DEMONETISATION DRIVES PETROLEUM DEMAND

Monthly Oil News Commentary: November – December 2016

India

The demonetisation drive has reportedly increased fuel demand by 12.1 percent in November. Petroleum product consumption is reported to have increased to 16.64 MT from 14.85 MT the same month in FY16.  Petrol consumption increased by 14.24 percent to 2.03 MT while diesel sales increased by 10.47 percent to 6.75 MT. But compared to October, the sales were up only marginally. 16.55 MT of petroleum products were sold in October 2016 with petrol sales at 2.11 MT and diesel at 6.67 MT. LPG sales in November surged 16.5 percent to 1.88 MT and Naphtha consumption was up 6.9 percent to 1.08 MT when compared with the same month in FY16.

One of interesting observations from Petrotech was the remark from the Secretary General of OPEC Mohammed Sanusi Barkindo said India’s oil demand would almost double to 10 mbpd by 2040 from the present 4.1 mbpd and being an important oil consumer, the country would play an important role in oil market stability. He also observed that for OPEC India represented an important source of rapidly growing oil demand now at its highest, at nearly 300,000 bpd, that surpasses China’s demand growth. According to OPEC global demand is forecast to increase by nearly 17 mbpd until 2040 when it could reach around 110 mbpd. Emerging and developing economies in Asia are expected to make up roughly 70 percent of this growth, which is being spurred on by the region’s population growth, a rapidly expanding middle class, urbanisation and industrialisation. OPEC says that $10 trillion of investment is required in the oil sector till 2040 to maintain production supplies to meet the needs of consumers. The Secretary General made a case for sustaining oil prices at a higher level to ensure stability in prices. Oil revenue has already declined 26 percent in 2015 and is projected to decline by 22 percent in 2016. Combined, this amounts to more than $300 billion and this trend is expected to extend into its third year according to the Secretary General of OPEC.

Reuters reported that Iran overtook Saudi Arabia as India’s top oil supplier in October.  Iran used to be India’s second-biggest oil supplier until it was put under sanctions when Iraq took its place.  In October Iran’s oil imports to India surged threefold compared with the same month last year, rising to 789,000 bpd. That compares to 697,000 bpd supplied last month by Saudi Arabia. Over the whole January to October period, though, Saudi Arabia still holds India’s top supply spot, at an average of 830,000 bpd versus Iraq’s 784,000 bpd and Iran’s 456,400 bpd. The surge from Iran is attributed to Iranian price discounts and increase in Saudi refining capacity.

Rest of the World

China, the world’s fifth-biggest producer last year, has reportedly reduced output by about 300,000 bpd this year, more than the combined cuts announced by non-OPEC countries, excluding Russia, as part of a deal coordinated with the producer group. The decline is expected to continue next year, with Chinese production shrinking as much as 200,000 bpd. Malaysia and Brunei were reported to be the only Asian nations in the group of producers outside the OPEC that agreed to cut output by a combined 558,000 bpd starting 1 January 2017. The region will use 32.88 mbpd accounting for more than a third of global consumption, according to data from the IEA.

The IEA’s World Energy Outlook 2016 says that global oil consumption will not peak before 2040, leaving its long-term forecasts for supply and demand unchanged despite the 2015 Paris Climate Change Agreement entering into force. While demand for oil to power passenger cars, may drop, other sectors may offset this fall. From 2020, the EU is expected to impose much tougher legislation to control vehicle emissions, which many expect to quickly erode use of traditional fuels such as gasoline and diesel, a major source of oil demand.

FY: Financial Year, OPEC: Organization of the Petroleum Exporting Countries, mbpd: million barrels per day, LPG: liquefied petroleum gas, IEA: International Energy Agency, MT: Million Tonnes, EU: European Union

Courtesy: Energy News Monitor | Volume XIII; Issue 28

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DOMESTIC COAL PRODUCTION: LESS IS MORE?

