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A Tough Row to Hoe

Osama Rizvi

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[yt_dropcap type=”square” font=”” size=”14″ color=”#000″ background=”#fff” ] A [/yt_dropcap]ll seemed hunky-dory. The air was suffused with a sanguine current cascading through the markets and rallying up the prices touching a year-high of $53.73. Saudi Arabia aims to cut 2%-4% of total production and Russia also says that it will drain some 700,000 bpd. But the whole scenario was tinged with a shadow of askance.

Soon after Russia said that she is ready to cut production, Rosneft’s boss put a check on the growing positivism by infusing uncertainty into the air. He said that we will not participate in this cut or freeze program.

Few days back when Saudi Arabia and Non-OPEC members met in Vienna in order to mull upon the minutiae as preparation for the final November 30th deal. There is almost a whole month to go before the world see what might happen on that very day. But before it I would like to veer the reader’s attention towards some of the stones that the OPEC and Non-OPEC producers have to turn in their way to reach at their destination.

A Look at Fundamentals- Figures and facts tend to depict a picture that is not corrupted by subjectivity, sentiments and speculations. International Energy Agency in its last oil market report give us a peek into the latest trends. “Global oil supply rose by 0.6 mb/d in September, with non-OPEC up nearly 0.5 mb/d on higher Russian and Kazakh flows and OPEC at an all-time high”. Also, “due to OPEC growth” the world supply tumefied to 97.2 mbpd- a 0.2%increase. The rig count, calculated by Baker and Hughes (of-late, engaged in a merger with GE), has been rising for 17 weeks only to fall by 2 in the past one (ending October 28th) making the total rig count 441. The EIA states that the US production has fallen only 0.10% . The inventory level, as per American based EIA, has seen a huge build-up of 14 million barrels for week ending October 28 sending crude 3% low. The aforesaid is a kaleidoscopic picture imbued with a numerical color. Some good and some bad news.

Exemptions and Excuses- First it was only Iran now another country stands in the queue to receive the largesse of exemption from any sort of cut or freeze. The new country is Iraq. OPEC’s second largest producer says that it should be exonerated from any production cut as it needs cash to fight the balaclava wearing IS terrorists. Iran, with an unwavering stance, rejects any notion of curtailing its production by abducing a simple argument: after years of sanctions its pulverulent pumping jacks are now waggling the dust off and it will be a pure folly to halt its production. Libya is another contender waiting to be absolved. Nigeria hit by the recent spate of attacks by Niger Delta Avengers too. And both are in no mood to curb. Nigeria’s output is reaching to its pre-crisis level as pointed out by Nigerian oil Minister Emmanuel Ibe. Its Trans Niger Pipeline has also resumed operation. Libya, since September, has ramped up its production to 590,000 bpd. This puts the onus on Saud Arabia and Russia. The latter one also seems dubious for, albeit said to participate in the deal, the figures in their budget finds itself in a contradiction as they aim to extract more than 11mbpd in the coming year(s). Last month KSA’s production also broke the ceiling when it touched an all-time high of 33.6mbpd. Certainly, not a good recipe to heal the markets.

Agreement- Let’s assume the best of scenarios. At the table, Mr. Khalid Al-Falih stands up and sprinkles the words that send a wave of relief and a smile among his interlocutors. “We have decided to cut production”, he heralds with a sense of far-sightedness and sensibility deeming himself as the sailor who seem to take pride to steer away the Saudi boat away from the whirlpool of economic pressures that has caused a dent in one of the top 20 biggest economies of the world. Russia follows and Mr. Putin reverberate the same. Gasps. Some flabbergasted. Some happy. The markets revel. All back to normal (normal will now be $60-$70). An uncannily prosperous picture, indeed. But the question then swims from this sea of mirth and start to surface on the level i.e. how long will this deal hold? Russia has recently bought Essar oil company which gives it control in one of the biggest and burgeoning market of the world i.e. India. The Kashagan oil field has started oozing out black gold and it will further contribute to the current supply glut. There is no demand as the Paris based IEA also said in its October oil market report that the demand has further slowed down. China, the main driving force behind the demand, is tepid. Also, the metamorphosis of a cut into quotas can also be witnessed. “The High Level Committee of experts will meet again in Vienna on Nov. 25 ahead of the next meeting of OPEC ministers on Nov. 30, to “finalize individual quotas”. Again quoting IEA Non OPEC supply is expected to increase by 0.4mbpd in 2017.

