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Is natural gas in good shape for the future?

MD Staff

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“Are we entering a Golden Age of Gas?” – That was the question the International Energy Agency asked in 2011 when examining the combination of market dynamics and policies that might allow natural gas to thrive in the future.

The idea of a “Golden Age” was built on a few pillars. On the supply side, the main thesis was that the abundance of unconventional gas resources would help to bring down supply costs, making natural gas more attractive and accessible worldwide. On the demand side, the main elements were an ambitious policy promoting gas use in China, lower growth in nuclear power and more use of gas in road transport.

Seven years later, most of these pillars are still at least partly in place. Today’s price levels are very much in line with those in the “Golden Age” analysis; China has reserved a strategic role in its energy policy for gas; the outlook for nuclear has indeed faded somewhat; the only area where natural gas has not made much ground is road transport, where electric vehicles have taken the lead.

Yet the mood in the natural gas industry, at least outside the United States, has not always been so optimistic since then. Demand has slowed considerably for most of the period since 2011, from an average of 2.8% per year between 2000 and 2010, to 1.4% per year from 2011-2016; lower prices squeezed revenues; traditional business models have been questioned without anyone being sure what will take their place; and the competitive landscape has become significantly more complex, as the traditional sparring partners for gas – coal and, to a lesser extent, oil – have been joined by the rising forces of renewables and energy efficiency.

What could the long-term outlook look like for natural gas? Every year, the World Energy Outlook chooses a fuel for an in-depth analysis. In 2017, that focus was on natural gas. The four chapters of that analysis, including a wealth of detail on the outlook for natural gas, are now available to download for free – and describe in detail the possible long-term opportunities and constraints that could face this fuel in the future.

Three key trends highlighted in the WEO projections and in the IEA’s five-year forecasts also came through very clearly in new data on global energy and CO2 emissions trends for 2017.

China and other emerging markets are the consumers of the future

Natural gas demand rebounded and grew by an estimated 3% in 2017. China alone accounted for nearly 30% of global growth – with more than 30 bcm out of a total of nearly 120 bcm. This reflects a structural shift in the Chinese economy away from energy-intensive industrial sectors as well as a move towards cleaner energy sources, with both trends benefiting natural gas. As part of the official policy drive to “make China’s skies blue again,” there has been a strong push to phase out the practice of burning coal in industrial boilers (especially those in and around major cities) as well as reduce coal use for residential heating.

In the New Policies Scenario to 2040, global natural gas consumption expands at an average rate of 1.6% per year to 2040, lower than the estimated 3% achieved in 2017 but a much higher rate than oil (0.5% per year on average) and coal (essentially flat). More than 80% of this growth takes place in developing countries, led by China, India and other countries in Asia. The challenge for the gas industry is that much of the gas needs to be imported (and so transportation costs are significant); infrastructure is often not yet in place; and policy-makers and consumers are very sensitive to questions of affordability.

Gas-for-power is no longer the main growth opportunity

The data for 2017 show that most of the increase came from gas consumption by industry and for use in buildings. In the WEO analysis, power generation is no longer the main projected growth area, even though this is currently the largest gas-consuming sector worldwide. Competition from other sources of electricity generation, from renewables in particular, is fierce. Only where gas prices are expected to be very low (e.g. United States, Russia and parts of the Middle East) is it commercially viable for gas plants to run at high utilisation rates and provide baseload power. In most gas-importing regions, the primary role of gas plants is to provide mid-load and peak load power, implying significantly lower utilisation rates and hence lower gas burn.

In the New Policies Scenario, the largest increase in gas demand comes instead from industry. Where gas is available, it is very well suited to meeting industrial demand. Competition from renewables is more limited, especially for provision of high-temperature heat. Gas typically beats oil on price, and beats coal on convenience and on emissions (notably for air pollutants, a major policy consideration in many developing countries). A similar combination of convenience and environmental advantages helps gas to displace household coal consumption for heating and as a cooking fuel. Gas also has potential in some countries as a lower emissions alternative to oil for transportation, especially for heavy-duty vehicles.

