The global energy transition is well underway, but it was a week of mixed signals in the drive for decarbonization. In Europe, additions of wind power capacity in 2018 fell to their lowest level since 2011 and the outlook for investment is uncertain, sector association WindEurope said.
Meanwhile, the EU struck an informal deal to enforce lower emissions from heavy goods vehicles. The rules would see new HGVs emit an average of 15% less CO2 by 2025 and 30% less by 2030 compared with 2019.
Glencore was the latest commodities company to pitch its environmental commitments, as investor pressure on corporates mounts. The mining giant announced its intention to cap coal output by 2020 and focus on “commodities essential to the energy and mobility transition,” such as copper, cobalt and nickel.
Despite widespread bullish views on EVs and commodities that are expected to power the transport revolution, S&P Global Ratings sounded a cautious note. In a report Friday, the company stressed that government policies and battery technologies will be major factors in the rate of growth.
As the industry flocks to London for IP Week 2019, Platts editors discuss the big oil topics that will be in the spotlight at the event.
GRAPHIC OF THE WEEK
Saudi Arabia has demanded greater adherence to oil production cuts by Nigeria in a bid to balance global oil markets and shore up prices, a Nigerian government statement said Wednesday.
EU ambassadors have endorsed an informal accord on new rules for operating offshore natural gas links like Russia’s planned 55 Bcm/year Nord Stream 2 link to Germany, an EU diplomatic source said Thursday.
Despite recent announcements by some ports on banning wash water discharge from open-loop scrubbers in their waters, about 8% of total bunkers consumed in 2020 will be scrubbed to meet compliance with the International Maritime Organization’s global sulfur limit rule for marine fuels, according to Robin Meech, MD at Marine and Energy Consulting Limited.
THE LAST WORD
“The importation of motor vehicle parts is not a risk to our national security, and not a single company in the domestic auto industry requested this investigation,” said the US Motor & Equipment Manufacturers Association.
The group, along with European car manufacturers, was warning against potential new US tariffs on foreign-made vehicles and parts.
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This is the concluding article in a three-part series exploring oil, plastics demand and sustainability.
European governments and corporates are setting ambitious goals on plastics recycling, but there are practical and economic hurdles to get over if the policies are to be a success.
Not only do some countries’ domestic markets lag behind, but there is a general reliance on material from countries such as Germany and the Netherlands where more inroads have been made to cope with high levels of demand.
So what are the key challenges that European countries need to overcome for their recycling aims to be realised?
Lackluster recycling rates
Collection rates are the biggest concern. This is the amount of plastic waste that is placed into the recycling stream by consumers. The collected plastic is processed into post-consumer bales, which become the feedstock for recyclers. It is in this most important factor that disparity is seen between European countries.
Germany, Scandinavia and the Netherlands enjoy higher collection rates, chiefly because they have effective consumer deposit return schemes that have been running for decades in many cases. A deposit return scheme works because it gives a financial incentive to consumers to recycle their plastic bottle, thus creating more supply of a good quality feedstock.
France and the UK, on the other hand, do not have deposit return schemes and have relatively low collection rates.
It is not just the rate of collection that is important – the quality of what is being collected also matters. Deposit return schemes work well because they provide a supply source that is, theoretically, almost 100% good quality, usable feedstock.
In Scandinavia, one market source even went as far as to say that the recycled polyethylene terephthalate flakes are of such a high quality that they can be fed directly into the machine that creates the bottles, and mixed with virgin PET. Normally the flakes must be processed further into pellets before being turned into a plastic bottle.
UK recycling, however, does not produce such high quality feedstock. There are two main reasons for this, which sources say must be addressed if the industry is to cope with expected growth in demand.
The first is consumer mixed recycling. The disadvantages of mixed recycling mean that when waste is brought to a mechanical recycling plant there are a significant number of contaminants that must be removed from the waste stream to create a usable feedstock. Not all the contaminants can always be successfully removed and, inevitably, not all of the PET will be recovered. Some will escape and move to landfill.
Simply put, by starting off with a lower quality waste stream, a lower quality feedstock is produced. This means that a lower-quality end product may be produced and less of the processed post-consumer material can be successfully recycled.
Output quality also determines the future use of the recycled product. Food-grade recycled PET pellets have to be of a very high quality, meaning only recycled material that was originally food-grade can be used and has to be processed several times. This increases costs and, even for countries with successful deposit return schemes, it is a tightly supplied market. Food-grade R-PET pellets, assessed by S&P Global Platts for the first time on February 6, 2018, can therefore be expected to command a premium price.
