Author: admin

The world is in crisis mode. The Corona virus is gripping humanity, leading to lockdowns, overcrowded hospitals and thousands of casualties. Oil markets are also heavily impacted. As a direct of effect of the Corona lock downs global oil demand plummeted. The OPEC+ cooperation also exploded. Russia and Saudi Arabia couldn’t agree on output cuts. As a result an outright fight for market shares erupted between both heavyweights with oil prices collapsing as a consequence.

Oil markets are totally out of balance. The demand destruction due to the many lockdowns around the world combined with the production increases coming from Arab Gulf States is leaving global markets oversupplied. Estimates range from 10mb/d to 20mb/d. Quite a big range, so no-one really knows how much. But one thing is certain: it’s a very big number. And there is no end in sight. Petroleum markets are notoriously slow in balancing out. Supply is slow to react to low oil prices as costs of maintaining production levels are low. The unit costs associated with crude oil production are mostly costs associated with exploration, drilling and completing wells. After this is finished these are sunk costs, so not relevant anymore. As a result producers will keep pumping oil until prices hit rock bottom.

Due to the oversupply situation a contango emerged on futures markets. In a contango situation prompt oil prices are lower than forward oil prices. Traders are stimulated to buy crude or oil products on the spot market, in order to increase demand, and put this oversupply into storage so that they can sell it on the futures market for higher prices and for delivery somewhere in the future. The contango is there to enable traders to earn money on this play. Otherwise they would not be encouraged to buy crude and oil product from producers because there is no demand. This is called storage arbitrage and this is perfectly in line with what the markets need: filling up tanks to store the oversupply and decreasing oil prices to limit production rates and stimulate consumption.

Who is profiting?

The contango has prompted a run on tanks. If you are able to find free tank capacity now you can make a fortune. Tank terminal owners are, despite the current depressed economic situation, in the best position that they can imagine. But who are these ‘winners’? See below a graph showing the global top tank owners.

Graph 1: global tank storage players

Also globally tank capacity is distributed unevenly and mostly concentrated in hubs. See below for tank capacity per region. As you can see North East Asia, with China included, the country where the outbreak started, has the most tank capacity. The USA and Europe are second and third in this ranking order.

Graph 2: tank capacity per region

How long until tanks reach tops?

For oil markets it is of vital importance to have spare tank capacity to absorb imbalances. However, the current oversupply is immense. How long will it take until global tank storage capacity is full?

Let’s assume that current oversupply is on average around 10mb/d for the coming months. It is probably higher right now but may decrease after the situation becomes normal again and the various lock downs and measures to contain the virus are lifted. Looking at current stock levels in the main hubs, ARA, USGC, Fujairah and Singapore, we see that approximately 75% of commercial tank capacity is full.

That leaves only 25% to go until tank capacity has reached tops. If we assume that this 25% applies to all independent tank capacity globally we can calculate, using global crude and petroleum products tank capacity and correcting for strategic petroleum reserves that are assumed to have a much higher utilization rate, that it will take about 112 days or almost four months for tanks to reach their full capacity.

After tank terminals are full the next most economic option is to charter vessels and use these vessels as floating storage. According to various sources we are already seeing this happen in shipping markets. So in reality, because the combined storage capacity is simultaneously being filled up, it might take a little bit longer for tanks to fill up.

In any case our ARA oil products stock data, Rhine flow data will give a good view on developments in European storage. If you require data to understand global tank terminal capacity our TankTerminals.com database is a vital piece of information you can use, either for analysis or to find free tank capacity. Let us know if you need anything!

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Kind regards,

Patrick Kulsen

Photo by Clyde Thomas on Unsplash

Local generation of wind, solar, hydro and nuclear power, renewable heat and energy conservation together will greatly reduce our dependence on oil, gas and coal exporting countries. Will the energy transition put an end to energy trade?

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.

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It would be naive to suggest that clean energy will not be traded

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:

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Electricity

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.

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Hydrogen

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

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Methane, methanol and other hydrocarbons

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.

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Ammonia

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.

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Metal powders

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.

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Biomass

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.

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No clear winner, potential for all

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.

The use of crude oil, natural gas and coal has been a primary driver of human progress. Unfortunately, now we know that the use of fossil resources is also a primary driver of anthropogenic climate change. What can be done in the short term?

 

Every tonne of carbon emitted counts

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.

Electrification of offshore platforms

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.

Old fashioned plumbing

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.

Carbon capture in production

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.

Utilization of concentrated solar hear

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.

CCS at refineries

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.

Reduction of gas flaring

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.

Abandoning unconventional reservoirs

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.

License to operate

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