(EnergyAsia, November 28 2014, Friday) — The US Energy Information Administration (EIA) expects oil prices to remain under selling pressure after slashing its latest forecast for 2015 global demand while raising the supply outlook. In its November report, the agency said it expects Brent crude oil spot prices to average US$83 per barrel in 2015,…
(EnergyAsia, November 28 2014, Friday) — After plunging by a third since peaking in June to their lowest levels in four-and-half years, crude oil prices still have room to fall, going by the conclusions of two recent studies pointing to the resilience of US unconventional oil in a bear market.
Consulting firm IHS said it found that about 80% of potential gross US tight oil capacity additions in 2015 would remain resilient with West Texas Intermediate (WTI) crude prices falling to their current levels of around US$70 per barrel.
According to Bloomberg New Energy Finance, only about 413,000 b/d of shale-based supply out of more than nine million b/d of total US production is unprofitable with WTI at US$75.
Both reports represent extremely bearish news for oil producing countries and companies used to operating at US$100 WTI and US$110 Brent over the last four years.
With Saudi Arabia holding firm, the Organisation of Petroleum Exporting Countries (OPEC) added to the gloom yesterday with its decision to continue with its production quotas. The financially weaker members like Iran, Iraq and Venezuela will likely suffer domestic political consequences from further cutbacks in their already derailed economic programmes.
Worse could follow as some analysts are calling for crude to plunge below US$50, which could inflict long-term damage on the viability of many oil companies, particularly shale-based operators which rely heavily on debt to finance their operations, as well as hydrocarbon-dependent economies like Nigeria, Angola, Malaysia and Indonesia.
OPEC’s decision to maintain the status quo reflects the Saudi view that the oil market should sort itself out, and that includes eliminating potential long-term competition from North America’s booming shale sector that has underpinned the rise of the US as a major oil producer.
According to the IHS report, US tight oil production will still grow by a hefty 700,000 b/d in 2015 based on an average price of US$77 per barrel, down from last year’s expansion of more than one million b/d with WTI at an average US$100.
“Since 2008, the cumulative growth in US tight oil production has been 3.5 million b/d — far exceeding supply gains from the rest of the world combined — making tight oil the key driver of global supply growth,” said Jim Burkhard, IHS Energy’s Vice President.
“While current lower crude oil prices do present challenges for new investment, IHS analysis shows that the vast majority of potential US supply growth in 2015 remain economical at $70 for WTI.”
The report found that existing tight oil production is unaffected by the recent drop in oil prices.
Since the highest level of production costs occurs during the initial development phase of a well, existing wells can remain economical at crude oil prices far below the break-even price for new production, said IHS.
Lower crude oil prices have a greater potential to affect supply growth because new wells require significant investment before production begins. In the initial months of production, the oil price is critical to in determining the profitability of a new tight oil well.
Regardless, there are reasons to believe in the resilience of tight oil growth, the report said. IHS found that 80% of the potential US tight oil capacity additions in 2015 have a break-even price in the range of US$50 to US$69 per barrel.
Continued productivity gains, such as improvements in well completion and downspacing, also support the resilience of US production growth at lower prices, the report said.
Though these are strong reasons to believe in the resilience of tight oil growth, IHS said the risk of supply growth falling short is much greater now than just a few months ago.
“Expectations of the future—and the trajectory of oil prices—means that prices do not need to fall to the breakeven price before psychology, investment, and thus output, is affected,” Mr Burkhard said.
“Lower oil prices bring into question the ongoing extent of one of the most profound developments in the world oil market—the great revival of American production. The ‘tight oil test’ is under way.”
Bloomberg’s analysis found that 19 shale regions in the US, which include parts of the Eaglebine and Eagle Ford in East and South Texas, would sink into the red with US$75 WTI.
But the biggest-producing fields, namely North Dakota’s Bakken and the Permian and Eagle Ford in Texas, which accounted for more than half of US supply last year in producing a combined 4.7 million b/day, will remain profitable at US$55 WTI.
The Bloomberg study found that at least a dozen US shale-based producers would reduce capital spending plans on account of crude oil prices staying at current levels or going lower.
(EnergyAsia, November 27 2014, Thursday) — With liquefied natural gas (LNG) supply growth outpacing demand, Asian buyers have the upper hand for now although a blast of cold from unpredictable weather conditions could easily spike prices, said consultant Wood Mackenzie.
Riding the downtrend, according to the International Energy Agency (IEA), Asian buyers are digging in with their demand for an overhaul of the LNG pricing formula as the market’s weakness could be protracted on account of weak global demand, rising supply and depressed oil prices.
Gavin Thompson, Wood Mackenzie’s Head of Asia Pacific Gas & Power Research, said he expects Asia’s LNG spot market to continue “to loosen this winter” to the delight of buyers, marking a reversal of previous years’ trends of high prices and tight supply.
“It turned in favour of buyers in summer this year, with the growth of Pacific LNG supply outpacing that of demand. Assuming normal winter weather patterns in the region from October to March, we expect that trend to continue this winter too,” he said.
“Storage inventory levels remain high, due primarily to mild weather through the past year. We now forecast that Pacific LNG imports will only grow by a modest one million tonnes during the traditional peak winter season.
