by Sara Vakhshouri
In the past several days—despite the conflicts affecting Iraq, Syria, Iran and Russia—oil prices have been on a downward trend, hitting their lowest number in the past four years. As of October 2014, oil prices are more than 20 percent lower than June. This trend started with Saudi Arabia reducing its crude oil prices without cutting its production—the result of a strategic shift in Saudi policy. Previously, the swing producer in the market would maintain a general higher price range. Now it has shifted to increasing market shares by offering lower prices to its customers. Iran, the United Arab Emirates (UAE) and Iraq also followed the kingdom’s lead and offered discounts on their crude oil in order to maintain their market share.
This raises a number of interesting points. On the one hand, the acceleration of higher energy efficiency, combined with higher energy prices, the economic crisis in Europe and lower economic growth in China have all put pressure on overall energy demand growth. On the other hand, the global energy supply has had a bullish growth mainly because of the shale oil boom in North America and Iraqi oil output. Yet the lower growth of demand and the higher rate of supply growth have both altered concerns over energy security paradigms, shifting from the security of supply to concerns about the security of demand and the profitability of oil production (in the case of unconventional oil). Keen competition among producers to maintain market share, concerns over the unconventional oil production’s profitability, and the effect of lower oil prices on oil dependent economies are all consequences of this broader change in the balance between supply and demand in global energy markets.
Stabilizing the Demand
Although it might take longer to see the real effects of lower oil prices on global oil demand growth, lower oil prices will have a positive effect on the demand side. Lower prices could particularly strengthen the demand in countries that lack fuel subsidy regimes as price fluctuations may have a more tangible effect on consumers.
Oil Dependent Economies
The economies of conventional oil producing countries (particularly OPEC producers such as Bahrain, Kuwait, Saudi Arabia, Iran and Iraq) are highly dependent on oil for around 80 percent of their national budgets. There is a close correlation between oil prices and their fiscal maneuverability. For example, Russia, Nigeria, Bahrain, Venezuela and Iran have national budgets that work under a scenario of $100 per barrel of oil. Saudi Arabia’s budget for 2014 is meanwhile based on oil at $90 per barrel, and remaining OPEC members have set their 2014 budgets according to a $70 per barrel range. The current drop in prices has the potential to negatively affect some of these countries’ economies. But on the flip side, it could also encourage them to reduce their dependency on oil revenue in the medium to long-term. Lower oil prices also reduce the gap between global market prices and local prices, decreasing the amount of subsidies these countries have to pay for domestic fuel consumption.
Unconventional Oil Production
The extraction of unconventional resources does not only require a high level of technological proficiency, it is also very costly compared to conventional production. For most of the United States’ tight oil resources to be economically developed and produced, oil prices should remain at least around $70 per barrel in the long-term. With current costs, it is expected that the overall tight oil production will drop to about 20 percent with a downturn of oil prices below $70 per barrel. If oil prices drop below the range of economically profitable production, the drilling of new wells, for maintaining production levels, will mostly stop and tight oil production will reduce significantly within a period of between three to six months. The more recent price drops have reduced the profit margin of investment in US unconventional oil resources and have reduced the gap between current global oil prices to shale oil production costs to about only $20 per barrel. This has raised concerns for investors and could affect the likelihood of their further investment in unconventional oil extraction.
Back to Iran?
As I mentioned earlier, the costs of unconventional oil extraction are much higher than conventional oil production, particularly in the Persian Gulf region. Lower profit margins due to lower oil market prices could divert investor attention and interest back to conventional oil production in the Persian Gulf. Sanctions aside, Iran could possibly benefit from this situation due to the political and security crisis in Iraq. Indeed, due to the ongoing attacks by Daesh (ISIS or ISIL) in Iraq, most international investors have left the country. Iran, with its new investment regulations, could accordingly attract foreign investors to its energy industry once again. However, lower oil prices and high competition among the major oil producers to maintain and increase market shares could increase the stakes in maintaining the limitations on Iran’s oil exports and prevent this country from increasing its production.
]]>by Sara Vakhshouri
After almost a decade of negotiations, Moscow reached a 400 billion dollar energy deal with Beijing yesterday, allowing the Russian state-controlled Gazprom to export gas to China for 30 years.
The key agreement guarantees long-term market access for Russian gas in the Asian market, where Russia has historically had [...]]]>
by Sara Vakhshouri
After almost a decade of negotiations, Moscow reached a 400 billion dollar energy deal with Beijing yesterday, allowing the Russian state-controlled Gazprom to export gas to China for 30 years.
