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Last Updated: October 11, 2018
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Market Watch

Headline crude prices for the week beginning 8 October 2018 – Brent: US$84/b; WTI: US$74/b

  • Oil prices are retreating from recent highs as a rush of pronouncements to mollify the market over concerns of a supply crunch were issued
  • President Donald Trump continues to berate OPEC over high oil prices and the US State Department took the unusual step of issuing a demand to OPEC, requesting that it raise collective output by 1.4 mmb/d
  • Saudi Arabia responded by saying that it is fulfilling promises made to America to replace lost Iranian crude supplies, boosting its current output to 10.7 mmb/d and the ability to add another 1.3 mmb/d if needed; Iraq is also benefitting as it chalked a second consecutive month of exports exceeding 4 mmb/d
  • Russian production also rose to a record 11.356 mmb/d in September, raising worries about shrinking spare capacity in oil markets as producers up output; Russian Premier Vladimir Putin fired back at Trump’s tantrums, stating ‘Donald should look in the mirror’ when complaining about high oil prices
  • There continue to be varying responses to the looming American sanctions against Iran; the UAE – which usually talks tough but still accepts Iranian oil – appears to be taking steps to reduce its purchases, with Dubai imports of Iranian condensate dropping by half in September and customs officials at Fujairah now asking for certification of origins for oil tankers docking there
  • Meanwhile, despite overtures to reduce Iranian imports by India to qualify for mooted American waivers, India is planning to purchase some 9 million barrels of Iranian oil in November, with liftings past the US deadline of November 4
  • On another battlefront, China is sticking to its guns and shunning purchase of American crude over the boiling trade war, boosting its imports of West African crude to their highest level in seven years
  • American oil prices are also drawing strength after falling last week on swelling stockpiles as Hurricane Michael heads inland towards Florida after shutting down some 19% of oil production in the Gulf of Mexico
  • Surprisingly, despite prices being attractive, American drillers remain cautious over introducing new rigs; the active US rig count actually lost two sites last week – both oil rigs – a second week of decline in the US oil rig count
  • Crude price outlook: Evidence that OPEC+ is responding with increased supply should pressure prices downwards this week, but a longer term risk remains of US$100/b crude oil, especially if Saudi Arabia and Russia run out of capacity to turn their taps on. We see Brent trading in the US$81-83/b and WTI in the US$70-73/b range.


Headlines of the week

Upstream

  • Equinor will take over Chevron’s 40% operating interest in the UK’s Rosebank project, one of the largest undeveloped fields on the UK Continental Shelf, with potential volumes of some 300 million barrels recoverable
  • Equinor has also confirmed a boost in its Norwegian assets, with the Cape Vulture discovery adding some 50-70 million barrels of recoverable oil, doubling the remaining oil reserves at the aging Norne field
  • Savannah Petroleum has made a fifth discovery in Zomo-1 well, locating in the R3 portion of the R3/R4 Adaem Rift Basin area in southeast Nigeria
  • Chevron will be proceeding with drilling a test well at the Mississippi Canyon Block 607, hoping to add to the deepwater Ballymore discovery that it made in the same area last year
  • Saudi Arabia’s crown prince hopes to be able to resolve an impasse with Kuwait over the Khafji and Wafra fields in the Neutral Zone ‘soon’, an area along the border that has been undefined for near a hundred years, which could unlock up to 500,000 b/d of crude production

Downstream

  • Pakistan will be building a new oil refinery at its deepwater Gwadar port, part of an ‘oil city’ project that Saudi Aramco is expected to invest in
  • Saudi International Petrochemical Co (Sipchem) has acquired fellow Saudi Arabian firm Sahara Petrochemical in a deal worth US$2.2 billion
  • Vietnam’s Petrolimex wants to halt the US$5 billion, 200 kb/d Nam Van Phong refining and petrochemical project with Japan’s JXTG Holdings to ‘focus its resources on executing other projects’
  • ExxonMobil is considering a multi-billion dollar investment at its 592 kb/d Singapore refinery – the largest in its system – to meet demand for low sulphur shipping fuels as the IMO’s strict new rules on marine fuels starts in 2020
  • India is reducing the pump prices of gasoline and diesel by 2.50 rupees (US$0.03 per litre) to ease the pain of rising crude prices and a weak rupee; this includes a reduction in excise duty of 1.50 rupee per litre

Natural Gas/LNG

  • After PetroChina and Korea Gas gave their blessing last week, Shell and its remaining partners have given the go-ahead for Kitimat LNG project in Canada, bucking trends by sanctioning construction without having signed any long-term LNG sales deals
  • G3 Exploration has been given approval to proceed with the development of the Chengzhuang Block in Shanxi, splitting the estimated recoverable gas volumes of 176 bcf with its partner CNPC
  • Qatar Petroleum will continue to supply the United Arab Emirates with piped natural gas, shunning bringing ‘politics into commercial business’ as the standoff between Qatar against Saudi Arabia and its allies continues

Corporate

  • Saudi Arabia’s crown prince is insisting that Saudi Aramco’s planned IPO will go ahead by 2021, after the sale was put on hold by Aramco’s plan to purchase a controlling stake in SABIC
  • BP and Norway’s Aker BP have signed a new cooperation agreement to explore development and deployment of advanced technologies in their businesses
  • Ensco and Rowan Companies have agreed to a US12 billion merger that will create a global powerhouse offshore drilling company covering 82 rigs

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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