Daily Energy Report
China gas demand, UK approves North Sea drilling, Russia’s export ban, War forces ships to travel longer, Offshore drilling bullish, LNG grows, US EV policy, Saudis in charge of prices, and more.
Chart of the Day: China’s Gas Demand to Reach Record Levels in 2023
Summary
Figure (1) above shows various estimates of growth in gas demand in China. China is not only the main driver of oil demand in the world but also of LNG demand. The chart shows the demand in 2022 at 366.3 million tons (mt). It also shows estimates of growth by the IEA, the Chinese company CNOOC, and our estimate. The numbers above the bars show the totals. The IEA is more bullish on China than us in both oil and gas.
EOA’s Main Takeaway
During the first half of 2023, gas consumption in China grew by 5.6% year-on-year to 194.1 bcm. The EOA predicted earlier that Chinese gas consumption could grow by 6%, reaching an all-time high of 390 bcm by the end of 2023. A higher demand growth rate was predicted by the state-owned oil major CNOOC's Gas and Power Research Centre division, which saw that demand could hit 396.4 bcm this year, 8% up from 2022 (Figure 1). The expected demand growth for gas would stimulate demand for LNG and piped gas imports in the remaining months of this year which could increase by 10% compared to 2022.
Demand growth in China is unlikely to have a significant impact on global gas supplies if the next heating season in Europe is mild, particularly since Europe is entering the winter season with near-full gas stockpiles.
However, in the case winter is colder than usual, we may see an increase in Asian or European demand for LNG, causing higher prices and higher price volatility.
Story of the Day
New York Times: Britain to Allow Big North Sea Oil Field, Despite Climate Concerns
AP: Britain approves new North Sea oil drilling in welcome news for the industry but not activists
Summary
The UK government approved the development of the large offshore Rosebank oil field, sparking criticism from environmental groups. The project is expected to generate £8.1 billion (about $9.4 billion) in direct investment and create jobs, providing a boost to the UK's oil and gas industry, which has struggled with declining production and recent tax hikes. Rosebank, located in the North Sea, holds an estimated 300 million barrels of recoverable oil.
EOA’s Main Takeaway
Common sense is prevailing in some countries in Europe. Politicians realized that achieving climate goals requires more time and energy security.
It remains to be seen how oil companies will react to such news. The Windfall Profits Tax that was imposed last year did not only reduce investment but drove oil companies away from investing in the region.
Our view is that oil companies will not invest unless they get some guarantees that they will not be unfairly penalized in the middle of development. Environmentalists will stage a strong opposition to such guarantees.
News of the Day
EIA: Crude inventories declined by more than expected: -2.2 mb
Summary
The EIA reported today that commercial crude inventories decreased by 2.2 mb, to 416.3 mb.
The government added 0.3 mb of sour crude to the SPR. The SPR stood at 351.5 mb last week.
Gasoline inventories increased by 1.0 mb/d to 220.5 mb. Distillate inventories increased by 0.4 mb to 120.1 mb.
Crude oil imports increased by 0.711 mb/d last week to 7.229 mb/d. Crude oil exports decreased by 1.055 mb/d to 4.012 mb/d.
Refinery utilization decreased from 91.9% to 89.5% as crude inputs to refineries decreased.
US demand for overall petroleum products decreased by 0.773 mb/d last week to 20.141 mb/d. US oil demand is weaker than expected. YTD remains lower than that of last year by 500,000 b/d. Gasoline demand remains robust, but it is unknown how recent increases in prices will affect the quantity demanded.
EOA’s Main Takeaway
Our readers should be aware not to fall into the trap of charts that do not show the data for 2018. Inventories were way lower than now and lower than the 400 mb level as shown in Figure (2) below. Current US consumption is slightly higher than that of 2018, but exports now are way higher.
Reuters: How Serious is Russia’s Fuel Export Ban and Who will be Hit?
Summary
Russia temporarily banned gasoline and diesel exports, except to four ex-Soviet states, due to domestic shortages, disrupting global trade. Though Russia eased some restrictions, importers need alternative sellers until Russia's stock is replenished. The diesel ban, impactful due to Russia's leading role in seaborne diesel export, might last up to two weeks, while gasoline ban predictions vary from a few weeks to two months.
EOA’s Main Takeaway
We discussed this matter last Monday. The media is missing the point: many of the countries that are importing Russian diesel are re-exporting to Europe and Ukraine, especially Turkey. Hence several European countries are affected, despite the sanctions. See more details here:
Chart of the Day: Who will suffer the most from the Russian ban on diesel exports?
