The U.S. Could Become A Net Oil Exporter In 2023
The United States hasn’t been a net exporter of oil and oil products since World War II. Now, it is on course to become a net exporter next year, with oil and product exports already hitting record highs of 3.4 million bpd and 3 million bpd respectively. Meanwhile, Reuters reports, citing official data from the Energy Department, imports of crude oil are on a decline, falling to just 1.1 million barrels daily in November. That’s compared with some 7 million bpd in crude imports five years ago. In fairness, the export-import balance this year was substantially affected by the massive 180-million-barrel release of crude oil from the strategic petroleum reserve, which the Biden administration used to fight soaring retail fuel prices. The expectation that the U.S. will become a net exporter of oil hinges on one big assumption: a faster ramp-up of shale oil production. “Russia’s invasion of Ukraine has spurred new demand for U.S. energy and should push oil exports above imports late next year assuming shale output accelerates,” Vortexa market analyst Rohit Rathod told Reuters. If shale output does not accelerate, then in order to become a net exporter, the U.S. would have to reduce demand, the report notes. However, this is quite unlikely. In fact, demand for oil in the world’s biggest consumer is projected to rise next year, albeit by a modest 0.7 percent, to 20.51 million bpd. U.S. oil production is forecast to reach a record high of 12.34 million bpd next year but, again, that is based on the assumption that shale oil production growth will accelerate. For now, most drillers appear to be reluctant to go back to the growth-at-all-costs mode of the past. Instead, they are taking a more cautious approach and prioritizing the return of cash to shareholders after years of burning through it to ramp up growth. The energy policies of the Biden administration have also had a discouraging effect on the oil industry because of their focus on the transition away from fossil fuels.
The Era Of Cheap Oil Has Come To An End
In its latest monthly report, OPEC revealed it had yet again failed to produce as much oil as it agreed to produce the last time it discussed output. And it wasn’t by a few thousand barrels per day, either. The shortfall was some 1.8 million barrels daily, but more importantly, that sort of undershooting of its own target has become a regular thing for the cartel. Meanwhile, the United States federal government needs to buy some oil for its strategic petroleum reserve after releasing close to 200 million barrels from it this year as a way of countering fuel price inflation. Yet U.S. drillers are not in a rush to boost production. On the contrary, it seems production growth has lost its place among these companies’ top priorities. Of course, there are also the sanctions against Russia, which many expect will hurt the country’s oil production, and that may well happen, but it has not happened yet. In fact, the oil sanctions—in the form of a price cap on maritime exports and an embargo on exports to the EU—have had no effect on oil flows out of Russia. For now. Investment banks expect higher oil prices, despite a recent slump prompted by expectations of an economic slowdown pretty much across the globe. The expectations, now beginning to seep into trader circles, too, are largely based on China’s reversal of its zero-Covid policy. But they also probably take into account the fact that oil remains an indispensable commodity. And the era of cheap oil may well be over for good. “We remain constructive on oil prices driven by recovering demand (China reopening, aviation recovering) amid constrained supply due to low levels of investment, risks to Russia supply, the end of SPR releases, and slowdown of U.S. shale,” Morgan Stanley said this week in a note. Yet the situation may be a lot more serious with regard to supply, as noted in a recent market commentary by TortoiseEcoFin’s President and Portfolio Manager, Matt Sallee. “Global oil inventory is at the lowest level since 2004, the Department of Energy has released 200 million barrels of oil from the Strategic Petroleum Reserve this year, OPEC continues to struggle to produce at their stated quota and US producers are helping but can only do so much.” This s a pretty succinct description of the global oil supply situation, but the picture is not one that would invoke positive emotions. It is one that is more likely to evoke concern, and with a good reason. Because there is little evidence that any of these trends will change meaningfully any time soon. OPEC, for example, has zero motivation to try and boost production, Sallee noted in follow-up comments for Oilprice. It would only do so if it knows oil will remain over $100 per barrel for a longer period of time, but there is no way to be confident about this right now. Then there are the purely physical constraints on OPEC production, as evidenced by the consistent failure of the group to hit its own—reduced—production targets. Most OPEC members have ambitious production growth plans, but they remain plans while actual production remains subdued for reasons such as natural depletion at mature fields and, ultimately, not enough investment. As Sallee notes, OPEC has not consistently produced more than 30 million bpd since 2015-2018 when it did so deliberately in a bid to destroy U.S. shale and, to a great extent, succeeded, temporarily. And that’s because it neither wants to nor can it do so. Underinvestment is turning into a thing in U.S. shale as well, at least from the perspective of the White House. According