Russia Exported Record Amounts Of Crude In August
Six months into Russia’s war on Ukraine, Russia’s oil output has continued to exceed expectations. According to data from the Institute of International Finance (IIF), Russian oil shipments hit their highest ever August level this month, with Greek-owned tankers playing the biggest role in helping Russia’s oil get to international markets. IIF chief economist Robin Brooks has tweeted that the capacity of oil tankers departing Russian ports–a proxy for exports–came in at just under 160 million barrels in August, more than in any August in any prior year. “Russia exports most of its crude via foreign-owned oil tankers. Volume of those shipments in August 2022 exceeds any prior year, thanks to Greek-owned oil tankers who shifted capacity to transport Russian oil,” Brooks has told Business Insider. A couple of months ago, Refinitiv Eikon via Reuters reported that Greece has emerged as a new hub for Russian oil via ship-to-ship (STS) loadings. Trading Russian crude and oil products remain legal for now because EU members cannot seem to agree on the methodology of a complete ban. For all the tough talk about abandoning Russian energy commodities, Russia is still managing to sell a good amount of its oil and gas, thanks to the fact that some of the world’s biggest commodity traders have little compunction against financing Putin’s war machine. According to ship tracking and port data, Switzerland’s Vitol, Glencore, and Gunvor as well as Singapore’s Trafigura, have all continued to lift large volumes of Russian crude and products, including diesel. Vitol has pledged to stop buying Russian crude by the end of this year, but that’s still a long way from today. Trafigura said it would stop buying crude from Russia’s state-run Rosneft by May 15th, but is free to buy cargoes of Russian crude from other suppliers. Glencore has said it wouldn’t enter any “new” trading business with Russia. Meanwhile, India and China are making up for much of the losses for Russia. A lot of the blame falls on Switzerland. The lion’s share of Russian raw materials is traded via Switzerland and its nearly 1,000 commodity firms.
China Is Quietly Reselling Its Excess Russian LNG To Europe
One month ago, we were surprised to read how, despite a suppressed appetite for energy amid its housing crash and economic downturn (for which “zero covid” has emerged as a convenient scapegoat for emperor Xi), China has been soaking up more Russian natural gas so far this year, while imports from most other sources declined. In July, the SCMP reported that according to Chinese customs data, in the first six months of the year, China bought a total of 2.35 million tonnes of liquefied natural gas (LNG) – valued at US$2.16 billion. The import volume increased by 28.7% year on year, with the value surging by 182%. It meant Russia surpassed Indonesia and the United States to become China’s fourth-largest supplier of LNG so far this year. This, of course, is not to be confused with pipeline gas, where Russian producer Gazprom recently announced that its daily supplies to China via the Power of Siberia pipeline had reached a new all-time high (Russia is China’s second-largest pipeline natural gas supplier after Turkmenistan), and earlier revealed that the supply of Russian pipeline gas to China had increased by 63.4% in the first half of 2022. What was behind this bizarre surge in Russian LNG imports, analysts speculated? After all, while China imports over half of the natural gas it consumes, with around two-thirds in the form of LNG, demand this year had fallen sharply amid economic headwinds and widespread shutdowns. In other words, why the surge in Russian LNG when i) domestic demand is just not there and ii) at the expense of everyone else? “The increase in Russian LNG could be a displacement of cargoes going to Japan or South Korea because of sanctions, or weaker demand there,” said Michal Meidan, director of the China Energy Programme at the Oxford Institute for Energy Studies. One thing that was clear: China wanted to keep its arms-length gas dealing with Russia as unclear as possible, which is why the General Administration of Customs of China stopped publicizing the breakdown in trade volume for pipeline natural gas since the beginning of the year, with spokesman Li Kuiwen confirming that the move was to “protect the legitimate business rights and interests of the relevant importers and exporters”. Well, we now know the answer: China has been quietly reselling Russian LNG to the one place that desperately needs it more than anything. Europe… and of course, it is charging a kidney’s worth of markups in the process. As the FT reported recently, “Europe’s fears of gas shortages heading into winter may have been circumvented, thanks to an unexpected white knight: China.” The Nikkei-owned publication further notes that “the world’s largest buyer of liquefied natural gas is reselling some of its surplus LNG cargoes due to weak energy demand at home. This has provided the spot market with an ample supply that Europe has tapped, despite the higher prices.” What the FT ignores, is that it’s not “surplus” – after all, if it