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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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The hydrogen revolution: A new development model that starts with the sea, the sun and the wind

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“Once again in history, energy is becoming the protagonist of a breaking phase in capitalism: a great transformation is taking place, matched by the digital technological revolution”.

The subtitle of the interesting book (“Energia. La grande trasformazione“, Laterza) by Valeria Termini, an economist at the Rome University “Roma Tre”,summarises – in a simple and brilliant way – the phase that will accompany the development of our planet for at least the next three decades,A phase starting from the awareness that technological progress and economic growth can no longer neglect environmental protection.

This awareness is now no longer confined to the ideological debates on the defence of the ecosystem based exclusively on limits, bans and prohibitions, on purely cosmetic measures such as the useless ‘Sundays on which vehicles with emissions that cause pollution are banned’, and on initiatives aimed at curbing development – considered harmful to mankind – under the banner of slogans that are as simple as they are full of damaging economic implications, such as the quest for ‘happy degrowth’.

With “degrowth” there is no happiness nor wellbeing, let alone social justice.

China has understood this and, with a view to remedying the environmental damage caused by three decades of relentless economic growth, it has not decided to take steps backwards in industrial production, by going back to the wooden plough typical of the period before the unfortunate “Great Leap Forward” of 1958, but – in its 14thFive-Year Plan (2020- 2025)-it has outlined a strategic project under the banner of “sustainable growth”, thus committing itself to continuing to build a dynamic development model in harmony with the needs of environmental protection, following the direction already taken with its 13th Five-Year Plan, which has enabled the Asian giant to reduce carbon dioxide emissions by 12% over the last five years. This achievement could make China the first country in the world to reach the targets set in the 2012 Paris Climate Agreement, which envisage achieving ‘zero CO2 emissions’ by the end of 2030.

Also as a result of the economic shock caused by the Covid-19 pandemic, Europe and the United States have decided to follow the path marked out by China which, although perceived and described as a “strategic adversary” of the West, can be considered a fellow traveller in the strategy defined by the economy of the third millennium for “turning green”.

The European Union’s ‘Green Deal’ has become an integral part of the ‘Recovery Plan’ designed to help EU Member States to emerge from the production crisis caused by the pandemic.

A substantial share of resources (47 billion euros in the case of Italy) is in fact allocated destined for the “great transformation” of the new development models, under the banner of research and exploitation of energy resources which, unlike traditional “non-renewable sources”, promote economic and industrial growth with the use of new tools capable of operating in conditions of balance with the ecosystem.

The most important of these tools is undoubtedly Hydrogen.

Hydrogen, as an energy source, has been the dream of generations of scientists because, besides being the originator of the ‘table of elements’, it is the most abundant substance on the planet, if not in the entire universe.

Its great limitation is that in order to be ‘separated’ from the oxygen with which it forms water, procedures requiring high electricity consumption are needed. The said energy has traditionally been supplied by fossil – and hence polluting- fuels.

In fact, in order to produce ‘clean’ hydrogen from water, it must be separated from oxygen by electrolysis, a mechanism that requires a large amount of energy.

The fact of using large quantities of electricity produced with traditional -and hence polluting – systems leads to the paradox that, in order to produce ‘clean’ energy from hydrogen, we keep on polluting the environment with ‘dirty’ emissions from non-renewable sources.

This paradox can be overcome with a small new industrial revolution, i.d. producing energy from the sea, the sun and the wind to power the electrolysis process that produces hydrogen.

The revolutionary strategy based on the use of ‘green’ energy to produce adequate quantities of hydrogen at an acceptable cost can be considered the key to a paradigm shift in production that can bring the world out of the pandemic crisis with positive impacts on the environment and on climate.

In the summer of last year, the European Union had already outlined an investment project worth 470 billion euros, called the “Hydrogen Energy Strategy”, aimed at equipping the EU Member States with devices for hydrogen electrolysis from renewable and clean sources, capable of ensuring the production of one million tonnes of “green” hydrogen (i.e. clean because extracted from water) by the end of 2024.

