Right from the day Trump withdrew from Iran’s nuclear deal, announcing his plan for cutting Iranian oil exports to zero, the oil scholars and experts all around the world begun contemplating the impacts of this decision on the Iranian oil industry especially on the country’s oil exports.
Today, near five months after Trump’s announcement and while the U.S. has re-imposed sanctions on Tehran, still nobody has a clear idea about the outcomes of the U.S. actions against Iran, and there is still great disagreement over the magnitude of the impact on Iranian oil industry and especially on crude exports.
However, the oil markets have been through various changes in the past few months based on which we can draw a relatively neat picture of what to expect in the future.
Markets moving toward ‘oversupply’
In January 2017 OPEC and a group of non-OPEC producers including Russia began cutting their output in order to balance an oversupplied market in which the oil prices had fallen from over $100 a barrel to under $30. After OPEC+ agreement the glut was slowly drained and the prices stared to move in an upward trend reaching $80.
The rise in oil prices started to concern Trump’s administration who were close to the midterm elections and also planning to re-impose sanctions on Iran; and the surging oil prices were not at all in line with their interests. This made Trump to begin pushing the U.S. allies in the Middle East to pump more oil in order to lower the surging prices.
In June 2018, led by Saudi Arabia as the biggest U.S. ally in the Middle East, OPEC and non-OPEC group agreed to restore some of their output to help rebalance the market which this time was considered “very tight”.
Afterward, despite the 2017 agreement, some OPEC members were allowed to pump at their maximum levels and also the world’s top three oil producers namely the U.S., Russia and Saudi Arabia, hit new production records.
Oil demand and a broken cycle
After pumping at their highest levels for over four months, Saudi Arabia and U.S. producers had to face the fact that there might not be enough demand for their oil in the markets.
The rising trade tensions between U.S. and China, rising interest rates and currency weakness in emerging markets have raised concerns about a slowdown in global economic growth and consequently in oil demand.
So getting back to the starting point [safe to say in a broken cycle], Saudi’s begun to believe that, once again, the markets were moving toward a glut and even with the cuts in Iranian output, the markets didn’t have the appetite for the new oil flows.
Consequently, in their latest gathering in Abu Dhabi, OPEC+, announced that the current situation “may require new strategies to balance the market.”
Gathered for their 11th meeting on Sunday, the OPEC-Non-OPEC Joint Ministerial Monitoring Committee (JMMC) announced that “the Committee reviewed current oil supply and demand fundamentals and noted that 2019 prospects point to higher supply growth than global requirements, taking into account current uncertainties.”
Following the meeting, Saudi Arabia announced its plans to reduce oil supply to world markets by 0.5 million barrels per day (bpd) in December, Reuters reported on Monday.
Iran sanctions and the exemptions
Facing resistance from Saudi Arabia for pumping more oil and pressured by high oil prices, the U.S. government had no choice but to soften their stance against Iran and let go of its “zero Iranian oil” dream.
So, just few days before OPEC+ meeting, when there were talks of a new strategy for cutting output, the U.S. government announced that it has agreed to let eight countries, including China, Turkey, South Korea, Japan and India to continue buying Iranian oil.
With the new waivers coming to effect, a significant amount of the cuts in Iran’s oil exports will be compensated.
The impacts on Iran’s oil industry
So far, affected by the U.S. sanctions, Iran’s oil exports have fallen from an average of more than 2.5 million barrels per day to around 1.5 million bpd in recent weeks.
This means currently near 1 million bps of Iranian crude oil has been wiped from the markets and Iran is currently selling a lot less than what it used to sell before the re-imposition of the sanctions.
So how big the effect of these cuts could project on the country’s economy?
First of all, the oil revenues envisaged in Iran’s current budget for Iranian calendar year 1397 (March 2018-March 2019) is estimated to be 1.01 quadrillion rials (near $26.5 billion) planned based upon $55 oil. This means under a $55 scenario, for this amount of oil revenues to be realized, Iran should sell 2.410 million barrels per day of oil up to March 2019.
What should be taking into consideration here, is the fact that since the beginning of the current Iranian calendar year (March 2018), average oil price has been at least over $60 and according to Reuters ship tracking data, Iran has been exporting 2.5 million barrels of oil and condensate on average during this time span, that is about 400,000 barrels more than what is expected in the country’s budget.