to the Biden administration, all U.S. producers need to do is spend more on additional production. According to the U.S. producers themselves, the long-term outlook for oil demand is too uncertain about investing in more production. Then there is the issue of prime acreage, which several experts have been warning is running out. TortoiseEcoFin’s Sallee is among them: “Best acreage has been drilled, the industry is struggling to attract labor and has limited sources of financing,” he told Oilprice. According to him, U.S. oil production is unlikely to ever again record annual output increase rates of 1 million bpd or more, as it did in the recent past. A growth rate of 500,000 to 750,000 bpd is far more likely, he believes. And that’s not good news for consumers because demand, although targeted by the energy transition camp, is not going down soon. The International Energy Agency, one of the most active members of the energy transition movement, in its latest Oil Market Report revised upwards its forecast for global oil demand next year because of an unexpected increase in consumption this year. Chances are this is a sustainable trend in the absence of viable alternatives to oil products. And this means that demand and supply will be in a precarious balance in the future, constantly on the brink of a shortage or even deep in a shortage, should Big Oil’s pivot to low-carbon energy continue, as it requires they reduce their oil production to hit their net-zero goals. What all this means is that the era of cheap crude oil may well be over for good.
Asian LNG Importers Set To Benefit From The EU Gas Price Cap
Asian LNG importers are rejoicing at the EU decision to cap natural gas prices. The price cap could limit volatility and excessive price spikes on the Asian spot LNG market, traders told Bloomberg after the EU energy ministers agreed on a “market correction mechanism”, which would come into force on February 15, 2023. Since the Russian invasion of Ukraine and the slashed pipeline gas supply from Russia to Europe, the EU and Asia have competed for LNG cargoes with prices setting record highs on both markets earlier this year amid intense competition and supply-side issues. The EU has managed to outbid Asia this year because of the higher prices in Europe and low demand in Asia, including in China. The cap on the European benchmark – which will be triggered if the month-ahead price at the TTF hub exceeds $191 (180 euros) per MWh for three consecutive days – could limit runaway price spikes on the Asian market, too, according to Bloomberg. Asian LNG importers could be happier with a price cap in Europe because they could thus outbid the EU for spot supply. For Europe, however, concerns remain that a price cap and market interventions could stifle its ability to pay up for LNG supply, which, analysts and traders say, will be badly needed next year when Russian pipeline gas flows would be much lower than in the first half of 2022 or none at all. The EU will need to cap gas demand too, along with capping the price of gas, or it risks worsening the gas shortage by inadvertently encouraging demand with the price cap, Goldman Sachs analysts said in a Monday report, quoted by Bloomberg. Meanwhile, LNG demand in Asia has increased in recent weeks as buyers have emerged to stock up for late-winter supply. Moreover, if China’s demand rebounds to 2021 levels next year, from depressingly low volumes this year, Europe may lose the ability to easily outbid Asia for extra LNG supply.
Green hydrogen booms in Asia as companies rush into projects
The race to establish green hydrogen production bases in the Asia-Pacific region is heating up, with Western and regional companies cooperating on massive projects to produce what many see as a next-generation power source. Danish multinational Orsted, the world’s largest offshore wind power company, is considering entering the market, as are major Western oil companies. Green hydrogen, which does not emit carbon dioxide in its production process, is seeing demand rise globally for use as a power-generating fuel. Europe, where renewable energy is widespread, has taken the lead in the field, but Asia is now starting to move toward production. “We have had an initial focus on Europe. But for certainly in the foreseeable future, we want to step into that area in Asia,” Per Kristensen, who oversees the Asia-Pacific division at Orsted, told Nikkei. Orsted agreed to cooperate with South Korean steelmaker POSCO last year on an offshore wind power project. The companies have also started a feasibility study for the production of green hydrogen, and could be preparing a supply for “hydrogen steel,” which uses hydrogen instead of coal for production. Orsted operates a business in Denmark that uses offshore wind power to split water molecules to produce green hydrogen. Having launched multiple projects mainly in the North Sea, it now looks to utilize its know-how in Asia. Major Western oil companies are also pouring into the region. BP has become the largest shareholder in the Asian Renewable Energy Hub, a huge Australian project, having made a 40.5% investment. With plans to produce up to 1.6 million tonnes of green hydrogen per year, the British multinational aims to acquire a 10% share of the world market. American multinational Chevron is collaborating with Indonesian oil company Pertamina and Keppel Corporation, a government-affiliated Singapore conglomerate, to investigate green hydrogen production using electricity obtained from geothermal power in Southeast Asia. It plans to produce 80,000 to 160,000 tonnes per year in the future.
