Peak Oil news

More glaring confirmation of Peak Oil. With no elasticity in the supply chain, any loss of any production, from anywhere is a threat because there is no swing production capacity anywhere.  The situation is further compounded by criminal market manipulations which are disguising real oil prices. Speculators make Peak Oil's effects worse while worsening shortages provide the impetus for bigger and bigger crimes. -- MCR

China, Japan scramble for oil as Sudan shuts fields

The shutdown in Sudanese oil supply could drive up already record premiums on spot crude markets as top Sudan customers China and Japan scramble for alternatives even as they weigh the impact on oil flows of international sanctions on Iran.

the Economic Times,

30 January, 2012

South Sudan has shut down its oil output, estimated at around 350,000 barrels per day (bpd), as it and neighbour Sudan row over how to disentangle their oil industries, borders and debt.

Before the shutdown, China imported most of that volume, bringing in around 260,000 bpd in 2011, according to Chinese customs data. That loss, in addition to cuts China has made in imports from Iran as Beijing and Tehran bicker over contract terms, has left China looking for alternatives equivalent to around 10 percent of its imports, or around 545,000 bpd.

"It will be a challenge to try to meet the shortfall in supply due to this sudden disruption as the overall quantity is not really that small," said Victor Shum, senior partner at oil consultancy Purvin & Gertz said. "Overall this is a tighter supply situation for Asian refiners."

The regional spot market is unlikely to provide much relief because of limited availability due to a spurt in demand from Japan for power generation after a devastating earthquake crippled nuclear facilities last year.

The supply disruption has added to the rally, boosting spot premiums for March to a record. It could drive prices even higher, although any rise may be tempered by refinery maintenance in the second quarter.

Sudan on Sunday released vessels loaded with South Sudanese oil, but has yet to agree to more exports from the terminal. The shutdown by South Sudan in protest has cut off supplies to equity holders China National Petroleum Corp (CNPC) , Malaysia's Petronas and India's Oil & Natural Gas Corp.

"We expect some disruption in loading schedules with the production shutdown," an official with one of the equity holders said. "We hope for a resolution soon."

The heavy sweet grades, Nile and Dar Blend, produced in South Sudan are preferred in Japan for power production and by Chinese refineries. They are often blended to reduce sulphur content in fuel oil, a residue output from refining crude and mostly used for running ships, for sale to power utilities in markets such as Japan and Taiwan.

CHINA'S ALTERNATIVES

Overall, the Asia-Pacific region is net short of crude as output from aging fields in Indonesia and Vietnam declines and as producers divert output to meet rising domestic demand. To make up for the loss from Iran, China has already been buying extra spot crude from Russia, West Africa, Middle East and also Vietnam in January and February.

"The disruption to crude imports from South Sudan has added to the reduction China has made in Iranian imports early in this year," Roy Jordan, London-based analyst from FACTS Global Energy said. "That means it will have to look to other exporters in the Middle East and Atlantic Basin for replacement crudes."

China has bought 10 percent more heavy sweet Angolan crude in March, pushing spot premiums for the highly acidic and heavy sweet Dalia, similar to Sudan's Dar Blend in quality, to a premium from a discount, a trader said.

Australian heavy sweet grades are a good substitute for Sudan, but exports typically fall during the cyclone season every first quarter. Cyclone Iggy disrupted output last week as producers shut several oil fields offshore Western Australia.

China's imports from Australia rose 42 percent in 2011 to 81,939 bpd, and gained 25 percent to 17,140 bpd from Vietnam. China's Unipec has increased spot imports of Russia's ESPO to three cargoes a month while it recently bought February Urals crude as the arbitrage window opened.

Compounding problems for China is Japan's additional demand for crude. The world's third-largest oil consumer has been regularly snapping up the bulk of medium to heavy sweet crude from Vietnam and Indonesia, leaving little for the spot market.

JAPANESE DEMAND

Alternatives Japan may be looking for include Gabon's Rabi Light crude and low-sulphur fuel oil, oil economist Osamu Fujisawa said. It has already started testing Rabi Blend, importing 600,000 to 1.2 million barrels a month from July.

Japan imported 48,847 bpd of Sudanese crude in the first 11 months of last year, up from 44,294 bpd in 2011. JX Nippon Oil & Energy and Mitsubishi Corp are the key importers. Sudan is the second-largest supplier of sweet crude to Japan after Indonesia. Japan burns the oil at power plants.

FACTS

Global Energy estimates Japanese crude purchases for use at power plants will be 200,000 to 300,000 bpd in the second quarter, rising from about 150,000 bpd now.

"Nile Blend is very popular for certain power plants in Japan as they form the baseload for thermal power generation," a trader with a Japanese firm said. "It would be tough to replace the crude as any change in quality could affect the machinery," he said.

Asia is importing record volumes of West African oil this year, rebuilding stocks after relatively low shipments in December, Reuters calculations showed. A drop in Brent's premium to Dubai to below $3 a barrel widened the arbitrage window, allowing more crude to flow from the Atlantic Basin to Asia.

"Overall, the Sudan volumes are not much in a global scale," said Natalie Roberston, an analyst at ANZ. "But they are adding to the overall sentiment in a market worried about supply disruptions."