“LNG supply from within the region, on the other hand, will be three million tonnes higher this winter than last mainly due to new volumes from Papua New Guinea, with minimal supply disruptions expected.
“Due to this comfortable demand-supply outlook, we expect Pacific LNG prices to be notably softer compared to the same period last year. With global oil prices also expected to remain soft through this period, LNG prices will struggle to match previous year highs.”
His colleague, Noel Tomnay, who heads the firm’s global gas research unit, said the biggest risk to supply will come from a cold winter, not Russia.
“Our estimates suggest that colder temperatures in northeast Asia could increase LNG demand by seven million tonnes, requiring additional sources of supply. Most of this additional demand would need to be served by increased diversions from Europe, as Asia will struggle to access sufficient Pacific LNG supply,” said Mr Tomnay.
“This has the potential to transform a currently loosening market into the tightest Pacific market we’ve seen yet. With growing regasification capacity in north China supporting higher Asian winter LNG demand potential, this is now a risk that is getting bigger.”
An increase in Asian LNG demand during the winter will mean Europe will have less to import.
However, as northwestern Europe has insufficient storage inventories, a cold winter will force it into a greater reliance on Russian gas. If the Russian-Western dispute over Ukraine worsens, European buyers of Russian would come under increased pressure to secure additional LNG cargoes to offset the potential loss of Russian supply.
According to Wood Mackenzie, the worst-case scenario combining cold winter weather in both Asia and Europe, and disruption of Russian piped gas through Ukraine would create an additional demand of 12 million tonnes of LNG. Europe alone would account for five million tonnes of that additional demand.
In this ‘perfect storm’ that includes limited global LNG supply availability, Wood Mackenzie said some of that demand, including in Asia, will not be met.
In a separate report, the IEA said last year’s average US$12 million BTU gap in natural gas prices between Asia and the US is unlikely to be repeated as a result of the recent weakness in global energy markets. Asia paid between US$15 and US$18 per million BTU for their LNG cargoes, while North American consumers enjoyed cheap energy from mostly paying just US$3 to US$4.
The IEA said Asian buyers are no longer ready to pay record oil-linked prices that harm their economies, with consequences such as Japan developing a trade deficit in 2011, a situation unseen in the previous 31 years.
Gas supplies have also emerged from new sources, with many of the new players prepared to offer cheaper and more flexible terms.
“As demand in Asia grows faster than in other regions, Asian countries think they should get better terms and are now considering developing co-operation among buyers,” said the IEA’s medium-term gas forecast to 2019.
“Additionally, companies are looking for different pricing mechanisms and more flexibility in the delivery terms. Signing up for cheaper hub-priced LNG from the US seems very attractive at current price levels.”
Not all suppliers agree that market conditions have changed so radically.
As new greenfield projects are increasingly expensive, investors will need to secure revenues through long-term contracts preferably linked to oil prices.
As of May 2014, the IEA said companies were building around 150 billion cubic metres per year of liquefaction capacity, with half of that in Australia at a record average cost of almost US$4,000 per ton including upstream and LNG development.
The agency said it expects the global LNG trade to rise from 322 billion cubic metres (bcm) in 2013 to 450 bcm by 2019, rising about 40% faster than that of inter-regional pipeline trade. Global LNG consumption edged up 1.2% to reach 3.5 trillion cubic metres last year.
“More LNG will be needed thereafter, and given the five-year construction period that any greenfield LNG projects usually require, decisions must be taken now for supply arriving to the markets by 2020. Although many LNG projects are at the planning stage, actually very few final investment decisions (FIDs) have been taken since mid-2012,” said the IEA.
(EnergyAsia, November 26 2014, Wednesday) — The weakest oil market in four years is having no impact on the Organisation of Petroleum Exporting Countries’ (OPEC) views on the world economy and oil supply-demand balances. For the fourth consecutive month, OPEC has kept unchanged its forecasts for the world economy to grow by 3.2% this year…
(EnergyAsia, November 25 2014, Tuesday) — Singapore’s stretched infrastructure is forcing Asia’s oil traders to tweak a winning formula of over two decades to accommodate a bigger storage and pricing role for neighbouring Malaysia and Indonesia, said the International Energy Agency (IEA) and energy media Platts.
In separate reports, the two organisations point to tiny Singapore’s topped-out influence as it reaches a limit to expansion of its oil storage infrastructure on the island’s roughly 750-sq km of land.
Since the late 1980s, Platts’ team of journalists in Singapore has been reporting deals and determining prices for a variety of crude grades and oil products. In the early 1990s, Platts introduced a real-time service that made its service so successful that it has since remained the main reference for price discovery in Asia.
Following complaints that some traders had reported fictitious deals to influence prices, Platts later demanded that they show proof of ownership or lease of tank space in Singapore for their cargoes so that their contracts could be verified.
This key condition strengthened both Singapore’s independent oil storage industry and trading hub status as Asia desperately needed an impartial source of price discovery and reference. The Platts’ trading window fulfilled that role, muscling out all attempts by other media and even futures exchanges to launch rival pricing systems.
