Connect with us

Energy

In natural gas markets, winter is coming

Jean-Baptiste Dubreuil

Published

on

Natural gas importers across the globe are looking at the next few months with similar anticipation as fans of the next season of Game of Thrones. In both cases, winter is coming.

The prospects of a natural gas glut, which was commonly heard within the energy industry not that long ago, has vanished following last winter’s tight market, and is being replaced by concerns over security of supply.

One of the most striking signs of this concern has been the race to fill storages in recent month. Underground gas storage is one of the most efficient tools to mitigate seasonal demand fluctuations, and it was widely used last winter to compensate for the impacts of late cold spells on both sides of the Atlantic. As a result, storage inventories fell to a four-year low level in the United States by the end of last winter and reached record lows in Europe.

This situation prompted strong injections to replenish underground storages, and contributed to sustained levels of imports in Europe and high prices throughout this summer. Still, despite these efforts, inventory levels as of the end of September were slightly lower than last year’s levels in Europe, and almost 20% lower in the United States.

Enter the dragon

But there is more to this story. Just like last season’s cliffhanger, winter is also bringing along new major player in the natural gas game. China, for one, which experienced an unprecedented 14.5% growth of its natural gas consumption in 2017, supported by continuous economic growth and by a strong government push towards a cleaner energy mix. The high level of air pollution in urban areas triggered strong policy measures to “win the battle for blue skies.” This included massive conversion from coal-to-gas for small industrial and residential boilers. The resulting gas demand surge could not be met by higher domestic production or import capacity, or even short-term liquefied natural gas (LNG) imports. As a result, China experienced supply shortfalls over the winter.

There were multiple lessons from this episode. Beyond the immediate emergency measures to handle the shortfall, they triggered a wide range of investment decisions and policy measures since the beginning of this year to reinforce the country’s security of supply – further development and diversification of the gas supply portfolio, new investment in storage, pipeline and regasification capacity, as well as new policy guidelines and targets for natural gas development.

At the same time, China’s natural gas demand keeps growing. During the first half of 2018, China’s gas consumption increased by 17% year-on-year, while LNG imports, a growing source of supply for the country, grew by 45% year-on-year for the January to September period. Domestic production and import infrastructure development have also grown but they still struggle to keep pace, and some local stakeholders brace themselves for the eventuality of a second tight winter.

The strong increase in China’s LNG spot procurement in 2018 contributed to higher market prices in Asia, which stood at above $10/MMBtu throughout the summer, a level that was reached last year only during the coldest winter months. Asian high prices, combined with strong storage injection activity, also contributed to a continuous rise in European gas prices since the beginning of summer.

Across the narrow sea

Another point of recent concern is the availability of LNG tankers. Once seen as a purely logistical aspect in supply contracts, LNG vessels have become a central component of the emerging short-term LNG trade. Ship availability was not a concern less than two years ago, when the spot chartering price was around $30,000 per day and shipyards were struggling to find new orders to maintain activity. But this has changed today, with prices rising steadily over the past months and reaching $140,000 a day (as of October 23) and with the risk of more tension when temperatures drop.

This is almost as high as the all-time record ($150,000) experienced during the winter following the Fukushima nuclear incident of March 2011, when Japan had to procure LNG to compensate for its offline nuclear power generation capacity.

Of course, risk exposure is not the same for all markets. Mature markets in Asia, Europe or North America have storage, diversified power generation assets, demand response measures and other mitigation tools at their disposal – plus they are more likely to endure higher prices than buyers from emerging markets. At the same time, the LNG short-term supply pool, for which Japan, Korea and Europe used to be the sole buyers, has now to be shared with a growing number of buyers.

The night is dark and full of terrors … or is it?

In the end, for gas markets as for television series, the outcome is never certain and some twists and surprises are likely to happen along the way. For winter gas demand needs, it boils down to remembering that weather is highly unpredictable. This may seem obvious, and yet out-of-the-norm winters tend to have lasting impacts on market behaviour.

If the coming winter happens to be a mild one, market prices are likely to remain stable or even decrease in the most extreme cases. A side effect could be that gas in stock would not be used as expected; market operators who booked and paid for storage capacities would tend to see them as useless costs. Finally, the overall market sentiment could probably end up considering security of supply as not so necessary – until the next tight market episode. For it can also happen to be the other way around, with risks of strong price volatility, (much) higher market prices and, in the worst-case scenario, some physical supply issues such as last winter in China.

