ENERGY THIS WEEK newsletter
Oil prices back under $100 per barrel but market remains tight
Brent? crude dipped back under $100 yesterday after a wild ride up almost to?$140 last week . The initial fall appeared to have been triggered by comments from the?UAE’s ambassador ?to the US that the country favours production increases under the Opec agreement.?Energy minister Suhail Al Mazrouei ?emphasised any boost in output would be within the context of the Opec+ agreement, which includes Russia.
Prices then dropped further this week, partly perhaps due to apparent progress on the Iran nuclear deal, but more because of rapidly-spreading coronavirus and?wider lockdowns ?in China. There are still concerns that disruptions to Russian output could take prices?above the all-time nominal record ?of $147 in July of 2008. At prices of $110 or more, all the GCC countries will see?fiscal surpluses ?this year.
Major?oil exporters’ spare capacity ?is an essential tool to manage volatility and any potential supply disruptions, which would risk a price spike, economic damage and long-term undermining of oil demand. The US has requested?GCC assistance , and British prime minister Boris Johnson may?go to Saudi Arabia ?this week to ask for higher production. Yet several Gulf states remain reluctant to dance to the US tune, given their feelings of a lack of recent political support from Washington over regional security problems.
Despite a testy relationship, US president Joe Biden has encouraged American oil companies to?increase production , and the number of rigs drilling has increased, but remains more than 20 per cent below pre-pandemic levels.
And UAE Minister of Industry and Advanced Technology, also chief executive of Adnoc, Dr Sultan Al Jaber, remarked at an energy conference in Morocco that?more investment in hydrocarbons ?was needed to meet demand.
Russia sanctions, formal and informal, are already hitting energy supplies
Steadily tightening and expanding sanctions on Russia don’t yet target energy exports. But over-compliance, problems of financial transactions, reputational damage and expectations of future action have already sent prices soaring. There are clear signs that oil, gas and coal shipments have dropped off significantly this month.
Germany has said it plans to get off Russian coal by autumn and almost totally off Russian oil by the end of the year. Yet it still rejects extending the life of its?remaining nuclear power plants . After a?US kibosh ?on imports of Russian oil and gas and a planned?UK ban , tankers afloat are?struggling to find buyers . Unconnected to the current fighting, BP won?$10 million in damages ?for a delivery of chemically-contaminated Russian oil received in 2019.
The economic consequences of high energy prices spread
Fertiliser prices ?have continued increasing as Russian exports are threatened and the cost of feedstock gas goes up, threatening food shortfalls. Airlines were already expected to?lose $11.6 billion ?collectively this year, with oil at $78 per barrel. Now with prices around $100, and additional costs from the closure of Russian airspace, the financial results will probably be much worse.
Several countries have considered tax cuts or subsidies to ease the pain of energy consumers. US treasury secretary Janet Yellen suggested the country’s already derisorily low?fuel taxes could be reduced . California?governor Gavin Newsom , whose state has the US’s most costly petrol, has called for a rebate on fuel taxes but rejected further drilling in the Golden State.
But such measures are economically wasteful, reward richer and higher-consuming people, worsen the supply-demand crunch and undercut environmental policies. It would be wiser to compensate low-income citizens directly with cash.
More sensibly, the?G7 countries ?are looking at limiting natural gas prices with diversification, including more use of nuclear power.
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Iran deal moves on tentatively but security threats remain
There have been signs of progress on a resumption of the nuclear deal between Iran and the US and other world powers. That would bring 1 million barrels per day or more of Iranian oil exports back on the market. The accord has been threatened by?Russian demands ?for exemptions to the sanctions levied on it.
Yet the negotiations continue against the backdrop of continuing threats, including an Iranian missile strike on Erbil in the Kurdistan region of Iraq, a?drone attack ?on the Riyadh refinery, and the American?seizure of two tankers ?suspected of carrying Iranian crude. The Riyadh strike did not disrupt operations, and has not been attributed, but Iran-friendly Houthi forces in Yemen have been blamed for several similar incidents.
Energy companies restructure amid market volatility and long-term strategies
After eight years of market underperformance out of the last nine (see chart above), the energy sector is finally delivering returns, boosted by high prices. It beat the S&P 500 by almost 25 points last year, and almost 50 points this year so far.
Italian supermajor Eni and Britain’s BP are to?merge their oil and gas operations ?in Angola, bringing synergies and more financial flexibility. A similar deal in Algeria could follow. Cairn Oil & Gas, owned by billionaire Anil Agarwal, plans to?spend $4 billion ?to triple production in import-dependent India.
Dubai Electricity and Water Authority (Dewa), the emirate’s monopoly utility, will?list 6.5 per cent ?of its shares on the Dubai Financial Market in April. Dubai aims to boost the bourse’s offering and capitalise on Dewa’s growth in customers and clean energy. And Oman will list?35 state-owned companies , including some subsidiaries of its OQ energy group.
The region continues to find value in downstream investments
Methanol is a key fuel and chemical feedstock, that could be an important low-carbon product. Proman, the world’s second largest maker of methanol, will build a?facility ?in partnership with Adnoc and Abu Dhabi holding company ADQ, in the growing Ta’ziz industrial zone at Ruwais, in the western part of Abu Dhabi.
Egypt is planning a?$2 billion petrochemical complex ?based on gas at the Suez Canal. And the Chinese market remains highly attractive for regional oil exporters. Saudi Aramco will build a large?integrated refinery and petrochemical plant ?in Liaoning, north-east China.
Regional progress on clean energy faces a worsening global picture
The Middle East has made several encouraging steps in climate-friendly energy recently.?Morocco , led by new energy transition minister Leila Benali, and?Ras Al Khaimah ?are both hosting clean energy summits. Dr Al Jaber told an unofficial UN security council gathering that?more climate finance ?was required for poorer nations.
The?Dubai Sevens ?rugby stadium has installed solar power, a?“flying” hydrogen boat ?has been unveiled, and Dubai is?safeguarding water supplies ?by stockpiling 90 days of requirements underground. Taqa and Dubal Holding will acquire the?power generation assets ?of Emirates Global Aluminium, helping to balance the grid and boost generation efficiency. And further afield, Panasonic revealed a?larger battery ?that could dramatically cut the cost and extend the range of electric vehicles, even though the cost of battery materials is rising again.
Yet despite these advances and other worldwide initiatives, the International Energy Agency says that worldwide energy-related carbon dioxide emissions reached an?all-time high ?last year, despite hopes the pandemic would mark a peak. The Russia-Ukraine crisis likely marks another barrier to climate policy in the short term, even if it accelerates clean energy progress later on. BP’s latest?World Energy Outlook ?says the carbon budget is running out, emissions have risen every year since 2015 except for the pandemic effects of 2020, and the world faces significant “economic and social costs”.