In its October market report, the IEA said Singapore has remained at the forefront of Asian oil trading and storage for the last 20 years by leveraging off its location at the mouth of the Strait of Malacca and the slim channel between Indonesia and Malaysia to serve as the main route for oil tankers voyaging between the Middle East and East Asia.
Having expanded its storage capacity to 73 million barrels, Singapore’s terminal owners today face limited growth prospects despite rising demand brought on by Asia’s increasing oil appetite. The IEA has forecast that developing Asia will need to import an additional 3.6 million b/d of oil over the next five years to 2019 to meet all its new demand.
But Singapore’s role in this additional supply flow will be limited by its land constraint and rising business costs which have held back investors from building more storage terminals.
“Additionally, recent government legislation has reportedly sought to prohibit the allocation of land to new oil terminals while prioritising the construction of high‐value assets such as petrochemical facilities,” said the IEA.
As a result, traders have begun building new tanks and storing oil in neighbouring Malaysia and Indonesia. Their governments have actively encouraged the construction of oil terminals to draw business away from Singapore to the extent that the two countries now have a combined capacity to store 50 million barrels of oil.
According to the IEA, Malaysia’s main push to capture business from Singapore is centred on nearby Johor state which has offered tax incentives and ample waterfront land to encourage investment. The planned Pengerang project in eastern Johor will include a complex of refineries, petrochemical plants and oil terminals capable of taking VLCCs. Johor state has also attracted investors to expand the Tanjung Bin storage facility to the west by 1.4 million barrels to 7.2 million barrels in 2015 while central Tanjung Langsat is slated to expand its storage capacity to 5.1 million barrels.
The IEA said Indonesia is planning to develop a number of projects around its northern islands near Singapore although implementation has not been as smooth sailing as in Malaysia.
In October 2012, Sinopec Kantons Holdings, a subsidiary of China’s Sinopec Group, filed a notice with the Hong Kong Exchange that its 95%-owned PT West Point Terminal had started constructing a terminal on Batam Island to store as much as 16 million barrels of crude and refined fuels. There has been no update on the project which was due to start up in late 2014.
Germany’s Oiltanking and Switzerland’s Gunvor Group expect to start up their jointly owned storage terminal on nearby Karimun Island in the third quarter of next year, with an initial 760,000-cubic metre storage capacity.
“While Singapore’s storage capacity has been growing steadily over the last decade, further growth is hampered by the scarcity of waterfront and lack of land available for new expansions,” said Gunvor in announcing its investment plan in June 2013.
To facilitate the industry’s growth, Platts said it will expand its FOB Singapore price assessments for oil products to include the Indonesian terminals from July 1 2015. The assessment, which have included Johor ports since 2001, will be renamed FOB Straits.
Announcing its plan in August 2014, Platts said it is “actively studying the evolution of the geographical coverage” of its FOB Singapore refined oil products benchmarks to ensure they continue to reflect growth and changes in the Asian oil trade.
“The limited possibility of further expansion of Singapore’s on-land oil storage, coupled with growth plans in nearby Johor and the Riau Islands, means trading of products – and the benchmarks that reflect that activity – will spill beyond Singapore’s traditional boundaries and into new frontiers,” it said.
As a response to industry concerns about land constraints, Singapore inaugurated the first phase of an underground storage project last September. Located on Jurong Island and composed of five rock caverns capable of holding approximately 9.2 million barrels of oil, the US$700 million project was conceived and developed to overcome space shortage aboveground.
In the project’s first phase, state landlord JTC Corp has completed and leased two caverns with a total capacity of three million barrels to petrochemicals producer Jurong Aromatics Corporation. Another three caverns will likely be completed in 2016.
(EnergyAsia, November 24 2014, Monday) — Singapore’s Universal Terminal Pte Ltd is looking to raise at least S$1 billion through a local share offering as a business trust that would make it the largest listed oil storage firm in Asia. (US$1=S$1.3).
Hin Leong Group, one of Asia’s largest family-owned oil traders, has a 65% stake in the company which owns and operates a 2.36-million cubic metre tank terminal on Jurong Island as well as trades, blends, stores and distributes petroleum products across the world. Hin Leong is owned by the family of Singaporean billionaire oil trader Lim Oon Kuin.
PetroChina, one of China’s largest oil companies, owns the remaining 35% in Universal Terminal’s S$750 million terminal which started up in 2008.
Universal Terminal is expected to launch its trust offering before the end of the year, capitalising on the continuing high demand for oil storage and blending services in Singapore.
(EnergyAsia, November 21 2014, Friday) — Singapore Exchange (SGX) said it will begin offering petrochemical swaps and futures contracts from December 2 in response growing demand from industry players to hedge their trading positions. The exchange said it will introduce a set of five petrochemical derivatives tools in two phases, starting with the SGX Platts…
(EnergyAsia, November 21 2014, Friday) — The spirit may be willing but weak market conditions and strong opposition from environmental, business and labour groups will likely block India’s pent-up desire to heal its sickly coal industry.