Competitiveness is key

Gas consumers responded in 2017 to abundant and relatively low-cost supplies, underlining that – if natural gas is to gain a firm foothold in emerging markets – it is of crucial importance that suppliers keep the cost gap to alternative fuels, including solar and wind, as narrow as possible. Projected changes on the supply side are indeed maintaining some downward pressure on prices and increasing the comfort that importers can feel in the future security and diversity of supply. A period of ample availability of LNG, driven largely by new liquefaction capacity in Australia and the United States, is deepening market liquidity and the ability to procure gas on a short-term basis. New projects and exporters are increasing the range of potential suppliers and competition for customers. Destination-flexible US exports are reducing the rigidity of LNG trade. More and more gas is being priced on the basis of benchmarks that reflect the supply-demand balance for gas, rather than the price of alternative fuels. The contours of a new, more globalised gas market are becoming visible.

This re-writing of the gas rulebook is creating uncertainty for some producers, who have claimed that long-term contracts indexed to oil prices and other trade rules (notably take-or-pay clauses) are vital for the financing of capital-intensive upstream and infrastructure projects. In the WEO-2017, we argue that the emergence of a new, more flexible gas order, the rise of major company “aggregators” that maintain a diverse global portfolio of gas sources and market positions, and a marked shift towards LNG are interdependent developments. The risk of a shortfall of investment in new supply is real, but in our judgement there is scope for brownfield project expansions and smaller, less capital-intensive projects in the LNG business to underpin project development in the next ten years and prevent a hard landing for markets in the 2020s. As gas trade expands by more than 500 bcm over the period to 2040, LNG’s inherent flexibility give it the edge over most new cross-border pipeline projects and, as a result, LNG meets the lion’s share of the growth in long-distance gas trade in the period to 2040. Although the European Union remains the largest importer of gas, Asian countries lead the growth in global gas trade with the Asia Pacific region as a whole accounting for some 80% of the growth in net-imports.

The other key debate about natural gas that we focused on in the WEO-2017 is its role in the multiple energy transitions that are underway. This includes how gas might fare in a scenario that is consistent with the Paris Agreement and the sharp reductions in global emissions that are required to keep the rise in global average temperatures down to ‘well below 2 degrees’ and to improve the world’s air quality.

Two key attributes of gas come strongly into play in this discussion. First, versatility: gas can play multiple roles across the energy system in a way that no other fuel or technology can match, generating power, heat, and mobility. Second, the environmental dimension: combustion of natural gas does produce nitrogen oxides (NOX), but emissions of the other major sources of poor air quality, particulate matter and sulfur dioxide, are negligible. The combustion of gas releases some 40% less CO2 than the combustion of coal and around 20% less than the burning of oil. Taking into account the efficiency of transforming gas into electricity, a combined-cycle gas turbine emits around 350 grammes of CO2 per kilowatt-hour, well under half of what a supercritical coal plant emits for the same amount of electricity. Gas-fired power plants also have technical and economic characteristics that make them a very suitable partner for a strategy favouring the expansion of variable renewables.

However, the industry cannot take it for granted that environmental arguments work in its favour, especially in ambitious decarbonisation scenarios such as the Sustainable Development Scenario. As the cleanest burning fossil fuel and one that emits few local air pollutants, natural gas fares best among the fossil fuels in the Sustainable Development Scenario, with consumption increasing by nearly 20% between 2016 and 2030 before exhibiting a very gradual decline. However, the contribution of natural gas to decarbonisation in this scenario varies across regions, between sectors and over time. In energy systems that are currently heavily reliant on coal, notably in China and India, natural gas can play a sustained, positive role. It has much less potential to help emissions reduction in more mature gas markets, although in the United States and Europe there is a window of opportunity for gas to aid decarbonisation by accelerating the switch away from coal. With the rapid ascent of low-carbon technologies in this scenario, the principal function of gas is to provide flexibility to support the integration of variable renewables. For some industrial applications, and in some parts of the transport sector, the “bridge” for gas is a much longer one, as cost-effective renewable alternatives are less readily available.

