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Oil producers dig into savings amid fiscal deficits

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Today many of the world’s major cities remain under lockdowns while their respective government is implementing work-from-home schemes. This has dramatically reduced the number of cars on the streets and cut the demand from the transportation sector. With WTI hovering around $10 and Brent on $20 a barrel, oil-producing nations are feeling the pinch. 

When planning their annual budget no government predicted such a bleak situation and oil-producing nations planned their budgets on higher than real prices, as a result, they are facing fiscal deficits.

Global oil demand for oil is down by as much as 30 million barrels a day, a 30 percent reduction.

IMF predicts West Asian economies to contract this year. “Vulnerabilities are high in certain countries” with “high levels of unemployment and low growth,” said Jihad Azour, the IMF’s Middle East and Central Asia director.

Most nations are turning to their state-owned investment vehicles commonly referred to as Sovereign Wealth Fund (SWF) designed to buffer oil price shocks. Today’s situation shows the need for economic diversification among oil-producing nations.

The private oil producers, on the other hand, are either shutting down or reducing production levels and freezing new drilling projects for the time being.

In the Islamic Republic, a fund called National Development Fund of Iran (NDFI) was founded 2011. SWF’s real assets are not officially declared and in this piece, I will quote news agencies and other unofficial sources.

NDFI is reportedly worth $91 billion. On April 6, Iran’s Supreme Leader Ayatollah Ali Khamenei approved withdrawal of one billion euros from NDFI to help fight the coronavirus epidemic.

The funds will be used for revamping funding needs of the overstretched health care system and the unemployment insurance fund. President Hassan Rouhani has thanked the leader for his move on his website and added that the needs will preferably come from domestic products and knowledge-based companies.

However, the U.S. sanctions have eroded the country’s dependence on oil exports.and the impact of the oil price shock will be minimal. Prior to re-imposition of U.S. sanctions in May 2018, Iran was exporting 2.5 million barrels a day. By most estimates today Iran exports less than 200,000 barrels a day. 

Rouhani has said that Iran will not suffer as much as other countries from the oil price plunge as it is less reliant on crude exports. “The more countries rely on oil, the greater they suffer. But as our reliance on oil income has decreased, willingly or unwillingly, either by our own will or by the imposition of the enemy, our losses will certainly be less,” Rouhani said during a television meeting.

Iran’s budget for the present year (started March 20, 2020) has been planned with the expectation of an export of one million barrels a day with an oil price of $50. This aspect of the budget needs to be revisited due to the extraordinary circumstances created due to the novel coronavirus outbreak.

IMF has warned Iran could face an $18 billion trade deficit in 2020 due to lack of exports, which could worsen if oil prices stay low.

Russia
Russian newspaper Vedomosti reported last week that a barrel of Russia’s Urals oil, where the price is determined by Brent, not WTI, was trading at $8.48 a barrel, the lowest since 1998. The current Russian budget is calculated at an oil price of $42 a barrel.  
Two-thirds of Russia’s export earnings and 40 percent of its budget is generated by oil sales.

Earlier this year the Russian Finance Ministry announced Russia could withstand prices as low as $25 a barrel for up to 10 years by drawing on a $150 billion National Wealth Fund to compensate for shortfalls of fiscal budget. Russia’s NWF has risen to $151.35 billion after the Finance Ministry channeled extra oil and gas revenues from 2019 to it, Reuters quoted the ministry in March.

Apart from low oil prices, Russia has to deal with the sanctions imposed by the U.S. and EU five years ago with Moscow’s annexation of Crimea in March 2014. The sanctions prohibit long-term financing for some major corporates and ban assistance to Russian oil and gas companies for Arctic, shale, and offshore projects.

During an annual press conference last month, Russian Prime Minister Vladimir Putin said while there was “nothing good about [sanctions]” but “Our economic – I can say this with full responsibility – has been able to adapt to external shocks, while our national currency has actually become much more stable, even with possible energy price fluctuations.”

Russia responded to sanctions in three ways: First tighten belt, cutting public spending, and forcing banks and major corporations to clean up their balance sheets. Second, it spent trillions of roubles to create domestic substitutes for imported goods, while food imports from the EU were banned to stimulate local production. Third, some income from energy exports diverted to national wealth fund, thanks to the steady rise in oil prices since 2014 Russia saved up to $124b in sovereign wealth fund (seven percent of GDP).

The results have been impressive. All the three levels of Russia’s government ran a budget surplus in 2018 and 2019, and its total public debt is about 15 percent of GDP. The EU average is 80 percent.