Monthly Coal News Summary: June 2016

India

Coal India Limited (CIL)’s choice now between the devil and the deep blue sea. On the one hand, the visible hand of the Government is exerting tremendous pressure on CIL to achieve the target of 1 billion tonnes (bt) coal production by 2020 while on the other hand. On the other hand there is the invisible hand of the market signalling that it cannot absorb a large increase in the supply of coal. What the State appears to have underestimated is the power of the invisible hand over its own iron hand. News reports in June confirmed CILs dilemma. CIL’s coal output in June was reported to be 42.72 million tonnes (mt) which was 99% of its target of 43.31 mt for June. Between 2010 and 2014 CIL production increased only by 31 mt while it recorded an increase of 32 mt in 2015-16 alone which was a growth rate of 9.8% a year.  The Government of India has set CIL a target of 598 mt production for the current financial year (2016-17). Total coal output increased to 626 mt in 2015-16 of which 90% was from state owned companies under CIL. There was also more news confirming the expectation that India is well on its way to hit the target of producing 1 bt of coal by 2020 based on a report from PricewaterhouseCoopers (PwC) a consultancy. The PwC report argues that production from 535 mines should add up to 908 mt of coal close to the target of 1 bt. The increase in coal production has increased available coal stock with power plants from hardly 3-7 days earlier to over 24 days. But this state driven boost in supply did not automatically translate in to increase in demand. Many power generators from States such as Uttar Pradesh, West Bengal, Haryana and Maharashtra are reported to have written to CIL asking it to back down coal supply as they are facing low demand for power and in addition have run out of space for storing coal. CIL is reported to be trying to promote higher quality coal at a higher price to make up for the shortfall in demand for cheap coal.  This will probably put CIL in competition with imported coal. The government is also seems to be lending a helping hand by increasing flexibility in how state owned companies use coal linkages and also by increasing options for private power generators.

Given the increase in domestic coal production it is not a surprise that import of coal falling (please refer to Data Insight). Import of coal is reported to have fell from 212 mt in 2014-15 to 193 mt in 2015-16. Of the total coal imports 80% was thermal coal.  It is probably safe to say that coal imports in India may have peaked after demonstrating unprecedented growth in the last ten years. Between 2011 and 2016 alone coal imports increased by 25%. While India’s coal imports are showing a declining trend, it was also reported that India’s coal imports may be shifting from quantity to quality.  Thermal coal importers in India were reported to have shifted their preference to higher quality coal from Australia, South Africa, Columbia and Russia from inferior quality coal from Indonesia. As per calculations by some analysts the calorific value of imported coal has not declined as much as the tonnage of coal imports. Though Indonesia continued to remain the largest exporter with 36.72 mt coal exports to India in the first five months of 2016, this was 20% lower than the 46.9 mt supplied in the same period last year. South Africa on the other hand increased export of 16.58 mt higher quality coal which was an increase of 26% over last year. Even Russia and Columbia have increased their export of coal to India. There was also positive news on the long-pending Jharsuguda- Barpali railway line in Odisha, one of the three critical links for faster transportation of coal in June. The link is expected to become operational next month. The other rail lines, Tori-Shivpur link in Jharkhand and East-West corridor in Chhattisgarh are expected to be completed by the end of this year. The three critical rail lines are expected to transport more than 200 mt of coal eventually.

Rest of the World

Coal was not an exception to the Brexit euphoria. It was reported that the change in Government in UK may improve prospects for coal power generation at the cost of renewable energy. Free from the EU mandate of phasing out coal by 2025 the UK may be in a position to bridge the anticipated gap between supply and demand for power with efficient coal based power plants. The other positive news for coal was that of Dubai’s Hassyan Energy Company, a joint venture between Dubai Electricity & Water Authority and ACWA Power Harbin Holding Company that is reported to be setting up a 2400 MW ‘best in class’ clean coal power plant.  Dubai aims to have about 7% of its power from clean coal and 61% from gas by 2050. Hassyan Clean Coal IPP will be the first clean coal power plant in the Middle East. The ultra-supercritical plant is expected to deliver best in class performance on efficiency, output and adherence to global environmental best practices.

