Monthly Newsletter

August 31, 2021

Prof. ST Hsieh

Director, US-China Energy Industry Forum

626-376-7460

[email protected]

Introduction: This monthly newsletter is intended to be a monthly update on US-China interactions on energy and environment industry sectors. We believe that accurate, quantitative, updated data is key for decision making. Please note that data is from open sources and comments are personal opinion.

Overview:

Energy security is a national security issue, but it is also a geopolitical issue. Balance of supply and demand dominates the price and vice versa. Currently, the global demand side is clouded by the threat of COVID-19 virus and its variants. Many nations, including USA, reverse previous relaxation of pandemic control in August. It is going to negatively impact on the global recovery. Thus, global energy demand will remain weak until COVID-19 pandemic is under control.

On the supply side, we notice the following issues:

1. US has pulled out of Afghanistan on August 30, 2021, but the evacuation has been widely criticized around the world. We will discuss in detail.  

2. OPEC and its allies are expected to press on with their planned revival of oil production when they meet next week, as prices bounce back from their August stumble.  

The coalition led by Saudi Arabia and Russia is gradually restoring the vast amount of crude production halted during the pandemic and will probably ratify the next monthly installment when it gathers on Sept. 1, according to a Bloomberg survey of traders and analysts. Several OPEC+ delegates privately predict the same outcome.

3. Aug 27 (Reuters) – U.S. energy firms this week added oil and natural gas rigs for a fourth week, resulting in the 13th monthly increase in a row, even as a major storm approaches the Gulf of Mexico.

The combined oil and gas rig count, an early indicator of future output, rose five in the week to Aug. 27 to 508, its highest since April 2020, energy services firm Baker Hughes Co (BKR.N) said in its closely followed report on Friday. In EIA’s August 2021 Short-Term Energy Outlook (STEO), we forecast that U.S. natural gas exports will exceed natural gas imports by an average of 11.0 billion cubic feet per day (Bcf/d) in 2021, or almost 50% more than the 2020 average of 7.5 Bcf/d. Increases in liquefied natural gas (LNG) exports and in pipeline exports to Mexico are driving this growth in U.S. natural gas exports. For the first time since U.S. LNG exports from the Lower 48 states began in 2016, annual LNG exports are expected to outpace pipeline exports—by an estimated 0.6 Bcf/d—this year.

4. US DOE announced in August that: Some 200,000 b/d of sour crude are expected to hit the market from the US Strategic Petroleum Reserve (SPR) from October through December, mere months after the US completed April-June deliveries averaging 180,000 b/d. The planned sale helps fulfill obligations to fund budget bills from 2015 and 2018 during fiscal 2022, which begins Oct. 1.

STH Observation: Since the US is now a net energy exporter exporting crude oil and LNG to the world market, it does not make any sense to maintain a large SPR now the stockpile held 621.3 million barrels as of Aug. 20, according to the US Energy Information Administration, but stocks have been on a steady decline since peaking at more than 726 million barrels in early 2010. If the infrastructure bill passes in its current form, Sheldon said the stockpile could fall below 323 million barrels by 2031. “It appears likely that Congress will mandate even more SPR sales in the months and years ahead, given persistent fiscal deficits and a rapidly shifting view of US energy security,” he added.

ClearView Energy Partners, in a research note, said the super-sized sale “could have modest downside impacts to price,” amid the OPEC+ supply increases and rising delta variant case counts. Those downside impacts could become more pronounced if the bulk of SPR deliveries arrive in October during refinery turnarounds, the note said.

DOE’s decision to frontload the sale also could bring political wins for the White House, ClearView asserted.

“Voters can see gasoline prices a lot more easily than they can see energy transitions, and the White House has thin congressional majorities to defend,” ClearView said. “Indeed, [President Joe] Biden’s green future may depend on keeping congressional seats ‘blue’ (and high prices tend to usher out incumbent politicians faster than they usher in new technologies). Accordingly, the White House appears to be responding to potential political risks in both optical and practical ways.”