Sanctions have hampered FDI from an annual average of $54.5b between 2011 and 2013 to 19.2b between 2015 and 2018.

Saudi Arabia

Saudi Arabia’s fiscal revenues are projected to decline by 25 to 30 percent or about eight percent of the GDP this year impacting fiscal deficits, according to rating agency Moody’s. IMF’s latest World Economic Outlook report has forecast a negative 2.3 percent GDP growth for Saudi Arabia in 2020.

Producing 13 percent of world output Saudi Aramco is the world’s largest oil producer. Since there is no way to audit any information coming out of Aramco, the world is left to guess the actual breakeven cost. According to IMF March 9 report, the fiscal breakeven price of Saudi crude is around $80 per barrel.

Saudi Crown Prince Mohammed bin Salman’s “Vision 2030” will need to be shelved for delays amid low oil prices, political instability in light of the recent crackdown by MBS amid a coup threat within the Saudi royal family and high unemployment amongst its youth.
Such instability does not encourage FDI and can put the Aramco IPO on hold for longer.

Founded in 1971 the Public Investment Fund (PIF) Saudi Arabia’s SWF, with estimated assets of $320 billion. Instead of bracing for a shock, the Saudi SWF went on a spending spree recently. Last week it built a $200 million stake in Norway’s largest crude producer Equinor. In the past, PIF has bought shares in Uber and Telsa, as well as European oil firms Royal Dutch Shell, Total, and Eni.

Saudi Arabia’s oil industry accounts for 70 percent of the country’s export earnings and half of GDP. According to Forbes magazine Saudi Arabia has approximately $500 billion in the SWF and the Saudis have the cash to ride out the low oil prices. With oil at present price, hovering less than $10 a barrel the kingdom is set to take a loss of $40 billion annual from total revenues.

With over one million people employed in its oil industry, the government will have to increase spending from its SWF. Given the population’s reliance on social programs, Saudi Arabia faces internal unrest if cuts run too deep.

Iraq
After Saudi Arabia, Iraq is OPEC’s second largest exporter. With 90 percent of government spending coming from oil revenues, the Iraqi government employs nearly eight percent of the country’s population.

Iraq does not have a SWF like many of its counterparts in West Asia. Essential public services like healthcare, education and policing, among others do not exist. If present situation persists one can expect return of more social unrest.

Norway
Producing two percent of global output, Norway does not plan output cuts because its oil production remains profitable despite the recent plunge, the country’s Minister of Petroleum and Energy Tina Bru told private local broadcaster.

A number of Norwegian fields would be profitable even at $10 per barrel, Bru said, adding unilateral action by Norway would not impact oil prices.

However, 10 exploration wells have been put on hold amid low oil prices.

Norway’s $930 billion SWF lost $114 billion in the first quarter amid the virus outbreak, reports Reuters.

Other producers

Qatar has a fiscal surplus and its economy is dependent on liquified natural gas exports, so less directly affected by oil prices, while the debt-burdened economies of small oil producers Oman and Bahrain are more vulnerable to price swings.

Mexican President Andres Manuel Lopez Obrador said on Tuesday Mexico will take more austerity measures in the face of oil price collapse. He vowed no layoffs of government employees according to Reuters.

Africa’s fastest growing economy Nigeria is also Africa’s largest country with population of 205 million. With oil making nine percent of GDP, Nigeria has a break-even oil price of $57. Oil accounts for over 90 percent of exports, a third of banking sector credit, and half of government revenues.

IMF expects unemployment will rise by 25 percent to approximately 25 million people in 2020, up from 20 million people in 2018.

Nigeria has a small SWF of approximately $2 billion that will be used spending to keep figures falling in the red zone.