was Chinese imports of Russian LNG would collapse. No – the correct word to describe the LNG that China sells to Europe is Russian. Going back to the story, the details are intuitive: with Russian pipeline gas to Europe effectively shuttered… … Europe’s imports of LNG have soared 60% year on year in the first six months of 2022, according to research firm Kpler. Some more details: China’s JOVO Group, a big LNG trader, recently disclosed that it had resold an LNG cargo to a European buyer. A futures trader in Shanghai told Nikkei that the profit made from such a transaction could be in the tens of millions of dollars or even reach $100mn. China’s biggest oil refiner Sinopec Group also acknowledged on an earnings call in April that it has been channelling excess LNG into the international market. Local media have said that Sinopec alone has sold 45 cargoes of LNG, or about 3.15mn tonnes. The total amount of Chinese LNG that has been resold is probably more than 4mn tonnes, equivalent to 7 per cent of Europe’s gas imports in the half year to the end of June. Make no mistake: all of this “excess” LNG was soured in part or in whole in Russia, but since it has been “tolled” in China, it is no longer Russian. It is instead – drumroll – Chinese LNG. The good news is that the 53 million tonnes that the bloc purchased surpasses imports by China and Japan and has brought Europe’s gas-storage occupancy rate up to 77%.If this continues, Europe is likely to reach its stated goal of filling 80% of its gas storage facilities by November (at which point it will start draining the reserves at a breakneck pace to keep warm during the winter). But while China’s economic slump has brought much-needed relief to Europe, it comes with a major footnote. As soon as economic activity bounces back in China, the situation will quickly reverse, and Beijing will no longer re-export Russia LNG to keep Europe warm. Hilariously, it also means that instead of being dependent on Russia for gas, Europe is now becoming dependent on Beijing instead for its energy – which is still Russian gas, only this time imported from China – which makes a mockery of US geopolitical ambitions to defend a liberal international order with its own energy exports. Worse, while Europe could buy Russian LNG for price X, it instead has to pay 2X, 3X or more, just to virtue signal to the world that it won’t fund Putin’s regime, when in reality is is paying extra to both Xi and to Putin, who is collecting a premium price thanks to the overall market scarcity. Without expressly stating it, the FT does imply that Europe is buying Russian LNG by way of China: If Russia ends up exporting more gas to China as a means to punish Europe, China will have more capacity to resell its surplus gas to the spot market — indirectly
Norway’s Natural Gas Production Could Set New Record This Year
The European Union is reducing its dependence on Russian natural gas and has made some progress. Norway has displaced Russia as the top supplier of NatGas to the EU as energy supply chains are rejiggered, reported Reuters, as Moscow reduces flows to EU countries via the Nord Stream 1 pipeline. According to government data in May, Norway ramped up NatGas production by at least 8% versus last year. This means the Scandinavian country could produce upwards of 122 billion cubic meters (bcm) of NatGas this year. Refinitiv Eikon data show Norway is now the largest supplier of NatGas to Europe, surpassing Russia, which has slashed Nord Stream capacity to just 20%. By Wednesday, the pipeline will undergo a surprise three-day shutdown for ‘maintenance’ work. Norwegian petroleum & energy minister Terje Aasland expects production levels can be sustained through the decade as new projects are coming online. This is undoubtedly a relief for the energy-stricken continent. “I expect that we can maintain the production levels we are at now until 2030. “We see that there are projects and also plans for development and operation coming now that can help maintain the high gas volumes going forward,” Terje Aasland told Reuters in an interview. The energy minister said diversification of EU’s Natgas supplies away from Russia is critical. He said, “this is an important message to get from the EU.” Increasing flows from Norway also come as European Natas prices have tripled and repeatedly hit new records this summer. Though prices plunged on Monday from all-time highs reached last week following news Germany was ahead of schedule in filling up storage facilities ahead of winter. “In principle, the market is predictable. When there is scarcity, prices are high. That also contributes to increasing production and steers the gas to the markets that need it most,” Aasland said. Despite Norway’s largest oil and gas producer, the majority state-owned Equinor, boosting renewable energy and low-carbon technologies investments, it will also increase hydrocarbon exploration projects to meet EU demand. Europe’s ability to unlock partial energy independence could be through Norway, as the oil-rich nation is now the largest supplier of NatGas to the continent and could be on track to sustain high production levels through at least 2030.
