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The Great Saudi Bet

Osama Rizvi

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The Saudi decision to not to cut production back in 2014 was a ham-fisted strategy. It went askew. Besides the market share, the Kingdom of Saudi Arabia (hereinafter, KSA) put their title of ‘swing producer” in jeopardy as well(see my article here). On the other hand Shale producers in US taking advantage of the technological developmentswere successful in eating up KSA’s market share. Not only this, the Vienna accord in November 2016, according to which most of the OPEC and NOPEC producers cut their production by 1.8 mbpd, and the resultant increase in price, led US to increase its own production to an all-time high of 9.66 mbpd.

Now, as if to make amends, and relying on the principle of “it is never too late” (rightly so) the Crown Prince, known in the West as Mr. Everything, Muhammad Bin Salman (MbS) has embarked on an ambitious plan: to wean the Kingdom off oil. How? Through the Initial Public Offering (IPO) of what is estimated to be a $2 trillion company, Aramco. But there road ahead is bumpy. The stakes are extremely high. If the scion fails there can be serious repercussions for the Kingdom. The issues are galore.

A  pertinent question: What if KSA ends up selling its ‘crown jewels’, but fails to diversify its economy yet again? There is a new way of thinking, which Muhammad Bin Salman has peddled. He says oil should be taken as an investment, “nothing more, and nothing less.”However, MbS try to elude the Catch-22 situation the Kingdom is embroiled in. This makes oil more than an investment.

Price tri-lemma—Once the IPO is completed. Saudi Arabia according to plan will move towards diversification. Which means oil, at least in the kingdom, will lose its value, demand. This in turn signals negative consequences for the investors!

Also, Saudi’s want high oil prices for two reasons—to breakeven their budget and for a lucrative IPO. But US shale is a hiatus. The vicious circle seems unresolvable, rebarbative. The rising prices, as a result of production cuts,will help Shale production to increase subsequently increasing the supply glut. This in turn will put downward pressure on oil prices, affecting the IPO.Demand, that too, very strong and sustainable, is the only way to rescue KSA unless the grinding and battering of this price corollary leaves them exhausted. There is another threatthat the linchpin of the Vienna deal, Russia, now wants an exit. Why? Because oil executives in Russia, that met a month ago, do not like the idea of further extension as this results in a growing US market share. Russia cannot tolerate this and has already some tricks up their sleeves.Their tax structure along with the growing exports of wheat and other commodities makes Russians to better deal with low oil prices than other countries. They reportedly have lower energy extraction costs as well. The OPEC and NOPEC countries that agreed for an extension on 30th November 2017 will meet again in June 2018. According to observers, this ‘review meeting’ can be an ‘exit strategy’ especially for the Russians, as they have been looking for a wicket gate. Russian economy has proven to be resilient even in the face of a double-whammy (lower oil prices, Western sanctions).

The case for United States in the equation is evidently. They want higher oil prices. However, not so higher that it becomes feasible for Saudi’s or others (Russians) to go on a pumping frenzy in turn glutting the markets and eating up the share of US shale which they have built, with so much effort, in recent years. IEA in their latest World Energy Outlook 2017 claims that U.S. will take over KSA as the swing producer. Their future prospects are rosy. They have to be cautious.

The long term quandaries—If the Saudi’s want to realize their dream then this act of passing the buck (of oil and swing producer) is significant, necessary even. But if the plan fails they can be left in lurch. Everything depends on the IPO and then the execution of the plan. Observers are concerned with the IPO and its effect on the region and Kingdom itself.

The concern for exposure to legal risks is relevant. It can also affect the sovereignty of the state by wresting the power from the state to adjust taxes.  The ownership of the reserves is another question. According to experts, the type of agreement between KSA and the operator will be a concession agreement. This means that the holder of the concession will have the full right to exploit and monetize the underground reserves “in return for payment of taxes and royalties to the government”. In simple words, through the IPO, Aramco will offer investors an ownership in the concession.

The valuation of the company is itself not confirmed. Estimates about $2 trillion might be exaggerated. According to one calculation, if the old system of a royalty (20%) and taxes (85%),is maintained the total valuation will be far less than the touted $2trillion.Even if the oil price is kept at $70 and production at 10mbpd, with above taxes and royalty, the total valuation will still make only $251 billion. Recent measures which had cut the tax rate to 50% will only stretch it to $419 billion. According to Wood Mackenzie, Aramco’s valuation is about $400 billion.

How can one forget social discontent? As the government tries to wend towards a more diversified and modernize economy the masses, which were in wont of benevolent government largesse, might have to face hardships. The long holidays, low taxes, and generous government programs have to be curtailed. Will the society accept the economic overhauling?

