When I give my chairman’s Crystal Ball Presentation for the twentieth edition of the Asia Oil and Gas Conference (AOGC) in Kuala Lumpur in June, it will remain focused on the oil and gas business and some of the attendant major environmental issues with it. I will talk about what are the likely developments in the upstream sector, on the refining sector, on the oil trading business and what's happening in the LNG markets. I will argue that the growth is ready to slow down, and it may be the last major cycle left in front of us.
The oil and gas industry have been used to a five per cent annual growth. That has fallen to 1.6 per cent now and is projected to grow at only 0.7 per cent for the next 20 years. The gasoline and diesel markets will plateau by around 2030 while the demand for aviation fuel continues to go up, and demand for petrochemicals continues. Basically, the transportation sector outside of aviation will slow down very significantly.
This has some interesting implications because with the oil business not growing so fast, nobody is building refineries which results in the margins remaining high. The operators will be making money and so there is no driver to build more capacity to satisfy this demand and reduce margins. This will leave the onus on the governments to invest in new facilities, which is not a likely scenario.
However, when we start talking about gas it is a different story; the cycles are alive and well. There's no end to demand for gas, and there's no end to demand for petrochemicals.
In the LNG business up to 2021 there is a bit of surplus in the market. From 2020 to 2025 there will be a huge deficit. This shortfall has been recognized and we are seeing a lot of final investment decisions (FIDs) although by the time these facilities are commission, they will have missed the start of the gap with a lot of them coming online in the middle of the next decade
What is very different this time is that many operators are building LNG infrastructure without customers signed up for supply. It is the companies with deep pockets that are investing to build, and this will change the shape of the global LNG business very dramatically.
In the past, you produced oil first and you sell it later. LNG, you sell it first then produce it later. That model has now permanently changed with all these new FIDs that we expect to come. This dramatic shift in the market will lead to more liquidity and perhaps make gas into a commodity much like oil. I will also focus on another important sector, the maritime industry and the effects that IMO 2020 will have on the market. These new regulations that come on line in 2020 will dramatically change the whole global oil and gas industry. It will change the demand for marine fuel with many shipowners opting for better quality of low Sulphur fuels, which in turn may put price pressures on fuel for cars and trucks.
It will almost certainly drive diesel prices up and by driving diesel prices up, it will also drive gasoline prices up.
All of this is set against a backdrop of geopolitical uncertainty. United States president Donald Trump has made himself a key player in the market, something that previous presidents have always avoided. At no other time has a US president had been directly involved in the price issues. The other geopolitical issue is related to US sanctions on Iran, Venezuela and potential problems in Saudi Arabia after the murder of the journalist in Turkey.
All these things are brewing on the upside, but on the downside, we have stronger US oil production coming in that will hit a ceiling somewhere in the next three to four years. OPEC in the southeast are still trying to keep a band on price by regulating production and trying to keep some order for people to make some investment decisions. It is the geopolitical issues relating to the sanctions and to the involvement of the US president. But as always, the king of the oil market is still Saudi Arabia and much of its future is in their hands.
When it comes to the investment that the oil and gas sectors needs to meet future demand it is going to reach the levels it did in 2014 and 2015. Before that slump there were a lot of bad investments made. With oil process above $100 there was scant regard for the costs; they just spent money. Since then there has been a lot of work to reduce costs and so an oil price of between $60 to $70 will be enough for investors. The investment is less but the productivity is much, much higher.
There is another potential hiccup and that comes from China. There is a concerted effort to dampen the demand growth for oil, above and beyond that caused by the slowing economic growth. They have the largest electric car programme in the world and the demand for diesel has started to fall and they intend to keep it falling every year. From 2025 they aim to flatten and reduce the demand for gasoline.
All in all, it is an interesting time for the industry and one that I am looking forward to presenting in June.
Dr. Fereidun Fesharaki is the Chairman of FGE - FACTS Global Energy. FGE is a leading consulting group focusing on the oil and gas markets East of the Suez, Europe, and the United States, with offices in London, Singapore, Dubai, Hawaii, Beijing, Yokohama, and Perth. Dr. Fesharaki’s work is well-recognized worldwide for pioneering oil and gas market analysis and studies of the Asia Pacific/Middle East energy markets since the early 1980. Dr Fereidun Fesharaki will highlights the key points from his Chairman’s Crystal Ball Presentation that he will make at the twentieth edition of the Asia Oil and Gas Conference (AOGC) in Kuala Lumpur in June.
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U.S. crude oil production in the U.S. Federal Gulf of Mexico (GOM) averaged 1.8 million barrels per day (b/d) in 2018, setting a new annual record. The U.S. Energy Information Administration (EIA) expects oil production in the GOM to set new production records in 2019 and in 2020, even after accounting for shut-ins related to Hurricane Barry in July 2019 and including forecasted adjustments for hurricane-related shut-ins for the remainder of 2019 and for 2020.