The key agreement guarantees long-term market access for Russian gas in the Asian market, where Russia has historically had a negligible market share. The China National Petroleum Corporation (CNPC) will meanwhile receive discounted gas prices for the duration of the contract.
Yet the logistics are daunting. For Russian gas to actually arrive in China, Russia has to invest $55 billion in exploration and pipeline construction. For its part, China has to provide $20 billion for gas development and infrastructure. Ultimately, the gas will be transported to China through a pipeline in the Siberian gas field. The flow of gas to China is scheduled to start in 2018, and will gradually increase to 38 billion cubic meters (bcm) a year. The exported volume could be increase to 60 bcm a year.
There has been much speculation as to why the two countries finally agreed to the mega-deal after so many years of not being able to find common ground. Analysts have pointed to a Russian desire to counter the growing Western pressure it faces, to a China that’s now desperately seeking long-term access to clean and discounted energy.
The agreed gas prices have not been announced yet, but the pricing method is similar to the European price formula, which is tied to crude oil prices. Russia obviously would not want to sell its gas at prices that are lower than those it offers Europe, between $350-$380 per thousand cubic meters. But China would not agree to higher prices; this is a long-term deal, and with expected growth in North American shale gas production, markets generally expect a downward price trend.
Another reason China expects lower prices is that it is in the early stages of producing gas from its own shale reserves, particularly from the three basins of Sichuan, Yangtze Platform and Tarim.
In 2013, the Energy Information Agency (EIA) estimated that China possessed 1,115 trillion cubic feet (31 trillion cubic meters) of technically recoverable shale gas. That same year China produced 7.1 billion cubic feet (200 million cubic meters) of natural gas from shale formations. This puts China in the third place of shale gas producing countries after the US and Canada.
Russia, however, sees things differently. Although Russian gas prices in Europe are too low to be replicable with other alternatives, this deal still undermines broader Western attempts to isolate Russia’s economy. President Vladimir Putin knows very well that low gas prices to Europe make it a relatively unattractive destination, particularly for Liquefied Natural Gas (LNG) shipments. But American LNG cannot be shipped to Europe at the same prices Russia offers — here again, logistics is the main issue.
Iranian natural gas is also not an option for Europe at present. Iran’s low natural gas export capacity makes it impossible for Tehran to be able to compete with Moscow in this market.
All this explains Putin’s plan for the Asian market: securing market share and access in Asia for the long-term by offering low gas prices. Russia is preparing to compete with US supplies in Asia, a region that potentially could become a major market for US shale gas and condensate. Indeed, the 30-year gas export deal between Gazprom and CNPC not only ensures the security of demand for Russian gas, it also allows Russia to compete with the US by sending its gas to Asia via pipeline at a time when the prospects of LNG exports from this country do not look very promising.
This landmark deal will also help Russia recover from its budgetary issues and partial revenue loss from the European market in the short- and long-term. In other words, Russia’s geopolitical influence in Asia will increase at a time when, due to Moscow’s actions in Ukraine, Europe has lost its trust in Russia as a long-term and reliable energy supplier.
For the Chinese, promoting natural gas is a top priority for their economic and energy policy strategies. Securing long-term access to Russian discounted natural gas therefore occupies an important place in Beijing’s energy security plan. Access to natural gas transferred via pipeline not only offers price advantages in comparison to LNG imports, it also reduces Chinese dependency on international waters. This will significantly reduce the transportation risks of energy flow to this country.
]]>by Sara Vakhshouri
This week Iranians began dealing with a new phase of reduced fuel subsidies and increased gasoline prices. The new gasoline prices were announced at midnight on April 24 by the National Iranian Oil Refining and Distribution Company (NIORDC).The price for the semi-subsidized gasoline will be 7,000 rials per liter [...]]]>
by Sara Vakhshouri
This week Iranians began dealing with a new phase of reduced fuel subsidies and increased gasoline prices. The new gasoline prices were announced at midnight on April 24 by the National Iranian Oil Refining and Distribution Company (NIORDC).The price for the semi-subsidized gasoline will be 7,000 rials per liter (27 cents) and 10,000 rials (42 cents) for free market price gasoline. That’s a considerable jump from the 4,000 rials (16 cents) per litre for the semi-subsidized gasoline and 7,000 rials for free market price gasoline.
The current gasoline subsidy reductions are part of the “second phase” of the subsidies reform plan in Iran, which was passed by the Parliament on January 5, 2010. The government announced that people could still use the remaining share of the subsidized gasoline with the previous price in their fuel cards after the price change. Each car has a fuel card with 60 liters of semi-subsidized gasoline a month and once they use up their share, they will have to purchase gasoline at the free market price.
