2015 ASIA ENERGY OUTLOOK

Transcription

1 October ASIA ENERGY OUTLOOK NEW TARGETS FOR JAPAN S REFINERS New government regulations once again push Japanese refiners to make decisions on CDU capacity cuts THE ROAD AHEAD FOR INDIA, INDONESIA WITH NEW LEADERS India and Indonesia embark on a journey on policy reform for E&P, oil subsidies and deregulation with their promising new leaders BEIJING TIGHTENS OIL TAX NOOSE, BUT WILL WILY PLAYERS ESCAPE AGAIN? Beijing is relentlessly plotting to develop a foolproof oil tax regime, but will devious market players keep finding ways to outsmart the system? ASIA POWERS UP 2014 Platts Top 250 Global Energy Company Rankings

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3 insight CONTENTS 4 REFINERS NEW TARGETS Seven months on, new government regulations once again push Japanese refiners to make decisions on CDU capacity reductions, after end-march cuts. 30 ASIA S LOW CV DIET As the coal-fired generation industry moves toward a lower quality product, it is increasingly frowned upon by those in the related yet more favorably perceived markets like crude oil and shale gas. 10 PNG LNG ARRIVES The start-up of the ExxonMobil-operated Papua New Guinea LNG project ahead of schedule in April this year cemented the small Pacific nation s position as a global gas producer, and there is more to come. 14 US, AFRICA LPG IN ASIA Asia is absorbing an increased flow of LPG from the US, West and North Africa, intensifying the competition faced by Mideast producers. 20 INVESTORS ROCKY ROAD Myanmar, portrayed as the land of opportunities post-sanctions, starts to reap the benefits of opening its gates to foreign investment, but many challenges remain. 24 HOME AND AWAY Europe shut its doors to Indonesian biodiesel last year after the European Commission hit the Southeast Asian country with stiff anti-dumping duties. But other doors opened at home and in China. 34 THE ROAD AHEAD India and Indonesia embark on a journey of policy reform for E&P, oil subsidies and deregulation with their promising new leaders Modi and Jokowi. 38 BEIJING TIGHTENS THE NOOSE Beijing is relentlessly plotting to develop a foolproof oil tax regime, but will devious market players keep finding ways to outsmart the system? 46 SMOOTH SAILING Shipowners in the dirty tanker segment look forward to smooth sailing next year with the scrapping of aged vessels, lighter order books and more pooling of vessels. 50 THE PHILIPPINES ON THE RISE The Philippines must transform good energy policies into a sustainable reality. From Asian Development Bank. 52 ASIA POWERS UP Global energy shake-up sees shale winners rival Asian energy growth. Platts Top 250 Global Energy Company Rankings reviewed. OCTOBER 2014 insight iii 1

4 insight October 2014 ISSN (print) ISSN (online) Production Manager: Production Offi ce: Nelson Sprinkle Insight Magazine 1800 Larimer Suite 2000 Denver, CO GLOBAL DIRECTOR, CONFERENCES Steven McCarthy AND STRATEGIC MEDIA PUBLISHER ADVERTISING SALES MANAGERS CUSTOMER SERVICE Circulation Manager: Article reprints and permissions: PLATTS Business office: President: VP Finance: Murray Fisher murray.fi Robin Mason Pamela Curran The YGS Group , ext Canada Square 12th Floor London, E14 5LH, UK Fax: (Sales) Fax: (Editorial) Larry Neal Hywel Thomas PLATTS NEWS & PRICING SERVICES VP, Global Editorial: Dan Tanz Global Director, News: John Kingston Global Director, Oil: Dave Ernsberger Editorial Director, Petrochemicals & Agriculture: Simon James Thorne Editorial Director, Metals: Joe Innace Global Director, Markets: Jorge Montepeque Get a free subscription at: or send to: pamela.curran@platts.com EDITOR S NOTE Just before I penned the editor s note, one of my colleagues asked me what was the main theme running through these articles, and of course, my initial answer was China and her response was Not again! Well, I guess there is no running away from China continuing to be the main star on the energy stage. But, has China lived up to its promise or are we a bit disappointed as a slowdown in the country s economic growth hits demand for all commodities? Coming back to what the theme should be! Politics, Policies and Prices I thought these would more or less cover it all. The second half of 2014 was initially dominated by geopolitical tensions with unrest in Iraq pushing Brent crude above $115/b in June. Geopolitical tensions in the Middle East and North Africa had everyone sitting on the edge of their seats. But where are we now? Prices have slipped below $90/b! How have these price swings impacted Asia? Policy changes triggered by the need for reform in Asia s energy sector are influencing the scene in Indonesia, India, Japan and China. Myanmar follows closely behind as it starts to lay out its policy map to woo investors, but the challenges are plenty. India and Indonesia promise to be very exciting following the unveiling of new leaders with humble backgrounds Modi, a former tea-seller, and Jokowi, a former carpenter. There are high expectations of them to introduce reforms that would save these countries from their dire energy situation. Indonesia s biodiesel is also in the focus with a shift in demand centers. What s interesting here is that even though the global shift is toward renewables and environmentally friendly resources, coal is still king in Asia. Meanwhile, China is taking the country s massive web of taxes by the horns, and trying to foolproof its tax regime against corruption. In the Land of the Rising Sun, refiners face the deadline of October 31 to respond to new regulations on proposed CDU capacity cuts will Japan become a net oil products importer? On LPG, the petrochemical industry in Asia is drawing barrels from the US and Africa, intensifying competition faced by Middle East producers. The props have now been set, so all eyes would be on the impact of these political, policy and price changes in Asia some of those I d look out for would be shifts in the subsidy burden, deregulation, capacity cuts and changes in importer/ exporter status. Geetha Narayanasamy, Editor 2 insight OCTOBER 2014

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6 JAPAN TAKEO KUMAGAI Senior Editor Asia Oil News REFINERS NEW TARGETS Seven months on, new government regulations have once again pushed Japanese refiners to make decisions on capacity cuts on crude distillation units, just after they slashed capacity to 3.95 million b/d at the end of March. These refiners face a deadline on October 31 to respond to the new regulations on proposed capacity cuts, which is expected to boost efficiency and competitiveness among them, while triggering a heavier flow of oil product imports, especially during turnarounds. Japan s total refining capacity at the end of March tumbled 12% year on year, and slid 19% from a 10-year peak of 4.89 million b/d in early April 2008, as a result of local refiners axing capacity to meet METI s previous regulations. On July 31, Japan s Ministry of Economy, Trade and Industry implemented new regulations that could result in trimming the country s installed refining capacity to around 3.55 million b/d by the end of March Courtesy: Petroleum Association of Japan The expected reduction under the new regulation amounts to about 400,000 b/d, or 10%, of the current installed capacity of 3.95 million b/d, if local refiners proceed with further cuts in the capacity of crude distillation units, according to a ministry source. Similar to the previous policy for refiners, the new regulation sets fines of up to Yen 1 million ($9,168) for companies that fail to meet the requirements. TonenGeneral s Kawasaki refi nery. But these fines are seen as minor compared with the heavy investments 4 insight OCTOBER 2014

7 JAPAN and costs of scrapping facilities to meet the new regulations. The thinking within the government is that companies will try to meet the new targets rather than to be seen to be violating them. The ministry presented a draft of the new regulations at its oil and natural gas subcommittee meeting on June 30, and closed a public comment period on July 15. New residual cracking capacity target Under the new regulation, Japanese refiners are expected to boost their residue cracking capacity to 50% by the end of March 2017, compared with 45% on March 31, under a revised definition of the capacity. The revision counts the capacity of units such as fluid catalytic crackers, residue direct-desulfurizers and solvent deasphalting units, in addition to those that made the list previously cokers, residue fluid catalytic crackers and residue hydrocrackers for residual cracking capacity of local refiners. Unlike the previous regulations, which required refiners to close CDUs or install certain residual cracking units, the new policy would consider taking into account reductions in nameplate CDU capacity, as well as more efficient use of residue at adjacent refineries by building new pipelines. In addition, METI is to consider refiners efforts to build new condensate splitters to produce petrochemicals, as well as their overall business restructuring plans in assessing their efficient use of feedstock. CHANGES IN JAPAN S REFINING CAPACITY Permanent closure Refi nery Owner Unit Capacity (b/d) Effective Tokuyama Idemitsu Kosan Entire 120,000 Mar 31, 2014 Muroran JX Nippon Oil & Energy Entire 180,000 Mar 31, 2014 Kawasaki TonenGeneral No. 1 CDU 67,000 Mar 31, 2014 Wakayama TonenGeneral No. 2 CDU 38,000 Mar 31, 2014 Capacity change Refi nery Owner New capacity (b/d) Effective Hokkaido Idemitsu Kosan 160,000 Mar 31, 2014 Aichi Idemitsu Kosan 175,000 Mar 31, 2014 Yokkaichi Cosmo Oil 112,000 Mar 31, 2014 Ichihara Kyokuto Petroleum Industries 152,000 Mar 31, 2014 Kikuma Taiyo Oil 118,000 Mar 31, 2014 Source: Company reports To meet the new regulations, local refiners would be expected to make certain physical cuts on their CDU capacities in the face of diminishing domestic demand over inefficient and uneconomical options, such as trimming their nameplate capacities and building new cracking units, according to industry sources. Under the new 50% residue cracking target, individual Japanese refiners would have varying improvement goals, depending on capacity and based on the revised March 31 definitions of residue cracking capacity. Residual capacity target for each refiner varies By March 31, 2017, Japanese refiners with residue cracking capacity of less than 45%, 45%-55% and more than 55% as of March 31 this year would be required to show improvements of more than 13%, 11% and 9%, respectively, according to the regulatory targets. Under these new targets, refiners JX Nippon Oil & Energy, Cosmo Oil, OCTOBER 2014 insight 5

8 JAPAN JAPAN S INSTALLED CAPACITY B/D TonenGeneral and Taiyo Oil would likely be required to boost their residual cracking capacities by 13% from their current capacities of less than 45%, according to an industry calculation obtained by Platts. Refiners Idemitsu Kosan, Fuji Oil and Showa Shell are expected to improve their residual cracking capacities by 11%, 11% and 9%, respectively, from their current residual cracking capacities of 49%, 48% and 57%, according to the calculation provided by an industry analyst who declined to be named. The METI regulation counts JX as having an installed capacity of million b/d, comprising million b/d of its official refining capacity, the 115,000 b/d Osaka export refinery jointly operated with PetroChina International (Japan) as well as a 63,500 b/d Kashima condensate splitter and a 35,000 b/d Mizushima-B condensate splitter. JX put its own official refining capacity at million b/d, which excludes the Osaka refinery and the Kashima and Mizushima-B condensate splitters. Taiyo Oil which was exempt from the previous round of cuts because it operates a single refinery a 118,000 b/d plant on Shikoku island might also escape the new regulation after submitting its response plan to METI, sources said. The same exemption might also apply to Fuji Oil, which operates its sole 143,000 b/d Sodegaura refinery in Tokyo Bay. Nansei Sekiyu, which was exempt from the previous regulation for its annual crude processing volume of less than 3 million kl, or 52,000 b/d, at its sole 100,000 b/d Nishihara refinery in Okinawa, could also be exempted from the new regulations as it also operates a single refinery, sources said. Japan may flip into net oil products importer during turnarounds Industry sources said it remains unclear how Japan s supply and demand balance will shake out after the latest round of capacity cuts. However, what the Japanese downstream sector has witnessed so far is that there were year-on-year increases in oil products imports, coupled with improvements in light oil products margins over April- June. A local industry analyst said South Korean suppliers have been seeking opportunities to sell oil products to the Japanese market after the series of recent refining capacity cuts End-March 2010 End-March 2011 End-March 2012 Source: Petroleum Association of Japan and company reports End-March 2013 End-March 2014 In the wake of the latest capacity reduction, Japan turned into a net importer of gasoline over May-June during the country s first peak refinery turnaround season following hefty cuts in capacity at the end of March. 6 insight OCTOBER 2014

9 JAPAN Gross gasoline imports by refiners and importers averaged 43,842 b/d over May-June, against average gross exports of 21,191 b/d, an analysis of METI data showed. Japan s gasoline imports in May-June had more than doubled from 19,245 b/d in the same period last year, while exports were down 6% from 22,538 b/d a year ago. Japan had flipped back into a regular net gasoline exporter in November 2013, after turning net importer in the aftermath of the devastating earthquake and tsunami in March Domestic gasoline demand, meanwhile, inched lower by 2.5% year on year to average 897,609 b/d over May-June, implying the steep hike in imports was to offset sharp cuts in domestic production ahead of seasonally higher summer demand. Japan produced 825,457 b/d of gasoline over May-June, down 7.5% from 892,630 b/d in the same period last year. The sharp fall in gasoline output and ensuing imports were due to a heavy turnaround season, which saw at least 915,000 b/d of the country s crude refining capacity taken offline in May and 1.2 million b/d in June, accounting for 23-30% of total capacity, according to Platts calculations. Japan was also net oil products importer over April-June, with average gross imports at 553,169 b/d, up 4.2% from a year ago, against exports of 442,987 b/d. This was led by a steep year-on-year drop of 20.1% in its oil product exports during the quarter, compared with a mere rise of 4.2% in its petroleum product imports. During Q2 this year, Japan s overall gasoline imports surged 47% year on year to 31,999 b/d, while gasoil imports came in at 7,626 b/d in the quarter, up more than four times from 1,745 b/d a year ago. Imports of fuel oil have also grown 8.4% year on year to 84,398 b/d in Q2, as a result of the capacity cuts and as refiners opted to import low sulfur fuel oil for thermal power generation amid nuclear outages, rather than produce the product. The heavy cut in refining throughput in Q also saw major middle distillates exporter Japan slash exports of the straight-run products. Exports of gasoil over April-June plunged 41.4% year on year to 116,277 b/d, while jet fuel exports edged down 7.9% to 190,935 b/d. A local industry analyst said Japan s steep hike in gasoline imports and sharp drop in gasoil exports were consequences of Japan s recent cut in its installed refining capacity, which he said was excessive when considering domestic needs, especially during the country s turnaround season. The country s refining throughput had plunged to multi-year lows in May and June at the peak of the spring turnaround season. Japan refined 2.62 million b/d of crude in June, down 16.8% from 3.15 million b/d a year ago, and the lowest for the month since 2.5 million b/d in June OCTOBER 2014 insight 7

10 JAPAN The June crude throughput figure was 11.2% lower than the 2.95 million b/d in May, which was the lowest for that month since 2.89 million b/d in May 2011 after the devastating March earthquake and refinery outages. Japan s total oil demand averaged 2.83 million b/d in Q2 2014, down 4.4% from the same quarter last year. Looking forward, Japan long known as a major exporter of oil products in Asia is expected to remain a regular importer of oil products, at least in the short term as domestic suppliers rebalance their output and imports after the capacity cuts. Given falling domestic oil demand, supply might still exceed demand if local refiners opt to cut total capacity to 3.55 million b/d by the end of March 2017, industry sources said. On the flip side, domestic output might fall short of demand, especially during the country s refinery turnaround seasons of May-June and October- November, which could increase Japan s requirement for oil products imports, industry sources said. Margins improve after capacity cuts Japan s refining margins improved over April-June from last year due to a combination of capacity cuts, heavy turnarounds and changes to several refiners weekly wholesale oil products pricing systems. Over April-June, several refiners in Japan adopted new pricing systems based on crude costs for their weekly changes to wholesale oil products prices, rather than heavily relying on domestic oil product benchmarks. The pricing changes differ among Cosmo Oil, Showa Shell and JX, which adopted new systems in April, May and June, respectively, according to the sources and company officials. The wholesale pricing systems apply to weekly changes in wholesale prices of gasoline, kerosene, gasoil and A-fuel oil, a blend of gasoil and fuel oil in a 90:10 ratio. Although exact details of refiners new pricing mechanisms remain unclear, numerous industry sources echoed that they reflect to a larger degree recent movements of international crude benchmarks such as Dubai, rather than being indexed to domestic oil product benchmarks. Looking at overseas opportunities While trimming refining capacities in Japan in the face of shrinking domestic demand, several Japanese companies are eying refining or oil products business opportunities overseas. The new president of JX Nippon Oil & Energy over the next two years plans to explore refining-to-retail opportunities in Indonesia and Vietnam while optimizing output and oil products trading amid contracting domestic demand. We are aware that Indonesia is short of petroleum, and we have heard that there are plans for refinery expansions as well as building new ones, Tsutomu Sugimori said in an interview with Platts in July. 8 insight OCTOBER 2014

11 JAPAN The company has begun exploring integrated business opportunities ranging from building a refinery to selling at service stations in Indonesia, said Sugimori, who took the helm on June 26. In July, Japan s Mitsubishi also said it will start gasoil imports, sales and distribution businesses in Australia by the April-June quarter of 2016, after completing a new gasoil import terminal at Port Bonython in South Australia. Mitsubishi will be the first Japanese company to own and operate an oil import terminal in Australia, where it intends to initially supply gasoil mainly to industrial users in the mining sector, a company official said then. Mitsubishi has an import capacity of 900,000 kiloliters (5.66 million barrels)/year of gasoil at the Port Bonython terminal, with three storage tanks with a capacity of 27,000 kl, or 169,825 barrels, each. Australia is becoming increasingly reliant on imported transport fuels due to the closure of two of the country s remaining six refineries over the coming year. Singapore rather than by shipping from its refineries in Japan. Looking further ahead, Nobuo Tanaka, former executive director of the International Energy Agency, called for a change in Japan s long standing post-war policy for refining and consuming, in the face of diminishing domestic demand. The Japanese refining sector needs an alternative business model to the refining and consuming policy, said Tanaka, now a special adviser and global associate for energy security and sustainability at the Institute of Energy Economics, Japan. The alternative business model can be entering refining or oil products businesses in growing markets, while another option can be participating in the refining sector in countries with affordable feedstock such as in the US or the Middle East, and bringing back oil products to Japan whenever necessary, he said in an interview with Platts. Courtesy: Petroleum Association of Japan JX s Sugimori also said that Japan s largest refiner could also be looking at Australia as a potential market to sell into. In December 2012, Japanese refiner Idemitsu Kosan acquired Australia s Freedom Energy, which has put Idemitsu in a position to potentially directly move oil products to Australia for gasoil and gasoline sales in the eastern states of Queensland, New South Wales and Victoria, possibly by securing supply in JX Nippon Oil & Energy s Kiire oil terminal. OCTOBER 2014 insight 9

12 PAPUA NEW GUINEA LNG CHRISTINE FORSTER Senior Writer Asia Oil News PNG LNGARRIVES The start-up of the ExxonMobiloperated Papua New Guinea LNG project ahead of schedule in April this year cemented the small Pacific nation s arrival as a global gas producer, and the signs are increasingly positive that there is more to come. PNG enjoyed its tenth straight year of economic expansion in 2012, when real gross domestic product rose by 8.1%, according to figures from the Australian government. Growth slowed to an estimated 4.6% in 2013 and is forecast to be 6% in But with the PNG LNG project now online, the country is poised for unprecedented growth. At a price tag of $19 billion, the project represents the biggest investment in the country s history. According to the 2014 CIA World Factbook, the massive gas development has the potential to double PNG s GDP in the near-term and triple its export revenue from the $5.6 billion recorded in It will boost government coffers, generate local employment opportunities and royalty payments to landowners, and provide infrastructure which could spur further industry development. Natural resources already dominate PNG s export mix, headed by oil, gold and copper. ExxonMobil s project adds to this list export capacity of 6.9 million mt/year of LNG from two production trains at the liquefaction facilities near Port Moresby. ExxonMobil holds a 33.2% operating stake in PNG LNG. Its joint venture partners are PNG-based Oil Search (29%), the government s National Petroleum Company of PNG (16.8%), Australia s Santos (13.5%), Japan s JX Nippon Oil & Gas Exploration (4.7%) and local landowner company MRDC (2.8%). The project is an integrated development that includes gas production and processing facilities in PNG s Southern Highlands, Hela, Western, Gulf and Central provinces. More than 700 km (434 miles) of pipelines connect the project facilities, including a gas 10 insight OCTOBER 2014

13 PAPUA NEW GUINEA LNG Courtesy: ExxonMobil conditioning plant in Hides and the liquefaction and storage infrastructure on the coast. The LNG plant began producing in April and delivered its first cargo in May, well ahead of the scheduled October start date. By the end of June, the project had loaded seven LNG cargoes, all of which were sold on the spot market. Around 95% of the project s LNG capacity is covered by long-term contracts, set to begin later in The project s term customers are China s Sinopec, Tepco and Osaka Gas from Japan, and Taiwan-based CPC. The project partners have been focused on ramping up operations to full capacity. With that now achieved, they are already eyeing the potential to add a third LNG production train at their liquefaction facilities. The joint venture is looking to expand the reserves base in the project s Hides field and will drill the Hides Deep prospect late this year or early next year, searching for gas to underpin a third train. In addition, plans are being progressed for the submission of a development licence for the nearby P nyang gas field, which Oil Search has flagged as a potential expansion resource. Oil Search is listed in Australia but is PNG-focused and is the operator of all of the country s existing crude oil production. It is also one of the main players behind what analysts are now tipping will be PNG s second LNG project, the Elk/Antelope development. The Elk/Antelope project has a long and at times controversial history. The field is operated by US-listed InterOil which, in years gone by, has been at odds with Vessel loading at the PNG LNG facility. OCTOBER 2014 insight 11

