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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 World’s Largest Natural Gas Discovery Since 2005

At the start of February, a major new find was jointly announced by the two largest emirates within the UAE: the oil-rich Abu Dhabi and the ambitious Dubai. Between them, they literally made the world’s largest natural gas discovery since 2005. Located at the border between the two sheikdoms, the Jebel Ali field is estimated to contain some 80 trillion scf of natural gas, the largest global find since the Galkynysh field in Turkmenistan.

Stretching over 5,000 square km, an exploration campaign by Abu Dhabi involving over 10 wells confirmed the enormous discovery in early January 2020. The shallow nature of the onshore reserves should make it easier to extract gas at lower costs, hastening the time-to-market. At current estimated figures, Jebel Ali would be the fourth-largest gas field in the Middle East, behind Qatar’s North Field, Iran’s South Pars and Abu Dhabi’s own Bab field.

The politics of the UAE can be complicated; each emirate is essentially self-governing with federal oversight, which is dominated by Abu Dhabi and Dubai (which always hold the President and Prime Minister roles, according to convention). This essentially means that each emirate has grew quite independently. Fujairah, for example, developed into a bunkering port, while Sharjah went into industry and manufacturing. Dubai is globally famous for its titanic real estate projects, pursued finance, services and media, while Abu Dhabi, the largest and most blessed of all with hydrocarbon resources, turned into an energy powerhouse. Oil & gas wealth in the UAE is mainly in Abu Dhabi; so while the Jebel Ali discovery is a welcome addition for Abu Dhabi, it is a game changer for Dubai, which imports most of its energy needs.

Speculation has raised that possibility that the Jebel Ali field could vault the UAE into gas self-sufficiency, because even Abu Dhabi imports gas. The UAE has a stated goal to be gas independent by 2030. On paper, that’s possible. Abu Dhabi’s ADNOC has agreed to develop the field with Dubai’s gas supplier, the Dubai Supply Authority (DUSUP), with the entire supply will be channel to DUSUP for use in Dubai. Jebel Ali could begin producing gas by 2023, and will likely be distributed domestically through pipeline. The enormous reserves could supply the entire UAE’s gas demand for nearly 30 years, assuming optimal recovery conditions. However, in practice, self-sufficiency might take longer to achieve.

Dubai and indeed, Abu Dhabi are currently reliant on Qatar for their gas supply. An existing sales agreement that expires in 2032 sees Qatar pipe 2 bcf/d of gas to the UAE through Abu Dhabi. The problem is that these neighbours are erstwhile friends. A division in the Middle East between the pro-Saudi Arabia and pro-Iran blocs has caused a rift. Led by Saudi Arabia, several Persian Gulf states  including the UAE implemented a diplomatic and trade blockade on Qatar, isolating it. The blockade, slightly weakened, still continues today. Even now, planes flying into Qatar have to make strange manoeuvres when approaching to avoid encroaching on Saudi and UAE airspace. However, the gas supply arrangement remains in place.

And this is where the Jebel Ali discovery could come in handy. Qatar is already on track to be self-sufficient in gas terms by 2025, but will probably honour the Qatar deal until expiration. Dubai has been increasingly reliant on LNG  through an FSRU for power generation, but has attempted over the years to kick-start a number of coal or solar-power projects. Jebel Ali won’t kick the addiction, but it could definitely reduce Dubai’s reliance on Qatari gas.

Jebel Ali wasn’t the only recent gas discovery made in the UAE. Further north, the Sharjah National Oil Corp and Italy’s Eni announced a new onshore gas and condensate discovery. Though tiny in comparison to Jebel Ali, some 50 mscf/d of lean gas and condensate. The cumulative effects of these discoveries could make gas self-sufficiency a reality sooner. At this point, the UAE consumes some 7.4 bcf gas per day, while marketed production is some 6.2 bcf/d. An ambitious plan to develop Abu Dhabi’s large gas fields was the rationale behind naming the 2030 self-sufficiency deadline. With the discovery of Jebel Ali, that can now be brought forward by a couple of years at least. And there might even be some left over to be exported as LNG

The UAE Major Gas Projects:

  • Estimated reserves: 273 tcf of conventional gas, 160 tcf of unconventional gas (Abu Dhabi)
  • Ghasha ultra-sour gas field (Abu Dhabi) – 1.5 bcf, by 2025
  • Shah sour gas field (Abu Dhabi) – 1.5 bcf/d

