S&P Global Platts
September 2020
Asia, oil demand Battery supply Pricing US Gulf Coast and coronavirus chains deglobalize oil flows
The path to net zero Insight
ISSN 2153-1536 (online) Contributors
Publisher Murray Fisher, +1 720 264 6644 [email protected] Daniel Editor Claudia Colover Andrew Carpenter Critchlow Emma Slawinski, +44 (0)20 7176 0365 Manager, [email protected] Editorial Lead, Market Head of News, Oil Engagement EMEA Copy Editors Alisdair Bowles, Jonathan Dart, Jonathan Loades-Carter, James Leech, Jonathan Fox Matt Silvia Jacqueline Production Manager Eversman Favasuli Holman David Sullivan, + 44 207 176 0268 Associate Director, Market Reporter, Senior Specialist, [email protected] Oil Generating Fuels Metals Pricing Production Office Platts Insight Magazine 1800 Larimer, Suite 2000 Denver, CO 80202 Martina Ben Klancisar JY Advertising Sales – Americas Kilbey Team Lead, Lim Robin Mason, +1 631 642 2600 Managing Editor, Design and Advisor, [email protected] Metals Production Asia Analytics Advertising Sales – EMEA Irina Bondareva, +44 207 176 0253 [email protected] Mark Advertising Sales – Sameer Mozur Elzbieta Mohindru Rabalska Asia-Pacific Lead Analyst, Senior Editor, Policy, Technology Managing Director, Sheryl Tan, +65 62161191 Shipping and Scenerio Platts Benchmarks [email protected] Article Reprints & Permissions The YGS Group, +1 717 505 9701, ext 105 Junaid [email protected] Rehman Henrique Dania Subscribe free at: Graphics Editor, Ribeiro Saadi spglobal.com/insight Production and Editor, Senior Editor, Design Metals Pricing Oil “What’s next for the S&P Global Platts 20 Canada Square, 9th Floor London, E14 5LH, UK US Gulf Coast?” President David Simon Stark Thorne Harry Martin Fraenkel Team Lead, Global Content Weber Global Head of Commodities, Design and Director, Senior Writer, Pricing and Market Insights Production Generating Fuels Generating Fuels Dave Ernsberger
Global Head of Analytics Kang Chris Midgley Wu Catherine Eric Head of Wood Global Demand, Yep Senior Specialist, Risk and Asia Editorial Lead, Backed by a market-leading methodology and an Shipping Analytics Generating Fuels objective view, you can move forward with confidence. Ask about Platts American GulfCoast Select spglobal.com/PlattsAGS See more. Solve more. Contents September 2020
30
8 48 80 90
8 Cover story: The path to net zero 36 Global to local 60 Insight from Washington 80 The price taker
How do global energy majors’ net zero ambitions fit with future The lithium-ion battery industry is shifting from a globalized How do US oil producers view the policy platforms Why is Italy one of the priciest natural gas markets in Europe oil demand requirements? S&P Global Platts Analytics looks at model to a local and regional one. How are investments shaping of Donald Trump and Joe Biden, ahead of the November despite varied supply sources, and will the start-up of the TAP strategies and risks up in the US, China and Europe? presidential election? pipeline challenge the status quo?
16 Steadying the ship 44 Insight from Shanghai 64 Solar race 88 Insight from Brussels
Weak oil demand and the drive for decarbonization pose risks China’s coronavirus response package is a twist on time- Renewables are still a small part of the energy mix in Gulf The EU’s next steps toward decarbonization could include radical for the shipping sector. Investment continues with a focus on honored, infrastructure-focused stimulus strategies, based Arab states, but the UAE and others are achieving record-low measures to stop carbon “leakage” across its borders, with second-hand vessels on high-tech and electrification electricity costs for some projects several options on the table
22 End of an era: the downfall of Hin Leong 48 Simplifying the complex 70 Valuing Middle East crude in volatile times 90 Top 250 Global Energy Company Rankings
Charting the rise and fall of a legend of the Singapore Market upheaval earlier this year showed the need for a new A look at the key factors in assessing the price of Middle Eastern State-owned energy companies came out on top in 2019 in commodities trading scene: what went wrong, and will there be benchmark for US oil at the Gulf Coast, a challenge met by crude, from deliverable volumes to refinery economics and terms of financial performance, while gas and LNG emerged as lasting consequences for the sector? S&P Global Platts’ new AGS assessment regulated prices in end-user markets drivers of growth
30 Restarting the engine: Asia, oil and coronavirus 54 Insight Conversation: Greg Newman, Onyx Capital 76 Insight from Moscow
Asia’s recovery from the coronavirus pandemic is underway: The CEO of the London-based proprietary trading house A gasoline leak in the Russian Arctic this year raised new S&P Global Platts Analytics offers a regional forecast for discusses the financialization of oil trading and the outlook for concerns about extractive industries in the region, but oil and the coming months the crude market gas development is continuing apace
4 Insight September 2020 September 2020 Insight 5 Editor’s Note Explore Insight
Across the globe, economic and social activity has been ramping up in recent months after Our website spglobal.com/platts contains an extensive selection of free news, videos, podcasts widespread lockdowns to control the spread of coronavirus. and special reports about energy and commodities. Here’s a small selection of recent highlights
The reopening of schools and universities in many countries should deliver a further boost, 2020 (million boe/d) but with cumulative coronavirus cases worldwide standing at more than 25 million as of early Passenger cars (25.0) Commercial road transport (21.8) September, it is clear that there is no quick and easy path to recovery. Oil (91.7)
Refining Aviation (6.7) Marine (5.4)
Chemicals, plastics, etc (23.8) The impact has been felt on all commodities in some way, but performance has diverged Ga s Natural gas (65.6) ocessing widely between products since the beginning of the year. Energy has borne the brunt of pr Industry (78.4)
demand destruction, while precious metals have benefited from their traditional appeal as CPH*
safe havens for investors and risen substantially as a result. Coal (72.8) Emma Slawinski y Buildings (57.4) Electricit Biomass (20.1) Shuttered economies early this year, combined with a cutthroat battle over oil prices between Biofuels (2.4) Solar (1.3) Editor Wind (2.7) Other renewable (1.6) sses Saudi Arabia and Russia, left crude markets reeling. A turbulent first half intensified scrutiny Nuclear (12.0) Lo Hydro (6.3) about how the oil demand curve will evolve in the decades to come and how new habits might S r e S b tt t S e r Ser e Video constrain expected peak demand. There is also the potential impact of green recovery plans Interactive Insight Conversation – Harold Hamm launched by national governments seeking to pivot toward decarbonization and sustainability Fossil fuels in the global energy mix as they emerge from the crisis. Harold Hamm, executive chairman, Continental Fossil fuels would shrink to roughly half of total primary Resources, discusses benchmarks, the Bakken, This edition of Insight takes a detailed look at the prospects for Asian oil and oil product energy supply in 2050, from about 77% in 2020, if the and a backlog of wells with Dave Ernsberger, demand from page 30, finding a relatively subdued picture for the rest of 2020, although a world meets the minimum Paris Agreement target of S&P Global Platts global head of pricing and rebound in major Asian economies is expected in 2021. 2C warming, according to the latest projections by S&P market insight. Global Platts Analytics. Videos, webinars and more multimedia content In China, the government has introduced a new twist to the traditional infrastructure-based Find more infographics here. at Platts LIVE. stimulus package. This time, the country is backing high-tech infrastructure to support a greater share of renewable energy in the mix and the electrification of transport (page 44).
Our cover story (page 8) delves into the energy transition strategies of some of the world’s Podcast largest integrated oil companies, and weighs their net zero emissions commitments against Capitol Crude – Capex cuts stunt US oil production expected future oil demand, as well as the shift that would be required in capital expenditure, away from crude production and toward clean energy. Ash Singh, manager of non-OPEC supply at S&P Global Platts Analytics, discusses the outlook for US oil production with host Meghan Gordon, which The volatility in commodity markets this year has underscored the importance of rigorous and includes a sharp drop in output for 2021 compared with forecasts before this reliable benchmarks to determine value. The considerations for pricing Middle Eastern crudes, year’s oil price collapse. as well as a US Gulf Coast export stream still in its infancy, are explored in features on pages Listen to more S&P Global Platts podcasts here. 70 and 48, respectively.
Another big theme to watch in commodities is the move toward deglobalization of supply chains. This was arguably already under way, but the pandemic is likely to have concentrated Special report the minds of national governments. The trend is especially clear in the global lithium-ion Turning on TAP: a shift in the European gas landscape battery sector, as investment flows into the EU rise while those into China decline (page 36). Barring any new, unexpected delays, the Trans Adriatic Pipeline is due to come Finally, our annual Top 250 Global Energy Company Rankings show how state-owned energy online in the fourth quarter of 2020 – the latest chapter in the diversification of giants dominated in terms of financial performance last year, while gas and LNG also played a European gas supply. This special report explores TAP’s potential impact for Italy role in fueling energy company growth. Find the full analysis and data from page 90. and Central and Eastern Europe. View all Platts special reports here. [email protected]
6 Insight September 2020 September 2020 Insight 7 The path to net zero Net zero goals imply huge shifts in strategy for global oil majors, but approaches vary. S&P Global Platts Analytics’ modelling lays out the potential displacement in both oil demand and capital expenditure up ahead, and highlights the inherent risks of each pathway for carbon reduction. By Mark Mozur
8 Insight September 2020 September 2020 Insight 9 The path to net zero
his year may be remembered as In short, there is an emerging conversation about a tipping point for the oil and gas the extent to which the coronavirus pandemic has industry. In the midst of a global shifted the world onto a low-demand and therefore a T low-carbon trajectory. Whether in terms of the drop in pandemic and economic lockdown that fossil fuel consumption or in terms of the expected fall are expected to wipe out over 8 million b/d in CO2 emissions, Platts Analytics expects near-term of oil demand, producers have slashed decreases to exceed those required in a low-carbon capital spending to the lowest in 15 years. world as defined by a modelled 2-degree-Celsius pathway. Platts Analytics forecasts a drop of 8% and 6%, respectively for the two indicators, versus 1.5% Crude and condensate output is forecast to fall 7% and 1.9% in a 2 C scenario. year on year, dipping below 80 million b/d, and oil prices in late August remained around $20/b below The Paris Agreement, ratified by 189 parties to date, 2019 average levels. targets limiting the global rise in temperature this century to well below 2 C above pre-industrial levels, In almost any other year, these cuts to capital spending in order to avoid catastrophic impacts of climate and output could be attributed to supply-demand change. From an energy end-use point of view, a 2 C cycles and price responsiveness. pathway can be modelled by requiring that annual CO2 emissions decline to 10-15 Gt per year by 2050. This But in more ways to count, 2020 is not just any other is based on the lowest Representative Concentration year. Prompted by virus transmission fears and the Pathway included in the most recent assessment new normal of working from home in many economic report from the Intergovernmental Panel on Climate segments, the coronavirus pandemic has caused Change. S&P Global Platts Analytics has adapted modellers to re-think how the legacy of the virus could this global greenhouse gas pathway to country-level change consumer – and business – behavior for years emissions reductions requirements. to come as no end-use sector has been immune to the impact of the global economic lockdown. In the context of this ongoing conversation, it is all the more remarkable that even as some of the world’s In the view of S&P Global Platts Analytics, the most prominent oil producers have announced major international major has made some form of a low- each of these transformations has a different set downside pressure to long-term oil demand in a cuts to capital spend, as well as asset write downs carbon commitment. of implications for what a 2050, low-carbon world post-pandemic world can be felt across the board, and dividend cuts, industry leaders such as BP, Total, would look like. touching nearly every single end-use sector in our Shell, and others have made headlines by effectively The more ambitious of these aspire to be “net zero” energy models. Examples include reduced vehicle redoubling their commitment to long-term net zero by 2050, but all companies have some form of Energy transition strategies of upstream oil and gas companies miles travelled as consumers adapt to remote work targets. As of the third quarter, nearly every single commitment to reduce the greenhouse-gas intensity Type Description Examples and slower growth in international air travel as social- of existing operations and some form of pledge to distancing norms become prohibitive for aviation and expand activity related to low-carbon energy carriers Emissions offsets Producers seek to offset Afforestation Change in global oil demand by sector emissions from existing and carbon credits businesses choose to limit travel. There is also the such as renewable power, biofuels, and even hydrogen. operations independently dampening effect on international trade as businesses Change (million b/d) Change (%) Concurrent with this, the reduced long-term oil from the operations themselves 0 20 – and governments – accelerate efforts to “reshore” demand outlook has caused many producers to adopt Transformation Producers seek to reduce Electric drilling global supply chains. lower pricing guidance. of operations carbon intensity by transforming platforms, CC S, existing operations reduced flaring, 00 0 drilling, flaring, leakage, refining increased operational In Platts Analytics’ long-term balances, the net Platts Analytics has reviewed various corporate low- efficiency impact has been to reduce projected 2050 oil demand carbon commitments and while there is a diverse set Transformation Producers seek to reduce A Hydrogen growth considerably as these trends far outweigh of measures announced to date to achieve long-term of product offering carbon intensity by offering new, from natural gas 20 low-carbon products using either upward pressure on demand from competing drivers targets, they do not all imply a full-scale business A the existing resource base or B Biofuels such as the rise in e-commerce and home shopping, model transformation. The table to the right reflects B existing delivery channels a continued preference for plastic packaging and – an attempt to categorize low-carbon ambitions of 0 0 Transformation Producers seek to reduce carbon EV charging stations, not to be forgotten – a substantially lower long-term 20 e er t t er tr er r e em 2020 upstream oil and gas producers. of business model intensity by fundamentally direct power sales r tr p rt e er t t er transforming their business model, oil price outlook. seeking out new end users and S r e S b tt t In principle, all four pathways are viable options to new delivery channels
reduce entity-level CO2 emissions. But at their hearts Source: S&P Global Platts Analytics
10 Insight September 2020 September 2020 Insight 11
Different energy transition strategies have specific challenges
Type Key challenges Degree Emissions offsetsWeak long-term oil demand
of
ex
Transformation Technological and natural limits to posu of operations potential efficiency gains and carbon sinks re
Transformation Need to build out supply infrastructure to
of product offering at scale refining of biofuels, production oi l
of hydrogen pric
Transformation Need to develop know-how e of business model Competition from incumbents lack of advantage Path dependency technological lock-in The path to net zero The path to net zero
