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The Oil Big Five: Looking to a new year and new opportunities

This is the final iteration of The Oil Big Five for 2015, and it comes at the end of the month because December had so much oil news it was hard to find a break during the month to look ahead. But as per usual, we’re here to highlight a few key trends or news items that we feel are worth watching, for both the short amount of time left in 2015 as well as into the new year.
These are topics nominated by our knowledgeable editors and analysts around the world. Tell us what you think in the comments below – any topics we missed, or any outcomes you foresee from the topics below. Alternatively, share your thoughts on Twitter using the hashtag #oilbig5.
This is also the final planned blog post for 2015. We’ve expanded the writers and topics covered on The Barrel, and we’re extremely grateful to our readers for considering our posts, sharing and commenting. We wish everyone a very peaceful end to 2015 and a profitable 2016, and here are some items to mull over as the year wraps up:
1. US crude exports
The good thing about waiting to compile The Oil Big Five is that you get the chance to include news that breaks later in the month. The limits on US crude oil exports were lifted earlier this month as part of a massive US government spending bill, giving US producers unfettered access to global markets for the first time in decades. There are various questions raised by the deal: does this set a new approach to US energy policy, when US crude will actually hit the global market, and how current crude oil prices will affect exports. This is a topic that has made The Oil Big Five before, and no doubt it will crop up again—Enterprise said December 23 that Vitol is scheduled to load a cargo of US crude oil during the first week of 2016, and more companies will surely make use of the open access to markets.
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2. North Sea production
Production in the famously mature and declining North Sea region has finally picked up a bit, thanks to Lundin Petroleum’s Edvard Grieg oilfield offshore Norway starting up after years of preparation. The Grane grade, which one of our Platts editorial staff said “could be termed the heavy acidic bad boy of the North Sea crude quality spectrum,” got a quality and volume boost with the startup, and investment decisions that took place before the 2014 oil price crash are starting to bear fruit, however brief. The key BFOE grades rebounded to production over 1 million b/d for the first time in years, driven by improvement in Forties production. But with technical issues of an aging infrastructure always on the horizon, how long can this increase be sustained?
3. OPEC production
OPEC’s last meeting, which took place at the beginning of December, has been well covered in various places by Platts. Without rehashing the same news too much, before the meeting there had been speculation about whether the group would change its output levels, but in the end, OPEC declined to set any specific output levels. In the US, where there’s been a surge of crude production, the meeting left some wondering what it meant for domestic business. Perhaps the biggest thing to watch, though, is whether this meeting signals some kind of change in the philosophy behind OPEC. Is OPEC at a crossroads?
4. US refined product stockpiles
Earlier in the year we talked about Asian stockpiling ahead of winter, and seasonal shifts are well established in the world of oil. But in the US, a very warm start to winter is throwing a wrench in the works for some as stocks for various refined products keep growing. US Atlantic Coast ultra low sulfur heating oil differentials dropped to their lowest level ever on high regional stockpiles on December 2; warm weather meant that home heating demand was down. Propane stocks in the US kept breaking records in December, too, and US Atlantic Coast ULSD stocks keep growing. One Atlantic Coast based ULSD source told Platts, “You need 15 consecutive cold days to see a rise in ULSD and heating oil demand.” When it looks like warm weather will grace much of the East Coast over the long holiday weekend, when traders along the US Gulf Coast are struggling to place ULSD even as it slips below $1/gal, and when a gallon of diesel costs the same as something off the dollar menu at a fast-food restaurant, it raises the question of where US stocks could end up by the end of the winter.
5. Nigerian crude
This topic is making an appearance on The Barrel again as some Nigerian grades of crude oil reached 10-year lows in their differentials to Dated Brent. Grades like Forcados and Bonga were assessed at negative values on December 9, and high freight rates from West Africa to the UK-Continent are discouraging for long-haul FOB cargoes. Good refining margins for sour barrels at European refineries means Nigerian crude is passed up for other barrels, the US’ purchases have dropped off, and some of Nigeria’s own refineries are broken, leaving cargoes drifting back into the wider market. India did pick up more crudes as the overhang built and differentials began to slide, but not enough to prevent some grades like Qua Iboe and Bonny Light from hitting those 10-year lows. The country also expects its 2016 oil revenue to be lower than 2015 due to declining prices. One crude trader told Platts, “Nigeria hasn’t been this weak since the dinosaur age.” What will it take to make a lasting dent in the overhang of Nigerian crude

Source: http://blogs.platts.com/

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Declining Trans-Alaska crude oil pipeline flows put a chill on operations: Fuel for Thought