Russian’s Gazprom was reported to have commissioned two new coal-fired power units in Russia totalling 1 GW. The group commissioned a 330 MW unit at the Novocherkasskaya and a 660 MW unit at the Troitsk power plant in the Chelyabinsk region. Poland, the coal rebel from Europe, was reported to be drafting legislation to help its coal-fired power producers to invest in new generating capacity. Coal power plants currently generate more than 80% of electricity in Poland, but many are old and need to be replaced to avoid power shortages in the future. 4 GW of coal power capacity is under construction in Poland. Poland has 39 GW installed coal based power generation capacity. Wholesale electricity prices in Poland are said to be too low to justify new investments and so the government is working on a scheme to provide them with incentives. But this will need approval from the European Commission as it might count as state aid. Japan too was reported to be burning record amounts of coal for electricity generation with plans to use even more to fill the gap after the Fukushima disaster paralysed its nuclear sector. However some of Japan’s powerful trading houses are said to be cutting or freezing coal investments over concerns about the studies that say that fossil fuel investments will become stranded assets. Japan recently gave environmental approval to three more coal-fired power plants out of 45 planned, though it agreed in Paris to cut carbon emissions by 26% by 2030 from 2013 levels. On the darker side, coal used to generate power in the United States was reported to be at its lowest monthly level since 1978 according to the U.S. Energy Information Administration (EIA). Coal-fired power plants generated only 72.2 million MWh in April their lowest since April 1978.  Natural gas surpassed coal as the United States’ top fuel source for the third straight month, producing 100.0 million MWh in April. Of the total 293.3 million MWh generated in April, gas accounted for 34% and coal for 25%. Ten years ago, coal produced 50% of the nation’s power supply, while gas accounted for just 19%. After shutting a record 17,500 MW of coal-fired power plants in 2015, energy companies in USA are reported to be planning closure of more than 13,000 MW of coal capacity this year on account of favourable gas prices, stringent environmental regulations and slowing demand. South Korea too announced closure of 10 ageing coal-fired power plants by 2025. Coal accounts for 40% of South Korea’s electricity supplies. In Paris, South Korea agreed to reduce emissions by 37% by 2030.  However South Korea is committed to building 20 new coal-fired plants by 2022. The share of total installed power capacity from coal was expected to fall from 26.2% by 2029 from 28% in 2015. While anti-fossil fuel activist groups are interpreting these developments as consequences of conscious policy driven shifts away from coal, it is the economics that is really driving the shift.  If natural gas was exorbitantly expensive as it was just a decade ago, both USA and Korea would have been burning coal for power generation.

Courtesy: Energy News Monitor | Volume XIII; Issue 5

IMPORTS CAST A SHADOW ON SOLAR POWER

Monthly Non-Fossil Fuels News Commentary: November – December 2016

India

The most fashionable non-fossil fuel source remains solar which kept up the momentum on generating positive news. India is reportedly generating 65.78 BU (or 5.60 percent of total generation of 1173.6 BU) from renewable energy sources in FY16. In November the media reported that India had crossed 10 GW solar capacity.  India was expected to become the world’s third biggest solar market next year, after China and the US.  An average annual capacity addition of 8-10 GW per annum is expected from next year. Utility-scale solar accounts for more than 85 per cent of the total installed capacity. Rooftop solar, so far about 10 percent of the sector, is reportedly grown at 98 per cent between 2011 and 2015. Among the states, Tamil Nadu has the highest installed capacity, followed by Rajasthan, Andhra Pradesh, Gujarat, Telangana, Madhya Pradesh and Punjab. These seven states collectively accounted for more than 80 per cent of total installed capacity.

A shadow was cast on the sunny story of solar energy in India by the statement by the concerned Minister that 84 per cent of solar cells and modules imports were from China alone in FY16. As much as $1.96 billion worth of solar cells and modules were imported from China against the total imports of these equipment of $2.34 billion in FY16. India imported solar cells and modules worth $820.95 million in FY15 including $603.34 million imports from China alone. Total wind power equipment imports were $727,741 which included $ 190,096 from China alone. It appears that Indian taxpayers and rate payers who ultimately underwrite India’s renewable energy push are also effectively subsidising solar jobs in China.

The saga of nuclear energy cooperation between India and Russia continues to move forward albeit at glacial pace.  It was reported this month that in India and Russia are expected to sign the GFA on Kudankulam units 5 and 6 by December. The story began in the 1960s when Russia actually declined the request of Homi Bhabha, the founder of India’s nuclear power program, for a nuclear plant. Soon global geo-political alliances shifted and Russia offered India a 1000 MW LWR, a predecessor of the two 1000 MW LWRs at Kudankulam but this time India declined.

In the 1980s, Leonid Brezhnev repeated the offer but once again India declined as it would have meant altering the Indian programme for nuclear power development, which was focused on HWRs. The Russians repeated the offer in 1982 to Prime Minister Indira Gandhi. In 1983, India suggested starting negotiations over two 440 MW reactors instead of one 1000 MW unit.

After a pause following the accident at Chernobyl 1986, Russia offered a long-term low interest loan of 2 billion roubles, repayable in rupees.  India declined saying that it would not import any item that would require it to sign the NPT. India eventually agreed in late 1988 to buy two 1000 MW LWRs with Rajiv Gandhi and Mikhail Gorbachev signing the deal.  Construction began in Kukankulam in 1992 but stalled when the Soviet Union imploded. In 1993 Russian President Boris Yeltsin visited India to revive the Kudankulam project after which the 1988 agreement was amended for Russia to install two VVER-1000/392 reactors at Kudankulam. The project was to cost $2.6 billion.

The ground-breaking for Kudankulam was conducted in 2001 with the first unit scheduled for commissioning in December 2007 and the second in 2008.  The deadlines were not met and Kudankulam was then slated for completion in 2012 at an estimated cost of 158.2 billion rupees (about $3.4 billion). Eventually the first unit started operations in 2013 and the second started in 2016.  Unit 3 and 4 of the Kudankulam are expected to be commissioned by 2022-23.

