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Last Updated: March 29, 2019
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Market Watch

Headline crude prices for the week beginning 25 March 2019 – Brent: US$67/b; WTI: US$59/b

  • Global crude oil prices saw a mixed start to the week, trading in a narrow range, as fears of a global recession subdued the market, offsetting continued concerns over tensions in Venezuela and Iran
  • Slowing manufacturing and bond indicators in the USA, France and Germany have hinted that a recession might be in the offing, spooking markets; but of greater concern is the tangible slowdown in Chinese economic growth, raising fears over global oil demand
  • Traders are also disappointed in a lack of progress in US-China trade war, as well as apparent fissures appearing between Saudi Arabia and Russia that postponed the OPEC+ meeting due in April to review the supply deal
  • The situation with US sanctions on Venezuelan crude continues to bite, as Nicolas Maduro clings on to power and attempts to isolate opposition leader Juan Guaidó; although a reprieve was given to Citgo, American refiners took no Venezuelan crude for the first time since 2010 last week
  • As US waivers on Iranian crude exports ticks down to expiry in May, the Petroleum Association of Japan is looking to avoid any imports of Iranian oil in April unless it gets clarity on a waiver extension
  • Despite WTI prices inching up towards US$60/b, US drillers continue to drop rigs; the Baker Hughes active rig count fell by 10 rigs – 9 oil, 1 gas – for a fifth consecutive week, to an overall 1,106
  • We expect crude prices to remain in their tight ranges, buffeted between OPEC’s attempts to stabilise supply and global unease over economic growth. Brent should be at US$66-68/b and WTI at US$58-60/b 

Headlines of the week

Upstream

  • Upstream independent Murphy Oil is exiting Malaysia after 20 years, selling its two primary Malaysian subsidiaries – Murphy Sabah Oil and Murphy Sarawak Oil – to Thailand’s PTTEP for some US$2.127 billion
  • Adnoc has awarded 35-year exploration rights for the Abu Dhabi onshore Block 4 to Japan’s Inpex, with Adnoc holding an option for a 60% stake if the project reaches commercial production phase
  • Spirit Energy has started production at its North Sea Oda field five months earlier than planned, with peak production estimated at 35,000 b/d
  • Canada’s state government of Alberta gas will increase crude production limits by 25,000 b/d per month over May and June to match distribution capacity
  • Nigerian President Muhammadu Buhari has ordered Shell to hand over operatorship of the prized OML 11 concession in Ogoniland to state firm NPDC

Midstream & Downstream

  • Refurbishment works on Aruba’s 209 kb/d refinery will continue after the US Treasury gave PDVSA’s American subsidiary Citgo a reprieve from sanctions
  • Ecuador has started plans to build a new 300 kb/d refinery with bidding on construction beginning in May 2019, which will also include a concession to upgrade the under-performing 110 kb/d Esmeraldas refinery
  • Despite some denials from Oman, it appears that Sri Lanka will be getting a new US$3.85 billion, 200 kb/d refinery near the Hambantota port through the combination of India’s Accord Group and Oman’s Ministry of Oil and Gas
  • Peru will be halting operations at its 65 kb/d Talara refinery for a year beginning November 2019 to complete a 5-year, US$5 billion expansion plan that will expand capacity to some 95 kb/d
  • Nigeria’s NNPC has recommitted to its plan to upgrade its four refineries, with the initial focus on revamping the ageing 210 kb/d Port Harcourt refinery
  • Mechanical completion of Sasol’s Westlake petrochemical complex in Louisiana – including a 1.5 mtpa ethane cracker – has been completed by Fluor

Natural Gas/LNG

  • Yet another US Gulf LNG project has received environmental approval to go ahead, with the 4 mtpa Texas LNG Brownsville LNG export terminal now looking to commence production by 2024
  • Gazprom has launched full-scale development of the Karasaveyskoye field in Russia’s Yamal Peninsula, which is expected to start production in 2023 as the second most important node in Yamal gas production after Bovanenkovskoye
  • Vietnam is looking to up its consumption of LNG through a US$7.8 billion investment in four gas-fired power plants, as the country hastens its transition away from coal through the US$ Ca Na LNG complex planned in Ninh Thuan
  • Egypt will now only begin to receive gas from Israel under a US$15 billion deal by late 2019 at the earliest, as ‘unexpected issues’ with the pipeline connecting the two countries forced a delay from the initial timeline of mid-2019
  • Tanzania is looking to finalise details and partners for its US$30 billion LNG project by September 2019, with Equinor, Shell and Ophir Energy involved
  • The Canada Pension Plan Investment Board (CPPIB) agreed to form a US$3.8 billion joint venture with pipeline infrastructure firm Williams, that will include the Ohio Valley Midstream and Utica East Ohio Midstream gas systems
  • Shell and Energy Transfer are moving forward with their 16.45 mtpa Lake Charles LNG project in Louisiana, kickstarting bids for EPC contracts

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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.

April, 17 2019
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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