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Overview


South Sudan gained independence from Sudan in July 2011. Although most of the oil production capacity in those two countries is in South Sudan, the country is landlocked and remains dependent on Sudan’s export pipelines and port. Civil unrest, disagreements over oil revenue sharing, and border disputes have curtailed oil production and investment in both countries.


South Sudan was officially recognized as an independent nation state in July 2011 following a referendum held in January 2011, when the South Sudanese voted overwhelmingly in favor of secession. Since the split, Sudan and South Sudan’s oil production has declined because of continued domestic political instability and conflict between the two countries.


The unified Sudan began producing oil in 1999, and as a result, the country tripled its per capita income within a decade.1 However, the secession of South Sudan significantly affected Sudan’s economy because it lost 75% of its oil production fields to South Sudan. According to an International Monetary Fund country report, Sudan’s government revenues and foreign exchange earnings fell by about one-half and two-thirds, respectively.2 Sudan and South Sudan’s oil sectors play a vital role in their economies and are closely linked; most of their producing assets are near or extend across their shared border. Although South Sudan now controls a substantial amount of the oil-producing fields, it is dependent on Sudan for transporting oil through its pipelines for processing and export. The transit and processing fees South Sudan must pay to Sudan to transport its crude oil are an important revenue stream for Sudan.3


Disruptions in oil production, disputes over oil revenue sharing, and lower oil prices have had a negative effect on both economies. In January 2012, South Sudan shut down virtually all of its oil production because of a dispute with Sudan over transit fees. The dispute was not resolved until April 2013 after protracted negotiations. In December 2013, a conflict between government forces and rebel factions led to a civil war in South Sudan. The peace agreement brokered in August 2015 provided a temporary reprieve, but fighting resumed in July 2016 and the security situation is still tenuous.4


Sudan has been more successful in weathering the downturn in oil prices in recent years by shifting to a more diversified economy. In addition, the partial lifting of U.S. sanctions on Sudan in October 2017 may provide more opportunities to attract additional foreign investment.5 Prospects for South Sudan are less optimistic, given the uncertain outcome for the ongoing peace process, its dependence on crude oil for revenue in the lower oil price environment, weak investor confidence, and a lack of functioning infrastructure.


Figure 1. Map of Sudan and South Sudan 

History


After gaining independence in 1956, the unified Sudan fought two civil wars. The second civil war ended with a Comprehensive Peace Agreement (CPA) between the Sudanese government and opposition forces in 2005, and the outcome of the 2011 referendum led to a newly created independent state: South Sudan. Border issues are a major source of tension between the two countries post-secession, and political dynamics in both countries pose significant security risks for the oil sector.


Sudan has experienced two civil wars since gaining independence in 1956. The second civil war ended with the help of international observers and led to the signing of the CPA by the Sudanese government and the rebel factions in the southern region in 2005. The CPA established guidelines for oil revenue sharing and a timeframe to hold a referendum for independence of the South. The southern region overwhelmingly voted for secession, and in July 2011, South Sudan became an independent nation-state that is separate from Sudan, with Juba and Khartoum as their respective capitals.6


Armed conflict in both countries has persisted in the post-referendum period, as unresolved issues on domestic and interstate relations still linger. Both countries still contest some areas around the demarcated border the CPA established. Disputes over the Abyei area and the Heglig oilfield in South Kordofan state have been particularly contentious, as the areas have strategic importance for the oil sector and agricultural resources that both countries rely on, adding another layer of complexity to the disputes.7 In January 2012, South Sudan announced that it would shut its oil production over a dispute about oil transit fees. The dispute later turned violent, as the South Sudanese army–the Sudan People’s Liberation Army (SPLA)–and Sudanese opposition forces took control of the oilfield for more than a week and destroyed critical infrastructure, which temporarily reduced Sudan’s oil production by more than 50%. The conflict was resolved in November 2012 with support from the international community, and both governments reached an agreement on oil transit fees and on compensation for lost production.8


The cooperation agreements and implementation matrix, which states the timeframe to carry out the obligations stipulated in the cooperation agreements, paved the way for restarting oil production in April 2013. According to a Business Monitor Intelligence (BMI) Research report, South Sudan currently pays Sudan US $24.50/barrel, which consists of a US $9.50/barrel transit fee and a US $15/barrel fee to cover the cost of debt repayment that is shared between the two countries.9 The drop of oil prices in 2014, however, has significantly lowered export revenues. Because South Sudan’s Dar blend trades at a significant discount to Brent, a drop in the price of Brent could significantly affect South Sudan’s fiscal position.10


Since the signing of the implementation matrix, the governments of Sudan and South Sudan shifted their focus from border conflicts to the mitigation of their respective domestic opposition factions. In September 2013, large-scale protests broke out around Sudan in response to cuts in fuel and basic commodities subsidies. The Sudanese security forces responded with violence, leading to hundreds of casualties.11 Divisions within the South Sudanese government eventually led to a civil war that still continues as of January 2018. The domestic political dynamics and the security situations in both countries directly affected negotiations on oil production and transportation and will continue to be a potential risk for disrupting the countries’ oil supplies and exports.


