Middle Eastern oil prices to rise

Growth of OPEC and non-OPEC oil supply is expected to decline within the next 18 months and the average Brent prices for 2014 and 2015 are likely to range from $106-$109 and$103-$108, respectively.

A recent report suggested that Brent prices may increase on the back of tighter supplies. Most research groups were expecting oil prices to decline as a result of strong dollar, slow GDP growth and increasing supplies.

However, Brent crude oil front-month contract rolling prices have average $109/bbl and a number of reasons have been responsible for these high rates. Geopolitical crises and supply issues coupled with depreciation of the dollar by 2 per cent and the rising US inflation have pushed up oil prices.

Non-Opec supply accounted for nearly 4 quarters of the 2 million bpd supply growth on a year-on-year basis, but is currently growing by only a million bpd year-on-year, which will lead to limited supply. Majority of the growth is expected to come from North America and nations like China, Brazil, Russia and Columbia will enjoy only limited gains. Thus, a number of key producers will likely face declines.

WTI is expected to fall below $100/bbl in 2014, while US benchmarks will see downside risks. The WTI crude oil forecast for 2014 and 2015has now been revised to $98/bbl and $96/bbl, respectively.

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Chemicals & Fertilisers Minister emphasize action points for Ministry

With the coming of new government, on 28th May, 2014 Chemicals& Fertilisers Minister Mr. Ananth Kumar who took charge had said that petrochemical hubs has been schedule to set up in Tamil Nadu, Assam and Orissa and to gain momentum and in order to make the country self-dependent on the widely used soil nutrient, necessary measures will be taken by the government to revive the sick urea manufacturing plants. Furthermore he stresses that the government should also plans to stimulate all closed urea plants and make the country self-reliant in fertiliser supply.

The Chemicals & Fertilisers Minister Mr. Ananth Kumar for his ministry on taking charge have stressed on three actions which is to set up petrochemical hubs in a hastening efforts in Assam, Orissa and Tamilnadu, plummeting the costs of medicines by over 25% and ensuring ample & appropriate supply of fertilisers to farmers and reinforcement of all closed urea plants.

In the year 2013, the global economic growth of fertiliser industry had been quite inadequate, whereas in 2014 the growth of world economic activity was seen as recuperating. Since mid 1990s the fertiliser sector had not seen any momentous growth to capacity for making urea which is noted as the most important fertiliser and for improving the domestic availability of fertilisers can only meet up by encouraging new projects particularly by existing manufacturers, however in last two decades demand and import of fertiliser has soared high. With the slowdown of growth in China towards 7% will affect many other countries especially the commodity exports. In the year 2014-15, highest growth rates have been projected in the emerging economies particularly in Indonesia, China and India.

Furthermore with the formation of the new government, the new Chemicals & Fertilisers Minister assures the farmers that there will be no shortage of urea in the coming kharif season. As per the sources, India produces nearly 22 million tonnes of urea whereas the annual domestic demand is about 30 million tonnes. According the market outline, the Ministry of Chemicals and Fertilizers are struggling to pay out subsidies and the demand of India continues to remain under pressure, moreover the demand of fertiliser may possibly collision with a nascent weakening rupee and inadequate monsoons season. Hence an innovative and comprehensive policy for fertiliser sector is needed.

For more than a decade the creation of chemical manufacturing hubs in coastal India is an idea that has been languished and only one petrochemical hub ONGC has taken off in Dahej which has commissioned a world-scale cracker and is will considerably boost the availability of raw materials for downstream processing. However diminutive progresses have been made by four other clusters in Orissa, Andhra Pradesh, Karnataka and Tamil Nadu not a great deal exists aside plans on paper. Moreover, to improve the battered image of the Indian chemical industry, the scheduled growth will be served.

