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Last Updated: July 20, 2018
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Market Watch

Headline crude prices for the week beginning 16 July 2018 – Brent: US$71/b; WTI: US$68/b

  • Signs that crude oil supply could expand in coming weeks have dragged crude prices down to a three-month low, particularly the promise of more oil from OPEC and its allies.
  • While Saudi Arabia will be reluctant to use up all its spare capacity and the question of replacing Iranian volumes is still up in the air, Russia stated that the OPEC+ group of 24 countries could boost production by more than the 1 mmb/d agreed in Vienna last month, if need be.
  • The re-opening of four key export terminals in Libya – following the ending of a blockade by eastern rebel factions – should reverse the decline in Libyan exports. However, a recent abduction at the Sharara oil field shows the situation is still fragile.
  • An ongoing strike by upstream oil workers in Norway is also feeding into concerns over short-term global supply, but the market seems to be assured that OPEC+ will be able to act to balance things.
  • News that China’s second quarter GDP growth was slower than expected – and June factory output slowing to a two-year low – caused worries that high oil prices could be arresting fuel demand growth at a time when China’s trade war with the US is intensifying.
  • Although American economic data is robust, there are fears of a slowdown elsewhere in the world, which could further hurt the demand-led improvement in crude prices over 2018.
  • With signs of cloudy weather over crude prices, American drillers took a step back, leaving the active oil rig count unchanged last week, while adding 2 new gas rigs to bring the total up to 1,054.
  • Crude price outlook: The market is balanced between immediate supply concerns and cloudier forecasts over mid and long-term demand, which should keep prices stable. The return of some functions at Suncor’s Syncrude facility should allow the Brent-WTI differential to fall. We expect Brent to range in US$70-73/b and WTI at US$65-67/b.

Headlines of the week

Upstream

  • Norwegian oil workers have gone on strike for the first time since 2012 in a dispute over wages and pensions, which has already forced Shell to close down production at its Knarr field.
  • BP is now the frontrunner in the race to buy BHP Billiton’s US onshore oil and gas operations, which the mining giant wants to sell as a single package.
  • Eni’s streak in Egypt continues, announcing a second light oil discovery at the B1-X prospect within the Faghur basin, which Eni is hoping will combine with its previously discovered A2-X well to form a new productive area.
  • The UK’s Oil and Gas Authority (OGA) has launched its 31st Offshore Licensing Round, with some 1,766 blocks covering 370,000 square kilometres from the Shetlands, North Sea and English Channel up for grabs.
  • Crude production in Kazakhstan has risen by some 6.2% y-o-y in the first half of 2018, with expansions at the Tengischevroil, Kashagan and Karachaganak fields contributing to a total output figure of 1.046 mmb/d. Over the same period, Kazakh exports were up 6% to 845,000 b/d.
  • The outage at Suncor’s Syncrude oil sands project in Alberta, Canada, which caused the dramatic narrowing of the WTI-Brent spread recently, will only be fully quelled by September, although some output will resume over July.

Downstream

  • The US Environmental Protection Agency will be ditching a plan requiring refiners to raise biofuel blending levels in 2019 to compensate for its waver program, capitulating to intense protest from the American refining industry.
  • Japanese refiners Idemitsu Kosan and Showa Shell Sekiyu have finally agreed to merge on April 1, 2019 through a share swap, after the Idemitsu founding family was convinced to drop its long-standing opposition to the plan.
  • Iraq has extended its deadline for submissions to build a planned 100,000 b/d refinery in its Kut province, with the new deadline being October 4.
  • Just as China unveiled measures to ease foreign investment, BASF announced that it is considering building China’s first fully-foreign-owned petrochemical plant in Guangdong, a US$10 billion project scheduled for 2030.

Natural Gas/LNG

  • Total has completed its acquisition of Engie’s upstream LNG assets, purchased for US$1.5 billion, making the French major the world’s second largest LNG player behind Shell.
  • ExxonMobil, Eni and CNPC – partners in Mozambique Rovuma Venture – have submitted their development plan for the first phase of the Rovuma LNG project, which include two LNG trains with 7.6 mmtpa capacity each.
  • Nigeria has started on its US$12 billion plan to expand its LNG capacity by a third, with Nigeria LNG – a joint venture between NNPC, Total, Shell and Eni – signing off on new trains that would increase capacity to 30 mmtpa by 2030.
  • Gazprom expects full-scale development of the Kharasaveyskoye gas and condensate field in the Yamal Peninsula to begin in 2019.
  • As the US LNG industry continues to take off, Cheniere and the CME Group are working to develop the first US physical LNG futures contract based on deliveries from Cheniere’s Sabine Pass export terminal.
  • Even as Inpex’s Ichthys LNG project approaches its long-delayed start, Australia’s safety regulator has reportedly found some electrical mistakes, which could delay the project’s start-up.

