Asia’s Top Refiner is Struggling With Weak Fuel Demand in China
The first-half earnings report of the largest refiner in Asia, China Petroleum and Chemical Corporation, confirmed market concerns about a weak fuel demand in China. China Petroleum and Chemical Corporation, commonly known as Sinopec, reported this weekend a first-half net profit that rose 1.7% year-over-year to $5 billion (35.7 billion Chinese yuan). The higher earnings were due to increased domestic crude oil and natural gas production and rising international oil prices. But the refining metrics of the largest refiner in Asia by capacity all deteriorated compared to the first half of last year, reflecting weak Chinese demand—especially for diesel—that has been spooking the markets this year. While domestic demand for natural gas saw apparent consumption rising by 10% year on year, domestic consumption of refined oil products fell by 0.5% due to declining diesel demand, Sinopec said in its first-half earnings report. The corporation was hit harder by the weaker demand than other Chinese state-held energy giants because of its more refining-weighted portfolio of assets. Sinopec’s domestic production for oil and gas equivalents hit a record high, with oil and gas output at 257.66 million barrels of oil equivalent, up by 3.1% year-on-year. Domestic crude oil production totaled 126.49 million barrels, up by 1.5%, and natural gas production reached 700.57 billion cubic feet, up by 6.0%. However, weak earnings and sales at the refining and chemicals divisions partly offset the good upstream results. Sinopec flagged “severe challenges brought by the weak market demand and narrowing margin of certain products” in the first half of the year. The corporation had already warned in July that its refining throughput barely inched up by 0.1% in the first half of 2024 due to higher crude prices and lackluster domestic fuel demand. Gasoline production rose by 6.6% year-on-year and jet fuel output jumped by 15.2%, but diesel production at Sinopec slumped by 8.8%, this weekend’s full first-half report showed. Light chemical feedstock production also fell, by 7.4%, reflecting weaker demand amid the ongoing property crisis and weaker-than-expected Chinese economic growth. Sinopec’s domestic sales of refined oil products fell by 2.5%, with retail oil product sales down by 4.7%. Overall, refineries in China produced 6.1% less fuel in July this year than a year earlier, logging the fourth consecutive monthly decline in output and signaling that the period of weak Chinese demand isn’t over yet. Sinopec said on Sunday that it “actively addressed the challenges of weak diesel demand and rapid growth of electric vehicles,” while expanding battery charging and LNG fueling network “with charging volume and vehicle LNG operating volume both going up significantly.” China’s weak diesel demand is not only the result of the property crisis and lackluster economy. It’s also due to a structural change in transportation as an ongoing shift to LNG-powered trucks limits diesel use for transportation, slowing overall oil demand growth. Jet fuel remains the only bright spot of Chinese oil product demand, logging in double-digit growth this year. But jet fuel consumption alone cannot offset weaker demand for road transportation fuels. A rebound in China’s airline traffic this year has boosted jet fuel demand in the only bright spot in transportation fuel consumption in the world’s top crude oil importer. But as a share of China’s total fuel consumption, jet fuel is much smaller than the shares of gasoline and diesel. Faltering overall oil demand and lower crude imports in China result from weaker economic growth and lackluster fuel demand below expectations. The apparent weaker demand and the slowing imports in China have been the biggest drags on oil prices in recent months, often overshadowing tensions in the Middle East.
