December 31, 2021
Prof. ST Hsieh
Director, US-China Energy Industry Forum
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
Energy security is a national security issue, but it is also a geopolitical issue. Balance of supply and demand dominates energy prices and vice versa. Now the key uncertainty is the continued global threat of COVID-19 variant Omicron. With Christmas and new year holidays, the US is bracing for a new wave of infections which could peak after mid-January of next year. Daily global covid-19 cases are surging to record highs. In the US, the seven-day average topped 267,000 on December 28, 2021, while new infections totaled nearly 1.5 million worldwide on December 27, 2021. Short term interruptions on global recovery are inevitable. Many US universities are delaying the Spring semester opening dates.
Despite high inflation and supply chain disruptions, US consumer spending is hot at this time. But economic data including new job creation is not encouraging. The US economy is a mixed bag at best and future energy demand is uncertain. The good news seems to be that this winter is projected to be mild so that natural gas (for heating) price should be stable.
US domestic gasoline price did come down a bit as compared to November, but it is still elevated compared to 2020. However, as we discussed last month, US gasoline price was not closely pinned to the global crude oil price. The reason is that US domestic oil production capacity is sufficient for exports already. It does not mean that US oil price is de-linked from the global market, but US gasoline price also depends on domestic refinery capacity and transportation/distribution.
So, it was a clear contradiction when President Biden pressed OPEC+ to increase outputs in the name of high US gasoline prices. Domestic oil and gas industry are very upset with President Biden because his environmentally friend policy limits US oil/gas industry, not only in terms of higher production cost but also the reduced transportation capacity by closing or cancelling pipelines.
US congress has floated a proposal to stop the export of US oil to combat domestic gasoline price hiking. But the proposal received a very cold shoulder from US industry groups and no further action is anticipated.
Globally, COVID-19 virus threat is real, but each nation takes different tactics to manage crisis. For example, China takes the zero-tolerance approach, so the overall infection rate is extremely low. But the lock down of cities and towns interrupts economic recovery. China could modify the strategy after the successful 2022 Winter Olympics scheduled to begin for February 4-20.
The key challenge for any government is a difficult balancing act between controlling/eliminating the threat of virus vs economic recovery. The bottom line is that people are tired of the isolation/frustration caused by government regulations. Globally, pandemic is a natural event, and it is not the fault of any government or leader. But each government takes different approaches with very different results, as such global recovery will be uneven and energy demand will be unstable.
In the US, The U.S. economic recovery from the covid pandemic was the strongest of any of the big Western economies. That is in large part thanks to the multiple rounds of government stimulus that totaled at least $5.2 trillion. Many of these measures poured money directly into Americans’ bank accounts.
the economy experienced two historic surprises. First, demand for workers came soaring back at a velocity almost never before seen. And second, despite companies going all out to hire, millions of workers either retired early or stayed on the sidelines.
These two forces collided to create the most unusual job market in living memory — and an economy afflicted not by too few jobs, but too few workers. The shortages are beginning to raise difficult questions about how much some of America’s most vital sectors can continue to rely on a relatively low-paid workforce.
In 2022, something’s got to give. Otherwise, worker shortages could become an enduring feature — or defect — of the U.S. economy.
The bright spot of the US market is the Dow Jones Average has increased by 19%, S& P 500 Index has increased by 27% and NSADAQ Index increased by 22% in 2021 (December 29, 2021).
However, strong consumer demand, continuing supply chain troubles and the emergence of the omicron variant of the coronavirus threaten to prolong sharply rising prices well into 2022, potentially making inflation the premier economic challenge of the new year.
- Biden deserves credit for taming the COVID-19 threat in the USA, after he took the office. But people are tired and frustrated with the seemingly endless new variants and waves of peak infections
- Biden’s vaccination mandate is not popular and further dividing the US society. States and industry groups have filed lawsuits challenging the policy. It incurs labor force shortages, for example the airline industry must cancel many flights in the busy holiday season.
- Biden’s latest strategy is free universal testing which, combined with new medicines for curing infected patients could effectively contain the Pandemic in the USA. However, Biden announced the strategy this month, but the testing kits will only be available after mid-January 2022. The simple reason is that Biden team did NOT anticipate the Omicron invasion and did not order manufacturing of testing kits ahead of his announcement.
- Unabated virus infections plus the core inflation challenges the US economic recovery. There is the need of effective leadership, coordination, investments in order to manage a global recover.