Amigo LNG Looks to Leverage Offtake Interest, Pipeline Capacity to Fast-Track Mexico Project
Mexico’s LNG space continues to grow with a new project called Amigo near the port of Guaymas in Sonora expecting a final investment decision by next February. “The fundamental driver behind the project is offtake interest in Asia, especially in India,” CEO Muthu Chezhian of Singapore-based LNG Alliance Ltd. told NGI’s Mexico GPI. India is the fourth largest consumer of liquefied natural gas in the world. An Indian company has already secured 50% of the proposed first train, he said. LNG Alliance develops end-to-end infrastructure solutions in the LNG space. The project would source gas from the Permian Basin in the United States. The Amigo LNG project has secured U.S. Department of Energy export permits for a terminal with 7.8 mmty of capacity across two trains. “The funding is in place, all the key elements are in place,” Chezhian said. “The big thing in Mexico is you want enough pipeline capacity, and access to that pipeline. Our project is very close to the Sasabe-Guaymas line. It literally runs right alongside.” The 700 MMcf/d Sasabe-Guaymas pipeline is anchored by Mexican utility Comisión Federal de Electricidad (CFE). Today, the pipeline feeds CFE’s 770 MW Empalme combined cycle power plant, and a significant amount of its capacity is unused. The state of Sonora is on board with the project, said Chezhian, and has agreed to lease the land for the project. A project launch event back in April saw representatives from the state in attendance, including the Governor of Sonora, the Mayor of Guaymas, and representatives from the Secretaría de Marina (Semar). “We are now working with the pipeline stakeholders directly for a contract for the next 25 years,” the CEO said. Nearby Shipping Channel Other LNG companies seeking to develop projects on Mexico’s Pacific Coast have floated the idea of potentially constructing a pipeline, but the existing pipeline is the quickest option. “I have fairly strong confidence that we will be able to negotiate a good and mutually beneficial deal,” Chezhian said. The project would be a tolling facility. “The water depth is good, it’s one of few places in the Sea of Cortez with this natural depth of 17 meters.” No dredging would be required, the CEO said. The Guaymas port shipping channel is nearby. “We will use services from the port of Guaymas and the maritime concession secured through the Port of Guaymas. This is a win-win cooperation model for both parties, as this project will enhance the overall port capacity by 35%.” The module-based fabrication would mean in-service would occur two and a half years after “we press the start button.” A short list of engineering, procurement and construction contractors has been drawn up. The modules would be built in Singapore and China, with the marine facility contract going to a U.S. company, Chezhian said. Upstream, the company has commitments on gas volumes starting in 2025 out of the Permian Basin. “Volumes are not a difficulty, the pipeline is the problem. If you want to lay a new pipeline, it takes years.” He says there is room for more projects in Sonora, if the pipeline capacity is enhanced. “But it’s not who starts the race, it’s who makes it to the finish line,” he said. He thinks the region can handle 10-15 mmty of LNG capacity. “But a tsunami of projects is not going to happen.” He thinks bypassing the Panama Canal gives these Mexico West Coast projects about an 80-cent advantage over U.S. Gulf Coast projects. The CEO said the way to handle the current market volatility is through a diversified demand strategy. “Our portfolio is a balanced one. It has to be a blended offtake.” The company has import projects in Montenegro, Indonesia, and in Karnataka, India. The target market in India is the fast-growing city gas distribution market. “LNG used to be a market for developing nations,” Chezhian said. “But with recent astronomical spot prices and higher cost long-term deals, countries like Pakistan, Bangladesh, the Philippines and Vietnam will find LNG to be less economically attractive.” He said, “we are also cautious that this market upcycle won’t be able to continue. We think within the first quarter of 2023 the market will be different.”
