Energy Outlook Q4 2019

Climate change: the greatest bearer of opportunities and challenges ever to face the global energy industry. When 196 countries that are Parties to the United Nations Framework Convention on Climate Change (UNFCCC) adopted the Paris Agreement in December 2015, it represented a major breakthrough – after more than 20 years of negotiations! The agreement is seen by many as the last hope for humanity to preserve the foundations for a healthy planet. Now, energy markets must play their part. 
Under the Paris Agreement, each country has set forth a climate action plan with Nationally Determined Contributions (NDCs), which describe the country’s climate targets and how they’re going to get there. Understandably, the Middle East’s energy industry and financial institutions (FIs) increasingly have these front and center of their 2020 agendas. 
The fossil fuels that have been the wind in the sails of the Middle East’s economic growth since the mid-1900s are charting a new course. A new era beckons as the Paris Agreement means an ‘energy basket’ will be the mainstay of the 21st century, fossil fuels and renewables alike. BP Energy Outlook anticipates that the Middle East will remain the world’s largest oil producer and the second-largest gas producer, accounting for more than 34% of global liquids production and 20% of gas production by 2040. At the same time, the share of non-fossil fuels in the Middle East’s primary energy demand mix increases from 1% in 2017 to 13% in 2040.
Have no doubt: the energy transition is expensive business. Investor confidence is pivotal to meeting environmental targets that the world cannot afford to miss. There’s good news. For the fifth consecutive year, global clean energy investment exceeded the $300bn benchmark, reaching $332bn in 2018, detailed Bloomberg New Energy Finance (BNEF). What is one key ingredient to sustain investors’ appetite in the Middle East? Transparency. 
We are all still figuring out what ‘good decarbonization’ looks like, so bolstering clarity will improve forecasts and risk-reward profiles. Watch this space.

Moderator: We are in a period of geopolitical infraction and witnessing significant changes in both supply and demand for oil. Yet prices seem to be stuck in a $60/bl-$70/bl bracket. How do you explain that?

Mele Kyari: Everybody thought that the attack on the Saudi oil facilities [in September] would create a very serious disruption and take prices to $80/bl, but it didn’t happen for two reasons. One is that Saudi Aramco took control and started delivering within a short period of time. Secondly, demand forecasts are casting a bearish impact on oil prices. I don’t see any situation where price conditions will go beyond $65/bl-$70/bl in the short-term.

Moderator: Is a price range of $60/bl-$70/bl conducive to the investment required in the oil and gas sector? What can we expect from Nigeria on that front in the next few years?

Mele Kyari: Nigeria has great opportunity for growth, particularly in oil and gas. We’re looking to increase our production to about 3mn b/d in the next two to three years and there’s significant progress on the ground to achieve that. Our country is also tactically placed geographically. Future demand growth is going to come from Africa and Middle Eastern economies. That is where you have the least infrastructural development, so there is great potential in these two regions. 
Moderator: Nigeria also has a major say in the state of affairs within OPEC. We find ourselves in a complex market situation where the US President does diplomacy by Twitter and there are unpredictable demand and supply dynamics. Where does OPEC sit in all of this, and with its new partners as part of OPEC+?

Mele Kyari: It sits in the middle. OPEC’s intervention is to the benefit of all consumer and producer nations. It enables the micro balancing that will guarantee that the cost of supply is covered, as well as the connection between the oil and gas industry and the global economy.  OPEC’s continuous intervention is not to intentionally raise prices. But of course, our actions to balance the market have had an impact on prices. Our intention is to create a balance between supply and demand that works for all and this includes taking into account the investment in US shale.  

Moderator: Will we see global oil demand peak in the coming ten to twenty years?

Mele Kyari: I don’t see it peaking. The global population is growing and with that comes continuous growth in energy demand. Yes, we see some decrease in oil demand because of energy efficiencies, for example in the combustion engine, but not due to renewables solutions, such as solar. These are, for the time, limited by battery power and storage and going forward, I don’t see exponential growth in solar energy sources. As long as demand for energy continues to grow, it will also grow for oil. The demand forecasts for 110mn b/d by 2040 are quite conservative, particularly when one looks at the potential growth of rising economies in the Middle East and Africa. Oil demand growth is on the up and it will probably not be matched by an equivalent growth in production.  

Moderator: How do you reconcile with the two objectives of being in the petroleum business while keeping Nigeria’s objective of balancing its carbon output? 

Mele Kyari: NNPC is a global oil company and we need to be in all sectors, including renewables. Currently, we’re short on supply of petroleum products and so our main purpose is to address that situation in the short-term. We know that the consumption of fossil fuels has an impact on the environment and, as long as we have improvements in the efficiency of the internal combustion engine, we will be able to contain that to a certain level. We don’t see any major conflict in addressing the impact of fossil fuels on the environment that is different from any other producer. One thing we should do going forward is leverage technologies so that in another five to ten years, we can probably make enough progress on renewables to produce a better balance between that resource and fossil fuels in addressing the environmental impact of energy consumption.

*Edited transcript from the Gulf Intelligence Energy Market Forum in September 2019.
 

Oil tankers ablaze and drone attacks on the world’s biggest oil exporter. It’s not been a dull year in the Middle Eastern energy markets, that’s for sure. While events allow dramatic news headlines to write themselves, this adds more complications to commodities and trade flows in the Middle East – global hub of East-West trade flows – in already unpredictable times. 

While geopolitics and energy have always been two sides of the same coin, there’s no denying that the knock-on impact of recent geopolitical bust-ups will influence prices. The sudden change in geopolitical risk warrants a potential $5/bl-10/bl premium to account for now-undeniably high Middle Eastern dangers to supply and the sudden elimination of spare capacity, S&P Global Platts Analytics said.

