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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.
The climate risk playing field is changing rapidly for the oil and gas industry. Methane emissions management was previously a niche or emergent issue for investors and companies alike; however, only one business week into 2016, developments suggest it is becoming a mainstream issue that is capturing increasing public, investor and environmental advocacy attention.
One year after the enthronization of King Salman, Saudi Arabia has enhanced its role as a center stage player not only on the global oil market but also throughout the Middle East. The modulations of Saudi’s regional foreign policy are monitored and scrutinized with more zeal and apprehension than the behavior of other main players, including the US, Russia, Iran, Israel, and even the increasingly unpredictable Turkey.
That is due to a number of overlapping factors, not fully positive for Riyadh. Saudi Arabia kick started a chain of crucial events in Libya, Yemen, Syria, etc. which did not evolve in the desired direction.
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.
The front-page maker, deputy crown prince, Mohammad bin Salman, the favorite son of Saudi King Salman, made waves at the beginning of the year by suggesting that Aramco, the state-owned energy monopoly, was nearing its first ever IPO. Most of the comments, unsurprisingly, circled as vultures over the assumptions of what it might be worth.
Since ExxonMobil, boasting of the possession of 25bn barrels of oil, is estimated to be worth around $320bn, Aramco with its immense hydrocarbon reserves of 261bn barrels could weight some $3400bn.
An expert with Bloomberg called the most likely capitalization of Aramco something ”out of this world”. While another shrewd market watcher claimed the final fix of the price tag for the Saudi’s giant would make Apple look like a ”small family owned business.”
In mid-January, Greece paved the way for an accelerated economic and trade engagement of the basically de-sanctioned Iran by purchasing the first batch of barrels of Iranian oil.
The reinstatement of Iran as a bona fide partner was later impressively manifested by the European tour to Italy and France by its President Hassan Rouhani, who netted quite remarkable benefits thus providing an unequivocal answer to the question used as a title for his study by expert Euler Hermes “Iran: Back in the game?” Indeed, this is a comeback for the 80-million nation, heir of the Persian Empire, and the would-be new regional leader.
Are investors running away?
With a barrel of oil worth about $30 today and no clear signal of rebound, whereas for most companies the break even price is above $50, the harsh reality for the oil and gas industry is well expressed by the following: “The longer you’ve got low oil prices, the more companies will have to focus on pure survival” . In this context the generous oil major’s payouts seem a bit quirky. A recent survey  provides indications on the dividend policy of large oil and gas companies (table 1)
The civil war in Syria, complicated by interventions of major regional and global players, became a turning point in the geopolitical narrative of the whole Middle East.
After the catastrophic failure of two projects, the Big Middle East and the Arab Spring, a new stage of the regional grand game unrolls. The originally assigned roles of all the involved parties are now being upturned, the preconceived goals inverted, and the actual stakes (and costs) reconsidered.
Recent efforts to put a cap on oil production in an attempt to balance the market, has not affected the pricing trend. Energy ministers from Saudi Arabia and Russia, the two major oil producers, accompanied by colleagues from Qatar and Venezuela failed to reach an agreement to cut production, compromising only on introducing a limit, fixing the output at mid- January level. With this diminishment of the original intentions, the agreement had no immediate impact on prices: curves stayed almost unchanged. The market, psychologically eager for a price adjustment, was disappointed by the modesty of the bargain.
All eyes were on Iran, which enjoyed being sanctions-free and was looking to increase his oil production and sales, seeking cash-flow, investments, and modernization. Iran did not promise to limit its production to the agreed level, but said to support the move.
Election results, resembling an earthquake, with the moderates making a strong gain at the expense of their arch-rivals, the hardliners, have shaken up Iran for the second time in its post- Shah status of an Islamic state. The astoundingly big win for reformers and independents marks a watershed in the on-going tug-of-war between the two wings of the political class. Soft-speaking, smiling, spectacled, with a convincing image of an intellectual, Iranian President Hassan Rouhani has essentially secured a vote of confidence for his long-term pragmatic policies.
The contentious deal on the migrant flow struck between the EU leadership (despite deep divisions) and Turkey seems to be rooted in the Roman principle “do ut des” (“I give that you might give”). On the surface, it looks like a sound compromise in the absence of any other unequivocal and convincing alternatives.
However, the deal has already drawn plenty of critical “slings and arrows". Nations of South East Europe, adversely affected by the in-flow of unexpected guests in the first place, remain skeptical.