Since its election to office last May, the government of Prime Minister Narendra Modi has made a top priority of untangling India’s corrupt and inefficient coal supply system that lies at the heart of the country’s worsening energy crisis. India derives more than 70% of its electricity from coal-fired power plants that are operating well below capacity due to a long-running endemic shortage of feedstock.
Riding on the government’s continuing popularity, the coal ministry has raised public expectations by setting overly ambitious targets to double domestic coal production and cease imports by 2019 at the same time disregarding environmental opposition at home and abroad.
The government has agreed to lend up to US$1 billion to privately-owned Adani Group to help develop its troubled A$7 billion coal project in Australia, and is ready to spend another US$1 billion to develop rail infrastructure in India to improve coal distribution across the country.
The government has also announced plans to open up its heavily protected coal mining and distribution sector to private and foreign participation and ownership. In a rare show of unity, domestic business groups have joined hands with labour unions to oppose the move on nationalistic grounds playing on fears of widespread jobs losses and foreign control over a strategic asset.
While the move could force India’s coal industry to become more efficient, the government has not laid out a viable plan to deal with the short-term pain of mass jobs losses and coal and electricity price hikes. Inevitably, private and foreign companies will slash jobs and demand higher prices for making expensive investment bets on an industry that has become bloated and unprofitable from four decades of state protection.
Furthermore, with coal prices hovering at a five-year low and likely to stay down, foreign companies are unlikely to be tempted to rush in. The government, to no one’s surprise, is unable to set a deadline or schedule on how it plans to open up the sector to private participation.
But that has not stopped the coal ministry from making ambitious projections that foreign investors will help India’s privately owned mines boost domestic coal production from less than 50 million tonnes last years to 400 million tonnes by 2019.
For now, state-owned Coal India Limited (CIL) accounts for around 80% of domestic output, with power, steel and cement companies producing the rest for inhouse consumption.
Power and Coal Minister Piyush Goyal has also forecast that CIL, notorious for missing production targets, will more than double output from 462 million tonnes for the year ending March 31 2014 to one billion tonnes five years later.
Speaking at an industry conference in New Delhi last week, he said the combined production increases from CIL and private mines will enable India, the world’s third largest coal importer, to cease buying from foreign suppliers by 2018.
Citing the government’s plan to expand electricity access to some 300 million poor Indians currently not served, he challenged environmentalists and scientists to find a mass solution that would bypass the use of cheap coal as a feedstock.
While his ministry was also pushing for the expansion of renewable energy production and consumption, he said coal-generated electricity will remain the main energy source for years to come.
He said India’s development imperatives will take precedence ahead of the environment and the world’s climate concerns.
As part of his election platform, Prime Minister Modi said his government would lay the foundation for round-the-clock electricity supply to all Indians — 1.2 billion — by 2022.
(EnergyAsia, November 20 2014, Thursday) — Singapore and Malaysia should cooperate to jointly create a location and pricing service to serve the fast-growing liquefied natural gas trade (LNG) in Asia, said the CEO of Singapore’s state-owned Pavilion Energy Pte Ltd. Seah Moon Ming said Asia urgently needs transparent LNG pricing and price discovery that are…
(EnergyAsia, November 19 2014, Wednesday) — Japan’s trade ministry has given Abu Dhabi an expanded and extended lease to store crude oil for free at a terminal on one of the Asian country’s southwestern islands.
The original five-year lease for Abu Dhabi to store 600 million litres or 3.8 million barrels of crude at the Kiire terminal in Kagoshima prefecture expired recently. The Middle Eastern producer, the second largest oil supplier to Japan, will now be allowed to store one billion litres or 6.3 million barrels for three years to 2017.
The extension agreement was signed by Japan’s vice minister of economy, trade and industry Yosuke Takagi and Hamad Al Hurr Al Suwaidi, a member of Abu Dhabi’s Supreme Petroleum Council in Abu Dhabi last week.
(EnergyAsia, November 18 2014, Tuesday) — India’s Adani Group said it has secured agreements from the Indian government and Australia’s Queensland state to support its proposed US$7 billion investment to develop the Carmichael coal mine and rail and port infrastructure.
The six-month-old government of Prime Minister Narendra Modi views the project as helping to secure long-term coal supply for India’s fuel-starved power plants while Queensland state wants to stanch further job losses and mine closures amid the continuing slump in global coal demand and prices.
The Mumbai-listed energy and infrastructure company said it has signed a memorandum of understanding with the State Bank of India for a loan of up to US$1 billion to help its development and start-up of the Carmichael mine in Queensland by end-2017.
Adani also said the Queensland state government has agreed to make short-term, minority investments in rail and port infrastructure to support the development of massive coal reserves in the Galilee Basin. The largely untouched region holds one of the world’s largest untapped coal reserves.
The company’s founding chairman, Gautam Adani, a close ally of Indian Prime Minister Narendra Modi, was in Australia last week to meet with political and business leaders who attended the summit of G20 countries.
In bringing on board what Adani Mining CEO Jeyakumar Janakaraj has described as valued partners, the company is looking to shore up its financial and political support for what is shaping up as its most challenging project in memory.
