RCEM: Views on Energy News

Thanks to ESCP Europe's Research Centre for Energy Management's  wide network in the academic and business communities, our views on energy news give you comprehensive insight into energy issues. 

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Since the discovery of oil in Saudi Arabia seventy nine years ago, the country has been synonymous with oil. But now the sands under which 16% of the global proven oil reserves lie are beginning to shift under the feet of its leaders.

Saudi Arabia whose beneficence, peace-making efforts, soft power and great oil wealth brought it to the forefront of influential countries in the world over a period of more than half a century, is now embroiled in a crescent of conflicts involving Iran, Iraq, Syria, Yemen and now Qatar not to mention its uneasy relations with the United States.

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With oil prices ebbing and flowing against a background of OPEC and non-OPEC production cuts’ extension and US shale oil production inching up, nobody is paying enough attention to the fast-approaching oil supply gap.

Despite the recent dip in oil prices, industry experts are predicting a supply gap and rising oil prices by 2020. This is due in large part to an oil investment drought marked by almost three years of consecutive decline in oil prices, a statistic that has no precedent in the oil industry. This year a report by the International Energy Agency (IEA) projected that if oil investment remains stagnant over the next few years, by 2020 we will see a significant increase in the price of oil as global demand continues to climb.

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In 2014, US President Barak Obama imposed sanctions on Russia in the aftermath of the Ukraine crisis and Russia’s annexation of the Crimea.

In the run-up to 2014 sanctions, US oil giant ExxonMobil led by its then CEO Mr Rex Tillerson, and Russia’s oil giant Rosneft invested $3.2 billion in a project for drilling for oil in the Kara Sea in the Russian sector of the Arctic — a region that Rosneft estimated it could have more oil than the entire Gulf of Mexico. But the sanctions forced Exxon Mobil to halt drilling.

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The US shale revolution and the rising shale oil production have had a seismic impact on the global oil market contributing in no small measure to the steep decline in crude oil prices since July 2014. Equally US liquefied natural gas (LNG) exports could have a similar impact on the global gas market possibly weakening further current low gas prices. The irony, however, is that without relatively higher gas prices, the potential and prospects of sizeable US LNG exports could be restricted.

In 2008 the United States overtook Russia to become the leading natural gas producer in the world. Just a few years ago the US was expected to be a major importer of natural gas. The shale revolution has virtually reversed that trend and enabled the US to start exporting LNG.

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Despite very positive signs in the global oil market, oil prices have never managed to break through the $60/barrel barrier since the OPEC production cuts were implemented in January 2017. On the contrary, they have declined from $57/barrel two weeks ago to just over $50/barrel today.

On the face of it, this could be due to two factors: one is rising Shale oil production and the second is that the glut in the global oil market might have been bigger than what was previously estimated. But circumstantial evidence suggests there could be a third factor, namely concerted efforts by the International Energy Agency (IEA), BP through its annual Statistical Review of world energy, the US Energy Information Administration (EIA) and the Financial Times (FT) to prevent the oil price breaking through the $60/barrel barrier. The rationale is that a price under $60/barrel is good enough for US shale oil production to breakeven and not high enough to slow global economic growth. Let us analyse these three factors to find out where the truth lies.

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Despite a 91% compliance by OPEC members with the production cuts implemented in January 2017 and the removal of more than 1 million barrels a day (mbd) from the global oil market, the oil price has seen a lot of volatility ranging between $53 and $57 a barrel.

And although US oil inventories have declined for the last five months consecutively according to the International Energy Agency (IEA), their levels are still close to record high. This could be due to two factors: one is rising Shale oil production and second, the glut in the global oil market might have been bigger than what was previously estimated.

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Among notable promises made by US President-elect Donald Trump during his presidential elections were four particular ones that attracted the attention of the world because of their geopolitical implications and their impact on the price of oil. These were the dismantling of the nuclear deal with Iran, lifting the sanctions on Russia, enhancing US oil production and a strong dollar.

