BRIC energy markets: Part 2

Oil supply and demand

Russia has faced ups and downs in its oil and natural gas production, but it stands out among the BRICs as the only net exporter. Oil prices spiked in 2008, and the US and much of the world fell into recession. Russian demand fell from 3 million bpd in 2008 to 2.81 million bpd in 2009, but demand growth resumed, and it was estimated at 3.42 million bpd in 2013. The high prices for crude stimulated production, which rose steadily from 10.0 million bpd in 2008 to 10.84 million bpd in 2013 (IEA estimate). This is a supply surplus of roughly 7.4 million bpd.

The Russian balance contrasts sharply with the balance in India. . India’s oil reserves are respectable, but production gains have been modest. In 2007, Indian crude production was 0.81 million bpd, and this has increased to 0.9 million bpd, an increase of only 0.09 million bpd over seven years. Demand has continued to grow strongly, going from 3.0 million bpd in 2007 to 3.38 million bpd in 2013, an increase of 0.38 million bpd.

China’s supply and demand gap has widened even more dramatically. China produced 3.73 million bpd of oil, and production grew to 4.17 million bpd in 2013. Chinese oil demand in 2007 was 7.57 million bpd, already more than 3.8 million bpd above production, and demand grew to 10.19 million bpd in 2013, a supply gap of more than 6 million bpd. China is keenly aware of this imbalance and has expanded its efforts to gain access to overseas resources, including assets in Africa and Latin America.

The BRIC countries have the potential to greatly boost their production of unconventional fuel sources: pre salt oil, shale gas, shale oil and biofuels, each to a varying degree depending on their resources, their regional market, and their preferences. Russia, China and India share a commonality, which is their key location cutting north to south through the Asian continent. In contrast, Brazil is on its own in the Western Hemisphere, and its energy market has been strongly influenced by events in the Americas. In recent years, the upsurge in shale oil and shale gas production in the US has greatly reduced US crude import dependency. This has depressed oil and natural gas prices in the mid continent US, which in turn boosted refinery activity. The US has become a major exporter of refined product to Latin America, including Brazil, as discussed in the section following on BRIC refining. Brazilian crude production gains have been delayed, partly in response to new market signals caused by the shale boom and partly because of changes in Brazil’s laws regarding the distribution of oil royalties. Brazil was forced to delay its 11^th bid round while the royalty issue was decided in the courts. In 2013, a number of actions finally moved forward. Petrobras reported that in 2013, it had added 43% to its proved pre salt reserves. New production came onstream, and a new pre salt crude production record level was achieved, 390 000 bpd. In October 2013, Brazil also awarded the rights to the Libra pre salt field in the Santos Basin. The Brazilian National Petroleum Agency (ANP) initially estimated that the Libra discovery could hold as much as 15 billion bbls of oil. This project is particularly relevant to the BRICs because of a strong Chinese presence. The consortium of majors developing the field are Petrobras (40%), Shell Brasil (20%), Total (20%), the China National Petroleum Corporation (CNPC, 10%), and the China National Offshore Oil Corporation, (CNOOC, 10%).

The refining sector

The four BRIC countries have pursued widely varying paths in terms of their refining industries. It is easier to find differences than commonalities, but five commonalities are clear:

• First, each BRIC views refining as a strategically vital industry.
• Second, each BRIC exerts strong state control over refining.
• Third, each BRIC has worked, and is working, to expand and modernise its refining industry.
• Fourth, each BRIC has a refining sector containing a juxtaposition of old and new.
• Fifth, the actions taken by each BRIC have had a major impact on oil trade dynamics in their areas.

In the 1980s, only Russia had a sizeable industry, with a capacity of 6.9 million bpd. Chinese capacity was 1.8 million bpd at the time. Brazil’s crude distillation unit (CDU) capacity was approximately 1.4 million bpd, and Indian capacity was less than 0.6 million bpd. The 1980s were, of course, a time of global overcapacity, and Russia therefore suffered disproportionately. Yet because refining was state run, Russia put off the decision to close refineries until the 1990s, and capacity fell for the next decade. Only in recent years has capacity begun to be expanded once again. Brazilian capacity stayed flat during the 1980s and began to rise in the late 1990s. Capacity has remained flat over the past decade, but a number of new refineries are planned. China and India not only weathered the downturn of the 1980s, however, they expanded capacity. China caught up with Russia in 2000, and China continued to build refineries at breakneck speed, surpassing 12 million bpd at the present time. India also made major investments in refinery capacity beginning in the late 1990s, reaching 4.3 million bpd by 2013.

Conclusion

Brazil, Russia, India and China share a number of economic goals and successes. The acronym BRIC conveys a sense of weightiness and solidity, though as noted, these four countries may exhibit solidity more than solidarity. Yet each country is keenly aware of the importance of energy in their course of economic development. All four have sought to expand their energy reserves and increase production, and crude output is expected to grow in all four countries. Brazil, in fact, stands at the beginning of a coming surge in crude production. China and India have been concerned about import dependency, and both have worked to gain access to overseas resources. Only Russia has the luxury of being a major net exporter of oil, yet even Russia has reason to be cautious about oil trade. Government spending has increased to the point that international oil prices must be above US$ 100/bbl in order to balance the budget, and the country has already spent in excess of US$ 50 billion on the Olympic Games in Sochi.

The BRIC countries exert strong government control over their energy sectors, including refining. Only gradually have the countries allowed private and/or foreign participation. Access to foreign capital and expertise has grown more important as each country has developed and modernised, and as the citizenry has grown more demanding.

The next major challenge in the BRIC’s energy sectors may be an environmental one. Each country has made huge investments in refining, and many of the investments were critical to modernise ageing and unsophisticated refineries. Without these investments, refineries could not comply with petroleum product regulations, both domestically and in export markets. Russia, for example, had limited access to Western European markets until it had made the investments needed to produce EURO standard fuels. China, India and Brazil also have tightened product quality standards, and all three have worked to develop biofuels industries. In terms of severe environmental problems, however, China is most likely the country to watch. China has more or less adopted the ‘pollute and develop now, pay later’ approach, valuing its status as the world’s major centre of manufacturing. It is now paying for this by suffering severe air and water pollution. The demand for water on the eastern coastal plain is already well beyond what the water tables can bear. While Japan, the US, and other developed economies may have survived the ‘pollute now, pay later’ approach, the Chinese population, and the work force, is so much larger that many, many more people are at risk. The BRIC countries have had many successes, and there is little doubt that all four countries will continue to push for economic growth and development, but it might surprise the world to see China lead the BRICs toward cleaner energy industries.

The full article can be found in the April issue of Hydrocarbon Engineering.

Part 1 of the abridged version of this article can be accessed here.

Read the article online at: https://www.oilfieldtechnology.com/exploration/01042014/bric_energy_part_2/