It is instructive to note here that financial diversification and economic diversification are two different things. Economic diversification relates to changes in the economic base e.g., creation of jobs, whereas financial diversification caters to diversifying the sources of income that doesn’t necessarily translate into job creation.Most of the investment is expected to be in the foreign market as the current economic depth of the Kingdom is not enough to absorb the investment. The recent deal between Softbank and PIF is indicative that most of the investments will be towards the tech sector outside the kingdom having a limited impact on the economic infrastructure at home.

As the Kingdom welcomes 2018 this will be the most pressing issue. The above mentioned problems are not the only ones. One thing should be vivid by now. The path is riddled with problems. The IPO is directly linked with the future of Saudi economy. The ante is high. MbS’ ambition confronts the conventional mindset and the reality of international political economy. This is an ambitious plan but worth taking risk for.

Independent Economic Analyst, Writer and Editor. Contributes columns to different newspapers. He is a columnist for Oilprice.com, where he analyzes Crude Oil and markets. Also a sub-editor of an online business magazine and a Guest Editor in Modern Diplomacy. His interests range from Economic history to Classical literature.

Energy

Renewables and Improved Cooling Technologies Key to Reducing India’s Water Use

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A new policy brief co-authored by the International Renewable Energy Agency (IRENA) and the World Resources Institute (WRI) finds that increasing the share of renewables, in particular solar photovoltaic (PV) and wind, in India’s power mix, and implementing changes in cooling technologies mandated for thermal power plants would not only lower carbon emissions intensity, but also substantially reduce water withdrawal and consumption intensity of power generation.

The brief, Water Use in India’s Power Generation – Impact of Renewables and Improved Cooling Technologies to 2030, finds that depending on the future energy pathways (IRENA’s REmap 2030 and the Central Electricity Authority of India), a power sector (excluding hydroelectricity) transformation  driven by solar PV and wind, coupled with improved cooling technologies in thermal and other renewable power plants, could yield as much as an 84% decrease in water withdrawal intensity by 2030, lower annual water consumption intensity by 25% and reduce carbon emissions intensity by 43%, compared to 2014 levels. It builds off of the findings of Parched Power: Water Demands, Risks, and Opportunities for India’s Power Sector, also launched today by WRI.

“India has emerged as a global leader in renewable energy achieving record-level growth in deployment, rapid cost reductions and many socio-economic benefits of the energy transformation.” said Dr Henning Wuester, IRENA Director of the Knowledge, Policy and Finance Centre (KPFC). “Scaling up the use of renewables, especially solar PV and wind, will yield further benefits, in particular long-term reductions in the dependency of the power sector on freshwater.”

More than four-fifths of India’s electricity is generated from coal, gas and nuclear power plants which rely significantly on freshwater for cooling purposes. Moreover, the power sector’s share in national water consumption is projected to grow from 1.4% to 9% between 2025 and 2050, placing further stress on water resources. Renewable energy, with the added potential to reduce both water demand and carbon emissions, must hence be at the core of India’s energy future.

“India’s move towards renewable energy is essential, especially as water stress puts increasing pressure on India’s thermal power plants,” said  Dr O.P. Agarwal, CEO, WRI India. “Water risks to thermal power plants cannot be ignored when considering the cost of thermal energy. Renewables, especially solar PV and wind energy, present a win-win solution for both water and climate.”

The joint brief was launched at the World Future Energy Summit 2018 in Abu Dhabi.

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Energy

Going Long Term: US Nuclear Power Plants Could Extend Operating Life to 80 Years

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The last couple of decades have witnessed increased interest in the extension of the operating life of nuclear power plants. Extending the life of a plant is more economical than building a new one, and where it makes business sense, many plant operators in the United States are seeking licence renewals. This helps avoid supply shortages and support the country in reducing carbon emissions.

“It is very important for us as a world community to care how electricity is produced,” said Maria Korsnick, President and Chief Executive Officer of the Nuclear Energy Institute. “You can produce electricity of an intermittent nature, like wind and solar, but you are going to also need 24/7 baseload energy supply that is kind to the environment, and nuclear is just that.”

The US Nuclear Regulatory Commission (NRC) issues licences for nuclear power plants to operate for up to 40 years and allows licences to be renewed for up to 20 years with every renewal application, as long as operators prove that the effects of ageing on certain plant structures and components will be adequately managed.

About 90 percent of US plants have already renewed their licences once, extending their operation to 60 years. But most of these will soon reach the end of their 60-year term. If they cease to operate or are not replaced by new plants, the percentage of energy generated from nuclear will drop. A subsequent renewal extends a plant’s operation from 60 to 80 years.