Petroleum and other liquids


Most of Sudan’s and South Sudan’s proved reserves of oil and natural gas are located in the Muglad and Melut Basins, which extend into both countries. Natural gas associated with oil production is mostly flared or reinjected into wells, and neither country currently produces nor consumes dry natural gas.


According to BP’s Statistical Review of World Energy, Sudan and South Sudan had 1.5 billion barrels and 3.5 billion barrels of proved oil reserves, as of January 1, 2017, respectively. Most of these reserves are located in the oil-rich Muglad and Melut basins, which extend into both countries. Oil and natural gas exploration in Sudan and South Sudan is limited outside of these basins because of the lack of evidence of prospective acreage and the persistent civil unrest affecting both countries.12 Sudan has made efforts in the past few years to boost oil production levels by attracting new investment and awarding exploration licenses to develop several blocks, but progress has been slow.13


Natural gas associated with oil fields is mostly flared or reinjected. Despite proved reserves of 3 trillion cubic feet, natural gas development has been limited. According to the latest data provided by the National Oceanic and Atmospheric Administration (NOAA) and the World Bank’s Global Gas Flaring Reduction Partnership (GGFR), Sudan emitted approximately 13.8 billion cubic feet (Bcf) of flared natural gas in 2016. From 2013 to 2016, Sudan was ranked 39th in the world for flared natural gas volume and intensity.14


Oil sector management


Prolonged sanctions against the unified Sudan allowed Asian national oil companies to dominate Sudan’s and South Sudan’s oil sectors. The China National Petroleum Corporation, India’s Oil and Natural Gas Corporation, and Malaysia’s Petronas hold large stakes in the leading consortia that operate oil fields and pipelines. Sudan and South Sudan’s national oil companies, Sudapet and Nilepet, respectively, also hold small stakes in operations.


In Sudan, three main entities oversee activities in Sudan’s petroleum sector: the Ministry of Petroleum (MOP) administers and manages the Sudanese oil sector; the Sudanese Petroleum Corporation (SPC), a fully state-owned arm of MOP, is responsible for exploration, production, and distribution of crude oil and petroleum products; and Sudapet, the national oil company, holds minority stakes in each of the international consortia operating in the oil-producing blocks. 15


In South Sudan, the administrative structure largely mirrors Sudan’s. The Ministry of Petroleum and Mining is responsible for managing South Sudan’s petroleum sector. The National Petroleum and Gas Corporation (NPGC) is the main policymaking and supervisory body and reports directly to the president and national legislative assembly; it participates in all segments of the hydrocarbon sector and approves petroleum agreements on the government’s behalf. The Nile Petroleum Corporation (Nilepet) is South Sudan’s national oil company, and its activities mirror much of the responsibilities of its Sudanese counterpart. Nilepet oversees operations in the petroleum sector, and because of its limited technical expertise and financial resources, it holds minority stakes in production-sharing contracts with foreign oil companies.16 South Sudan’s Transitional Constitution, the 2012 Petroleum Act, and the 2013 Petroleum Revenue Management Act define the regulatory framework governing the hydrocarbon sector.17


Asian national oil companies (NOCs) dominate the oil sectors in both countries. The China National Petroleum Corporation (CNPC), India's Oil and Natural Gas Corporation (ONGC), and Malaysia’s Petronas hold large stakes in the leading consortia operating in both countries: the Greater Nile Petroleum Operating Company, the Dar Petroleum Operating Company, and the Sudd Petroleum Operating Company. The lifting of U.S. sanctions against Sudan in October 2017 may provide opportunities for other foreign investors to enter the industry.


Table 1: Main oil companies in Sudan and South Sudan
Consortium/subsidiaryCompanyCountry of
origin
Share %
Greater Nile Petroleum Operating Company (GNPOC)CNPCChina40
PetronasMalaysia30
ONGCIndia25
Sudapet*Sudan5
Greater Pioneer Operating Company (GPOC)CNPCChina40
PetronasMalaysia30
ONGCIndia25
Nilepet*South Sudan5
Dar Petroleum Operating Company (DPOC)CNPCChina41
PetronasMalaysia40
NilepetSouth Sudan8
SinopecChina6
Tri-ocean EnergyEgypt5
Sudd Petroleum Operating Company (SPOC)PetronasMalaysis67.9
ONGCIndia24.1
NilepetSouth Sudan8.0
Petro Energy Operating Company (PEOC)CNPCChina95
SudapetSudan5
Petrolines for Crude Oil Ltd. (Petco)PetcoSudan50
SudapetSudan50
Source: Company websites, IHS Edin, IHS Markit, BMI Research


Crude oil production


Sudan and South Sudan have experienced frequent disruptions to oil production because of disputes over oil revenue sharing and armed conflict. Maturing oil fields and persistent violence, in conjunction with a lower oil price environment, have dampened investor confidence in spite of efforts to attract foreign investment.