India’s LNG imports during May-July 2024 at 4-year high
India’s imports of liquefied natural gas (LNG) rose to a multi-year high during May-July 2024 driven by an unprecedented heat wave coupled with record high temperatures pushing electricity consumption to a new high. According to energy intelligence firm Vortexa, India’s monthly LNG imports in May, June and July 2024 hit a four year record, averaging 2.57 million tonnes (MT). “This was largely driven by record high temperatures that plagued the country since May, resulting in a spike in gas-fired power generation to meet increased cooling demand. This comes despite Asian spot LNG prices reaching a seven month high of around $12 per million British thermal units (mBtu),” said Vortexa’s LNG Analyst Miko Tan. The previous LNG import highs across 2020 occurred in a significantly different market where LNG prices fell to record lows, creating an incentive for coal-to-gas switching in power generation across India, she added in a commentary earlier this week. However, power demand has softened in July with the start of the monsoon season and easing temperatures, thereby putting downward pressure on gas-fired power generation, Tan said. Power demand India’s power demand has been rising at around 7-9 per cent on an annual basis driven by an expanding industrial and commercial base coupled with rising household consumption. Tan pointed out that record high temperatures led to an uptick in total power generation across the country in May and June 2024. While the increased demand was met largely by hydropower, the share of gas-fired power generation doubled from level in the first quarter. Capacity utilisation and electricity generation by gas-based power plants, with 23.64 gigawatts (GW) capacity under operation, was the second highest on record during April-June 2024. In April-June 2024, gas-based plants clocked a capacity utilisation, or plant load factor (PLF), of 25.8 per cent generating 13,338.23 million units (MU) on a provisional basis. This is second only to April-June 2020 when PLFs hit 28.6 per cent producing 14,961.55 MU of electricity. Higher production by gas-based power plants pushed up gas’ contribution in India’s power generation mix increasing from 2 per cent in June 2023 to 2.8 per cent in June 2024, Crisil Market Intelligence & Analytics said in a report. However, power demand fell in July with the start of the monsoon season and easing temperatures, thereby putting downward pressure on gas-fired power generation, Tan said. “While LNG imports remained strong, demand is likely to taper off as the current price point is unattractive to most buyers in the country. GAIL and state-owned refiner IOC did not award their recent tenders seeking cargoes in September and October, as offers were deemed unattractive,” she added.
Reliance to Invest Rs.10 billion in CBM
Reliance Industries Limited (RIL) has announced a significant investment of Rs.10 billion to enhance coal bed methane (CBM) production from its existing blocks in India. This move is aimed at reversing the recent decline in CBM production. BM, a form of natural gas extracted from coal seams, is considered a cleaner alternative to conventional fossil fuels. Reliance Industries has been a major player in the CBM sector, with substantial reserves in its blocks located in the eastern part of India, particularly in the states of Madhya Pradesh and west Bengal o address this issue, RIL’s Rs.10 billion investment will focus on several key areas. These include the deployment of advanced technologies for drilling and extraction, enhancing the efficiency of existing wells, and exploring new reserves within the existing blocks.
Oil & gas firms’ prioritise green hydrogen, carbon capture to achieve net-zero targets
India’s oil and gas companies are focussing on initiatives such as green hydrogen and carbon capture, utilization and storage (CCUS) as they move towards achieving net-zero emission targets. The companies are committing large investments towards energy transition, particularly in the renewable space, an oil ministry journal on net-zero plans has said. The first-of-its kind report, which was released on August 25, list various steps being taken by these companies to reduce emissions and their carbon footprint. India’s largest oil and gas explorer ONGC said the company is advancing in the field of CCUS with a capacity to sequester 2.21 million MT of CO2 emissions. “This technology is vital for reducing the carbon intensity of industrial processes and achieving long-term sustainability targets,” the company said. CCUS is a set of technologies that capture carbon dioxide and use it or store it safely to prevent it from contributing to climate change. These technologies can also remove existing CO2 from the atmosphere. There is debate over its feasibility, with critics saying it is too expensive to be viable. In the Budget FY25, Finance minister Nirmala Sitharaman said the Centre planned to introduce a policy for hard-to-abate industries to nudge them towards lower emissions. The decision comes as India plans to achieve net zero by 2070, while the oil and gas companies have pledged to attain the emission target much earlier.
Domestic gas drives industrial consumption
Natural gas consumption in India is recovering from the post-COVID-19 slump, primarily driven by the fertiliser, city gas distribution (CGD) and industrial sectors. Even though the power sector has shown an incremental increase in gas use for peak power demand in the last two fiscal years, it has not reached pre-pandemic levels yet. Small- to medium-scale industries, including tea plantation, manufacturing, liquefied petroleum gas (LPG) shrinkage and sponge iron, are driving consumption growth. The industrial sector, including refinery, petrochemicals and other industries, witnessed a 37% increase in gas consumption in FY2023-24 from the pre-pandemic levels of FY2019-20. However, gas consumption by other industries – excluding refinery and petrochemicals – surged 136% over the period. Gas consumption by other industries shot up from around 7,000 million metric standard cubic meters (MMSCM) in FY2019-20 to over 16,000MMSCM in FY2023-24, accounting for almost two-thirds of the total gas consumption by the industrial sector.