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After proving to be a thorn in the side of the planned merger between Japanese refiners Idemitsu and Showa Shell Sekiyu since 2016, the family of Idemitsu’s founder Sazo Idemitsu has now acquiesced to the wishes of Idemitsu’s board and dropped its opposition to the merger. This paves the way for the latest merger in the Japanese refining business, as the industry – once a global titan – prepares for a future of shrinking domestic demand.
The merger was first announced in 2016, the first planned merger in Japanese refining since an initial wave of consolidation in the 2000s. But opposition from the Idemitsu founding family – which hold a considerable stake in the company – meant that the merger remains uncompleted, while the Nippon Oil and Mitsubishi Oil and the JX Holdings and TonenGeneral mergers sped ahead, even though they were announced later. The completion of the Idemitsu-Showa Shell Sekiyu merger will slash the number of Japanese refiners from six to three, a trend backed by the Japanese government, which sees consolidation as the only way forward to optimise the industry. Although Idemitsu – Japan’s second-largest refiner – claims that no refineries will be closed post-merger, it seems inevitable; Japanese fuel demand peaked in the late 2000s and its decline is accelerating. From a peak of 4.6 mmb/d in refining capacity, consolidation means that Japanese capacity could halve to 2.3 mmb/d by 2030 – mainly by shuttering the country’s aging simple refineries. While this will increase Japan’s fuel product import bill, the Japanese government seems fine with this, given that the downstream companies will merely be swapping crude imports for product imports.
But back to the Idemitsu-Showa Shell Sekiyu merger. There were legitimate concerns from the Idemitsu family regarding the logic of the merger. They argued that cultural differences between the management of both companies and geopolitical factors – Idemitsu is a major importer of Iranian crude, while Saudi Aramco owns part of Showa Shell – were insurmountable. With the US now re-imposing sanctions on Iran crude, the latter has once again come into prominence. But even when Iranian crude returned to the world market in 2016, the Idemitsu family went as far as to increase its stake in the firm – in response to a strategic share dilution designed to reduce their veto power – to derail the merger. But the show went on despite their opposition – Idemitsu bought a 33% stake in Showa Shell in 2016, and since 2017 deepened ties through an exchange of directors and combining operations. A merger was always inevitable, and now even the Idemitsu clan has seen that. Even the family’s most strident voice, Shosuke Idemitsu, has fallen, agreeing on the condition that the new company ‘respect the values and principles that have guided Idemitsu since 1917.’ Two seats for the family on the board of the combined company have also been demanded.
The new merged company could be formed as early as the end of 2018. Since both firms are operating on a level just short of a full-merger, it seems almost a formality. But it is necessary. The JX-TonenGeneral merger was completed last April, now the country’s dominant player. Idemitsu-Showa Shell may form 30% of the domestic fuels market, but that is 30% of a shrinking market. As its rivals speed ahead, Idemitsu-Showa Shell can now begin to catch up.
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The UK has just designated the Persian Gulf as a level 3 risk for its ships – the highest level possible threat for British vessel traffic – as the confrontation between Iran with the US and its allies escalated. The strategically-important bit of water - and in particular the narrow Strait of Hormuz – is boiling over, and it seems as if full-blown military confrontation is inevitable.
The risk assessment comes as the British warship HMS Montrose had to escort the BP oil tanker British Heritage out of the Persian Gulf into the Indian Ocean from being blocked by Iranian vessels. The risk is particularly acute as Iran is spoiling for a fight after the Royal Marines seized the Iranian crude supertanker Grace-1 in Gibraltar on suspicions that it was violating sanctions by sending crude to war-torn Syria. Tensions over the Gibraltar seizure kept the British Heritage tanker in ‘safe’ Saudi Arabian waters for almost a week after making a U-turn from the Basrah oil terminal in Iraq on fears of Iranian reprisals, until the HMW Montrose came to its rescue. Iran’s Revolutionary Guard Corps have warned of further ‘reciprocation’ even as it denied the British Heritage incident ever occurred.
This is just the latest in a series of events around Iran that is rattling the oil world. Since the waivers on exports of Iranian crude by the USA expired in early May, there were four sabotage attacks on oil tankers in the region and two additional attacks in June, all near the major bunkering hub of Fujairah. Increased US military presence resulted in Iran downing an American drone, which almost led to a full-blown conflict were it not for a last-minute U-turn by President Donald Trump. Reports suggest that Iran’s Revolutionary Guard Corps have moved military equipment to its southern coast surrounding the narrow Strait of Hormuz, which is 39km at its narrowest. Up to a third of all seaborne petroleum trade passes through this chokepoint and while Iran would most likely overrun by US-led forces eventually if war breaks out, it could cause a major amount of damage in a little amount of time.