Trans-Alaska Pipeline System operators are taking new steps to keep North Slope crude oil warm enough to flow through the 800-mile pipeline during cold months of the Alaskan winter.
In 2011, a mid-winter disruption in operations almost resulted in oil congealing into sludge, to a point where the pipeline would be difficult to restart. Since then, operators have been adding heat during the winter by recirculating oil through pipe loops at pump stations.
In 2015 they added a plug-in heating unit at a remote gate valve in Interior Alaska, where winter temperatures drop below minus 60 degrees Fahrenheit, said Alyeska Pipeline Service Co. spokeswoman Michelle Egan.
The pipeline company is battling a gradual, long-term cooling of the oil temperature as production from the North Slope drops and as lower volumes reduce natural mechanisms that previously warmed the oil, such as the friction of fluids against pipe walls.
During winter, oil that now enters the pipeline at 104 degrees on the North Slope drops to 40 degrees by the time it reaches the Valdez Marine Terminal in southern Alaska.
Egan said TAPS operators now work to keep the temperature above 32 degrees, the point at which ice can form at low points in the pipeline and wax can build up and impede the flow of oil.
TAPS, built in 1977, now operates at about 25% of its 2 million b/d design capacity.
“Our operations in winter are becoming increasingly complex,” Alyeska CEO Thomas Barrett said in a briefing.
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This happened in 2011 when a small oil leak at Pump Station 1 caused TAPS to shut for several days during cold weather. The crude temperature dropped below freezing at several points along the pipeline in Interior Alaska.
When regulators gave approval to restart, Alyeska was able get the congealed oil moving again, but with difficulty. Had the shutdown lasted a day or two longer, the freeze-up could have lasted for several months.
Since then, as a contingency, Alyeska has been adding heat at four locations by circulating crude through loops of piping, with the friction adding the heat. At Pump Stations 3, 4, 7 and 9, heat is added by running oil through a recycle loop at a rate of up to 25,000 b/hour.
This helps, Egan said. Last January, for example, oil left Pump Station 1 at a temperature of 106 degrees, with an ambient air temperature of minus 17 degrees. By the time the oil traveled 100 mile to Pump Station 3, its temperature had dropped 51 degrees. Recirculating the oil at Pump Station 3 added 15 degrees of heat back, she said.
A new heat source was added in 2015, with a diesel-fueled heat skid put at Remote Gate Valve 65, 17 miles north of Pump Station 7, a point where cold winter temperatures are common and the pipeline could be vulnerable to ice
formation.
Alyeska is considering adding similar heat skids at various points. TAPS also gets a bump in heat by the return of residual oil from a small refinery near Fairbanks owned by Petro Star Inc. It takes crude from TAPS to make jet fuel and diesel, returning unused portions of the crude at a high temperature to the pipeline.
The pipeline company’s main strategy is to protect Pump Station 9, near Delta, southeast of Fairbanks, where oil must be warmed enough to get the rest of the way to Valdez and over two mountain passes.
One experiment by Alyeska was unsuccessful. In a special test facility built at the University of Tulsa, the company experimented with removing water from North Slope crude, from its ambient content of 0.2% water to 0.02%. But ice still formed even at the lower water content.
TAPS is averaging about 550,000 b/d this winter, but its yearly average is about 500,000 b/d, according to Alaska’s Department of Revenue. Throughput is continuing to decline at an average or 5% a year, and Alyeska is concerned the wax buildup will become a real problem when throughput reaches 400,000 b/d or 350,000 b/d, which it will if the trend continues.
“The real solution for us is finding more oil on the North Slope and adding new production and throughput,” Barrett said. — Tim Bradner

Source: http://blogs.platts.com/

The Oil Big Five: What news is good news for oil in 2016?

Welcome to the first version of The Oil Big Five for 2016, when we round up some of the biggest news and trends from the global oil industry and think to ourselves: Wow, things sure have changed since our first post.

But then, that’s oil for you: Things are always changing, and yet some things remain the same. We asked our oil editors and analysts around the world for what they think are outstandingly important drivers in the markets, and these are items they chose, in no particular order.

This is also your chance to weigh in. Tell us in the comments whether any of these topics ring especially true to you, or whether we’ve neglected some other topic that you think is really interesting or has the potential to shake markets. You can also find us on Twitter @PlattsOil and can share your thoughts on this post with the hashtag #oilbig5.

1. US crude exports — to Europe

Last month, the newly unfettered access of US crude oil to global markets made our list, but that’s not the end of the story. One senior editorial leader here said, “The Big Five should really become the Big One this month, all about US crude exports.” While many wondered whether somewhat dubious economics would hobble exports, it turns out that the WTI/Brent spread doesn’t solely determine whether shipments will hit the open seas, and the first cargo of US crude set sail before 2015 closed. Furthermore, European refiners, which have been on a bit of a tear this year with crack spreads, are now eyeing attractive gasoline and naphtha cracks that could help drive up demand for US light sweet crude and condensate. On the other hand, European refiners have been spoilt for choice recently. So can European demand for US crude last?

2. Western Canadian crude prices and production

While the light sweet crude of the US shale plays gets a lot of attention, heavy Canadian crudes rule much of North America and are dealing with some significant pressures. The US dollar price of Canadian heavy has dipped below $20/b for several grades so far in January. Canadian heavy benchmark Western Canadian Select, an unconventional heavy sour, hit $19.82/b January 8, the lowest outright price since Platts started assessing it in April 2006. (The WCS price was alarming the market back in August at $27.47/b, too.) As a result of the price pressure, some companies are pushing up maintenance, and there’s been talk that production could be shut in. Winter is traditionally a period of peak activity in Western Canada, with an average of 530 rigs in operation during a “good” winter drilling season in Alberta, Saskatchewan, Manitoba and British Columbia. But for the week ended December 18, that figure was 158, according to data from the Canadian Association of Oilwell Drilling Contractors. Will prices stifle production this winter, and if so, who could feel the impact most keenly — conventional and heavy producers, or oil sands players?

