Tag Archives: oil industry

The Global Oil Chokepoints and the War in Yemen

global oil chokepoints

Fighters from Yemen’s Houthi militia entered  on March 31, 2015 a coastal military base overlooking the Red Sea’s strategic Bab el-Mandeb strait, local officials told Reuters.  Soldiers of the 17th Armored Division in the Dabab district in Yemen’s southwestern Taiz province opened the gates to the Houthis, whose military advance has been challenged by six days of Saudi-led air strikes. This means that Houthi rebels have a foothold along one of the world’s crucial oil chokepoints.    According to the US Energy Information Administration’s (EIA) fact-sheet on global oil chokepoints, 3.8 million barrels of oil and “refined petroleum products” passed through the Bab el-Mandeb each day on its way to Europe, Asia, and the US, making it the world’s fourth-busiest chokepoint.  The strait controls access to multiple oil terminals and to a oil pipeline co-owned by state companies from Egypt, Saudi Arabia, the United Arab Emirates and Qatar that transits oil between the Red Sea and the Mediterranean Sea, called the Suez-Mediterranean or SUMED pipeline.  The Bab el-Mandeb is 18 miles wide at its narrowest point, “limiting tanker traffic to two 2-mile-wide channels for inbound and outbound shipments,” according to the Energy Information Administration.

“Closure of the Bab el-Mandeb could keep tankers from the Persian Gulf from reaching the Suez Canal or SUMED Pipeline, diverting them around the southern tip of Africa, adding to transit time and cost,” the EIA fact-sheet explains. “In addition, European and North African southbound oil flows could no longer take the most direct route to Asian markets via the Suez Canal and Bab el-Mandeb.”

Recent events in Yemen, where a Saudi-led Arab military coalition is fighting to restore president Abd Rabbu Mansur Hadi against an Iranian-backed insurgent movement, have already jolted global oil prices.

Excerpt from ARMIN ROSEN,  Iran-backed Houthi militants in Yemen just captured a military base along one of the world’s major oil lanes, Reuters, Mar. 31, 2015

More from wikipedia: On February 22, 2008, it was revealed that a company owned by Tarek bin Laden is planning to build a bridge  across the Bab el-Mandeb strait, linking Yemen with Djibouti.  Middle East Development LLC, a Dubai company owned by Tarek bin Laden, would build the bridge. The project has been assigned to engineering company COWI in collaboration with architect studio Dissing+Weitling, both from Denmark.

Economics and Environmental Impact of Oil Shale Production

oil shale combustion. Image from wikipedia

[A] second shale revolution is in prospect, in which cleaner and more efficient ways are being found to squeeze the oil and gas out of the stone. The Jordanian government said on June 12th that it had reached agreement with Enefit, an Estonian company, and its partners on a $2.1 billion contract to build a 540MW shale-fuelled power station. Frustratingly for Jordan, as it eyes its rich, oil-drenched Gulf neighbours, the country sits on the world’s fifth-largest oil-shale reserves but has to import 97% of its energy needs.

In Australia, Queensland Energy Resources, another oil-shale company, has just applied for permission to upgrade its demonstration plant to a commercial scale. Production is expected to start in 2018. Questerre Energy, a Canadian company, also said recently that it would start work on a commercial demonstration project, in Utah in the United States.

In all these projects, the shale is “cooked” cheaply, cleanly and productively in oxygen-free retorts to separate much of the oil and gas. In Enefit’s process the remaining solid is burned to raise steam, which drives a generator. So the process produces electricity, natural gas (a big plus in Estonia, a country otherwise dependent on Russian supplies) and synthetic crude, which can be used to make diesel and aviation fuel. The leftover ash can be used to make cement. Enefit’s chief executive, Sandor Liive, says his plants, the first of which started production in December 2012, should be profitable so long as oil prices stay above $75 a barrel (North Sea Brent oil was around $113 this week).

Although the new methods of exploiting the rock are cleaner than old ones, environmentalists still have plenty to worry about. Oil shale varies hugely in quality. Estonia’s is clean, Jordan’s has a high sulphur content, Utah’s is laden with arsenic. Like opencast coal mining, digging up oil shale scars the landscape. Enefit has solved that in green-minded Estonia, by landscaping and replacing the topsoil. Other countries may be less choosy.

