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Independent refiners in northern China, which ran fuel oil mixed with Sudanese crude to cut

costs when margins were bad, has shied away from the Singapore-supplied blend as profits

return with cheaper residue fuels.

But traders who had gained from selling the cocktail feedstock may find business again in

the same patch when China cuts retail pump prices, forcing the margin-sensitive “teapot”

refiners to fall back on lower-quality but cheaper raw material.

“We see other companies doing this trade, and we see demand from time to time from China for

this sort of material, which we think would continue for the short to medium term,” Mike

Scott, a director at European oil trader Trafigura, told Reuters.

Apart from refining margins, which also depend on oil product prices, he said demand for the

blended fuel hinged on the cost and availability of Russian M100 fuel, the staple feedstock

of “teapot” refineries.

Another factor is the supply of Venezuelan fuel oil offered by state oil firms to the

teapots.

The teapots in northern China turned to Singapore for supply earlier this year when their

feed of Russian straight-run M100 was diverted to Japan, where refiners were hankering after

cheaper feedstock.

The Singapore blend, a mix of Iranian 280-centistoke (cst) fuel oil and Sudan’s Dar Blend

crude oil, though inferior in quality, came close to the Russian M100 grade, traders had

said.

Unlike state-owned refiners Sinopec Corp and PetroChina , which are subject to political

pressures, the teapots operate mostly based on economics and are more sensitive to market

price fluctuations.

“It’s always about the pricing. They may not need to buy the cheaper blend anymore and can

go for higher quality feedstock,” said a Singapore-based trader.

SINGAPORE SUPPLY

China’s teapot refineries, which account for about a fifth of the country’s total refining

capacity, ramped up runs recently to meet improved demand from wholesalers stocking up on

motor fuels before an expected fuel tax hike, sources had said.

The refineries have been running at minimal rates or even ceased operations from July to

September, when record oil prices and poor products demand turned margins into the red.

Official Chinese data showed monthly fuel oil shipments from Singapore hit the highest this

year in April, at a total 583,754 tonnes of “No. 5-7 fuel oil” and “Other diesel and fuel

oil” — a category traders said might include fuel oil-crude mixtures.

The volumes from Singapore plunged below 200,000 tonnes in August and September and tumbled

to just 24,621 tonnes in October, as teapots faced high feedstock prices and heavy

stockpiles accumulated before the Olympics.

In particular, Singapore’s October supply of “other” fuel oil shrank to almost one-twenty

the volume in September at 9,488 tonnes, customs data showed on Monday, a figure that should

pick up if teapots turn to more blends from the city-state.

LID ON DEMAND

China’s pump prices are expected to be cut before the end of the year, a move that will

squeeze margins for the teapots and force them to look at cost-cutting solutions, some of

which Singapore blenders can offer.

But analysts were bleak on the outlook for overall fuel demand even after a price cut, which

they said meant business opportunities for mixed blends from Singapore would be limited.

“The demand side will put a lid on this trade,” said Victor Shum, an analyst with energy

consultancy Purvin & Gertz.

Analysts generally do not see a meaningful recovery in Chinese oil demand until second-half

2009, as the economic slowdown and impact from a massive stimulus plan will take more months

to properly unwind.

Margins could also be squeezed to a point where some teapots would choose to shut

operations, a path many had chosen over the last few months.

“If China cuts domestic diesel prices — and there’re expectations it will do so soon –

that will also narrow margins for the teapots and further limit the trade,” Shum said.

But other than Trafigura, there are other Singapore traders that seem to be betting the

mixed fuel oil blend will provide future business prospects.

Swiss energy trader Glencore International leased out most of its landed fuel oil tanks in

Singapore while taking up floating storage, a move some industry sources said signalled an

intent to supply more fuel oil-crude mixtures.

Inflation in Malaysia may dip to seven percent or lower either this month or next based on

the downward trend of the prices of raw materials and basic commodities, says Minister of

Domestic Trade and Consumer Affairs Datuk Shahrir Samad.

“The expected downtrend is based on the fall in the prices of commodities and food items

such as flour and rice which have declined tracking the price of crude oil, thus easing the

pressures on Consumer Price Index,” he said after officiating at the CSR and Sustainability

Business Conference here Tuesday.

Inflation for October fell to 7.6 percent from 8.2 percent in September.

He said although the interest rate cut by Bank Negara Malaysia yesterday would certainly

help growth because of the lower cost of funds it would put pressure on the ringgit and thus

increased the cost of imports.