Mr. Fereydoun Barkehsli, Advisor of the Institute of International Energy Studies and Head of Vienna Energy Center in response to the question that what might be the issues impeding Nov. 30th deal, says: “Saudi Arabia was OPEC Swing producer for several years. The Kingdom was Quota-free under the condition that once market was under-supplied or over-supplied, Saudi Arabia would adjust its supply accordingly and an official price level would be maintained. But as crude oil prices plummeted during 1984-85 Mr. Zaki Yamani who was then Kingdom’s oil minister officially announced that his country could not cut down production any longer to maintain price and asked for production quota. Since then Saudi Arabia has persistently asked for pro-rata cut by all members. Iran is not the only member who is unhappy about cutting production, but all members who have already reached their production peak do not want to cut, because once demand and price was on the rise, Saudi Arabia got most of the market share ergo the dissent of other members. Russia and non-OPEC producers have a different story of their own. Russia has consistently jumped over OPEC shoulders and benefited from the organizations higher demand and price and never contributed towards OPEC sacrifices. I believe in 30 November’s Ministerial conference in Vienna the organization will have to fight at two fronts. Moscow is, behind the scenes, lobbying with Venezuela and Iran for exemption but neither of them is supportive of giant non-OPEC producer.”

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

Potential of Pakistan’s Power Sector

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A few years ago, several hours of load-shedding in Pakistan was very common, even in Islamabad, the capital of Pakistan was without electricity for 6 hours on daily basis. Thanks to CPEC, thanks to China, who has completed several power projects and the people of Pakistan are relieved a lot. Now there is still load-shedding but only for couple of hours. The country was able to produce 16000 MW of electricity in the 7 decades almost. And most of the mega projects were completed in 1960s or 1970. Last 4 decades the nation was unable to add any significant amount of power into national grid.

China helped Pakistan to over-come its power shortage and just within few years, under CPEC, the country was able to add 11000 MW of power into National Grid. There are several power projects under execution or in the pipe line. It is believed, that next couple of years and we may get rid of load-shedding absolutely. However, it is also expected that due to planned industrialization, the demand may also increase tremendously. We still need to focus on the power generation, transmission and distribution. As the transmission is rather old and line losses are rather high. There is a need to up-grade our transmission system on urgent basis. The major issue is still the distribution, which resulted in theft of electricity. Line losses and theft made electricity rather expensive as it has to be recovered from consumers.

However, Pakistan possess potential of 65000 MW hydropower generation. Some of the sits are natural dams and suits for electricity production easily. Building big dams or mega dams, require a lot of investment as well as technical expertise too. But, small dams are easily constructed by our private sector. The requirement of investment is within the reach of our private sector and the technology required is also available within the country.

Dams also store water which will be additional value for Pakistan. As Pakistan is a country which faces water related disaster twice a year. During the rainy season, heavy rains causes flood every year and damages our crops, cattle’s, villages and loss of human live. Floods cause spread of seasonal diseases and epidemics also cause a big loss to nation. Just after a few month, Pakistan faces drought season too. During the drought season, water shortage cause big damage to human life and animals’ and husbandry. Crops suffered heavy losses due to shortage of water.

If appropriate dams are built, it may generate power to meet the national requirements as well it stores water during rainy season to avoid floods and utilize water during the drought season. We can overcome some of our serious problems by indigenous technology and domestic resources, without going to International donors.

Usually building big dams requires a long time 10-15 years, but our political system is based on 5 years tenure term. Most of political parties do not initiate any project, which cannot be completed within their tenure and they get benefits of completed projects during the election. As a practice, most of political parties never takes any initiatives, which may goes to credit of next government. But recently, Pakistani voters have become matured and they understands the worth of long term projects and may vote for those who are visionary leaders and sincere with Pakistan, and take long tern initiatives for the best interest of the nation. Our political parties may also up-date their strategies accordingly.

Not only hydropower, even Pakistan is rich with coal. Only Thar coal can meet the nation’s energy requirement for next 500 years. Coal technologies are on its path of rapid development. There exists technologies to convert coal into natural gas, or diesel. Coal can also help the whole downstream hydrocarbon industry too. Clean coal technologies are already applied in the field. Pakistan can be major beneficiary of its coal reserves.

God has blessed Pakistan with unlimited solar energy. There are areas in Pakistan, where the Sun shine duration is above 300 days in a year, and upto 18 hours of Sun shine on daily basis. This unique potential may be exploited for green and clean energy. Wind is also one of our strength.

What do we need? An enabling policy from Government of Pakistan. The policy may be focused to attract local entrepreneurs based on incentives. Sustainable and long term incentives, and protection may be the priority of Government. Our private sector possess the potential of rapid growth. It may include International market too. But the indigenous know-how and domestic investment may be given priority.

If PTI government can deliver something like this, their next elections are guaranteed to win.  As per my perception, Imran Khan, the prime minister of Pakistan has vision, has will and sincere with the nation, based on our understanding, we expect he will take serious notice of things and include power sector in its priority too.