Rest of the World

European renewable stocks reportedly fell sharply after Donald Trump won the US presidential election.  The US wind market, the World’s second-largest with 2015 installed capacity of over 75 GW is said to be a major market for European turbine manufacturers. On the brighter side the Norwegian oil major Statoil was reported to have made its first investment in solar power technology by making an investment in Oxford PV, a solar technology company.

On the technology front solar received a boost in terms of efficiency gains. Researchers from Australia were reported to have achieved an efficiency record of 12.1 per cent for a 16 cm2 perovskite solar cell, the largest cell of its kind. The result set a new world efficiency record for the perovskite photovoltaic cell certified with the highest energy conversion efficiency. The team reportedly also achieved an 18 percent efficiency rating on a 1.2 cm2 single perovskite cell and an 11.5 per cent for a 16 cm2 four-cell perovskite mini-module.  The cell is said to be 10 times larger than the current certified high-efficiency perovskite cells on record.

On the nuclear front, there was a call for a nuclear power plant to be built in western Victorian city of Portland to supply cheap electricity to Alcoa’s troubled aluminium smelter. It is believed that the city with a population of about 10,000, will become a ghost town if the smelter closes and cheap power generation is not created.

The British government received a warning from scientists that nuclear power stations were at risk from tsunamis caused by undersea landslides. Scientists said that Britain had been hit by more tsunamis than previously believed, including one wave which reached a height of 60 feet and they urged the government to take the threat of tsunamis seriously.

In one of the most significant boosts for nuclear energy in the developed world, citizens of Switzerland rejected the proposal to force older nuclear power plants to close in a referendum. The five reactors that provide over one-third of electricity can now continue to operate according to their economic lives. As per news reports, nuclear power is Switzerland’s second largest source of electricity, providing about 35 per cent of electricity in 2015 with hydropower providing 52 percent. Both are low carbon sources which gives Switzerland one of cleanest and most efficient power systems in Europe.

Now Swiss nuclear plants can operate according to their owners’ commercial plans, subject to approval from safety regulators. They are now likely to continue until the age of 60, closing in the 2030s-2040s. They are expected to generate some 320 TWh of electricity in the longer operating period, which would reportedly avoid at least 50 MT of CO2 compared to a typical replacement mix of natural gas and imports from France and Germany.

In the USA media reported that ‘big oil’ and ‘big corn’ were pitching for a major battle after the election of Trump.  The Renewable Fuel Standard (RFS) program, signed into law by President George W. Bush requires energy firms to blend ethanol and biodiesel into gasoline and diesel. The policy was designed to cut greenhouse gas emissions, reduce US reliance on oil imports and boost rural economies that provide the crops for biofuels.

The farming sector has lobbied hard for the maximum biofuel volumes laid out in the law to be blended into gasoline motor fuels, while the oil industry argues that the program creates additional costs. Balancing oil and farm interests is said to be a challenge for Trump, who had apparently promised to boost both.

GFA: General Framework Agreement, LWRs: light water reactors, HWRs: heavy water reactors, NPT: Non-Proliferation Treaty, US: United States, BU: billion units, CO2: carbon dioxide, cm2: Square centimetre, MW: megawatt, GW: gigawatt, TWh: terawatt hours, RFS: Renewable Fuel Standard, MT: million tonnes, FY: Financial Year

Courtesy: Energy News Monitor | Volume XIII; Issue 27

WILL INDIA’S SLOW AND STEADY STRATEGY WIN THE DASH TO GAS?

Monthly Gas News Summary: June 2016

India

Going by news reports for June, India appeared to be actively engaged in renegotiating its LNG contracts following its successful renegotiation of the contracts with Qatar’s Rasgas to reduce price below $5/mmBtu.  Petronet was reported to be in talks with ExxonMobil to renegotiate pricing of its 20 year 1.4 mtpa contract signed in 2009 for Australian Gorgon LNG. The revised formula is expected to be based on the three month average of Brent price rather than a five year average of crude imported by Japan on condition that Petronet buys an additional volume of 1 mtpa annually. As per the old contract the price of gas would have been about $6.5/mmBtu at the receiving terminal.  Easing gas prices will most likely improve the financial performance of gar importers and also pave the way for an increase in gas consumption. Revival of gas based power projects and growth in fertiliser output from gas based plants were signs of the industry resuming or increasing gas consumption.