1. Current Commodity Prices (December 30, 2021)
West Texas Intermediate Benchmark closed at US$76.26/bbl, 0.6% higher on Thursday, rising for a seventh day for its longest run of increases in 10 months. Brent Benchmark closed at US$79.32/bbl.
“That creep up reflects recognition that economic activity remains quite strong despite the obvious worsening of the pandemic,” said Pavel Molchanov, an analyst at Raymond James & Associates Inc. “Consumer behavior and the overall economy is in good shape, and ultimately that’s what matters more for oil demand.”
U.S. natural gas futures dropped more than 7% on Thursday to a six-month low, following a slide in European gas prices, as output continues to rise. The price drop came despite a bigger-than-expected storage withdrawal last week and forecasts for colder weather and more heating demand over the next two weeks.
2. Biden’s card of coordinated releasing of SPR.
On November 23, 2021, the White House announced that that the Department of Energy will make available releases of 50 million barrels of oil from the Strategic Petroleum Reserve to lower prices for Americans and address the mismatch between demand exiting the pandemic and supply.
The US Department of Energy (DOE) has announced that it will put 18 million bbl of crude oil from the US strategic petroleum reserve (SPR) on sale on 17 December 2021 as part of a previously announced plan to reduce fuel prices. SPR crude oil will be delivered to successful bidders between December 16, 2021, and April 30, 2022, with priority given to those bidders that can take the SPR crude oil the earliest. The first exchange, of 4.8 million bbl, went to ExxonMobil. Delivery will be conducted from the Bryan Mound, West Hackberry, and Bayou Choctaw SPR storage sites.
U.S. Loans Oil to Exxon Again in Bid to Tame Pump Pain
Lucia Kassai Thu, December 30, 2021, 12:24 PM
(Bloomberg) — Exxon Mobil Corp. was granted another oil loan from the U.S. strategic reserves under President Joe Biden’s effort to ease pain at the gasoline pump.
Exxon was awarded 2 million barrels as part of the crude-exchange program announced in November after gasoline prices touched a seven-year high. The latest grant brings the total awarded to date to 7 million barrels, or 22% of the maximum amount on offer of 32 million, according to the U.S. Department of Energy.
Under the program, refiners can take oil on loan on condition they return an equal amount between 2022 and 2024. Exxon previously accessed 4.8 million SPR barrels while Marathon Petroleum Corp. borrowed 250,000.
The government is separately offering 18 million barrels from the reserve for sale. The tender closes Jan. 4.
It was also announced by the White House that this release will be taken in parallel with other major energy consuming nations including China, India, Japan, Republic of Korea and the United Kingdom. Although the named energy consuming nations officially endorsed Biden’s proposal, not every nation has announced specific releasing plan.
A. 日本2月初拍賣原油 配合美國釋油
B. South Korea will release 3.17 million barrels of its oil reserves in the first quarter of 2022 as part of the U.S.-led global effort by major oil-consuming nations to lower prices.
The volume to be released between January and March accounts for 3.3 percent of South Korea’s state oil reserves of 97 million barrels, according to the ministry of trade, industry and energy (Motie). Just over 2 million barrels of the release will be crude and will go to local refiners via loan agreements, and the other 1.09 million barrels will be petroleum products released via a bidding process to the highest bidder, South Korea said.
C. India holds about 26.5 million barrels of oil in its reserves. India responded to President Biden’s call and announced that she will release up to 5 mbbl late November, 2021. The 5 million barrels of crude that India is said to consider releasing within a week cannot cover even a day of India’s total petroleum consumption, but it is a move aimed at showing OPEC+ that major oil consumers are unhappy with the high crude oil and gasoline prices.
3. European Gas Shortage goes global
EU plus Britain have two major challenges, cold winter and natural gas shortage. These challenges are expected and completely manageable. But geopolitics makes it a mess in 2021. Trump-Biden administration do not have a consistent or realistic policy toward resolving the Putin vs Ukraine conflict but threatens military actions, thus dragging Europe nations into the mess. Traditionally, even during the US-Soviet cold war, USSR exported natural gas to Europe. But the west underestimates the leadership of Putin and the power of natural gas for heating. Ukraine was a pivotal distribution center for Russia gas to Europe and it worked. Unfortunately, after Russia took back Crimea, the west supports Ukraine with lip services, Putin decided to play hard ball the natural gas supply to Europe.
- With undersea pipelines there are different routes that can provide natural gas to Europe by-passing Ukraine. But the US maintains that Putin sends certain amount of gas via Ukraine, which is against market economy.