It is no big secret that Greece has all the prerequisites to assume the role of a regional energy hub, predominantly in respect of pipeline gas and LNG, and act as a gateway to South East Europe.
This relatively immodest ambition received thumbs up from the visiting Vice-President Maroš Šefčovič in charge of energy issues in the EU. His upbeat statements made in Athens could not but please and embolden, and the skies of tomorrow would look uncloudy were it not for the arguments in support of such a bright future.
Western nations, supported by the UN, are keen to restore a kind of statehood in Libya, which disintegrated after the killing of the dictator, Col. Muammar Gaddafi who died from bullet wounds in 2011. So far, attempts to bring back law, order and some form of stable governance are basically unsuccessful.
US shale gas: the first of five revolutions at the beginning of the XXI century
Three revolutions on the supply side: US shale gas, US shale oil and worldwide renewable
The US shale gas revolution is only the first (and most documented) of three revolutions that happened since the beginning of this century on the supply side. The world has changed thanks to the US shale revolutions (gas first and then oil) and a global quest for renewable. Those revolutions took over a decade but will shape the XXI century. Australia followed producing unconventional gas and is now also exporting it. It should take some time for unconventional oil and gas production to materialize in other places where the resource is available (Argentina, Canada, China, Mexico, Russia, South Africa, etc.) but the US shale revolutions should be exported in a few other countries.
Although carbon emissions factors from electricity generation vary according to their net calorific values and efficiencies, natural gas with about 400 gCO2 per kWh is clearly the lowest of the fossil fuels. For those concerned with the need to move to a low carbon future, and quickly - especially those who have negative views about nuclear power - natural gas would appear to be the obvious bridge to that low carbon future as far as electricity generation is concerned, with a reliance on renewable energy, and avoidance of the potentially catastrophic consequences of human-induced climatic change. However, it scarcely touches the transportation sector. In this short Note I suggest, without going into the challenges of a renewable energy future or the uncertainties and complexities surrounding the subject of climatic change (topics I intend to cover in a talk at the ESCP Europe Paris Campus on May 31st), that the natural gas sector faces its own severe challenges. These challenges largely come about due to the internal contradictions and unforeseen consequences of energy policies in all too many countries.
Watching with carefully hidden uneasiness the controversial mid-term result of depressed global oil prices, that the Kingdom of Saudi Arabia has heavy-handedly imposed on OPEC, leaders of the desert monarchy have proclaimed an unrivalled ambitious plan, named Vision 2030, to reform itself from within, restructure oil-dependent economy and emerge as a beacon of the ‘brave new Arab world’ (whatever it might mean in this case) in a matter of just 15 years.
The aspirations of Bulgaria to become a major regional energy hub have acquired some solid ground. By the end of April, nine companies have submitted non-binding expressions of interest (EoI) to book capacity in the Greece-Bulgaria gas interconnector (ICGB), which is in tune with the European Union’s energy policies. The list of companies features UK Noble Energy, Italy’s Edison, Azerbaijan’s Socar, Greece’s Depa and Gastrade, Bulgaria’s Bulgargaz, etc. The timeline stipulates submission of binding offers by mid-2016.
That is the question put to Italians on April 17. They were invited to a referendum to decide what to do with the 92 offshore drilling platforms, which are producing hydrocarbons in the country’s territorial water. Most platforms belong to the national energy major, Eni.
The story is a typically Italian one, where the core problem doesn’t matter much but the buzz is around the attached topics.
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.
The Chinese project of putting together the Economic Belt of the Silk Road (EBSR) is one of the biggest geopolitical challenges of modern times. The ambitious idea is to create a network of guaranteed transportation corridors between China and Europe, engulfing transit regions into a unique macro-economic system.
China views it as a means to capitalize on its financial, industrial and human potential. Countries and regional associations along the way of the Silk Road have a stake in harmonizing their differences and achieve a synergic effect through pooling their resources. On the contrary, the United States perceive the Silk Road idea as a big challenge, since the planned trade transit corridors, especially on-shore, will be out of American reach and control.
All along most of the 2016 U.S. election trail the issues of energy policy have been conspicuously omitted by the frontrunners, instigating certain uneasiness among the industry actors, investors, trading intermediaries, stockbrokers, insurance agents and shippers. At last, the silence has been broken, partially.
Energy topped the agenda of a public rally and discourse in Bismark, North Dakota, bringing some relief to the interested parties noted for their divergent views on tapping the offshore oil deposits, widening the application of the fracking technologies, and above all, earmarking shale gas either for exports or for the domestic market.
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.
