For most countries, energy independence is just a dream
For nations that never had the luxury of natural resources, renewable energy provides a great opportunity to lessen the dependance on international energy trade. The same goes for nations that already depleted all economically viable reservoirs.
Consequentially, national energy self sufficiency often has been mentioned in support of the energy transition. Self sufficiency however should not be a goal in itself. Costs minimization has been the reason that energy trade has surged over the last decades. Imported coal, oil and gas often simply provide cheaper energy than can be sourced locally.
Costs will of course still be relevant in a carbon constrained world. Regions with favorable climate, favorable geography, low population density, a fleet of operational nuclear power plants or a pragmatic stance on carbon capture will be able to produce low carbon energy far cheaper than less advantageous parts of the world.
If the whole world strives to reduce carbon emissions, front runner countries will reach carbon neutral self sufficiency faster than others. From that point on, some countries will almost certainly be able to reduce emissions faster and cheaper via trade than by continuing to strive for total self sufficiency. If part of a country’s energy demand can be met cheaper via imported low carbon energy, low carbon energy will be traded. There is no sound reason not to.
The challenge now is to predict in what forms renewable or low carbon energy will be traded. What will be the commodities of the future? Six likely contenders:
Electricity is the fastest growing form of low carbon energy. As a commodity, low carbon electricity is indistinguishable from electricity generated in conventional power plants. Low carbon electricity is fully compatible with existing infrastructure for power transport and distribution. New high capacity power lines enable power trade not just between neighbouring countries but also across whole continents. The problem with electricity is that long term storage is complicated and expensive due to the relatively low energy density of batteries.
Hydrogen is an energy carrier that can be produced practically carbon neutral. From fossil fuels with carbon capture or via electrolysis using low carbon electricity. As a gas, hydrogen can be transported in bulk via pipelines. Some existing natural gas infrastructure might be repurposed for hydrogen. Below -253 degrees centigrade, hydrogen becomes an energy dense liquid that can be shipped or stored in cryo tanks
Methane is a fossil commodity but can also be produced from biomass. Using hydrogen and (non fossil) carbon dioxide, methane can also be synthesized carbon neutral. The same goes for methanol, various oils, lactic acid and almost all useful hydrocarbons that currently are produced at scale from fossil oil. Low carbon variants are chemically identical to current commodities and can make use of existing infrastructure.
Ammonia is a commodity currently produced and traded in bulk for the production of fertilizers and other chemicals. Ammonia nowadays is made mostly from fossil methane but it can be produced carbon neutral using hydrogen and nitrogen. Low carbon ammonia can replace current industrial ammonia consumption. Ammonia itself can also be used as a fuel or as an easily liquefied carrier for transport of hydrogen.
Metal oxidation is a natural process that can be sped up by increasing temperature and exposed metal surface. Metal powder in a flame burns at high temperature. Oxidized metal powder can be regenerated using low carbon electricity or hydrogen. Iron, alumina and other metals are already global commodities. Creating metal powder might be done before transport or on site where stored energy is consumed.
Biomass is a low carbon commodity that already has some traction as renewable commodity. Wood chips, pellets, bio-ethanol, biodiesel are the only carbon neutral energy carriers that are already traded at scale between continents. Further scaling however is bound by natural growth rates. Biomass is only carbon neutral if the regrowth of trees and energy crops is in balance with bioenergy consumption.
In non carbon neutral form, all potential global energy commodities mentioned above already have their applications in our current carbon intensive economy. Most of those industries will stay just as relevant in a carbon constrained world. For all mentioned carbon neutral commodities therefore it is reasonable to at least meet current consumption without carbon emissions.
Carbon neutral electricity has a head start in replacing its fossil counterpart. Electrification of mobility, heating and some industrial processes furthermore assures that the relevance of electricity will grow in a carbon constrained economy. Except for biomass, all other proposed commodities will also be produced mainly using low carbon electricity.
Which future commodity eventually will replace fossil oil as the world’s main energy carrier, will be decided by energy losses in conversion, practicalities in handling, storage and transport, geopolitics and of course first mover advantages. The transition has started, it’s time to place your bets.
In this article we would like to explain Insights Global’s tank terminal commercial performance model and why this model offers essential insights into tank storage demand drivers.
Insights Global’s tank terminal commercial performance model (see figure: 1) shows the relation between a terminal’s market environment and its commercial performance. The environment is divided into market fundamentals (which have a slow rate of change) and market dynamics (which have a fast rate of change).
In our model the fundamentals drive dynamics. A terminal that has a good fit with market dynamics will find storage rates are being better supported. Besides market dynamics also market fundamentals influence storage rates.