Secondly, it is important to recall that methane – the primary component of natural gas – is a potent greenhouse gas and emissions of methane along the oil and gas value chain (which are estimated for 2015 at around 76 Mt of methane) threaten to reduce many of the climate advantages claimed by gas. In the WEO-2017, we present first-of-a-kind marginal abatement cost curves for methane emissions from oil and gas operations, which suggest that around 40-50% of today’s emissions from the oil and gas sector could be avoided using approaches that have zero or negative costs (because the captured methane can be sold). Implementing just these cost-effective abatement measures in the New Policies Scenario would have the same impact on reducing the average global surface temperature rise in 2100 as immediately shutting all existing coal-fired power plants in China. If natural gas is to play a credible role in the transition to a decarbonised energy system, this is an opportunity for action that cannot be ignored.

Ultimately, the prospects for natural gas will be determined by how it is assessed by policy-makers and prospective consumers against three criteria: is it affordable, is it secure, and is it clean? In each of these areas, there is homework for the industry to do, to keep costs under control, to ensure adequate and timely investment, and to tackle the issue of methane emissions. If the answers to these questions are positive, then gas can make a persuasive pitch for a place in countries’ energy strategies, underpinning further infrastructure development and opening new opportunities for growth.

The International Energy Agency will provide its updated 5-year gas markets forecasts in the next Gas 2018 publication, which will be launched at the World Gas Conference, in Washington D.C., on 26 June 2018.

IEA

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Bids open for Somalia’s first-ever oil block licensing round

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Somalia has announced that it is opening licensing rounds for seven offshore oil blocks. This comes days after the Federal Government of Somalia approved the board members of the newly established Somali Petroleum Authority (SPA), which will serve to be the regulatory body of Somalia’s oil and gas industry.

Somalia’s Minister of Petroleum and Mineral Resources Abdirashid M. Ahmed stated that the establishment of a regulator leadership is the first critical step of the implementation of Somalia’s petroleum law which was passed earlier this year and signed by President Mohamed Abdullahi Mohamed “Farmaajo”.

The Petroleum Law asserts that the regulatory body serves to design a financial and managerial system that fosters international competition and investment into Somalia’s oil and gas industry. While also ensuring the citizens of Somalia, and the Federal Member States see their fair share of oil and gas revenue based on the revenue-sharing agreement.

Somalia has been plagued with civil war, drought and famine for nearly three decades, tapping into Somalia’s vast oil reserves which are estimated to be approximately 30 billion barrels would greatly contribute to the rebuilding and the development of the country’s infrastructure, security, and the economic and social sectors. Exploration for oil in the East African nation started well before the nations collapse in 1991. ExxonMobil and Shell previously had rights to five offshore oil blocks in Somalia and has recently renewed its previous lease agreement with the government of Somalia. Both companies have agreed to pay $1.7 million per month in rent for the leased offshore blocks.

The Office of Minister of Petroleum and Mineral Resources stated that the 7 blocks which are up for bidding process are among “the most prospective areas for hydrocarbon exploration and production in Somalia”

The licensing round will take place between August 4th, 2020, and March 12th, 2021.

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Armenia’s attack against Tovuz is also an attack against Europe’s energy security

Dr. Esmira Jafarova

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The recent escalation of tensions between Armenia and Azerbaijan, this time along the international border in the direction of the Tovuz district of Azerbaijan in the aftermath of an armed attack launched by Armenia on July12–14, 2020,had been brewing for some time before finally boiling over into full-fledged military clashes, the worst in recent years, that caused causalities and destruction on both sides. Azerbaijan lost more than 10 servicemen, including one general and a 76-year-old civilian. There are many reasons why this attack happened in this particular border area (and not along the Line of Contact, as usual) and at this particular time, but in this piece I want specifically to focus on one of them and, in concurrence with other internationally recognized scholars in this field, assert that this attack against Azerbaijan should be considered as an attack against Europe’s energy security and well-being.

