September 30, 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 the price and vice versa. Currently, the global demand side is still clouded by the threat of COVID-19 virus and its variants. The Biden administration is redoubling efforts of vaccination including announcing booster shots available to part of the populations. However, the impact of this policy remains to be seen. In the meantime, the financial crisis at Chinese real estate giant Everglades has rattled the global financial market. The Biden administration did not have a great August, but September could be worse if his domestic agenda did not pass by the US Congress by the end of September. Thus, the near-term global energy demand will remain uncertain. The recent global oil price hike is basically due to supply side interruptions.
We will focus on the latest actions by the US and China on managing Strategic Petroleum Reserve (SPR) Major economies have built SPR as a cushion for major supply interruption. The United States started the petroleum reserve in 1975 after oil supplies were interrupted during the 1973–1974 oil embargo, to mitigate future supply disruptions. Now the US has the world largest government owned/operated SPR capacity at 714 million barrels (113,500,000 m 3.) In addition, US energy companies have storge capacity at 650 million barrels across the US. In 2007 China announced an expansion of their crude reserves into a two-part system. Chinese reserves would consist of a government-controlled strategic reserve complemented by mandated commercial reserves. China doesn’t officially report it’s SPR volume but it’s estimated to be approximately 400 million barrels in total, with a capacity of around 500 million barrels.
Lately, both the US and China have released some SPR. We discuss some of the major events and impacts. But first,
- Biden Administration does not have a good September.
One of the few bright spots was the settlement of Huawei Chief Financial Officer Meng Wanzhou, there is an opportunity for the United States and Canada to repair bilateral relations with China. US State Department announced that it will release an Indo-Pacific strategic plan later this fall.
- But will there be a government shutdown? Not for now!
Democrats scrambled Tuesday (September 28) to extend funding for the federal government to avoid a shutdown, with negotiations in Congress at a stalemate as Biden canceled a planned trip to Chicago to focus on budget talks.
A shutdown would happen at the start of the fiscal year Friday (October 1st, 2021) but a bill to fund the government has passed both the House and Senate. The bill has been sent to the White House already (less than six hours away from shut down.) But the bill does not cover the entire fiscal year of 2022, the US government will be funded till Dec. 2, 2021. So, three months later the shut down crisis will surface again.
- Biden’s major infrastructure spending bill that cost US$3.2 Trillion has not been resolved. Thus, Biden’s major agenda is still unfunded.
- The federal deficit ceiling will be topped on Oct. 18, it is squarely on Biden’s hand and could trigger a global economic crisis.
- In 2020, the U.S. net merchandise trade value of non-energy goods (which compares the value of all U.S. exports to all imports) reached a record $938 billion deficit, contributing to the record total U.S. net trade value deficit of $911 billion. Through the first six months of 2021, the U.S. net traded value of energy was a surplus of $9 billion, and non-energy trade was a deficit of $505 billion. Note, energy trade has a small surplus of US$9 billion but it lifted the overall trade from deficit to surplus.
- Major SPR development in China
- More than 400 million barrels of SPR capacity is available in China (12 facilities).
- Given that the oil market itself has around 2 million barrels per day of excess supply, Chinese SPR is providing a cushion, but not a huge one. Global oil prices may drop when these imports are completed; however, it will not be catastrophic to the market. In September 2019, China announced that the country had 80 days of crude oil inventories to cover its imports, which is close to China’s goal for its SPR program of 90 days of import cover.
- The global impact of China’s public auction of SPR is minimal.
Based on the public information available:
The SPR is supposed to eventually hold 500 million barrels, although some are now estimating that figure is meant to rise to 600 million by 2020, based on new demand assumptions and added facilities brought online, Estimates for commercial reserves range anywhere from 200 million to 400 million barrels of crude, and no reliable ways to tell how much is already stored, and how much additional space may be available for new stocks.