Highlighting the importance of security of supply issues and their potential consequences is not about fearmongering, of course. It is about raising awareness of market stakeholders and policy makers and underscore that once-in-a-lifetime weather or security events do happen – sometimes more than once.

IEA

Continue Reading
Comments

Energy

Iran’s ‘oil for execution’ plan: Old ideas in a new wrapping

Published

on

This week Iranian Oil Ministry is going to officially start a new plan that is aimed to be a new way for selling oil and tackling the pressures imposed by U.S. sanctions on the country’s oil industry.

The plan is to execute a barter system which allows domestic and foreign companies, investors and contractors to carry out projects in Iran in exchange for oil (I would like to call it “oil for execution”).

In this regard, as the official inauguration of this new program, a business contract will be signed within the next few days, under which a domestic company is going to receive crude oil in exchange for funding a project to renovate a power plant in Rey county, near the capital Tehran.

At the first glance, the idea of offering oil in exchange for execution of industrial projects seems quite a new idea, however unfortunately it is no more than the same old structure under a new façade.

U.S. sanctions and Iran’s coping tactics

Since the U.S.’s withdrew from Iran’s nuclear pact in May 2018, vowing to drive Iran’s oil exports down to zero, the Islamic Republic has been taking various measures to counter U.S. actions and to keep its oil exports levels as high as possible.

The country has repeatedly announced that it is mobilizing all its resources to sell its oil, and it has done so to some extent. However, considering the U.S.’s harsher stand in the new round of sanctions, the situation seems more complicated for the Iranian government which is finding it harder to get its oil into the market like the previous rounds of sanctions.

Selling in the gray market, offering oil in stock exchange, offering oil futures for certain countries, bartering oil for basic goods and finally bartering oil in exchange for executing industrial projects are some of the approaches Iran has taken to maintain its oil exports.

A simple comparison between the above mentioned strategies would reveal that they are mostly the same in nature, and there are just small differences in their presentation and implementation.

For instance, let’s take a look at the “offering oil in stock market” strategy, and to see how it is different from the new idea of “offering oil in exchange for development projects”.

Oil at IRENEX vs. oil for execution 

As I mentioned earlier, one of the main strategies that Iran followed in order to help its oil exports afloat has been trying new ways to diversify the mechanisms of oil sales, one of which was offering oil at the country’s energy stock market (known as IRENEX).

In simple words, the idea behind this strategy was that companies would buy the oil which is offered at IRENEX and then they would export it to destination markets using whatever means necessary.

Since the first offering of crude oil at Iran Energy Exchange (IRENEX) in October 2018, the plan has not been very successful in attracting traders, and during its total 15 rounds of oil (including heavy and light crude) offerings only 1.1 million barrels were sold, while seven offerings of gas condensate have also been concluded with no sales. This has made some energy experts to believe that this whole strategy is doomed to fail.

The most important challenge that Iran has been faced in executing this approach is the impact of U.S. sanctions on the country’s banking system and its shipping lines, since the purchased oil, ultimately has to be transported from the agreed oil terminals via oil tankers to different destination across the world. 

With the previous strategies coming short, nearly six months after the first offering of oil at IRENEX, in early May, Masoud Karbasian, the head of National Iranian Oil Company (NIOC) announced that the company plans to barter oil for goods and in exchange for executing development projects.

However, the “oil for execution” part wasn’t implemented until this weekend when Head of Thermal Power Plants Holding Company (TPPH) of Iran, Mohsen Tarztalab announced that the company is going to sign a €500 million contract under the new “oil for execution” framework for renovation of Rey power plant near Tehran.

According to Tarztalab, the TPPH decided to go for the deal after the sanctions prevented Japan from financing the renovation of Rey power plan.

Based on this deal, TPPH is going to renovate the power plant and in return NIOC will pay for the services in the form of crude oil. Clearly, TPPH is then in charge of the received oil and it’s their concern weather to export it or sell it inside the country.

A closer look at this deal, reveals how similar it is to other approaches that NIOC has been taking. Just like the oil offered at IRENEX, in this model, too, a company is left with an oil cargo which is banned from entering global markets. The buyers are once again facing financial barriers and shipping difficulties.