14 PAPUA NEW GUINEA LNG the PNG government over how best to develop the resource. Under the terms of InterOil s 2009 project agreement with PNG, Elk/ Antelope was to be developed to deliver a 7.6 million-10.6 million mt/year LNG project, using internationally recognized technology and operators. InterOil subsequently earned rebukes from senior government officials over its plans to develop a smaller, staged LNG project with a number of joint venture partners, none of which Port Moresby deemed met its requirement for international project operating experience. In response, InterOil opened negotiations over the sale of a stake in the project with the three industry heavyweights ExxonMobil, Shell and Total who were on the ground looking for opportunities in PNG. In December 2013, an initial deal was unveiled with Total, then reworked and finally agreed in March this year. The eventual acquisition by Total came just after Oil Search bought into the project, via a takeover of one of InterOil s joint venture partners, Pacific LNG Group Companies. Pacific LNG, an affiliate of Clarion Finanz, held a 22.8% stake in Elk/Antelope. Oil Search has since claimed that this acquisition afforded it pre-emptive rights in relation to the joint venture and has sought arbitration of the dispute. The arbitration is expected to be heard in late November and decided in the first quarter of Notwithstanding that hiccup, with French major Total and experienced local operator Oil Search on board, the prospects for a development of Elk/ Antelope are looking bright. Total agreed to pay $401 million for its 40.1% share of the project, reducing InterOil s stake to 36.5%. The remaining equity is held by minorities. Under the terms of its acquisition, Total will make further payments dependent on the size of the gas resource which is certified, at a final investment decision on a development, and again at the shipment of the first LNG cargo. Should the resource be determined at 7.1 Tcf of gas, the certification payment would be $580 million, taking the total return to InterOil, including all other contingent payments, to $1.62 billion. InterOil s eventual pay-out could rise to as much as $3.5 billion, should the resource turn out to be as big as 11.8 Tcf. According to Oil Search, the key objective of drilling at Elk/Antelope over the next six months is to narrow the contingent resource range and determine whether the field can underpin one or two LNG production trains. In parallel, the joint venture is considering the scope for concept selection phase studies and surveys, which will address viable LNG development options. Although there is still a long way to go, Oil Search sounds increasingly confident that the expansion opportunities at PNG LNG and the development potential of Elk/Antelope will see it involved in two, and possibly three, additional LNG production trains by the end of this decade. Should that occur, PNG will be able to claim its place as a significant player in the global LNG market. 12 insight OCTOBER 2014

15 Market access Risk management Asset optimisation 2014 Energy Risk 2014 Energy Risk Asia Paris Brussels Singapore

16 LPG MOHD RAMTHAN HUSSAIN Senior Editor LPG (Asia Pacific and Middle East) US, AFRICA LPG IN ASIA Asia is diversifying its sources of LPG and absorbing an increased flow from the US, West and North Africa to meet rising levels of demand from Chinese and North Asian petrochemical industries. This is intensifying the competition faced by Middle Eastern producers Qatar, the United Arab Emirates, Saudi Arabia and Kuwait, who could however look forward to rising demand from India, traders and analysts said. Iranian cargo flows to Asia, which resumed in May 2013 after an eightmonth hiatus on worries over an EU ban on shipping insurance, have touched levels close to the pre-sanction period and are also finding their way to China. The increased Atlantic Basin supplies did not immediately prompt a marked drop in Asian prices till recently, reflecting equally steady demand so far and due to a shortage of very large gas carriers in the spot market for trading firms to move free-on-board cargoes, traders and shipping analysts said. This was unlike the volatility seen over the past three years. However, a supply build-up in the region, moves by some Chinese petrochemical companies to resell cargoes bought for their propane dehydrogenation plants and tepid summer demand, had pushed prices to around 14-month lows in early August. Prices have since slid to 27-month lows due to the large inflows, expected soft winter demand and the plunge in crude futures, traders said. The tight vessel supply had driven up global VLGC rates to record peaks twice so far this year and helped shipowners and trading companies with time-chartered tonnage to strengthen their stranglehold on the LPG spot market, traders and shipping sources said. The high freight rates have also supported premium levels for cost-and-freight LPG cargoes. A typical VLGC steaming under ideal conditions can make eight to 10 voyages in a year loading in the Middle East and discharging in the Far East. However, if it is loading in the US Gulf and 14 insight OCTOBER 2014

17 LPG ROUTES TO JAPAN COMPARED US Gulf Japan (via Cape of Good Hope) 15,600 nautical miles 100 days round voyage 6.4 vessels/million mt LPG Middle East Japan 6,600 nautical miles 46.5 days round voyage 3.0 vessels/million mt LPG US Gulf Japan (via Panama Canal) 9,200 nautical miles 65 days round voyage 4.2 vessels/million mt LPG discharging in the Far East, it can make three to four voyages, not passing through the Panama Canal, said Kumar Shantanu Bhushan, Lead Research Analyst, Gas Shipping, at shipping consultancy Drewry. If a vessel loads once in the US for discharge in East Asia and is back to load again after around days, this leads to a tight supply situation in the loading region. Therefore, a slight mismatch between cargoes available to load and available tonnage can help rates move on either side in a very short span of time, Bhushan said. Both tonnes and miles are increasing, taking tonne-mile demand higher for larger vessels. As a result, freight rates have shot up. Congestion at ports, such as those in India, have also held up tonnage and tightened vessel supply, he added. OCTOBER 2014 insight 15

18 LPG US PROPANE SUPPLY/DEMAND BALANCE MMB/D Source: EIA, analysts Petchem Res/Comm Exports Inventory draw Total supply US LPG starts to make mark in Asia Over the past year, five to six LPG cargoes from Houston dominated by propane and totaling some 264,000 mt are shipped each month to Asia, against the odd one to two parcels seen more than a year ago, said traders, brokers and shipping sources polled by Platts. Around four to five more cargoes are moved each month from West Africa. Algeria is also making more regular shipments to Asia, ranging from none in some months to up to five monthly cargoes, they said. So overall it makes for typically 12 arbitrage cargoes per month coming to Asia, one trader said. An unprecedentedly high number of 15 cargoes could arrive in Asia from the US, West Africa and Algeria around October/ November through early December, which would help end-users stock up for the winter, shipping and trade sources said, adding that these are expected to rise further next year. The number of cargoes from West Africa and Algeria are coming into the East with some regularity at least during the summer, another trader said. Trading companies that have concluded term contracts with US exporter Enterprise Products Partners included Japan s Astomos, Eneos Globe, Itochu, TonenGeneral, Sumitomo, Iwatani, South Korea s SK Gas and E1 Corp., Geogas, Naftomar, Petredec, Petrobras, Petroecuador, Repsol, Shell, Statoil, Total, Trafigura, Vitol and Texas Gas and Oil, market sources said. Among firms holding term deals with US-based Targa Resources are Gunvor, Gazprom, Geogas, Petredec, Vilma, Itochu as well as Chinese buyers such as China Soft Package, Everglory and Oriental Energy, market sources said. The duration of these contracts ranges between 2013 and up to En *Vantage analyst Peter Fasullo recently said the US has terminal capacity to export about 428,000 b/d of natural gas liquids each month, while Energy Information Administration data showed the US shipped 446,000 b/d of propane in May, up from April s 414,000 b/d and 308,000 b/d in May last year. The US also exported 79,000 b/d of butane in May, versus 75,000 b/d in April and 30,000 b/d in May US propane exports are projected to surge 50% over the next two years to 626,000 b/d, while normal butane exports are forecast to jump to 120,000 b/d next year and 146,000 b/d in 2016, according to Market Call: North American NGLs, by Bentek, a unit of McGraw-Hill Financial. Exports are set to gather steam especially after the projected startup of the 16 insight OCTOBER 2014

19 LPG expanded Panama Canal by mid-2016, which would almost halve the round voyage to Japan. US exports of NGLs hit a record of 17.2 million barrels in May, up around 2 million barrels above the previous record set in April, the EIA said. Exports were over 7 million barrels higher than the same month last year. Brazil, Canada, Japan, Mexico and the Netherlands were the biggest importers of US NGLs, getting a total of 9.1 million barrels. This was enabled by growing US shale production and the on-track development of NGL export terminals, inland transportation infrastructure as well as processing, piping and fractionating capacity. Overall, this has made us more confident on our current estimates on future export volumes out of the US, Norwegian bank DNB said in a recent report. It said 2.2 million mt, or 25.6 million barrels, of propane inventory were built-up from March to June 2014 in the US, the largest since About a third of US exports have now moved to the East, in line with DNB s 2014 estimate of 30%. Other than Enterprise and Targa, other US exporters include Sunoco and refiner Phillips 66 which is aiming to raise its total refrigerated LPG handling capacity to 12 million barrels/month, if a plan to build a second natural gas liquids fractionator in Texas gets board approval. Phillips 66 sealed its first long-term propane supply contract in March, with China International United Petroleum & Chemicals Co. Ltd., or Unipec. Sage Midstream, a privately held US company focused on NGL infrastructure projects, is also eyeing the Asian market with the fourth-quarter 2016 startup of an LPG marine terminal operated by wholly owned unit Haven Energy at Port of Longview, Washington state. Washington on the US West Coast is also the site of the Ferndale terminal, where Japanese refiner Idemitsu Kosan loaded its first butane cargo for export in early August. Other terminal developments include those by Occidental Chemical and Crosstex Energy. The monthly flow of cargoes to Asia from the Atlantic Basin, come on top of the 36 million mt/year from the Middle East in Middle Eastern LPG flows to Asia in 2016 are projected at 37 million mt. US export capacity is forecast to grow to more than 30 million mt/year by 2017 from 13.7 million mt/year of propane and butane exports projected for this year. US gains from rising Asian demand Japan has been increasing imports from the US to secure diverse and cheaper supply sources. Tatsuhiko Yamasaki, chairman of Japan LP Gas Association had said Japanese buyers have signed contracts to import at least 2 million mt/year of US LPG by If all the committed US LPG is brought back to Japan in 2016, US LPG imports could make up about 17% of the country s total 2013 imports of million mt, according to Platts calculations based on the association data. Japan imported 9.1 million mt of LPG from the Middle East last year, accounting for 78.6% of total imports, down from 84% in 2005, while the US accounts for 952,000 mt of Japanese LPG Photo by Ramthan Hussain China s fi rst propane dehydrogenation plant, Tianjin Bohua Petrochemical Co. OCTOBER 2014 insight 17

20 LPG imports, or 8.2% of the total, up from 0.2% in 2005, the association said. Yamasaki had also said Japan s imports of US LPG are expected to rise further to around 3 million mt/year, including spot purchases, by 2017 and will make up about 25% of the country s total imports. This has led Japanese buyers to push for a new pricing system, which takes into consideration the Saudi Aramco Contract Prices and the typically lower-priced US Mont Belvieu benchmarks. Backed by growing demand from the new propane dehydrogenation plants three are now operating with three more due to start by year-end China s LPG imports are soaring. In the first half of the year, overall imports jumped 97% year on year to 3.12 million, General Administration of Customs data showed. China s net LPG imports totaled 2.44 million mt in the first half, up 150% from the year-ago period. Net propane imports were at 1.84 million mt, up 167% year on year, while net butane imports totaled 592,439 mt in the first half, up 108%. While Middle Eastern producers the UAE and Qatar remained the top two suppliers, the US has raced into third spot in the first half with 243,280 mt. India s LPG imports for public and private sector consumption are expected to grow at double digits to more than 8 million mt in fiscal (April- March) from 6.3 million mt in , after the government raised the number of subsidized cylinders early this year, India-based traders said. While the Middle East remains the major source of Indian imports due to geographical proximity and the country s Japan has been increasing imports from the US to secure diverse and cheaper supply sources. focus on using butane, sources said that US exporters are exploring possibilities of selling to India, especially if the country moves to raising the proportion of propane in its demand mix. Tight vessel supply to last through 2015 The rise in Asian demand for US LPG has impacted US prices over the past year and tied up vessels on the long-distance route. Mont Belvieu propane was assessed September 9 at cents/gal ($554.87/mt), while propane for delivery along the key Singapore-Japan route was assessed at $840/mt, making for a discount of around $285/mt, narrower than $323.5/mt around the same time last year, Platts data showed. But taking into account the current high Houston-Japan VLGC freight of around $280/mt compared with $200/mt a year ago the discount between US and North Asia prices narrows to just above $5/mt, Platts data showed, making it less economical for most traders to make regular longdistance journeys to Asia, except for shipowners, or those with term-charter tonnage. VLGC rates on the Persian Gulf-to-Japan route have also jumped to record highs twice this year, the latest above $140/mt on July 23, and hovering above $100/mt in September. Traders and shipowners said tightening vessel supply and the trend of escalating freight could persist till second-half 2015 or even into 2016, with one shipowner expecting the Persian Gulf-to-Japan rates to soar to above $200/mt. Shipowners and analysts said there are currently 1,195 LPG carriers with a capacity of 1,000 cubic meters or more. Of these, 157 are VLGCs accounting for 12.6 million cu m, they added. Analysts said 146 new LPG carriers, including 73 VLGCs, are lined up for delivery during , with the majority slated to hit the market from the second quarter of 2015 through Q for now. With more VLGCs in operation, as well as the opening of the expanded Panama Canal, vessels would not be tied up too long, which could help to reduce freight rates, analysts said. But with major shipowners already making orders, along with Chinese and Japanese companies, while a new trend of building very large ethane carriers is emerging, shipyards are booked to the maximum and are unable to rush for earlier delivery dates, analysts said. In view of such high demand and expectations of a surge in global LPG flows, the industry could consider building ultra large gas carriers, or ULGCs, to cater to the growing longdistance, one shipping expert said, though others said this may be a premature idea. 18 insight OCTOBER 2014

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22 MYANMAR SONG YEN LING Senior Writer Asia Oil News INVESTORS ROCKY ROAD Myanmar, portrayed as the land of opportunities post-sanctions, is starting to reap the benefits of opening its gates to foreign investment. The country with open arms welcomed investors in various fields, including the energy sector, but it is still new to the game and has yet to smoothen the path for these investors. The challenges bureaucratic red tape, shortage of skilled labor, corruption, non-existent infrastructure seem daunting and may threaten to stymie progress. The country is estimated to hold 17.5 Tcf of gas reserves and 3.2 billion barrels of crude oil reserves, according to the country s energy ministry. The oil and gas sector in 2013 was valued at some $14.4 billion, second only to the power sector, which was just under $20 billion, according to the Ministry of National Planning and Economic Development. Foreign oil and gas players had been eager to re-enter Myanmar after it lifted its curtain in April 2011 with the easing of sanctions, attracted by promising geological prospectivity and its proximity to energy consumers such as China. A lack of transparency But in Myanmar it is obvious that regulatory delays and corruption are endemic, creating a greater need for transparency in all fields. In the energy field, analysts pointed out that more needs to be done to enhance transparency in upstream bid rounds. For example, the government should disclose more information about the criteria it uses to assess bidders and how it selects the winners of the oil and gas blocks, according to consultancy IHS. The Ministry of Energy also failed to reveal signature bonuses offered by each company, making it difficult to assess the standard of less known companies and their proven oil and gas track record. This heightens the risk that smaller, politically connected bidders with little E&P expertise will be awarded contracts. In turn, they may fail to develop the blocks but instead sell them on once asset prices rise, IHS warned. Sixteen onshore blocks were awarded to foreign companies, including Eni, 20 insight OCTOBER 2014

23 MYANMAR MYANMAR-CHINA CRUDE, GAS PIPELINE ROUTES CHINA Crude Tibet oil pipeline Chengdu Gas pipeline Chongqing Hubei Sichuan Chongqing Nanchang BHUTAN CHINA Guizhou Hunan Jiangxi BANGLADESH Chittagong Lufeng Chuxiong Ruili, Dehong Anning Yunnan Myingyan MYANMAR Guiyang Kunming Hechi Yuxi Guangxi Nanning Guigang Yulin VIETNAM Hanoi Guangdong Guangzhou Hong Ko Macau Hong Kong Bay of Bengal Ramree Island THAILAND LAOS Vientiane Hainan South China Sea Source: Platts Petronas, PTT Exploration & Production and ONGC Videsh, during the 2013 bid round in October last year. The awarded offshore acreage was evenly split between shallow-water and deepwater blocks. The formal signing of the production sharing contracts, however, only took place in the third quarter of 2014, some 10 months later. The formal award of the PSCs for the 20 offshore blocks, which were announced in March 2014, may take just as long. My personal view is that it took longer than some of them had thought, said Nomita Nair, partner at UK law firm Berwin Leighton Paisner, which has offered its consulting services to the Myanmar government in dealing with oil and gas joint ventures. But I think all the players have been quite realistic, they have operated in challenging situations [before], so I don t think delays would have necessarily been unexpected, Nair added. While noting the bureaucratic delays in finalizing and executing the PSCs, Sanjeev Gupta, Asia-Pacific Oil and Gas Leader at Ernst & Young, said the key challenges facing operators also include under investment in infrastructure as well as an under-developed financial sector that results in onerous processes for transactions with domestic and overseas suppliers of oil-field services. Compared with other countries in the region, Myanmar s upstream fiscal regime is considered relatively burdensome, particularly for deepwater developments because of the high costs involved. The biggest pull, however, is Myanmar s perceived superior geological prospectivity that trumps its neighbors the country has yielded regular significant discoveries and many of the offshore basins are still considered frontier acreage and lightly explored. The entry of companies during the latest annual bid rounds followed an initial wave of interest from Chinese, Thai, OCTOBER 2014 insight 21

24 MYANMAR Indian and South Korean companies along with France s Total, in the decades before Western economic sanctions were lifted in Myanmar s legacy gas projects are the Yetagun and Yadana fields, where production is mostly exported to Thailand. Following the start of production from the deepwater Shwe gas project last year, where South Korea s Daewoo the operator contracted to sell gas to China National Petroleum Corp., the Zawtika project from the M9 block spearheaded by Thailand s PTTEP came on stream in February The next two projects in line for development are likely to be M3, also operated by PTTEP, and M2, operated by PetroVietnam. Strong bond with China To date, China has been one of the biggest investors in Myanmar s energy sector. Myanmar received a revenue SELECTED FOREIGN OPERATORS BEFORE LIFTING OF SANCTIONS ONGC Essar Energy China National Petroleum Corporation CNOOC Daewoo International JX Nippon Oil & Energy Noble Group Petronas PetroVietnam PTTEP Sinopec Total SELECTED FOREIGN WINNERS IN 2013 UPSTREAM BIDDING ROUND BG Brunei National Petroleum Chevron ConocoPhillips Eni Oil India Ophir Energy Petronas PTTEP Reliance Industries Roc Oil Shell Statoil Total Woodside boost last year with the start of the deepwater Shwe gas project in August. China s state-owned CNPC will purchase 80% of production, or 400,000 Mcf/day of gas from the block in the Bay of Bengal, off western Myanmar s Rakhine state. This will be delivered via the 12 billion cubic meters/year Myanmar-China gas pipeline, which the Chinese funded. CNPC is also building a parallel 440,000 b/d crude pipeline that will transport Middle Eastern grades which it typically imports from the Burmese port of Kyauk Phyu on the coast of northwestern Rakhine state. The pipeline will traverse Myanmar before reaching China s southern Yunnan border, thus allowing CNPC to reduce its reliance on the narrow Strait of Malacca between the Malay Peninsula and Indonesia that connects the Pacific Ocean with the Indian Ocean, which is prone to piracy attacks, for at least some of its imported crude. Construction of the pipeline is in progress and Burmese energy ministry sources expect the segment within Myanmar to be completed before the end of It is still unclear as to when the pipeline will be operational. The crude was meant to feed a new refinery in Yunnan, originally to be commissioned by this year, but due to protests from local residents unhappy about a refinery sited at their doorstep and the current overcapacity in China s refining sector, the refinery could be delayed by two years, according to analysts. The World Economic Forum estimated last year that the crude pipeline is 22 insight OCTOBER 2014

