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The Global Oil Market: OPEC+ Alliance at the Crossroads

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Since the pandemic struck last year, the energy market has been under a constant spiral of uncertainty. The oil markets experienced the brunt as the world underwent a static pause. Factories closed, travel ceased, and roads no longer bustled with buzzing traffic of routine life. As energy demand suddenly plummeted, the oil producers around the globe started to panic. Reportedly, the oil producers resorted to selling the bubbling supply instead of completely shutting down the production. While a no-demand situation patched with an excess supply stood as an unfavorable bargain, it was still better to supply at a loss than let the rigs dry out. Resulting was a day that no one expected to witness. 20th April 2020. Due to excess supply flooding the market with a practically non-existent demand, the oil prices collapsed. One wonders then how did the markets rebound? Surely the oil-producing countries would have colluded proportionally to cut supply to maintain market equilibrium.

Apparently, the situation was relatively worsened by the very dialogue that should have solved the problem swifter rather than later. In March 2020, the Organization of Petroleum Exporting Countries (OPEC) started a dialogue with Russia to jointly pull back the oil supply in accordance with the reduced global demand. However Russia, being highly dependent on its oil exports, walked out of the dialogue leading to a price war with Saudi Arabia, the largest oil producer in the world. The resulting deadlock ensued a rarely witnessed price war as both Russia and Saudi Arabia started flooding the oil market amid a pandemic. Russia, being the second-largest oil producer in the world, went head-to-head while the market experienced a record drop in demand due to the restricted activity in the world. With excess supply and record low demand, the oil prices crashed beyond historical thresholds. The West Texas Intermediate (WTI) Index, the US benchmark for crude, dropped below zero for the first time in history: slipping down as low as negative $37.63/barrel. The ultra-bearish market defied the laws of derivatives and basic economics as the oil futures verged into the negative territory. The aftermath was a market correction as the sharp price drops alarmed the United States to mediate and push for a resolution. The speculators went out of business as the market was briefly turned worthless, at least on paper. The market only stabilized when OPEC+ (OPEC + Russia) alliance was reconciled and forged a revised agreement to jointly slash the output by 9.7 million bpd in May 2020.

While the oil market stabilized as soon as the dialogue resumed and even gained strong traction once the output cuts finalized, the price war wreaked havoc in a couple of months. Reportedly, the price war resulted in an estimated 65% quarterly fall in the oil prices in just two months. Now, as the market has finally started showing a rebound in terms of demand, another stalemate seems to threaten the recovery of the oil market. And while the talks are still in progress, it is worth realizing what another price war could subsequently bring to the table, especially as the global economy is still reeling through the pandemic.

The recent meeting of the OPEC+ alliance was on track to approve a proposal to loosen the curbs placed on the crude output last year. The proposal was in line with the bullish trend in the oil market as global demand has picked pace in the Second Quarter of 2021. The continual upward trend in demand is clear from the performance of both the global crude benchmark Brent and the United States’ crude benchmark WTI. Both benchmarks surpassed the $75/barrel mark last week to settle at the highest levels since the production baselines were originally placed in October 2018. Therefore, the OPEC+ alliance was proposed to increase the output of each member by 400,000 bpd from August through December 2021. The suggested hike would allow the OPEC+ alliance to pump an estimated 2 million bpd of production by the end of 2021, thus, stabilizing the overly bullish market by matching the oozing demand with an incrementally increased supply. While the ease of production was not a direct matter of contention, the proposal was left in the air as UAE followed on to object to the latter part of the proposal.

The pitched proposal further called for a deferment in the previously agreed supply cut expiration from April 2022 to December 2022. The clause was pushed into the proposal as the global demand still seems to be staggering in the face of a still active pandemic. The decision to retain the supply cuts through 2022 would safeguard against a possible collapse of demand as the airline industry, one of the largest consumers of petroleum, would reportedly drag to complete normalization until 2023. Thus, the supply cuts would help control the market and avoid another excess supply scenario. However, the plan to extend the supply cuts – currently standing at 5.8 million bpd – did not bode well with UAE.

The UAE apparently had no problem with the multilateral ease of supply from August to December. However, the Emirati regime demanded a unilateral increase in the output past the baseline levels agreed. Since UAE’s oil production capacity had pumped up from 3.16 million bpd back in October 2018 to 3.841 million bpd in April 2020, the Emirati state wants its baseline to be leveled up in accordance. Moreover, UAE also objected to the proposed extension in the supply cuts expiration through 2022. In response, the state demanded to lock an increase in production before extending the agreement beyond the April 2022 expiration. The deadlock, thus, impeded the proposal and continues to pose a significant problem; to the alliance, sure. But to the broader market as well.

