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World Energy Outlook: A sea change in the global oil trade

MD Staff

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The new World Energy Outlook is the story of a series of upheavals in global energy, in particular the dramatic changes in the Unites States and China and the rising role of renewables and electricity in global energy consumption. But this is by no means an exhaustive list of the changes underway. The shale revolution in the United States and new demand and investment trends in the Middle East and Asia are recasting traditional patterns of global oil trade, with global implications for energy security.

The Middle East is set to remain, by far, the largest global crude-exporting region, but the availability of additional crude from this region for international trade is being squeezed by rising domestic consumption and new refinery capacity. In the WEO’s New Policies Scenario (NPS), which incorporates existing and planned energy policies, the largest increase in crude export comes from North America, propelling the region above Russia, Africa and South America in the global rankings. On the importers side, Asia’s crude oil import requirement grows by a massive 9 mb/d, drawing in available supply from around the world. Taken together, these trends imply the need for a fresh look at oil security and how best to achieve it.

A dramatic change of fortune in the United States

The surge in tight oil output from the United States has already triggered major changes in the dynamics of global oil supply and prices. Through a decline in imports and a surge in exports, US tight oil is now having a similarly profound impact on global crude oil trade. Crude oil imports to the United States fell by more than 1.3 million barrels a day (mb/d) between 2010 and 2016, to 7.9 mb/d. At the same time, since the ban on crude oil exports was lifted in late 2015, US exports have skyrocketed to over 1 mb/d in October 2017, and have expanded their range of destinations from a single country, Canada, to more than 30 countries across Latin America, Europe and Asia.

Looking to the future, WEO projections in the New Policies Scenario suggest a continued fall in US net crude oil imports, from more than 7 mb/d today to less than 3 mb/d by 2040. Meanwhile, net product exports double from 2 mb/d to almost 4 mb/d over the same period, pushing the overall net oil trade balance of the United States into positive territory by the late-2020s, an astonishing turnaround.

But the United States is still a large exporter and a major importer of crude even in 2040. This is mainly due to limited ability of US refiners to take domestic light crude oil (which is therefore exported) and continued demand from refineries for medium-to-heavy grades (which continue to be imported). Even with the extraordinary move to a net export position, the health of the US energy economy remains intricately linked with those of its neighbours in North America and with choices made by countries further afield. In practice, no country is an island in a deeply interconnected energy world.

A refining future for the Middle East

It has been a long-standing ambition of producing countries in the Middle East to expand into the downstream sector in order to extract more value from their oil production and diversify the region’s economies – a topic that will be examined in more detail in the WEO-2018.

With the commissioning of several new refineries, the Middle East is now set to become not only the largest crude oil exporter but also the largest product exporter in the world. The Middle East is also a major oil-consuming region and, as a consequence, less than 1 mb/d of the 4.5 mb/d increase in the region’s crude oil production becomes available for exports. At present, refineries within the Middle East consume around a quarter of the region’s crude oil production, but the share rises to more than one-third by 2040 as the region adds more than 4 mb/d of net refining capacity over the Outlook period.

New refinery capacity within the Middle East is not the only factor affecting the availability of crude for exports. Major Middle East oil producers are also increasingly participating in refinery projects in other parts of the world. This introduces a degree of “tied demand,” as the crude used in the refinery tends to come from the corresponding exporter. Equity stakes held by Middle East producers in overseas refineries and the strategic reorientation in favour of refined products has significant ramifications for Asia, the final destination of an increasing share of global crude oil shipments, where import requirements are projected to continue their rapid upward path.

Asia’s inexorable appetite for crude

Asia accounts for the lion’s share of oil demand growth over the coming 25 years and, unsurprisingly, the same is true for crude oil imports. In the New Policies Scenario, Asia’s combined crude oil import needs rise by 9 mb/d to around 30 mb/d by 2040, with strong growth in China, India and Southeast Asia more than offsetting declines in Japan and Korea. Asia’s share of global crude oil imports therefore rises from 50% today to more than two-thirds by 2040.