25 MYANMAR expected to raise some $900 million in earnings for Myanmar annually in value added taxes alone. A further $900 million a year is expected to be reaped from long-term gas sales from the Shwe project. Besides CNPC, Chinese oil trader Guangdong Zhenrong Energy, an affiliate of state-owned Zhuhai Zhenrong, has been keen to build a greenfield refinery in Dawei, in the Thanintharyi region in central Myanmar, as early as 2012 but needs the green light from the Chinese government. Other challenges One of the most pressing problems facing the business sector is a lack of skilled labor. Despite a relatively youthful population, many lacked access to higher education during the decades of military rule while those that were skilled left Myanmar for greener pastures, resulting in a brain drain. Companies looking to expand their positions in the country highlight the search for skilled labor as one of the larger stumbling blocks. In addition, the high wages needed to attract skilled labor could undercut the advantages of investing in Myanmar. One unique obstacle that operators may face in Myanmar is simply because of the fact that there are still live sanctions in place, said Nair. The US still prohibits American companies and individuals from doing business with Burmese individuals who were involved in the repression of the democracy movement since the mid-1990s. One such individual is Myanmar tycoon U Zaw Zaw, who is on the US treasury department s Specially Designated MYANMAR S OIL AND GAS FACILITIES Thanlyin Refi nery Chauk Refi nery Thanbayakan Petrochemical Complex Seiktha Methanol Plant Minbu LPG Extraction Plant Nyaung-Don LPG Plant Thanlyin Bitumen Plant Source: Ministry of Energy Nationals list. He tried to gain access to Singapore s capital market by engineering a reverse takeover of Singapore-listed bedlinen maker Aussino in 2012 with Max Myanmar his chain of fuel service stations in Myanmar. The move was rejected by Singaporean regulators last year due to concerns over alleged human rights violations and tax investigations by the tax authorities associated with Max Myanmar. Energy strategy Aside from opening its doors to foreign investment, the government has yet to formulate a concrete energy policy for the long term. In early 2013, the National Energy Management Committee was established to oversee the sector and tasked with introducing reforms and new legislation to help with the transition to a new economy but progress has been slow. But energy officials know this is urgently needed, given so much is at stake for a country facing an acute energy shortage. There are currently few regulations governing the use of resources for the domestic market. For instance with an energy plan, gas exports to other countries currently unrestricted could be slapped with domestic market 20,000 b/d 6,000 b/d 25,000 b/d obligations. This, however, could have repercussions for future investment. Energy subsidies are mainly in the power sector, where tariffs are low, although over 50% of the country is still not connected to a power grid. Because it was closed off from global trade for so long, Myanmar s reliance on oil for its energy needs has been minimal, although that is expected to grow significantly with urbanization. Stateowned Myanma Petrochemical Enterprise currently imports gasoline, diesel, jet fuel and LPG to meet the country s needs. Myanmar currently has three refineries with total nameplate capacity of 51,000 barrels/day a 6,000 b/d facility in Chauk, a 25,000 b/d refinery in Thanbayakan and a 20,000 b/d refinery in Thanlyin. A vestige of the British empire, the Thanlyin plant not far from Yangon was rebuilt in the 1950s after being destroyed during World War II. Running at about half its capacity now, the refinery has been prioritized for an upgrade, with an open tender launched this year looking for well-capitalized partners for the revamp. Other similar joint ventures have been proposed for LPG production facilities and jet fuel marketing at domestic airports. OCTOBER 2014 insight 23

26 INDONESIA BIODIESEL ESTHER NG Editor, Agriculture Asia HOME AND AWAY Courtesy: Shutterstock Europe slammed its doors shut to Indonesian biodiesel last year after the European Commission hit Indonesia and Argentina with stiff anti-dumping duties, while China s consumption tax on diesel with less than 30% of palm methyl ester effected January 1 marked the end of that blended fuel trade from Southeast Asia to China. The anti-dumping duties meant that Indonesian cargoes would be prohibitively expensive Eur /mt ($ /mt) higher. But other doors opened for Indonesian biodiesel a new market emerged in China for bigger-sized, 100% biodiesel cargoes while Indonesia increased the biodiesel blend for subsidized diesel from B7.5 to B10. This pushed state-owned oil and gas company Pertamina to seek its increased requirements via tenders, last year and this year. Palm oil fruit transported from plantation to processing plant. The move by Indonesia was to trim its refined oil import bill after its current account deficit ballooned to $9.8 billion in the second quarter of 2013 the widest since the Asian financial crisis of the late 1990s. Shift in Chinese buying China has been importing biodiesel from Southeast Asia, mainly Indonesia, Thailand and Malaysia, since 2012, but as B2-B5 cargoes diesel blended with 2-5% PME. Traders on both sides of the South China Sea declared these cargoes as biodiesel in order to avoid paying 24 insight OCTOBER 2014

27 INDONESIA BIODIESEL Chinese customs fuel consumption tax which, for gasoil, is Yuan 941/mt ($153.38/mt). It was a lucrative trade. The imported cost of the biodiesel blend was around Yuan 7,600/mt, while the average wholesale price for biodiesel was Yuan 7,700/mt in Guangzhou and the wholesale price for 100% diesel or gasoil was around Yuan 8,350/mt. The blended fuel was preferably sold as gasoil at the higher retail prices, eating into China s domestic gasoil market share. The imports of the cheaper blended fuel exacerbated an oversupplied gasoil market and forced state-owned oil companies to export excess gasoil. According to customs data, China imported 2.53 million mt of the biodiesel blend in 2013, up nearly 25-fold from 101,156 mt imported in China s 2013 gasoil imports fell 71% year on year to 270,000 mt, while its gasoil exports surged 50.3% year on year to 2.78 million mt. But on January 1, the Chinese government closed this loophole by levying Yuan 941/mt on these blended fuel cargoes with less than 30% biodiesel content. For a while in January, it appeared that the biodiesel trade was dead. Certainly, the B2-B5 trade was, but it heralded in a new trade: the B100. Instead of buying 3,000-5,000 mt PME, the Chinese started buying bigger parcels of 10,000-15,000 mt of 100% PME. The Chinese preferred Indonesian PME because it was some $30/mt cheaper than Malaysian product. The CHINESE PME IMPORTS (MT) five major Indonesian biodiesel producers and exporters are Wilmar International, Musim Mas, Permata Hijau Group, Ciliandra Perkasa and AAA Oils and Fats. In January, China imported 52,862 mt of PME, almost of all of it from Indonesia (see table), Chinese customs data showed. Imports fell to 25,499 mt in February but this was mostly because the Chinese were on holiday for two weeks for the Lunar New Year. Many Chinese workers return to their hometowns during this time. But trade resumed in March and April to slightly over 100,000 mt each month. Around this time, traders reported that their Chinese buyers had trouble getting letters of credit. The Chinese government s effort to rein in excessive lending at low inter-bank rates in December had finally caught up with the biodiesel trade. And this resulted in a 54% drop in imports to 48,331 mt in May. China s credit crunch In the years after the global financial crisis, an influx of hot money at low interest rates has given rise to a shadow banking sector in China YTD volume Jan 52,862 52,862 Feb 25,499 78,361 Mar 102, ,263 Apr 105, ,454 May 48, ,785 Jun 57, ,077 Jul 116, ,182 Aug 82, ,777 Source: China customs data OCTOBER 2014 insight 25

28 INDONESIA BIODIESEL RESULTS OF FIRST PERTAMINA BIODIESEL TENDER Total volume secured Price Sellers Largely unregulated by the government, non-bank financial intermediaries are able to access these funds directly or through large state-owned banks at low interest rates. Arbitrageurs obtain short-term loans in the form of letter of credit, typically days, from these banks or agents with strong connections to banks by buying commodities. These commodity financing deals are not restricted to biodiesel, but include soybean, palm olein, rubber, zinc, aluminum and nickel. After receiving the LC, they would use the credit and re-loan it to an investor at a higher interest rate, making money on the interest spread. As for the agents, they would keep re-using the documents issued by logistic companies showing the ownership of the underlying asset a few times as long as the value is within their credit line, a trader said. Then in December last year, the Chinese government repeated what it 1,237,069 KL Discount (0.1 to 2.05%) to MOPS 0.25% gasoil assessment Musim Mas, Pelita Agung Agrindustri, Darmex Biofuels, Indo Biofuels Energy, Eterindo Wahanatama RESULTS OF SECOND PERTAMINA BIODIESEL TENDER Total volume secured Price Sellers 1,146,884 KL Discount (0.005 to 0.02%) to MOPS 0.25% gasoil assessment Wilmar International, Primanusa Palma Energi RESULTS OF THIRD PERTAMINA BIODIESEL TENDER Total volume secured Price Sellers around 600,000 KL 3% to MOPS 0.25% gasoil assessment Wilmar International, Darmex Biofuels did last June: It kept money supply tight and inter-bank borrowing rates went up. Lenders in the shadow financing sector were hit by more expensive credit. The effects of the credit crunch remain, but not tight enough as Chinese buyers continue to buy Indonesian PME spot cargoes all the way to December. About 70% of Chinese PME demand is driven by shadow banking, and the remainder for transport and power generation use, a trader estimated, though other sources say it is the other way around. Chinese customs data showed PME imports in May dropped by 54% to 48,331 mt, but were up 18.5% to 57,292 mt in June. The bulk of imports in June were from Indonesia and include 52,145 mt of PME and 5,138 mt of used cooking oil methyl ester from Hong Kong. Biodiesel traders point out that customs data do not always capture the large volume of biodiesel cargoes from Southeast Asia in bonded storage off the Dongguan, Yantai, Huangpu, Nansha and Zhanjiang ports. Prices of biodiesel from these tanks were Yuan 6,200/mt in August, which works out at $847/mt on an import parity basis, after deducting value added tax. There is no import tax on cargoes from ASEAN, of which, Indonesia is a member. Market sources had expected July and August import figures to be lower due to the tightening of credit lines in China. A number of traders said letter of credit openings for July were slower than usual. 26 insight OCTOBER 2014

29 INDONESIA BIODIESEL But PME imports in July went up by a whopping % to 116,105 mt, customs data showed. Biodiesel traders said the hike in July imports were most likely trades done in June when the discount of palm oil against gasoil dropped from minus $130/mt in May to minus $ /mt in June. A POGO palm oil versus gasoil spread of minus $150/mt and greater starts to become attractive for both producers and buyers because it means that crude palm oil has become cheaper, and therefore so would PME. CPO, RBD (refined, bleached and deodorized) palm oil and RBD palm olein are feedstocks of PME. Overall, China has imported 590,777 mt from January to August. But not all of this demand for biodiesel is for credit financing. In the summer, the Chinese blend 35-40% of PME with gasoil for power generation in their factories. They also blend 10-15% of PME with kerosene to make diesel for bunker use, and with light cycle oil to increase heating value. Indonesia s oil demand Indonesia s oil production has decreased over the last 10 years and in 2004, Indonesia became a net importer of oil with imports growing further amid population and economic growth. Over time, the country s current account deficit widened to $9.8 billion in the second quarter of last year the widest since the Asian financial crisis of the late 1990s, prompting the Indonesian government to find ways to cut fuel imports. In September last year, it announced that it would raise the biodiesel content in subsidized gasoil to 10% from 7.5%. The move would reduce the country s foreign exchange bill on gasoil imports by at least $2.6 million/year, or by 3.5 million kiloliters/year (60,313 b/d), and absorb biodiesel exports which would have gone to Europe were it not for anti-dumping taxes. The government has set a biodiesel consumption target of 4 million kl for 2014, but the realization is currently only 54% of the target due to the lack of blending facilities, logistics and price. Pertamina had launched a tender last September to buy 6.6 million kl over When the tender was first launched, Pertamina only managed to cover 1.2 million kl. The price awarded was at a discount to the Mean of Platts Singapore 0.25% sulfur gasoil assessments on a CIF basis. This was the main reason why the volume was small, biodiesel traders said. Pertamina then re-issued a tender in December, securing only 1.15 million kl for this year. The price awarded was slightly under the MOPS 0.25% sulfur gasoil assessment. The tenders have been dogged by late payment although this could not be officially confirmed with the major exporters preferring to sell PME in the export market. In May, Pertamina issued a tender to buy 1.7 million kl for delivery to Sulawesi, Papua, Kalimantan and Nusa Tenggara. The results were released in September, and the state-owned oil and gas OCTOBER 2014 insight 27

30 INDONESIA BIODIESEL company had secured around 600,000 kl, some 250,000 kl below market expectation. In total, Pertamina has secured 2.95 million kl of biodiesel for The government has revised Indonesia s biodiesel consumption target from 4 million kl to 2.3 million kl for Elsewhere, there has been some PME exported to the US, but these volumes are small compared to what goes to China. In August, for the second month in a row, the top origin for US biodiesel Elsewhere, there has been some PME exported to the US, but these volumes are small compared to what goes to China. imports was Indonesia at 34,974 mt, up 45% from the previous month. Traders attributed the surge in imports from Indonesia over the past few months to lower palm oil prices. Two producers from Indonesia are already registered with the US Environmental Protection Agency and would be capable of generating Renewable Identification Numbers if they used approved feedstock. Although palm oil has not been approved as an eligible feedstock to generate RINs under the US Renewable Fuel Standard, grandfathered biodiesel plants construction of which started prior to December 19, 2007 can assign RINs with a D6 code to palm oil-based biodiesel if they keep up with the appropriate documentation. Indonesian biodiesel could find more homes in the US if the blenders credit is reinstated. Qualified biodiesel producers or blenders are eligible for an income tax credit of $1/gallon of pure biodiesel (B100) or renewable diesel produced or used in the blending process. The tax credit expired in December last year. An attempt in May by the US to advance a tax extenders package that would have retroactively reinstated and extended for two years a $1/gal blenders tax credit for biodiesel and a $1.01/gal production tax credit for cellulosic biofuels, failed. A decision on the tax credit is not expected until after the US November mid-term elections. In the meantime, the new administration of Indonesian president-elect Joko Widodo is said to be committed to renewable energy and fulfilling the B10 mandate. But it faces a tough challenge of declining oil production, which means the government will have to import a huge volume of fuel to meet growing domestic demand. As Indonesia tries to meet its biodiesel blending targets, it will continue exporting biodiesel mostly to China. It s a win-win situation for both countries, just as long as the Chinese government does not clamp down too aggressively on shadowing financing. Market sources expect the Chinese government to strike a balance reining in excessive lending, though not too tightly as to crash the economy. 28 insight OCTOBER 2014

31 Bringing energy to life Taiwan, 7:30 pm. Sunny looks forward to the Lantern Festival. RasGas is there. RasGas supplies Europe, Asia and the Americas with liquefied natural gas, one of the world s most climate-friendly fossil fuels. From Qatar, one of the world s largest and most reliable sources.

32 ASIA COAL JAMES O CONNELL Editoral Director Coal ASIA S LOW CV DIET Coal traditionally gets the thin end of the publicity wedge, particularly in the broad press where it tends to receive less than complimentary coverage. In recent years, as the coal-fired generation industry moves towards a lower quality product, it is increasingly frowned upon by those in the related yet more favorably perceived markets like crude oil and shale gas. The mature commodity markets in Europe and America have moved on somewhat, but here coal is by no means a relic of the past. It is really in the developing countries in Asia where coal dominates the grid and continues to reign supreme. Customs statistics show that China imported over 220 million mt of coal in 2012 and racked up imports of over 260 million mt in China is now the largest importer of coal in the world, having overtaken Japan in India is on track to overtake Japan as the world s second largest importer of coal this year with anticipated thermal coal volumes in excess of 150 million mt. Europe, in comparison, is hovering steadily around the million mt mark and the much publicized shale gas revolution has decimated the US coal mining industry where it is now a net exporter of some 50 million mt of coal per annum. 600 GW of planned build Coal burn globally is only going to increase, not decrease, in the next 6-8 years as India, China and several other Asian nations expand their generation capacity. Over 600 GW of new coal-fired capacity is either under construction or forecast to get built in Asia alone by 2020, accounting for almost 60% of power plant capacity in the region, research by Australia-based consultancy group Salva suggests. There have been major increases in seaborne thermal coal demand, particularly in Asia, which has seen trade flows radically change and grow to over 1 billion mt in 2013, from 527 million mt in 2005, a compound annual growth rate of over 8%. Australia s Macquarie Bank is suggesting that seaborne coal demand could potentially exceed 1.3 billion mt by Asia is expected to account for 90%, or some 350 million mt, of this increase. Those who think coal is dead, be they governments, trading houses or publishers, are barking up the wrong tree. 30 insight OCTOBER 2014

33 ASIA COAL Courtesy: Shutterstock One could argue that the patient has never been more robust or fit-forpurpose. The largest exporter in the world is Indonesia and its steam coal exports have doubled in the last five years. Official government figures for 2012 saw 387 million mt in exports most experts agree the unofficial figure is million mt north of that. The 400 million mt mark was breached in 2013, and exports for the first-half of 2014 amounted to 213 million mt, up almost 8% year on year. The majority of this growth since 2008 has come from lower quality coal sub-bituminous that has up to 10 times less sulfur and % less ash than standard benchmark Australian or South African coal. It s also quite cheap and, consequently, in cash-strapped or price sensitive nations like India, China or even Japan the last bastion of high cv coal addiction in Asia lower calorific value coal has become more than a viable prospect it has become the lifeblood of countries trying to sustain or revive economic growth. Prices tumble from highs The price volatility that had been the hallmark of thermal coal prices for the previous years continued in This year saw FOB Newcastle 6,000 Net As Received, Australia (and Pan-Asia) benchmark prices slide from a high of $87.70/mt in late December to fall through support at $70/mt by late OCTOBER 2014 insight 31

34 ASIA COAL June. This 20% fall has been echoed elsewhere, with European delivered prices falling from $87/mt in early January to a year-to-date low of $71/mt in late June, before recovering to touch $77/mt in August. Away from the benchmark level, looking particularly at the new liquid markets, 5,500 NAR prices have also echoed a 20% plus decline. FOB Newcastle 5,500 NAR prices have Japan is the last country in the Asia Pacific region to consider low calorific value coal as part of its fuel mix. traded in a $72-56/mt range as Australian producers endure major competition from domestic Chinabased miners. In H1 2013, the even lower calorific value coal products, dominated almost exclusively by Indonesian exporters bucked the trend with a completely different trading pattern. The FOB Kalimantan 4,200 kcal/kg Gross As Received and 3,800 kcal/kg GAR price series posted respectable gains. The 4,200 GAR assessments rose 13% to $43.50/mt in the first six months while similar gains were seen in the sister 3,800 GAR market. However, since then, producers renewed emphasis on increasing production to reduce unit costs has seen an oversupply situation in the market develop and overshadow modest consumption growth. By August 2014, 4,200 GAR prices had sunk to levels just north of $36/mt, while 3,800 GAR prices fell through support at $30/mt for the first time ever. Conservative Japan trials low CV Pre-Fukushima, nuclear energy accounted for around 20% of the country s total installed power generation capacity across 54 reactors. In September 2013, Kansai Electric took offline the country s last operating nuclear reactors, raising concerns about fuel supply shortages. The March 2011 natural disaster did not have a major impact on Japan s demand for coal for the simple reason that its power plants had maxed out their baseload allocation and were already running at full steam. Japan, as mentioned earlier, is the last country in the Asia Pacific region to consider low calorific value coal as part of its fuel mix. It seems contrary to expectations at a time when its capacity is stretched to breaking point that it would increase their exposure to a lower quality product. However, when placed in context of an increasing reliance on expensive oil, gas and LNG imports and a current account deficit that continues to slide in and out of the red, something s got to give. The land of the rising sun has stubbornly refused to increase its exposure in the spot market over recent years unlike all of its neighbors. It continues to negotiate annual and term contracts with Australian producers for 6,080 kcal/kg NAR branded coal, frequently paying 15% and higher premiums to market prices. In 2012, news filtered through that trial-cargoes of 5,500 kcal/kg NAR coal had been accepted by several power plants. In June this year, the market was stunned by an announcement by Chubu Electric trading that it was carrying out trials with low calorific value coal at the Hekinan power station and would likely increase its portfolio to 14% from 6% in 32 insight OCTOBER 2014

35 ASIA COAL the short term. Toshimi Tsuchiya, director of Chubu Energy Trading Singapore, has said Chubu is trial burning thermal coal with a calorific value of 5,000 kcal/kg NAR specifically to cut costs. Restrained by technical limitations Sources at Japanese power utilities have, however, said that they face technical limitations despite their desire to increase the importation of subbituminous coals from Indonesia and the US. One source estimated that Japanese utilities would increase sub-bituminous coal imports by around 5 million mt to million mt in General industry in Japan has less strenuous regulations and sources estimate that totals could range between 3-5 million mt. On the whole, this would account for just over 10% of total imports and while not overtly significant in size, it represents a large shift in policy and strategy. In recent years, cheap supplies of shale gas has flooded the US power market, elbowing coal to the fringes of the country s energy mix and forcing US coal producers to embark on frantic efforts to export their product to overseas markets. In fact, 2012 is a year defined in the US natural gas, power, and coal markets as one with astonishing volumes of coal to gas displacement. The US winter of was the warmest winter in 62 years, crippling natural gas demand and leaving storage inventories at all-time record highs exiting the winter season. Prices crashed to the lowest levels seen in over a decade. This price crash left natural gas competitive with coal for generation for a sustained period of time, driving large volumes of generation to be fueled by natural gas in just a few months, displacing coal in the process. This ability to switch fuel types in large volumes so quickly was developed over 10 years ago. US coal regains ground on gas Last year, however, coal made somewhat of a comeback, with statistics from Bentek Energy a unit of Platts showing generation data from independent system operators that cover approximately 60% of the country increased 15% year on year. The rise in coal generation is due to an increase in electricity loads year over year across all ISOs, along with a decline in gas generation, down 16% over the same period. Gas generation has been curtailed by rising gas prices at the same time coal delivery costs to power plants have remained reasonably flat year on year. Overall, coal may have reclaimed some lost territory in 2013 but as far as US policy is concerned the war is over with new plant build shifting significantly towards gas. Coal growth is increasingly becoming an Asia-centric story and that story is steeped in low calorific demand in the new economic centers of India and China. The dynamic is presenting a new set of challenges to the industry a plethora of new grades, radically different purities requiring normalization with regards to ash, sulfur and moisture and an infantile paper market. One could argue that the coal industry has one foot in the grave in the West but as China, India and Asia in general rely on it to power their industry and economic growth, and as the balance of world power shifts east, King Coal s reign looks set to continue. OCTOBER 2014 insight 33