The infamous TAPI pipeline was reported to have received an interest from ADB for funding. ADB’s interest in the project is understandable given that it was among the first to invest in viability studies for the TAPI pipeline decades ago. Turkministan is also reported to have committed $45 million for the project. News on revival of talks on the Mayanmar-Bangladesh-India pipeline also emerged in June. Many observers of the industry had written off the project as all the gas from Myanmar was expected to flow to China.

Exiting Terminals
Dahej Terminal, Gujarat 10 MMTPA
Kochi Terminal, Kerala 5 MMTPA
Hazira Terminal, Gujarat 5 MMTPA
Dabhol Terminal* 5 MMTPA
Total LNG regasification capacity 25 MMTPA

*operating at 1.24 MMTPA capacity

Source: Press Information Bureau

The Ministry of Petroleum and Natural Gas expected the country’s LNG import terminal capacity to double in the next 6 years to 47.5 mtpa from the current 21.3 mtpa.  In 2015-16 gas consumption rose by a marginal 2% to 52 bcm.  40% of this was imported in the form of LNG.

The Indian company H energy was reported to be close to placing an order to India’s first floating Storage Regasification Unit (FSRU) with a capacity of 3.5 mtpa.  The company was reported have entered into contracts with consumers for the supply of 1 mtpa. H energy is also reported to have won the bid for building the 715 km gas pipeline in Eastern India (Contai-Dattapulia-Jaipur-Dharma-Cuttack_Paradip) from PNGRB. The pipeline is expected to connect demand centres in West Bengal and Orissa. The pipeline is also expected to deliver LNG to customers in Western Bangladesh near Dattapulia at the border between the two countries.

Fox Petroleum another Indian company is said to be in talks with Samsung for a FSRU in Karwar Karnataka.  Though no one in India is likely to admit it, the motivation for FSRU’s may have come from Pakistan which completed its Qasim FSRU terminal to receive LNG in a world record time of 335 days with only 179 actual construction days.

Pakistan is now importing LNG from Qatar at very competitive prices to replace diesel and fuel oil that were being used to generate power. The speed with which FSRUs can be built raises questions over trans-border pipeline projects that have failed to take off the ground even after three decades.

ONGC’s investments in its Coal bed Methane blocks was also reported in June. Two blocks in North Karanpura and Bokaro in Jharkhand are expected to start production by 2017-18. ONGC also has CMB blocks in Raniganj and Jharia in West Bengal. GEECL and Essar are currently producing CBM from their Raniganj blocks.

Inland Waterways Authority of India (IWAI) and Petronet LNG were reported to finalising plans for LNG based barges on the Ganges. This may prove difficult at current low prices of bunker fuel but Petronet and IWAI are convinced that the environmental benefits will outweigh the costs.

Rest of the World

Ukraine and Russia were reported to be close to finalising a deal on resuming gas supplies from Gazprom but questions on volumes and price are yet to be answered.  Some reports said that Gazprom’s initial offer would be for 3 billion cubic meters (bcm) at about $4.8/mmBtu.

In the USA gas inventories were reported be high at about 30 million cubic meters (mcm) indicating the continuation of the glut. Low prices have constrained production in the USA pushing prices up from a low of $2/mmBtu to about 2.4/mmBtu.  Spot price of LNG in Japan has fallen by 45% this year though Brent prices gained 35%.

Following the apology to Russia by the Turkish President, Russia is reported to be ready to discuss revival of the Turkish Stream project.  Though there may be some truth in this, the economic viability of the project remains uncertain.

Wood Mackinzie reported that the number of gas importers may double on account of low prices and encourage nations to ditch oil. According to Wood Mackinzie more than 50 countries will switch to LNG accounting for 150 mtpa by 2025. This is over 60% of the current market.

The number of LNG importers increased to 34 with Egypt, Jorden and Pakistan joining the list last year. This year Colombia, Jamaica, Malta, Philipines and Abu Dhabi joined the list.  Among new entrants expected are Bangladesh, El Salvador, Ghana and Kenya.

Courtesy: Energy News Monitor | Volume XIII; Issue 4

OIL WEATHERS THE BREXIT STORM

Monthly Oil News Summary: June 2016

India

There was little more than a business as usual environment in the oil sector in India this month. However some developments are worth following.  There was news on proposals for more refineries in India.  It is not clear why this makes economic sense as the South Asian region is said to have over-capacity in refining.  Interestingly Essar is reported to have decided to double petrol pumps to 4300 in the next 18 months.  We could probably take this as a decision based on belief in low or stable oil prices in the short term.

The opposition party’s claim that Petrol is expensive due to taxation by the Prime Minister and the Chief Minister (of Delhi) is unlikely to lend itself to political mobilisation.  Tax on petroleum products has been a source of stable revenue for governments at the central and state levels since the 1970s oil crises.

