special presentation situation & trends in the european ... · speech/presentation. any persons...

Situation & Trends in the European Oil Market5th JANAF International Energy Conference

03 December 2019

Eugene Lindell

Special Presentation

Disclaimer

All statements other than statements of historical fact are, or may be deemed to be, forward-looking statements. Forward-looking statements (including those depicted in graphical form) are statements of future expectations that are based onJBC Energy’s current expectations and assumptions and involve known and unknown risks and uncertainties that couldcause actual results, performance or events to differ materially from those expressed or implied in these statements.Forward-looking statements include, among other things statements expressing JBC Energy’s expectations, beliefs,estimates, forecasts, projections and assumptions. These forward-looking statements are identified by their use of termsand phrases such as ‘‘anticipate’’, ‘‘believe’’, ‘‘could’’, ‘‘estimate’’, ‘‘expect’’, ‘‘intend’’, ‘‘may’’, ‘‘plan’’, ‘‘objectives’’,‘‘outlook’’, ‘‘probably’’, ‘‘project’’, ‘‘will’’, “forecast”, “predict”, “think”, ‘‘seek’’, ‘‘target’’, ‘‘risks’’, ‘‘goals’’, ‘‘should’’ andsimilar terms and phrases. All forward-looking statements contained in this speech/presentation are expressly qualified intheir entirety by the cautionary statements contained or referred to in this section. Readers/audience should not placeundue reliance on forward-looking statements. Each forward-looking statement speaks only as of the date of thispresentation. Neither JBC Energy nor any of its subsidiaries undertake any obligation to publicly update or revise anyforward-looking statement as a result of new information, future events or other information. In light of these risks, resultscould differ materially from those stated, implied or inferred from the forward-looking statements contained in thisspeech/presentation. Any persons acting on information contained in this presentation does so solely at their own risk.

JBC Energy is not responsible for the accuracy of data collected from external sources and will not be held liable for anyerrors or omissions in facts or analysis contained in this presentation. JBC’s third party sources provide data to JBC on an“as-is” basis and accept no responsibility and disclaim any liability relating to reliance on or use of their data by any party.Furthermore, JBC’s third party sources do not represent or warrant that their data as cited herein is accurate, up to date orfit for the end user’s purposes. Data sourced as SuDeP (JBC’s in-house Supply-Demand-Price forecasting model) or JBCDerived Data may be partly based on EIA and various national statistical entities; JODI; the MODS, ADS or MGDS(http://data.iea.org) services developed by the IEA, © OECD/IEA 2019; OPEC; and other industry sources, but the resultingwork has been prepared by JBC Energy and does not necessarily reflect the views of the original data providers. To theextent that JBC Energy comments or opines on data obtained from third party sources, these comments or opinions shallbe understood as JBC Energy’s own comments or opinions unless a third party is quoted as their source.

Monday, 02 December 2019 www.jbcenergy.com Slide 2

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Introduction

• Crude market characterised by:– Lightening crude slate

• (N)OPEC cuts (medium and heavy sour crude) • Heavy crude outages (Venezuela/Iran/Neutral Zone)• Missing crude replaced by extra-light US shale crude

– Backwardation• Physical market tight; OSPs high• baseload crudes expensive (e.g. Urals, Arab Light, Basrah Light, Mars, Dubai, etc.)• Heavy sours more expensive than gross product worth

• Refining market characterised by:– Strong refining capacity additions

• More than 1.5 million b/d added, most of which in Asia

– Weak core product demand growth• fraction of (slowing) demand growth is actually core product demand

– IMO environment: • Extreme HSFO weakness• Opportunities in producing and supplying new fuel, i.e. VLSFO

– Disappointment by some that VLSFO and not MGO is bunker fuel of choice


Current Scene

The global supply picture has changed drastically over recent years, much more than the average changes in the decade before. The refining industry has been affected in two ways: 1) it has had to meet demand with a much lighter crude slate than anticipated; and 2) that demand is negatively affected by growing shares of NGLs and biofuels.

www.jbcenergy.com Slide 5

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Light crude

Condensate

NGLs

Biofuels, GTL, CTL

Medium & heavy crude

World: Total Liquids Supply Cumulative Change Y-o-Y [million b/d]

Compared to Jan-17 some 6 million b/d of light barrels were added, while 3 million b/d of medium &

heavy crude supply was lost

Source: JBC Derived Data

Monday, 02 December 2019

Current Scene

Part of the reason is that residue rich crudes remain constrained from the OPEC cuts as well as loss of Venezuela and Iran. These barrels have paved the way strong US shale production growth. But light crude ≠ heavy crude as it yields much less residue…


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Global ARES vs Conversion Runs - rhs

Global Conversion Unit Runs

ARES in Global Crude Run Slate

Global Conversion Runs and ARES in Global Crude Slate [million b/d]


Current Scene

A lack of residue is good for simple setups as it yields more straight-run clean products. At medium and complex units, lack of residue can constrain runs at secondary units. As new capacity additions are all relatively complex, there is a strong pull on available heavy and medium sour crudes.