It is also estimated China has been importing approximately half a million barrels per day over its required import amount. However, the problem with these figures is that it remains unclear how much of that amount is actually going to the SPR and how much is being diverted to other sources, especially to commercial storage, where Chinese NOCs have also been stockpiling in the midst of their own expansion. CNPC (PTR), Sinopec (SNP), and CNOOC (CEO), have all been expanding their own commercial reserve capacity, filling stores with cheap crude, in preparation for a future rise in price.
Given that the oil market itself has around 2 million barrels per day of excess supply, Chinese SPR demand is providing a cushion, but not a huge one. Prices may drop when these imports are completed; however, it will not be catastrophic to the market, and will most likely come when the market is at last beginning to move in the other direction.
Due to the approximate amount of China’s excess imports to global oversupply, and to the probable shift in the markets, the ultimate impact of any decrease or release in Chinese SPR imports will be negligible.
China auctioned SPR to the public bidder for the first time on September 24, 2021.
- China first reported on September 2, that it planned to auction crude oil from its strategic reserves, aiming to ease oil prices and inflationary pressure. The Chinese announcement led to a slump in (global) oil prices that day. Even it was not clear how much oil China would auction so it is purely a market speculation.
- On September 14, 2021, China announced the first auction of crude from its strategic reserves on September 24, launching the unprecedented sale of oil from the national stockpiles it announced last week in a bid to “alleviate (domestic) raw material price pressures.” The Chinese authorities planned auction 7.38 million barrels of bonded crude oil; the state reserves administration announced.
- According to the administration, China planned auction several crude grades in five different batches on September 24. It will sell 951,137 barrels of Marine crude from Qatar, nearly 1.1 million barrels of the Forties Blend from the North Sea, over 1.79 million barrels of Oman crude, more than 2.95 million barrels of the Murban crude grade from Abu Dhabi, and 592,031 barrels of the Upper Zakum crude variety, also from Abu Dhabi.
Bidders who buy the crude at the auction cannot re-sell it, the Chinese administration said. They should also comply with the state refining industry policy and have enough crude oil import quotas to buy the bonded crude, the administration added.
- China’s release of SPR did attract global attention: Commenting on global oil supply in its Oil Market Report, the International Energy Agency (IEA) said that China and the U.S. are tapping strategic crude reserves this month. (The United States has loaned barrels from the SPR to refiners in the U.S. Gulf Coast to help offset crude supply losses from Hurricane Ida.) China, “For the first time ever, it will sell oil from state-owned tanks in an effort to dampen domestic oil prices and inflationary pressures,” the IEA said.
- September 24, 2021: Oil prices are heading for a third straight week of gains despite a slight downward correction on Friday, buoyed by ongoing supply disruptions due to hurricane Ida in the United States and several OPEC+ countries (such as Nigeria and Angola) failing to increase production according to their production targets. The anticipated Chinese SPR sale turned out to be a marginal blip on the screen, with most of the discussion now focusing on countries’ capabilities and willingness to meet robust demand across the globe.
- Chinese SPR Sale Fails to Impress: Of the 7.3 MMbbls of crude on offer, only 4.4 MMbbls were allocated amongst two bidders, state-owned Petrochina (SHA:601857) and private refiner Hengli (SHA:600346). Despite them paying a relatively low price of $65 per barrel on all crudes except Upper Zakum, the desired effect of sending a strong signal to global markets didn’t materialize.
- China’s inaugural SPR auction unlikely to impact global crude oil markets (25/09/2021)
- China’s inaugural SPR auction unlikely to impact global crude oil markets (25/09/2021)
China begins the sale of its Strategic Petroleum Reserves (SPR) today. According to Wood Mackenzie, the SPR auction is unlikely to have material impact on crude oil markets globally.
The released batch of crude oil was mostly bought and stored in the period from April to May 2020, coinciding with the oil price crash last year. Hence, a relatively low transaction price is expected at $65 per barrel.