Regional Jitters
Thanks to the biggest attack on oil infrastructure since the Gulf War, oil markets are still calculating the risk premium after drones hit Saudi Arabia’s Abqaiq oil processing facility – the kingdom’s largest – and the Khurais oil field, in September. The attacks took 5.7mn b/d of production offline, about half of OPEC’s biggest and most influential member’s capacity – equating to 5% of global supplies. In short, this attack exposed a nerve, not just in Saudi, but worldwide. Saudi Arabia has, by all counts, done a good job at restoring its production – a valuable confidence boost to an industry awakening to a new (and for many, unnerving) style of aerial attacks. The kingdom’s press conference shortly after the attack was a masterpiece of positive communication. A reassuring picture was presented, dulling the more severe price moves. The US, a key ally of the Saudis, accused Iran of carrying out the attacks, which Tehran strongly denied. Yemen’s Iran-backed Houthi rebels claimed responsibility for the attacks. And it goes on; the bad blood doing little to stabilize energy prices. 
On October 11, oil prices jumped again after Iran’s state shipping company said one of its Suezmax tankers in the Red Sea carrying 1mn b/d of crude had spilled oil after two “separate explosions, probably by missile hits” occurred. This followed a handful of tanker-related incidents in the Strait of Hormuz chokepoint – through which a fifth of the world’s sea-borne oil passes daily – earlier this year. The narrative of pricing premiums for the Middle East was reinforced (again). 

INFLUENCERS TO WATCH
With US sanctions, OPEC member Iran is essentially knocked out of the international market. Having clawed back production efficiently from the first round of sanctions, Iran was exporting 2mn b/d a day last August. Now it’s in the six figures, approximately 200,000 b/d. And the US Trump administration continues to press China to stop importing Iranian crude. Comparatively, the US’ progress speeds on. It will account for a staggering 70% of the increase in global production capacity until 2024, adding a total of 4mn b/d, according to the IEA’s Oil Outlook 2019-2024. Likely a net oil exporter in 2021, the US’ gross exports will reach 9mn b/d near 2024, overtaking Russia and catching up on Saudi Arabia. The fortunes of these two energy behemoths – one fading, one soaring – may be edited when they have their presidential elections: the US in November 2020, Iran in 2021. Or maybe they won’t. 

GLOBAL ROWS
There’s the US-China trade war that continues to reshape global trade flows. 61% of respondents to a GIQ Industry Survey in October believe the trade dispute is nearer the beginning than the end but the good news is that just 10% feel the Middle East is the biggest loser; Asia meanwhile was seen taking the biggest hit at 57% with other countries along the New Silk Road at 33%. If the tension is not resolved, 58% of survey respondents said energy companies in the Middle East and worldwide are not prepared for the long-term impact of the decoupling of the world’s two economic heavyweights. Adding to the uncertainty is the impact on oil prices from discord within the Gulf Corporation Council (GCC) and also from Libya and Venezuela’s geopolitics.

GOLDEN CHILD: OPEC+?
And not to mention the growing production from non-OPEC producers like Brazil, Canada, Norway and Guyana (while output from some OPEC producers falls). Every growth and every decline in an oil producer’s influence triggers a political ripple. Watch this space. The recent OPEC meeting in Vienna in December, with the group doing a good job at reassuring the market since they joined forces with Russia and other non-OPEC allies – rare unity in any industry worldwide – in 2016. Nearly half (42%) of survey respondents said they are very confident in OPEC+’s ability to balance the oil markets this fourth quarter; 28% said somewhat confident. Let’s end this long list (that only covers a slither of geopolitical-energy dynamics worldwide) on a positive note. Saudi and Kuwait may (there have been many false starts) resume oil production in jointly-operated fields in the Saudi–Kuwaiti Neutral Zone since the shutdowns of Khafji and Wafra in 2014 and 2015, respectively. 

BOLSTER ACCOUNTABILITY?
There has been a relatively muted response worldwide, notably from the US, to the scale and global impact of the attacks on energy infrastructure in the Middle East this year. The road of geopolitically powered violence and hostility will be easier to tread if there’s a lack of consequences, militarily speaking but this isn’t necessarily good news for the energy markets, nor economic growth. There must be stronger or more predictable deterrents in place, in part, to buoy investors’ confidence. 
In 2018, global energy investment remained relatively stable, at over $1.8trn, following three years of decline, the IEA detailed in its World Energy Investment 2019 report. This trajectory must accelerate to ensure energy security. Investment in the Middle East was down by one-fifth over the past three years, one of the largest declines globally, the IEA added. Soon it will be revealed whether the largest Middle Eastern national oil companies (NOCs), many stating higher capital budgets for 2019, came through.

WHAT’S NEXT?
What is certain is that worsened geopolitics typically don’t bode well for deeper pockets. And there’s no telling whether 2020 will be calmer. So, the rallying support of regional NOCs and IOCs, plus new partners worldwide, is critical to sustaining the much-needed flow of funds. This feeds directly into the region’s energy security, but also its attractiveness as a global hub – value that is impossible to put a price tag on. War of words, and worse, only hamper the region’s bottom line.

Moderator: China was the US’ biggest trading partner when US President Trump took office almost three years ago. It is now number three behind Canada and Mexico. During the same period, US tariffs on Chinese goods have increased from 3% to 21%. We have all witnessed the negative impact that the trade war is having on global GDP, energy demand growth and oil prices. Is there an end in sight for this battle between the world’s two largest economies and how is it impacting countries along the New Silk Road? 

Thomas Waymel: We’re closer to the beginning than to the end of this trade war, which has been going on for years and hasn’t made any decent progress. I don’t see any breakthrough in the negotiations ahead of the US presidential elections next year.  

Moderator: What has been the main impact been on countries and downstream industries?