Following the price increase announcement, the average consumption of gasoline in Iran spiked massively. Average gasoline consumption in Iran fluctuates between 66 and 70 million liters per day. This number reaches over 70 million during seasons of high demand, particularly around the Persian New Year in March. Of course, this past week average gasoline consumption increased significantly. According to the NIORD, gasoline consumption on Saturday, April 19, rose to 80.7 million liters — and the next day it reached 94 million. Although this number eventually dropped back to 76 million liters, it was still up 6 million a day from the previous week. The spike in gasoline consumption strongly suggests that people are storing gasoline in anticipation of their remaining subsidized shares being cancelled. The head of Iran’s Gas Station Owners Association, Bijan Haj Mohammadreza, said that Iranians are “storing gasoline in non-standard containers” in anticipation of rising prices.
Indeed, domestic gasoline supply and the direct influence of its prices on inflation and standards of living have always been Iran’s Achilles’ heel. Subsidized gasoline prices have created an expectation of, if not demand for, lower prices. This is something that the government in Tehran has to manage. The subsidies reform plan has thus far helped the Iranian government somewhat control domestic gasoline consumption, and to a certain degree also aided efforts aimed at preventing smuggling to neighboring countries.
Why Iran needs subsidy reform
Reducing Iran’s gasoline subsidies would initially reduce the gap between international and domestic prices. It would also help the government save money and better manage its domestic consumption. According to Iran’s Fifth Five-Year Development Plan, domestic gasoline prices should rise to about 90 percent of the free on board prices of the Persian Gulf by the end of the fifth plan in the next year and half.
However, Iran’s current gasoline prices lag far behind the plan. The inflation resulting from sanctions, coupled with currency devaluation, has prevented the government from increasing gasoline prices since 2011. The rial’s devaluation has also increased the gap between international and domestic gasoline prices. The first phase of Iran’s subsidies reform was attempted by former President Mahmoud Ahmadinejad. At that time, the US dollar amounted to about 1,000 rials, and Iran could mange an increase in gasoline prices from 10 to 40 cents a liter (at the previous price of 4,000 rials a liter). Yet for the past two years, with gasoline prices at the same rate of 4,000 rials, prices once again were forced down to 16 cents a liter.
Petrochemical facilities halting gasoline production
Iran’s dependency on gasoline imports has been a bottleneck issue for the country. During the Ahmadinejad government, Iranian petrochemical factories started to change their production line in order to produce gasoline and reduce their dependency on imports. Iranian petrochemical facilities managed to produce gasoline with 95 octanes, which is generally considered a good quality gasoline. However, the aromatic contents of this gasoline fell well short of international standards, and significantly contributed to air pollution, particularly in Tehran.
However, the “petroleum team” of Iran’s new president has stated on different occasions that Iran is planning to increase its gasoline imports to reduce air pollution. Aside from making air more breathable, this would also, crucially, allow petrochemical factories to return to their planned production line and produce higher profits by exporting their products to the international markets.
Iran currently imports around 3.5 million liters of gasoline a day. According to the director of NIORDC, Abbas Kazemi, this number will increase almost threefold to almost 10 million liters per day. Iranian refineries currently produce around 60 million liters of gasoline a day, up from the 48 million liters per day they produced in 2012.
Over the past few years Iran has been planning to increase its refinery capacity and gasoline production. Iranian petroleum officials are aiming for self-sufficiency by March of 2015, when construction on the Persian Gulf Star Refinery is expected to be complete. Based in Assalouyeh, South Pars, this refinery has a total capacity of processing 360,000 barrels of gas condensate. Seventy-five percent of this gas condensate will be converted to gasoline and diesel oil.
Iran’s current gasoline subsidies reduction plan, which is part of a broader attempt at reforming Iran’s subsidies, could stoke inflation, which will be tough for average Iranian families. But in the long-term, this strategy will help Iran manage its domestic fuel consumption, which will save money for the Iranian government and increase the value of its petroleum products.
]]>by Sara Vakhshouri
The tension between Russia and the West, and particularly the European Union, over Crimea has once again raised questions over the security of energy supplies and the use of energy as a tool of foreign policy and diplomacy. On the one hand, energy exports are a vital source of [...]]]>
by Sara Vakhshouri
The tension between Russia and the West, and particularly the European Union, over Crimea has once again raised questions over the security of energy supplies and the use of energy as a tool of foreign policy and diplomacy. On the one hand, energy exports are a vital source of income for Russia. On the other hand, its massive energy resources and supply dominance in the EU have deterred the EU and US from sanctioning the Russian energy sector.