Platts Analytics’ 2 C pathway has been modelled at Forecast fossil vs non-fossil split, 2050 The fact that new upstream oil investment is still 2 C pathway implies lower long-term average oil price the sectoral level and has been built by balancing needed to meet demand in such a sensitivity points 2050 reference case (million boe/d) ßTotal final consumption Electricity outputà e e pme t t b 20 150 long-term energy demand growth against structural to a key reason why many major producers have 0 r pp r e constraints such as available non-fossil fuel supply, All other put forward hybrid strategies to achieve net-zero technology costs, and global emissions caps. targets that blend across the four different categories 100 0 described previously. As modellers, this fact also e ere e e term er e r e pr e Fossil From an oil producer’s perspective, the end-user enables us to frame the energy transition in terms of 2 er e pr e results of this modelling exercise are substantial. capital allocation. 0 The collective share of fossil fuels in final energy 50 consumption in 2050 is projected to decline from nearly In Platts Analytics’ reference case long-term balances, 20 45% in current Platts Analytics’ long-term balances to the slashed upstream capital spending observed this 0 under 30% in a 2 C sensitivity. The sensitivity analysis Industry Transportation Buildings Power generation year rebounds to average $380 billion a year in real in terms of oil is even starker: 50 million b/d of demand 2018-equivalent dollars from 2025 through 2050. To 0 2050 2 C (million boe/d) 0 020 0 0 0 0 0 0 0 00 0 destruction separates a reference-case outlook from a 150 calculate changes in capital allocation implied by a r t m b low-carbon sensitivity. low-carbon pathway, Platts Analytics has mapped 2 C S r e S b tt t demand for refined products to current estimates of Most significantly, in a 2 C world refined petroleum 100 marginal supply costs. All other products are almost entirely displaced from on-road Any additional demand-side risk could cause other transport (passenger cars and commercial road In this analysis Platts Analytics has assumed that basins to fall out of the marginal supply stack as transport). Fossil fuel’s share of on-road transport 50 Fossil supply growth is optimized across cost, meaning producers continue to adjust their long-term price demand is expected to fall from 91% now to 77% in that incremental oil production is almost exclusively view, and each such iteration could narrow the gap 2050 in the Platts Analytics reference case compared restricted to core OPEC producers. Overall, from 2025 between the incremental capital spend in the Platts with only 10% in a 2 C sensitivity. Though other 0 to 2050, this key assumption implies $3.4 trillion Analytics reference case ($9.5 trillion) and the Platts Industry Transportation Buildings Power generation transport sectors such as air and marine are slower to in total upstream capex, versus $9.5 trillion in the Analytics 2 C pathway ($3.4 trillion). Fossil includes coal, gas, and oil. Industry, transportation, and buildings are considered decarbonize, the volume growth is too small to replace total final consumption, not total primary energy supply. reference case, effectively leading to $6.1 trillion in the lost oil demand elsewhere. Source: S&P Global Platts Analytics potential long-term capital reallocation. Should this happen, the post-coronavirus world would indeed be moving onto a lower-carbon trajectory. Further, a 2 C sensitivity necessitates a massive Moreover, policy uncertainties such as the potential One key driver of this dynamic is that the customer Incremental oil supply needs after demand peak buildout in the electric power grid. Strictly in terms of application of some form of carbon pricing on oil base is essentially undergoing profound structural m b absolute demand levels, new low-carbon electricity 00 output represent a potential upside to this estimate. change that has weakened the demand outlook for 2 C refined demand is nearly equal to the reduction in fossil fuel product demand The capital reallocation figure is contrasted nearly every major oil-product category, with the supply for on-road use in 2050. 0 against $14 trillion in needed spend on incremental exception of plastics. power generation capacity in the same Platts 0 Incremental 2 C supply needs* Analytics 2 C pathway. Returning to energy transition strategy frameworks, Capital allocation shift 0 each strategy faces a unique set of risks related to Recent events have borne out this analysis. the long-term demand outlook. At a general level, These modelling results would imply that oil and gas 20 Base crude + condensate supply Recognizing that a weaker demand outlook will not additional cost implications need to be applied in incumbents should seek to transform their business bolster long-term prices, some oil producers and major any strategy, affecting their commercial viability. But 0 model fundamentally to the extent that they consider 2020 202 20 0 20 20 0 20 20 0 lenders have announced that they will no longer seek in terms of specifics, each strategy has a different such a 2 C sensitivity viable. But perhaps it should to develop higher cost supplies such as Canadian oil key challenge. bee te ter b em pe come as no surprise that it is not that simple. sands or Russian Arctic offshore deposits. S r e S b tt t As mentioned above, the expected single-year drop in 2020 exceeds required reductions on a low-carbon peak. At a global aggregate level, this rolls up into an A company that pursues a full-scale transformation of its pathway on the oil-demand side. Similar analysis can average annual base decline rate of 3.3%. Once again, be applied to the supply side. To meet the reduced call this overall decline rate is more aggressive than the business model as part of its energy transition strategy would on crude (and condensate) in a 2 C sensitivity, Platts projected decline in oil demand, which would fall by Analytics assigned a basin-specific decline rate to 1.9% a year. Thus, in a 2 C sensitivity incremental currently producing assets and any assets expected investment in upstream oil production is still needed either face intense competition from incumbents or could to be brought online between now and the mid-2020s, to meet demand. when oil demand growth would be projected to develop a path dependency
12 Insight September 2020 September 2020 Insight 13 The path to net zero
Each energy transition strategy also carries with it a different level of exposure to oil prices, related to the Some oil producers and major degree to which oil companies seek to preserve existing operations (and revenue streams). Paradoxically, the lenders have announced that degree to which a successful energy transition strategy insulates producers from long-term exposure to oil they will no longer seek to develop prices is likely to have a direct impact on the return on capital employed, narrowing margins. higher cost supplies such as But this paradox is entirely consistent with one of the most important insights from modeling a low carbon Canadian oil sands or Russian sensitivity: in a 2 C pathway, long-term average oil prices are substantially lower than the Platts Analytics Arctic offshore deposits Reference Case and enter secular decline once peak oil demand is reached in the mid-2020s. Policy, including taxes, and technological change are modelled to fuel is offset by the growth in new end-user markets accelerate the turnover of capital stock in a 2 C world, for carbon-free electricity. At the same time, even rendering demand inelastic to price in the long-term. the most aggressive sensitivities still require new That is, there is no demand rebound in response to low investment in upstream oil supply to meet demand. oil prices as consumer choice becomes constrained due to a ban on internal combustion engines. Overall, the story might be told through capital re-allocation: energy transition would imply $14 trillion in new capital spend in low-carbon Oil price impact electricity against a $6 trillion reduction in upstream oil spending. That is a huge gap to fill, but if investments Having already lowered the long-term average oil in low-carbon alternatives are profitable, the capital Firstly, oil and gas producers that pursue carbon dependency – investing in an energy transition solution price outlook in the Platts reference case by around markets should be able to link a wide range of investors reductions strictly in terms of emissions offsets are that eventually falls out of long-term energy balances $10/b (constant 2018-equivalent dollars) due to the with these opportunities, given enough time and exposed to the risk that long-term oil demand will either due to regulatory constraints, commercial impact of the pandemic, a low-carbon pathway would appropriate policy incentives. continue to weaken, effectively leading to further challenges or other reasons. The diversity of these require an additional $10/b reduction in average oil reductions in asset value. Second, there are limits – challenges is reflected in the Platts 2 C pathway, which prices over 2020-50. both technological and natural – to efficiency gains features a combination of all four in various degrees at faced by any company seeking to reduce emissions the country level. The energy transition ambition is staggering: the Platts by transforming the environmental footprint of its Analytics 2 C sensitivity requires a 50% reduction Go deeper upstream operations. in CO2 emissions by 2050 as well as a 50 million b/d reduction in oil demand. But at a time when the world S&P Global Platts Future Energy Outlooks delivers a Third, while there are considerable benefits to oil and Different energy transition strategies have specific challenges has experienced an unprecedented – and unforeseen pragmatic view of the long-term trajectory of energy and gas producers that transform their product offering – drop in energy consumption, economic activity commodity markets. Insights about the interconnected to include low-carbon energy carriers, there is still a Type Key challenges and emissions, some of the most prominent industry nature of technology, policy and consumer preference Degree need to build out supply and distribution infrastructure Emissions offsetsWeak long-term oil demand players have redoubled their commitments to achieving help explain what tradeoffs are likely and what the world
at scale. That means an oil producer that transitions long-term net zero targets. And these long-term will look like when they occur. of from the sale of jet kerosene to sustainable aviation ex net zero targets come with a diverse set of energy
Transformation Technological and natural limits to posu fuel (biojet) would not need to develop a new customer of operations potential efficiency gains and carbon sinks transition strategies, ranging from procuring emissions Learn more about Platts energy transition coverage base or even a new logistics network, but would need to re offsets and improving operational efficiencies to in our comprehensive annual guidebook, quarterly
Transformation Need to build out supply infrastructure to develop new large-scale production infrastructure. pursuing a full-scale business model transformation. tracking reports and focused analysis around alternative of product offering at scale ('refining' of biofuels, production oi l
of hydrogen) pric transport, hydrogen and other energy transition
Finally, a company that pursues a full-scale Transformation Need to develop know-how e The results of Platts Analytics’ low carbon modeling technologies spglobal.com/scenario transformation of its business model as part of its of business model Competition from incumbents (lack of advantage) show that a combination of all strategies may be Path dependency (technological lock-in) energy transition strategy would either face intense needed: the full displacement of oil as a transport competition from incumbents or could develop a path Source: S&P Global Platts Analytics
14 Insight September 2020 September 2020 Insight 15 Steadying the ship The tanker sector is navigating twin challenges in 2020: oil market turbulence due to the coronavirus crisis, and a decarbonization drive in the longer term. But shipowners and investors are already starting to adapt, writes Sameer C. Mohindru
16 Insight September 2020 September 2020 Insight 17 Steadying the ship
he global tanker shipping industry With larger-scale investments already made to adjust is likely to find a new normal in to the new system, tanker owners are now hesitant to the medium term, with sales of pour money into fresh greenfield projects. The value of T all kinds of ships is falling, according to Copenhagen- second-hand ships taking center stage based Peter Sand, chief shipping analyst at BIMCO, while orders for newbuilds slow down. the world’s largest international shipping association with more than 2,200 members. Even though sale and Meanwhile, existing tanker companies may become purchase activity in the tanker sector remained active bigger as ships change hands, or they may form pools into April, thereafter it started to ease, Sand said. to enable better bargaining with charterers, while shying away from ordering new ships. A sale and purchase broker cited the example of a 2005 built, 302,000 dwt VLCC recently changing Uncertainties over how and when the coronavirus hands at just under $27 million. Sales of a couple of pandemic will end are partly behind the new approach, similar 15-year-old ships in April took place at around but so is the higher use of greener fuels. The global $37-$39 million. health crisis hit when the shipping industry was already in the throes of a major transition to a low- Analysts point out that the April-May period was sulfur fuel regime, and starting to plan for its eventual exceptional, in that low crude prices made floating decarbonzation. storage of crude and refined products lucrative, and supported the prices of tankers as well. According While in 2020 to date shipowners benefited from a to UK-based shipping consultancy VesselsValue, the glut of oil supply and the ensuing demand for floating phase of high-priced tanker sales has ended for the storage, leaner days may be ahead now that crude time being and rates are now in a period of adjustment. flows have evened out and global oil consumption has slumped. This, along with the longer-term impact on oil The total shipping order book, including tankers, is demand from the energy transition, is already having a now at a 17-year low as the coronavirus pandemic has partnership, DiaNor. Under the agreement, Diamond S is of firm market values, according to Olivia Watkins, clear effect on investment in the sector. massively slowed contracting, Sand said. Orders for contributing 28 Medium Range tankers to the NORDEN- VesselsValue’s UK-based head cargo analyst. An new tankers have dropped more than 40% in the first owned Norient Product Pool, making it one of the world’s estimated $4.5 billion worth of sale and purchase seven months of 2020 compared with the year-earlier largest, with close to 90 such ships. Diamond S CEO Craig activity is estimated to have taken place in the first half Caution a watchword period, according to BIMCO’s estimates. Stevenson in a statement described the move as of 2020, up from $4.2 billion in the same period two “much needed consolidation in the tanker industry.” years ago, VesselsValue data showed. From January this year, the tanker sector, along with Instead of ordering new ships, companies are looking its dry bulk and container shipping peers, successfully for greater synergies. In June, through a combination of Through long-duration arrangements such as time There have been at least two significant spikes in spot executed a worldwide plan steered by the International pool and time charter deals, Trafigura Maritime placed charters, or contributing ships to a single pool, owners tanker freight rates so far this year and the year-to- Maritime Organization (IMO) under which marine seven of its tankers with Navig8, which owns and can increase the possibility of garnering higher freight date average daily earnings of VLCC owners on the fuels with more than 0.5% sulfur can only be used in operates vessels and also manages shipping pools. and avoid having to undertake complete transfer of ships that have exhaust systems called scrubbers ownership through mergers and acquisitions. S&P Global Platts spot freight rates, key routes fitted on them. Around the same time, owner and operator companies r e p t NORDEN and Diamond S Shipping Inc. formed a joint 00 2 t e More deals, lower rates er p 00 The values at which sales and purchases of tankers are 00 The global energy mix is set to change in the next taking place may have declined but the number and frequency of deals involving second-hand ships have er 200 been robust. Going forward, this vibrant market will be t e three decades, with greater use of electric vehicles er p the flavor of the industry, some analysts say. 00 gradually reducing the movement of crude oil and Even during the global pandemic, a large number of 0 second-hand transactions took place, and sellers eb 20 pr 20 20 20 refined products loaded on tankers with prompt tonnage were able to take advantage S r e S b tt
18 Insight September 2020 September 2020 Insight 19 Steadying the ship
benchmark Persian Gulf-China route are close to Tanker fleet development $60,000, according to Masood Baig, a director with mber e e Singapore-based Straitship Brokers. 0 e ere 0 According to brokers, even now VLCC owners are earning around $12,000/day. Baig says that, with strong 0 demand projected for the last quarter, an annual 20 average of $40,000-50,000/day is highly likely for 2020. It is these kinds of earnings, and reluctance to buy new 0 ships, that are keeping investors’ interest alive in the 20 second-hand sector. S r ppe 0 eb eb eb 20 20 Decarbonization 000 e e 2 Another consideration influencing the choice between eet e second-hand and newbuild ships is the unpredictability 2 0 of the market in the medium to long term as the energy transition gathers pace. Using 2008 as a baseline year, the IMO is aiming for a 50% reduction in greenhouse gas emissions from 0 shipping by 2050. This will result in less use of fossil But further support from floating storage for freight VesselsValue estimates that the delivery of new fuels to move ships, as alternatives including ammonia rates and ship values is unlikely in the near term, tankers has halved to 24 in July, from 47 in January. 0 or hydrogen gain traction. eb eb eb 20 20 analysts say. Wherever and whenever possible, floating UK-based Marine Strategies International forecasts storage is now being offloaded and there is no more less than 1% growth in the VLCC fleet in the current and S r e e e e In addition, the global energy mix is set to change in incentive to buy at current prices as the demand next two quarters. the next three decades, with greater use of electric outlook is weak, Sand said. vehicles gradually reducing the movement of crude The pandemic has also resulted in a situation where Yet the supply is unlikely to tighten, because there oil and refined products loaded on tankers. Already, not all crude volumes being pumped out and products has been hardly any demolition of old ships. “It’s the sale of EVs has shown a sharp rise in recent being refined can be sold or consumed in a seamless Supply outlook been seven months now, without a single VLCC being years. Electric cars, which accounted for 2.6% of flow, as was the norm last year. demolished,” noted Sand. global car sales and about 1% of global car stock in The possibility of a return to a scenario of low demand 2019, registered a 40% increase between 2018-2019, This has prompted refining and trading companies and increased supply availability of tankers due But there is potential for scrappings to pick up if rates according to IEA estimates. to hold larger volumes in ships, for longer durations, to reduced floating storage is the main threat to stay depressed, as 20% of the tanker fleet is more than either due to limited demand or in anticipation of supported rates, said Ole-Rikard Hammer, a senior 15 years old and capital expenditure on them can go Ordering a new tanker now gives a 20-year ownership better prices in a contango pricing structure. Demand analyst with Oslo-based Arctic Securities. up, Hammer said. horizon, but going into 2040, the share of crude oil in for floating storage was so high in the second the energy mix may change drastically, said Baig. An quarter of this year that spot tanker freight rates hit According to Straitship Brokers’ Baig, in the “normal” It is still not clear whether the world is in the beginning owner will be in a more predictable trading environment an all-time high. course of events, global crude market growth of or middle of the pandemic. What is clear, however, is by instead buying a second hand VLCC and operating it 1 million b/d would have implied an additional that a sudden abrupt end to this new normal is highly for a decade, he said. In turn, this dynamic supported the value of ships requirement of around 25 VLCCs this year. However, in unlikely in the near term. At the same time, while the as well. For product tankers, the sale and purchase the current environment, S&P Global Platts Analytics global economy in general and the maritime world in The majority of investments in tanker sales so far this market has stayed fairly liquid, although activity expects oil demand will contract by particular is taking a beating, a catastrophic doomsday year have been for those between 15 and 20 years old, in sheer numbers is much below that of 2018 and 8.1 million b/d in 2020. is nowhere on the horizon. said Watkins. According to one broker tracking such 2019, according to BIMCO’s Sand. In early August, deals, a 17-year-old Suezmax was snapped up by a VesselsValue estimated a five-year-old Long Range Consequently, additional tonnage is no longer required, If shipping tycoons and their fellow investors hold back Greek buyer for $20 million in May, and in early August II tanker – the most popular for floating storage of and both deliveries and orders have already slowed the urge to buy new tankers and strategically position a 10-year old changed hands for $25 million. products – at almost $42 million, up 14% from the down. Some dirty tanker orders were placed in the their existing fleet to prevent a glut from developing beginning of last year. first five months, but June and July were completely at the key loading ports, their return on investment anaemic with no orders at all, added Sand. will be protected.