To boost the amount of collected waste that can be successfully recycled, sources have suggested that a deposit return scheme, akin to those in the Netherlands, Germany and Scandinavia, could be introduced in the UK. This would help increase supply, by providing the consumer an incentive to recycle and increase the quality of that supply, by having a dedicated PET supply stream.
In late March 2018, the UK Government proposed the introduction of a deposit return scheme as a means of increasing collection rates within the UK. According to the government’s Commons Select Committee environmental audit, a deposit return scheme in the UK could significantly increase recycling rates to between 80-90%, as in countries with successful deposit return schemes.
Effective, but costly
The German deposit return scheme has certainly helped increase recycling rates. Around 93% of PET bottles are reused and over 97% of bottles are deposited. As a result, the average recycled content of PET bottles in 2017 in Germany was just over 24%. Forum PET, an industry group that campaigns for the sustainable use of PET, now aims to increase this recycled material to 50% by 2022. This is much higher than the UK government’s plans of 30% by 2022.
These schemes, however, come at a cost, both in the installation process and in the incentive that needs to be given to the consumer – large enough to tempt them, but not so large that the recyclers are unable to pay. They also take time: time to gain enough coverage over the country, time for consumers to become used to depositing and time for recyclers to receive consistently good quality supply.
Sweden’s deposit return scheme started in the mid-1980s, while the rest of Scandinavia introduced schemes in the 1990s and early 2000s. In Germany, the scheme started in 2003 and there are now plans for expansion of products that can be deposited, beyond beverage bottles.
Despite the high costs involved in introducing and maintaining deposit return schemes, the increase in collection rates and quality of collection is sizeable. For the UK and France to meet their proposed policies on recycled content, introducing schemes seems to be a must. Even European countries that already have a scheme will have to increase participation in some way to meet increasingly ambitious recycled plastics policies.
Read the other articles in this series:
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Plastics and chemicals will account for the largest share of global crude demand growth by 2030, and a third wave of petrochemicals expansion underway in the Middle East is looking to cash in on the trend, as investment into downstream petroleum industries will become a critical demand driver for oil markets in the future.
Industrialized economies use up to 20 times more plastic and up to 10 times more fertilizer than developing nations on a per person basis, underscoring the huge potential for global growth. The International Energy Agency expects petrochemicals to account for almost half of global oil demand growth by 2050, equivalent to almost 7 million b/d.
However, chemicals and plastics have become dirty words for many consumers, with a growing international campaign gaining momentum to ban single-use products like bottles and cups. Despite the environmental backlash, particularly in Europe, Japan and South Korea, which have ramped up recycling efforts, S&P Global Platts Analytics expects demand for the material and other associated materials to remain on a growth trajectory.
“Petchems and plastics demand are highly correlated to population and GDP growth,” said Jennifer Van Dinter, Platts Analytics’ global head of NGL and petrochemicals. “The focus at present in the petchem market is targeting economic growth in China and India and bringing western development trends to those economies.”
Middle Eastern leaders
Middle East petrochemicals producers are racing to expand, and Saudi Arabia – already the region’s largest producer – is leading the charge. Last month Saudi Aramco unveiled a deal with France’s Total and Daelim of South Korea to build a new 80,000 mt/year polyisobutylene plant by 2024. The product is used for adhesives and lubricants.
The deal comes as Aramco pursues a tie-up with Saudi Basic Industries – the world’s third largest petrochemicals producer. Aramco and Total are also planning to construct a huge petrochemicals complex in Jubail, next to the SATORP refinery, utilizing 1.5 million mt/year of ethylene, key for plastic packaging. The state-controlled upstream giant is also working with Sabic on an another major project to convert crude oil to chemicals at Yanbu on the eastern Red Sea coast.
Abu Dhabi is also targeting significant petrochemical production growth. ADNOC is expanding its global refining and petrochemicals footprint, with plans to transform its main Ruwais facility into a sprawling integrated refining and petrochemicals complex.
Last year, the company said it aims to double crude refining capacity and triple petrochemicals production in a $45 billion investment drive alongside its partners. In Oman, the sultanate is investing heavily to create an integrated refining and petrochemicals hub in the port of Duqm outside the Persian Gulf.