Adani has delayed making a final investment decision on the long-delayed Carmichael project amid the prolonged downturn in coal prices and growing opposition from environmental and labour rights groups. There have been reports that the company, which has a net debt of US$13 billion, is unable to justify the high cost of this risky frontier project.
Adani is also facing criticism from scientists, green groups and even the UN that the project will cause serious long-term damage to the nearby Great Barrier Reef as coal ash and dredging to develop a coal port will kill off sensitive marine life in what is one of the world’s most important natural parks.
Adani expects to start construction early next year in time for the mine to begin production from the 60-million-tonne/year mine in 2017. To help speed up the project’s development, the company has appointed Morgan Stanley to help sell a minority stake in the port of Abbot Point located near the Great Barrier Reef.
(EnergyAsia, November 17 2014, Monday) — Chinese firms are slowing down their oil stockbuilding in response to expectations that their nation’s economy will grow at a slower pace while oil prices could decline further after hitting a four-year low last week.
Last month, the World Bank slashed its forecast for China’s economic growth to 7.4% in 2014 and to slightly above 7% in 2015 and 2016. These numbers are significantly down from its previous forecasts for the Chinese economy to grow by 7.6% for 2014 and 7.5% for 2015.
Traders and the International Energy Agency (IEA) believe oil prices could fall further after crashing last week to their lowest levels in four years with Brent crude selling for just over US$77 a barrel and US WTI going under US$75.
Chinese buying to build inventory has been cited as a key reason for oil prices holding above US$100 a barrel for the first half of the year.
Traders estimate Chinese state-owned firms bought a record of 20 to 25 million barrels of mostly Middle Eastern crude in October. Most of the cargoes have been put into storage at the country’s expanded strategic stockpiling bases, which Beijing is targeting to meet the equivalent of 100 days of imports, or about 650 to 700 million barrels, by 2020. The state-owned tanks are believed to hold at least 140 million barrels now, with private companies holding an unknown quantity.
But their buying spree could be slowing down amid the growing bearish outlook on the oil markets and the
Chinese economy. China’s domestic oil demand growth has slowed sharply, to just 1.8% for the first nine months this year over the same period last year. However, its imports have surged by more than 8% year-on-year, implying that most of the purchases have gone into stockbuilding.
The IEA took note of China’s active stockbuilding activities in its April report on the global markets when it said the country’s crude import reached a record high 6.81 million b/d for the month.
Amid “an unprecedented crude stock build of 1.4 million b/d” in April, the IEA said China might have begun filling a recently completed expansion of its strategic petroleum reserve facilities, and help support crude prices staying above US$100 a barrel.
“How Chinese importers plan to use those barrels remains an open question. Reports of Chinese budget allocations to expand strategic reserves suggest that the oil is going into storage, a view backed by the fact that some of the Chinese ports where crude imports rose the most border the new strategic facilities in Tianjin and Huangdao,” it said.
Taking a medium-term view, the IEA said it expects China’s oil demand to rise to 12 million b/d in 2018 from 9.84 million b/d in 2009 and 4.6 million b/d in 2000.
The country’s domestic crude production is expected to rise from 4.13 million b/d in 2012 to 4.4 million b/d, far from sufficient to meet the growth ind omestic demand. As such, China’s dependence on oil imports is expected to surge
The EIA said the Chinese government has committed to building storage facilities to hold 500 million barrels of strategic petroleum reserves (SPR) by 2020. The project is being implemented in three phases, starting with four storage facilities completed by 2010 to hold 103 million barrels of crude oil.
Citing China National Petroleum Corp’s 2011 yearbook, the IEA said China plans to build another 207 million barrels in eight locations under the SPR’s second phase.
“However, as the government treats the SPR as a state secret, information on capacity increases and stock levels remains elusive. According to public information, it is likely that the second phase will include more than 207 million barrels of storage capacity. Although completion of the second phase was forecast for the end of 2013, it appears that it has been delayed until 2015.”
In the current third phase, the IEA believes Beijing plans to build between 150 million and 200 million barrels of new capacity, thus raising the nation’s state-owned strategic reserves to 500 million barrels by 2020. Construction of the sites under SPR3 has not started, said the IEA.
At the same time, Beijing is also encouraging domestic private companies to develop and operate their own commercial reserves to help meet China’s fast-growing domestic oil demand.
Chinese refiners are expected to add some four million b/d of capacity by 2018, raising demand for storage terminals to handle both crude and refined products.
The IEA said it does not have clear information about China’s total commercial inventory level as there is “an unclear distinction between SPR sites and commercial storage.”
(EnergyAsia, November 14 2014, Friday) — The oil markets continued crashing late into Thursday in the New York with North Sea Brent settling well below support at US$80 a barrel while US WTI broke through US$75. Brent settled at US$77.83, down US$2.46 from the previous day, while WTI was hovering at around US$74.42 in late…
(EnergyAsia, November 14 2014, Friday) — The state gas companies of Turkmenistan, Afghanistan, Pakistan, and India have established a company that will build, own and operate a planned 1,800-km pipeline linking the four countries, said Asian Development Bank (ADB) which was appointed project adviser last November. The Turkmenistan-Afghanistan-Pakistan-India (TAPI) gas pipeline will be equally owned…
(EnergyAsia, November 13 2014, Thursday) — Malaysian state energy firm Petronas said it will fully own Malaysian Refining Company Sdn Bhd (MRC) when it completes the buy-out of its US partner’s 47% stake for US$635 million in cash. Petronas will take full control of MRC’s 170,000 b/d refinery in Melaka state on the west coast…
(EnergyAsia, November 12 2014, Wednesday) — Having invested a total of US$73 billion in upstream assets over the last three years, Chinese state-owned firms now control around seven percent of global crude oil production of over 93 million b/d, said the International Energy Agency (IEA).