5. The US was pumping about 11.2 million b/d of crude in August, and up to 11.4 million b/d for the week ended Aug. 20, according to the latest estimates from the EIA. Output remains well below the pre-pandemic level of 12.8 million b/d in March 2020 before global demand plunged, and the EIA expects production to remain relatively flat through October.
6. Some relevant news in the US:

• India to Boost LNG Import Potential. India will see the commissioning of a 5mtpa LNG import terminal next year in the western state of Gujarat, with private investor Swan Energy (NS:SWAN) intent on completing it by next March. State companies IOC, Bharat Petroleum and ONGC have all leased 1mtpa per year of Swan’s capacities.
• Rosneft Wants to Export Pipeline Gas. The Russian state oil company Rosneft (MCX:ROSN) has asked Russian President Putin to grant them access to pipeline gas exports, to export 10 bcm per year via an agent agreement with Gazprom.
   
• China Wants More Pipeline Gas. China’s CNPC (SHA:601857) will drill three new “complex” production wells at the supergiant Galkynysh gas field in Turkmenistan, in a deal that would see it receiving produced gas as a means of payment for its drilling. Amidst soaring LNG prices, China has been ramping up its (cheaper) pipeline gas imports.
• Asian Coal Might Decouple from Gas Prices. Whilst gas prices fell off after soaring over the summer, coal prices might remain elevated in the upcoming weeks, especially in Asia where Indonesia’s decision to ban several large producers from exporting (for failing to meet domestic demand on a preferential basis) will add further tightness to seaborne supplies. 

Natural Disaster

Hurricane season in the USA lasts almost six months, the most active period in Gulf of Mexico is mid-August to September each year. Hurricane is not new, but damages are getting worse year after year. On August 29, 2005, Hurricane Katrina hit the Gulf Coast caused severe damages with human casualties up to 1,800. We had to live in LA for about three months and we had to rebuild our home. Tulane University cancelled the fall semester of 2005. Hurricane Ida just hit Louisiana on August 29, 2021. The government learned from Katrina so human casualties will not be high. Tulane University just announced that it will stay closed till September 12, 2021. Obviously Ida’s economic impacts will be horrendous. Here we focus on Ida’s impact on energy production, transportation, and price.

