What oil at $100 a barrel would mean for the world economy
Surging crude prices are posing another headwind for the world economy after President Donald Trump’s “zero” pledge on Iran oil sales. Brent crude has risen about 33 percent this year and is close to the highest in six months. While higher prices due to strong demand typically reflects a robust world economy, a shock from constrained supply is a negative. Much will depend on how sustained the spike proves to be. Exporting nations will enjoy a boost to corporate and government revenues, while consuming nations will bear the cost at the pump, potentially fanning inflation and hurting demand. Ultimately, there comes a point where higher prices may be damaging to everyone. 1. What does it mean for global growth? The impact will vary. Rising oil prices will hurt household income and spending and it could accelerate inflation. As the world’s biggest importer of oil, China is vulnerable, and many countries in Europe also rely on imported energy. Seasonal effects will also impact. With the Northern Hemisphere summer approaching, consumers can switch energy sources and scale back usage. A slowing world economy will also hurt demand and by extension keep a lid on prices. 2. How can the world economy absorb oil at $100? For a sustained hit to growth, economists say oil would need to hold above $100. It also depends on dollar strength or weakness, given crude is priced in greenbacks. Analysis by Oxford Economics found that Brent at $100 per barrel by the end of 2019 means the level of global gross domestic product would be 0.6 percent lower than currently projected by end-2020, with inflation on average 0.7 percentage points higher. “We see increased risks of significantly higher oil prices,” Oxford economists John Payne and Gabriel Sterne wrote in a note. “In the short-run, it is likely the supply impact will be offset by higher production elsewhere, but the market is tightening and all it would take is one more shock to supply and oil could reach $100.” 3. How will Iran and Trump impact the market? An upending of global oil trade around the Iran-Trump spat could continue to have a sizable impact on financial markets, as the affected supply is as much as 800,000 barrels a day. Uncertainties around availability have already whipsawed oil markets. And the political sensitivities of these developments have other markets bracing for volatility. Trump has pledged to help, alongside Saudi Arabia and the U.A.E., those needing to shift orders from Iran to another supplier. But U.S. claims that its domestic supply can help offset the loss are a high bar to meet, given that the daily American output for similar crude is about a quarter of Iran’s. 4. Who wins from higher oil prices? Emerging economies dominate the list of oil-producing nations which is why they’re affected more than developed ones. The increase in revenues will help to repair budgets and current account deficits, allowing governments to increase spending that will spur investment. Winners include Saudi Arabia, Russia, Norway, Nigeria and Ecuador according to analysis by Nomura. 5. Who loses? Those emerging economies nursing current account and fiscal deficits run the risk of large capital outflows and weaker currencies, which in turn would spark inflation. That, in turn, will force governments and central banks to weigh up their options: hike interest rates even as growth slows or ride it out and risk capital flight. Nomura’s losers list includes Turkey, Ukraine, and India. 6. What does it mean for the world’s biggest economy? While U.S. oil producers try to take advantage of any sales boost from customers moving away from Iran, the broader U.S. economy won’t necessarily see benefits with oil price tags as high as $100 a barrel. It would be a squeeze on American consumers that are the backbone of still-steady economic growth. Prices at the gas pump already have risen more than 7 percent this month to $2.89 a gallon, which could weigh on retail sales that jumped in March by the most since 2017. And if things go awry in global oil markets, there’s a risk that political blame shifts back to the U.S. for the sanctions, which could mean backlash via investment or other channels that threaten economic stability. 7. Will it lead to higher inflation around the world? Because energy features prominently in consumer price gauges, policymakers look to core indexes that remove volatile components. If the run-up in prices proves to be substantial and sustained, those costs will filter through to transportation and utilities. 8. What does it mean for central banks? Led by the Federal Reserve, central banks around the world have taken a dovish tilt as the absence of inflation allows policymakers to shift their focus to slowing growth. That’s unlikely to quickly change. The International Monetary Fund this month lowered its global growth forecast and said the world is in a “delicate moment.”