3. North Sea spot market backwardation

Despite generally weak crude values, physical differentials in benchmark North Sea crude oil grades saw big swings in January, with bids and offers for neighboring cargoes showing a wide divergence in values; a dual market seems to be emerging in the region. January loading cargoes were bid at a significant premium to February loading cargoes of the same grade, meaning there’s backwardation in the spot North Sea market while the rest of the physical and financial crude complex is trading in contango. What gives? PetroIneos, a joint venture between Ineos and PetroChina, became the largest bidder for North Sea crude in the Platts Market on Close Assessment process and bidding for January-loading cargoes 34 times as of January 7, compared with seven bids for December-loading cargoes and no bids for November-loading cargoes. Traders told Platts that PetroIneos’ buying interest appears focused on specific dates, different crude grades than usual for the company, as well as on January-loading cargoes held by Shell. One of our crude managing editors put it into perspective, saying, “This looks at a huge trend in crude buying in the North Sea which was quite controversial, and which demonstrated a very different structure for the January Brent market than that seen for other months.” Is this something that will continue through the rest of January and the winter? Will PetroIneos continue its bidding, or will it back off? And what could prompt the North Sea market to fall back in line with the larger crude complex?

4. US Gulf Coast vacuum gasoil

Refined oil products along the US Gulf Coast are at multiyear lows — as are products around much of the world — and it’s a good time to remember that crude isn’t the only input to start the refinery process, one managing editor said. VGO producers in various parts of Europe and Russia are traditionally long in the product, and market sources in the US are reportingcargoes of feedstock are coming to US shores regardless of whether there’s demand or open arbitrage opportunities. VGO is used to make gasoline, among other things, but whilegasoline demand is strong, outright prices are also dipping under $1/gal. On January 15, VGO barges at Houston fell on news that there will be a US-bound cargo coming from Colombia, and high-sulfur VGO has held value or fallen 25 of the last 26 trading days. Looking later in the year, a new Russian refinery is expected to add to the Transatlantic flow of VGO. “I guess people are getting a real shock with ships entering Gulf Coast waters unsold,” a European feedstocks trader said to Platts. “I think now there is a sudden realization that this market is not in good shape.” Will VGO values continue to fall as potentially more cargoes stack up in the Gulf of Mexico, and what sort of ripple effects could this have on downstream gasoline or diesel?

5. The Saudi-Iran conflict’s impact on oil prices

The worldwide glut of crude oil means that the way markets respond to news is much different than in the past, as we noted on The Oil Big Five in February 2015, when Saudi Arabia’s King Abdullah died. We got a reminder with the new year, when a conflict between Saudi Arabia and Iran didn’t send prices soaring as it may have in years gone by.International oil prices were momentarily lifted, but analysts don’t view the escalated tensions between the two countries as threatening to the global oil supply anytime soon. Together the countries account for 13 million b/d of global oil output, but as we’ve noted before, OPEC members are battling for market share both among themselves as well as within a larger world of well-supplied producers. So what would it take for global oil prices to lift significantly? What sort of news could bump up prices and, more impressively, keep them up?

Source: http://blogs.platts.com/

To get big results for energy in the US Congress, start small: Fuel for Thought

If you want to exercise big influence in Washington, think small.
There are hundreds of groups of US legislators huddled around special interests in the Congress, including several dozen organized around energy-related issues. These groups, sometimes called congressional caucuses, are often the first place an industry group will go to start the conversation on a key issue, whether it be protecting US refiners or promoting oil and gas exploration off the Atlantic coast.
The size of these “Congressional Member Organizations”— their formal name — can be as small as a handful of legislators pushing a specific issue.
The “Congressional Rock and Roll Caucus,” for instance, was formed in 2012 by a legislator whose district includes the Rock and Roll Hall of Fame in Ohio.
There are other narrowly-focused groups, centered around such issues as bicycles, cement, horses, hockey and cranberries.
Energy-related caucuses include those focused on biofuels, US refining, the use of algae as a fuel source, and LNG exports.
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Harper’s district includes the Kemper Project, a Southern Company power plant that pairs a gas-generation unit with a coal-generation unit. The carbon dioxide emitted will be captured, then sold to companies who plan to pump it into oil reservoirs to coax out previously unrecoverable crude.
The issue of carbon capture and sequestration comes before the US Congress in may forms, from providing money to fund extensive research at national laboratories, to providing tax credits for companies adopting the nascent technology.
The aim of the CO2-EOR caucus is to educate members who will be asked one day to vote on such matters.
“The general idea is to get industry and congressional leaders together to help each other learn what the issues are surrounding enhanced oil recovery and then to work on those challenges,” said Jordan Downs, deputy policy director for Rep. Harper.
Unlike some groups, which come together to push a specific bill, the CO2-EOR caucus is playing the long game, focusing on raising the profile of the issue.
“There are very few issues that are solved overnight or in two months or maybe even two years,” Downs said. “A lot of it is education.”
Slow and steady wins this race
The groups host informational meetings, often involving pizza and a guest speaker. A large percentage of the time, the meeting is attended by staff members, who then go back and keep their congress member up to speed.
“The engagement level of staffers is key,” said Anne Korin, who has presented to caucuses about alternative transportation fuels on behalf of the Institute for the Analysis of Global Security.
“Smart, focused, and passionate staffers that have the blessing of their boss can move mountains, and caucuses help them — through educational events, group letters, and so forth—get the word out and mobilize support for a given issue.”
These groups can often be the first place to go when an issue arises in Congress that needs immediate attention, said Bob Dinneen, president of the Renewable Fuels Association.
“The caucuses would be the first line of defense or offense,” Dinneen said. Caucus members, such as those of the Congressional Biofuels Caucus, are “most likely the folks that who are going to support your agenda — folks you go to first to alert them of a threat or invite them to proactively pursue a legislative agenda. They have already identified themselves as being supportive of your cause, so let’s go there first and you build from there.”
Randall Luthi, the president of the National Ocean Industries Association, has presented to several such groups, including the Atlantic Offshore Energy Caucus. The group was formed last year to “to advance policies that explore and expand energy production in the Atlantic Outer Continental Shelf.”
While the members who formed the caucus are already sold on the idea of energy development, Luthi said talking to them can help spread accurate information to other legislators.
“It’s impossible to reach every member of the hill on every issue,” Luthi said. “Our job is to educate members of congress about our issues, to share with them the information we know. You want to make sure the information is consistent.

