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Last Updated: July 26, 2019
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Market Watch 

Headline crude prices for the week beginning 22 July 2019 – Brent: US$63/b; WTI: US$56/b

  • After a week of weak demand sending Brent crude prices back down towards the US$60/b level, oil prices started the week on a higher note as tensions in the Middle East between Iran and the US heightened once again
  • The US warship USS Boxer downed an Iranian drone that approached the ship in the Strait of Hormuz, sending fears of military escalation in the key Persian Gulf chokepoint soaring once again
  • In retaliation for the British seizing of an Iranian crude tanker in the Mediterranean, the Iranian Revolutionary Guard seized a British-flagged tanker in the Strait of Hormuz; a second vessel – Liberian-flagged but reportedly British-owned – was also seized in the area
  • The fresh reminders of the fragile situation in the Middle East propped crude back up after a week where demand indications had faltered and weakened the trajectory for crude prices
  • But the economic risk is by no means removed; as the US and China return to the negotiating table once again, President Donald Trump once again ratcheted up the pressure by claiming he is willing to escalate the trade war even further
  • Against this backdrop, US crude oil exports reached an all-time high of 3.3 mmb/d as copious amounts of light shale oil enable refineries in Asia to diversify their crude slate
  • With OPEC warning that a supply glut is very much likely in 2020, even with the extension of the current OPEC+ supply deal to March, the only possible upside for crude prices currently lies with supply disruptions and military action
  • With this delicate environment, the active US oil and gas rig count fell for the third consecutive week – losing five oil rigs but gaining two gas rigs to a total active count of 954, or 92 fewer sites than the 1,046 reported last year
  • With the market currently balanced between demand fears and supply risks, crude prices will remain rangebound – with Brent trading at US$62-64/b and WTI at US$55-57


Headlines of the week

Upstream

  • Greece has offered an olive branch to Turkey, pledging to work together to exploit natural resources if Turkey would agree to back down from its drilling campaign offshore Cyprus that has drawn it into a dispute with the EU

Midstream/Downstream

  • Iran maintains that it will invest in the expansion of the CPCL Nagapattinam refinery in India’s Tamil Nadu despite US sanctions resulting in India dropping Iranian crude; the planned investment is part of a US$5.1 billion plan to replace the existing 20 kb/d plant with a new, modern 180 kb/d refinery
  • Tainted crude from Russia’s Druzhba pipeline is now being sent to PKN Orlen’s Mazeikiai refinery in Lithuania, where the Polish firm is ready to dilute contaminated crude with clean oil for processing
  • After two years of failed attempts to find a replacement for PDVSA’s expiring operation of the Isla refinery in Curacao, the island’s government is now evaluating 10 proposals to take over the site, which has lain idled this year
  • Refineries along the US Gulf Coast, including Phillips 66’s Alliance plant in Louisiana, have restarted operations back to full capacity following the threat of Tropical Storm Barry abating
  • Sinopec has set up a new fuel oil company in Sri Lanka in Hambantota with the aim of using it as a fuel supply hub along the major Indian Ocean trading route
  • After blackouts completed halted operations at Venezuela’s Amuay and Cardon refineries, the 645 kb/d Amuay site has been partially restarted

Natural Gas/LNG

  • Total is moving ahead with its plan to turn Oman into a regional LNG hub through the Sohar LNG Bunkering Project as new IMO low-sulfur rules for marine fuels kick in, with Total handing over the FEED contract to McDermott
  • Bolstered by the giant Brulpadda discovery earlier this year, Total is sending the Deepsea Stavanger semi-submersible rig back to South Africa to start on its Block 11B/12B offshore drilling campaign
  • Chevron has applied for permission to modify its 18 mtpa Kitimat LNG project in Canada’s British Columbia into an all-electric design in an attempt to market its LNG as ‘clean’ with the lowest GHG emissions per ton of fuel
  • BHP has completed phase 3 of its deepwater drilling campaign offshore Trinidad, with 3 wells – Bélé-1, Tuk-1 and Hi-Hat-1 – all hitting gas
  • The small Canadian Tilbury LNG terminal in Delta, British Columbia has won its first export contract, supplying 53,000 tons of LNG per year to China’s Top Speed Energy over a two-year contract period
  • Poland’s PGNiG has acquired a 20% stake in the Duva gas field on the Norwegian Continental Shelf, expanding its reach in the North Sea after recently acquiring stakes in the King Lear and Tommeliten Alpha fields
  • Mubadala Petroleum has reached a farmout agreement with the UK’s Premier Oil for a 20% stake in the Andaman I and South Andaman gas blocks offshore the Indonesian province of Aceh, consolidating its presence in the area
  • Total has struck a new deal to supply Benin’s SBEE power firm with up to 500,000 tpa of LNG from its global portfolio for 15 years beginning 2021

Corporate

  • Schlumberger has named Olivier Le Peuch as its new CEO, succeeding Paal Kibsgaard who has overseen the services firm as CEO for 8 years

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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