Although, like the first oil offering in which a few companies risked buying some oil, this time, too, TPPH, is making a significant gamble in signing this deal, but, just like the IRENEX experience, it seems really improbable for more companies to follow the state-owned TPPH’s footsteps.

Final thoughts

The need for taking all necessary measures for withstanding the economic pressures of the U.S. sanctions is an obvious fact, however the ways of doing so should be chosen more carefully.

It seems that the government has been only wrestling with the “problem” here rather than attempting to find practical “solutions”.

Fortunately, in the past few months, the government seems to have seen the fact that the best way to withstand any economic pressure is the transition from an oil-dependent economy to an active, self-sufficient and independent economy which is more invested in its potentials for trade with neighbors rather than the oil market. 

Solutions like offering oil in the energy exchange or oil for execution might be some kind of transition from traditional oil sales to new approaches, but they are not ultimate solutions in the face of sanctions.

To overcome the current economic conditions, the government has realized that it should have medium- and long-term planning and policy making. 

Active diplomacy and attention to the energy needs and capacities of the neighboring countries and offering discounts for oil products, although are more time-consuming ways to increase oil sales, but will be more successful than the ways we discussed, and will yield greater benefits for the country.

From our partner Tehran Times

Continue Reading

Energy

The who and how of power system flexibility

Published

on

All around the world, power systems are changing fast. For example last year Denmark supplied 63% of its power demand from variable renewables (wind and solar PV) while last June Great Britain went a full 18 days without burning coal for power generation.

Yet despite such examples of progress, change has not been fast enough to meet the objectives of the Paris Agreement. In fact, power sector emissions have been on the rise over the past two years and investments in variable renewable power capacity appear to have stalled for the first time in two decades. Meanwhile electrification continues in sectors such as transport – and without accelerated decarbonisation, much of the growth in power demand will be met by fossil fuels.

But having more low-carbon electricity on the grid is not enough; we need to make better use of that low-carbon electricity. That means coordinated action on the transformation of power systems.

Power system flexibility – the ability to respond in a timely manner to variations in electricity supply and demand – stands at the core of this transformation. Luckily, policy makers and industry leaders across the globe are increasingly aware of the importance of flexibility and are taking action. Over the last two years, two Clean Energy Ministerial Campaigns have contributed to developing an understanding of what technical solutions for flexibility are available – in power plants, grids, storage and on the demand side.

That’s the ‘what’ of power system flexibility. But the more difficult questions are ‘how do we implement this flexibility?’ and ‘who should be involved?’.

The answer is: it depends. More precisely, introducing the appropriate measures to deploy power system flexibility requires a deep, thoughtful look at each country’s institutional framework. One key finding from the various workshops and forums organised by the CEM Power System Flexibility Campaign is that the changes necessary to activate innovative flexibility solutions inevitably deal with regulatory decisions.

One key myth that these same events are contributing to dismantle is that power sector regulation is far too complex and far too country-specific to profit from international sharing of best practices. In fact, it may be the contrary. This sharing of best practices is one of the main contributions of the joint IEA and 21st Century Power Partnership report Status of Power System Transformation 2019, which explores the various points of intervention, along with the relevant stakeholders for flexibility deployment.

The report describes how it is possible for policy makers to easily identify areas where they can directly enable change and areas where more targeted interventions may need wider stakeholder engagement.

It starts by looking at energy strategies, legal frameworks, and policies and programmes. These high-level instruments are usually what is thought of when looking at renewable energy policy support. While relatively far away from implementation, this level is particularly important as it sets the overall course for power system development.

Energy strategies typically lay out broad targets, such as China’s target of flexibility retrofits for 220 GW of coal-fired power plants in its 13th Five-Year Plan or Switzerland’s ‘Energy Strategy 2050’. Legal frameworks go one step closer to implementation by defining electricity industry structure along with the foundations of who does what, such as the UK’s recent bill for electric mobility or the distribution sector and flexibility reforms in Chile. Lastly, policies and programmes can be useful tools to test specific technology approaches or focus on specific aspects of the energy transition, for example Italy’s feasibility study on ‘Virtual Storage Systems’ or the creation of a working group for the modernisation of Brazil’s power sector.