- The Nord-Stream II pipeline can export Russian natural gas to Germany (a US alley and the strongest economy in Europe.) It is completed now even it was sanctioned by the Trump administration. It is ready to go, but the US Congress does not “approve” so it is not functional yet.
- The other issue is that the US is a net LNG exporter and will be the country with largest LNG export capacity in the world by 2022. US DOE has “encouraged” Europe to use LNG. So obviously there is a conflict of interests (Russia pipeline vs US LNG.)
- Cargo ships divert gas from China to Britain
Lucy Burton Tue, December 28, 2021, 5:15 AM
Huge cargo ships carrying liquid gas that were destined for China have changed course and are now heading towards the UK as Europe remains trapped in a major supply crunch.
While the Continent’s energy crisis and high prices have attracted ships away from other parts of the world, the new arrivals are now bringing prices down.
James Huckstepp, managing analyst at S&P Global Platts, said tankers are flocking towards British shores in a move that is “critical to tempering even more extreme prices and demand destruction in Europe”.
He said: “We are seeing cargoes previously destined for Asia now diverting to the UK. This is particularly the case for those cargoes originating in the US, given the journey between the US and Europe is much shorter than that to Asia.”
The number of US tankers heading for European ports jumped by one third last weekend, according to Bloomberg, with 20 vessels bearing American gas heading for Europe and another 14 heading in the general direction of Europe while awaiting final orders.
The number of cargoes travelling to the UK and elsewhere in Europe will raise hopes that new supplies can ease the energy crisis and help lower gas prices, which have declined after soaring to record highs last week. That will bring some relief to UK energy bosses, who met Downing Street officials this week for crunch crisis talks.
Nathan Piper, head of oil and gas research at Investec, said European and UK prices have surged above Asian liquefied natural gas (LNG) prices, attracting volumes away from China.
The additional supplies will provide some much-needed respite ahead of looming winter shortages. However, one Singapore-based trader told S&P Global Platts earlier this month that they are not sure “how sustainable these diversions to the Atlantic will be”.
The cost of energy in Europe has been soaring this year due to low levels of gas storage, tight supplies from Russia and lower output from clean energy sources, in part because of weak wind speeds. Some 26 retail energy companies have gone bust since August.
The country gets most of its gas via pipes connected to the North Sea, Norway and continental Europe, but in normal times it also gets about 20pc via ships in the global market.
Russia has been accused of withholding extra pipeline gas supplies to mainland Europe in recent months, in an attempt to pressure Germany into starting up its new pipeline, Nord Stream 2.
It comes as new data show that shipments of gas from Russia to the UK increased this year. As of last week, Russia had sent 29 shipments of LNG to the UK during 2021 – compared to 22 a year earlier – according to data from S&P Global Platts Analytics. It marks the second highest annual figure since the first Russian shipments to the UK in 2017.
Proponents of the North Sea industry argue that the Government could boost Britain’s energy security by granting permission for more domestic oil and gas drilling. About 10 licenced North Sea projects are expected to be up for development approval and final investment decisions in next year but are likely to draw opposition from climate change activists.
Protesters have been emboldened by Shell’s decision earlier this month to pull out of the Cambo field development. Its partner, Siccar Point Energy, subsequently paused the project.
In October, Friends of the Earth, using analysis from campaign group Uplift, found in total about 30 licenced UK offshore oil and gas projects are in line for development approval by 2025.
The Government has said it supports domestic production as oil and gas still fulfils about 75pc of total UK’s energy needs – fuelling most boilers, cars and almost 40pc of UK power supply.
However, it has also introduced a “climate compatibility” checklist that new oil and gas projects need to pass if they are to get a licence. Supporters of North Sea drilling say it results in lower emissions than importing gas from other parts of the world.
U.S. exports of liquefied natural gas (LNG) continued to grow in the first six months of 2021, averaging 9.6 billion cubic feet per day (Bcf/d). This average marks an increase of 42%, or 2.8 Bcf/d, compared with the same period in 2020 (according to the U.S. Department of Energy’s LNG Monthly reports and our estimates for June 2021, based on shipping data from Bloomberg Finance L.P.). During the summer months of 2020, U.S. LNG exports fell to record lows, but they set consecutive record highs in November and December.
In December Short-Term Energy Outlook (STEO), we forecast that U.S. dry natural gas production will increase from 95.1 billion cubic feet per day (Bcf/d) in October 2021 to 97.5 Bcf/d by December 2022, a new record high. The previous monthly record of 97.2 Bcf/d was set in November 2019.