The risk has already driven up oil prices. While a risk premium has already been applied to current oil prices, some analysts are suggesting that further major spikes in crude oil prices could be incoming if Iran manages to close the Strait of Hormuz for an extended period of time. While international crude oil stocks will buffer any short-term impediment, if the Strait is closed for more than two weeks, crude oil prices could jump above US$100/b. If the Strait is closed for an extended period of time – and if the world has run down on its spare crude capacity – then prices could jump as high as US$325/b, according to a study conducted by the King Abdullah Petroleum Studies and Research Centre in Riyadh. This hasn’t happened yet, but the impact is already being felt beyond crude prices: insurance premiums for ships sailing to and fro the Persian Gulf rose tenfold in June, while the insurance-advice group Joint War Committee has designated the waters as a ‘Listed Area’, the highest risk classification on the scale. VLCC rates for trips in the Persian Gulf have also slipped, with traders cagey about sending ships into the potential conflict zone.
This will continue, as there is no end-game in sight for the Iranian issue. With the USA vague on what its eventual goals are and Iran in an aggressive mood at perceived injustice, the situation could explode in war or stay on steady heat for a longer while. Either way, this will have a major impact on the global crude markets. The boiling point has not been reached yet, but the waters of the Strait of Hormuz are certainly simmering.
The Strait of Hormuz:
Market Watch
Headline crude prices for the week beginning 8 July 2019 – Brent: US$64/b; WTI: US$57/b
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Utility-scale battery storage units (units of one megawatt (MW) or greater power capacity) are a newer electric power resource, and their use has been growing in recent years. Operating utility-scale battery storage power capacity has more than quadrupled from the end of 2014 (214 MW) through March 2019 (899 MW). Assuming currently planned additions are completed and no current operating capacity is retired, utility-scale battery storage power capacity could exceed 2,500 MW by 2023.
Source: U.S. Energy Information Administration, Annual Electric Generator Report and the Preliminary Monthly Electric Generator Inventory
EIA's Annual Electric Generator Report (Form EIA-860) collects data on the status of existing utility-scale battery storage units in the United States, along with proposed utility-scale battery storage projects scheduled for initial commercial operation within the next five years. The monthly version of this survey, the Preliminary Monthly Electric Generator Inventory (Form EIA-860M), collects the updated status of any projects scheduled to come online within the next 12 months.
Growth in utility-scale battery installations is the result of supportive state-level energy storage policies and the Federal Energy Regulatory Commission’s Order 841 that directs power system operators to allow utility-scale battery systems to engage in their wholesale energy, capacity, and ancillary services markets. In addition, pairing utility-scale battery storage with intermittent renewable resources, such as wind and solar, has become increasingly competitive compared with traditional generation options.
The two largest operating utility-scale battery storage sites in the United States as of March 2019 provide 40 MW of power capacity each: the Golden Valley Electric Association’s battery energy storage system in Alaska and the Vista Energy storage system in California. In the United States, 16 operating battery storage sites have an installed power capacity of 20 MW or greater. Of the 899 MW of installed operating battery storage reported by states as of March 2019, California, Illinois, and Texas account for a little less than half of that storage capacity.
Source: U.S. Energy Information Administration, Annual Electric Generator Report and the Preliminary Monthly Electric Generator Inventory
In the first quarter of 2019, 60 MW of utility-scale battery storage power capacity came online, and an additional 108 MW of installed capacity will likely become operational by the end of the year. Of these planned 2019 installations, the largest is the Top Gun Energy Storage facility in California with 30 MW of installed capacity.
As of March 2019, the total utility-scale battery storage power capacity planned to come online through 2023 is 1,623 MW. If these planned facilities come online as scheduled, total U.S. utility-scale battery storage power capacity would nearly triple by the end of 2023. Additional capacity beyond what has already been reported may also be added as future operational dates approach.
Of all planned battery storage projects reported on Form EIA-860M, the largest two sites account for 725 MW and are planned to start commercial operation in 2021. The largest of these planned sites is the Manatee Solar Energy Center in Parrish, Florida. With a capacity of 409 MW, this project will be the largest solar-powered battery system in the world and will store energy from a nearby Florida Power and Light solar plant in Manatee County.
The second-largest planned utility-scale battery storage facility is the Helix Ravenswood facility located in Queens, New York. The site is planned to be developed in three stages and will have a total capacity of 316 MW.