Daily Energy Report
Coal use in Germany, crude oil flows from northern Iraq, Iranian oil in Asian markets, Russia’s naphtha exports, Mexico’s “new nationalization”, India’s renewable energy projects, US oil-directed rig
CHART OF THE DAY: What Energy Transition?
Figure (1)
Commentary:
Last year’s energy crisis in Germany, which led to a return to coal, was mainly due to Berlin’s stance on Russia’s invasion of Ukraine. But the energy crisis, not only in Germany but throughout Europe, started before the war. Figure (1) above shows the energy sources used for power generation in Germany in December 2022. Coal was the leading source with a share of 36% followed by wind at 25%, and natural gas at 18%. About 55% of power generation in Germany came from fossil fuels despite the country’s plans to spend billions to support energy transition.
EOA’s Main Takeaway:
One may argue that Germany has been facing unprecedented circumstances given the war in Ukraine, but the reality tells a different story. Germany’s coal use in December 2022 was virtually the same as that in December 2021— two months before Russia invaded Ukraine, although total energy consumption in December 2022 was lower than that of December 2021 by 8.7%. On top of that, the share of wind in December 2022 was virtually the same as in 2021, despite all the spending on energy transition projects.
How much will Germany have to spend to completely move away from coal, and by when? And if the country cannot end the use of coal in its industries, then why do some pundits keep downplaying the leading role of fossil fuels in the energy sector?
STORY OF THE DAY
REUTERS: New Exxon Beaumont, Texas crude unit completes startup -sources
Summary:
Reuters today reported that Exxon Mobil Corp has finalized the startup of a new crude distillation unit (250,000 b/d) at its Beaumont, Texas, refinery and which is worth $2 billion. With the completion of this unit, the refinery is now the second largest plant in the US, Reuters said citing sources familiar with the operations. The Beaumont refinery's capacity currently stands at 619,024 b/d.
At the same time, the company has also restarted the refinery’s 65,000 diesel-producing hydrocracker which experienced an outage on March 22, according to Reuters.
EOA’s Main Takeaway:
Our long-held conviction has been that the market is moving toward more competition in refined products. We are now seeing this happening as the world is experiencing the largest increase in global refining capacity in decades.
While the start of the new crude distillation unit at the Beaumont refinery should help ease the tight US gasoline and diesel markets, it is not enough.
An important point to highlight here is that the large increase in global refining capacity does not translate into an increase in demand for crude, and higher oil prices. Only an actual increase in demand for petroleum products leads to an increase in demand for crude by refineries. The world had a large spare refining capacity for years but this did not affect demand or crude prices.
Mexico’s newest refinery, the Olmeca with an installed refining capacity of 340,000 b/d, is a case in point. The refinery will lead to a reduction in Mexico‘s crude exports, but will also result in an equivalent decrease in gasoline imports from the US. So, the net impact is almost zero.
NEWS OF THE DAY
1- BLOOMBERG: Turkey Wants to Negotiate Payments to Iraq Before Oil Exports Resume
REUTERS: Iraq's northern oil exports to Turkey yet to resume, Kurdish output shut-in
Summary:
A few days after Baghdad and Erbil agreed to resume oil exports from northern Iraq, crude flows remain suspended due to Turkey’s position. Bloomberg today quoted Turkish officials as saying that before it reopens the crude oil pipeline from northern Iraq to Ceyhan, Ankara wants to settle the compensation which the International Chamber of Commerce (ICC) had reportedly ordered Baghdad to pay to Turkey.
EOA’s Main Takeaway:
This is one of the reasons why we have been skeptical about an immediate resumption of crude oil exports from northern Iraq. On April 4, we told readers in the Daily Energy Report that we believed the “temporary” agreement remains very fragile and is contingent on the outcome of the tough talks that need to be held in the next days or weeks over the technical and legal procedures. Based on Kpler’s data, tankers have yet to resume loading of Iraqi crude from the Turkish port of Ceyhan.
As the suspension of around 450,000 b/d from northern Iraq drags on, this will give Baghdad more leverage over oil companies operating in the semi-autonomous Kurdistan Regional Government (KRG). The emergence of M&A activities in the region should not come as a surprise.
2- BLOOMBERG: Iran Oil Snapped Up by Chinese Private Refiners as Market Shifts
Summary:
Privately owned oil refiners in China, or what is also known as teapots, are now turning to buy cheap Iranian oil as competition over Russian oil supplies increases, Bloomberg reported. The report noted that Russian oil is becoming costlier as it is eyed by big buyers such as state-owned Chinese refiners, and Indian clients. Data carried by Bloomberg showed that China’s imports of Iranian oil (crude and condensate) rose 20% m-o-m last month standing at 800,000 b/d.
EOA’s Main Takeaway:
As the Russian discount declines due to lower shipping costs, Iranian crude is becoming more attractive in Asia. But while economics is at play here, we cannot ignore the role of politics since this follows the China-brokered agreement between Saudi Arabia and Iran.
3- REUTERS: Singapore imports of Russian naphtha surge as EU ban shifts flows
Summary:
Using government data, Reuters reported today that Singapore’s imports of Russian naphtha “nearly tripled in the first quarter” of this year. Reuters calculations showed that Singapore imported 741 tonnes of naphtha of Russian origin, making up 23% of total imports of oil products.