Gauging a broader perspective, the proposed extension in the output by an additional 2 million bpd through the end of 2021 would boast the supply significantly. However, the relative global demand increase of an estimated 6 million bpd would still render the market with a bullish sentiment. The underlying nature could be assessed by the response of both Brent and WTI as the duo inched past the $76/barrel mark while the talks were in progress. It further proves that the surge is not transitionary. However, the strong market could be threatened by UAE’s adamancy in its objectives overriding the proposal of the OPEC+ alliance. The resulting impasse poses two scenarios.

If UAE is allowed a unilateral increase in the output benchmark, the OPEC+ alliance could weaken in its foundations. An increase in the baseline for UAE could alienate the other 32 countries forming the OPEC+ alliance. Russia would be a prime contender as almost 60% of its economy depends on petroleum exports. While Russia has led the camp of members including towards a supply increase, the Kremlin would not allow a unilateral hike which could plausibly fuel resentment within the alliance. Moreover, a shifting baseline for a single member would create confusion in the market as the remaining members would stand out of sync. The perplexing benchmarks and variating supplies could plunge the market into the same pit of darkness that the participants faced last year as the pandemic caused the oil market to go haywire. This is one of the main reasons why Saudi Arabia, the de facto leader of OPEC, would rather join muscle with Russia than UAE: to retain equity in the alliance and – by extension – in the broader market.

If UAE is not granted the easement in the proposal, which is the likeliest outcome, a ’No-Deal’ scenario could result in lasting fissures in the Saudi-UAE alliance with a high possibility of UAE exiting from the OPEC+ alliance. The UAE had earlier alluded in 2020 that it could exist as an independent entity, splitting from the OPEC+ alliance and pouring its spare capacity through its national Murban Crude Oil Index. However, with an uneven recovery in the global demand due to the returning nightmare of the Delta variant of the coronavirus, a splitting supply in face of a plummeting demand could lead the market into another price war. Regardless of demand, a contending supply could still upend the rally in the oil prices, impeding the recovery in the process.

The oil market, much like any other market in the world today, is still only recovering from the pandemic. The demand is only picking up months after a historical crash. While the trend seems strong and lasting in nature, ease of supply – even if 2 million bpd – could pull the market down if the demand retracts in the following months. Unlikely but plausible. However, the alliance awaits another meeting to further discuss the prospects of passing the proposal without any significant supply shocks. The backend channels would most likely play a crucial role to avoid a repeat of last year. Saudi Arabia, a strict member adhering to tight supply measures, would push for reconciliation rather than a detachment of UAE. Especially when Iran is all set on the sidelines to pour its exorbitant oil supply in the global market following a breakthrough in the Vienna talks. However, UAE would probably attempt to leverage its position as well. While not to the point of breaking loose from the alliance when the global market is so uncertain, UAE would surely drive some value out of this deadlock before it ultimately agrees to comply. Whatever follows in the following days, another fallout in the alliance would be a sight to marvel: it’s unclear, however, in which direction.

The author is an active current affairs writer primarily analyzing the global affairs and their political, economic and social consequences. He also holds a Bachelor’s degree from Institute of Business Administration (IBA) Karachi, Pakistan.

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Energy

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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Pakistan–Russia Gas Stream: Opportunities and Risks of New Flagship Energy Project

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source: twitter

Russia’s Yekaterinburg hosted the 7th meeting of the Russian-Pakistani Intergovernmental Commission on Trade, Economic, Scientific and Technical Cooperation on November 24–26, 2021. Chaired by Omar Ayub Khan, Pakistan’s Minister for Economic Affairs, and Nikolai Shulginov, Russia’s Minister of Energy, the meeting was attended by around 70 policy makers, heads of key industrial companies and businessmen from both sides, marking a significant change in the bilateral relations between Moscow and Islamabad.

Three pillars of bilateral relations

Among the most important questions raised by the Commission were collaboration in trade, investment and the energy sector.

According to the Russian Federal Customs Service, the Russian-Pakistani trade turnover increased in 2020 by 45.8% compared to 2019, totaling 789.8 million U.S. dollars. Yet, there is still huge potential for increasing the trade volume for the two countries, including textiles and agricultural products of Pakistan and Russian products of machinery, technical expertise as well as transfer of knowledge and R&D.

