Depends on who you ask, there are signs that the friction in the oil rich South China Sea may be abating. Tensions seem to be easing in the short term, with nothing resolved to the long-term problem of border demarcation. Two countries in particular have been China’s main thorn in their quest to claim the entire sweep of the South China Sea – Vietnam and the Philippines – and in its dealings with both of them, China is rewarding cooperation and punishing dissidence.
Last month, Vietnam ordered Spanish firm Repsol to halt work on its Ca Rong Do (Red Emperor), where commercial drilling was imminent, later asking it to declare ‘force majeure’ following pressure from China. It is the second major cancellation in the southern Nam Con Son basin – which skirts China’s nine-dashed line – and could cost Repsol and partners some US$200 million in sunk investment. Vietnam has been vocal about pursuing its own energy agenda, but in the end, ended up having to kowtow to China.
The Philippines has also loudly proclaimed sovereignty over its part of the South China Sea, going as far as to bring the case to UNCLOS, which ruled in favour of the Philippines in a 2016 verdict that China refuses to recognise. However, since then, President Duterte has made cordial overtures to joint developments. While both sides have reiterated that joint oil and gas exploration will not affect their legal positions. The Philippines announced last week that cooperation was moving ahead after both countries claimed to recognise and accept each other’s ‘firm red lines’. It by no means settles the issue in the long run – indeed, successive governments could reverse the position – but it paves way for resources to be developed like in the Thailand-Malaysia Joint Development Area, legally unsettled but commercially viable. In choosing to engage, China has seemingly rewarded the Philippines with a mutually beneficial arrangement, a stance that it has not taken with the more belligerent Vietnam.
That’s not the best outcome, though, as the issue of maritime borders is still unsettled. China has always favoured bilateral talks with each of the claimants to the South China Sea – Malaysia, Indonesia and Brunei included – a divide and conquer strategy that allows it to throw its weight around. But with the USA absent to exert pressure for encompassing solution, favoured by the Obama administration but ignored by Trump, the countries of the South China Sea rim are sitting ducks against the might of China. Either they capitulate – and are rewarded with some crumbs – like the Philippines; or they defy – and end up capitulating anyway with nothing to show – like Vietnam. The vibe in the South China Sea may be seemingly calmer right now, but there are still dangerous currents beneath the surface.
The Current Weather Forecast: China and the South China Sea Nations
Vietnam – Choppy. China has been pressuring Vietnam to halt fishing and upstream activity.
The Philippines – Calmer. China has agreed to joint development of hydrocarbon resources
Malaysia – Calm. No clashes yet, but Malaysia controls part of the disputed Spratly islands.
Brunei – Calm. No clashes yet, but Brunei claims part of the disputed Spratly islands.
Indonesia – Choppy. No clashes yet, but Indonesia claims the waters around the Natuna islands are its ‘traditional fishing grounds’, effectively re-naming it “North Natuna Sea”
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U.S. crude oil production in the U.S. Federal Gulf of Mexico (GOM) averaged 1.8 million barrels per day (b/d) in 2018, setting a new annual record. The U.S. Energy Information Administration (EIA) expects oil production in the GOM to set new production records in 2019 and in 2020, even after accounting for shut-ins related to Hurricane Barry in July 2019 and including forecasted adjustments for hurricane-related shut-ins for the remainder of 2019 and for 2020.
Based on EIA’s latest Short-Term Energy Outlook’s (STEO) expected production levels at new and existing fields, annual crude oil production in the GOM will increase to an average of 1.9 million b/d in 2019 and 2.0 million b/d in 2020. However, even with this level of growth, projected GOM crude oil production will account for a smaller share of the U.S. total. EIA expects the GOM to account for 15% of total U.S. crude oil production in 2019 and in 2020, compared with 23% of total U.S. crude oil production in 2011, as onshore production growth continues to outpace offshore production growth.
In 2019, crude oil production in the GOM fell from 1.9 million b/d in June to 1.6 million b/d in July because some production platforms were evacuated in anticipation of Hurricane Barry. This disruption was resolved relatively quickly, and no disruptions caused by Hurricane Barry remain. Although final data are not yet available, EIA estimates GOM crude oil production reached 2.0 million b/d in August 2019.
