Lithium demand soars while supply lags behind

by | Aug 9, 2017 | Uncategorized

The article below by Peter Stewart appeared in The Analyst column of the July 9 edition of Natural Gas Daily, a gas market publication by Interfax. Please note that all views expressed reflect the opinions of the author, and are for information only.

Lithium-ion (Li-i) batteries are the fastest-growing technology in the power storage sector, according to a recent report by Forum for the Future, which tapped insights from half a dozen key executives in the UK energy sector. But the rising cost of lithium and cobalt, which is a component of the cathodes used in Li-i batteries, could slow their progress.

Cheaper batteries are seen as a potential threat to gas demand because they could reduce the need for the fuel to deal with intermittency in renewable power generation. The World Energy Council issued a report on energy storage, E-storage: Shifting from cost to value 2016, which said Li-i batteries were among the most efficient technologies on offer and predicted a sharp fall in costs.

“The cost profile of lithium batteries has been strikingly similar to that of solar PV, falling four-fold in six years,” the Forum for the Future report said.

However, the vast bulk of solar PV cells are made from crystalline silicon, which is among the most abundant of elements in the earth’s crust. Costs have fallen sharply in recent years largely because of process improvements and growth in the scale of manufacturing.

In contrast, lithium is a relatively rare mineral, the price of which has risen sharply as demand has grown. Reserves are concentrated in a few countries: Chile and Australia account for the bulk of world production; and while a number of countries in Europe, Latin America, Asia and Africa have deposits, Argentina and China are the only other states with substantial reserves.

The price of lithium carbonate soared by as much as 300% year on year in 2016 because of an acute shortage of spodumene, a mineral rock that lithium is extracted from, which is mainly found in Australia. Chinese demand for lithium briefly pushed lithium carbonate prices above $20,000/ton in 2016. The price spike led to a scramble of mining activity that has now boosted production, but prices remain above $10,000/ton.

Cobalt is an even rarer commodity, with half of the world’s mined production coming from just one country: the Democratic Republic of Congo. Elsewhere, cobalt is produced as a byproduct of copper and nickel mining, both of which have declined because of low prices. Batteries account for 80% of refined cobalt demand. With China dominating the production of refined cobalt, supply is expected to remain tight as battery demand surges towards the end of the decade driven by increases in electric vehicle production.

Future demand

Elon Musk’s Tesla recently unveiled its Model 3 electric car, which uses Li-i batteries made by Panasonic. Tesla is also developing utility-scale applications for Li-i batteries. It signed a deal with the state of South Australia in July to install a 100 MW Li-i battery – more than treble the capacity of the world’s largest existing battery.

The US Geological Survey estimated demand for lithium rose by 14% between 2015 and 2016. Demand is expected to grow even more rapidly as electric vehicles are rolled out on a larger scale over the next few years, although it will slow as battery recycling becomes more common. New lithium production from Australia and Tibet should ease the upward pressure on prices over the next year, and alternative battery designs are available if supply is unable to meet demand in the longer term.

The World Energy Council’s report said that although Li-i is the leader, “many other possible battery chemistries are in development or in the research phase, and could well supersede these”. The report singled out flow batteries as a significant potential competitor.
 
