Friday, July 13, 2018

Future Iranian exports - the big question

Iran Natural Gas Map


What if US sanctions reduce Iranian exports close to zero? 
 
Most analysts expected the reduction in Iranian exports to be gradual and limited, including Poten & Partners, author of this report. 
 
It was thought the reduction could eventually reach 500-600,000 barrels per day from an average of 2.6 mill barrels per day in 2018 year-to-date. 
 
However, an alternative scenario has been gaining traction, one in which Iranian exports will be reduced even more than during the previous sanctions period.
 
Reports from the US State Department indicate that the Trump administration is not only looking for reductions in exports, similar to those imposed during the Obama administration but also aims to bring Iranian exports down to zero.
 
While this may not be a realistic expectation, the US is expected to use its considerable leverage to force rolling reductions in purchases from all buyers of Iranian crude and waivers are conditional on immediate cuts.
 
The implications of further Iranian export cuts for the tanker market are uncertain; it depends to a large extent on which countries have the spare production capacity to make up the shortfall.
 
The ultimate impact on tanker tonne/mile demand hinges on the resulting changes in trade flows.
 
Iran has ample experience in dealing with various kinds of sanctions and even if the US applies maximum pressure on its trading partners, Iran will have various options to keep at least some of its exports flowing.
 
For example, as sanctions start to bite, it will try to lure buyers with discounts and extended payment terms. To circumvent US banking restrictions, it could accept payment in other currencies or do barter deals and has already agreed to an oil swap with Iraq.
 
Iran will also be using its own tanker fleet (one of the largest in the world) to move and store crude.
 
However, despite Iran’s attempts to minimise the damage, early indications are not encouraging for the country. Most international oil companies, especially those with meaningful US operations, have already decided to steer clear from buying Iranian crude.
 
US allies like Japan and South Korea are under pressure to reduce their purchases. Indeed, South Korea has already dropped imports to zero. Turkey is also a significant buyer of Iranian oil and while they may resist pressure from the US to cut back, they don’t have a lot of room to increase their purchases.
 
The two countries that could take more Iranian crude are the two largest current buyers - India and China. Combined they imported about 1.4 mill barrels per day over the past three months. India is more likely than China to reduce its imports from Iran under US pressure.
 
China, which is already embroiled in a trade conflict with the US has less incentive to comply and may import more (discounted) Iranian crude.
 
So, what happens if US sanctions are so successful that Iranian exports are reduced from 2.6 mill to 1 mill barrels per day by the end of this year?
 
Unfortunately, the Iranian sanctions are not happening in a vacuum. Venezuela’s production is also falling. The IEA estimates that Venezuela’s production capacity will fall a further 550,000 to around 800,000 barrels per day by the end of 2019.
 
Angola is also facing challenges maintaining production. In the short-term Libya and Canada are facing production and export hiccups. In our own backyard, the shale oil producers in Texas have problems bringing their growing crude oil flows to market due to pipeline restrictions and port constraints.
 
Where will the replacement crude oil come from?
 
The only OPEC countries with significant spare capacity are Saudi Arabia, the UAE and Kuwait.
 
Industry experts believe that these countries can sustainably increase production by 1.5 –2 mill barrels per day within 12 months; outside OPEC, Russian producers can reverse their voluntary cutbacks, which will add back 300,000 barrels per day.
 
The bottom-line is: it will be ‘all hands on deck’ for the producers with spare capacity, and in such a scenario, there is a risk of significant price increases.
 
Higher prices will throttle demand growth, in particular in developing countries, which are already facing headwinds with higher oil prices in combination with a strong dollar.
 
A slowdown in global oil demand will also have a negative impact on tanker demand, Poten concluded.

Strait of Hormuz threatened with closure

Iranian President Hassan Rouhani

Iranian President Rouhani has hinted that Iran could disrupt the flow of crude exports out of the Arabian Gulf, while an Iranian Revolutionary Guard commander explicitly stated; "If they want to stop Iranian oil exports, we will not allow any oil shipment to pass through the Strait of Hormuz." 
 
A disruption of this magnitude would result in a monumental shift for both the global oil and oil transportation markets as 979 mill tonnes of dirty and clean cargo passed through this choke point last year, McQuilling Services said in a blog.
 
Roughly one third of global crude exports would be removed from the market, sending crude prices well over $100 per barrel into uncharted territory. Worldwide refiners will look to alternative regions for feedstock requirements after severe drawdowns of existing inventories. 
 