From our partner Tehran Times

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Energy

Indonesia’s contribution in renewables through Rare Earth Metals

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The increasing of technological advances, the needs of each country are increasing. The discovery of innovations, the production of goods that are increasing, and renewing energy in a country. It causes countries to desperately need an adequate supply of energy to meet these needs. Energy especially mineral is important in the manufacture of raw materials for an electronic product or can be used as a raw material for realizing renewable energy. Entering the Covid-19 Pandemic, the demand for electronic goods is increasing because, amid a pandemic, people spend more time at home and use digital goods in conducting transactions, using electronic devices, both those used in households such as televisions, refrigerators, induction cookers, washing machines as well as those things we use every day, such as cellphones, laptops and other electronic devices that can accompany people’s daily activities during the pandemic. Besides being able to be used as raw material for making electronic goods, energy, especially Mineral Resources, it can also contribute to realizing the renewable energy in the world, which is the increasing greenhouse gas emissions which will have an impact on the environment and will worsen the environmental, social conditions and Worsening human health is caused by CO2 gas released into the air. Based on data from the World Meteorological Organization (WMO) explained that the concentration of greenhouse gas emissions in the atmosphere increased and reached a record high last year. Therefore, the supply of Mineral Resources is important in a country to meet human needs and realize renewable energy in the future. The Geological Agency of the Indonesian Ministry of Energy and Mineral Resources revealed that Rare Earth Metals were found in a Lapindo mud located in Sidoarjo, East Java, Indonesia. (Murdaningsih, 2021) Rare Earth Metal is one of the minerals that have very important content to be used as raw materials for the manufacture of electronic goods, electric vehicles, and as an energy that can be used as a source of realizing renewable energy. Currently, the world’s largest reserves of Rare Earth Metals are in China, which is the main producer of Rare Earth Metals in the world followed by the United States, Australia, and India (Potential of Rare Earth Metals in Indonesia, 2019). The discovery of rare earth metals in Indonesia can be maximized by Indonesia to take advantage of this invention. Maximizing a Rare Earth Metal can be done to meet the needs of society, especially to meet the supply of electronic goods in a country, and participate in producing Rare Earth Metals in the world to maximize international cooperation both in terms of cooperation to meet electronic products, as well as mutual fulfillment the need to work together in realizing the renewable energy in the world.

Based on data from the Indonesian Central Statistics Agency, it explains that China is still becoming the biggest partner to export telecommunication equipment to Indonesia with an amount of US$ 5,002.8 in 2020 (Central Bureau of Statistics, 2021). Not only telecommunications equipment, but Indonesia is also imports machinery for industrial purposes as much as 757.1 tons (Central Bureau of Statistics, 2021). Therefore, this data shows that Indonesia is still completely dependent on China in importing electronic products as well as products for industrial purposes. To minimize this dependence, Rare Earth Metals can be used as a strategy by Indonesia to participate in producing local electronic goods, as well as a reserve energy source in a country. Indonesia can maximize its diplomatic strategy to cooperate with other countries, such as opening a raw material processing industry by bringing in technologies from other countries to manage raw materials to semi-finished materials or finished products. this strategy can be used by Indonesia to maximize its resources and improve Indonesia’s performance so that it is better in the future and can produce its products without having to import from other countries. Electronic devices will always be updated for the sake of updating to be able to keep up with the growing era of globalization. This causes the technology industry market to become one of the most influential for the economy of a country. The electronics industry facing an increase in raw material prices which causes pressure on prices for finished products to also increase. Secretary-General of the Association of Electronic Entrepreneurs (Gabel) Daniel Suhardiman, said that the increase in raw material prices is continuing to soar due to the scarcity of chip or semiconductor components due to the high demand for the technology industry (Ayu, 2021). The high level of use of electronic devices in daily life will have an impact on the high market demand for the technology industry, so the technology industry must be very careful in dealing with the supply of raw materials.

In addition to Rare Earth Metals which have the potential to meet the supply of raw materials for the manufacture of electronic goods, on the other hand, Rare Earth Metals greatly contribute to assisting in implementing renewable energy in the future. Which is realizing renewable energy in a country is increasingly being carried out by the world caused by increasing greenhouse gas emissions that have an impact on the environment. Based on data from the World Meteorological Organization (WMO) explained that the concentration of greenhouse gases reached a new high. which has levels of carbon dioxide (CO2) released into the air as much as 413.2 parts per million (ppm), methane (CH4) at 1,889 parts per billion (ppb)) and nitrous oxide (N2O) at 333.2 ppb and the increase has continued in 2021 (World Meteorological Organization, 2021). Rare Earth Metals contain minerals in the form of Monazite, Xenotime, and Zircon (Alkalis, 2021). Where these mineral sources can contribute to realizing renewable energy in developing electric vehicles because Rare Earth Metals can also be used as the main raw material for making electric vehicle batteries. The discovery of Rare Earth Metals in Indonesia can also be an opportunity for Indonesia to contribute to realizing a balance in the supply of electronic goods in the world and contribute to realizing the world’s renewable energy in the future.

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Libya’s Energy Puzzle: Every Challenge is an Opportunity

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Libya’s energy sector remains divided between two authorities, the National Oil Corporation (NOC) and the Petroleum Facilities Guard, and three governments namely the House of Representatives in Tobruk, the General National Congress and the Presidential Council in Tripoli. Failure to conduct a fair and expedient election in late December 2021 is expected to prolong division of Libya’s oil wealth between East and West. This would cement the presence of foreign powers and mercenaries in and around Libyan oil and gas installations.

