The collapse of the OPEC+ deal, coupled with a drop in demand amid the raging coronavirus pandemic, has sent tectonic shocks across the global oil and gas markets. Simultaneously, attacks on the Nord Stream-2 gas pipeline project have intensified again.
The global demand for oil had started to decline well before negotiations on the possibility of OPEC+ extension got under way in Vienna at the beginning of March. The decline was due to the pandemic and warm winter. In the course of Vienna talks Riyadh issued an ”ultimatum-like demand” for a dramatic reduction in oil production, which was unacceptable for a whole number of supplier countries because of the risk of losing their share of the market. Meanwhile, accusations on the part of Saudi and western politicians and mass media who blame Moscow for initiating the OPEC+ failure are groundless. Cartel agreements naturally lose their attractiveness over time, since «every participant tends to cheat on others». Another substantial flaw of the OPEC+ is that there are no oil companies from the United States among its signatories. As a result, the reduction in oil production on the part of OPEC+ countries has increased the market share of American producers.
In response to the OPEC+ fiasco, Saudi Arabia (KSA) announced its intention to “inundate the market” by boosting the output by 25%. Riyadh launched a price war in the hope of “regaining the lost share of the market”. KSA cut the oil prices it offered for April by 5-8 dollars per barrel in an attempt to exert pressure on Russia and “on other producers, which are not members of OPEC, including the United States». A number of Gulf countries have also announced an increase in production. As a result, by the end of March, oil prices had reached an 18-year low, the Russian Urals hitting less than 15 dollars per barrel. Should the price war escalate, the Urals price may drop to 5-8 dollars.
Observers present different comments as to Riyadh’s reasons for doing so. From purely tactical considerations – «to force Moscow to return to the negotiating table», to long-term ones, oriented at re-carving the entire oil and gas market, including destabilization of the oil industry of competitor countries, first of all, Russia and the United States. It could even be an attempt to undermine the social and political stability in economies which are dependent on oil and gas exports.
The Saudis’ major advantages comprise, first of all, the lowest production cost, huge oil reserves, substantial, over 0.5 trillion dollar state reserves, and unlimited opportunities for foreign loans. At the same time, experts say, «the Saudi economy is bogged down in debt». If it wants to maintain deficit-free budget, Riyadh ought to keep prices at no less than 80 dollars per barrel. According to IMF experts, even a return to «the rate of 50-55 dollars per barrel» will not be enough for KSA.
By 2024, Saudi Arabia may face a balance of payments crisis and could choose not to tie the rial to the dollar . Meanwhile, on March 27, The Wall-Street Journal reported mass consumer refusals in Europe and North America to accept new shipments of Saudi oil, as “there is nowhere to store more of it.”
The dramatic decline in oil prices has seriously hit the US oil business, as fears of mass bankruptcies in the American shale oil production sector build up. Regular suppliers are preparing to significantly reduce investments and supplies.
The “shale boom” made it possible for America to surpass Saudi Arabia and Russia in 2018 and become the world’s largest oil producer. Unlike earlier, when cheap oil always played into the hands of the American economy, now the situation has changed radically. In the conditions of the coronavirus pandemic, the money saved by gasoline consumers is unlikely to whip up demand in other sectors of the economy. What will sustain damage as well is the shale oil sector on which a number of US states depend. The breakeven threshold for shale oil companies, according to The Economist, varies from $ 23 to $ 75 per barrel, depending on the oil basin. The price collapse is fraught with mass layoffs – right in the year of the presidential election.
Meanwhile, shale oil producers have experienced mounting difficulties even before the start of the current price war. Many companies have been reporting only losses in balance sheets of late. Investors have turned away from the shale sector, most companies found it almost impossible to draw new loans or refinance the old ones. Now, given the dramatically developing situation in the oil market, many shale producers may see being taken over by larger players as the “best” option.
The collapse of oil prices has dealt an equally devastating blow to the geopolitical plans of the US leadership. As dependence on oil imports decreased, Washington became ever more confident that the United States would now be able, through sanctions, to completely halt oil exports from Venezuela and Iran, without fearing uncontrolled global destabilization. A number of experts in Russia express concerns that the growth of production and export capacities in LNG and shale oil sectors, according to the standard scheme now, could prompt Washington to “tighten sanctions” against the Russian oil and gas industry.