Naphtha can be used in gasoline blending, and for the manufacturing of plastics and other products. According to Reuters, South Korea, China, Taiwan, and Japan, are among the top buyers of naphtha from Singapore.
EOA’s Main Takeaway:
The sharp increase in imports of Russian naphtha proves the point that Russian petroleum products are finding markets. The irony is that most of the trading is carried out by European companies despite EU sanctions on Russia’s oil industry.
It remains to be seen how this trend will affect exports of naphtha by other producers, not only in the Gulf region but also in the US,
4- BLOOMBERG: Mexico’s $6 Billion Iberdrola Energy Deal Marks Warning to Foreign Firms
Summary:
After the Mexican government had agreed to buy power plants from Spanish energy giant Iberdrola as part of a deal worth $6 billion, some observers saw this “new nationalization” move in the electricity market as a warning to foreign firms working in Mexico, and which include names like Enel SpA, Engie SA and Acciona SA, according to Bloomberg. However, the report also cited sources as saying the deal could in fact take some pressure off private firms since the agreement increases the state’s control in the power market. Mexico’s state utility, Comision Federal de Electricidad, will have a share of 55% of total energy generation.
EOA’s Main Takeaway:
Mexico was the first oil-producing country to nationalize the oil industry in the 1930s. That period was marred by violence and saw a deterioration in relations with the US and other countries. Historically, nationalization has meant an end to the role of foreign companies after seizing their assets. But this is not the case now in Mexico because there will be negotiations, agreements, and fair compensation.
The energy deal with Iberdrola means more government control, but this is expected from any leftist government. Although it is true that such a move takes some pressure off private firms, it remains to be seen how effective such firms will be once they are under the control of the Mexican government.
5- S&P Global: Middle East oil exports to Asia seen weakening amid OPEC+ cuts, cheap Russian barrels
Summary:
S&P Global wrote today that Mideast exporters are expected to lose more shares in some oil markets in Asia due to the recently announced 1.66 million b/d voluntary cuts, cheap Russian oil, and what S&P Global referred to as “higher-priced Dubai-linked cargoes.” S&P Global focused on India given that it’s a price-sensitive market.
The report said that exports from Iraq, Kuwait, UAE, Oman, Saudi Arabia, Qatar, and Bahrain to India fell 25% to 2.338 mb/d in the first quarter of 2023.
EOA’s Main Takeaway:
So what? It is a decline by design, and exports to Europe have increased!
6- ARGUS: India plans 250GW of renewable capacity in five years
Summary:
As part of India’s plan to reach 500 GW of installed renewable capacity by 2030, the country wants to add 250 GW of renewable energy in the next five years, which according to Argus could help the Asian country move away from fossil fuels.
Coal currently accounts for more than 70% of India’s actual power generation, while renewables make up only 10% of the country’s electricity mix, according to Argus.
EOA’s Main Takeaway:
With the impressive economic growth rate, it remains to be seen how much of these renewable additions will replace coal. In our view, the possibility that renewable energy will sharply reduce coal consumption remains low.
7- REUTERS: Analysis: Europe facing costly winter without enough long-term LNG deals
Summary:
Reuters wrote today that Europe will likely face challenges next winter if it does not make enough progress on seizing long-term LNG contracts especially as a rebound in Chinese demand could tighten the market.
EOA’s Main Takeaway:
This is a topic we have been covering regularly in our weekly newsletter and Daily Energy Report. In our latest weekly newsletter published on April 3, we told readers that Europe needs Russian LNG for the next winter season. Moreover, we argued that the EU’s legal option to prevent Russian LNG imports will put additional pressure on Europe to secure its gas needs due to the significant share of Russian LNG in the EU’s gas import mix. Under current market conditions, Europe is not in a position to proceed with halting Russian LNG, especially amid a tight LNG supply market. We encourage readers to subscribe to our weekly newsletter here.
9- BAKER HUGHES: US Oil-Directed Rig Count Declined by 2 Last Week
The US rig count declined last week by 4 to 751, according to Baker Hughes. In detail, the oil-directed rig count dropped by 2 to 590, while the gas-directed rig count fell by 2 to 158.
The rig count declined by 1 in each of the following plays: Cana Woodford, DJ Niobrara, Williston, and the Gulf of Mexico, while it increased by 1 in each of the Eagle Ford, and the Permian. The oil-directed rig count in the Permian currently stands at 348.
Figure (2) below shows the oil-directed rig count in the tight plays and how it has been flat for months now. Last week, it declined only by 1.
Figure (2)
RECOMMENDED READINGS/VIDEOS
1- Although the report below was published in February, it is still relevant:
OBSERVER RESEARCH FOUNDATION: Did India need to stop buying oil from Iran?
2- In yesterday’s Daily Energy Report, we focused on Norway and how it has become vital for Europe’s energy needs. We also covered this topic earlier in our weekly newsletter. Today, the New York Times carried a report on the subject:
NEW YORK TIMES: With Russia’s Exit, Norway Becomes Europe’s Energy Champion