The country’s oil and gas reserves are estimated at approximately 48 billion barrels of crude oil and 52 trillion cubic feet of gas. Libya’s oil production was 1.3 million barrels per day (bpd) on average throughout 2020, with plans for oil production to reach up to 2 million bpd within the next five years.

These plans, however, can prove futile because of militant attacks on oil and gas installations, increased number of leaks due to lack of infrastructure maintenance, and the possibility of renewed months-long blockades on energy facilities. The December closure of Shahara field, Libya’s largest oil field in the southwest part of the country, by militants was translated into temporary reduction of oil production by around 350 thousand bpd. That means overall oil production easily decreased at approximately 700 thousand bpd, thus constituting Libya’s lowest production level within a year period.

In addition, months-old blockades on energy facilities, throughout the last few years, have led to the halt of significant part of exports. According to the central bank in Tripoli, oil and gas revenues for 2020 plummeted to 652 million dollars from around 7 billion dollars in 2019, which is, practically, a drop by 92 percent.

Overall, militant attacks and blockades prevent oil exports and deprive Libya from revenues that could be otherwise funneled to its reconstruction. It is also noteworthy that the under-funding of the NOC due to failure to pass a national budget has starved it of economic resources, preventing upgrades to the aging or damaged oil infrastructure, and limiting oil and gas production. 

Foreign Energy Investment Flows

Despite the challenges, foreign investment plans continue unabated. French Total, through its subsidiary Total Energies, foresees the execution of a 2-billion-dollar investment plan to increase the production capacity of the North Gialo and NC-98 oil fields.

Concurrently, Total Energies partners with American ConocoPhilips exploration and production company for the acquisition of American Hess Corporation’s 8.16 percent interest in the six Waha oil concessions located in the Sirte Basin in eastern Libya. The commercial deal will increase the French company’s stake in the concessions to 20,4 percent from the current 16,3 percent, thus solidifying the energy footprint of France in Libya.

On a parallel level, Royal Dutch Shell announced its plans not only to re-develop ageing fields like the block NC-174 in the Murzuq basin but also to develop new fields offshore the Cyrenaica basin and onshore the Ghadames and Sirte basins. Shell’s investment plans signal its re-entry in Libya after a decade’s absence attributed to the 2011 first Libyan civil war.

The attraction of substantial international investment in the energy sector of Libya, however, remains dependent on improved security and a stable and united government that is outcome of elections.

Russia and Turkey at the Forefront of Actions

In the meantime, foreign powers persist in their battle for control over Libya’s energy wealth, with Russia and Turkey being at the forefront of the evolving dominance process. Russian security contractors and Russian-aligned mercenaries are stationed in Libya to protect critical energy assets operated by Russian oil companies like Gazprom and Rosneft.  Moscow wants to export Libyan oil to Europe in accordance with the relevant provisions of a Memorandum of Understanding (MoU) signed between Russian major Rosneft and NOC that foresees the sale of Libyan crude oil to third markets, and the signing of additional energy deals that will allow Moscow to maintain its position as a leading supplier of energy to Europe.

Moscow also looks eager to get a piece of the reconstruction pie in Libya with the renewal of a 2.6-billion-dollar contract for a railway that will connect the city of Sirte to Benghazi, and with the execution of other infrastructure projects. On top of that, Moscow maintains military interests in Libya and persistently pursues its bid to gain a permanent naval facility on the 1,900-kilometer Libyan coast that will serve as a Russian gate to Africa.

For its part, Turkey looks eager to collect Qaddafi-era debt owed to Turkish businesses, to participate in the 50-billion-dollar of reconstruction contracts, and to establish a Turkey-Libya axis that would disrupt the alignment between Greece, Israel, Cyprus, and Egypt. This was the specific goal of the Turkey-Libya MoU on the demarcation of maritime boundaries, which is nevertheless invalid for two reasons: Firstly, it was not ratified by the Libyan Parliament and, secondly, it was not approved unanimously by members of the Presidential Council in breach of the UN-sponsored Libyan Political Agreement.

Alarming bells have started to ring in western capitals over the alleged close cooperation between Russia and Turkey on the basis that they have practically divided Libya, on the patterns of Syria, into distinct spheres of influence between them. There are worries that Libya is divided along Islamic lines supported by Turkey. Turkish support of Islamic militias with military equipment is allegedly used to damage Libyan critical energy infrastructure. The ultimate Turkish goal is to control a large portion of Libya’s offshore gas, to disrupt the unimpeded flow of energy, and thus control a significant part of Libyan energy reserves.