Most crude oil in Sudan and South Sudan is produced in the Muglad and Melut basins. South Sudan’s secession in 2011 substantially reduced Sudan’s oil production capabilities, because most of the oil fields are located in South Sudan. Sudan brought online two small oil fields in Blocks 6 and 17 at the end of 2012, and the country is exploring offshore production in the Red Sea basin. However, progress in developing the Red Sea basin area has been slow.18 In addition, Sudan’s oilfields are reaching maturity and thus nearing depletion. Sudan is trying to mitigate declining output by using enhanced oil recovery (EOR) techniques, but the decline is expected to continue.19


The partial lifting of U.S. sanctions imposed on Sudan has led to a renewed push by the Sudanese government to attract foreign investment in the upstream sector. In November 2017, Sudan put up 15 blocks for direct negotiation, with a possible second round in February 2018. Discussions of potential development projects between the government and State Oil Canada Ltd. and Russia-based Lukoil have been reported.20


In South Sudan, the ongoing civil war and political instability have undermined its ability to increase output to peak production capacity. Low investor confidence and the poor security situation pose serious obstacles to the government’s ability to boost crude oil production, and they may need to rely on deals that are privately negotiated with smaller companies such as Nigeria-based Oranto, which secured a 90% stake in Block B321. According to a recent study conducted by the World Bank Group on unsolicited proposals in infrastructure projects, privately negotiated transactions can face significant risk of cost overruns, delays in implementation, or early termination. Transactions that are privately negotiated, as opposed to transactions that use a competitive bidding process for procurement, are also more vulnerable than to allegations of corruption, whether perceived or real, which could complicate the execution of the project.22


South Sudan and, to a lesser extent, Sudan have experienced frequent disruptions to production because of disagreements over oil revenue sharing over the past few years. Damaged infrastructure and shut-in fields stemming from conflict have lowered overall production levels, and efforts to repair infrastructure or re-start production have been delayed. In 2016, combined production from both countries was 257,000 barrels per day (b/d)—lower than the peak production levels of 2010 when the unified Sudan produced approximately 486,000 b/d.23 Crude oil production in Sudan and South Sudan averaged approximately 102,000 b/d and 150,000 b/d in 2017, respectively.24 It is unlikely that either country will be able to increase production without significant improvements to the security situation or an increase in foreign investment.

Table 2: Sudan and South Sudan oil fields and operators
CountryLocationMain fieldsBlendOperator

Sudan
Block 1Unity, Toma, MungaNileGNPOC
Block 2Heglig, BambooNileGNPOC, Petrolines
Block 4Diffra, NeemNileGNPOC
Block 6Fula, HadidaFulaPetro Energy
Block 17al-BarasayaNASudapet*
Block 25Rawat Central, WateeshNASudapet*
South SudanBlock 1Unity, Toma, MungaNileGNPOC
Block 2Heglig, BambooNileGNPOC
Block 4Diffra, NeemNileGNPOC
Block 3 & 7Palogue, Adar-YaleDarDPOC
Block 5Mala, Thar JathNileSPOC
Source: IHS Markit, IHS Edin, Rystad, BMI Research 
Note: Star Oil exited partnership in 2016, Sudapet now sole operator


Export oil pipelines, storage, and port


Sudan has two main export pipelines that travel north across the country to the Bashayer Marine Terminal, located about 15 miles south of Port Sudan. Most of Sudan’s storage facilities for crude oil and refined products are also located at the Bashayer Terminal. The Bashayer Marine Terminal has a storage facility with a capacity of 2.5 million b/d and an export/import facility with a handling capacity of 1.2 million b/d. The terminal is operated by the GNPOC. South Sudan currently does not have any significant storage capacity.25


South Sudan exports all of its crude oil via pipeline through Sudan. Plans for the construction of a separate pipeline have been reported that would allow South Sudan to export crude oil through neighboring Kenya or Djibouti via Ethiopia and avoid transit fees.26 However, it is unlikely that the pipeline will be built, because production in South Sudan has been affected by the natural maturation of its fields and by disruptions.


