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Deal, No Deal

Osama Rizvi

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It has been a topsy-turvy story for the most traded and (politically and economically) significant commodity in the world. Welcome to the world of Crude Oil. Back in 2014 when the war between Sheikhs and Shale begun, Saudi Arabia deliberately balked to play the role of, what has been called, Swing Producer of the world. By refusing to turn off the taps Saudis envisaged a future that will, acting out of the principle of survival of the fittest, drive out high-cost producers (most importantly US Shale).

But the strategy went awry. To their, and everyone surprise, even opposite. After a year in 2015 it was Kingdom burning through their cash reserves at a precarious rate. Subsidies were cut, holidays curtailed, salaries slashed. Government largesse, of which the Saudi masses are acquainted with, were shrunk at an uncomfortable rate. There was an imminent chance of a social unrest, if things had continue to be so. Fortunately, they didn’t. After much ado, OPEC was able to strike a last minute deal with Non-OPEC producers. Oil prices, after touching a nadir of $26, climbed up, gradually smashing through the $50 psychological mark. Articles and opinions were replete with positivity and that the act of rebalancing has begun. But across the pacific matters were quite different.

US Shale boom, Fracking 2.0. It has been called many names. The technological innovations in drilling and fracking coupled with certain softwares rendered the US shale industry a chance to stand in the face of low oil prices. The world saw how costs in US plunged almost 30-40%. In some areas such as Permian Basin it is even low. Instead of ousting the Shale producers, the days after the Vienna oil accord (signed 30th November 2016) saw an utterly different phenomena: rise in Shale production. Let us have a look at fundamentals. Right now the inventories stand at 527.8 million barrels down from the historic high of 535 million-not at all a bullish level, indeed. The rig count is also high: 697, highest since August 2015. The US shale production increased by 17,000 barrels per day this month. Total production has risen from 8 million barrels per day to 9.2 million barrels. Expected to touch 9.7mbpd by 2018. Bearishness spread all over! We are back at square one: oil prices are back to the pre-deal level and there has been a deluge of selling in the markets. Bloomberg reported today (5th May, 2017) “The number of contracts traded in a minute — usually in the hundreds early in the trading day — surged above 7,000 on WTI at 4:28am London time”.

Now coming back to Middle-East. The KSA, after the prices stabilized has become stable as well. Deputy Crown Prince Muhammad Bin Salman is trying to ease things up. In a gerontocracy which doesn’t likes the idea of a young man getting hold of the bridles of the country, it is no doubt an achievement for the young scion that he has been able to kick-start projects that will diversify the Saudi economy disconnecting, to a great extent, its dependence on oil. About 90% of Saudi revenue comes from Oil exports. But now The Saudi Vision 2030 and the National Transformation Plan, attempts to wean itself from oil, calls for a bright future, provided both the plans are implemented in letter and spirit. But why are we talking about these projects and plans? Because they lead us to what is being dubbed as the creation of the largest sovereign fund in the world. Behold, Aramco. According to some estimates it is the largest company on earth big enough to swallow Alphabet Inc., Berkshire Hathaway, Microsoft and still leaving some room for Apple Inc! Albeit its history has been shrouded in controversy due to the absence of any proper documentation and transparency now it is going public. There will be an IPO, late 2018, in which 5% shares of Saudi Aramco will be floated which is supposed to create a $1trillion sovereign fund. Once again, why Aramco? That is because it takes us to the deal. To the question that whether, on 25th May when the OPEC and NOPEC oil producers meet, the deal that was originally decided to be implemented for first six months of the year, will be extended or not? It takes us to the nuances that why KSA in the first place not only convinced OPEC and NOPEC producers to reach an entente but also went an extra mile cutting production more than what it had initially promised. It was because KSA needs oil prices more than $50 not only for the impending IPO but also for maintaining their economic health. It has reduced its tax from 85% to 50% to make Aramco more lucrative. Moreover, other Middle Eastern producers also need a stable oil as their revenue mostly depends upon oil, no surprise! Libya and Nigeria were exempted from the deal but they are in doldrums partially because of security issues and partially, economically. See what is happening in Venezuela. In a single phrase it is ripping apart, all because of low oil prices. With a war engulfed Syria a fuming refugee crisis, Middle East cannot afford another tumult as the consequence of low oil prices. Hence, my guesstimate is that there will be an extension, may be it is not for whole 6 months. Although, Saudi Oil Minister admonished the ‘free-riders’ at CERAweek and recently echoed that it is too early to decide, I think the Kingdom has to succumb to ground realities. This will give a support to oil prices for the remaining year.