36 INDIA AND INDONESIA MRIGANKA JAIPURIYAR Senior Editor Oilgram News THE ROAD AHEAD 2014 has been a historic year for two of the world s largest democracies. In India, the Bharatiya Janata Party, led by Narendra Modi a former tea-seller secured a decisive win in the national elections, booting out the ruling National Congress Party and ridding India of the shackles of a coalition government for the first time since Indonesians in July brought to power Joko Widodo a former carpenter. Widodo, widely known as Jokowi, is the first president not to come from the country s political elite or to have been a former army general. Besides having democracy in common, another commonality between the two countries is the dire energy situation they face. Both are increasingly reliant on oil imports, vulnerable to oil price hikes and/or exchange rate volatility, spend billions of dollars on fuel subsidies, and have suffered from a policy paralysis that has stunted growth in their oil and gas industries. So, what can the industry expect from Modi and Jokowi, as they wade through the various challenges? Fuel subsidies As Jokowi settles into his presidency, one of the first issues he needs to tackle is that of Indonesia s astronomical fuel subsidy bill. Subsidies not only use up valuable budget funds, but also contribute to a widening current account deficit by artificially propping up demand for the subsidized fuels. In Indonesia s case, subsidized fuels include 88 RON gasoline, gasoil and kerosene. Indonesia has allocated Rupiah trillion ($21 billion) for fuel and biodiesel subsidies this year. According to estimates by energy consultants Wood Mackenzie, Indonesia s fuel subsidy bill is expected to be around $120 billion during , assuming crude prices stay around the $110/barrel mark. Subsidies are indeed at the top of Jokowi s agenda, but given the political sensitivity of the issue, no change in 34 insight OCTOBER 2014

37 INDIA AND INDONESIA Courtesy: Shutterstock pricing regime should be expected in the near future. Jokowi s priority after taking office on October 20 will be setting up his government and subsidy cuts are unlikely to be the first order of business, suggesting they are unlikely to happen within the year, Nomura said. We think Jokowi is also unlikely to do something so unpopular so early in his term after such a divisive election, not to mention the fact that, as it stands, his coalition does not have a parliamentary majority, the bank added. Instead, Jokowi and his team have talked about trying to get consumers to switch from using subsidized auto fuels to natural gas. Darmawan Prasodjo, chief of Jokowi s economy team, said in July that the party was thinking about fuel subsidies and intended to cut expenditure on fuel subsidies by getting more people to switch to using gas in the transport sector. Jokowi estimates that a 30% conversion from oil to gas in the transport sector will cut the annual subsidy bill by Rupiah 60 trillion ($5.2 billion), Prasodjo told Platts after his party came to power. Jokowi s plan is to provide incentives to attract investment in building gas OCTOBER 2014 insight 35

38 INDIA AND INDONESIA infrastructure, a lack of which is often seen as the reason for the country s low gas demand. Declining production Another immediate challenge facing Jokowi is to reverse the decline in crude oil production and boost natural gas output. Indonesia s crude oil output peaked at 1.6 million b/d in 1995 and has since fallen. It hovers around 800,000 b/d today. Gas production is expected to rise to 9.35 Bcf/d over the next few years from 8 Bcf/d currently, but growth in demand is expected to outpace supply. Against this backdrop, the industry is urging the government to do whatever is necessary to kickstart the E&P engine. Their demands include making the necessary amendments to the oil and gas law of 2001 to remove the regulatory uncertainty currently plaguing the industry, cutting the number of permits required, and making the fiscal regime more attractive. Oil and gas contractors in Indonesia currently need 284 permits and have to go through 12 different ministries before they can get a project off the ground. It is therefore not surprising that it takes around 10 years to convert a discovery to production. Prasodjo did not outline any concrete steps that the new government intended to take, but said that Jokowi is keen to boost domestic exploration and production and sees the current fiscal regime as outdated. Each oil field has its own characteristics, therefore [what is required is a] flexible fiscal system that is able to answer the difference, Prasodjo told Platts in an interview soon after the election results were announced. Jokowi will also look at promoting the application of enhanced oil recovery techniques to boost production from ageing wells, Prasodjo said. Consultants Wood Mackenzie are optimistic that Jokowi will accelerate E&P. Jokowi aims to boost oil and gas output by providing enhanced fiscal terms for mature fields and exploration, and removing red-tape, WoodMac said in its report. Modi better off than Jokowi? The challenges facing Modi s government are not too different, but he is better off than Jokowi in two ways. Firstly, the previous government had already got the wheels rolling on some big policy changes. Secondly, they have come to power with a full majority, which will make implementation of policies relatively hassle-free. On fuel subsidies, the Congress government in January 2013 announced a managed deregulation of diesel prices, wherein oil companies are allowed to raise diesel prices by Rupees 0.50/liter ($0.008/liter) every month. The new government simply continued this, and as a result domestic diesel prices are now almost in line with international prices. At the time of writing, there was talk that the government may use this opportunity of low differentials between international and domestic diesel prices to completely deregulate diesel. If diesel deregulation indeed goes through, the effect will be manifold. 36 insight OCTOBER 2014

39 INDIA AND INDONESIA The money spent on subsidizing diesel, which amounted to Rupees 90 billion in the April-June quarter, can be better spent elsewhere; state-owned upstream oil companies that share the subsidy burden, by discounting the crude oil they sell to state-owned refiners, will be able to cut the discounts and get a higher price for their oil; and state-owned refiners will not suffer from a liquidity crunch as they wait to get reimbursed by the government. Analysts are optimistic that a full diesel deregulation is not too far away. Moody s anticipates a full deregulation of diesel prices over the next few months, the ratings agency said in a report issued in August. Analysts at Hong Kong-based Bernstein Research also expect diesel to be deregulated, but they are concerned, and rightly so, about LPG and kerosene that continue to be subsidized. India spent Rupees 75 billion on kerosene subsidies and Rupees billion on LPG subsidies in the April- June quarter. The Modi government has been quiet on LPG and kerosene. Gas pricing Another challenge facing the government is boosting India s oil and gas production. Here the issues are that of pricing, especially in the case of gas, and of fiscal regime. The Congress-led government had almost implemented a gas price hike on April 1 this year, which would have seen prices at the wellhead double to $8.40/MMBtu, before backtracking due to the elections. The proposed price hike by the Congress government had faced severe opposition from various stakeholders, so when the Modi government took over, they decided to tread with caution and have launched a review of the pricing formula that was to have been implemented. India has to increase gas prices, although the dilemma remains how to fund this increase given it is uneconomic for power and fertilizer users, which make up 80% of demand, Bernstein said in a report issued in August. While the new pricing formula implies a more than doubling of gas prices... We suspect this will be too big an increase for the market to absorb in one go. As such, we suspect the government will either limit the increase... Or look at ways in which state energy firms will indirectly subsidize this increase, the analysts said. The issue of gas prices is critical to unlocking India s gas potential. India s state-owned Oil and Natural Gas Corp. and privately held Reliance Industries have long called for higher gas prices, saying that several of their discoveries are economically unviable at $4.20/MMBtu. According to Reliance, operator of the deepwater KG-D6 block, lack of clarity on gas prices has held up close to $4 billion worth of upstream investment this year. Upstream policy On upstream fiscal regime, the ongoing debate centers around whether India should continue with its existing cost recovery model or switch to a revenue sharing model. Under the cost recovery model, the contractor recovers all costs incurred for developing a block before sharing profit Another challenge facing the government is boosting India s oil and gas production. with the government. The focus on costs under this model has been a major bottleneck in exploration with the contractor and the government often disagreeing on the actual cost and delaying progress of a project. Under the revenue sharing model, which was recommended by a special committee, contracts would be awarded based on the volume of oil and gas a company is willing to offer the government. According to Narendra Taneja, the chief of the BJP s energy cell, the party s plan is to treat deepwater and ultradeepwater blocks differently from shallow water and onshore blocks and provide different policy solutions for different types of blocks. Our philosophy is very simple. We want to incentivize in such a way that we can produce more of our own oil and gas in the country for our consumption. Some of our geologists say that the Bay of Bengal is floating on gas. If that is the case, we want to bring that gas to our consumers, he told Platts in an interview just before the BJP was gearing up for its victory. OCTOBER 2014 insight 37

40 CHINA VANDANA HARI Asia Editorial Director Singapore BEIJING TIGHTENS THE NOOSE Courtesy: Shutterstock It s a 21st century remake of Tom and Jerry. The modern version of the classic cat-and-mouse chase has Beijing relentlessly plotting to develop a fool-proof oil tax regime, to perhaps see devious market players stopping in their tracks every now and again. But only till they find new ways to outsmart the system. This year, Beijing began tightening the consumption tax noose, a notch at a time, hoping to end the practice of oil market players illegitimately shaking down the state for refunds. Armed with fraudulent invoices, some players routinely get tax reimbursements they are not entitled to, while others recover taxes they didn t even pay in other words, they tax the government. The consumption tax, collected by the central government, is levied on all imports and production of luxury and non-renewable resource goods in China. It was introduced in the oil sector in April 2006, after nearly eight years of deliberations, as a means to encourage fuel efficiency and environmental consciousness. Some at the time also described it as a tax on the rich, who are bigger consumers of energy. For oil products, the consumption tax is levied as a fixed yuan rate per liter. It currently ranges from zero on crude, asphalt, LPG and MTBE, to Yuan 0.8/l (13 cents/l) on gasoil and a high of Yuan 1/l on gasoline. Oceana Zhou, Cindy Liang, Daisy Xu, Sebastian Lewis, and Song Yen Ling contributed to this article. 38 insight OCTOBER 2014

41 CHINA A new, more sophisticated invoicing system imposed on oil refiners in China from February 1 and extended to refined product wholesalers and retailers from August 1 set the market abuzz, prompting some fear and uncertainty, and temporarily crimping the appetite of some of the companies that are known to rely on tax fraud to eke out margins, several sources told Platts. In order to weigh the chances of Beijing s latest measures succeeding and the potential for demand erosion from shrinking margins at some of the oil and petrochemical players, one needs to understand how the tax deception works and how the government hopes to stop it. Massive web of taxes At the heart of the problem is China s massive web of taxes on imports and domestic sale of oil and petrochemicals, which is further complicated by consumption tax waivers on certain feedstocks and products and refunds on others, as a means to incentivize their use and processing. While the tax breaks themselves can be a challenge to understand, keeping on top of all the changes being made to them every few months can be even harder. There have been no less than 13 adjustments to the oil consumption tax policy since it was introduced on April 1, Government restrictions on the import and processing of crude oil through a system of quotas and licenses, and controls on the sale of on-specification products in the domestic market adds an additional layer of complexity to the regulatory environment. Not only are there a multitude of taxes to administer the country has 19 categories including value-added tax, consumption tax, and customs duty among others but their administration is split between the central government s State Administration of Taxation or SAT and the tax bureaus at the provincial, municipal and county levels. Industry players and tax consultants point out that poor coordination between the central and local governments, the absence of a consolidated electronic data management system, and suspected widespread corruption in the local tax offices makes it difficult to detect fraud and inconsistencies. Brokering invoices A lynchpin in the elaborate game of deception is the so-called invoice broker, who finds counterparties willing to issue an invoice as per his client s requirements. The broker sells VAT invoices to buyers ranging from teapot refiners, to blenders, to wholesalers, for a fee. Until the introduction of the new invoicing system this year, the going rate for such invoices was in the range of Yuan /mt, according to market sources. A regular VAT invoice, typically issued by the seller to the buyer, bears the seller s and buyer s names, the product name, quantity, price, and the 17% VAT levied on all crude and oil product sales in China. The invoice does not break down the consumption tax component, but serves as proof that this and all other applicable taxes were paid as part of the final amount. The fraudulent VAT invoice has all the above information. It even bears the OCTOBER 2014 insight 39

42 CHINA VAT INVOICE FRAUD The VAT invoice fraud comes in many guises. One of the common ones exploits the tax refund available for processing fuel oil into higher-value, cleaner products such as gasoil and gasoline. A teapot refi ner might buy crude or asphalt as feedstock, both of which are exempt from consumption tax, but submit a fake VAT invoice to the SAT authorities, showing it bought fuel oil for processing. This allows the teapot refi ner to net the consumption tax it collects from the sale of its products, say Yuan 1,388/mt on gasoline, against the Yuan 812/mt it claims to have paid on its purchase of fuel oil. The refund is calculated by netting the volume of fuel oil tax claimed to have been paid against the various consumption taxes collected from the volume of refi ned products sold, based on the teapot s typical products slate. The refi ner is thus able to pocket a part or all of the consumption tax from its product sales even if it hasn t processed a drop of fuel oil. A teapot refi ner may also buy fuel oil and ask the seller to state it as asphalt on the VAT invoice, to avoid paying any consumption tax. Another common fraud involves gasoline blenders declaring their MTBE purchase as off-spec gasoline, so that they can appropriate at least a part of the consumption tax collected from their sale of fi nished gasoline as refund of the consumption tax they claim to have paid on the off-spec gasoline. This scam was the by-product of the government s February 2013 announcement that it would grant consumption tax rebate to blenders on their purchase of off-spec gasoline, as a way to encourage them to upgrade it to meet national emission standards. tax registration number of the issuing company, and a transaction-specific serial number generated by a USB device, issued by the local tax authority. The device is used in conjunction with tax authority-approved software, installed on a regular personal computer, to generate the invoice. All these bits are authentic, unlike the commonly available counterfeit invoices or fapiaos as they are called in Chinese, with fake names, serial numbers and seals, which can be bought for token sums to be used as receipts for the sale of goods or services that never happened. Real invoice with fake sale While the fraudulent VAT invoice is real, the sale declared in it is fake: the lot never changed hands between the two companies named in it. The company named as the seller in the invoice might have actually sold that product, or perhaps a related one, but it would have been to some other buyer or buyers, who agreed to forego the receipt. Products are also commonly sold without a VAT invoice if they are of a specification the seller is not authorized to sell. The VAT on such sales might even be collected and submitted, but it comes from the real buyer, not the one stated in the fraudulent invoice. Another racket cited by industry players, albeit somewhat murkier and believed to occur on a smaller scale, involves small tax-registered trading companies that issue fraudulent VAT invoices in their own name. These outfits, typically tucked away in rural interiors, don t actually deal in oil and also get away without submitting any taxes, thanks to a lax or corrupt local tax administration. These outfits tend to exist only for short time spans, to avoid detection. The lack of reconciliation between information collected through the VAT invoices and consumption tax collections and refunds, sources say, is in large part due to local tax administrations that collect VAT not being bothered about the consumption tax, which is administered by the central government. Thorough checking of the validity of consumption tax refund claims would also need national level coordination if the buyer and seller are located in different provinces. Collusion in invoice fraud In addition to consumption tax-related hocus pocus, sources also cite as common occurrence, collusion between small buyers and sellers to alter the product name in the VAT invoice to evade consumption tax, for example mis-declaring gasoline sale as MTBE, or to dispense with an invoice altogether and split the tax savings. Fraudulent invoices also help companies circumvent government regulations on what they are allowed to buy and sell. For instance, a teapot refiner might submit an invoice showing it bought asphalt as feedstock, which, while not affording it any consumption tax reimbursement, gets it off the hook with regard to the crude purchase license rules. In other instances, companies not licensed to sell on-specification product, for example gasoil, issue a fraudulent invoice claiming they sold fuel oil. In China s eastern Shandong province, only about half of the 70-odd teapot refiners, who have secondary processing units, are authorized to sell gasoil and gasoline. However, the remaining, which 40 insight OCTOBER 2014

43 CHINA are usually those with the smallest capacities, sell these two fuels as well, sources said, but declare the sale as MTBE, aromatics, or a light liquid petrochemical product in the VAT invoice. Sometimes, gasoline and gasoil is available from some of these refiners at discounts of up to Yuan /mt, or about 2-3%, if the buyer can do without a VAT invoice. Retailers buying the product for sale at gas stations are often willing to skip the invoice as their own customers rarely ask for receipts. Refiners and blenders are known to put the product volumes they have sold without receipts into an invoicing pool. Receipts are issued to invoicing brokers as per their requirements from this pool, according to sources familiar with the practice. SAT ups the ante This year, SAT decided to up the ante against those using fraudulent invoices to claim illegitimate tax refunds or misdeclaring products for other reasons. Its choice of weapon: the mighty Quick Response code, which was made mandatory on all VAT invoices in the oil sector. The two-dimensional encrypted barcode replaces the alphanumeric code used in the older VAT invoices and can accommodate Chinese characters. It is designed to capture and store data electronically and centrally in such a way that SAT can compare the input and output VAT invoice information of all companies, according to consultants Ernst & Young. The same data could then be used for comparison or followon inspections if inconsistencies were spotted, Ernst & Young said in a note. Additionally, SAT is doing away with the old system wherein companies submitted copies of paper VAT invoices they had issued while selling consumption-taxable oil products, for the tax authorities to manually input that information into the consumption tax refund management system. The buyers were required to separately provide paper VAT invoices showing procurement of the consumption-taxable products for verification when applying for a consumption tax refund. This placed a heavy workload on the tax authorities as well as the taxpayers, and the information was hard to reconcile across the length and breadth of the country. The new VAT anti-fraud and control system using QR code-equipped invoices will automatically flag a consumption tax refund through information collected on the sale of, say fuel oil or naphtha, to a qualifying downstream enterprise, which is one known to be engaged in the business of further processing those products into gasoline, gasoil, or petrochemicals, Ernst & Young said in a note. Any other use of fuel oil and naphtha, including gasoline blending of the latter, is not eligible for consumption tax refund. Consolidating information So, in theory, a company found to be issuing or receiving invoices for the sale or purchase of a product that does not tally with the feedstock it buys or the end- products it sells based on all the information available to the tax authorities from its other invoices, could be caught and prosecuted. The move [to introduce the new invoicing format] aims to crack down on the practice of changing the OCTOBER 2014 insight 41

44 CHINA TEAPOT REFINERS BOUNCE BACK Consumption and production data analyzed by Platts showed that teapot refi ners, who trudged cautiously in the days following the February 1 introduction of the new invoicing system, were back to business as usual as the year progressed. In the fi rst seven months of 2014, the Shandong teapot refi ners purchase of domestic and imported crude which was expected to drop if they were no longer able to evade buying restrictions or claim tax refunds through fraudulent fuel oil invoices actually jumped 56% from the same period of 2013, according to a monthly survey by Beijing-based energy information provider JYD Commodites Hub. Crude accounted for more than 80% of their feedstock. Meanwhile, their use of fuel oil as feedstock which should have risen if the VAT invoice fraud clampdown prevented evasion of crude purchase restrictions dropped 58% over the same period, the survey showed. On balance, despite their continuing overall anemic run rates averaging around 40%, the Shandong teapots collectively produced 10% more refi ned product in January-July 2014 than a year ago, suggesting no apparent hit from the tax reforms. However, the storyline began changing toward the end of August, as some teapot refi neries became the subject of investigation by tax authorities, which spread considerable nervousness among their peers, sources said. At this time of writing, it was not clear if any consumption tax-related frauds would be found, especially as the database from the new QR code-equipped invoices was still under construction, but some other minor tax transgressions might be exposed, sources said, to serve as a warning bell. Meanwhile, in the markets, sources also cited renewed interest in straight-run fuel oil as feedstock from teapot refi ners in Shandong. Some of this displaced their earlier appetite for asphalt a bitumen and tar-like blended feedstock that had been a growing favorite in previous months. Buying interest for asphalt has been quite thin as refi neries fi nd it diffi cult to change the invoice for asphalt to fuel oil, a trader said. At the same time, the relative attractiveness of fuel oil because of softer prices could also not be discounted. With both factors pulling in the same direction, it was diffi cult to isolate the impact of one. SHANDONG TEAPOT AVERAGE PERCENTAGE RUNS % Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Source: Platts RATIO OF CRUDE AND FUEL OIL REFINED 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Jan-13 Mar-13 May-13 Jul-13 Sep-13 Nov-13 Jan-14 Mar-14 May-14 Jul-14 Source: Platts MT Crude FO MAJOR CRUDE, FUEL OIL IMPORTS 2,500,000 2,000,000 Asphalt M100 Imported 180 CST Venezuelan 380 CST Merey So the jury was out on whether the latest reform would end up being a damp squib. After all, there have been more of those, such as SAT s requirement since January 2013 of product inspection certifi cates from technical experts to accompany VAT invoices for products free of consumption tax. The move was initially expected to crimp fuel oil demand from teapot refi ners if they could no longer evade the consumption tax by passing off their purchases as asphalt. But that did not come to pass through the year, which sources attributed to the lack of will as well as the means at the local level to rigorously implement the new rules. 1,500,000 1,000, ,000 0 Jan-13 Mar-13 May-13 Jul-13 Source: Platts Sep-13 Nov-13 Jan-14 Mar-14 May-14 Jul insight OCTOBER 2014