The Duqm refinery—a joint venture between Kuwait Petroleum International and Oman Oil Company—includes a petrochemicals complex. The facility is expected to reach completion by 2023. The Duqm industrial zone, which aims to attract investments of up to $15 billion over the next 15 years, is Oman’s biggest single economic project and part of the sultanate’s efforts to diversify its economy away from oil export revenues.
State-owned Kuwait Petroleum Corporation is eyeing further expansion in petrochemicals. The company is mulling a potential fourth complex, called Olefins-4, to produce plastics. The project would add to KPC’s petrochemicals capacity on top of Olefins-3 and Aromatics-2, which are being built at the Al-Zour refinery. The 615,000 b/d Al-Zour refinery and petrochemicals complex in the south of the country is expected to come online in 2020 after years of delays.
The next wave
It is no longer just the Middle East banking on petrochemicals as the key source of oil demand growth. The US and now China are muscling in, with Deloitte saying availability of low-cost shale gas resulted in an unprecedented capacity creation and expansion in 2010-2017, primarily along the US Gulf Coast. And the next wave is imminent.
The Middle East, with an advantaged supply, and China and India, where there is strong demand, are “leading the way for oil-to-petchems refineries and projects,” Van Dinter said. “The North American petrochemicals complex has put significant investment dollars behind the ethylene value chain [which goes to making plastics among other products] in the form of ethane-fed steam crackers.”
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This is the first installment in a three-part series exploring oil, plastics demand and sustainability.
Barely a week goes by without another headline decrying the use of plastics and plastic packaging in Europe. Plastics are clogging up our oceans, overflowing our landfill sites and even finding their way into our food.
But as the world wakes up to the environmental damage caused by plastic waste and pollution, it may come as a surprise to learn that the industry is looking to dramatically ramp up production, not slow it down.
The International Energy Agency now forecasts demand for petrochemical feedstocks – the specific group of refined oil and gas products used to produce plastics – to grow by nearly 5 million barrels per day to 2040. Meanwhile, the petrochemicals sector itself is now being positioned as the largest driver of global oil consumption at more than a third of the growth in oil demand to 2030, and nearly half to 2050.
In the US, ready access to low-cost unconventional oil reserves has already led to the investment of more than $200 billion in new chemical manufacturing facilities since 2010, while in Europe new investments are counting on exports of US chemicals to produce even more plastics for consumption worldwide. Coal and methanol to olefins projects in China are driving self-sufficient plastics production in East Asia, while at the same time a wave of new capacity additions for ethylene – one of the major building blocks of plastics production –in South Korea, India and the Middle East are being met by an average global demand growth year on year of 3.4% from 2018 to 2028 according to S&P Global Platts Analytics.
As the public backlash against plastics intensifies, however, the industry is being forced to manage a difficult double act: meet growing demand while attempting to transition from a single-use economy to true sustainability.
Media spotlight drives policy
Reducing our reliance on single-use plastic and boosting recycling rates is certainly getting lots of attention in the media at the moment and that is a good thing. The 2017 BBC documentary Blue Planet II may have been a turning point, bringing home the scale of the damage plastics are doing to the world’s oceans. The shift in opinion against plastics has been as decisive as it has been central to recent decisions taken to curb their usage.
The European Commission is now moving aggressively to implement stricter recycling measures, the UK is proposing a ban on plastic straws and cotton buds as part of a 25-year plan to eliminate plastic waste, and India is committed to doing the same, only by 2022. Elsewhere, brand-owners such as Coca-Cola, Evian, Unilever and Nestle have committed to higher standards of product design and recycling content targets, and in April last year, supermarkets across the UK signed up to a ‘plastics pact’ which set targets to use 30% recycled material in all plastic packaging.
Yet while efforts are clearly being made to reduce the production of the world’s most harmful plastics, the focus until now has been almost entirely centred on single-use plastics. Legislation to restrict disposable plastic is an obvious win for legislators in Europe, representing a kind of low-hanging fruit to appease both consumers and voters, but the fact is these efforts are likely to do little to offset the massive underlying growth of chemical products globally. The truth is that plastics and the petrochemicals that are used to produce them are an integral part of modern society, and that is not going to change any time soon.
Plastic is everywhere
Chemicals derived from oil and gases are used in just about everything. Besides the manufacture of plastic straws, cotton buds, shopping bags and food packaging, they are used in digital devices, medical equipment and clothing. Synthetic rubber derived from the petrochemical butadiene is used in tires for cars, trucks and bicycles. Polypropylene – a polymer derived from cracking the hydrocarbon chains of distilled fractions of oil and then connecting the by-products – is used to keep tea bags from falling apart.