Arif Mahmood: The three areas that the trade war impacts are demand, trade flows and pricing margins. If the sweet spot of prices is not right, it impacts investments. Some refining projects take years to build and the market needs stability for this, so having these erratic tariffs leads to a lot of uncertainty. I do see potential positive points. If you look at petrochemicals, the tariffs against the US can open new markets for those operating in Asia and offer more flexibility to producers in the region. There were a lot of polymers coming into the Asian market from the US and these are now looking for new ports. But by the same token, there are not many markets in Asia that can give the volume of demand that China does.  

Moderator: Large Chinese refineries, such as Sinopec, are relying on orders of US crude made months ago. Can this be easily replaced by West African crude or Middle Eastern crude?  

Arif Mahmood: China is currently importing 10mn barrels of African crude but whether that’s enough to supply long-term may be a challenge. China has ramped up supplies from Nigeria, Angola and the Middle East, but questions remain. Will demand be further suppressed? Will product start to flow in different directions in and out of China? The whole supply-demand dynamic on pricing and margins triggers a lot of uncertainty from an investment point of view. 

Moderator: Do you see the change in crude flows impacting China’s strategy of building strategic oil reserves?

Thomas Waymel: I don’t see any huge change in long-term policy. China has been building strategic reserves for the last ten years and they may now speed that up. They are securing long-term supply for large new refineries, some of which are being built as joint ventures with the likes of Saudi Aramco.  

Moderator: Shipping accounts for 90% of global trade and the Suez Canal is a critical part of that. Have the trade dynamics between the US and China led to any significant rerouting of trade flows and how have volumes at the Suez Canal fared?  

H.E. Admiral Mohab Mohamed Hussein Mamish: The movement of world trade is changing to move from the East – China, India and Vietnam – through Europe and onto the US. We are actively preparing for that. We must be ready for the number of ships needed and build the infrastructure and facilities to supply the ships. The Suez Canal touches the Red Sea and Mediterranean with around 20,000 vessels a year and investments along the New Silk Road will only lead to increased volumes.  

Thomas Waymel: Shipping has been a bad investment for the last few years as there have been too many new builds. As a trader, you want to have long options, long storage and long ships. IMO 2020 may provide some respite with new flows expected to materialize, so the market has been pricing a stronger shipping for 2020. But on the other hand, we have a slowing global economy, which is stymying trade and is bearish for shipping rates.  

Moderator: There’s a lot of investment going into refineries across the Middle East and into China itself. Can refiners still have peace of mind knowing that crude flows will not be disrupted on the back of the escalating trade war?

Arif Mahmood: My main concern is that we don’t see demand increasing and that means bad margins for refiners. One tactic has been to get closer to where markets are and take advantage of distance logistics. The other challenge at the moment for Asia is that there are a lot of changing specifications for products and many countries in the Association of Southeast Asian Nations (ASEAN) are behind. I don’t see margins for refiners as very optimistic as we move towards IMO 2020 in January.

Moderator: Are energy companies prepared for the long-term structural impact of the US-China decoupling?

Thomas Waymel: Companies don’t expect this to last; it will be resolved one way or another. We don’t expect to be planning for a global meltdown of worldwide trade.

Arif Mahmood: The oil business has always been impacted with abrupt changes. Refiners, traders, shippers and storage companies have always been expected to adjust. Long-term, things will eventually normalize in this new trade dynamic, but that is not to say that we will continue as we are today. A new normal will have to be established.
 

Middle East: Impact on Trading and Shipping Routes?

Thomas Waymel: The US and Asia are the two regions most affected, not the Middle East. The US export market for crude and gas now has limitations. Most of the LNG that was destined for China now can’t find a home and this has impacted the price of LNG significantly. There is obviously enough crude supply in the market today and US crude is being redirected to Europe instead of China, while Europe continues to take West African crude. The Middle East has perhaps been benefiting short-term with more Abu Dhabi and Saudi Arabian crude going to China. In terms of the impact on flat prices, if President Trump tweets that negotiations are going well, the market jumps $3/bl and if not, it drops by the same amount. But that is sentiment and not fundamentals. Although that type of volatility is not ideal, it’s totally unpredictable.
 Moderator: So, there’s no tangible opportunity for traders to capitalize on then? Are they shifting their focus at all on what products to trade over others? 

Thomas Waymel: A trading company must continuously look for opportunities and sort out the imbalances created by the market and those are there today as a result of the trade war, the most recent being the tariff by China on US crude. Flows will always be rearranged, creating a new optimum and that is an opportunity for trading houses. But, there’s good and bad volatility. If it’s volatility like an unexpected and significant strike on Saudi Arabian oil facilities, traders will be hurt.
 

New Silk Road: Flow of Funds?

Moderator: As part of its Belt and Road Initiative (BRI), China is one of the biggest investors in new oil and gas infrastructure across the New Silk Road and beyond. How are countries like Singapore being impacted by the dynamics of the trade war? Is there a shift or refocus of Chinese investment? China has also been opening up its own economy to outside investors in the last few years to boost internal infrastructure.  

Roger Chia Kim Piow: Singapore is very strongly dependent on investors and our GDP took a big hit in the second quarter of this year on the back of the slowdown in China and the global economy. China as a state is playing a very important part in eastern trading and that’s where economies are being impacted. The energy storage and trading industry by itself will not be affected too much. Manufacturing businesses like electronics will be, for example. In general, China’s BRI investment is continuing to take advantage of new centers of demand. Singapore’s small and medium enterprises (SMEs) are also venturing into some of those same countries that offer opportunities.  

Arif Mahmood: Energy security is key for China and when the trust of a free market is disrupted by excessive tariffs, countries secure supply either through partnerships or new investors. There will be an increase in the pace of investment to ensure this security through joint ventures. China is still growing at 6%, which is huge for a population of 1.2bn people. It needs to create new markets and the Middle East and Russia will increasingly become more important regions for that. The tariffs are also triggering a new dynamic in regards to innovation in China. It does not want to become reliant on any particular region or country like the US, so we are seeing this increased pace of innovative thinking on energy product flows, intellectual property (IP), software and technology.  