Sudan and South Sudan produce three crude oil blends: Dar, Nile, and Fula. The Dar blend (25.0° API gravity, 0.11% sulfur) is a heavy paraffinic type of crude oil that has a high acid content and must be heated during transport to avoid congealing in ship tanks.27 The Dar blend is produced at Blocks 3 and 7 in the Melut Basin, which is controlled by South Sudan.28The Nile blend (33.9° API gravity, 0.06% sulfur) is produced in the Muglad Basin at Blocks 1, 2, 4, and 5A; it is a medium, low-sulfur waxy crude oil and is a more attractive blend to refiners because of its high fuel and gasoil yields.29 The Fula blend is a highly acidic crude oil that is produced in the Muglad Basin at Block 6 and is transported via pipeline to the Khartoum refinery, where it is processed for domestic use rather than for export.30


The Petrodar (PDOC) pipeline transports crude oil from Palogue and Adar Yale oil fields (Blocks 3E and 7E) in the Melut Basin to the Bashayer Marine Terminal in Port Sudan. The pipeline is approximately 850 miles long with a design capacity of 500,000 b/d, and it has several heating units to facilitate the movement of the Dar blend crude oil along the pipeline.31


The Greater Nile Petroleum Operating Company (GNPOC) pipeline transports Nile blend crude oil from the Heglig oil fields (Blocks 2 and 4) in Sudan and the Thar Jath and Mala oil fields (Block 1 and 5A) in South Sudan to the Bashayer Marine Terminal in Port Sudan for export, and to two refineries in El-Obeid and Khartoum for refining and distribution to the domestic market. South Sudan’s Thar Jath-Heglig section of the pipeline is approximately 100 miles and has a capacity of 200,000 b/d; the Heglig-Port Sudan section is approximately 930 miles long with a design capacity of 450,000 b/d.32 In September 2014, ownership of the pipeline and facilities was fully transferred to a local Sudanese pipeline operator, Petrolines for Crude Oil Ltd. (PETCO).33

Table 3: Crude oil pipelines in Sudan and South Sudan
OperatorStart of pipelineDestinationCrude oil blend
type
Aprox. length (miles)Design capacity
('000 bbl/d)
Main crude oil pipelines
DPOCBlock 3 and 7Bashayer Terminal 2, Port SudanDar850500
GNPOCHeglig facilitiesBashayer Terminal 1, Port SudanNile1000450
SPOCBlock 5AConnects to Heglig facilitiesNile60200
CNPCBlock 6Khartoum RefineryFula450200
Proposed crude oil pipelines
--South SudanLamu (Kenya)----450
--South SudanDjibouti via Ethiopia------
Source: Company websites, IHS Markit, BMI Research, IHS Edin

Figure 2. Crude oil production in Sudan and South Sudan

Crude oil exports


China is the leading export destination for crude oil from Sudan and South Sudan. In 2016, China accounted for 94% and 100% of Sudan’s and South Sudan’s crude oil exports, respectively.


Sudan and South Sudan export the Nile and Dar blends to Asian markets. All crude oil produced in South Sudan is exported via pipeline to Sudan for refining or export, because South Sudan has no refining capacity, and Sudan is the only country in the region with the refining infrastructure capable of processing these particular blends.34 Crude oil is exported from Port Sudan to Asia via the Bab el-Mandeb Strait. Given the lack of alternative transit routes, Bab el-Mandeb is a strategically important chokepoint that if blocked or closed could lead to significant increases in shipping time and costs.35


According to the United Nations international trade statistics database (UN Comtrade), Sudan and South Sudan exported a total of approximately 127,000 b/d of crude oil in 2016. Although this level is higher than the 65,000 b/d exported in 2012 during the production shutdown, it is lower than the 182,000 b/d exported in 2014. China is by far the largest export destination for Sudan’s and South Sudan’s crude oil, receiving almost 99% of total exports. India and Japan also import relatively small volumes of Sudan and South Sudan’s crude oil.Figure 3. Sudan and South Sudan crude oil exports
Figure 4. Sudan and South Sudan total exports in 2016

Oil refineries


Sudan has two oil refineries and three topping plants (smaller, less complex refineries) with a total capacity of 143,700 b/d. However, the only active refineries are the Khartoum (al-Jaili) refinery and the El-Obeid topping plant.36 The al-Jaili refinery, located approximately 45 miles north of Khartoum, is the country’s largest, with a capacity of 100,000 b/d. The other full-conversion refinery is the Port Sudan refinery (21,700 b/d), and the three topping plants are El-Obeid (10,000 b/d), Shajirah (10,000 b/d), and Abu Gabra (2,000 b/d).37