45 CHINA name of the goods to escape paying tax, a policy counsellor at the State Tax Office told Platts. However, following the first phase of implementation in February, no fraud detections or prosecutions came to light. The expectations before February were for teapot refiners to lose some of their appetite for crude and asphalt, but that dip proved to be short-lived. The practice of fraudulent invoicing by oil producers was brought to a halt for about a month and a half [after February 1] and then sprang back to life, a source noted. Similarly, sources expressed doubt there would be any lasting impact on the parts of the oil sector brought under the new VAT invoicing system in August. Although most people are somehow clear that the new system will not have much real effect, they know what they are doing is illegal, so they will be cautious for the time being, said a source at a teapot refiner in Shandong. MTBE, LPG demand down Players in the Chinese MTBE market reported a sharp decline in demand for the octane booster from gasoline blenders as August progressed, saying apprehension around the new VAT invoicing system had exacerbated already weak domestic demand as the driving season tailed off. This in turn dampened LPG buying for production of MTBE and alkylates, they said. The LPG market in China is split roughly 60:40 between domestic/ commercial consumption and use as chemical feedstock. Some in the market felt the caution might be short-lived, as players retreated from fraudulent VAT invoices to wait and watch if there is indeed a crackdown. Their prognosis was grounded in the fact that fraudulent invoices could still be procured with the requisite QR code. They became dearer, though, at Yuan /mt, presumably to account for the higher risk being taken by the issuer. Moving goalposts on MTBE Among the changes implemented in January 2013 was a new Yuan 1,385/mt (Yuan 1/liter) consumption tax imposed on MTBE, aromatics and alkylates used for gasoline blending, putting them on par with naphtha if used as an octane booster. While this initially created expectations of a drop in Chinese aromatics imports, a rise in gasoline blending costs and a corresponding erosion in blending margins, none of this transpired, as the new tax was never actually implemented. And then the government moved the goalpost again later in the year, removing the tax on MTBE, with the proviso that the product had to adhere to national or industry standards. From market sources accounts, though, nothing changed on the ground even as the regulations were being written and re-written. So does Jerry the mouse become progressively nonchalant and adept at escaping the most elaborate of Tom the cat s traps? As far as the Chinese government s latest maneuver to stamp out VAT invoice fraud goes, only a flawless execution will convince skeptical market players that this one was the trick to end all undeserved treats. OCTOBER 2014 insight 43

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48 SAMEER C MOHINDRU Senior Editor Asia Pacific Shipping and Freight SHIPPING WANDA WANG Associate Editor Asian Shipping and Freight SMOOTH SAILING? Shipowners in the dirty tanker segment could look forward to smooth sailing next year with the scrapping of aged vessels, lighter order books as the global fleet s expansion will be the lowest since 2001 at an estimated rise of just 1.2% and more pooling of vessels by owners to boost earnings. Since the second-half of 2008, this segment has been reeling under pressure on excess supply and weak demand, but the scene is changing and could lead to better returns for the shipowners. In what can arguably be a game changer in the supertanker market and prop up earnings by reducing competition, Tankers International with its pool of Very Large Crude Carriers teamed up with Frontline Management to create a new company in October. The new company, VLCC Chartering Limited, will handle around 60 ships, or almost 10% of the global VLCC fleet. The VLCC segment, which has mostly been in turmoil since the 2008 financial meltdown due to oversupply of tonnage, will see a little over 20 ships being delivered this year, or 4% of current tonnage, while 15 ships will be phased out, said a chartering source with a North Asian refiner. Courtesy: NITC Iran The situation will be similar next year, with the fleet size not expanding 46 insight OCTOBER 2014

49 SHIPPING significantly. There was a spike in VLCC orders late last year, but they will be delivered only in 2016, the source said. Shipowners have been judicious in ordering new ships due to the volatility in the market, which had brought their daily earnings to almost nil in August last year. We have no plans to expand our VLCC fleet, and instead the focus is to increase the number of MRs we possess, said a source with an owner of a tanker fleet. The logic behind this move is that with refineries closing down in Australia and Japan, there will be more trade in clean products. The average annual addition of new VLCCs in the last five years was 26, while it is expected to be a total of 19 for this year and the next combined, said a shipping research analyst in Singapore. The rather anemic growth in crude demand has also resulted in shipowners holding back on new orders. There are fewer [VLCC] orders now, it is not an easy business to enter because of its capital intensive nature and long gestation period before breaking even, the research analyst said. Tanker market watchers point out that there has been a drop in loadings of crude from the Persian Gulf this year, which doesn t necessarily translate into weak overall demand since many refiners have shifted to the cheaper West African and Caribbean grades. As more crude flows from West to East in the coming years, market participants contend there may not be enough VLCCs for such long haul voyages. All this will potentially translate into higher freight rates in the medium term. The industry has had a rollercoaster ride so far this year with the earnings for tanker owners recovering from the Tanker market watchers point out that there has been a drop in loadings of crude from the Persian Gulf this year, which doesn t necessarily translate into weak overall demand since many refiners have shifted to the cheaper West African and Caribbean grades. post-2010 lows, especially with the VLCC segment experiencing a positive momentum in the second half of the year. The Persian Gulf VLCC market largest for this class of vessels has seen rates rising to a 24-month high in January only to slump on the back of weak demand, before showing signs of revival ahead of the winter demand season. The year started with a bang, on spillover impact from tight supply of Suezmaxes, weather-related delays and strong tonnage demand, which pushed up rates for the key Persian Gulf to Japan route to 73 Worldscale points on January 22 a level not seen in two years, according to Platts assessment data. Baltic and International Maritime Council, or Bimco, an international shipping association representing shipowners said in a report in OCTOBER 2014 insight 47

50 SHIPPING August that the average earnings on the VLCC had briefly touched $50,000/day late January, which later dropped below $20,000/day and recovered close to the $30,000/day levels since July. The higher earnings in the $50,000/day range couldn t be sustained as refineries moved into the maintenance season, when typically some of the units are shut and therefore imports of crude are lower, bringing down the demand for VLCCs. As many refineries have come out of maintenance, the demand for VLCCs has increased and there are also expectations that some among them may be taken for floating storage due to a contango in the Brent crude market in August and September. Not easy to come across a shipbuilder making Suezmaxes In the crude market, the Suezmax segment s slow growth in fleet may help in a rebound in rates. The global order book for Suezmaxes isn t very large and this may support the freight rates in the medium term, said a source with a Suezmax owner. You won t easily come across a shipbuilder who is making Suezmaxes, the source said. According to the research arm of a global shipping brokerage, four Suezmaxes have been delivered so far this year and an equal number have been scrapped, keeping the fleet size steady. The total global order book for this year is 14 and for 2015 it is even lower at 8, with a five-year order book of 45, or less than 10% of the current fleet of almost 500. Tight supply keeps pushing up Suezmax rates from time to time and the trend is expected to continue through In January, a lack of Suezmax tonnage in West Africa, the Mediterranean, the Persian Gulf and the Black Sea had even prompted many charterers to combine cargoes for loading on to VLCCs, pushing up the rates. Such a scenario may emerge again early next year as tonnage tightens due to seasonal delays such as cold weather and dense fog, particularly in the Bosporus Straits. Suezmax tankers typically carry crude or fuel oil in parcels of 1 million barrels or 130, ,000 mt and are in strong demand for moving cargoes into Europe. In fact, the returns for shipowners from the Suezmax is well above expectations, with earnings reaching $44,058/day briefly in mid-july, a Bimco research report said. There has been an increase in the number of cargoes going to Europe, pushing up the loadings in West Africa, said a source with a Suezmax owner. This pulled a lot of tonnage from the Persian Gulf, tightening availability there as well. For every new Aframax, two old ones were scrapped The smaller Aframax dirty tanker fleet is expected to decline this year, while demand to store fuel oil also provides support to the rates which hit their highest level for the year in August. But, they are likely to come under downward pressure in insight OCTOBER 2014

51 SHIPPING There are close to 900 Aframaxes globally and for every new addition so far this year, two have been scrapped. Still this has helped in only a modest trimming of supply because the total number of ships scrapped is small in absolute terms at 15. According to brokers, 16 new ships will be added to the fleet this year and 41 in Pushing for higher rates will be a challenge for shipowners because charterers are spoilt for choice. One trend, which is expected to continue is the consolidation of ships into pools, where several owners come together to offer their tonnage. There are several such pools currently operating, such as Teekay, Heidmar, Jellicoe and Navig8. There is a lot of consolidation going on but overhang in tonnage remains, said an Aframax broker in Singapore. Spike in rates is not in the interest of oil refiners as they sell cargoes on a delivered basis and this year more than in any other year there has been a change in trading pattern. Shipowners are pinning their hopes on more floating storage opportunities coming their way to boost earnings in It is commonplace for fuel oil traders to take Aframaxes for floating storage and blending, and when the market is in a contango, such demand gathers steam, as seen in early August. The key Indonesia to Japan route was assessed at w122.5 on August 15, surpassing the previous high for the year, w122, seen on January 2, Platts data showed. The Persian Gulf to East route was also assessed at a one-year high of w125. Market participants said trading companies were buying and storing fuel oil, hoping to secure higher returns due to the expectation of rising prices later. It translated into some ships getting locked in short-term time charters for storage purposes in a year that will see just over a dozen new Aframaxes being delivered. The floating storage conundrum illustrates how the Aframax market is dependent on fuel oil prices, and if the contango disappears, the demand softens. Similarly, rising Aframax rates make spot fixtures more lucrative for owners and help drive up time charter rates as well, eroding the price advantage to traders in storing fuel oil on this class of tankers. This won t change in 2015 either. Since the excess supply will spill over into 2015, the Aframaxes will try to do what they do best pick up whatever cargoes they can from Southeast Asia, for delivering to North Asia and then head to the Russian port of Kozmino, where demand is stable for worldwide shipments of ESPO crude. As Australia shuts down some of its refineries, the number of cargoes moving from Southeast Asia to Down Under have also come down. As of end-august, the global dirty tankers fleet comprised of more than 1,900 ships aggregating almost 350 million dwt. Maritime researcher and consultant, Drewry, projects a total expansion by only 43 ships or around 8,200 thousand dwt in the segment this year. This translates into less than 3% annual growth both in terms of numbers of ships and deadweight tons. Growth is expected to be even slower next year at 34 ships or 7,203 thousand dwt. OCTOBER 2014 insight 49

52 ADVERTORIAL ANTHONY JUDE Senior Advisor Asian Development Bank THE PHILIPPINES ON THE RISE The Philippines must transform good energy policies into a sustainable reality The Philippines has taken great strides towards meeting its future energy needs but must do more on implementation, competition and infrastructure to turn its goals into sustainable and affordable reality. Like many of its Southeast Asian neighbours, the Philippines has enjoyed robust economic growth and a rising consumer class. Another fillip came last year when it won investment grade status from all three major ratings agencies, thanks to reforms to improve transparency and efforts to boost growth. Growth and investment bring huge benefits to the Philippines but carry equally enormous challenges for energy security as more foreign manufacturers come in, local businesses expand and the population already above 100 million people grows in size and prosperity. Primary energy demand among the 10 countries of the Association of Southeast Asian Nations is projected to double between 2010 and The rise in the Philippines is expected to be even higher at about 105%. Demand for energy in the Philippines is growing across all sectors and peak electricity consumption is starting to exceed supply. To address the demand, coal-based generation has been increasing and will overtake oil sometime after 2025 to account for the largest share of primary power supply in 2035 at 37.5%. This scenario flies in the face of ASEAN s intent to pursue a low-carbon energy path but the Philippines is not alone. Fossil fuels dominate, so there is a big gap between ASEAN s vision for clean energy and the increased use of fossil fuels to sustain growth. Fast-growing energy demand means finding secure, stable and affordable sources of fossil fuels, especially oil and natural gas. It also requires rehabilitation of old energy infrastructure and the construction of new facilities along with measures to improve efficiency and conservation. Obstacles include tight budgets and often tepid interest in the power sector from foreign investors. But governments 50 insight OCTOBER 2014

53 ADVERTORIAL must realise that energy infrastructure is an imperative that cannot be ignored. Advanced technologies, building and lighting programmes and appliance labeling improve efficiency and energy security while cutting capacity additions and carbon emissions. But there is no use having a labeling scheme unless it is accompanied by robust monitoring, verification, testing and reporting. The Philippines is no stranger to energy security challenges. It went through its own crisis in the early 1990s with daily brownouts for three years before stable supply was restored by contracting power from independent power producers. Then the Electric Power Industry Reform Act of 2001 provided a sound framework to restructure, recapitalise and privatize the National Power Corporation assets and to overhaul the industry as a whole. It set the stage for retail competition and open access, enabling big consumers to pick their electricity providers. This has worked to a certain extent but the challenge is to maintain open access when competition laws are weak and the regulatory body is relatively ineffective. In 2012, the Philippines spent about $12.6 billion on oil imports a 14% rise from Imported diesel, fuel oil and coal make electricity generation more expensive and the country vulnerable to supply disruptions and global price shocks. Reliable electricity services at competitive rates are essential to improve the investment climate and ensure the economy continues to grow. The Philippines has the highest residential power prices in Asia after Japan. This is partly because there are no government subsidies like the ones elsewhere in ASEAN but it also comes down to the costs of imported fossil fuels and of stranded assets that were contracted during the power crisis. Enhancing energy security and keeping power costs down have been the main drivers for the Philippines to set goals for renewables. The Renewable Energy Act of 2008 was passed to accelerate development of these resources and, under the National Renewable Energy Program, the Department of Energy seeks to triple the output from renewables to 15,300 megawatts by 2030 with geothermal, solar, wind and biomass contributing about 30% of new generation capacity. Progress in energy savings is being made as the country s energy to gross domestic product ratio fell from 5.4 in 2004 to 3.5 in The government must adhere strictly to the national conservation programme and encourage energy efficient technologies. The Philippines introduced appliance labeling in the mid-1990s but the scheme has room for improvement and higher efficiency standards. The Asian Development Bank supported the government s lighting and building efficiency initiatives in 2009, which helped shave about 300 megawatts from the peak. In 2012, the government brought in an electric vehicles project aimed at transforming public transportation. This will help cut emissions and lower the oil import bill. Aside from Singapore, the Philippines is the only other ASEAN country with a competitive power market and a privatisation programme. This should promote greater efficiency, improve pricing signals and set the foundation for investments to be driven by market conditions rather than planning assumptions. Substantial progress has been made in implementing the Electric Power Industry Reform Act, including basic market rules and infrastructure for the wholesale electricity spot market. But much more remains to be done and the initial target dates for reforms and privatisation have proven to be overly ambitious. Further progress is needed to ensure that long-standing financial issues in the power sector are addressed, the wholesale and retail electricity markets are competitive and a force for efficiency, the participants have the capacity to properly manage risk and there is a sound basis for investment in new capacity to ensure security of supply. Policy makers in the Philippines and elsewhere in Asia must take climate change seriously and develop policies to support a low-carbon path. It may not be possible to make an immediate shift but it can be done in phases. It may not be possible to shut an inefficient power plant and build a new one but actions can be taken to modernise it and reduce its fuel consumption. Instead of grid extensions to rural areas, an off-grid renewable energy system can be introduced and later integrated into the grid. All of this can be done to improve energy security, boost efficiency, cut imported fuel costs and reduce emissions. All it needs is political will. Anthony Jude is Senior Advisor and Practice Leader of Energy at the Asian Development Bank. He will be speaking at Singapore International Energy Week in October to share more insights on energy connectivity in Asia. OCTOBER 2014 insight 51

54 ROBERT PERKINS Senior Writer, EMEA Oil News TOP 250 ENERGY COMPANIES HENRY EDWARDES-EVANS Associate Editorial Director, Power in Europe ASIA UP POWERS Global energy shake-up sees shale winners rival Asian energy growth The global energy industry is going through a period of profound transformation. While the fracking revolution in the US looks set to topple Saudi Arabia as the world s number one oil producer, in Germany, plummeting costs of solar power have sidelined some gas-fired generators. On one level there is good reason to be nervous. Global growth is threatened by conflict, and geopolitical turmoil has kept oil prices buoyant. But the shifting energy map has also seen more renewables and natural gas displace coal and oil across the energy chain. Without a doubt, energy companies are being forced to evolve at breakneck speed to cope with new levels of fuel substitution and shifting lines of energy trade, both locally and regionally. In this year s Platts Top 250 Global Energy Company Rankings, we see a continuation of the pivot to Asia theme as economic rebalancing in the region consolidates it as the new center of energy demand. This year, the rankings again show the relative growth of Asia s energy companies to feed the developing region s voracious appetite for power, now the world s largest and fastest growing component of primary energy consumption. The shift in energy demand dynamics towards the East has also been mirrored by Europe s declining energy demand. Battered by shrinking markets, growing regulatory hurdles, carbon prices, and challenges from renewable energies, many European players are being forced to navigate seismic changes in their markets. Many of Europe s refiners, for example, continue to struggle to remain in profit as a capacity glut still overshadows recent plant closures. Another clear theme this year remains the dramatic upheaval, and for most growth, that the American shale-led boom continues to thrust on energy players. 52 insight OCTOBER 2014

55 TOP 250 ENERGY COMPANIES Inside the United States, the story remains a transformational one for the oil and gas industry, as the light, tight oil revolution carries with it a wave of both winners and losers from the shale boom. PRICE DRIVERS Despite a largely stagnant global economy, 2013 did see acceleration in the growth of global energy consumption albeit at below-average rates. Emerging Asian economies, led by China, continued to lead the global push for energy demand, accounting for 80% of growth last year. China alone remained the world s largest energy consumer and, although the country s energy consumption growth continued to ebb, it made up half of the world s net energy demand growth. In terms of the world s energy mix, all fuels except oil, nuclear power and renewables in power generation grew at below-average rates. Oil remains the world s leading fuel, with a third of global energy consumption, according to BP, but it continues to lose market share to gas, coal and other rivals. Oil and gas prices underpin the earnings of many producers while others, such as utilities and refiners, are more dependent on cross fuel spreads or retail margins. Despite the relentless surge of oil supply growth from the US, last year saw Brent decline for the first time since Average oil prices still topped $100 per barrel (/b) for a third consecutive year, however, held aloft by supply disruptions and heightened political risk. Dated Brent crude averaged $108.66/b in 2013, according to Platts, an FASTEST GROWING ASIA COMPANIES Rank Company Country 3-year Industry CGR % Platts Rank 1 Kunlun Energy Co Ltd Hong Kong E&P Guangdong Electric Power Development Co Ltd China IPP China Resources Gas Group Ltd Hong Kong GU Essar Oil Ltd India R&M ENN Energy Holdings Ltd China GU Petron Corp Philippines R&M Cairn India Ltd India E&P Power Grid Corp of India Ltd India EU China Shenhua Energy Co Ltd China C&CF CLP Holdings Ltd Hong Kong EU GAIL (India) Ltd India GU Shanxi Xishan Coal & Electricity Power Co Ltd China C&CF Inner Mongolia Yitai Coal Co Ltd China C&CF Bharat Petroleum Corp Ltd India R&M Origin Energy Ltd Australia IOG Hindustan Petroleum Corp Ltd India R&M Yanzhou Coal Mining Co Ltd China C&CF Cheung Kong Infrastructure Holdings Ltd Hong Kong EU Reliance Industries Ltd India R&M Korea Gas Corp South Korea GU Fastest Growing is based on a three year compound growth rate (CGR) for revenues. The compound growth rate (CGR) is based on the companies revenue numbers for the past four years (current year included). If only three years of data was available then it is a two year CGR. All rankings are computed from data collected and translated into USD June 2, Source: S&P Capital IQ/Platts independent price reporting organization and global commodities information provider. This is down $3.01/b from the year before. Driven by fast growing US shale production, the US crude oil benchmark West Texas Intermediate (WTI) continued to trade at large discounts to Brent averaging $10.67/b. Once again, the global natural gas market showed marked regional divergence as its supply and availability of rival fuels distorts gas values compared to oil. For the first time, in 2010, natural gas prices rose in North America but remained suppressed by shale gas flows. Natural gas in the US averaged $3.71 per million British Thermal Units (MMBtu) at Henry Hub, a key distribution hub and pricing OCTOBER 2014 insight 53