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Variety of economic policies indicated by the proposals of Union Budget 2014-15

The Indian finance minister Arun Jaitley on 10th July, 2014 had presented the Union Budget 2014-15 in the midst of high expectation from the middle class and industries. According to the market players, across the political spectrum the reaction towards the Union Budget for 2014-15 have been fairly predictable and for most of the chemical industry such as pharma and fertiliser industry were quite disappointing for most of the chemical industries. However the Indian finance minister Arun Jaitley have come up with few comprehensive ideas such emphasis on renewable energy and agriculture, improving the infrastructure by making better ports, roads and rail linkages.

Furthermore talking about curtail on custom duty in the budget proposals, there was diminutive to an unambiguously show for the chemical industry. Basic Customs Duty on a few basic petrochemicals such as ethylene, propylene, butadiene and o-xylene (OX) has been cutback from 7.5% to 5% and 10% to 5% on crude naphthalene. With the decreased in the Basic Customs Duty, producers of naphthalene which produces dye intermediates as well as of naphthalene formaldehyde sulphoxylates which are basically used in the construction industry as a concrete admixture will merriment cheaper imports of crude naphthalene.

Moreover the budget proposals have seen few segments in paints and coating industry, pharmaceuticals industry and fertiliser industry. The coating industry directly and indirectly might be a recipient of the proposals and demand for paints might be certainly collision due to higher tax immunity and incentives for savings which may perhaps abscond more money in the pockets of consumers.

For the pharmaceuticals industry the Union Budget 2014-15 has no specific proposals and have only focused on one part of the segment – health care. The finance minister looks forward to concentrate of healthcare segments by setting up four AIIMS in different parts of the country and number of government medical colleges and also improving public infrastructure that will boast optimistic impacts. Moreover to reinforce the States Drug Regulatory and Food Regulatory systems the Central Government for the first time will provide central assistance by creating new drug testing laboratories and will also make the 31 existing state laboratories stronger. However the Union budget 2014-15 of 2014 for pharma sector is quite growth-oriented, balanced and a realistic budget.

 

This year the Union Budget 2014-15 for the fertiliser industry is to focus to frame a new urea policy and on the fertilizer business the overhaul subsidy regime will have a positive impact. Furthermore the finance minister had declared the conception of an Agriculture Infrastructure Fund of Rs. 100 crore to shore up research and development, in order to give an impetus to investment in agriculture and make the farming more competitive. According to the sources the Finance Minister had further added that the corrosion of the soils was in turn resulted due to concerns regarding inequity in the utilisation of different types of fertilisers that were mounting high. However, according to the researched report the reform for the chemical industry is vital with its long value chains.

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Policy support for biofuels seems to be losing ground

Biofuels which are derived from other waste like animals and plants are in form of liquid fuels and Bioethanol and biodiesel are the two forms of biofuels which are used as a replacement for gasoline and diesel. A massive growth area around the world is embodying by biofuels which play a major role in relocating the types of fuels which are being used in the past few decades by the world. The size of the biofuels business is large and according to the estimate done by a researched report, in the year 2013 the production and uptake of biofuels had augmented to 115 billion litres from 16 billion litres.

According to the industry experts, the businesses of biofuels are vitally reliant on the right public policy support and have been uphold by the financial assistances in several part of the value chain, moreover Europe and the US are the two countries which are mostly now as the largest markets for biofuels. Furthermore, in these two countries the policy support seems to be losing the ground even though it is having aftermath.

Increase in demand at a global level seems to be incredible for biofuels and for automotive fuels in the outlook of overall demand, it is equally imperative to spot it. According to the International Energy Agency (IEA) in the year 2013, on an energy basis the world road transport fuel demand had reported biofuels for just 3.5% and the IEA which is an autonomous organization that works to ensure reliable, affordable and clean energy for its 29 member countries and beyond, targets for a low CO₂ emissions scenario by the year 2050.

In the past few years in the US the waning interest of policy makers for biofuels have also drawn closer from their superior sense of energy security than anytime and the country will eventually be transformed from a net energy importer to a significant exporter after an innovation of a bountiful quantities of cheap shale gas, which may perhaps be an imaginary vision five years ago.

