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Last Updated: August 30, 2018
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Market Watch

Headline crude prices for the week beginning 27 August 2018 – Brent: US$76/b; WTI: US$68/b

  • Having risen progressively over last week over a larger-than-expected fall in US crude stockpiles and signs that the sanctions on Iranian crude are beginning to bite, crude prices started the week off on even trends.
  • While the Trump administration has been starting fires over trade with allies and foes alike, news that the US and Mexico may have come to agreement over a new bilateral trade agreement to replace NAFTA has calmed markets, with Canada also reportedly mulling over concessions to secure a new trade deal.
  • Strong demand in Asia, particularly from China, and modest gains in OPEC output have also been helpful for prices, with OPEC reporting that its member nations had cut output in July by 9% more than was called for.
  • News that OPEC’s compliance level over the (previous) supply reduction agreement was 120% in June and 147% in May stoked some fears that the market balance could tighten increasingly over the rest of the year.
  • The Iranian question is still hanging like the Sword of Damocles over the market, and OPEC looks like it will be kicking the ball further down the road, announcing that it will only discuss if its members can compensate for a sudden drop in Iranian oil supply at its next bi-annual meeting in December.
  • The awkward introduction of the new sovereign bolivar in Venezuela – linked to its new petro-cryptocurrency and crude prices – raises worries that the implosion in Venezuelan could derail OPEC’s careful plans.
  • There is conflicting news over Saudi Aramco’s planned IPO – news has filtered out that the IPO is being shelved temporarily to concentrate on an acquisition in SABIC, but the government has just granted Aramco an official 40 year concession for exploration rights to bolster the company’s value.
  • With crude prices in flux, the active rig count in the US has also been very fluid, moving from a huge gain two weeks ago, to being flat last week, to dropping by 13 this week – the biggest drop in two years – as 9 oil rigs and 4 gas rigs stopped work.
  • Crude price outlook: Signs that the market is tightening will see crude prices on a rising tide this week. We expect Brent to trade in the US$76-78/b range, while WTI will inch up towards the US$70/b mark.


Headlines of the week

Upstream

  • ConocoPhillips and PDVSA have settled their long-running dispute over the nationalisation of the Venezuelan oil industry, with PDVSA agreeing to pay some US$2 billion in recovery fees to COP.
  • Angola has created a new regulator for its upstream industry, seeking to break Sonangol’s grip on the energy industry by transferring its role as the national concessionaire to the new National Agency of Petroleum and Gasin (NOGA) by 2020, with the goal on reviving flailing upstream output.

Downstream

  • Abu Dhabi’s Adnoc is looking to sell minority stakes in its US$20 billion refining business, with Eni and Austria’s OMV – already its existing partners with Adnoc on the upstream side – reportedly being the front-runners.
  • CNPC has completed the planned upgrade of its Shymkent refinery in Kazakhstan, installing a new catalytic cracker unit to boost fuel quality from Euro II to Euro IV/V.
  • Petronas is on the hunt for specialty chemicals acquisitions, for both ‘technology and market penetration’, as it prepares to capitalise on its upcoming jump in petrochemicals production through the RAPID project.
  • Indonesia has allowed nine new companies to sell biodiesel, including the local outfits of ExxonMobil and Shell, as it moves to implement a hard B20 biodiesel mandate across the country to reduce costly gasoil imports.
  • China has sold diesel to South Africa for the first time through Sinopec, a sign that Chinese refiners are struggling to deal with a domestic supply glut.
  • Glencore has been given the go-ahead by South Africa’s competition watchdog to purchase Chevron’s downstream assets in SA and Botswana for US$900 million, potentially scuppering an earlier sale to Sinopec.
  • Despite chaos at home over the introduction of a new cryptocurrency, PDVSA has reached an agreement with NuStar Energy to resume usage of the St. Eustatius storage facility in the Caribbean after settling outstanding fees.