As for the current oil prices, according to the Reuters’ latest report on Sunday, after Saudi Arabia announced a decision for cutting their output by 500,000 bpd in December and considering the U.S. announcement regarding the waivers over Iran sanctions, oil is currently being traded at over $70 per barrel that is still over $15 more than the price based on which Iran’s budget is set.
Aside from the increase which is due to come from the resumption of purchases by the exempted countries, Iranian crude exports are also keeping steady with the demand staying strong in the EU. European buyers including Italy, France, Spain and Croatia continuing their intakes even after announcement of the sanctions.
This indicates that even at the current levels, and even without considering the barrels which are going to be back to Iranian oil exports due to the waivers for the mentioned eight countries, the U.S. sanctions are not having as a severe impact on Iran’s economy and oil industry as they were supposed to.
Let’s not forget the country’s ample domestic storage which can easily absorb the barrels that are not exported. Previously, when the U.S. and EU imposed sanctions on Iran, the country put almost 50 million barrels of crude and condensates on floating storage between 2012 and January 2016.
Meanwhile, the country’s refineries have also been picking up in the past few months. Iran’s gasoline production has surged 50 percent over the last 12 months, with further increases to come, according to the oil ministry.
In the end, considering the global supply and demand patterns, the trade tensions between the U.S. and China and with OPEC+ considering new cuts to be executed in 2019, as well as U.S.’ recent waivers over Iran sanctions, we can see that the odds are quite slim for U.S. sanctions having a significant impact on the Islamic Republic’s economy and its oil industry in the long run.
First published in our partner Tehran Times
Gender equality for an inclusive energy transition
Women represent 32% of workers in renewables, a new survey and analysis conducted by the International Renewable Energy Agency (IRENA) reveals. This compares to 22% reported in traditional energy industries like oil and gas and over 48% in global labor force participation. IRENA’s report Renewable Energy: A Gender Perspective highlights significant opportunities for a greater gender balance in the global energy transformation. Based on responses from nearly 1500 participants in 144 countries, this new study is one of the largest surveys conducted on gender in renewable energy to date. It was presented to IRENA Members during a Special Evening Event at the 9th Assembly taking place in Abu Dhabi from 11-13 January 2019.
The global energy landscape is witnessing a rapid and wide-ranging change driven by an unprecedented growth of renewables. This transformation enables an array of social and economic benefits, including growing employment. IRENA estimates that the number of jobs in the sector could increase from 10.3 million in 2017 to nearly 29 million in 2050. The renewable energy sector offers diverse career opportunities along the value chain, requiring different skill sets and talents. The greater participation of women would allow this rapidly growing sector to draw on untapped female talents while ensuring the socially fair distribution of socio-economic opportunities of the global energy transformation.
Adopting a gender perspective to renewables development is important to ensure that women’s skills and views are part of the growing industry, participants in the survey recommend. Responses show that 75% of women, but only 40% of men, perceive the existence of barriers to women’s entry and advancement in the sector. The survey shows a similar gap about wage equity along gender lines: 60% of male respondents assume pay equity between women and men versus only 29% of female respondents. “Woman are often offered positions and say no because they believe they cannot do it”, said María Fernanda Suárez, Energy Minister of Colombia, encouraging woman to be bold. “We tell employers to employ women,” agreed Habiba Ali, CEO of Sosai Renewable Energies in Nigeria, “and we tell woman to stand up and say: I can do it.” Fiame Naomi Mata’afa, Deputy Prime Minister of Samoa, confirmed, “Gender equality is about social attitude. If this doesn’t change, nothing will move on”. Full support to gender equality in business by Harish Hande, Co-Founder of Selco India, “the fact that we are talking about gender in 2019 is shameful.”
Greater gender diversity brings substantial co-benefits, the survey finds. Mainstreaming gender perspectives, adopting gender-sensitive policies and tailoring training and skills development can help increase women’s engagement and ensure that women’s perspectives are fully articulated. Speaking at the Evening event, Gauri Singh from the Public Health & Family Welfare Department at the Renewable Energy Corporation in Madhya Pradesh agreed, calling on communities to empower woman. “We need clear and equal rules”, added Gabriela Cuevas Barron, Senator from Mexico and President of the Inter-Parliamentary Union (IPU). “We have to set up an ecosystem that allows woman to combine the professional with family life.”
Women bring new perspectives to the workplace and improve collaboration, while increasing the number of qualified women in an organisation’s leadership yields better performance overall. In the context of energy access, engaging women as active agents in deploying off-grid renewable energy solutions is known to improve sustainability and maximise the socio-economic benefits. “We don’t achieve our sustainable energy for all agenda if we don’t advance on gender balance”, Sheila Oparaocha, International Coordinator and Programme Manager at ENERGIA Hivos reminded, suggesting to “start building the business case.”