20 Insight September 2020 September 2020 Insight 21 End of an era: the downfall of Hin Leong The Hin Leong scandal rocked the Singapore trading community earlier this year, topping many earlier bankruptcies in the commodities space in terms of financial losses. Eric Yep unpicks the company’s path to self-destruction and assesses the fallout
22 Insight September 2020 September 2020 Insight 23 End of an era
in Leong’s bankruptcy filing, quintessential oil trader who arbitraged between on April 17, marked one of the prices, regions, fuel quality and geopolitics to profit H world’s largest collapses of from a barrel of oil. It was briefly the stomping ground an oil trading firm. The story of the of Glencore founder and legendary commodities trader Marc Rich, who, like OK Lim, had an immigrant rags-to- Singaporean company and its founder, riches story of his own in the US. Oon Kuin Lim, is inextricably linked with the history of the petroleum trade in It is not so extraordinary, then, that OK Lim grew Singapore and the Asia-Pacific region. his fortunes in Singapore, eventually becoming one of the largest traders of petroleum products in the region and a regular on the Forbes list of Singapore’s Oon Kuin Lim, more popularly known as OK Lim in richest people. Hin Leong’s bunkering arm was industry circles, started his oil distribution business Singapore’s third largest bunker supplier in 2019, around 1965, the same year that Singapore separated accounting for 10% of local bunker sales, and was a from Malaysia to chart its own future, after several key supplier to countries like Indonesia and Myanmar years of political differences. in Southeast Asia.
In his first affidavit to a Singaporean court in April, Anatomy of a decline OK Lim said he was a “one-man-one-truck” oil dealer, selling oil bought wholesale from the oil majors to taxi companies, bus companies, and fishing boat operators When Hin Leong’s troubles became public it was the as the tiny Southeast Asian country built its economy. equivalent to the collapse of an institution, shaking Singapore’s commodity trading community to the The forged document was used to secure more troubling, and suggests that the company had, possibly OK Lim, born in China’s Fujian province, built his core, not only those who had exposure to the company than $56 million in trade financing from a financial for many years, been carrying on its business by fleet of tank-trucks in Singapore over the years and but also everyday traders who had dealt with OK institution, Singapore Police said when the charges presenting a picture of financial health that was a far incorporated Hin Leong in 1973 as an oil trading Lim for decades. were made public, adding that investigations cry from the underlying reality,” the report said. company, followed by Ocean Tankers in 1978 as a ship were ongoing into other offences possibly chartering and management company. He started the In mid-August 2020, OK Lim was charged in committed by OK Lim. The report went on to say that financial statements for Universal Terminal tank farm in 2008. Singapore’s court with abetment of forgery for the the year ended 31 October 2019 grossly overstated the purpose of cheating, after investigations by the Two weeks later, PricewaterhouseCoopers (PwC) value of assets by “an astonishing amount of at least The early years of Lim’s business were turbulent Commercial Affairs Department into Hin Leong’s Advisory Services, the judicial manager for petroleum $3 billion” comprising $2.23 billion in accounts decades for the oil industry in Singapore, whose iconic business activities. trader Hin Leong Trading, sued OK Lim and his two receivables which had no prospect of recovery and downstream refining sector has seen everything from children for $3.5 billion. The sum represented Hin $0.8 billion in inventory shortfalls. the rise of Asian crude grades such as China’s Shengli According to the charges, OK Lim had instigated a Hin Leong’s outstanding debts, according to a statement and Malaysia’s Tapis to the rise of US shale. The city Leong employee to forge a document that looked like it from Drew & Napier, the law firm representing Hin “The overstatement existed to conceal significant state even helped fuel the Vietnam War at one point. was issued by UT Singapore Services, which operates Leong Trading, as instructed by PwC. losses that the Company had accumulated over the the Lim family’s Universal Terminal tank farm, stating years,” according to the report. By virtue of being at the heart of Asia’s fuel supply that Hin Leong had transferred more than 1 million PwC also sought to recover another $90 million in chains, Singapore has also been home to the barrels of gasoil to China Aviation Oil (Singapore). dividends that the Lim family, which includes his two The investigators said there was evidence of children, Evan Lim Chee Meng and Lim Huey Ching, accumulated derivatives trading losses of about paid themselves in previous years out of Hin Leong’s $808 million over the past 10 years, in line with OK disputed profits, it said. Lim’s own affidavit, but added that these losses were Interim judicial managers had laid out the scale of concealed through the overstatement of derivatives Interim judicial managers had laid out the scale of gains by as much as $2.1 billion over the same period. “irregularities” at Hin Leong in detail in June, covering “irregularities” at Hin Leong in detail in June, in an They said receivables were overstated through the interim report seen by S&P Global Platts, covering manipulation of accounting entries, and the use of everything from the fabrication of documents to “control accounts” to make inter-bank transfers that everything from the fabrication of documents to derivatives trading losses and accounting cover-ups. gave the false impression of payments, when none were actually received from customers. derivatives trading losses and accounting cover-ups “The scale of the irregularities uncovered in just the financial year ended 31 October 2019 alone is highly
24 Insight September 2020 September 2020 Insight 25 The Hin Leong story: rise and fall of a Singaporean oil tycoon 2020 has been a tough year for oil and even worse for those caught on the wrong side of the price collapse. For Hin Leong Trading, one of Asia’s Irregularities eventually triggered a liquidity crisis and a court-ordered restructuring with nearly $3.85 billion in debt. Hin Leong’s collapse largest petroleum traders founded by Singaporean tycoon Lim Oon Kuin, the turmoil exposed faultlines in a highly secretive business. jeopardized billions of dollars of family assets across petroleum storage and shipping, and continues to have repercussions across the industry. Prominent commodity trading losses over the years ($ billion)2 The rise and fall of Hin Leong Hin Leong was one of the most active participants 20 Agritrade Resources, Singapore1 pre-1963 OK Lim comes to Singapore from small in the spot market Chinese town of Putian Volume of trades reported during the Platts MOC process 2020 losses pile up, but still short of Enron’s 18 1963 Hin Leong Trading is established 001 Gasoline — Apr 2019-Mar 2020 (million barrels) — 2 US (“Hin Leong” means “Prosperity”) , ives losse on at s r riv 0 Buy n e 02 1965 “One-man-one-truck” dealer sells oil 16 E d 2 Hin Leong y g Sell r to taxis, buses and fishing boats e n E 1968 Acquires first vessel, 100 dwt “Sea Lion” Buy 14 Vitol Sell 3.85 1973 Hin Leong Trading incorporated as oil trading company
n o 1978 Ocean Tankers incorporated as ship chartering company Shell 12 illi $19.28 b Qingdao metals on warehousing scam, 1978 Ocean Bunkering Services set up as bunkering company illi $74 b China 10 1980s HLT becomes one of Singapore‘s largest petroleum traders PetroChina Unipec (Sinopec), China, Airlines industry, Jet fuel hedging losses 2008 Universal Terminal starts operations Oil trading losses PTT 8 2010 Talks with Sinopec to build Petro-Diamond Amaranth Advisors, Singapore (Mitsubishi), $6 billion - $8 billion refinery fizzle out 0 5 10 15 20 25 US natural gas hedge fund Oil trading losses 6 2014 Plans for Universal Terminal IPO fail to materialize Fuel oil — Jan-Dec 2019 (million mt) Bank of Montreal, Canada Hin Leong Trading, (Natural gas trading) Singapore1 April-20 Brent crude crashes to $22/b, COVID-19 slashes oil demand Buy Noble Group, HK Hin Leong 4 Sell Sumitomo Corp, Japan, (Accounting fraud, Bank of China, HLT defaults on loans, lenders freeze credit lines Copper futures trading 2016-2018)1 Cosco/Nobu Su/Others, Oil trading losses Buy Metallgesellschaft, Shipping derivatives losses Hontop Energy, OK Lim resigns, Hin Leong files for bankruptcy protection Vitol Sell 2 Germany, Singapore Oil trading losses (China Wanda Group) China Aviation Oil, Hin Leong put under judicial management Singapore OW Bunker A/S, Zenrock Commodities, BP Denmark Singapore May-20 Ocean Tankers put under judicial management 0 Phoenix Commodities, Dubai 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 June-20 Judicial managers issue report Gunvor 1 Total Enterprise Value at time of default 2 Losses / debt levels have not been inflation adjusted on widespread irregularities
July-20 Assets subject to multiple claims, lawsuits Tra What went wrong at Hin Leong Aug-20 OK Lim charged in court for abetment of forgery Shell Derivatives Alleged fabrication Overstated Resale of Release of Xihe Holdings put under judicial management losses of fictitious gains asset value collateralized inventory fuel cargo Glencore of $800 million go unrecorded, from derivatives trading by $3 billion: $2.23 billion to generate cash flows to persons not holding PWC sues OK Lim and 2 children for $3.5 billion overstatement of derivatives gains and fictitious sales invoices in receivables and $0.8 billion of bills of lading by $2.1 billion over 10 years in inventory shortfalls 0 1 2 3 4 5 Note: Fuel oil market changed due to IMO2020 from Jan 1, 2020
Decline in inventory volume Decline in inventory value* Lim family empire 77% of petroleum stocks (worth $1.136 billion) lost in 6 months Over 50% fall in petroleum fuel prices OK Lim (founder) | Evan Lim Chee Meng | Lim Huey Ching
(million mt) Market rate ($/mt) 31-Jan-20 29-Feb-20 31-Mar-20 9-Apr-20 700 Hin Leong Trading Ocean Tankers Universal Terminal Xihe Holdings / LSFO 600 Oil trading Ship chartering Oil storage Xihe Capital 31-Oct-19* 31-Mar-19* PetroChina 25%, Macquarie 34% Shipholding 500 MGO Revenue: $20.27 billion Revenue: $724 million Lim family 41% 400 Net profit: $78 million Net loss: $106 million 31-Dec-18* Gasoline 09-Apr-20 Liabilities to trade creditors: Revenue: $183 million 300 Total liabilities: $4.05 billion $58.5 million (29-Feb-20) Net profit: $31 million Assets: $714 million HSFO 200 Ocean Bunkering Services 09-Apr-20 100 Jet fuel 100% subsidiary 31-Oct-19 0 0.0 0.2 0.4 0.6 0.8 1.0 1.2 1.4 1.6 Gasoline Jet fuel LSFO MGO HSFO Hin Leong Marine Bunkering * Mark to market losses in 2020 54.55% ownership *Year ended
Sources: Court documents, company filings, S&P Global Platts, S&P Global Market Intelligence, news reports 26 Insight September 2020 September 2020 Insight 27 End of an era
The bank transfers were facilitated by using “fabricated documents on a massive scale” and the Not only had Hin Leong been scale and regularity of the fabrication suggested that “the practice was routine and pervasive,” the report unprofitable in the last few said. These included forged bank remittance advices, bank statements, bills of lading, sales contracts, years but its total liabilities at sales invoices, swap trade confirmations, swap trade tickets, deal settlement slips and inter-tank transfer certificates. the time of the report came to
The forged documents in turn misled banks into $3.5 billion while its assets were extending financing to the company and also acted as supporting documentation for fictitious gains or only $257 million profits, the IJMs said. To keep the losses concealed, Hin Leong had to maintain the flow of liquidity for which it obtained financing from banks through schemes that in Singapore’s High Court to put Zenrock Commodities involved the sale and repurchase of cargo at a loss, under judicial management, citing “suspicious” forged documents, non-existent inventory, or the sale transactions and trade practices in its affidavit. of the same inventory to multiple parties; leading to Hontop filed for debt restructuring with the High competing legal claims on the same cargo. Court in March.
