A crisis of its own making

Ng Weng Hoong, Contributing Editor,

considers why inadequate oil stockpiling is intensifying Asia’s energy crisis.

Remember ‘peak oil,’ the concept that global supply will one day no longer keep up with energy demand growth as reserves deplete and production falls? Through the second half of the 2010s, peak oil seemed discredited as prices collapsed under the weight of the shale-based oil production boom in the US. Today, it is back with a vengeance as the Brent crude oil price has rebounded above the US$100/bbl level while retail fuel prices have hit record highs around the world following Russia’s military invasion of Ukraine on 24 February 2022. With Russia’s oil, gas and coal supplies sanctioned off by the

West, the world is suddenly facing severe energy shortages that could last for months, if not years, to come. Some of Asia’s poorest countries gave a glimpse of humanity’s peak-oil future: protracted supply shortages, loss of essential services, and economic decline. The mostly energy-deficit region of over 4.2 billion people has been particularly hard hit, made worse by the inadequacy of oil stockpiling programmes in several countries. The biggest surprise has been Australia. The wealthy, resource-rich country with just 26 million people suffered its worst energy shock in nearly 50 years as electricity and fuel prices surged to record highs. Power outages hit many parts of the country in June. While the Russia-Ukraine war provided the trigger,

Australia’s failure to build up its oil stockpile over the past decade contributed to an energy crisis of its own making that portends worse to come. China and India have been gorging on discounted Russian oil, but imports are starting to slow down as the two Asian giants are running out of tank storage capacity while tanker shipping costs have risen sharply. India has seen its currency plunge to record lows, its finances drained by increasingly costly energy and food imports. Pakistan is struggling to avoid economic collapse amid worsening power and fuel shortages, exacerbated by low oil stockpiles and poor management of inventories. Sri Lanka is the showcase for the worst outcome of Asia’s energy crisis. It has the unwanted distinction of becoming Asia’s first economy to ever run out of fuel supplies. On 13 July, its storage tanks were depleted, just days after protestors had driven former President Gotabaya Rajapaksa out of office and out of the country. “As of now, Sri Lanka has run out of fuel. There is no fuel even for essential services,” declared the country’s Daily Mirror newspaper. A week before protestors stormed into the president’s official residence in

Colombo, Sri Lanka’s Petroleum Minister, Kanchana Wijesekera, had pledged to keep fuel supplies flowing. He met representatives from the country’s main retailers and storage companies, Ceylon Petroleum Corp. (CPC) and Ceylon

Petroleum Storage Terminals Ltd (CPSTL) in a desperate but vain attempt to ensure distribution to the country’s essential services. On 21 July, Wijesekera tweeted that Sri Lanka had imported its first emergency cargoes of gasoline and heavy fuel oil in recent weeks. It remains to be seen when regular fuel supplies will resume as the country is effectively bankrupt while it awaits aid from international agencies and neighbouring India. Thailand has emerged as the latest centre in Asia for Saudi Arabia to store, trade and distribute oil in the region. As part of an agreement to deepen energy cooperation, Thailand’s PTT and Saudi Aramco said they will jointly undertake crude oil sourcing and the marketing of refined and petrochemical products, as well as LNG. The agreement follows the Thai government’s decision to increase the nation’s oil stockpiles following the start of the Ukraine war. In March, the

Energy Ministry ordered oil companies to raise their petroleum reserves to meet 70 days of domestic consumption, up from 60 days previously. In Asia, tankers have usurped some of the stockpiling role played by land-based storage terminals. With Russia’s oil made illegal by sanctions, traders have increased their hoarding and stockpiling of crude and products in ocean-going tankers where they are harder to track.

China and India to lead global liquids storage capacity expansion

Driven by growing fears of a new energy crisis, the world will add a total of more than 1 million bbl in liquids storage capacity by 2026, said research firm Global Data.

China and India will lead the charge as they are among the world’s largest energy-deficit economies. With insufficient domestic oil and gas reserves, both countries will increasingly rely on imports to meet the rising energy needs of their combined 2.8 million population. From 2022 to 2026, China will add 359 million bbl or nearly 35% of the world’s new storage capacities, while India will contribute 153 million bbl or 15%, said Global Data Oil and Gas Analyst Himani Pant Pandey. The company made these forecasts in its latest report on the state of the world’s liquids storage industry.

Outlook for China and India

Pandey said he expects China to begin work on 20 projects including new terminals and expansions of existing facilities over the next four years. “With a capacity of 132 million bbl, the Zhoushan V expansion project will be the largest liquids storage terminal in the country, followed by Zhanjiang IV and Shanshan, each with a capacity of 44 million bbl,” he said.

Pandey expects India to start newbuild and expansion work on more than 40 projects through 2026. “Chandikhol will be the largest upcoming liquids storage terminal in the country with a capacity of 30 million bbl by 2026, followed by Bikaner with a capacity of 27.5 million bbl.”