*Edited transcript 

Fully monetize the value chain; rethink corporate philosophies; and go back to the basics of trading. Applying these three steps will mean national oil companies (NOCs) can accelerate up the global hierarchy. Over the last three years, many have laid the foundations to emerge as energy trading heavyweights; a role historically dominated by international oil companies (IOCs). Now, they must up the tempo. 

Saudi Aramco’s bid to be among the world’s top three global oil traders reflects the ambitious step change among Gulf NOCs. They have increasingly been advancing and diversifying their upstream dominance into downstream expertise and building vertically integrated businesses that are sometimes direct competition to established global energy traders. 

FORTUNATE GEOGRAPHY
One golden ticket for Gulf NOCs is geography, notably the UAE’s Emirate of Fujairah. The Middle East’s biggest port and the world’s second largest bunkering hub lies at the heart of global east-west crossroads, especially the surge of trade flowing towards Asia. Aramco Trading, which expects to see its oil trading volume rise to 6mn b/d next year, has opened its second international office in Fujairah. Plus, ADNOC is building the world’s largest underground oil storage project in Fujairah having awarded a $1.21bn engineering, procurement and construction (EPC) contract to South Korea’s SK Engineering and Construction Co (SKEC). The port has also made excellent progress (in a global context) to have a clean and steady supply of LSFO for when the International Maritime Organization’s (IMO) ruling to reduce sulfur limits from 3.5% to 0.5% comes into play on 1 January 2020. All these moves are affirmations of Fujairah’s strategic importance – and capability – to meeting NOCs’ trading goals. 

SQUEEZE, SQUEEZE, SQUEEZE
NOCs must maximize the overall value of the integrated portfolio rather than any single element, which is sentiment echoed by management consultancy Strategy& Middle East last year. This encompasses standardized management tools and data transparency along the entire value chain to create a holistic, not fragmented, overview. ADNOC are an excellent recent example of how this strategy pays off. As many (surviving) energy companies did after the oil price dramatically fell in 2014, the company has stretched the value of every barrel, squeezed efficiencies internally and opened its metaphorical and literal doors to be more entwined in global energy dialogue and foreign partners. Consequently, ADNOC is leaner, more aggressive and, critically, easier to benchmark to a private business than a government. All play well into broadening an influential trading portfolio, plus the efficiencies add some fat back to the balance books – helpful for trading liquidity.  

A NEW CULTURAL STATUS QUO
Cultural change can be a tricky and long slog – but it’s non-negotiable. Currently, it is still not 100% clear which direction the Gulf NOCs’ trading arms are going to take. What we do know is that they will be sizeable and important players who will be welcomed into the market (greater liquidity is a win-win for all). But what of their philosophy to regional and global growth, alliances and risk? The first step to updating NOCs’ corporate philosophy is staff. It’s very simple: hire people who know what they’re doing. Secondly, cover every base when it comes to mitigating risk. With all the checks in place, red flags of misalignment should be easy to spot. Of course, every company will have a different pain threshold. 

BACK TO BASICS
Liberalization is a simple and sure way to accelerate liquidity and grow a traded market. NOCs must let go, reduce destination restrictions and reduce official selling prices. Let the market decide the price and supply-demand dynamics.  Of course, NOCs by the very nature of their social and state responsibilities may find this balancing act difficult. But it also offers significant value. For one, NOCs have the advantage of being able to manage the whole value chain, from drilling for black gold through to the trading desks and retail.  

DIGITAL SMARTS
Another step towards simplifying trading is leveraging the 4th Industrial Revolution, notably blockchain. Approximately, if you made a spreadsheet of all the blockchain consortiums worldwide, there are more IOCs than NOCs. NOCs are missing a very relevant trick; blockchain is only going to be become more widespread and more influential in building confidence among traders.
Make no mistake, Gulf NOCs emerging as another Vitol or BP Trading is a major leap. It only takes one big loss on the books to rattle the market and spark doubt, so NOCs must tread carefully and smartly. But their strong track record, plus Fujairah’s credentials, means there’s no reason Gulf NOCs can’t enjoy one of the best seats at the table of global traders in the early 2020s.

Moderator: Which sector is better prepared for IMO 2020 – shippers, refineries or ports?  

Mike Muller: There is a general expectation that stakeholders may not be ready to immediately comply. I would say it may be easier for the ports to be prepared because they just need to enforce rules, whereas others must invest in structural changes.  

Moderator: Many say the ports have a responsibility for the communication of clarity and procedure and that preparation could have been done better.

Mike Muller: It depends on the port. But for the most part, those that have engaged have been very clear in towing the line and threatening enforcement and consequences on stakeholders who are caught not complying. The biggest concern is consistency of enforcement globally, but you really do not want to be boycotted by concerned investors these days. They represent a large percentage of the share price and are consistently talking about sustainable growth and accountability to the environment. It’s an extremely large issue and if you listen to the top people at the IMO, they are singing the exact same tune and already looking to the next step, encouraging alternative fuels, such as LNG. 

Magid Shenouda: Refineries are most prepared. They have been for two years, with the exception of the Russian refinery sector maybe. Globally, in the last five months, we’ve seen heavy and medium sweet crudes trading at large premiums to Brent, contrary to what they have done historically. So, refineries have been buying those products to get ready. Product can always be sourced. The real question is how is it going to affect feedstocks, how are people going to switch feedstocks and what impact will that have? 
Dave Ernsberger: Most people are prepared. We are talking about a massive group of entities with a huge number of vessels and assets. More than 2,400 scrubbers have been, or will be, installed by the end of this year and another 3,000 by the end of 2020. The only constituency that is absolutely 100% exposed to this new rule is the shipping community. What I hear from shippers is that everybody’s switched the lights on from mid-October to go to LSFO. They’ve already put the enquiries into the ports. Most people think the industry’s ready and we see that reflected in prices as well. 

