4-West Naphtha Shipments to Exceed Asia Demand
Shipments of naphtha from the West, including Europe and the Mediterranean, to Asia in September are forecast to exceed Asian demand amid maintenance at naphtha crackers and as petrochemical producers use alternative feedstock.
Asia is expected to receive some 1.3 million tonnes of naphtha from the West next month, four industry sources said.
That amount will exceed the demand from regional steam crackers. Naphtha is the primary feedstock used by petrochemical manufacturers to make the chemical precursors for plastics and polyester fabrics.
“This is still too much supply for September ... Asia needs probably 1 million tonnes,” said a Singapore-based industry source who tracks the eastbound cargoes.
Naphtha supply has outpaced demand this year because of scheduled cracker maintenance, cracker outages in Japan and South Korea and the prolonged use of cheaper alternative feedstock liquefied petroleum gas.
That has pressured the profit margin, known as the crack spread, for naphtha versus Brent crude oil to an average of $35.50 a tonne for this year, set for the lowest yearly average since Reuters data started in April 2008. NAF-SIN-CRK
This month, Taiwan’s Formosa Petrochemical Corp, Asia’s top naphtha importer, and Chandra Asri, which operates Indonesia’s only steam cracker, are down for maintenance until late September, reducing regional naphtha demand by at least 300,000 tonnes next month.
“We estimate that there will be surplus naphtha barrels in August/September,” said Matthew Chew, principal oil analyst at IHS Markit, although the oversupply in September is expected to be lower than August.
Chew said that the September supply surplus is expected to be around 100,000 tonnes versus 150,000 to 200,000 tonnes in August.
Asia is structurally short of naphtha and relies on imports from the Middle East and the West to plug the shortfall.
August cargoes from the Middle East to Asia were estimated at up to 3 million tonnes, higher than the year-to-date monthly average of 2.3 million tonnes, according to a weekly report by Refinitiv Oil Research.
Supplies from India, Asia’s key spot supplier, were also higher in August at more than 650,000 tonnes versus below 450,000 tonnes in July.
5-Asian Refiner Profits Hammered
Asian refining margins have tumbled more than 50% since mid-July on anticipation of plummeting demand for high sulfur fuel oil (HSFO) ahead of a shift to cleaner marine fuels next year.
“Refining margins have been weighed down by bearish HSFO cracks over the past two weeks, with rampant sell-off and de-stocking of HSFO ahead of IMO 2020,” said Serena Huang, senior market analyst at oil analytics firm Vortexa.
Margins for HSFO, an industrial fuel primarily used in ship engines and power generators, have collapsed this month as the global shipping industry prepares for new International Maritime Organization (IMO) rules that start from January 2020.
The new regulations limit the sulfur content of fuels burned in ships to 0.5%, from 3.5% currently.
The slump in the overall Singapore refining margins marks a sharp reversal from the near two-year highs that were scaled in mid-July amid tightening fuel supplies brought on by widespread seasonal refinery maintenance.
But now output of gasoline, diesel and other fuels is surging as the maintenance turnaround season wraps up and new refineries in China, India and Malaysia crank up, hurting the processing margins, analysts said.
“Sluggish demand, alongside rampant refining capacity additions, have fuelled rampant exports by (Chinese) refiners, and in turn dragged down prices and margins,” said Peter Lee, senior oil & gas analyst at Fitch Solutions.
On the demand side, a protracted trade war between the world’s two largest economies, the United States and China, is denting global economic growth and the outlook for the consumption of transport fuels.
“The overall very negative macro context of slowing growth across Europe and Asia, and even some disturbing signs in the U.S. ... are a major factor,” said Tilak Doshi, managing consultant for Muse, Stancil & Co in Asia.
Looking ahead, refining margins are expected to receive a boost eventually from the new IMO rules, which will force a switch from dirty fuels to cleaner, more expensive ones like low-sulfur fuel oil (LSFO) or marine gasoil.
“An expected increase in marine gasoil and LSFO bunker fuel demand for IMO 2020 should ... support refining margins,” said Vortexa’s Huang.
Ship operators are expected to begin burning the cleaner fuels in the last quarter of 2019, boosting demand for the more expensive fuels ahead of the IMO’s Jan. 1, 2020, deadline.
Simple refiners processing heavy crudes will face headwinds as a result of the collapse of HSFO margins, while complex refiners capable of producing lighter, low-sulfur fuels will see a boost in margins as the fourth quarter approaches, said Sri Paravaikkarasu, director at Singapore-based consultancy FGE.
Still, continued increases in refined fuel output from markets such as China and India might limit overall upside potential for the margins, analysts said.
6-Rosneft Becomes Top Venezuelan Oil Trader
Russian state oil major Rosneft has become the main trader of Venezuelan crude, shipping oil to buyers in China and India and helping Caracas offset the loss of traditional dealers who are avoiding it for fear of breaching U.S. sanctions.