Source: http://blogs.platts.com/

Grow a tree, burn a tree…a rethink of biomass philosophy

A re-evaluation of biomass for electricity generation appears a certainty, and the evolution of sustainability criteria is likely to retard market growth, just as it did for biofuels, although their implementation will run into industry and political resistance.

However, the experience of biofuels and doubts over biomass-fired power generation raise a broader question. The world has a functioning energy system in the production of food.

The energy source for this system is the sun. Plants are the generation system and animals the end-users and recyclers.

Humans have required additional energy to raise their standard of living, whether it be using cow dung for heat and cooking fuel, or electricity to browse the internet.

To date, the vast bulk of this additional energy has been sourced from biomass, either fresh, or from the raid on the millennia old solar energy store that are fossil fuels. This raid has now become unsustainable.

The use of biomass today represents a subtraction from the food/energy system for alternative use, whether that biomass be a direct food stuff, such as palm oil, an intermediary, such as sugarcane, or inedible wood.

It represents a disturbance to the ecosystem that carbon accounting is showing to be much more complex than the simple ‘grow a tree, burn a tree’ philosophy suggests.

It may be no more of a disturbance than modern agriculture, which is necessary to raise and concentrate the productivity of the ecosystem in order to feed the world’s population.

But modern agriculture is itself emissions intensive and cannot function without additional energy inputs.

There is a clear negative trade-off between using biomass both for food energy and for electrical or locomotive energy. Using biomass for power generation and for biofuels puts additional and unpredictable demands on the ecosystem, when raising the productivity of that system already requires external energy inputs, not subtractions. Biomass is just early stage fossil fuel.

Other sources of energy are external to this cycle. Solar and wind power are not really forms of energy production at all – they are harvesting techniques.

They are not even commodities that can be owned. They represent a bigger drawdown of what might be termed ‘natural’ energy. Marine energy systems, including hydroelectricity, are also essentially harvesting techniques.

Geothermal energy taps an additional source of energy which is not sustained by the sun – the heat of the earth’s core — so it too is external to the hydrocarbon cycle.

And then there is the atom. Though there are many well-reasoned environmental and social concerns with nuclear fission technology as is currently constituted, the energy contained within the atom is a seemingly limitless source of additional energy that could sustain and raise the productivity of the hydrocarbon cycle. The latter is a cycle, or system, that doesn’t simply sustain life, it is life.

