George Hatziioannou, EIRA’s Editor introduces this Newsletter – VOLUME 4, ISSUE VII, which comes at possibly the best time given what takes place Geopoliticaly:
Mixing economics with politics does not always pay off. So far in the first five months of 2016, LNG imports into Northwest Europe, predominantly from Qatar, plummeted by 15% year-on-year. The LNG cargoes were shipped to customers in Asia, experiencing a modest demand growth, and clients in the Middle East.
Moreover, the heralded arrival of US LNG amounted solely to just one delivery in late April (out of 14 from Cheniere Energy’s Sabine Pass in Louisiana) that reached its destination in Europe, more specifically in Portugal. The rest of US LNG ended up in South America; a more lucrative market which is currently on the rise.
It boils down to a simple observation: at the end of the day, business considerations prevail and determine energy flows.
For more on this on our current EIRA issue please visit .eiranews.com.
For Greece, LNG Terminal In Świnoujście Is A Test Ground
The solemn upbeat ceremony on 18 of June devoted to the launching into operation of LNG Terminal in Świnoujście was attended by top government officials of Poland: President Andrzej Duda, Prime Minister Beata Szydło, Minister of Treasury Dawid Jackiewicz, other cabinet ministers, and the President of the ruling party Prawo i Sprawiedliwość (Pis), Jarosław
His brother, the late Polish President Lech Kaczyński who died in a tragic air crash near the Russian city of Smolensk, was the actual godfather of the new gas facility on the Baltic shore, having spearheaded the concept back in 2006. Now, he was duly honoured and proclaimed Patron of LNG Terminal in Świnoujście.
The upbeat ritual served the purpose of attributing to this event a symbolic meaning. The LNG terminal fulfils the grand vision of Lech Kaczyński of Poland as an independent, strong and sovereign state. “One of the most important components of this vision was the energy security”, President Duda accentuated.
The Polish government has long viewed LNG imports as an effective measure to undercut its dependence on Russian pipeline gas deliveries. Despite delays, setbacks and cost overruns, the decade-long construction marathon finally ended. A emphasised during the launch, the new strategic infrastructure will contribute to “diversifying the sources of gas.” It was immediately proved by the first shipment of liquefied gas by Qatargas Operating Company Ltd., which was downloaded at the terminal.
From now on it would make strong business sense for the Greek government to monitor, from a distance, naturally, the commercial operations at the Świnoujście terminal to assess all the pros and cons of placing a huge bet on LNG as the
energy source of choice.
Once the new LNG terminal in Alexandroupolis complements the existing facilities at Revithoussa, Greece will remarkably enhance its potential of receiving cargoes with liquefied gas. But there is still uncertainty: will these investments and efforts pay off without overburdening the budget and limiting freedom of manoeuvre?
Going back to the Polish grand endeavour, the LNG terminal has a production capacity to process (regasify) up to 5 billion cubic metres of gas per year (bcma). Consequently, Poland would be able to meet 35% of domestic demand by imported LNG. To diversify its gas portfolio, Poland is conducting negotiations with Norway to build a Baltic Pipeline, which might come on
stream in 2020.
However, given the candid admission by former Statoil CEO Helge Lund that the uppermost ambition of the Norwegian major is to maintain its current level of production for the next 10 years at best, Poland’s dependence on this source
could be short-lived.
Apart from one-off purchases of LNG on the spot market, Poland relies on a long-term contract, which is to last for 20 years, with Qatargas. The agreement stipulates deliveries of one cargo a month to the annual amount of 1.3 bcm. In late June, LNG Terminal in Świnoujście has already welcomed the first spot supply from Norway’s Statoil. Yet, Maciej Wozniak of the Polish gas distributor PGNiG has announced that “for the time being that is enough.” In addition, the re-negotiated contract with Qatargas, signed in 2015, allows Poland’s to defer deliveries in the second half of 2016. Poland might well activate this provision.
