[ROCKMAN]

Sparky - I read that it was the independent Chinese refineries were hurting the most. They weren't allowed to import oil directly and had to buy from the national refinery company which always took advantage of the situation. Now there appears to be a move to allow them to import directly to spur more competition and supply.

[ROCKMAN]

Beancounter - not just a stop in México but Trinidad with its huge offshore stranded NG fields with no local market. And in Costa Rica with an idle oil refinery on its Caribbean coast the Chinese are talking about spending $1 billion to bring back into service. CR has no oil production but that refinery is just a short sail from Mexico's huge offshore oil field. As it stands now Mexico's constitution kills any chance of bringing big foreign capital in the help develop energy. But both political parties are proposing very radical changes to the rules.

Pure speculation on my part but this is how I imagine the chat went. China pointed out the hundreds of $billions they are spending in other countries on oil/NG infrastructure. Pointed out how much of Mexico's oil income has to be sent back to the US to buy refined products PEMEX is unable to supply. Pointed out the huge pile of Mexican pesos China accumulates every year due to the huge trade imbalance. Pesos that could be exchanged for Mexican oil without the US petrodollar being involved.

What isn't speculation is that México is making a trial run by exporting 50,000 bopd to China now. At the least the Mexicans, like the Canadians, see a big advantage in having another buyer to compete with the US. Time will tell what changes will happen with Mexican law but whatever they are China will always have a great advantage over US public companies. A match made in heaven IMHO: China has the capex and business structure México needs to save its declining oil production that supplies about 40% of its national budget and México has the oil China needs.

[ROCKMAN]

A couple of small tidbits from Rigzone regarding the refining game.

A fire at the largest oil refinery in the United States has knocked out more than half of its output for at least two weeks, the latest in a string of mishaps following a $10-billion expansion at the Motiva plant in Port Arthur, Texas. Royal Dutch Shell Plc - which owns the refinery with Saudi Aramco - said production was crimped after the fire on Saturday, the second in a week, caused reductions and shutdowns at the 600,000 barrel-per-day (bpd) plant. Despite the outage, the U.S. Gulf Coast refined oil markets had a muted reaction. U.S. Gulf Coast gasoline and ultra-low sulfur diesel prices relative to the New York Mercantile Exchange barely rose on Monday because the region is well supplied.

And: Executives at publicly-held U.S. oil refiners have been at pains to reassure investors that the dislocations once seen in the North American crude oil market will return, delivering bumper profits once again to refineries. Despite bumper earnings, there is a sense of unease among refining executives. No doubt they are worried that skittish investors, who have seen the discount on benchmark U.S. crude oil evaporate and deterioration in the spreads between refined products and crude oil, will prematurely dump their shares. Maybe these executives are right and anyone selling now would be foolish. At the same time, it is worth bearing in mind that the compensation packages of these men are tied to the company share price. Perhaps it pays to follow where the so-called smart money is going. If things are good and only going to get better, why are two private equity firms choosing this moment to dispose of roughly a third of their remaining shareholding in a small refiner that is supposedly well-positioned to take advantage of these sorts of conditions?

Neither are big stories in a global sense but give some measure to the dynamics involved in this one segment of the overall process.

[beancounter123]

Thank you Rockman for your response. As China works this angle to control petroleum resources and the profit elements of the cycle, their footprints are subtle but noticeable.
Would it make sense to extend this into other companies (not necessarily Chinese but heavily influenced by the Chinese) and other resources?

My example having done very little work on this: BHP with their investment in oil (Petrohawk etal) and just this week saying we are open to a JV partner in Jansen (the Canadian potash development) Could this be a way to "control" or influence resources? I need to go further into the other resources BHP supplies to china, but certainly the ore and coal supply to china would make them somewhat "influence-able".

[ROCKMAN]

bc - I don't keep track of them but there are occasional articles about the Chinese buying hard mineral assets and even farm land around the world. Recent I found that China has over $3 trillion in foreign currency socked away. Kind of good news/bad news: they need to invest that money in the most efficient way for their economy to grow. Given their size and shift towards a more affluent society that would require them to import more of the commodities they consume which they can’t produce internally. You don’t need to produce what you need if you can outbid others for it. The US has worked that philosophy well with respect to oil for many decades.