Moreover as per the researched reports, in the developed countries of the world the policy support for biofuels are being diminished for various reason and in the most major markets the complete consumption numbers for diesel and gasoline are also being dilapidated owing to technology shifts, environmental issues and dynamics of demographics.

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US asserts its position as the world's largest oil and gas producer

The US has succeeded in overtaking Russia and Saudi Arabia to become the largest producer of crude and natural gas liquids. A recent research revealed in the past six months the US has had overwhelming success in the oil and gas sector.

Natural gas prices in the US are on the lower end compared to international prices as a result of the shale gas revolution.

In North America, the industrial sector has witnessed mixed results as some segments have had only moderate growth. Increased production of oil has obviously led to improved employment rates. Wages have also improved in states with greatest oil output in the past five years.

Investment in the oil and natural gas sector accounts for nearly 20 per cent of the total US private fixed  structure investment- a figure which is as high as residential investment.

Looking at US inflation before and after shale oil boom, inflation drivers have moved from labour market slack to production slack and increased concerns about inflationary fiscal policy. However, oil prices continue to remain strong in both periods.

Global oil producers have been struggling due to disruptions in engineering or geopolitics.

The shale gas boom in the US has had a major impact on the US and global economies. Oil production in the US has increased by,70 per cent, while production of natural gas expanded by 40 per cent, helping them overtake Russia and Saudi Arabia.

LNG and crude oil imports into the US have declined as a result of expanding supply. Thus domestic production has helped America reduce dependence on foreign fuels and spends less than 1.5 per cent of national revenue to purchase foreign oil and gas- a marked improvement over the situation in 2008.

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U.S. divulges plan to deal with emissions of methane

Methane which is the second and one of the largest parts of prevailing greenhouse gas radiated in the U.S. from human activities. On 28th March, 2014 U.S. had announced that in the coming months the administration will be taking a series of actions to aim at plummeting emissions of methane. These emissions of methane which is a powerful greenhouse gas will be released by the landfills, cattle and leaks from oil and natural gas production that contributes to climate change. The U.S. has the largest greenhouse gas emitter after China.

The main component of natural gas is the Methane – a greenhouse gas which far effective than carbon dioxide. This methane strategy was a part of climate action plan which was announced by the U.S. President

Barack Obama. Approximately 9% of methane makes up for U.S emissions, however, the ecological outcome is somewhat 20 times as effective as that of the most common greenhouse gas, carbon dioxide.

Another leading source of methane is cow manure and according to the White House, by the year 2020 the dairy industry and federal departments would divulge plans of June voluntary to condense the emission of the sector by 25%. Moreover, to see if there is any need for more regulations the Environmental Protection Agency will meet the experts on methane emissions from oil and gas which might be unveiled by the end of 2016.

In the current year, new standards on landfills and a separate federal body will be proposed by the Environmental Protection Agency, and also regulations to reduce venting and flaring from oil and gas production on public lands will be updated by the Bureau of Land Management.

In accord to the change in the climate of United Nation in 2009, the President Barack Obama pledged that by the year 2020 the U.S. would target of cutting overall greenhouse gas emissions by 17% from 2005 levels. As per Dan Utech, a top White House adviser to Obama for energy and climate change said that this methane strategy is one component and is one set of actions the administration will be going to take to get there.

Through new rules and voluntary action by industry the plan that was outlined on 28th March aims cut emissions of methane from landfills, coal mining, agriculture, and oil and gas systems. Amid the specific actions outlined on 28th March, 2014 by the administration to address methane pollution, the Interior Department on public lands will be proposing to update the standards to lessen venting and flaring of methane from oil and gas production. For the capture and sale of methane produced by coal mines on lands leased by the federal government, the Bureau of Land Management of the Interior Department in the month of April will commence to congregate public comment on the development of a program.

To reduce emission of methane from new landfills the Environmental Protection Agency will be updating standards this summer and for the existing landfills public comments will be taken on whether to update their standards. In the month of June, a joint biogas road map will be released by the Agriculture Department, the Energy Department and the Environmental Protection Agency, aimed at accelerating adoption of methane digesters a machine which will cut the emission of methane from cattle, in order to condense dairy-sector greenhouse gas emissions by 25% by the year 2020.