The rumour’s mill claimed that Qatargas LNG cargoes are more expensive than gas on spot markets and Russian pipeline gas. One Polish energy expert once asserted that Qatari LNG is more expensive by some 30%, which was dismissed by the Polish company, Polskie LNG that keeps it as a commercial secret. Krzysztof Kozlowski, vice-minister of economy and the minister of sea and inland shipping, in an interview with Polish News Bulletin also refused to give figures on the Qatari gas price tag,
stating the price was competitive enough.
Noteworthy, Mr. Kozlowski finalized his statement by saying the contract had improved Poland’s security, which can be measured in categories other than money.
The non-commercial overtone of Mr. Kozlowski’s argument is apparent and it casts a shadow of doubt on whether Poland is not paying extra money for the imported LNG simply for the sake of “diversification” and staying in tune with the concept of European Energy Union and European Commission directives.
It has been revealed by industry players that regasifiacation cost at LNG Terminal in Świnoujście is “significantly higher than the pipeline capacity tariffs at the German border points of Lasow and Mallnow, from where much of the additional gas Poland needs is sourced,” a publication in the European Spot Gas Markets (Reed Business Information Ltd.) says.
The article headlined “Polish shippers at odds over role of LNG terminal” claims the cost amounts to €1.96/MWh per hour, provided the capacity is fully used, with additional variable fees pushing up the cost to €2.07/MWh. The article concludes, “this makes Poland’s terminal costs more than €1.00/MWh more expensive than many facilities in western Europe, including
those in Britain as well as in France, the Netherlands and Belgium.”
Moreover, the publication cites the opinion of a gas trader operating on the Polish market: “I think the main purpose of the terminal is purely political at the moment. It acts as a tool to show Poland’s current main suppliers, Russia or Qatar, that we can buy gas from European suppliers on a spot basis and regardless of price.”
Whether Poland’s smart tactics proves successful or not, yet remains to be seen. The “politically correct” imported natural gas and LNG seem to be the order of the day in Poland. But, as for everything, you have to pay toll. LNG Terminal in Świnoujście is an essential element of diversification and energy security for Poland, provided it is ready and capable to bear the price that has no connection to the state of play on the European energy market.
For Greece, it is a telling example of the unwarranted dangers of mixing economics with politics. So far, in the first five month of 2016, LNG imports into Northwest Europe, predominantly from Qatar, plummeted by 15% year-on-year.
The LNG cargoes were shipped to customers in Asia, experiencing a modest demand growth, and clients in the Middle East. Moreover, the heralded arrival of US LNG amounted solely to just one delivery in late April (out of 14 from Cheniere Energy’s Sabine Pass in Louisiana) that reached its destination in Europe, and it was Portugal. The rest of US LNG ended up on a
more lucrative market, now on the march and on the rise, South America. It boils down to a simple observation: At the end
of the day, business considerations prevail and give directions to energy flows.
Western Balkans Stuck In Limbo
The Western Balkan region (former Yugoslavia plus Albania) remains confined to a geopolitically uncomfortable twilight zone. On the one side, this part of the Balkans is beset by conflicting interests and is perceived as of critical importance by all main actors at regional and global level.
On the other side, Western Balkans have no strategically significant natural resources, and not enough money of its own to ensure sustainable economic development. The only advantage is the geographical location and a potentially huge appetite for energy consumption.
What is the state of play in the energy sector in this part of South East Europe? The trans-border electrical grid was built under the Yugoslavian regime and now is virtually obsolete. No modernization, poor maintenance and a succession of local civil wars have contributed to the degradation of the whole system. The good news is that national and international companies from Europe and Asia are looking for lucrative contracts in that segment of the economy.
Serbia is at the heart of the power generation due to its hydrocarbons and water resources. The country is in possession of 8 hydroelectric power plants and 9 thermal power stations. Theycover 60% of domestic demand, making Serbia relatively independent of energy imports. However, the NATO bombardments in 1999 have damaged the infrastructure forcing Serbia
to import electricity. In recent years, the EU has provided some financing (loans) for the development of power generation. Serbia has the possibility to increase the output at the hydroelectric power station Djerdap, located on the Danube, and untap the potential of the rivers Drina, Ibar and Lim. Croatia has the intention to become a two-way transit link for gas transportation from the East and from the West. So far, it has not capitalized on its lucrative geographical position with most
of the projects under discussion driven more by politics rather than sound economics. What really counts is that Croatia has a weighty hydropower potential with 30 stations in place.
