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Last Updated: December 28, 2018
Business Trends

Market Watch

Headline crude prices for the week beginning 17 December 2018 – Brent: US$50/b; WTI: US$42/b

  • It hasn’t been a Merry Christmas for oil prices, as both international benchmarks slid down to lows for the year, with Brent prices dropping below US$50/b at one point as international financial markets descended into chaos
  • OPEC’s attempt to support prices via a new supply deal became merely a blip in a sea of red, as the market shrugged off the deal to focus on a softening global economy and surging American oil production
  • The US Federal Reserve’s decision to hike interest rates – and the subsequent Twitter tantrum by US President Donald Trump – spooked markets, resulting in a Christmas Eve selloff that rattled stock exchanges globally
  • Saudi Arabia has tried to re-assure the market that the OPEC+ club would continue to trim production, asserting confidence that the review due in April will see extended cuts and appealing to the market that ‘we need more time to achieve the (intended) results’
  • Perhaps as a sign of confidence, Saudi Arabia estimates that it will produce 10.2 mmb/d of crude in 2019, with prices expected at US$80/b; Russia’s Energy Minister Alexander Novak also attempted to reassure the market, stating that the producers will react if the situation changes
  • Counter to the market direction, American drillers added 10 new oil rigs – almost all onshore – to service, with the active rig count expected to be up by some 150 rigs year-on-year
  • Crude price outlook: After the panic sell-off, a rebound is likely, as the market realigns itself. Longer-term concerns over a supply glut are still looming, but Brent should be able to claw back some ground to US$52-54/b and WTI to US$44-46/b

Headlines of the week


  • China’s CNOOC has signed strategic cooperation agreements with 9 international oil majors – including Shell, Chevron, Total and Equinor – aimed at boosting production in the Pearl River Mouth Basin offshore area
  • South Sudan has announced that it has secured at least US$2 billion in oil investments, including funds from the South African government, Petronas and Oranto Petroleum, with more expected in 2019
  • Total is set to begin crude exports from the offshore Egina field in Nigeria, with an initial 100,000 b/d joining the market in February, possibly doubling after
  • The Canadian federal government has offered some US$1.1 billion in loans for the oil and gas sector, aimed at supporting the beleaguered industry in Alberta, but the package was criticised as ‘insufficient’ by the state premier
  • After agreeing on the Platina field development, Sonangol and BP have agreed to extend the production licence for the Greater Plutonio field in Angola’s offshore Block 18 to 2032, with Sonangol taking an 8% stake in the block
  • Total and Petrobras have agreed to another MoU, this one covering joint development of the Lapa field in Brazil – with Total acquiring an additional 10% stake, up to 45% – as well as onshore solar and wind projects
  • Mexico’s new President is boosting Pemex’s budget to US$23 billion next year - US$10.4 billion for upstream and the remainder for downstream – in a bid to reverse the country’s flagging oil production and slash fuel imports; Pemex’s new upstream budget is mainly aimed at shallow water and onshore fields
  • A record 100 crude tankers were scrapped this year by ship owners, as the industry consolidates after the worst average shipping rates in three decades


  • After vacillating between an imploding PDVSA and a failed courtship with a Chinese firm, the government of Curacao has reported chosen Motiva – Saudi Aramco’s American refining arm – to operate the island’s 335 kb/d Isla refinery
  • Saudi Arabia and India’s Reliance have agreed to explore joint ventures focusing on refining and petrochemical operations in both countries
  • Croatia’s INA has announced plans to invest some US$616 million to upgrade its largest refinery in Rijeka and convert the Sisak refinery into a fuel plant
  • Sudan has reportedly signed an agreement with a consortium of Russian firms to build a 222 kb/d refinery in Port Sudan, with access to the Red Sea

Natural Gas/LNG

  • BP and its partners Kosmos Energy, Petrosen and SMHPM have sanctioned FID for Phase 1 of the Greater Tortiue Ahmeyim development in offshore Mauritania and Senegal – an innovative deepwater gas project involving an FPSO/FLNG combo with capacity for 2.5 mtpa of LNG 
  • Sempara Energy subsidiary Port Arthur LNG and Poland’s PGNiG have signed a 20-year agreement which will see 2 mtpa of LNG exported from the liquefaction facility currently under development in Jefferson County, Texas
  • Production at Equinor’s Aasta Hansteen field in the Norwegian Sea has begun, with recoverable reserves estimated at 353 million boe


  • Shell is in preliminary negotiations to purchase American oil producer Endeavor Energy for US$8 billion, roughly half of the company’s self-valuation, with the prize of undeveloped land in the Permian up for grabs

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In 2018, the United States consumed more energy than ever before

U.S. total energy consumption

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

Primary energy consumption in the United States reached a record high of 101.3 quadrillion British thermal units (Btu) in 2018, up 4% from 2017 and 0.3% above the previous record set in 2007. The increase in 2018 was the largest increase in energy consumption, in both absolute and percentage terms, since 2010.

Consumption of fossil fuels—petroleum, natural gas, and coal—grew by 4% in 2018 and accounted for 80% of U.S. total energy consumption. Natural gas consumption reached a record high, rising by 10% from 2017. This increase in natural gas, along with relatively smaller increases in the consumption of petroleum fuels, renewable energy, and nuclear electric power, more than offset a 4% decline in coal consumption.

U.S. total energy consumption

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

Petroleum consumption in the United States increased to 20.5 million barrels per day (b/d), or 37 quadrillion Btu in 2018, up nearly 500,000 b/d from 2017 and the highest level since 2007. Growth was driven primarily by increased use in the industrial sector, which grew by about 200,000 b/d in 2018. The transportation sector grew by about 140,000 b/d in 2018 as a result of increased demand for fuels such as petroleum diesel and jet fuel.