Although the relative abundance of oil supply in recent years has made traditional exporters vie for market share in growing Asian markets, this should not necessarily be taken as a comforting sign for the longer term. The rapid increase in crude oil import needs in the New Policies Scenario along with the reduced availability of crude oil from traditional exporters point to tougher times ahead. The expanding volume of exports going through the Strait of Malacca, the world’s second-busiest trade chokepoint, adds another layer of complexity to Asian importers’ oil security concerns. In the past, Asia’s total crude oil import needs were less than the crude oil exports of the Middle East, but the gap has narrowed and the situation is reversed in the New Policies Scenario. This means that, while strengthening strategic ties with their largest suppliers in the Middle East, Asian importers increasingly tap into other sources from across the globe.

Implications for oil security

The period of low oil prices since 2014 has alleviated some concerns over oil security in many oil-importing countries. But our projections suggest some challenges ahead – especially if oil demand continues to grow strongly. Asia’s oil import needs and the Middle East’s export availability are diverging. As described in past WEO reports, including a detailed analysis in WEO-2016, there is also a significant possibility of a market imbalance in the 2020s as a result of the current low levels of investment in new conventional oil projects. There is always a risk of supply disruptions due to natural disasters or geopolitical events. The disruption caused by Hurricane Harvey in 2017 to US refining, production and pipeline facilities served as a reminder that reduced oil imports do not eliminate vulnerability to supply interruptions. And a large part of the spare production capacity to cushion the impact of potential crises continues to be concentrated in Saudi Arabia.

All this has implications for energy security. As ever, a coherent approach to oil security needs to cast its net widely to encompass the adequacy of investment in future supply, regular dialogue between producers and consumers, well-functioning markets and measures to curb demand growth via greater efficiency or fuel switching. Policies to promote greater efficiency and electrification in transport are becoming significant at tackling traditional oil security concerns. In this regard, the period of lower oil prices offers an opportunity to remove fossil-fuel subsidies, which are still prevalent in many parts of the world, in order to provide incentives for investment in more efficient technologies and to create greater demand responsiveness in times of oil shortage.

In addition, maintaining a coordinated and robust system of oil stockholding that can be used to respond to any disruptions to supply also represents a vital avenue; this is a major task for the IEA – custodian of today’s global oil security mechanism. But waning oil demand in many IEA member countries and surging demand in many emerging countries is not only changing the geography of global demand; over time it can also impact the effectiveness of the IEA system. This suggests the need to re-think the IEA oil stockholding mechanism in order to continue to cover the contingencies that might arise in tomorrow’s oil market, and to broaden the country grouping carrying that responsibility, of which one option would be to bring the rising oil-consuming countries – most of which are now Association countries of the IEA – closer to the collective oil security system in a gradual and inclusive manner. The IEA’s latest emergency response exercise that drew the largest-ever participation, with 44 countries taking part including IEA Association Member Countries such as China, India, Indonesia, Morocco and Thailand, highlights efforts underway in this direction, which will bring the share of the extended IEA family in global energy demand to more than 70%, up from less than 40% in 2015.

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Energy

Four Things You Should Know About Battery Storage

MD Staff

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The global energy landscape is undergoing a major transformation. This year’s Innovate4Climate (I4C) will have a priority focus on battery storage, helping to identify ways to overcome the technology, policy and financing barriers to deploy batteries widely and close the global energy storage gap.

Here are four things about battery storage that are worth knowing.

First, energy storage is key to realizing the potential of clean energy

Renewable sources of energy, mainly solar and wind, are getting cheaper and easier to deploy in developing countries, helping expand energy access, aiding global efforts to reach the Sustainable Development Goal on Energy (SDG7) and to mitigate climate change. But solar and wind energy are variable by nature, making it necessary to have an at-scale, tailored solution to store the electricity they produce and use it when it is needed most.