The electricity market is controlled by HEP (Electroprivreda Hrvatska), while the oil sector is privatized but dependent on Governmental regulations. Kosovo experiences outages and other problems with energy production, but it has enough mineral resources to be viewed as an interesting investment destination. It has reserves of lignite, lead, zinc, copper, gold, silver, nickel, bauxite and manganese. The World Bank estimates of 2007 placed the worth of these resources at $13 billion.
The mineral resources in Kosovo are extracted by companies, which were privatized in recent years. They are under the control of national or foreign business entities with good connections to people in power. International energy majors promote all big deals, including hydrocarbon transportation projects. All agreements in the making are closely scrutinized by the United
States. This policy of “leading from behind” offers economic advantages to the winner but can spell trouble as well. In 2008, Russia’s Gazpromneft, after a secret fight behind the scenes with the Austrian OMV, bought the Serbian NIS company followed by investments resulting, among other things, in the modernization of the refinery in Novy Sad, and leading to a surge in production. Yet, it triggered off political scuffles and media attacks on the Russian company.
Bosnia, or to be correct, Bosnia-Herzegovina is in a more dire strait. It has to import oil from Serbia and refine it at two production units, acquired by the Russians and located in the Serbian part of the confederation. As for natural gas supplies, things are even worse. Bosnia originally counted on the South Stream pipeline, which was supposed to branch out from the
trunk pipeline running across Serbia. Since the project was cancelled on 1 December 2014,
Bosnia was left with no realistic alternative in the short and mid-term. Bosnia has some energy production facilities but they have suffered a major setback due to four years of civil war that ravaged the country. Institutional banks, BERD and BEI, have provided loans ($230 million) to three national producers. Hydro and lignite are the only national energy resources.
Montenegro is in a similar position, too far from gas transportation networks and with no mineral resources for domestic energy production. The tiny country is located outside the hydrocarbon mainstream flows.
Geopolitical players monitor the Western Balkans and its energy market. It has its appeal. But the final composition of energy purveyors is far from being clear. Russia could be one of the major suppliers of natural gas to the region, for instance, but Brussels and Washington do not welcome this option out of political considerations. The alternative providers (Azerbaijan, Eastern Mediterranean countries, and the US with shale LNG cargoes) have bona fide political credentials, but cannot boast of enough resources for exports to the Balkans and, moreover, can hardly offer “competitively-priced” gas.
Consequently, quite a number of energy projects designed for the Western Balkans are on the table but there are no breakthroughs and no gamechanger on the horizon.
The Limits Of A Limitless Qatar
Qatar is the smallest Arab country. It is located on a small peninsula (Al-Jazeera, in Arabic) covering a terrain of 11,500 km2, with some 1.2 million inhabitants. However, for almost a decade the kingdom is considered to be one of the major players in the region and beyond.
This is the product of a long-term strategy launched by the previous emir, Hamad ben Khalifa Al Thani and pursued by the present emir, Tamim bin Hamad Al Thani. The goal is to be part and parcel of the team of regional powers that are shaping, or rather re-shaping the Middle East, and also play a crucial role in managing the hydrocarbons’ market, maintain a
high profile in the Sunnite monarchies’ association, and engage in regional geopolitics on par with the local heavyweights like Egypt, Saudi Arabia and Iran. Classical vehicles of power projection do not drive the strategy.
Qatar started with the creation of a network of supporters within the politically conservative Islam camp, keeping a distance from other small petro-monarchies in the Persian Gulf. It refused, just like Bahrain, to join the United Arab Emirates when this federation was in the making. But in 1981 Qatar initiated the formation of a less binding structure, the Gulf Cooperation
Council, the main political association now reportedly steered ahead by Saudi Arabia.