Peter Stewart
(C) Resource Economist  

US refiners wean off Venezuelan crude

by | Aug 7, 2017 | Uncategorized

Faced with the possibility of tighter sanctions on Venezuela, US refiners are switching to lighter crude slates and sourcing more heavy grades from Canada and Mexico. Asian refiners look set to reap the benefit.
The US government last week imposed sanctions on 13 Venezuelan officials, and further sanctions are likely to be imposed in the next few weeks by the administration of US president Donald Trump. Even if these do not result in an import ban on Venezuelan crude, refiners look set to wean themselves off these grades due to the risk of supply disruptions as civil unrest in the country mounts. Marathon Petroleum and Valero have already said that they would process more light and sweet crude oil in the next quarter, thus relying less on Venezuelan and Middle Eastern barrels.
US refiners look to Canada, Mexico
Venezuela depends on exports of crude oil and refined products for 95% of its revenue. Most of the Venezuelan crude oil imported by the US is processed on the Gulf Coast. The best alternative for these refiners will be Canada, which also produces heavy sour grades similar in quality to Venezuelan crude. However, pipeline constraints and railway transport will add up to $2.50/bbl to refiners’ average costs, at least in the early stages of intensified sanctions. Canadian benchmark West Canada Select (WCS) prices have surged – the discount to light sweet benchmark West Texas Intermediate (WTI) has narrowed to around $5 per barrel ($/bbl) in recent days. The price gap between the Midwest and the Gulf Coast could lead to higher profits for refiners in the Midwest at the expense of their Gulf Coast counterparts.
US crude imports from Venezuela have varied between 600,000-800,000 bpd in recent weeks, accounting for almost 10 percent of US requirements. Citgo Energy, the US refining arm of Venezuelan state-run PDVSA, Valero Energy, Phillips 66, Chevron and PBF Energy have been the key buyers of Venezuelan crude in 2017. The crude slate at BPF’s 190,000-bpd Chalmette Refinery in Louisiana has been more than 90% Venezuelan oil in recent years, while crude processed in Phillips 66’s 145,000 bpd Sweeny refinery in Texas and Valero’s 370,000-bpd St. Charles refinery in Louisiana has predominantly been from Venezuela.
Although Mexico would benefit from less competition from Venezuelan crude oil on the US Gulf Coast, its exports to Asia and Europe would suffer. Mexico has traditionally exported nearly two thirds of its crude oil to the US. Other Latin American oil producers would also benefit from an import ban on Venezuelan oil but their overall production has been declining in recent months. Any increase in Middle Eastern crude oil exports to the US is likely to be marginal because of OPEC/ non-OPEC production cuts.
US service companies such as Halliburton and Schlumberger are expected to leave Venezuela completely due to sanctions. The companies announced in 2016 that they would be curtailing their business activity in the country, although this decision appears to have been triggered in part by PDVSA’s tardiness in making payments to service firms.
Middle Eastern crude oil grades face more competition
Surplus Venezuelan crude oil supplies are expected to be sold in Asia, primarily China and India. This has the potential to widen the discount of Middle East marker crude Dubai’s to North Sea Brent by 20 to 40 cents/bbl. Middle Eastern crude oils that are similar in quality to Venezuelan crude include Arab Heavy from Saudi Arabia and Basrah Heavy from Iraq. These grades will suffer, although the impact is reduced by OPEC production cuts which have significantly reduced supplies of heavy fuel oil-rich grades. Increased exports from Venezuela into Asia would be accompanied by a fall in the region’s imports from countries such as Mexico.
Venezuelan oil exports to India could hit 1 million bpd if the country stops exporting to the US. Reliance and Essar have the main Indian beneficiaries of heavy crude oil from Venezuela. Russia’s Rosneft, which receives Venezuelan oil in return for loans, will benefit from its 49% share of Essar Oil. PDVSA reportedly owes India’s ONGC Videsh about $600 million in late dividends for their joint crude oil project at San Cristobal. The Venezuelan state oil company is now settling these debts by dedicating exports of 17,000 bpd for this purpose. Rising Venezuelan exports could reduce Indian refiners’ interest in Canadian crude. State-owned Indian Oil Corporation (IOC) acquired its first cargo of US and Canadian heavy crude in July this year, as medium and heavy sour supplies from the Middle East have dried up.
China will also profit from additional deliveries from Venezuela. China’s indigenous oil production has suffered hugely in the wake of lower oil prices. Venezuela’s exports to China to service debts owed to the country have almost doubled since oil prices collapsed from their mid-2014 highs above $100/bbl.
Venezuelan imports to worsen economic woes
The debt burden will get worse if the US applies sanctions on the Andean nation. Venezuela also imports gasoline and US light sweet crude oil for blending with its own heavy crude oil. Caracas will have to pay a higher price for gasoline imports and would be forced to source light crude from long-haul suppliers such as West and North Africa, if sanctions prevent it from taking US light sweet crude. Given the country’s spiralling debt burden, this could intensify the social and economic problems it faces.
Venezuela needs to blend its crude with that from countries such as Libya, Algeria and Nigeria to reduce the concentration of impurities such as metals and salt. Naphtha has also been used to improve the quality of Venezuelan crude oils. PDVSA could replace US naphtha supplies with European supplies but once again would have to pay higher freight. Similarly, US gasoline can be substituted by the European material while diesel can be sourced from the Middle East or Russia, but again at higher cost.
Conclusions
US sanctions against Venezuela are expected to be supportive of global crude oil prices, particularly if the political instability results in supply disruption, or to a perception that Venezuela has become an unreliable supplier. Unless this happens, however, Venezuelan crude oil supplies will simply be redirected towards Asia, increasing the competition for Middle Eastern grades, but doing nothing to reduce global oil stocks. Heavy sour crude differentials would come under pressure, but outright prices would be little affected.