Moderator: Will there be enough LSFO supply to meet demand in the first half of 2020?

Keith Martin: Great efforts have been made and storage is full. Our unit in Fujairah is producing today and we’ve got a number of locations with storage and this is being echoed by other players. We see ships full, laying in the harbour waiting for the change. The refineries are all ready to switch and have been prepared as well, so there will be enough product available. That is not a concern. What everybody’s interested in is what will be the initial teething problems in terms of system changes. This will only work if applied globally and we have seen government commitment at a high level, which will put on a lot of pressure to make this happen. Those that don’t will be castigated by shareholders.

Moderator: With plenty of supply, does the big opportunity of margin disappear?

Keith Martin: I don’t think so. There is stock at the moment to reassure concerns around readiness in the first half of 2020. But the market will level out, demand will increase, we’ll get over the teething problems and then we’ll have a new dynamic in terms of price levels and margins will be reasonable. 

Moderator: Where is the pricing spread of LSFO and high sulfur fuel oil (HSFO) today and where is it headed?

Mike Muller: The front of the market price for LSFO is in the low $300s/t. There are going to be very different flavors of ultra LSFO…high viscosity, low viscosity, directly from the refinery, blended by somebody you trust or don’t trust, etc.

Magid Shenouda: The market is currently trading at $276/t. To get to $300/t, you only need another $25/t, which is going to happen because the HSFO market is going to be pushed down, as well as other factors.

Adi Imsirovic: I would be a bit more conservative. There will be very good demand for ultra LSFO, given where marine gas oil prices are, so somewhere between $200/t-$300/t.

Moderator: What is the big picture outlook vis-à-vis the first half of next year? How do you see IMO 2020 playing out?

Dave Ernsberger: It’s important to keep these things in perspective. The bunker fuel market is 3.5mn b/d in some shape or form. The global oil markets have managed much bigger changes than this; many of us have seen shifts from diesel, from HSFO to ultra LSFO, gasoline to cleaner standards all around the world. The bunker market will be roiled a little from November and probably through to February next year with technical challenges, such as tanks changing and ships loading new fuels. But the fundamental challenge is the fuel itself and it appears that the required investments have been made on that front in LSFO production through to blending and new scrubbers. We are not looking at a crisis – this is more Y2K than it is anything massive. 

Moderator: As prices are on a bearish trend, will OPEC need to make much deeper supply cuts at its December meeting to support prices at where they are today?

Dave Ernsberger: OPEC will definitely have to make a bigger cut if it wants to get to $70/bl again. We’re reaching the end of the road on OPEC’s output cut policy. What the group faces right now is diminishing growth in oil demand, which is being very weighed upon by uncertainty in the global economy and in the move towards sustainable energy. One of the great triggers that can accelerate the further erosion of demand growth is a high oil price. So, if we push to get prices higher in an environment where there could be another shock, that could become a little self-defeating medium to long-term. There are voices in OPEC that are making this argument today. 
Moderator: OPEC and non-OPEC recently signed a charter of cooperation for a longer-term partnership. Do you think there’s appetite in Russia to sustain the partnership and make these kinds of commitments?

Adi Imsirovic:  There are so many variables involved. First of all, IMO should have given the market a bit of a kick and it didn’t. Secondly, the fact that there has been no geopolitical risk impact has also been a huge surprise. Is the market complacent? I am not sure. Thirdly, it’s very hard to say what President Trump is going to tweet next and that is really influencing fundamentals. Trade drives the world economy and at the moment, Asia is being really badly hit. Singapore’s economy is doing extremely poorly. With demand growth mainly coming from Asia, this does not bode well for the global economy. But oil producers will still make sure that prices are stable and Saudi Arabia has done a fantastic job so far in ensuring that.

Snapshot: Price Impact of Drone Attacks on Saudi’s Oil Market?

Moderator: In the aftermath of the attacks on Saudi oil facilities in September, there has been a lot of talk about the return of a geopolitical premium to the oil price, but that has not really materialized. Could it still do so?

Keith Martin: The shale oil revolution in the US and the amount of supply that’s available in the market has brought in a calming factor. Former US President Bush said recently that if that same attack had happened ten years earlier, the price probably would have been up $40/bl and would have been far more sustained and damaging. But the fact that there’s such healthy supply means that markets are far more prepared to cope with shocks than ever before, so I don’t see a premium sustained for any serious period of time.  

Moderator: For many years, there’s been a sense that the sector is a little nonchalant about the risk here to supply. Is there geopolitical risk?   

Mike Muller: There is. Is it due to the fact that Venezuela, Libya and Iran production have been impacted?  Yes, that’s in there somewhere. But what the recent attack in Saudi has done is take away spare infrastructure, which the kingdom put in place in order to have the ability to cope with such challenges. So, we are eating away at those layers of assurance.  

Magid Shenouda: Prior to the attack, the market was really short and would have gone close to $55/bl for Brent. We were trending down anyway because of President Trump’s tweets and the impact of the trade war on demand. At the same time, if you look at the global economy, it’s still sick and has never really recovered since the 2008 financial crisis. We keep printing money and there is too much cheap cash. The trading community is short and the fact that there’s a plethora of producers, mostly in the US, waiting for spikes so that they can sell into it, says something. Private equity markets have a lot of money scoping oil and gas and praying for higher prices so that they can hedge.  