Going step by step, Doha has established privileged links with the future Islamists movements and leaders, like the Egyptian
preacher Youssef Al Qardaoui, or leaders of the Algerian Islamic Salvation Front, the Palestinian HAMAS, etc. Qatar also worked occasionally with warring parties, as in 2008 when it financed the HAMAS rebellion but preserved intact contacts with the State of Israel.
Finally, Doha was the main regional promoter of the anti-establishment revolts and rebellions that started in 2011, known as Arab Spring, in Tunisia, Egypt, Yemen, Libya, Syria… The political and religious arm and tool of that policy, which had been supported at the beginning by the US and other Western powers (later they all lost control over the course events), was the
Muslim Brotherhood movement with several local subsidiaries, like Ennahdha party in Tunisia.
Qatar was also one of the main US allies in the region, welcoming from 1991 the advance GH of the US Central Command (CENTCOM) at the Al-Udeid base, placed in charge also of military operations in Afghanistan. In 2002 Qatar has opened a representative office of the Taliban movement fighting against the US forces in Afghanistan and was a silent partner in the soon aborted peace negotiations. Qatar provided military jets when NATO was looking for an Arab world representation in the fight against Kaddafi in Libya, contributed to reconciliation between Palestinians, between HAMAS and Fatah and, finally, spearheaded a civil war against the al-Assad regime in Syria. The emirate’s foreign intervention policy is not limited to the region. Qataris have put their footprint in different conflicts in Africa too: Morocco, Soudan, Chad, etc.
Qatar’s economic power is based on its huge gas reserves; it shares the 3rd or 4th topmost position in the energy world, depending on how to treat the not always accurate data from Turkmenistan.
What is certain is that Qatar is the second world’s largest gas producer, although in two years time its cash flow generated by energy exports visibly dried up due to falling oil prices. The emirate is keen to diversify income sources and has launched a remarkable investment program, lucrative for business and for maintaining prestige. The Qatar Investment Authority, second only to the sovereign fund of Abu Dhabi, is moving money to the London Stock Exchange and buying assets, like Veolia,
Volkswagen, EADS, Harrods, etc., and also channeling capital to the developing countries. Qatar is investing in local top grade universities, in football clubs (PSG team, for example) or in the organization of the World championship in 2022, and it is constructing a world-class airport hub through its trusted vehicle, Qatar Airways.
The strategy is elaborated in the Vision 2030 program, which is describing life without dependence on hydrocarbon resources. The information support of the Qatari policy is rendered by Al-Jazeera TV channel (launched in 1996) whose slogan is “We have no limits”. The station turned out to be very popular in the Arab world, and also internationally, due to comprehensive and witness-proven reporting of the events in Iraq during and after the US invasion (2003). Yet, later its popularity has somehow paled.
Today, by mid-2016 Qatar is showing symptoms of overstretching its resources, burdened by commitments as if it were a huge empire. The crunch of oil and gas revenues is limiting the possibilities of the emirate to project its influence abroad. There are also signs of potential internal political tension, due to the growing gap between the local population and the poor immigrants with fading hopes of finding here palpable prosperity.
The most devastating problem, in theory, could be the epic fiasco with the strategy of a Sunnite Islamization of other countries; for example, in the event of a likely defeat in the war Qatar is conducting in Syria, which might end in an unwanted and unwarranted fashion.
All combined, these regional geopolitical risks could undermine the rule of the reigning family whose financial interests are closely linked to those of the emirate as a nation state.
Bahrain Sliding Toward A Civil War
The tiny kingdom is back to troubled times. Bahrain is squeezed between its powerful neighbors, Saudi Arabia and Iran, and torn apart by Shiite oppressed majority and Sunnite ruling minority. The country is like a boat in stormy waters, and it reflects, to a certain extent, the connotation of its name: Bahrain means, in Arabic, “between two seas.”
