SIMON SAYS: Don’t forget those other C-words – you guessed it, Climate Change!

Submitted by Simon Hill on Sun, 11/22/2020 - 17:00
Don’t forget those other C-words – you guessed it, Climate Change!

The good news just keeps on rolling in, whether it’s further positive data from Pfizer/ BioNTech, the new Moderna vaccine, our very own Oxford University/ Astra Zeneca serum, which is showing very encouraging phase two test results, as well as Russia’s very own Sputnik V inoculation, that’s a great name! But as always there’s an understandable inclination for everybody to concentrate on these short-term success events, instead of getting to grips with longer term trends, and the big one of course is climate change.

Our Boris has just revealed a self-styled green revolution via his long awaited “10-point plan”, aimed at helping the UK to achieve a net zero emissions target by 2050, and also incorporating a ban on new petrol and diesel cars within the next ten years. President elect Biden and the EU are targeting the same finishing line for carbon dioxide. Even China’s President Xi has vowed to become carbon neutral by 2060, and they’re the world’s largest emitter of CO2. Of course these are words, and even the Paris Agreement involved non-binding pledges, but politicians in the next few years will need to show they’re stepping up to the plate, especially as the nemesis of climate change, President Trump, has just about gone, and although Joe Biden is unlikely to be the fastest mover in town, the impetus worldwide is certainly gaining momentum.

Post coronavirus, and I’m a believer it’s only a matter of time, climate change will be the number one topic for the world to grapple with, clearly positioned right on energy’s doorstep. We can’t side-step it in the LPG world, and we are already starting to see the environmental lobby play its hand. Take the refinery sector, especially in the U.S., where 7 refineries have already shut their gates in just over a year, mainly due to the impact of coronavirus, but it’s what will follow that concerns me most in this sector. Shell’s 240 M Bbls/d Convent refinery in Louisiana is the latest to close, meaning the total capacity lost is now over 1,000 M Bbls/d, a little more than 5% of U.S. capacity. And the trend is likely to continue, maybe even gather pace, and this is where LPG needs to be on its guard. Refinery LPG volumes still makes-up more than 35% of a total global production of circa 340 million Mt/ year, but for how long?

It’s also interwoven with the ways in which the oil and gas industry finances itself, the era of ploughing back huge profits into capital investment seems to have past, access to cheap and easy to find funds, somewhat loose change in many people’s eyes, also appears to have faded away. Now the financial pillars of Wall Street and beyond, such as BlackRock and Fidelity, are leading a $130 trillion shift to sustainable investments, referred to as ESGs (an acronym based on Environmental, Social and Governance criteria). Why would they risk lending money any more to fossil fuel related companies? It’s bad enough for those U.S. shale producers desperate to find more cash to inject into their businesses, let alone find a white knight to buy them out. But it will be refining companies around the world that will also have to convince lenders, and sustainability in the refining of crude oil is a hard topic to convince people about, especially when they sign the cheques. It’ll mean more expensive capital; maybe we’ll also see capital ultimately restricted. It’s potentially a big crusade in attitude!

It was only recently that the demand for crude oil and its derivatives were still on a population fueled uplift, I’ve even read today there is more confidence in a 2021 “rebound”. Okay, the integrated refinery model, such as being developed in China by Shenghong Refining & Chemical Company, at its new 16 million Mt/ y integrated refining complex in Lianyungang City in Jiangsu, will make refining and petrochemical production more efficient, but others will fall by the wayside, especially if they fail to attract funding for upgrades. As refineries start to close, or run at lower capacity, then the supply of LPG will drop, especially in countries where domestic supply is crucial. There may well be some offset as a result of lower blending and octane boosting levels, but the move to increase LPG imports in the next 10 years will increase, wherever you think LPG’s future lies within the climate change matrix.

The evidence has already been seen earlier this year when India went into lockdown, refinery operations were severely cut as the demand for motor transportation fuels plummeted, refinery LPG supplies also fell, but demand held-up. The only solution at the time was to import more. We are also seeing the same happen in Brazil today, as summer gets into full swing in the southern hemisphere, we are still seeing Petrobras buying cargoes from the U.S. Gulf, why, because the refineries, hit by COVID-19 demand ruin, are limping from day to day, yet cooking demand for LPG is holding firm. But as we know import demand has a reputation for blowing hot and cold. We’re seeing this right now in the market

There appears to be a lull in proceedings as the LPG trading juggernaut rolls into a new year, with most attention focused on January arrivals, and dare I say it, the back-end of winter demand and the potential price drop. January cargoes in the U.S. are March arrivals in Asia, beware! In the virtual reality of the pricing window, the pre-Christmas position tidying appears to have begun, but with a backdrop of more buyers looking for longer term deals than spot purchases, again bolstering the bounce argument of the Asian economies post the initial coronavirus impact. Dare I say it, but has Asia taken-on a bit of a near-term bearish mood these days? Despite a somewhat resurgent crude market, it’s been a week of price falls in the LPG space, both flat price and structure, with the front end of the FEI curve looking a little like a lightweight steamroller has gone over it. At one stage there was even a sniff of contango on the FEI spreads in the paper market.

Usually I would expect Asian softness to start forcing the ARB to contract, especially with the mid-week EIA stock numbers dropping by 2 MM Bbls, and at the same time as stronger crude oil prices, surely a bullish move, but traders were having none of it, and NGL prices across the board took something of a pounding. Therefore, if anything, the ARB has tweaked a little wider, not that this has seen a deluge of deals appear, far from it, the fear of arriving closer and closer to the end of winter in Asia, coupled with a freight market edging up on the back of “earlier is better”, as well as sketchy vessel positions resulting from delays and uncertain itineraries, are frustrating deal-making. Re-sale numbers are still healthy at the higher-end of the single digits, but there is more downward pressure than upward, especially in January where the call is probably 6 c/ gallon on the bid and 8.5 c/ gallon on the offer.

So as you think about popping the Christmas decorations up, or whatever else you have in mind for the week ahead, do try and search-up on the implications of ESG, and it’s direct influence on the oil and gas sector, especially in light of emission controls everywhere coming closer at a faster rate of speed!