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Last Updated: August 8, 2019
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Market Watch 

Headline crude prices for the week beginning 5 August 2019 – Brent: US$61/b; WTI: US$54/b

  • Crude prices continue to be buffeted by demand scares and supply issues, with more fuel added to the fire of the former as the US-China trade war ratchets up several notches
  • President Donald Trump’s new tariffs on US$300 billion worth of Chinese imports was met with China suspending all purchasing of US agricultural products; financial markets slide in response and the Chinese yuan fell sharply, compounded by the US Federal Reserve’s decision to raise interest rates
  • China’s move to let the yuan weaken below CNY7 to the dollar for the first time in over a decade also stoked fears of a currency war, a new front that could consume the world in a depreciating spiral; in response, the US officially labelled China a ‘currency manipulator’
  • The spectre of a global recession is, therefore, becoming more apparent, with the market believing that a worsening of the US-China situation is far more likely than a full-blown military confrontation between the US and Iran
  • This development overshadowed the seizure of a ship in the Persian Gulf by the Iranian Revolutionary Guard, accusing the foreign-flagged ship of smuggling 700,000 litres of fuel near Farsi Island
  • This is the third ship seized by Iranian authorities since July 14, provoking disruption in maritime oil distribution as supermajor BP confirmed that it was avoiding sending its crude tankers to the region
  • Even news that Libyan output had fallen to a 5-month low of 950,000 b/d – caused by the unauthorised closing of a pipeline valve linked to the Sharara field – failed to lift a crude price market fixated on immediate recessionary factors
  • As OPEC’s Oil Market Report for July affirmed that the oil producers club expects a continued glut in 2020 that could require further cuts of 560,000 b/d, Saudi Aramco lowered the September pricing for its crude grades to Asia in a move to gain market share lost by Iran
  • Meanwhile, in the Permian, fears of a slowdown in the prolific shale patch solidified as Concho Resources – called the bellwether of shale help – announced it was scaling back production targets as well output falls off faster than expected in its Dominator project
  • While US crude production should continue to grow (albeit more slowly), the Permian woes can be seen in the Baker Hughes active US rig count, which fell for a fifth consecutive week; the loss of six oil rigs was offset by the gain of two gas rigs for an active count of 942 – the 15th week that the total has been below 1000
  • The implications of an escalating trade and currency wars are causing crude oil prices to crater, with WTI falling to US$51-53/b and Brent to US$56-58/b this week


Headlines of the week

Upstream

  • Shell has sold its non-operated interest in the US Gulf of Mexico Caeser-Tonga asset to Equinor for some US$965 million
  • Canada’s Alberta province has relaxed crude production limits by 25,000 b/d as its oil producers increase exports by rail and pipeline southwards to the US
  • BP and Eni have signed a 50:50 E&P sharing agreement for the onshore Block 77 in central Oman, located 30km east of BP’s Block 61 that is home to the producing Khazzan gas project and the in-development Ghazeer gas project
  • Israel has awarded 12 new offshore blocks to UK firms Cairn and Soco from its second offshore bidding round, covering licenses in Zones 3 and 4
  • Qatar Petroleum has bought a 40% stake of Total’s 25% interest in the Orinduik and Kanuku blocks in Guyana to capitalise on the new prospective basin
  • Malaysia’s Petronas has become the first oil company to sign upstream permits in Gabon after a new oil law was enacted in July, gaining two licenses for the offshore F12 and F13 blocks with anticipated production of 200,000 b/d
  • UK independent Neptune Energy has acquired additional stakes in the Barmberge, Meppen and Annaveen oilfields in the onshore Emslands oil and Grafschaft Bentheim gas regions in Germany from Wintershall DEA
  • Enterprise Product Partners and Chevron have agreed to jointly develop Entreprise’s Sea Port Oil Terminal crude export project in the Gulf of Mexico
  • Occidental and Ecopetrol have formed a new joint venture to develop 97,000 net acres in the Midland Basin of the Permian, with Ecopetrol paying US$1.5 million for a 49% interest in the venture

Midstream/Downstream

  • Total and Lukoil’s 180 kb/d Zeeland refinery in the Netherlands will add a third hydrocracker unit by 2020 to expand its low-sulfur diesel capacity
  • Finland’s Neste will be expanding capacity at its Singapore renewable fuels refinery in Tuas from 1 mtpa to 1.3 mtpa through a US$1.6 billion investment to capitalise on an anticipated surge in renewable diesel and jet fuel demand
  • Russian gasoline and gas oil has arrived in Venezuela, offering a reprieve to the sanctions that have disrupted fuel distribution in the nation
  • West Coast Olefins is planning to build a new large-scale petrochemical complex in Prince George, British Columbia, converting Canadian NGLs into polyethylene through a 1 mtpa ethylene plant

Natural Gas/LNG

  • After a few weeks of jitters, the new government of Papua New Guinea has confirmed that it will stand by the existing natural gas agreement, allowing Total’s US$15 billion Papua LNG development a go-ahead
  • Horizon Oil has started discussions with the new PNG government to develop the Elevala-Ketu fields, including third-party access to LNG facilities
  • Novatek has formally asked for Russian state support to back its ongoing LNG developments in the Gydan and Yamal regions in West Siberia
  • BP is anticipating a delay in starting up the Tangguh LNG Train 3 in Indonesia, citing impact from the 2018 tsunami and issues with contractor Chiyoda
  • The US Department of Energy has approved the Gulf LNG Liquefaction project in Jackson Country, Mississippi to export LNG to countries that the US does not have an FTA with, with volumes of up to 11.5 mtpa from the facility
  • Osaka Gas has acquired full ownership of Sabine Oil & Gas Corporation, marking the first Japanese investment into an American shale gas developer

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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