The kingdom is turning into a new flashpoint of the regional tug of war between Saudi Arabia and Iran. Their on-going proxy confrontation in Yemen and Syria is far from being over, resembling a stalemate but with Tehran seemingly to have scored more victorious points.
Riyadh was unable to crush the Shiite tribes of the Huthis in Yemen, and its Islamists protégées in Syria are now in a weaker position than a year ago. Apparently, Iran has decided to use the momentum to aggravate the troubles besieging its formidable adversary.
Bahrain is a battlefield of choice. The ruling dynasty, Al Khalifa, is Sunnite and closely linked to the House of Saud and to the USA. The majority of the Bahraini subjects (65%) are Shiites; they are systematically discriminated, having few chances ever to access senior positions in any field of life. The Shiites compose less than 5% of staff in the security services, as well as in
key ministries like Internal or Foreign Affairs, or Defense, etc.
In 2011, the kingdom was shaken by a Shiite revolt, supported in a covert way by Iran, but eventually dispersed and repressed with the help of the Saudi army. Since then the Government keeps in place stringent measures to monitor any of the Shiites’ moves. The local Shiite opposition claims there are 2.000 political prisoners, 10 of them are on the “waiting list” to be executed.
This time Amnesty International has not turn a blind eye on the pro-West country and reported regular violations of human rights. Currently, all eyes are focused on the main Shiite association, Al-Wefaq, which is fighting for what it believes is a ‘real’ constitutional monarchy. To note: political parties are forbidden in the kingdom; associations can be allowed only by rigid orders of the Ministry of Justice. On 14 June 2016, a local court suspended Al-Wefaq activities. The rumor has it that this Shiites association would be banned altogether on accusations of terrorism, extremism and violence, and of having connections with an unnamed foreign country, obviously, meaning Iran.
On 13 June, local police arrested a known human right activist, Nabil Rajab. On 20 June, a Shiite religious leader, Sheikh Issa Qassem, was stripped off his Bahraini nationality. The leader of Al-Wefaq, Sheikh Ali Salman, remains in prison on charges of complotting against the regime.
The Government is using a heavy hand to keep the situation manageable. Iran probably has ome to the conclusion that the Saudis are on the retreat and the moment is opportune to reactivate the Bahraini rebels in order to put additional pressure on Riyadh.
After the anti-Shiite crackdown in Bahrain, General Qassem Soleimani, commander of the Al-Quds brigade, which is part of the Iranian Revolutionary Guards, said that for the oppressed majority in Bahrain there is no other option but to start armed resistance. In a rare political declaration he said that Bahrain’s ruling dynasty “will pay for there deeds and it will bring about the collapse of the ruling regime, which is thirsty of blood.”
Some analysts, especially of Sunnite faith, regard the statement as proof of the Iranian plan to destabilize Bahrain, the weak link of the Persian Gulf petro-monarchies, and, affect the mood in the neighboring Saudi Eastern Province, Al Sharqiyya, with a population of 4 million, most of them Shiites.
In that part of Saudi Arabia 80% of oil reserves are concentrated. The most important city is AlQatif, a junction for 12 oil pipelines, bound to main oil terminals in the Persian Gulf, for example, Ras-Tanura or Dharhan. The Iranians are suspected of plotting to destabilize this part of the region with its compact Shiite population, and attempt to create a kind of Great Bahrain under Teheran’s patronage. Traditionally, the name is attributed to a large territory, stretching from Bassorah (Iraq) up to Musandam peninsula (Oman).
This conspiracy scenario remains the focus of discussions and speculations in Saudi Arabia for almost half a year. In January 2016, there was a erious deterioration of relations and Saudi Arabia teamed up with its allies against Iran after the Saudis had executed a popular Shiite cleric, Nimr al Nimr, who, by the way, was born in AlQatif.
Saudi Arabia claimed to have found arms and explosives of Iranian origin in October 2015, which allegedly supported the conspiracy theory. The weapons were reportedly meant to arm the Shiite rebels, maybe in Al-Sharqiyya.