Beyond even tea bags, however, the attractiveness of plastics also extends to investments in clean energy infrastructure. Silicone is used in solar cells and thermoplastic foams are needed to make wind turbine blades lighter and more durable. Plastics also compose many of the materials needed for the light-weighting of electric vehicles –a fleet expected to number 280 million in 2040, according to S&P Global Platts Analytics.
To achieve the grand challenge of reducing our global carbon footprint, plastics will continue playing a crucial role in leading the transition away from fossil fuels to low-emission, low-cost alternatives.
Investment and innovation
Given the vital role plastics are expected to play in meeting the needs of future economies, major oil and gas companies have already begun moving to integrate downstream assets within their operations. For oil companies with deep pockets, the focus on major downstream initiatives in petrochemicals is both an effort to diversify portfolios and also a hedge against future reductions in road transportation fuels as the world moves to electric powered vehicles.
The recent acquisition by Saudi Aramco of Saudi Basic Industries Corp., the Middle East’s largest producer of plastics and chemicals, is one of many examples of oil giants that now perceive chemicals to be one of the future growth engines of the economy. Last year the company announced its latest investment will be the building of a crude-to-chemicals complex with a capacity to process 400,000 b/d of crude to produce 9 million mt per year of various petrochemicals. News quickly followed that Aramco will be investing $100 billion in chemicals over the next decade and will use 70% of its crude oil in petrochemical production.
Almost paling by comparison then, was news last month of the launch of the Alliance to End Plastic Waste, a partnership of companies committed to spending $1 billion to keep plastic waste out of the environment. Despite grabbing headlines, the pact seems unlikely to tackle the production problem at its source. The signatories in the alliance include Shell and Exxon, companies that are actively investing many more billions building integrated chemical production plants worldwide. With global production of more than 300 million metric tons of plastic each year and massive growth expected worldwide, sustainability concerns are unlikely to temper plastics demand.
However, many companies are beginning to see the economic potential in building infrastructure for plastics disposal and re-use. In 2017, furniture giant IKEA acquired a 15% stake in a Dutch polypropylene and high density polyethylene (HDPE) recycling plant. Petrochemical giant Borealis acquired German recycler mtm plastics in 2016 and Austrian recycler Ecoplast in 2018. Add to that list the purchase last summer of French recycler Sorepla by polyethylene terephthalate (PET) producer Indorama.
There are also signs that oil and gas companies are strengthening their links with recycling players, with the signing of an agreement in August last year between oil and gas major MOL and German recycler APK to support completion of the latter’s ‘Newcycling’ plant which will enable recycling of multi-layer packaging.
As the field of waste management evolves, the future of the industry may even lie in a new generation of plastic to fuel (PTF) conversion technologies, aimed at recovering synthetic crude oil from plastic waste. PTF may well be the first step in a move to a truly circular economy, irrespective of the massive increase in plastics demand that recent headlines seem to have missed.
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OPEC still needs Russia to prop up oil markets, but the arguments for an even closer relationship with the cartel are weakening.
The Kremlin’s two-year-long alliance with the 14-member group has been useful up to a point. On the one hand, oil diplomacy has helped to bolster President Vladimir Putin’s growing regional ambitions in the wider Middle East. On the other, Russia’s economy has also benefited from higher prices buffing up Putin’s financial credentials and popularity at home.
Russia’s oil minister and Putin loyalist Alexander Novak is an advocate of the OPEC deal. He said this week oil prices would have dropped to levels below the $27/barrel recorded in 2016 without his country’s commitment to the group’s cuts and pledged his ongoing support for cooperation on supply. It’s a view not necessarily shared by everyone in Russia. Rosneft’s chief executive Igor Sechin has previously been a powerful critic of working with the cartel.
“Reports this week indicate that the head of Rosneft continues to oppose ceding market share to the US, which may echo the opinion of others in the oil industry,” said Paul Sheldon, S&P Global Platts Analytics’ chief geopolitical adviser. “First, Russia’s budget still depends on oil revenues, and comments from President Putin in November point to a preference for Brent to remain around $60 per barrel. In addition, the geopolitical benefits of cooperating with US ally Saudi Arabia are likely appealing to the Kremlin.”