Batteries are a key part of the solution. However, the unique requirements of developing countries’ grids are not yet fully considered in the current market for battery storage – even though these countries may have the largest potential for battery deployment.

Today’s market for batteries is driven mainly by the electric vehicles industry and most mainstream technologies cannot provide long duration storage nor withstand harsh climatic conditions and have limited operation and maintenance capacity. Many developing countries also have limited access to other flexibility options such as natural gas generation or increased transmission capacity.

Second, boosting battery storage is a major opportunity

Global demand for battery storage is expected to reach 2,800 gigawatt hours (GWh) by 2040 – the equivalent of storing a little more than half of all the renewable energy generated [today] around the world in a day. Power systems around the world will need many exponentially more storage capacity by 2050 to integrate even more solar and wind energy into the electricity grid.

For battery storage to become an at-scale enabler for the storage and deployment of clean energy, it will be imperative to accelerate the innovation in and deployment of new technologies and their applications. It will also be important to foster the right regulatory and policy environments and procurement practices to drive down the cost of batteries at scale and to ensure financial arrangements that will create confidence in cost recovery for developers. It will also be essential to find ways to ensure sustainability in the battery value chain, safe working conditions and environmentally responsible recycling.

With the right enabling environment and the innovative use of batteries, it will be possible to help developing countries build the flexible energy systems of the future and deliver electricity to the 1 billion people who live without it even today.

Third, battery storage can be transformational for the clean energy landscape in developing countries

Today, battery technology is not widely deployed in large-scale energy projects in developing countries. The gap is particularly acute in Sub-Saharan Africa, where nearly 600 million people still live without access to reliable and affordable electricity, despite the region’s significant wind and solar power potential and burgeoning energy demand. Catalyzing new markets will be key to drive down costs for batteries and make it a viable energy storage solution in Africa.

Already, there is tremendous demand in the region today for energy solutions that do not just boost the uptake of clean energy, but also help stabilize and strengthen existing electricity grids and aid the global push to adopt more clean energy and fight against climate change.

Fourth, the World Bank is stepping up its catalytic role in boosting battery storage solutions

There is a clear need to catalyze a new market for batteries and other storage solutions that are suitable for electricity grids for a variety of applications and deployable on a large scale. The World Bank is already taking steps to address this challenge. In 2018, the World Bank Group announced a $1 billion global battery storage program, aiming to raise $4 billion more in private and public funds to create markets and help drive down prices for batteries, so it can be deployed as an affordable and at-scale solution in middle-income and developing countries.

By 2025, the World Bank expects to finance 17.5 GWh of battery storage – more than triple the 4-5 GWh currently installed in developing countries. With the right solutions, it can be possible to build large-scale renewable energy projects with significant energy storage components, deploy batteries to stabilize power grids in countries with weak infrastructure, and increase off-grid access to communities that are ready for clean energy with storage.

The World Bank has already financed over 15% of grid-related battery storage in various stages of deployment in developing countries to date.

In Haiti, a combined solar and battery storage project will ultimately provide electricity to 800,000 people and 10,000 schools, clinics and other institutions. An emergency solar and battery storage power plant is being built in the Gambia, as are mini-grids in several island states to boost their resilience.

In India, a joint WB-IFC team is developing one of the largest hybrid solar, wind and storage power plants in the world, while in South Africa, the World Bank is helping develop 1.44 gigawatt-hours of battery storage capacity, which is expected to be the largest project of its kind in Sub-Saharan Africa.

World Bank

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Energy

Driving a Smarter Future

MD Staff

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Today the average car runs on fossil fuels, but growing pressure for climate action, falling battery costs, and concerns about air pollution in cities, has given life to the once “over-priced” and neglected electric vehicle.