Some of the world’s biggest energy firms have also experimented with mining and processing oil shale, only to give up, after finding that it took so much energy that the sums did not add up. However, Shell says it is making progress with a new method it is trying, also in Jordan, in which the shale is heated underground with an electric current to extract the oil.

These rival technologies have yet to prove their reliability at large scale—and they are far from cheap. Mr Liive reckons it will cost $100m to get a pilot project going in Utah (where his firm has bought a disused oil-shale mine), and another $300m to reach a commercial scale. A fall in the oil price could doom the industry, as happened in the 1980s when a lot of shale mines went out of business…America this week loosened its ban on crude exports. If the second shale revolution succeeds, it will have a lot more oil to sell.

Oil shale: Flaming rocks, Economist, June  28, 2014, at 58

The Thirst for Commodities: loans-for-oil deals

china latin america

China’s demand for commodities has entrenched Latin America’s position as a supplier of raw materials. The country guzzles oil from Venezuela and Ecuador, copper from Chile, soyabeans from Argentina, and iron ore from Brazil—with which it signed a corn-import deal on April 8th.   Chinese lending to the region also has a strong flavour of natural resources. Data are patchy, but according to new figures from the China-Latin America Finance Database, a joint effort between the Inter-American Dialogue, a think-tank, and Boston University, China committed almost $100 billion to Latin America between 2005 and 2013 (see chart). The biggest dollops by far have come from the China Development Bank (CDB). These sums are meaningful. Chinese lenders committed some $15 billion last year; the World Bank $5.2 billion in fiscal year 2013; foreign commercial banks lent an estimated $17 billion.

More than half of China’s lending to Latin America has been swallowed by Venezuela, which pays much of the loan back from the proceeds of long-term oil sales to China. Ecuador has struck similar deals, as has Petrobras, Brazil’s state-controlled oil firm, which negotiated a $10 billion credit line from CDB in 2009.

Such loan-for-oil arrangements suit the Chinese, and not simply because they help secure long-term energy supplies. They also reduce the risk of lending to less creditworthy countries like Venezuela and Argentina. Money from oil sales is deposited in the oil firm’s Chinese account, from where payments can be directly siphoned.  It is no surprise that Chinese money is welcome in places where financial markets are wary. Ecuador, which defaulted on its debts in 2008, has used Chinese loans both to fill in holes in its budget and to re-establish a record of repayment in advance of trying to tap bond markets again.

But Chinese credit has its attractions in other economies, too. It often makes sense for countries to diversify sources of lending. Loans can open the door to direct investment. And as Kevin Gallagher of Boston University points out, the Chinese banks operate in largely different sectors to the multilaterals. Of the money China has lent in the region since 2005, 85% has gone to infrastructure, energy and mining. Borrowers may have to spend a proportion of their loan on Chinese goods in return; some observers worry about the laxer environmental standards of Chinese banks. But the main thing is that money is available. Expect the loan figures to rise.

Chinese lending to Latin America: Flexible friends, Economist,  Apr. 12, 2014, at 27

Oil Industry Resistant to Change

Global efforts to drastically reduce toxic sulfur emissions in the shipping industry will likely be delayed for years due to the reluctance of refiners to invest billions of dollars to produce cleaner burning fuel.  The U.N. shipping agency, International Maritime Organization (IMO), has set a 2020 deadline for the maritime community to slash the amount of sulfur burned by the global fleet, blamed for thousands of deaths every year.  The IMO estimates the industry needs to invest nearly $150 billion in secondary refining capacity to ensure enough supplies are available.

IMO’s cap can only be realistically met through the use of cleaner burning fuels, known as middle distillates, already in short supply due to high demand from automobiles, airplanes and power stations. As a result of the changes, demand for such fuels could rise by up to 50 percent, or an additional 600 million tones, from current levels by 2030, according to estimates by oil major ExxonMobil. “This represents a major increase in distillate demand, a product that has experienced high growth even without the marine fuel growth,” said Vincent Chong, global head of ExxonMobil’s marine fuel division.