But they aren’t the only govt that’s working this angle. I’ve recently discovered that Brazil, the 6th largest economy on the planet, has been making similar though less publicized moves in Africa. If I recall correctly trade between Bz and Africa has grown 600% in the last 10 years. This also includes Bz buying assets on the African continent. Given their future oil production growth and a population growing more impatient with their less than comfortable lives it seems their govt is in the same position as the Chinese PTB.

It’s an old model: at one time the Dutch, then the Brits, then the US and for a while the Japanese where roaming the planet in acquiring what they needed. Now it’s just a new group with the financial capability to do the same.

[ROCKMAN]

pstarr - Can't really tell how much of the positive spin the MSM put out on the meet between the Chinese and Mexican leaders was true or not. But apparently Mexico has been rather unhappy with their huge trade deficit with China. But China does know how to make nice. Last July China’s Export-Import bank agreed to establish a $1 billion line of credit for PEMEX for the acquisition of ships and equipment for offshore maritime activities. The agreement will have a term of three years and represents the first contact with this Chinese bank. A second agreement will be governed by a memorandum of understanding signed by Pemex and Xinxing Cathay International Group and aims to identify options for joint work in the area of pipelines.

And not surprising: Mexico is pushing to double crude oil exports to China next year and boost India-bound shipments, the next stage of a long-term plan to diversify oil sales away from the United States. Crude oil shipments to China, which have risen from zero in 2010 to more than 20,000 bpd so far this year, will reach a yearly average of 30,000 barrels per day but could more than double in 2014 according to Mexican officials. But not just exports to China: exports to India already stand at nearly 100,000 bpd but are likely to increase in the short and medium term, said the same officials. They also added that in total, Asia could be taking as much as a fifth of Mexico's 1.1 million bpd of exports. The United States is still by far Mexico's largest oil export partner. But shipments have halved since 2006 to less than 850,000 bpd this year, the lowest rate in two decades due to both declining Mexican production and rising U.S. output. So good news that the US has needed less Mexican oil. But bad news: this drives Mexico to establish oil trade with other nations. BTW this same dynamic is happening with Nigeria with half of its export market in the NE being lost to the Bakken et al. But don't worry about the Nigerians: China is preparing to move in and build at least 3 refineries to lend them a helping hand.

Now for a bit of a surprise: Mexico is also open to importing light crude supplies from the United States, the country's top oil trade executive said in an interview, a sign that the world's No. 10 oil producer may be ready to give up decades of total crude oil self-sufficiency in order to take advantage of a growing glut of U.S. shale oil. IOW the Gulf Coast refineries are not well suited to crack the new shale production. Which is also why upwards of 50,000 bopd of EFS oil is being shipped by tanker from Texas to eastern Canadian refineries. Imagine the irony if this dynamic holds: EFS production is shipped to Mexico to be refined in plants built by China with some of the products sold to Mexico (taking market share from GC refiners) with the balance of the products shipped to China. In the meantime the US is importing 3 million bopd from Canada. And the US continues to export significant volumes of NG to Mexico...hopefully enough to keep NG prices increasing. Hopefully for the Rockman, that is.

OK now…everyone grasp hands and sing: “We are the world…”

[ROCKMAN]

One more dot connected in Iraq by China: China and Indonesia are set to join Exxon Mobil's $50 billion project to develop Iraq's West Qurna-1 oilfield. China's biggest energy firm, PetroChina, is expected to take 25 percent and Indonesia's state-owned Pertamina 10 percent. Exxon would remain operator of the southern field, though its share could be cut to 25 percent. Royal Dutch Shell would retain its existing 15 percent share.

China is already the top foreign player in Iraq's oilfields and such a big stake in West Qurna-1 would make PetroChina the single biggest foreign investor in Iraqi oil. For Pertamina, the deal could be its largest foreign acquisition and mark its first move into Iraqi oil and gas since U.S.-led forces toppled leader Saddam Hussein in 2003. Indonesia, once a member of OPEC, is now a net importer.

[ROCKMAN]

The future of EU refiners and their consumers seems to get bleaker every day. In addition to the potential of Chinese refinery JV’s high jacking some of their feedstock it looks like Russia is on the verge of hammering them even further.

MOSCOW, Aug 20 (Reuters) - Russia is close to launching a long-delayed upgrade at a major Baltic refinery, posing another challenge to European plants struggling due to lower supplies and higher prices for crude from the world's top oil producer. The Kirishi refinery upgrade - planned in the 1990s - will be completed next month, allowing one of Russia's largest albeit outdated plants to slash fuel oil production and boost output of quality diesel, several industry sources told Reuters.