56 TOP 250 ENERGY COMPANIES PLATTS RANK 2014 STATE OR ASSETS REVENUES PROFITS RETURN ON INVESTED CAPITAL 3-YEAR COMPANY COUNTRY REGION $ MILLION RANK $ MILLION RANK $ MILLION RANK ROIC% RANK CGR% 1 Exxon Mobil Corp Texas Americas IOG 2 BP plc United Kingdom EMEA IOG 3 Chevron Corp California Americas IOG 4 OJSC Gazprom Russia EMEA IOG 5 Royal Dutch Shell plc Netherlands EMEA IOG 6 OJSC Rosneft Oil Co Russia EMEA IOG 7 PetroChina Co Ltd China Asia/Pacifi c Rim IOG 8 Total SA France EMEA IOG 9 China Petroleum & Chemical Corp China Asia/Pacifi c Rim IOG 10 ConocoPhillips Texas Americas E&P 11 OJSC LUKOIL Oil Co Russia EMEA IOG 12 CNOOC Ltd Hong Kong Asia/Pacifi c Rim E&P 13 Phillips 66 Texas Americas R&M 14 Ecopetrol SA Colombia Americas IOG 15 China Shenhua Energy Co Ltd China Asia/Pacifi c Rim C&CF 16 Statoil ASA Norway EMEA IOG 17 Eni SpA Italy EMEA IOG 18 OJSC Surgutneftegas Russia EMEA IOG 19 Valero Energy Corp Texas Americas R&M 20 Occidental Petroleum Corp California Americas IOG 21 Oil & Natural Gas Corp Ltd India Asia/Pacifi c Rim E&P 22 Reliance Industries Ltd India Asia/Pacifi c Rim R&M 23 Suncor Energy Inc Canada Americas IOG 24 PTT Plc Thailand Asia/Pacifi c Rim IOG 25 Marathon Petroleum Corp Ohio Americas R&M 26 Tokyo Electric Power Co Inc Japan Asia/Pacifi c Rim EU 27 Petróleo Brasileiro SA - Petrobras Brazil Americas IOG 28 Hess Corp New York Americas IOG 29 OAO AK Transneft Russia EMEA S&T 30 National Grid plc United Kingdom EMEA DU 31 Enterprise Products Partners LP Texas Americas S&T 32 Electricite de France SA France EMEA EU 33 E.ON SE Germany EMEA DU 34 Centrica plc United Kingdom EMEA DU 35 Iberdrola SA Spain EMEA EU 36 Enel SpA Italy EMEA EU 37 Sasol Ltd South Africa EMEA IOG 38 OMV Aktiengesellschaft Austria EMEA IOG 39 EOG Resources Inc Texas Americas E&P 40 Gas Natural SDG SA Spain EMEA GU 41 Canadian Natural Resources Ltd Canada Americas E&P 42 Husky Energy Inc Canada Americas IOG 43 Indian Oil Corp Ltd India Asia/Pacifi c Rim R&M 44 BG Group plc United Kingdom EMEA IOG 45 Apache Corp Texas Americas E&P 46 Exelon Corp Illinois Americas EU 47 Coal India Ltd India Asia/Pacifi c Rim C&CF 48 OAO Tatneft Russia EMEA E&P 49 Duke Energy Corp North Carolina Americas EU 50 NTPC Ltd India Asia/Pacifi c Rim IPP INDUSTRY CODE Notes: C&CF = coal and consumable fuels, DNR = data not reported, DU = diversifi ed utility, E&P = exploration and production, EU = electric utility, GU = gas utility, IOG = integrated oil and gas, IPP = independent power producer and energy trader, R&M = refi ning and marketing, S&T = storage and transfer. All rankings are computed from data collected and translated into USD 6/2/ insight OCTOBER 2014

57 TOP 250 ENERGY COMPANIES PLATTS RANK 2014 STATE OR ASSETS REVENUES PROFITS RETURN ON INVESTED CAPITAL 3-YEAR COMPANY COUNTRY REGION $ MILLION RANK $ MILLION RANK $ MILLION RANK ROIC% RANK CGR% 51 Dominion Resources Inc Virginia Americas DU 52 CEZ a.s. Czech Republic EMEA EU 53 Huaneng Power International Inc China Asia/Pacifi c Rim IPP 54 Marathon Oil Corp Texas Americas E&P 55 OAO Novatek Russia EMEA E&P 56 Southern Co Georgia Americas EU 57 Plains All American Pipeline LP Texas Americas S&T 58 NextEra Energy Inc Florida Americas EU 59 American Electric Power Co Inc Ohio Americas EU 60 Tenaga Nasional Berhad Malaysia Asia/Pacifi c Rim EU 61 Inpex Corp Japan Asia/Pacifi c Rim E&P 62 JX Holdings Inc Japan Asia/Pacifi c Rim R&M 63 Repsol SA Spain EMEA IOG 64 Tokyo Gas Co Ltd Japan Asia/Pacifi c Rim GU 65 EDP-Energias de Portugal SA Portugal EMEA EU 66 Bharat Petroleum Corp Ltd India Asia/Pacifi c Rim R&M 67 JSOC Bashneft Russia EMEA E&P 68 Polska Grupa Energetyczna SA Poland EMEA EU 69 Woodside Petroleum Ltd Australia Asia/Pacifi c Rim E&P 70 Formosa Petrochemical Corp Taiwan Asia/Pacifi c Rim R&M 71 Fortum Oyj Finland EMEA EU 72 Public Service Enterprise Group Inc New Jersey Americas DU 73 Showa Shell Sekiyu KK Japan Asia/Pacifi c Rim R&M 74 Consolidated Edison Inc New York Americas DU 75 China Resources Power Holdings Co Ltd Hong Kong Asia/Pacifi c Rim IPP 76 SK Innovation Co Ltd South Korea Asia/Pacifi c Rim R&M 77 Edison International California Americas EU 78 Xcel Energy Inc Minnesota Americas EU 79 Empresas Copec SA Chile Americas R&M 80 Companhia Energética de Minas Gerais SA Brazil Americas EU 81 TransCanada Corp Canada Americas S&T 82 PG&E Corp California Americas DU 83 PPL Corp Pennsylvania Americas EU 84 Kinder Morgan Inc Texas Americas S&T 85 Neste Oil Corp Finland EMEA R&M 86 HollyFrontier Corp Texas Americas R&M 87 Sempra Energy California Americas DU 88 SSE plc United Kingdom EMEA EU 89 Turkiye Petrol Rafinerileri A.S. Turkey EMEA R&M 90 VERBUND AG Austria EMEA EU 91 Anadarko Petroleum Corp Texas Americas E&P 92 YPF SA Argentina Americas IOG 93 Cenovus Energy Inc Canada Americas IOG 94 Zhejiang Zheneng Electric Power Co Ltd China Asia/Pacifi c Rim IPP 95 Murphy Oil Corp Arkansas Americas E&P 96 Snam S.p.A. Italy EMEA GU 97 GAIL (India) Ltd India Asia/Pacifi c Rim GU 98 Saudi Electricity Co Saudi Arabia EMEA EU 99 CLP Holdings Ltd Hong Kong Asia/Pacifi c Rim EU 100 Entergy Corp Louisiana Americas EU INDUSTRY CODE Notes: C&CF = coal and consumable fuels, DNR = data not reported, DU = diversifi ed utility, E&P = exploration and production, EU = electric utility, GU = gas utility, IOG = integrated oil and gas, IPP = independent power producer and energy trader, R&M = refi ning and marketing, S&T = storage and transfer. All rankings are computed from data collected and translated into USD 6/2/2014. OCTOBER 2014 insight 55

58 TOP 250 ENERGY COMPANIES PLATTS RANK 2014 STATE OR ASSETS REVENUES PROFITS RETURN ON INVESTED CAPITAL 3-YEAR COMPANY COUNTRY REGION $ MILLION RANK $ MILLION RANK $ MILLION RANK ROIC% RANK CGR% 101 GD Power Development Co Ltd China Asia/Pacifi c Rim IPP 102 China Yangtze Power Co Ltd China Asia/Pacifi c Rim IPP 103 Noble Energy Inc Texas Americas E&P 104 Cairn India Ltd India Asia/Pacifi c Rim E&P 105 Northeast Utilities Massachusetts Americas EU 106 Spectra Energy Corp Texas Americas S&T 107 DTE Energy Co Michigan Americas DU 108 Tesoro Corp Texas Americas R&M 109 Kunlun Energy Co Ltd Hong Kong Asia/Pacifi c Rim E&P 110 Ultrapar Holdings Inc Brazil Americas S&T 111 Enbridge Inc Canada Americas S&T 112 Polskie Gornictwo Naftowe I Gazownictwo SA Poland EMEA IOG 113 Idemitsu Kosan Co Ltd Japan Asia/Pacifi c Rim R&M 114 Chesapeake Energy Corp Oklahoma Americas E&P 115 China Coal Energy Co Ltd China Asia/Pacifi c Rim C&CF 116 Caltex Australia Ltd Australia Asia/Pacifi c Rim R&M 117 Huadian Power International Corp Ltd China Asia/Pacifi c Rim IPP 118 The Hong Kong & China Gas Co Ltd Hong Kong Asia/Pacifi c Rim GU 119 Datang International Power Generation Co Ltd China Asia/Pacifi c Rim IPP 120 ONEOK Partners LP Oklahoma Americas S&T 121 FirstEnergy Corp Ohio Americas EU 122 Shaanxi Coal Industry Co Ltd China Asia/Pacifi c Rim C&CF 123 Power Assets Holdings Ltd Hong Kong Asia/Pacifi c Rim EU 124 Continental Resources Inc Oklahoma Americas E&P 125 Tohoku Electric Power Co Inc Japan Asia/Pacifi c Rim EU 126 Canadian Oil Sands Ltd Canada Americas E&P 127 Korea Electric Power Corp South Korea Asia/Pacifi c Rim EU 128 Wisconsin Energy Corp Wisconsin Americas DU 129 Energy Transfer Equity LP Texas Americas S&T 130 OJSC Federal Hydro-Generating Co - RusHydro Russia EMEA EU 131 Cheung Kong Infrastructure Holdings Ltd Hong Kong Asia/Pacifi c Rim EU 132 JSC KazMunaiGas Exploration Production Kazakhstan EMEA E&P 133 Osaka Gas Co Ltd Japan Asia/Pacifi c Rim GU 134 Ameren Corp Missouri Americas DU 135 TonenGeneral Sekiyu KK Japan Asia/Pacifi c Rim R&M 136 The AES Corp Virginia Americas IPP 137 CMS Energy Corp Michigan Americas DU 138 NiSource Inc Indiana Americas DU 139 Origin Energy Ltd Australia Asia/Pacifi c Rim IOG 140 Red Eléctrica Corporación SA Spain EMEA EU 141 Southwestern Energy Co Texas Americas E&P 142 Power Grid Corp of India Ltd India Asia/Pacifi c Rim EU 143 S-Oil Corp South Korea Asia/Pacifi c Rim R&M 144 Galp Energia SGPS SA Portugal EMEA IOG 145 TERNA SpA Italy EMEA EU 146 Williams Companies Inc Oklahoma Americas S&T 147 EnBW Energie Baden-Wuerttemberg AG Germany EMEA EU 148 SCANA Corp South Carolina Americas DU 149 Tauron Polska Energia SA Poland EMEA EU 150 Manila Electric Co Philippines Asia/Pacifi c Rim EU INDUSTRY CODE Notes: C&CF = coal and consumable fuels, DNR = data not reported, DU = diversifi ed utility, E&P = exploration and production, EU = electric utility, GU = gas utility, IOG = integrated oil and gas, IPP = independent power producer and energy trader, R&M = refi ning and marketing, S&T = storage and transfer. All rankings are computed from data collected and translated into USD 6/2/ insight OCTOBER 2014

59 TOP 250 ENERGY COMPANIES PLATTS RANK 2014 STATE OR ASSETS REVENUES PROFITS RETURN ON INVESTED CAPITAL 3-YEAR COMPANY COUNTRY REGION $ MILLION RANK $ MILLION RANK $ MILLION RANK ROIC% RANK CGR% 151 Guangdong Electric Power Development Co Ltd China Asia/Pacifi c Rim IPP 152 JSC Moscow United Electric Grid Co Russia EMEA EU 153 Hindustan Petroleum Corp Ltd India Asia/Pacifi c Rim R&M 154 CPFL Energia SA Brazil Americas EU 155 ONEOK Inc Oklahoma Americas S&T 156 Companhia Paranaense de Energia Brazil Americas EU 157 AGL Energy Ltd Australia Asia/Pacifi c Rim DU 158 CenterPoint Energy Inc Texas Americas DU 159 SDIC Power Holdings Co Ltd China Asia/Pacifi c Rim IPP 160 Integrys Energy Group Inc Illinois Americas DU 161 Pinnacle West Capital Corp Arizona Americas EU 162 Inner Mongolia Yitai Coal Co Ltd China Asia/Pacifi c Rim C&CF 163 Pacific Rubiales Energy Corp Canada Americas E&P 164 GDF SUEZ SA France EMEA DU 165 Thai Oil Pcl Thailand Asia/Pacifi c Rim R&M 166 YTL Corp Berhad Malaysia Asia/Pacifi c Rim DU 167 GS Holdings Corp South Korea Asia/Pacifi c Rim R&M 168 Santos Ltd Australia Asia/Pacifi c Rim E&P 169 RWE AG Germany EMEA DU 170 Korea Gas Corp South Korea Asia/Pacifi c Rim GU 171 The Kansai Electric Power Co Inc Japan Asia/Pacifi c Rim EU 172 Veolia Environnement SA France EMEA DU 173 Electric Power Development Co Ltd Japan Asia/Pacifi c Rim IPP 174 Cimarex Energy Co Colorado Americas E&P 175 Plains GP Holdings LP Texas Americas S&T 176 MOL Hungarian Oil & Gas Co Hungary EMEA IOG 177 Polski Koncern Naftowy Orlen SA Poland EMEA R&M 178 Chubu Electric Power Co Inc Japan Asia/Pacifi c Rim EU 179 AGL Resources Inc Georgia Americas GU 180 ATCO Ltd Canada Americas DU 181 Enagás SA Spain EMEA GU 182 OGE Energy Corp Oklahoma Americas EU 183 Western Refining Inc Texas Americas R&M 184 Alliant Energy Corp Wisconsin Americas DU 185 UGI Corp Pennsylvania Americas GU 186 Enable Midstream Partners LP Oklahoma Americas S&T 187 HK Electric Investments Ltd Hong Kong Asia/Pacifi c Rim EU 188 Cosmo Oil Co Ltd Japan Asia/Pacifi c Rim R&M 189 Denbury Resources Inc Texas Americas E&P 190 Shenergy Co Ltd China Asia/Pacifi c Rim IPP 191 YTL Power International Berhad Malaysia Asia/Pacifi c Rim DU 192 Buckeye Partners LP Texas Americas S&T 193 Encana Corp Canada Americas E&P 194 Devon Energy Corp Oklahoma Americas E&P 195 Pembina Pipeline Corp Canada Americas S&T 196 JSC Russian Grids Russia EMEA EU 197 Whiting Petroleum Corp Colorado Americas E&P 198 Reliance Infrastructure Ltd India Asia/Pacifi c Rim EU 199 Yanzhou Coal Mining Co Ltd China Asia/Pacifi c Rim C&CF 200 Fortis Inc Canada Americas EU INDUSTRY CODE Notes: C&CF = coal and consumable fuels, DNR = data not reported, DU = diversifi ed utility, E&P = exploration and production, EU = electric utility, GU = gas utility, IOG = integrated oil and gas, IPP = independent power producer and energy trader, R&M = refi ning and marketing, S&T = storage and transfer. All rankings are computed from data collected and translated into USD 6/2/2014. OCTOBER 2014 insight 57

60 TOP 250 ENERGY COMPANIES PLATTS RANK 2014 STATE OR ASSETS REVENUES PROFITS RETURN ON INVESTED CAPITAL 3-YEAR COMPANY COUNTRY REGION $ MILLION RANK $ MILLION RANK $ MILLION RANK ROIC% RANK CGR% 201 MDU Resources Group Inc North Dakota Americas DU 202 Kyushu Electric Power Co Inc Japan Asia/Pacifi c Rim EU 203 China Power International Development Ltd Hong Kong Asia/Pacifi c Rim IPP 204 China Longyuan Power Group Corp Ltd China Asia/Pacifi c Rim IPP 205 Delek Group Ltd Israel EMEA R&M 206 The Chugoku Electric Power Co Inc Japan Asia/Pacifi c Rim EU 207 Royal Vopak NV Netherlands EMEA S&T 208 Oil India Ltd India Asia/Pacifi c Rim E&P 209 Essar Energy plc United Kingdom EMEA R&M 210 Rabigh Refining & Petrochemical Co Saudi Arabia EMEA R&M 211 Hera S.p.A. Italy EMEA DU 212 Westar Energy Inc Kansas Americas EU 213 Empresa de Energia de Bogotá SA ESP Colombia Americas GU 214 Hawaiian Electric Industries Inc Hawaii Americas EU 215 Centrais Elétricas Brasileiras SA - Eletrobras Brazil Americas EU 216 NRG Energy Inc New Jersey Americas IPP 217 Shanxi Lu'an Environmental Energy Development Co Ltd China Asia/Pacifi c Rim C&CF 218 China Resources Gas Group Ltd Hong Kong Asia/Pacifi c Rim GU 219 Atmos Energy Corp Texas Americas GU 220 A2A S.p.A. Italy EMEA DU 221 EQT Corp Pennsylvania Americas E&P 222 El Paso Pipeline Partners LP Texas Americas S&T 223 Light SA Brazil Americas EU 224 ACEA S.p.A. Italy EMEA DU 225 ENERGA Spólka Akcyjna Poland EMEA EU 226 Cameco Corp Canada Americas C&CF 227 Japan Petroleum Exploration Co Ltd Japan Asia/Pacifi c Rim E&P 228 Alpiq Holding AG Switzerland EMEA EU 229 Pepco Holdings Inc District of Columbia Americas EU 230 National Fuel Gas Co New York Americas GU 231 Great Plains Energy Incorporated Missouri Americas EU 232 Essar Oil Ltd India Asia/Pacifi c Rim R&M 233 PT Adaro Energy Tbk Indonesia Asia/Pacifi c Rim C&CF 234 Calpine Corp Texas Americas IPP 235 Abu Dhabi National Energy Co PJSC United Arab Emirates EMEA DU 236 ENN Energy Holdings Ltd China Asia/Pacifi c Rim GU 237 Shanxi Xishan Coal & Electricity Power Co Ltd China Asia/Pacifi c Rim C&CF 238 Meridian Energy Ltd New Zealand Asia/Pacifi c Rim IPP 239 Concho Resources Inc Texas Americas E&P 240 Public Power Corp SA Greece EMEA EU 241 Interconexión Eléctrica SA E.S.P. Colombia Americas EU 242 Jizhong Energy Resources Co Ltd China Asia/Pacifi c Rim C&CF 243 EVN AG Austria EMEA EU 244 Huadian Fuxin Energy Corp Ltd China Asia/Pacifi c Rim IPP 245 TECO Energy Inc Florida Americas DU 246 Hokuriku Electric Power Co Japan Asia/Pacifi c Rim EU 247 Petron Corp Philippines Asia/Pacifi c Rim R&M 248 Tullow Oil plc United Kingdom EMEA E&P 249 Elia System Operator SA Belgium EMEA EU 250 Acciona SA Spain EMEA EU INDUSTRY CODE Notes: C&CF = coal and consumable fuels, DNR = data not reported, DU = diversifi ed utility, E&P = exploration and production, EU = electric utility, GU = gas utility, IOG = integrated oil and gas, IPP = independent power producer and energy trader, R&M = refi ning and marketing, S&T = storage and transfer. All rankings are computed from data collected and translated into USD 6/2/ insight OCTOBER 2014

61 TOP 250 ENERGY COMPANIES location on the US natural gas pipeline system, in 2013, up from an all-time low of $2.77/MMBtu the year before. Although differentials between North American and international gas prices generally narrowed, the US gas price remained less than a quarter of the import price in Japan. Global gas demand continues to grow, driven by Asian consumption, but has been below average in 2013 in all regions except North America, and is falling in Europe. In Europe, the rising use of renewable energy, falling wholesale market prices, and the growth of distributed generation and energy efficiency, were trends eroding traditional utility market shares and sending profits into free fall. Coal consumption in the United States rebounded in 2013, eroding some of the historic declines in US coal use experienced during 2011 and Coal consumption climbed 36.2 million short tons for the first half of 2013, according to US Energy Information Administration data, an 8.8% year-overyear increase. The rebound was driven almost entirely by the electric power sector, where coal regained some of the market share lost over the two preceding years in the face of higher natural gas prices. TOP 10 ENERGY COMPANIES Cost pressures in the energy industry have become one of the biggest hurdles to earnings growth in recent times and this year is no different. For the integrated oil majors, which dominate the top rankings, this squeeze on upstream earnings has been matched only by sliding downstream earnings as FASTEST GROWING AMERICAS COMPANIES Rank Company State or Country Industry 3-year CGR % Platts Rank 1 Energy Transfer Equity, LP Texas S&T Pembina Pipeline Corp Canada S&T Continental Resources, Inc Oklahoma E&P Enable Midstream Partners, LP Oklahoma S&T Pacifi c Rubiales Energy Corp Canada E&P Concho Resources, Inc Texas E&P EOG Resources, Inc Texas E&P HollyFrontier Corp Texas R&M Empresa de Energia de Bogotá SA ESP Colombia GU YPF SA Argentina IOG Fastest Growing is based on a three year compound growth rate (CGR) for revenues. The compound growth rate (CGR) is based on the companies revenue numbers for the past four years (current year included). If only three years of data was available then it is a two year CGR. All rankings are computed from data collected and translated into USD June 2, Source: S&P Capital IQ/Platts overcapacity and sluggish demand hit returns from refining oil. Collectively, the world s 10 biggest energy companies generated profits of $193 billion on revenues of $2.83 trillion in But for a second year in a row, the profitability of the world s biggest energy players took a hit, with combined earnings down 8.5% year on year. At the same time, total revenues rose 6% on the year. ExxonMobil retains pole position for the tenth year running, with its industryleading return on capital still holding its oil major rivals at bay in the rankings. Back this year at second place in the top 10 is the return of BP, which is recovering from the financial pain of its payouts over the 2010 Gulf of Mexico oil spill. With its final court battle to settle remaining liabilities for the disaster not due to start until 2015, the major s recovery in the rankings this year is likely not yet to be definitive. This year was Statoil s turn to fall out of the top 10. The Norwegian oil company, which is also Europe s second-biggest gas supplier, OCTOBER 2014 insight 59