I will conclude with a catch-22 situation: Suppose there is an extension and that the oil prices rise. What this augurs for the Shale producers (Read USA)? Euphoria! With cries of hurray their derricks are going to ooze out more black gold as higher prices makes it feasible to do so. Subsequently the rising prices will start to feel downward pressure and either come down or, in the best case, become stagnant.

A question to the readers: What is then the fun in extending the deal? Bitter, yet a reality.

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

IRENA Outlines Importance of Energy Transition in Global Innovation Index

MD Staff

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The International Renewable Energy Agency (IRENA) has outlined the innovation priorities needed to accelerate the transition to a sustainable energy system. The Agency authored a chapter of the recently published 2018 Global Innovation Index (GII) report, named Innovation Driving the Energy Transition in which four central policy-level innovation recommendations are outlined as critical to scaling-up renewable energy deployment.

The chapter also charts the development of various renewable technologies, categorising their viability and deployment progress. Applications seen as being ‘on track’ include wind and solar PV power technologies together with electric vehicle development, while areas in need of further innovations to improve their economics and adoption rates include biofuels and solar thermal heat applications, the chapter highlights.

The 11th edition of the World Intellectual Property Organisation’s (WIPO) global innovation index report, themed Energizing the World with Innovation analysed the state of energy sector innovation, identifying areas where further effort is required, and where breakthroughs in fields such as energy production, storage, distribution, consumption, and decarbonisation are taking place. IRENA’s chapter makes the following policy-level recommendations:

  1. Foster a system wide approach to innovation, beyond research and development

Innovations in technology, together with innovative approaches to enabling infrastructure, business models and system operation, must all be pursued with equal assiduousness, IRENA points out. “Leveraging synergies between innovations across all sectors and components of the energy system, and involving all actors, is crucial for the transition,” said Dolf Gielen, Director of IRENA’s Innovation and Technology Centre.

  1. Strengthen international cooperation to nurture innovation

Innovation is central to decarbonising the energy sector, and international cooperation is critical to innovation, IRENA points out. To stimulate the breakthroughs necessary to advance the energy transition, existing platforms designed to foster international collaboration should be prioritised at a national level. This allows countries to share ideas, pool resources and capital, and co-develop programmes that support common interests.

  1. Advance power system integration

The business case for renewable power generation is now unquestionable, with power generation costs now falling well within the fossil fuel cost range. Yet despite the strong business case, achieving the world’s full resource potential requires a significant scaling-up of the share of renewable power in global electricity systems from a quarter today, to around 85 per cent by 2050. This requires efforts to promote systems integration by increasing the flexibility of power systems in supply and demand.

  1. Support a portfolio of technology options to electrify and decarbonise end-use sectors

The electrification and decarbonisation of end-use sectors such as transportation, heating, cooling and industry lags the renewables momentum for power generation, yet end-use sectors represent close to 60 per cent of energy related CO2 emissions. A combination of electrification, technology breakthroughs, and sector-specific global agreements for decarbonisation, are needed according to IRENA’s recent analysis. Francisco Boshell, Analyst – Renewable Energy Technology, Standards and Markets at IRENA said: “Electrifying energy demand of end-use sectors represents a ‘win-win’ that can reduce emissions whilst supporting the integration of higher shares of renewable power.” IRENA indicates that pursuing electrification can double the share of electricity in final energy use in the coming decades.

IRENA. View and download the report here.

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10 tips to stay cool in today’s heat

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Across the world, extreme weather and prolonged heat waves are setting records. In Europe, the historical heat record – set in Athens 41 years ago – may be broken today if parts of Spain and Portugal creep above 48°C. In Japan, temperatures are still in the mid-30s after Tokyo saw its highest ever recorded temperature of 41°C in late July. And in South Korea as many as 29 people died from heatstroke this week, after temperatures in Seoul hit a 111 year high. Beijing also broke a 50-year record in June.

Understandably, this has driven a demand for cooling. Recent reports in France, which is presently suffering its second heat wave this summer, show that sales of household fans in July increased 125% over last year, while air conditioner (AC) sales jumped nearly 200% compared to 2017. In Montreal, stores ran out of ACs during the prolonged heat wave in July. And in India, AC producers expect that sales this year will reach double-digit growth as rising household incomes – paired with recent high temperatures – lead to greater demand for cooling services.