The Way Out

To prevent a security breakdown and another round of civil conflict that will negatively impact development and production of energy resources in Libya, a new definite elections date must be declared. The UN can serve as valuable vehicle in this direction by ensuring that Libyan presidential and parliamentary elections are held as soon as possible, while enabling the resolution of pending matters that postponed them in the first place. Failure to meet a new elections’ deadline would trigger a constitutional crisis, undermine the legitimacy of the political system, create an opening for domestic spoilers, and provide a pretext for foreign powers to maintain their malign military presence in Libya.

Evidently, time is of essence. But still, there is a window of opportunity for Libya to escape the vicious cycle of instability and uncertainty that prevents the realization of its full energy potential. It is beyond the shadow of a doubt that the international community can play a constructive role to this end.

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Energy transition is a global challenge that needs an urgent global response

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COP26 showed that green energy is not yet appealing enough for the world to reach a consensus on coal phase-out. The priority now should be creating affordable and viable alternatives 

Many were hoping that COP26 would be the moment the world agreed to phase out coal. Instead, we received a much-needed reality check when the pledge to “phase out” coal was weakened to “phase down”. 

 This change was reportedly pushed by India and China whose economies are still largely reliant on coal. The decision proved that the world is not yet ready to live without the most polluting fossil fuels. 

 This is an enormous problem. Coal is the planet’s largest source of carbon dioxide emissions, but also a major source of energy, producing over one-third of global electricity generation. Furthermore, global coal-fired electricity generation could reach an all-time high in 2022, according to the International Energy Agency (IEA).

 Given the continued demand for coal, especially in the emerging markets, we need to accelerate the use of alternative energy sources, but also ensure their equal distribution around the world.

 There are a number of steps policymakers and business leaders are taking to tackle this challenge, but all of them need to be accelerated if we are to incentivise as rapid shift away from coal as the world needs. 

 The first action to be stepped up is public and private investment in renewable energy. This investment can help on three fronts: improve efficiency and increase output of existing technologies, and help develop new technologies. For green alternatives to coal to become more economically viable, especially, for poorer countries, we need more supply and lower costs.

 There are some reasons to be hopeful. During COP26 more than 450 firms representing a ground-breaking $130 trillion of assets pledged investment to meet the goals set out in the Paris climate agreement. 

 The benefits of existing investment are also becoming clearer. Global hydrogen initiatives, for example, are accelerating rapidly, and if investment is kept up, the Hydrogen Council expects it to become a competitive low-carbon solution in long haul trucking, shipping, and steel production.

 However, the challenge remains enormous. The IEA warned in October 2021 that investment in renewable energy needs to triple by the end of this decade to effectively combat climate change. Momentum must be kept up.

 This is especially important for countries like India where coal is arguably the main driver for the country’s economic growth and supports “as many as 10-15 million people … through ancillary employment and social programs near the mines”, according to Brookings Institute.  

This leads us to the second step which must be accelerated: support for developing countries to incentivise energy transition in a way which does not compromise their growth. 

Again, there is activity on this front, but it is insufficient. Twelve years ago, richer countries pledged to channel US$100 billion a year to less wealthy nations by 2020, to help them adapt to climate change. 

The Organization for Economic Cooperation and Development estimates that the financial assistance failed to reach $80 billion in 2019, and likely fell substantially short in 2020. Governments say they will reach the promised amount by 2023. If anything, they should aim to reach it sooner.

There are huge structural costs in adapting electricity grids to be powered at a large scale by renewable energy rather than fossil fuels. Businesses will also need to adapt and millions of employees across the world will need to be re-skilled. To incentivise making these difficult but necessary changes, developing countries should be provided with the financial support promised them over a decade ago.

The third step to be developed further is regulation. Only governments are in a position to pass legislation which encourages a faster energy transition. To take just one example, the European Commission’s Green Deal, proposes introduction of new CO2 emission performance standards for cars and vans, incentivising the electrification of vehicles. 

This kind of simple, direct legislation can reduce consumption of fossil fuels and encourage industry to tackle climate change.

Widespread legislative change won’t be straightforward. Governments should closely involve industry in the consultative process to ensure changes drive innovation rather than add unnecessary bureaucracy, which has already delayed development of renewable assets in countries including Germany and Italy. Still, regardless of the challenges, stronger regulation will be key to turning corporate and sovereign pledges into concrete achievements. 

COP26 showed that we are not ready as a globe to phase out coal. The priority for the global leaders must now be to do everything they can to drive the shift towards green energy and reach the global consensus needed to save our planet.

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