IN BRIEF NEW S UK


Chevron is to sell the 220,000 b/d Pembroke refinery and other down- stream assets in the UK and Ireland to Valero Energy Corporation for $730mn. The sale includes approximately 1,000 Texaco-branded retail service stations in the UK and Ireland, a commercial and industrial fuels business, seven equity- owned terminals, shareholdings in four pipelines, eight aviation facilities and related support and trading operations. Chevron will retain its upstream, lubri- cants and Oronite additives businesses in Europe, as well as its aviation busi- ness in Sweden, Greece and the Benelux. The company is planning to concentrate its downstream portfolio primarily in North America and the Asia-Pacific region. It recently reached a sales agreement for most of its down- stream assets in Spain. Since 2010, Chevron has agreed to sell downstream assets in more than 20 other countries, mostly fuels marketing businesses in the Caribbean and southern Africa.


The UK government has launched a Renewable Heat Incentive (RHI), reportedly the first of its kind in the world, in a bid to provide long-term support for renewable heat technolo- gies, from ground-source heat pumps to wood-chip boilers. According to Greg Barker, Minister of State, Department of Energy and Climate Change (DECC), the scheme will ‘help drive around a seven-fold increase in renewable heat over the coming decade, which will help shift what cur- rently is a fringe option, firmly into the mainstream’. Currently around half of the UK’s carbon emissions come from the energy used to produce heat – more than from generating electricity. The RHI will reduce emissions by 44mn tonnes of carbon to 2020, equivalent to the annual carbon emitted by 20 typical new gas power stations. Further details about the RHI scheme can be found at www.decc.gov.uk/rhi


Some of the UK’s leading energy providers are supporting a recently launched scheme that aims to bring certainty to consumers that the gas they buy is totally ‘green’. The Green Gas Certification Scheme (GGCS) tracks biomethane, or ‘green gas’, through the supply chain to provide certainty for those that buy it and has been established by the Renewable Energy Association (REA), working with Bio Group, British Gas, E.ON, National Grid, Milton Keynes Council, Thames Water and CNG Services. For informa- tion, visit www.greengas.org.uk


6


downstream Airlines look for hedging alternatives


The steep discount of benchmark WTI crude futures to global oil markets is leading more US airlines to seek alter- native hedges against rising fuel costs, according to Argus Global Markets. More than 1.1mn b/d of US jet fuel swaps was cleared through CME’s Clearport site in February 2011, nearly double the January figure (see Figure 1). The sharp increase in swaps activity


reveals a degree of anxiety in the market regarding rising fuel costs. Airlines have been limiting the use of over-the-counter swaps to hedge risk because of lower liquidity and higher costs compared with futures contracts. But with Gulf coast jet fuel trading more than $25/b above WTI, compared with less than $15/b in January, basis risk has become a bigger factor in hedgers’ calculations. ‘WTI-based hedges are simply less


effective,’ the Trading Vice-President at jet fuel supplierWorld Fuel Services, Bradley Hurwitz, says. ‘This dislocation should cause airlines to rethink their hedging strategies and try to minimise this ineffectiveness or potential expo- sure, whether through jet swaps or otherwise.’ Nymex heating oil futures or ICE


Brent futures could be less costly hedging alternatives that are more closely related to global oil markets and therefore to jet fuel prices. ‘Over time, I think you will see some experi- mentation with Brent,’ Southwest Airlines Treasurer Vice-President Scott Topping says. ‘Decisions on hedging in crude versus products are influenced by the consumer’s view on supply and


Figure 1: Clearport US jet swaps (in mn b/d)


demand.’ Many airlines expected refinery mar-


gins to come under pressure as more refineries have come online globally, limiting their fuel costs relative to the crude futures they used for hedging. But this has not been the case for WTI hedges because of the mid-continent crude surplus. Airlines began to increase their


hedged positions in the first quarter of this year as the outlook on fuel prices started to change. Southwest Airlines anticipates average fuel costs of $117.60/b this quarter, with 68% of expected consumption hedged, com- pared with $104.16/b and hedging positions of 40% in 4Q2010. American Airlines has hedged 50%of its expected first-quarter fuel consump- tion at around $110.04/b, compared with 40% in the previous quarter. Most airlines combine hedging books


with fuel surcharges. JetBlue has hedged 37% of its projected fuel con- sumption in 1Q2011, at a jet fuel price of $119.28/b. The carrier has also intro- duced new fuel surcharges to its Latin American destinations.


BP expands biofuels business in Brazil


BP has agreed to acquire majority control of the Brazilian ethanol and sugar pro- ducer Companhia Nacional de Açúcar e Álcool (CNAA). When CNAA’s assets are fully developed, this is expected to increase BP’s overall Brazilian production capacity to around 1.4bn litres of ethanol equivalent per year (or some 9mn bar- rels). BP has agreed to pay approximately $680mn to acquire 83% of the shares of CNAA and to refinance 100% of CNAA’s existing long-term debt. After the acquisition, which is subject to regulatory approval and agreed closing


conditions, BPwill become the operator of two producing ethanol mills, located in Goiás and Minas Gerais states. A third CNAA mill is currently under development in Minas Gerais state. The mills will be able to supply both Brazilian and interna- tional markets with ethanol. The agricultural land used for sugar cane cultivation related to these projects is all within the areas permitted under Brazil’s proposed Agro-Ecological Zoning of Sugarcane (Zoneamento Agroecológico da Cana-de- açúcar). The total planned combined crushing capacity of all three mills, when fully developed, is expected to be 15mn t/y of sugar cane. At full capacity, each mill will have a production capacity of about 480mn litres of ethanol equivalent per year. Each mill will also have the capacity to supply approximately 340 GWh/y of elec- tricity to the grid. According to the recently published BP Energy Outlook 2030, alternative energy


is expected to be the fastest growing energy sector over the next 20 years, with global biofuels production projected to more than triple.


PETROLEUMREVIEW APRIL 2011


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