1. As of August 29, 2021, more than 95% of the Gulf of Mexico’s oil production has been shut down thanks to Hurricane Ida, regulators said Sunday, indicating the hurricane is having a significant impact on energy supply.  As of 11:30 a.m. CT, personnel have been evacuated from a total of 288 oil-and-gas production platforms, according to the Bureau of Safety and Environmental Enforcement. That represents about 51% of the manned platforms in the Gulf of Mexico. The agency said all 11 rigs in the Gulf of Mexico have also been evacuated, and a total of 1.7 million barrels of daily oil production in the Gulf of Mexico has been shut-in – the equivalent to 95.7% of the region’s total output.  US oil prices rose sharply last week ahead of Hurricane Ida’s arrival. 
2. (Bloomberg) — U.S. gasoline futures jumped and oil advanced after Hurricane Ida barreled ashore in Louisiana, disrupting energy supplies in the world’s largest economy at a time of rising commodity prices. Gasoline for October surged as much 4.4% in New York as electronic trading resumed after the weekend break, while West Texas Intermediate was 0.7% higher. Last week, WTI rallied 10% as investors wagered global demand would weather the setback posed by the spread of the delta coronavirus variant.
3. “For a Category 4, you could be looking at four to six weeks or more of downtime for the refineries,” said Andy Lipow, president of Lipow Oil Associates LLC in Houston. New York (CNN) Hurricane Ida hit New Orleans Sunday after cutting through the Gulf of Mexico, causing massive disruptions to US oil production before making landfall. Gasoline futures climbed 2.75% Sunday evening to $2.33 a gallon — up from $2.27 on Friday. US oil prices were up only 0.6% Sunday evening, trading at $69.30 a barrel — up from $68.74 on Friday.
4. Six refineries in the New Orleans area — including PBF, Phillips, Shell, Marathon and two Valero refineries — are shut down right now, Andy Lipow, president of Lipow Oil Associates, a Houston-based consulting firm, told CNN Business. “It’s now a waiting game to assess whatever wind and flooding damage will be caused as the hurricane passes through the area.” The location of Hurricane Ida’s landfall is “one of the worst possible for the oil industry” and it could impact the major pipelines that carry fuel from the Gulf Coast to the East Coast markets, Lipow said. The shuttered six refineries “account for about 1.7 million barrels per day of refinery capacity, representing 9% of the nation’s total,” he added. The other three refineries in the area — Exxon, Placid and Kratz Springs — are in the Baton Rouge area. “They appear to be operating at reduced levels,” Lipow said, adding that those three refineries account for about 700,000 barrels per day, roughly 3.5% of US daily consumption. Louisiana is home to three of the nation’s seven largest refineries, and accounts for 17.5% of the nation’s overall refining capacity at its 15 refineries, according to the US Energy Information Administration.
5. Another concern is that major pipelines carrying gas, diesel and jet fuel from the Gulf Coast to other states were also shut as a precaution ahead of the storm. The shutdown of one of those, the Colonial Pipeline, after a computer hack earlier this year, caused price spikes and gasoline shortages along parts of the East Coast.
6. To restart operations in the aftermath of the storm, producers will need to get personnel back on site, assess and repair damage and restore utilities, Lipow said. But these initiatives take time, especially under the current conditions. The week after Hurricane Katrina hit in 2005, the average price of a gallon of regular gas shot up 46 cents, to $3.07 a gallon, according to data from the US Energy Information Administration. That 18% jump in prices was the largest one-week percentage spike in data going back to the 1991 Gulf War. It took two months for gas prices to return to the pre-Katrina levels after that storm.
7. Another factor in the direction could be an upcoming meeting of OPEC oil ministers along with officials from Russia and several other major oil producers. The Biden administration, concerned about inflation, has been pressuring allies in the group to agree to an increase in production. The group had been widely expected to agree to a 400,000 barrels a day increase. But Reuters reported that Kuwait’s oil minister made comments on Sunday questioning whether such an increase is needed in the face of surging Covid-19 cases and expectations that the ongoing pandemic could cut into economic activity and oil consumption. “The markets are slowing,” Mohammad Abdulatif al-Fares said in comments to Reuters on Sunday. “Since Covid-19 has begun its fourth wave in some areas, we must be careful and reconsider this increase.”

STH Comments:

Ida, as a very strong hurricane, has left a large scar in the Gulf Coast. More than a million families are out of power and drinking water. This is because the strong wind of Ida knocked off almost 2,000 miles of power lines. It will take weeks for the power company to fully recover. As such, economic activities in the region will be hampered for weeks. Offshore oil and gas industry platforms depend on the onshore supply lines for safe operations. The second reason is that each offshore platform, especially those shut-in and evacuated ones, will need professional safety checks and certifications before re-starting. That takes more manpower and time.

The same goes to re-starting refineries. Even oil and gas pipelines need safety checks.

1. So even the path of hurricane Ida is relatively narrow (and limited) but because it hits Gulf of Mexico, a major energy hub, the economic impacts are not limited to the USA. Fortunately, LNG export facilities are not damaged so US LNG export will not be impacted.
2. Ida’s domestic impact, mainly the consumer gasoline price will increase, has significant ramifications. US inflation is a threat to economic recovery already. Rise of gasoline price will enhance inflation pressure, so it is a challenge to the Biden’s administration.
3. Ida also came in a very bad time: September 6^th is the Labor Day, one of the most travelled holidays in the USA and demand of gasoline is very high.

