Forces beyond demand growth reshaping trade in oil and gas

Aug. 1, 2005
Patterns of trade in oil and natural gas, while never static, are entering a period of fundamental change.

Patterns of trade in oil and natural gas, while never static, are entering a period of fundamental change. Demand for both fuels is not only increasing worldwide but also changing in other ways that will create broad shifts in the movement of hydrocarbons.

Elements of these changes already are manifest in major projects in specific areas. Crude has begun to move from the Caspian Sea to the Mediterranean, for example, and Caspian gas soon will begin moving westward along part of the same route (OGJ, June 27, 2005, p. 61). Long crude oil pipelines are planned from Russia and Kazakhstan to Japan and China (OGJ, July 18, 2005, p. 52). Export pipelines from Canada to the US are expanding to accommodate growing production from Alberta’s oil sands. And long-static trade in LNG has begun to zoom as liquefaction capacity expands, the carrier fleet grows, and import terminals come on stream.

Beyond specific developments like those, broad trends are at work that will shape future oil and gas trade and require adjustment to traditional trading relationships.

In overall petroleum trade, rapidly increasing consumption by developing countries will claim a growing share of exports, once dominated by industrial buyers, from members of the Organization of Petroleum Exporting Countries.

For natural gas, the rapid growth in trade of LNG is forcing attention to buyers and the volumes they’ll need as well as to prospects for additions to supply.

Within those general movements in trade of oil and gas, important changes also are under way in trade of petroleum products. Much of the needed expansion in global refining capacity will occur in countries that now mostly export crude oil, which will create important new sources of internationally traded products. Product flow patterns are changing, too-but for different reasons-in the Atlantic Basin and East of Suez markets.

Shifting oil trade

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The US Energy Information Administration’s most recent International Energy Outlook highlights the growing share of future OPEC and Persian Gulf exports destined for developing countries (Fig. 1).

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Through 2025, EIA noted, the amount of oil flowing from OPEC exporters to industrial importers will grow. But oil movement to developing countries will grow even more (Table 1).

“The significant shift expected in the balance of OPEC export shares between the industrialized and developing nations is a direct result of the economic growth anticipated for the developing nations of the world, especially those of Asia,” EIA said.

In its reference, or most likely, case, the agency expects OPEC exports to developing countries to increase by more than 18 million b/d during 2001-25. Three fourths of the increase will go to Asian developing countries.

“China, alone, is likely to import about 6.6 million b/d from OPEC by 2025, virtually all of which is expected to come from Persian Gulf producers,” the report says.

While North America’s oil imports from the Persian Gulf will double during 2001-25, more than half the region’s imports at the end of the forecast period will be from Atlantic Basin sources. EIA expects major increases in North American imports of crude oil from Venezuela, Brazil, Colombia, and Mexico and further increases from Nigeria, Angola, and other West African producers. Most of North America’s increase in product imports will be from Caribbean Basin refiners.

Western Europe’s oil imports will grow during the study period as North Sea production declines, mostly from Persian Gulf producers and OPEC members in North and West Africa. The region also will receive growing volumes from the Caspian region.

EIA said the already heavy dependence of industrialized Asian countries on Persian Gulf oil will increase. Total oil imports by developing Pacific Rim countries will nearly double during 2001-25.

Gas trade accelerating

Growth of trade in natural gas is accelerating in response to steady increases in demand for the fuel, especially in power generation.

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In its latest energy outlook, ExxonMobil Corp. projects total regional trade in natural gas to grow 2.2%/year and reach 48 bcfd in 2010, 85 bcfd in 2020, and 110 bcfd in 2030 (Fig. 2). It expects about 75% of gas demand growth during 2000-30 to be in developing countries and half of total demand growth to be for power generation.

A more-detailed projection of future gas trade appears in a recent study entitled World Natural Gas: Demand, Supply and International Trade to 2030 by Dr. Muhammad Ali Zainy of the Centre for Global Energy Studies, London ([email protected];

The study forecasts growth in global demand for gas at 2-3.2%/year during 2003-30, with a most likely rate of 2.5%/year-the highest rate among all primary sources of energy.