Wood Mackenzie senior consultant Alex Sun said: “We think total SPR capacity is around 330 million barrels and the current utilisation rate at 75%. The SPR could release 33 to 82.5 million barrels of crude oil in this series of auctions but did not have a material impact on global crude markets considering China’s 10 million barrels per day (mb/d) import and 14 mb/d consumption.
China’s SPR auction could benefit both the government and refiners. The Chinese government will be able to apply knowledge of crude oil supply/demand fundamentals to increase SPR sales revenue and influence international crude markets.
Distance and financial strength also play a part in determining the attractiveness of the SPR auction. As the crude oil up for auction are in Dalian City, northern refiners stand to gain when factoring in freight costs. Additionally, payment terms indicate settlement within five working days of signing the contract. This naturally excludes teapot refiners who might have weaker balance sheets.
With more bidding batches coming, the number of qualified participants could increase.
“While impact of China’s virgin SPR auction on global markets may be small, it does signal a major shift in how China likes to employ its SPR and potentially influence the behaviours of key suppliers.”
- Major US SPR Development
A. WASHINGTON, D.C. – March 10, 2020, the United States and Australia have signed a milestone arrangement that lays the groundwork for Australia to lease space in the U.S. Strategic Petroleum Reserve (SPR) to store and access Australian owned oil, strengthening international energy security and resiliency.
B. Washington — The United States and India signed a memorandum of understanding July 17, 2020, that could result in India renting space in the US Strategic Petroleum Reserve for an overseas oil stockpile, after Australia did the same earlier this year.
C. WASHINGTON, D.C. (April 16, 2021) — The U.S. Department of Energy’s (DOE) Office of Fossil Energy (FE) announced today a Notice of Sale of crude oil from SPR.
DOE intends to sell up to nine million barrels of crude oil from the SPR.
The Notice of Sale announced today includes a price-competitive sale of up to nine million barrels of SPR sour crude oil. The sale will be conducted from the following SPR sites:
- Up to 3 million barrels from West Hackberry
- Up to 3 million barrels from Bryan Mound
- Up to 3 million barrels from Big Hill
DOE must receive bids no later than 10 a.m. CDT on Tuesday, April 27, 2021, and will award contracts to successful offerors no later than May 6, 2021. Deliveries will take place in June 2021, with early deliveries available in May 2021.
D. On August 23, 2021, DOE issued a Notice of Sale for a price-competitive sale of up to 20 million barrels of SPR crude oil. A total of 15 companies responded and 104 bids were submitted for evaluation. On September 13, 2021, Contracts were awarded to the following eight companies:
- Atlantic Trading & Marketing, Inc.
- Chevron USA
- ExxonMobil Oil Corporation
- Marathon Petroleum Supply and Trading, LLC
- Motiva Enterprises, LLC
- Phillips 66 Company
- Unipec America, Inc. (联合石化美洲有限公司) wholly owned subsidiary and trading arm of SINOPEC – the 2nd largest refiner in the world.
- Valero Marketing and Supply Company
Of the 20 million barrels of crude oil awarded, 5.1 million will be sold from the SPR’s Bryan Mound site (near Freeport, TX), 6.1 million from the West Hackberry site (near Hackberry, LA), 0.75 million from the Bayou Choctaw site (near Baton Rouge, LA), and 8.05 million from the Big Hill site (near Winnie, TX). The SPR plans to schedule deliveries between October 1–December 15, 2021.
E. September 13, 2021, The US Department of Energy (DoE) authorized the release of 1.5 million bbl of crude oil to ExxonMobil’s Baton Rouge refinery, and 300,000 bbl to Placid Refining, from SPR, as the fuel supply chain continues to recover following Hurricane Ida. It is the second time since the hurricane that the two refineries have received oil from the SPR, with the same amounts first being released on 2 September 2021. The SPR has now released a total of 3.3 million bbl of oil as a result of Hurricane Ida. It is the second time since the hurricane that the two refineries have received oil from the SPR, with the same amounts first being released on 2 September 2021. The SPR has now released a total of 3.3 million bbl of oil because of Hurricane Ida.