Falling behind the US
Rosneft’s Sechin may have a point. There have been negative consequences for snuggling up closer to OPEC. Bound by the group’s rigid production quotas, Russia’s once fast-growing oil industry has fallen behind its major rival. The country now ranks below the US as the world’s largest producer of petroleum liquids. Its semi-independent producers like Rosneft must now toe the line with output policies conceived in Riyadh and OPEC’s headquarters in Vienna.
Rosneft, which pumped almost 4.7 million barrels per day of petroleum liquids on average last year, complained last week it may have to slow down the development of several oil projects to fit OPEC’s strategy of managing the pace of supply in line with demand. Meanwhile, total US production is expected to hit a new record above 13 million barrels per day in 2020, according to the Energy Information Administration.
“If US shale production continues to grow at or near its current pace for the next few years, decisions for both Russia and Saudi Arabia will become more difficult down the road,” said Sheldon.
Despite the critics, it’s a scheme devised with the help of Russia, and has worked by preventing another collapse in prices. The cartel now hopes it can lock Russia into extending its pact, effectively binding some of the world’s largest producers together into a price regulating powerhouse on a scale not seen since the days of Standard Oil’s monopoly in the US at the beginning of the last century. Together the so called “OPEC+” alliance controls almost half the world’s supply of oil.
OPEC in the crosshairs
But the pact’s dominant position also brings dangers for Moscow. As with Standard Oil – broken up by US lawmakers in 1911 – OPEC is increasingly seen as an anti-competitive threat to America’s homegrown brand of “laissez faire” free-market capitalism. The proposed No Oil Producing and Exporting Cartels Act – also known as NOPEC – hangs over the group’s future in the US like a dark cloud.
The draft legislation has already scared some Middle East petro-states into rethinking their allegiances. Qatar’s decision to leave OPEC in January after 50 years of membership may have been partly influenced by the fear of being frozen out of the world’s biggest economy if NOPEC legislation should become law. Russia is already subject to Western sanctions and its ever closer association with OPEC could easily turn toxic.
Moscow’s relationship with both sides of the political divide in Washington is already complicated. Russia faces the prospect of tougher sanctions being imposed by the US as part of mandatory penalties doled out last year. Meanwhile, new US legislation could target Russia’s conventional oil industry, hurting some of the country’s most valuable assets. Ironically, Russia’s OPEC pact has arguably set its oil industry back more than sanctions.
Even with its current OPEC deal, Russia needs special treatment due to the structure of its oil industry. Output fell to 11.4 million barrels per day in January, but that’s still 185,000 barrels per day above its output quota of 11.19 million b/d, according to official data. Without Russia’s participation then responsibility will almost entirely fall on Saudi Arabia’s shoulders to ensure the 1.2 million barrels per day of output cuts agreed by OPEC and its allies are delivered.
“Russia’s cooperation in the 2016 and 2018 OPEC decisions to cut production were crucial to getting both deals over the finish line. And the short-term economic benefits of doing so the first time were clear, considering that the oil price impact proportionally outweighed Russia’s own loss of supply,” said Sheldon.
The same argument holds true today but a longer-term relationship with OPEC has other political and economic consequences that Putin would be reckless to ignore.
This article previously appeared as a column in The Telegraph
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The Lunar New Year brings shifts in supply in demand patterns across commodities, and 2019 was no different. Chinese oil imports saw a strong year on year increase in January, but February figures are likely to be weaker due to the vacation. Meanwhile, steel markets were braced for pent up demand as China went back to work.
Ferrous markets continued to focus on the fallout from Vale’s catastrophic iron ore dam failure, with far-reaching Brazilian legislation now responding to the disaster. Neighboring Venezuala is still in the grip of political turmoil, meanwhile, with consequences for global oil trade flows and supply chains further downstream.
New state and Brazilian federal government legislation restricting the use of tailing dams may have a significant and permanent impact on iron ore production in the southeastern state of Minas Gerais, the country’s biggest producer, with both market and political implications, state government and iron ore market sources say.
GRAPHIC OF THE WEEK
Factbox and infographic: PDVSA sanctions affect flows, accelerating output declines
The February 16 Nigerian election pits incumbent President Muhammadu Buhari against Atiku Abubakar from the People’s Democractic Party, in what is expected to be a close race. For Africa’s largest oil producer, the impact of the vote could stretch across the barrel, from crude oil exports to the domestic gasoline market.
Renewable energy sources are now a commercially profitable business in many parts of Asia Pacific without government largesse and subsidy support. But the renewables story has just started.