IRENA’s survey reveals that modern energy access reduces drudgery, improves well-being and frees up time for women and girls to seek an education and engage in income-generating activities. Women are ideally placed to lead and support the delivery of off-grid energy solutions, especially in view of their role as primary energy users within the household and their social networks. Actively engaging women in deploying off-grid renewable energy solutions requires a particular focus on training and skills development, followed by access to finance and mainstreaming gender in energy access programmes, according to the survey respondents. The socio-economic dividends of gender mainstreaming are immense; with several examples covered in the report suggesting improvements in women’s self-perception and empowerment within the community.
During the evening’s panel discussion, Kudakwashe Ndhlukula, Executive Director from the Southern Africa Centre for Renewable Energy and Energy Efficiency added that “from a renewables-side, we traditionally see women as victims. Now, we focus on ensuring that the benefits are shared equally.” Shawn Tupper, Associate Deputy Minister from Natural Resources Canada confirmed that new and 160th Member of IRENA intends to advance the gender agenda Internationally together with its partner.
While the 2030 Agenda for Sustainable Development specifically dedicates one goal to gender equality, detailed information related to gender equality in the renewable energy sector remains sparse. Renewable Energy: A Gender Perspective aims to contribute to filling this knowledge gap. Findings from the survey offer a glimpse into the current status of women’s participation in the sector and provide insights on what measures are needed, and by whom, to “engender” the energy transition.
Winners, losers and unintended consequences in the outlook for oil product demand
Debates about the future of oil tend to focus on total demand: how long it might continue to grow, when it might peak, and so on. But digging deeper into the prospects for individual oil products reveals a rich variety of stories of growth and decline that are also of great significance for the overall oil outlook.
Global oil consumption has been on an almost unbroken rising trend for decades, but there have already been divergent trends for individual oil products. Demand for heavy fuel oil, for example, has been declining since the 1980s, while the pace of demand growth for lighter products – such as ethane, liquefied petroleum gas (LPG) and naphtha – has been almost triple that of total oil demand.
In the World Energy Outlook’s New Policies Scenario, heavy fuel oil is set to face another blow when the International Maritime Organization (IMO)’s regulation on the sulfur content of bunker fuels comes into effect from 2020. Gasoline demand also peaks in the late 2020s as efficiency improvements, fuel switching and electrification weigh on oil demand for cars. But there are sectors where efficiency improvements or electrification are less effective in curbing oil demand, most notably the petrochemical sector.
As a result, demand for ethane, LPG and naphtha (mainly used as petrochemical feedstocks) continues to grow much faster than total oil demand in the New Policies Scenario. Robust growth in these lighter products (also known as the “top of the barrel”) means that their share of total oil consumption rises from 19% today to 23% in 2040. In contrast, the share of gasoline and heavy fuel oil declines from 33% to 28%. Refiners have coped with divergent trends for different oil products in the past, but the pace and extent of the changes envisaged in the New Policies Scenario still pose a significant test.
In the Sustainable Development Scenario, which provides an integrated strategy to meet Paris climate targets, achieve energy access, and significantly improve air quality, the share of “top of the barrel” products grows to an even greater extent. Oil demand in cars drops significantly; consumption for other transport modes – trucks, ships and aviation – also declines; but use in the petrochemical sector remains robust due to strong demand growth for chemical products in developing economies.
These changes engender a major shift in the composition of oil product demand. Demand for gasoline and diesel falls by some 50% and 35% respectively between today and 2040. Demand for kerosene and fuel oil also falls. By contrast, demand for ethane, naphtha and LPG grows by around 25%. LPG is also key in this scenario to tackle the negative health impacts associated with the traditional use of solid biomass as a cooking fuel in many developing countries. As a result, the share of lighter products rises to over 30% by 2040 in the Sustainable Development Scenario, which poses an unprecedented challenge for refiners.
Refiners are used to coping with changing demand patterns. In the past, these efforts were mainly focused on reducing heavier yields and increasing the output of gasoline and middle distillates (diesel and kerosene). The challenge in the Sustainable Development Scenario comes from a different angle: to increase the yield of lighter products and reduce the output of traditional refined products such as gasoline and diesel. Growth in the availability of natural gas liquids (NGLs) and lighter crude oil eases some of the pressure on refiners, at least in the near term. However, production of NGLs and of tight oil are both projected to fall back post-2025, while demand for lighter products continues to increase.
