East Timor and Australia are friends again. But a grudging friendship for mutual benefit that replaces the outright animosity that existed before. And like most fallouts, it revolved around money.
In 1974, the collective Greater Sunrise fields were discovered in the Timor Gap, an area of the Timor Sea that lies between Australia and then-Portuguese colony East Timor. With estimated reserves of some 5.13 tcf of natural gas – equivalent to about a third of current global LNG consumption – it is a jewel that is begging to be developed. However, Indonesia invaded East Timor – which had only enjoyed independence from Portugal for 9 days – and administered it until 2002; among the many things it conducted on ‘behalf’ of the Timorese was to agree on a maritime border with Australia.
As it finally became independent in 2002, the new East Timor (Democratic Republic of Timor-Leste) needed new friends. Indonesia wasn’t the best option, so it turned to Australia, its largest international supporter. But the riches in the Timor Sea proved too vast. Although the young and naïve East Timor did agree on treaties governing joint development of the Timor Gap and Greater Sunrise, it also asserted that it did not recognise the maritime border agreed by Indonesia with Australia. Rather, it argued for a border that is equi-distance between East Timor and Australia; a move that would put Greater Sunrise within Timorese waters. Alarmed by this, Australia’s government sanctioned placing bugs within the Timorese cabinets to monitor discussions. And just as Greater Sunrise was on the verge of finally being developed, the scandal broke… followed by years of argument and accusations.
That has been put aside for now. East Timor dropped its suit against Australia at the Permanent Court of Arbitration last year, and last week signed a new treaty that redraws their maritime boundary*. This formally ends the dispute over the border. It, however, does not set out terms of the actual field development, preferring to leave that up to the Greater Sunrise consortium of Woodside, ConocoPhillips, Shell and Osaka Gas – East Timor will receive at least 70% of Greater Sunrise revenues, up to 80% depending on where the gas is processed. The decision is particularly pertinent for East Timor, as its Bayu Undan field – the only major gas production field in operation – is set to be depleted by 2022. From friends to enemies to friends again, Australia has sought to re-assure all parties that no clandestine shenanigans were involved this time.
*On 6 March 2018, Australia’s Minister for Foreign Affairs, the Hon Julie Bishop MP, and Timor-Leste’s Minister in the Office of the Prime Minister for the Delimitation of Borders and the Agent in the Conciliation, His Excellency Mr Hermenegildo Pereira, signed the Treaty Between Australia and the Democratic Republic of Timor-Leste Establishing Their Maritime Boundaries in the Timor Sea [PDF 592 KB]. The treaty was signed in New York at the United Nations Headquarters in the presence of the United Nations Secretary-General and the Chair of the Conciliation Commission.
"Frenemy" (less commonly spelled "frienemy") is an oxymoron and a portmanteau of "friend" and "enemy" that refers to "a person with whom one is friendly, despite a fundamental dislike or rivalry" or "a person who combines the characteristics of a friend and an enemy". https://en.wikipedia.org/wiki/Frenemy
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Less than two weeks ago, the VLCC Navarin arrived at Tanjung Pengerang, at the southern end of Peninsular Malaysia. It was carrying two million barrels of crude oil, split equally between Saudi Arab Medium and Iraqi Basra Light grades.
The RAPID refinery in Johor. An equal joint partnership between Malaysia’s Petronas and Saudi Aramco whose 300 kb/d mega refinery is nearing completion. Once questioned for its economic viability, RAPID is now scheduled to start up in early 2019, entering a market that is still booming and in demand of the higher quality, Euro IV and Euro V level fuels RAPID will produce.
Beyond fuel products, RAPID will also have massive petrochemical capacity. Meant to come on online at a later date, RAPID will have a collective capacity of some 7.7 million tons per annum of differentiated and specialty chemicals, including 3 mtpa of propylene. To be completed in stages, Petronas nonetheless projects that it will add some 3.3 million tons of petrochemicals to the Asia market by the end of next year. That’s blockbuster numbers, and it will elevate Petronas’ stature in downstream, bringing more international appeal to a refining network previously focused mainly on Malaysia. For its partner Saudi Aramco, RAPID is part of a multi-pronged strategy of investing mega refineries in key parts of the world, to diversify its business and ensure demand for its crude flows as it edges towards an IPO.
