The Battle For Market Share

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It’s been a while since I blogged about the Oil Price, and since my last note it does appear that things have stabilised and prices are slowly creeping up.

This is good news for for the Oil and Gas Industry and is starting to provide the comfort that producers need to start spending money on new plant again. In particular, it seems that refiners who profited most from the low oil prices early on and have a cash reserve available are starting to look at developing and upgrading their facilities for new and emerging markets.

They are also taking the opportunity to adapt refineries to be able to process heavier (cheaper but poorer quality) crudes and to meet more stringent EU and US fuel specifications.

This article from World Oil paints an interesting picture – a stand-off between those who were prepared to sell on even when oil prices plummeted and those that preferred to keep their oil in reserve and wait for higher prices to return.

 

 

Where is oil going

Oil prices continue to ratchet upwards – good news for the industry, not such good news for consumers.

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The key for companies to start investing again will be when they see this price rally continuing for a few years and an oil price high enough to generate good profits.

This report  suggests that  people are now looking at oil prices above $60 per barrel next year which would certainly provide sufficient margin for investment.

Pretty much every single fundamental that we have points to those commodity prices going up, not down,” Ryan Sitton, one of three elected members of the Texas Railroad Commission

To give you some idea of the impact that low prices have had, the article points out

In Texas alone, Sitton said, state regulators are processing less than a third of the oil and gas well permits they did just two years ago, highlighting the wariness companies have to drill and pump more.

However, not everyone is so optimistic, another commentator stated;

Investors don’t expect prices to climb above $53 at all for the rest of the decade, and most shale oil producers in the United States have begun planning for what they are calling a “lower for longer” price scheme

These differences of opinion often come about as a result of different agendas, which has always been a problem in the Oil industry.

Fingers crossed things are starting to look up.

Is this a turning point?

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After a year of low oil prices which have brought cheaper fuel for most but lack of investment leading to wage and job cuts in the oil and gas industry have we finally turned the corner?

This article in World Oil cites the 27% rise in crude prices in three days amid news that maybe Saudi Arabia and Opec are ready to discuss a cut in output as long as it is a global cut and not just Opec countries.

Some people are trying to downplay the news, maybe they are right, the price of oil seems to be being driven purely by speculators and market makers rather than supply and demand fundamentals.

Remember how many times in the past, when the oil price went up, we were told it was due to instability in the middle east?

Can the Middle East have ever been less stable than right now?  And yet oil is at lows not seen for 6 years.

It’s a strange World out there!

More news from Saudi Arabia

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Two new stories emerge today that underline a new dominance that Saudi Arabia is creating in the Oil Industry.

It is well known that as the most influential oil producer in the World, the actions of Saudi Arabia have significant influence over the global crude oil price (crude oil is a stabilised product that is sold to refineries around the world to be turned into ‘refined’ products such as gasoline, kerosene, diesel etc.).

In recent months Saudi has been increasing its output (as previously reported here) and will probably exceed Russia in the first two quarters of this year to regain top spot as the World’s largest oil-producing nation.

As I have postulated before, the aim of flooding the market with cheaper oil is to retain (and increase) market share and this is spelled out in an article from Downstream Today that states

“Saudi Arabia expanded its share of China’s oil market last month, outpacing rival producers as they compete to meet record demand from the world’s biggest energy consumer.”

It goes on to say;

“China’s imports from the Middle East producer jumped 37 percent from a year earlier to the highest level since July 2013, according to customs data. The world’s biggest crude exporter was the No. 1 supplier to the Asian nation, accounting for 17.4 percent of its overseas purchases, up from 15.1 percent in March. The next three largest sellers — Russia, Iran and Angola — lost market share.”

So the plan is clearly working. But low oil prices whilst good for refiners (and to a lesser extent petrol consumers) are bad for oil producers.  Saudi Arabia has already thought of this, and for some time has been building up refining capability in-Kingdom and out-of-Kingdom to take advantage as another article from Downstream Today outlines. I worked on the FEED phase of the Jizan refinery mentioned in the article – an amazing project and vision [VIDEO HERE];

“The kingdom now has stakes in more than 5 million barrels per day (bpd) of refining capacity, at home and abroad, landing it a place among the global leaders in making oil products. Its own target of 8-10 million bpd of refining firepower would eclipse even ExxonMobil.”

Why does this matter?

Well firstly, the statement that China is demanding more oil suggests an upturn in the global economy which is a good thing for all of us.

Secondly, additional refining capacity at state of the art (e.g. high efficiency) refineries located right next door to the oil sources will enable Saudi Arabia to make good margin on refined products during periods of low oil prices, which will enable them to sustain low crude oil prices for longer if they wish – this will hurt oil producers with a higher break-even price.