However, it’s unlikely that would offset the negative impacts of a lack of Arabian Gulf flows. This would result in a significant fall in tanker demand as Arabian Gulf tanker exports account for well over 5 trill tonne/miles annually, McQuilling concluded.
 
Meanwhile, US President Trump has criticised OPEC for the recent rise in fuel prices, claiming that the US pays for defence for many of the groups’ members.
 
As a result, OPEC should make an effort to increase crude supply to pressure global pricing, he said. 
 
The closing of the Straits has been threatened many times before, especially during the two Israel/Arab conflicts in the 1960s and 1970s, which resulted in the shutting of the Suez Canal and the Shatt el Arab, plus the Iran/Iraq war in the 1980s when VLCCs/ULCCs ran the gauntlet of missile attacks when shuttling crude from Kharg Island to Hormuz Island - Ed.

Wednesday, July 11, 2018

OPEC's oil output jumps in June as Saudi Arabia opens the taps to tame crude prices

 
Akos Stiller | Bloomberg | Getty Images
Khalid Al-Falih, Saudi Arabia's energy and industry minister, arrives for the 171st Organization of Petroleum Exporting Countries (OPEC) meeting in Vienna, Austria, on Wednesday, Nov. 30, 2016.

  • Saudi Arabia's oil production jumped by nearly 500,000 barrels per day in June as it aims to put more supply into the market to tame the cost of crude.
  • Output from OPEC was up 173,000 bpd as the 15-member producer group prepares to lift production caps in place since 2017.
  • OPEC forecast that global oil demand will cross 100 million bpd for the first time in 2019, but warned trade tensions could negatively impact the market.
Saudi Arabia hiked its oil output in June to the highest level since the end of 2016, as it aims to cool the market after crude prices recently rose to 3½-year highs.

The jump in Saudi supplies shows the world's top crude exporter is making good on its recent vows to tame oil prices. The kingdom has faced pressure from big crude importers like China and India, as well as President Donald Trump, who worry about negative economic impacts from rising fuel costs.
The increase also comes as OPEC forecast global oil demand will surpass 100 million barrels per day (bpd) next year.

Saudi Arabia reported that it pumped nearly 10.5 million bpd last month, up from just more than 10 million bpd in May. Data from independent sources cited in OPEC's monthly report showed a slightly smaller build to just more than 10.4 million bpd.

That pushed production from OPEC to more than 32.3 million bpd in June, up 173,000 bpd from the previous month, according to the independent figures. The cartel's total production got a boost of 331,000 bpd from the Republic of Congo, which began reporting as OPEC's 15th member this month.
OPEC, along with Russia and several other producer nations, has been limiting output since January 2017 in order to drain a crude glut that sent oil prices to 12-year lows in 2016. However, output from the participating nations has fallen much more than expected, largely due to production problems in several of the countries.

At a contentious meeting last month, the cartel agreed to increase output in light of falling production in Venezuela and looming U.S. sanctions on Iran, the world's fifth-biggest oil producer. The producers agreed to start raising output beginning in July, but OPEC's latest monthly report shows several began pumping more last month.

Iraq chipped in the second-biggest increase in June, upping its output by 71,500 bpd to about 4.5 million bpd. Baghdad was one of several countries that initially expressed skepticism about lifting OPEC's production caps.

The United Arab Emirates and Kuwait raised output by 35,100 bpd and 27,300 bpd, respectively. The Arab nations are seen as two of only a handful of OPEC members with spare capacity.

The gains were offset by a 254,000-bpd plunge in production from Libya, where an ongoing political rift shut several of the country's oil ports. Output also continued to decline in Angola and Venezuela, dropping by 88,300 bpd and 47,500 bpd, respectively.

Iran also posted a small drop, bringing its output to about 3.8 million bpd. U.S. demands for oil buyers to cut Iranian imports to zero by November have roiled the market in the last two weeks. However, crude prices eased Tuesday after Secretary of State Mike Pompeo signaled some countries could get waivers.

2019 supply and demand forecast

OPEC also released its initial forecast for oil supply and demand in 2019 on Wednesday.

The group sees demand growth moderating, but still increasing by 1.45 million bpd next year. That would push the world's appetite for oil beyond the 100 million bpd threshold for the first time.

However, OPEC made clear that its view of the global economy assumes there is no significant increase in trade tariffs and that current disputes will soon be resolved. The cartel appeared to be referencing the growing number of trade battles the United States has pursued against China, Europe, Canada and other countries.

"Hence, if trade tensions rise further, and given other uncertainties, it could weigh on business and consumer sentiment," OPEC said. "This may then start to negatively impact investment, capital flows and consumer spending, with a subsequent negative effect on the global oil market.