ONGC to add 100,000 sq km of new exploration area annually
ONGC’s current exploratory acreage stands at 170,000 sq km. India’s top oil & gas producer ONGC plans to add around 100,000 sq km of new exploration area annually to take the total exploratory acreage to 500,000 sq km by 2024-25. Addressing the shareholders in the company’s annual general meeting (AGM) on Monday, ONGC’s acting chairman and managing director Alka Mittal said, “Your company has launched a very ambitious exploration programme under which it plans to increase the exploratory acreage to 5,00,000 sq km by 2024-25 with an addition of around 1,00,00 sq km of new exploration area annually.” ONGC’s current exploratory acreage stands at 170,000 sq km. Mittal said the company plans to forge new partnerships and collaborations in exploration and production activities. The company has signed an initial pact with ExxonMobil, Aramco and Equinor. ONGC is currently implementing 21 major projects, each costing over Rs 1 billion. The total investment in these projects is around Rs 600 and envisaged oil and gas gain of about 97 million tonne of oil equivalent. During FY22, ONGC’s crude oil production, including share of production from joint ventures, was 21.7 million tonne (mt) while natural gas production was 21.68 billion cubic metres. Production of value-added products was 3.09 mt.
The Global Gas Crisis Is Spilling Into The United States
Both experts and everyday consumers remain at odds about the current state of the global natural gas market. The main point of contention is whether U.S. prices will drop significantly or rise further. With inflation hitting record highs this past year, nobody can blame consumers for being wary. Most experts agree that gas prices and demand will keep up their pace. The ongoing European energy crisis weighed into this heavily. EU countries continue to search for alternatives to Russian fuel. However, Europe’s energy problems will likely ripple into the entirety of the international energy market. In fact, it might be happening already. LNG Crisis in Europe Spilling into the U.S. The Nord Stream 1 pipeline running at low capacities could hit the U.S. harder than expected. With sky-high gas prices across Europe and dwindling reserves, the EU has been scouring the world for alternatives to Russian energy. Because of this, global gas competition recently experienced a sharp – and ongoing – rise. Along with this, the winter months will prove the most strenuous on the average consumer’s wallet. After all, millions of American and European homes rely on natural gas for heat. With winter quickly approaching, the situation looks grim. While bills like the Inflation Reduction Act will likely take some of the pressure off of natural gas demand in the US, those initiatives will take time to implement and build. The real question remains; will they be ready in 3-4 months’ time? On the positive side, Europe’s frantic search for solutions could pay off in the near future. Already, countries like Norway, the US, and the UK have stepped up to aid Germany and other central EU nations in getting alternative gas imports. However, whether or not these sources are enough to tide the EU over through winter remains up for debate. Asia Watching Natural Gas Reserves Closely With competition for natural gas hitting a fever pitch, many speculate gas prices will continue rising worldwide. Not only are natural gas supplies in the US being shipped to Europe to aid with the energy crisis, but record-setting heat waves mean more power consumption as American, and European homes are relying more and more on air conditioning. Even Asia has started feeling the strain of the Western energy crisis these past few weeks. For instance, Japan has begun looking for alternative sources of natural gas in light of the war in Ukraine and gas shortages in Europe. As with the West, Northern Asia is firmly focused on making it through the coming winter. In the past couple of weeks, Russia started hinting that it might also limit gas supplies to Northern Asia. Russia halted a large shipment of natural gas bound for its southern neighbors. Countries like South Korea and Japan, which have minimal natural gas reserves of their own, are heavily reliant on natural gas imports. This puts them in direct competition with European, which has its eye on LNG supplies shipped by sea. Though the battle to secure supplies just started, many experts expect it to intensify in the coming years.
