Adnoc takes the 10-year view on LPG exports

The oil firm’s long-term deal with Vitol, the world’s largest independent energy trader, marks a change of export strategy.

Liquefied petroleum gas cylinders in Foshan, Guangdong. LPG – propane or butane – is used for heating, cooking and in vehicles. Reuters
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State-owned Abu Dhabi National Oil Company (Adnoc) said on Wednesday that it has signed a long-term agreement with Vitol, the world’s largest independent energy trader, to sell up to 528,000 tonnes of liquefied petroleum gas (LPG) annually over the next 10 years.

The agreement marks a shift for Adnoc to longer-term deals as the shale gas revolution creates a glut in global gas markets, with the US setting new record highs for LPG exports in January. The bulk of the US loads are heading to Asian markets including South Korea, Japan and China.

Abdulla Salem Al Dhaheri, Adnoc’s sales and marketing director, said in a statement that the deal with Vitol “is a prime example of the innovative and different thinking we are bringing to our business deals”.

“It will create reliable, long-term value and maximise our gas resources to ensure the company is resilient to future fluctuations in the global energy markets,” he said.

The deal was sealed on the sidelines of International Petroleum Week in London by Mr Al Dhaheri and Russell Hardy, a member of Vitol’s executive committee. It is backdated to January 1 this year and will expire on December 31, 2026.

Mr Hardy said that the long-term supply agreement with Adnoc “will support our growing downstream LPG business”.

LPG – propane or butane – is used for heating, cooking and in vehicles.

The collapse in oil prices from mid-2014 hit the worldwide hydrocarbon industry hard and gave renewed impetus for reform, especially at the Arabian Gulf’s state oil companies. While in the past Adnoc would make shorter-term agreements to sell LPG, ranging from three to five years, it is now keener to strike longer-dated deals to get as much market share as possible.

That strategy mirrors what Gulf producers have been mostly doing in crude markets since the oil crash began. But economic pain from countries such as Saudi Arabia, the world’s largest exporter, led to an agreement among the biggest oil producers in November to reduce output in a bid to boost prices. Saudi Arabia was key to last year’s talks, which resulted in the deal to cut 1.8 million barrels per day (bpd) from 11 Opec members – excluding troubled Nigeria and Libya – and another nearly 600,000 bpd from 11 non-Opec countries, led by Russia, the world’s largest producer, which has pledged to cut 300,000 bpd.

Saudi Arabia told Opec this month that it cut production to 9.7 million bpd in January, well in excess of its pledged cuts under an Opec agreement hammered out in November and a signal to the oil market of its commitment to the deal.

The higher oil price has helped US shale producers to increase their own output.

While oil prices have been rising, gas prices have been falling. Gas futures for March delivery fell on Tuesday by 27 cents, or 9.5 per cent, to US$2.564 per 1,000 cubic feet on the New York Mercantile Exchange, the lowest settlement since August 11, according to Bloomberg News. The one-day decline was the biggest since January 3.

The gas futures tumbled as forecasts for an early-March cold spell evaporated, signalling that the peak of winter demand for the heating fuel has passed. Gas has been the worst performer among major commodities so far in 2017 as earlier outlooks for an extended freeze failed to pan out, leaving stockpiles above normal for the time of year.

As for oil, a barrel of Brent crude was trading at $55.97 on Wednesday afternoon. While that is about half of its price at the 2014 peak level, it represents a gain of 20.5 per cent since the output cut was agreed in November. After rebounding by 52.4 per cent last year, Brent has been steady so far this year and is less than $1 below its price on January 1.

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