In the summer of 2017, President Trump announced plans to secure a US dominant position in the global gas market. An energy strategy that saw light at that time as well “describes Russia as a competitor,” claiming that “Russian projects to diversify supply routes to Europe run counter to the US policy.” Resulting from such political approaches is “concerted effort … against Nord Stream-2 (NS-2)” and other Russian projects on the construction of new gas pipelines to Europe.
At the end of 2017, the United States, for the first time in 60 years, began to export more gas than it imported. The growth of shale production enabled the United States to produce 733 billion cubic meters by the end of 2017 – more than anywhere in the world, including Russia. However, until recently, one of the major obstacles to expanding US gas exports was the US dependence on oil imports. Oil in the US domestic market is several times more expensive than gas in energy equivalent. If the US is to increase the supply of its “cheap” gas – to compensate for the shortage of oil and gas in the domestic market – it would have to increase the import of “expensive” oil.
Another deterrent is competition from Russia. American LNG is more expensive than Russian pipeline gas. As a result, in 2017, gas supplies from the USA to Europe amounted to no more than 3 billion cubic meters of gas. Meanwhile, gas consumption in Europe last year reached 500 billion cubic meters. In an attempt to reverse the trend, in the same 2017, the US Congress voted in favor of a package of sanctions that put under “threat the construction of any new gas pipeline” in Europe with the participation of Russia. In general, it was supposed to launch sanctioned weapons against Moscow by the time the LNG production in the USA reaches full capacity – by 2020-2022. On December 21, 2019, when the United States imposed sanctions against companies engaged in laying NS-2, foreign project contractors suspended all operations.
It cannot be ruled out that if and when the EU sees American LNG as a good alternative to Russian gas, Brussels may choose to swap restrictions on gas supplies from Russia to Europe. The political will to “pay extra for energy security” is also present in a number of European countries. Another scenario could feature a US attempt to force a price war on Moscow, to guarantee dumping in the European direction. In this case, Nord Stream-2 will fall not only under political, but also under direct financial pressure. But it’s hard to imagine how the US authorities are going to convince their power engineers to supply Europe at a loss?
Meanwhile, the long-term strategy of the United States, according to a number of Russian analysts, may not boil down to the struggle for the gas market, but for its transformation by analogy with the oil market. If it were possible to block the maximum number of existing and under construction pipelines, the lion’s share of gas in the world would go by sea in the form of LNG. This would help “untie” gas prices from oil and transform the international gas market into a single, global and spot one where transactions are quick and are made in US dollars to minimize costs and risks. Thus, the main goal of the hype around the “shale revolution” and the “seizure of the global gas market” is to keep the global oil and gas market tied to the US dollar.
The price war declared by Saudi Arabia may put an end to such plans. That the situation in the United States has reached a critical point becomes clear on the basis of recent statements from Washington. According to US media reports, on March 26, the US Secretary of State called on Saudi Arabia to “stop the price war with Russia”. Texas shale producers have urged state officials to “consider reducing oil production … due to falling demand”. On March 30, at the initiative of the White House, there was a telephone conversation between Vladimir Putin and Donald Trump. The two parties agreed to hold “Russian-American consultations” “on the current state of the world oil market” “on the level of ministers of energy”. Markets took the news with some hope of concluding a comprehensive agreement on the regulation of oil production between Moscow, Washington and Riyadh.
Europe, in the event of further blockage of the Nord Stream 2 project, risk falling hostage to Washington’s geopolitical ambitions, what with its statements about the intention to fill the market with its LNG. But this may undermine the economic leadership of Germany, and, accordingly, the policy of strengthening EU unity. Finally, if, after all the current cataclysms, the European Union is still adamant to fight for energy independence, it will have to think how to reduce the share of international commodity trade in dollars. Back in September 2018, the then head of the European Commission, Jean-Claude Juncker, said it was “absurd” for the EU to pay for 80% of its energy imports in dollars, considering that these imports are estimated at 300 billion euros per year. And this is despite the fact that only 2% of Europe’s energy imports come from the United States.
Rumors circulating in the oil market are about the possibility of behind-the-scenes agreements between the United States and Saudi Arabia, which will be directed against Moscow. At the same time, The Financial Times writes, “Russia’s major oil companies have every chance of surviving a drop in oil prices over the next two years, taking into account the advantages that they have over foreign competitors.” For example, Russian oil companies will remain profitable even at a barrel price of $ 15.
