Oil companies want to become power utilities to meet rising demand from electricity in transport and from growing populations. The strategy makes sense, but would also bring risks for regulators and consumers if it were to create a new breed of gigantic energy-controlling monopolies.
On one hand, watchdogs in developed markets such as the UK should welcome the introduction of relatively new players like Shell and BP to challenge the Big Six conventional utilities. On the other, electricity markets are politically sensitive and oil majors would make easy targets for politicians keen to be seen protecting consumers if profits are put too far ahead of the public good.
The Labour Party has threatened to nationalize parts of the electricity industry if it gains power in Britain. Meanwhile, regulator Ofgem was forced last year to introduce price caps to reduce household energy costs in response to political pressure. Introducing big oil into the debate could fan the flames.
There is also the question of shareholder value for oil industry leaders to consider. Can Shell and other international oil majors afford to increase spending in their embryonic electricity businesses and still maintain adequate levels of expenditure on their conventional oil and gas divisions, which remain the main drivers of profits and investor returns?
The decline in capital expenditure in new oil production has been flagged as a major concern for policymakers seeking stable crude prices. The world could require at least another 30 million barrels per day of new crude capacity by 2040 to meet demand, replace ageing reservoirs and keep prices affordable. Diverting capital into electricity markets could be a distraction.
Despite these concerns, international oil companies such as Shell are ramping up their investments in electricity. The largest international oil major in Europe expects the market for power to be the fastest growing area of the energy industry as pressure builds to cut global pollution and carbon emissions, according to a recent Bloomberg television interview by Shell executive committee member Maarten Wetselaar.
“We believe we can be the largest electricity power company in the world in the early 2030s, because this part of the energy system is going to be the thing that grows fastest,” said Wetselaar, who also heads up Shell’s gas and new energies division.
Wetselaar’s vision is understandable given the rapid growth in electric vehicles (EVs). S&P Global Platts Analytics forecasts that plug-in EVs – including rechargeable hybrids – will account for nearly half of global auto sales by 2040, displacing some oil demand as a transport fuel and expanding the role of the electricity sector.
Shell has said it plans to avoid investing in conventional transmission and power station assets to focus instead on distributed renewables and supply, making its goal to become number one in the power sector a complex and risky bet on emerging technologies and markets. The company beefed up its UK electricity supply business by buying First Utility in late 2017. It has since struggled to compete with cheaper start-ups in a fiercely competitive market that has seen a slew of supplier bankruptcies in recent months.
Energy majors in new battleground
To become the world’s biggest renewable generator, meanwhile, would require an annual expenditure in the region of $2 billion initially, according to a report by S&P Global Platts. By comparison, Spain’s Iberdrola – a European sector leader – ploughed over $5 billion into green power generation growth last year.
Iberdrola has 29 GW of renewable electricity capacity installed worldwide. Shell has 1.6 GW of solar and will have 5 GW of wind on completion of committed investments. And Shell isn’t alone in wanting to forge into these new markets. BP claims it is now generating enough power from wind renewables to feed 400,000 homes.
Meanwhile, some international oil companies are being even more aggressive, posing a direct challenge to incumbent conventional utilities in their domestic markets. In France, Total recently acquired Direct Energie. The deal pits it against the state-owned market giant EDF. By 2022, Total aims to be supplying electricity to 6 million customers in France and 1 million in Belgium.
However, utilities can’t match the financial muscle of big oil. NextEra Energy, the world’s biggest renewable generator in the US, had a turnover of around $17 billion last year, which is less than Shell made in actual profits over the same period. Gobbling up rivals in the power sector is relatively cheap when armed with an oil company’s gigantic balance sheet.
Globally, it’s not just international oil majors going electric. State-owned fossil fuel producers are increasingly looking at the sector for growth. Saudi policymakers have for the last decade harboured dreams of the kingdom being the biggest exporter of solar-generated electricity in addition to crude oil. Elsewhere in the oil-rich Gulf, petrodollar sheikhdoms are pumping billions into renewables.
US oil companies are also coming under more pressure to diversify. Rising star US Congresswoman Alexandria Ocasio-Cortez has America’s most powerful business lobby in her sights. Ocasio-Cortez wants 100% of the country’s power to come from renewables and fossil fuels to be phased out in the world’s biggest economy, in just a decade.