Whilst most declarations made by US presidential candidates during their election campaigning would be quickly forgotten once they are installed inside the White House, it might be wise to analyse these promises in case Mr Trump stuns the world by fulfilling some or all of them.

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For the first time in eight years, the Organization of Petroleum Exporting Countries (OPEC) has decided to cut crude oil production to bolster the oil price having suffered huge losses since the collapse of the oil price in July 2014.

The continued weakness of oil prices has inflicted a huge damage on the global economy, the economies of the oil-producing countries and global investments. There has been a loss of 0.75%-1.00% annually in global economic growth since 2014. Investment in upstream exploration from 2014 to 2020 is projected to be $1.8 trillion less than previously assumed, according to leading US consultants IHS. The Arab Gulf oil producers have lost an estimated $443 bn in oil revenues between July 2014 and December 2016. And the US shale oil industry took a major blow by losing some 1.5 million barrels a day (mbd) of oil production and also risking major defaults on the $200 billion in loans that have been extended to the domestic shale oil industry.

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Despite developments in renewable energy, it will take 50 years for electric cars to impact global oil demand in transport, according to Dr Mamdouh G Salameh, professor of energy economics at the ESCP Europe Business School.

In his recent paper, ‘Is oil supremacy on the wane?’ Dr Salameh says the enabling technologies of renewable energy are not developed enough to properly impact consumption levels of oil in the transport sector.

Predictions of a post-oil era are also unlikely as in 2015, renewable energy accounted for only 2.8% of the global primary energy consumption.

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On June 10, 2014, the Islamic State of Iraq and al-Sham (ISIS) – surprised the world by advancing into several territories of central and northern Iraq. Most notably, ISIS has taken over Iraq’s second biggest city, Mosul. ISIS has also tried to gain control of the oil-rich area of Kirkuk (which is now under the control of Iraqi Kurdish forces). ISIS’ offensive has left Iraq in a dire situation, ridden by sectarian and ethnic conflict.

However, an overwhelmingly Iraqi force of 30,000 with a contribution from Iraqi Kurdish (Peshmerga) forces are now closing on Mosul with Western air support.

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The amazing age of oil

When Edwin Drake drilled one of the world’s first commercial oil wells in Titusville, Pennsylvania in 1859, he definitely could not have anticipated the tremendous impact his drilling would have on the global economy, civilization and warfare in the years that followed.

Who gets what?

Since then, oil has been the lifeblood of the industrial world’s progress and standard of living. Innumerable everyday products – from pharmaceuticals to computers- depend on oil and its refining into complex chemicals and plastics. Modern industrial farming, which feeds much of the world, would grind to a halt if it were deprived of diesel-powered tractors, oil-and gas-based fertilizers to grow and harvest crops and the fossil fuels to process, package and ship food worldwide to feed a world population that has skyrocketed from 1.5 billion at the start of the oil age to 7 billion now.

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Twenty seven months since Saudi Arabia launched its war of attrition against US shale oil production, it has still failed to break the back of US shale industry. This failure is starting to haunt Saudi Arabia.

By flooding the global oil market with oil, Saudi Arabia and its allies in the Gulf have certainly succeeded in killing a string of global offshore mega-projects. Investment in upstream exploration from 2014 to 2020 will be $1.8 trillion less than previously assumed, according to leading US consultants IHS. But this is a bitter victory at best.

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With the majority of its nuclear-related economic sanctions lifted, Iran is to all appearances open for trading with the world. However, the reality is different.

With supposedly the fourth-biggest proven reserves of crude oil estimated at 157.8 billion barrels (bb) and the second largest proven reserves of natural gas estimated at 1201 trillion cubic feet (tcf), Iran has the potential to grow into a major market in the world.

Iran’s economy with an estimated gross domestic product (GDP) of $417 bn is the third biggest in the Middle East after Saudi Arabia and the UAE. Oil accounted for 60% of Iran’s budget revenues in 2015.

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Historical Background

The United Arab Emirates (UAE) gained independence from the United Kingdom in December, 1971. It is a federation of seven emirates: Abu Dhabi, Dubai, Sharjah, Fujairah, Ras al-Khaimah, Ajman and Umm al-Quwain. Each emirate is governed by its own ruler; together, they jointly form the Federal Supreme Council.