However, since Russia gave an exemption to “dirtier” fuels, the ban will have a minimum impact on Turkey and Saudi Arabia. For more details, see:
Chart of the Day: Saudi Imports of Petroleum Products
EIA: Kuwait’s Oil Exports Shift from Crude Oil to Petroleum Products
Summary
Kuwait's oil exports are increasingly composed of refined petroleum products due to new refining capacity. In June and July 2023, the country exported over 1 mb/d of petroleum products and liquified petroleum gas. In comparison, crude oil exports averaged about 1.6 mb/d, down from 1.8 mb/d in the same period in 2022. Kuwait's refining capacity has more than doubled since January 2021, reaching 1.4 million b/d in July 2023.
EOA’s Main Takeaway
More than ten years ago we wrote a report in which we predicted that the world would become more competitive in petroleum products than with crude. Several reasons were cited including the desire of the oil-producing countries to get the value-added from refining, to start a chain of factories and plants that leads to the expansion of the petrochemical industry, and the desire of the international oil and petrochemical companies to leave their home countries as ESG and climate policies increase their costs substantially.
Kuwait in the story above is an example. Although Kuwait is a late-comer because of its domestic political problems.
Bloomberg: War Forces Grain & Oil to Travel Record Distances
Summary
In 2023, grain shipments traveled unprecedented distances as importers turned to alternative suppliers due to blockades on Ukraine’s exports. Oil cargoes also experienced extended travel, marking the longest distances since at least 1999, as Russia sought new export markets, particularly focusing on China and India.
EOA’s Main Takeaway
Sanctions and the resulting game of musical chairs will always lead ships to travel longer distances, consuming more fuel, and increasing CO2 emissions. We have seen this before.
The irony is that the EU claims it wants to reduce global emissions. One of the unintended consequences of their actions is to increase global emissions as explained above!
UK Guardian: Key Details behind Nord Stream Pipeline Blasts Revealed
Hindustan Times: Kremlin Says US, Britain behind Nord Stream Blasts
Summary
Norwegian scientists revealed new details about the Nord Stream pipeline attack, providing seismic evidence of four explosions, two more than previously known. These additional detonations occurred near Denmark’s Bornholm Island. The explosions, which damaged the Nord Stream 1 and 2 pipelines, were caused by man-made explosives. Russia insists the UK and US were involved, but so far has provided no evidence of the claim.
EOA’s Main Takeaway
This is a case that will remain a myth. European investigators see Ukraine as responsible for the bombing of the pipeline. Others blame Russia. Now Russia is blaming the US and the UK. From our view, it does not matter who did it. It highlights the idea that international pipelines, even the most secure, are subject to sabotage. We are back in square one: how to achieve energy security?
Reuters: Asia’s Coal Sector Sees Long, Prosperous Life, Despite Energy Transition
Summary
Asia's coal sector, previously expecting a decline due to the global shift towards net-zero carbon, now anticipates remaining part of the energy mix for decades while generating profits. Despite potential competition from natural gas, participants in the Coaltrans Asia Conference expressed confidence that coal offers a cheaper and more secure alternative.
EOA’s Main Takeaway
The above article comes on the heels of two news items:
FT: India's dream of green energy runs into the reality of coal
Reuters: Chinese demand drives deals at world's largest coal conference
In a report we published on July 13 entitled: Back To Earth: Reality of the Energy Transition, we highlighted the fact that coal is so well-entrenched that eliminating dependence on it by 2050 or 2060 is impossible.
Here is the problem: the demand for energy in emerging and developing countries is increasing at a high rate. Adding more wind and solar capacity will barely meet such an increase in demand. Additionally, you can’t build a stable grid beginning with high percentages of wind and solar because of the intermittency problem with these technologies. Substantial baseload power is a must. Hence, solar and wind cannot replace coal the way those countries desire!
Forbes: Strong Offshore Drilling Outlook Keeps Pushing Peak Oil to the Right
Summary
Commentary by David Blackmon: Global demand for oil and gas is fueling growth in deep ocean drilling across various regions, including Brazil, Guyana, Suriname, West Africa, and the U.S. Gulf of Mexico. Houston-based Noble Drilling sees this trend as a significant opportunity, with CEO Robert Eifler stating the current outlook is the strongest it's been in decades. Eifler cites lower costs per barrel, reduced per-barrel emissions due to economies of scale, existing infrastructure, and available support services as factors attracting customers back to offshore markets.