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Energy

Back to the future

Laszlo Varro

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In the classic Back to the Future movies, the future was powered by a decentralized clean-energy system. Houses and flying cars ran on fuel cells fuelled by residential garbage. The technology itself isn’t particularly far-fetched – not the flying car bit, but the process to power a fuel cell from hydrogen produced by methane from garbage is relatively straightforward for today’s biogas plants.

But time travel aside, what the 1980s vision of the future missed are the actual technologies that emerged started to reshape our energy system in the last three decades since the movies came out – namely wind, solar and battery electric cars. While the present of the energy system is strikingly similar to the 1980s with a practically unchanged domination of fossil fuels, the expectations of what will follow shifted. This is a very different future and one that creates a delicate challenge for the electricity sector.

Transport is a huge and growing energy consuming sector. It represents 28% of total final energy consumption, and is responsible for almost 60% of global oil demand. Electricity is used in transport, though today mostly in electric railways compared to which electric cars are still minor.

If garbage, or, in a more scalable fashion, biomass or hydrogen produced from natural gas, were to provide a clean-energy alternative for transport, the transport sector could move away from oil without integrating more deeply into the electricity sector. There would be no need to deploy new infrastructure to support electric car charging, no concerns about charging times and impacts on power flows, it would be business as usual for electricity.

In addition, garbage is easy to store, and fuel cells can regulate their production in a flexible fashion. In technical terms this creates decentralised dispatchable clean-energy production – meaning it can collect power into a central system, much like the current system. Such a technology would enable the continuation of a hundred-year paradigm of regarding electricity demand fluctuations as a given and managing the system from the supply side.

But, this market is tiny. Only a few thousand residential fuel cells are sold in Japan each year, nothing compared to the millions of solar panels sold around the world. To be sure, solar production varies with the weather and it is often not well correlated with demand. A solar rooftop with a battery in the garage seems like a perfect distributed dispatchable solution and generates increasing attention. However, more than 99% of the solar panels are deployed without batteries – their variability is handled at the system level rather than at a project level. In fact the optimal location is of batteries is often not next to the solar panel but in specific network nodes where their operation can relieve bottlenecks.

Solar and its twin brother, wind experienced a radical technological progress, cost declines and are rolled out at an impressive scale. While the energy system will continue to rely on a diversified set of fuels and technologies, the rapid growth of wind and solar will have to play a key role in tacking  disruptive climate change. Nevertheless, both of them generate electricity which accounts for only 20% of energy consumption today.  The full potential of wind and solar will be realised only if a much higher proportion of energy is consumed by electrifying other sectors, including transport. Such electrification not only reduces direct fossil fuel use in vehicles or buildings, but if done smartly it unlocks need new flexibility sources that wind and solar will need for really large-scale growth.

The transport technology that generates the most excitement is electric cars. Although personal cars represent only a minority of the oil use of the transport sector, electric cars capture public imagination in a fashion that is disproportional to their energy footprint. As a result, they tend to dominate discussions on the future of energy even though ships, aircraft or heavy trucks are most likely to continue to use oil for a considerable time. Linking electric cars to wind and solar creates major opportunities but also challenges. Cars and wind and solar production will need to interact through an interconnected system. An EV can’t be self-sufficient when coupled with a residential rooftop solar panel since solar production is low in the winter precisely when the car has a higher electricity need. In temperate climates, nearly all solar households remain connected to the grid with a changed utilisation pattern and wind is evolving towards a quintessential utility scale big business where technological progress makes wind turbines bigger and bigger rather than small and decentralised.

While early adopter electric cars used in suburban commuting can take advantage of the existing network and charge in the garage of the owner for mass adoption and long distance travel a new infrastructure development will be needed. High capacity chargers will require network reinforcements as well as a careful coordination of when the cars charge. Due to the energy density of hydrocarbons, it is not possible to copy the gasoline lifestyle to the electricity age. Plugging in and quickly filling the car at sunset will be part of the problem, responding to changes in wind with smart charging will be part of the solution.

A dominant role of electricity is not a new dream. The 19th-century science fiction novels of Jules Verne are full of electric cars, battery powered submarines and even electric helicopters. This electric future was delayed by the century of oil, but it is now arriving. Its features are becoming increasingly clear: A new electricity network that is more robust and more flexible at the same time. A new market design that is able to orient and optimise millions of producers, consumers and prosumers giving value to time and location. A new transport system where parking vehicles are not idle but act as active system assets.

Because of its security implications and importance to modern society, electricity will remain a heavily regulated industry where government policy plays a crucial role in guiding the transformation. This complex interplay of technology, investment, policy and regulation shaping the growing role of electricity will be depicted in the upcoming World Energy Outlook focus. In special effects, it might not be up to Hollywood’s standards, but it will be as exciting and innovative.