To begin, a brief review of the history of recent developments in conflict resolution testifies that, although the year 2019 was relatively incident free along the Line of Contact between the Armed Forces of Armenia and Azerbaijan, and for the first time in many years mutual visits of journalists took pace, the year was also identified as the “lost year for the conflict settlement” owing to the lack of progress in the negotiations. This absence of progress was accompanied by incendiary rhetoric employed by Armenia’s Prime Minister Nikol Pashinyan who, having ascended to power on the back of the many alluring promises of the so-called “Velvet Revolution,” found himself grappling to deliver on those ambitious reform pledges. The harbingers of heightening hostility were seen in Pashinyan’s infamous declaration during the pan-Armenian games held in Khankendi on August 5,2019, when he said that “Nagorno-Karabakh is Armenia, and that is all;” as well as his continuous insistence on changing the negotiation format –already established by the relevant decisions of the OSCE –to include representatives of the puppet regime in the occupied Nagorno-Karabakh region as an independent party to the peace negotiations.

The year 2020 started off with the January meeting of the Foreign Ministers in Geneva, and in April and June two virtual meetings were held because of COVID-19 lockdowns; however, hopes for any positive progress quickly subsided in the wake of other negative developments. The so-called “parliamentary and presidential elections” that were held by Armenia in the occupied Nagorno-Karabakh region of Azerbaijan on March31, 2020, were condemned by the international community. These mock elections later culminated in the Shusha provocation,in which the “newly elected president” of the puppet regime in the occupied territories of Azerbaijan was “inaugurated” in Shusha – a city that carries great moral significance for Azerbaijan. The last straw in a hostile build-up was the denial by Pashinyan of Russia’s Foreign Minister Sergei Lavrov’s comments about a staged, step-by-step solution to the conflict; Pashinyan denied that this was ever the subject of negotiations. The very recent threats by the Armenian Ministry of Defense, which publicly threatened “to occupy new advantageous positions” in Azerbaijan, further testified to the increasingly militaristic mood among Armenia’s upper echelons.

This litany of discouraging events relating to the peace process over the last year and a half in some ways heralded what we witnessed on July12–14, 2020.This attack against Azerbaijan along the international border between Armenia and Azerbaijan reflects the deep frustration of the Pashinyan regime in its inability to bring about the promised changes. Economic problems were heightened by the COVID-19-induced challenge and decreasing foreign assistance, and this was all happening against the backdrop of Azerbaijan’s increasing successes domestically, economically and internationally. Azerbaijan has long been established as an important provider of energy security and sustainable development for Europe through the energy projects that it is implementing together with its international partners. The Baku–Tbilisi–Supsa Western Export (1998) and Baku–Tbilisi–Ceyhan (2005) oil pipelines and Baku–Tbilisi–Erzurum (2006) gas pipeline have enhanced Azerbaijan’s role as an energy producing and exporting country, and the Southern Gas Corridor (SGC) is already becoming a reality. This 3500-km-long Corridor comprises four segments – the Shah Deniz-II project, Southern Caucasus Pipeline Extension (SCPX), Trans Anatolian Pipeline (TANAP) and its final portion, the Trans Adriatic Pipeline (TAP). The Corridor passes through seven countries – Azerbaijan, Georgia, Turkey, Bulgaria, Greece, Albania and Italy – with Italy being the final destination receiving Caspian gas. Turkey is already receiving gas via TANAP and is contracted to accept up to 6 billion cubic meters of gas via this pipeline. Europe is expected to receive 10 billion cubic meters of Azerbaijani gas per year, and the first gas has already arrived on Albanian territory. The SGC is scheduled to be fully operational by fall 2020 and TAP is almost complete. Things are progressing uninhibitedly and even the COVID-19 pandemic has been unable topreventthe success of the SGC. This Corridor stands as one of the guarantors of Europe’s energy security by providing diversification of energy sources and routes, even despite Europe’s Green Deal, which also acknowledges the continent’s long-term demand for gas.

Such critical infrastructure, vital for Europe’s energy security, passes close to the border area that includes the Tovuz district attacked by the Armed Forces of the Republic of Armenia on July12–14. Armenia is the only country in the South Caucasus that is isolated from these regional energy projects owing to its policy of expansion and occupation. It is thus the only country that does not have anything to losefrom creating chaos and destruction around this critical energy infrastructure. Jealousy and the feeling of self-imposed isolation from all regional cooperation initiatives have no doubt increased Armenia’s hostility toward these energy projects. Further vivid evidence of Armenia’s belligerence against Azerbaijan’s energy infrastructure was provided by its threat to attack the Mingachevir Dam, a civilian infrastructure project that is also a vital component of Azerbaijan’s largest hydroelectric power plant. Hydroelectric power comprises the largest component in Azerbaijan’s renewable energy potential, today standing at around 17–18%ofthe overall energy balance of the country. It is not difficult to imagine the magnitude of civilian causalities in case such a destruction materializes. 