All governments irrespective of party affiliation have been addicted to oil revenue since then. As some of the tax components increased in proportion to the price of crude (ad valorem taxes) revenue for governments increased with increase in international crude prices (please refer to Data Insight). The opposition party has been in power during most of the high oil price years.  The opposition party is therefore more likely to be embarrassed if some analyst takes the time to prove that it has benefited more from tax on petrol using actual numbers.

The opposition party should be more imaginative in identifying causes for political mobilisation. Why not go for something positive such as the right to electricity or no house left behind for LPG? The scheme to initiate home delivery of LPG cylinders to rural consumers is welcome news.

All governments have favoured meeting the needs and desires of the affluent and articulate urban consumers at the expense of rural consumers when it comes to the supply of efficient and convenient energy sources. While it is a fact that lower density of population and lower levels of consumption in rural areas increases cost of serving them, policy makers must realise that this investment will pay back socially and economically in the longer term.

The quality of India’s urbanisation will depend critically on the quality of its rural population. Access to modern cooking fuels such as LPG will lessen the burden on rural women, reduce their chances of getting lung and other disorders on account of indoor pollution and enhance their contribution to the household. This will enhance the quality of life of rural households.

Rest of the World

The month of June began with the OPEC meeting in Vienna that failed to agree on production targets. Iran was reported to be steadfast in its determination not to consider any production cuts until it reached the target of 4 mb/d. Iran is close to the target as its oil production was reported to be 3.8 mb/d at present.  Iran’s oil exports doubled to over 2.3 mb/d since sanctions were lifted with exports to Europe said to be growing at the expense of Saudi Arabia.

On the other hand, oil output of USA declined by more than 900,000 b/d since its peak of 9.7 mb/d last year.  Nigeria’s oil output was reported to have recovered from 1.4 mb/d to about 1.6 mb/d despite news of the attack on oil wells controlled by Chevron.  Speculation on the beginning of a shale revolution outside USA intensified when ExxonMobil announced that it is considering an investment of $10 billion in Argentina’s Vaca Muerta shale prospect.

Brazil’s Petrobras was reported to be considering a move away from the legal requirement that it must operate all pre-salt oil fields.  If this materialises it will open up opportunities for international oil companies. Venezuela’s oil production is reported to have fallen by 120,000 b/d in May on account of problems with cash flow.  Russia was reported to have beaten Saudi Arabia as China’s largest supplier of crude for the third consequent month with Russia’s exports touching 1.24 mb/d compared with Saudi Arabia’s 1 mb/d.  500,000 barrels of oil from new offshore projects in the Gulf of Mexico are expected to come online in 2016-17.

These projects that were planned earlier do not reflect today’s market conditions but oil production from these projects is expected to offset production declines elsewhere. There was good news for the oil market as prospects for growth in oil demand improved.

The IEA’s monthly report said that global surplus oil production shrunk from 1.5 mb/d to 800,000 b/d in May on account of reduction in production in Nigeria and Canada.  Global oil output is 590,000 b/d lower than last year.

The IEA has revised its demand growth forecast upward by 100,000 b/d to 1.3 mb/d for 2016.  It expects the same level of growth to continue in 2017. Fears over Brexit raised questions over Europe’s economic prospects.  Investors moved out of the Euro and the Sterling and into the Dollar.  This exerted a downward pressure on oil prices.

Oil prices plunged by more than 5% after the news of Brexit emerged but it recovered soon after as fundamentals in the market have not exactly changed.  US regulators estimated that bad energy loans from US banks reached over $32 billion making credit harder.  The much anticipated expansion of the Panama Canal, the first since the Canal opened in 1914, was inaugurated in June 2016.

The expansion will allow larger ‘Neo-panamax’ vessels equipped to carry 400,000-600,000 b/d to pass through. The Panamax vessels could carry up to 500,000 b/d.

Courtesy: Energy News Monitor | Volume XIII; Issue 3

 

TIME FOR CLEAN AIR PREMIUM IN POWER TARIFF

Monthly Power News Commentary: November 2016

India

One of the interesting developments in the Indian power sector this month was the observation from ICRA that power bills for households consuming between 300-500 kWh/month would increase by Rs 500-1300/year from 2017. According to ICRA, meeting new emission norms for power generation would require spending of over Rs 1 trillion in the next 2-3 years. As this cost is expected to be passed on to rate payers their bills will go up by Rs 0.13-0.22/kWh. This is because there is provision for increase in tariff on account of ‘change of law’. The MOEF&CC issued new emission norms for power plants depending on their vintage. The newer the plant the more stringent the emission norm. According to ICRA 187 GW of operational power generation capacity and 74 GW of capacity under development will come under these regulations. ICRA calculations say that this is likely to increase capital cost by about Rs 10 million/MW which is roughly an increase of 20 percent. This is an interesting development as it opens the door for gas to compete with domestic coal as fuel for power generation. Power generators have not been able to use cleaner fuels such as natural gas for power generation as it was believed that the consequent increase in tariff cannot be passed through to final consumers particularly households.