RAPID won’t be alone. Vietnam’s second refinery – the 200 kb/d Nghi Son – has finally started up this year after multiple delays. And in the same timeframe as RAPID, the Zhejiang refinery by Rongsheng Petro Chemical and the Dalian refinery by Hengli Petrochemical in China are both due to start up. At 400 kb/d each, that could add 1.1 mmb/d of new refining capacity in Asia within 1H19. And there’s more coming. Hengli’s Pulau Muara Besar project in Brunei is also aiming for a 2019 start, potentially adding another 175 kb/d of capacity. And just like RAPID, each of these new or recent projects has substantial petrochemical capacity planned.
That’s okay for now, since demand remains strong. But the danger is that this could all unravel. With American sanctions on Iran due to kick in November, even existing refineries are fleeing from contributing to Tehran in favour of other crude grades. The new refineries will be entering a tight market that could become even tighter. RAPID can rely on Saudi Arabia and Nghi Son can depend on Kuwait, both the Chinese projects are having to scramble to find alternate supplies for their designed diet of heavy sour crude. This race to find supplies has already sent Brent prices to four-year highs, and most in the industry are already predicting that crude oil prices will rise to US$100/b by the year’s end. At prices like this, demand destruction begins and the current massive growth – fuelled by cheap oil prices – could come to an end. The market can rapidly change again, and by the end of this decade, Asia could be swirling with far more oil products that it can handle.
Upcoming and recent Asia refineries:
Headline crude prices for the week beginning 8 October 2018 – Brent: US$84/b; WTI: US$74/b
Headlines of the week
Source: U.S. Energy Information Administration, Monthly Crude Oil and Natural Gas Production
As domestic production continues to increase, the average density of crude oil produced in the United States continues to become lighter. The average API gravity—a measure of a crude oil’s density where higher numbers mean lower density—of U.S. crude oil increased in 2017 and through the first six months of 2018. Crude oil production with an API gravity greater than 40 degrees grew by 310,000 barrels per day (b/d) to more than 4.6 million b/d in 2017. This increase represents 53% of total Lower 48 production in 2017, an increase from 50% in 2015, the earliest year for which EIA has oil production data by API gravity.
API gravity is measured as the inverse of the density of a petroleum liquid relative to water. The higher the API gravity, the lower the density of the petroleum liquid, meaning lighter oils have higher API gravities. The increase in light crude oil production is the result of the growth in crude oil production from tight formations enabled by improvements in horizontal drilling and hydraulic fracturing.
Along with sulfur content, API gravity determines the type of processing needed to refine crude oil into fuel and other petroleum products, all of which factor into refineries’ profits. Overall U.S. refining capacity is geared toward a diverse range of crude oil inputs, so it can be uneconomic to run some refineries solely on light crude oil. Conversely, it is impossible to run some refineries on heavy crude oil without producing significant quantities of low-valued heavy products such as residual fuel.
Source: U.S. Energy Information Administration, Monthly Crude Oil and Natural Gas Production
API gravity can differ greatly by production area. For example, oil produced in Texas—the largest crude oil-producing state—has a relatively broad distribution of API gravities with most production ranging from 30 to 50 degrees API. However, crude oil with API gravity of 40 to 50 degrees accounted for the largest share of Texas production, at 55%, in 2017. This category was also the fastest growing, reaching 1.9 million b/d, driven by increasing production in the tight oil plays of the Permian and Eagle Ford.
Oil produced in North Dakota’s Bakken formation also tends to be less dense and lighter. About 90% of North Dakota’s 2017 crude oil production had an API gravity of 40 to 50 degrees. The oil coming from the Federal Gulf of Mexico (GOM) tends to be more dense and heavier. More than 34% of the crude oil produced in the GOM in 2017 had an API gravity of lower than 30 degrees and 65% had an API gravity of 30 to 40 degrees.
In contrast to the increasing production of light crude oil in the United States, imported crude oil continues to be heavier. In 2017, 7.6 million b/d (96%) of imported crude oil had an API gravity of 40 or below, compared with 4.2 million b/d (48%) of domestic production.
EIA collects API gravity production data by state in the monthly crude oil and natural gas production report as well as crude oil quality by company level imports to better inform analysis of refinery inputs and utilization, crude oil trade, and regional crude oil pricing. API gravity is also projected to continue changing: EIA’s Annual Energy Outlook 2018 Reference case projects that U.S. oil production from tight formations will continue to increase in the coming decades.