The UAE has accumulated so many accolades that no other country in the world could have done so in such a short period of its history. It has the world’s eighth largest proven oil reserves amounting to 97.8 billion barrels (bb) and is the third biggest exporter of oil after Saudi Arabia and Russia exporting more than 2 million barrels a day (mbd). It also has the seventh largest proven natural gas reserves in the world estimated at 215.1 trillion cubic feet (tcf). Moreover, the UAE’s economy is the second biggest in the Arab world after Saudi Arabia. It is also the most diversified economy among the Gulf Cooperation Council (GCC) countries.

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A new claim has been made about the size of the United States proven oil reserves. The claim comes this time not from BP Statistical Review of World Energy but from a Norwegian Consulting Group Rystad Energy.

Rystad Energy claims in a new report quoted by Reuters that due to its large deposits of shale oil, the United States has more recoverable oil reserves than either Russia or Saudi Arabia.

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While it is true that low oil prices could reduce the cost of manufacturing, thus helping the global economy to grow, it is a short-term benefit as this is offset by a  curtailment of global investment which forces companies around the world to cut spending, sell assets and make thousands, if not millions, of people redundant.

Therefore, it is doubtful whether the steep decline in oil prices would provide a boost to the US economic recovery. While the price decline would certainly provide the equivalent of a sizable tax cut for US consumers, it will deliver a major blow to the increasingly important US oil industry.

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Since the discovery of oil in commercial quantities at Dammam oil well No.7 in March 4, 1938, Saudi Arabia has been almost totally dependent on the oil-export revenues. Seventy eight years later and a cumulative production of 146 billion barrels of oil (bb) since then, Saudi Arabia’s budget is still dependent on the oil revenues to the tune of 90%.

This is a moment of high anxiety in Saudi Arabia. Oil prices, currently $48/barrel, are less than half the level the Saudi government needs in order to balance its books. Moreover, its financial reserves are depleting very fast.

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On the 7th of January 2016, Saudi deputy crown prince, Mohammed bin Salman, the King’s son, told the Economist magazine that ”the Saudi government is considering whether to sell shares in state oil giant Saudi Aramco as part of a privatisation drive to raise money in an era of cheap oil”.

Saudi Aramco is the world's largest oil company with crude reserves reported to be 267 billion barrels, over 16% of all global oil deposits. It employs 60,000 people worldwide and produces 10 million barrels a day (mbd), three times Exxon Mobil’s. If it went public, it could become the first listed company valued at more than $1 trillion or more, almost three times as much as the world's largest listed oil company, Exxon Mobil, analysts have estimated.

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On the 28th of December, 2015, Saudi Arabia published its 2016 budget. The budget showed a decline in spending by 16% down from 2015 and amounting to $36 bn. When this reduction in government spending is added to their declared $98 bn deficit, we come to a realistic budget deficit of $134 bn which is not far off from the International Monetary Fund’s (IMF) projection of $140 bn or 20% of GDP. The budget shows just how much the global crude oil glut is affecting the finances of the OPEC kingpin. The new budget was based on an oil price of $50/barrel in 2016 but an OPEC study projected that oil prices could range from $30-$40/barrel.

The Saudi budget showed that the country’s earnings in 2016 are forecast at $137 bn, $25 bn down from 2015 against a spending of $224 bn. However, it is believed that the fall in government expenditure will be sharper than implied in the budget.

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Japan might have stolen a march on other countries and oil companies considering investing in post-sanctions Iran. The foreign ministers of Iran and Japan have agreed in discussions in Tehran on the 19th of October to expedite the conclusion of a bilateral investment agreement. A statement issued after the conclusion of their discussions also called for close cooperation between the two countries in the implementation of the International Atomic Energy Agency’s (IAEA) safeguards in order to help Iran implement its part of the nuclear deal reached last month with the major powers (P5+1) – namely the United States, Russia, China, France, Britain and Germany.

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