July 11, 2012:

Abu Dhabi started exporting its first crude from a pipeline that bypasses the Strait of Hormuz, shipping the fuel to a refinery in Pakistan.  The pipeline, stretching from Abu Dhabi to the neighboring sheikhdom of Fujairah on the Gulf of Oman, was loading the first shipment of 500,000 barrels to the Pakistani plant, Mohamed Bin Dhaen Al-Hamli, oil minister for the United Arab Emirates, said yesterday at a ceremony to inaugurate the network. International Petroleum Investment Co. spent $4.2 billion building the 423- kilometer (263-mile) link, Khadem Al-Qubaisi, managing director of the Abu Dhabi-run fund known as IPIC, said at the ceremony in Fujairah.  Abu Dhabi, the U.A.E.’s capital and holder of more than 90 percent of its oil, built the link as an export route for crude that avoids Hormuz at the mouth of the Persian Gulf. Iran has threatened to block the strait, a chokepoint for tankers carrying a fifth of the world’s traded oil, in retaliation for sanctions targeting the country’s nuclear program. The U.A.E., the fifth-biggest oil producer in OPEC, pumped 2.61 million barrels a day in June, according to data compiled by Bloomberg. Fujairah is one of the U.A.E.’s seven sheikhdoms.

An Iranian lawmaker, Mohammad-Hassan Asferi, said yesterday the pipeline’s limited capacity would keep it from obviating the need of regional suppliers to export most of their oil through the strait. He dismissed the project as “propaganda and political maneuvering guided by the Western countries, especially the United States, which aims to reduce the strategic importance of the Strait of Hormuz,” according to state-run Press TV. Asferi serves on the national security and foreign policy committee of Iran’s parliament.

Iran

Abu Dhabi’s first export cargo from Fujairah is destined for Pak Arab Refinery Ltd., a joint venture between Pakistan’s government and IPIC, Al-Qubaisi said. IPIC owns a 40 percent stake in the plant, which regularly uses about 40,000 barrels a day of Abu Dhabi crude, of the 100,000 barrels it consumes daily, he said.  Abu Dhabi earlier shipped a test cargo from Fujairah to its own refinery at Ruwais, inside the Persian Gulf, said Abdul Munim Al-Kindi, general manager of Abu Dhabi Co. for Onshore Oil Operations. As the main oil producer at the emirate’s onshore fields, the company, known as ADCO, will operate the pipeline and gradually expand its capacity by year-end, he said. The network is designed to load tankers at three offshore buoys, Al- Kindi said.

Fujairah’s Expansion

IPIC’s Al-Qubaisi said his company plans to spend as much as $5 billion to build a refinery in Fujairah with a capacity of about 250,000 barrels a day to produce for local sale and export, further enhancing the port’s importance as a hub for the processing, storage and shipment of fuels. The company is working with another state-owned investment fund, Mubadala Development Co., on a project for a terminal at the port for imports of liquefied natural gas. Fujairah is already among the world’s three biggest refuelling ports for commercial ships, along with Singapore and Rotterdam.  Al-Hamli, the oil minister, said the pipeline gives buyers an alternative location from which to receive crude. It will allow them to fill very large crude carriers, or VLCCs, the largest class of tanker capable of carrying 2 million barrels of oil. Filling such vessels in the Gulf of Oman will reduce shipping traffic in Hormuz, he said.

Shipping Flexibility

“The pipeline is going to be beneficial because our clients will be able to lift bigger cargoes,” he said. “Currently you can only lift 1 million barrels a day from Ruwais. From Fujairah now our clients now can bring in VLCCs and lift more.”  The pipeline can transport 1.5 million barrels a day of Murban crude from Habshan, a collection point for Abu Dhabi’s onshore oil fields, across a desert and mountains to Fujairah. The system is able to pump as much as 1.8 million barrels a day at periodic intervals, officials said at the inauguration. IPIC will likely charge ADCO “a few cents per barrel” for use of the pipeline, Al-Qubaisi said.  The first oil exported from Fujairah is priced the same as Murban crude loaded inside the Gulf, three people with knowledge of the matter said this month. Abu Dhabi may later devise a separate formula including a premium to account for the cost of using the pipeline, said the people, who asked not to be identified because the matter is confidential. Abu Dhabi officials yesterday did not comment on pricing.