The militant group Niger Delta Avengers once again took the arms and destroyed several oil wells and installations located in South of Nigeria, region populated by a large Christian community.
There is a grim feeling ofdéjà vutaking us back to 2006-2009 when rebels of this region inhabited by some 20 million people revolted against the federal government demanding at least some control over local natural resources.
On July 12th, 2016, the UK Climate Change Committee was reported as advising that, if near surface temperatures rise more than 20 C above their 'pre-industrial' level by the 2040s then there will be chronic water shortages in the UK and people living in modern homes will die from the heat. Or they will unless they fit shutters to their windows like the French do, because modern British homes, care homes, and hospitals have been designed to retain heat in winter rather than stay cool in summer.
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.
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.
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.
The proof that Iran honours its commitment to create a favourable investment climate and lure back foreign capital lies in the signing of confidentiality agreements with brand named International Oil Companies (IOCs) that happened at the end of August.
The multinational assortment of energy majors included the leader in the current re-discovery of post-sanctions Iran, French giant Total, followed by Austria’s OMV, Germany’s Wintershall, Russia’s Lukoil and Zarubezhneft, and Indonesia’s Pertamina.
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.
What are the most likely repercussions for South East Europe’s energy security after the somewhat ambiguous reconciliation between Ankara and Moscow has re-activated the Turkish Stream pipeline project? Will it challenge the EU energy directives? Will it drive another wedge into the alliance of nations loyal to the concept of an ‘energy union’ and undermine solidarity? Does it really matter or it is not worth consideration? Is it a challenge or an opportunity?
For the moment, the implementation of the project stepping into the shoes of the defunct South Stream is far from being ascertained. Yet, pre-emptive review is appropriate. Should the Black Sea offshore infrastructure materialize, even in its current scaled-down design, it might impact the breakdown of energy imports of the south East corner of Europe having negatively affected the prospects of Azeri pipeline gas deliveries as well as Qatari and US-shipped LNG.
The African continent is not considered to be the main source of oil for the global market. However, it is playing a more significant role as provider of the still principal energy resource. It sets the stage for accelerated development as well as for wars and political destabilization.
Africa is home to only 7.6% of the world oil resources and it accounts for 9.3% of the world oil production. From 2010 onward, one third of all new oil fields discoveries were made on this continent.
Recent intense bellicose rhetoric and sabre-rattling between India and Pakistan has raised the stakes in the completion of the much-heralded Turkmenistan-Afghanistan-Pakistan-India (TAPI) natural gas pipeline project. An unnamed official of the Indian government dismissed suspicions that the US$9-billion project could be either postponed or shelved indefinitely due to flaring animosity.
The current round of open and covert hostilities was provoked by a terrorist attack on an army camp at Uri on September 18 and another one at 46 Rashtriya Rifles camp in Baramulla on October 2. The attack in Uri located in India-administered Kashmir was carried out by a radical grouping called Jaish-e-Mohammed (JeM) that is allegedly linked to Pakistani intelligence services and reportedly responsible for a similar attack on a military base in the town of Pathankot in the Indian state of Punjab in January this year.
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.
The incomprehensible relative political stability in Algeria is largely attributed to the psychological trauma suffered by the people during the so-called Black Decade, the civil war that raged between 1991 and 2002 with Islamist fundamentalists challenging the regime.
Today, the aging and basically unhealthy 79-year-old president Abdelaziz Bouteflika who heads the National Liberation Front (FLN) is offering a semblance of 'stability and continuity' (the ultimate and most appealing of the FLN slogans) and thus capitalizes on the rejection of violence by 40 million people of the weary nation.
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.
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.
In spite of all the polls assuring of a clean win for Hillary Clinton, the latent anti-establishment revolt of the “America first” electorate has propelled a non-interventionist and, in this sense, a “nationalist” (as opposed to globalists) to the top job in the last world’s superpower. It is hard to dismiss outright the comment from non-mainstream but gaining momentum political groups that the result of the 2016 US elections is “a triumph of the people over a failed political establishment” and that America will never be the same again.
However, the last assumption could be effectively challenged. It is not over yet. There are deep divisions within the political class and corporate community with Wall Street bankers still clinging to their guns and the neocons in both parties ready to continue sacrificing the United States for the sake of a globalist vision.
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.
After years of confrontation Brussels decided to permit Gazprom to use almost 90% of the OPAL gas pipeline, located in Eastern Germany. Almost simultaneously there were information leaks about a deal between the two players on the competition case. Apparently, both sides found a way to settle the row in a satisfactory way.