OPEC expects production from countries outside the group to jump by 2.1 million bpd in 2019, led by surging U.S. output. That means the world will need about 32.2 million bpd from OPEC, or roughly 800,000 fewer bpd than during 2018, the group estimates.

"Therefore, if the world economy performs better than expected, leading to higher growth in crude oil demand, OPEC will continue to have sufficient supply to support oil market stability," the group said.

Tom DiChristopher CNBC
Tom DiChristopherEnergy Reporter

Tuesday, July 10, 2018

Anatomy of Saudi Arabia’s Crude Oil Capabilities

Saudi Arabia Fig 4

It comes with oil prices back on the brink of $80/b spurred by sharp supply outages from Venezuela and Libya and with the potential for the market to tightening further due to looming sanctions on Iran’s oil sector. Saudi Arabia has changed its tone since May, reassuring some of the world’s biggest crude oil consumers, especially the US and India, that it is willing to balance the market.

That has drawn fellow OPEC member Iran’s ire, which has questioned whether changes to its production cut agreement in June to pump an extra 1 million b/d can come at the expense of other member’s market share.

Saudi Arabia, meanwhile, continues to reiterate its readiness to use its spare oil production capacity to meet any future changes in oil supply and demand “when needed”.

The kingdom has always maintained it can boost output by up to 2 million b/d and over the weekend it reassured the US it can deliver.

But S&P Global Platts Analytics believes the global crude market could be left short by that very same 2 million b/d by the end of the year.

The question whether the world’s only swing producer has both the means and the motivation to pump to the maximum to meet global oil supply shortages at short notice and for the long-term therefore needs an answer.

Saudi Arabia’s oil and gas infrastructure

PRODUCTION PROFILE
 
While Saudi Aramco CEO Amin Nasser told Platts recently that “maximum sustainable production” was 12 million b/d up from 10.03 million b/d in May, industry experts believe Saudi Arabia will struggle to pump more than 1 million b/d of additional output.

Platts Analytics says even if Saudi Arabia produces close to 11 million b/d it would be running its system at stress levels.

Saudi crude production averaged 9.96 million b/d from January to May this week, according to Platts OPEC survey data and is set to add at least 300,000 b/d in June according to preliminary survey data as it starts to empty some of its tanks.

Saudi crude output averaged 10.38 million b/d in 2016, before OPEC and non-OPEC started their production cuts.

SPARE CAPACITY
 
EIA defines spare capacity as the volume of production that can be brought on within 30 days and sustained for at least 90 days.

In the longer term Saudi Arabia could possibly reach the 12 million b/d but it would take significant time and investment and doesn’t fit the spare capacity definition.

There is the possibility of an emergency surge in output towards 12 million b/d whereby oil fields are depleted beyond what would be considered a reasonable rate and could end up damaging its production abilities further out.

NEUTRAL ZONE
 
Saudi Arabia shares with Kuwait a partitioned neutral zone that can generate up to 500,000 b/d.
The closure of the key fields, Khafji and Wafra, has led to a political stand-off between the two OPEC producers.

The restarts of these fields will be crucial for the kingdom if it wants to reach its 12 million b/d target.
Earlier this week, Japan’s Toyo Engineering said the Khafji oil field shared by Saudi Arabia and Kuwait is being prepared to restart production in 2019.

Khafji was shut in October 2014 for environmental reasons and Wafra has been shut since May 2015 due to operational difficulties.

Industry experts believe it will take time for production to return should the issue be resolved.

KEY TERMINALS
 
The country’s largest oil export terminals are in the port of Ras Tanura.
 
The port can handle capacity of about 6.5 million b/d, according to the EIA.

All of Saudi’s key crude oil grades load from here along with condensate and products.

The port comprises three terminals: Ras Tanura terminal, Ju’aymah crude terminal, and Ju’aymah LPG export terminal.

The Ras Tanura crude terminal has a 33 million barrels storage capacity.

Sea shipping capacity is crucial to Saudi Arabia given that it lacks international pipelines.

The other key crude export terminal is the King Fahd terminal in Yanbu on the Red Sea, which has a loading capacity of 6.6 million b/d.

Total crude oil storage capacity at the terminal is 12.5 million barrels.

Only Arab Light crude oil grade is loaded at the Yanbu terminal.

Saudi Arabia has other smaller ports, including Ras al-Khafji, Jubail, Jizan, and Jeddah.

KEY BUYERS
 
The main customers of the kingdom’s oil are in Asia, with the region taking almost two-thirds of the country’s oil exports.