Shahrir said it was not possible to lower the fuel subsidy by more than 15 sen at any one

time as it would affect trade.

He said the government was not reneging on its promise to maintain 30 sen subsidy per litre

for petrol.

“It is just that the prices of the global crude oil prices dropped at a faster rate than the

30 sen subsidy,” he said.

Shahrir said the crude oil price has gone back about US$50 per barrel, and since the

government worked on monthly average, there was still room for the fuel price to come down.

its budget were conceived and developed when the EU was considerably smaller and faced energy challenges of a different dimension compared to today. The EC’s Green Paper suggests developing the grid along the
lines of ensuring security of supply, while at the same time encouraging use of renewables in line with its 20/20/20 framework and its third liberalisation package. There has been an attempt to tie up these ends in this strategy paper.

Nevertheless, these problems have largely been identified before. The main problem the EC
faces is getting co-operation from the 27-member bloc, and encouraging the bloc to speak
with one voice. Other projects, for example, have been identified as priority TEN-E projects

- such as Nabucco - and the collective movement on these has been slow. The EC is examining

the issue from a top-down perspective, with little regard for commercial viability. On one

hand, the EC is pushing for a single market with the fundamental logic that “the market will

provide”. Yet on the other, it is proposing the pursuit of projects that may fly in the face

of free-market logic, purely in the political interests of diversifying supply.

Oil slipped back to $54 a barrel on Tuesday, chipping away at a near 10 percent rally after

a rebound in equity markets and expectations of another OPEC cut helped the market to its

biggest two-day gain in two months.

Oil prices leapt by 9.1 percent on Monday after Washington agreed to pump $20 billion into

struggling Citigroup <C.N>, the second-largest U.S. bank, sending the U.S. dollar to a

two-week low against the euro and making oil more attractive.

U.S. light crude for January delivery fell 56 cents to $53.94 a barrel by 0207 GMT, having

rebounded from the 3-½ year low of $48.25 it hit on Friday. Prices have tumbled by nearly

$100 from their record high in July as the global economic crisis eats into demand in

consumer nations.

London Brent crude slipped 28 cents to $53.65.

Oil traders are now looking ahead to Saturday’s informal OPEC meeting in Cairo for further

action from the cartel, which agreed a 1.5 million barrels per day cut in oil production

from Nov. 1, supply curbs that may not be fully felt until December or even January when oil

reaches refineries worldwide.

Analysts were divided over whether further action was immiment, with 8 of 15 oil analysts

polled by Reuters saying OPEC would likely wait until its policy-setting meeting in Oran on

Dec. 17 to tighten supplies further.

“The only support is coming from OPEC. And the market might have to wait for the second

cut,” said French bank Societe Generale in a research report.

The weakness of the oil market calls for another OPEC cut of more than one million barrels

per day (bpd), the group’s president, Chakib Khelil, said on Monday, but added the precise

amount would only become clear in December. [

Oil prices have not risen for more than two days in a row since mid-September, with fleeting

rallies quickly sold as investors flee riskier markets or sell commodities to cover falling

equity positions.

Bringing some seasonal support to the market, cold weather in the United States is expected

to send demand for heating oil, concentrated in the Northeast, 10 percent above normal this

week, according to the National Weather Service.

Stronger winter demand may also be reflected in U.S. oil and products data, to be released

on Wednesday by the Energy Information Administration

Stocks of distillates — which include heating oil — are likely to have fallen by 1 million

barrels, according to a Reuters poll. Crude stocks likely rose by 400,000 barrels and

gasoline stocks by 700,000 barrels in the week to Nov. 21.

“Cold weather and OPEC are supportive. But underlying demand fundamentals are bearish,”

Societe Generale said.

Despite news that average U.S. gasoline pump prices had fallen below $2 for the first time

since March 2005, the AAA motorist group forecast last week that Thanksgiving travel will

decline this year for first time since 2002.

lio investments to reduce perennial vulnerability. However, it remains to be seen if the

government will be willing and able to implement these measures and more significantly if it

will be able to survive the political backlash that follows the harsh conditions called for

by the IMF.

Yesterday, the European Commission released a package of proposals aimed at addressing
security of energy supply and improving Europe’s energy infrastructure.