*Edited transcript 

Clean and compliant. Make no mistake, these two words are dictating the economic health of the world’s shipping industry. This is significant; the sector transports 90% of the world’s trade, including energy. So, everyone should be watching the calendar. It is a mere fifteen days – a blink in an economic eye – until the IMO ruling that bunker fuels from January 1, 2020 must be 0.5% sulfur, down from today’s 3.5%.
One misstep after the clock ticks past midnight on New Year’s Eve can spark costly rumours, dull operational credibility and give business away to competitors overnight. Ports and all other stakeholders – refineries, storage operators, traders, shippers – must ensure clean and compliant fuels flow through their terminals i.e. uncontaminated with other blends and sub-0.5% sulfur. Success means leveraging a major opportunity to expand global influence, as votes of confidence in global shipping lanes work their way down the maritime grapevine. Make sure you’re on the right team; IMO 2020 is a game of confidence. 
Everyone must play by the same rules, but there must also be minor wiggle room for first-time mistakes in the early days. The majority of those in the value chain are starting from ground zero with 0.5% fuels (we already supply more than 4mn tons of IMO 2020 and ECA compliant marine fuel oils). Volatility in the first quarter of 2020 is inevitable; it is the biggest shift in the shipping industry in 100 years, after all. Most importantly, don’t let rogue waves of disruption derail the positive momentum on the many compliant seas. The fuel markets already contend with enough (volatile geopolitics, fluctuating oil prices, pressure to embrace digitalization, talent shortages, etc). Look at IMO 2020 through a prism of progress, not finger pointing. 

DUSTING OFF COBWEBS
In this vein, all stakeholders must up their game amid the more stringent fuel rulebook – never a negative. IMO 2020 is spurring much more extensive collaborations along the value chain, such as smarter tank segregation and fuel testing to eliminate contamination. The ambiguity surrounding pricing – a thorn in the energy and shipping industry’s side – has made it more challenging to comply. Some financiers’ forecasts have little choice but to be riddled with guesswork. The ‘chicken and egg’ element – supply-demand dynamics drive the price yet knowing the price influences supply-demand – has caused many headaches this year. But stronger opinions appear to be forming.
It seems likely for now that $200-$300 will be the average price spread per metric ton of compliant LSFO over non-compliant HSFO in Q1 of 2020, according to half the respondents to a GIQ Industry Survey of more than 350 energy executives in Fujairah in October. A quarter (26%) said $100-$200/mt and another quarter (24%) said $300-$400/mt. More transparency may also come with the new bunker adjustment factor (BAF) indexing mechanism from Drewry and the European Shippers’ Council, which aims to help shippers control bunker charges as shipping lines switch to compliant fuels. Watch this space. 
Our meetings worldwide have revealed that many new players seek business locally under IMO 2020 terms – Fujairah’s compliance efforts and UED’s LSFO supply make the decision easy for them. We were also recently added by S&P Global Platts, the world’s biggest energy pricing agency, to their Asia Market On Close (MOC) assessment process for Asian fuel oil. The same applies for Singapore and Fujairah physical bunker fuel, the world’s first and second largest bunkering hubs, respectively. This emphasises our rapidly growing influence and credibility worldwide. 
Still, no matter the upside, IMO 2020 is new territory. Amid the noise, keep these two words as top priorities: clean and compliant. They are your allies in a market where you can never have enough.

Ambitions and alliances are fast being achieved at the Port of Fujairah. The UAE emirate is the unblinking beacon in the energy market’s storm of opacity; one driven by sub-$60/bl oil, geopolitical tensions, wildly fluctuating forecasts on peak oil and other unpredictabilities. Fujairah’s unwavering positive trajectory for the last decade gives the market confidence that we can fulfil our goals in the 2020s. 
As we approach the next decade, the world’s second largest bunkering hub will see a number of new and exciting projects come to fruition such as; commissioning of an additional 796,178 m³ of storage capacity of which 43,000m³ will be dedicated for chemicals, a new Petroleum Regeneration and Recycling facility in 2020 and completion of the world’s largest underground storage caverns designed to hold 42mn barrels of crude oil in 2022. A new trading desk for Aramco Trading (which expects to see its oil trading volume rise to 6mn b/d next year) has been established, Brooge Petroleum & Gas Investment Co. and Sahara Energy Resources DMCC are currently constructing a new 24,000 b/d Topping Unit to produce LSFO products for the bunkering market, which is expected to come online within a year and future plans to construct a 250,000 b/d refinery – major investments that clearly signals confidence in the energy hub’s future. Feasibility studies and analysis are ongoing regarding the need for more jetties, including the possibility of a second VLCC jetty to complement Fujairah’s inaugural VLCC jetty commissioned in 2016, which heralded the UAE’s first on the Indian Ocean. Plus, OPEC and PLATTS are publishing the ledger data for Fujairah, highlighting the value of ‘soft’ progress alongside the ‘hard’ progress of infrastructural developments.

PROACTIVE MARKETING
Part of evolving into the leading global hub means better marketing these successes internationally. This is just the tip of the iceberg of what has been achieved since the port opened in 1983 – less than four decades ago (comparatively, Singapore, the world’s biggest bunkering hub, opened two centuries ago in 1819). Today, Fujairah Oil Tank Terminal (FOTT) is handling more product and ships than ever however, through the implementation of new operational efficiency programs and our service offering jetty occupancy and vessel waiting times have decreased significantly, year to date the average berth occupancy is 57.9% and vessel waiting times are 3.5hrs which is best in class. Let’s share that message!

IMO 2020
Fujairah is transforming what some view as economic toil into a golden opportunity: IMO 2020. Fujairah has the capacity – and the will – to spearhead what is a drastic and arguably one of the industry’s most defining moments since the shift away from coal. The emirate also benefits from sophisticated and flexible crude palettes in the Middle East’s many new refineries over the last five-plus years. 
Some operators in Fujairah, such as Uniper Energy DMCC and VTTI, have made significant progress in ensuring a healthy supply of LSFO will be available in Fujairah prior to compliance enforcement date of January 1, 2020. Today we are seeing some of this product being exported to Singapore; a somewhat surprising trend considering our friend in the East’s bunkering prominence. Of course, we are keen to capture as much market share as possible. 
The big challenge with IMO 2020 will be building confidence. Respondents to a GIQ Survey of 350 high-level executives in Fujairah in September were split equally over whether they thought there would be sufficient supply of LSFO worldwide in January. Of course, we want the ‘Yes’ response to be in the high-90% for Fujairah. Our customers, existing and potential, need to know they can come here and get as much compliant, compatible and quality specific fuels as they need. That belief will get stronger with every successful cargo we handle. At a minimum, traders and suppliers have said they will conduct extensive testing, in addition to existing tests – an excellent step to bolster confidence. However, with regard to compliance Fujairah is not going to inspect every vessel; the Port of Fujairah (PoF) will take direction from the UAE Federal Roads and Transport Authority (FTA) and our representative who sits in the IMO offices. Every stakeholder is responsible for their actions.