The al-Jaili refinery initially came online in 2000 with a capacity of 50,000 b/d and was a 50/50 joint venture between the Ministry of Energy and Mining (MEM) and CNPC. It was later expanded in 2006, increasing total capacity to 100,000 b/d and creating two production lines that would allow the refining of both Nile and Fula blend crude oils. The expansion was notable for using the world’s first delayed-coking unit, a unit required to process Fula crude oil because of its high acid and calcium content. Discussions between Sudanese and Chinese officials on a proposed second expansion that could double the refinery’s capacity have been reported, but no significant progress has been made.38 Petronas signed a contract with MEM to expand the currently inactive Port Sudan refinery through a 50/50 joint venture and to add 100,000 b/d to its capacity, but development has been postponed as a result of rising costs.39


In South Sudan, two refineries were under construction: a 3,000 b/d refinery at Bentiu in the Unity State and a 10,000 b/d refinery at Thiangrial in the Upper Nile region. Plans to expand the Bentiu refinery to increase its capacity to 5,000 b/d have been reported. However, security issues have delayed the completion of the refineries, and it is unclear when or if the refineries will be operational.40

Table 4: Oil refineries in Sudan and South Sudan
CountryRefineryCapacity
(000 bbl/d)
StatusOperator
SudanKhartoum (al-Jaili)100OperationalCNPC/Sudapet
Port Sudan21.7Not operatingSudapet
El Obeid10OperationalSudapet
Shajirah10Not operatingConcorp
Abu Gabra2Not operatingSudapet
Total Capacity 143.7  
Planned refineriesOperator and/or builder 
South SudanUnity State (Bentiu)5Under constructionSafinat (Russia)/Nilepet
Upper Nile (Tangrial)10SuspendedGovernment of South Sudan
Proposed refineries
SudanPort Sudan100-- 
Khartoum (expansion)100-- 
Source: BMI Research, IHS Markit, PFC Energy, African Development Bank 
Note: The initial plan for construction at the Bentiu refinery in South Sudan was to build facilities with a capacity to process 3,000 b/d. Plans for expansion to increase capacity to 5,000 b/d have been discussed, but no progress has been made.


Liquids consumption


Oil consumption in Sudan and South Sudan peaked at 125,000 b/d in 2009 and has slightly declined to about 105,000 b/d in 2017.41 Domestic consumption of petroleum products grew rapidly with increased industrialization, car ownership, and access to electricity in the 2000s; however, the persistent instability in both states has dampened consumption.


Petroleum consumption in Sudan has been met by domestically refined crude oil, although lower production levels over the past few years have led to an increase of imported petroleum products to meet shortfalls in domestic demand. According to the latest data from the International Energy Agency (IEA), diesel and fuel oil for electricity generation, followed by gasoline for transportation, make up a significant portion of Sudan’s oil consumption, constituting 40% and 17% of total consumption in 2015, respectively. Diesel/fuel oil and gasoline make up an ever larger share of South Sudan’s oil consumption at 73% and 10% in 2015, respectively, although in absolute terms, its oil consumption has been declining.42

Figure 5. Petroleum and other liquids consumption in Sudan and South Sudan

Electricity


Sudan


Total electricity generation in Sudan was 12.7 billion kilowatthours (kWh) in 2015, of which 66% was generated by hydropower.43 Although power generation has continued to grow in the post-independence era, only 45% of the population had access to electricity in 2014, according to latest estimates from the World Bank.44 Approximately 40% of the population had access to electricity in 2013, with urban populations benefitting from a substantially higher level of access than rural populations, according to the most recent estimates made by African Development Bank (AfDB). Those not connected to a grid rely on biomass or diesel-fired generators for electricity.45 Sudan has two interconnected grids, the Blue Nile and Western grids, that cover a small portion of the country. An additional fourteen centers receive service from thermal generators and local distribution networks.46


Hydroelectricity is generated from seven dams: Roseires, Sinnar, Jebel Aulia, Khashm el-Girba, Merowe, Rumela, and Burdana. The Rumela and Burdana dams, located on the Upper Atbara and Setit rivers in eastern Sudan, were brought online in 2017 and are the most recent additions in hydropower generation. According to BMI Research reports, the two dams added 320 megawatts (MW) and 15 MW to total generation capacity, respectively.47 Development of the Kajbar dam, located further north in the Nile Valley, has stalled. The dam was strongly opposed by local communities because of its potentially significant environmental impact, and no evidence of progress regarding its construction is evident. The Kajbar dam, along with two other proposed hydropower projects, the Dal and El-Shireig dams, are heavily financed by the Saudi government.48


Regarding nonhydropower generation, the 500 MW Kosti Thermal Power Plant that came online in 2016 is an oil-fired plant jointly sponsored by the Sudanese and Indian government that was constructed by India-based Bharat Heavy Electricals Ltd.49 The Sudanese government is attempting to diversify its power generation mix by focusing on developing conventional thermal plants to meet domestic energy demand. However, the proposed projects are still at an early stage and rely heavily on Saudi financing. With the significant cuts in the Saudi budget as a result of lower oil prices, the future of these plants remains in doubt. Without diversification of its power generation mix, Sudan must rely heavily on hydropower to meet domestic demand, and will be especially vulnerable to weather patterns such as a severe or sustained drought.