Trading sources and Refinitiv Eikon data showed Rosneft became the biggest buyer of Venezuelan crude in July and the first half of August.
It took 40% of state oil company PDVSA’s exports in July and 66% so far in August, according to the firm’s export programs and the Refinitiv Eikon data, double the purchases before sanctions.
Three industry sources said Rosneft, which produces around five percent of the world’s oil, is now taking care of shipping and marketing operations for the bulk of Venezuelan oil exports, ensuring that PDVSA can continue to supply buyers.
Rosneft used to resell volumes it bought from PDVSA to trading firms and was less involved in marketing.
Now it has started supplying some PDVSA clients - Chinese and Indian refineries - while trading houses such as Swiss-based Trafigura and Vitol have walked away because they fear they could breach secondary U.S. sanctions, according to six trade sources.
Oil accounts for more than 95 percent of Venezuela’s export revenue and Washington has warned trading houses and other buyers about possible sanctions if they prop up Caracas.
The United States and some Western governments have recognized Venezuelan opposition leader Juan Guaido as the country’s rightful head of state and are seeking to oust the current socialist President Nicolas Maduro.
A State Department spokesman said the United States “has put foreign institutions on notice that they will face sanctions for being involved in facilitating illegitimate transactions that benefit ... Maduro and his corrupt network.
“We will continue to use the full weight of U.S. economic and diplomatic power to complete the peaceful transition to a once-again free, prosperous and stable Venezuela.”
Moscow is one of Maduro’s closest allies and has provided military support to his government as well as billions of dollars in loans and equipment.
“Rosneft has been dealing with Venezuela’s crude directly, fixing vessels and offering it to end users”, a source with an oil trading firm said.
Rosneft is not in breach of U.S. sanctions, because it takes oil as part of debt servicing agreements after lending Caracas money in previous years.
PDVSA lowered its outstanding debt to Rosneft to $1.1 billion by the end of the second quarter this year from $1.8 billion at the end of the first, the Russian company said.
The sources said most deals between the two do not involve cash. Those that do are processed in Euros rather than in U.S. dollars to cover Venezuela’s debt to Rosneft.
Russia and China have called U.S. sanctions against Venezuela unilateral and illegal.
7-South Sudan Makes Minor Oil Discovery
South Sudan has made a small oil discovery in Northern Upper Nile State, its first project since independence in 2011 when exploration was interrupted by war and instability, the oil minister said.
The new field in the Adar area of the state contains 5.3 million barrels of recoverable oil and will be linked to the nearby Paloch oilfields, which are operated by Dar Petroleum Operating Company, the minister Awow Daniel Chuang said.
“Production is likely to begin towards the end of the year,” Chuang told a news conference.
“As of now, we are very excited ... within some few weeks, exploration will be taken as a priority. We are going to move all over South Sudan.”
The country gets almost all its revenue from oil and has boosted output, now at 180,000 barrels per day, as it struggles to rebuild its shattered economy after a five-year civil war.
In 2012 a dispute with Sudan over pipeline fees caused South Sudan to close its oil industry for over a year. The shutdown crippled the economy, leaving soldiers and civil servants unpaid. Months later the country was plunged into civil war.
Much of the landlocked East African nation’s oil infrastructure was damaged in the conflict, during which about 400,000 people were killed and more than a third of the 12 million population uprooted.
The government is keen to reach pre-war oil production levels of 350,000 to 400,000 bpd by mid-2020.
A fragile ceasefire reached in September ended most of the fighting, but plans to form a unity government in May were delayed after there was no funding to disarm, retrain and integrate militias and rebels.
The oil ministry will conduct an environmental audit of South Sudan oilfields led by a technical environmental consultant, Chuang said.
8- Brazil's Bolsonaro Wants to Privatize Petrobras
The economic team of Brazilian President Jair Bolsonaro wants to privatize state-controlled oil company Petroleo Brasileiro SA before the end of his term in 2022, Brazilian newspaper Valor Economico reported on its website, citing anonymous sources.
The report also cites a speech by Economy Minister Paulo Guedes at an event hosted by Valor. “There are big guys thinking they won’t be privatized, but we will get there,” Guedes is reported as saying.
Guedes also said the government plans to announce next year a new round of companies to be privatized, according to the newspaper.
Although Petrobras has been selling assets including large subsidiaries, such as its fuel distribution unit Petrobras Distribuidora SA and the large natural gas pipeline networks NTS and TAG, the government would need Congressional approval to sell the fuel company.
The board of a government privatization committee known as PPI met to include new companies in a list of potential privatizations. Among them is the company that controls the postal service, Reuters reported and power company Centrais Eletricas Brasileiras SA, known as Eletrobras.