February, 23 2020
Your Weekly Update: 17 - 21 February 2020

Market Watch   

Headline crude prices for the week beginning 17 February 2020 – Brent: US$53/b; WTI: US$49/b

  • As the Covid-19 pandemic seems to be coming increasingly under control, crude oil prices are recovering some ground as the market moves into speculative mode given the availability of cheap crude cargoes
  • Case in point, while the fear was of widespread demand destruction in China, a sudden buying spree by Chinese independent teapot refineries – attracted by cheap spot cargoes – surprised the market, being a sign that Chinese private refiners are anticipating a rebound in demand sooner rather than later
  • Despite this, the pandemic is still recalibrating Chinese energy demand in a dramatic way, with reports of four LNG tanker bound for northern China from Oman and Qatar diverted as CNOOC invoked force majeure on its contracts
  • China’s pain is also India’s gain, with so-called ‘distressed cargoes’ originally intended for China now offered to India at attractive terms from all over the world, including grades from the Caspian Sea to Latin America and West Africa
  • Based on the situation in China, the IEA is forecasting the first annual decline in quarterly global oil demand for the first time in over a decade, and dragging overall 2020 growth down by 30% to 825,000 b/d; the EIA followed suit as well, cutting its Brent price forecast for 2020 from US$64.83 to US$61.25
  • China and key Asian hubs impacted by the virus like Hong Kong and Singapore have pledged to provide extra fiscal stimulus to counteract the impact of the pandemic, possibly setting the stage for a rebound in Q2 2020
  • Saudi Arabia’s attempt to cajole the OPEC+ club into extending its supply cuts until June 2020 through an emergency February meeting has faded, with Russia being the main holdout
  • Amid the turmoil in the markets, the US active rig count remained unchanged for the week, adding two oil sites but losing gas and miscellaneous sites for a total of 790
  • Oil prices gained over the week as the Covid-19 pandemic looks to be contained; Brent should trade in a higher US$57-59/b range and WTI at US$43-55/b


Headlines of the week

Upstream

  • Saudi Arabia and Kuwait have officially restarted production from their shared Wafra field in the Neutral after five years of halted output
  • Despite being hampered by quarterly waivers that are subject to renewals by the US government, Chevron has ramped up production at its Petropiar crude upgrader plant in Venezuela to 130,000 b/d after being closed for most of 2019
  • Canada’s Alberta province’s plan to ease its crude glut through rail shipments has hit a snag, as protestors blocked train lines and the provincial government ordered trains to reduce speeds after a major derailment and fire
  • Tullow Oil reports that it has received approval from Ghana to flare gas ‘when necessary’ from its offshore fields, which should help the beleaguered company support production levels after a set of disappointing results for 2019
  • Somalia has passed a new petroleum bill into law, with the aim of setting up a regulatory framework to attract foreign upstream investment; Somalia currently does not produce any oil but estimates suggest significant reserves
  • As Uganda prepares to start producing oil for the first time, distribution and transport infrastructure remain an issue, with the state recently tapping a Chinese lender to build three roads to connect to its western oilfields
  • After a challenging few years of scandals and a subsequent refocusing on upstream, Petrobras has now hit a new upstream production record, with the ramp-up in pre-salt basins contributing to 3.025 mmboe/d in Q4 2019
  • CNOOC has commenced production at the offshore Bozhong 34-9 field in the Bohai Sea, with peak output expected at 22,500 b/d of crude by 2022

Midstream/Downstream

  • The Covid-19 Wuhan outbreak has claimed a few more refinery scalps, with ChemChina shutting down its 100 kb/d Zhenghe refinery in Shandong and reducing processing at its Changyi and Huaxing refineries by 10%; Hengli Petrochemical has cut utilisation rates at its new 400 kb/d Dalian refinery by some 17% as well, as petchem demand dries up
  • The 120,000 b/d Azzawiya Oil Refining Company refinery in Libya has been forced to halt all operations, as a prolonged conflict in the country has dried up the availability of crude for export or local refining
  • Egypt has given the go-ahead for a US$2.5 billion, 65 kb/d oil refinery in the Upper Egypt region, focusing on hydrocracking mazut – heavy, low quality fuel oil typically used for power generation – into high-value fuels
  • The Bangladesh Petroleum Corp has awarded a tender to supply some 1.06 million tons of gasoil, jet fuel, fuel oil and gasoline to Unipec and Vitol
  • Vietnam’s Nghi Son refining has offered a cargo of gasoil for export for the first time – an indication of slowing domestic demand from the Covid-19 outbreak that is hitting most major East and Southeast Asian economies