With many new electric vehicles (EV) now out-performing their fossil-powered counterparts’ capabilities on the road, energy planners are looking to bring innovation to the garage — 95% of a car’s time is spent parked. The result is that with careful planning and the right infrastructure in place, parked and plugged-in EVs could be the battery banks of the future, stabilising electric grids powered by wind and solar energy.

Today the average car runs on fossil fuels, but growing pressure for climate action, falling battery costs, and concerns about air pollution in cities, has given life to the once “over-priced” and neglected electric vehicle.

With many new electric vehicles (EV) now out-performing their fossil-powered counterparts’ capabilities on the road, energy planners are looking to bring innovation to the garage — 95% of a car’s time is spent parked. The result is that with careful planning and the right infrastructure in place, parked and plugged-in EVs could be the battery banks of the future, stabilising electric grids powered by wind and solar energy.

Advanced forms of smart charging

An advanced smart charging approach, called Vehicle-to-Grid (V2G), allows EVs not to just withdraw electricity from the grid, but to also inject electricity back to the grid. V2G technology may create a business case for car owners, via aggregators (PDF), to provide ancillary services to the grid. However, to be attractive for car owners, smart charging must satisfy the mobility needs, meaning cars should be charged when needed, at the lowest cost, and owners should possibly be remunerated for providing services to the grid. Policy instruments, such as rebates for the installation of smart charging points as well as time-of-use tariffs (PDF), may incentivise a wide deployment of smart charging.

“We’ve seen this tested in the UK, Netherlands and Denmark,” Boshell says. “For example, since 2016, Nissan, Enel and Nuvve have partnered and worked on an energy management solution that allows vehicle owners and energy users to operate as individual energy hubs. Their two pilot projects in Denmark and the UK have allowed owners of Nissan EVs to earn money by sending power to the grid through Enel’s bidirectional chargers.”

Perfect solution?

While EVs have a lot to offer towards accelerating variable renewable energy deployment, their uptake also brings technical challenges that need to be overcome.

IRENA analysis suggests uncontrolled and simultaneous charging of EVs could significantly increase congestion in power systems and peak load. Resulting in limitations to increase the share of solar PV and wind in power systems, and the need for additional investment costs in electrical infrastructure in form of replacing and additional cables, transformers, switchgears, etc., respectively.

An increase in autonomous and ‘mobility-as-a-service’ driving — i.e. innovations for car-sharing or those that would allow your car to taxi strangers when you are not using it — could disrupt the potential availability of grid-stabilising plugged-in EVs, as batteries will be connected and available to the grid less often.

Impact of charging according to type

It has also become clear that fast and ultra-fast charging are a priority for the mobility sector, however, slow charging is actually better suited for smart charging, as batteries are connected and available to the grid longer. For slow charging, locating charging infrastructure at home and at the workplace is critical, an aspect to be considered during infrastructure planning. Fast and ultra-fast charging may increase the peak demand stress on local grids. Solutions such as battery swapping, charging stations with buffer storage, and night EV fleet charging, might become necessary, in combination with fast and ultra-fast charging, to avoid high infrastructure investments.

To learn more about smart charging, read IRENA’s Innovation Outlook: smart charging for electric vehicles. The report explores the degree of complementarity potential between variable renewable energy sources and EVs, and considers how this potential could be tapped through smart charging between now and mid-century, and the possible impact of the expected mobility disruptions in the coming two to three decades.

IRENA

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Energy

What may cause Oil prices to fall?

Osama Rizvi

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Oil prices have rallied a whopping 30 percent this year. Among other factors, OPEC’s commitment to reduce output, geopolitical flash-points like the brewing war in Libya, slowdown in shale production and optimism in U.S. and China trade war have all added to the increase. The recent rally being sparked by cancellation of waivers granted to countries importing oil form Iran has taken prices to new highs.

However, one might question the sustainability of this rally by pointing out few bearish factors that might cause a correction, or possibly, a fall in oil prices. The recent sharp slide shows the presence of tail-risks!