Significance The European Union (EU) has published a series of energy security, solidarity, and efficiency proposals.
Implications The focus is on diversifying supply away from Russia and unifying member states in their external energy policies in order to better leverage Europe’s buying power.
Outlook Published just ahead of an EU-Russia summit, the emphasis on strong tactics with

producer countries could aggravate Russia.
The European Commission (EC) has today proposed a wide-ranging energy package which gives a

new boost to energy security in Europe, supporting the 20-20-20 climate-change proposals

which should be agreed by December, according to the Commission. The EC put forward a new

strategy to build up energy solidarity among member states and a new policy to stimulate

investment in more efficient, low-carbon energy networks. There is also a new EU Energy

Security and Solidarity Action Plan which sets out five areas where more action is needed to

secure sustainable energy supplies, as well as papers on energy efficiency and wind energy.
United We Stand?

The EC proposes a five-point security and solidarity action plan:

· Infrastructure needs and the diversification of energy supplies;
· External energy relations;
· Oil and gas stocks and crisis response mechanisms;
· Energy efficiency;
· Making the best use of the EU’s indigenous energy resources.

The most interesting points are the first two, in which the EC outlines the potential

strength of Europe as a solid bloc, united in energy policy. As part of infrastructural

development, the Commission proposes a Baltic interconnection plan, to better link the

region with the rest of the EU. In the second point, the EC says that Europe must “intensify

its efforts in developing an effective external energy policy; speaking with one voice” and

adds that “as much as Europe seeks security of supply, external suppliers and industry seek

security of demand”. It further states that the “important role of Africa in the EU energy

security needs to be assessed”.

It was reported earlier in the week that the EC was effectively seeking to create a “buyers

cartel” in the face of Russian dependency. Clearly, the EC has stopped short of that, but

the sentiment behind their actions is the same. This idea has surfaced before, notably in

the IEA’s September report into EU-Russia energy relations. The report proposed that the EU

act collectively to deal with large energy suppliers, further stating a belief that Russia

was more dependent on Europe than vice versa. A key point to note in this discussion is the

relative absence in both EC and IEA papers of the role of transit states, and the relatively

short-term outlook as to where in the world Russia exports its gas.

The EC’s paper says a framework for co-operation with transit states is also provided by the

“Energy Community”, which is building an integrated energy market in South-East Europe,

anchored to the EU. The EC adds: “If negotiations are successful, the accession of Ukraine,

the Republic of Moldova and Turkey to the Energy Community would catalyse their energy

sector reforms and create a mutually beneficial enlarged energy market based on common

rules”, in effect co-opting transit states. This is foreign policy creeping into energy

policy, as it would keep these states - in particular Ukraine - West-facing rather than

leaning towards Russia at a political level. This idea also overlooks the unreliable role of

these states - again notably Ukraine - in transporting gas to Europe after Russia has

fulfilled its part of the deal.

The idea of a “buyer’s cartel” being formed after the EU has voiced fears of the nascent gas

troika created by Russia, Qatar, and Iran, opens the EC up to the charge of holding double

standards. However, pushing the idea that member states must speak collectively could put an

end (if adopted) to the problems associated with certain member states signing long-terms

deals with Gazprom, which again affects these states’ foreign policies.

Outlook and Implications

There will be around four months for each consultation on these papers. They are wide

ranging in scope and share an underlying ethos that technology should play a lead role in

energy strategy. The papers acknowledge the importance of incorporating renewable sources

into the grid, and also flag-up a future Communication on Financing Low Carbon Technologies

aimed at promoting carbon capture and storage.

Despite the EC’s careful emphasis on EU-Russia energy “interdependence” - that if the supply

is guaranteed then the market is guaranteed - the message risks being misinterpreted by

Russia. One the one hand, the EC talks about diversifying supplies and focusing on Africa,

yet on the other, calls on Russia to “play along”. Although much of the draft strategy is

innovative and forward looking, the same old problems are likely to complicate matters.

Australia has granted 13 new offshore petroleum permits, which have been earmarked for total

exploration spending of A$500 million ($317 million), federal Minister for Resources and

Energy Martin Ferguson said in a statement on Monday.

“In the current economic climate, it is encouraging that so many companies want to invest in

the future of Australia’s petroleum industry,” Ferguson said. “Exploration is vital to prove

up new reserves and maintain a pipeline of new developments for the nation’s ongoing energy

security and future exports.”

The new permits, released in 2007, are located in Commonwealth waters off Western Australia

and the Northern Territory and include four areas eligible for the Designated Frontier Area

tax incentive. A total of 24 bids were received for the 13 areas.