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AsiaMiddle EastUSRest of worldCapacity Utilisation - rs

Monthly Primary Capacity and Utilisation Rate vs Crude Intake, Y-o-y Change ['000 b/d, pp]

Jan-17 Jan-18 Jan-19 Jan-20

Crude Intake, 3MMAvg Capacity

Bars show net y-o-y change vs the same month of the previous year.Source: JBC Derived Data


Current Scene

This has helped keep OSPs and medium-sour baseload crudes strong with a strong pull on Urals seen from Asian refineries. Urals diffs are not reflecting extremely weak HSFO cracks (granted, support also came from a tighter loading schedule).


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Urals NWE vs Urals Med Urals NWE Urals Med

Urals Differentials to North Sea Dated [$/bbl]

Source: Argus Media

Current Scene

Despite the strong pull on medium and heavy sour crude from the more complex setups, its worth for simple setups has collapsed as HSFO bunkering demand is disappearing. Gasoil is not showing any upside, as it is (as expected) VSLFO and not MGO that has become the compliant IMO bunker of choice.


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Naphtha 65 cifEBOB oxy bargeULSD cifJet/Kero cifHSFO 3.5% fobVLSFO

NWE Product Cracks (vs North Sea Dated) [$/bbl; $/tonne]

Source: JBC Energy based on Argus Media

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Urals Brent WTI Qua Iboe

NW European Coastal Hydroskimming and Full-Conversion Margins by Crude [$/mt]

Source: Argus Media, Reuters, JBC Energy

IMO Implementation Already Under Way

Consequently, Urals margins compare very well in complex setups, but very poorly in simple setups. We see this as necessary signal and assume in our base case that medium-sour crudes do not need to price into simple setups most of the times in 2020.


Necessary signal

Solid lines show hydro-skimming and dotted lines full-conversion margins.


A key aspect of the global refining system’s flexibility comes from the option to run a given crude in very different setups around the world. In a post-IMO world, the focus can be not only on gasoline vs diesel, but also VLSFO. This has given simple setups a way out:


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VLSFO (Simple Distillation) Light Distillates - USGC Middle Distillates - Europe

WTI (42 API) WTI (42 API) WTI (42 API)

Other Resid VLSFO MDs LDs LPG

Indicative Crude Refining Yields in Different Refining Setups [tonne %]

Source: JBC Estimates



European refiners have clearly reacted to their HSFO exposure by maxing imports of sweet crude. China, on the other hand, is going the other direction thanks to growing complexity.



Early preparations such as the mass crude slate switches have allowed Europe to become the dominant global VLSFO supplier (sofar). Cargoes regularly flow to Asia and the arb window to the USGC is currently wide open.


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Estimated Phase-in of Global VLSFO Bunkering [million b/d]

Newswires indicate that 50-65% of bunker sales in Nov-2019 were for low sulphur

products, which appear to be almost entirely VLSFO and not MGO...

Source: JBC estimate

2019 VLSFO demand = 220,000 b/d

Estimated contribution to VLSFO supply in March 2020:300,000 b/d segregated low-sulphur molecules (before part of HSFO)400,000 b/d de-sulphurised residue molecules200,000 b/d blending components (e.g. light cycle oil)1+ million b/d of straight-run residues (SRFO)


What about the Russian refineries? The simple refineries, which are most exposed to HSFO cracks (with fuel oil yields above 30%) represent about 15% of total capacity. They have produced 100,000 b/d of gasoline ytd, similar to Russia’s annual average gasoline surplus and remain crucial to maintaining a net exporter status over the summer months.


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Russia: Simple Refineries' Capacity and Supply Based on Their Fuel Oil Yield ['000 b/d; %]

Capacity

Source: JBC Energy estimates based on Reuters, Argus Media,

own assumptions

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Gasolinesupply


Gasoline

x-axis = HSFO yield


The HSFO produced from these Russian refineries is finding a new home in the USGC. The region has ramped up buying of fuel oi l, with Vortexa data hinting at refineries having been the primary targets for unloading such cargoes. This trend will likely grow.


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Unaffiliated

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US: Y-o-Y Seaborne HSFO Imports by PADD and Usage ['000 b/d]

Feedstock

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Other/bunkering

The bulk of the unassigned volumes in November is most

probably feedstock going predominantly to PADD-3

Refining & Petchem Overcapacity Looming

In our base case, we see the global refining system going though a cycle of higher consolidation pressure in the next few years. We currently see capacity growth decelerating gradually from 2021 onwards, assuming several big projects in early stages of development are not realised.


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World: Primary Capacity Additions By Region and Nameplate Utilisation [million b/d; %]

SuDeP

Tightening spare

capacity

Overcapacity/ consolidation pressure exacerbated by the

economic crisis

Tightening spare capacity

Overcapacity/ consolidation pressure



The weaker crude intake growth in 2019 reflects the weaker incremental call on crude refining amid slowing demand growth and competition from alternative supply streams (NGLs and biofuels). With this trend set to continue over the coming years, relatively few capacity additions are needed going forward.


