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Just after the calendar officially turned over to 2020, reports from China suggested that a ‘new strain of viral pneumonia of an unknown cause’ had been detected in the city of Wuhan. As investigations began, normal life continued, which included the mass movement of several million people in Wuhan and the surrounding Hubei province in preparation for the Lunar New Year festivities. As the extent of pandemic became apparent, Wuhan was placed on virtual lockdown on 23 January; several other cities in Hubei – totalling almost 60 million people – followed suit. The World Health Organisation declare the Wuhan Coronavirus Outbreak a ‘global emergency’, as the first death outside of China was declared in the Philippines.
Traced to the Huanan Seafood Wholesale Market in Wuhan, a mutating melting pot for infections with the cramped presence of all forms of live animals, domesticated and wild – the Wuhan pandemic has now exceeded the 2003 SARS crisis in terms of infections, nearing 20,000 in over a month vs just over 8,000 over five months. Infections and deaths have been mainly localised to China, with over 26 countries have reported cases (vs 29 for SARS). The University of Hong Kong predicts that the cases in Wuhan alone could peak at 75,000. In response, China has curtailed outbound travel, other countries have closed their borders to visitors with recent travel to China and airlines have cancelled thousands of flights. Economic activity in Hubei – as well as other Chinese provinces – has slowed down, with orders to work from home and public/private transportation banned. Given that the Wuhan Coronavirus is only in its second months, it is very likely that its broader impact will be far greater than SARS.
But let’s focus on its impact on oil. Crude oil prices plunged as the impact of the Wuhan pandemic deepened. Much of this is sentiment-based, pricing in a long-lasting economic disruption on pessimistic expectations of the outbreak. How true is this prognosis? In 2003, a similar fall in crude prices accompanied the SARS crisis. However, this cannot be a true parallel as coordinated OPEC efforts reduced crude prices that had risen as the US invaded Iraq at the same time. In China, the SARS effects on oil demand was broadly localised to one quarter – Q2 – and then also localised to one product – jet fuel. LPG, naphtha, gasoline and gasoil demand were relatively unaffected, with annual growth of 8-12% for the year vs 1% for jet fuel (which had grown by 28% the previous year). Will the Wuhan pandemic follow this pattern?
There is reason to believe it won’t. Take jet fuel. In 2003, Chinese jet fuel demand was 160,000 b/d; in 2019, it has grown six-fold to 860,000 b/d. In 17 years, China has become increasingly more connected to the world by air. The SARS crisis affected an estimated 21% of jet fuel demand in 2003. Apply that to 2019 and over 180,000 b/d of jet fuel demand could be eliminated. With the government placing restrictions on domestic and international air travel in China – something that was only implemented partially during SARS – the effect could be even higher. There is also global jet fuel demand to consider. As major airlines scale back or even cancel all flights to China, it will be tough times depending on how long the pandemic lasts. Refining margins for jet fuel in Asia are now at their lowest level in 4 years.
Other fuel products could be affected. Unlike SARS, China been praised for its speedy response to the pandemic – including extended civil lockdowns, activity shutdowns and extending official holiday periods – but that has curtailed tourist activity, transport movements and manufacturing operations. Gasoline and gasoil, in particular, will be impacted by this. Against a backdrop of already-decelerating oil and gas demand, Standard Chartered estimates that the Wuhan pandemic could reduce oil demand growth in 2020 from 1 mmb/d to 900,000 b/d – a 10% fall. A lot will depend on how soon and how well the pandemic can be contained. This new pandemic might not be as fatal as SARS thus far, but its effect on oil demand could be graver.
SARS vs Wuhan Coronavirus:
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In the U.S. Energy Information Administration’s (EIA) February Short-Term Energy Outlook (STEO), EIA forecasts that the Lower 48 states’ working natural gas in storage will end the 2019–20 winter heating season (November 1–March 31) at 1,935 billion cubic feet (Bcf), with 12% more inventory than the previous five-year average. This increase is the result of mild winter temperatures and continuing strong production. EIA forecasts that net injections during the refill season (April 1–October 31) will bring the total working gas in storage to 4,029 Bcf, which, if realized, would be the largest monthly inventory level on record.
Mild winter temperatures for the current winter have put downward pressure on natural gas prices and led to smaller withdrawals from natural gas into storage. Year-over-year growth in dry natural gas production and natural gas exports—especially liquefied natural gas (LNG)—throughout 2019 also affected natural gas storage levels. On October 11, 2019, the total natural gas in storage surpassed the previous five-year average—an indicator of typical storage levels—for the first time since mid-2017.
Source: U.S. Energy Information Administration, Natural Gas Monthly, Weekly Natural Gas Storage Report, and Short-Term Energy Outlook
The total natural gas in storage at the start of this heating season was 3,725 Bcf on October 31, 2019. EIA expects withdrawals from working natural gas storage to total 1,790 Bcf at the end of March 2020. If realized, this would be the least natural gas withdrawn during a heating season since the winter of 2015–16, when temperatures were also mild.
Injections into and withdrawals from natural gas storage balance seasonal and other fluctuations in consumption. Natural gas demand is greatest in the winter months, when residential and commercial demand for natural gas for space heating increases. Natural gas consumption in the power sector is greatest in summer months, when overall electricity demand is relatively high because of air conditioning.
Source: U.S. Energy Information Administration, Short-Term Energy Outlook
In the latest STEO, EIA expects the total working natural gas in storage will exceed the previous five-year average for the remainder of 2020, despite declines in dry natural gas production, increases in natural gas consumption in the electric power sector, and increases in natural gas exports. EIA expects monthly natural gas production to decline from last year’s record levels in 2020 as lower natural gas prices reduce incentives for natural gas-directed drilling and as lower crude oil prices reduce incentives for oil-directed drilling and associated gas production.
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:
Market Watch
Headline crude prices for the week beginning 17 February 2020 – Brent: US$53/b; WTI: US$49/b
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