Off Western Australia, four permits were awarded in the Browse Basin to Hunt Oil Company

(WA-413-P and WA-414-P), Murphy Australia (WA-423-P), and Nexus Energy Australia NL

(WA-424-P); three were awarded in the Canning Basin to Woodside Energy (WA-415-P, WA-416-P

and WA-417-P); one was awarded in the Carnarvon Basin to Finder Exploration (WA-418-P); and

three were awarded in the Bonaparte Basin to Goldsborough Energy (WA-420-P and WA-421-P) and

National Oil Corporation (WA-422-P)

Shell India, which sold spot LNG for more than $22/MMBtu to Indian customers when demand was

at its peak in summer, has found just one or two buyers since mid-October.

In fact, one of the buyers said that Shell’s storage facility was full with October cargo

and so it has had to keep one cargo on board a vessel for 30 to 45 days, hoping for a spike

in demand in the winter.

Gujarat Paguthan Energy Corporation, wholly owned by Hong Kong-based CLP group, has been the

only spot LNG buyer in the last three weeks.

With the price of naphtha having fallen below $8/MMBtu equivalent energy price, it is the

preferred fuel for industrial consumers.

Natural gas liquids are also available at a competitive price of around $10/MMBtu, making it

a popular choice for bulk consumers. However, even NGL sales have suffered because of low

naphtha prices and so ONGC, which supplies NGL in India, has gone in for exports. ONGC

exported 28,000 mt of NGL on November 17.

Some buyers such as Gujarat State Petronet Corporation, which supplies gas through its

subsidiary Gujarat State Petronet Limited to industrial and domestic consumers, and

automobile CNG dispensers across the state, has been selling at a price lower than its

purchase price.

India’s only spot LNG seller, Shell Hazira LNG, has been banking on buyers who do not have

the flexibility to use alternate fuel such as naphtha or NGL. These include gas distribution

companies such as GSPC, fertilizer companies such as Krishak Bharti Cooperatives or KRIBHCO

with gas-fired plants, or power companies such as National Thermal Power Corporation.

However, many of these buyers are already saddled with high price spot LNG bought during the

past couple of weeks. “We have stayed away from fresh purchase of spot LNG as we are

struggling to sell the gas bought at more than $18/MMBtu,” a GSPC official said.

Shell India, which operates a termin

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Engen will import refined oil and oil products after a fire destroyed the main processing unit at its South African crude oil refinery, the country’s second largest, the company said on Thursday.

Engen said the refinery, which has a capacity of 135,000 barrels per day, would be shut for months of repairs after fire broke out shortly after midnight at the plant and burned for three hours before being put out.

The normal production capacity at the refinery, in Durban on South Africa’s eastern coast was 130,000 bpd, Tania Landsberg, Engen’s spokeswoman, said.

Landsberg said the fire destroyed some 50,000 litres of crude and the shutdown would force it to import refined oil and oil products for the period of the closure.

South Africa does not have enough refining capacity and relies partly on imports of products to meet fast-growing demand.

Engen is South Africa’s biggest supplier of oil and related products, with a market share of about 26 percent, ahead of a BP Plc and Royal Dutch Shell Plc venture. BP and Shell run the Sapref oil refinery, South Africa’s biggest.

Landsberg said the Engen refinery’s main crude unit had undergone scheduled maintenance in October.

Investigations continued into the cause of the fire and the company was evaluating how long repairs would take, she added.

“It looks like the shutdown will last for quite some time. We are not sure yet exactly how long it will last, it may be months rather than weeks,” Landsberg told Reuters.

“The main crude unit has been affected and the damage by the fire has been quite significant,” she added.

“The fire comes just after a turnaround, which was completed two weeks ago on the main crude unit,” Landsberg said.

She said the company was evaluating its contingency plan, which includes importing refined products.

Engen is 80 percent owned by Malaysia’s state firm Petronasand the rest is held by South Africa’s black-owned Worldwide African Investments Holdings.

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Crude oil may fall next week on speculation that demand will further decline as the recession in the U.S., Europe and Japan spreads to emerging markets.

Twenty of 34 analysts surveyed by Bloomberg News, or 59 percent, said prices will decline through Nov. 28. Five respondents, or 15 percent, said oil will rise and nine forecast markets will be little changed. Last week 55 percent expected futures to decline.

The Standard & Poor’s 500 Index plunged to its lowest close in 11 years yesterday after reports signaled a deeper U.S. recession. The Organization of Petroleum Exporting Countries, the International Energy Agency and U.S. Energy Department slashed demand projections this month because of the economic outlook.