Inflation Fears Push Oil Prices Back Down
Crude oil prices declined ahead of European markets opening as fears about more aggressive rate action by central banks outweighed any possible concerns for tighter supply from OPEC. At the time of writing, Brent crude was trading at $104.50 per barrel, with West Texas Intermediate at $96.86 per barrel, both slightly down on Tuesday’s close. “Risk appetite has cooled over an anticipation that the Federal Reserve would continue to increase interest rates…A pull-back of natural gas prices in Europe also adds uncertainties to the picture of energy crisis,” analysts from Hong Kong-based Haitong Futures said, as quoted by Reuters. The gloomy mood follows remarks made by Fed chairman Jerome Powell, who said on Friday that central banks are likely to stay the course of interest rate hikes as a means of reining in inflation. In making these remarks, Powell admitted that they would cause “some pain” to households. The European Central Bank is also a supporter of aggressive rate-hiking as a tool for inflation control. Separately, economist Steven Roach, a former Morgan Stanley executive, said the United States was definitely heading for a recession, deepening the pessimistic mood on markets and the outlook for oil demand. “We’ll definitely have a recession as the lagged impacts of this major monetary tightening start to kick in,” Roach told CNBC. “They haven’t kicked in at all right now.” Meanwhile, supply uncertainty remains although oil-buying in some key markets is not particularly strong, Reuters’ Clyde Russell noted in a column this week. Russell reported that oil buying in Asia was softer than prices would suggest, as China’s imports weakened. He also noted that any potential output cuts by OPEC+ might not have a direct impact on prices since the group is already undershooting its own targets, and by a lot. Meanwhile, violence in Iraq may threaten the oil production of OPEC’s second-largest member, adding to the upward potential for prices.
Pricing pressures shrink fuel retailers’ earnings
Pressure on marketing margins remains a key concern for oil marketing companies (OMC) that otherwise benefited from a rebound in gross refining margins (GRMs) and the strong volume growth in auto fuels. Fitch Ratings said that it expects India’s petroleum product demand to remain robust, driven by GDP growth of 7.8% forecast for FY23. It expects GRMs to moderate but stay close to mid-cycle levels in the second half of FY23. Nevertheless, large marketing losses at OMCs are likely to more than offset the benefits from strong GRMs during the year. Though crude oil prices have surged from around $77 a barrel levels at the start of the calendar year and Brent even crossed $130 during the first quarter, retail auto fuel prices have not changed much. This had hurt the Q1 performance of OMCs and is likely to restrict future earnings too. Analysts at Yes Securities Ltd said the lack of revision in domestic, retail, petrol and diesel prices despite international product prices touching record highs in the aftermath of the Russia-Ukraine conflict resulted in significantly weaker marketing margins, which were incrementally amplified by marketing inventory losses. While Indian Oil Corp. Ltd (IOC) managed to report an operating profit of ₹17.50 billion (down 84% from a year ago and 85% sequentially), Bharat Petroleum Corp. Ltd (BPCL) and Hindustan Petroleum Corp. Ltd (HPCL) reported operating losses of around ₹59 billion and ₹125 billion, respectively. This was even though companies reported robust GRMs, which soared as the benchmark Singapore GRM averaged at around $21.4/barrel in the June quarter, which was a significant jump from $8 a barrel seen in the March quarter. These were helped by improving diesel and petrol cracks. The decline in Russian and Chinese exports of refined products also hit demand-supply dynamics at a time demand recovered in the US and Europe, and inventories remained at multi-year lows. As a result, GRMs for IOCL, BPCL and HPCL stood at $31.8, $27.5 and $16.7 a barrel, respectively, significantly above $18.5, $15.3 a barrel and $12.44 they reported during Q4, as per analysts’ calculations. The GRM for HPCL was comparatively weaker, as the company is yet to accrue the benefit of expansion at its Vizag refinery. For BPCL, the merger of the Bina refinery helped cushion overall margins, said analysts. On the positive side, volume growth remains very strong and is seen in a positive light. Nevertheless, high crude prices will crimp marketing margins. A state of prolonged government interference in auto fuel retail prices and losses at OMCs would be negative for the standalone credit profile of OMCs and may lead to a rethink of the government’s approach to fuel prices, analysts at Fitch Ratings said. “We believe freedom for OMCs to control retail fuel prices would support government attempts to re-initiate the divestment of BPCL, should it choose to do so,” they added.