Finally, as well as flooding the market with cheap crude oil, they will also be able to supply cheap refined fuels across the Arab region and the wider world, putting further pressure on European refineries which are already struggling with high energy costs, aging plants and lack of investment. This in turn could lead to the closure of UK refineries, lost jobs and a greater reliance on imported fuels.

Governments across Europe (including our own) have failed to see this coming and continue to bicker over CO2, emissions, green renewables, taxation etc. Within the next 5 years it will become apparent to all that we are firmly in the grip of the Middle-East when it comes to our crude oil and refined fuels.

What Is In A Barrel Of Oil?

Basic refinery

After my recent post (on my politics blog) about oil reserves around the World, I received a comment with a couple of questions that I thought might make a good follow-up article on this blog.

okay. I’ve always wanted to ask this question of someone, now’s my chance….. hope you have the answer Paul…..

How many gallons (or even litres!!) are there in one barrel (in terms of crude oil I think).

You would expect there to be an easy answer, but it is muddied somewhat by different definitions of barrels and gallons, but official values based on Oil Industry standards;

A US Barrel of oil is 159 litres which is about 35 UK gallons or 42 US gallons

The second question was even more interesting;

I realise crude needs to be refined to get what we call petrol etc, so maybe a secondary question, how many gallons of petrol do we get from one barrel?

A barrel is a bit of a difficult measurement to be clear upon, whereas at least gallons or litres are easier to visualise in everyday terms

The amount of petrol (gasoline) that is distilled from a barrel of crude oil depends on the type of crude, which varies enormously across the World.  There are many variables and impurities including; sulphur, metals, paraffins (wax), nitrogen, oxygen etc. that all impact the way the crude is processed.

The main variable however is the assay of the crude which determines how much of the various fractions are present to form the main refinery products; natural gas, propane/ butane, gasoline, diesel, fuel oil, heavy fuel oil, bitumen etc.

There are a number of grades of crude oil; ‘Light’ or ‘Extra Light’ contain larger quantities of gasoline and are correspondingly more expensive. A medium crude contains less gasoline and more heavier material. A heavy crude may contain 70% heavy material and is very difficult (and expensive) to process but is also a lot cheaper.

The aim of a modern refinery isn’t normally to just separate the various components of a barrel, but also to ‘upgrade’ heavy products into lighter, more saleable products through a number of energy intensive (usually high temperature and high pressure) processes.  These cause the longer heavier carbon chains to ‘crack‘ into shorter lighter (more valuable) chains.

Different refineries are set up in different ways. Some aim to produce more gasoline, others more diesel. Some will specialise in ‘bottom of the barrel’ processes – meaning they are built to process heavy crudes and residues – others will be simple topping or hydroskimming refineries.

It is therefore difficult to to give a specific answer, but after looking over a range of refinery outputs of different types, a ‘typical’ barrel of oil will generate something like;

Product 159
Gasoline 47% 74.73 litres
Heating Oil/ Diesel Fuel 19% 30.21
Jet Fuel (Kerosene) 11% 17.49
Natural Gas Liquids (Propane, Butane etc.) 6% 9.54
Natural Gas 4% 6.36
Other 13% 20.67

Refiners Back Wrong Product

petrol fillup

This recent report shows how fragile the refining business is.  New refineries in the Middle East, that have been in planning and development for many years, are now coming on stream but producing the wrong products for a market that changes far more quickly.

“The configuration of the plants, designed to maximize diesel production, seems somewhat at odds with market trends that in recent months have shown stronger demand growth for gasoline and jet fuel than for middle distillates,” the agency said in its Oil Market Report.

It’s a risky market – people would do well to remember that when they complain about the ‘massive’ profits of the Oil Majors.

 

SATORP Reaches Full Production

Quick Note

 

I saw this report today that the SATORP refinery in Saudi Arabia reached it’s full 400,000 BPSD capacity last month.

A somewhat worrying comment from the report;

Europe’s refineries are too small and not sophisticated enough to compete with new plants, Chris Bake, executive director at Vitol, the world’s largest oil trader.

We’ll see.

 

Refinery Upgrade Surprise

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We read constantly about the hard times that refiners are having in Europe, and how narrow the margins are, but in a recent article in Hydrocarbon Processing ExxonMobil are upgrading their Slagen refinery in Norway  with a new residual flash tower.

This is on top of a recently announced major upgrade at their Antwerp facility.

What do we read into this?  Either times aren’t quite as tough and there is money to spend on further improvement, or margins are really tight and improvements are being made to keep the operations viable.

On a personal note, I was offered a job with Exxon Mobil a few years ago and was very tempted, it was just the location down in Southampton (and moving Vicky out of school) that held us back.

It also reminds me of a Crude Unit study I worked on a few years back where we added a Flash Tower to a crude column – to improve operability and enable the refinery to process different crudes from those it was designed to handle.

Ahh the good old days of Process simulation and plant modelling – these days I spend most of my day playing with manpower plans and justifying progress, I do miss the technical days, some times.