Based on EIA’s latest Short-Term Energy Outlook’s (STEO) expected production levels at new and existing fields, annual crude oil production in the GOM will increase to an average of 1.9 million b/d in 2019 and 2.0 million b/d in 2020. However, even with this level of growth, projected GOM crude oil production will account for a smaller share of the U.S. total. EIA expects the GOM to account for 15% of total U.S. crude oil production in 2019 and in 2020, compared with 23% of total U.S. crude oil production in 2011, as onshore production growth continues to outpace offshore production growth.
In 2019, crude oil production in the GOM fell from 1.9 million b/d in June to 1.6 million b/d in July because some production platforms were evacuated in anticipation of Hurricane Barry. This disruption was resolved relatively quickly, and no disruptions caused by Hurricane Barry remain. Although final data are not yet available, EIA estimates GOM crude oil production reached 2.0 million b/d in August 2019.
Producers expect eight new projects to come online in 2019 and four more in 2020. EIA expects these projects to contribute about 44,000 b/d in 2019 and about 190,000 b/d in 2020 as projects ramp up production. Uncertainties in oil markets affect long-term planning and operations in the GOM, and the timelines of future projects may change accordingly.
Source: Rystad Energy
Because of the amount of time needed to discover and develop large offshore projects, oil production in the GOM is less sensitive to short-term oil price movements than onshore production in the Lower 48 states. In 2015 and early 2016, decreasing profit margins and reduced expectations for a quick oil price recovery prompted many GOM operators to reconsider future exploration spending and to restructure or delay drilling rig contracts, causing average monthly rig counts to decline through 2018.
Crude oil price increases in 2017 and 2018 relative to lows in 2015 and 2016 have not yet had a significant effect on operations in the GOM, but they have the potential to contribute to increasing rig counts and field discoveries in the coming years. Unlike onshore operations, falling rig counts do not affect current production levels, but instead they affect the discovery of future fields and the start-up of new projects.
Source: U.S. Energy Information Administration, Monthly Refinery Report
The API gravity of crude oil input to U.S. refineries has generally increased, or gotten lighter, since 2011 because of changes in domestic production and imports. Regionally, refinery crude slates—or the mix of crude oil grades that a refinery is processing—have become lighter in the East Coast, Gulf Coast, and West Coast regions, and they have become slightly heavier in the Midwest and Rocky Mountain regions.
API gravity is measured as the inverse of the density of a petroleum liquid relative to water. The higher the API gravity, the lower the density of the petroleum liquid, so light oils have high API gravities. Crude oil with an API gravity greater than 38 degrees is generally considered light crude oil; crude oil with an API gravity of 22 degrees or below is considered heavy crude oil.
The crude slate processed in refineries situated along the Gulf Coast—the region with the most refining capacity in the United States—has had the largest increase in API gravity, increasing from an average of 30.0 degrees in 2011 to an average of 32.6 degrees in 2018. The West Coast had the heaviest crude slate in 2018 at 28.2 degrees, and the East Coast had the lightest of the three regions at 34.8 degrees.
Production of increasingly lighter crude oil in the United States has contributed to the overall lightening of the crude oil slate for U.S. refiners. The fastest-growing category of domestic production has been crude oil with an API gravity greater than 40 degrees, according to data in the U.S. Energy Information Administration’s (EIA) Monthly Crude Oil and Natural Gas Production Report.
Since 2015, when EIA began collecting crude oil production data by API gravity, light crude oil production in the Lower 48 states has grown from an annual average of 4.6 million barrels per day (b/d) to 6.4 million b/d in the first seven months of 2019.
Source: U.S. Energy Information Administration, Monthly Crude Oil and Natural Gas Production Report
When setting crude oil slates, refiners consider logistical constraints and the cost of transportation, as well as their unique refinery configuration. For example, nearly all (more than 99% in 2018) crude oil imports to the Midwest and the Rocky Mountain regions come from Canada because of geographic proximity and existing pipeline and rail infrastructure between these regions.
Crude oil imports from Canada, which consist of mostly heavy crude oil, have increased by 67% since 2011 because of increased Canadian production. Crude oil imports from Canada have accounted for a greater share of refinery inputs in the Midwest and Rocky Mountain regions, leading to heavier refinery crude slates in these regions.
By comparison, crude oil production in Texas tends to be lighter: Texas accounted for half of crude oil production above 40 degrees API in the United States in 2018. The share of domestic crude oil in the Gulf Coast refinery crude oil slate increased from 36% in 2011 to 70% in 2018. As a result, the change in the average API gravity of crude oil processed in refineries in the Gulf Coast region was the largest increase among all regions in the United States during that period.
East Coast refineries have three ways to receive crude oil shipments, depending on which are more economical: by rail from the Midwest, by coastwise-compliant (Jones Act) tankers from the Gulf Coast, or by importing. From 2011 to 2018, the share of imported crude oil in the East Coast region decreased from 95% to 81% as the share of domestic crude oil inputs increased. Conversely, the share of imported crude oil at West Coast refineries increased from 46% in 2011 to 51% in 2018.
Headline crude prices for the week beginning 7 October 2019 – Brent: US$58/b; WTI: US$52/b
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