SIMON SAYS: Europe – From Russia with Love

Submitted by Simon Hill on Mon, 07/01/2019 - 16:10
East-West ARB Spread

The North West European market used to be really exciting, it was the happening place, new production in both UK and Norwegian sectors, lots of load ports such as Sullom Voe, Braefoot Bay, Grangemouth, Flotta, Tees and Karstoe. The entry of the petrochemical buyers such as ICI in Tees, Dow in Terneuzen, Norsk Hydro in Rafnes, and Esso in Stenungsund. The big boys were all there BP, Shell, Esso Europe, Texaco, Mobil, Gulf and Chevron. There was Elf and Calor, Primagaz, Deutsche Shell and Gelsenberg. And of course, the traders Trammo, Geogas, NorElf, Enron….

But Europe’s trade has changed and there’s further variations around the corner, I would like to say for the better but I’m not sure. What I do know is that Europe is becoming more and more influenced by the international market than probably at any time in the past. The balances are looking more unstable within Europe and market players are not only looking outside the comfort zone for supplies but taking advantage of Arb opportunities, especially going east.  

Waterborne, non-refinery supplies within Europe are now limited to only 3 areas, Karstoe and Mongstad in Norway, Braefoot Bay in the UK and Ust-Luga in Russia, situated in the extreme east of the Baltic Sea.

The Norwegians had their lowest oil production for 30 years in 2018, falling to 1.49 million Bbls/d, but before you get too shocked they will bounce back again once the North Sea giant Johan Svedrup starts up later this year, followed by the Johan Castberg field in the Barents Sea in 2022. Nonetheless Norway doesn’t have other major oil discoveries, nor new projects to sustain oil production beyond 2025, though it’s still a while away and a lot can happen. In the meantime, UK production has rebounded in 2019 after a years-long downward trend. Production stands at 1.18 million Bbls/d following the start of the giant Clair Ridge project, west of Shetland, and it looks as if the UK sector should be able to sustain production levels.

As far as LPG is concerned, production out of Karstoe and Mongstad should hold around 2.7 million Mt of propane and 1.2 million Mt of butane for 2019 before likely moving higher once the new mega field starts. Braefoot Bay should remain steady at around 1.1 million Mt of propane and 0.6 million Mt of butane. Although I have seen different export numbers each time I look up Ugst-Luga, it seems to be hovering around 1.45 million Mt of propane and around 0.7 million Mt of butane, just above 2.1 million of LPG overall. Where this will go in the next few years is a little more difficult to predict but it looks as if volumes will reduce. Why?

The reason appears to be project and geographically related. There’s this huge$9.5 billion petrochemical complex that is just about completed ZapSibNeftekhim, or ZapSib-2 for short, located in Tobolsk, Western Siberia, which is miles from anywhere. The complex has been built by Sibur, close to its polymer unit in Tobolsk, which was completed in 2014, and will integrate a steam cracker producing ethylene, propylene and butane-butylene fractions (BBFs) as well as polyethylene and polypropylene units. The ethylene units will produce 1.5 million Mt/y of ethylene, 0.5 million Mt/y or propylene and 0.1 million Mt/y of  BBFs, using our beloved NGLs as feedstock.

I should mention that Sibur are already one of Russia’s largest LPG producers, with over 5 million Mt last year. ZapSib-2 has been built purely on cheap feedstock economics, it’s certainly not location, given ZapSib-2 is 4,000 miles away from Russia’s own industrial consumption area, but okay a little closer to Mongolia and of course China. The cheap NGLs feedstock allows the plant to suck-in roughly 2 million Mt of Russian LPGs previously exported.

Yes, there are other production projects in the pipeline (SIMON SAYS: A lot more natgas, just a little more crude oil, and plenty of LPG), but the mega Amur gas processing plant in Svobodny, starting in 2021, and building up to 1.5 million Mt/y of LPG is bound for China – surely. As is the INK project also beginning in 2021 in eastern Siberia, and a similar 4,000 miles away from its destination, this time to Ust-Luga, which is a similar distance to exporting Alaskan crude through Houston!. What will impact exports positively is Rospan’s Novy-Urengoy production in western Siberia, due this year delay permitting. Overall, it looks like exports could be hit by over 1 million Mt, especially in the north as opposed to the Black Sea exports. So, less Euro volumes.

I thought I would be saying that European demand is a little old in the tooth to say the least. However, retail demand has had a resurgence over the last couple of years, even though it’s a bit hit and miss, and 2019 might see volumes slip in the traditional sector.  I’m putting volumes at under 4.2 million Mt. Petrochemical volumes are moving higher, and I expect to see them in excess of 4.5 million Mt in 2019. So, LPG demand in North West Europe is keeping relatively buoyant at circa 8.7 million, while supply looks likely to reduce in 2019 from 7.7 million Mt to around 6.5 million Mt. On simple maths the balancing item, imports, are likely to increase. Looks perfect for the new additional exports coming from ME2 doesn’t it (SIMON SAYS: Marcus Hook Terminal Fee Warning).

But hold on, the East/West arb is starting to make it more interesting to move cargoes out of North West Europe, especially to India, Far East as well as the Mediterranean. Why just sell it to European buyers whose price ideas might be on the cheap side, to be diplomatic as I can; see our headline graph.

We’ve seen a regular movement of cargoes out of the North Sea to the Mediterranean, by the likes of Equinor and Shell, especially to Turkey where they can take advantage of spot price differentials. The other day I checked Braemar’s spot freight rate calculations and saw that the differential to Flushing in the Netherlands compared to Dortyol in Turkey is $46/Mt from Marcus Hook, USEC and $43/Mt from Karstoe. It therefore makes sense to import into North West Europe from Marcus Hook and take North Sea volumes down to Turkey, even without the price premium.

What’s even more interesting is that Ust-Lugar was previously seen as “North West Europe destination only”, mainly due to limitations restricting ships to the smaller MGCs and handy size, making them less competitive the further distance the ship must travel. But, VLGC cargoes have been built-up by transshipping from the smaller to the larger vessels, then heading East via the Suez Canal; VLGCs such as “Cheyanne” and “Princess” have been loaded in such a way. Who knows whether this trade will persist, but it wonderfully throws all the conventions of trade direction up in the air – traders can still surprise us with their James Bond flair for the unbelievable!