Supply disruptions in the Asia Pacific region have failed to lift LNG spot prices, amid lackluster demand in northeast Asia and ample supplies elsewhere in the market. Despite production cuts at the Pluto, Wheatstone and Gorgon facilities in Australia, and Bintulu in Malaysia, there were three to five excess cargoes available for March delivery, LNG trading sources said.
The bunker industry in Singapore should brace itself for volatile barging costs once the International Maritime Organization’s tighter sulfur limit rule is implemented in 2020, a development which could further squeeze barge companies that are already facing tough market conditions.
THE LAST WORD
“Probably for the next couple of years we will see US LNG in Italy, because the market is in such a situation that we think there will be room,” said Eni head of gas and LNG marketing, Massimo Mantovani, addressing the EGYPS conference in Cairo.
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In the event of Brexit there could be long-term consequences for UK-Russia energy links, if the UK’s policy on sanctions against Russia changes to reflect its vocal opposition to the current Russian government, and close relationship with the US.
“There is a good chance the UK would eventually toughen sanctions against Russia, if and when a deal to leave the EU is finalized,” Paul Sheldon at Platts Analytics said. Currently the UK is a participant in EU sanctions against Russia introduced gradually since 2014 in response to Russia’s role in the conflict in Ukraine. These include restrictions on Russian oil and gas companies’ access to long-term financing and technology used in offshore Arctic, shale and deep-water oil production.
UK officials have indicated they will carry over all EU sanctions and can do so via the Sanctions and Anti-Money Laundering Act passed last year.
If Brexit goes ahead there may be a greater chance of the EU and UK pursuing different sanctions policies in the longer term, however. The UK has long been one of the most vocal critics of the Russian government within the EU. Last year it pushed for harsher sanctions in the wake of suspected Russian involvement in the poisoning of former intelligence officer Sergei Skripal in the UK. While other EU countries offered support by expelling some Russian diplomats, they were reluctant to introduce broader measures. Further risks lie in ongoing investigations into alleged Russian interference in the Brexit referendum, which could spark fresh calls for new sanctions.
The UK’s close relationship with the US could also fuel calls for harsher measures. “Several uncertainties persist, led by the fate of Brexit itself and the potential for tighter U.S sanctions on Russian oil at the conclusion of ongoing investigations. In the event of the latter, Brexit would make it easier for the UK to act in solidarity with the U.S.,” Sheldon said.
US lawmakers have pushed for harsher sanctions against Russia in response to allegations of Russian interference in the 2016 presidential election, and it is likely that some of these proposals will come into force. This may include restrictions on the energy sector, including development of the Nord Stream 2 gas pipeline.
This has led to a divergence in approach between the EU and the US. While they remain aligned in opposition to Russian interference in Ukraine, there is no consensus in Europe on introducing fresh sanctions on major energy projects including Nord Stream 2. The EU is looking to apply stronger regulations to Nord Stream 2, but it stands to lose out if the project is delayed or blocked, as it involves investment from several European companies and would increase gas supply capacity to Europe.
UK energy assets in Russia
Sanctions aside, analysts do not expect Brexit, if it goes ahead, to have any immediate impact on the UK’s energy interests in Russia. UK companies have continued to develop their operations in Russia in recent years, despite living with sanctions and the significant deterioration in the two countries’ political relationship.
Any changes to UK sanctions policy are unlikely to put those projects at risk, Platts Analytics believes. “We do not currently anticipate new sanctions on BP cooperation with Rosneft in conventional oil fields, or other penalties outside of the already-restricted upstream sectors of shale, Arctic, and deepwater,” Sheldon said.
The cornerstone of UK-Russian energy links is BP’s cooperation with Russia’s largest oil producer Rosneft. BP owns a 19.75% stake in the company itself, as well as stakes in joint ventures. A company spokesman said that BP’s share of output in Russia averaged around 1.1 million barrels of oil equivalent per day in 2018, around a third of the company’s overall output. This is likely to grow in future if plans to increase output from the Taas-Yuryakh and Kharampur projects go ahead.
BP closed deals to join these two projects since sanctions were introduced. It has also expanded cooperation with Rosneft outside of Russia, with Rosneft taking a 30% stake in the Zohr gas field in Egypt in 2017. In recent years BP officials have indicated that they want to continue to develop operations in Russia and with Rosneft, but will adhere strictly to sanctions.