62 TOP 250 ENERGY COMPANIES ASIA/PACIFIC RIM COMPANIES IN 2014 TOP 250 TOP ASIA PLATTS RANK ASSETS REVENUES PROFITS RETURN ON INVESTED CAPITAL 2014 COMPANY STATE OR COUNTRY $ MILLION RANK $ MILLION RANK $ MILLION RANK ROIC% RANK 1 7 PetroChina Co Ltd China IOG 2 9 China Petroleum & Chemical Corp China IOG 3 12 CNOOC Ltd Hong Kong E&P 4 15 China Shenhua Energy Co Ltd China C&CF 5 21 Oil & Natural Gas Corp Ltd India E&P 6 22 Reliance Industries Ltd India R&M 7 24 PTT Plc Thailand IOG 8 26 Tokyo Electric Power Co, Incorporated Japan EU 9 43 Indian Oil Corp Ltd India R&M Coal India Ltd India C&CF NTPC Ltd India IPP Huaneng Power International, Inc China IPP Tenaga Nasional Berhad Malaysia EU Inpex Corp Japan E&P JX Holdings Inc Japan R&M Tokyo Gas Co Ltd Japan GU Bharat Petroleum Corp Ltd India R&M Woodside Petroleum Ltd Australia E&P Formosa Petrochemical Corp Taiwan R&M Showa Shell Sekiyu KK Japan R&M China Resources Power Holdings Co Ltd Hong Kong IPP SK Innovation Co Ltd South Korea R&M Zhejiang Zheneng Electric Power Co Ltd China IPP GAIL (India) Ltd India GU CLP Holdings Ltd Hong Kong EU GD Power Development Co, Ltd China IPP China Yangtze Power Co Ltd China IPP Cairn India Ltd India E&P Kunlun Energy Co Ltd Hong Kong E&P Idemitsu Kosan Co Ltd Japan R&M China Coal Energy Co Ltd China C&CF Caltex Australia Ltd Australia R&M Huadian Power International Corp Ltd China IPP The Hong Kong & China Gas Co Ltd Hong Kong GU Datang International Power Generation Co Ltd China IPP Shaanxi Coal Industry Co, Ltd China C&CF Power Assets Holdings Ltd Hong Kong EU Tohoku Electric Power Co Inc Japan EU Korea Electric Power Corp South Korea EU Cheung Kong Infrastructure Holdings Ltd Hong Kong EU Osaka Gas Co Ltd Japan GU Notes: C&CF = coal and consumable fuels, DNR = data not reported, DU = diversifi ed utility, E&P = exploration and production, EU = electric utility, GU = gas utility, IOG = integrated oil and gas, IPP = independent power producer and energy trader, R&M = refi ning and marketing, S&T = storage and transfer. All rankings are computed from data collected and translated into USD 6/2/2014. INDUSTRY CODE sank from 5th to 16th place in Platts 2014 rankings after its earnings suffered due to asset sales and weaker gas prices. Following the $55 billion acquisition of TNK-BP, Russian giant Rosneft has gained three positions to rival Royal Dutch Shell in sixth place. Although the deal put Rosneft ahead of ExxonMobil in terms of production and reserves, Rosneft still ranks below the US 60 insight OCTOBER 2014

63 TOP 250 ENERGY COMPANIES ASIA/PACIFIC RIM COMPANIES IN 2014 TOP 250 TOP ASIA PLATTS RANK ASSETS REVENUES PROFITS RETURN ON INVESTED CAPITAL 2014 COMPANY STATE OR COUNTRY $ MILLION RANK $ MILLION RANK $ MILLION RANK ROIC% RANK TonenGeneral Sekiyu KK Japan R&M Origin Energy Ltd Australia IOG Power Grid Corp of India Ltd India EU S-Oil Corp South Korea R&M Manila Electric Co Philippines EU Guangdong Electric Power Development Co Ltd China IPP Hindustan Petroleum Corp Ltd India R&M AGL Energy Ltd Australia DU SDIC Power Holdings Co Ltd China IPP Inner Mongolia Yitai Coal Co Ltd China C&CF Thai Oil Pcl Thailand R&M YTL Corp Berhad Malaysia DU GS Holdings Corp South Korea R&M Santos Ltd Australia E&P Korea Gas Corp South Korea GU The Kansai Electric Power Co Incorporated Japan EU Electric Power Development Co Ltd Japan IPP Chubu Electric Power Co Incorporated Japan EU HK Electric Investments Ltd Hong Kong EU Cosmo Oil Co Ltd Japan R&M Shenergy Co Ltd China IPP YTL Power International Berhad Malaysia DU Reliance Infrastructure Ltd India EU Yanzhou Coal Mining Co Ltd China C&CF Kyushu Electric Power Co Incorporated Japan EU China Power International Development Ltd Hong Kong IPP China Longyuan Power Group Corp Ltd China IPP The Chugoku Electric Power Co Inc Japan EU Oil India Ltd India E&P Shanxi Lu'an Environmental Energy Development Co Ltd China C&CF China Resources Gas Group Ltd Hong Kong GU Japan Petroleum Exploration Co Ltd Japan E&P Essar Oil Ltd India R&M PT Adaro Energy Tbk Indonesia C&CF ENN Energy Holdings Ltd China GU Shanxi Xishan Coal & Electricity Power Co Ltd China C&CF Meridian Energy Ltd New Zealand IPP Jizhong Energy Resources Co Ltd China C&CF Huadian Fuxin Energy Corp Ltd China IPP Hokuriku Electric Power Co Japan EU Petron Corp Philippines R&M INDUSTRY CODE Notes: C&CF = coal and consumable fuels, DNR = data not reported, DU = diversifi ed utility, E&P = exploration and production, EU = electric utility, GU = gas utility, IOG = integrated oil and gas, IPP = independent power producer and energy trader, R&M = refi ning and marketing, S&T = storage and transfer. All rankings are computed from data collected and translated into USD 6/2/2014. supermajor in Platts rankings due to lower revenues, profits, assets and return on capital. of the leaderboard in this year s rankings hit by multi-billion dollar write-offs at some major projects. Russia s largest oil independent Lukoil, previously in 7th place, has slipped out With the exit of Lukoil and Statoil, China s two biggest state integrated OCTOBER 2014 insight 61

64 TOP 250 ENERGY COMPANIES #1 IN ASIA BY INDUSTRY Industry Company Country Platts Rank IOG PetroChina Co Ltd China 7 E&P CNOOC Ltd Hong Kong 12 C&CF China Shenhua Energy Co Ltd China 15 R&M Reliance Industries Ltd India 22 EU Tokyo Electric Power Co Incorporated Japan 26 IPP NTPC Ltd India 50 GU Tokyo Gas Co Ltd Japan 64 DU AGL Energy Ltd Australia 157 All rankings are computed from data collected and translated into USD June 2, Source: S&P Capital IQ/Platts FASTEST GROWING ASIAN COMPANIES BY INDUSTRY oil giants PetroChina and Sinopec have now each moved up a position in the leaderboard. REGIONS Asia: Booming China China was the world s largest producer and consumer of energy overall in At the same time, Europe s energy consumption continued to decline, hitting the lowest level since As a region, Asia and Pacific Rim energy companies were the only ones to see their number swell in the rankings this year, reflecting the resilient economic growth rates of the developing countries. With eight new Asian players in the list this year, the region now makes up one third Industry Company Country 3-year CGR % Platts Rank E&P Kunlun Energy Co Ltd Hong Kong IPP Guangdong Electric Power Development Co Ltd China GU China Resources Gas Group Ltd Hong Kong R&M Essar Oil Ltd India EU Power Grid Corp of India Ltd India C&CF China Shenhua Energy Co Ltd China IOG Origin Energy Ltd Australia DU AGL Energy Ltd Australia Fastest Growing is based on a 3 year compound growth rate (CGR) for revenues. All rankings are computed from data collected and translated into USD June 2, Source: S&P Capital IQ/Platts of the total list, up from 30% in the previous year. Emerging economies accounted for 80% of the global increase in energy consumption last year and Asia is, without a doubt, becoming the unrivaled center of the global energy trade. Each year the region absorbs a growing share of the available oil and gas, not just from the Middle East, but also from Russia, the Caspian, Africa, Latin America and North America. Asian NOCs continued to focus on asset deals to build access to resources in 2013, which are less politically controversial than corporate takeovers. Backed by access to cheap capital, Chinese companies also are estimated to have spent $8.5 billion on unconventional oil and gas projects in the US since In April last year, Japex acquired a 10% interest in Progress Energy Canada s natural gas assets in northeast British Columbia and in Canadian West Coast called Pacific North West LNG. Sinopec bought a 33% stake in Apache s Egyptian oil interests for $3.1 billion. In the rankings, Showa Shell jumps from 214 to 73, on higher net income from inventory valuation gains in the oil business, backed by rising crude oil prices and an increase in domestic sales of solar cells in the energy solution business. Indian companies, hold seven places on the fastest growing list more than half of all the Indian based players and six more than in the previous year s rankings with an average 3-year compound growth rate (CGR) of 21.3%. 62 insight OCTOBER 2014

65 TOP 250 ENERGY COMPANIES As in recent years, the success stories in the EMEA region are dominated by Russian players, which saw their return on capital average 9%, double that of the EMEA region as a whole. This year there are 11 Russian companies in the standings, down from 14 in 2012, with the notable absence of former Russian-Anglo venture TNK-BP, snapped up by Rosneft. But the combined placement of Russian energy companies has now strengthened to 65th from an average ranking of 81th previously. In terms of growth rates, four Russian companies make it into the top 50 growth outliers this time; the gas independent Novatek, integrated giant Rosneft, producer Bashneft and pipeline company Transneft averaging a 27% 3-year CGR. American oil, gas production boom American region companies filled 103 places in the rankings with average placement of 126th. The year before, American firms held 106 positions with an average placement of 133th. The US again saw the world s largest increase in oil production last year, offsetting almost barrel for barrel the numerous supply disruptions around the globe. For a second year running, the US saw its oil output jump by over 1 million barrels per day (b/d), the largest annual increment in the country s history. The US oil supply estimate excludes biofuels which when added to the total are widely believed to place the US as the world s biggest liquids producer above Saudi Arabia and Russia. FASTEST GROWING EMEA COMPANIES Rank Company Country Industry 3-year CGR % Platts Rank 1 OAO Novatek Russia E&P Tullow Oil plc United Kingdom E&P OJSC Rosneft Oil Co Russia IOG OMV Aktiengesellschaft Austria IOG JSOC Bashneft Russia E&P OAO AK Transneft Russia S&T Turkiye Petrol Rafi nerileri A.S. Turkey R&M Polskie Gornictwo Naftowe I Gazownictwo SA Poland IOG Neste Oil Corp Finland R&M Sasol Ltd South Africa IOG Fastest Growing is based on a three year compound growth rate (CGR) for revenues. The compound growth rate (CGR) is based on the companies revenue numbers for the past four years (current year included). If only three years of data was available then it is a two year CGR. All rankings are computed from data collected and translated into USD June 2, Source: S&P Capital IQ/Platts Surging supplies of light, tight oil continued to have a profound impact on oil trade flows to and from North America. US net imports fell by 1.4 million b/d to 6.5 million b/d last year. China is now importing more crude than the US. The US will also overtake Russia as the world s biggest gas producer by 2015 and will become almost self-sufficient in its energy needs by about 2035, according to the International Energy Agency. But many of the fracking pioneers spent more on leasing land and drilling than they have gained from selling oil and gas. A number of rapid US shale expansion plans have backfired, resulting in massive writedowns and spending cutbacks. But the US shale industry has now grown up, moving from a land grab phase to an acute focus on costs through new drilling efficiencies. Many US shale players which have slashed their exposure to low gas prices are now getting to grips with costs and turning a corner with the economics of fracking using new technology. This OCTOBER 2014 insight 63

66 TOP 250 ENERGY COMPANIES TOP 50 FASTEST GROWING COMPANIES Company 3-year CGR% Platts Rank 1 Energy Transfer Equity LP Pembina Pipeline Corp Continental Resources Inc Enable Midstream Partners LP Pacifi c Rubiales Energy Corp Concho Resources Inc OAO Novatek Kunlun Energy Co Ltd EOG Resources Inc Guangdong Electric Power Development Co Ltd Tullow Oil plc HollyFrontier Corp OJSC Rosneft Oil Co China Resources Gas Group Ltd Empresa de Energia de Bogotá SA ESP Essar Oil Ltd ENN Energy Holdings Ltd YPF SA Petron Corp Empresas Copec SA AGL Resources Inc Chesapeake Energy Corp Noble Energy Inc Tesoro Corp Cairn India Ltd OMV Aktiengesellschaft Power Grid Corp of India Ltd Whiting Petroleum Corp China Shenhua Energy Co Ltd Kinder Morgan Inc CLP Holdings Ltd GAIL (India) Ltd Shanxi Xishan Coal & Electricity Power Co Ltd Inner Mongolia Yitai Coal Co Ltd Duke Energy Corp Bharat Petroleum Corp Ltd Origin Energy Ltd Valero Energy Corp Hindustan Petroleum Corp Ltd JSOC Bashneft OAO AK Transneft Ecopetrol SA Yanzhou Coal Mining Co Ltd Cheung Kong Infrastructure Holdings Ltd Marathon Petroleum Corp Reliance Industries Ltd Plains GP Holdings LP Plains All American Pipeline LP Korea Gas Corp SDIC Power Holdings Co Ltd Fastest Growing is based on a 3 year compound growth rate (CGR) for revenues. All rankings are computed from data collected and translated into USD June 2, Source: S&P Capital IQ/Platts year s ranking tracks the progress of shale s biggest winners. Under a new chief executive, Chesapeake is now recovering from the fall out of its debt-fuelled acquisitions after becoming a pioneer for the US shale gas industry. In the 2013 rankings list, it dived from 64 to 210th place, a fall which it has partially recouped to now reach 114th in the current list. Oklahoma-based Devon Energy, another shale gas standard-bearer which suffered from the shale gas glut, remains 14 positions better off at 194th in the current rankings. The company has still some way to go, however, to regain a high of 57th place in the 2012 list. The US biggest horizontal driller, EOG Resources jumped from 127th to 39th this year and now ranks as the world s 9th fastest growing energy company. Strong results from the Eagle Ford, Bakken/Three Forks and Permian shale plays drove EOG s year-on-year oil production up over 40% and natural gas liquids (NGL) volumes up 17%. EOG, now ranks as the biggest crude producer in the onshore US Lower 48 states. Continental Resources, which like EOG, has been quick to shift towards more lucrative shale oil, moved up 18 places to 124th overall. Encana, Canada s largest natural gas producer, is one company which has had a rocky ride due to shale gas. Ranking as high as the world s 16th biggest energy company by Platts in 2009, Encana dramatically fell out of the listings last year after its earnings were devastated by diving gas prices as 64 insight OCTOBER 2014

67 TOP 250 ENERGY COMPANIES surging US shale gas flooded the North American markets. Under new management, it has sold off vast swaths of poorly-performing assets and reduced its exposure to gas in favor of oil production. The remedy seems to be working as the company makes its reappearance this year at 193th place. Not all shale players have been so fortunate. Consol Energy, a Marcellus shale gas operator, has dropped out of the ranking this year after placing 148th last year. Consol was impacted by lower coal prices, falling sales volumes and weaker prices for coalbed methane. Pain in Europe The pain being felt by European energy companies is played out in the rankings. More than half of the 15 companies that lost more than 50 positions were based in Europe or Russia. By contrast, EMEA energy firms made up just three of the 19 companies rising more than 50 places this year. EMEA energy companies fielded 65 positions with an average placement of 113, down from the previous list when the region s firms held 70 positions with an average 106th place. After the loss of its Argentinean unit YPF, which was nationalized by the government in 2012, Repsol slid 25 positions to 63, putting it at the bottom of the pack for European oil companies and well below its regional peers Total and Eni. MOL, a Hungarian oil producer and refiner, suffered in 2013 from weak natural gas prices and shrinking motor fuel crack spreads and Brent-Ural crude differentials at its plants. Germany s RWE, one of Europe s biggest utilities, dived 127 positions after posting its first loss in decades due to a $4.5 billion impairment charge reflecting tough regulatory and economic conditions and a fast-growing rival, renewables power. Tullow Oil, last year s fastest growing energy company in the EMEA region, saw its overall rankings slide to 248 from 147, after it took a large write-off to the due to a string of unsuccessful exploration wells. The African-focused explorer has now slipped to hold EMEA s second place as fastest growing firm, behind Russian gas producer Novatek. FASTEST GROWING COMPANIES Overall, corporate growth rates slowed in 2013, with average return on capital for the top 10 fastest growing falling to 18% from 23% the year before. The average growth rates of the world s top 50 fastest growing companies slipped from a 3-year CGR of 38% over 2012, to 27.8% in As a continuation of the US shale oil and gas boom, it is no coincidence that the world s fastest growing companies are still the shale players. There are now 19 American and Canadian companies in the top 50 fastest growing list, which is up from 15 the year before and just six of the 2012 rankings.asian-pacific companies reached a total of 21 in the list, unchanged from a year earlier but down from 2012 rankings when the region accounted for almost two-thirds of the world s fastest growing energy firms. Top 250 Methodology This annual survey of global energy companies by Platts measures companies fi nancial performance using four key metrics: asset worth, revenues, profi ts, and return on invested capital. All companies on the list have assets greater than US $5 billion. The fundamental and market data comes from a database compiled and maintained by S&P Capital IQ, a business unit of McGraw Hill Financial. Energy companies were grouped according to their Global Industry Classifi cation Standard (GICS) code. Each company is assigned to an industry according to the defi nition of its principal business activity. Because the survey is global, and because all countries do not share a common fi nancial reporting standard, the information presented is for each company s most current reporting period. Since then, material changes to a company s fi nancial health may have occurred. Data for U.S. companies came from Securities and Exchange Commission (SEC) Form 10K. The company rankings are derived using a special Platts formula. We added each company s numerical ranking for asset worth, revenues, profi ts, and ROIC and assigned a rank of 1 to the company with the lowest total, 2 to the company with the second-lowest total, and so on. Finally, ROIC fi gures-widely regarded as a driver of cash fl ow and value-were calculated using the following equation: ROIC = [(Income before extraordinary items) - (Available for common stock)] (Total invested capital) x 100 where Income before extraordinary items is net income less preferred dividends and Total invested capital is the sum of total debt, preferred stock (value), noncontrolling interest, and total common equity. OCTOBER 2014 insight 65

68 TOP 250 ENERGY COMPANIES North American companies continue to dominate the fastest growing list, taking seven of the top 10 spots. Their gap between expanding rivals in Asia also widened this year with the America s region now holding the top six spots on the leaderboard, twice as many in those positions as the year before. It s not just the outright number of American energy growth stories which sets the scene this year. America s top performers are now outstripping their Asian rivals on growth rates. According to the data, America s top 10 fastest growing firms averaged 46.8% 3-year CRG, while in Asia the number was 27.3%. Six of the top 10 fastest growing companies are US shale producers and midstream companies, enjoying 3-year growth rates in excess of 35%. The average US growth rates are down from the previous year, but enough to outpace fast-growing rivals in Asia. US and Canadian pipeline and storage companies Energy Transfer Partners and Pembina Pipeline are the world s two fastest growing firms this year, with a third, Enable Midstream Partners, in fourth place. By contrast, in Europe, just six companies ranked within the 50 fastest growing firms, down from 11 the year before. Europe s declines have become Asia s gains with the relative importance of Asia and Pacific Rim companies gaining ground against their rivals in Europe. Where Cairn India, Hong Kong s Kunlun Energy and China Resources Gas Group enjoyed sector-leading growth, shalefuelled production and transport companies hold the top spots. Overall, Asia s energy growth stories mostly maintained their outright positions, holding 20 places in the top 50 fastest growing list, one less than the year before. Kunlun Energy, the listed natural gas subsidiary of Chinese state-controlled company PetroChina, continues to outpace the growth of its regional rivals with its 36% 3-year CGR. SECTORS Oil & gas sector faces pressure from investors The oil & gas sector is currently facing pressure from investors to focus on capital discipline, and several majors have stated that their capex will either fall or stay flat over the coming years. A number of high-cost oil and gas projects have also been shelved. According to a recent study by environmental think tank Carbon Tracker, the world s seven biggest oil majors have more than $500 billion in planned capital spending at stake over the next decade on projects that require a market price of at least $95/b to make a return. Downstream, refining and retail profits continue to be tested. Average annual refining margins improved somewhat in 2013 but most European and Asian players still suffered. For the majors, and some national oil companies, the focus continues to shift to natural gas, while for some others, managing growth versus national development continues to be a priority. Global natural gas demand continues to grow, driven by Asian consumption. 66 insight OCTOBER 2014