So far, both sides carefully manage (and contain within certain limits) the undeclared cold war. Iran doesn’t seem to be eager to escalate the showdown, preferring simply to maintain pressure on its main foe in the region.
However, the degree of animosity and wrath in the Middle East is so high at present that events could easily spin out of control.
Nigerian Oil Targeted By HardLine Militants
Terror-fed pandemonium broke out in the Christian-populated south of Nigeria when a renowned grouping that calls itself Niger Delta Avengers once again took to arms and destroyed several oil wells and installations. There is a grim feeling of déjà vu taking us back to 2006-2009 when militants of this region inhabited by some 20 million people revolted against the federal
government demanding at least some control over local natural resources.
The previous hostilities in Niger Delta ended seven years ago with a payoff by the government in Abuja, the national capital. Central authorities consented to a comprehensive amnesty for the rebels, launched a job-training vocational program and employed the yesterday’s ‘bombists’ as guardians of the oil infrastructure they used to blast. Actually, it amounted to a monthly ’stipend’ (at that time worth some $400) paid to the fighters to pacify them and buy out peace and tranquillity in the troubled region.
However, this year after the nosedived global oil prices siphoned bailout cash from the budget, Nigerian President Muhammadu Buhari, who is also the commander-in-chief, slashed by nearly three-quarters the financing of the regional
programs and, especially, has cut the legitimized bribes for the local militants used to rent their loyalty. On top of it, the grand project of setting up a new university in the Niger Delta was abandoned too.
Soon after, the deeply rooted sense of resentment in the Christian south toward Mr. Buhari, who happens to be a Muslim, was automatically transformed into extreme forms of defiance. To be fair, it is not only and not essentially about a fair distribution of profits from the hydrocarbon riches. Niger Delta people are infuriated by the demonstrative disinterest of the government in
tackling the appalling environmental situation.
Apart from “a half-century legacy of offshore oil spills equivalent to one Exxon Valdez every year”, as Steve Levine wrote back in 2010, there is the scourge of mismanagement by multinational oil companies that have devastated the local mangrove swamp, considered as probably the most precious natural reserve on earth. Eventually, it undermined the delicate saltwater and freshwater balance and inflicted irreparable damage to flora and fauna.
The region was not immune to oil spills as well. Royal Dutch Shell alone pleaded guilty to 1,693 oil spills since 2007. Today, the Niger Delta soil is soaked with this heavy substance. Contamination of soil and water prevents traditional farming and fishing that local population used to rely upon for income and nourishment.
Experts of the United Nations Development Programme assessing the situation in the Niger Delta region have noted in their 2006 report “administrative neglect, crumbling social infrastructure and services, high unemployment, social deprivation, abject poverty, filth and squalor, and endemic conflict.” The federal authorities seemed to neglect these abysmal conditions and viewed the region as a Cinderella, the unloved child that deserves mistreatment.
No wonder, frustration has accumulated and burst out in the most vicious forms of recalcitrant behaviour. The recent attacks on oil infrastructure, wells and pipeline, belonging, in particular, to the US energy major Chevron, have curtailed daily output from 2.2 million b/d at the beginning of the year to something in the interval from 1.6 million b/d to 1.4 million b/d (estimates vary). As a result, Nigeria was dethroned from the number one oil producer in Africa, sliding down to the second place beneath Angola.
The more worrisome element in the renewed round of hostilities in the Nigerian latent civil war is the extreme bellicose stance of what is believed to be the new generation of “avengers”. They refuse to enter negotiations with the government and have pledged to roll back oil production in the country, as they put it, “ to zero.”
It might be a bluff but it might be as well evidence that stakes are upped and that previous compromise struck between the Muslim North and the Christian South was half-baked and nonsustainable.
The crucial issue of an equitable apportioning of oil revenues is still on the agenda. Hammering out and pursuing a coherent multi-faith and multicultural (sorry for using the annoying term) policy in order to balance the interests of the two parts of this artificial nation, stitched together by the British former colonizers, has not been achieved. It is not even in the pipe. It leaves the country in limbo, prone to social unrest, political convulsions and chaos.