While these high-level solutions are necessary and can be very effective, accelerating the energy transition for increasingly complex and decentralised power systems will increasingly require detailed fine-tuning of institutional frameworks. This is where we come to regulation, market rules and technical standards. By allocating costs and risk, regulation essentially determines who can do what, and how. Similarly, market rules and technical standards play a key role in shaping the interactions of different stakeholders in the power system.

In many cases, it may be necessary to update regulatory frameworks to recognise the new capabilities of new technologies in the power system. This might be the responsibility of the regulator in the case of vertically integrated utilities or spread across regulatory decisions, market rules and technical standards in the case of more unbundled power systems.

For example, if modern wind and solar power plants are technically able to provide frequency regulation, the recognition of their contribution to system reliability may require a regulatory decision to assess and validate their capabilities. It might also require modifying the system operator’s market rules to allow access to ancillary services, as was done in Spain.

Similarly, if digitalisation and decentralisation of the power system offer the potential of greater demand-side participation, it will be regulation that enables smaller system resources to participate in energy, capacity and ancillary service markets. How this is implemented would vary across jurisdictions, for example updating prequalification requirements may be necessary to enable aggregation, as in the EU, simply recognising independent aggregators as market players, as in Australia, or reforming retail tariffs as in Singapore.

But to know what changes should be implemented, and by who, it is critically important to understand the specific point of intervention and engage the right stakeholders. More broadly, it is important to start a conversation with a comprehensive set of stakeholders, to get an idea of what is possible and what is needed, and to compare experiences within and across countries.

Over the coming year, the IEA and PSF Campaign will continue working on this global dialogue to improve the understanding of regulatory and market design options for the deployment of system flexibility, supported by the Campaign’s co-leads – China, Denmark, Germany and Sweden. The PSF campaign is preparing initial steps to collaborate with CEM’s 21st Century Power Partnership, the Electric Vehicle Initiative and the International Smart Grid Action Network to look at the linkage between power system flexibility and transport electrification, an important conversation given the trend towards decentralisation driven by adoption of electric vehicles.

This work all aims to drive home one key-message: we need creative policy making if we are serious about accelerating the energy transition, and regulatory innovation and international cooperation are a good place to start.

IEA

Continue Reading

Energy

U.S. Is World’s Largest Producer of Fossil Fuels

Todd Royal

Published

on

The world is using more, not less energy, with the United States (U.S.) leading this surge. This fact will continue changing the world geopolitically, and bring changes to global markets. British Petroleum’s (BP) seminal Statistical Review of World Energy 2019 was released in early June, and the findings revealed the U.S. is leading the world in production of fossil fuels. The report counters prevailing wisdom that peak oil demand is rapidly happening, when the exact opposite is taking place.

World oil records were broken in 2018; according to the Review: “a new oil consumption record of 99.8 million barrels per day (mbpd), which is the ninth straight year global oil demand has increased.” Demand for oil grew 1.5 percent. This is above the “decades-long average of 1.2 percent.”

The Review showed the U.S. is the world’s top consumer at 20.5 mbpd in 2018, and China was second at 13.5 mbpd, with India in third place at 5.2 mbpd. China and India are growing faster than world and U.S. consumer growth at 5 percent the past decade. What’s noticeable about the data is: “Asia Pacific has been the world’s fastest growing oil market over the past decade with 2.7% average annual growth.”

BP also released the emergence of a new global oil production record in 2018 that averaged 94.7 mbpd. This increased from 2.22 million mbpd from 2017. The U.S. came in at 15.3 mbpd, and led all countries by increasing production from 2017 by over 2.18 mbpd. The U.S. added 98 percent of total global additions, an astonishing figure.

Before the U.S. shale exploration and production (E&P) took off, oil was over $100 a barrel, but since the 2014 oil crash, global oil production has increased by 11.6 mbpd, and shows no signs of slowing down. What Russell Gold of The Wall Street Journal calls, “the shale boom,” has seen “U.S. oil production increase by 8.5 mbpd – equal to 73.2% of the global increase in production.”

What the numbers increasingly showed was the U.S. quickly surpassing Saudi Arabia. which is the second leading oil producer at 12.3 mbpd, and Russia in third at 11.4 mbpd. Though Canada has domestic opposition from environmental groups to fossil fuel production, Canada added over 410,000 bpd in 2017.