Mukesh Ambani says, KG-D6 to contribute 30% of India’s gas production
In the 45th annual general meeting (AGM), Reliance Industries chairman Mukesh Ambani on Monday said KG-D6 will contribute ~30% of India’s gas production. He was addressing RIL’s 45th annual general meeting for shareholders, investors, and others. Ambani congratulated its Oil and Gas team for a spectacular turnaround, with production jumping 9x and revenues crossing $1 billion. At present, KG-D6 is contributing 20% of India’s domestic gas production. While addressing in the AGM, Ambani said, “Let me congratulate our Oil & Gas team for a spectacular turnaround, with production jumping nine times and revenues crossing a billion dollars.” Ambani highlighted that with 19 million standard cubic meters per day of production in ultra-deep water fields, KG-D6 is contributing 20% of India’s domestic gas production. Going forward, Ambani said, “With the commissioning of the MJ Field by end-2022, KG-D6 will increase its contribution to nearly 30% of India’s gas production.” Last year, in April, supermajor bp had stated RIL and bp have been developing three deep-water gas developments in block KG D6 – R Cluster, Satellite Cluster, and MJ – which together are expected to produce around 30 mmscmd (1 billion cubic feet a day) of natural gas by 2023, meeting up to 15% of India’s gas demand. Notably, the developments will each utilize the existing hub infrastructure in the KG D6 block. RIL is the operator of the block with a 66.67% participating interest and bp holds a 33.33% participating interest. The third KG D6 development, MJ, is expected to come on stream by end of December 2022. According to Ambani, this will help meet India’s growing demand indigenously, leading to import savings of nearly $9 billion/ annum. Natural gas is a major source of clean and affordable energy for India, particularly in times of significant global energy crisis.
Russia Is Flaring Natural Gas While Choking Supply To Europe
Russia is flaring natural gas at the Portovaya plant near the Finnish border while drastically cutting gas flows via the Nord Stream pipeline to Germany, a Rystad Energy analysis shared with BBC News showed on Friday. The plant northwest of St. Petersburg is flaring an estimated around $10 million worth of natural gas per day—gas that would have gone to Germany otherwise. The Portovaya plant is near the compressor station of the same name where the Nord Stream route to Germany begins. Since June, Russia has significantly cut flows via Nord Stream, first to 40% of the pipeline’s capacity and then to just 20% of Nord Stream capacity after a ten-day regular maintenance period ended on July 22. At the same time, analysts, residents, and satellite imagery have detected and seen more heat from the Portovaya plant. Researchers tell the BBC they think the jump in heat coming out of the plant was the result of gas flaring. “They don’t have other places where they can sell their gas, so they have to burn it,” Miguel Berger, the German ambassador to the UK, told BBC News, commenting on the possible reason for the significant increase in flaring. According to Dr. Jessica McCarty, an expert on satellite data from Miami University in Ohio, “Starting around June, we saw this huge peak, and it just didn’t go away. It’s stayed very anomalously high,” she told BBC News. Meanwhile, gas prices in Europe hit fresh records this week after Russia’s Gazprom said last week that it would halt all deliveries via Nord Stream to Germany for three days. The reason for the 3-day suspension of gas flows via the pipeline would be due to maintenance work at the Trent 60 gas compressor station, which would be carried out with Siemens, according to Gazprom. This announcement raised renewed concerns in Europe that supply via the pipeline could be further cut or halted altogether after the three-day unplanned maintenance at the end of August.