This is an absolutely sustainable target, considering that the International Energy Agency (IEA) estimates that the “total installed wind, marine and solar capacity is set to overtake natural gas by the end 2023 and coal by the end of 2024”.

A study dated February 17, 2021, carried out by the Hydrogen Council and McKinsey & Company, entitled ‘Hydrogen Insights’, shows that many new hydrogen projects are appearing on the market all over the world, at such a pace that ‘the industry cannot keep up with it’.

According to the study, 345 billion dollars will be invested globally in hydrogen research and production by the end of 2030, to which the billion euros allocated by the European Union in the ‘Hydrogen Strategy’ shall be added.

To understand how the momentum and drive for hydrogen seems to be unstoppable, we can note that the Hydrogen Council, which only four years ago had 18 members, has now grown to 109 members, research centres and companies backed by70 billion dollar of public funding provided by enthusiastic governments.

According to the Executive Director of the Hydrogen Council, Daryl Wilson, “hydrogen energy research already accounts for 20% of the success in our pathway to decarbonisation”.

According to the study mentioned above, all European countries are “betting on hydrogen and are planning to allocate billions of euros under the Next Generation EU Recovery Plan for investment in this sector”:

Spain has already earmarked 1.5 billion euros for national hydrogen production over the next two years, while Portugal plans to invest 186 billion euros of the Recovery Plan in projects related to hydrogen energy production.

Italy will have 47 billion euros available for “ecological transition”, an ambitious goal of which the government has understood the importance by deciding to set up a department with a dedicated portfolio.

Italy is well prepared and equipped on a scientific and productive level to face the challenge of ‘producing clean energy using clean energy’.

Not only are we at the forefront in the production of devices for extracting energy from sea waves – such as the Inertial Sea Waves Energy Converter (ISWEC), created thanks to research by the Turin Polytechnic, which occupies only 150 square metres of sea water and produces large quantities of clean energy, and alone reduces CO2 emissions by 68 tonnes a year, or the so-called Pinguino (Penguin), a device placed at a depth of 50 metres which produces energy without damaging the marine ecosystem – but we also have the inventiveness, culture and courage to accompany the strategy for “turning green”.

The International World Group of Rome and Eldor Corporation Spa, located in the Latium Region, have recently signed an agreement to promote projects for energy generation and the production of hydrogen from sea waves and other renewable energy sources, as part of cooperation between Europe and China under the Road and Belt Initiative.

The project will see Italian companies, starting with Eldor, working in close collaboration with the Chinese “National Ocean Technology Centre”, based in Shenzhen, to set up an international research and development centre in the field of ‘green’ hydrogen production using clean energy.

A process that is part of a global strategy which, with the contribution of Italy, its productive forces and its institutions, can help our country, Europe and the rest of the world to recover from a pandemic crisis that, once resolved, together with digital revolution, can trigger a new industrial revolution based no longer on coal or oil, but on hydrogen, which can be turned from the most widespread element in the universe into the growth engine of a new civilisation.

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Jordan, Israel, and Palestine in Quest of Solving the Energy Conundrum

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Gas discoveries in the Eastern Mediterranean can help deliver dividends of peace to Jordan, Israel, and Egypt. New energy supply options can strengthen Jordan’s energy security and emergence as a leading transit hub of natural gas from the Eastern Mediterranean. In fact, the transformation of the port of Aqaba into a second regional energy hub would enable Jordan to re-export Israeli and Egyptian gas to Arab and Asian markets.