South Sudan

South Sudan has one of the lowest electrification rates in the world, with only 5% of its population having access to electricity in 2014, according to the latest estimates from the World Bank. Total electricity generation was 310 million kWh in 2015.50 Those connected to the power network experience frequent blackouts or forced load shedding, making citizens rely on standby generators to meet energy needs.51 In April 2017, the AfDB approved a supplemental loan of US $14.57 million for a project approved in 2013 that supported the state-owned utility, the South Sudan Electricity Corporation, to strengthen and expand the country’s electricity distribution networks.52 AfDB project documents state that the additional financing was needed because the original grant underestimated project costs.53


According to BMI Research, five hydropower projects have been identified as potential opportunities for development: Fula Rapids (42 MW), Grand Fula (890 MW), Shukkoli (230 MW), Lakki (410 MW), and Bedden (570 MW). However, construction has been delayed because of low investor confidence and a lack of funding.54

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EIA forecasts the U.S. will import more petroleum than it exports in 2021 and 2022

Throughout much of its history, the United States has imported more petroleum (which includes crude oil, refined petroleum products, and other liquids) than it has exported. That status changed in 2020. The U.S. Energy Information Administration’s (EIA) February 2021 Short-Term Energy Outlook (STEO) estimates that 2020 marked the first year that the United States exported more petroleum than it imported on an annual basis. However, largely because of declines in domestic crude oil production and corresponding increases in crude oil imports, EIA expects the United States to return to being a net petroleum importer on an annual basis in both 2021 and 2022.

EIA expects that increasing crude oil imports will drive the growth in net petroleum imports in 2021 and 2022 and more than offset changes in refined product net trade. EIA forecasts that net imports of crude oil will increase from its 2020 average of 2.7 million barrels per day (b/d) to 3.7 million b/d in 2021 and 4.4 million b/d in 2022.

Compared with crude oil trade, net exports of refined petroleum products did not change as much during 2020. On an annual average basis, U.S. net petroleum product exports—distillate fuel oil, hydrocarbon gas liquids, and motor gasoline, among others—averaged 3.2 million b/d in 2019 and 3.4 million b/d in 2020. EIA forecasts that net petroleum product exports will average 3.5 million b/d in 2021 and 3.9 million b/d in 2022 as global demand for petroleum products continues to increase from its recent low point in the first half of 2020.

U.S. quarterly crude oil production, net trade, and refinery runs

Source: U.S. Energy Information Administration, Short-Term Energy Outlook (STEO), February 2021

EIA expects that the United States will import more crude oil to fill the widening gap between refinery inputs of crude oil and domestic crude oil production in 2021 and 2022. U.S. crude oil production declined by an estimated 0.9 million b/d (8%) to 11.3 million b/d in 2020 because of well curtailment and a drop in drilling activity related to low crude oil prices.

EIA expects the rising price of crude oil, which started in the fourth quarter of 2020, will contribute to more U.S. crude oil production later this year. EIA forecasts monthly domestic crude oil production will reach 11.3 million b/d by the end of 2021 and 11.9 million b/d by the end of 2022. These values are increases from the most recent monthly average of 11.1 million b/d in November 2020 (based on data in EIA’s Petroleum Supply Monthly) but still lower than the previous peak of 12.9 million b/d in November 2019.

February, 18 2021
The Perfect Storm Pushes Crude Oil Prices

In the past week, crude oil prices have surged to levels last seen over a year ago. The global Brent benchmark hit US$63/b, while its American counterpart WTI crested over the US$60/b mark. The more optimistic in the market see these gains as a start of a commodity supercycle stemming from market forces pent-up over the long Covid-19 pandemic. The more cynical see it as a short-term spike from a perfect winter storm and constrained supply. So, which is it?

To get to that point, let’s examine how crude oil prices have evolved since the start of the year. On the consumption side, the market is vacillating between hopeful recovery and jittery reactions as Covid-19 outbreaks and vaccinations lent a start-stop rhythm to consumption trends. Yes, vaccination programmes were developed at lightning speed; and even plenty of bureaucratic hiccoughs have not hampered a steady rollout across the globe. In the UK, more than 20% of adults have received at least one dose of the vaccines, with the USA not too far behind. Israel has vaccinated more than 75% of its population, and most countries should be well into their own programmes by the end of March. That acceleration of vaccinations has underpinned expectations of higher oil demand, with hopes that people will begin to drive again, fly again and buy again. But those hopes have been occasionally interrupted by new Covid-19 clusters detected and, more worryingly, new mutations of the virus.