Japan, China, India and South Korea are the largest buyers of Saudi crude. The main buyers in this region are China’s Unipec, CNOOC and Sinochem; Japan’s Nippon Oil Corporation, Cosmo Oil, Idemitsu Kosan; and India’s IOC, BPCL and Reliance.

The US, a key ally of the kingdom, is also a sizeable buyer, taking around 15% of Saudi crude exports.

Saudi Aramco operates the 603,000 b/d Port Arthur refinery in Texas, which is a pivotal buyer.

Flows to Europe are around 10% of Saudi crude loadings with the bulk being exported from the Sidi Kerir terminal in Egypt.

CRUDE QUALITY, EXPORT GRADES
 
Saudi crude is generally a mix of heavy to medium sour oil, which is generally high in sulfur and yields a decent amount of residual fuel and vacuum gasoil.

The oil is particularly popular with complex refineries in Asia, US and Europe which can crack heavy sulfurous crudes, and still yield distillate products due to the refiners having complex secondary units.

The key export grades are Arab Heavy, Arab Medium, Arab Light and Arab Extra Light.

Some of Saudi’s key oil fields are Ghawar, Khurais, Shaybah, Safaniyah, Qatif and Zuluf.

EXPORT EXPANSION
 
Saudi Aramco plans to begin exports from the Muajjiz oil terminal on the Red Sea sometime before the end of 2018.

This would raise Saudi Arabia’s total loading and (crude and products) export capacity to about 15 million b/d from 11.5 million b/d.

CRUDE BURN
 
Liquid fuels continue to account for half of the current energy mix.

Saudi Arabia burned an average of 458,000 b/d of crude last year in its power plants, with a peak of 680,000 b/d in June, according to the Riyadh-based Joint Organizations Data Initiative.

The government hopes to increase the share of gas used to 70% over the next 10 years, nearly doubling its current gas production to 23 Bcf/d by 2026.

It processed an all-time high of 12 Bcf/d of raw gas in 2016, producing 8.3 Bcf/d of sales gas.

That was up from around 8 Bcf/d of sales gas in 2015, according to its annual review released in June last year.

Monday, July 9, 2018

Conoco to Depose Citgo in Hunt for PDVSA's Caribbean Assets

Witness swearing on bible telling the truth

ConocoPhillips moved to bring Venezuelan PDVSA's U.S. refining unit Citgo Petroleum into its legal battles to enforce a $2 billion arbitration award against the South American country's nationalization of its Venezuelan assets.

A U.S. district court judge in Houston on Thursday ruled Conoco can depose Citgo as preparation for a court case against PDVSA and others over alleged asset transfers in the Caribbean that Conoco claims were designed to frustrate its efforts to obtain payment under an International Chamber of Commerce (ICC) award.

Citgo declined to comment, citing a policy regarding ongoing litigation.

Conoco is pleased with the court's decision, spokesman Daren Beaudo said in a statement. The company has not received any payment from PDVSA for the award and will continue to pursue the matter, he added.

The decision is another blow to the Venezuelan oil company, which has struggled to pay creditors as its oil production has fallen to the lowest level in more than three decades.

Conoco alleges state-run PDVSA transferred crude and fuels stored at the Isla refinery and Bullenbay Terminal in Curacao to Citgo to prevent it from seizing the oil to enforce the ICC award, according to its filing with a U.S. district in Houston.

The court filing portrays active and often successful efforts by PDVSA and its subsidiary to defeat Conoco's bids to seize oil cargoes and other assets. In one case, it claims PDVSA caused Citgo Petroleum to claim ownership of cargoes off Aruba as a way to lift the company's liens, Conoco said in its June filing.

PDVSA also denied court officers access to some ships docked near Curacao and at least one vessel temporarily disabled its GPS transponder to make a getaway, avoiding seizure, the filing said.

Conoco's assets in Venezuela were expropriated in 2007, after the late President Hugo Chavez nationalized several oil projects by forcing their conversion into joint ventures controlled by PDVSA.
Conoco and Exxon Mobil Corp left Venezuela after they were unable to reach agreements with PDVSA.

As part of the arbitration award, Conoco was able to place liens on assets owned or rented in Curacao, Aruba, Bonaire and St. Eustatius, including inventories held at refineries and terminals, and cargoes aboard vessels.

But those efforts have been hindered by local groups and courts. A Curacao court provisionally lifted Conoco's claims on the Isla refinery in May after public utilities and the island's government petitioned the court, citing their need for the fuels.