IEA

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Israel’s Gas Ambitions are Valid but Challenges Remain

Antonia Dimou

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The discovery of Israel’s natural gas resources promise important benefits of energy security and economic gains. Israel is a leading country because preparations to extract gas are already at advanced stages despite that its gas fields’ development has proved to be a lengthy process.

Delays are attributed to the fact that the fields’ development is capital intensive and entails risks that unsettle investors. A major risk is the lack of energy transportation infrastructure in Israel. Leviathan field partners namely Noble Energy, Avner Oil Exploration, Ratio Oil Exploration and Delek Drilling are likely to develop infrastructure used exclusively by Leviathan, blocking out competitors and endangering prospects for future gas discoveries in Israel. In particular, the likelihood that competitors will have to finance their own transportation infrastructure, raises the costs of developing smaller fields at prohibitive levels. Concurrently, the Israeli Leviathan field’s development, the largest exploration success since December 2010,is capital intensive given that it requires significant investment that will be carried out in two stages: the first stage foresees four development wells with an annual capacity production of 12 billion cubic meters (bcm) of gas, and, the second, four additional wells that would increase production capacity by another 9 bcm.

In regional terms, Israel’s efficiency as a gas exporter is significant. This is evidenced by the signing in early 2018 of two agreements valued $15 billion between Leviathan and Tamar fields’ consortium and Egyptian company Dolphinus Holdings for the provision of 64 bcm of gas over a ten-year period. The agreement are expected to produce three benefits. First, Egypt is a viable export market for Israeli gas and will thus generate interest from foreign energy companies to bid for licenses in future Israeli international auction rounds. Second, the Israeli government would benefit financially from royalties on sales and taxes on profits. Third, Leviathan partners will secure funding for the field’s development.

Reservations however subsist when it comes to the transportation of Israeli gas to Egypt via the existing pipeline infrastructure in Sinai as terrorist attacks on the pipeline could halt exports from Israel as it happened in 2012. The prospect of terrorism raises the cost of the Israeli fields’ development because of the increased risk premium. It is in this spirit that the construction of a subsea gas pipeline that connects Israel to Egypt could present a safer option. In any case, transportation of Israeli gas to Egypt is not only a milestone in regional gas cooperation, but also supports authentic Israel-Egypt normalization.

Israeli government interference in the form of heavy regulation and bureaucracy is a self-inflicted wound that prevents foreign energy companies from participating in bidding processes. Despite the approval of a revised framework for gas regulation by the Israeli government,  the first Israeli bidding process received limited attention taking into account that only a Greek energy company and a consortium of Indian companies participated. Notably, the main outlines of the revised gas regulatory framework included the mandatory sale by Delek Group Ltd, Avner Oil & Gas LP and Delek Drilling LP of all their rights in the Israeli Tanin and Karish fields that are currently owned by Greek Eneregan Oil & Gas Company; and, a stability clause which foresees that the Israeli government guarantees regulatory stability for ten years.

On a parallel level, overlapping maritime claims between Israel and Lebanon over a 854-square kilometer maritime boundary carry the risk of escalation. The January 2018 signing of Lebanon’s first exploration and production agreement (EPA) with a consortium of companies led by French Total as operator, and Italian Eni and Russian Novatek as partners signals competition that could evolve into confrontation over energy resources. Undoubtedly, in the absence of mutual diplomatic recognition between Lebanon and Israel, no trans-boundary natural resource sharing initiative can be taken. The consortium’s announcement that no operation within 25 km of the disputed area will happen leaves room for a third party mediation to minimize the risk of armed conflict and to work on reciprocal acceptance of the 2012 American proposal so that consensual and authorized economic activity becomes feasible. Noteworthy, the 2012 American proposal involved division of the disputed area granting Lebanon a larger share with the aim to serve as basis of bilateral discussions and be deposited with the UN.

To fulfill its energy potential, Israel should speedy proceed with the supply of gas pumped directly from the Leviathan and Tamar fields to LNG plants in Egypt as this will benefit both Egypt’s natural gas industry and development of Israeli fields.  Israel should also invest in security of its energy supply to refute the notion of insecurity that prevents foreign energy companies from investing in the country’s gas fields. Equally important, risks that concern investors like export sustainability should be addressed by guaranteeing a certain amount of financial recovery though the existing compensation mechanism. A transparent and predictable Israeli regulatory environment for foreign investors and access to external sources of project finance and loan guarantees and production commitments in Israel are important for the development of export oriented gas resources.

Unquestionably, decisive steps have to be taken by Israel so that a new horizon is revealed; the horizon of indigenous energy development.

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