Nuclear provides 20 percent of the United States’ electricity supply and more than 60 percent of the country’s CO2 emissions-free generation. Electricity demand is expected to rise by more than 30 percent by 2035.

To obtain licence renewal, a plant must provide the NRC with an assessment of the technical aspects of plant ageing and show how any issues will be managed safely. This includes review of system metals, welds and piping, concrete, electrical cables and reactor pressure vessels. It must also evaluate potential impact on the environment, assuming the plant will operate for another 20 years. The NRC verifies evaluations through inspection and audits, and its reviews of licence renewal applications can last anywhere between 22 and 30 months.

“In the very beginning, an NRC review took years to complete,” Korsnick said. “Now that the process is better understood, we are just under two years. For subsequent licence renewal, we will probably get the process down to 18 months.”

While there have not been any subsequent licence renewals yet, three plants have already expressed their intent to submit an application for such renewal.

“If a subsequent renewal is granted and plants are allowed to operate for 80 years, NRC could see increased interest by other utilities,” said Allen Hiser, Senior Technical Advisor for Licence Renewal Ageing Management at NRC. “NRC experienced a similar trend when the original licence renewals were granted back in 2000.”

Coping with government and market challenges

Most US Government policies favour renewables over nuclear, and according to Korsnick the market does not value all of the attributes that the nuclear plants bring. Three plants in the past six years have already shut down even before their original licence expired because they could not make sufficient money in the current market place. Korsnick maintains that the markets must be improved so that they value the products that nuclear is bringing — products that include clean air, constant 24/7 power and continuous operation for at least 18 months before needing to refuel. Full recognition of these benefits would prevent additional plants from shutting down prematurely.

“Fundamentally we want an electricity grid that boasts a diversity of generating technologies and that appropriately values the core attributes of each technology and the benefits they deliver to society,” Korsnick said.

The IAEA and long-term operation

The IAEA has benefited from NRC support in its long-term operation (LTO) activities. The NRC was an early funder and active participant in the IAEA International Generic Ageing Lessons Learned (IGALL) programme, which used technical information from the NRC’s Generic Ageing Lessons Learned report as its starting point. Other IAEA Member States added data for their plants to that US information, including information for pressurized heavy water reactor designs.

The USA has been an active participant in other IAEA activities related to LTO, including the development of safety guides on ageing management and LTO and presenting LTO workshops for international regulators and plants. The US also continues to provide expertise during IAEA Safety Aspects of Long-Term Operation (SALTO) missions to countries in Europe, Asia, North and South America.

Source: International Atomic Energy Agency

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Energy

New Global Commission to Examine Geopolitics of Energy Transformation

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The International Renewable Energy Agency (IRENA), has today launched the Global Commission on the Geopolitics of Energy Transformation, with the support of the governments of Germany, Norway and the United Arab Emirates. The Commission will examine the immediate and longer-term geopolitical implications of global energy transformation driven by large scale-up of renewable energy in the context of global efforts to tackle climate change and advance sustainable development. The Commission will be chaired by Mr. Olafur Grimsson, the former President of Iceland.

“The global energy landscape is witnessing rapid and disruptive change that will have far reaching effects on geopolitical dynamics,” said Adnan Z. Amin, IRENA Director-General. “Renewable energy resources are abundant, sustainable and have the power to significantly improve energy access, security and independence.

“At the same time, the large-scale deployment of variable sources of renewable energy such as solar PV and wind, is fostering greater cross-border energy trade and cooperation between nations,” continued Mr. Amin. “Understanding these changing dynamics in a way that informs policy makers, will be the primary goal of the commission.”

“I am delighted to chair the Global Commission on the Geopolitics of Energy Transformation, and congratulate IRENA on this timely initiative,” said Mr.  Olafur Grimsson, former President of Iceland. “The geopolitical implications of energy transformation is becoming one of the most debated issues in the global energy agenda. The Commission can make an important contribution to these global discussions, on the basis of solid evidence and analysis as well as a diverse range of perspectives,” added Mr. Grimsson.

While most geopolitical analyses of energy related issues have focused on conventional fuels such as oil and gas, the Commission will review the implications of the ongoing global energy transformation underpinned by the surge in renewables and report on how it would impact the geopolitics of energy based on rigorous and credible evidence.

The Commission will be composed by twelve leaders and experts on international energy and global security issues, with particular emphasis given to ensuring diverse geographical and expert background representation. The Commission will present its report at the 9th Session of the IRENA Assembly in January 2019.

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