In its defence, big oil is stressing that EVs are no magic bullet for climate change and won’t spell the end of petroleum. EVs still account for a small share of the total global passenger vehicle fleet. Global sales of light duty plug-in EVs saw double-digit year-on-year growth in January, but still only totalled 155,000 units, according to the latest S&P Global Platts Analytics monthly report.
Of course, declines in consumption by motorists will be compensated by growth in petrochemicals and industrial transport like shipping. Rapidly growing developing economies in Asia will also increasingly play a more important role in supporting crude demand. In tilting from hydrocarbons to electrons, oil companies will have to find a balance between serving their fossil fuel past while investing in their electric future.
This article previously appeared as a column in The Telegraph
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Louisiana Offshore Oil Port continues to load on average one VLCC crude tanker per month for export and logged its third such export of the year late last week.
The 2 million barrel-capacity VLCC Dilam loaded at LOOP and set sail for South Korea on Wednesday, according to cFlow, Platts trade flow software.
Dilam marks the third VLCC export from LOOP so far this year. All of the LOOP-loaded tankers have been taken to South Korea. New Caesar departed LOOP on February 1 and was observed in South China Sea on Monday. The tanker is expected to arrive at the Port of Yeosu in South Korea on March 26. The 2 million barrel-capacity Amad set sail from LOOP on January 6 and also made a trip to the Far East.
The vessels’ destination of Yeosu is home to the 785,000 b/d GS Caltex refinery, which runs mainly light and medium sour crudes. South Korea continues to be a popular destination for US crudes. The country has taken on average, 2 million barrels/week during the past five weeks, according to Platts data.
LOOP, which is only facility in the US that can directly load a VLCC without using ship-to-ship transfers, first started exporting crude on VLCCs in February 2018. The facility averaged loading about one tanker a month for the remainder of the year.
LOOP exported 1.94 million barrels of crude oil in February 2018, which was the first month of LOOP exports, according to data from the state of Louisiana. In December, the most recent month for which data is available, LOOP exported about a record-high 6 million barrels. That same month LOOP reported loading three VLCCs.
US crude exports have exploded in the past year, reaching or exceeding 3 million b/d twice in 2018.
US crude exports reached a record high of 3.6 million b/d for the week ending February 15 and the four-week crude export average is about 3 million b/d, according to data from the Energy Information Administration.
The US exported around 2.3 million b/d for the week ending March 15, according to S&P Global Analytics.
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Trade in polyethylene resin and finished products slowed in the fourth quarter of 2018, becoming a casualty of the US-China trade war.
Last year, the Trump Administration launched a full-scale trade war with China, imposing three rounds of tariffs worth a cumulative $250 billion on Chinese products.
The move was intended to counter China’s practice of requiring US companies to turn over intellectual property as a condition for gaining access to the world’s second-largest economy. China responded with $110 billion in tariffs on US products, also in three rounds, signaling a commitment to protecting its interests and economic growth.
The petrochemical-heavy second and third rounds of these tariffs came as the US chemical industry started up the first wave of more than $200 billion in new and planned infrastructure.
US gas boom drives petchems ramp-up
This industrial build-up emerged from the domestic natural gas boom and its seemingly endless bounty of cheap feedstock, namely ethane. That feedstock advantage, shared only by the Middle East, prompted chemical producers to turn the US into a global supplier of raw materials and resins. Asia, and more specifically China, were the target markets, given the region’s projected demand growth that far surpasses the rest of the globe.
Much of the new US chemical infrastructure focuses on making polyethylene, a precursor to the most-used plastics in the world. Natural gas transmission pipes, opaque milk jugs, toys, grocery bags, buckets, cookie packaging and cellophane wrapped around meat at the grocery store are among the hundreds of products made with PE. Accordingly, PE manufacture dominates the petrochemical infrastructure currently starting up, under construction or planned in the US.
China originally announced in 2018 that its tariffs would target low density polyethylene (LDPE), which makes up about 7% of 13.7 million mt/year of new PE US production that is operational, under construction or planned from 2017-2027. However, China replaced LDPE with linear low density (LLDPE) and high density PE (HDPE) shortly before imposing its retaliatory tariffs in August. Those grades make up more than 90% of that new US output, 29% of which is operational – suddenly making it a significant concern to US producers.
Overall, US PE exports reached a record 4.3 million mt in 2018, up more than 24% from 2017, US International Trade Commission data shows. The share sent to China declined while some flows shifted to other markets, notably Europe and Vietnam.