Sources said the refinery's flows would reach full steam by year-end, dealing a fresh blow to European plants already crippled by economic stagnation and a U.S. shale oil boom. Some 1.8 million barrels per day of European capacity have been mothballed since 2009, Deutsche Bank data shows, with some 600,000 bpd of closures in 2012. That leaves only 10.7 million bpd of operating capacity in the European Union plus Norway. Several plants in Italy, Germany and the Netherlands have come under Russian control in recent years, seeking to avoid closure.

The pressure is mounting as Europe is exporting less gasoline to the United States and has to compete with new Middle East and Asian refineries for African markets, which the European players had previously dominated. And all this happening before China begins its major refining moves on the African continent. The pain is also aggravated by record-high prices for Russian Urals crude, the preferred grade of European refiners, as Moscow gradually shifts oil flows to Asia.

[ROCKMAN]

More changing dynamics. Algeria had been supplying much NG to Italy via pipelines. But the Italian economic downturn has reduced those exports about 50%. So now the Algerian gov't is looking at LNG exports to other countries. But there's that common problem: capital. In general oil-rich Algeria hasn't done a great job in maintaining the infrastructure. If only some wealthy nation could lend them a hand.

FYI: about 50 Chinese companies, mostly state controlled, are about to undertake $20 billion in new construction projects in Algeria. The projects include a new airport, the largest prison in the country, their first mall, 60,000 new homes, two luxury hotels and the longest continuous highway in Africa. There's a long and friendly history already between the two countries. The Chinese are the second largest group of foreigners after the French.

Maybe some day the Italian (and EU) economy will turn around. But they may have lost a good bit of the imported energy sources at that time. Sounds like an easy move for China to dig in as tight as a tick on another African oil/NG exported.

[Keith_McClary]

Still waiting for the first barrel from Kashagan.
Russia emerges as surprise favourite to ship Kashagan oil$this->bbcode_second_pass_quote('', '*') Russian pipelines had long been seen as outsiders

* Other shipping options complicated by delays, quality

* Bottleneck adds to headaches for world's most expensive field

By Vladimir Soldatkin and Dmitry Zhdannikov

MOSCOW/ALMATY, Aug 8 (Reuters) - Russia has emerged as the surprise favourite to ship the bulk of crude from Kazakhstan's Kashagan field, capitalising on a regional pipeline bottleneck that is adding to headaches for the world's most expensive oil development.

Costs for Kashagan have soared because the Eni-led consortium developing it revised expenditures up fivefold in the last decade - to almost $50 billion - as a result of building artificial islands and infrastructure in the Caspian Sea.

Production is due to start later this year almost 10 years later than planned and ultimately reach 1 million barrels per day (bpd), or more than 1 percent of global oil output.

Debates about oil-evacuation options from the landlocked sea have run on for a decade, with Russian pipeline monopoly Transneft initially among the outsiders.

Other routes considered by Eni and its partners Exxon Mobil, Royal Dutch Shell and Total included a BP-led Azeri-Turkish link, a Chevron-led Russian-Kazakh CPC pipeline to the Black Sea and a route to China.

Over the past few years, several of those options have become less likely, making Transneft the unexpected frontrunner to ship the bulk of oil from Kashagan, at least during the first years, industry sources said.

Several sources among oil majors said a large portion of oil from Kashagan would go via Transneft's Atyrau-Samara pipeline, connecting Kazakhstan to Russian trunk pipelines and allowing oil exports via the Black Sea, Baltic Sea or central Europe.

"They are asking to ship up to 5 million tonnes (100,000 bpd) via Atyrau from September. We said yes," a Transneft source said. The company declined official comment.

The Atyrau-Samara pipeline currently ships 300,000 bpd, has a capacity of 400,000 bpd and can be boosted to 600,000 bpd with modest investments, the source said.

Sources said some Kashagan volumes, which could amount to 140,000 bpd next year, gradually rising to 300,000 bpd, may still go towards other routes such as CPC or China.

[ROCKMAN]

Keith - Another interesting dot connected. Thanks. It seems that more of the POD is being impacted by the transport and refining of hydrocarbons than the actual production.