69 TOP 250 ENERGY COMPANIES For the service companies and independent players, trying to navigate the positive and negative effects of the North American supply revolution is the overriding concern. While international oil companies (IOCs) have remained exposed to troubled operating environments in Libya, Egypt and Nigeria, many of the smaller independents and nationallyowned oil companies (NOCs) seem to be driving profits from growing regional demand and an increasing asset base. Overall, buoyant oil prices have not been enough to keep the IOCs in this year s list from losing ground to other energy industry players. IOCs hold an average ranking of 41th this year, that s down from 34th the year before. In terms of growth, the sector is performing at an average 3-year CGR of 11.25%, the figures show, down from a more respectable 17.7%% in last year s list. The smaller, often more nimble, exploration and production firms in the rankings have fared somewhat better with a 15% 3-year CGR, down from 28% the year before. Anadarko, a major climber in last year s Top 250, slipped from 44th to 91th place after losses related to fraud claims arising from its 2006 acquisition of Kerr-McGee. Hungary s MOL operated in a challenging environment decreasing natural gas prices in CEE upstream and shrinking motor fuel crack spreads and Brent-Ural differential downstream. The UK s Tullow Oil, the frontier exploration pioneer in Africa, has had a poor run of drilling success and slumped 101 positions to just hang on in the ranks at 248. But there are success stories in Europe. Finland s Neste Oil moved up from 164 to 85 as it expands production volumes of its trademark renewable diesel. Italy s Eni also moved up the rankings despite continuing to absorb heaving losses on its domestic downstream operations. It now stands at 17th overall. Refining sector s profit edges up despite oversupply There are 30 refiners and fuel marketers this year, two less than the previous list. Profits from the sector averaged $767 million, surprisingly slightly higher than the year-ago average, despite the dire outlook for the oversupplied sector. The IEA estimates that 13 million b/d of new refining capacity is due to come on stream by 2035, mostly in China, India and the Middle East. The plants will add to global overcapacity, increase competition for available crude as well as for product export markets. Overcapacity remains rife, particularly with more liquid fuels bypassing the refining system in the form of biofuels and NGLs and new capacity in growing non-oecd markets. In 2013, global refinery capacity utilization declined to 80.4% the lowest since 1987 while global refining capacity increased by a robust 1.4 million b/d, according to BP, with large capacity additions in China and Saudi Arabia outpacing capacity reductions in the Atlantic Basin and Japan. OCTOBER 2014 insight 67

70 TOP 250 ENERGY COMPANIES Global refinery crude runs increased by a below-average 390,000 b/d, or 0.5%, with non-oecd countries accounting for all of the net increase. In the US, surging regional liquids supply is translating into higher runs. Bucking the trend of lower OECD throughputs, US refiners saw an increase of 320,000 b/d in refinery runs, as the country continued to export more oil products. US refinery crude throughput leaped to eight-year highs in December 2013, resulting in annual gains of more than 500,000 b/d for the second half of the year and 300,000 b/d for 2013 as a whole. Phillips 66 remained the world s top refiner in 2013, taking 13th place in the overall 2014 list. US Valero Energy, the world s biggest independent refiner, has pushed out India s Reliance Industries to move up to place second on the refiners list. Two US refiners that have not fared so well this year are HollyFrontier and Tesoro. Their margin exposure to discounted US shale oil slipped during the second half of 2013 due to the shrinking spread between the US WTI crude benchmark and the European benchmark, Brent. Although still more than $10/b, the Brent-WTI spread last year began to narrow considerably, reflecting the result of new US transport infrastructure and US refineries running at near-record levels. In 2012, the Brent-WTI price spread was about $19/b. Western Refining, which operates refineries in Texas and New Mexico, makes an entrance this year at 183th place after enjoying strong margins from refining cheap shale crude into gasoline and diesel. Regionally, it is Asia s refiners that still dominate the industry in terms of scale. Still led by Indian giant Reliance Industries, Asia and Pacific Rim refiners have shrugged off weak margins to take seven of the top global spots for the refining industry this year. India s state-controlled Bharat Petroleum Corp. Ltd., one of this year s biggest movers, jumped from 119th to 66th place on the back of rising throughput and a fall in its crude costs. Indian Oil Corp. has also surged ahead coming in 43rd from 80th in The growth of Asian refiners due to the sheer scale of their markets is impressive but they are also facing growing pressure from the US shale boom. Japanese utility Tokyo Electric Power last year began to import 200,000 metric tons (mt) of liquefied petroleum gas (LPG) from the US Enterprise Products Partners between 2013 and In Europe, the situation remained very different to America as refiners continue to struggle to stay in profit, faced with meager regional demand for fuels and dismal margins. European refiners saw margins average below or close to break-even levels. Despite a brief recovery early in the year, Brent cracking margins in Northwest Europe ended 2013 at around $2.5/b. ERG, formerly Italy s biggest independent refiner which was 196th in the 2013 list, has dropped out of the Top 250 after completing its exit from Europe s beleaguered refining industry after selling its main refining asset to Lukoil. Greece s Hellenic Petroleum has also exited the rankings this year. Poland s PKN Orlen saw its ranking slide from 79th to 177th in the current list. Storage and transport picks up With the US shale boom, the global relative importance of the midstream sector continues to grow. More than 80% of the world s biggest transport companies are based in Canada and the US, improving the sector s average Platts ranking by six positions from a year ago. Midstream operators have seen markets swell and earnings climb as the sector scrambles to move oil and products in new directions around North America. Excluding Transneft and Brazil s Ultrapar Holdings, North American storage and pipeline companies made up eight of the top 10 spots for the industry sector last year. More importantly, US midstream players now score three positions on the list of 10 fastest growing energy companies in the Americas. Two years ago there were none. The US biggest pipeline company Kinder Morgan continued to grow under the tax-advantaged legal structure Master Limited Partnership (MLP) it had popularized during the US shale boom. Kinder pioneered the MLP structure in the 1990s and a slew of oil and gas infrastructure-based companies followed suit to take advantage of the tax benefits of the structure. Time will tell how the company will fair after shedding its MLP structure this year. 68 insight OCTOBER 2014

71 TOP 250 ENERGY COMPANIES The US biggest MLP by market value, Enterprise Products Partners, slipped a couple of positions this year. But at 31st place overall, the Houston-based pipeline operator, which has 50,000 miles of natural gas, NGL oil, refined products and petrochemical pipelines to its name, still stands just two positions below Russian giant Transneft. A new entry last year, Canada s Pembina Pipeline continues to climb, as it reaps the benefits of launching the largest pipeline expansion plan in its history. It continues to grow on the back of the booming oil sands industry as it manages pipelines used to transport synthetic crude from upgrading facilities. Pipeline capacity constraints have led some refiners to pursue rail options for shipping Bakken crude, however, pushing down pipeline volumes. Enbridge Energy Partners, which slipped out of the ranks this year, hopes expansion projects on its North Dakota system will begin to negate the cost advantage of rail in the coming year. Its results were also impacted by the cost of dealing with a crude oil spill into Lakehead. UTILITIES Utilities play a secondary role to global oil and gas companies in Platts Top 250. The eye has to wander down to 26th place before a utility enters the fray. Thereafter the top 10 global utilities cram in to the overall Top 50. Seven are European, two North American, one Asian. The European utilities in particular have demonstrated a remarkable level of volatility in recent Top 250 listings due to harsh one-off impairments and goodwill adjustments in annual accounts. One year a multibillion dollar impairment will drop a company out of the higher reaches of the list. The next year it will bounce back in a post-purge impairment-free accounting period. The impairments invariably relate to stranded generation assets or an expensive pre-recession acquisition. So often the European and US utility story is one of painful adjustment to global commodity price movements, falling demand and of course the who-movedmy-cheese renewables growth that has been undermining conventional generation s hegemony. Only in Asia is there substantive economic growth to be had for Top 250 utilities. Indian per capita power consumption has gone from 560-kilowatt hours (kwh) to 917-kWh in 11 years to end March, In that time, installed generation capacity has more than doubled, rising from 105,046 megawatts (MW) to 223,344 MW. Tepco: number one, but on life support We start, however, with an Asian anomaly. Heading the utilities category in the Top 250 is Tokyo Electric Power Co., up to 26th from a lowly 162nd, in the process displacing French nuclear giant EDF from last year s top spot in the utility segment. Tepco s volatile ranking is rooted in the Fukushima disaster of March, 2011, when three of its reactors at the Fukushima Daiichi site suffered a meltdown following a 9.0 magnitude earthquake and tsunami. The disaster led to closure of its entire nuclear fleet and an overnight switch of generation to conventional thermal sources, more than doubling Tepco s annual fuel bill. The result is a company on life-support. On the face of it, Tepco s march up the 2014 rankings mirrors a net income swing from a $6.8 billion loss in 2012 to a $3.2 billion gain in The turnaround was, however, almost entirely due to over $16 billion in grants-in-aid from the country s Nuclear Damage Liability Facilitation Fund. Tepco s year-on-year revenues increased 11% due to revisions in electricity rates and an uptick in demand, but these incremental improvements and attempts to cut costs were dwarfed by an annual fuel bill approaching $13 billion and extraordinary nuclear damage compensation of $13.7 billion. The company s precarious position was recognized by management s decision not to pay a dividend in 2013, and a warning that none was planned for Looking to 2015 and beyond, Tepco plans to maximize its business alliances to reduce fuel costs, invest more upstream, add liquefied natural gas (LNG) tanks at Futtsu, extend use of light LNG and replace old thermal power plants via tenders and joint development of power stations outside of its service area. For a healthier outlook one must turn to the second-ranked utility in the 250, the UK s National Grid, up to 30th from 33rd. Moving ahead of nuclear giant EDF is no mean feat at 32nd, EDF has slipped three places year on year but National Grid is benefitting from slow-but-sure incremental growth in its core regulated transmission business, diversified across power and gas in the UK and power in North America. The company invested over 3.4 billion in 2013/14 and turned in an operating OCTOBER 2014 insight 69

72 TOP 250 ENERGY COMPANIES profit of 3.6 billion for the second year in a row. Network operators are not fast-growth plays, but National Grid ranks 25th in the world on assets and 26th on profits with a return on invested capital of 6%. As a pure networks company National Grid is less exposed to the vagaries of demand, wholesale power price and feedstock price that confront generation/supply utilities. Yes, it faces the risk of tighter cost control regulation and the challenge of adapting from central to decentralized generation, but its large asset base enjoys natural monopoly status. This confers widows and orphans status on its shares and explains why pension funds and Asian investors looking for a safe financial haven have been buying into European networks. In third place is EDF, the integrated utility with a huge, fully operative fleet of reactors in France and the UK. As noted it has slipped three places to 32nd, reflecting the stability and long-term nature of its large asset base, but also tough market conditions in terms of weak price and demand fundamentals. EDF has been a long-term fixture in the top 50 of Platts global energy companies can it count on this continuing in the years to come? On balance the answer must be yes given the strategic importance of low-carbon, baseload nuclear. On the upside is the possibility that EDF will be allowed to extend operation of its French reactors beyond their 40-year lifetimes. In the UK, meanwhile, it has provisionally been awarded a guaranteed offtake contract by the government to build the 3.2-GW Hinkley Point C nuclear plant. Balancing its immense market presence, however, is its exposure to political risk. Some 76% of EDF s French generation output is sold under regulated tariffs through the ARENH mechanism a fixed price offtake requirement whereby EDF sells nuclear production to third party competitors. Further, network regulation in France is tough, with the returns on offer currently seen as insufficient to drive new investment. Finally, there is the possibility that reactor life extension is less viable than expected, economically and technically. Both EDF and GDF Suez are experiencing a raised level of unscheduled outages at ageing reactors, with an often harsh impact on assumed volumes and earnings. Some 2.7 GW of UK nuclear capacity has just been withdrawn from the market by EDF because of concerns relating to boilers at Hartlepool and Heysham. GDF Suez suffered outages at two 1-GW reactors in its Belgian fleet in 2013 and is undergoing a similar fate this year. The company has given guidance that lost output from the two reactors in 2014 is costing around Eur40 million per month of recurring net income. There is no guarantee that the heavy capital investments required to extend operational lives to 60 years and bring these assets up to post-fukushima safety levels will pass economic muster. European crunch European utilities figure prominently among the biggest fallers in the Top 250 list in a year-on-year comparison, reflecting strong headwinds facing power and gas suppliers across the region. The reasons for this extend back several years to , when for the first time since the 1940s, European demand for electricity fell. Across the major markets of Germany, France, the UK, Spain and Italy, pre-credit crunch levels of demand are yet to be regained. Simultaneously, subsidized renewables have been growing regardless of actual need for the electricity. The result is significant overcapacity in generation, compounded by the commissioning of several large coal and gas plants planned and financed before the credit crunch. Conventional utilities have been hit by a triple whammy of new entrant competition eating into their core generation business (the German renewables boom has been dominated by private investors); a swift, steep decline in thermal load factors forcing widespread plant closure and mothballing; and a collapse in power prices. The wholesale base price of electricity in Germany reached a peak of Eur66 per megawatt hours (/MWh) in As of August 19, 2014, German baseload power was assessed by Platts at Eur30.50/MWh, with peak power at Eur33/MWh exactly half the base price of six years earlier. This is hugely significant for utilities. Before, less efficient thermal plant could still cover costs and make a modest profit by operating at peak times. With solar photovoltaics flattening the midday peak, this is no longer an option. Utilities are coping as best they can. RWE down to 169th in the latest 250 ranking from 42nd and GDF Suez down to 164th from 54th have closed or mothballed several gigawatts of largely gas-fired power plant, outflanked by excess wind, solar, nuclear and hydro output, cheap coal prices and a low cost of carbon. EnBW down to 147th from 83rd forecasts an 80% decline in its conventional generation to insight OCTOBER 2014

73 TOP 250 ENERGY COMPANIES Some, like Spain s Iberdrola down just four places year on year at 35th and Italy s ENEL up to 36th this year from 69th are ahead of the utility curve in terms of diversifying into renewables. Others are giving much more attention to the service component of power. Incorporating a growing share of renewables is the biggest challenge facing modern power systems. There are new revenue streams to be had from smart system operation, distributed generation, demand response and balancing power markets. As RWE s chairman has said, however, it is not realistic to suggest that these additional earnings will compensate for the loss of earnings from conventional power generation. The timing and extent of conventional power s decline remains hard to gauge. Today in Europe, the customer is getting something of a free ride from assets that are either fully depreciated or not being rewarded by the existing market design. Almost all utilities and many regulators and policymakers now see the need for capacity markets to run alongside energy markets and restore commercial viability to thermal units that may not be needed most of the time, but are essential for system security. As and when capacity markets are established, demand recovers and prices rise, we may see utilities begin to re-establish themselves in the Top 250. Until then, some radical business strategies are needed to restore former levels of profitability. US demand dips, Asian demand strong US utilities in the list are headed by Exelon Corp. (46th position), Duke Energy (49) and Southern Co. (56) three asset-rich companies with revenue below their overall rankings and returns on invested capital of 3%-4%. This was just about par for the course in the US utility sector, where companies are facing similar challenges to those in Europe, with the key difference being the US shale gas revolution. As Exelon notes in its annual report, a fall in operating earnings in 2013 primarily reflected continuing declines in realized power and gas prices during the year, in part driven by the abundance of natural gas supply, continued sluggish demand and subsidized renewable generation. For pure electric utilities like Duke, the low gas price has had a beneficial effect on its gas-fired plant margins. Duke readily admits that since 2007, US per capita electricity use has been declining. The reasons are largely positive: more energyefficient building codes, appliances and lighting systems; utility-sponsored efficiency programs; and a continued focus on cutting energy expenses in homes and businesses. The economic recession also had an impact. At the same time, utilities face additional costs from upgrading ageing infrastructure and complying with new regulations for plant emissions, nuclear safety and grid security. These are expensive requirements in a shrinking market. For genuine demand growth one must turn to Asia. Per capita power consumption in India has risen from 560 kwh in 2002 to 917 kwh in 2013, while installed capacity has risen from 105 GW to 223 GW. Chinese electricity consumption, meanwhile, rose 7.5% year on year in In Hong Kong, Power Assets Holding achieved return on invested capital (ROIC) of 12% last year, as did Cheung Kong Infrastructure Holdings and HK Electric Investments. Manila Electric Co. of the Philippines, meanwhile, achieved 16%. State-owned Chinese utilities do not figure in the Top 250, but nine Independent Power Producers (IPPs) do a high number given the focused nature of the business, but perhaps no surprise given that China s electricity demand growth average over the last 10 years has been running at over 10% per annum. At 53rd, China s Huaneng Power International is the second-highestplaced IPP in the overall 250 list, behind India s NTPC Ltd. (50th) and, for global perspective, well ahead of AES of the US (136th). Asian IPPs have benefited considerably from the fall in global coal prices. NTPC is India s largest power generator, with over 43 GW of coal- and gas-fired capacity installed, as well as hydro, coal mining, power equipment manufacturing, oil & gas exploration, power trading and distribution businesses. It added over 4-GW of plant capacity in 2013, was awarded a further 8-GW, increased investment by some 24% and net profits by 37%. Huaneng Power International had a highly profitable 2013, helping to lift the IPP from 96th place in the previous 250 list. With a largely coal-fired portfolio of 59-GW, the company saw fuel costs drop over 12% to Yuan 218.6/MWh ($35.5/ MWh). It produced over 317 terawatthours (TWh) of power in 2013, up 5%, as were overall sales of 300 TWh. Encouraging performance from gas Gas utilities represent a group of just 15 companies in the Top 250, but their general performance in 2013 was encouraging, with the leading five - Gas Natural, Tokyo Gas Co., Snam, Gail OCTOBER 2014 insight 71

74 TOP 250 ENERGY COMPANIES (India) and the Hong Kong & China Gas Co. all rising up the list by between 4 and 16 places. Top-placed Gas Natural (40th) has seen its net profits grow by an average of 9.8% year on year since 2003 despite Spain s severe economic crisis. With mature gas and power assets in Spain, Gas Natural is now seeking opportunities for growth overseas, notably in the global LNG market. Demand for LNG is expected to grow at 4% per annum. Asia, which currently accounts for 70% of LNG demand worldwide, is expected to report higher growth of around 6.9% per annum, while Mexico, Chile, Brazil and Argentina are expected to grow into significant LNG markets. Through 2013, global gas prices were stable or rising. Platts Japan Korea Marker (Platts JKM ) benchmark price reference for LNG ranged between $15-20/MMBtu, UK NBP prices between $10-12/MMBtu and US Henry Hub prices between $3-5/MMBtu. No surprise, then, that Western gas concerns are targeting the Asian LNG market and that five of the top seven gas utilities in the Top 250 are Asian, although special mention goes to UGI Corp. of the US as the highest climber in its industry group, up 27 places to 185th. The picture is changing rapidly this year and will have an impact on gas utility placings in future Top 250s. Since February, 2014, LNG prices have been tumbling, with the Japan Korea Marker for September 2014 closing at $10.57/ MMBtu. This is the lowest level since March 11, 2011, when the JKM was assessed at $9.90/MMBtu. European gas is also on the move down, after a mild winter and despite geopolitical threats to supply from Russia/Ukraine. In July, the price for day-ahead gas in the UK hit a four-year low. The decoupling of prices between Asia, Europe and the US remains, but the premiums heading east are far less marked today than they were a year ago, and those opportunities identified by the likes of Gas Natural are not quite so enticing. China leads the way for coal China dominates global coal production. Of record production of 7.8 billion mt in 2012, China produced 3.55 billion mt, well over three times more than the world s second largest producer, the US, and nearly six times as much as thirdplaced India. No surprise, then, that Chinese coal producers take up seven of the top 10 places in the Top 250 s coal company list, with China Shenhua Energy the highest of all non-oil companies in the overall list in 15th place down one place on last year. Growth is the key driver for this integrated mining and generation company. In terms of assets and revenue, it should be ranked further down the 250 list but its three-year compound growth rate of 21.6% is bettered by only three companies in the overall top 50, EOG Resources of Texas (overall place 39th, 3-yr CGR of 35.5%); OJSC Rosneft Oil Co. of Russia (6th place overall, 3-yr CGR of 34.2%); and OMV of Austria (38th place, 3-yr CGR of 22.1%). Growth is the defining characteristic of two other smaller Chinese coal companies, with Yanzhou Coal Mining registering a three-year CGR of 18.4% overall placing 199th and Inner Mongolia Yitai Coal 20.3% overall placing 162nd. While China Shenhua Energy s return on invested capital of 11% in the most recent year of reports ranks it 30th in that financial category, it is Coal India that takes the laurels. Ranked 47th overall, the Indian company had an ROIC of 35% the highest of any concern in the overall 250. Over 54.5% of primary commercial energy requirements in India are met by coal, and around 72% of power generated in the country is coal based. In fiscal , coal based power generation increased in India by 8.3% year on year. Coal India produces around 82% of the country s total coal production. India s ever-increasing demand for coal is expected to reach 980 million mt by Of this, power sector demand constitutes 70%. Indigenous coal availability is projected, optimistically according to Coal India, at 795 million mt. So while Coal India is growing strongly, it is always fighting to meet state targets. The company produced around million mt in fiscal against a target of 464 million mt. This year s target is 482 million mt. Looking ahead, the picture is less bright for Asia s coal tigers. A slump in coal purchasing by utilities amid high inventories and stronger hydropower output is likely to hit China Shenhua s full year 2014 performance, for instance. The company noted that commercial coal sales in July 2014 plunged 53.5% year on year to a five-year low of 15.4 million mt. The miner cut prices by up to Yuan 55/mt ($8.96/mt) during the month in a bid to attract buyers. Over January-July 2014, it produced million mt of commercial coal, down 1.3% year on year. Total coal sales over the seven-month period fell 9.4% year on year to 250 million mt, while power generation was down 0.8% year on year to TWh. 72 insight OCTOBER 2014

75 GLOBAL THOUGHT LEADERSHIP. DELIVERED. Every dawn brings with it new opportunity & every new opportunity - A unique set of risk. of today s Commodity and Energy Trading Industry. With the growing need to address sustainability and the

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