PetroChina Q1 profit flat as weak fuel business offsets exploration gains
PetroChina said on Monday its first-quarter net profit edged up 1 percent from a year earlier as a weaker refined fuel business offset strong growth at its exploration and production segment. The state-controlled giant, Asia’s largest oil and gas producer, said net profit in the January-March period was 10.255 billion yuan ($1.52 billion), versus 10.15 billion a year ago. Total revenue grew 8.9 percent during the period to 591 billion yuan, the firm said in a filing to the Hong Kong Stock Exchange. It is still the lowest quarterly revenue since the second-quarter of 2018. PetroChina’s crude oil production rose 4.6 percent during the period to 223.4 million barrels, and output of natural gas expanded 8.9 percent to 999.9 billion cubic feet. Its dominant exploration and production business reaped in operating profit of 14.33 billion yuan in the first three months of the year, up 47 percent over a year earlier. The group’s crude oil throughput rose 3.3 percent to 291.6 million barrels, or 3.24 million barrels per day. First-quarter operating profit from the refining and chemical segment, however, shrank by 64 percent to 2.999 billon yuan, because of inventory loss in refined fuel products and also weakening margins in petrochemicals production. The natural gas import business – including piped gas and liquefied natural gas – suffered a net loss of about 3.3 billion yuan, narrowing from the 5.82 billion loss a year earlier, thanks to higher sales, the firm said. The state firm has for years suffered heavy losses in the gas import business because the cost of gas imports often exceeds the government-capped domestic prices. PetroChina’s Hong Kong share prices are up 3.7 percent so far in 2019, underperforming the 21 percent rise of its domestic peer CNOOC Ltd and the 23 percent jump of the Shanghai Composite index over the same period.
Qatar expected to add 30 MTPA to global LNG production in 2025-26
The year 2018 witnessed an important change of direction in the commissioning of new LNG projects. Stronger global market conditions led to new LNG projects getting approval in the past year. A larger volume of new proposed production received FID (final investment decisions) in 2018 than in the prior 3 years combined, MENA Advisors noted in its latest report. According to the report, Qatar is expected to add 30 MTPA (million tonnes per annum) to the global LNG production in 2025-26, taking the global production to over 500 MTPA, up by over 60 percent from 2008. A total of 21.5 MTPA (6 percent of existing capacity) received FID in 2018 and a further 15.6 MTPA reached FID in February 2019 with a number of other large US projects expected to reach FID this year. According to MENA Advisor, the global LNG market had a good year in 2018. LNG trade grew 10 percent, following on from strong growth of 12 percent in 2017. In particular, demand from Asia, mainly China and South Korea, grew strongly as the region looks to natural gas to reduce the negative impact on air quality of other energy sources, mainly coal. Additionally, most LNG prices globally followed an upward trend in 2018, thanks to strong demand growth and also as a result of higher oil prices, which has a knock-on impact on the LNG market. The new commissions come in addition to 101 MTPA of production capacity that is already under construction, equivalent to 26 percent of 2018 production capacity, having been commissioned before the sharp drop in oil prices in 2014. Additionally, LNG spot prices have softened during 2019 due to a slowdown in demand from Asia. However, analysts at the MENA Advisors argue that the global LNG market will not be oversupplied, at least in the next seven years. “Facilities already under construction mean that there should be a fairly sharp increase in production capacity in 2019 and 2020, before plateauing in 2021-24. Most of these new additions will come from the US and Australia. We expect Qatar to add 30 MTPA in 2025-26, taking global production to over 500 MTPA, up by over 60% from 2018,” they said. For this additional capacity to be fully utilised, demand would need to grow at just over 6 percent. This is not out of line with historical demand growth, which has averaged 6.4 percent since 2000, nor with recent demand growth, which has risen to an average of 11 percent over the last two years as Asian countries have voraciously switched to gas as a cheap and clean source of energy. Additionally, many countries, mainly China and India, continue to build out regasification facilities, which are needed to receive LNG, in a positive indication for future demand growth. Despite these strong drivers, slower growth in the global economy, especially China, could lead to slower growth in demand for LNG. However, even if demand growth fell short and grew at 3 percent per year on average out to 2026, this would be sufficient to maintain the utilisation of production capacity in 2018, which was 80 percent.