“Nymex oil futures will continue to fall in line with the erosion of the global economy,” said Mordechai Abir, director of energy research at Burnham Securities Inc. in New York.

The crude oil contract for January delivery has fallen $8.18, or 14 percent, to $49.42 a barrel so far this week on the New York Mercantile Exchange. Futures have dropped 66 percent from the record $147.27 a barrel reached on July 11.

The oil survey has correctly predicted the direction of futures 49 percent of the time since its start in April 2004.

Bloomberg’s survey of oil analysts and traders, conducted each Thursday, asks for an assessment of whether crude oil futures are likely to rise, fall or remain neutral in the coming

week. The results were:

RISE NEUTRAL FALL

5 9 20

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This week, Asian markets were initially energized by China’s announcement of a near $600 billion economic stimulus package for its own economy. Although I have never been a fan of government-fueled stimuli, the relative wisdom of the plan hinges on the source of funds the Chinese government decides to utilize. Their best choice would be the country’s nearly $2 trillion in foreign reserves, the largest portion of which is held in U.S. Treasury and agency debt. This pile of dollars, which really amounts to no more than a subsidy for U.S. consumers, does nothing to benefit Chinese citizens.

If it does decide to employ this ocean of cash, China will become a net seller of U.S Treasuries just as the U.S. Government itself will be pushing up its issuance of new Treasury bonds into record territory. With two huge sellers and few major buyers (just about every major creditor nation having problems of their own), the Federal Reserve will become the only reliable customer. As a result, not only will the Fed monetize our own economic stimulus packages, but will be forced to provide the same service to the Chinese.

Most economists feel that China will maintain the status quo by borrowing or printing the funds for their own stimulus while continuing to hoard its trillions of existing U.S. dollars. Most also believe that the Chinese will substantially increase their dollar holdings in order to finance America’s never-ending string of bailouts and its ballooning Federal deficit, which is soon to pass $1 trillion annually. These optimists are in for a rude awakening.

The Chinese cannot follow such a course without unleashing intolerable inflation at home. Selling down their vast reserves of U.S. debt and using the proceeds for domestic infrastructure projects (or anything else for that matter) is a vastly superior stimulus mechanism than “lending” to Americans so we keep “buying” their products. When Chinese authorities finally figure this out the United States will suffer the consequences.

<!– /* Style Definitions */ p.MsoNormal, li.MsoNormal, div.MsoNormal {mso-style-parent:”"; margin:0in; margin-bottom:.0001pt; mso-pagination:widow-orphan; font-size:12.0pt; font-family:”Times New Roman”; mso-fareast-font-family:”Times New Roman”;} @page Section1 {size:8.5in 11.0in; margin:1.0in 1.25in 1.0in 1.25in; mso-header-margin:.5in; mso-footer-margin:.5in; mso-paper-source:0;} div.Section1 {page:Section1;} –> Indonesia’s oil and gas regulator BPMIGAS has announced that oil and gas companies will soon be required to use domestic banks to finance their operations, according to the Jakarta Post Newspaper. BPMIGAS chairman R. Priyono said that the regulation could be put in place as soon as next month and would be mandatory for both national and foreign companies otherwise their expenses would not be reimbursed under the cost recovery scheme. According to Priyono the regulation aims to increase the liquidity of domestic banks as well as improving their balance of payments.

Significance: The announcement suggests that BPMIGAS is heeding the recommendation of the National Development Planning Board which last month suggested that local banks should support energy projects because the low percentage of non-performing loans to the energy sector made the risk of credit default relatively low(see Indonesia: 27 October 2008: Indonesian Energy Firms Encouraged to Seek Domestic Funding to Avoid Credit Crunch).At the end of August 2008 the energy sector only accounted for around US$4.2 billion or 3.5% of total domestic bank credits disbursed. Given that oil and gas companies are expected to spend US$11.8 million next year, the regulation would significantly increase domestic lending for energy projects. The government may be hoping that the regulation will encourage inter-bank lending, after the lowering of statutory reserve requirements for banks by 4% last month had a limited impact. However at the same time the move is likely to increase anxiety among foreign investors already worried about revisions in cost recovery mechanisms and Pertamina’s moves to acquire farm-in rights in large development projects. They may also be concerned about corruption in Indonesia’s banking sector following the successful prosecution of the Indonesian Central Bank’s former governor Burhanuddin Abdullah on charges of graft. If passed the regulation could deter investor-interest in 31 new oil and gas blocks due to be awarded in spring 2009.