While the deals are driven by commercial interests, the IEA said “some quarters” have expressed concern that the Chinese government might leverage its growing oil and gas holdings to advance its foreign policy interest, influence world prices, and impinge on the supply security of other nations.
To address these concerns, the IEA, which represent the world’s 28 leading oil consumers, said it investigated Chinese state firms’ spending, and produced two reports in 2011 and this year.
The first report, “Overseas Investments by China’s National Oil Companies: Assessing the Drivers and Impacts” which quantified the size and growth of investments, found that Chinese firms had been responsible for 61% of acquisitions by all state-owned firms in 2009, and that their investments had helped boost global oil and gas supplies.
A follow-up study, “Update on Overseas Investments by China’s Oil Companies”, published this year affirmed the 2011 findings as China raised its overseas oil and gas production to a total of 2.5 million b/d.
Importantly, the IEA said its two studies “did not find cause to believe that the Chinese (firms) operate under the direct instructions of, or in close co-ordination with, the central government. Instead, the studies determined that the companies, especially the big three – China National Petroleum Corp (CNPC), parent company of PetroChina; China Petroleum & Chemical Corporation (Sinopec Group); and China National Offshore Oil Corp (CNOOC) – had benefitted from three decades of economic reforms to gain a great deal of power in relation to the government.”
China’s soaring domestic energy consumption has increased the state firms’ financial and economic impact, giving them the means to lobby for greater influence, said the IEA.
With domestic production stalled at just over 4 million b/d for the past two years, imports have risen to meet 59% of Chinese demand – which grew 3% last year and is expected to overtake that of the US in 2030.
While the firms remain primarily owned by the state, the studies found that they have carved out significant operational and investment independence from the government because of their historical associations with former ministries, said the IEA.
It found that top company officials held high ranks within the Communist Party, Chinese firms have a fragmented and decentralised governance structure while their enormous sizes and lobbying power give them an advantage over the government agencies tasked with overseeing them.
The IEA said it did not find evidence that Beijing requires the companies to ship back overseas production to China, as some critics have suggested.
Instead, it found that the firms made decisions on distributing and marketing their equity oil mainly based on commercial considerations, and the terms set by their production-sharing contract, or both.
“The IEA report (2011) disproved the common misconception that China’s national oil companies (NOCs) were acting overseas under the instruction of the Chinese government,” the 2014 study said, adding that “further research conducted for this updated publication has uncovered no evidence to suggest that the Chinese government imposes a quota on the NOCs regarding the amount of their overseas oil that they must ship to China”.
Change in investment behaviour
The latest study uncovered two important changes in Chinese investment behaviour: the companies’ new emphasis on investment in unconventional oil and gas, and a reorientation from high-risk regions to areas with more stable geopolitics.
The recalibration has come as countries in the Americas and Australia have been more welcoming of Chinese investment, while investments in other regions have had less success amid rising nationalism and political uncertainty, said the IEA.
The first significant setback for Chinese investment was in Sudan. Chinese state firms are the biggest investors in South Sudan’s oil industry, but the investment was made before the new nation came into existence as a result of separation from the old Sudan.
Sudan was among the very first countries to attract Chinese interest, with activities dating back to 1995. That involvement forced China to weather international scrutiny during the Darfur crisis, but by 2010, Chinese equity production in the country, most of whose oil fields are in the south, was 210 000 b/d.
After South Sudan’s 2011 independence, oil transport negotiations deadlocked, and by early 2012, nearly 900 Chinese-operated wells were shut or forced to reduce production. South Sudan expelled President Liu Yingcai of the Chinese-Malaysian oil consortium Petrodar for “non-cooperation”.
By the end of 2013, CNPC and Sinopec reported oil production of only 84,000 b/d in South Sudan and Sudan.
Unrest in South Sudan has not gone away, with intermittent fighting this year. But contrary to the position it adopted during the so-called Arab Spring and in Syria in particular, the Chinese government has sought to be a major mediator among the various factions.
Similarly, unrest in Iraq continues to threaten Chinese firms’ combined 472,000 b/d production entitlement – 25% of all Chinese overseas oil output. China has long viewed Iraq as a replacement for reduced flow from Iran.
Since 2007, Chinese firms have invested no less than US$14 billion in Iranian oil and gas fields. As a result, Iran became China’s third-largest oil supplier in 2010 and 2011 to account for 11% of total imports. But the effects of international sanctions dropped Iran to sixth place as of the end of 2013, just after Iraq and well behind top-ranked Saudi Arabia, which provides about half of all imports.