GUESSWORK ISSUES
Wallets are, understandably, not being flung open amid this major shift, at this stage many traders and suppliers are hesitant to enter into long-term supply contracts. This is largely due to the guesswork over the price differential between LSFO, HSFO and Marine Gas Oil (MGO). Ports and shipping are very cost driven markets, and both are trying to operate with unreliable signposts. At the beginning of this year, I conducted a survey with ship owners who utilize the PoF, and the consensus was a preference to run on MGO in 2020. Now, LSFO is the talk of the town. With just less than a month left until the enforcement date, what’s the lesson? Nobody knows. As unsettling as it may be, we must accept the ‘wait-and-see’ approach while doing our utmost to prepare.
Inevitably, this affects other operations at Fujairah. We need to know where the tipping point for more investment lies before signing checks for additional jetties, or another VLCC. We are in a solid position, with advice from our management to always try and be 25% to 30% ahead of the game in terms of capacity.

BENCHMARKS FOR 2020
There’s a lot of discussion about whether establishing an independent Middle East oil pricing benchmark is a requirement or a nice to have. For me, it’s the former if we want to take pole position as a global hub. Over the last three years, long-delayed talk has evolved quickly into serious conversations on ‘how can this be established?’ – a smart move that must gain momentum in 2020.
Now, how do we capitalize on all these opportunities and further enhance Fujairah as a global logistical epicenter for crude oil and refined products, as well as storage and trading? Companies like Uniper Energy DMCC and BPGIC have capitalized on these opportunities with great success. We must keep making Fujairah an easy sell. The question is: are you in?

$275 billion.That’s the potential value for downstream oil and gas companies if the digital and physical worlds are combined between 2015-2016 as per the 4th Industrial Revolution (4IR), according to the World Economic Forum and Accenture. Plus, operating costs in downstream can be cut by up to 3% by using artificial intelligence (AI), blockchain, robotics, sensor technology, machine learning, deep learning and edge computing, detailed McKinsey. These figures should trigger a sigh of relief among stakeholders operating in a world of sub-$60/bl, compliance for IMO 2020 just days away and rising geopolitical tension. No stakeholder can afford to give digitalization a cold shoulder; even 0.1% of greater economic efficiency is golden. 

PROGRESS CLOSE TO HOME?
This certainly applies to the 20,000 ships sailing into the Port of Fujairah every year, not to mention the vast operations and infrastructure at what is the Middle East’s biggest port and the world’s second largest bunkering hub. Applying the tools of the 4IR – Internet of Things (IoT), predictive analytics to name just a few more – will spur transparency and give the Middle East’s downstream ambitions more global credibility. Stakeholders need to know at the click of a button how much storage there is, where the customers and shippers are, when the delivery is and what the likely external triggers to liquidity will be i.e. geopolitics and so on.  Operating in a vacuum of guesswork dulls competitive edges and makes business models irrelevant – fast.

PARADIGM SHIFT
Two decades ago, little information was transmitted from a ship at sea. Today, every inch of operations and every decision can be monitored and analyzed, no matter the sea or port. This creates a real-time, global picture of where every single asset is at any point in time and accelerates the speed of decision-making, bolstering trade volumes and liquidity. But this real-time looking glass is a two-way street that not all downstream players are travelling on – yet. Failing to gather and transmit data means the digital, real-time maritime ecosystem splutters to a halt. 

PROACTIVITY CAN PAY – LITERALLY
Traders, refiners, storage operators and all others in the downstream value chain must keep greasing the conveyor belt of data. Saudi Aramco and ADNOC are among the NOC forerunners who are opening their digital doors without jeopardizing intellectual property (IP). The UAE Government’s Open Data policy also heralds a major cultural step change in how the region manages its intel, and NOCs’ trading desks are becoming extremely proactive with real-time vessel tracking, tank monitoring and proactive talk of adopting blockchain. The next step is tailoring the data to maximize usefulness. Important information for a trader differs to what a shipper considers dear. Stakeholders must think about how to gather, assimilate and distribute targeted knowledge, avoiding a scattergun approach. 

WALK THE TALK 
Desire for greater digital adoption is building; the holistic roll-outs less so. Approximately 62% of CEOs have a management initiative or transformation program to make their business more digital, according to Gartner’s 2018 CEO and Senior Business Executive Survey. But executives still tend to neglect a holistic cross company approach, often leaving initiatives to be taken exclusively by their IT business units. In the refining world, a report by Accenture recently revealed that while 60% of refiners intend to spend more on digital this year, just 48% have mature or semi-mature digital technology deployment. This is especially surprising when 80% of the same respondents said digital is, or could, add more than $50mn to their business. This disconnect needs fixing. Unleashing the economic value of digitalization needs companies to walk the walk, not just talk the talk.

TREAD CAREFULLY
The ultra-efficiency offered by digitalization comes at a cost: cybercrime. Damages from cyberattacks will cost the world $6trn annually by 2021, up from $3trn in 2015, reported Cybersecurity Ventures. Such attacks worldwide already cost the world $600bn in 2017, 0.8% of global GDP, according to McAfee. Downstream operators, vital gateways to global trade, cannot be an easy target. Many proactive steps are being taken – Honeywell opened its first Industrial Cybersecurity Center of Excellence (COE) at its Middle East headquarters in Dubai – but many more are needed to combat the fast-moving digital mafia. Leveraging the 4IR toolbox and building robust digital defenses must be a continual effort to not just fatten profit margins but protect the region’s energy security. Digital fluency is no longer a language you can choose to learn tomorrow; it’s a must-have today.