By Bloomberg

July 11, 2012:

When Delta Air Lines decided to buy the idled Trainer refinery outside Philadelphia to keep itself supplied with jet fuel, the announcement was met with a mix of skepticism, outright disbelief, and nods of approval from experts who follow the airline industry and oil and energy markets. Delta's move was smart, risky, insane, stupid, even brilliant — or all of those. "Is there a better investment than a refinery? Maybe not," wrote airline analyst Helane Becker in a client note. Jet fuel accounts for 37 percent of Delta's operating costs. The fuel tab for the world's second-largest airline was $12 billion last year, including a $2.2 billion premium paid to refiners for jet fuel, a payment known as the crack spread. "If you go through the reasons why an airline would buy a refinery, it's purely selfish," said Becker, of Dahlman Rose & Co. "It's to maintain access to jet fuel, and it's really to eliminate the exposure to the crack spread."

Airlines can "hedge" the cost of oil by entering into long-term future contracts. But they cannot hedge the crack spread, or the refiners' profit margin, which fluctuates based on supply, demand, and market trends. In the Northeast, refinery shutdowns have resulted in "significantly higher jet-fuel crack spreads" than in the rest of the country, Delta CEO Richard Anderson said in a phone briefing with reporters in April. Many in finance scoff at the suggestion that Delta thinks it can run a refinery more efficiently than ConocoPhillips, a major oil company that in October idled the Trainer plant and put it up for sale. "I heard from everyone in the oil business who had anything to do with jet fuel, whether they be a refiner or a buyer, and they said, ‘This is the most ridiculous thing,'?" said Tom Kloza, chief oil analyst for the Oil Price Information Service, which tracks wholesale and retail prices.

Kloza said he sees it differently: "I've seen many cases where new operators come in and take an asset that was marginal when managed by a major oil company and make it work. There are lots of examples." "Big oil companies get excited about finding new crude reserves. They don't tend to get excited about refining or marketing," Kloza said. Oil and gas analyst Philip Weiss, with Argus Research Corp., understands Delta's pitch but says he doesn't think it makes financial sense. "I don't see why an airline would want to vertically integrate its business that way because the refining business is very volatile," he said. "It's a return on capital business. “Why are refineries closing? Because it's not a good business," Weiss said. And two-thirds of what the Trainer refinery will produce — gasoline and diesel fuel — will not be used by Delta. Under the deal announced April 30, Delta has multiyear contracts with British Petroleum to supply the crude to Trainer, and Phillips 66 and BP will swap the gasoline and diesel for jet fuel to serve Delta at airports around the country.

When the Trainer plant is up and running in September, production will be 165,000 to 185,000 barrels a day, including 52,000 barrels a day of jet fuel, which will go by pipeline and barge to Delta's hub operations at New York's LaGuardia and John F. Kennedy airports. "We've had this matter under study for the better part of a year," Anderson said in a call with reporters. "What we're tackling here today is the jet crack spread," the fastest-growing portion of all Delta's expenses, he said. The idled Trainer facility came cheap — an asset probably worth a $1 billion, he said. Delta bought it for $150 million, plus $100 million the airline will invest to modify the plant to maximize jet fuel production. (Pennsylvania kicked in $30 million for job creation and infrastructure improvement.) Delta said that $250 million investment — a little less than the list price of a new wide-body airplane — would pay off in the first 12 months in lower annual fuel costs of $300 million. The jet fuel from Trainer, and the swaps with BP and Phillips 66, will cover 80 percent of Delta's domestic fuel needs, the company said.

"It looks like it's a good thing; I don't know why all the oil guys tell me it's a bad thing," said airline analyst Bob McAdoo, with Imperial Capital L.L.C. "I am a little skeptical that the people who are the loudest negative are also people who haven't seen the details of this transaction." "When you look at how much Delta spends on oil, and how much they spend on everything, this is not a big risk financially. These guys do their homework," McAdoo said. "I would expect that it's going to work for them. Even if it doesn't, it's not a big number relative to the overall size of Delta." Airline analyst Ray Neidl, of Maxim Group L.L.C. said, "If it works out, it will make them look very smart and help them in a small to medium way control the price of the fuel they pay for. It's not a save-all situation as far as the volatility of fuel prices, but it will help them have a better insight into the market and actually be part of the market. “

The critics say that “from an economic perspective it doesn't make sense," said Craig Pirrong, professor of finance and energy markets at the University of Houston. The real cost is what they could sell the jet fuel for in the market. "If they buy that jet fuel from somebody else, or they produce it and consume it themselves, they are giving up the opportunity to sell the barrel to somebody else," he said. "The cost is pretty much the same." In the 1980s, plenty of companies integrated vertically — a steel company bought an oil company, DuPont Co. bought Conoco Inc. "New management came in later and said, ‘Hey, this isn't making any economic sense, so we'll spin it off,'?" Pirrong recalled. "The fact that Delta seems to be going in the opposite direction of everybody else suggests that they are ignoring some key economic costs."