The possibility of the kingdom to turn into a regional energy distribution centre can bevalid through the direction of Israeli and Egyptian natural gas to Egyptian liquefaction plants and onwards to Jordan, where it could be piped via the Arab Gas Pipeline to Syria, Lebanon, and countries to the East.  The creation of an energy hub in Jordan will not only help diversify the region’s energy suppliers and routes. Equal important, it is conducive to Jordan’s energy diversification efforts whose main pillars lie in the import of gas from Israel and Egypt; construction of a dual oil and gas pipeline from Iraq; and a shift towards renewables. In a systematic effort to reduce dependence on oil imports, the kingdom swiftly proceeds with exploration of its domestic fields like the Risha gas field that makes up almost 5% of the national gas consumption. Notably, the state-owned National Petroleum Company discovered in late 2020 promising new quantities in the Risha gas field that lies along Jordan’s eastern border with Iraq.

In addition, gas discoveries in the Eastern Mediterranean can be leveraged to create interdependencies between Israel, Jordan, and Palestine with the use of gas and solar for the generation of energy, which, in turn, can power desalination plants to generate shared drinking water. Eco-Peace Middle East, an organization that brings together environmentalists from Jordan, Israel and Palestine pursues the Water-Energy Nexus Project that examines the technical and economic feasibility of turning Israeli, Palestinian, and potentially Lebanese gas in the short-term, and Jordan’s solar energy in the long-term into desalinated water providing viable solutions to water scarcity in the region. Concurrently, Jordan supplies electricity to the Palestinians as means to enhancing grid connectivity with neighbours and promoting regional stability.

In neighbouring Israel, gas largely replaced diesel and coal-fired electricity generation feeding about 85% of Israeli domestic energy demand. It is estimated that by 2025 all new power plants in Israel will use renewable energy resources for electricity generation. Still, gas will be used to produce methane, ethanol and hydrogen, the fuel of the future that supports transition to clean energy. The coronavirus pandemic inflicted challenges and opportunities upon the gas market in Israel. A prime opportunity is the entry of American energy major Chevron into the Israeli gas sector with the acquisition of American Noble Energy with a deal valued $13 billion that includes Noble’s$8 billion in debt.

The participation of Chevron in Israeli gas fields strengthens its investment portfolio in the Eastern Mediterranean and fortifies the position of Israel as a reliable gas producer in the Arab world. This is reinforced by the fact that the American energy major participates in the exploration of energy assets in Iraqi Kurdistan, the UAE, and the neutral zone between Saudi Arabia and Kuwait. Israel’s normalization agreement with the UAE makes Chevron’s acquisition of Noble Energy less controversial and advances Israel’s geostrategic interests and energy export outreach to markets in Asia via Gulf countries.

The reduction by 50% in Egyptian purchase of gas from Israel is a major challenge caused by the pandemic. Notably, a clause in the Israel-Egypt gas contract allows up to 50% decrease of Egyptian purchase of gas from Israel if Brent Crude prices fall below $50 per barrel. At another level, it seems that Israel should make use of Egypt’s excess liquefaction capacity in the Damietta and Idku plants rather than build an Israeli liquefaction plant at Eilat so that liquefied Israeli gas is shipped through the Arab Gas Pipeline to third markets.

When it comes to the West Bank and Gaza, energy challenges remain high. Palestine has the lowest GDP in the region, but it experiences rapid economic growth, leading to an annual average 3% increase of electricity demand. Around 90% of the total electricity consumption in the Palestinian territories is provided by Israel and the remaining 10% is provided by Jordan and Egypt as well as rooftop solar panels primarily in the West Bank. Palestinian cities can be described as energy islands with limited integration into the national grid due to lack of high-voltage transmission lines that would connect north and south West Bank. Because of this reality, the Palestinian Authority should engage the private sector in energy infrastructure projects like construction of high-voltage transmission and distribution lines that will connect north and south of the West Bank. The private sector can partly finance infrastructure costs in a Public Private Partnership scheme and guarantee smooth project execution.