According to the IEA, Libya also has been a deep disappointment as the country’s growing conflict has slashed exports to China by more than one-third, to 0.8% of total imports in 2013. Beijing also had to arrange an emergency plan to evacuate 35,000 Chinese nationals from the country during the overthrow of the Gaddafi regime, and it subsequently has been involved in complex discussions concerning its pre-2011 contracts.
In Syria, Chinese companies saw their combined equity production fall from 84,000 b/d to less than 53,000 b/d in 2011. By end-2013, only Sinochem was still operating and its production came to a measly 2.5,000 b/d, said the IEA.
Security challenges have affected Chinese operations in Myanmar and Nigeria and potentially in Central Asia, where the competitive edge held from early entry is threatened by growing ethnic tensions and terrorist threats in the some of the five countries through which the Central Asia-China pipelines run. More trouble may follow, as CNPC successfully bid in 2012 to be among the first companies to explore for oil and gas in Afghanistan.
In Africa, the IEA, said Chinese firms face the risk of contract disputes in Niger and Chad.
The companies have had greater success in Russia, Saudi Arabia and Central Asian countries such as Turkmenistan and Kazakhstan, where energy deals have been combined with other investment.
Sinopec entered the refining industry in Saudi Arabia by investing US$4.5 billion in the company’s first international downstream deal. A loan-for-gas deal with Turkmenistan secured 25 billion cubic metres (bcm) of gas supply, bringing total supply capacity to 65 bcm per year.
Benefits from increased co-operation with Western firms
Increasingly, the Chinese firms are looking to invest in more stable regions as well as step up co-operation and co-ordination with independent oil companies of Western countries, said the IEA.
Every Chinese state firm has expanded its global production portfolio significantly, particularly in North America and Australia, usually through direct acquisition when possible.
The IEA estimated that last year state-owned and smaller Chinese companies invested a total US$38 billion in global upstream oil and gas mergers and acquisitions, up from US$15 billion in 2012 and US$20 billion in 2011. This shift of investment focus also has improved China’s upstream knowledge and techniques that it intends to use for domestic production.
The National Energy Administration addressed research, development and demonstration projects in 2012’s 12th Five-Year Plan for Energy Technology, which calls for domestic development of shale gas, heavy oil and other unconventional energy sources. The Ministry of Land and Resources estimates that domestic shale gas reserves exceed the US’, and expertise from state firms’ investments in foreign companies could help develop those reserves.
International majors including Shell, ConocoPhillips, ENI and Total have co-operation accords with Chinese firms to conduct seismic surveys, exploration, and joint research to develop shale gas and oil blocks in China.
But the IEA also cautioned that there are significant differences between US and Chinese reserves, which will mean a potentially challenging adaptation of North American drilling technologies to China’s geological specifications.
Commercial influences on foreign policy
The IEA’s studies addressed the concerns of other countries towards the state firms’ role in China’s expansion of oil and gas investment abroad.
Given 21 years of surging investment in countries around the world, the IEA said it was inevitable that Chinese firms would run into challenges and generate concerns.
The IE said its studies found that the companies have relied heavily on Beijing’s support in the Middle East and in Sudan and South Sudan, raising two questions: will China’s commercial interests help shape the country’s foreign policy in these regions, and to what extent does the existence of substantial energy and other commercial investments already influence China’s diplomatic decisions?
The IEA described the firms will face their greatest challenge in managing their business interests that are highly dependent on the evolution of Chinese foreign policy. For now, the firms are still charging ahead with overseas expansions and keep the pressure on both themselves and their government.
Given their growing presence and potential impact on global energy security and engagement, the IEA said it will “carefully monitor” ongoing investment by all state-owned firms around the world.
While the Chinese firms’ overseas investments may have originated as primarily commercial moves, the IEA said recent events have politicised many of them.
The IEA said it “is among many observers watching how the Chinese NOCs and their government find ways to work with each other – and other players in the global energy sector – to reconcile these political and security issues.”
(EnergyAsia, November 11 2014, Tuesday) — Utilities representing nearly 95% of India’s 78,000MW of coal-fired power capacity have secured feedstock through supply contracts with state-owned Coal India Limited (CIL), said the Coal Ministry.
But doubts persist as to whether the underachieving CIL will be able to even deliver on the 161 fuel supply agreements to the utilities which control a combined generation capacity of 73,675 MW. As it is, despite pressure from the Coal Ministry and the Cabinet Committee on Economic Affair (CCEA), CIL and the power industry have failed to meet the September 2013 deadline to seal all 172 supply agreements for 78,000MW of India’s coal-fired power capacity.
The Coal Ministry said the company, which accounts for 80% of India’s domestic coal production, has been unable to conclude the agreements with companies that are undergoing ownership restructuring or making their own supply arrangements.
The utilities with existing supply deals with CIL complain they often encounter supply disruptions and problems with the fuel quality of the coal delivered.
According to the Central Electricity Authority (CEA), coal stockpiles at India’s 103 main coal-fired power plants last month plunged to a 25-year low of 7.2 million tonnes, sufficient to meet just several days of consumption. This comprised 6.58 million tonnes of domestically produced coal and 706,000 tonnes of imports.