Significantly, the ability of the Russian fuel and energy complex to effectively resist price fluctuations is largely the result of Western sanctions. For example, “a large part of the costs and debts” of Russian oil companies is denominated in rubles. At the same time, the ruble exchange rate is free, “floating,” while the currencies of the KSA and the UAE are tightly tied to the dollar. The decline in the ruble leads to an increase in export revenues. The Russian tax system flexibly responds to falling oil prices. Finally, “the country’s oil companies have built up large foreign exchange reserves in recent years”.
Russia’s positions in the European gas market remain strong as well. Despite the year-on-year increase in political and sanction pressure, as well as the decline in contract prices, Russia accounts for a third of the European market. The Russian leadership, as well as Gazprom, have repeatedly emphasized their commitment to completing the Nord Stream 2. The energy strategy of Russia until 2035 provides for the progressive development of new projects in the LNG sector, where world trade is expected to increase to 70% by 2040.
Thus, the current state of the global oil and gas market is determined by three key factors: the price war, the coronavirus pandemic and, as a result, an excess of oil supply. In addition, the situation in the world economy may break the sad “records” of the 2008-2009 crisis. According to the estimates of the Xinhua News Agency, the whole world is “in survival mode.” In such circumstances, each of the supplier countries faces a dilemma: to fight for a greater market share in the hope of beating the competitors, or try to coordinate efforts to stabilize prices. It seems that the struggle for exhaustion is the last thing the world community needs now. For this reason, Moscow calls for dialogue and a return to constructive cooperation, which hinges on a thorough analysis of the long-term consequences of decisions made.
From our partner International Affairs
Indonesian Coal Roadmap: Optimizing Utilization amid Global Tendency to Phasing Out
Authors: Razin Abdullah and Luky Yusgiantoro*
Indonesia is potentially losing state revenue of around USD 1.64-2.5 billion per year from the coal tax and non-tax revenues. Although currently Indonesia has abundant coal resources, especially thermal coal, the coal market is gradually shrinking. This shrinking market will negatively impact Indonesia’s economy. The revenue can be used for developing the country, such as for the provision of public infrastructures, improving public education and health services and many more.
One of the main causes of the shrinking coal market is the global tendency to shift to renewable energy (RE). Therefore, a roadmap is urgently needed by Indonesia as a guideline for optimizing the coal management so that it can be continuously utilized and not become neglected natural resources. The Indonesian Coal Roadmap should also offer detailed guidance on utilizing coal for the short-term, medium-term and long-term.
Why is the roadmap needed?
Indonesia’s total coal reserves is around 37.6 billion tons. If there are no additional reserves and the assumed production rate is 600 million tons/year, then coal production can continue for another 62 years. Even though Indonesia’s coal production was enormous, most of it was for export. In 2019, the export reached 454.5 million tons or almost 74% of the total production. Therefore, it shows a strong dependency of the Indonesian coal market on exports, with China and India as the main destinations. The strong dependency and the global trend towards clean energy made the threat of Indonesian coal abandonment increasingly real.
China, one of Indonesia’s main coal export destinations, has massive coal reserves and was the world’s largest coal producer. In addition, China also has the ambition to become a carbon-free country by 2060, following the European Union countries, which are targeting to achieve it in 2050. It means China and European Union countries would not produce more carbon dioxide than they captured by 2060 and 2050, respectively. Furthermore, India and China have the biggest and second-biggest solar park in the world. India leads with the 2.245GW Bhadla solar park, while China’s Qinghai solar park has a capacity of 2.2GW. Those two solar parks are almost four times larger than the U.S.’ biggest solar farm with a capacity of 579 MW. The above factors raise concerns that China and India, as the main export destinations for Indonesian coal, will reduce their coal imports in the next few years.
The indications of a global trend towards RE can be seen from the energy consumption trend in the U.S. In 2019, U.S. RE consumption exceeded coal for the first time in over 130 years. During 2008-2019, there has been a significant decrease in U.S coal consumption, down by around 49%. Therefore, without proper coal management planning and demand from abroad continues to decline, Indonesia will lose a large amount of state revenue. The value of the remaining coal resources will also drop drastically.
Besides the global market, the domestic use of coal is mostly intended for electricity generation. With the aggressive development of RE power plant technology, the generation prices are getting cheaper. Sooner or later, the RE power plant will replace the conventional coal power plant. Therefore, it is necessary to emphasize efforts to diversify coal products by promoting the downstream coal industries in the future Indonesian Coal Roadmap.
What should be included: the short-term plan
In designing the Indonesian Coal Roadmap, a special attention should be paid to planning the diversification of export destinations and the diversification of coal derivative products. In the short term, it is necessary to study the potential of other countries for the Indonesian coal market so that Indonesia is not only dependent on China and India. As for the medium and long term, it is necessary to plan the downstream coal industry development and map the future market potential.