If President Buhari fails to come up with a subtler instrument of settling differences in interests and opinions than simply sending troops to the rebellious province, then Nigeria will remain hostage to the so-far inherent instability. It would adversely affect the mood and state of play on the global oil markets. Thomas Pugh, commodities economist at Capital Economics, was quoted by CNN, “output could stay low for years if there is no ceasefire.”
The global repercussions would be far-reaching. Oil exports and revenues have oiled the smooth economic growth of Nigeria long enough. The annual GDP growth averaged 4.12% in the timeframe from 1982 until 2016, making it to the book of records in the fourth quarter of 2004 with an impressive 19.17% hike. Now, things are going from boom to bust. Latest statistics serves nothing but to fuel disillusionment: In the first three months of 2016, GDP lost 0.36% compared to last year. Prospects are dim and grim.
Should the hard-line militants, more commonly referred to as the Movement for the Emancipation of the Niger Delta (MEND),
prolong their fight against the federal government to bring it to its knees, Nigeria will piral downward to clone the fate of Libya, firmly trapped in the dismal state of halfdisintegration.
Consequently, systemic disruptions of production wiping out Nigeria’s 2.2 million b/d input would dwindle overall global supply and put upward pressure on prices. Paradoxically, much to the gleeful satisfaction of Saudi Arabia who initially provoked the oil price crunch before finding itself on the receiving end of this policy.
For the record: Nigeria is among the top 10 largest oil producers in the world with 37.2 billion barrels of proven oil reserves (2011 data). Oil and gas sector generate about 35% cent of GDP. Crude and petroleum products exports revenues form more than 90% of total exports revenues. Niger Delta is the main hydrocarbon ‘bread-basket’ for the nation, producing 90% of crude oil and thus providing 70% of all revenues for the federal budget.
Crude Performance Of Crude Oil
Recent prophecies of a sustained oil glut and long-term low oil prices seem to be running out of steam. It is somewhat similar to the previous doom and gloom predictions of ultimately driedup wells, the ominous forecast known as Peak Oil. Both insights are wrong.
The breakdown of the oil glut was based on at least three factors. First, the old school’s market fundamentals: lower demand in the newly industrialized economies in Asia, predominantly in China, and additional supply due to shale oil boom in the United States. Second, the new school’s preaching of the financialization of energy markets with the US Federal Reserve QE policy providing cheap US dollars for commodity brokers to buy and stash away oil futures. Once the QE was put on hold,
the US dollar soared in value and made oil futures less attractive, and it withdrew easy-come money from the commodity exchanges. Oil price plummeted.
Third, the vengeful manipulation of OPEC by Saudi Arabia keen to maintain low prices to bankrupt US marginal shale oil producers and deal a blow to competitors, Iran and Russia. However, the realities on the ground are making the art of prophecy, especially related to oil price forecasts, a risky occupation. It has come to pass that the ‘glut’ estimated at around 2 million b/d in 2015 has started to dilute. Recently, The Wall Street Journal even questioned the widely quoted figure claiming it possesses data to back up only half of the announced surplus. Moreover, sources in the industry have asserted that by the end of the first six months of 2016, the disturbing (for producers and, paradoxically, consumers alike) surplus has shrunk to 1.3 million b/d. The rough estimates of the world oil demand surge by the end of 2016 are circling around 1.2 million b/d. It translates into an overall worldwide demand of 95.9 million b/d. Since global oil production has increased by 250,000 b/d in April and has totalled 96.2 million b/d (data by the Oil Market Report issued on May 12), the supply-demand spread is definitely narrowing.
Then again, the slowing down of production, in particular, of tight oil in the U.S., where it is expected to lose some 113,000 b/d in June ( a c c o r d i n g t o E n e r g y I n f o r m a t i o n Administration), sets the trend towards a balanced market.
Despite the inherent deficiencies of the energy market, just like of any other market, it certainly has an in-build mechanism of seeking a balance between demand and supply, and overcoming the no less intrinsic conflict of interests between producers, traders, shippers, regulators and endconsumers.