Against this hopeful demand picture, supply has been managed. Squabbling among the OPEC+ club has prevented a more aggressive approach to managing supply than kingpin Saudi Arabia would like, but OPEC+ has still managed to hold itself together to placate the market that crude spigots will remain restrained. And while the UAE has successfully shifted OPEC+ quota plan for 2021 from quarterly adjustments to monthly, Saudi Arabia stepped into the vacuum to stamp its authority with a voluntary 1 million barrels per day cut. The market was impressed.

That combination of events over January was enough to move Brent prices from the low US$50/b level to the upper US$50/b range. However, US$60/b remained seemingly out of reach. It took a heavy dusting of snow across Texas to achieve that.

Winter weather across the northern hemisphere seemed harsher than usual this year. Europe was hit by two large continent-wide storms, while the American Northeast and Pacific Northwest were buffeted with quite a few snowstorms. Temperatures in East Asia were fairly cold too, which led to strong prices for natural gas and LNG to keep the population warm. But it was a major snowstorm that swept through the southern United States – including Texas – that had the largest effect on prices. Some areas of Texas saw temperatures as low as -18 degrees Celsius, while electricity demand surged to the point where grids failed, leaving 4.3 million people without power. A national emergency was declared, with over 150 million Americans under winter storm warning conditions.

 

For the global oil complex, the effects of the storm were also direct. Some of the largest oil refineries in the world were forced to shut down due to the Arctic conditions, further disrupting power and fuel supplies. All in all, over 3 mmb/d of oil processing capacity had to be idled in the wake of the storm, including Motiva’s Port Arthur, ExxonMobil’s Baytown and Marathon’s Galveston Bay refineries. And even if the sites were still running, they would have to contend to upstream disruptions: estimates suggest that crude oil production in the prolific Permian Basin dropped by over a million barrels per day due to power outages, while several key pipelines connecting Cushing, Oklahoma to the Texas Gulf Coast were also forced to shutter.

That perfect storm was enough to send crude prices above the US$60/b level. But will it last? The damage from the Texan snowstorm has already begun to abate, and even then crude prices did not seem to have the appetite to push higher than US$63/b for Brent and US$60/b for WTI.

Instead, the key development that should determine the future range for crude prices going into the second quarter of 2021 will be in early March, when the OPEC+ club meets once again to decide the level of its supply quotas for April and perhaps beyond. The conundrum facing the various factions within the club is this: at US$60/b, crude oil prices are not low enough to scare all members in voting for unanimous stricter quotas and also not high enough to rescind controlled supply. Instead, prices are at a fragile level where arguments can be made both ways. Russia is already claiming that global oil markets are ‘balanced’, while Saudi Arabia is emphasising the need for caution in public messaging ahead of the meeting. Saudi Arabia’s voluntary supply cut will also expire in March, setting up the stage for yet another fractious meeting. If a snow overrun Texans was a perfect storm to push crude prices to a 13-month high, then the upcoming OPEC+ meeting faces another perfect storm that could negate confidence. Which will it be? The answer lies on the other side of the storm.

Market Outlook:

  • Crude price trading range: Brent – US$58-61/b, WTI – US$60-63/b
  • Better longer-term prospects for fuels demand over 2021 and a severe winter storm in the southern United States that idled many upstream and downstream facilities sent global crude oil prices to their highest levels since January 2021
  • Falling levels at key oil storage locations worldwide are also contributing to the crude rally, with crude inventories in Cushing falling to a six-month low and reports of drained storage tanks in the US Gulf Coast, the Caribbean and East Asia
February, 17 2021
The State of Industry: Q4 2020 Financials – A Fragile Recovery

Much like the year itself, the final quarter of 2020 proved to be full of shocks and surprises… at least in terms of financial results from oil and gas giants. With crude oil prices recovering on the back of a concerted effort by OPEC+ to keep a lid on supply, even at the detriment of their market share, the fourth quarter of 2020 was supposed to be smooth sailing. The tailwind of stronger crude and commodity prices, alongside gradual demand recovery, was expected to have smoothen out the revenue and profit curves for the supermajors.

That didn’t happen.

Instead, losses were declared where they were not expected. And where profits were to be had, they were meagre in volume. And crucially, a deeper dive into the financial results revealed worrying trends in the cash flow of several supermajors, calling into question the ability of these giants to continue on their capital expenditure and dividend plans, and the risks of resorting to debt financing in order to appease investors and yet also continue expanding.