4. Global 2021 Oil and Gas Finds to Hit Rock-Bottom in Decades Urbashi Dutta Mon, December 27, 2021, 6:34 AM
For the oil and gas sector, the coronavirus outbreak led to a slowdown in mobility, causing a significant drop in the global oil demand. According to OPEC estimates, demand is expected to increase to 108.2 million barrels per day (bpd) in 2045 from 90.6 million bpd in 2020. In other words, if the trend of low discovery levels continues, supply might eventually fall short of demand. This, in turn, could drive long term prices sky-high.
Although the energy system operated well this year, global oil and gas discoveries in 2021 are expected to hit the lowest level in 75 years if no significant discoveries are unearthed during the next few days. Of what was unearthed this year, energy companies like Exxon Mobil Corporation XOM, Hess Corporation HES and Sinopec SNP were the prominent names.
ExxonMobil and Hess discovered hydrocarbons at Pinktail in the Stabroek Block, located offshore Guyana. With the latest discovery, ExxonMobil and Hess have added to their previously estimated 9 billion barrels of oil equivalent of recoverable resource in the block.
In August, Sinopec, discovered an oil and gas field in China’s Xinjiang province. The field is located in the Shunbei area of the famous Tarim Basin. Sinopec is expected to have discovered more than 100 million tons of hydrocarbons in the field.
While some high-ranked prospects are expected to be drilled by 2021-end, even a sizable discovery might be insufficient to contribute toward discovered volumes for 2021, as those wells may not be completed this year. As a result, the aggregate discovered volume for 2021 is approaching to hit its lowest level in decades.
As of November-end, total global discovered volumes were 4.7 billion barrels of oil equivalent (boe). With no major finds announced in December, the oil and gas sector is on course for its worst discovery record since 1946. This would indicate a significant decline from the 12.5 billion boe discovered in 2020.
Per a Norwegian energy intelligence firm, liquids dominate the hydrocarbon mix, constituting 66% of the total discoveries. In November 2021, seven discoveries were made, with about 219 million boe of volumes. Hence, the monthly average of discovered volumes now stands at 424 million boe this year.
Amid clean energy transitions, underinvestment in the hydrocarbon sector and changing government regulations are expected to have resulted in lower discoveries. Notably, the total investment in the exploration and production of oil and gas declined 23% below the pre-coronavirus levels to $341 billion in 2021, even as oil demand continued to rise globally.
In this context, some experts have sounded the alarm of an impending deficit. Though the worldwide oil demand is expected to plateau by the mid-2030s, the commodity will likely remain major part of the international energy mix until 2045, as the global population will likely increase.
5. EIA expects short-term crude oil prices to remain lower than the highs of 2021 December 7, 2021
The U.S. Energy Information Administration (EIA) forecasts that global oil production will increase more quickly than demand in 2022, pushing crude oil and petroleum product prices lower than in late 2021. Brent crude oil prices averaged $81 per barrel in November, but they closed the month at $70 per barrel.
In its December Short-Term Energy Outlook (STEO), EIA forecast Brent crude oil prices will average $70 per barrel in 2022.
Responses to the new COVID-19 Omicron variant could lead to a decline in demand for petroleum products in the near term.
“This is a very complicated environment for the entire energy sector,” said EIA Acting Administrator Steve Nalley. “Our forecasts for petroleum and other energy prices, consumption, and production could change significantly as we learn more about how responses to the Omicron variant could affect oil demand and the broader economy.”
The STEO forecast also reports that the release of crude oil reserves by the United States and other countries may have contributed to the decrease in Brent crude oil prices in November, and that decrease could contribute to lower prices in 2022.
STH Comments: We disagree with the assumption that coordinated release of SPR will have significant long-term impact on global oil price. It means that Biden’s strategy for lowering the US gasoline prices may have limited effect. The following article presents Russia’s argument.
Wed, December 29, 2021, 7:00 AM Oilprice.com
An ambition to provide the global oil market with clear guidance on future production plans and discipline in sticking to already agreed policies is the reason OPEC+ did not respond to U.S. calls to boost oil production, Russia’s Deputy PM and top OPEC+ negotiator Alexander Novak said.
In an interview with news outlet RBC, Novak explained that it was more important for the extended cartel to indicate how much oil it will be producing in the medium term as demand increases rather than boosting output in the near term in response to a large consumer’s call. (Note, “a large consumer” means the USA)
“We cannot secure fluctuating production,” Novak said. “Oil production companies must plan their investments ahead of time in order to secure production growth,” he added, noting that during the winter, there is usually a decline in the demand for oil.