Source: http://blogs.platts.com/

The impact of Saudi ethane price increases on competitiveness

At the end of December, Platts reported that Saudi Arabia increased the price of gasoline, domestic gas for power generation and ethane feedstock in its 2016 budget, part of a broader program to cut subsidies and reduce its budget deficit. As a part of this, the ethane price more than doubled from the long-standing fixed price of $0.75/MMBtu to $1.75/MMBtu, according to the official Saudi Press Agency.
So what does this mean for Saudi Arabia’s position as the world’s lowest-cost ethylene producer?
Setting the stage
According to Platts Analytics, Saudi Arabia has 13 steam crackers currently operating with a total ethylene capacity of 15.7 million mt/year. For 2016, we expect capacity to reach 16.9 million mt with the start of the 1.5 million mt/year Sadara cracker.
Additionally, the country will have a full year of production from the Petro-Rabigh unit 2 cracker, which started up in mid-2015. The largest facility in the country is the 2.45 million mt/year Petrokemya steam cracker in Al Jubail. The facility has a naphtha-based cracker with a capacity of 700,000 mt/year (Unit 1), an ethane/propane mix cracker with a capacity of 950,000 mt/year (Unit 2), and an ethane-based cracker with a capacity of 800,000 mt year (Unit 3).
Approximately 62% of the ethylene produced in Saudi Arabia is from ethane, followed by 25% from propane, 10.8% from naphtha, and 1.4% from butane according to Platts Analytics. By 2024 we expect the percent of ethylene produced from naphtha to increase to 17%.
gonzalez-saudi-arabia-ethylene-feedstock
The question of competitiveness
How will this affect the competitiveness of Saudi ethylene producers in the region and the world moving forward? As reported by Platts, Saudi Arabia will remain the world’s lowest cost ethylene producer despite the significant increase in the cost of ethane. In order to compare regional prices we must look at everything on a $/mt basis. Using typical conversion factors, the $1.75/MMBtu Saudi ethane price on a $/mt basis is approximately $86/mt.
(To convert from $/MMBtu to $/mt we multiplied the $/MMBtu price by 66,000 Btu/gal. We then multiplied that by 742 gal/mt, and then divided by 1,000,000 to achieve the $/mt price.)
Even with the more than doubling of the ethane price, the feedstock cost for Saudi producers is much lower than the other producers in the Middle East using ethane and the US producers. The average US ethane price for January 12 was 15.13 cents/gal, or $112.26/mt using the aforementioned conversion factors. The price of naphtha in NW Europe and NE Asia for the same time period is $309.75/mt and $342.88/mt, respectively.
However, we must consider the amount of feedstock needed to produce one metric ton of ethylene. Using the typical cracker yields shown below, Platts Analytics calculated the price of feedstock to produce 1 mt of ethylene.
gonzalez-steam-cracker-yields
The estimated price of the amount of feedstock needed to produce 1 mt of ethylene is: $108.50/mt in Saudi Arabia using 100% ethane, $142.10/mt in the US using 100% ethane, $303.80/mt in other countries in the Middle East using 100% ethane, $911/mt in NW Europe using 100% naphtha, and $1,008.47/MT in NE Asia using 100% naphtha. When we factor in the co-products, and add estimated variable and fixed costs, we have the following approximate production costs.
Regional production costs
gonzalez-ethylene-production-costs
The production costs above were calculated based on a 1 million mt/year cracker in each region using 100% of the same feedstock. However, this is often not the case. For instance, in the US, most crackers use a mixed feedstock comprised of NGLs, and the percentage of each component in the feedstock varies month to month. In Europe and Asia, producers are increasing flexibility in their units to take more LPG. In Saudi Arabia, as well as the Middle East, many crackers are using ethane, LPG, and naphtha in their feedstock mix.
The column chart above however can be viewed as the upper or lower end of ranges in production costs for each region. For instance, the Saudi ethane price shown in the chart can be interpreted as the lowest cost in the region. As mentioned above, most crackers are using a mixed feed of naphtha and LPG. The production costs for NW Europe and Asia naphtha crackers can be interpreted as the higher end of the range, as most crackers in both regions continue to increase flexibility to utilize more LPG.
Strategies to maintain margins
Saudi producers still hold the position as the most competitive ethylene producer globally followed by the US. The increase in production costs in Saudi Arabia will however erode margins. With only three components in the equation to work with — including net feedstock cost, variable cost and fixed cost — producers will have to increase efficiency in order to lower the variable costs.
Some strategies to increase efficiency by lowering variable cost can include horizontal and/or vertical integration including refinery/petrochemical integration or integration through the value chain — in this case, polymer plants.
Integration has proven to increase profitability by lowering costs through shared utility and labor costs, but does have its own costs added to it, including capital, transaction, and re-organization/management costs. We will see later this year how the producers in the Kingdom offset the higher production costs in order to maintain margins.

Source: http://blogs.platts.com/

Iran’s post-sanctions oil plans and their market impact

This weekend the world witnessed what has been hailed as the most significant diplomatic breakthrough since the collapse of the Soviet Union: the lifting of nuclear sanctions against Iran.
The lifting of sanctions, which came late Saturday, followed confirmation from the UN’s International Atomic Energy Agency that Tehran had fulfilled its obligations under an agreement last summer to limit its nuclear program.
The IAEA report triggered Implementation Day, which will give Iran access to billions of petrodollars frozen in foreign banks and remove the constraints that have capped the country’s crude exports at just 1 million b/d over the past four years.
Iran on Sunday activated plans to lift oil production by 500,000 b/d.
Below Platts highlights details of the sanctions that have been lifted, Iran’s plans to raise oil production and exports, and what this means for an already oversupplied global oil market.
Iran’s oil exports then and now
Iran’s oil exports then and now (click to view larger)
Sanctions lifted
The European Council lifted its nuclear-related sanctions January 16.Sanctions lifted by the US include a ban on commodities trade for non-US citizens, who will now be permitted to trade with Iranian government institutions and sell goods and services.Companies from outside the US will be able to start doing business with Iran immediately, without sanction from the US.Sanctions will no longer apply to non-US persons providing underwriting services, insurance, or re-insurance for the Iranian energy sector, including vessels for the transport of crude oil, gas, oil and petrochemical products to or from Iran. The insurance ban had made it hard for many of Iran’s remaining crude customers in Asia to arrange transport of their oil purchases.Companies will no longer be sanctioned for investments in Iran’s oil, gas and petrochemicals sectors, or buying and transporting Iranian crude, oil products and petrochemicals. The sale of refined products and petrochemicals to Iran will also no longer come under US sanctions, nor will transactions with Iran’s energy sector.
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Some US sanctions remain
A number of older US sanctions against Iran remain in force, including those imposed for Iran’s alleged support of terrorism and human rights violations, which experts say might be tricky for companies to navigate.Still in force is a US trade embargo preventing US entities from conducting business with Iran and which bans the import of Iranian oil into the US. It also effectively prohibits any US dollar transactions with Iran since those typically transit through US banks.Restrictions on exports of US upstream and downstream technology to Iran, unless granted a license by the Obama administration, will also remain in force.However, the US Treasury Department has said it will permit foreign subsidiaries of US companies to operate in Iran, provided there is no involvement of US citizens, technology or financing.
Iran’s oil plans
Iran’s oil ministry activated its planned 500,000 b/d oil output increase Sunday, issuing an order to its state-owned companies to increase production and placing the National Iranian Oil Terminals Company on standby.If achieved, this volume would take Iranian output to around 3.39 million b/d and exports to 1.5 million b/d.Top Iranian officials including Mehdi Assali, oil ministry head of OPEC affairs, and Amir Hossein Zamaninia, deputy oil minister for international and commercial affairs, said Iran plans to regain its lost market share but in a manner that would have the least impact on oil prices.Iran has based its next budget for March 2016-March 2017 on an oil price of $40/b and exports of 2.25 million b/d, Gholamreza Kateb, a government spokesman said Sunday.Iran hopes to attract top international oil companies to its upstream sector to help it develop its vast reserves of oil (estimated at 157 billion barrels) and gas (about 1,200 Tcf). It has designed a new upstream contract model that it will present in London in February.Iran is currently pumping less than 3 million b/d. A Platts survey estimated that the country produced 2.89 million b/d in December.The International Energy Agency has said it expects Iran to be able to achieve crude output of 3.6 million b/d — similar to the 2011 level — within six months of the lifting of sanctions.
Immediate impact on supply
The immediate impact on exports is expected to come from Iran’s considerable floating storage. According to latest data from cFlow, Platts trade flow software, between 47 million and 49 million barrels of Iranian crude oil and condensate is stored on a combination of vessel classes on ships of the state-owned National Iranian Tanker Co. and other ship operators.Market sources have estimated 65% of this volume to be condensate and expect some of this to trickle into the spot market in Asia. They have, however, said that Iranian condensate has limited outlets in Asia due to its high sulfur content.
Key buyers
Only six oil importers are currently allowed to buy crude from Iran — China, India, Japan, South Korea, Turkey and Taiwan — down from around 20 before sanctions were tightened in mid-2012.Zamaninia said Sunday that China, which imported an average 539,509 b/d of Iranian crude over the first 11 months of 2015, would remain Iran’s top buyer.All Asian buyers have said they will be interested in Iranian oil as long as the pricing is competitive.The EU had imported nearly 600,000 b/d of Iranian crude and condensate before the tightening of sanctions in 2012. Most of this volume went to Spain, Italy and Greece. Spanish and Italian refiners have said they are interested in resuming Iranian crude imports once sanctions are lifted.Increased supply from Iran could affect demand for West African, Russian, Caspian, North Sea and Iraqi crudes, among others, which have replaced Iranian volumes.