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Market fundamentals are:
Market dynamics are:
These variables have a direct impact on a terminal’s operations and on a terminal’s requirements. When a terminal is able to react faster to these dynamics in relation to its competition, it is more likely that it can create superior commercial performance.
Do you want to understand the essential insights into tank storage demand drivers?
In order to explain the essentials of the model we would like to invite you to join our webinar, presided by Insights Global’s Managing Director Patrick Kulsen.
Key highlights of webinar are:
Learn what drives tank storage demand. Join the FREE Webinar: Insights Global Tank Terminal Commercial Performance Model upcoming March 18th 2020.
Insights Global’s Tank Terminal Week Report has been based on these essential parametrics that drive tank storage demand. This report will improve your understanding of the world of oil trading and as a result offers you the chance to make intelligent decisions.
Geographical price differences will lead to increased trade! In this article we would like to highlight the subject arbitrage and what this theme has for impact on the tank storage market.
In theory (Investopedia), arbitrage is the simultaneous purchase and sale of an asset to profit from a difference in the price. It is a trade that profits by exploiting the price differences of identical or similar positions on different markets or in different forms. Arbitrage exists as a result of market inefficiencies.
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But how does this work in practice? As commodity trading firm Trafigura describes on their website, they apply three forms of physical arbitrage:
1 – Geographical arbitrage identifies temporary price anomalies between different locations;
2 – Time arbitrage seeks to benefit from the shape of the forward curve for physical delivery (see our article on market structure); and
3 – Technical arbitrage seeks to benefit from the different pricing perceptions for particular commodity grades and specifications
In this article and to make things clear we will focus solely on geographical arbitrage and in particular the Northwest European Singapore arb for heavy fuel oil.
In order to calculate heavy fuel oil’s price difference between Northwest Europe or ARA and Singapore, we compare the FOB ARA spot price with FOB Singapore swap price, second month due to the duration of the voyage. The difference between these values is the spread and should be large enough to cover the trade costs.
On most occasions heavy fuel oil is shipped to Singapore in a VLCC (Very Large Crude Carrier/310 kt DWT) and loads approximately 270 kt of product. We therefore sum the VLCC freight rate, finance costs, port costs, inspection costs and demurrage to come to total trade costs. Should the spread be more than the trade costs the arb between both regions is open. When the spread is less than the trade costs the arbs is closed.
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So monitoring if arbs are open (or closed) is a good indication, to understand if trade between two regions is likely to increase. A positive trading environment, ultimately will influence tank storage dynamics.
Please note that arbitrage cannot be seen as a single indicator for business opportunities for tank storage companies. Other indicators that should be taken into account are: price volatility, market structure, and more. These subjects have been highlighted in other articles.
Source: www.trafigura.com
The market structure stimulates traders to buy now and sell late. In this article we would like to highlight the themes contango and backwardation and what market structure means for tank storage operators.
An oil price for immediate delivery is called spot price or cash price while an oil price for delivery at a specified date in the future is called a forward price. When we plot these various prices and order them from short to long term delivery, a forward curve is created.
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When a futures price (second month) is below a futures spot price (first or front month), the market structure is in backwardation. In this case, the forward curve is downward sloping. When the futures spot price is below the futures price, the market structure is known as contango. In this case, the forward curve is upward sloping.
A contango usually occurs when supply is higher relative to demand (supply glut) while in a backwardation demand is higher relative to supply (shortage). As time evolves, an oil forward curve can switch from backwardation into contango as in the case of the NYMEX RBOB futures forward curve. When a cyclical pattern is visible, this is called seasonality.
With respect to NYMEX RBOB futures, US gasoline prices tend to rise towards summer driving season during the period June and September. In the period before peak demand, oil traders tend to buy and store products to have product available in times of high consumption.
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In a period of contango, oil traders are encouraged to buy oil products today and sell in the future when the spread between two months covers storage, shipping and finance costs. When this opportunity presents itself, product is being sold, shipped and stored, resulting in more business for tank storage companies. This play is known as a ‘contango storage play’ but is limited by the maximum tank storage capacity available.
In some rare occasions, when the time spread is large enough even tanker vessels are chartered by trading companies to store oil products. This is known as floating storage. In this rare environment demand for tank storage is high and pushes storage rates for spot availability. Backwardation discourages storing oil products as a trader can sell oil today at a better price than in the future.
There are other indicators that should be taken into account such as price volatility, arbitrage and more. These topics and Insights Global’s market model will be covered in upcoming weeks.
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Volatility is applied to describe fluctuations of oil prices and it relates to the level of uncertainty in the market. Historic volatility is calculated by the standard deviation of an oil price return series, measured during a certain time frame
Price volatility will stimulate traders to buy low and sell high. In this article you will learn about it and how it influences demand for tank storage.