Monroe Energy L.L.C., a wholly owned subsidiary of Delta, took control of the refinery June 22. Union workers in operations and maintenance returned the next week to begin the process of getting the plant up and running. The refinery, when fully operational, will employ 400, including 220 members of United Steelworkers Local 10-234, the same number employed by ConocoPhillips. The Trainer facility will not aim to be a traditional refiner, like PBF, Sunoco, or predecessor ConocoPhillips. "We don't have a marketing department. We are totally exchanging everything to get jet fuel," said Jeffrey Warmann, Monroe's CEO and plant manager. "That's our whole purpose: to maximize jet fuel availability to our parent company."

Wharton School management professor Larry Hrebiniak said that while some people, especially in energy and finance, don't like the deal, "I'm going to go the other way. I think it makes some sense," but it is not without risks.  The risks include what happens when the contracts with BP and Phillips run out. If there's no more swap, where will Delta sell the by-products, gasoline and diesel, in return for more jet fuel? he asked. Another risk: If crude and jet fuel prices were to plummet, Delta could be stuck with a refinery that's more expensive to operate than the cost of buying jet fuel in the open market. "I don't think that's going to occur any time soon," Hrebiniak added. On the other hand, if the economy picks up, and more people fly, jet fuel prices will rise, "and their decision is going to look pretty good." CrankyFlier.com author Brett Snyder, who formerly worked for America West and United Airlines, says the deal seems good if Delta does not have to spend more than $100 million to get the refinery running, and there are no unforeseen big expenses, such as a safety problem.

"The swap is crucial as part of this because gas and diesel are just terrible to sell, especially the gas," Snyder said. "With the swap in place, it seems like it sets this up to work at least for a few years. By then, Delta has made its money back. Maybe it doesn't work a few years down the line, maybe it does," Snyder said. "They'll know more at that point. Then they can make that judgment. And they still should have made money."

By Philly.com

July 10, 2012:

There are indications that the much-awaited three Greenfield Refineries billed for Lagos, Bayelsa and Kogi States, scheduled to come on stream by 2017 may not be realizable. This, it was gathered, is because the construction earlier planned to begin this month has been put on hold due to the Nigerian National Petroleum Corporation's (NNPC's) inability to secure Federal Government's approval to commence work. THISDAY checks revaled that the NNPC, which is to provide 20 per cent of the amount budgeted for the project is still planning to put together a consortium for the purpose of raising the funds. The NNPC and the China State Construction Engineering Corporation (CSCEC) Limited had in 2010 signed a Memorandum of Understanding (MoU) for the joint sourcing of funds for the construction of three new refineries and a petrochemical plant in Nigeria under a $28.5-billion provisional deal.

The project had been envisaged to increase Nigeria's refining capacity to over one million barrels per day (bpd) from the current 445,000 bpd capacity and stem the flood of importation of refined products into the country. The parties had fixed (this month as the new date for the commencement of construction, following the NNPC's inability to meet the May 13, 2011 date. Front End Engineering and Design (FEED), site preparation and infrastructure had been scheduled to start in February 2012 to be followed by construction works this month of July. Under the agreement, the Industrial and Commercial Bank of China (ICBC), the world's largest bank, was to provide 80 per cent of the $11.3 billion budgeted for the project, while the NNPC will provide 20 per cent equity, to be diluted for private sector participation later. However, a source familiar with the project told THISDAY yesterday that the project will no longer come on stream as earlier planned because the NNPC is still awaiting Federal Government's approval to begin construction. The source said aside from the delay in securing government's approval to begin construction, two other major challenges were the issue of funding and the delay by the National Refinery Special Task Force to submit the report of its findings on the traditional refineries, located in Warri, Kaduna and Port Harcourt.

Commenting on the project, the General Manager at the NNPC's Group Public Affairs department, Mr. Fidel Pepple, told THISDAY that the Final Investment Decision (FID) had been completed and soil analysis revealed that the project is viable. He explained that commencement of construction could not take-off as scheduled because the NNPC is still awaiting government's approval. On the issue of funding, Pepple confirmed that NNPC plans to float a consortium to enable it raise enough funds for the project. He said: "The issue of funding is not a problem. What we are waiting for is federal government's approval to commence construction, once that is done, we will put together a consortium to raise the funds, as the NNPC alone cannot do it". The initial plan was that each of the Greenfield Refineries would be able to process around 250,000 barrels of oil a day, but their combined capacity was later downsized to 400,000 barrels per day. Under the new arrangement, the capacities of the plants to be built in Kogi and Bayelsa were reduced to 100,000 barrels per day (bpd) each, while the one to be located in Lagos, will now have the capacity for 200,000 bpd. THISDAY gathered that the capacities of the plants were downsized based on the new Detailed Feasibility Study (DFS) prepared by Wood Makenzie & Foster Will. The NNPC had repeatedly stated that the new refineries, when completed, would help to eliminate the country's current reliance on imported petroleum products and position it (NNPC) to engage profitably in the international trading of refined petroleum products. The delay in its take-off is considered a major setback to Nigeria's plan to increase her refining capacity to over one million barrels per day by 2017.