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Total oil products demand growthBiofuels supplyLPG supply from NGLsEthane supplyCall on crude refining

World: Call on Crude Refining Y-o-y Change [million b/d]

SuDeP

LPG (70%) and Ethane (100%) assumed to be met by NGLs processing.


Petchem Sector Heading into Pronounced Oversupply Cycle

• Supply-side Factors:– US investments incentivised by cheap shale feedstocks– Chinese investment motivated amid others by strive for

independence in base products– Existing and new refiners focus on petchem sector as road

transportation fuels demand is set to slow

• Demand-side Factors– Economic slowdown is pressuring consumption– Aspects related to environmental concerns – plastic avoidance,

recycling, renewable feedstocks – have a difficult to assess but substantial downside potential

www.jbcenergy.com Slide 18Monday, 02 December 2019


Current exporters of petrochemical intermediates are set to face an increasingly crowded market over the years to come.


Long feedstockShort intermediate

petchem

Integrated greenfield

refineries, Crude-to-Chemicals

Adding steam crackers to existing refineries, integrated greenfield projects, Crude-to-Chemicals, dehydrogenation

plants

NGLs-based steam cracker,

dehydrogenation plants

Pressure on exporters w/o feedstock cost advantage

NGLsCrude

Refiners shifting focus from

transport fuels to petchem

(short crude)

Adding FCCs (propylene), steam

crackers, PDH plants to capture additional value

Covering local shorts

Exporter without feedstock cost

advantage


Refining – Competitive Forces

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Global Refining Margins (3MMAVG) [$/bbl]

Source: JBC Energy

The margin pressure so far this year has been primarily felt in Asia, as a function of falling product prices, the highest crude procurement costs and the exposure to high freight rates. The observations of the more recent past are primarily maintenance driven and will fade again.



In Asia, in particular, slowing core product demand growth is being overtaken by rapid net-capacity expansions, pressuring refining margins across the region.


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Asia: Cumulative Products Demand, Refinery Capacity Growth; Y-o-Y Margin Change [Million b/d; $/bbl]


Y-o-y change in refining margins from September 2019 onwards are forecasts based on The View. Demand and capacity growth vs 2015 average levels.



Relative to Asia, European complex margins have the better refining economics in all categories: freight has increased less, margins and products have decreased less, while the cost of the crude basket has gotten cheaper.


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Complex margins Crude basket Products Freight

NWE Spore

NWE & Spore Complex Margin Breakdown (2019 vs 2018, Jan-Nov) [$/bbl]

Source: JBC Energy (calculations), Argus Media (prices)

Freight will play a much bigger role next

year as more expensive IMO fuels

will inflate costs by at least 25-30%. This hits

Asia on the procurement side as well as the product

export side


Total East is actually massively tightening but only LPG through jet. Light ends development is probably OK (Chinese projects make sense to expand light ends), more West-to-East is also OK in theory. But crunch point is gasoil, which cannot lengthen in all markets.


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Gas oil/diesel Fuel Oil

Other Products Total Products

East vs West of Suez Product Balances [million b/d]

SuDeP

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Europe’s diesel (and jet fuel) short is a big asset as it translates into superior pricing (and in extension margins), especially in inland markets. The need to arb these volumes exerts strong pressure on prices in origin markets especially in high freight environments.


Regional Gas Oil/Diesel Balance ['000 b/d]

SuDeP

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East Asia: China, Japan, S.Korea, Taiwan, Hong Kong

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ME, India, E. Africa

As net short, Europe is the premium market, pricing highest

for 55% of its product supply (gasoil/diesel and jet fuel)


Greater pressure on local Asian refiners: (Malay/Indo/Viet/Thai/Aus/Philip)

Greater pressure on closerC&S American setups

Conclusions

Strategic Refining Considerations:

• The first-mover disadvantage– We see a disadvantage to a pro-active approach to refinery shutdowns. The

improvement of refining economics once sufficient refining capacity is scaled back should benefit players who manage to wait out the most difficult period.

• The net-importer benefits– Refiners located in net-short local products markets benefit from the fact that the

marginal barrel needs to come from outside, leading to the net-short local markets pricing at a premium to trade hubs.• Higher freight costs post-IMO to further underpin this advantage• Next wave of pressure should heat weaker setups in Asia/Latin America

• Strategic Considerations– Do not build grassroots refineries given that peak demand will come before 2030– Closer inter-departmental cooperation (between operational management, trading,

strategic planning, etc.); ensures that market signals can be acted on at the right level– Optimise operations to take advantage of short-term price signals to maximise – Optimise midstream presence to help improve profitability

• Procurement: crude slate and overall feedstock flexibility• Production: flexibility to adjust throughput and product yields to market needs


Thank you!

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