[ROCKMAN]

With the focus on Chinese acquisition of energy resources it’s easy to overlook India’s efforts. India's Oil and Natural Gas Corp has agreed to buy 10 percent in a gas field offshore Mozambique from Anadarko Petroleum Corp for $2.64 billion. ONGC is offsetting diminishing supplies from domestic gas fields by buying overseas assets. The Anadarko acquisition is a relatively small chip in the game. Deals involving Indian companies have added up to $168 billion since 2008. During the same time period the USNOC (US National Oil Company) has acquired exactly $zero in overseas energy resources.

[Keith_McClary]

I think pre-peak the low hanging fruit tended to be near tidewater so the oil could be shipped anywhere by tanker. Now we are getting into mid-continent fields that require expensive fixed pipelines to consumers which require a committed supply to justify financing. Do you think this is a factor in the control issue?

[ROCKMAN]

Keith – I agree. The dynamics seem to be shifting a bit from a singular focus on who produces oil/NG to who has to be involved in the transport from producer to consumer. And just as interesting not just the movement of raw production but refined products. And as you point out that’s bring more focus on sea transport as well as long distance transport via pipelines and rail.

So it’s no longer solely about who controls the flow of oil out of the wellhead. It still tickles me the mild connection between the reversal of an oil pipeline from the San Antonio to Corpus Christie that has affected, to some small degree, the expansion of Chinese refinery ops in Nigeria. I mentioned it before: upwards of 50k bopd of Eagle Ford oil is being piped to the Texas coast and is being shipped to eastern Canadian refineries because they can create a better spread. Those refineries, as well as US east coast refineries that are receiving increasing Bakken production, have significantly reduced the amount of Nigerian oil previous shipped to the region. This has allowed the Chinese to jump into Nigeria with major refinery expansion plans that will allow Nigeria to transition from an oil exporter with a limited market to more of a product exporter with a broader market.

And while it’s great we’ve had a boom in US oil production it will have a limited life. Refining, OTOH, is a long term proposition. An EFS well might payout in less than 12 months. But a refinery can easily take 5+ years to payout. The refiners see a profit flow many decades into the future. Obvious not so for a shale well. In time the shale trends, like every other trend since the beginning of the petroleum age, will peter out. But control of refined products will be a major issue indefinitely. And as China locks up more long term oil acquisition commitments from oil exporters via those refinery JV’s the more control they’ll have over the products consumers require. Egypt may eventually become the poster child for this dynamic. As a net oil exporter they are insignificant. But as a country that may have up to 4 million bbls of Persian Gulf oil transiting it daily where China has plans to build the largest refinery ever in the history of the country, Egypt may become one of the leading refined product exporters on the planet. A particularly sticky wicket for the EU which would lose feedstock (with much transiting Egypt today) for it's refineries and become more dependent upon refined product imports from Chinese refineries in Egypt. Rut roh!

Like an adjustment to the old Golden Rule line: he that owns the gold makes the rules. In an new dynamic the manufacturer that acquires the gold from the miners and makes the jewelry gets to control who gets to buy the pretties...and at what price. IOW it may become the Trinket Rule: he that owns the trinkets makes the rules. And the miners are willing players since they now get a cut of the more expensive trinkets compared to just selling raw gold. And if China has first call on much of the baubles and beads the rest of the world may find itself lacking the “accessories” it require.

[pwallmann]

Haha, well put RM

Just wondering if you can offer any insight into refinery strategy: Is there any discussion about entering longterm supply contracts with foreign producers, despite cheaper short term american supply availability? Or is it simply a matter of maximizing spreads on a day to day basis? (I would have thought that these longer term contracts existed, at some level, with say, Nigeria, and thus we wouldn't see such a drop in imports)

Perhaps more importantly, my assumption is that the super majors and the E&P companies that are active internationally are also significant players in the domestic refining markets. If that is true, when we see JVs involving them and a foreign producer, do those agreements typically have call options on the crude production similar to what we speculate for the Chinese JVs? If not, would you expect a push in that direction to ensure adequate feedstock in the future (assuming they don't see the long term viability of american tight oil)?

[ROCKMAN]

Pw - Not much I can add about the contract side. I know just enough to be dangerous. But I can tell you supply contacts are some of the most tightly guarded trade secrets. That and they can also be very complex. I've read that the bulk of oil bought is done on a contract basis and not the spot market. But the contract terms can vary greatly in length and detail.