For the short-term plan, the Asian market is still attractive for Indonesian coal. China and India are expected to continue to use a massive amount of coal. Vietnam is also another promising prospective destination. Vietnam is projected to increase its use of coal amidst the growing industrial sector. In this plan, the Indonesian government plays an essential role in building political relations with these countries so that Indonesian coal can be prioritized.
What should be included: the medium and long-term plans
For the medium and long-term plans, it is necessary to integrate the coal supply chain, the mining site and potential demand location for coal. Therefore, the coal logistics chain becomes more optimal and efficient, according to the mining site location, type of coal, and transportation mode to the end-user. Mapping is needed both for conventional coal utilization and downstream activities.
Particularly for the downstream activities, the roadmap needs to include a map of the low-rank coal (LRC) potentials in Indonesia, which can be used for coal gasification and liquefaction. Coal gasification can produce methanol, dimethyl ether (a substitute for LPG) and, indirectly, produce synthetic oil. Meanwhile, the main product of coal liquefaction is synthetic oil, which can substitute conventional oil fuels. By promoting the downstream coal activities, the government can increase coal’s added value, get a multiplier effect, and reduce petroleum products imports.
The Indonesian Coal Roadmap also needs to consider related existing and planned regulations so that it does not cause conflicts in the future. In designing the roadmap, the government needs to involve relevant stakeholders, such as business entities, local governments and related associations.
The roadmap is expected not only to regulate coal business aspects but also to consider environmental aspects. The abandoned mine lands can be used for installing a solar farm, providing clean energy for the country. Meanwhile, the coal power plant is encouraged to use clean coal technology (CCT). CCT includes carbon capture storage (CCS), ultra-supercritical, and advanced ultra-supercritical technologies, reducing emissions from the coal power plant.
*Luky Yusgiantoro, Ph.D. A governing board member of The Purnomo Yusgiantoro Center (PYC).
Engaging the ‘Climate’ Generation in Global Energy Transition
Renewable energy is at the heart of global efforts to secure a sustainable future. Partnering with young people to amplify calls for the global energy transition is an essential part of this endeavour, as they represent a major driver of development, social change, economic growth, innovation and environmental protection. In recent years, young people have become increasingly involved in shaping the sustainable development discourse, and have a key role to play in propelling climate change mitigation efforts within their respective communities.
Therefore, how might we best engage this new generation of climate champions to accentuate their role in the ongoing energy transition? In short, engagement begins with information and awareness. Young people must be exposed to the growing body of knowledge and perspectives on renewable energy technologies and be encouraged to engage in peer-to-peer exchanges on the subject via new platforms.
To this end, IRENA convened the first IRENA Youth Forum in Abu Dhabi in January 2020, bringing together young people from more than 35 countries to discuss their role in accelerating the global energy transformation. The Forum allowed participants to take part in a truly global conversation, exchanging views with each other as well as with renewable energy experts and representatives from governments around the world, the private sector and the international community.
Similarly, the IRENA Youth Talk webinar, organised in collaboration with the SDG 7 Youth Constituency of the UN Major Group for Children and Youth, presented the views of youth leaders, to identify how young people can further the promotion of renewables through entrepreneurship that accelerates the energy transition.
For example, Joachim Tamaro’s experience in Kenya was shared in the Youth Talk, illustrating how effective young entrepreneurs can be as agents of change in their communities. He is currently working on the East Africa Geo-Aquacultural Development Project – a venture that envisages the use of solar energy to power refrigeration in rural areas that rely on fishing for their livelihoods. The project will also use geothermal-based steam for hatchery, production, processing, storage, preparation and cooking processes.
It is time for governments, international organisations and other relevant stakeholders to engage with young people like Joachim and integrate their contributions into the broader plan to accelerate the energy transition, address climate change and achieve the UN Sustainable Development Agenda.
Business incubators, entrepreneurship accelerators and innovation programmes can empower young people to take their initiatives further. They can give young innovators and entrepreneurs opportunities to showcase and implement their ideas and contribute to their communities’ economic and sustainable development. At the same time, they also allow them to benefit from technical training, mentorship and financing opportunities.
Governments must also engage young people by reflecting their views and perspectives when developing policies that aim to secure a sustainable energy future, not least because it is the youth of today who will be the leaders of tomorrow.