Another prospective project discussed at the intergovernmental level is initiating a common trade corridor between Russia, the Central Asia and Pakistan. Based on the One-Belt-One-Road concept, launched by China, the Pakistan Road project is supposed to create a free flow of goods between Russia and Pakistan through building necessary economic and transport infrastructure, including railway construction and special customs conditions. During the Commission meeting, both countries expressed their intention to collaborate on renewal of the railway machines fleet and facilities in Pakistan, including supplies of mechanized track maintenance and renewal machines; supplies of 50 shunting (2400HP or less) and 100 mainline (over 3000HP) diesel locomotives; joint R&D of the technical and economic feasibility of locomotives production based in the Locomotive Factory Risalpur and other. The proposed contractors of the project might be the Russian Sinara Transport Machines, Uralvagonzavod JSC that stand ready to supply Pakistan Railway with freight wagons, locomotives and passenger coaches. In order to engage import and export activities between Russian and Pakistani businessmen, the Federation of Pakistan Chamber of Commerce signed a memorandum with Ural Chamber of Commerce and Industry, marking a new step in bilateral relations. Similar memorandums have already been signed with other Chambers of Commerce in Russian regions.

— Today, the ties between Russia and Pakistan are objectively strengthening in all areas including economic, political and military collaboration. But we, as businessmen, are primarily interested in the development of trade relations and new transit corridors for export-import activities. For example, the prospective pathways of the Pakistan-Central Asia-Russia trade and economic corridor project are now being actively discussed at the intergovernmental level, — said Mohsin Sheikh, Director of the Pakistan Russia Business Council of the Federation of Pakistan Chambers of Commerce and Industry. — For Islamabad, this issue is one of the most important. Based on a similar experience of trade with China, we see great prospects for this direction. That is why representatives of Pakistan’s government, customs officers, diplomats and businessmen gathered in Yekaterinburg today.

However, the flagship project of the new era of the Pakistan-Russia relations is likely to be the Pakistan Gas Stream. Previously known as the North-South Gas Pipeline, this mega-project (1,100 kilometers in length) is expected to cost up to USD 2,5 billion and is claimed to be highly beneficial for Pakistan. Being a net importer of energy, Pakistan will be able to develop and integrate new sources of natural gas and transport it to the densely populated industrialized north. At the same time, the project will enable Pakistan—whose main industries are still dependent on the coal consumption—to take a major step forward gradually replacing coal with relatively more ecologically sustainable natural gas. To enable this significant development in the Pakistan’s energy sector, Moscow and Islamabad have made preliminary agreements to carry on the research of Pakistan’s mineral resource sector including copper, gold, iron, lead and zinc ores of Baluchistan, Khyber Pukhtunkhwa and Punjab Provinces.

A lot opportunities but a lot more risks?

The Pakistan Stream Gas Pipe Project undoubtedly opens major investment opportunities for Pakistan. Among them are establishment of new refineries; the launch of virtual LNG pipelines; building of LNG onshore storages of LNG; investing in strategic oil and gas storages. Yet, it seems that Pakistan is likely to win more from the Project than Russia. And here’s why. The current version of the agreement signed by Moscow and Islamabad has been essentially reworked. According to it, Russia will likely to receive only 26 percent in the project stake instead of 85 percent as it was previously planned, while the Pakistani side will retain a controlling stake (74 percent) in the project.

Another stranding factor for Russia is although Moscow will be entitled to provide all the necessary facilities and equipment for the building of the pipeline, the entire construction process will be supervised by an independent Pakistani-based company, which will substantially boost Pakistan’s influence at each development. Finally, the vast bulk of the gas transported via the pipeline will likely come from Qatar, which will further strengthen Qatar’s role in the Pakistani energy sector.

Big strategy but safety first

The Pakistan Stream Gas Pipeline will surely become an important strategic tool for Russia to reactivate the South Asian vector of its foreign policy. Even though the project’s aim is not to gain a fast investment return and economic benefits, it follows significant strategic goals for both countries. As Russia-India political and economic relations are cooling down, Moscow is likely to boost ties with Pakistan, including cooperation in economy, military, safety and potentially nuclear energy, that was highlighted by Russian Foreign Minister Sergey Lavrov during visit to Islamabad earlier this year. Such an expansion of relations with Pakistan will allow Russia to gain a more solid foothold in the South Asian part of China’s BRI, thus opening up a range of new lucrative opportunities for Moscow.