Gas trade in 2030, the study predicts, will total 1.406-2.285 trillion cu m (tcm), with a most likely volume of 1.771 tcm. That value would be about 2.8 times total gas trade in 2003, reflecting average growth of 3.8%/year. It includes 1.137 tcm to be moved through pipelines and the rest transported as LNG.

Top gas-importing countries in 2030, according to the CGES study, will be the US, 289 billion cu m (bcm); Germany, 134 bcm; China, 117 bcm; Japan, 108 bcm; Italy, 101 bcm; Turkey, 90 bcm; India, 72 bcm; France, 68 bcm; Spain, 60 bcm; and South Korea, 59 bcm.

The study predicts the top gas exporting countries in 2030 will be Russia, 632 bcm; Qatar, 200 bcm; Algeria, 164 bcm; Iran, 159 bcm; Canada, 86 bcm; Nigeria, 78 bcm; Norway, 70 bcm; Iraq, 55 bcm; Egypt, 48 bcm; and Australia, 44 bcm.

LNG trade, the CGES study says, will grow from 169 bcm in 2003 to 634 bcm in 2030. Qatar will be the top LNG exporter, followed by Algeria, Nigeria, Australia, Venezuela, Trinidad and Tobago, Iran, and Indonesia.

“This almost fourfold increase in the size of LNG trade will imply that the world’s natural gas liquefaction capacity will need an additional 286 million tonnes/year in 2030 over and above the liquefaction capacity now existing and presently under construction,” the study says. It estimates cost of the additional capacity at $43 billion (2005 prices).

LNG importers will need regasification capacity of 413 bcm/year by 2030 beyond capacity existing and under construction. The estimated cost of the additional capacity: $17 billion.

The projected 2030 LNG trade will require 247 LNG carriers, based on an average size of 137,000 cu m.

The CGES study notes development of trade based on the conversion of natural gas to liquids (GTL), citing Qatar as the probable leading exporter. It projects the country’s GTL capacity at about 800,000 b/d of ultralow-sulfur diesel, naphtha, and high-quality base stocks by 2010.

“Some other gas-rich countries and those with stranded gas deposits will follow suit,” the study says. “GTL will not compete with LNG because they are destined to different markets, but they will compete in the area of monetization of natural gas deposits, and economics will decide each individually.”

Supply questions

Like oil, however, LNG has supply limits. In a paper presented at the Asia Oil & Gas Conference June 12-14 in Kuala Lumpur, two representatives of FACTS Inc., Honolulu, pointed out that LNG supply can’t grow indefinitely.

In the Middle East, said FACTS Pres. Fereidun Fesharaki and consultant Alexis Aik, Yemen, Oman, and Abu Dhabi “have run out of supplies.” And it’s a mistake, they said, to assume Qatar has limitless supply.

“We believe somewhere around 100 million [tonnes/year] might be the limit” for Qatari LNG supply. “About 80 million tonnes are already committed.”

Iran’s LNG export potential, the analysts said, is limited to 20-30 million tonnes/year plus small amounts of pipeline gas. Their reasons: The country has an extensive pipeline grid that makes gas available for domestic uses for 1¢/cu m. The Iranian oil industry needs an estimated 10 bcfd for gas injection. Gas needs of Iran’s large petrochemical industry are great. The country is encouraging the use of compressed natural gas for vehicle use. And gas exports face major political opposition.

Fesharaki and Aik said the rapid entry of the US, China, and India into LNG trade will push up LNG prices, which already are elevated by high oil prices.

The US entered the LNG market “from virtually zero, early in the decade,” and probably will become the second largest LNG importer, after Japan, by 2010, they said. The US will surpass Japan as an LNG importer after 2015.“The entry of a huge importer in such a short span, plus the high oil prices, will surely make LNG prices rise and cause the market to become very tight,” they said.

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With China and India “on a path towards massive new LNG imports” and US and South Korea demands growing, the analysts asked, “Where will all the gas come from (Table 2)?”

Product trade

In oil, the expected growth in OPEC dominance of overall trade and the rising claim by nonindustrialized importers on OPEC supplies tend to overshadow adjustments in store for product movements.