To prove the point, most of the oilproducing nations, but taking out Saudi Arabia, Venezuela and some other purveyors out of the equation, have managed by now to adjust their economies an social commitments to low oil prices.
Saudi Arabia despite its original competitive advantage of solid financial reserves has taken the beating due to its national currency being pegged to the US dollar. If it chooses one day to switch over to a floating exchange rate, and use the devaluation of the Riyal as a tool to boost revenues, then it would go one level up in its resilience to depressed global oil prices.
Yet, today the desert oil Eldorado is in the grips of a cunning strategy it has unleashed all by itself, and its reportedly reform-minded new leaders are seeking to mitigate the adverse effects of thinning oil exports revenues.
Even US President Barack Obama in the context of supporting the conversion to the alternative energy, namely, the renewables, has called the current oil low price environment as unacceptable.
Surprisingly, the prayers from various quarters of the shaking OPEC edifice and non-OPEC bastions have been heard (by Whom remains a question). Once again, a combination of hardboiled fundamental factors and a shift in perceptions of the oil market players has resulted in the gradual rise in prices, this time without drastic and unnerving frantic fluctuations.
First of all, the market reacted to output declines triggered off by wildfires in the Canadian province of Alberta affecting oil sands production and by the emergence of uncompromising Niger delta warlords who appear to reject any deals with the authorities. It became clear that Libya should be counted out as oil provider due to the continuous tribal and sectarian violence preserving its unofficial status of an utterly failed state. The mounting social unrest in Venezuela convinced some market
observers to forecast an almost inevitable downturn in oil production by the end of the year.
These developments have had a bullish effect on oil prices. Richard Mallinson, an analyst at Energy Aspects, a consultancy in London, concluded, “the market is definitely awake to geopolitics again.”
Secondly, despite the absence of dramatic recovery in any part of the globe, China and India have recorded a moderate growth in oil consumption translated into imports’ surge. In the first half of 2016, India alone has added to its purchase list some 400,000 b/d (compared to the same period of 2015).
Thirdly, as spelled out by Keith Johnson in The Era Of Cheap Oil Is Coming To An End (The Foreign Policy journal), the Kingdom of Saudi Arabia “is still pumping oil at near-record levels, producing 10.2 million barrels a day. That means Saudi Arabia has a lot less ability to “surge” oil production to meet global needs; the more it pumps on a daily basis, the less spare production capacity there is inside OPEC.”
Fourthly, it has become common wisdom imposed by certain energy gurus that US shale producers, currently barely surviving, pushed to the side-lines or even pre-bankrupt, have all the qualities, properties and tools to stage a comeback in the nick of time.
Once the average oil price starts fluctuating closer to $60, which is something predicted by some market-watchers by the end of 2017, the American shale oil (and shale gas) sector would rebound. Not miraculously but rationally, claim experts. It become commercially expedient to produce US shale oil when the price is no less than $58 per barrel, Rystad Energy, a Norwegian energy consultancy, has calculated back in 2015.
In fact, this is hardly a given. Contraction in the US shale industry has seen highly qualified personnel leave for other greener pastures. The assortment of investors who had eagerly jumped on the bandwagon when the American ‘shale revolution’ was the talk of the town and of the whole country, now are aware of the likelihood of a reverse trend. Having tasted defeat, they
would avoid duplicating their previous large-scale and long-term financial commitments.
These two handicaps would largely prevent the US shale oil/gas sector from re-emerging as a formidable player on the market in the timeframe of next five years at least. It adds up to the forecast of an inexorable re-balancing of the supply-demand pendulum.
The crude performance of crude oil in the time span of the last eight years (remember July 2008 when oil hit $147 per barrel leading to a collapse of eight US airlines?) has undermined the credibility of many self-proclaimed modern pythonesses.
Earlier, their prediction of Peak Oil fell flat. Today, their assertions that the current oversupply will keep the world awash with cheap oil for years to come are being proved utterly and precisely wrong.