Rising prices show tighter supplies of cleaner fuel for global shipping
The price of very low-sulfur fuel oil has risen in recent months, a sign of increasing worry there is not enough of the fuel to comply with new global shipping laws that took effect this year, market participants said. Very low-sulfur fuel oil (VLSFO) lately has started to trade at levels comparable to marine gasoil, a type of diesel fuel used by tankers. That is an indication that refineries may need to increase production of VLSFO as tankers shift from dirtier, high-sulfur fuel to a cleaner product to comply with International Maritime Organization regulations designed to reduce smog. Under those rules, shippers either need to use fuels with a sulfur content not exceeding 0.5 per cent, or install scrubbers that can clean higher-sulfur fuels to reduce emissions. The rules, known as IMO 2020, affect more than 50,000 merchant ships worldwide. Supply has tightened in trading markets in Asia and Europe and now in the United States. On Wednesday VLSFO in Houston traded at $642 per tonne, compared with $667 per tonne for marine gasoil, S&P Global Platts data showed. That $25 spread was at $152 half a year ago. That suggests not enough VLSFO is being produced and raises concerns about supply this coming spring when refiners go into maintenance season, said Rick Joswick, head of oil pricing and trade flow analytics at S&P Global Platts in New York. The spread in Singapore has narrowed to $15, while in Rotterdam it has narrowed to $3, S&P Global Platts data showed. Meanwhile, VLSFO stocks are also falling, Joswick said. “You can’t cover demand out of inventory forever,” he said. “Production has to pick up and trade flows have to shift.” “It means marine gasoil needs to be called upon to cover some of that demand,” Joswick added. The spread between VLSFO and high-sulfur fuel used by shippers that installed scrubbers was $330 per tonne in Singapore and $272 per tonne in Houston, S&P Global Platts data showed. That spread was greater than shipowners expected, benefiting tanker operators that installed scrubbers, shipping sources said. VLSFO demand could prompt refiners to increase supplies later this year, said Andy Lipow, president of Lipow Oil Associates in Houston. “This is a nice, high price for VLSFO. We’ll reach some new equilibrium,” he said.
Asia most dependent on Middle East crude oil, LNG supplies
Asia, the epicentre of growth for oil and gas demand globally, is the region most vulnerable to any disruption in supply from the Gulf in the event of further escalation in the war of words between Iran and the United States in Iraq. Most of Iraq’s crude oil exports from its southern Basra ports head to Asia, according to Refinitiv data. And an estimated 76 per cent of the 17.3 million barrels per day (bpd) of crude and condensate that flowed through the Strait of Hormuz in 2018 went to Asia, according to the U.S. Energy Information Administration (EIA). Asian refiners prefer to process Middle East crude grades as they are generally cheaper than oil from other regions due to relatively higher sulphur levels. Middle East oils also tend to be heavier grades, allowing refiners to further process residue fuel into higher-value products to boost revenue. The United States used to be a major importer of oil from the Middle East but its share has steadily declined in recent years on the back of its own shale oil boom. In 2018, U.S. oil imports passing through the Strait of Hormuz stood at 1.4 million bpd of oil and condensate, accounting for about 18 per cent of total U.S. crude and condensate imports and 7 per cent of total U.S. petroleum liquids consumption, according to the U.S. government. Here’s a breakdown of Middle East crude oil and liquefied natural gas (LNG) imports for each major Asian importing country. CHINA China, the world’s largest crude oil importer, buys about 40 per cent of its crude from the Middle East. While China’s imports are diversified, it is the largest Middle East oil buyer globally, at just over 4 million bpd. INDIA The second-biggest Asian oil importer gets nearly 60 per cent of its crude supplies from the Middle East. It is also the largest buyer of crude from Iraq, at just over 1 million bpd in 2019. JAPAN Japan has one of the highest proportion of Middle East oil in its imports at 88.5 per cent for the first 11 months of 2019. “Our policy is to keep a big stockpile so, even if the Middle East has a big disruption, as long as we have these reserves we will be OK,” a senior official from Japan’s trade ministry told Reuters. “We have enough supplies to last 200 days.” REST OF ASIA Despite efforts to diversify purchases beyond the Middle East, South Korea, Singapore and Taiwan still need to import 70-75 per cent of their crude from the Gulf. In southeast Asia, nearly half of Indonesia’s oil imports come from the Middle East, while almost all of Vietnam’s crude imports to feed the country’s second refinery are from Kuwait. Middle East crude accounted for 73 per cent of Philippines’ imports in the first half of 2019, government data showed. LNG Top three destinations for LNG from Qatar – the world’s top exporter – are South Korea, India and Japan, but those most reliant on Qatari LNG are Bangladesh, Pakistan and India.