Chinese Customs data show China’s Q4 2018 imports of US-origin PE resin nosedived 57% to 98,000 mt compared with the third quarter, with new inflows seen from Saudi Arabia, UAE, Taiwan and Singapore, according to China customs.
Total PE imports to China in Q4 actually rose 0.5% to 3.8 million mt from Q3, according to the data.
Data from Chinese firms who typically imports large quantities of US PE details this pullback.
Tetra Pak Hohhot, part of the multinational food and beverage packaging company Tetra Pak, saw its LLDPE resin imports from the US drop by 74% to about 600 mt in Q4 compared with Q3, as compared with its overall LLDPE resin imports, which fell 26%.
Weihai Lianqiao International, a textiles and garments company that lists US stores such as Walmart, Forever 21 and Macy’s on its website as clients, saw its US-origin HDPE resin imports fall by 93% to about 400 mt in Q4 compared with Q3, while its overall HDPE imports fell by about half.
This does not mean China has stopped buying PE from US companies altogether. US PE producers with global footprints have the option to reroute supply from their international operations. DowDupont, for example, can supply Asia from its Canadian assets as well as its Sadara joint venture in Saudi Arabia. ExxonMobil also can supply China via its Singapore operations, minimizing tariff fallout.
Bag trade blighted
Meanwhile, China’s petrochemical finished goods products were caught in the middle of the trade tensions as well. US imports of Chinese PE bags and sacks began declining last September, targeted by the US’ $200 billion in tariffs implemented the same month.
These imports fell 19% in Q4 2018 from Q3, according the data, reversing 2017 year-on-year growth of 35%, according supply chain data from Panjiva.
The growth decline is accelerating in 2019, with import figures plunging 38% in January and 45% in February compared with same month last year, according to the data.
The chief fallout from ongoing trade tensions between the US and China is uncertainty. No one knows how long tariffs will last.
Building a new plant can take up to five years from initial planning to startup, and companies make such investments based on long-term forecasts of supply and demand, not market volatility or geopolitics. Tariffs could be gone by the time a plant under construction in 2019 starts up in 2021 – or by the time one starts up in late 2019.
In addition, changing long-established supply chains can take up to 18 months or more, to conduct due diligence for quality control before a the arrival of a new supplier’s first shipment of key ingredients, for anything from medicines and cosmetics to flame retardants or packaging. That complex, expensive process could be rendered moot if the tariffs are suddenly lifted.
Conversely, if the trade war drags on, China could keep finding alternate sources for raw materials and plastics, siphoning market share that the US may not be able to retrieve – just as the shale revolution is offering it a competitive edge.
The post Tariffs frustrate US-China trade in plastic resins and finished products appeared first on The Barrel Blog.
The global chasm in crude oil quality supply shows no signs of narrowing, prompting refiners to lighten their slate and leading to a market awash with gasoline , naphtha and LPG.
New restrictions next year on the amount of sulfur in global marine fuels may mean refiners buy even more US shale oil , but this may not put an end to a saturated light ends market. Much hinges on demand.
The meteoric rise in US production over the past decade — almost doubling to record highs of around 12 million b/d — shows little sign of slowing in the near term.
As light sweet US shale floods the market, producers of heavier, more acidic varieties have been cutting back due to OPEC-led output cuts to the tune of 1.2 million b/d.
US sanctions on key exporters like Venezuela and Iran have choked off more than 1 million b/d and even cuts from the US’s northern neighbor Canada have tightened the sour oil market.
There appear few answers to the supply side of the ledger.
Even oil’s supermajors, once burned by forays into the Permian and other important shale plays, are muscling in once again on the US independents, while Middle Eastern producers are reluctant to cut back on what little sweet crude they export.
Saudi Arabia and their Gulf allies are tacitly benefitting from higher prices for their heavier grades.
Iran is likely to suffer further sanctions misery in May when the exemptions granted in November are most probably eased, while the full force of sanctions of state-owned PDVSA will be felt in the months ahead.
The demand side, while complicated, could provide some respite to an off-kilter market.
At the refinery level, there has been a changing diet to lighter, sweeter crude . This has been more challenging for the swath of sophisticated refineries which had invested in equipment to handle thicker, sourer varieties only to find themselves paying relatively higher prices.
The spread between the light sweet S&P Global Platts Dated Brent benchmark and the medium sour Platts Dubai measure has narrowed considerably in the past few years, reflecting the growing disparity between sweet-sour grades.
