WTI should trade at US$62-63/b.


Headlines of the week

Upstream

  • Big moves in the USA as the Trump administration proposes to open up almost all US offshore waters to oil and gas drilling, while also planning to relax offshore regulations introduced after the 2010 Macondo disaster.
  • ExxonMobil continues to strike gold in Guyana. Test results from the Ranger-1 exploration well have been positive, the sixth oil discovery for ExxonMobil in the country since 2015 with 3.2 boe barrels in place so far.
  • Iraq’s parliament has voted to ban Kurdish engineering firm Kar Group from operating in Kirkuk oilfields, a move that could have KRG and Kurdish firms excluded from the northern oil fields.
  • The UK’s Tullow Oil has picked up six new licenses offshore Peru, with prospects in the Tumbes Basin, near the prolific Talara Basin, high.
  • A power trip on an FPSO has shut down the Ophir oil field in Malaysia, with repairs expected to last at least a week.
  • Lebanon has awarded its first oil blocks – Blocks 4 and 9 – to a consortium of Total, Eni and JSC Novatek – as it aims to capitalise on the upstream boom in the eastern Mediterranean.

Downstream

  • The Finnish government has given up its majority stake in refiner Neste. Donations to a charitable foundation reduced the state’s stake in Neste from 50.1% to 49.7%, and further reductions to 33.4% are planned.
  • Taiwan’s FPC plans to run its 540 kb/d Mailiao refinery at full capacity over January and February before scheduled maintenance in March, it may contribute to a growing glut of naphtha in Asia.
  • In another twist to the Curacao refinery drama, the island’s government has scrapped a deal with China’s Guangdong Zhenrong Energy to operate the Isla refinery, which may push Curacao back to working with PDVSA.
  • Borealis is planning a 740,000 ton propane dehydrogenation (PDH) plant at its Kallo site, Belgium, which would be one of the largest in the world.
  • Shell has begun transferring its Hong Kong and Macau LPG marketing business to DCC LPG, but will still operate its LPG plant in Hong Kong.

Natural Gas/LNG

  • Russian natural gas production rose to 24.4 tcf last year, the highest level ever, with sales boosted by domestic and European demand.
  • Norway’s gas production also hit a record high in 2017, with exports growing by 7% to 4.1 tcf, meeting roughly a quarter of European demand.
  • Gas supply has been restored at the Escravos-Lagos Pipeline System in Nigeria after being affected for a week by a fire.
  • Gas production at Repsol’s Sagari field in Cusco, Peru has begun, contributing to a 25% output gain to 5.6 mcm/d for Repsol’s Block 57.
  • Eni has gained Shell’s 32.5% stake in Australia’s Evans Shoal offshore gas field, aiming to boost feedstock to support expansion at Darwin LNG.

Corporate

Ahead of its planned IPO this year, Saudi Aramco has been converted from a single shareholder to joint-stock company as of January 1, a necessary requirement for any public listing in Saudi Arabia.

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In 2018, the United States consumed more energy than ever before

U.S. total energy consumption

Source: U.S. Energy Information Administration, Monthly Energy Review

Primary energy consumption in the United States reached a record high of 101.3 quadrillion British thermal units (Btu) in 2018, up 4% from 2017 and 0.3% above the previous record set in 2007. The increase in 2018 was the largest increase in energy consumption, in both absolute and percentage terms, since 2010.

Consumption of fossil fuels—petroleum, natural gas, and coal—grew by 4% in 2018 and accounted for 80% of U.S. total energy consumption. Natural gas consumption reached a record high, rising by 10% from 2017. This increase in natural gas, along with relatively smaller increases in the consumption of petroleum fuels, renewable energy, and nuclear electric power, more than offset a 4% decline in coal consumption.

U.S. total energy consumption

Source: U.S. Energy Information Administration, Monthly Energy Review

Petroleum consumption in the United States increased to 20.5 million barrels per day (b/d), or 37 quadrillion Btu in 2018, up nearly 500,000 b/d from 2017 and the highest level since 2007. Growth was driven primarily by increased use in the industrial sector, which grew by about 200,000 b/d in 2018. The transportation sector grew by about 140,000 b/d in 2018 as a result of increased demand for fuels such as petroleum diesel and jet fuel.

Natural gas consumption in the United States reached a record high 83.1 billion cubic feet/day (Bcf/d), the equivalent of 31 quadrillion Btu, in 2018. Natural gas use rose across all sectors in 2018, primarily driven by weather-related factors that increased demand for space heating during the winter and for air conditioning during the summer. As more natural gas-fired power plants came online and existing natural gas-fired power plants were used more often, natural gas consumption in the electric power sector increased 15% from 2017 levels to 29.1 Bcf/d. Natural gas consumption also grew in the residential, commercial, and industrial sectors in 2018, increasing 13%, 10%, and 4% compared with 2017 levels, respectively.