This growing demand is part of a major global emerging trend: rising need for cooling comfort – and in particular air conditioners. Cooling is now the fastest growing use of energy in buildings, and ACs and electric fans already account for about 10% of all global electricity consumption. This is one of the most critical blind spots in the energy world today – by 2050, cooling demand could more than triple. Our recent report on the Future of Cooling highlights why this is such a dilemma: while greater access to much needed cooling services is a good thing, it could place a major strain on energy systems if we don’t do something about how efficiently we keep cool.

Fortunately, there are many solutions – many of which we can all take today. Here’s a list of ten things we can all do to be cool, efficiently:

Shut your shades and close the blinds. As much as 80% or more of the heat from the sun can be transmitted through your windows. This solar heat gain is a significant factor in the need for cooling in buildings. In the short term, keeping the curtains drawn or the shades shut can make a big difference in how much of the sun’s heat comes indoors. If you’re thinking of replacing your windows, ask for a low-emissivity coating to let the light in but keep the solar heat out.

Use fans and ventilation. The power consumption of a fan is typically between 25 and 150 Watts, compared to a small AC unit that is often between 1 000 and 1 500 Watts. So before turning on that AC, think about using a fan. And when you can, letting a little air in can make a world of difference, especially when cooler nights set in or when there is a good breeze.

Take a second look at your thermostat. Raising the temperature set point on your AC by 1°C can reduce its energy consumption by as much as 10%. Most ACs use a vapour compression cycle, moving heat from the inside to the outside by using energy. Just like us, the more work they do, the more energy they burn. So the next time you go to touch that dial, think about turning it up a notch.

Take a second look at what you’re wearing. Experiences with programmes like Japan’s Cool Biz (which encourages employees to ditch the ties and formal wear in summertime) show that appropriate summer attire can let people stay comfortable at higher indoor temperatures. The next time you think about throwing on a sweater in summer, consider raising the thermostat first.

Maintain your AC. Something as simple as a clogged filter can lower AC performance by 5% to 15%. Neglecting regular maintenance of AC filters, coils and fins (all the pieces that help exchange the heat from the inside to the outside) can lead to poor energy performance. Making sure your AC passes a good bill of health (preferably through a trained technician) can improve its performance and cut down on your energy bill.

Keep an eye out for energy labels. If you’re buying an AC or replacing an existing model, be sure to take a look at the AC energy label (or if you can’t find one, try looking for product information online). Our Future of Cooling report finds that people often buy ACs that are significantly less efficient than what is available on shelves – even when the more efficient ACs are similarly priced. Be cool and take a look at the energy performance label to buy the most efficient choice.

Get a programmable or smart thermostat. A smart thermostat can cut AC energy use by as much as 15% or more. Programmable thermostats can also cut back on energy demand by setting fixed hours for AC operations. Smart thermostats take this a step further by monitoring, predicting and adjusting cooling needs to cut back on energy use when and where it is needed. So keep cool and let your thermostat do the thinking for you.

Part-time, part-space is part of the solution. Research by the IEA Technology Collaboration Programme on Energy in Buildings and Communities found that household electricity use for cooling can be as much as 10 times lower when ACs are only used as and where needed. This can be as simple as turning off the AC when you leave a room. Try turning on your AC to get comfortable before going to bed and then turning it off when you go to sleep. Or get a smart thermostat to monitor and control when your AC goes on.

Watch out for those pesky plug loads. On really hot days, think twice before using your stove, running the washing machine or turning on the dishwasher. Electrical plug loads – ranging from large appliances to computers and hair-dryers – all generate heat when operating. Avoid heat build-up in your home by turning those devices off for the day and reduce your electricity consumption at the same time.

Build it right. The building envelope – the parts of a building that form the primary thermal barrier between interior and exterior – plays a key role in how much energy is required to heat and cool a building. Cool roofs, awnings and insulation can all help cut down on the need for mechanical cooling. Let in the light but keep out the heat with double-glazed, low-e windows. And don’t forget to seal those cracks with proper air sealing. So when renovating or building, make sure to build it right and keep cool for years to come.

IEA

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What should be India’s priority: Energy security or ‘America first’?

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Although no final decision has been taken yet by New Delhi, speculation is rife that oil imports from Iran could slow down from August when some US sanctions against Tehran take effect. However, for now, there is reason to cheer for those who want to see India stand its ground and refuse to buckle under the US pressure.