The Brent /Dubai Exchange of Futures for Swaps (EFS), which is a key indicator of ICE Brent’s premium to benchmark cash Dubai prices , has been paper thin. The Brent /Dubai EFS has averaged around 50 cents/barrel this year compared to $3.75/b in 2016, S&P Global Platts data shows.
In Europe , naphtha cracks have been averaging minus $8-$9/b to Dated Brent so far this year, the lowest since 2009, according to Platts data.
“Lighter average crude quality is increasing the supply of naphtha, but tightening residual fuel until IMO 2020 frees up high sulfur fuel oil,” S&P Global Platts Analytics said in a recent note.
There is no doubt that demand for less sulfurous products is shifting, in particular less demand for fuel oil used in shipping as the International Maritime Organization ’s 0.5% sulfur cap comes into force at the start of 2020 from the current 3.5% limit.
Refiners will have to meet additional shipping demand for diesel and low sulfur vacuum gasoil by snapping up lighter, sweeter crude and producing less fuel oil .
Refineries becoming more complex can convert residual fuel oil into more valuable products, with companies such as Saudi Aramco telling Platts recently that it is targeting zero fuel oil output by 2024.
But this doesn’t solve the riddle and may only exacerbate the glut in gasoline, jet fuel and naphtha.
Looking at the proportion of products that come from a typical barrel of US shale oil and a typical barrel of heavier sour crude, the former can be almost 90% middle distillates or lighter, while the latter produces around 50% fuel oil. Moreover, greater refining of middle distillates will tend to mean more gasoline and naphtha is also produced.
The recent International Energy Agency “Oil 2019” report doesn’t suggest the excess gasoline and light end cousins will be mopped up that easily.
Demand growth for gasoline — the world’s most popular transport fuel — is expected to slow to below 1% a year to 2024 due to efficiency improvements and new fuel economy standards
Wider spreads needed
However, aviation and petrochemicals makes for lighter reading, with a 1.9% a year growth in jet fuel demand over the next five years and a 2.6% a year rise in LPG, ethane and naphtha demand in that period.
”Wider spreads between light, sweet products and heavy, sour ones will be required to allow more expensive rebalancing steps to be carried out economically,” wrote S&P Global Platts Analytics’ Rick Joswick in the latest Turning Tides special report.
So while the looming IMO decision will encourage a shift to consume US shale and other light sweet grades, it could also lead to a gasoline glut as global demand across the barrel is predicted to slow down.
The newer price dynamics for premium products may indeed become the new normal, with price once again the ultimate arbiter.
One thing seems certain in the years ahead: crude quality and the fungible nature of crude can no longer be taken for granted.
The post IMO 2020 may not solve crude oil quality riddle: Fuel for Thought appeared first on The Barrel Blog.
Ulterra's SplitBlade wins @Hart_EPMag Special Meritorious Award for Engineering Innovation (MEA)! Click here to read more >> https://ulterra.com/drilling-technology-news/ulterras-splitblade-wins-the-2019-ep-special-meritorious-award-for-engineering
Ulterra's SplitBlade wins @Hart_EPMag Special Meritorious Award for Engineering Innovation (MEA)! Click here to read more >> https://ulterra.com/drilling-technology-news/ulterras-splitblade-wins-the-2019-ep-special-meritorious-award-for-engineering-innovation/ … pic.twitter.com/YZOt0vP6yG
As energy industry professionals gathered in Houston for CERAWeek, global oil politics was top of the agenda.
Policymakers and market participants saw opportunities for the US to grow its oil and gas exports amid geopolitical turbulence.
Developments on Iran sanctions were a key question hanging over the event, as the market awaits further news on waivers for key importers of Iranian crude. And the US’s request thatIndia cut its Venezuelan crude oil imports has raised the possibility that it could take a softer line on Indian purchases of Iranian oil.
Meanwhile, Japan this week looked poised to take a last cargo of Iranian oil under the current waiver, as talks between Japan and the US on the sanctions continue.
GRAPHIC OF THE WEEK
US oil and gas rig counts have shown erratic patterns lately, but one reason for recent declines may be the increasing efficiency of operators.
The European Parliament is on track to approve all outstanding draft EU energy laws by mid-April, ensuring that the push away from fossil fuels towards renewable energies will not be disrupted by its elections in May.
India’s appetite for gasoil is set to witness robust growth in the second quarter as the country gears up for its federal election in April, prompting refiners to delay turnaround plans, limit exports and build stocks in expectation of a rise in incremental demand.