Natural Gas/LNG

  • NextDecade Corp’s US$15 billion, 26 million tons per annum Rio Grande LNG facility in Texas has been cleared for LNG exports by the US DoE
  • Portugal’s Sines port is being eyed by US energy companies as a strategic landing point for US LNG exports to Europe, as American LNG exporters race to lock down customers amid a supply glut that could last for years
  • Shell has acquired a 50% stake in Ecopetrol’s Fuerte Sur, Purple Angel and COL-5 gas blocks located in Colombia’s Caribbean deepwater region
February, 21 2020
This Week in Petroleum

Forecast growth in demand for U.S. petroleum and other liquids is not driven by transportation and not supplied by refineries

The U.S. Energy Information Administration’s (EIA) February Short-Term Energy Outlook (STEO) forecasts that in 2021, U.S. consumption (as measured by product supplied) of total petroleum and other liquid fuels will average 20.71 million barrels per day (b/d), surpassing the 2007 pre-recession level of 20.68 million b/d. However, the drivers of this consumption growth have changed. Since the 2007–09 recession, U.S. consumption growth has shifted toward liquid fuels that are used primarily outside the transportation sector and are supplied mostly from non-refinery sources. Despite this shift away from domestic demand for refinery-produced fuels, U.S. refinery runs have increased, and the excess products have been exported, greatly contributing to the United States becoming a net exporter of petroleum in September 2019. EIA expects these trends to continue for at least the next 10 years.

Hydrocarbon gas liquids (HGL) have been the main driver of U.S. petroleum and other liquids demand growth since 2007 (Figure 1). U.S. production and consumption of HGLs—a group of products that include ethane, propane, normal butane and isobutane, natural gasoline, and refinery olefins—have risen with increased natural gas production and demand from an expanding petrochemical sector. As a result, EIA forecasts U.S. HGL consumption will be 1.27 million b/d more in 2021 than in 2007, and will average 3.45 million b/d.

Figure 1. Forecast change in U.S. consumption from 2007 to 2021

With the exception of jet fuel, EIA expects less U.S. consumption of refinery-produced products in 2021 than in 2007. Since 2007, increases in U.S. vehicle miles traveled, which normally increases total motor gasoline consumption, have been countered to some extent by increases in vehicle fuel efficiency. In addition, although U.S. total motor gasoline consumption exceeded 2007 levels for the first time in 2016, increased blending of ethanol into finished motor gasoline has displaced some of the petroleum-based, or refinery-produced, portion of gasoline consumption. Therefore, EIA forecasts 570,000 b/d less consumption of refinery-produced gasoline in the United States in 2021 than in 2007, while ethanol will be 0.5 million b/d higher. Ethanol is almost exclusively produced at non-petroleum refinery sites.

Some HGLs can be produced by both refineries and natural gas processing plants. Natural gas plant liquids (NGPLs)—a subset of HGLs that includes ethane, propane, normal butanes and isobutanes, and natural gasoline—can be extracted from natural gas production streams or produced at refineries that process crude oil. However, as U.S. natural gas production increased from 55.3 billion cubic feet per day (Bcf/d) in 2007 to 98.9 Bcf/d in 2019, the amount of HGLs extracted from natural gas production increased from 1.78 million b/d in 2007 to 4.83 million b/d in 2019. EIA expects HGL production from natural gas processing plants to continue to increase to 5.47 million b/d in 2021. Meanwhile, refinery HGL production has been flat at about 600,000 b/d (Figure 2).

Figure 2. U.S. hydrocarbon gas liquids production by source

Although HGLs have several different end uses, such as propane for space heating and normal butane for blending with motor gasoline, most of the growth in consumption stems from the use of HGLs as feedstock for petrochemical processes. The large increase in U.S. production of HGLs, and the resulting low prices, led to large investments in U.S. infrastructure to extract and transport HGLs to market, as well as investments in petrochemical facilities to consume it. Many of these facilities consume ethane, and to a lesser degree propane and normal butane, as feedstocks to produce intermediate building blocks for plastics, resins, and other materials with nonenergy uses. EIA forecasts that U.S. ethane consumption will reach 1.96 million b/d in 2021, up from 743,000 b/d in 2007, which represents 96% of the increase in U.S. HGL consumption between 2007 and 2021.