Natural Gas/LNG

  • Total has sold off its 26% stake in India’s Hazira LNG project to Shell, boosting Shell’s share of the import project in Gujarat to 74%; as part of the same deal, Shell has also agreed to buy some 500,000 tpa of LNG over five years beginning in 2019 from Total, to be delivered into India and South Asia.
  • Carnavron Petroleum and Quadrant Energy have completed their initial assessment of the North West Shelf Dorado discovery, estimating that it has some 1.1 tcf of natural gas resources in place.
  • Sinopec and Zhejiang Energy Group are building a new 3 million tpa LNG plant in Wenzhou, Zhejiang, with the first phase of the project planned to be operational by 2021 as Sinopec’s fourth LNG receiving terminal.
  • Thailand’s state-run Electricity Generating Authority (EGAT) is looking to import LNG directly for the first time, as the country plans to boost competition in the power sector, breaking a monopoly held by PTT.

Corporate

  • Saudi Aramco is reportedly putting plans for a giant IPO on hold so that it can focus on a more immediate goal of purchasing a strategic stake in SABIC, a transaction that could cost as much as US$70 billion.
  • Santos has agreed to entirely purchase West Australian specialist Quadrant Energy – partner in the giant Dorado discovery – for US$2.15 billion.

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Libya & OPEC’s Quota

The constant domestic fighting in Libya – a civil war, to call a spade a spade, has taken a toll on the once-prolific oil production in the North African country. After nearly a decade of turmoil, it appears now that the violent clash between the UN-recognised government in Tripoli and the upstart insurgent Libyan National Army (LNA) forces could be ameliorating into something less destructive with the announcement of a pact between the two sides that would to some normalisation of oil production and exports.

A quick recap. Since the 2011 uprising that ended the rule of dictator Muammar Gaddafi, Libya has been in a state of perpetual turmoil. Led by General Khalifa Haftar and the remnants of loyalists that fought under Gaddafi’s full-green flag, the Libyan National Army stands in direct opposition to the UN-backed Government of National Accord (GNA) that was formed in 2015. Caught between the two sides are the Libyan people and Libya’s oilfields. Access to key oilfields and key port facilities has changed hands constantly over the past few years, resulting in a start-stop rhythm that has sapped productivity and, more than once, forced Libya’s National Oil Corporation (NOC) to issue force majeure on its exports. Libya’s largest producing field, El Sharara, has had to stop production because of Haftar’s militia aggression no fewer than four times in the past four years. At one point, all seven of Libya’s oil ports – including Zawiyah (350 kb/d), Es Sider (360 kb/d) and Ras Lanuf (230 kb/d) were blockaded as pipelines ran dry. For a country that used to produce an average of 1.2 mmb/d of crude oil, currently output stands at only 80,000 b/d and exports considerably less. Gaddafi might have been an abhorrent strongman, but political stability can have its pros.

This mutually-destructive impasse, economically, at least might be lifted, at least partially, if the GNA and LNA follow through with their agreement to let Libyan oil flow again. The deal, brokered in Moscow between the warlord Haftar and Vice President of the Libyan Presidential Council Ahmed Maiteeq calls for the ‘unrestrained’ resumption of crude oil production that has been at a near standstill since January 2020. The caveat because there always is one, is that Haftar demanded that oil revenues be ‘distributed fairly’ in order to lift the blockade he has initiated across most of the country’s upstream infrastructure.

Shortly after the announcement of the deal, the NOC announced that it would kick off restarting oil production and exports, lifting an 8-month force majeure situation, but only at ‘secure terminals and facilities’. ‘Secure’ in this cases means facilities and fields where NOC has full control, but will exclude areas and assets that the LNA rebels still have control. That’s a significant limitation, since the LNA, which includes support from local tribal groups and Russian mercenaries still controls key oilfields and terminals. But it is also a softening from the NOC, which had previously stated that it would only return to operations when all rebels had left all facilities, citing safety of its staff.