President Biden criticised

The normally mundane act of oil stockpiling has become the latest point of irritation in the increasingly troubled ties between the US and China. With gasoline prices at record high levels in the US, President Joe Biden recently came under fire from domestic critics for apparently contributing to China’s oil stockpiling programme.

Members of the opposition Republican Party have called for the President to be impeached for selling 950 000 bbl of crude oil from the US Strategic Petroleum Reserves (SPR) to a subsidiary of China’s state-owned Sinopec.

Unipec America was among 12 companies that won bids to buy SPR crude at market prices, said the US Department of Energy in a statement on 21 April. The sale from the nation’s reserves is part of the Biden administration’s efforts to combat rising oil prices that it has blamed on Russia’s invasion of Ukraine.

Since the start of the conflict, US gasoline prices have touched a record high of US$6/gal. in some cities while Brent crude briefly hit a 24-year high of over US$130/bbl.

While most of the 30 million SPR bbl in the April sale went to US firms including ExxonMobil, Atlantic Trading & Marketing, Chevron, and Marathon, a portion was exported to Europe. But it was the single cargo to the Chinese state firm that caught political fire.

Several Republicans accused the Biden administration of assisting the Chinese government, rather than helping hard-pressed US consumers. However, the facts did not support that conclusion. Consultant Rystad Energy explained that the exports made commercial sense as US oil companies are unable to process the released crude due to their limited refining capacity. “Domestic refining capacity in the US remains depressed compared to pre-COVID levels, so it’s no surprise that government intervention to support crude supplies has resulted in an increase in exports of domestically produced light barrels,” said Artem Abramov, Head of Shale Research at Rystad Energy. By exporting its surplus crude, the US is helping to dampen refined fuel competition from Europe and Asia.

Australia pays for insufficient oil stockpile

Australia is reeling from a double whammy of record fuel and electricity prices made worse by years of official neglect of the country’s oil refining industry and stockpiling mandate. Gasoline prices at the pump have surged more than 60% over the past year while electricity rates have risen 140% in the first few months of 2022. Much of this can be blamed on the global energy shock of 2022, brought on by the sudden loss of Russia’s oil, gas, and coal supplies from Western trade sanctions. The markets could be driven higher by the uncertainties over Russia’s 11 million bpd of oil flows coinciding with a slowdown in US shale-based production amid rising global energy demand.

But Australia has aggravated its own suffering through the complacency of successive governments on the issue of energy security over the past 15 years. The country’s once thriving oil refineries are near extinction from prolonged capital starvation while strategic petroleum reserves have long become the orphan of national energy policy.

The newly elected government of Prime Minister Anthony Albanese will likely add to the country’s energy woes. Promising to address the country’s worsening climate crisis, Mr Albanese is expected to push ahead with promoting renewable energy and taxing fossil fuels that will only pile additional inflationary pressures onto a slowing economy.

Stockpile data in dispute

In one of its last acts, the defeated conservative government of former Prime Minister Scott Morrison apparently exaggerated the actual level of the country’s strategic petroleum reserves. In April, the Australian Institute revealed that the country’s strategic reserves could meet only 32 days of consumption, not 89 days as suggested by former Energy Minister Angus Taylor.

In a research paper highlighting Australia’s declining fuel security, the Canberra-based think tank accused the Morrison government of having misled the public. “The International Energy Agency (IEA) guidelines require Australia to hold 90 net import days’ worth of fuel,” it said. Instead, the institute found that “we currently hold only 68 ‘IEA days’ of reserve.”

The public policy institution suggested the Morrison government had understated the dire state of the country’s fuel supply by including in its count of strategic reserves “some 21 days of fuel in transit to Australia or onboard ships in foreign ports.” As many of the ships are foreign owned, the institute warned: “There is no guarantee that this fuel would reach Australia in the event of a crisis. Our strategic fuel

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supply is particularly vulnerable as our two remaining refineries are set up to produce largely petrol (gasoline) rather than aviation fuel and diesel.”

Australia has shut down five refineries with a combined capacity of 553 000 bpd over the past decade. Ampol’s 108 000 bpd plant in Lytton and Viva’s 129 000 bpd Geelong plant are being kept alive by state subsidies. “Australia is almost entirely reliant on imports of refined fuels and crude to meet consumption. In FY2021, 91% of all fuel consumed in Australia was imported,” said the Australia Institute. “Fuel security has decreased over the last decade.”

Supporting this conclusion, the Lowy Institute slammed Australia’s approach to energy security as “a debacle”. The Sydney-based think tank derided the Morrison government’s landmark move in 2020 to stockpile some of its strategic oil reserves in the US as a “piecemeal” move that has “done very little to improve the country’s physical energy security.” The long-standing fear that meeting the 90-day stockpile requirement could significantly boost fuel prices has been a major reason for Australia’s reluctance to invest in expanding its strategic reserves.

