Market Update: Oil & Gas - June 2017 | KPMG | ME

Market Update: Oil & Gas - June 2017

Market Update: Oil & Gas - June 2017

A closer look on Chinese teapot refinery fuel exports, St Petersburg International Economic Forum, and Paris climate agreement.

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Paris Agreement

On 1 June, President Donald Trump announced in the White House Rose Garden that he would withdraw the US from participation in the Paris Agreement to address climate change. Withdrawal from the Paris Agreement could only be initiated in December 2019 (three years after it took effect) and seen through one year later. The president in his speech left open the option to “reenter” the agreement on better terms for the US, but it is unlikely that any steps would be taken soon toward this end. Another option for the US would be to withdraw from the United Nations Framework Convention on Climate Change (UNFCCC), the treaty underpinning international efforts to address climate change. The latter option would be far more drastic, and therefore less likely. Nonetheless, from a GHG reduction standpoint, the debate over whether or not Trump should withdraw the US from the Paris Agreement was largely symbolic, given that the administration has been actively dismantling policies and regulations meant to underpin the Paris targets anyway (notably, the Obama administration’s Clean Power Plan).

 

US withdrawal from the Paris Agreement is undoubtedly a blow to international efforts to address climate change, given that the US is the world’s second-largest emitter and that US commitments under the agreement represented an outsized portion of the overall targeted emissions cuts. Nonetheless, the lack of US participation by no means signals an unraveling of the Paris Agreement. It remains highly unlikely that other signatories to Paris would follow the US’ lead and withdraw. An important development in international climate politics in recent years has been the more active participation of China (and more recently, India) in taking on emissions commitments. Though economic growth remains an overarching imperative for developing countries, climate policies are increasingly aligning with other pressing priorities such as air quality, industrial policy, and energy security.Within the US, climate action will be redirected to states, cities, and companies, many of which will continue to take action for political or economic reasons. In fact, several states (notably California) have taken on more aggressive carbon and clean energy targets in direct defiance of federal backtracking on climate. This will most likely continue, especially in blue states, but even in some red states that have seen growth in their renewables sectors. Nonetheless, for US energy companies, the lack of bipartisan consensus on the issue of climate change will extend energy policy uncertainty and unpredictability based around the political cycle.

Divya Reddy,Practice Head, Global Energy & Natural Resources, Eurasia
Group*

 * Guest contributor to June edition

Export Bans on Chinese Teapot Refinery Fuel Exports

In late 2015, the Chinese government loosened export quotas, and began allowing the exporting of refined fuel products.  This had the impact of allowed Chinese “teapot” refineries, small independent refineries, to enter the international energy markets, and enabled them to compete alongside the ‘big four’ state-run refineries.  These teapot refineries have absorbed up to 1.64 mbpd of crude oil, representing 12% of China’s total crude imports.  Last month, in order to address domestic refining overcapacity concerns, the National Development & Reform Commission (NDRC) announced that it would stop accepting new applications, alongside greater scrutiny on the teapots’ tax practices.

 

The relatively low-cost base and small-scale of the Chinese teapot refineries has drastically shifted the balance in the Chinese fuel market in the past 18 months.  Many of the gains realized by these independent refiners has been at the expense of the state-owned refineries.  Once the domestic supply glut drains, the state-run refineries should be able to breathe easier; with a number currently considering run cuts.  China’s strong fuel demand and this latest export-restriction on independent teapot refiners, bodes well for the state-run refineries.

Oliver Hsieh, Director, Commodity & Energy Risk Management, KPMG in
Singapore

St Petersburg International Economic Forum

The St Petersburg International Economic Forum came to a successful close on June 2. Major topics included the dynamics of the global economy, the Russian economic agenda, tech disruptors, the human factor, and future economic developments.

 

The oil and gas industry played a prominent role in this year’s Forum. Almost all the CEOs of IOCs and NOCs were in attendance. Energy-related themes included the following:

 

Today’s price of crude is the "new normal." Given current and expected levels of supply, production and market demand, the lower oil price is here to stay for a prolonged period.

 

The industry is shifting from oil to natural gas. Companies are recognizing the long-term advantages of gas in terms of price and demand. They are rebalancing their portfolios accordingly.

 

NOCs see a bright future. NOCs are steadily overtaking IOCs in terms of greater volumes and lower production costs. Although IOCs have reduced capital spend and increased borrowing to meet their dividend commitments, the IOC business model seems to be under threat because production costs have not been brought into alignment with current oil prices.

 

Greater international coordination is needed. Saudi Arabia, the US and Russia could work together to further balance the oil market. This would be in the interest of all stakeholders, including US shale producers.

 

Alternative energy is a small but growing issue. Uncertainty regarding the internal combustion engine and alternative energy sources creates additional strategic issues for the industry, however the possibility of serious disruption to companies is still considered to be remote.

– Anton Oussov, Global Head of Oil & Gas and Head of Oil & Gas in Russia and the CIS, KPMG in Russia

Analyst estimates: oil

  2017 2018 2019 2020
Min 50.0 55.0 60.0 65.0
Average 57.1 63.3 70.0 75.0
Median 56.8 61.5 67.5 75.0
Max 64.9 80.0 85.0 85.5
 
  2017 2018 2019 2020
April Avg 58.7 65.4 71.3 75.8
May Avg 57.1 63.3 70.0 75.0
April Median 57.5 65.0 70.0 75.0
May Median 56.8 61.5 67.5 75.0

Analyst estimates: gas

  2017 2018 2019 2020
Min 2.8 2.9 2.9 3.2
Average 3.2 3.2 3.3 3.5
Median 3.2 3.1 3.2 3.3
Max 3.5 4.0 4.0 4.0
         
  2017 2018 2019 2020
April Avg 3.2 3.2 3.3 3.5
May Avg 3.2 3.2 3.3 3.5
April Median 3.3 3.1 3.2 3.4
May Median 3.2 3.1 3.2 3.3

Note: The forecasts/analyst estimates identified are an indication based on third party sources and information. They do not represent the views of KPMG.

The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.

© 2017 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.

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