The original concept of Strategic Petroleum Reserve (SPR) was conceived after the very first Arabic Oil Embargo in the 1970’s. The Embargo essentially created a major oil shortage in the developed nations, it not only affected economic output but also created a public panic. In short it was a global crisis. So, the developed nations created the International Energy Agency (IEA) to coordinate data sharing with specific SPR requirements. The US built the world largest SPR facility. However, SPR was never meant to manipulate global oil prices. In fact, the US SPR underground facility was designed not to be “reusable” thus US oil stored at the SPR facility meant to be stay there and pumped out once for extreme emergency supply shortage. The SPR is the world’s largest supply of emergency crude oil. The federally-owned oil stocks are stored in underground salt caverns at four storage sites in Texas and Louisiana. SPR has a long history of protecting the economy and American livelihoods in times of emergency oil shortages created by hurricanes and geopolitical events. The SPR facility also protects Americans in times of oil surplus, such as those caused by COVID-19-related changes in demand.
Note that the US is a major oil and gas producer in the world, but for many years US SPR was a major strategic asset and expansion plan was drafted to store up to one billion barrels as late of 2008. But by 2008, the US Shale revolution took shape and quickly made domestic US oil and gas supply self-sufficient, as of now, the US is already a net energy exporter. Depends on the global oil price, the estimated 600 million barrels of US SPR is valued around US$25B, plus the annual maintenance cost is around US$ 100 million. For the US, SPR is not an insurance policy anymore, rather it becomes a bleeding waste of resources. As such, the US has taken the following actions:
- The Congress has authorized in 2005 that DOE to slowly dispose SPR with income for balancing budget deficits. There is no intention or plan to re-fill. The sale complies with the 2015 law that called for the offering of 58 million barrels between 2018 and 2025.
- Leasing the spare SPR capacity to foreign nations, Australia already committed WASHINGTON, Aug 23, 2021 (Reuters) – The U.S. Department of Energy said Monday it would sell up to 20 million barrels of crude from the emergency oil reserve to comply with legislation passed in recent years.
- The US has managed SPR for almost 46 years while China has managed SPR for 16 years, there are many lessons can be learned.
- Information of US SPR is regularly updated by the US Department of Energy, especially releasing dates/amounts etc. There are not many speculations and so the impacts on the market can be maximized.
- China should consider a SPR transparent policy so that it can also enjoy the full benefits of her SPR such as inviting foreign bidders to participate.
- US SPR capacity is now used for generating incomes with foreign partners, but more significantly SPR space is now a part of US global strategic partnership.
Hurricane Ida just hit Louisiana on August 29, 2021. On September 24, 2021, EIA’s Weekly Petroleum Status Report, released Wednesday (September 22, 2021,) showed production climbed to 10.6 million b/d for the week ended Sept. 17, up from 10.1 million b/d a week earlier, when output capabilities were still largely hampered by flooding and wind damage as well as power outages caused by Ida. A major unexpected challenge is under water oil spill caused by Ida. The loss of crude oil productions also forced the emergency waivers issued in Port Fourchon by the US Environmental Protection Agency (EPA) allowing the sale of non-ultra-low sulphur diesel for certain uses to ease fuel supply concerns. Non-ultra-low sulfur diesel is highly polluting.
For the public, the recovery has been suffering:
Sep. 29, 2021 at 4:46 AM
NEW ORLEANS (WVUE) – FEMA is opening a temporary disaster recovery center to assist Hurricane Ida survivors at the main branch of the New Orleans Public Library, the agency announced Wednesday (Sept. 29).
FEMA specialists will be on site to assist affected Louisiana residents Monday through Thursday from 10:30 a.m.-5:30 p.m., and on Friday-Saturday from 10:30 a.m.-4:30 p.m. The center will be closed on Sundays.