Apart from its economic and political aspects, the Pakistan Stream Project also has clear geopolitical implications. It marks Russia’s growing influence in South Asia and points to some remarkable transformations that are currently taking place in this region. The ongoing geopolitical game within the India-Russia-Pakistan triangle is yet less favorable for New Delhi much because of the Pakistan Stream Project. Even though the project is not directly aimed to jeopardize the India’s role in the region, it is considered the first dangerous signal for New Delhi. For instance, the International “Extended troika” Conference on Afghanistan, which was held in Moscow last spring united representatives from the United States, Russia, China and Pakistan but left India aside (even though the latter has important strategic interests in Afghanistan).

With the recent withdrawal of the U.S. military forces from Afghanistan, Moscow has become literally the only warden of Central Asia’s security. As Russia is worried about the possibility of Islamist militants infiltrating the Central Asia, the main defensive buffer in the South for Moscow, the recent decision of Vladimir Putin to equip its military base in Tajikistan, which neighbors Afghanistan, seems to be just on time. Obviously, Islamabad that faces major risks amidst the Afghanistan crisis sees Moscow as a prospective strategic partner who will help Imran Khan strengthen the Pakistani efforts in fighting the terrorism threat.

From our partner RIAC

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How wind power is transforming communities in Viet Nam

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In two provinces of Viet Nam, a quiet transformation is taking place, driven by the power of renewable energy.

Thien Nghiep Commune, a few hundred kilometres from Ho Chi Min City, is a community of just over 6,000 people – where for years, people relied largely on farming, fishing and seasonal labour to make ends meet.

Now, thanks to a wind farm backed by the Seed Capital Assistance Facility (SCAF) – a multi-donor trust fund, led by the United Nations Environment Programme (UNEP) – people in the Thien Nghiep Commune are accessing new jobs, infrastructure and – soon – cheap, clean energy. The 40MW Dai Phong project, one of two wind farms run by SCAF partner company the Blue Circle, has brought new hope to the community.

For the 759 million people in the world who lack access to electricity, the introduction of clean energy solutions can bring improved healthcare, better education and affordable broadband, creating new jobs, livelihoods and sustainable economic value to reduce poverty.

“It’s not only about the technology and the big spinning wheel for me. It’s more about making investment decisions for the planet and at the same time not compromising on the necessity that we call electricity,” said Nguyen Thi Hoai Thuong, who works as a community liaison. “The interesting part is I work for the project, but I actually work for the community and with the community.”

While the wind farm is not yet online, a focus on local hiring and paying fair prices for land has already made a big difference to the community.

“I used the money from the land sale to the Dai Phong project to repair my house and invest in my cattle. Currently, my life is stable and I have not encountered any difficulties since selling the land,” said Ms. Le Thi Doan.

Powering change

The energy sector accounts for approximately 75 per cent of total global greenhouse gas emissions (GHGs). UNEP research shows that these need to be reduced dramatically and eventually eliminated to meet the goals of the Paris Agreement.

Renewable energy, in all its forms, is one of humanity’s greatest assets in the fight to limit climate change. Capacity across the globe continues to grow every year, lowering both GHGs and air pollution, but the pace of action must accelerate to hold global temperature rise to 1.5 °C this century.

“To boost growth in renewables, however, companies need to access finance,” said Rakesh  Shejwal, a Programme Management Officer at SCAF. “This is where SCAF comes in. SCAF works through private equity funds and development companies to mobilize early-stage investment low-carbon projects in developing countries.”

The 176 projects it seed financed have mobilized US $3.47 billion to build over one gigawatt of generation capacity, avoiding emissions of 4.68 million tons of carbon dioxide (CO2) equivalent each year.

But SCAF’s work isn’t just about cutting emissions. It is bringing huge benefits across the sustainable development agenda: increasing access to clean and reliable electricity and boosting communities across Asia and Africa. SCAF will be potentially creating 17,000 jobs.

This is evident in Ninh Thuan province, where the Blue Circle created both the first commercial wind power project and the first to be commissioned by a foreign private investor in Viet Nam.

Here, the Dam Nai wind farm has delivered fifteen 2.625 MW turbines, the largest in the country at the time. These will generate approximately 100 GWh per year. They will avoid over 68,000 tCO2e annually and create more than an estimated 302 temporary construction and 13 permanent operation and maintenance jobs for the local community.

Students from the local high school in Ninh Thuan Province were also given the opportunity to meet with engineers and technicians on the project, increasing their knowledge about how renewable energy works and opening up new career paths.

SCAF, through its partners, is supporting clean energy project development in the Southeast Asian region and African region. SCAF has more than a decade of experience in decarbonization and is currently poised to run till 2026.

UNEP

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