Let's make it perfectly clear what's happening here. There is less and less oil to refine. refineries can only make money by refining... oil. Therefore those with the oil (i.e. the majors and sovereign owners) can literally dictate to refineries what they are willing to pay. Refineries are shutting down because oil companies are arm twisting for the lowest price in order to maximize profits.

It's the way money works. -- MCR

Europe’s refiners fall on hard times

By Sylvia Pfeifer and Guy Chazan

Financial Times,

30 Janaury, 2012

Refineries are strange beasts. Nationally strategic assets, they are nevertheless invisible to the general public until forecourts run out of petrol or diesel.

The collapse of Petroplus, Europe’s largest independent refiner by capacity and owner of among others the Coryton refinery in the UK, made front-page headlines amid fears of a fuel shortage but it is only the latest example of an industry fallen on hard times.

Overcapacity, shrinking margins and competition from Asia have conspired to prompt the current shake-out in which oil majors including BP, Royal Dutch Shell and France’s Total, have divested large chunks of their refining portfolio in a bid to focus on a smaller network of strategic plants and instead ploughed resources into more profitable operations such as exploration and production. Since 2009, Shell has reduced its global refining capacity by 15 per cent; in Europe, it has reduced it by 30 per cent over the same period.

The immediate outlook is for more pain. Analysts are already predicting that refining will be one of the weak spots during the upcoming earnings season for Europe’s oil majors.

“In terms of refining margins, the industry has hit rock bottom,” admits Volker Schultz, chief executive of Essar Oil UK, which runs the Stanlow refinery in Cheshire which was previously owned by Shell. “If these margins persist, it’ll force a lot of European refineries to close.”

It has been a slow decline. Most of Europe’s big refineries were built in the years after the second world war where the bias was towards petrol for cars and fuel oil for power generation. But in the past two decades, demand for middle distillates such as diesel and jet fuel began to increase, and soon exceeded the supply capacity of Europe’s refineries, increasing the continent’s import dependency.

This mismatch in demand and supply led to a steady decline. In the UK, for example, the number of refineries has fallen from 18 in the late 1970s to eight today. Since 1990, three have closed, the most recent in 2009, and of those that are left, two changed hands in 2011 and two are for sale, the latest being Petroplus’s Coryton. Total shelved plans to sell a fifth, Lindsey, after failing to find a buyer.

Andrew Owens, chief executive of Greenergy, an independent fuel supplier, says: “Older European refineries – with technology that could be 30-35 years old – typically have higher maintenance costs, higher sustaining capex costs and higher overhead costs than their newer bigger competitors in fast growth countries such as India.”

Europe’s refiners enjoyed a brief golden age in the mid-2000s, when China’s industrial boom fuelled a huge spurt in oil demand, while in the west tightening sulphur specifications for diesel pushed up prices for middle distillates, boosting refiners’ profits. Between 2004 and 2008, global surplus refining capacity fell by 3m-4m barrels, says one refining executive. Refining margins soared, reaching a peak of $10 per barrel in aggregate terms in 2007.

But the increased profitability triggered a new wave of investment in refining capacity. When in 2008/09, the global financial crisis hit, many of these new additions were just starting to come onstream. In the EU, refiners were also impacted by growing curbs on carbon emissions, the rising price of crude and competition from a new generation of “super-refineries” in Asia and the Middle East. Refining’s “golden nanosecond,” was over, says the industry executive.

In Europe today, “there is no strong demand for refined products, at a time when operating costs are high, carbon charges are rising and there is gross structural overcapacity,” says Francis Osborne, head of energy economics at KBC, a consultancy. “Many refiners are struggling to break even, let alone make a profit.”

Industry estimates suggest there are currently 6m barrels per day of surplus capacity globally. Demand growth, meanwhile, is a mere 1m-2m barrels per day per year – suggesting it will take two to three years to use up the surplus. To make matters worse, new capacity is coming onstream, notably in Asia and the former Soviet Union.

UBS analysts, in a note on the European refining sector titled “Hard Times”, already warned last November that a “further 4-5m barrels per day of capacity must close by 2015”. The added: “The further necessary readjustment is likely to be a painful process for the industry.”

Despite the gloom, there is room for optimism. James Zhang, commodity strategist at Standard Bank, argues the risk of foreclosure for other European refiners will come from problems they may have in terms of refinancing their debts rather than poor margins. Nor are all refineries created equal; proximity to transport infrastructure, for example, can provide protection.

New players are also entering the market, looking for a strategic foothold in Europe. India’s Essar Energy bought Stanlow, while PetroChina last year paid just over $1bn in cash for shares in trading and refining joint ventures with Ineos, including Scotland’s Grangemouth refinery and the Lavera refinery in France. Both refineries are geographically well positioned. Located on the Firth of Forth, Grangemouth, for example, has direct access to crude oil and gas from the North Sea.

The collapse of Petroplus could presage a broader and much-needed shake-out of the sector. Traders are among potential buyers for Petroplus’s assets. Gary Klesch, the American who owns a range of industrial assets including a German refinery he bought from Shell two years ago, is also seen as a possible buyer.

“There has to be attrition in the industry, and it’s more likely to happen now than it was before Petroplus went to the wall,” says Mr Osborne of KBC. “The strong will survive.”