Natural disasters like Ida are related to Global Warming which is closely related to global fossil energy consumptions. If we do not take immediate and effective actions, it is just going to get worse!

Biden Administration just has had a very bad August but it will take significant efforts to recover.

We focus on policy but not politics. Details of Biden’s Black August is widely reported around the world so we will not repeat here, we focus on some major consequences or impacts.

1. Biden’s approval rating as US President has taken a nosedive in the USA. It will impact negatively on his national agenda, especially his environmental policy which is not favorable to fossil energy production and usage. Biden will be challenged every step of his policy from formation, congress approval and implementations.
2. Biden’s international standing has taken a BIG hit, it will be difficult for him to portray that the US under his leadership as the coming-back global leader. Biden will have to convince US allies on major global issues that Biden has the right idea. More difficult for Biden is to convince US allies that Biden has the team and capacity to carry out any US foreign policy.
3. Without the support of US allies, it is impossible for Biden to promote any international agenda, even global climate change issues.
4. A major challenge for Biden himself is his own capacity: health, energy, and mental capacity.
5. Another challenge is that time is not on Biden’s side. US mid-term election is in November 2022, if Democratic Party loses the majority in the House and Senate then Biden will be a half-term President.

Example of Biden’s action and impacts.

On August 11^th,
Oil drops after Biden tells Opec to boost output

Tim Wallace

Oil fell below $70 per barrel on Wednesday after Joe Biden put pressure on the Opec cartel to ramp up production in a bid to bring down energy prices.

The White House said higher prices “risk harming the ongoing global recovery” as costs rebounded from $45 last August to a high of $77 in June.

Jake Sullivan, the US President’s national security adviser, said: “The price of crude oil has been higher than it was at the end of 2019, before the onset of the pandemic.

“While Opec+ recently agreed to production increases, these increases will not fully offset previous production cuts that Opec+ imposed during the pandemic until well into 2022. At a critical moment in the global recovery, this is simply not enough.”

He said Mr Biden wanted “affordable and reliable energy, including at the pump”, adding: “Competitive energy markets will ensure reliable and stable energy supplies, and Opec+ must do more to support the recovery.”.

Last month the group agreed to raise production again, raising output by 400,000 barrels a day every month from August with the aim of restoring the quantity pumped back to its pre-Covid level by late next year.

“But now the US, which is seeing higher gasoline prices as demand for products like jet fuel and gasoline surge on the back of a successful vaccine campaign and busy summer travel season, has voiced concern that high oil prices could derail economic recovery.”

The US’s own stockpiles of oil are shrinking more slowly than previously expected, nudging prices down.

The world’s second-largest economy is also showing signs of weakening demand as the delta variant spreads, forcing new lockdowns.

“China’s trade data shows that crude oil imports into the country have continued to be soft over the last month,” said Wenyu Yao, senior commodities strategist at ING, noting that the country’s imports were down by almost a fifth in July compared to the same month last year.

STH Comments: Biden’s action is unusual. Because Biden is against fossil energy.

Critics of the administration have pointed out that Biden curtailed domestic oil production — by shutting down the Keystone oil pipeline and implementing a moratorium on new oil and gas drilling leases — as one of his first acts in office, reducing U.S. control over oil supply and prices. The U.S. is currently producing about 11.2 million barrels of oil per day, compared with 13 million barrels during the Trump administration, according to Energy Information Administration data cited by Fox News.

US Gasoline price hike causes inflation, that is common sense. However, for Biden to ask OPEC+ to raise oil production seems very selfish and purely for US domestic purposes because under global climate change pressure each nation has the obligation to reduce greenhouse gas. A major greenhouse gas source is fossil energy production and transportation so Biden’s request to OPEC+ is passing the greenhouse burden to OPEC+ for the benefit of his domestic agenda.

Further, under market-based economy, which the US claims as the world leader, it is not appropriate for Biden’s government to interfere any market.