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The United States now exports crude oil to more destinations than it imports from

As U.S. crude oil export volumes have increased to an average of 2.8 million barrels per day (b/d) in the first seven months of 2019, the number of destinations (which includes countries, territories, autonomous regions, and other administrative regions) that receive U.S. exports has also increased. Earlier this year, the number of U.S. crude oil export destinations surpassed the number of sources of U.S. crude oil imports that EIA tracks.

In 2009, the United States imported crude oil from as many as of 37 sources per month. In the first seven months of 2019, the largest number of sources in any month fell to 27. As the number of sources fell, the number of destinations for U.S. crude oil exports rose. In the first seven months of 2019, the United States exported crude oil to as many as 31 destinations per month.

This rise in U.S. export destinations coincides with the late 2015 lifting of restrictions on exporting domestic crude oil. Before the restrictions were lifted, U.S. crude oil exports almost exclusively went to Canada. Between January 2016 (the first full month of unrestricted U.S. crude oil exports) and July 2019, U.S. crude oil production increased by 2.6 million b/d, and export volumes increased by 2.2 million b/d.

monthly U.S. crude oil production and exports

Source: U.S. Energy Information Administration, Petroleum Supply Monthly

The United States has also been importing crude oil from fewer of these sources largely because of the increase in domestic crude oil production. Most of this increase has been relatively light-sweet crude oil, but most U.S. refineries are configured to process medium- to heavy-sour crude oil. U.S. refineries have accommodated this increase in production by displacing imports of light and medium crude oils from countries other than Canada and by increasing refinery utilization rates.

Conversely, the United States has exported crude oil to more destinations because of growing demand for light-sweet crude oil abroad. Several infrastructure changes have allowed the United States to export this crude oil. New, expanded, or reversed pipelines have been delivering crude oil from production centers to export terminals. Export terminals have been expanded to accommodate greater crude oil tanker traffic, larger crude oil tankers, and larger cargo sizes.

More stringent national and international regulations limiting the sulfur content of transportation fuels are also affecting demand for light-sweet crude oil. Many of the less complex refineries outside of the United States cannot process and remove sulfur from heavy-sour crude oils and are better suited to process light-sweet crude oil into transportation fuels with lower sulfur content.

The U.S. Energy Information Administration’s monthly export data for crude oil and petroleum products come from the U.S. Census Bureau. For export values, Census trade data records the destinations of trade volumes, which may not be the ultimate destinations of the shipments.

October, 23 2019
Recalibrating Singapore’s Offshore Marine Industry

The state investment firm Temasek Holdings has made an offer to purchase control of Singaporean conglomerate Keppel Corp for S$4.1 billion. News of this has reverberated around the island, sparking speculation about what the new ownership structure could bring – particularly in the Singaporean rig-building sector.

Temasek already owns 20.5% of Keppel Corp. Its offer to increase its stake to 51% for S$4.1 billion would see it gain majority shareholding, allowing a huge amount of strategic flexibility. The deal would be through Temasek’s wholly-owned subsidiary Kyanite Investment Holdings, offering S$7.35 per share of Keppel Corp, a 26% premium of the traded price at that point. The financial analyst community have remarked that the bid is ‘fair’ and ‘reasonable’, and there appears to be no political headwinds against the deal being carried out with the exception of foreign and domestic regulatory approval.

The implications of the deal are far-ranging. Keppel Corp’s business ranges from property to infrastructure to telecommunications, including Keppel Land and a partial stake in major Singapore telco M1. Temasek has already said that it does not intend to delist and privatise Keppel Corp, and has a long-standing history of not interfering or getting involved in the operations or decisions of its portfolio companies.

This might be different. Speculation is that this move, if successful could lead to a restructuring of the Singapore offshore and marine industry. Since 2015, Singapore’s rig-building industry has been in the doldrums as global oil prices tumbled. Although prices have recovered, cost-cutting and investment reticence have provided a slower recovery for the industry. In Singapore, this has affected the two major rigbuilders – Keppel O&M and its rival Sembcorp Marine. In 2018, Keppel O&M reported a loss of over SS$100 million (although much improved from its previous loss of over SS$800 million); Sembcorp Marine, too, faces a challenging market, with a net loss of nearly 50 million. Temasek itself is already a majority shareholder in Sembcorp Marine.