Add these figures to U.S. numbers, and North America is now arguably the most important source for oil in the world. The BP Review decided to add natural gas liquids (NGLs) to oil production numbers and found that U.S. NGL is higher than any country at 4.3 mbpd. This is higher than Middle Eastern numbers combined, and “accounts for 37.6% of total global NGL production.”

What does this mean for geopolitics? The axiom whoever controls energy controls the world now takes on new meaning with the U.S. drastically pulling ahead of Middle Eastern rivals, Russia and other global producers. Energy has always been a main factor in human development, and is especially true of today’s complex international, political and economic systems that have been in place since the end of World War II (WWII)

With abundant energy, scarcity no longer makes sense when global energy sources are now readily available. When geopolitical havoc comes from Africa since over 600 million Africans are without power, added to the over 1.2 billion people on earth without electricity that is a recipe for geopolitical disaster than can be avoided.

What abundant U.S. shale oil, and natural gas can provide, as well if steadfastly pursued, is putting a stop, or at least halting the rampant weaponization of energy from countries like Russia and Iran. However, both would argue they are doing this national security and sovereign protection.

The current path of demonizing fossil fuels won’t lift billions out of energy poverty, but it will serve to fortify Putin’s resolve. Western media outlets that back the get-off-fossil-fuels crowd do not seem to understand those geopolitical realities. Building electrical lines powered by U.S. natural gas over authoritarian dictators oil and natural gas supplies is a great pathway to promoting democratic capitalism, energy-sufficient nation-states, and continents with market economies.

This will lead billions out of despair, and solve a host of geopolitical problems that has vexed the U.S., EU, NATO and UN for decades. All of these problems will be solved without a shot being fired, or another fruitless war occurring.

By the U.S. countering the weaponization of energy through increased oil and NGL production this has national security and foreign policy implications that affects literally every person on the planet. As an example, if Ukraine, a NATO Member Action Plan applicant since 2008, can be bullied, annexed and invaded without consequence from the West, then global economic markets can be crushed on a whim.

Understanding foreign policy decisions through the lens of energy can lead either to chaos, or the deterring of determined enemies, and that’s why it is so important the U.S. continues leading the world in oil and natural gas production.

When more than 80 percent of the world’s energy comes from oil, natural gas and coal, while understanding “fossil fuels have enabled the greatest advancements in living standards over the last 150 years,” then energy is the number one soft and hard power geopolitical weapon outside of a nuclear arsenal.

“Leading from behind” and “resets” favored by the former U.S. administration won’t help Ukraine or other Russian border states under systematic assault. Trillions in economic growth is then stifled over energy concerns when the exact opposite should be happening.

Viewing the U.S.’ number one oil producer status through the prism of stopping authoritarians, and moving international relations toward the U.S.-led order is the best hope for the world in this perilous century. Geopolitically, it may also be out best hope for growth and forestalling another global war.

Continue Reading

Latest

Newsdesk55 mins ago

Increasing Data Accessibility and Usability for Prosperous Nepal

Over 75 Nepali professionals from the academia, media, and private and non-profit sectors successfully completed the first phase of the...

Middle East3 hours ago

Muslim causes vs national interest: Muslim nations make risky bets

Saudi attitudes towards the plight of thousands of illegal Rohingya in the kingdom fleeing persecution in Myanmar and squalid Bangladeshi...

South Asia5 hours ago

Aftermath of US-Afghan Peace Talks

In Doha, the Capital of Qatar, an unprecedented meeting co-hosted by German and Qatari officials brought together diverse factions interested...

Hotels & Resorts7 hours ago

Marriott Bonvoy Brings Once-In-A-Lifetime Manchester United Experiences to Asia Pacific

Members of Marriott International’s travel program, Marriott Bonvoy can enjoy an exclusive series of experiences during Manchester United’s pre-season tour...

Russia9 hours ago

Why Economic Sanctions Mean Little to Moscow

Realpolitik, a German term for politics based on day-to-day calculations regarding the military and economic balance of power among major...

Newsdesk11 hours ago

Afghan returnees face economic difficulties, unemployment

Afghan refugees who returned to Afghanistan between 2014 and 2017 tend to be worse off financially and face multiple economic...

South Asia13 hours ago

Pak-US Relations: The Way Forward

Cooperation and Trust is the only way forward for Pakistan –US relations. Both countries have wasted a huge time experienced...

Trending

Copyright © 2019 Modern Diplomacy