9-Alberta Smaller Oil Producers Eye Output Boost
Small and mid-sized Alberta oil producers are looking to increase drilling as early as this autumn after the Canadian province exempted a dozen of them from government-mandated oil production cuts, boosting the struggling industry.
Alberta’s previous New Democratic Party government imposed production limits in January to drain an oil glut that built up due to congested pipelines.
The new United Conservative Party government extended curtailments through 2020, citing a delay to Enbridge Inc’s Line 3 replacement that could swell inventories again unless the limits remained in place.
It also doubled an exemption threshold in the curtailment policy to 20,000 bpd, eliminating constraints on 13 companies whose output falls below that level. Alberta’s 16 biggest producers will be the only ones receiving curtailment orders starting in October.
“We were diverting capital into share buybacks and into Saskatchewan,” Tamarack Valley Energy Ltd Chief Executive Brian Schmidt told Reuters in an interview. “Now we’ll put capital back to work in Alberta.”
Tamarack will adjust 2020 capital spending plans because of the changes and could lift its Alberta production by another 2,000-3,000 bpd, Schmidt said. The Calgary-based company currently produces 11,000 bpd in Alberta, just under half its total output.
Other producers that benefit include Whitecap Resources Inc, Athabasca Oil Corp, Pengrowth Energy Corp, Baytex Energy Corp and Obsidian Energy Ltd, AltaCorp Capital Research said in a note.
Pengrowth deferred spending more than half of its C$45 million ($33.9 million) capital budget earlier in 2019, but now looks to increase drilling as early as October, Chief Executive Pete Sametz said. That will also reduce the need to buy credits from other producers that allowed Pengrowth to produce over its quota, he said.
“We’re really happy about (the higher exemption). That’s good for our company.”
Whitecap, which shifted capital to neighboring province Saskatchewan this year because of curtailments, can now consider restoring Alberta production for 2020, said CEO Grant Fagerheim.
The company has capacity to produce 15,000-16,000 bpd in Alberta.
“This is a very wise move by the Alberta government,” Fagerheim said. “Now as we go into our budget cycle (for 2020), it changes the way we think for sure. We can look at our assets on a total basis to get the best returns.”
Tweaking the exemption will prop up Alberta’s struggling oilfield services companies by increasing drilling, said Gary Mar, CEO of the Petroleum Services Association of Canada, but he said the outlook is still challenging.
“Making small adjustments so small producers are exempt will help keep people in the service business around. It’s the best of a bad situation,” Mar said.
With curtailments lasting longer, differentials between Canadian heavy and U.S. light crude look more stable, giving investors reason for greater comfort in heavy oil producers Canadian Natural Resources Ltd, Cenovus Energy Inc , MEG Energy Corp and Athabasca, CIBC analyst Jon Morrison said in a note.
10-Colombia Pipeline Ready to Transport More Crude
Pipeline company Oleoducto de Colombia is ready to move increased crude output from the center of Colombia to the Caribbean if the use of fracking is approved in the Andean country, the company’s chief executive said.
Both the government and investors interested in possible projects that would use hydraulic fracturing, which breaks up rock formations with pressurized liquid, are waiting for an administrative tribunal to rule on whether the technique will be allowed.
Its possible use has sparked vitriolic debate among lawmakers, activists, officials and regular citizens about whether it could cause pollution or other environmental harm.
The government has said that fracking could nearly triple the country’s reserves to some 1.95 million barrels, equivalent to 6.2 years.
“The evacuation and transport systems of the pipeline are ready to receive an incremental production via fracking,” Oleoducto de Colombia’s Natalia De la Calle said.
The company, majority-owned by state-run oil company Ecopetrol, moves a third of the country’s oil output.
The 483 km (300 mile) long pipeline can transport up to 236,000 barrels per day (bpd) and runs through the Magdalena Medio region, home to geological formations estimated to contain between 2 billion and 7 billion barrels of crude.
“If we’re talking about investments, the sector is ready to make those investments, it’s willing,” De la Calle said, without providing concrete figures.
The company will likely not need to invest much now to increase the pipeline’s capacity, she said, but will spend money on reception and distribution systems.
“An increase in capacity for Oleoducto de Colombia could be something that we review in the future given the results of non-conventional deposits if that’s the case,” De la Calle said.
Ecopetrol and minority owners, who include China’s Emerald Energy, France’s Perenco, Canada’s Frontera Energy and Spain’s Repsol, have the necessary funds to make adjustments, she said.
In a worst case scenario where Colombia was forced to import crude, the pipeline could be used to carry it to refineries like the one in central Barrancabermeja, De la Calle said.
“All of the systems can be reversed. We can do what’s necessary although that’s not contemplated now,” she said.