Producers expect eight new projects to come online in 2019 and four more in 2020. EIA expects these projects to contribute about 44,000 b/d in 2019 and about 190,000 b/d in 2020 as projects ramp up production. Uncertainties in oil markets affect long-term planning and operations in the GOM, and the timelines of future projects may change accordingly.
Source: Rystad Energy
Because of the amount of time needed to discover and develop large offshore projects, oil production in the GOM is less sensitive to short-term oil price movements than onshore production in the Lower 48 states. In 2015 and early 2016, decreasing profit margins and reduced expectations for a quick oil price recovery prompted many GOM operators to reconsider future exploration spending and to restructure or delay drilling rig contracts, causing average monthly rig counts to decline through 2018.
Crude oil price increases in 2017 and 2018 relative to lows in 2015 and 2016 have not yet had a significant effect on operations in the GOM, but they have the potential to contribute to increasing rig counts and field discoveries in the coming years. Unlike onshore operations, falling rig counts do not affect current production levels, but instead they affect the discovery of future fields and the start-up of new projects.
Source: U.S. Energy Information Administration, Monthly Refinery Report
The API gravity of crude oil input to U.S. refineries has generally increased, or gotten lighter, since 2011 because of changes in domestic production and imports. Regionally, refinery crude slates—or the mix of crude oil grades that a refinery is processing—have become lighter in the East Coast, Gulf Coast, and West Coast regions, and they have become slightly heavier in the Midwest and Rocky Mountain regions.
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, so light oils have high API gravities. Crude oil with an API gravity greater than 38 degrees is generally considered light crude oil; crude oil with an API gravity of 22 degrees or below is considered heavy crude oil.
The crude slate processed in refineries situated along the Gulf Coast—the region with the most refining capacity in the United States—has had the largest increase in API gravity, increasing from an average of 30.0 degrees in 2011 to an average of 32.6 degrees in 2018. The West Coast had the heaviest crude slate in 2018 at 28.2 degrees, and the East Coast had the lightest of the three regions at 34.8 degrees.
Production of increasingly lighter crude oil in the United States has contributed to the overall lightening of the crude oil slate for U.S. refiners. The fastest-growing category of domestic production has been crude oil with an API gravity greater than 40 degrees, according to data in the U.S. Energy Information Administration’s (EIA) Monthly Crude Oil and Natural Gas Production Report.
Since 2015, when EIA began collecting crude oil production data by API gravity, light crude oil production in the Lower 48 states has grown from an annual average of 4.6 million barrels per day (b/d) to 6.4 million b/d in the first seven months of 2019.
Source: U.S. Energy Information Administration, Monthly Crude Oil and Natural Gas Production Report
When setting crude oil slates, refiners consider logistical constraints and the cost of transportation, as well as their unique refinery configuration. For example, nearly all (more than 99% in 2018) crude oil imports to the Midwest and the Rocky Mountain regions come from Canada because of geographic proximity and existing pipeline and rail infrastructure between these regions.
Crude oil imports from Canada, which consist of mostly heavy crude oil, have increased by 67% since 2011 because of increased Canadian production. Crude oil imports from Canada have accounted for a greater share of refinery inputs in the Midwest and Rocky Mountain regions, leading to heavier refinery crude slates in these regions.
By comparison, crude oil production in Texas tends to be lighter: Texas accounted for half of crude oil production above 40 degrees API in the United States in 2018. The share of domestic crude oil in the Gulf Coast refinery crude oil slate increased from 36% in 2011 to 70% in 2018. As a result, the change in the average API gravity of crude oil processed in refineries in the Gulf Coast region was the largest increase among all regions in the United States during that period.
East Coast refineries have three ways to receive crude oil shipments, depending on which are more economical: by rail from the Midwest, by coastwise-compliant (Jones Act) tankers from the Gulf Coast, or by importing. From 2011 to 2018, the share of imported crude oil in the East Coast region decreased from 95% to 81% as the share of domestic crude oil inputs increased. Conversely, the share of imported crude oil at West Coast refineries increased from 46% in 2011 to 51% in 2018.
Headline crude prices for the week beginning 7 October 2019 – Brent: US$58/b; WTI: US$52/b
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