EOA’s Main Takeaway
As our readers know, we have been bullish on offshore drilling since last year. There are four factors at play here:
ESG and climate change policies are forcing oil majors to invest in deeper waters mostly in emerging and developing countries.
While the UK is opening up its offshore, the windfall profit tax in the UK and other countries is forcing companies to go as far as Brazil to invest.
The retreat of many major oil and consuming countries from climate goals means by default higher oil and gas demand than current expectations.
The rise of nationalism and the control of the national oil companies are forcing international oil companies to go into deeper waters.
Reuters: QatarEnergy, Korea’s HHI Sign $3.9 Billion Deal for 17 LNG Carriers
Summary
QatarEnergy has signed a deal worth 14.2 billion Qatari riyals ($3.90 billion) with South Korea's HD Hyundai Heavy Industries to acquire 17 liquefied natural gas (LNG) carriers. The purchase supports QatarEnergy's increased LNG production capacity from the North Field LNG expansion, the Golden Pass LNG export projects, and its long-term fleet replacement needs.
EOA’s Main Takeaway
The expansion of LNG liquefaction plants in Qatar from 77 mt to 126 mt requires additional LNG tankers. In addition, some older tankers will be scrapped in the coming years. Little by little, LNG is becoming an international commodity. More tanker capacity will eventually internationalize the gas market.
Wall Street Journal: The United Auto Workers vs. EVs
Summary
Column by Holman Jenkins: Joe Biden came to the picket lines to side with the United Auto Workers (UAW) union strike. The UAW wants a much larger portion of transitory profits, including from EV subsidies. Of course, subsidies for "green" energy and EVs will not effectively reduce overall emissions. On top of that, most people don’t want EVs.
EOA’s Main Takeaway
It’s encouraging to see columnists from the legacy media writing about the limitations of EVs and the true costs of these emerging technologies. It’s doubly encouraging when columnists like Holman Jenkins link the reality about the EV market with the fact that widespread adoption of EVs (if that were even possible in the short term), will have almost no impact on overall emissions nor the changing climate if those two factors are even linked. We expect to see more admissions of these truths as energy fantasy continues to meet stronger resistance from energy reality.
Regardless, it is ironic that the Biden administration gave GM and others $12 billion to help with EV plants, only to help the workers increase the cost of GM and minimize the impact of this subsidy!
Bloomberg: Winter Fuel Prices will be Determined in Riyadh
Summary
Saudi Arabia's production policy will be the key determinant of oil prices for the rest of the year and beyond. The country has reduced its output by 1.5 million barrels per day over the summer and extended these cuts until year-end, making its contribution almost five times the combined reductions made by the UAE, Kuwait, and Russia. OPEC now predicts a supply shortfall of 3.3 million barrels per day in Q4, contributing to a 30% increase in Brent crude prices since June, reaching $95 a barrel.
EOA’s Main Takeaway
There is nothing new here. We have been telling our readers since March that the Saudi voluntary cut is about changing the “narrative” and the “sentiment.” They succeeded in both.
We also told our readers last December that the only way the Saudis can control the market is to create steep backwardation, which we see today. Therefore, the idea that Riyadh will determine oil prices is contingent upon the steep backwardation. If we end up in contango, Riyadh will lose its grip on prices.
Bloomberg continues to publish articles that mix crude with products either intentionally or unintentionally. As we said in yesterday’s report, while crude prices constitute most of the cost of gasoline, changes in prices of gasoline and other petroleum products may not be related to changes in crude prices because of refinery problems and logistics.
Argus: Iraq-Turkey Oil Pipe Restart not Imminent: Iraqi Source
Summary
The halt in oil exports between Turkey and Iraq is due to financial disagreements, not logistics as publicly claimed. In March, the International Chamber of Commerce mandated Turkey to pay Iraq $1.9 billion for violating its contract with Iraq by directly trading oil with the Kurdistan Regional Government from 2014 to 2018. Turkey, however, received $500 million for counterclaims and is currently contesting the ICC's decision.
EOA’s Main Takeaway
This is an update. As our readers know, we have been following the story from day one in March. We were the first to say that this would drag on for a while. At that time, we thought the situation would be solved by August, but then the situation changed after we looked at the Turkish conditions. For now, there is no end in sight. We do not expect the Iraqi central government to accept the Turkish demands. In addition, weaker governments in Kurdistan benefit both the Iraqi and Turkish governments. We believe the current situation is not sustainable and the possibility of political instability in the region is high.
Other News
Reuters: IATA Head says Price of Sustainable Fuel Likely to Remain High
Reuters: Oil jumps 3% as steep US crude stockdraw adds to supply concerns