According to reports, India’s monthly oil imports from Iran touched a record high in July, jumping by about 30 percent to 768,000 barrels per day (bpd). The shipments include tankers that were loaded in June and arrived in India in July, based on preliminary tanker arrival data.

The volume of oil trade in July between New Delhi and Tehran marked a significant 85 percent jump from the same period last year when it was 415,000 bpd. Pertinently, Indian state refiners had reduced oil imports from Iran last year following a dispute over development rights of Farzad-B gas field, located in Persian Gulf.

Since the beginning of this fiscal year in April, the oil purchase from Tehran has surged, primarily due to heavy discounts, free shipping and extended credit period for oil sales offered by Iran.

According to reports, Iran has employed its own ships to transport oil to India as very few shipping lines had participated in recent tenders. Indian oil firm Hindustan Petroleum Corp Limited (HPCL) had to annul the purchase of an Iranian cargo a few weeks ago after it faced issues related to insurance cover. Other major Indian petroleum companies like Indian Oil Corporation (OIL) are expected to renew their insurance cover in next few months. But everything hinges on the final decision New Delhi takes.

Importantly, India is now the top oil client for Iran after China, having shipped in 5.67 million tonnes or about 457,000 barrels per day (bpd) of oil in the first three months of this fiscal year, India’s Union Petroleum and Natural Gas Minister Dharmendra Pradhan informed Indian parliament last week. And according to the latest data, quoted by Reuters and other news agencies, in the first four months of this fiscal year, India’s oil imports from Iran had reached 677,500 bpd.

However, it remains to be seen whether or not the oil keeps flowing after August. Some US sanctions will take effect from August 6, while others, including those pertaining to oil and petroleum, will come into force from November 4.

India has been under tremendous pressure from the US to cut oil imports from Iran in the wake of sanctions against Iran. New Delhi, which shares deep historical ties with Iran, had initially said that it does not recognize unilateral sanctions imposed by Washington, and only recognizes UN sanctions. However, later reports emerged in local and international media that a message had been sent to state refiners to be prepared for cut in oil imports from November.

In an attempt to allay fears and put speculation to rest, India’s Petroleum Minister Dharmendra Pradhan told a leading Indian daily last month that India sees US sanctions on Iran as a “challenge” given its close ties with both the countries, and said New Delhi will take a “considered and considerate’ view based on ‘national interest’ on the issue of US sanctions against Iranian oil.

A high-level US delegation visited New Delhi last month to hold talks with Indian officials over the matter. Iran’s deputy foreign minister Seyyed Abbas Araghchi also visited New Delhi and held wide-ranging discussions with Indian foreign secretary Vijay Gokhale.

Meanwhile, an intense debate is underway in India’s media and intelligentsia circles over the issue of oil imports from Iran. Many experts and political stalwarts maintain that buying oil from Iran is in India’s national interest and succumbing to the US pressure will send a wrong message to the world.

India’s former vice president Hamid Ansari believes Iran is an important country for India, and not just as an oil supplier. “We have to keep in mind two things. We get a good amount of energy supply from Iran. But Iran is not only an energy supplier,” Ansari told reporters in New Delhi. “Iran is a big and important country for us. It is a country which is next to Pakistan and Afghanistan. So when we look at Iran we have to understand these things too.”

Former Indian diplomat M K Bhadrakumar, writing in an Indian daily Deccan Herald, said India’s strategic autonomy and independent foreign policy demands that the approach to this Iran question should be based on national interests. “Nothing should be done to cause damage to the mutual trust and understanding in India’s relations with Iran. Equally, energy security – not ‘America First’ – should be our priority,” he wrote.

Last week, Germany also urged India not to buckle under the US pressure and continue buying oil from Iran. German minister of state for International Affairs Niels Annen, during his visit to New Delhi, described the pressure being put by Washington on its allies to stop buying oil from Iran as “irritating”. “It will be India’s sovereign decision. I am not a salesman for Iran but I have an impression that India is willing to continue buying oil from Iran and this will be a very important statement,” he said.

Pertinently, Iran’s deputy envoy to New Delhi Massoud Rezvanian Rahaghi had last month warned that India stands to lose many privileges if it betrays Iran and imports oil from other countries.

At a time when the oil imports from Iran are touching record high and Tehran is offering ‘privileges’ like discount, free shipping and insurance cover to Indian refiners, the decision between energy security and ‘America first’ should not be too difficult to make for New Delhi.

First published in our partner MNA

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