Govt reviews IEA report on India’s energy policies
An in-depth review of a report on India’s energy policies by the International Energy Agency (IEA) was launched in New Delhi on Friday. Dharmendra Pradhan, Minister of Petroleum and Natural Gas & Steel, Pralhad Joshi, Minister of Coal, Mines and Parliamentary Affairs, Raj Kumar Singh, Minister of State (I/C) for Power and New and Renewable Energy, Rajiv Kumar, Fatih Birol, Executive Director, International Energy Agency, and Amitabh Kant, CEO, Niti Aayog were present on the occasion. Thanking Birol and his IEA team for coming up with a comprehensive report covering India’s energy sector in its entirety, Pradhan said that IEA’s findings are a vindication of the significant advances made in realising the energy vision enunciated by Prime Minister Narendra Modi. Pradhan said that India is now the third largest energy consumer in the world. India is in the midst of a major transformative shift in its energy sector. The energy polices already put in place by the government and also those on the anvil, clearly demonstrate its determination to embrace this energy transition in a sustainable and responsible manner. The minister said that a number of pathbreaking initiatives launched by the government since 2015 have redefined India’s commitment to sustainable energy. “Our key challenge as a developing country, with per capita energy consumption below the global average, is to meet the growing demand for energy. India made great strides in recent years towards achieving universal access to modern energy, including clean cooking and electricity, affordable, secure and cleaner energy for its people. The report captures well the progress made in achieving sustainable energy for all, as reflected in the UN Sustainable Development Goal 7 (SDG 7). It does also highlight the persisting challenges to be focused in the coming days,” he added. Talking about the Ujjwala Yojana, Pradhan said that the remotest corners of India have been touched for cleaner fuel access under it. “We are also sharing our experience with our friends in Africa and Asia to enable them to benefit from the best practices in promotion of LPG. I do recognise that we have more ground to cover and also to ensure that the initiatives are implemented for achieving universal coverage in the country.” Pradhan said that India’s transformation to a gas-based economy and developing indigenously produced biofuels, apart from renewable energy and energy efficiency measures, can potentially achieve the much-needed carbon reductions. As part of the energy transition, decarbonisation of the energy sector is picking up momentum in India. “Given India’s development imperative, our thrust is on building oil and gas infrastructure to ensure access to affordable energy to all our citizens. The report notes that India is moving towards a gas-based economy,” he said. Pradhan said that an estimated investment of 100 billion US dollars in oil and gas infrastructure has been lined up. The gas pipeline network will soon be covering the length and breadth of the country – from Kutch in western India to Kohima in the east, and from Kashmir in the north to Kanyakumari in the south. “In yet another important decision, our government has approved viability Gap Funding/Capital Grant at 60 per cent of the estimated cost of Rs 9,265 crore for the North East gas grid project to develop gas pipeline grid of 1,656 km in the eight states of the northeastern region,” he said. “We are aggressively working to build City Gas Distribution Network covering more than 400 districts of India. This network will serve 72 per cent of India’s population with cleaner and affordable gas over more than 50 per cent of India’s geography.” He said the proposed Workshop on Natural Gas on January 23 in New Delhi will bring together for the first time all relevant stakeholders under one roof. “I am confident that these initiatives in the gas sector would bring about a transformative change in India’s energy landscape,” Pradhan said. The minister said that the report acknowledges the government’s efforts in making energy security as a prime policy priority, and recognises the efficiency achieved due to relentless march in undertaking tectonic reforms in the energy sector and continued pursuit of market-based solutions. He said “We have taken note of IEA’s recommendation for reinforcement of India’s oil emergency response policy. Enhancing international engagement on global oil security issues is already an active goal being pursued by my ministry. Energy has become an essential commodity in our bilateral trade engagements with several key trading partners and in positioning India as an important strategic player in the global energy landscape.” On the diversification of oil sources and development of alternate resources of energy as biofuels, he said that these are being undertaken on an accelerated mode. “We are on the way to achieve 20 per cent ethanol blending in petrol and 5 per cent bio-diesel in diesel by 2030. Indeed, to promote energy sustainability, our new National Biofuel Policy focuses on waste-to-wealth creation and targets to generate various types of biofuels from agricultural residue and municipal waste,” Pradhan said. Expressing deep concern about the crude oil price volatility, the minister said that “today, we are meeting in the backdrop of rising tensions in the Middle East and its impact on stability and security in the region.” He said “We have taken several measures to ensure investor-friendly environment. IEA has noted that during the period 2015 to 2018, investments in the energy sector in India recorded the second highest growth in the world. We are happy that global oil and gas majors like Saudi Aramco, ADNOC, BP, Shell, Total, Rosneft and ExxonMobil are making their significant presence in India.”