Main emissions from coal and lignite based thermal power plants in India are CO2, NOX and SOX and air-borne inorganic particles such as fly ash, carbonaceous material (soot), SPM and other trace gas species. Thermal power plants are among the LPS accounting for 50 percent of CO2 and SOX and about 20 percent of NOX emissions in 2013.

It is not clear how the issue of increase in tariff will play out when it moves to the context of political economy. People, particularly the urban, affluent and articulate people have been clamouring for clean air but perhaps under the inaccurate assumption that clean air if free. Clearly clean air is not free. Only time will tell if the urban elite that has been clamouring for clean air will endorse its stand with its purse.

Staying with power tariff, the observation by the CEO of Niti Aayog that Indian discoms must either reform or perish at a conference organised by the India Energy Forum is interesting. Death of discoms or increase in power tariff may to be easy to state from a conference platform but not so easy to carry out in India’s political and social platform. Many brave politicians have tried in the past but they have succumbed at the altar of electoral politics.

However there appears to be a silver lining. The ratings agency Fitch expects the persistent problem of low power generation capacity utilisation to continue in 2017 which means that tariff levels will be low and so a small increase in tariff could be accommodated. For inadequate capacity utilisation, new generation capacity coming online is listed as part of the problem but slow recovery of discoms is also among reasons noted by Fitch. Fitch expects most of the investments in the next few years to come under the traditional cost­plus model, providing companies with greater security on returns. Overall Fitch does not appear to be very optimistic on big changes in the power sector in the near term.

Coming to the power problems of the poor, the call by the CM of Delhi to provide power connections to unauthorised colonies in Delhi to discourage use of diesel generators is not unreasonable. Out of over 600 unauthorised colonies in Delhi, many have been electrified but some in the fringes remain un-electrified. The households in these colonies either resort to theft or to diesel sets. While the CM had reportedly remarked that connecting these households to the grid would not amount to authorisation of the colony, a similar situation in Brazil suggests otherwise. Unauthorised settlers in Urban Brazil were apparently offered bottled propane cooking gas at a discount, an unexpected positive outcome after the Hindenburg tragedy. This not only increased the penetration of cooking gas use in poor Brazilian households but also gave them a document on consumption of cooking gas which doubled as proof of address.

There was news of e-rickshaws, emerging as illegal or informal consumers of electricity according to an internal assessment by a private power distribution company. As per the claims of the company, this results in a loss of Rs 2 billion every year. This would mean a loss of revenue for just under 2 percent of electricity consumption in Delhi. As per media reports, a fully charged e-rickshaw, operating on four 900 V batteries is expected to run for 80 km to 100 km per charge. Rather than going after the poor owners of e-rickshaws, the discom should set up charging stations at convenient locations and increase consumption of electricity.

Rest of the World

Reports on problems with Chinese power plants are not new. The latest is Botswana which was apparently wanting to sell a 600 MW Chinese-built power plant after persistent technical problems since it was commissioned in 2012. Botswana’s Morupule B coal-fired power station, built by the China National Electric Equipment Corporation at a cost of $970 million, was reported to have broken down often, leading to a reliance on diesel generators and imports from South Africa. According to the BPC, Morupule B has proven to be costly to maintain and operate due to construction defects rendering the plant unreliable. A joint venture between Japan’s Marubeni Corp and South Korea’s Posco Energy won an $800 million tender earlier this year to expand the Morupule B plant by 300 MW. BPC has been running at a loss for 8 years and is implementing a turnaround strategy after posting a $180 million operating loss this year. It also received over $200 million in government subsidies. The other country from which a similar problem was reported is Sri Lanka. This is an opportunity for Indian power generators who have an impeccable record in building and operating affordable power plants.

Renewable energy appears to be generating cracks in the European power market. According to international news reports, Austrian electricity utility Verbund and customer industries were reported to be seeking compensation from European energy watchdog ACER if it allows the Austrian and German power markets to be separated as this is expected to increase power tariff. The reason for the split is an oversupply from northern German wind parks, whose power flows into the Austrian, Polish and Czech grids in a development known as loop flows that destabilises the grids of these countries.