Natural gas consumption in the United States reached a record high 83.1 billion cubic feet/day (Bcf/d), the equivalent of 31 quadrillion Btu, in 2018. Natural gas use rose across all sectors in 2018, primarily driven by weather-related factors that increased demand for space heating during the winter and for air conditioning during the summer. As more natural gas-fired power plants came online and existing natural gas-fired power plants were used more often, natural gas consumption in the electric power sector increased 15% from 2017 levels to 29.1 Bcf/d. Natural gas consumption also grew in the residential, commercial, and industrial sectors in 2018, increasing 13%, 10%, and 4% compared with 2017 levels, respectively.

Coal consumption in the United States fell to 688 million short tons (13 quadrillion Btu) in 2018, the fifth consecutive year of decline. Almost all of the reduction came from the electric power sector, which fell 4% from 2017 levels. Coal-fired power plants continued to be displaced by newer, more efficient natural gas and renewable power generation sources. In 2018, 12.9 gigawatts (GW) of coal-fired capacity were retired, while 14.6 GW of net natural gas-fired capacity were added.

U.S. fossil fuel energy consumption by sector

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

Renewable energy consumption in the United States reached a record high 11.5 quadrillion Btu in 2018, rising 3% from 2017, largely driven by the addition of new wind and solar power plants. Wind electricity consumption increased by 8% while solar consumption rose 22%. Biomass consumption, primarily in the form of transportation fuels such as fuel ethanol and biodiesel, accounted for 45% of all renewable consumption in 2018, up 1% from 2017 levels. Increases in wind, solar, and biomass consumption were partially offset by a 3% decrease in hydroelectricity consumption.

U.S. energy consumption of selected fuels

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

Nuclear consumption in the United States increased less than 1% compared with 2017 levels but still set a record for electricity generation in 2018. The number of total operable nuclear generating units decreased to 98 in September 2018 when the Oyster Creek Nuclear Generating Station in New Jersey was retired. Annual average nuclear capacity factors, which reflect the use of power plants, were slightly higher at 92.6% in 2018 compared with 92.2% in 2017.

More information about total energy consumption, production, trade, and emissions is available in EIA’s Monthly Energy Review.

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April, 17 2019
A New Frontier for LNG Pricing and Contracts

How’s this for a first? As the world’s demand for LNG continues to grow, the world’s largest LNG supplier (Shell) has inked an innovative new deal with one of the world’s largest LNG buyers (Tokyo Gas), including a coal pricing formula link for the first time in a large-scale LNG contract. It’s a notable change in an industry that has long depended on pricing gas off crude, but could this be a sign of new things to come?

Both parties have named the deal an ‘innovative solution’, with Tokyo Gas hailing it as a ‘further diversification of price indexation’ and Shell calling it a ‘tailored solutions including flexible contract terms under a variety of pricing indices.’ Beneath the rhetoric, the actual nuts and bolts is slightly more mundane. The pricing formula link to coal indexation will only be used for part of the supply, with the remainder priced off the conventional oil & gas-linked indexation ie. Brent and Henry Hub pricing. This makes sense, since Tokyo Gas will be sourcing LNG from Shell’s global portfolio – which includes upcoming projects in Canada and the US Gulf Coast. Neither party provided the split of volumes under each pricing method, meaning that the coal-linked portion could be small, acting as a hedge.

However, it is likely that the push for this came from Tokyo Gas. As one of the world’s largest LNG buyers, Tokyo Gas has been at the forefront of redefining the strict traditions of LNG contracts. Reading between the lines, this deal most likely does not include any destination restriction clauses, a change that Tokyo Gas has been particularly pushing for. With the trajectory for Brent crude prices uncertain – owing to a difficult-to-predict balance between OPEC+ and US shale – creating a third link in the pricing formula might be a good move. Particularly since in Japan, LNG faces off directly with coal in power generation. With the general retreat from nuclear power in the country, the coal-LNG battle will intensify.

What does this mean for the rest of the industry? Could coal-linked contracts become the norm? The industry has been discussing new innovations in LNG contracts at the recent LNG2019 conference in Shanghai, while the influx of new American LNG players hungry to seal deals has unleashed a new sense of flexibility. But will there be takers?

I am not a pricing expert but the answer is maybe. While Tokyo Gas predominantly uses natural gas as its power generation fuel (hence the name), it is competing with other players using cheaper coal-based generation. So in Japan, LNG and coal are direct competitors. This is also true in South Korea and much of Southeast Asia. In the two rising Asian LNG powerhouses, however, the situation is different. In China – on track to become the world’s largest LNG buyer in the next two decades – LNG is rarely used in power generation, consumed instead by residential heating. In India – where LNG imports are also rising sharply – LNG is primarily aimed at petrochemicals and fertiliser. LNG based power generation in China and India could see a surge, of course, but that will take plenty of infrastructure, and time, to build. It is far more likely that their contracts will be based off existing LNG or natural gas benchmarks, several of which are being developed in Asia alone.

If it takes off  the coal-link LNG formula is likely to remain a Asian-based development. But with the huge volumes demanded by countries in this region, that’s still a very big niche. Enough perhaps for the innovation to slowly gain traction elsewhere, next stop -  Europe?

The Shell-Tokyo Gas Deal:

Contract – April 2020-March 2030 (10 Years)

Volume – 500,000 metric tons per year

Source – Shell global portfolio

Pricing – Formula based on coal and oil & gas-linked indexes

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April, 15 2019