Buyers in Southeast Asia have returned to the Black Sea to purchase new crop milling and feed wheat, three to four months ahead of the harvest. In this podcast, agriculture editors Takmila Shahid and Andrei Agapi examine the factors that triggered the buying appetite and whether the pace will pick up rapidly.
THE LAST WORD
“I’d venture to say the [US] Gulf of Mexico itself is on life support… We’re not putting enough money back in to grow supply five [to] 10 years from now.”
– John Hess, CEO of oil company Hess Corp., speaking Monday at CERAWeek.
The post Energy and commodities highlights: CERAWeek, US sanctions and EU energy laws appeared first on The Barrel Blog.
Minerals producers have made fortunes over the last decade to slake China’s thirst for raw industrial metals.
But in the future their profits could be hit by the Middle Kingdom recycling ever-greater quantities of its own ferrous scrap to meet industrial demand and, more importantly, cut dangerous pollution levels.
It is an interesting time to be a scrap dealer in China. The market for recycled metal in the world’s second-largest economy is booming. Demand for steel scrap for smelting into new material in China surged by almost 40% in the first nine months of 2018 to around 150 million mt, according to the International Recycling Bureau’s latest figures.
Stricter rules to reduce emissions, trade tariff wars on the import of waste metals from the US and the rise of China’s urbanised middle classes, who are now buying new white goods and throwing out old household appliances with greater frequency, have triggered a scrap metal revolution in the country.
“Many believe scrap is the future,” said William Chin, senior vice-president and head of commodities at the Singapore Exchange (SGX), in an interview this week with S&P Global Platts. The exchange, which is a hub for iron ore trading in Asia, is considering launching a new scrap metals derivative contract, partly in recognition of the growing market in China.
“Everyone I have spoken to has said scrap is going to be big,” said Chin.
Emissions a political priority
China’s war on pollution will require more metals to be recycled, a less energy intensive process than smelting ore. Despite a concerted effort by the government to clean up the country’s dirty air, emissions remain a major political and economic concern. Previously, China has been forced to shut down its factories when the air became unbreathable.
The problem is particularly bad in cities like Tangshan, China’s equivalent of Sheffield during Britain’s heyday as a major global producer of iron and steel. The air in this city of almost 8 million people is often classified as unhealthy for humans by the closely watched Air Quality Index. China’s cities have outdone the grim image of dark satanic mills in England’s industrial north painted by LS Lowry.
The annual meeting of the National People’s Congress, which kicked off this week, was shrouded in thick smog smothering Beijing. The high levels of pollution wafting in from neighboring industrial cities in Northern China will have served as a reminder to delegates in the Great Hall of the People to not relent on their campaign to clean up the environment.
Premier Li Keqiang opened the gathering by vowing to sharply cut emissions of sulfur dioxide and nitrogen oxide, both major pollutants produced by the country’s dirty iron and steel foundries. Mixing scrap metal into their furnaces is a way for China’s steel mill owners to meet demand, while hitting new emissions quotas.
China’s domestic supply of scrap metal should also help to reduce its dependence on imports of iron ore. The country accounts for over 70% of the 1.6 billion mt annual market for the steel-making ingredient. This will continue but the blend of imports is changing to take account of new environmental standards and the growing use of domestic scrap by Chinese smelters.
The recycling drive also extends to non-ferrous metals such as copper. China’s decision last year to impose a 25% tariff on the import of US recycling materials including copper means domestic supply has to increase to help meet industrial consumption. The government has also introduced legislation to regulate imports of waste materials to prevent China becoming the world’s rubbish dump and last year already banned imports of mixed metal waste, with lower metal contents.
However, China still needs more domestic metal and industrial scrap to keep its giant economy humming. Although exports suffered their biggest drop in three years last month, the government has unveiled almost $300 billion of tax cuts and stimulus measures over the last week, to help support growth.
Despite the robust fundamentals to support the global ferrous metal scrap market, prices have remained weak, partly due to China’s growing use of its own domestic supplies instead of importing more waste material from overseas. The price of the Heavy Melting Steel benchmark assessed by S&P Global Platts has dropped by almost 15% to around $322/mt over the last year to date. However, the decline is mainly due to problems in the Turkish market, a major hub for scrap.
China’s push to use more of its own scrap metal, to help clean up its dirty air and reduce foreign imports, will be an increasingly important factor for global commodities investors to consider and a way for this industrial powerhouse to prevent catastrophic levels of pollution from ruining its economic achievements.
