May 6, 2016 -- Global Structural Shift -- The World Moving Away From Diesel; Moving Toward Gasoline -- RBN Energy

This will be another busy day. It will start with the April "Jobs Report."

Before we get to the Bakken, some stories making the rounds.

Perhaps the biggest story of the week: the EU scraps biofuel targets (hopefully you can get to the site despite the annoying "ads").

The European Union has scrapped post 2020 biofuel targets, thanks to pressure from green groups concerned about environmental damage.

EU laws requiring member states to use “at least 10%” renewable energy in transport will be scrapped after 2020, the European Commission confirmed, hoping to set aside a protracted controversy surrounding the environmental damage caused by biofuels.

The European Commission will table a revision of the Renewable Energy Directive at the end of 2016, aiming to further push renewable sources like wind and solar across the European Union.

On transport, “we will look specifically at the challenges and opportunities of renewable fuels including biofuels."

The current directive, adopted in 2008, requires each EU member state to have “at least 10%” renewable energy used in transport by 2020 – including from biofuels and other sources like green electricity.

This has drawn criticism in Britain, where reaching the 10% target will require doubling current biofuel supply, adding a further penny per litre on pump prices.

But the 10% target will be dropped in the new directive.

I doubt the additional penny per litre had any effect on this decision. As long as Iowa is the first state to hold presidential caucuses/primaries, the biofuel mandate in this country will never be scrapped.

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Coal, Natural Gas, Wind In North Dakota

This is a fascinating story coming out of North Dakota, being reported by The Bismarck Tribune. Lots of information about the convergence of coal, natural gas and wind.

It will be fascinating to watch the grid the next few years. This is tricky, tricky stuff. The story is about Great River Energy's coal-fueled power plant, Stanton Station. The plant gets its coal from Spring Creek Mine in Montana.

Due to decreasing demand for electricity from this plant (mostly due to wind competition), the plant ran only four days in the previous 18 (at the time the story ran).

The plant sometimes had to run at a financial loss:

It takes 16 hours to bring Stanton Station to full load once it has been shut down so, in short periods where the price of power on the market drops below what Stanton could make it for, it made sense to keep it running.

With mild weather, those periods of lower prices are getting longer.

The plant powered up and ran March 27-28.

“Those were not windy days. The 29th, the wind started blowing again,” said Lancaster, explaining the facility was taken offline when market prices dropped. It returned to production twice for one-day stretches.

“It’s been off ever since,” Lancaster said. “We felt like we were economically forced into this. We need to do what’s in the best interest of our members, so we’re not operating the plant at a time when we’re not even getting paid for the coal we’re burning …. We’re really affected by whether the wind blows.”

Even GRE’s larger Coal Creek Station, which sends power to Minnesota via a direct current transmission line, has been affected to some extent, reducing its load and running lower than capacity.

Not only wind, but also natural gas is affecting the coal-powered plants.

“There’s a lot of natural gas in Minnesota,” Lancaster said. “That’s when we’re noticing the effect of low natural gas prices. On days when it’s not windy, the prices are not getting up to what they used to be …. Coal Creek is less affected by North Dakota wind and more affected by Minnesota natural gas.”

So far, Basin’s coal power has remained competitively priced on the power pool with a few minor instances of prices dipping below what the cooperative can make it for. The difference is coal plants can move generation at 3 megawatts a minute while natural gas can move 15 megawatts per minute.

As a result, Basin and GRE have found themselves leaning more heavily on its natural gas-fired peaking plants.

No eagles were killed in the process of filing this report. How many eagles were killed by the wind turbines is anyone's guess. But it no longer matters. Times have changed.

Batteries are going to be the answer, and Elon Musk knows this. Once we start having brownouts and blackouts because of problems with the grid, that's when we will see huge state and federal subsidies for his batteries. Wind is not going to go away no matter how many problems it creates. Times have changed.

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Next, the mea culpas: why the mainstream media missed the Trump story, one man's opinion, over at Yahoo!Finance:

Pundits and prognosticators are in a rare mea culpa moment, acknowledging how badly they misjudged Donald Trump as a presidential candidate and apologizing for being so narrow-minded. But they didn’t need to travel to dozens of campaign events or poll hundreds of Iowans to understand Trump’s appeal. All they had to do was understand one single number: $55,191.

That was median household income, adjusted for inflation, in June 2015, the month Trump declared he was running for the Republican presidential nomination. That number is neither good nor bad on its own, but when you compare it with a second number, the problem becomes clear. In January 2000, median household income was $57,371, which means when Trump declared his candidacy, the buying power of the typical family had fallen 4% during the prior 15 years.

Gun sales: families may be earning less income, but what income they have, they are increasingly spending it on guns. April marked the 12th straight month for increased gun sales. Thank you, Mr Obama.

This April saw the most gun-related background checks of any April on record, making it the 12th month in a row to achieve a high water mark for gun sales.
The FBI ran 2,145,865 checks through the National Instant Background Check System last month, according to the agency’s records. That represents more than a 400,000 increase over the previous record set in April 2014. Though the numbers represent the best April on record, the month also saw the fewest checks of any month thus far in 2016.