Source: http://blogs.platts.com/

Shipping ahoy: Mending broken hearts and noses in Tehran

There is no place like Iran in the world,
Iran is the heart of the world,
And we are people of heart’.

So went the poem quoted by the master of ceremonies at the conference held by the National Iranian Tanker Company in Tehran, the day after nuclear sanctions were lifted. Iran the heart of the world? That may be stretching the point a little but there’s no doubt something significant has happened here over the last couple of days.

The imminent return of Iranian oil to the global market, happily coinciding with the 60th anniversary of NITC’s foundation, prompted the company to invite a host of businesses to Tehran in anticipation of renewing activities which were interrupted by the tightening of sanctions in 2012.

The number of attendees – perhaps not as many as the official number of 650 people, comprising 300 from overseas and 350 from Iran, but still enough to be impressive – showed how significant this country is for the international business community.

Moreover, the range of companies in attendance, including but not limited to shipbrokers, shipowners, ship managers, trading houses, classification societies and IT suppliers, demonstrated the desire for market participants to grab a piece of the action as Iran’s doors open once more.

Coming at a time when oil prices have crashed and tanker freight rates have started 2016 on the slide, these businesses recognise the return of a major global player as a potential opportunity that cannot be ignored.

For the Iranians themselves, this marks the end of a very challenging period. During the conference, the former managing director of NITC Mohammad Souri spoke of the difficult times for the company finally being over.

NITC has had arguably the most challenging experience of any shipping company over the past 30 years. The recent sanctions aside, the company shipped 2.5 million tons of crude oil per day during the late 1980s at the height of the war with Iraq.

Its vessels came under attack over 200 times during the Iran-Iraq war and more than 150 sailors were killed.

While mindful of these experiences, NITC is keen to turn a new page and the talk now is of international cooperation, foreign investment and, significantly, diversification.

NITC’s managing director Ali Akbar Safaei told Platts that the strategic plan is to diversify the company’s sources of income, relying not just on crude oil revenues but also shipping more LPG, LNG and even providing offshore services.

NITC is ready to partner with foreign investors and intends to list a portion of its shares on the international market.

At a time of falling freight rates, Mr Safaei was keen to stress that the company would not bring more than its existing 15.4 million deadweight of vessel capacity to the market. However this would still allow for some purchasing of second hand or even new-building tonnage, which would be offset by scrapping older vessels.

The overriding message from the Tehran gathering is that Iran is open for business, and from spending just a few days in Tehran that’s the wider impression the city gives.

Our first meaningful interaction with an Iranian was with an elderly gentleman on the flight into Tehran from Dubai. Delighted that a British citizen was visiting his country, he immediately offered to share a cab into the city.

At the conference, a Norwegian delegate told us about bumping into a young Iranian man while walking in the city, who then happily spent 45 minutes showing him around.

The sophistication and modernity of the Iranian youth are there to see in a country whose official name portrays conservatism.

On a walk around the bazaars of Tehran, it is a common sight to see young men and women walking around holding hands, along with scores of ladies with bandaged noses after undergoing plastic surgeries.

Tourist attractions in Tehran include the Shah’s old palaces which, despite representing an era that the revolution did away with, have been respectfully preserved and put on display.

In the same way, with both a keen sense of history and hard-won experience as well as a new sense of outward-facing optimism, NITC and the country as a whole turns its heart and its head towards the next chapter on the world stage.

Source: http://blogs.platts.com/

US Interior review will likely find ways to ‘fix’ federal coal

The US Interior Department announced January 15 that it is going to “review” the Bureau of Land Management’s leasing program of federal lands upon which an estimated 41% of all US coal is currently produced, and is putting a hold on all new lease applications while the three-year review is underway.