There are other ways to calculate volatility i.e. looking at the daily high and low range of oil prices during a trading session or the estimated volatility of an option (implied volatility). Implied volatility offers an outlook on the expected volatility and is the opposite to historic volatility that looks back into recent history. It is important to understand that there are events that can impact the level of price volatility.
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Figure 1 Brent crude price and price volatility
When analyzing the Brent crude price and periods of high volatility there are a number of time frames when crude futures prices dropped while volatility expanded. Like on January 8 (weaker geopolitical risk premium), and February 3 (worries of Corona to demand for oil).
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Important for tank storage companies to understand is that in times of high volatility, such as described in these three cases, trading volumes on the paper market are very high. As traders are able to make bigger profits in a high volatile regime when an old saying become reality: ‘buy low and sell high’.
Taking into account that every paper position is squared by a physical position, one can understand that also physical trade will increase. More physical trade will eventually lead to more demand for tank storage capacity.
There are other indicators that should be taken into account such as market structure, arbitrage and more. These topics and Insights Global’s market model will be covered in upcoming weeks.
Learn what drives tank storage demand. Join the FREE Webinar: Insights Global Tank Terminal Commercial Performance Model upcoming March 18th 2020.
Source: Grimes, A.H., Trading Volatility Compression, 2014
In 2050 and thereafter, cheap and abundant energy will still be of utmost importance for human progress. The big difference is that this energy will also have to be carbon neutral.
Until all of our energy is sourced carbon neutral, every ton of carbon (not) emitted counts. In the coming decades, it will be fairly easy to do without our most carbon intensive energy source: coal. Substituting oil and gas will however be far more difficult. In the short run, the use of gas may very well increase because of climate policy. Gas fired power plants pollute substantially less than coal fired power plants. Trends in oil consumption for the coming decades will be defined by slow but steady reductions in the ‘old’ economies, balanced at first by growing demand in emerging and evolving economies.
Given that oil and gas production, refining and transport will be facts of life for the coming decades, reducing the carbon intensity of oil and gas consumed will be just as important as substituting oil and gas with carbon free alternatives. Here are seven routes that substantially reduce the climate impact of the oil and gas industry.
Using 11 floating windturbines, Equinor will electrify 5 of it’s production platforms. Reducing gasturbine utilization by 35%, the project will cut carbon emissions by ±200,000 tonnes annually. Besides wind power, providing onshore power to offshore projects may also help cut emissions.
Leaks in production and transport result in loss of revenue but are nevertheless common. New satellite and drone imagery simplifies the recognition of leaks. Solving leaks, especially methane leaks, reduces the climate impact while increasing the yield of energy companies.
Raw natural gas and oil may contain large amounts of CO2 which have to be removed in order to comply to standards. This is often done directly at the point of extraction. Storing the separated CO2 underground, instead of just venting it into the air, is an effective climate policy.
Most of the easily recoverable oil has already been extracted. The remaining, more viscous crudes have to be heat treated before extraction is possible. Normally, steam for this process is produced by burning gas or oil. GlassPoint Solar enables solar heat to replace this fossil fuel consumption.
Oil refineries consume large amounts of hydrogen for removing sulphur and other contaminants from crude oil and to convert crude into refined fuels. This hydrogen is produced from natural gas, with CO2 as byproduct. Capture and storage of this pure stream of CO2 is rather easy.
Flaring of gas at oil wells in itself is a climate measure, as CO2 from burned methane has a far lower climate impact than the methane itself. Still, routinely burning away gas on site that could just as well be used productively elsewhere should be prohibited as much as possible.
Extraction and refining of oil from tar sands, in the arctic or from shale reservoirs by nature is more carbon intensive than production from more conventional fields. Given most of fossil resources should be kept underground anyway, it’s best to abandon unconventional fields first.
At sufficient scale, most of the options mentioned above are not extremely expensive. Given that almost all oil majors have come to terms with the fact that fossil carbon is the prime source of anthropogenic climate change, implementation of measures that greatly reduce the climate impact of operations should be a no brainer.
Furthermore, if oil and gas producers are not yet intrinsically motivated, exposure to cap and trade programs, carbon taxes, shareholder pressure and eventually consumer boycots should help enforce the utilization of renewable energy in production and refineries, the capture and storage of carbon and the minimization of leaks and flaring.
If you are active in oil and gas, now is the time to take action.
Auteur: Thijs ten Brink, Photo: Zbynek Burival via Unsplash Public Domain
As a market research company specialized in the tank terminal business we truly value the FETSA and its members. Europe is our home base so this makes it even more logical to become a supplier partner. With this partnership we want to underline the long term commitment to FETSA members to improve their markets by providing insights and enabling intelligent decisions.
Patrick Kulsen, Managing Director of Insights Global
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