British-Dutch company Shell also continues to operate in Russia, through its joint projects with Gazprom. It holds a 27.5% stake in the Sakalin 2 oil, gas and LNG project, and a 50% stake in Salym Petroleum, which produces around 120,000 b/d of oil. Shell is also one of the investors in the Nord Stream 2 pipeline project.
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From relatively traditional roots, the Japanese beer industry became a hotbed of innovation in 2018.
For over 100 years, legislation dictated that beer had to contain 67% malt, with the balance of 33% strictly water, hops, yeast, corn, rice, or more malt. But a revision of the country’s alcohol laws – or “Shuzei ho” – which went into effect April 2018, allowed breweries to introduce a new gamut of flavors, including potato, fruit and spices. The revised legislation has also allowed the malt content in beer to be lowered to 50% from the earlier 67%.
The legislation opened ways to reduce input costs and create more innovative product lines offering new and different drinking experiences. With brewers facing a challenging domestic market due to Japan’s declining population, they quickly embraced the opportunity. Products with fewer calories, less sugar and purine soon sprouted, as well as beer-tasting beverages with no alcohol, appealing to the health-conscious.
One liquor store owner said they were satisfied with the resulting sales. Instead of detracting from real beer sales, he said non-alcoholic “virtual beer” was contributing to sales of its more potent counterpart.
“After giving their liver a break with virtual beer, customers go back to drinking real beer the next day,” he said.
Virtual beer appears to be creating a new market, allowing customers to relax outside without going to a bar. Many offices do not allow non-alcoholic beer to be drunk at work, so instead people often take their drinks outdoors to unwind.
It’s not the first time that Japan’s breweries, steeped in hundreds of years of tradition, have decided to experiment: 2015 saw the launch of collagen beer, a brew with added collagen, targeting women who want to increase their intake of the natural protein.
Losing its fizz?
The rise of virtual beer has implications not just for the future of the beverage industry, but also for the aluminum that has traditionally been used to make beer cans.
The beverage sector in Japan uses 20–30 billion cans annually, driving total aluminum consumption of 400,000–500,000 mt/year. This consumption is drawn from primary aluminum, all of which is imported, as well as recycled cans sourced locally.
The cans are made domestically by melting the primary aluminum and used can feedstock, pressing the molten aluminum into sheets, and cutting the sheets into cans. Japanese can imports are marginal, at 50 million cans per year – or about a quarter of a percent at most.
The prices of key inputs for Japan’s breweries changed significantly between 2016 and 2018. For example, between January 2016 and January 2018, the price of imported hops fell 64% to just ¥1,297/kg ($11.77/kg), according to customs data.
Price movements in other materials, such as ethanol, wheat and aluminum, were less favorable (see chart, below). Although the aluminum used in cans typically only makes up 5–10% of total production costs, the “all-in” price of Japanese aluminum, including both the LME cash aluminum price and the S&P Global Platts CIF Japan spot premium, rose 22.8% between January 4, 2016 and January 4, 2018, reaching $1,941.25/mt. By January 28, the all-in price had risen further to $1,942.75/mt.
The shift in Japanese aluminum prices reflects a drastic change in fundamentals. In 2015, aluminum supply was so abundant that, at times, using fresh aluminum was cheaper than recycling used beverage cans. Since then, the global aluminum balance shifted towards a deficit thanks to increases in demand from emerging market economies, as well as the closure of high-cost smelters in China and elsewhere.
Since 2016, China’s war against pollution has led non-compliant steel and non-ferrous metal production facilities to close, while the country’s government has been discreet about new plant starts.
Then there was the US government’s targeting of Russian aluminum producer Rusal with sanctions in April 2018 – a decision that was only reversed on January 28 this year. Within two weeks of the sanctions being imposed, benchmark LME aluminum prices rose by $599/mt, or about 30%.
Rusal had previously been exporting 4 million mt/year to Japan, leading to concerns this supply could suddenly become unavailable. In the two weeks after the sanctions were announced, the S&P Global Platts CIF Japan spot premium ballooned from $112.50/mt to $187.50/mt.
Other, longer term factors have also been at play – including rising consumption from domestic auto manufacturers. The beverage industry’s 400,000-500,000 mt/year aluminum consumption is larger than that of the automotive sector, which stands at about 300,000 mt/year. However, market participants forecast auto demand will outgrow that of the beverage sector. Kobe Steel forecasts Japanese aluminum sheet demand for cars will soar seven-fold from 2016 to 2025. Japan’s total aluminum sheet production capacity is 2 million mt/year, which would not be enough to accommodate demand growth from the auto industry.