More than 90 percent of Russian natural gas, and 80 percent of its crude oil exports, go to the EU. Taken together, this accounts for about 50 percent of Russia’s federal budget. Russia supplies about 30 percent of the EU’s natural gas and, crucially, more than half of this is transported via Ukraine. Russian natural gas also plays an important role in Ukraine’s energy basket. Natural gas accounts for 40 percent of Ukraine’s overall energy consumption — more than half of this comes from Russia. Before the Crimean crisis, Ukraine was receiving more than a 30 percent discount on Russian gas, and was also heavily dependent upon Russian crude oil.
Russia’s calculus
The EU and Ukraine’s energy dependency has so far played in Russia’s favor. During the March 25 Nuclear Security Summit in The Hague, US President Barack Obama and EU leaders warned that they would enact broader sanctions against Russia in order to check its expansionist ambition in Ukraine. They mentioned that sanctions could expand to cover whole sectors in Russia including, crucially, its defense and energy industries. However, Moscow knows that in the short-term there is no substitute for its energy supplies, particularly to the EU.
Indeed, the first American liquefied natural gas (LNG) cargo delivery will not be available until late 2015 or early 2016. Some countries in Eastern Europe are also highly dependent on Russian gas transferred via pipeline — as they lack substantial LNG facilities. Yet US crude oil stockpiles in its Strategic Petroleum Reserve (SPR) are also a factor. In 2013, the SPR held 695.9 million barrels of crude oil. At this rate the US could supply 4 million barrels of oil per day (mb/d) for 90 days. This could, conceivably, help offset any fluctuations in prices in the event of an interruption of Russia’s 7.2 mb/d in exports of crude oil.
Regardless, in the medium-term Russia’s moves in Ukraine are going to hurt its interests in European and global energy markets. Gazprom, the Russian giant gas company with ownership of one-fifth of global natural gas reserves, hasn’t yet threatened to cut off its natural gas. But the Crimea crisis has damaged European trust in Russia as a reliable supplier.
The issue of reliable supply, coupled with diversification, is also a crucial factor in any country’s overall energy security. As Winston Churchill said, “safety and certainty in oil lies in variety and variety alone.” European countries have already started rethinking their strategies to diversify their energy suppliers. Russia was planning to increase its natural gas market in Europe by 23 percent in the next two decades, but its annexation of Crimea seems to have strongly damaged its future market share in Europe, particularly when one considers possible imports of American Shale Gas.
Coupled with energy sanctions on Iran, the Ukraine crisis has increased US awareness that their massive shale oil and gas resources could be converted into a strategic weapon and diplomatic tool. Debates on removing the ban on US energy exports have recently spiked and taken on a new intensity. US oil and gas supplies are not going to scare Russian President Vladimir Putin right now, but in the long-term Moscow will need to seriously consider the competition from US exports, which will require new market planning and strategic shifts from Moscow, some of which may be very uncomfortable for the Kremlin.
Still, not everything is bleak for Russia. Asia’s energy market, and particularly China, has always been a long-term objective. In fact, China could be a substitute for possible future European market losses. Last month, Chinese imports of Russian crude oil reached their highest in 7 years: 2.72 million metric tones. This was three times more than the average of Chinese oil imports over the past decade, and made up 12 percent of overall Chinese oil imports. The decline of Iranian imports for China has also shaped this calculus. Historically the third largest supplier of crude oil to China, Iran’s market share there has dropped from 11 percent of China’s oil needs in 2011 to 8 percent this past year. With China facing continued restrictions in importing Iranian crude, it may now see Russia as a reliable source of supply diversification.
Indeed, the tensions between Russia and European countries over Crimea could change the dynamics of global energy flows. Europe is in search of new suppliers; Russia is seeking new energy markets. This changes the traditional suppliers and consumers in the global energy market; it would bring China and Russia closer together, with the effect of solidifying strategic ties and the alliance between Europe and the US. This will also have profound implications for global energy markets and energy security.
Advantage Iran?
Perhaps ironically, Iran could also benefit from these changing dynamics. Europe faces possible energy supply interruptions and high-energy prices in the short-term. With the nuclear-focused negotiations between Iran and world powers known as the P5+1 moving along, some European countries could once again rethink their bans on Iranian oil imports. In other words, any energy supply interruption from Russia due to US and EU sanctions could have the unintended effect of undermining the regime of global sanctions against Iran.
In the short-term, Iran’s massive domestic consumption doesn’t leave much capacity for Iranian exports to Europe to substitute an offset of Russian supplies. But because Iran has the second largest natural gas reserves in the world after Russia, it has always seen Europe as a huge potential market. If Iran succeeds in overcoming sanctions through a constructive nuclear deal with the P5+1, European companies will be more inclined to invest in the Iranian energy industry than ever before. Losing some of its shares in the Asian and Chinese energy market, combined with weaning Russian energy influence in Europe, could give Iran a chance to once again strengthen its energy ties with the West and find a new market for natural gas exports.