Modi’s ‘free cooking gas’ leaves bitter taste for some Indians
Reena Devi says her life changed when she got a cooking gas connection under a billion-dollar programme championed by Prime Minister Narendra Modi, meaning she no longer has to cook with wood or coal and breathe in smelly, toxic fumes. But the programme to connect millions of homes to gas, empower women and cut pollution — designed as a key vote-winning policy for Modi – has been beset by allegations of corruption and misuse. Devi says she had to pay 3,000 rupees ($43) for the “free” kit — the equivalent of a month’s wages for most people in her village Nisarpura, in India’s poorest state, Bihar. “I pleaded with the officials that this is supposed to be free but they gave me two options: Pay and take the kit or forget it,” Devi said, rolling out bread to be cooked on the stove. Critics say the programme has been marred by bribes and corruption and that the poor households targeted by the scheme cannot afford to pay for gas refills, pushing those who have received new stoves back to traditional fuels. But the prime minister, seeking a second term in India’s marathon national election, has touted the cooking gas scheme a success as he campaigns around the country. Batting away criticism, the Bharatiya Janata Party (BJP) government says more than 70 million poor households across India now have gas stoves. Modi launched his “Ujjwala Yojana” (“bright scheme”) in May 2016, and is aiming to connect 80 million rural households to gas by 2022. Household pollution is a serious health hazard in India, with a World Health Organization (WHO) report saying that smoke inhaled by women from unclean fuel is a major cause of cancer, heart disease and strokes. In a bid to move India towards clean energy, the scheme offers recipients a loan of 1,600 rupees ($23) that covers the cost of the stove, connection pipes, regulator and a gas canister. The loan is supposed to be paid back through the purchase of subsidised gas refills. In Nisarpura, Jamintra Devi applied for a connection but local officials would not give it unless she paid a bribe. “We come back from work at midnight or 1:00am and then we have to cook on wood,” said Devi, who is not related to Reena. Some recipients say their kits have effectively been repossessed. Shahjahan Khatoon, from an impoverished neighbourhood of the state capital, Patna, enrolled in the scheme in January 2018. Two months later, officials distributing gas canisters came to her home looking for money. She had already paid them 700 rupees ($10) to get the connection, but they demanded 4,000 rupees more — far beyond her means. “I told them that I don’t have money. They removed the gas cylinder and stove and left,” Khatoon told AFP. “I was in the middle of cooking lunch and they didn’t even let me finish the meal.” A senior member of the ruling party also drew online ridicule this month after posting a video of himself with a family in eastern India — which showed the family burning firewood under a traditional earth stove. The government set aside 80 billion rupees ($1.14 billion) when the scheme was launched to fund the gas connections which it said would “empower” women, and have since extended that to 120 billion rupees. The red gas canisters are emblazoned with the slogan “respecting the dignity of women”, and only women can qualify for the project. In Bihar state alone, eight million people have received cooking gas connections, but a study by the Indian non-profit Research Institute for Compassionate Economics this month said 36 percent of households in four of India’s largest states, including Bihar, still use traditional fuel. Despite sometimes patchy success, the WHO last year praised the scheme, saying that in two years it had helped 37 million women living below the poverty line to move to clean energy. But the pressure of fluctuating gas prices could force many poor Indians back towards using wood, coal or cow dung instead. Sanjay Kumar, a gas canister distributor in Patna, has around 5,000 customers who have gas connections from Modi’s programme. But at least half stop buying refills and return to traditional fuel if prices rise even slightly, he said. “Our country is still poor. Families in rural India still can’t afford refills when the rates are high.”
HPCL-MRPL merger hits cash hurdle; ONGC rules out share-swap
Hindustan Petroleum Corp’s plans to acquire Mangalore Refinery and Petrochemicals (MRPL) has hit a cash hurdle, with parent ONGC preferring a cash deal rather than a share-swap, sources aware of the development said. Oil and Natural Gas Corp (ONGC), India’s biggest oil and gas producer, last year completed acquisition of Hindustan Petroleum Corp (HPCL) for Rs 36,915 crore. After this takeover, ONGC has two refining subsidiaries — HPCL and MRPL. Since then, HPCL is keen to get MRPL in its fold citing operational synergies. It has been talking of a combination of cash and share-swap for the deal that will make it India’s third-largest oil refiner. But now, ONGC wants only cash as HPCL shares are on the slide. ONGC acquired the government’s 51.11 per cent stake in HPCL in January 2018 at Rs 473.97 per share. The same share of HPCL on Friday closed at Rs 282.60, a massive 40 per cent loss in value in 15 months. Sources said HPCL has not yet come up with a concrete proposal for acquiring MRPL and has been talking about the deal mostly through the Oil Ministry and the media. ONGC, they said, wants HPCL to make a compelling offer to it for the merger talks to begin. ONGC holds 71.63 per cent stake in MRPL. HPCL can acquire MRPL by buying out ONGC’s shares, which at Friday’s trading price is worth about Rs 9,300 crore. The other option is share-swap, wherein ONGC will get more shares in HPCL in lieu of it giving up control in MRPL. A third option and more preferable is a combination of the two. Sources said ONGC feels it does not want to end up with more shares of HPCL whose value has been on the decline on the stock market. HPCL currently holds 16.96 per cent stake in MRPL. HPCL Chairman and Managing Director Mukesh Kumar Surana has been since January 2018 talking of the synergy MRPL acquisition will bring to the company. For one, HPCL sells more petroleum products than it produces and bringing MRPL’s 15 million tonne a year refinery under the fold would help bridge the shortfall. Also, there can be synergies in crude oil procurement as well as in optimising refinery set-up, he has been saying. Sources, however, said HPCL has not made any firm proposal for the acquisition to ONGC. MRPL is not a new company for HPCL. It was an HPCL company before ONGC in 2003 acquired joint venture partner A V Birla Group’s stake. HPCL has 23.8 million tonnes of annual oil refining capacity. Together with 15 million tonnes refinery of MRPL, it will become India’s second-biggest state-owned oil refiner after Indian Oil Corp (IOC). Overall, it will become the third biggest refiner behind IOC and Reliance Industries. MRPL will be the third refinery of HPCL, which already has units at Mumbai and Visakhapatnam.