India’s oil demand growth to overtake China by mid-2020s: Energy Agency
India’s oil demand growth is set to overtake China by mid-2020s, priming the country for more refinery investment but making it more vulnerable to supply disruption in the Middle East, the International Energy Agency (IEA) said on Friday. India’s oil demand is expected to reach 6 million barrels per day (bpd) by 2024 from 4.4 million bpd in 2017, but its domestic production is expected to rise only marginally, making the country more reliant on crude imports and more vulnerable to supply disruption in the Middle East, the agency said. China’s demand growth is likely to be slightly lower than that of India by the mid-2020s, as per IEA’s China estimates given in November, but the gap would slowly become bigger thereafter. “Indian economy is and will become even more exposed to risks of supply disruptions, geopolitical uncertainties and the volatility of oil prices,” the IEA said in a report on India’s energy policies. Brent crude prices topped $70 a barrel on rising geopolitical tensions in the Middle East, putting pressure on emerging markets such as India. Like the rest of Asia, India is highly dependent on Middle East oil supplies with Iraq being its largest crude supplier. India, which ranks No. 3 in terms of global oil consumption after China and the United States, ships in over 80% of its oil needs, of which 65% is from the Middle East through the Strait of Hormuz, the IEA said. The IEA, which coordinates release of strategic petroleum reserves (SPR) among developed countries in times of emergency, said it is important for India to expand its reserves. REFINERY INVESTMENTS India is the world’s fourth largest oil refiner and a net exporter of refined fuel, mainly gasoline and diesel. India has drawn plans to lift its refining capacity to about 8 million bpd by 2025 from the current about 5 million bpd. The IEA, however, forecasts India’s refining capacity to rise to 5.7 million bpd by 2024. This would make “India a very attractive market for refinery investment,” IEA said. Drawn to India’s higher fuel demand potential, global oil majors like Saudi Aramco, BP, Abu Dhabi National Oil Co and Total are looking at investing in India’s oil sector. Saudi Aramco and ADNOC aim to own a 50% stake in a planned 1.2-million bpd refinery in western Maharashtra state, for which land is yet to be acquired.
Commodity prices, access to capital among top risks for oil and gas companies: Moody’s
Global energy companies face increasingly tight access to capital in 2020, weakening their liquidity, increasing their cost of capital and intensifying default risk for companies with looming maturities, according to Moody’s Investors Service. Low commodity prices will limit opportunities for exploration and production companies to increase cash flow organically, and low-rated energy companies face the prospect of both difficult capital markets and weak conditions for mergers and acquisition activity. “We expect high volatility in oil and natural gas prices in 2020 amid growing production and slower growth in demand as well as rising geopolitical tensions,” said Moody’s in a report. Rising production in 2020 will outpace growth in demand for oil amid a cyclical economic slowdown in several large industrial countries. Short-term supply adjustments and rising geopolitical tensions in the Middle East will heighten volatility. Oil and gas producers will deliver higher volumes but essentially flat EBITDA growth in 2020, despite their capital spending cuts amid commodity-price volatility. However, the pace of production growth will slow, which will help midstream infrastructure to catch up in 2020, especially in the prolific oil-producing Permian Basin. Mid-stream EBITDA will grow by about 5 to 7 per cent in 2020 overall. The leading Democratic presidential contenders’ policy positions will be more detrimental to the oil and gas industry than the re-election of US President Donald Trump, whose pro-industry ‘energy dominance’ policy pursues limited regulation. Yet state and regulatory opposition to specific projects and practices will affect the industry more immediately than even a new presidential administration will. Constrained capital spending growth by the exploration and production companies in 2020 will translate to flat demand for oil field services in 2020, keeping prices and margins tight for the providers. Moody’s said refining margins and petrochemical spreads in Asia will remain depressed in 2020, constraining earnings growth for the region’s downstream-focused companies. The trade dispute between the United States and China and the consequent economic growth slowdown in the region has dampened growth in consumption of petroleum products and petrochemicals. The growth will not pick up significantly in 2020 especially with likely subdued economic growth in the region, especially in India and China.
China opens oil and gas exploration to foreign firms
China will allow foreign companies to take part in oil and gas exploration and production in the country, in what officials hailed Thursday as a “major reform” opening up the industry. The Ministry of Natural Resources said foreign firms registered in China with net assets of not less than 300 million yuan ($43 million) will be eligible to obtain oil and gas mining rights. The change takes place from May 1 and also applies to domestic companies. “Opening to both domestic and foreign enterprises is a major reform measure,” said Deputy Minister of Natural Resources Ling Yueming at a news conference. In the past, international companies could only enter the industry by working with Chinese firms, such as state-owned enterprises. The move comes as China looks to open to private firms more sectors of the economy that have been dominated by state-owned companies. The country’s oil and gas market has been dominated by state players such as the China National Petroleum Company and China Petrochemical Corp (Sinopec). On Thursday, the ministry also said permits for mineral resources mining will be valid for five years. Each extension period is five years as well. When firms apply for a renewal of exploration rights, their area of exploration will be cut by 25 percent, said the ministry.