An important change is taking shape in sources of products in global trade. EIA has noted that the new refineries required by a growing market probably won’t be built in the high-demand areas of the US and Europe.

The reference case of its 2004 international outlook projected the need for 40 million b/d of new refining capacity by 2025, nearly a 50% increase over global refining capacity at the beginning of 2002.

It predicted “substantial growth” in distillation capacity in the Middle East, Central and South America, and especially the Asia-Pacific region.

Refiners in North America and Europe, EIA said, will concentrate on improving product quality and improve their abilities to convert heavy intermediates to light products. Their additions modest.

Atlantic Basin trade

At the same time, the Atlantic Basin market inclines increasingly toward diesel on its eastern flank and toward gasoline in the west.

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In Europe, growing demand for diesel and declining demand for gasoline have accelerated exports of the latter product to the US, where demand is growing for both fuels. The tilt is increasing because of diesel’s environmental advantages, only partly offset by diminishing European demand for distillates other than diesel, mainly heating oil (Fig. 3).

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Except for the UK, the major European countries favor diesel over gasoline with tax preferences (Fig. 4). At the Energy Institute’s International Petroleum Week last February in London, Jean Jacques Mosconi, Total SA Downstream Division senior vice-president, strategy and development, said the emphasis likely will last.

European governments, he explained, prefer diesel to gasoline as a way to reduce emissions of most air pollutants and to cut emissions of carbon dioxide. Improvements in diesel engine technology will enhance diesel’s environmental advantages, Mosconi added. As a result, diesel’s dominance as a truck fuel will grow, as will the share of diesel-fueled cars in many countries of Western Europe.

Mosconi said that, by 2015, demand for diesel might be two and a half times that for gasoline in Europe-and five times that for gasoline in France.

European refiners, however, will continue to make gasoline, which, being surplus to local markets, will be increasingly available for export.

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Product and location value differentials reflect these patterns and create a strong attraction for surplus European gasoline to the US, the National Petroleum Council said in a report late in 2004. It used a comparison of the gasoline-gas oil (distillate) price spreads between the Mediterranean and Western Europe markets to show what’s happening (Fig. 5).

The Mediterranean pattern approximated that of Western Europe until 2001, NPC noted, with gasoline values growing relative to distillate during 1996-99 as new environmental standards affecting the former fuel came into effect. After 1999, the value differentials narrowed as distillate demand grew. In the Western Europe market, though, the gasoline premium jumped after 2001 and continued to grow through 2003.

“This suggests that gasoline in Rotterdam is now being valued into New York Harbor as opposed to being valued into the local market,” NPC said. The Mediterranean market historically has been less affected by conditions in the US than the Rotterdam market, which is closer to the US East Coast.

“This price trend in Rotterdam is consistent with the increase in Western European gasoline exports to the US,” NPC said. The trend is likely to continue.

“Given the expected demand trends in Europe, European refiners are likely to be able to produce additional quantities of gasoline surplus to the local markets for several years,” NPC said. “The US East Coast is a logical outlet for these supplies.” Volumes of this increased trade will depend on the cost of imports relative to incremental US production and gasoline values in other potential markets.

East of Suez

Future products trade in the East-of-Suez market will be shaped by rapidly changing refining dynamics in Asia, Fesharaki and Aik said at the Kuala Lumpur conference in June.

Asian demand, led by China and India, remains strong, yet additions to Asian refining capacity are limited in the short term, the analysts said.

China cannot build enough refining capacity to keep up with demand. And India is building capacity too fast and will have to export “huge volumes” of products.

According to Fesharaki and Aik, refinery construction in Asia will concentrate on upgrades motivated by environmental quality changes rather than new capacity. But, they warned, “It will not take much to overbuild refineries and bring down margins.”

A slowdown in Chinese demand due to a political crisis “can itself create a refining surplus very quickly,” they said.

Worldwide, the analysts said, refining margins will subside from the large values of 2004 but remain strong. For environmental reasons, the ability to add refining capacity is limited in Europe and the US.

Like NPC, they noted what they called Europe’s “dieselization,” which will make gasoline available for export to the US.