By conducting this act of aggression against Azerbaijan along the international border in the direction of Tovuz, Armenia wanted firstly, to divert attention from its own internal problems. Secondly, the regime desired to disguise its failures on the international front, especially recently when Azerbaijan initiated the summoning of a special session of the United Nations General Assembly related to COVID-19,convened on July 10, that was supported by more than 130 members of the UN. Thirdly, Armenia wanted to drag in the Collective Security Treaty Organization (CSTO) against Azerbaijan by invoking Article 4, which states: “… if one of the States Parties is subjected to aggression by any state or group of states, then this will be considered as aggression against all States Parties to this Treaty…”.Fourthly, and the central thesis of this article, Armenia intended to target critical energy infrastructure implemented by Azerbaijan and its international partners, thereby jeopardizing the energy security of not only the neighboring region, but also of the greater European continent. The aforementioned existing oil and gas infrastructure aside, the SGC is set to be fully operational by fall 2020, and this multibillion-dollar megaproject offers economic, social and many other benefits to all participating countries involved in the construction and implementation of this project. Any damage to this critical infrastructure would deal a heavy blow to the current and future sustainable development of Europe.

Europe must therefore be vigilant regarding such provocations. International actors, including the European Union,OSCE Minsk Group, United Nations, United States, and the Russian Federation, called for an immediate cessation of hostilities between Armenia and Azerbaijan. However, given what is at stake,including this time the crucial energy infrastructure, had Armenia’sattack not been proportionately parried by the Azerbaijani Armed Forces, the statement made by the European Union about this recent military attack could have contained stronger language beyond just “…urging both sides to stop the armed confrontation, refrain from action and rhetoric that provoke tension, and undertake immediate measures to prevent further escalation… .” Naming and shaming the aggressor appropriately is indispensable in this situation. As Mr. Hikmat Hajiyev, Head of Foreign Policy Department of the Presidential Administration and Adviser to the President of the Republic of Azerbaijan on Foreign Affairs, also noted: “the EU should distinguish between the aggressor and the subject of aggression.”

In the 21st century, the international community should not tolerate such flagrant violations of international law; disrespect of UN Security Council resolutions (822, 853, 874, and 884) and other relevant international documents calling for an end to the occupation of Azerbaijani territories; and the feeling of impunity in instigating an attack against a sovereign state, a neighbor, and a crucial player in the realization of critical energy infrastructure projects key to Europe’s own energy security. Azerbaijan has long put up with such aggression and the occupation of its internationally recognized territories in Nagorno-Karabakh region and seven adjacent districts, and has opted for negotiations toward a peaceful solution of the conflict. Yet the aggressor cannot be allowed to continue its attacks against other parts of Azerbaijan– this time Tovuz –thereby jeopardizing not only the latter, but also energy security and sustainable development of the greater European continent just because such provocations seem to offer an escape from the regime’s domestic and external problems. Such practices should be condemned in the strongest possible terms. This should be done not only for the sake of Azerbaijan and regional security in the South Caucasus, but in the name of Europe’s own energy security and well-being. 

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Palestine Plays Regional Power Politics with Proposed Energy Deal

Dr. James M. Dorsey

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Faed Mustafa, Palestine’s ambassador in Ankara, Turkey

When Faed Mustafa, Palestine’s ambassador in Ankara, expressed interest in June in negotiating with Turkey an agreement on the delineation of maritime boundaries in the eastern Mediterranean and cooperating on the exploitation of natural resources, he was repositioning Palestine in the larger struggle for regional dominance and the future of his state.

“We also have rights in the Mediterranean. Palestine has shares in oil and gas located in the eastern Mediterranean. We are ready to cooperate in these areas and sign a deal,” Mr. Mustafa said.