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Life doesn’t seem to be getting any easier for hydrocarbon producers despite their return to bumper earnings from firmer prices.
As energy executives prepare to face activist investors at annual general meetings next month, pressure for faster change seems to be coming from all angles. Already under siege to de-carbonise their long-term business models, Big Oil is still struggling to attract talent and overhaul its male-dominated management structures.
With the AGM season fast approaching, climate-change related proposals from US investor groups alone are expected to hit a new record of over 90 this year, up from up from 36 in 2013, according to ISS Analytics.
At the International Petroleum (IP) Week last month, an annual London gathering of traders and industry executives, corporate hand-wringing over the industry’s present and looming business woes was palpable.
The key message from the headline speaker – the head state energy giant Saudi Aramco Amin Nasser – was clear; there is a “crisis of perception” that the global oil and gas industry has little future, risking a major energy supply crunch in the years ahead.
“Facts and logic” over the need for hydrocarbons are being ignored and the importance of oil is “misunderstood” by both the public and climate activists, the event heard.
Justified or not, public perceptions about the future for hydrocarbons are certainly hitting producer’s ability to hire and retain expertise.
Oil majors have for years been lamenting their fading appeal to young minds as a future career path, as they struggle to shake off their image as a dinosaur industry ready for obsolescence. Concern is now growing within the industry that the digital revolution is hoovering up the best young talent.
With more of the talent pool opting for alluring jobs in the technology sectors, new geologists and petroleum engineering graduates have been in short supply, putting pressure on wages and driving upstream costs.
To compete, oil companies at IP Week talked up the need to engage new recruits with their own digital initiatives. Representations from BP, Total and Equinor all said they are looking to double down on efforts to embrace the “disruptive” potential of new tech such as quantum computing, artificial intelligence, and blockchain.
“Millennials … are not motivated as much by money; they are driven by mission and meaning,” Mr Nasser said. “We need to inspire them … with the technology-driven enablers we are contributing to address some of the world’s greatest challenges.”
Lagging on diversity
Shareholders have also been increasingly targeting companies with little or no female representation on their boards. As representatives of blue-chip power, Big Oil is very much in the firing line.
Last year, Legal & General Investment Management, one of the biggest investors in the UK stock market, announced it would step up pressure on companies by voting against the chairs of FTSE 350 firms at annual meetings if their boards were not at least 25 per cent female.
Tellingly, during one IP Week session, an all-white male panel of industry executives was quizzed from the floor on how oil majors can tackle the lack of diversity in their boardrooms.
Big corporations have spent billions of dollars attracting and managing diversity, but they still face discrimination lawsuits and, for many, their leadership ranks are stubbornly white and male.
Overall, 22% of the global oil and gas sector’s workers are women, according to a 2017 study by Boston Consulting Group. Only the construction section fares worse.
The problem is most visible, and arguably controversial, at the top of the corporate food chain: in the boardroom. An EY survey last year found only 11% of the world’s top oil and gas senior executives are women.
Top female leadership roles are also the hardest to fill, with the retention of women beyond the mid-career, middle management levels a particular challenge.
But to claim there has been a little progress in gender leadership roles is unfair. Government targets and the rising threat of shareholder action has already pushed most companies to take action.
In the UK, female participation on boards in the FTSE350 has more than trebled to 27 % since the 2011 landmark Lord Davis review which set “soft” targets.
Detractors point to the very low starting base, and many shareholders now focused on gender parity in the workplace are still frustrated by the slow pace of change.
This poses a continued dilemma for international and national oil companies which – despite making progress on improving the ratio of top women to men – are still being labelled as big “boys’ clubs”.
Gender equality aside, producers also face rising expectations that board diversity translates to stronger earnings. Simply put, more diversity is now seen as a performance driver critical to business success.
So how should the energy industry respond to its new challenges? Perhaps simply claiming that its purpose and value is “misunderstood” due to a “crisis of perception” might not be the best way forward, BP’s upstream chief Bernard Looney suggested at the London event.
“We run a slight risk of feeling misunderstand and therefore our response is to shout louder,” he said in response to a question on how oil companies can navigate the shift to clean energy.
“I don’t believe that shouting louder is a way to articulate our purpose. We have to find a way to be more engaged, but not do it in a way that appears defensive.”
That same prudence over the message will need to be in plentiful supply as oil majors face investors at AGM’s next month.