Once Keppel Corp is under Temasek’s control, this could lead to consolidation in the industry. There are many pros to this, mainly the merging of rig-building operations and shipyards will put Singapore is a stronger position against giant shipyards of China and South Korea, which have been on an asset buying spree. With the overhang of the Sete Brasil scandal over as both Keppel O&M and Sembcorp Marine have settled corruption allegations over drillship and rig contracts, a merger is now increasingly likely. It would sort of backtrack from Temasek’s recent direction in steering away from fossil fuel investments (it had decided to not participate in the upcoming Saudi Aramco IPO for environmental concerns) but strengthening the Singaporeans O&M industry has national interest implications. As a representative of Temasek said of its portfolio – ‘(we are trying to) re-purpose some businesses to try and grasp the demands of tomorrow.’ So, if there is to be a tomorrow, then Singapore’s two largest offshore players need to start preparing for that now in the face of tremendous competition. And once again it will fall on the Singaporean government, through Temasek, to facilitate an arranged marriage for the greater good.

Keppel and Sembcorp O&M at a glance:

Keppel Offshore & Marine, 2018

  • Revenue: S$1.88 billion (up from S$1.80 billion)
  • Net Profit: -S$109 million (up from -S$826 million)
  • Contracts secured: S$1.7 billion

Sembcorp Marine, 2018

  • Turnover: S$4.88 billion (up from S$3.03 billion)
  • Net Profit: -S$48 million (down from S$157 million)
  • Contracts secured: S$1.2 billion
October, 22 2019
Global energy consumption driven by more electricity in residential, commercial buildings

Energy used in the buildings sector—which includes residential and commercial structures—accounted for 20% of global delivered energy consumption in 2018. In its International Energy Outlook 2019 (IEO2019) Reference case, the U.S. Energy Information Administration (EIA) projects that global energy consumption in buildings will grow by 1.3% per year on average from 2018 to 2050. In countries that are not part of the Organization for Economic Cooperation and Development (non-OECD countries), EIA projects that energy consumed in buildings will grow by more than 2% per year, or about five times the rate of OECD countries.

building sector energy consumption

Source: U.S. Energy Information Administration, International Energy Outlook 2019 Reference case

Electricity—the main energy source for lighting, space cooling, appliances, and equipment—is the fastest-growing energy source in residential and commercial buildings. EIA expects that rising population and standards of living in non-OECD countries will lead to an increase in the demand for electricity-consuming appliances and personal equipment.

EIA expects that in the early 2020s, total electricity use in buildings in non-OECD countries will surpass electricity use in OECD countries. By 2050, buildings in non-OECD countries will collectively use about twice as much electricity as buildings in OECD countries.

average annual change in buildings sector electricity consumption

Source: U.S. Energy Information Administration, International Energy Outlook 2019 Reference case
Note: OECD is the Organization for Economic Cooperation and Development.

In the IEO2019 Reference case, electricity use by buildings in China is projected to increase more than any other country in absolute terms, but India will experience the fastest growth rate in buildings electricity use from 2018 to 2050. EIA expects that use of electricity by buildings in China will surpass that of the United States by 2030. By 2050, EIA expects China’s buildings will account for more than one-fifth of the electricity consumption in buildings worldwide.

As the quality of life in emerging economies improves with urbanization, rising income, and access to electricity, EIA projects that electricity’s share of the total use of energy in buildings will nearly double in non-OECD countries, from 21% in 2018 to 38% in 2050. By contrast, electricity’s share of delivered energy consumption in OECD countries’ buildings will decrease from 24% to 21%.

building sector electricity consumption per capita by region

Source: U.S. Energy Information Administration, International Energy Outlook 2019 Reference case
Note: OECD is the Organization for Economic Cooperation and Development.

The per capita use of electricity in buildings in OECD countries will increase 0.6% per year between 2018 and 2050. The relatively slow growth is affected by improvements in building codes and improvements in the efficiency of appliances and equipment. Despite a slower rate of growth than non-OECD countries, OECD per capita electricity use in buildings will remain higher than in non-OECD countries because of more demand for energy-intensive services such as space cooling.

In non-OECD countries, the IEO2019 Reference case projects that per capita electricity use in buildings will grow by 2.5% per year, as access to energy expands and living standards rise, leading to increased use of electric-intensive appliances and equipment. This trend is particularly evident in India and China, where EIA projects that per capita electricity use in buildings will increase by 5.3% per year in India and 3.6% per year in China from 2018 to 2050.

October, 22 2019