Shell building oil products terminal in the Philippines

Following the closure of its only refinery in the Philippines, the local subsidiary of Shell has been expanding its oil import, storage and distribution business. Pilipinas Shell Petroleum Corp. (PSPC) recently announced it has begun constructing its fourth oil products storage terminal, but did not reveal the cost. PSPC said the 421 000 bbl terminal in the country’s southern island of Mindanao is due to begin operating in 3Q24. It will boost the company’s total storage capacity by 16% to 3 million bbl or 474 million litres.

PSPC said the terminal will enhance energy security in the region, which often experiences fuel supply disruptions caused by storms, floods, and other natural disasters. “The Darong Import Facility will allow us to fulfil our commitment to support economic activities as the Philippines continues to recover from COVID-19. It strengthens our capacity to continue to deliver quality fuels to our customers,” said Serge Bernal, Pilipinas Shell Vice President for corporate relations.

The Santa Cruz Storage Corp. (SCSC) will design, construct, and operate the facility for Shell under an exclusive term contract with an option to extend. The terms were not disclosed.

Shell’s other storage terminals

PSPC currently owns and operates a 166 000 bbl import terminal in Batangas city and a 340 000 bbl facility in Subic Bay, both located on Luzon Island, the country’s main economic region. The company’s largest terminal, with a capacity of 566 000 bbl, is located in Cagayan de Oro City in northern Mindanao. In 2020, PSPC shut down its 110 000 bpd refinery in Batangas and converted it into an import terminal to store and distribute oil products for the domestic market. Citing “demand destruction” from the pandemic, the company decided to shut down what used to be the Philippines’ second largest oil refinery, which started up in 1962. It then converted the facility into an oil storage terminal.

IndianOil to expand crude oil storage capacity in Gujarat state

Indian Oil Corp. Ltd (IOC) will build nine crude oil tanks with a combined storage capacity of 540 million litres (3.4 million bbl) at Mundra Port in India’s northwestern state of Gujarat. The investment will add to the port’s existing 12 tanks and boost total storage capacity by 75% to 1.26 billion litres, said Mundra’s owner, Adani Ports and Special Economic Zone Ltd (APSEZ). APSEZ and IOC did not reveal the project’s cost or when construction will begin. The new tanks will mostly stockpile crude oil for processing at IOC’s refinery located 1250 km away at Panipat, north of New Delhi. The Mundra tanks are linked to the 15 million t refinery, now undergoing an expansion by pipeline.

The new tanks are expected to be operational before the completion of the refinery capacity’s expansion to 25 million t by September 2024. APSEZ said its Mundra facilities are already providing the logistical services to discharge crude from very large crude carriers (VLCCs) berthed some 4 km off the coast into its storage tanks at the port before delivery by pipeline to the refinery.

“Mundra Port is a major economic gateway that serves the northern hinterland of India. As IOC’s trusted long-term partner, APSEZ is well equipped to handle the additional 10 million t of crude oil (supply) at our existing single buoy mooring (SBM) at Mundra,” said Karan Adani, APSEZ’s CEO.

Over the past decade, India has been expanding its oil, chemical, and gas storage facilities as well as refining capacity to meet the country’s rising energy demand. Russia’s war on Ukraine has added urgency to India’s programme to expand its energy-infrastructure as well as strategic petroleum reserves.

Vopak joint venture

Dutch storage giant Royal Vopak has completed its joint venture (JV) with logistics provider Aegis Group to become a major independent fuel and chemicals terminal operator in India. In a joint statement, the partners announced that Aegis Vopak Terminals will become the largest provider of independent tank storage services for LPG and chemicals in India. “LPG is earmarked by the Indian government to provide cleaner and safer cooking fuels for households,” it said. Since the announcement of the JV plan in July 2021, Aegis Vopak has added three terminals to expand its network to 11 terminals in five ports along the east and west coasts of India. The terminals have a combined capacity of 1.5 million t.

Raj Chandaria, Aegis Logistics Ltd’s Chairman, said the JV will accelerate his company’s growth and enable its diversification into the energy storage business including LNG. Eelco Hoekstra, Royal Vopak’s Chairman and CEO, has set a goal for its new investment “to deliver growth over the next 10 years in line with the new [JVs] and India’s ambition for LPG.” He praised Aegis Logistics as “a reputed local partner with a ready organisation and proven track record of conceiving and executing tank farm assets in strategic locations along the Indian coastline.”

Vopak’s focus on meeting India’s demand for LPG storage ties in with its growth strategy. The company said it will “expand its network of LNG and LPG terminals at strategic locations” to increase exposure to the global gas markets.