The mismatch between refinery configurations and product demand in the Sustainable Development Scenario would increase the incentives for refiners to deepen integration with petrochemical operations, and thereby boost the direct production of chemical products relative to transportation fuels. There are various technological pathways to increase chemical product yields beyond the levels that a refinery can typically produce (less than 10%).
Several Asian refineries have aromatics units attached to a refinery; high-severity fluid catalytic cracking technologies are being explored; while companies in China are building integrated petrochemical and refining facilities that aim to have chemical yields of around 40%. There are even more ambitious schemes being pursued in the Middle East to bypass refining operations and produce chemicals directly from crude oil.
Implications for the refining industry
The changes in product demand could also have profound implications for the business model of the refining industry. Today, refiners typically earn most of their profit from selling road transport fuels such as gasoline and diesel. Prices for petrochemical feedstocks – the main sources of demand growth – often trend lower than crude oil prices. The significant reduction in road transport fuel demand may therefore challenge this traditional pattern.
In theory, foregone profits in one area would be compensated by higher prices for products in high demand such as naphtha and LPG. While it is conceivable for the prices of these products to increase to some degree, it is hard to envisage a rise that fully compensates for the reduction in road transport fuels sales. The current interest in petrochemical integration reflects a desire to hedge against this risk by seeking out new business lines and revenue streams.
Implications for the energy transition
The IMO sulfur regulation is expected to increase demand for diesel and reduce that for high-sulfur fuel oil (HSFO) around 2020. This raises the prospect of a spike in diesel prices and a drop in HSFO prices, which could have broader economic ramifications beyond oil product markets. The regulation may provide an illustration of how changes in product demand can send ripples through the refining industry and then through the wider energy system.
Our projections highlight other possible mismatches between products demanded and refinery configurations, causing spikes or slumps in the price of individual oil products. While policy makers need to try to minimise the potential impacts of price spikes on energy consumers, they would also need to be attentive to the unintended influences of price slumps.
For example, if policy action were concentrated narrowly on the passenger car segment while other sectors – such as trucks, aviation, shipping and petrochemicals – were left relatively untouched, it would be difficult to avoid a glut of gasoline on the market once demand started to fall back. Efforts to curb oil use in passenger cars would therefore face much stronger headwinds because cheap gasoline would make efficiency improvements and electrification more difficult and expensive.
Avoiding such rebound effects would require removing fossil fuel subsidies or putting in place an offsetting tax or duty that maintains end-user prices at higher levels. Anticipating and mitigating these feedbacks from the supply side needs to be a central element of the discussion about orderly energy transitions.
Could tight oil go global?
Authors: Tim Gould and Christophe McGlade*
Tight oil production is today a largely US phenomenon. From less than 0.5 mb/d in 2010, production has surged to around 6 mb/d in 2018 and this growth shows little sign of slowing down any time soon. In the most recent World Energy Outlook, tight oil output continues to rise until well into the 2020s in the New Policies Scenario, reaching more than 9 mb/d. As a result, the United States reinforces its position as the world’s largest oil producer, accounting for almost one in every five barrels of production by 2025; it also become a net oil exporter.
This dramatic turnaround in fortunes has had profound implications for energy markets, and the consequences are also being felt beyond energy, for example in the renaissance of the US petrochemical industry. This example has also led many other countries to ask whether they too could experience a shale revolution.
So, what are the prospects for tight oil going global?
One key issue with tight oil production is the sheer number of wells that are needed to reach material levels of production. Production from an individual tight oil well declines very rapidly after it has been completed. If the rate of drilling drops, production is likely to follow suit shortly after. For example, in 2017, around 8 500 tight oil wells were completed in the United States and nearly 70% of these were needed simply to compensate for declines at existing wells. If no new wells had been completed after the end of 2017, we estimate that tight crude oil production would have fallen by around 1.8 mb/d within 12 months and by a further 0.6 mb/d in the next year.
The eternal tussle between innovation and depletion
A critical determinant of future production is having a sizeable resource potential. In theory, there are major tight oil resources in multiple countries. The latest assessment estimates that there are around 350 billion tight oil barrels that are technically recoverable outside the United States (triple the amount in the United States).
