Almost half of Nigeria’s cargoes due to be exported in January are still available, Reuters has reported, even as oil prices reach the $50s trough, almost $10 below Nigeria’s benchmark price.
The backlog has pushed Nigerian oil differentials versus Brent to their lowest since at least 2009 BFO-QUA at 65 cents a barrel, down 80 per cent since May, said Reuters. And it is also creating a discount frenzy between African and Gulf oil producers to Asian buyers.
Asia has become a hotspot for a price war between African and Gulf oil producers who, hobbled by bulging global supplies and waning demand, are offering steep discounts to defend their market share in the world’s top net crude buying region.
The competition is welcome news for Asian buyers. If oil stays near $60 per barrel, import costs for the world’s second biggest oil consumer, China, would drop to under $125 billion a year, versus $222 billion in 2013 when crude averaged $110.
But for producers, it means more competition, and African sellers like Nigeria and Angola, faced with precarious finances due to plummeting oil prices, are struggling to make inroads into Asia, a Middle Eastern stronghold.
Owing to the frantic competition for Asian buyers, India, THISDAY learnt, has taken the unusual step of asking Nigeria to offer it a 90-day credit line if it must continue to buy her crude oil.
With the loss of the US market earlier this year, India has replaced it as Nigeria’s biggest buyer of the country’s light crude grade.
“There is competition between West African and Middle East suppliers for the Asian markets, but the Middle East suppliers have the cost advantage,” said Philip Andrews-Speed, head of Energy Security Division at the National University of Singapore. The city-state is a major oil trading hub in Asia.
Low operating costs in Saudi Arabia, Kuwait and the Emirates already allow these countries to offer hefty discounts.
Now, a more than 50 per cent jump in freight rates between West Africa and China since September is adding to the relative advantage of Middle Eastern grades, which require shorter shipping distances to Asia. This has been a big setback for West African producers.
West African exports got a brief boost in August when Brent’s premium to Middle East crude DUB-EFS-1M narrowed to less than $2 per barrel from almost $5 in June. But with Middle Eastern producers now offering even more competitive prices, the advantage has faded.
“A year ago, a $2 premium would have been attractive, but in today’s environment it’s different,” a trader dealing with West African crude said.
West African producers traditionally sold most of their oil to North America and Europe, but exports dwindled given a gusher of shale oil from the United States and higher output from nations outside the Organisation of the Petroleum Exporting Countries (OPEC).
West African crude exports to Asia rose more than 4 per cent between January and December, Reuters data has shown. China accounted for most of the rise as it took advantage of low prices to build up oil reserves.
But the higher West African arrivals into Asia were mainly due to sales before October, and have dropped since then due to Middle East discounts.
Middle East producers continue to dominate the Asian oil market, with Saudi Arabia, the United Arab Emirates (UAE) and Kuwait all increasing shipments to the region since 2012.
The Middle East accounts for around half of China’s imports and Africa has a 25 per cent share.
With pricing an advantage for Gulf producers, one hope for West Africa is China’s drive for diversification in order to avoid over-reliance on Middle Eastern oil, JBC Energy said.
But analysts are sceptical about the sustainability of steep discounts, as producers need higher prices to finance their budgets.
“Governments that underpin their budgets with oil or metals have seen currency values plummet, reserves erode or current account deficits rise… Regimes built on oil wealth will come under pressure,” risk consultancy and insurance brokerage JLT Group said in its 2015 outlook.
Meanwhile, Excelerate Energy’s Texan liquefied natural gas terminal plan has become the first victim of the oil price slump threatening the economics of US LNG export projects.
A halving in the oil price since June has upended assumptions by developers that cheap US LNG would muscle into high-value Asian energy markets, which relied on oil prices staying high to make the US supply affordable.
The floating 8 million tonne per annum (mtpa) export plant moored at Lavaca Bay, Texas advanced by Houston-based Excelerate has been put on hold, according to regulatory filings obtained by Reuters.
The project was initially due to begin exports in 2018.
Excelerate’s move bodes ill for 13 other US LNG projects, which have also not signed up enough international buyers, to reach a final investment decision (FID). Only Cheniere’s Sabine Pass and Sempra’s Cameron LNG projects have hit that milestone.
Back when LNG and crude oil prices were riding high in February, Excelerate, founded by Oklahoma billionaire George Kaiser, applied for permits to build the facility.
Eleven months on, its submission to the US Federal Energy Regulatory Commission on December 23 said that uncertainty generated by a steep decrease in oil prices has forced it to conduct a “strategic reconsideration of the economic value of the project” and to suspend all activities until April 1, 2015.
“Due to the recent global market conditions, the company has determined that, at this time, this project no longer meets the financial criteria necessary in order for us to move forward with the capital investment,” a company spokesman told Reuters.
Stiff economic headwinds are making new developments tough going.
Prices that LNG projects can charge for long-term supply are falling from historic highs as new producers crowd the market, which is already oversupplied due to slowing demand and rising output that has seen spot Asian LNG prices halve this year.
At the same time, major consumers from Japan to South Korea and China are seeking to offload some of their long-term LNG supply commitments, contributing to the glut.
Excelerate Energy will update the regulator on the status of Lavaca Bay in April, 2015, according to the filing.
The export plant operates under a tolling model, whereby the developer sells liquefaction capacity to LNG consumers who then must arrange for shipping to transport the fuel.
Typically, companies seek to lock-in buyers for around 85 per cent of a project’s capacity before reaching an investment decision.
Excelerate hints in the filing that lacklustre demand for capacity was behind the suspension, saying that only “renewed interest of potential counterparties” could get it moving again.
Even before the oil price slide, US LNG projects were struggling to sign up the big Asian buyers needed to underpin multi-billion dollar investments, resorting finally to tapping vestiges of demand left in Europe.
Seen in the light of plus-$100 a barrel oil, projects to liquefy and export US gas by ship promised major cost savings to Asian buyers reliant on costly oil-linked gas supplied by Australia and Qatar, which generated huge demand.
The advantage of US export plants was that the LNG costs would reflect local benchmark Henry Hub gas prices, currently trading around $4 per million British thermal units (mmBtu), plus shipping and liquefaction costs.
“The oil price plunge makes US LNG with prices linked to Henry Hub potentially uncompetitive with LNG from other sources especially those using an oil price linkage,” independent consultant Andy Flower said.
Prior to the oil price crash, the US discount to rival Brent-linked LNG supply from Qatar and Australia was around $8-$9 per mmBtu. Now those supplies represent a cost saving over US projects.
“With US LNG no longer looking to be the cheap LNG that off-takers have been seeking, finding companies prepared to commit to tolling fees for 20 years has become more challenging,” Flower said.