Let’s start with the least surprising result of all. For months, ExxonMobil had been signalling that it would be taking a massive writedown on its upstream assets in Q4 2020, which could lead to a net loss for the quarter and the year. Unlike its peers, ExxonMobil had resisted making writedowns on the value of its crude-producing assets earlier in 2020. At the time, it stated that it had already built caution in the value assessments of those assets, reflecting ‘fair value’; not so long after that bold statement, ExxonMobil has been forced to backtrack and make a US$20.2 billion downward adjustment. Unusually, that meant that non-cash impairments aside, ExxonMobil actually eked out a tiny profit of US$110 million for the quarter on the strength of margins in the chemicals segment, but a full year loss of US$22.4 billion: the first ever annual loss since Exxon and Mobil merged in 1998. This was better than expected by Wall Street analysts, who would also be cheering the formation of ExxonMobil Low Carbon Solutions, in which the group would pump some US$3 billion through 2025 to reduce its greenhouse gas emissions by 20% from 2016 levels. That acknowledgement of a carbon neutral future is still far less ambitious than its European counterparts, but is a clear sign that ExxonMobil is starting to take the climate change element of its business more seriously.

If ExxonMobil managed to surprise in a good way, then its closest American rival did the opposite. Chevron had been outperforming ExxonMobil in quarterly results for a while now, but in Q4 2020 retreated with a net loss of US$665 million. That was narrower than the US$6.6 billion loss declared in Q4 2019, but still a shock since analysts were expecting a narrow profit. Calling 2020 ‘a year like no other’, the headwinds facing Chevron in Q4 2020 were the same facing all majors and supermajors, despite gains in crude prices, refining margins and fuel sales were still soft. Chevron’s cash flow was also a concern – as was ExxonMobil’s – which prompted chatter that the two direct descendants of JD Rockefeller’s Standard Oil were considering a merger. If so, then there is at least alignment on the climate topic: Chevron is also following the trail blazed by European supermajors in embracing a carbon neutral future, with CEO Michael Wirth conceding that Chevron may ‘not be an oil-first company in 2040’.

On the European side of the pond, that same theme of lowered downstream performance dragging down overall performance continued. But unlike the US supermajors, the likes of Shell, BP and Total were somewhat insulated from the Covid-19 blows at the peak of the pandemic as their opportunistic trading divisions capitalised on the wild swings in crude and fuel prices. That factor is now absent, with crude prices taking on a steady upward curve. That’s good for the rest of their businesses, but bad for trading, which thrives on uncertainty and volatility. And so BP reported a Q4 net profit of US$115 million, Shell followed with a Q4 net profit of US$393 million and Total closed out the earning season with industry-beating Q4 net profit of US$1.3 billion, above market expectations.

The softness of the financials hasn’t stopped dividend payouts, but has also been used by Europe’s Big Oil to set the tone for the next few decades of their existence. Total and BP paid a hefty premium to secure rights to build the next generation of UK wind farms; Total joined the Maersk-McKinney Moller Center for Zero Carbon Shipping to develop carbon neutral shipping solutions and splashed out on acquiring 2.2 GW of solar power projects in Texas; BP signed a strategic collaboration agreement with Russia’s Rosneft to develop new low carbon solutions; and aircraft carrier KLM took off with the first flight powered by synthetic kerosene that was developed by Shell through carbon dioxide, water and renewables. That’s a lot of a groundwork laid for the future where these giants can be carbon neutral by 2050.

The message from Q4 seems clear. Big Oil has barely begun its recovery from the Covid-19 maelstrom, and the road to a new normal remains long and painful. But this is also an opportunity to pivot; to set a new destination that is no longer business-as-usual, but embraces zero carbon ambitions. Even the American supermajors are slowly coming around, while the European continues to lead. Will majors in Asia, Latin America and Africa/Middle East follow? Let’s see what that attitude will bring over this new decade.

Market Outlook:

  • Crude price trading range: Brent – US$60-62/b, WTI – US$57-59/b
  • The Brent crude benchmark rose above US$60/b level for the first time in over a year, as the demand outlook for fuels improves with the accelerating rollout of Covid-19 vaccines and tight stockpiles brush off worries of oversupply
  • On the latter, the IEA estimated that global stockpiles of crude and fuels in onshore and floating storage has shrunk by 300 million barrels since OPEC+ first embarked on its deep production controls in May; in China, stockpiles are at their lowest level over a 12-month period, with US crude stockpiles also fell by 1 million barrels
  • Despite a tenuous alliance, OPEC+ has continuously reassured the market that it will work to clear the massive oil surplus created by the pandemic-induced demand slump, signalling that despite its internal differences, a repeat of last March’s surprise price war is not on the cards

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February, 10 2021