The trend of record-setting months began last May. In that period the background check system has seen records set for the most checks in a day, month, and year. Thus far 2016 is on pace to pass 2015 as the best year on record for gun-related background checks.

It would be interesting to see a breakdown by states. My hunch where guns sales are rising:

• urban areas in the northeast where private ownership is still allowed
• along the southern border (Texas, Arizona, California east of San Diego)
• Chicago
• Florida

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Active rigs:

	5/6/2016	05/06/2015	05/06/2014	05/06/2013	05/06/2012
Active Rigs	27	85	186	190	210

RBN Energy: paraffinic versus naphthenic crudes; implications for US exports. More than usual posted today but the bulk of the information is not here; go to the link for the full story, a hugely important story for those interested in the Bakken.

On December 18, 2015, Congress and President Obama ended the 40-year ban on U.S. crude oil exports to countries other than Canada. Today the arbitrage window doesn’t make much economic sense for most exports – Light Louisiana Sweet on the Gulf Coast is about the same price as Brent in the North Sea.  But the prospect of selling crude abroad remains tantalizing for a depressed U.S. upstream, and U.S. producers have begun to consider the possibilities for more significant export volumes.  But does the U.S. have the right stuff?  Will the qualities of U.S. crudes be competitive in global markets?  In today’s blog, we begin a series to consider the qualities of U.S. crudes that are likely to be favored by international crude buyers.

Last month we discussed some of the changing patterns of U.S. crude exports. 

Until the export ban was removed, the vast majority of U.S. export barrels moving by ship went to Canada, peaking at 354 Mb/d in July 2014 but remaining above 300 Mb/d a year later in July 2015. (Note these do not include exports to Canada from elsewhere in the U.S. – such as Bakken crude-by-rail).

Then things changed. Canadian refiners severely reduced their imports of U.S. Gulf Coast crude since October 2015, taking only 40 Mb/d in March 2016, due in part to the start-up of Enbridge’s reversed Line 9B in November 2015, which brings crude oil from Alberta into the Montreal region.   

U.S. waterborne exports have remained at about the same level, but now most of the barrels are moving to Latin America, Europe and Asia instead of Canada.  It is a whole new world in the U.S. crude export market.

So far the non-Canadian crude exports have been more or less loss-leaders, with overseas refiners “trying out” new U.S. crude grades, such as Gulf Coast sweet (a blend of various light crudes, including Eagle Ford), as well as testing old grades such as West Texas Intermediate (WTI) which have not been run in refineries abroad for generations. 

The major factors that influence an end-user’s purchase of crude include price, distance (i.e. delivered cost), timing and suitability for processing. Price - both relative and absolute - remains the primary factor in what crude oil grades are purchased by refiners.  Yet there are other fundamental factors that subtly shape buyers’ choices longer term: the physical characteristics of a crude grade beyond the basic indicators of crude quality, such as its gravity, as measured typically by its American Petroleum Institute (API) number, and its sulfur content (S%) by weight.

API and S% are the basics – the higher the API number, the lighter the crude, with the tendency of lighter crude to produce a higher proportion of light products such as gasoline and naphtha, through base refining, i.e. distillation.

In contrast, the heavier the grade, the higher proportion of heavier products such as mid-distillates (kerosene and diesel), and residual (fuel oil) in outturn, though the proportion of heavier products in yields will often be reduced through secondary processing.  Sulfur is the chief (though not the sole) contaminant that must be removed from refined products to meet minimum market quality standards, and the lower the sulfur, generally the higher the value of the crude grade.

Why is all this important?

In recent years there has been a structural shift in land transport fuel use, with gasoline gaining considerable ground, even in Asia, traditionally the region with the largest volume diesel demand.

Gasoline has remained dominant in North America, with the U.S. still the world’s largest gasoline market. Latin America and Sub-Saharan Africa also have been shifting to more gasoline. And Europe, which saw “dieselization” take hold since 2000 shows signs that gasoline use may rebound.

The reasons for this move away from diesel have been varied. In Europe the fuel increasingly has been blamed for air pollution in the form of hydrocarbon particulates. Some major cities such as Paris have begun to limit the use of diesel-engine vehicles.  In Asia, the shift has been simply from buyers purchasing larger and more powerful gasoline-powered cars. The Volkswagen emissions scandal further tarnished diesel’s reputation.

Consequently, the superior yield of high-octane gasoline components from naphthenic crudes is becoming more of an advantage in global crude markets.  But this is a general statement, and does not apply to the refining systems of many countries that were designed to use more paraffinic crudes.  

So a key question is how this will play out in future years, particularly with the possibility of more U.S. crudes being introduced into the mix?  Which U.S. crudes will be most advantaged in this evolving market for different qualities of crude oil.  These are questions that will be explored in the next edition of this blog series.