If brewers intend to continue using 400,000-500,000 mt/year of sheet metal for cans, they need to pay to sheet makers attractive processing fees to match that of automakers. Currently, automakers are said to be paying at least 30% more for their sheets.
To go even further, breweries have looked at less costly substitutes. But cost is not the only ingredient for success when it comes to beer packaging: the material needs to provide strong protection from heat and light, ease of transport, and should also be recyclable. Steel and glass are two potential alternatives. However, while steel can be less than quarter of the cost of aluminum, it is heavy by comparison, as are traditional glass bottles.
Of these criteria, recyclability has become increasingly important as environmental sustainability is now a key operating metric for beverage makers. Breweries are vocal about being green, and some plants aim for the full reuse and recycling of all resources. Japanese beer makers resell waste from breweries to livestock farms, while containers are recycled. Aluminum can be used for several life cycles, with cans being re-melted and used over and over again.
On a relative basis, PET is increasingly seen as an ecologically friendly resource. As of 2017, Japanese recycled plastics production stood at 2.06 million mt/year, according to the Japan Waste Management Institute. Of the total 2.06 million mt, around 26% of this is PET, while 20% is polypropylene, 16% polyethylene and 15% PVC.
In response, breweries made what some might consider a logical cost-control decision: to move towards plastic bottles made from PET. However, the move was confined to non-alcoholic virtual beer. Although there is no official explanation as to why, sources said was likely the non-traditional market segment was less hostile to change than drinkers of real beer, who had got used to sipping their beverages from aluminum cans during the past 30 years.
Non-alcoholic brews that now come in unusual PET bottles include Suntory’s All Free All Time and Asahi Brewery’s Asahi Dry Zero Spark. Both look like radically different products compared with the traditional beers to which Japanese drinkers have become accustomed.
Outside the beer industry, PET and paper dominate the market for food packaging. If PET were to entirely replace aluminum in the beverage sector, as much as 500,000 mt/year of Japanese demand could be under threat. But sources suggest such a move is unlikely. One can maker said aluminum will continue to comprise a major share of beer packaging.
The liquor store owner agreed. The overwhelming majority of buyers still reach out for aluminum cans, he said, rather than PET.
“The feel of aluminum cans and the taste of beer come together.”
Additional reporting by Andrei Agapi, Hui Heng, Srijan Kanoi, Samar Niazi, Vanessa Ronsisvalle, Serena Seng & Takmila Shahid
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Narrower price spreads between US crudes and Dubai-based crudes have limited arbitrage opportunities to export US crude to Asia recently, S&P Global Platts data shows. However, some deals continue to get done as US crude delivered to Asia remains at a slight discount to competing grades.
In the first 29 trading days of 2019, the spread between LOOP Sour and Dubai has averaged about $2.60/b. That is compared with an average spread of $2.75/b during the same period a year ago.
As Dubai’s premium over LOOP decreases, US-based sour crudes become less competitive with comparable Dubai-based grades in export markets. The Dubai/LOOP Sour spread reached its widest point of the year so far on January 11 at $5.11/b. Its narrowest point of the year came January 25 at 90 cents/b.
The LOOP Sour-Dubai spread has been mostly narrowing since the fall as US Gulf Coast sour crude differentials have soared in recent weeks. US crudes, particularly sour grades, have jumped on concerns over the supply of medium and heavy sour crudes due to OPEC production cuts and uncertainty arising from US sanctions on Venezuela.
The 10-day moving average between LOOP Sour and Dubai was $2.40/b on Monday compared with $3.60/b one month ago and $4.40/b two months ago. One US-based crude buyer for an Indian refinery said that US crude differentials are too expensive at the moment to make export deals work.
“Prices are too high,” the crude trader said. “The arb is closed.” While the window of opportunity to move US crude is limited, some deals continue to get done, likely because values for delivered US crude to Asia remain at a discount to competing grades.
On Monday, S&P Global Platts assessed LOOP Sour CFR North Asia at $62.13/b. It is still at a small discount to comparable values for competing grades as Dubai was assessed at $63.10/b, and Basrah Light at $62.80/b.
Buyers in Asia may be looking to alternatives to expensive VLCCs in order to move crude from the US. ATMI on Friday was heard to have fixed the Suezmax Sonangol for a US Gulf Coast to West Coast India voyage in February. Oxy also arranged for a VLCC to carry US crude to China in March. No US-to-East fixtures were heard done Monday.
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