Infrastructure matters as much as brain power; hard and soft capacity are two sides of the same coin. Policies and forecasts detailed on paper mean little if the supporting ecosystem is weak. Capacity – a simple word with significant meaning in what is the biggest change in the energy markets for a century – sits at the core of a successful energy transition for downstream operators; for those in trading, shipping, refining, storage and more. 

HIGH DEMANDS
The Middle East’s energy supply and environmental pledges are highly demanding. BP expects energy consumption in the region to rise by 55% by 2040, the UN says it has one of the world’s fastest growing populations and it is also becoming increasingly industrialized. On the environmental front, the Middle East is one of the world’s most vulnerable spots to the negative impacts of climate change (some parts of MENA, home to 500mn people, may be uninhabitable by 2050, said the Max Planck Institute for Chemistry). Accordingly, governments have committed to ambitious – but laudable – environmental targets as per the Paris Agreement.  Downstream operators in the historical global epicenter of black gold are increasingly environmentally aware. The trick is sustaining this momentum so that it’s affordable, scalable and sustainable.  

PROGRESS AHOY
The UAE’s Port of Fujairah is at the front of a global push for greener fuels for the world’s 50,000 merchant vessels from January 1, 2020, when the IMO’s ruling for a 0.5% sulfur limit starts. The world’s second largest bunkering hub has already earmarked loading berths for compliant fuel only, for example. 
Globally, 28 of the 100 largest ports, in terms of cargo volume, are offering port-based financial incentives, such as a differentiated fee for greener ships, to mitigate greenhouse gas (GHG) emissions, according to the OECD International Transport Forum (ITF). The Panama Canal Authority’s scheme gives priority slot allocation to greener ships and Spain includes environmental incentives in the tender and license criteria for the towage services provided in ports. Shanghai has an emission trading scheme (ETS) in which ports and domestic shipping are included, the ITF detailed.

COMMON GOAL: KEEP INNOVATING
All these steps bring the industry closer to the UN’s goal to reduce the total annual GHG emissions from shipping by at least 50% by 2050 compared to 2008. But the journey has just begun. Middle Eastern downstream operators must do more to be proactive and relevant actors in the global energy transition. 
One new route to explore is the widespread development of hydrogen as a fuel. Hydrogen and energy have a long-shared history, from powering the first internal combustion engines over 200 years ago to becoming an integral part of the modern refining industry, according to the IEA. It is light, storable, energy-dense and produces no direct emissions of pollutants or greenhouse gases. Surely this is a win-win for the energy transition, so what’s the hold up? Well, it certainly has advocates within industry and academia. The International Renewable Energy Agency (IRENA) recently called green hydrogen the “missing link” in the transformation of the energy system. And some projects are moving ahead, such as the world’s first hydrogen powered yacht, the 30.5 metre catamaran Energy Observer. But this is on a very different scale to reliably fueling some of the world’s largest vessels, each on a tight schedule to sustain energy security and trade flows (shipping accounts for 90% of global trade). 

HOLISTIC PROGRESS
Hard and soft capacity development will only become more multifaceted as the energy basket diversifies. For hard infrastructure, it ranges from more ships much more efficiently crisscrossing the world’s oceans to more sophisticated information technology (IT) resources being integrated into daily operations. 
For soft capacity, it encompasses more investments in energy education (school onwards) to ensure the market has the intellectual capacity it needs in the 2020s, to developing professional opportunities like internships and secondments. This also extends to more conferences and knowledge-sharing at home and abroad, plus more funds and time funneled into innovative research and development (R&D). Above all, one feature is non-negotiable: high safety standards. These must be sustained by sharing technical expertise and best practices across all capacity developments. Progress cannot outpace safety measures.  
Global energy investment totaled more than $1.8trn in 2018, a level similar to 2017, according to the IEA’s World Energy Investment 2018 report. This is not enough; momentum must build in 2020 to have a chance of energy, environmental and economy security. Unchartered territory means all stakeholders need a confidence boost. Downstream operators must encourage investors by showing tangible signs of progress and knowledge, while investors must be open to new opportunities. 

LEVERAGING EXISTING VALUE
A central part of improving capacity is leveraging what we already have by filling the gaps of existing inefficiencies. Industry could produce nearly twice as much value per unit of energy in 2040, according to the IEA. Every business, every value chain and every partnership have areas that can be streamlined, from operations to communications. From an economic perspective, one measure of this is the energy intensity of the global economy – expressed as units of energy per unit of GDP. It took 4.6 megajoules to produce a dollar of global GDP in 2017, yet it will take just 1.9 megajoules in 2050, DNV GL forecast – a near 60% reduction if efforts continue. Downstream operators – already facing sub-$60/bl oil prices, rising demand, geopolitical tensions – must benefit from this potential. 

BOUNTIFUL ECONOMICS OF DIGITAL
And of course, let’s not look past the endless value of the digital tools under the umbrella of the 4th Industrial Revolution. More than $11trn could be generated by combining the physical and digital worlds by 2025, McKinsey estimated. Tools include blockchain, artificial intelligence (AI), predictive analytics, robotics and more; all can finesse how downstream operators work. Google recently designed a machine that needs only 200 seconds to solve a problem that would take the world’s fastest supercomputer 10,000 years longer. Clearly, it would be easy to fall behind in this rapid-moving field. 
Opportunities and risks abound in equal measure in the energy transition; everyone is operating amid unknowns. Downstream operators’ strong foundation of infrastructure and know-how – hard and soft capacity – gives them a head start in remaining profitable and sustainable. But they must ramp up capacity again (and again) to keep pace with intensifying market pressures.