Energy industry company Petronet moving towards 20 million ton production mark
India’s fuel firms are given ambitious targets, particularly the one to increase natural gas contribution to 15 per cent of the total energy mix. But Prabhat Singh, MD & CEO, Petronet LNG, believes firms have become wiser and are seizing the opportunity to ensure they offer last-mile connectivity. Petronet will have enhanced capacities and move towards the coveted 20 million tonne production mark, Singh tells Sunitha Natti What will be the fallout of the US-Iran tensions? Today, what has happened fortunately is, we are (globally) endowed with a great amount of oil and gas resources, well-diversified across geographies. Otherwise, if you see what’s really happening today globally where Iran is an issue, Saudi Arabia has been attacked six times, Venezuela, Libya and even Nigeria are having their own problems. The US also is actually running down on the inventory. So it’s a sure recipe that prices of oil per barrel would be at $130-$140 anyway. But despite all this, it’s barely crossing $70-$71, which actually indicates if there’s a balance that has suddenly come into the market. Or it could be that there are other mechanisms, which are pushing more material into the system…so I’d think this is the great time for oil and gas (industry) to make the best of what they should and focus on building infrastructure, allowing last-mile connectivity. Given it’s an opportune time, are investments materialising? If you look at India, significant investments on infrastructure happened recently such as city gas distribution (CGD) networks aggregating Rs 1200 billion. Then there’s an effort to complete the national gas grid project, and so many gas terminals are also coming up. There’s a bent of mind as well as positive action because within eight years if you don’t spend Rs 1200 billion (earmarked for CGD), you need to pay penalty for that. What more push can the government give? The best example is considered upstream activities when there was a time you are unable to get FIDs (final investment decisions) because there were no long-term contracts signed. But now people are doing it through their own balance sheets because they are realising that if they don’t take their oil and gas and sell it quickly, someone else will. It has become a wise market today. To that extent, you also see liquified natural gas plants coming up. For instance, nearly 100 mn tonnes of LNG plants are expected in the next 2-3 years. The bottom line is, everything is positive at this juncture. But isn’t there a demand contraction? There hasn’t been any slack in demand, but the anticipated increase in demand hasn’t happened as expected. In the calendar year 2018, we’ve imported 22.5 mn tonnes of LNG, in 2019 it’ll be over 23 mn tonnes and in 2020, I think it’ll be around 24 mn tonnes, which isn’t much, but as infrastructure comes up, demand will pick up. How about the fertilizers sector? Fertilizer plants that have already been sanctioned to be put up indigenously, that amount of demand of say about 10 to 10.5 mn cubic meters of gas would basically happen in the next 3 or 4 years time or whatever it takes for fertilizer plants to come up. But that’s final and beyond that you don’t need more fertilizer plants. So it’s not too big a demand, but whatever is there has been captured. How’s Petronet’s expansion taking shape? At Dahej plant (Gujarat), we already have tanks, and a third jetty is in the pipeline. We are looking at moving towards the 20 mn tonne mark and to that extent we also have to do something with regasification, which is still to happen. Within these parameters, there’s a certain percentage, like we have been already operating at 110-112 per cent capacities, and the tanks and jetties which are coming up will be supplementary. What’s the progress on making LNG a mainstream fuel? It’s going in the right direction. I think, we have already started with two LNG buses each at Dahej and Kochi. They are operational, picking employees in shifts, but it’s only a step to say that it’s possible. Therefore, when you look at the demand for trucks and heavy-duty long-distance trucks, demand is anywhere between 8-9 mn tonnes. Besides, we’ve already picked up the Delhi-Mumbai highway and another 20 locations, where we are going to put up these LNG outlets as a proof-of-concept. We’ve identified nearly 4,500 km of national highways, where this is going to happen and therefore on a phase-I, II and III basis, starting from 20 to maybe 100 and then 500 locations will be added. Phase 1 will roll out within a year’s time and next 100-500 will take another 1.5 to 2 years. Basically, the second phase should happen by say 2022-2023 and further expansion beyond that depends on how the market takes because the ecosystem needs to be developed with retail outlets and operating OMCs. Is the Kochi plant going as per plan? We are fortunate that we are doing over 1 mn tonne production and the plant is now delivering operating profits. The Kochi-Mangalore pipeline too is being commissioned, perhaps by March, which will further increase its capacity utilisation to about 30 per cent from roughly 18-20 per cent today. This increase should materialize by next financial year. Can you update us about the overseas ventures? In Sri Lanka, we are very competitive in our bidding. Right now, we have put all our commercial numbers in place and once the project’s approved, it’ll be up in say at least 26-30 months. Similarly, in Mauritius, we have something in the pipeline, while in Bangladesh, we are back in the process after a change in location.