Coal consumption in the United States fell to 688 million short tons (13 quadrillion Btu) in 2018, the fifth consecutive year of decline. Almost all of the reduction came from the electric power sector, which fell 4% from 2017 levels. Coal-fired power plants continued to be displaced by newer, more efficient natural gas and renewable power generation sources. In 2018, 12.9 gigawatts (GW) of coal-fired capacity were retired, while 14.6 GW of net natural gas-fired capacity were added.

U.S. fossil fuel energy consumption by sector

Source: U.S. Energy Information Administration, Monthly Energy Review

Renewable energy consumption in the United States reached a record high 11.5 quadrillion Btu in 2018, rising 3% from 2017, largely driven by the addition of new wind and solar power plants. Wind electricity consumption increased by 8% while solar consumption rose 22%. Biomass consumption, primarily in the form of transportation fuels such as fuel ethanol and biodiesel, accounted for 45% of all renewable consumption in 2018, up 1% from 2017 levels. Increases in wind, solar, and biomass consumption were partially offset by a 3% decrease in hydroelectricity consumption.

U.S. energy consumption of selected fuels

Source: U.S. Energy Information Administration, Monthly Energy Review

Nuclear consumption in the United States increased less than 1% compared with 2017 levels but still set a record for electricity generation in 2018. The number of total operable nuclear generating units decreased to 98 in September 2018 when the Oyster Creek Nuclear Generating Station in New Jersey was retired. Annual average nuclear capacity factors, which reflect the use of power plants, were slightly higher at 92.6% in 2018 compared with 92.2% in 2017.

More information about total energy consumption, production, trade, and emissions is available in EIA’s Monthly Energy Review.

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April, 17 2019
A New Frontier for LNG Pricing and Contracts

How’s this for a first? As the world’s demand for LNG continues to grow, the world’s largest LNG supplier (Shell) has inked an innovative new deal with one of the world’s largest LNG buyers (Tokyo Gas), including a coal pricing formula link for the first time in a large-scale LNG contract. It’s a notable change in an industry that has long depended on pricing gas off crude, but could this be a sign of new things to come?

Both parties have named the deal an ‘innovative solution’, with Tokyo Gas hailing it as a ‘further diversification of price indexation’ and Shell calling it a ‘tailored solutions including flexible contract terms under a variety of pricing indices.’ Beneath the rhetoric, the actual nuts and bolts is slightly more mundane. The pricing formula link to coal indexation will only be used for part of the supply, with the remainder priced off the conventional oil & gas-linked indexation ie. Brent and Henry Hub pricing. This makes sense, since Tokyo Gas will be sourcing LNG from Shell’s global portfolio – which includes upcoming projects in Canada and the US Gulf Coast. Neither party provided the split of volumes under each pricing method, meaning that the coal-linked portion could be small, acting as a hedge.

However, it is likely that the push for this came from Tokyo Gas. As one of the world’s largest LNG buyers, Tokyo Gas has been at the forefront of redefining the strict traditions of LNG contracts. Reading between the lines, this deal most likely does not include any destination restriction clauses, a change that Tokyo Gas has been particularly pushing for. With the trajectory for Brent crude prices uncertain – owing to a difficult-to-predict balance between OPEC+ and US shale – creating a third link in the pricing formula might be a good move. Particularly since in Japan, LNG faces off directly with coal in power generation. With the general retreat from nuclear power in the country, the coal-LNG battle will intensify.

What does this mean for the rest of the industry? Could coal-linked contracts become the norm? The industry has been discussing new innovations in LNG contracts at the recent LNG2019 conference in Shanghai, while the influx of new American LNG players hungry to seal deals has unleashed a new sense of flexibility. But will there be takers?

I am not a pricing expert but the answer is maybe. While Tokyo Gas predominantly uses natural gas as its power generation fuel (hence the name), it is competing with other players using cheaper coal-based generation. So in Japan, LNG and coal are direct competitors. This is also true in South Korea and much of Southeast Asia. In the two rising Asian LNG powerhouses, however, the situation is different. In China – on track to become the world’s largest LNG buyer in the next two decades – LNG is rarely used in power generation, consumed instead by residential heating. In India – where LNG imports are also rising sharply – LNG is primarily aimed at petrochemicals and fertiliser. LNG based power generation in China and India could see a surge, of course, but that will take plenty of infrastructure, and time, to build. It is far more likely that their contracts will be based off existing LNG or natural gas benchmarks, several of which are being developed in Asia alone.

If it takes off  the coal-link LNG formula is likely to remain a Asian-based development. But with the huge volumes demanded by countries in this region, that’s still a very big niche. Enough perhaps for the innovation to slowly gain traction elsewhere, next stop -  Europe?

The Shell-Tokyo Gas Deal:

Contract – April 2020-March 2030 (10 Years)

Volume – 500,000 metric tons per year

Source – Shell global portfolio

Pricing – Formula based on coal and oil & gas-linked indexes

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