India’s LNG imports in November down 6 per cent
India’s LNG imports in November were 2.32bn m3 (1.68mn metric tons), down 5.9% year/year, the country’s oil and gas ministry’s Petroleum Planning and Analysis Cell (PPAC) website showed on December 19. The cumulative imports during the April-November period, the first eight months of the 2022-2023 financial year, were 18.57bn m3, down 13.5% yr/yr. The LNG imports cost $1.6bn last month versus $1.2bn in the same month of the previous year, PPAC said.
How India can emerge as a natural gas hub in the South Asia region
India’s natural gas demand has been growing steadily and is expected to nearly double by 2030. The Government has put a significant thrust on increasing the share of natural gas in the primary energy mix. To realize this ambition, there is an increased focus to complete the national gas grid which has pipelines being laid across the country including implementation of the Northeast Gas Grid (NEGG) in a difficult terrain. There are regasification terminals on both coasts of the country and the regasification capacity is expected to increase from 40 MMTPA to more than 80 MMTPA by 2030 [1]. One of the key issues for a gas importing nation would be managing volatility of gas prices to ensure that demand is not impacted. To have a greater say in the procurement, there are many examples of regional countries or companies getting together. Given that India is a leading gas consumption centre in the South Asian Region (SAR) [2], the country can play a key role in developing gas network in the region and ensure efficient procurement of Liquefied Natural Gas (LNG). The SAR accounts for around 3.5 percent [3] of the global natural gas consumption and around 10 percent [4] of LNG trade despite having 30 percent [5] of the global population. The consumption is growing faster than the world on account of increase in per capita energy consumption owing to improved living standards. Amongst the SAR, Nepal, Bhutan, Sri Lanka, and Maldives are largely dependent on liquid fuels to meet their energy demands. Only Bangladesh, Pakistan and Afghanistan have gas consumption as part of their energy portfolio. India can set-up, small scale LNG through road transportation to immediately serve Bhutan and Nepal using RLNG terminals on the east coast. The upcoming NEGG can be leveraged to set-up dedicated network of Compressed Natural Gas (CNG) stations along the land routes from India to Bangladesh. The Right of Use (ROU) of India Bangladesh Friendship Pipeline for transport of diesel can be utilised to extend the gas grid in Bangladesh. Similarly, RLNG terminals in the south can play an important role in supplying LNG to Sri Lanka and Maldives using Floating Storage Regasification Unit (FSRU) based LNG hub and spoke distribution model. The combined trading potential of India with Bangladesh, Sri Lanka, Nepal, Bhutan, and Maldives can be more than 25 mmscmd in the next 15 years [6]. Besides encouraging gas trade, India can be seen as a catalyst providing economic, social, and environmental benefits for the regional countries which are heavily dependent on liquid fuel. After establishing gas infrastructure connectivity with neighbouring countries (such as Bangladesh, Bhutan, and Nepal), India can take a lead to develop a gas pricing Index for gas trade in the region. The key enablers for cross-border gas trade in the SAR would be gas supplies from upcoming LNG terminals, exploring new sources for gas such as pipeline from gas exporting nations, timely completion of ongoing infrastructural pipeline projects, development of trade routes (roadways or waterways) and development of a regional gas index amongst others. The first step could be formation of a regional body that has energy ministries from SAR to deliberate and chalk out the actions for each nation. After establishing such a regional body, aspects on additional gas sources, access to pipelines, standardization of contractual arrangements, physical location of trading hub, preferable pricing mechanism, regulatory structure, access to information and other aspects of collaboration can be detailed out. Commencement of cross-border gas trading would result in creation of additional markets for players operating LNG terminals and pipelines. This would eventually lead to improvement in infrastructure utilisation and opportunities for the government to get better negotiations for LNG supply from global markets. Another outcome would be ability to have a better say in LNG sourcing contracts. Further, this will help in collaboration between the member countries for the development of the gas value chain and strengthening energy security in the region. This will also contribute towards enhancing India and SAR gas demand and favourably contributing to country’s commitment towards the environment.