Gas oil, a key middle distillate product, accounted for 42 per cent of global oil products growth in the third quarter of 2010, expanding twice as quickly as the same period in 2009, according to the International Energy Agency’s December oil market report.  Cheaper high-sulfur residual fuel oil (HSFO) — the sludgy, bottom of the barrel residue left behind from refining more profitable fuels — is most commonly used by ships now.  If the cap is imposed, refiners will have to scramble for waytonessing up millions of tones of the fuel. Global residual fuel production in 2010 is estimated at around 570 million tones with residual bunker consumption at around 190-200 million tones, according to a study by energy consultants Poten & Partners.

The shipping industry, which transports about 90 percent of the world’s traded goods by volume, does not believe enough low sulfur marine fuel will be produced in time for its more than 50,000 merchant vessels.  “We will monitor the 2020 deadline very carefully because we believe the bunker fuel supplies to meet the limits may not be available,” said Torben Skaanild, chief executive of BIMCO, the world’s largest ship owners’ association.

Although seaborne trade contributes less than 10 percent of global sulfur emissions, the burning of bunker fuel by ships is blamed for 60,000 cancer-related deaths worldwide each year, according to a published 2007 study.  To help prevent this, the IMO has passed regulations to cut sulfur emissions by more than 80 percent by reducing the air pollutant’s presence in marine fuel to 0.5 percent by 2020 from the current global average of 2.7 percent.

Some refiners have earmarked funds to make the necessary upgrades to meet the expected rise in demand. South Korea’s No.2 oil refiner GS Caltex will invest almost $1 billion to raise its capacity to convert heavy oil into cleaner fuel by a quarter from 2013, as it races to bethe country’s top producer of high-value distillates.  Around 20 percent of a refiner’s output comprises residual fuel oil, according to ballpark estimates from industry officials.  Analysts, however, do not expect enough refiners would agree to the needed investment within the relatively tight timeframe.  “Show refiners the money and they’ll likely show you the barrels,” said Poten & Partners.  “But these barrels of marine distillate might not be readily available everywhere and they might come with a sticker price that might shock some people.”  But even if a refiner decides to upgrade its facility, it can take a decade or more to fully execute the changes, making the 2020 deadline unrealistic, analysts said.

Another alternative was for refiners to “desulfurize” HSFO into a lower-sulfur version, an option that provides little economic benefit for the industry.  “Considering the gap between low sulfur fuel oil and HSFO prices, it does not seem to be attractive for any new refiners to invest in new processes or change their oil basket to raise LSFO output,” said Eduardo Bertonha de Campos, a market analyst with Petrobras.

Despite the complexity of the marine fuel conundrum, a potential cure-all exists in the form of exhaust abatement technology, also known as scrubbers.  In theory, this onboard system removes sulfur emissions from marine fuel, effectively allowing heavy sulfur fuel to be used while satisfying the upcoming curbs.  “The 2020 date is sufficiently far away enough in the future,” said Eivind Vagslid, head of the IMO’s chemical and air pollution prevention section. “We hope there will be a combination of new refinery capacity and the use of scrubbers.”

But the industry was divided over whether the technology would be ready for mass adoption since it was still being tested and manufactured by only a handful of companies worldwide.  “Scrubbers won’t be the silver bullet. A sizeable portion of the fleet will still need to rely on low sulfur fuel being available,” said Kurt Barrow, vice president of Purvin and Gertz.

Others options are the use of alternative fuels like liquefied natural gas (LNG) and biofuels, but critics again doubted their suitability for widespread use.  LNG would make up only 5 percent of bunker use by 2025 due to the cost of retrofitting vessels to use the new fuel, said Robin Meech, managing director of UK-based Marine and Energy Consulting.  Given the issues at hand, many affected parties were pushing for the IMO deadline to be extended. An IMO committee was expected to review the supply issue by 2018, and could push the deadline back to 2025.  “I don’t think there is a single solution that can surmount the challenges that lie ahead,” said Exxon’s Chong.

By Francis Kan and Randy Fabi, Analysis: Refiners threaten anti-pollution efforts in shipping, Reuters, Jan. 17, 2010