By Allafrica

July 10, 2012

Moscow refinery, owned by Gazprom Neft, has halted gasoline-making unit for maintenance for several days, the company told Reuters in emailed comments late on Monday. It also said that the output of 95-RON and 92-RON gasoline will continue at the plant where gasoline production covers around 40 percent of Moscow's fuel needs.

By Reuters

July 10, 2012:

Oil traders in Europe are striving to prevent a shortage of diesel this summer after refineries across the globe have closed or cut runs, pushing spot premiums to seven-month highs that may pass through to retail prices soon. Traders say owners of diesel-fuelled cars are likely to encounter rising prices within a few weeks, although the impact will vary widely from country to country depending on retail competition, regulation and differences in economic performance. European oil refiners face a mismatch between supply and demand for diesel. Overall demand for refined products in Europe has shrunk, forcing refineries to close surplus capacity since 2009, due to a drop in dirty heavy fuel oil consumption and lower U.S. imports of European gasoline. But the region lacks sufficient capacity to make diesel, in particular. Instead of investing in new units, many oil companies have chosen to import diesel from the United States, Russia, the Middle East and India, where refineries' operating costs are lower than in Europe. That leaves Europe vulnerable to a potential shortage of the auto fuel in case of a global supply crunch.

And a crunch is precisely what traders in the intermediary market have been struggling to avoid since late June, hoping to keep consumers oblivious of the problem. "I am struggling to find cargoes. Diesel is scary tight, not just tight," a trading source said. The source, who has been handling physical diesel in Northwest Europe for about 20 years, asked for anonymity due to compliance. "The market is the tightest I have ever seen," the source added. Traders cited the impending closure of Britain's Coryton refinery, which used to be run by insolvent Petroplus , and the failed start-up of a new unit at the Motiva refinery in Texas as the main reasons leading to the tight supply of diesel. "We have shut down too many refineries at the same time, and the new start-up in Motiva failed. So we have pushed the refining system tight for the short term," a trader said. Some issues about diesel quality at Royal Dutch Shell's Pernis refinery in the Netherlands, Europe's largest, added to the tightness in late June, traders said. Shell then declined to comment. "The product is just not available, partly because quality is not right. Refinery shutdowns are one reason too," independent analyst Pieter Kulsen said.

Spot premiums on 10 ppm diesel jumped to an eight-month high of $34 to $35 a tonne fob to ICE gasoil futures late on Monday from about $22 a tonne a week ago, according to Reuters data.

PASSING THROUGH

The rise in wholesale spot premiums is likely to pass through to pump prices in many European countries within a few weeks, traders said. "High spot prices have to be passed on unless the market is very competitive and retailers squeeze their margins. But this is less likely, really," one UK-based trader said. Spot premiums to buy diesel in the European wholesale and import markets are likely to remain high until wholesale demand starts to ease in August, typically ahead of retail demand, traders said. Swaps show the premiums are likely to remain above $30 a tonne for July and ease to around $22 a tonne in August. International Energy Agency (IEA) data shows Europe's major economies consumed 6.05 million barrels per day of middle distillates in 2011 such as gasoil for heating and diesel for cars, making the region the biggest distillate market in the world. Imports had accounted for 6 to 7 percent of European demand before the Coryton closure, according to industry estimates, and the figure may well be higher now.

Competition for those imports is high, because the United States, a major supplier, has a bigger deficit in middle distillate inventories than Europe does. Euroilstock data showed that European middle distillate stocks at end-May were running 13.4 million barrels below a year earlier. U.S. distillate stocks were down 24.3 million barrels from a year earlier, according to weekly official data at end-June. A rise in wholesale prices usually is felt at the retail level after a lag time of about two weeks. But the market in Italy will be at least one major exception. Italian oil major Eni has committed to keeping pump prices low in a promotion that runs until Sept. 2. Eni has cut the prices of petrol and diesel by 20 percent on weekends for customers who use a self-service option. Eni says it will sell fuel even below cost during the offer at its roughly 3,000 stations across Italy. Traders said Eni has been scrambling to secure fuel on the wholesale market after a jump in its sales pulled down stocks at its tanks to levels that nearly fell below the minimums mandated by the IEA. "They need to buy some cargoes for the system. Everything goes very quickly," said one trader, who is familiar with Eni's discount marketing. "And they need to keep the stock above certain level to meet regulation."

By Reuters