“The cumulative effect of the above irregularities was Hin Leong’s alleged fraudulent actions were discovered that a vastly misleading picture of the Company’s only when the coronavirus pandemic stressed out financial health was presented to external parties, already overextended credit lines used to cover the are often not available, especially when a cargo Lastly, there is the question of regulation and risk possibly for many years, with the result that the company’s losses. When Brent crude sank below passes through many hands in a physical trade. But management in the industry. Banks have scaled back Company was able to continue to trade and obtain $30/b in March it was the proverbial straw that broke use of LOIs carries risks that are not always properly significantly from lending to the commodities sector in financing,” the IJMs concluded. Not only had Hin Leong the camel’s back. The trader defaulted on some accounted for. Traders are more cautious now, but it 2020, a move accelerated by incidents like Hin Leong. been unprofitable in the last few years but its total payments, which is when the real scrutiny into its remains to be seen whether industry practices will Risk management divisions are working overtime liabilities at the time of the report came to $3.5 billion transactions began. change permanently. to scrutinize trades, and Singapore has deployed while its assets were only $257 million, the report said. data-crunching technologies to assist investigators If the coronavirus pandemic had not happened, how The current crisis has also exposed the true valuations in the Hin Leong case and other fraud cases such On June 25, the Lim family issued a statement to the much longer could Hin Leong have continued? How of petroleum assets in the midst of a crisis as oil majors as Wirecard earlier this year, and the 1MDB scandal press saying they had not been given opportunity to widespread is the scale of losses at trading houses this write-off billions of dollars in reserves and projects. several years ago. respond to the allegations in the interim report and year? What if the contango trade, which helped trading The Lim family’s shipping and storage assets – Ocean that OK Lim was deemed medically unfit to work at the desks boost their profits and recoup losses in the Tankers and Universal Terminal – are likely to be on the Tighter measures are expected by the industry in time the investigations were being conducted. They second quarter, had failed? chopping block with both the companies now under coming months, although it is unclear what form they said they reserved their rights against all relevant judicial management. will take. As commodity trading itself gets digitized, the persons and would address the report and its findings Most large private commodity trading houses remain types of “old-school” Ponzi schemes and fraud we are in the right fora. relatively opaque, even as they replace oil majors in Ocean Tankers charters or operates Singapore’s largest seeing alleged here would no longer be possible. But remote countries with unstable governments, to the fleet of tanker vessels and was one of the world’s that does not necessarily mean the renegade trader They had not issued a public statement on either the extent of financing the extraction of natural resources. largest tanker fleet operators with over 150 vessels, will disappear. charges or the lawsuit as of early September. Traders, including Hin Leong, prefer to control all according to OK Lim’s affidavit. Its total exposure aspects of the supply chain including shipping and to Hin Leong’s trades was $2.67 billion. Universal Marc Rich, in his biography ‘The King of Oil’ said the US storage to gain that extra optionality for the marginal Terminal, 41% owned by the Lim Family, is the largest shoots small birds with big cannons, referring to his Business as usual? profit on a barrel. independent petroleum storage complex in Singapore indictment by the US government for trading Iranian and one of largest tank farms in the world with crude amid sanctions. In the aftermath of the Hin The Hin Leong episode has raised pertinent questions New light has been thrown on lax industry practices 2.23 million cu m of storage capacity. Leong bankruptcy, it remains to be seen whether the for the trading industry and everyone that deals with on payment and collateral, such as the use of letters big guns will be brought out. it, even as casualties from this year’s disruptions are of indemnity in place of bills of lading, which carry Market participants say that storage assets are worth still piling up, such as Zenrock Commodities Trading the actual title to a cargo, for payment. LOIs were more in this crisis, but shipping assets and shipping and Hontop Energy. HSBC in May filed an application devised as a solution as the original bills of lading company stocks have seen their value slashed.
28 Insight September 2020 September 2020 Insight 29 Restarting the engine: Asia, oil and coronavirus Asia has for many years played the leading role in global oil demand growth. The region has shown resilience during the coronavirus pandemic, but the path to recovery may not be smooth, write JY Lim and Kang Wu of S&P Global Platts Analytics
30 Insight September 2020 September 2020 Insight 31 Restarting the engine Restarting the engine
lobal oil demand is set to suffer Global oil demand growth by region quarter. The country’s oil demand for the whole year m b is projected to fall by some 95,000 b/d or 0.6%, the China’s oil demand for 2020 its largest slump in history this 0 re t year due to COVID-19. Asia will also smallest percentage decline among all major countries G r around the world. is projected to fall by some see a sharp downturn as oil demand in rmer S et both China and India, the twin engines of r The situation is not helped by falling demand in e t 95,000 b/d or 0.6%, the smallest 0 growth in the region, has been slashed rt mer India, the other main center of growth in the region, following the coronavirus outbreak. t mer where consumption plunged by 2.1 million b/d year on r pe year in April, amid a nationwide lockdown. Demand percentage decline among all recovered strongly in May and June, but still dropped The pandemic triggered a collapse in passenger by a massive 1.1 million b/d on average in Q2. July oil major countries around the world 0 transportation-related oil demand due to the 20 20 20 20 20 2020 202 demand was lower month on month by 240,000 b/d, enforcement of lockdowns, starting with China in late S r e S b tt t with consumption hit by localized lockdowns, coupled both developed and emerging economies. Japan’s oil January and February and extending to the rest of the with the monsoon season and higher fuel prices. demand is expected to drop by 330,000 b/d this year, world in March and April, as countries around the world after the nation imposed a state of emergency that tried to mitigate the virus spread. Asia oil product demand growth Platts Analytics expects India’s oil demand recovery lasted until late May. r t 2020 m b to slow in H2 due to localized lockdowns following an 2 A catastrophic economic deterioration ensued almost re t uptick in coronavirus cases, with demand for the whole South Korea will not be spared either, despite its immediately after the lockdowns. Many activities year forecast to contract by 505,000 b/d versus 2019. effective containment of the coronavirus outbreak, were curbed, not just in the tertiary sectors but also in 0 India is now the second-worst-hit nation in the world, with a drop of 55,000 b/d. Southeast Asian oil demand t er manufacturing, affecting freight-related and industrial behind only the US, and the worst in Asia, with over is expected to drop by 520,000 b/d. The Philippines and feedstock-related oil demand. er e e 4 million confirmed COVID-19 cases, the number of new became the epicenter for the coronavirus pandemic in 2 et e e daily cases surging after the lifting of the nationwide Southeast Asia as new daily cases surged in late July S&P Global Platts Analytics expects Asian demand to lockdown in late May. and early August, overtaking Indonesia in the total
drop by an unprecedented 1.7 million b/d in 2020, down number of COVID-19 cases. The Philippines’ economy from growth of 680,000 b/d in 2019 and posting the first The rest of Asia is expected to register a decline in contracted by 16.5% year on year during the second decline since 2008, during the global financial crisis. eb r pr Sep t e oil demand of 1.1 million b/d in 2020, with falls in quarter, its deepest fall on record, while Indonesia But in 2021, led by demand recovery in China and India, S r e S b tt t Asia is expected to return to growth of 1.6 million b/d. which together accounted for more than half of global Globally, oil demand is expected to contract by 8.1 growth over the period. As a result of the strong million b/d in 2020, with the more severe demand growth, Asia’s share of global oil demand rose from destruction already having happened in the second 31% in 2010 to 36% in 2019. Nevertheless, 2020 will quarter. A rebound is then expected in 2021 with mark an interruption of the recent sustained rise in oil growth of 6.3 million b/d, but this will not wholly demand, as the coronavirus crisis leaves virtually no compensate for the decline this year: oil demand in territory unscathed. 2021 will still be at least 1.8 million b/d lower than the 2019 level. To paraphrase a popular saying, when China sneezes, the rest of Asia catches a cold. This is certainly the case for oil demand, as China now accounts for close to China bounces back 40% of regional consumption, and contributed nearly 60% of demand growth in the region over 2011-19. The Asia-Pacific region, fueled by growing populations, urbanization and rising disposable incomes, China was the first country to be hit by COVID-19, with has seen its oil demand expand rapidly in recent its oil product demand plunging year-on-year by 1.2 years. The region accounted on average for about million b/d in Q1 2020. But it recovered quickly with the two-thirds of global oil product demand growth lifting of lockdown and demand rose again by 670,000 between 2011 and 2019. b/d year on year in Q2.
The growth was unsurprisingly concentrated in the China avoided a recession after its economy grew by region’s most populous nations, China and India, 3.2% in Q2, following a 6.8% contraction in the first
32 Insight September 2020 September 2020 Insight 33 Restarting the engine
reported its first economic contraction in more than Asia oil demand vs mobility index in 2020 Asia manufacturing PMI by country two decades after Q2 GDP shrank by 5.3% from a e em e e te e m e m b b t e 0 year earlier. 20 0 Transport fuels worst hit 0 S p re et m 0 S re 2 0 In terms of demand for key products, only LPG is e expected to grow this year. This growth will be driven 0 0 by demand from propane dehydrogenation plants in p China and ethylene plants in Asia as LPG becomes 20 0 0 20 eb 20 r 20 pr 20 20 20 20 a cost-effective feedstock from time to time, eb r pr Sep t e S r e S b tt t coupled with residential consumption in India as the S r e S b tt t government gives out free LPG cylinder refills to low- income households. Asian oil demand growth by country The pandemic has weighed heavily on demand for 000 b gasoline and jet fuel. Consumption of both products is 00 tied to discretionary travel, which is severely curtailed by government measures such as quarantines, 00 S lockdowns, border closures, school and office closures headwinds to further growth for the rest of the year and limited social gatherings, among others, as well t er due to the weakened global economy, the ongoing Barring any second-wave outbreaks, S re as people changing their behavior due to fears of 0 restriction of international travel and China’s own contracting the disease. Platts Analytics expects Asian p stimulus programs possibly running out of steam. Asia’s oil demand is expected to grow kerosene/jet fuel and gasoline demand this year to 00 drop by 970,000 b/d and 490,000 b/d, respectively. On a positive note, Asia is expected to bounce back in by 1.6 million b/d in 2021 as economic 00 2021, led by demand recovery in China and India, with 20 20 2020 202 re t According to Amap, by mid-August congestion in growth pegged at 565,000 b/d and 535,000 b/d for the Wuhan, the epicenter of the outbreak of China’s first S r e S b tt t two countries, respectively. Barring any second-wave activity continues to resume wave of COVID-19, was back to normal levels seen outbreaks, Asia’s oil demand is expected to grow by 1.6 over the last four years. Except for Beijing, where road have been less effective in dealing with the pandemic, million b/d in 2021 as economic activity continues to hemisphere’s winter will also make it increasingly traffic had still not recovered following a re-emergence such as India and the Philippines. resume, but it will not be a return to business as usual challenging to keep social distance for human activities of COVID-19 cases in the middle of June, major cities for some sectors, particularly aviation. in order to limit the spread of coronavirus. The extent including Shanghai, Guangzhou, and Shenzhen were all Gasoil/diesel is the more resilient of the main refined to which another serious wave of the COVID-19 close to normal levels at the time of writing. products because it is used in many different For 2021, Platts Analytics still sees Asian kerosene/ pandemic can be avoided this winter remains unclear, sectors, including energy-intensive industrial and jet fuel demand 590,000 b/d lower than that of 2019 even as the world looks ahead to a more lasting Data from Apple’s Mobility Index points to further manufacturing, in addition to transportation. In times whereas gasoline and gasoil/diesel demand is likely improvement in 2021. improvement in driving activity among Asian countries of crisis, governments will do whatever it takes to keep to surpass 2019 levels. Taking all products together, outside China. Weighted against the baseline of economic activity going, such as the introduction of Asia’s oil demand in 2021 will still be 115,000 b/d lower January 13, 2020, the index indicates regional driving various stimulus packages in the region, which will compared to the level in 2019. activity was back to 100% of that level as of mid- help to support gasoil/diesel demand. As a result, the August. Activity in most countries has been on an decline of Asian gasoil/diesel demand is expected to be However, the recovery is not guaranteed. With upward trend since the April lows. less severe at 290,000 b/d. COVID-19 cases continuing to increase globally as Go deeper well as in Asia, and the resumption of international Learn more about S&P Global Platts Analytics’ products These mobility index trends are highly consistent with China’s economy has clearly been on a V-shaped travel proceeds slowly, the prospects for 2021 demand and services, including in-depth and independent analysis the latest developments in coronavirus lockdown recovery path so far as headline macroeconomic recovery still face some headwinds and uncertainties. of worldwide crude and petroleum products markets measures. Almost all economies in the region either numbers continued to come in strong and above plattsinsight.com/analytics/ ended or severely relaxed restrictions by the end of expectations in recent months, as reflected by leading The end of the summer driving season and falling May. June saw the index up by 23% from the May indicators such as the manufacturing Purchasing temperatures will not only mark the start of the average, with the pace of improvement slowing to 13% Managers’ Index. But most other Asian countries are lower demand season – the onset of the northern in July. The mobility index has lagged in countries that still in the recovery stage, and even China is facing
34 Insight September 2020 September 2020 Insight 35 Global to local
Global to local A globalized supply chain for lithium-ion batteries has supported the global EV sector to date. Is that model now on the way out? Henrique Ribeiro, Jacqueline Holman and Ben Kilbey look at regional strategies and investment flows in the sector
This is a consequence of the Chinese government’s he COVID-19 crisis has exacerbated early push towards electrification, especially through concerns across the lithium-ion battery subsidizing electric vehicles (EVs). The country Tindustry about China’s dominance currently accounts for more than half of global EV of the supply chain. The pandemic has sales. This emergence of demand incentivized the also highlighted the need for local supply development of the industry around it, combined with an important financial push from the chains, in order to improve sustainability Chinese government. and work towards net zero targets. As it becomes increasingly clear that the electrification trend will not reverse, the Western Hemisphere has Despite some momentum, however, the development been trying to catch up. In the case of the US, one of of regional supply chains still faces challenges that go the main challenges to reducing the gap is the lack of beyond simply raising equity. a government-run, one-direction plan, which is exactly what allowed China to take the lead, according to Emily Although there has been controversy about Chinese Hersh, managing partner at consultancy DCDB. dominance, other regions such as South America and Australia are significantly more important than China “You won’t find a Republican senator saying he is in in the lithium raw materials mining and extraction favor of green energy, and you won’t find a Democrat process. But it is evident that the vast majority of the saying he is in favor of mining,” she said, adding that downstream value-add activities are performed in there needs to be a champion to articulate a plan. China, largely due to an abundance of cheap energy and forward planning.