The post Big Oil braces for fresh pressure over climate strategy, diversity appeared first on The Barrel Blog.
Price differentials for heavy, sour Western Canadian Select on the US Gulf Coast have reached their highest levels on record as Albertan production curtailment, Venezuelan political upheaval and OPEC production cutbacks have created a tight supply of heavy sour grades in the region.
WCS at Nederland, Texas, was assessed Monday at the NYMEX WTI CMA plus $3.50/b, its strongest ever differential, according to S&P Global Platts data going back to 2016.
Since trading at parity with the WTI CMA on February 7, WCS at Nederland, Texas, has steadily strengthened as the market reacted to the high demand and short supply of heavy sours.
Oil production in Alberta, where WCS is produced, was initially curtailed by 325,000 b/d in January after a provincial government mandate capped production at 3.56 million b/d. Since then, Alberta production levels have twice increased, to a total 100,000 b/d from the initial curtailment, in an effort to widen the differential between WCS at Hardisty and WTI.
Since curtailment has taken effect, differentials for WCS at Nederland have strengthened by $4.40/b from trading at the WTI CMA minus $1.90/b on December 28.
On Thursday, the Trump administration said it was preparing new sanctions against Venezuela. It is anticipated these would include additional oil-related sanctions and potentially moving up the deadline banning dollar transactions with PDVSA that currently stands at April 28.
Should these be put in place, WCS in the USGC is likely to continue its bullish performance. Venezuela produced 1.10 million b/d in February, 60,000 b/d lower than January, according to an S&P Global Platts survey released Thursday.
Venezuelan oil production has plummeted by 910,000 b/d since 2017 and is at its lowest level since an industry strike in late 2002 and early 2003, according to S&P Global Platts survey data. Imports of Venezuelan crude have dropped significantly over the past few years as the country’s production has waned. US Imports of Venezuelan crude in 2018 were nearly 220,000 b/d less than the over 733,000 b/d imported in 2016, according to data from the EIA.
The data shows US imports of Venezuelan crude fell precipitously in the first week of March, numbering only 83,000 b/d, down from an average of over 491,000 b/d in the three months prior to March. The ongoing power blackout in Venezuela is also expected to limit exports from the country.
Also adding to the tight market for heavy sour crudes has been the 1.2 million b/d OPEC supply cuts that took effect in January 2019, and more significantly, a decline in Saudi imports to the US. Saudi Arabia imported 491,250 b/d of crude to the US in February 2019, down from an average of
881,000 b/d crude imported in the three months prior to February 2019, according to data from the EIA. This drop-off, assuredly an effect of OPEC cuts and a Saudi focus on Asian market share, has contributed to the strength of heavy sours in the USGC.
Mars vs. WTI Midland
These factors have also boosted US Gulf Coast sour grade Mars to a premium to WTI Midland crude at the Magellan East Houston terminal (MEH) this year for the first time in more than three and a half years. The heavy, medium grade typically trades at a discount to lighter, sweet crudes on the Gulf Coast.
Mars reached a premium to MEH on January 17, when it was assessed at WTI cash plus $5.85/b, which was 25 cents/b over MEH on the same day. The last time front-month Mars was at a premium to MEH was May 7, 2015.
The two grades have tracked closely together since January, with MEH at times reclaiming its premium to Mars. However, late last week Mars once again was heard trading at WTI plus $7.40/b, about a 20 cents/b premium to light, sweet MEH. Mars has averaged about an 8 cents/b premium over the past 30 trading days. That is compared with the average $2.70/b premium MEH held over Mars in 2018.
The tight market for heavy sours has also had an impact for Latin American crudes. Last week Colombian heavy-sour Castilla Blend tenders were traded around minus $5.50-$5.00/b for April loadings compared with an average of $9.00/b traded for March shipments. Two separate tenders with Colombian medium-sour Vasconia for April loadings were heard done around minus $2.50-$2.25/b versus ICE Brent last week.
Such levels were above the average of $5.30-$5.10/b recorded for March shipments of the same grade in the tender market. As a result of the strong demand, Vasconia reached its highest level in nearly six years. Castilla Blend and Vasconia compete for business with other heavy-sour grades in the US. In January-February, imports of Vasconia and Castilla amounted 10. 3 million barrels, 17% down from 12.4 million barrels in the same period of last year.