Since 1990, the methane pollution had decreased by 11% even as the U.S. government had pushed for a greater reliance on natural gas, however, the methane pollution is as intense on a longer view. Hence if no action is taken to reduce methane emission then in long term by the year 2030, methane pollution is anticipated to boost to a level equivalent to over 620 million tons of carbon dioxide pollution, as per the studies made by the Obama administration points.

According to the Environmental Defense Fund (EDF) commissioned analysis, by implementing on the existing emissions control technologies the industry could curtail the emissions of methane by 40% lower estimated 2018 levels. Moreover, the economical methane diminution opportunities would indeed save industry a combined USD 164 million/year.

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Fertiliser industry is in wait and watch stance for several policy changes

India’s one of the leadings players – chemicals and fertiliser sector, ought to endeavor amid top five chemicals and petrochemical industries and most of the fertiliser manufactures have taken a stance of wait-and-watch to explore more options to boost investments. In last few decades, in fertiliser industry very less of investments have taken place due to one after the crisis. According to the sources, natural gas which is a preferred raw material for urea manufacturing has significantly showed rise in the prices.

Moreover, natural gas is one of the most efficient and cleaner fuel & raw material when it comes to the production of ammonia, however with the inadequate availability of gas few urea producers were forced to use alternate liquid feedstock to keep their plants running at curtailed rates, whereas few manufactures have vigorously shutdown their plants. According to the sources, on 1st July, 2014 the oil ministry had passed a note to the cabinet demanding a fresh formula for gas price and will likely fragment the formula of Rangarajan for decisive domestic natural gas price.

According to the industry experts, the pricing formula that pushed the gas prices higher as suggested by the Rangarajan panel will be juggled around on certain elements by the government. Furthermore, the domestic prices through most calculations are expected to be double in near future from around USD 4.2/mBtu to around USD 8/mBtu from July, 2014.

Moreover, as per the sources to revive fertilizer plants several Indian public-sector companies are getting together that are also undertakings. Major fertiliser manufacturers of India Rashtriya Chemicals & Fertilizers Ltd., GAIL India and Coal India Ltd., will revive the Talcher unit of Fertilizer Corp of India by investing USD 1.3 billion with an aim of producing

1.2 million tons/annum of ammonium nitrate and urea. Furthermore according to the researched report, Rashtriya Chemicals & Fertilizers Ltd. which is noted as one of the leading producers of fertilizers in India will aim to double its turnover in the next five years.

However, Ananth Kumar the Union Minister for Chemicals, Petrochemicals and Fertilisers on 4th July, 2014 had announced that at present there are no such plans to boost the prices of urea or cut the subsidies and the market of urea is currently tamed and valued at the cost of Rs. 5,360 a ton. In addition to it Ananth Kumar has pointed out that his ministry had sought good reason of more incentives and taxes in the imminent Budget for the fertilisers, petrochemicals and chemicals sector.

As per the sources, China is one the first country to use coal based ammonia production which is probably one of the aggressive methods, however the country has also produced methanol for olefins by using coal as a primary hydrocarbon resource. 

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India to pay for crude oil purchase from Iran through UAE central bank

India is considering clearing some of its pending oil payments to Iran through the United Arab Emirates central bank, under a system that would enable Washington to keep a an eye on the flow of the funds.

India will be making a payment of $1.65 billion under this system which involves sending funds through the US Federal Reserve.

Tehran has been permitted to access $4.2 billion in blocked funds, which can be seen as a token of appreciation for Tehran's cooperation in the nuclear talks.

Asian countries like Japan and South Korea have made payments in accordance with a schedule decided upon by world powers in November.

The payment has been divided into eight instalments, ranging from $450 to $650 million each, from February to July. India will be taking the last three instalments of $550 million each. Under the new system, RBI would purchase dollars from authorised currency dealers. The RBI would then ask the Federal Reserve to transfer dollars to the UAE central bank's account there.