Libya produces just over 1 percent of world oil output at 1.1 million barrels, which is indeed not of such a magnitude as to dramatically affect global oil supplies. What is important is the market reaction to every geopolitical event that occurs in the Middle East given the intricate alliances and therefore the increasing chances of other countries jumping in with a national event climaxing into a regional affair.

Matters in Libya got serious as an airstrike was carried out on the only functioning airport in the country a few days ago. Khalifa Haftar who heads Libyan National Army has assumed responsibility for the strike. However, UN and G7 have urged to restore peace in Tripoli. Russia has categorically said to use “all available means” while U.S.’ Pompeo called for “an immediate halt” of atrocities in Libya.

The fighting has been far from locations that hold oil but the overall sentiment is that of fear which is understandable as this happens in parallel to a steep decline in Venezuelan production, touching multi-year low of 740,000 bpd.  However, as international forces play their part we might expect a de-escalation in the Libyan war — as it has happened before.

Besides the chances of an alleviation of hostilities in Libya, concerns pertaining to global economic growth, and thereof demand for oil, have still not disappeared. The U.S. treasury yield, one of the best measures to predict a future slowdown (recession),  inverted last month; first time since 2007. If this does not raise doubts over the global economic health then the very recent announcement by International Monetary Fund (IMF) who has slashed its outlook for world economic growth to its lowest since the last financial crisis. According to the Fund the global economy will grow 3.3 percent this year down from 3.5 percent that predicted three months ago.

image: Bloomberg

Then there is Trump, whose declaration of Iran’s IRGC as a terrorist organization might increase the likelihoods of yet another spate of heated rhetoric between the arch-rivals. But if he is genuinely irked by higher oil prices as his tweets at times show and if he thinks that higher gasoline prices can hurt his political capital then this will certainly have a bearish effect on the markets as observers take a sigh regarding the mounting, yet unsubstantiated,  concern over supply.

One of the factors that contributed most to the recent rally was OPEC’s unwavering commitment to its production cuts. The organization’s output fell to its lowest in a year at 30.23 million barrels per day in February 2019, its lowest in four years. But the question remains for how long can these cuts go on? Last month it was reported the Kingdom of Saudi Arabia had admitted that they need oil at $70 for a balanced budget while estimates from IMF claims that the level for a budget break-even are even higher: $80-$85. We should not forget Trump and his tweets in this regard as well. Whenever prices have inched up from a certain threshold POTUS’ tweet forced the market to correct themselves (save the last time). One of the key Russian officials who made the deal with OPEC possible recently signaled that Russia may urge others to increase production as they meet in the last week of June this year. While this is not a confirmation that others will agree but it certainly shows that one of the three largest oil producers in the world does feel that markets are now almost balanced and the cuts are not needed further.

Now with the recent cancellation of waivers we should expect U.S. to press KSA to increase production to offset the lost barrels and stabilize the prices.

Finally stoking fears of an impending supply crunch (a bullish factor) is the supposed slowdown in U.S. Shale production. But the facts might be a tad different. Few weeks ago U.S. added 15 oil rigs in one day, a very strong number indeed-this comes after a decline of streak of six consecutive weeks. According to different estimates the shale producers are fine with prices anywhere between $48 to $54 and the recent rise in prices has certainly helped. Well Fargo Investment Institute Laforge said that higher prices will result in “extra U.S. oil production in coming months”. Albeit, U.S.’ average daily production has decreased a bit but it doesn’t mean that the shale producers cannot bring back production online again. Prices are very conducive for it.

So if you think that prices will continue to head higher, think again. Following graph shows that oil had entered the overbought territory few days back–hence the recent slide.

Therefore, If the war in Libya settles down (and there is a strong possibility that it will); rumors of a production increase making its way into investors’ and traders’ mind (as it already have) and global economy continue to struggle in order to gain a strong footing — the chances are oil will fall again. The current rally might last for some-time but, like always, beware not to buy too high.

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