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A strict sulfur limit for marine fuels starting in 2020 and its potential to boost US gasoline and diesel prices may have caught the White House off guard last year, but it’s not taking refiners or members of the shipping industry by surprise.
US refiners say they have been preparing for the International Maritime Organization’s 0.5% sulfur cap for a dozen years by making billions of dollars of investments to their plants. They also think US oil producers are well positioned to meet new global demand for lower-sulfur fuels.
Despite the industry’s confidence, Gulf Coast refiners are nevertheless skittish about one major wild card.
The January 1, 2020 implementation date comes right in the middle of President Donald Trump’s re-election campaign, and this White House has shown a particular sensitivity to pump prices and their impact on voters.
Trump has proved through his Twitter feed that he personally keeps a close eye on oil prices, even if he sometimes confuses ICE Brent and NYMEX WTI. Additionally, his administration weighs policy options with an understanding of how they might move gasoline and crude oil prices.
Trump administration sources told the Wall Street Journal in October that the White House was considering ways to delay the IMO’s 0.5% sulfur cap beyond the long-scheduled January 1, 2020, implementation date. The story alone sent the stock market value of five US refining companies down by a combined $11 billion – hence their skittishness.
Within weeks of the story, trade groups for refiners, oil and gas producers, LNG exporters and steelworkers created the Coalition for American Energy Security to educate White House officials and members of Congress about IMO 2020 and what US industries were already doing to prepare.
“As we draw closer to implementation of IMO 2020, it’s essential that the president and his administration are fully aware of the job impacts and energy security benefits of implementing the standards on time,” said Ken Spain, spokesman for the Coalition for American Energy Security. “The American energy industry is ready to dominate the global market for these new fuels, and timely implementation is critical to achieving that objective.”
The International Energy Agency and Energy Information Administration project modest price increases for diesel and jet fuel as a result of the tighter marine sulfur standards, but other analysts see more dramatic impacts coming at the end of the year.
Short-term price spikes?
Either way, the impending sulfur cap will bring big changes for the shipping, aviation, refining, oil production and power generation sectors.
Go deeper:Read S&P Global Platts’ special report on the future of fuel oil after IMO 2020
IEA Executive Director Fatih Birol testified to Congress in February that there was a “bit of panic” in the oil industry about the impending regulations, but refiners are adjusting.
“There may be some temporary price spikes for diesel and jet fuel prices, but we think the market will adjust, and we don’t expect those price spikes will be long-lasting and big,” he said. “There will be some adjustment period. But the refineries are today being configured according to the IMO rules, and the US is one of the leaders.”
So if US pump prices or oil benchmarks spike ahead of implementation day, what can theWhite House do to delay IMO 2020? Not much at all – short of building a majority coalition supporting delay ahead of the IMO’s Marine Environment Protection Committee meeting in May. That looks very unlikely, though, after the panel in October already rejected a proposal for a soft rollout of the standards.
Trump does hold a few tools that he could use for domestic messaging purposes if prices spike: releasing fuel from the 1 million barrel Northeast Home Heating Oil Reserve or ordering an emergency crude oil drawdown from the Strategic Petroleum Reserve.
Citigroup commodities strategist Eric Lee said that the White House wanting to lower fuel prices ahead of the November 2020 elections is the most notable policy risk surrounding implementation of the sulfur specs.
“The headline risk alone could drive a selloff in diesel cracks and thus jet cracks, though we see a low probability of IMO 2020 actually being stymied or pushed back, and thus would expect such market reactions to reverse,” Lee wrote in a note to clients.
In the year since Trump first used Twitter to complain about high oil prices, his oil-related tweets continue to move intraday prices in a big way. Lee’s analysis found an average 1.5% movement immediately after a tweet, with Trump’s February 25 tweet driving a 3-4% selloff within five hours.
While Trump’s oil tweets may move the market for a day or two, Lee said the tweets have ultimately had little long-term effect in changing the course of oil prices.
“It is not the first time a US president has tried to influence OPEC policy, but the speed of the new information hitting the market, the specific tone of Trump’s tweets, and the automation of trading orders, is driving more short-term and sharp reactions to such messaging for oil markets,” Citigroup’s Lee said.
Goldman Sachs sees a “non-trivial probability” that the 2020 presidential election will have an influence on IMO implementation.
“There is a risk on the horizon, but it is not our base case,” Jeff Currie, the bank’s global head of commodities research, told S&P Global Platts. “We wouldn’t discount any involvement if prices were to rise significantly.”
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