As for as Big Oil goes it can be deceptive. An ExxonMobil refinery might buy Chevron oil and vice versa because it makes economic sense. And lots of "paper trades": Shell might have a license to export oil from Country X and Chevron from Country Y. But each company ships the oil to the other's refinery because of logistical factors.

But it looks like we're entering a dynamic that seems, from my limited exposure, to be new and potentially very significant: the linkage between refinery ownership and the exporters. The Dutch and the KSA undertook the most expensive refinery upgrade in the history of the US with the expansion of the Motiva refinery on the Texas coast. I can't predict the future but as long as Saudi has $billions invested in that plant I doubt it will ever lack feedstock. Likewise for the 400,000 bopd Red Sea refinery the Saudis and China plan to build. It's one thing to have a piece of paper saying the Saudis are obligated to sell oil to your refinery. But probably a better bet to have $5 billion of their money invested in the refinery.

[ROCKMAN]

A small but interesting sidebar to happenings in Syria: http://www.aljazeera.com/indepth/inpict ... 98853.html

Once again the reason I'm glad I discovered Al Jezeera some time ago. They find stories the MSM doesn't care to cover.

[ROCKMAN]

More of those unanticipated developments from the US shale boom. As a result of many Gulf Coast refineries not being capable of efficiently refining the lighter shale crude over 100,000 bbls per day of US oil has been exported (mostly to Canadian refineries) during the first 3 months of 2013. Even México, the third largest exporter of oil to the US, is considering the possibility of importing Eagle Ford oil. Apparently the Chinese are discussing the possibility of helping Pemex to crack the US oil.

Somewhat ironic that the loss of US/Canadian markets by Nigeria is allowing China to move into Nigeria and attempt to establish a long term energy relationship with them. A relationship Nigeria is desperate to develop given it's govt's great dependency on oil export revenue. So booming US oil production is helping China develop a negotiation edge with other countries. Which probably also goes a long way to explaining why the reduction of oil imports by a major oil consumer, the US, hasn't lowered oil prices: China is finding oil exporters more than willing to trade with them. Especially true with respect to long term supplies linked to major refinery JV's.

Perhaps some oil exporters are taking the "US oil independence" chatter seriously and feel the need to establish long term relationships with other countries such as China and India. Perhaps an overstatement but the success of the US unconventional resources appears to be driving exporting nations into the arms of China et al. When the shale plays peter out (as every oil trend in the US has in the past) we may find ourselves looking to reestablish trade with the oil exporters. At the moment the Canadian oil sands appear to have the potential to act as a buffer to such a develop in circumstances. But only as long the US remains the primary beneficiary. That may, or may not, be a safe assumption.

[ROCKMAN]

I suppose I should have included NG in the title. As rapidly as the political dynamics are changing in the ME so are the dynamics involving energy economics. Now Israel and Egypt are going to partner up. Egypt that had cut NG sales to Israel just a couple of years ago will now not only become a customer of Israel NG production but will assist them in delivering LNG to other countries.

“Israeli gas partnerships are in talks to sell natural gas from the Tamar and Leviathan fields to customers in Egypt. Energy market sources said today that the oil majors that operate Egypt's two LNG plants were participating in the talks with the Israeli partnerships. These plants are currently only operating at partial capacity because of the natural gas shortage in Egypt. The two plants exported 4.7 million tons of LNG in 2012, a third of their total capacity of 12.2 million tons a year. Importing gas from Israel would allow ENI and Union Fenosa Gas to greatly boost the plants' production, after billions of dollars were invested in building them.

In addition to exporting gas to Egypt's LNG plants, Israel could make spot deliveries of NG to Egypt via pipeline. The pipeline from the Tamar field to the onshore terminal is already struggling to meet peak demand by Israeli customers, but during off-peak hours, mainly at night, the pipeline could supply gas to Egypt, which is still connected to Israel via the pipeline built by Egypt's EMG.

Egypt's well-known natural gas shortage has worsened in the two years since the fall of President Hosni Mubarak. Egypt's gas reserves are twice the size of Israel's, but development of country's gas fields lags far behind the growth in demand for gas. The problem is exacerbated by the Egyptian government's fear of cutting its generous gas subsidies. As a consequence, Egypt barely exports gas, not even to Jordan, which agreed to raise sharply the price it pays for Egyptian gas.

So Israel will help the new military controllers of Egypt appease some of their upset locals with NG supplies and thus make the Brotherhood look a tad less appealing.

Sure…who couldn’t see that coming? LOL.