Closer to home, Saudi Arabia is reported to be on the verge of privatising the first of four companies to be created from Saudi Electricity Company’s generating business. The Saudi Electricity Company is dividing this business into four separate companies – each of which will be privatised and compete for customers across the kingdom. Existing capacity of about 60 GW is expected to be split into four with 15-20 GW in each. Although Saudi Electricity Company is expected to retain control over electricity transmission and distribution, it is expected that once the four generating companies have been brought to market, there could be some private sector involvement in distribution in the future. Electricity supply in Saudi Arabia has been growing at a rate of about 7 percent a year and demand currently stands at about 62 GW. Demand is expected to increase to more than 120 GW by 2030. Population growth is said to be adding 500,000 new customers per year and that per capita growth is increasing because of demand from industry.

kWh: kilowatt hour, MW: megawatt, GW: gigawatt, CO2: carbon dioxide, NOX: oxides of nitrogen, SOX: oxides of sulphur, SPM: suspended particulate matter, LPS: large point sources, discoms: distribution companies, CM: Chief Minister, CEO: chief executive officer, BPC: Botswana Power Corp, MOEF&CC: Ministry of Environment, Forest and Climate Change

Courtesy: Energy News Monitor | Volume XIII; Issue 26

COAL: TOO MUCH OF A GOOD THING?

December 2, 2016
Monthly Coal News Commentary: October – November 2016
India
The government’s effort to curb coal imports were reported to be continuing. The latest in a series of steps that the government has been taking is the effort to boost sale of low-quality domestic coal by with lower freight tariff. Apparently off-take of domestic coal was weak last month as higher quality imported coal was available at competitive prices. Higher international price for coal and the increase in domestic coal output are expected to cut India’s imports by around 20 MT in FY17 from the 181 MT in FY16. The strategy of countering quality with cost may bring short term benefits but it will also bring longer term problems. There is a lesson from history. In 1954 higher grades of coal particularly coking coal, the reserves of which were depleting fast, was being burnt in power plants. The government introduced the concept of useful heat value to encourage and popularize the use of poor grades of non-coking coal by the power utilities. This entrenched the use of poor coal grades for power generation which reduced overall efficiency of power generation and contributed to environmental pollution. These inefficient power plants are now at a disadvantage compared to newer efficient plants. Likewise, lower rail tariff for coal transport may make domestic coal competitive compared to imported coal for distant coastal power plants in the short term. However this may encourage the transport of coal which is not necessarily a good thing in the long term from a macro-economic efficiency and environmental perspectives. The ideal from both economic and environmental perspective would be to have pit head plants that generate power and transmit electricity across the nation.
According to a new research report, India will be a global star in coal production increasing global market share of output from 10.1 percent in 2016 to 13.1 percent by 2020. India is expected to surpass the USA to become the second largest coal producing country in the world, second only to China.
Rest of the World
Indonesia is reported to be expecting thermal coal production to be flat at 400 MT after 2019 but as domestic consumption is expected to increase, exports are expected to fall. Indonesian coal exports are expected to drop to 160 MT 2019, which is just over half the forecasted quantity of 308 MT. This must be music to the ears of CIL as its thermal coal grades have been facing stiff competition from Indonesian coal. Indonesia is the World’s top thermal coal exporter. Demand for coal at Indonesia’s power plants is expected to climb to 119 MT in 2019 up from the 86 MT in 2016.
China was reported to have adopted new rules to stimulate coal production to counter surging prices and to balance demand for heating over winter with efforts to tackle pollution. China’s NDRC ruled that all coal mines that abide by production safety rules can operate 330 days a year rather than 276 days previously. Domestic coal production is yet to pick up and China’s thermal coal imports continue to increase to make up for the shortfall.
The Finnish government was reported to be considering banning all coal-fired power stations by 2030 to help meet emission reduction goals. Coal-fired power generation accounted for 7 percent of all electricity production in 2015 with 45 percent coming from renewable sources and 34 percent from nuclear. The ban, if implemented would be part Finland’s new energy strategy. The Finnish government has previously said that it wants Finland to source more than half of its energy needs from renewables, and to halve the use of imported oil for domestic needs during the 2020s. Last year Britain announced plans to phase out all its coal-fired power plants by 2025, other than any fitted with CCS systems. Denmark is aiming to become fossil fuel-free by 2050, but it has no binding targets or bans for coal use. There was also news of the EU paying countries such as Poland to stop using coal. It appears that the EU has taken a leaf off its immigration policy (paying Turkey to keep immigrants out) to fashion its policy against coal.
FY: Financial Year, MT: Million Tonnes, CIL: Coal India Ltd, NDRC: National Development and Reform Commission, CCS: carbon capture and storage, EU: European Union
Courtesy: Energy News Monitor | Volume XIII; Issue 25