The Coal Ministry laid the blame on CIL and its subsidiaries for not meeting their production targets. Without sufficient coal supply, more than 60 thermal power stations were forced to sharply reduce operations, contributing to brownouts and power supply disruptions to several major cities across the country.
CIL produced 462 million tonnes in the last fiscal year to March 31 2014, significantly below its target of 482 million tonnes. Analysts doubt the company will achieve its latest production target of 507 million tonnes in the current fiscal year to March 31 2015.
(EnergyAsia, November 10 2014, Monday) — India’s coal imports are expected to continue rising through the decade to feed the country’s growing power demand that is being helped by the protracted weakness in the fuel’s price. Amid slumping demand and oversupply around the world, thermal coal prices are holding near a five-year low with little prospects of recovery in the near-term.
Japan’s leading energy think tank has forecast India’s thermal coal imports to rise by 4% to 135 million tons in 2014, and by another 4% to 141 million tons next year.
The pace of coal demand and import growth has picked up speed since the nation’s May 2014 general election which has swept the government of Narendra Modi to power, said Koji Morita, a board member at the Institute of Energy Economics Japan (IEEJ).
Taking a long-term view, another IEEJ scholar, Shoichi Itoh, has projected Indian coal imports to rise from around 100 million tons in 2011 to 350 million tons by 2035.
Glencore, the Switzerland-based commodities trader, is even more bullish as it expects Indian imports of thermal, metallurgical and coking coal to rise from a total of180 million tons next year to 300 million tons by 2020, to possibly overtake China as the world’s biggest buyer of the fuel.
Analysts believe India’s appetite for coal will remain strong as global prices are likely to languish for some years on account of weaker demand in other parts of the world. China, the world’s leading coal importer and consumer, is planning to reduce its dependency on the fuel in favour of natural gas to fight climate change and pollution.
Helped by the plunge in world coal prices, India boosted its import of the fuel by nearly 18.5% to more than 110 million tons in the first half of the current 2014 financial year compared with the same period last year, accoding to an analysis by MoneyControl.
(EnergyAsia, November 7 2014, Friday) — One of the world’s largest bitumen terminals with the capacity to store 74,000 tonnes of the petroleum product for paving roads officially started up in Malaysia’s Johor state this week. Puma Energy, a Singapore-based global integrated midstream and downstream energy company, said it held an opening ceremony for the…
(EnergyAsia, November 6 2014, Thursday) — Crude’s relentless drive to test new lows was briefly interrupted on the overnight New York markets by unconfirmed fears of a terror attack in Saudi Arabia and a smaller-than-expected buildup in US crude stocks. US WTI touched a low of US$76.46 a barrel while North Sea slumped to US$81.63…
(EnergyAsia, November 5 2014, Wednesday) — As part of its reform programme to solve India’s domestic energy crisis, the six-month-old government to Prime Minister Narendra Modi is planning to speed up
the development of 90 state-owned coal mines as well as auction off more than 70 others that it recently reclaimed from private companies.
The coal ministry appears to be gaining the upper hand against the powerful Coal India Limited, which accounts for 80% of the country’s domestic coal production, with its order to the state firm to immediately develop 90 of its 150 mines. The ministry is also planning to start auctioning off 72 coal blocks that have sat idle for the last two decades and are now ready to be developed after the Supreme Court revoked the licences of the private firms to mine the deposits.
India badly needs to exploit its domestic coal reserves, the world’s fifth largest according to BP, to supply its mostly coal-fired power plants that have often operated well below capacity due largely to the unreliable supply of feedstock.
The ministry has identified the 90 mines, which have a combined annual production capacity of more than 400 million tonnes, as ready for development, implying that CIL has failed in its supply role. CIL’s coal output of 462 million tonnes last year fell short of target by 20 million tonnes.
As a result, Indian power companies have been forced to import coal from other countries at high cost. India’s coal imports are on course to reach a record of more than 200 million tonnes this year after rising from 145 million tonnes in 2012 to 171 million tonnes last year.
The government is also preparing to open up the country’s inefficient coal sector to foreign investment, breaking decades of protectionism and incurring the wrath of powerful businesses and unions who see a common threat from any inflow of expertise and capital from abroad. The unions representing India’s coal workers, with the tacit support of business groups, are planning a national strike on November 24 unless the government repeals its ordinance passed on October 21 to open the coal sector to foreign investment.
(EnergyAsia, November 4 2014, Tuesday) — Malaysia’s state-owned energy firm Petronas has signed an agreement with a subsidiary of Singapore’s Keppel Corp for the annual supply of one million tonnes of liquefied natural gas (LNG) for 10 years. The Singapore firm said Keppel Infrastructure Holdings Pte Ltd (Keppel Infrastructure) signed the heads of agreement through…
(EnergyAsia, November 3 2014, Monday) — Singapore, the world’s largest port for supplying shipping fuels, plans to add cleaner-burning liquefied natural gas (LNG) to the list by 2020, said its transport minister. Speaking at an industry event, Lui Tuck Yew said Singapore might even offer LNG as a bunkering fuel before that as it plans…