The announcement raised immediate suspicions in some quarters that the department was angling at more than a mere review of leasing procedures, a possible royalty fee hike and a benign moratorium on future leases. At the very least, the announcement was seen as a shot across the bow of coal production in the US.

The Secretary of Interior, Sally Jewell, said the department wants to “identify and evaluate” potential reforms to the federal coal program “in order to ensure that it is properly structured to provide a fair return to taxpayers and reflects its impacts on the environment.”

Jewell also called the review “another step” along the path that President Barack Obama announced in his recent State of the Union address to improve the way the US manages its fossil fuel resources “and move the country towards a clean energy economy.”

Jonathan Downing, the executive director of the Wyoming Mining Association, was emphatic in his response. “This is yet another salvo in the president’s efforts to kill the coal industry. He and his allies in the extreme environmental movement know full well that this measure will make federal coal uneconomical to mine, thereby locking up America’s most abundant and reliable source of electricity generation.”

Downing added that coal remains a main source of baseload power in the US, one that renewable generation such as wind and solar is “unable to provide regardless of the billions in federal subsidies currently being funneled their way.”

Coal squeaked past gas for power gen in 2015

Even as it has been rearranging generation portfolios, retiring coal-fired facilities and switching from coal to gas, the US power sector nonetheless has an enormous stake in the Interior Department’s review. Literally hundreds of generating firms and utilities are big coal buyers.

In 2015, coal fueled 33.8% of all power generation, compared to 32.6% by natural gas, according to data released January 12 by the Department of Energy’s Energy Information Administration. Moreover, the Interior Department said Friday that 14% of the country’s electricity was generated by federal coal.

Total coal production in the US in 2015 was 890.5 million short tons. The electric power sector consumed 754 million short tons of that total.

In fiscal year 2014, 402 million short tons of coal were produced on federal lands. According to the Interior Department, the Bureau of Land Management has responsibility for coal leasing on 570 million acres “where the coal mineral estate is owned by the federal government.”

As of fiscal year 2014, there were 310 federal coal leases that encompassed 475,692 acres in 10 states that had recoverable coal reserves of 7.75 billion short tons.

The BLM receives revenue from coal leasing from bonuses paid at the time it issues a lease; rental fees; and production royalties. In 2015, according to the BLM, its coal program had taken in about $1.29 billion in royalties, rents and bonuses.

The Powder River Basin as the federal coal epicenter

Pointing to the huge Powder River Basin coal producing area in Wyoming and Montana, the Interior Department noted last week that over 85% of all federal coal is the low-sulfur, low-priced PBR coal.

The BLM says that 19 coal mines and 91 coal leases in the Wyoming portion of the Powder River Basin produced 382 million short tons in 2014 and employed over 6,500 personnel.

The largest PBR mine, owned by Peabody Energy, is the North Antelope Rochelle facility, which produced 117.9 million tons in 2014, according to the BLM. The second largest is Black Thunder, which produced 101 million tons in 2014 and is owned by Arch Coal.

On January 12, Arch Coal filed for bankruptcy protection in a federal court in Missouri in an effort to shed some $4.5 billion in debt. In the first 10 months of 2015, Arch delivered 73.7 million short tons of PBR coal to 51 clients.

The biggest Arch customer in the 10-month period was Tennessee Valley Authority, which took delivery of 7.5 million short tons of Wyoming coal. Alabama Power received 5.1 million short tons from Arch. MidAmerican Energy, Entergy Arkansas, Consumers Energy and Kansas City Power & Light each received more than 4 million short tons.

The 2,697 MW coal-fired Parish facility received just over 2 million short tons of Wyoming coal from Arch in the first ten months of 2015.

The ‘pause’ and climate change

The Interior Department, which issued Order 3338 outlining the review, said that in its “pause,” the BLM will not hold lease sales or process new lease applications for surface and underground coal.

Jewel, noted there had not been a comprehensive review of the program “in more than 30 years,” and said there is “concern” about the “fair return” on the leases, 90% of which, she argued, received bids from only one bidder, and, she said, the current royalty rate of 8% for underground mines and not less than 12.5% for surface mines, “may be inadequate.”

From her statement, though, it seemed clear what was really on her mind.

The “second broad category of concerns” about the federal coal program “relates to its impacts on climate change,” she said.

She said that the US has “pledged to the United Nations Framework Convention on Climate Change to reduce its greenhouse gas emissions by 26-28% below 2005 levels by 2025.”

“At the same time, the federal coal program is a significant component of overall US coal production and, when combusted, federal coal contributes roughly 10% of the total US GHG emissions,” she said.

The Interior Secretary said that many stakeholders have highlighted the contradiction of producing very large quantities of federal coal while pursuing policies to reduce US GHG emissions substantially, including from coal combustion.

“The current leasing system does not provide a way to systematically consider the climate impacts and costs to taxpayers of federal coal development,” she said.

One suspects the review will figure out how to fix that.

Source: http://blogs.platts.com/

The dying embers of Britain’s blast furnaces

Blast furnaces across the UK are under threat as the steel industry bounces from one crisis meeting to another. And, as the last flames in the furnaces flicker in the headwinds, commentators are scrambling to find out what has gone wrong.

China is the easiest fall guy with its huge increase in low-priced exports flooding the international markets. But the scaling back of the British steel industry is as much down to historical bad decision-making as it is the current threat of foreign competition.