‘For some reason,” the official said, “The U.S. is not asking its own shale oil companies to boost production, which has fallen considerably over the last two years. On the contrary, they are deliberately reducing their production. I believe there is a certain contradiction in these actions.”
U.S. President Joe Biden called on OPEC+ repeatedly to boost production by more than 400,000 bpd because prices at the pump were becoming too high for American drivers. When the calls failed to produce a response, Biden blamed OPEC+ for hurting poor working American families. This failed to work, too, which is when the Biden administration announced a release of up to 50 million barrels from the strategic petroleum reserve.
The news has served to moderate prices, especially as it coincided with the news of the emergence of the omicron variant, which prompted worry about new movement restrictions that would, as usual, hurt oil demand.
Novak, like many observers, downplayed the effect of the SPR release along with the planned releases of other countries.
“Plans are for a total release of 50-60 million barrels,” he told RBC. “Of this, the U.S. will release about 30 million barrels in January and February. But the world consumes 36 billion barrels annually,” he explained, noting that in this context, the release of 50 or 60 million barrels will have only a temporary effect.
On the other hand, some predictions by GasBuddy’s 2022 Gasoline Forecast , released Dec. 29, predicts that the national retail gasoline price will average $3.41 per gallon for all of 2022—assuming no significant interruptions to the ongoing economic recovery.
“While Americans are likely to see higher prices in 2022, it’s a sign that the economy continues to recover from COVID-19,” GasBuddy head petroleum analyst Patrick De Haan wrote in the forecast. Pump prices will peak in spring, ranging between $3.52-$4.06 per gallon in May and between $3.43-$4.13 per gallon in June, according to the forecast.
6. Uncertainties Mount in 2022
Strategic choices in investment in clean energy solutions, responding to the pressure to decarbonize, and portfolio repositioning will be next year’s key themes for all oil and gas companies—from the supermajors and the NOCs to the U.S. independent oil and gas producers, Tom Ellacott, Senior Vice President, Corporate Research, at Wood Mackenzie, wrote in a recent report with an outlook of what to expect in 2022.
“Companies will allocate more capital to upstream decarbonisation. Value accretive solutions, which increase product sales, will continue to lead the way, but CCS projects will gain momentum and attract new participants,” Wood Mackenzie’s McKay said in WoodMac’s Global Upstream Outlook 2022.
The energy research firm expects operators to sanction in 2022 more than 40 projects over 50 million barrels of oil equivalent (boe) each, with low-breakeven, low-carbon deepwater projects dominating greenfield final investment decisions (FIDs).
The upstream oil and gas industry is set for a rebound next year, but overall investment of $400 billion will still lag the needed around $540 billion to stave off a supply shortage (STH: It means high crude prices) within a few years’ time. In addition, the pressure to decarbonize would also shape the industry’s future investment choices, both in 2022 and in the long run.
7. Industry Accidents: Barbara Powell and Francesca Maglione
Fri, December 24, 2021, 11:11 AM
(Bloomberg) — Exxon Mobil Corp. says an overnight fire at its Baytown, Texas, refinery that injured four people has been extinguished.
The blaze occurred at 1 a.m. local time at the plant, which is the fourth largest in the U.S., capable of processing more than half a million barrels of oil a day. Gasoline trading in New York jumped as much as 4 cents per gallon on the New York Mercantile Exchange.
The fire at units involved in gasoline production comes as U.S. stockpiles of the fuel hit their lowest for this time of year since 2015. Gasoline futures, meanwhile, are at their highest seasonally in eight years. Prices rose 1.8% to settle at $2.2061 per gallon in New York.
The blaze broke out in a unit called a reformer feed hydrotreater, according to Wood Mackenzie’s Genscape unit. Other units impacted include a toluene benzene unit and a nearby cooling tower, according to a person familiar with operations.
Reformer feed hydrotreaters remove sulfur from partially refined oil to help the finished gasoline meet clean-air rules. The units process feedstock used by reformers to make high-octane gasoline. The toluene unit extracts aromatics from feed sent to it by the reformer. If the fire impact is prolonged, it could affect prices of premium gasoline.
Exxon spokeswoman Julie King said Baytown is adjusting rates at other Baytown facilities to focus on stabilizing the affected units but did not discuss the impact on fuel production.
It’s the second such blaze at Baytown in the last two years. In 2019 a fire on the plastic-producing side of the industrial complex injured about 37 people.
Exxon on Wednesday reported a leak at one of Baytown’s sulfur-removal units, according to a filing with a state regulator. The leak was discovered at around 10 p.m. Tuesday, according to the filing.