Qatar emerges as front-runner for long-term LNG deal for Pakistan
Qatar has emerged as the front-runner for a long-term gas supply deal to Pakistan, a senior Pakistani official said on Friday, with the cabinet of Prime Minister Imran Khan set to decide in the coming weeks on an agreement. Pakistan, with 208 million people, is running out of domestic gas and has turned to liquefied natural gas (LNG) imports to alleviate chronic energy shortages that have hindered its economy and led to a decade of electricity blackouts. Qatar is already Pakistan’s biggest gas supplier after signing a 15-year agreement to export up to 3.75 million tonnes of LNG a year to the South Asian country. That 2016 deal supplied Pakistan’s first LNG terminal. Emerging as one of the world’s fastest growing LNG markets, Pakistan is looking to secure a long-term supply contracts for its second LNG terminal, which can receive 600 million cubic feet per day (mmcfd) of natural gas. Pakistan has already signed a five-year import deal with commodity trader Gunvor and a 15-year agreement with Italy’s Eni, but is seeking long-term agreements for about 400 mmcfd. Pakistan has been negotiating with eight countries with whom it has signed inter-governmental agreements in recent years, including Qatar, Russia, Turkey, Italy, Oman, Azerbaijan, Malaysia, and Indonesia. A Saudi Arabian delegation representing state-owned Saudi Aramco has also shown interest in a gas deal. The senior Pakistani official told Reuters that state-run Qatargas put forward the lowest bid for a long-term LNG supply contract that would have a price review after five or 10 years. “Qatar has offered the lowest price,” said the official, declining to say the amount of LNG or the price offered by Qatar. Pakistan’s cabinet is in the next week or two expected to decide if it will proceed with a government-to-government deal, when it will also decide on the size, he said. Cash-strapped Pakistan is most likely to go with the cheapest supplier, in this case Qatar, officials have said. However, the government may choose more expensive rates to bolster its relations with a chosen country. Khan’s cabinet could also choose to put out an open tender for long-term agreements, said the senior official. However, some energy officials believe direct government-to-government deals could offer better rates than tendering. The Pakistani official added that Saudi Aramco may sign a long-term supply deal with Pakistan, potentially also providing some of the 400 mmcfd available at the second terminal.
Gazprom reports doubling of 2018 profit on record Europe sales
Russian gas producer Gazprom on Monday reported a doubling of annual net profit to 1.456 trillion roubles ($7.1 billion) led by record-high sales to Europe. Gazprom is a lynchpin of Russia’s commodity-dependent economy with its sales accounting for over 5 percent of country’s $1.6 trillion annual gross domestic product. Last year, Gazprom’s exports to European countries and Turkey reached a record-high of almost 202 billion cubic metres despite calls from the European Commission for EU states to diversify away from Russian energy imports amid wider political tensions. Gazprom has been going through an unprecedented management reshuffle which saw exports boss Alexander Medvedev and Andrey Kruglov, who oversaw the company’s finances, leaving the company. Alexei Miller, who is close to Russian President Vladimir Putin, is still at the company’s helm. The reasons behind the high-profile departures have not been revealed. Some analysts and sources have pointed to internal infighting and poor results of some of the company’s units, namely Gazprom Marketing & Trading. After record-high gas exports to Europe last year, Gazprom’s exports have declined this year, partly due to warmer weather. Gas sales to Europe account for almost 70 percent of Gazprom’s gas revenue. Gazprom’s share of the European gas market rose to a record high 36.7 percent last year from 34.7 percent in 2017. Revenue rose to 8.22 trillion roubles from 6.55 trillion in 2017, the company said.