Mr. Mustafa did not spell it out, but Palestine would bring the Gaza Marine gas deposit, 36 kilometers off the Gazan coast, to the table. Discovered in 1999, the field, believed to have reserves of 31 billion cubic meters, remains unexplored as a result of multiple armed Israeli-Palestinian clashes, Israeli obstruction, and repeated changes in the consortium that would have ultimately exploited the field.

Palestine’s efforts to hook up with Turkey, at a time when relations with Israel have all but broken down, coincide with stepped up Israeli attempts to stymie Turkish inroads in Palestine paved by support for activists in Jerusalem and funding of historic and cultural facilities, in the wake of US President Donald J. Trump’s 2018 recognition of the city as Israel’s capital.

The Palestinian move also is a ploy to counter several steps taken by the United Arab Emirates and Saudi Arabia to confront Turkey in Jerusalem and the eastern Mediterranean, facilitate a US plan to resolve the Palestinian-Israeli conflict that endorses annexation, and influence the succession of ailing 84-year old Palestinian President Mahmoud Abbas.

Turkish President Recep Tayyip Erdogan vowed last week in a speech celebrating the change of status of Istanbul’s Hagia Sofia – originally built as a Greek Orthodox church in 537 AD, then renovated into a mosque before becoming a museum by the founder of the Turkish Republic, Mustafa Kemal Ataturk, in 1935 – to a mosque once again this month, that it would be “the harbinger of the liberation of the Al-Aqsa mosque.”

Al-Aqsa on the Harm-e-Sharif or Temple Mount in Jerusalem is Islam’s third holiest shrine. Backed by Israel, Saudi Arabia has sought to muscle its way into the Jordanian-controlled endowment that administers the Harm-e-Sharif.

A Palestine hook-up with Turkey could complicate Palestinian membership of the East Mediterranean Gas Forum, dubbed the OPEC of Mediterranean gas, that also includes Egypt, Cyprus, Greece, Israel, Italy, and Jordan. France has applied for membership in the Cairo-based grouping while the United States is seeking observer status.

Founded in January and backed by the UAE, the Forum is virulently opposed to Turkish attempts to redraw the maritime boundaries in the region on the back of an agreement with Libya. Turkey refused to join the Forum.

While it is unlikely that the Gaza field will be operational any time soon, production would reduce Palestinian dependence on Israel. Palestinian officials said early this year that they were discussing with Israel an extension of Israeli pipelines to send gas from Israeli gas fields to Palestine but that the talks, contrary to Israeli assertions, did not include development of the Gaza field.

In a twist of irony, Qatar, the UAE’s nemesis, would support a pipeline agreement by guaranteeing Palestinian payments for the gas. The Israeli pipeline along a 40-kilometer route adjacent to the Gaza border with three pumping stations would enable Gaza to operate a 400 MW power plant in a region that has, at the best of times, an energy supply of 15 hours a day.

The status of the talks remains unclear given an apparent delay of Prime Minister Benjamin Netanyahu’s annexation plans amid international condemnation and US insistence that the Israeli leader postpone his move that had been scheduled for July 1.

Qatar reportedly threatened to cut off millions of dollars in aid to Gaza, provided in coordination with the Israeli government, if the Jewish state pressed ahead with annexation.

In June, Israel  approved the transfer of US$50 million from Qatar to Gaza in a bid to dial back mounting tension with militants in the Strip that could spark renewed military confrontation as both Israel and Palestine struggle to get a grip on the coronavirus.

Some Palestinian analysts see the pipeline deal as an attempt by the Palestine Authority (PA) to enhance its influence in Gaza and undermine Hamas – its Islamist rival that controls the Strip – by a significant contribution to a surge in the power supply and a dramatic reduction of the cost of electricity. The risk, these analysts say, is that the pipeline would increase Palestinian dependence on Israel.

Economist Nasr Abdel Karim argued that Israel would only allow enhanced flows of gas, including from the Gaza field, if it leads to an even deeper split between the territory and the West Bank.

“Israel will not allow the Palestinians to benefit from the gas field for economic and political reasons. Israel might allow this in one case — if this plan is part of a bigger project to develop Gaza’s economy so that it splits from the PA and the West Bank,” Mr. Abdel Karim said.

Author’s note: An initial version of this story was first published in Inside Arabia

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