36 Insight September 2020 September 2020 Insight 37 Global to local
“The successful approach in the US would be for governors who have slightly different capital According to the Fraser Institute’s situations going on to take the lead and work with each other regionally,” Hersh said. Investment Attractiveness Index The US concerns about the importance of lithium 2019, Europe was the most and other minerals date from 2017, when the Trump administration signed an executive order to “ensure secure and reliable supplies of critical minerals.” A list attractive region in the world for of 35 minerals – including not only niche products such as lithium and rare earths, but also more common ones mining investment in 2019 like bauxite and tin – was released one year later.
However, in practice little has changed so far. “Take in 2019, with Finland coming in as the second best rare earths for example, what is mined in the US has to jurisdiction in the world for investment, after go to China for processing,” Hersh said. ranking 17th in 2018. Portugal came in fifth, up from number 46 in 2018, while the Republic of Ireland and In November last year, the US signed a cooperation Sweden also made the top 10. agreement with Australia on critical minerals. The countries’ export finance agencies agreed to Normark said the main challenge now was for work together to fund new projects and diminish countries and companies to deliver on the expectations China’s dominance, but no investments have been created for the mining industry. announced so far. “Another challenge is finding competent people since Europe, on the other hand, seems to be ahead of the the mining industry has been less attractive in Europe US in the race. Despite also being far behind China in for many decades,” he said. the development of regional lithium supply chains, being used not only in today’s batteries, but also in the building strategic cooperation along the battery value Europe has been attracting more investments than the He added that it was well known that there are next generation of batteries,” Normark said. chain and this can become less efficient. Currently Asian country since last year (see infographic). sufficient lithium deposits in Europe to meet the the battery material supply chains create a lot of continent’s entire long-term requirements. He noted that from a purely commercial standpoint, transportation that can be avoided with local sourcing the formation of a more global battery supply chain from Europe,” he said. Europe’s ambition “This will not be done overnight, but a realistic plan would allow the European battery industry to find the is that Europe in the timeframe of 2025-2030 could lowest-cost options for extracting the materials it “Creating jobs in Europe in combination with the The European Battery Alliance was established in become self-supplied in lithium. This is important needs, while also contributing to the competitiveness electrification of transportation is an important 2017 to help create a competitive manufacturing since all projections today are pointing towards lithium of the industry. element to create public acceptance. If jobs are chain in Europe. lost and not new created it could slow down the “Industrial development, investment and jobs are transformation,” Normark added. EBA senior industry strategy executive Bo Normark Europe dwarfs China in new investments naturally important elements for distribution of told S&P Global Platts that mining had been given very r b r pe global wealth. With this also comes, if done right, [the low priority in Europe for decades, resulting in low 0 opportunity] to spread high environmental and ethical Britishvolt eyes UK dominance activity and attractiveness. standards to developing countries,” he said. 0 Britishvolt recently expressed interest in building the “This has, however, changed dramatically even before 0 But there are some disadvantages, Normark said, UK’s first EV battery gigafactory. The preferred location the coronavirus [pandemic] and in the annual survey of noting that there could be supply risks from instability is in Wales, where it could eventually lead to creation of 0 the most attractive regions for mining globally by the arising for various reasons, while it also makes it more more than 4,000 jobs. Fraser Institute, they conclude that there has been a 20 difficult to implement and guarantee the highest spectacular change in the top,” he said. ethical and environmental standards. Speaking to S&P Global Platts, chief strategy officer 0 Isobel Sheldon said collaboration will be essential for
According to the Fraser Institute’s Investment 0 “Another disadvantage is that the fast development of success in the EV and broader battery sectors. Attractiveness Index 2019, Europe was the most 20 20 2020 t te the battery industry has proven to be closely linked to t e tme t e 2 attractive region in the world for mining investment S r e S b tt
38 Insight September 2020 September 2020 Insight 39 Global to local Global to local
Charged up up: :Europe Europe the the new new hot hot spot spot for for lithium-ion lithium-ion batt baerytt invesery investmenttments s Electrification in transport has been predominantly a Chinese endeavor so far, but Europe is The pandemic had significant impacts upstream, leaving an unanswered question: where Electrification in transport has been predominantly a Chinese endeavor so far, but Europe is The pandemic had significant impacts upstream, leaving an unanswered question: where increasing it itss re relevanclevance ase as another another ke yke regiony region for thisfor this transition transition. Driven. Driven by stri byct erst riregucterla regutionsla ontions on will the lithiuwillm th reequir lithiued mto repoquirwered all tothes poewe bartt aleriel thess comee ba fromtterie? Befores come th frome pandem? Beforeic, a th e pandemic, a emissions, ,Eu Europeropeanan co compmpanieanies ars ear ate thate th forefrone forefront of int ofve stinmentvestments relates related to thde toba thttere bay supplyttery supply lithium shorlithiutagem wa shors cetartgeain wa to sta cekert plaiacn eto in ta a kefew pl yearaces. in Th a efe neww year scenarios. The in nedicwate scenarios it indicates it chain. EuEuroperope al alsoso al alreadyready at attractracts asts asmany many projec projects asts Chin as China doesa does. . might be soonermight thanbe sooner expected than. expected.
Investment announcements announcements - 202 - 2020 0 Owner Owner Supply chain Supplystage chain stage t m t m t m t m 2 r e p t 2 r e p t 2 S rp rp 2 S me e t m t m e t m m S S e t m rb te p t S rb te p t S t e Build country e e t e Build country e e m ter p t S m ter p t t pe 2 S t p tr e 2 e Owner’s location tr er e e Build region e e Owner’s location t etr e Build region erm t S t m m er S t S r t tr S m em t r t r e tr e tte r em S r e rr e r te m r pe tt b r S rr r e tter p t r pe r t m r pe t t b e r e rt rt m e S r tter p t r pe r t e e S t t m r r rt rt e e r 2 em S e r t S 2 re r p r e r mt 2 e r tr 2 tr t r e t p er e S S tr tr re m tr t t t er e S S S tr 0 re m t t S te tter p t 0 e S S e te tter p t t 2 e S S e e t 2 p t er e e e ee p e p t S e m er e er e e e ee tr t S pe r p tter e m re p t S S er e S tr S e er t rS t r pe mer tter et tter t t t e me p t er e e e b S b tter p t t e r pe t e e S rt mer e e t re re p t S bet ee r pe e e mp e e er t r All data on investments is as of June 26 mer tter et Source: S&P Global Platts t t t e me p t er e e e b b tter p t t e r pe t e e rt mer e e t re bet ee r pe e e mp e All data on investments is as of June 26 Source: S&P Global Platts
40 Insight September 2020 September 2020 Insight 41 Global to local Global to local
Sheldon has nearly 20 years of experience in the space, ranging from roles at Johnson Matthey, Cummings Creating jobs in Europe in and the UK Battery Industrialisation Centre, as well as previously running her own successful battery- combination with the focused business. electrification of transportation She said that Brexit and the pandemic offer favorable opportunities to the development and rollout of Britishvolt. is an important element to
“Local supply chains are as important to business as create public acceptance they are to the environment,” she added. – Bo Normark, European Battery Alliance
Sheldon said materials such as the cathode (high nickel-based cathode materials), a significant part regional market [is] key for industrial players and of next generation EV batteries, need to be protected policy makers,” Vincent Ledoux Pedailles, executive from moisture. Long transit times from places with hot director at Infinity Lithium, told S&P Global Platts. climates could be detrimental to the product before it “The [pandemic] will accentuate even more the need is even placed into a battery cell. to develop an integrated and local EV supply chain in Europe, with direct access to lithium.” This means local refining is essential. One big concern for consumers is the range of an EV, and the better the material is processed and constructed, the better the Bypassing China longevity of the battery pack. Despite all the efforts from other regions, especially The UK domestic battery industry is forecast to Europe and the US, China is expected to remain an be worth GBP5 billion ($6.3 billion) by 2025, and important participant in the lithium-ion supply chain demand for lithium ion cells across a number of – and is even more crucial for those towards the industries, including vehicle electrification, is already upstream side of the industry. increasing dramatically. “It is generally more economically attractive to place “In light of recent events [the coronavirus pandemic], [lithium] converting assets either near the resource it is clear that moving from a global to [a more] or in regions that can easily serve energy storage
COVID-19 to delay several lithium projects device manufacturing centers like China, Japan and logistics of shipping raw material or finished goods, Owner Name of project Capacity (’000 mt/yr) Product Project type [South] Korea,” said Eric Norris, president for lithium permitting, and proximity to customers. Argentina at US-based chemicals company Albemarle, stressing t m mer e r r 0 rb te e e t S r e mbre ert 0 rb te p that China continues to be an important country Going downstream, China’s relevance as the biggest r met e te r t e rb te e for the company. EV consumer market is still to be challenged, which r bre S r e r 2 rb te p should keep feeding the local industry with further S e 2 rb te e Chile “As such, we will have, and will plan to have going investments. Since the beginning of the year, at least bem r e e r 0 rb te p forward, ample conversion capacity in China to serve two major Western automakers announced significant e t m er ter t r 20 rb te e that market, as well as capacity outside of China to milestones in China: US-based Tesla started up its Australia bem r e emert 0 r e e address the globalization of the industry,” he added. Shanghai gigafactory, while Germany’s Volkswagen S e t rmer t r e e invested Eur2.1 billion to acquire stakes in battery r e e Norris said Albemarle chooses the location of its maker Guoxuan High-tech Company and auto e e t e e r ete pr t t e conversion plants based on the proximity to the lithium manufacturer JAC Motors. t e tme t e 2 resource, overall capex requirements, operating costs, S r e S b tt
42 Insight September 2020 September 2020 Insight 43 Insight from Shanghai Insight from Shanghai
resilient by making it less dependent on imports and China selected industrial indicators exports, and more reliant on domestic demand. Y-o-Y change (%) 25 But in the short term the government has needed to Industrial profits Steel production fall back on investment to shore up the economy, which Cement production S&P Global economists forecast will grow by only 0 Insight from Shanghai 1.2% this year. -25 Yet again, the government has resorted to infrastructure to provide jobs and support the economy. Sales of excavators and front loaders in -50 the first seven months of this year are up 15% on last Jan-20 Feb-20 Mar-20 Apr-20 May-20 Jun-20 Jul-20 year and steel production is at all-time highs. But this Source: CEIC, S&P Global Platts stimulus package is a little bit different.