If the deal moves forward, it would certainly be an improvement to the major economic crisis faced by Libya, where cash flow has dried up and basic utilities face severe cutbacks. But it is still an ‘if’. Many within the GNA sphere are critical of the deal struck by Maiteeq, claiming that it did not involve the consultation or input of his allies. The current GNA leader, Prime Minister Fayyaz al Sarraj is also stepping down at the end of October, ushering in another political sea change that could affect the deal. Haftar is a mercurial beast, so predictions are difficult, but what is certain is that depriving a country of its chief moneymaker is a recipe for disaster on all sides. Which is why the deal will probably go ahead.

Which is bad news for the OPEC+ club. Because of its precarious situation, Libya has been exempt for the current OPEC+ supply deal. Even the best case scenarios within OPEC+ had factored out Libya, given the severe uncertainty of the situation there. But if the deal goes through and holds, it could potentially add a significant amount of restored crude supply to global markets at a time when OPEC+ itself is struggling to manage the quotas within its own, from recalcitrant members like Iraq to surprising flouters like the UAE.

Mathematically at least, the ceiling for restored Libyan production is likely in the 300-400,000 b/d range, given that Haftar is still in control of the main fields and ports. That does not seem like much, but it will give cause for dissent within OPEC on the exemption of Libya from the supply deal. Libya will resist being roped into the supply deal, and it has justification to do so. But freeing those Libyan volumes into a world market that is already suffering from oversupply and weak prices will be undermining in nature. The equation has changed, and the Libyan situation can no longer be taken for granted.

Market Outlook:

  •  Crude price trading range: Brent – US$41-43/b, WTI – US$39-41/b
  • While a resurgence in Covid-19 cases globally is undermining faith that the ongoing oil demand recovery will continue unabated, crude markets have been buoyed by a show of force by Saudi Arabia and US supply disruptions from Tropical Storm Sally
  • In a week when Iraq’s OPEC+ commitments seem even more distant with signs of its crude exports rising and key Saudi ally the UAE admitting it had ‘pumped too much recently’, the Saudi Energy Minister issued a force condemnation on breaking quotas
  • On the demand side, the IEA revised its forecast for oil demand in 2020 to an annual decline of 8.4 mmb/d, up from 8.1 mmb/d in August, citing Covid resurgences
  • In a possible preview of the future, BP issued a report stating that the ‘relentless growth of oil demand is over’, offering its own vision of future energy requirements that splits the oil world into the pro-clean lobby led by Europeans and the prevailing oil/gas orthodoxy that remains in place across North America and the rest of the world

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September, 22 2020
Average U.S. construction costs for solar and wind generation continue to fall

According to 2018 data from the U.S. Energy Information Administration (EIA) for newly constructed utility-scale electric generators in the United States, annual capacity-weighted average construction costs for solar photovoltaic systems and onshore wind turbines have continued to decrease. Natural gas generator costs also decreased slightly in 2018.

From 2013 to 2018, costs for solar fell 50%, costs for wind fell 27%, and costs for natural gas fell 13%. Together, these three generation technologies accounted for more than 98% of total capacity added to the electricity grid in the United States in 2018. Investment in U.S. electric-generating capacity in 2018 increased by 9.3% from 2017, driven by natural gas capacity additions.

Solar
The average construction cost for solar photovoltaic generators is higher than wind and natural gas generators on a dollar-per-kilowatt basis, although the gap is narrowing as the cost of solar falls rapidly. From 2017 to 2018, the average construction cost of solar in the United States fell 21% to $1,848 per kilowatt (kW). The decrease was driven by falling costs for crystalline silicon fixed-tilt panels, which were at their lowest average construction cost of $1,767 per kW in 2018.