Indian-based Tata Steel is the largest producer in the UK, having taken on many of the British steel assets when it bought the European operation, formerly known as Corus, for a whopping £6.2 billion in early 2007. The UK division of that business is now a forlorn shadow of its former self with headcount diminished and many of the assets mothballed.

The company announced a further 1,050 job cuts Monday with the majority of jobs to be cut located at its blast furnace-based Port Talbot plant in south Wales. Talks are ongoing regarding the sale of its long products division, centered around two active blast furnaces in Scunthorpe, the assets of which have had their value written down to zero.

Sources close to the negotiations with Greybull Capital suggest that if Tata cannot sell the division by the end of March, then operations will be halted as the Indian parent company finally loses patience.

With the liquidation of the Teesside slabmaking business, SSI UK, in October last year, one of Europe’s largest furnaces was rendered another relic of a former industrial powerhouse. Undoubtedly it will face the same fate as Ravenscraig, a giant symbol of Scottish steelmaking that was closed in 1992 and demolished in 1996.

Sources suggest Port Talbot may itself run out of funding without a radical restructuring to restore profitability, hence this announcement of further job cuts.

The current chapter in the story of the British steel industry is one of accelerating rationalization as businesses find it increasingly difficult to compete in one of the world’s most globalized industries. But why is the UK, once the giant of the industry, such an uncompetitive place to produce steel?

The commentariat points the finger at imports, energy costs, business rates and government procurement policies. While these factors are accelerating deindustrialization, there are more crucial deep-rooted reasons why once proud production sites appear impotent in what are now critical times for the sector.

Throughout the escalation of this crisis, politicians and trade unions have called on the state to intervene. State intervention, much like protectionist trade measures, is booming in the global steel industry as governments look to save jobs.

The shadow chancellor John McDonnell used Italian steelmaker Ilva, Europe’s largest steel production hub, as a case study for positive state action. “The government intervened, they took over, they invested and turned the situation around,” he said.

In reality, the financial backing of the heavily-indebted steelmaker meant the company could lower sales prices without risk of bankruptcy. Tata Steel is among a host of companies competing with Ilva in Europe and it suddenly faced the prospect of competing on price with a huge local mill selling at Chinese prices. This drove the market down and hammered the margins of much of the European industry.

Even European steel producers’ association Eurofer has complained to the Commission about Italian aid for Ilva, saying it is against state-aid rules.

Tata Steel’s UK division suffers from legacy issues relating to its own former days as a state-owned, bureaucratic behemoth whose commercial decisions were influenced by political pressures.

The reason Port Talbot is such a production hub dates back to British Steel’s desire to shift investment and jobs to south Wales. This was as a result of a need to bring jobs to a particularly poor region suffering from high unemployment rather than any apparent commercial benefits.

The Teesside production site has a large dock and a huge blast furnace allowing it to benefit from economies of scale in both its production process and deliveries of raw materials. However, investment shifted away and the site was mothballed before its resurrection under Thai ownership.

This strategic misstep of spreading production facilities is critical in understanding Tata’s current difficulties in such a thin margin environment.

The company’s recently mothballed Scottish plate mills are supplied with slab cast miles away in Scunthorpe. The plate is then freighted back to the West Midlands where its main distribution hub is located.

Liberty Steel, the company behind the revival of another south Wales rolling mill, plans to buy the Scottish mills and supply them with competitively priced slab on the merchant market. It is likely the scale of the production would also be reduced to tailor the needs of the market, rather than the needs of government to provide jobs.

The subsequent privatization of British Steel presented new problems, with independent ports adding extra margin pressure with their cargo discharging costs significantly higher than those seen on the continent.

The direct comparison is Tata’s other major European production hub based in Ijmuiden, Netherlands. This unit of the business produces more steel, has its downstream operations on site and state-of-the-art technology after investment was centred on a single location.

It seems increasingly likely Tata will base its future operations at this division.

The UK industry is fragmented but the demand for steel means there is a future for steel processing companies. However, it appears the iconic blast furnaces, and the huge number of jobs that come with them, will soon be nothing more than ashes and dust.

A future for EAFs?

Perhaps electric arc furnace-based production has a future in the UK. The country has a reservoir of scrap; currently most of this is shipped to Turkey and Asia, which could be melted in domestic furnaces — as happens at Celsa.

Liberty, which is becoming the darling of the UK industry, continues to invest heavily in the steel industry. After restarting its hot strip mill in Newport, where it also says it will begin remelting, it has acquired a slew of assets from the stricken Caparo Group and is also in talks with Tata and Greybull over the Scottish plate mills.

Unlike Tata, Liberty has acquired all of its assets in a very tough market, and subsequently paid cheaper prices. Therefore it will not have to keep up high debt payments — Tata’s misery was compounded recently by a credit rating cut by Standard & Poor’s. (Standard & Poor’s, like Platts, is owned by McGraw Hill Financial.)

Liberty has also invested in a power station in Newport, which could theoretically reduce costs by supplying the steelworks, and is buying downstream assets such as Caparo’s tube business, guaranteeing it a market for its coil.

Others have taken this tack in the UK, notably Thamesteel and Celsa, to varying degrees of success; Thamesteel went out of business after one of its wholly owned fabricators ran into financial difficulty, and amid a lack of support from its parent company.

Celsa is still running, but the company’s financials are always a source of keen debate in the close-knit UK market.

Source: http://blogs.platts.com/