Fiscal challenges however outweigh infrastructure challenges with most representative the inability of the Palestinian Authority to collect electricity bill payments from customers. The situation forced the Palestinian Authority to introduce subsidies and outstanding payments are owed by Palestinian distribution companies to the Israeli Electricity Corporation which is the largest supplier of electricity. As consequence 6% of the Palestinian budget is dedicated to paying electricity debts and when this does not happen, the amount is deducted from the taxes Israel collects for the Palestinian Authority.

The best option for Palestine to meet electricity demand is the construction of a solar power plant with 300 MW capacity in Area C of the West Bank and another solar power plant with 200 MW capacity across the Gaza-Israel border. In addition, the development of the Gaza marine gas field would funnel gas in the West Bank and Gaza and convert the Gaza power plant to burn gas instead of heavy fuel. The recent signing of a Memorandum of Understanding between the Palestinian Investment Fund, the Egyptian Natural Gas Holding Company (EGAS) and Consolidated Contractors Company (CCC) for the development of the Gaza marine field, the construction of all necessary infrastructure, and the transportation of Palestinian gas to Egypt is a major development. Coordination with Israel can unlock the development of the Palestinian field and pave the way for the resolution of the energy crisis in Gaza and also supply gas to a new power plant in Jenin.

Overall, the creation of an integrating energy economy between Israel, Jordan, Egypt, and Palestine can anchor lasting and mutually beneficial economic interdependencies and deliver dividends of peace. All it takes is efficient leadership that recognizes the high potentials.

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The EV Effect: Markets are Betting on the Energy Transition

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The International Renewable Energy Agency (IRENA) has calculated that USD 2 trillion in annual investment will be required to achieve the goals of the Paris Agreement in the coming three years.

Electromobility has a major role to play in this regard – IRENA’s transformation pathway estimates that 350 million electric vehicles (EVs) will be needed by 2030, kickstarting developments in the industry and influencing share values as manufacturers, suppliers and investors move to capitalise on the energy transition.

Today, around eight million EVs account for a mere 1% of all vehicles on the world’s roads, but 3.1 million were sold in 2020, representing a 4% market share. While the penetration of EVs in the heavy duty (3.5+ tons) vehicles category is much lower, electric trucks are expected to become more mainstream as manufacturers begin to offer new models to meet increasing demand.

The pace of development in the industry has increased the value of stocks in companies such as Tesla, Nio and BYD, who were among the highest performers in the sector in 2020. Tesla produced half a million cars last year, was valued at USD 670 billion, and produced a price-to-earnings ratio that vastly outstripped the industry average, despite Volkswagen and Renault both selling significantly more electric vehicles (EV) than Tesla in Europe in the last months of 2020.

Nevertheless, it is unlikely this gap will remain as volumes continue to grow, and with EV growth will come increased demand for batteries. The recent success of EV sales has largely been driven by the falling cost of battery packs – which reached 137 USD/kWh in 2020. The sale of more than 35 million vehicles per year will require a ten-fold increase in battery manufacturing capacity from today’s levels, leading to increased shares in battery manufacturers like Samsung SDI and CATL in the past year.

This rising demand has also boosted mining stocks, as about 80 kg of copper is required for a single EV battery. As the energy transition gathers pace, the need for copper will extend beyond electric cars to encompass electric grids and other motors. Copper prices have therefore risen by 30% in recent months to USD 7 800 per tonne, pushing up the share prices of miners such as Freeport-McRoran significantly.

Finally, around 35 million public charging stations will be needed by 2030, as well as ten times more private charging stations, which require an investment in the range of USD 1.2 – 2.4 trillion. This has increased the value of charging companies such as Fastnet and Switchback significantly in recent months.

Skyrocketing stock prices – ahead of actual deployment – testify to market confidence in the energy transition; however, investment opportunities remain scarce. Market expectations are that financing will follow as soon as skills and investment barriers fall. Nevertheless, these must be addressed without delay to attract and accelerate the investment required to deliver on the significant promise of the energy transition.

IRENA

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