Crystalline silicon fixed-tilt panels—which accounted for more than one-third of the solar capacity added in the United States in 2018, at 1.7 gigawatts (GW)—had the second-highest share of solar capacity additions by technology. Crystalline silicon axis-based tracking panels had the highest share, with 2.0 GW (41% of total solar capacity additions) of added generating capacity at an average cost of $1,834 per kW.

average construction costs for solar photovoltaic electricity generators

Source: U.S. Energy Information Administration, Electric Generator Construction Costs and Annual Electric Generator Inventory

Wind
Total U.S. wind capacity additions increased 18% from 2017 to 2018 as the average construction cost for wind turbines dropped 16% to $1,382 per kW. All wind farm size classes had lower average construction costs in 2018. The largest decreases were at wind farms with 1 megawatt (MW) to 25 MW of capacity; construction costs at these farms decreased by 22.6% to $1,790 per kW.

average construction costs for wind farms

Source: U.S. Energy Information Administration, Electric Generator Construction Costs and Annual Electric Generator Inventory

Natural gas
Compared with other generation technologies, natural gas technologies received the highest U.S. investment in 2018, accounting for 46% of total capacity additions for all energy sources. Growth in natural gas electric-generating capacity was led by significant additions in new capacity from combined-cycle facilities, which almost doubled the previous year’s additions for that technology. Combined-cycle technology construction costs dropped by 4% in 2018 to $858 per kW.

average construction costs for natural gas-fired electricity generators

Source: U.S. Energy Information Administration, Electric Generator Construction Costs and Annual Electric Generator Inventory

September, 17 2020
Fossil fuels account for the largest share of U.S. energy production and consumption

Fossil fuels, or energy sources formed in the Earth’s crust from decayed organic material, including petroleum, natural gas, and coal, continue to account for the largest share of energy production and consumption in the United States. In 2019, 80% of domestic energy production was from fossil fuels, and 80% of domestic energy consumption originated from fossil fuels.

The U.S. Energy Information Administration (EIA) publishes the U.S. total energy flow diagram to visualize U.S. energy from primary energy supply (production and imports) to disposition (consumption, exports, and net stock additions). In this diagram, losses that take place when primary energy sources are converted into electricity are allocated proportionally to the end-use sectors. The result is a visualization that associates the primary energy consumed to generate electricity with the end-use sectors of the retail electricity sales customers, even though the amount of electric energy end users directly consumed was significantly less.

U.S. primary energy production by source

Source: U.S. Energy Information Administration, Monthly Energy Review

The share of U.S. total energy production from fossil fuels peaked in 1966 at 93%. Total fossil fuel production has continued to rise, but production has also risen for non-fossil fuel sources such as nuclear power and renewables. As a result, fossil fuels have accounted for about 80% of U.S. energy production in the past decade.

Since 2008, U.S. production of crude oil, dry natural gas, and natural gas plant liquids (NGPL) has increased by 15 quadrillion British thermal units (quads), 14 quads, and 4 quads, respectively. These increases have more than offset decreasing coal production, which has fallen 10 quads since its peak in 2008.

U.S. primary energy overview and net imports share of consumption

Source: U.S. Energy Information Administration, Monthly Energy Review

In 2019, U.S. energy production exceeded energy consumption for the first time since 1957, and U.S. energy exports exceeded energy imports for the first time since 1952. U.S. energy net imports as a share of consumption peaked in 2005 at 30%. Although energy net imports fell below zero in 2019, many regions of the United States still import significant amounts of energy.

Most U.S. energy trade is from petroleum (crude oil and petroleum products), which accounted for 69% of energy exports and 86% of energy imports in 2019. Much of the imported crude oil is processed by U.S. refineries and is then exported as petroleum products. Petroleum products accounted for 42% of total U.S. energy exports in 2019.

U.S. primary energy consumption by source

Source: U.S. Energy Information Administration, Monthly Energy Review

The share of U.S. total energy consumption that originated from fossil fuels has fallen from its peak of 94% in 1966 to 80% in 2019. The total amount of fossil fuels consumed in the United States has also fallen from its peak of 86 quads in 2007. Since then, coal consumption has decreased by 11 quads. In 2019, renewable energy consumption in the United States surpassed coal consumption for the first time. The decrease in coal consumption, along with a 3-quad decrease in petroleum consumption, more than offset an 8-quad increase in natural gas consumption.

EIA previously published articles explaining the energy flows of petroleum, natural gas, coal, and electricity. More information about total energy consumption, production, trade, and emissions is available in EIA’s Monthly Energy Review.

Principal contributor: Bill Sanchez

September, 15 2020