The Urgency of Strategic Petroleum Reserve (SPR) for Indonesia’s Energy Security
Authors:Akhmad Hanan and Dr. Luky Yusgiantoro*
Indonesia is located in the Pacific Ring of Fire, which has great potential for natural disasters. These disasters have caused damage to energy infrastructure and casualties. Natural disasters usually cut the energy supply chain in an area, causing a shortage of fuel supply and power outages.
Besides natural disasters, energy crisis events occur mainly due to the disruption of energy supplies. This is because of the disconnection of energy facilities and infrastructure by natural disasters, criminal and terrorist acts, escalation in regional politics, rising oil prices, and others. With strategic national energy reserves, particularly strategic petroleum reserves (SPR), Indonesia can survive the energy crisis if it has.
Until now, Indonesia does not have an SPR. Meanwhile, fuel stocks owned by business entities such as PT Pertamina (Persero) are only categorized as operational reserves. The existing fuel stock can only guarantee 20 days of continuity. Whereas in theory, a country has secured energy security if it has a guaranteed energy supply with affordable energy prices, easy access for the people, and environmentally friendly. With current conditions, Indonesia still does not have guaranteed energy security.
Indonesian Law mandates that to ensure national energy security, the government is obliged to provide national energy reserves. This reserve can be used at any time for conditions of crisis and national energy emergencies. It has been 13 years since the energy law was issued, Indonesia does not yet have an SPR.
Lessons from other countries
Many countries in the world have SPR, and its function is to store crude oil and or fuel oil. SPR is built by many developed countries, especially countries that are members of the International Energy Agency (IEA). The IEA was formed due to the disruption of oil supply in the 1970s. To avoid the same thing happening again, the IEA has made a strategic decision by obliging member countries to keep in the SPR for 90 days.
As one of the member countries, the US has the largest SPR in the world. Its storage capacity reaches a maximum of 714 million barrels (estimated to equal 115 days of imports) to mitigate the impact of disruption in the supply of petroleum products and implement US obligations under the international energy program. The US’ SPR is under the control of the US Department of Energy and is stored in large underground salt caves at four locations along the Gulf of Mexico coastline.
Besides the US, Japan also has the SPR. Japan’s SPR capacity is 527 million barrels (estimated to equal 141 days of imports). SPR Japan priority is used for disaster conditions. For example, in 2011, when the nuclear reactor leak occurred at the Fukushima nuclear power plant due to the Tsunami, Japan must find an energy alternative. Consequently, Japan must replace them with fossil fuel power plants, mainly gas and oil stored in SPR.
China, Thailand, and India also have their own SPR. China has an SPR capacity of 400-900 million barrels, Thailand 27.6 million barrels, and India 37.4 million barrels. Singapore does not have an SPR. However, Singapore has operational reserve in the form of fuel stock for up to 90 days which is longer than Indonesia.
Indonesia really needs SPR
The biggest obstacles of developing SPR in Indonesia are budget availability, location selection, and the absence of any derivative regulations from the law. Under the law, no agency has been appointed and responsible for building and managing SPR. Also, government technical regulations regarding the existence and management of SPR in Indonesia is important.
The required SPR capacity in Indonesia can be estimated by calculating the daily consumption from the previous year. For 2019, the national average daily consumption of fuel is 2.6 million kiloliters per day. With the estimation of 90 days of imports, Indonesia’s SPR capacity must at least be more than 100 million barrels to be used in emergencies situations.
For selecting SPR locations, priority can be given to areas that have safe geological structures. East Kalimantan is suitable to be studied as an SPR placement area. It is also geologically safe from disasters and is also located in the middle of Indonesia. East Kalimantan has the Balikpapan oil refinery with the capacity of 260,000 BPD for SPR stock. For SPR funding solution, can use the state budget with a long-term program and designation as a national strategic project.
Another short-term solution for SPR is to use or lease existing oil tankers around the world that are not being used. Should the development of SPR be approved by the government, then the international shipping companies may be able to contribute to its development.
China currently dominates oil tanker shipping in the world, Indonesia can work with China to lease and become Indonesia’s SPR. Actually, this is a good opportunity at the time of the COVID-19 pandemic because oil prices are falling. It would be great if Indonesia could charter some oil tankers and buy fuel to use as SPR. This solution was very interesting while the government prepared long-term planning for the SPR facility. In this way, Indonesia’s energy security will be more secure.
*Dr. Luky Yusgiantoro, governing board member of The Purnomo Yusgiantoro Center (PYC).
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