China is turning its back on heavy industry – China is Last hurrah for the old economy? going to need coal and steel for decades to come. But By Sebastian Lewis investment will increasingly be focused on areas that Alongside urban renewal and major transport and support domestic consumption and help the country water conservation projects, the government is become more self-reliant. This means investment also prioritizing investment in what it is calling “new in emerging industries like new materials, robotics infrastructure”. The focus this year will be on seven and biotechnology, as well the transformation and key areas: 5G, data centers, AI, the industrial internet, upgrading of basic manufacturing, improving it so that inter-city and urban rail, new energy vehicle charging it can meet the needs of domestic consumers. infrastructure and further investment in the ultra-high- Contribution to China GDP growth voltage grid to reduce transmission losses and more It also means big investment in areas that will alking down a street right now in per e t e p t efficiently deliver the electricity required to power this make China less dependent on imports. Developing 0 Shanghai, one would be forgiven new infrastructure. domestic competence in areas like semiconductors for thinking the pandemic will be a priority, but so is strengthening energy mpt W e pe t re Total investment is estimated at Yuan 1-1.2 trillion security to reduce China’s ever-growing thirst for never happened. At times it’s hard even r p t ($158 billion–$187 billion), which is relatively modest imported oil and gas. to spot someone wearing a mask. rm t 0 compared to the estimated Yuan 17 trillion spend on all et e p rt infrastructure in 2019. But the government hopes that This will require further investment in domestic er e Dig a little deeper, though, and it’s clear that recent this initiative will accelerate the construction of the production, notably unconventional natural gas, a events have had a profound impact on the Chinese t r t data and communications networks needed to support segment that China’s oil and gas majors will continue economy. Foreign investment and exports turbo- the development of e-commerce, smart manufacturing 0 charged the Chinese economy for nearly two 2 2 2 20 and smart cities with internet-enabled transport and
decades after China entered the WTO. But now S r e S b tt energy networks, all powered by AI and data collected things have changed. from the millions of digital measurement devices To some extent, events this year have merely and sensors that form the backbone of the industrial The pandemic has underlined how important exports accelerated trends in deglobalization that were internet. Well, that’s the vision, anyway. are to the Chinese economy. It has also exacerbated already underway. But with economic decoupling existing frictions between China and other countries, set to continue, China’s old economic model looks highlighting how dependent China has become on increasingly unsuited to the post-pandemic world. In with the new imports of key components and materials. On the other side, the pandemic has exposed how reliant global Step forward the government’s latest economic This opens up opportunities but also presents supply chains have become on Chinese-made inputs. buzzword, “dual circulation”. This somewhat gnomic challenges to the energy sector. It doesn’t mean concept boils down to making the economy more
44 Insight September 2020 September 2020 Insight 45 Insight from Shanghai
to develop. In the first seven months of the year natural China demand for transport fuels gas production was up 9.5%, growing significantly e 20 00 faster than oil or coal output over the same period. 00 00 e tr t
While petrochemicals and aviation fuel will see 00 continued growth, increasing use of electric vehicles 00 and the electrification of public transport presents an 00 existential threat to China’s oil and gas companies. 200 e e et e S&P Global Platts Analytics forecasts Chinese gasoline 00 t r e demand will plateau around 2025, with gasoil peaking 0 a decade later. With the market for two of their key 2020 202 202 20 2 20 20 0 products set to decline, China’s energy companies S r e S b tt t will need to look not to exports but to China itself for new markets and business models, to continue to be relevant. Sinopec has already started on this journey, system could help increase the role of renewables and installing electrical and hydrogen charging facilities at distributed generation in China’s energy mix. Hydrogen some of its filling stations. CNOOC has established a company to develop an offshore wind power business. China isn’t the only country hoping to harness big Its project off the coast of Jiangsu is set to connect to data and digitization to transform its economy. But its Price Assessments the grid by the end of this year. state-directed model of development, with its ability to allocate and co-ordinate investment in the new digital economy, might mean that it gets there more Platts launches world’s first daily hydrogen assessments A digital revolution quickly than others. featuring cost of production pricing from 11 North American The industrial internet, big data and AI will likely be able The 14th Five Year Plan, to be released next year, will hubs, the Netherlands and Japan to help drive efficiencies and reduce costs. Alibaba, contain more detail on the government’s ambitions and one of China’s leading technology companies, claims targets for China’s new economic model. The transition that by applying machine learning to real-time data may be gradual and incremental, but the direction - Brings transparency to a fast developing, but still from wind turbines they have been able to predict in of travel is clear. China’s centrally planned, digitally largely opaque market advance when they will fail, reducing the operation and coordinated, consumption-driven economy is beginning maintenance costs at one wind farm by nearly a third. to take shape. - Modelled pricing underpinned by robust methodology Sinopec has introduced an industrial cloud platform and Platts compliance to IOSCO principles across some of its refineries to optimize production - Provides cost of production assessments for major and reduce costs. Downstream, it has been developing digital transaction platforms and e-commerce production pathways channels to better secure the market for its chemicals - Industry leading Special Reports, Webinars and Podcasts and refined products. from Platts and Platts Analytics
But to be truly transformative, these technologies need to capture and analyze real-time data not only Upcoming Hydrogen Conferences along individual energy value chains – from production through to distribution and consumption – but also EMEA - Hydrogen Markets Conference October across them, where the oil, gas, coal and electricity energy systems interface and interconnect. Better co- Asia - LNG & Hydrogen Conference October ordination and optimization across the whole energy Americas - Hydrogen Markets Americas November
Learn more at spglobal.com/hydrogen
46 Insight September 2020 Simplifying the complex Market stress in the spring of 2020 demonstrated the need for a new price reference reflecting the value of high-quality Permian supply at the nexus of the domestic and global market. Matt Eversman discusses how S&P Global Platts addressed this challenge with a new benchmark, Platts AGS
48 Insight September 2020 September 2020 Insight 49 Simplifying the complex Simplifying the complex
n the wake of a historic dive into negative The other extreme would be a futures contract with With over 4 million b/d of production spread across Houston-area terminal reported crude gravity figures on April 20, the oil industry physical deliverability at one or a few close-proximity two distinct basins, a crude buyer for a refinery might assets. This pricing mechanism would be clearer make the argument that the Permian should be carved called for an alternative to pricing I and more precise, but would not provide a regional up into different grades like Brent, Forties, Oseberg, at the hub of Cushing, Oklahoma. representation of value. Limiting deliverability to Ekofisk, and more recently Troll, a few thousand miles tt m a small group of assets, while positive for clarity to the northeast. terpr e r e t S&P Global Platts responded by putting to and precision, excludes liquidity. And because of e t work its expertise in cargo markets to design a the financial-to-physical convergence inherent in Platts decided it would be most useful to draw up the 2 t methodology that would simultaneously provide these types of contracts, there is no flexibility for an specifications for one grade that captured the majority clarity into what is being valued and a broad, regional assessment process to determine value from nuanced of unblended, direct-from-Permian supply while 0 tt m representation of price. market information. meeting the technical needs of refiners across the US, Europe and Asia. Platts AGS, the US’ new waterborne crude benchmark, Following in the footsteps of other waterborne 20 20 clearly demonstrates the value of a defined grade benchmark ecosystems – Dated Brent and Platts “Crude oil specifications need to consider the market S r e terpr e r t within a specific trading framework, bringing structure Dubai – Platts AGS strikes the balance between the liquidity of the streams involved… commingling/ to a regional market previously characterized by “anything goes”, volume-weighted average approach blending that may occur in production and one-off deals. and the overly restrictive physically deliverable futures transportation… [and] the requirements of refiners Houston-area terminal reported crude sulfur content contract examples. The assessment provides total who will ultimately transform the crude oil into finished The tension between liquidity and precision is an clarity into what is being valued and under what trading products,” said Dennis Sutton, executive director of the 0 22 important consideration in the development of a new circumstances. In addition, it captures a large swath Crude Oil Quality Association. US crude benchmark. Higher transaction volume does of transaction volume and the entirety of the US’ main 0 20 tt r m not improve the usefulness of an assessment if it crude exporting region without distorting value. With that in mind, Platts proposed and – following 0 undermines clarity and precision. On the other hand, some revisions – implemented a set of specifications an overly specific assessment may not reflect a broad To get there, Platts worked with the market to develop for Platts WTI Midland that accommodated 0 terpr e r e t enough segment of the market to provide a trustworthy solutions for two key methodology challenges. feedback from producers, traders, refiners and other 0 representation of price. stakeholders. The specifications cover the basics like e t t gravity and sulfur content in addition to addressing 0 2 Quality control To take an extreme example, consider a US Gulf iron and mercaptans, which are left out of many 0 0 Coast crude assessment that calculates a volume- specifications. 20 20
weighted average based on information from a basket The impediments to fungibility in the USGC crude S r e terpr e r t of pipeline and cargo trading locations in the Gulf market boil down to two questions at the point of In its determination of suitable gravity parameters, Coast, normalized based on historical spreads to delivery: what is the crude and how deep is the water Platts considered data reported by Houston-area a single terminal. This assessment could advertise where it’s loading? terminals as well as Certificates of Analysis for US significant liquidity, but would that liquidity come at Gulf Coast cargoes. The data showed that direct-from- Platts’ specifications including 40-44 API and 0.2% the expense of clarity and precision? The proportion of The former presents an interesting challenge in setting Permian supply is consistently pushing (or exceeding) or less sulfur are a first step in finding the balance market information from different locations and from the guideposts for a functional market based on the upper bounds of the NYMEX WTI API specification between maintaining liquidity and providing a pipeline versus cargo trades would fundamentally Permian crude. Unlike, for instance, the North Sea, range of 37-42. In addition, the reported quality clear representation of value that is technically change the kind of market the assessment represents where a certain grade will be fed by a relatively small statistics demonstrate the variability in crude from this practical for buyers. each day. And that’s not a problem you can solve geographic area, the Permian Basin covers a huge area vast production area with reported API at Magellan through a normalization process based on historical of the southwestern US with big gathering systems East Houston and Enterprise Crude Houston terminals “Quality consistency is the hallmark of concerns for price differences. feeding nine key pipelines. diverging by as much as 1.5 API in a given month. any refinery and in particular for the Asian refiner due to issues related to crudes being offered that were Quality data from the Houston terminals also showed not Midland grade but rather blends of Midland and that the direct-from-Permian stream is significantly Canadian grades. By setting standards that ensure that In the US Gulf Coast crude export market another sweeter than the NYMEX WTI sulfur limit of 0.42% and the quality of the barrel in the AGS assessment falls most of the Permian-to-USGC pipeline limits of 0.4%. within defined parameters that reflect Midland-grade Industry feedback suggested 0.2% has emerged as an WTI, such concerns are assuaged,” said Robert Sanz, impediment to a uniform regional market is different export market litmus test for unblended, direct-from- president of RLS Consultants. water depth at different docks Permian barrels often sought by global refiners.
50 Insight September 2020 September 2020 Insight 51 Simplifying the complex Simplifying the complex
As the Permian crude stream and crude export Assuming a USGC to UK lump sum freight cost of Assessment-applied value for trade at $40/b, market evolve, so too may the Platts WTI Midland Normalization of market $1,000,000, a 725,000 barrel Corpus Christi loaded $1,000,000 lump sum freight specifications. However, it will remain consistent Aframax would incur $1.38/b of freight cost to reach e r e me t b 0 0 that further changes are based on industry information puts docks western Europe. Meanwhile, the 600,000 barrel feedback and implemented with transparency and Nederland vessel would clock in at $1.67/b for the appropriate lead time. across the US Gulf Coast same route. So on an FOB basis, all else equal, a trader 0 2 would be willing to pay 29 cents/b more for the same molecules loading in Corpus Christi. 0 00 Dealing with inconsistent seas on a level playing field Given this dynamic of variable volume and fixed freight, In the US Gulf Coast crude export market another FOB cargoes will understandably trade at different impediment to a uniform regional market is different In the case of Corpus Christi, depth in excess of 45 feet values depending on achievable loaded volume. Platts 0 0 00 0 00 0 00 water depth at different docks. The Americas Aframax may allow over 700,000 barrels to safely load onto an viewed this distortion as important to address – not r e 000 b rre market long ago ceded control to freight buyers on Aframax. On the other end of the spectrum, depth of in the Market on Close process itself – but in how that S r e S b tt the issue of overage charges. Crude shippers have the about 40 feet in Nederland may limit Aframax loadings market information is interpreted. So, the Platts AGS incentive to load as many barrels as possible to get to about 600,000 barrels. A buyer would only pay for methodology calls for bids, offers and trades used in the most out of their fixed freight cost. The maximum the volumes they load, so why would the 100,000 barrel the assessment to be normalized to reflect the freight Assessment-applied value for trade at $40/b, number of barrels is determined by the draft at berth difference matter? economics of a 700,000 barrel typical cargo size. $3,000,000 lump sum freight and on the way out to sea. e r e me t b One important point of this adjustment is that, unlike 2 0 a backward-looking location normalization, as may be present in other new Gulf Coast crude assessments, 0 Platts’ cargo-size normalization is not a circular reference with historical trade information. Rather, 0
this normalization changes daily based on the value of 0 0 Platts’ assessed freight rates.
When Aframax rates are on the lower end of about 0 0 00 0 00 0 00 $14/mt, the normalization would be about 25 cents r e 000 b rre per 100,000 barrels. However, when freight rates are S r e S b tt at elevated levels, as seen in early 2020, that same normalization could reach $1/b or more. Platts AGS changes that, answering the call of the This normalization of market information puts industry for an alternative to Cushing, by addressing docks across the US Gulf Coast on a level playing the complexities of the US Gulf Coast export market field, a crucial step in assuring the daily Platts AGS and balancing assessment liquidity and precision. assessment reflects the value of oil, not logistics. Additional reporting by Catherine Wood Bringing order to a chaotic market
Now in just its fifth year, the US Gulf Coast export market has so far had few pillars of consistency. Go deeper
Crude quality was mainly handled on a one-off basis Learn more about Platts American GulfCoast Select (AGS) and with no defined specifications to pinpoint true direct- find resources including FAQs and the latest assessments at from-Permian supply. Value was difficult to ascertain spglobal.com/plattsAGS in the absence of a price assessment that isolated the value of Midland-quality WTI from the impact of dock- to-dock logistics.
52 Insight September 2020 September 2020 Insight 53 Insight Conversation: Greg Newman Insight Conversation: Greg Newman
that the Chinese imported so much from the US In the retail space, in particular, as those volumes and wherever else too quickly. These cargoes have come in, the same thing that happened with foreign been offered back into Europe, for instance. And it’s exchange, where you have a lot of retail trading, will Insight Conversation: probably just a bit of a tapered kind of level on the take place. Now you’ve got the tightest market in bullish run. But on balance, I still think we get out of everything you could possibly want, even in trading. this range and we head north, just because we are We’re hedging as a firm forward FX rates of dollar Greg Newman ultimately in a constructive market. sterling. And we’ll do it 12 months out, and it’s like three basis points – tiny, tiny spreads and huge volume My main reasoning for that is just the refinery margin – because everyone around the world has access to Greg Newman, CEO of London-based proprietary trading house – not the classic refinery margin, the new refinery it and is trading it. I think on balance, it’s a good thing Onyx Capital Group, caught up with S&P Global Platts head of news for margin with IMO shipping fuel, the idea being you’ve for transparency. EMEA, Andy Critchlow, and global head of generating fuels Simon Thorne got so much optionality. You can either buy your crude [and] blend it to a decent product, [or] you can to discuss what the future holds for the financialization of energy markets buy traditional crude being a traditional refiner. And actually, your waste products, fuel oil and naphtha are really at quite attractive levels on a crack basis, very high levels relative to what they’ve been in the last few years. So you’re not too concerned about what’s going to be left over when you’re running through your CDU [crude distillation unit].
