Saturday, June 24, 2006

World energy pricing,supply and demand

As we have noted there are large pricing differentials in the cost of oil futures and gas pricing at the indicator Henry Hub in the US.Spot prices at the Henry Hub could drop below $4/MMBtu near the end of the injection season as many gas storage fields could reach their maximum capacity, Energy and Environmental Analysis Inc. (EEA) said Tuesday, echoing the predictions of some analysts and regulators but contrasting with recent comments from analysts at Raymond James & Associates (see Daily GPI, June 20). However, EEA also said gas prices are likely to "rebound significantly as soon as winter heating load develops."This would be the lowest pricing since 2001.

A number of factors are involved here,increased storage and low demand due to utilities switching generation to coal.The reserve requirement for Hurricane season,and seasonal fluctuations.

As a cost comparison of oil to gas energy coefficent that of 1bbl to 5.176 gas units this makes both cng and lng very cost effective transport fuels.(Around 36$ now and forward 24$)

There are interesting observations coming out of the oil physical market with demand reducing in India by around 10% and the cancellation of Saudi contracts in China.Whilst the usual suspects are suggesting this is due to the higher sulphur content of the lower production grades coming out of Saudi,and indeed this was used as a reason for cancellation by China,industry sources in Kazakhastan and Russia are suggesting the reason is for a lessening in dependence of Middle East oil due to new transit options.

Kazakhstan has a long common border with China to the east and has been exporting Caspian oil to China’s north-western province Xinjiang by rail since the 1990s. In 2005, Kazakhstan exported about 30,000 barrels per day to China via the Alashankoy rail crossing – a far cry from the 200,000 Russia exported to China in the same year.

However, in August 2005, state-owned oil company China National Petroleum Corp (CNPC) agreed to buy PetroKazakhstan, a Canadian firm based in Calgary and listed on the Toronto Stock Exchange, for $4.18 billion as part of China’s strategy to reduce its dependence on foreign-owned firms and boost its energy supplies. The purchase went through in October, after a Canadian court turned down an attempt by the Russian oil firm LUKoil to block the sale.

The acquisition was a logical extension of China’s operations in Kazakhstan, which is looking to increase its oil exports by expanding its infrastructure. CNPC, China’s biggest oil producer, and the Kazakhstan National Petroleum and Natural Gas Company (KMG), are financing and building a pipeline from Kazakhstan to China. The first section was completed in 2003 and runs across Western Kazakhstan from the Aktobe oil fields to the oil hub at Atyrau. Construction began on the second segment of the Kazakhstan-China pipeline in late September 2004 and was completed in November 2005. It has a capacity of some 140 million barrels of crude per year. The Chinese side is responsible for filling the pipeline from its own oil fields in Kazakhstan, although Russia’s state-owned Rosneft oil company, which already exports oil to China by rail, wants to ship 8.8 million barrels of oil via the pipeline this year.

A Kazakh official admitted in June 2005 that, in spite of the Kazakhstan-China and Baku-Tbilisi-Ceyhan pipelines, Kazakhstan would still need additional export capacity of some 300,000 to 400,000 barrels per day by 2011.

Last week, the Shanghai Cooperation Organization (SCO) celebrated its fifth anniversary by holding a summit in its birthplace. The organization came together in 1996 as an alliance focused on military cooperation between China, Kazakhstan, Kyrgyzstan, Russia and Tajikistan. In 2001, the group admitted Uzbekistan and changed the name from the Shanghai Five to the SCO and altered its aims to include economic and political support.

Last week in Shanghai, both Pakistan and Iran stated their strong interest in joining the organization, although SCO leaders have yet to develop both a policy on enlargement and clear criteria for membership.On the economic front, the biggest news from Shanghai involved energy – a topic that has dominated every other international discussion this year as well. With Iran knocking on the SCO’s door and Gazprom getting a deal to help build and operate a multi-billion dollar gas pipeline from Iran to India via Pakistan, many analysts suggested that something similar to a gas OPEC is in the works. Russian President Vladimir Putin added fuel to this speculation by telling the SCO leaders that the time has come to coordinate their energy strategies.

Now here arises some other competitive forces,The Btc pipeline from the caspian to Turkey for transhipment to Europe and beyond to remove the transfer of oil from the Russian pipeline network to Azeri-Georgia-Turkey opened last week.The pipeline will require both Kazakh and Russian oil to be sustainable but neither is forthcoming.

There are regional conflicts of interest here .but one suspects just a realignment of bargaining areas prior to the G8 meetings on energy.Good background here and here


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