The Western sanctions on Iran prevented access to banking channels for tansfer of crude oil payments, affecting its economy.

Iran has asked India to pay $1.65 billion in three equal instalments through the UAE central bank. The system used to make the payments is complex but will ensure transparency.

Firstly, Indian refuners would be directed to deposit money in rupees to the account of an Iranian bank with UCO Bank, which would be transferred to the RBI for remitting to a new account held by the UAE central bank.

The UAE central bank would then make payments to the Iranian central bank in dhirams. Once the RBI receives payment confirmation, they would remit an equivalent sum in dollars in the UAE account at the Fed. The RBI would also pay for the dollar purchases using funds in the UAE rupee account at the Indian central bank.

Indian oil refiners Mangalore Refinery and Petrochemicals Ltd (MRPL.NS), Indian Oil Corp. (IOC.NS), Essar Oil (ESRO.NS), Hindustan Petroleum Corp (HPCL.NS) and HPCL-Mittal Energy Ltd. will have to pay about $4 billion  to National Iranian Oil Co.

In the first two instalments, MRPL would be paying nearly $238 million, Essar $232 million, IOC $57 million, HPCL about $8 and HPCL-Mittal about $15 million. India has been making 45 per cent of the payments by remitting rupees into Iranian account with UCO Bank, which Tehran plans to use to import goods from India.

India had relief on Turkey's Halkbank HALBK.IS pay for its oil purchases but this channel was closed in February 2013.

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Hurdles in the path to sustainable growth

The chemical industry of China faces innumerable challenges, including sustainability, feedstock change and human resource management. Despite the opportunities available to the chemical companies these challenges can prove to be major hurdles in the path to establish a sustainable economy.

China has been trying to reduce its dependence on non-renewable resources and its entry into the alternative feedstock sector can give rise to a new set of challenges. Changing the energy mix will have a direct impact on the chemical companies. The US petrochemical and energy sectors have reduced their reliance on heavy feedstock to lighter feedstock, a change brought about by the shale gas revolution. Thus, increasing number of crackers are replacing existing naphtha capacities. This transition, however, may not be so smooth for China. China has and continues to invest in naphtha-based ethylene capacities. Its crackers are dependent on the refining sector and naphtha accounts for 75 per cent of the feedstock use.

However, the increasing use of naphtha has pushed the government to make use of the country’s shale gas reserves to promote coal-to-gas technology. But this sector is still being explored and the plan of using coal as feedstock has not materialized. There isn’t a single coal-to-gas plant that has started commercial production. However, these projects would require huge investments and are likely to consume enormous amounts of resources. For instance, a plant producing 4 billion cubic meters of gas per year will consume nearly 16 million tonnes of fresh water annually.

Despite government and industry initiatives to establish a sustainable sector, sustainability continues to be a major issue for the chemical industry. Many chemical companies are yet to understand that sustainability will not only lead to reduced environmental impacts and carbon footprints, but also help reduce costs.

Chemical companies in China continue to focus on scale of operations and capturing new markets. However, forming joint ventures with firms in Europe and America will encourage Chinese companies to embrace sustainability. The Chinese government has formulated a plan which focuses on reducing carbon emissions and encouraging use of clean energy. The government has introduced scientific means to record carbon emissions of various firms in major industries.

The government should also encourage heavy industries to focus on returns as well as environmental protection. However, sustainability is not the sole prerogative of the government and industry players should also work toward establishing a sustainable economy.

Certain chemical companies have started investing in new products, using alternative feedstock and encouraging stakeholders as well as supply chain participants to be environmentally conscious. But there continue to be a large number of firms that fail to link their business strategies to sustainability goals. Sustainability should be made a priority, a vital business practice, in order to help China make hassle-free transition to a clean economy.

The industry continues to be plagued by poor management of human resources. Several enterprises are over-staffed with overlapping management levels and reduced efficiency. Chemical companies need to bring about changes in the organization structure and employ talented workforce to promote diversification and greater flexibility. The need of the hour is to reform company management and staff training programmes. 

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