I think you’re not making a hell of a lot of money refining, but you’re definitely making enough to be buying crudes from around the world and running fully, and I think that’s quite constructive. And then we just right now, you’re going to be heading towards the need to see the overhang clear out a bit more, and we rop trading houses have largely bullish direction. could be well on the way. replaced the role previously held by banks as market We were getting particularly excited about the market P How does increased liquidity makers on the Platts eWindow about six weeks ago, when we recovered very strongly, from retail investors tie into the communication tool for assessing particularly in the Dated Brent space, and we saw all the evidence that the physical diffs hugely recovered financialization of Platts’ eWindow? the tradable value of commodities. very, very quickly into positive territory. The retail side in my mind is always going to be a good Greg Newman is one of the founding partners of Onyx The wider European market in crude, in particular, thing for markets because it is just going to increase Trading, which started operating in 2016 as an oil largely rebounded because of the fuel oil market and liquidity. The oil market has always been this kind of derivatives trade house. In this interview with Platts on this whole IMO switch that I think has gone under the status quo of “no one really knows what’s going on”, August 5, Newman shared views on driving factors for radar in terms of real impact. Refiners aren’t really and not that much transparency, but that’s really oil price in the coming months and the role of different producing residual fuel oil at the moment. A lot of the not the case these days. I think it’s more and more types of trader in the market. VGO [vacuum gas oil] and heavy crude, things that transparent as we go on. can be blended into the IMO fuel, are being sent to that blending pool and not sent out as residual fuel. Do you see an upside for oil this year? So actually, as opposed to the residual fuel cracks being very weak, they’re very tight because no one We personally think it’s going to steadily improve is producing it. And that, in turn, has supported towards the $50 [per barrel] range as there’s more the medium-heavy grades, and the North Sea and more confidence for people putting their money followed suit. where their mouth is. Ultimately, traders need to make a bonus. They need to generate returns on a So we were getting quite excited about how the respective basis. They need to make a call one way market could follow through, but I think it just kind of or another. I think if you need to be bullish or bearish exhausted itself too quickly. You can see the evidence
54 Insight September 2020 September 2020 Insight 55 Insight Conversation: Greg Newman Insight Conversation: Greg Newman
kind of forward-curve arbitrage type of trading. Buying and [secondly] a lot of people getting access to that However, it was a bit worrying how it was being in March, selling in June, and trading out the time along with the rise of financial trading because we do managed. It’s not the problem that retail money is “We don’t hold the physical – spreads and just managing all the risk. That works to that all day long. If there’s any inefficiency in any of the in oil, it’s the problem of how that’s been allocated. eliminate some inefficiencies that are there, and that markets in oil contracts we will be there to try and iron Holding the front month as long as they did was clearly our job is to explore inefficiencies was obviously a good thing because the banks, the that out and the relative value opportunities, and it’s foolish with the WTI contract [financial players caught trade houses and whoever else had the physical barrels not just us doing that. out by physical delivery terms for WTI were seen as and to trade in and out of that” that were pricing the contracts that were underlying, contributing to the contract plunging into negative but there was no one in between. So it was too That creates a very orderly market in terms of price. territory on April 20] and that had its implications. monopolized in a way because it was just the people I would say that on the forward curve it is interesting are coming out with the Gulf Coast Select [Platts AGS, a with the physical barrels that could have influence on because people have different opinions about the But also, I think the job of a retail broker, or an ETF US waterborne crude assessment launched in June]. the pricing. There were too few participants involved, actual pricing of swaps. It’s not about getting off a provider, is to be reflective of crude as much as and therefore, inefficiencies were huge. hedge, it’s not about getting the right price for a hedge, possible. And I think there’s a way to do that to make it or a future position, it is about the actual pricing of clear. I think basketing contracts, things like that, but How does that tie into greater So from 2013 up until now, it’s been humming. I mean the contract. In my mind, financialization has provided we don’t because there’s starting to be an appreciation financialization from institutions? you can see it in the swap volumes, or OTC [over- what I’ve been saying tenfold, because before it was now of localized events. So for instance, we all know the-counter] financial futures volumes, which just just the guys with the physical barrels doing what now very clearly that Cushing crude is completely On the financialization of the professional space, on skyrocketed in the last eight years. And in my mind, they want to do, and no one in between to exploit the different to Gulf Coast crude, and that’s why you guys balance it is very good, because when I first entered that’s down to two things. One, the move from mostly inefficiencies in a wider sense. trading in 2013, it was about applying a very simple bilateral trading to electronic trading on the exchange,
How proprietary traders replaced banks as oil’s financial market makers
Proprietary trading houses have helped to fill the role previously held by banks as market makers on the Platts eWindow communication tool Others* for assessing the tradable value of commodities. Since 2012, prop trading houses have gradually replaced banks, which closed down Financial trades Banks Props commodity trading desks to focus on their financing role. Prop traders now account foforr a growing stream of liquidity in the paper market Physical trades Financial trades Financial trades for oil, especially during periods of high volatility such as when the coronavirus pandemic hit this year and caused Physical trades a flood of retail investor money into speculative exchange traded funds. 113 million July 2020
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 barrels January 2010 53 million barrels
Tighter regulation, capital constraints As banks retreat, trading houses and Former bankers start to set up and thin margins introduced over the hedge funds assume their role. Vitol and or shift to trading commodities last decade have disincentivized banks Glencore financed the acquisition of from trading houses or funds. from participating in commodity markets. TNK/BP via Rosneft in 2013, for example.
Source: S&P Global Platts Market on Close Data origination: Elzbieta Rabalska Source: S&P Global Platts eWindow *All other eWindow participants including producers, end users, traders etc
56 Insight September 2020 September 2020 Insight 57 Where do prop traders fit in and make I think that’s been really good for the industry as a So with the success you and others But a company like ours is very into branching out into the market more efficient? whole. It just means that there’s a much lower barrier have had are you anticipating more ensuring that we’re doing the market making on the to entry. And actually, what we’re seeing is a lot more people coming in and providing that one side. We’re driving flows in the right way in all these I started trading Dated Brent in 2015 and the eWindow interest and desire from trade houses and majors who sort of liquidity, more prop traders? different contracts and all these different areas, but barely had any volume, or if there was volume, it was traditionally, even if a refiner, or a producer, that has a then also really passionate about educating on the hugely inefficient. I mean, how you extrapolated the very sophisticated physical tendering process, would About 10 years ago the prop trader’s function was services side, on how to do things correctly. CFDs [Contracts for Difference] relative to the DFL leave the paper market to someone else. taken by the banks and there were so many. And all (Dated to Frontline) prices and all that, was all over of them moving out to purely financing roles and very We think there’s going to be more and more volume the place. And that’s since come well into line and little paper volumes that first needed to be filled. And coming in that didn’t exist before from corporates, everything is very well-functioning and I don’t see how Do you subscribe to the idea that a I think now it’s got to the stage where it’s a bit like the actually also from oil traders and retail as a financial that’s not a good thing. physical market has a more complex banks, in that you have a hell of a lot of competition to contract. There’s no reason why retail can’t be in this understanding that ultimately drives it be in this space, and that’s very healthy because the space, it is just a lack of understanding. So if we work From a pricing perspective, it means that for Platts than exchange traded funds? market benefits. But it does create a barrier to entry. to bridge that gap, and we’re hugely passionate about you’re looking at your eWindow and you’re looking at There is always room for more competition, but it’s a being the ones who can do that, I think there’s so the physical bids and offers. But when you look at What I think the ETFs do very well is provide volume much harder ask. much in the future. the paper trades, instead of your job being very hard and enough liquidity for the people who should know, because you have to interpret everything and use like the prop traders, the market makers and the We’ve got a huge amount ahead of us, and it will the previous day highs and lows, there is now more physical, to put everything in line. It dampens the Will commodity markets remain a niche outpace oil demand – even if oil demand tapers off, than enough volume to go on in the North Sea strip impact of a one-off hedge, or anything like that. So I corner of the financial world, or will it’s irrelevant because people that do have physical and whatever else. It makes your calculation pretty actually see it as the opposite. If these guys come in they go electronic? volume aren’t hedging 100%. There’s a huge amount straightforward, and I think that’s a great thing. You and trade ETFs, or someone comes in speculating, a of speculative volume to get and I would love to think just have certainty in price discovery. physical guy or a market maker should absolutely love For an algorithm, or electronic markets to really take that it can become like FX. It’s a great time to be in the it, because it means they can get their hedge off in hold, you need a market and a very good market on market, and I think it’s got an explosion ahead of it. We don’t hold the physical – our job is to explore one tick. It is fantastic and means we’re going to make every single contract, and you need depth to those inefficiencies and to trade in and out of that. And yes, more money. More volume is always good because it markets with volumes all the way down as you go higher if you want to take speculative risk, that’s fine. But will create an environment that is more reflective of the and lower on the price. I’d say we are 10 years off that. our primary job is for efficient price discovery. And physical environment.
58 Insight September 2020 September 2020 Insight 59 Insight from Washington Insight from Washington
US oil production increased 3.9 million b/d between Rapidan Energy Group said Harris “will likely pull the Trump’s inauguration in 2017 and the onset of the Biden platform further left on a nationwide hydraulic pandemic in March, but the end to export restrictions fracturing ban and possibly a ban on fossil fuel exports in 2015, during the Obama administration, arguably (neither of which Biden currently supports).” played a bigger role than current White House policies. Trump has promised to continue a deregulatory The election risks are clearly on the minds of US push in a second term, after loosening methane drillers as drilling data shows federal permit holders Insight from Washington rules and opening new offshore and arctic areas to acting quickly to drill wells before a potential ban on drilling in the first. new permits. Executives also had to field plenty of questions about the November possibilities during Former Vice President Joe Biden, Trump’s Democratic second-quarter earnings calls. challenger, has promised to adopt energy policies with climate risks in mind. He said he would halt issuing new drilling permits on federal lands, weigh climate Bakken impact impacts and environmental justice during federal project approvals, reject permits for the Keystone XL In North Dakota, home to the once-booming Bakken and Dakota Access crude pipelines, and rejoin the Shale play, regulators say holders of federal permits By Meghan Gordon Iran nuclear deal. are among the few drillers staying active, along with drillers with significant hedged production. Biden’s selection of Senator Kamala Harris as his running mate could move his energy and environmental “There is a great deal of discomfort and uncertainty platform even further left, as she has embraced with the potential November election,” said North harsher measures to limit US oil and gas production. Dakota Department of Mineral Resources Director Lynn Helms. “If people have a federal permit or right-of-way Share of US oil wells drilled on federal land rises ahead of November election “There’s no question I’m in favor of banning fracking,” in hand, they’re acting on it even though it is expensive he US presidential election in Harris said during a CNN town hall in September 2019 to do so at this time.” e er t t e November presents a stark contrast 2 2 00 e er when she was running for the Democratic nomination. for the next four years of US oil e er Harris’ climate plan also mentioned closing the Helms estimated that an end to new leases on federal T 20 2000 policy that could shape supply/demand 2005 so-called “Halliburton loophole” that exempts lands would cut drilling permits by about 25%. fracking from federal oversight under the Safe dynamics domestically and abroad. 00 Drinking Water Act. “It would be a significant negative impact,” he said. “It’s 0 000 very substantial – we’re talking hundreds of thousands President Donald Trump is expected to continue a Since picking Harris, though, Biden has tried to put this of barrels a day.” deregulatory push to expand federal areas to drilling, 00 discussion to rest. ease permitting for pipelines and export projects, 0 0 remain a vocal player in supply negotiations among eb t eb 20 20 “I am not banning fracking,” Biden said August 31 OPEC+ producers, and keep a tight hold on sanctions S r e S b tt t during a campaign stop in Pittsburgh. “Let me say that against Iran and Venezuela. again. I am not banning fracking – no matter how many times Donald Trump lies about me.” Trump often touted US “energy abundance” in his drillers’ severe capital expenditure cuts will constrict first term to highlight economic growth and reduced output through next year. Biden added that his $2 trillion clean energy dependence on Middle East imports. But the oil price investment plan held a place for oil and gas workers in collapse earlier this year has left US oil producers Platts Analytics expects US oil production to decline western Pennsylvania. hobbled, making any federal deregulation in a second by about 880,000 b/d year on year in 2020 and more Trump term take a backseat to market forces. than 1 million b/d in 2021. That would put US output about 3.1 million b/d below Platts’ pre-price collapse US oil production is returning from peak shut-ins of forecast by end-2021. 2.8 million b/d during this spring’s oil price crash, but
60 Insight September 2020 September 2020 Insight 61 Insight from Washington
The trend can be seen in other US basins, as operators federal acreage is very attractive to us and thus why we holding federal permits have kept actively drilling wells would want to get something done right now.” while other producers have slowed drilling to a bare minimum in response to low prices. EOG Resources CEO Bill Thomas sounded similarly optimistic that the driller would be able to shift US oil wells drilled on federal lands surged to 22% focus to wells on private land if it cannot obtain new of total wells drilled in June, from 12% in February, permits on its federal acreage. “We’ve got a lot of according to S&P Global Platts Analytics. confidence that we can continue to generate and add non-federal potential that’s even better than what we In second-quarter earnings calls, executives spoke of have,” he said. continuing to act on federal drilling permits to build up a supply of drilled-but-uncompleted wells before any federal policy changes. Political tides
Hess CEO John Hess said that while his company had Pioneer Natural Resources CEO Scott Sheffield said he reduced its exposure to federal onshore permitting expects Biden to win based on current polling, which to less than 3% of its North Dakota acreage and would bring significant risks to US drillers. But he said “significantly reduced” its Gulf of Mexico activity Pioneer has no activity on federal lands and “so should through 2021, a potential regulatory shift holds major be unaffected” by a ban on new federal permits. risks for the US economy. “I would expect pipeline infrastructure will be “Any proposals that would restrict our country’s ability significantly delayed crossing state lines, [but] again, to explore, develop and produce that oil is going to all of our acreage is in Texas, and we move our oil and be very bad for US jobs, very bad for the US economy our gas to the Gulf Coast,” he said. and very bad for our national security,” Hess said. “So we hope when people are thinking about future ConocoPhillips CEO Ryan Lance said the driller has policy, when it comes to federal lands, reason prevails, successfully secured federal permits and brought wells which would be in the interest of all US taxpayers into production through 50 years of US presidential and consumers.” administrations, including “those that have said they want to shut the business down and those who want to accelerate it, and we still managed to get our projects Move at the speed of Possible shift to Texas done because we do it responsibly, we do it sustainably, and we follow the process.” Permian Basin oil and natural gas driller Cimarex the commodity markets Energy signaled that it might have to shift some focus Tim Duncan, CEO of pure-play Gulf of Mexico producer from its prime Delaware Basin assets in New Mexico Talos Energy, struck a similar tone: “It is our belief that to its Texas assets on private land. A third of Cimarex’s being pragmatic on how to embrace the basin and its with Platts API Delivery. acreage is on federal land in New Mexico. role in job creation, revenue generation for the federal government and our role in producing low-emission “Our federal acreage is located in some of the best part barrels will ultimately prevail politically.” Fundamental market data from Platts Analytics is now of the Delaware Basin,” said John Lambuth, Cimarex’s available via Platts machine-to-machine delivery options, executive vice president of exploration. “It’s in the including API, Streaming and Bulk. deepest part, it’s the most-pressured part, it’s oil in the reservoir, and it has some of the better water cuts. Visit the Platts Developer Portal to learn more “When we compare different assets, although they are all outstanding, by a little bit more you would say the developer.platts.com
62 Insight September 2020 Solar race
Solar race Gulf Arab countries’ renewables projects are attracting outside investors and achieving world-beating low tariffs. Claudia Carpenter and Dania Saadi look at the project pipeline as well as the tailwinds and challenges ahead
ulf Arab countries are forging The UAE, Saudi Arabia, Qatar and Oman are the four countries in the six-member Gulf Cooperation Council ahead with renewable projects that have developed renewables projects over the last Gdespite an abundance of fossil few years. Bahrain and Kuwait also belong to the GCC. fuels and the coronavirus pandemic. Saudi Arabia, the world’s largest oil exporter, is forecast to lead the push in the Middle East in the Record-low tariffs and plans to reduce dependence next few years, having launched several renewables on crude oil and natural gas as feedstock for power projects, including its first wind farm, to free up crude and energy-intensive water desalination plants are burned in power plants for export. the main factors behind the rapid development of renewables in the region. The country’s third renewables round to add 1.2 GW of solar capacity is advancing after 49 companies The renewable power sector was the only energy pre-qualified for lead roles. Energy minister Prince source to grow its share of the power market globally Abdulaziz bin Salman told local media in June that the during the pandemic, while oil, natural gas and coal kingdom would “very soon” announce a solar energy have all declined, IRENA Director General Francesco project with the lowest electricity cost per kilowatt- La Camera said in June. Even as oil prices slumped hour. The world record-low solar cost is was by due to the pandemic, the share of renewables in the Abu Dhabi, the oil-rich emirate of the seven- generation of electricity has grown in all parts of the member UAE federation, until Portugal got a lower world, he said. price in August.