Removing HGL and ethanol consumption from the total demand for U.S. petroleum and other liquids indicates that EIA’s 2021 forecast U.S. demand for principally refinery-produced products is about 16.31 million b/d, on par with the 1997 level (Figure 3).

Figure 3. U.S. total petroleum and other liquids demand

Despite domestic demand shifting away from traditionally refinery-produced products, U.S. refinery capacity has increased 1.7 million b/d between 2007 and 2019. U.S. refineries have adapted to falling domestic demand for certain products, such as residual fuel, by investing in downstream coking capacity to upgrade it into more valuable products. More importantly, international demand for refinery-produced products has increased since 2007, allowing U.S. refineries to increase runs and utilization beyond what the domestic market demanded to supply products to export markets. As a result, the United States became a net exporter on an annual basis of distillate and residual fuel in 2008, of jet fuel in 2011, and of motor gasoline in 2016.

Similarly, demand for HGLs outside of the United States has increased and caused U.S exports of HGLs to increase from 70,000 b/d in 2007 to 2.07 million b/d in November 2019. Between 2013 and 2016, exports of HGLs were the largest contributor to the increase in U.S. exports of petroleum products. U.S. exports of HGLs are mostly of propane and ethane to markets in Asia and Europe, where they are also displacing refinery-produced naphtha as a petrochemical feedstock.

EIA projects that these trends of increasing U.S. production of HGLs, increasing domestic consumption of HGLs, and increasing exports of HGLs will continue beyond 2021. EIA’s Annual Energy Outlook 2020 (AEO2020), released in January, shows projections for further growth in HGL production at natural gas processing plants from 4.91 million b/d in 2019 to a peak of 6.58 million b/d in 2029 and then slowly decline to 6.17 million b/d by 2050. Domestic consumption of HGLs will also increase, driven by continued petrochemical demand for feedstock, which rises from about 3.14 million b/d in 2019 to more than 4.0 million b/d in 2029. Meanwhile, in the AEO2020 Reference case, U.S. consumption of motor gasoline declines until 2042, distillate consumption declines until 2040, and residual fuel consumption continues declining out to 2050.

U.S. average regular gasoline prices rise, diesel prices decline

The U.S. average regular gasoline retail price increased nearly 1 cent from the previous week to $2.43 per gallon on February 17, 11 cents higher than the same time last year. The Midwest price rose nearly 5 cents to $2.31 per gallon. The Rocky Mountain price fell more than 3 cents to $2.47 per gallon, the West Coast price fell 1 cent to $3.14 per gallon, the East Coast price fell nearly 1 cent to $2.36 per gallon, and the Gulf Coast price declined by less than 1 cent to $2.08 per gallon.

The U.S. average diesel fuel price fell 2 cents from the previous week to $2.89 per gallon on February 17, 12 cents lower than a year ago. The Rocky Mountain price fell nearly 4 cents to $2.86 per gallon, the East Coast price fell more than 2 cents to $2.94 per gallon, the Midwest and Gulf Coast prices each fell nearly 2 cents to $2.76 per gallon and $2.66 per gallon, respectively, and the West Coast price fell more than 1 cent to $3.47 per gallon.

Residential heating oil prices increase, propane prices decrease

As of February 17, 2020, residential heating oil prices averaged more than $2.91 per gallon, almost 1 cent per gallon above last week’s price but more than 31 cents per gallon lower than last year’s price at this time. Wholesale heating oil prices averaged $1.80 per gallon, more than 5 cents per gallon above last week’s price but 34 cents per gallon lower than a year ago.

Residential propane prices averaged more than $1.98 per gallon, less than 1 cent per gallon below last week’s price and nearly 45 cents per gallon less than a year ago. Wholesale propane prices averaged more than $0.56 per gallon, more than 1 cent per gallon higher than last week’s price but almost 27 cents per gallon below last year’s price.

Propane/propylene inventories decline

U.S. propane/propylene stocks decreased by 3.0 million barrels last week to 74.3 million barrels as of February 14, 2020, 18.4 million barrels (32.9%) greater than the five-year (2015-19) average inventory levels for this same time of year. Midwest, Gulf Coast, East Coast, and Rocky Mountain/West Coast inventories decreased by 1.1 million barrels, 1.0 million barrels, 0.6 million barrels, and 0.4 million barrels, respectively. Propylene non-fuel-use inventories represented 7.5% of total propane/propylene inventories.

February, 21 2020