However, estimates of resource potential are subject to a huge degree of uncertainty. In some cases, this results in major upward revisions and in other cases to substantial downward revisions. For example, a recent reassessment by the United States Geological Survey (USGS) of the Permian shale play indicated that there were around 20 billion barrels more technically recoverable tight crude oil resources than was previously thought.
In our modelling, increases in the estimated US tight oil resource potential translate into higher projected production levels. For example, tight oil resources in the WEO-2018 (at about 115 billion barrels) are around 10% greater than in the WEO-2017, and production in 2025 is around 0.9 mb/d higher as a result.
Many observers expect further upward revisions in US resource estimates in the coming years. These should not be taken for granted, but they would be necessary to meet oil demand in the New Policies Scenario if the US shale industry is to compensate for a continued shortage of new conventional projects elsewhere.
In the end, as the United States has demonstrated, the only way to prove whether a resource is technically or economically producible is through drilling. A huge theoretical resource potential is no real indication that a shale industry can be successfully developed.
Tight oil is a relatively new production technique and many of the increases in resources in the United States have stemmed from technological progress. Yet even with continued innovation in the New Policies Scenario many of the most productive areas in the United States start to show signs of depletion by the mid-2020s (with the recoverable resource potential that we assume).
This means the average well drilled in 2025 is less productive than today and so a larger number of wells need to be completed to maintain or increase production. We estimate that achieving more than 9 mb/d tight crude oil production in the New Policies Scenario in the United States would require around 20 000 new wells to be drilled and completed in 2025. Thereafter, with our current estimate for recoverable resources, production starts to fall gradually.
How does the success of US shale affect prospects elsewhere?
The knowledge and expertise gained in the United States can clearly be of value in developing tight oil resources in other parts of the world. But, perhaps ironically, one reason for the lack of take-off of shale production (for both oil and gas) to date has been the degree of success in the United States. US tight oil was a central reason for the drop in the oil price in 2014 (and again in recent months), which dimmed the economics of similar production elsewhere.
The US shale sector has also absorbed a large portion of the attention and capital spending of international companies that could have otherwise invested elsewhere. Outside the United States, shale remains a relatively high-cost, poorly-understood resource that poses challenges stretching from access to land and availability of water to bureaucratic hurdles. A critical mass of activity and learning is necessary to generate economies of scale and bring down breakeven prices. But getting the momentum going for this is tough.
To date, only a limited number of countries have achieved some success with tight oil production. Canada produces around 0.4 mb/d tight oil and initial drilling in Argentina has been promising and suggested that resources could be large. Production there stands at around 50 kb/d today. Results have been less promising elsewhere, China, South Africa, and Ukraine all experimented with tight oil, for example, but production targets have been lowered or drilling abandoned altogether.
Despite these near-term difficulties, the New Policies Scenario does eventually see some spread in tight oil. Projected growth is most apparent in Argentina, Canada, Russia and Mexico, and there are also increases in Australia, China and the United Arab Emirates. By 2040, there is more than 3.5 mb/d of tight oil production from areas outside the United States. Crucially, the upturn in tight oil production does not really occur until after production in the United States reaches its peak of production.
As it becomes more difficult for companies to find commercial resources to develop, this encourages them to seek out opportunities elsewhere. There is, of course, a high degree of uncertainty in these projections. Developments could take off sooner if ongoing drilling activity is particularly successful (in Argentina for example), but could also be delayed if the oil price is suppressed for extended periods.
What if the world accelerated a transition away from hydrocarbons? Lower oil demand and prices in our Sustainable Development Scenario would pose a challenge to both the established shale industry in the United States and the more nascent industry elsewhere. Yet tight oil is also arguably a logical choice for many companies faced with uncertainty about the future. Decline rates are high and so there is less need for a long-term outlook on demand and prices. Operators need just enough market visibility to know when to increase or throttle back on drilling. Tight oil is also generally a relatively light crude oil that is well suited to provide the kinds of products in most demand in the Sustainable Development Scenario.
So, an accelerated energy transition would not necessarily constrain tight oil production as much as other types of resources. But, as we have emphasised in previous WEO analysis, prospects in individual jurisdictions also depend on the way that social and environmental concerns are addressed, as the scale and intensity of shale development can have major implications for local communities, land use and water resources, as well as for emissions.
In the world depicted in the Sustainable Development Scenario, there is likely to be even greater attention placed on these aspects. The prospects for tight oil going global depend not just on what is available below the surface, but also on how effectively and credibly these ‘above-ground’ issues are managed.
*Christophe McGlade, WEO energy analyst
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