The oil-rich Gulf region is among the areas benefiting “We expect renewables capacity in the Middle East to most from the global appetite for renewables projects. more than double within the next five years, given that
64 Insight September 2020 September 2020 Insight 65 Solar race Solar race
there are almost 7 GW of utility-scale solar and 1.5 GW solar PV power plants, which will cost Riyals 1.7 billion hydrogen-based ammonia production facility powered of wind projects in development,” head of global power In Saudi Arabia a key renewable ($463 million), Qatar Petroleum said in January. Total by renewable energy. The project, which will be equally planning at S&P Global Platts Analytics in New York, and Japan’s Marubeni will hold the remaining stakes in owned by the three partners, will be sited in NEOM. The Bruno Brunetti, said. project is set to be sited in the the project that will follow the build, own, operate and project will produce green ammonia for export to global transfer model for a 25-year period. markets and will include more than 4 GW of renewable The pipeline of utility-scale solar projects has not $500 billion future city of NEOM, power from solar, wind and storage. changed much so far this year, indicating the damage In Oman, the biggest Arab oil producer outside OPEC, done by the coronavirus has so far been largely Petroleum Development Oman this year began “This deal is of particular significance, as the kingdom’s contained, Brunetti said. The Middle East had over which will be 35 times the operations of the sultanate’s first utility-scale solar ambitious renewables expansion program should no 5.1 GW of solar PV and 700 MW of wind installed as power plant, which will free up 95.5 million cu m a year longer be seen only through the lenses of diversifying of the end of 2019, according to the International size of Singapore of natural gas for export, at a time when the country’s its domestic fossil-fuel based power mix, but also Renewable Energy Agency. oil revenues are dwindling due to OPEC+ cuts and in view of meeting growing global demand for green plummeting prices. hydrogen,” Brunetti said. Solar and wind accounted for about 1% of power The $2-billion fifth phase project achieved an production in the Middle East in 2019, according to the international record-low bid at the time, of $16.953/MWh. Meanwhile in Saudi Arabia, a key renewable project is Renewables growth in the region is accelerating due S&P Global Platts World Energy Demand Model. It is The development uses photovoltaic solar panels, and is set to be sited in the $500 billion future city of NEOM, to growing power demand, falling solar and wind costs expected to be slightly higher at around 1.3% in 2020, based on the independent power producer model. which will be 35 times the size of Singapore on a large and favorable government policies that attract private and about 3% of the total by 2025 in the region. swathe of land in the Northwest of the country. investment, such as competitive auctions, according to Qatar, together with Total and Marubeni, plans to the IEA’s Abdelilah. develop an 800-MW solar power plant near the capital In July, ACWA Power, NEOM and the US’s Air Products Encouraging private investment Doha, as the Gulf state accelerates its renewables push signed a $5-billion agreement to build a green to free up energy production for export. Middle East renewables have been fostered by regulatory environments that have allowed private Qatar’s Siraj Energy, in which Qatar Petroleum has a developers to own projects, generate electricity and 40% stake, will hold a 60% interest in the Al-Kharsaah consume and sell the power, according to renewable energy analyst at the International Energy Agency, Yasmina Abdelilah. Countries that have long-term Renewables activity in Middle East on growth track renewable energy targets coupled with support policies Capacity installed and projects in development will enjoy growth in the near term, she said. Wind (GW) r per t 20 e e pme t The UAE, for example, targets 50% clean energy by r 2050, including nuclear power, with renewables playing r e a lead role, and has conducted several large-scale, eb competitive solar auctions that yielded low prices. S r b 0 0 0 0 2 0 0 0 0 Within the UAE, Abu Dhabi and Dubai are developing Solar PV (GW) large-scale renewables projects at record low prices. In April, Abu Dhabi’s 2-GW tender drew a world near r e record-low solar bid of $13.50/MWh, submitted by r TAQA, France’s EDF and China’s Jinko Solar for a r 30-year contract. It will be the largest solar farm in S r b the world, joining plants in China, India and Egypt with eme capacity of over 1 GW. eb r The Dubai Electricity & Water Authority this year m awarded Saudi Arabia’s ACWA Power the 900-MW, fifth r phase of the Mohammed bin Rashid Al Maktoum Solar t r Park, a project that aims to have 5 GW of solar power by 0 0 0 0 2 02 0 0 2030 at a cost of Dirham 50 billion ($13.6 billion). S r e S b tt t S b tt r et te e e
66 Insight September 2020 September 2020 Insight 67 Growth would be even faster if regulatory barriers to 25% owned by Saudi Arabia’s sovereign wealth fund, concerns have become more central to oil-exporting new market entrants outside of auctions were removed, while Abu Dhabi’s clean energy firm Masdar is a unit of countries, Brunetti said. Kuwait in July canceled plans permitting procedures were simplified and more low- Mubadala Investments Co., a fund managing more than cost financing available. Access to the grid and clear $230 billion in assets. The kingdom has set a target of 27.3 GW of renewables to build the Al-Dabdaba solar regulations surrounding connection permitting would by 2024. “Even if Saudi Arabia continues to lag behind also open up opportunities, Abdelilah said. Masdar said August 13 it had clinched its second in terms of installed capacity and projects, we think plant, which would have provided strategic investment in the US in a deal with EDF the country will catch up within the next few years to Renewables North America under which it will acquire become the largest player for renewables in the region Global ambitions, local setbacks a 50% stake in a 1.6-GW clean-energy portfolio. next to UAE,” he added. 15% of the oil sector’s needs
Despite the coronavirus pandemic, Middle Eastern However, Kuwait in July canceled plans to build the Due to coronavirus-related business and travel of electrical energy, due to renewable companies are pressing ahead with Al-Dabdaba solar plant, which would have provided restrictions, the Saudi ministry of energy in April international projects as well as local ones. 15% of the oil sector’s needs of electrical energy, due to extended the request for proposals deadline for its the coronavirus the coronavirus. State-run Kuwait National Petroleum 1.2-GW solar project to six months from four, which In July, Saudi Basic Industries Corp., majority-owned Co. was supposed to start operating the project would mean the results could be out as early as October. by state-controlled oil company Saudi Aramco, said in February 2021. Only 18% of executives in the Middle East expect to see its polycarbonate facility in Cartagena, Spain, is set The jury is still out on whether the coronavirus will slow growing opportunities to invest in the energy transition to become the world’s first large-scale chemical Saudi Arabia’s renewables program has also been future renewables plans in the region. “Most of the in the next 12 months, the lowest percentage globally, production site to be run entirely on renewable power. delayed, raising questions about its renewables goals, growth in the near term is from projects already in the according to a survey published in May by UK-based Brunetti said. Even before the pandemic, Saudi Arabia later stages of project development,” Abdelilah said. law firm Ashurst. The agreement will mean Iberdrola investing almost had put on hold a $200-billion solar project with Eur70 million ($80 million) to construct a 100-MW Japan’s Softbank Group. But she added that the economic environment “We believe this is a result of a combination of the solar PV facility with 263,000 panels, on land owned remained a big variable for new project development region’s reliance on oil and gas, which still dominates by SABIC, making it the largest industrial renewable Although there are risks that the Saudi renewable and financing. Furthermore, for hydrocarbon exporters, its energy policy, and a lack of government policies on power plant in Europe. The plant is expected to be in program may be scaled down, as well as other threats low oil prices could limit the support available renewables,” Ashurst said in its report. operation in 2024. to lower-carbon energy across the Middle East from an for renewables. abundance of fossil fuels, most renewables projects ACWA Power and Masdar are leading the regional haven’t been rolled back or cancelled, potentially In more ways than one, then, the regional focus on foray into global renewable markets. ACWA Power is showing how environmental, social and governance fossil fuels could hinder the push into renewables.
68 Insight September 2020 September 2020 Insight 69 Valuing Middle East crude in volatile times How do you ensure crude oil value accurately reflects market fundamentals? Sufficient volumes and a reflection of a variety of buyers and sellers are the keys to a robust benchmark, writes Daniel Colover
70 Insight September 2020 September 2020 Insight 71 Valuing Middle East crude in volatile times Valuing Middle East crude in volatile times
he crude oil market witnessed some Many crudes around the world share some of these these are accounted for, a conservative estimate of of the highest volatility in living characteristics but only a handful fulfill all criteria. crude available for delivery into Platts Dubai would be Grades from the Middle East memory in the early months of this Only a marker price that consistently displays all the 2.75 million b/d, and for Platts Oman, 1.75 million b/d. T relevant characteristics can ultimately function as are sought by complex refiners year, casting a spotlight on the evolving a proxy value for the broader market underpinning By limiting itself to a single deliverable grade, the DME role of global crude benchmarks. producer and consumer economics. Oman futures contract is underpinned by Oman’s in Asia who typically blend 950,000 b/d production – and after allowing for In the Middle East and key consuming regions such as Within the Middle East, reference prices include Platts domestic refinery consumption, around 800,000 b/d – Asia, it follows that the market is keen to understand Dubai, Platts Oman and DME Oman, each having slightly more than a cargo and a half of crude per day. different crudes to customize what the tradable value of Middle Eastern crude is, different characteristics. amid recent demand and supply shocks. The alternative delivery mechanisms ensure there their preferred slate required In the case of Platts Dubai and Platts Oman, their is enough available crude to adequately reflect the Typically the value of a grade of crude oil is defined by assessment methodology contains a feature that underlying value of the commodity, in this case Middle for their processing units the underlying value of the products that are produced enhances their benchmark characteristics. Both have East crude. While crudes are not homogenous, those when it is refined, although there are exceptions – an alternative delivery mechanism, which means more that come from similar regions or locations often trade for example, if a crude is used for direct burning in a than one crude grade can help form the daily value of in the same vein, despite quality differences that may at the other end of the spectrum Qatar Land is 40 API power station, then its value might also be linked to its the assessment. For Platts Dubai, this includes the be regionally more stark than if looking more broadly. and 1.35% sulfur. However, all these crudes are still calorific value. alternative delivery of Oman, Upper Zakum, Al Shaheen collectively known as Middle East sour crudes. and Murban, while for Platts Oman, Murban is also The grades that go into Platts Dubai are largely medium Therefore, the refinery yields of different crude grades acceptable as an alternative deliverable grade. heavy, sour crudes with an API gravity of around Grades from the Middle East are sought by complex and underlying refinery economics are critical in 30 degrees and a sulfur content of around 2%, while refiners in Asia who typically blend different crudes analyzing the competitiveness of crudes. Murban is lighter with an API of around 40 degrees to customize their preferred slate required for their Production volumes and a sulfur content of around 0.8%. processing units. As a result, the underlying value Crudes are not homogenous and there are hundreds of these different grades is critical when a refiner of different types, each with their own qualities and Total deliverable crude on a daily basis for Platts Dubai There is wider variation in crude quality in the region, is evaluating which to purchase as part of their characteristics, therefore the market has settled on can therefore be calculated as the daily production of for example Iraq’s Basrah Heavy has an API gravity of monthly requirements. using certain crude grades as benchmarks, against the five streams of crude that go into the assessment. around 24 degrees and a sulfur content of 3.83% while which the values of other crudes are measured. Dubai production is around 50,000 b/d, Oman around 950,000 b/d, Al Shaheen around 300,000 b/d, Upper For a crude benchmark to be robust and purposeful it Zakum 650,000 b/d and Murban production is around must have a variety of often disparate characteristics. 1.6 million b/d. These include abundance in production volume, steady quality, diversity of buyers and sellers, geographic However, not all of this volume will be freely available relevance and absence of interference, from political on the spot market on any given day as some will be forces for example. diverted into domestic refineries while some cargoes may have destination restrictions. Therefore once
Middle East crude cracking margins