]]>by Sara Vakhshouri
In the last week of April, the US Energy Department issued a report showing that Iran’s crude oil and condensate exports have dropped to their lowest level in the past 26 years. The Energy Information Administration (EIA) estimates that Iran’s net oil export revenue in 2012 was $69 [...]]]>
by Sara Vakhshouri
In the last week of April, the US Energy Department issued a report showing that Iran’s crude oil and condensate exports have dropped to their lowest level in the past 26 years. The Energy Information Administration (EIA) estimates that Iran’s net oil export revenue in 2012 was $69 billion, down from $95 billion in 2011.
In 2012, the average export of crude oil and condensate declined to around 40 percent, from 2.5 million barrels a day (mb/d) in 2011 to about 1.5 mb/d in 2012. Due to the substantial drop in exports and a lack of sufficient storage capacity, the EIA estimates that Iran had to reduce 17 percent of its crude oil and condensate production. Iran was, on average, the second largest producer of OPEC in 2012. But for some months, its production fell below Iraqi levels for the first time since 1989, moving it from second to third place.
This dramatic drop in oil production and exports are the result of the US and EU sanctions implemented since late 2011 that targeted Iranian oil income, which makes up 80 percent of Iran’s total export earnings and about 60 percent of the government’s revenue.
The new sanctions ban European insurance companies from offering any coverage to refineries that process Iranian crude oil. Although a tight market combined with higher prices has made up for some of Iran’s income losses, it is believed that these sanctions have hurt Iranian oil exports in an unprecedented and significant way.
The new sanctions also present a major challenge for Iran to sell its oil to major customers, particularly India, Japan and South Korea. According to the US Energy Department, Iran’s crude oil export to India and South Korea is particularly going to be influenced by these sanctions as their refineries rely mainly on European insurance companies. Previously, Iran could skirt the EU ban on insurance by offering its domestic insurance. But the new sanctions make this impossible. This means Tehran is going to have an even harder time marketing and selling its crude oil: its major customers have to start searching for alternative supplies in the market.
The refinery overhaul season is also going to make it harder for Iran to sell its oil. The second quarter of each year is the period for maintenance overhaul for refineries in the Northern Hemisphere that results in a seasonal decline in demand. It is expected that the spike in Iranian crude oil from the last quarter of 2012 will drop once again due to the new EU restrictions on refinery insurance and seasonal demand.
It is not expected that Iranian crude oil production will rise soon. According to the EIA report, Iran’s oil production in 2012 was around 700 thousand b/d, lower than in 2011. The natural production decline of Iran’s matured fields is playing a major role in curbing its crude oil production. Iran needs to invest in its oil fields in order to maintain its production but the large scale of prohibitions on investments in the country’s oil and gas fields imposed by the US and EU prevents any further increase of the country’s production.
]]>by Sara Vakhshouri
Sanctions against Iran by the European Union and the United States, which aim to change Iran’s attitude toward its nuclear program, have increased pressure on its oil export and revenue. This resulted in the reduction of Iran’s oil exports from 2.2 million barrels per day (bpd) in late 2011 [...]]]>
by Sara Vakhshouri
Sanctions against Iran by the European Union and the United States, which aim to change Iran’s attitude toward its nuclear program, have increased pressure on its oil export and revenue. This resulted in the reduction of Iran’s oil exports from 2.2 million barrels per day (bpd) in late 2011 to around between 900 thousand to slightly above 1 million bpd until October 2012. On 30 January 2013, Reuters reported that Iran’s crude oil exports hit its highest level in December, at around 1.4 million bpd since EU sanctions took effect last July. What was the reason for this sudden hike?
Seasonal Demand
Winter and summer months traditionally mark peaks in global fuel demand. The cold weather during November and December, compared to September and October, usually creates higher energy demand and consumption. As expected, heating fuel consumption increased during the last two months of 2012, particularly in the US, Japan and other members of the Organisation for Economic Co-operation and Development (OECD), due to colder than normal weather conditions. According to the Energy Information Administration (EIA), the global demand for liquid fuels surpassed production in November and December 2012 due to seasonal increases in consumption. This caused a 1.4 million bpd draw from the global oil stocks. The average global demand for liquid fuels in November and December 2012 was estimated at around 90.2 million bpd, or about 0.9 million bpd higher than the consumption of September and October. However, the global supply outside of Iran was about 86.7 million bpd during this period.
Easing of Shipping Restrictions
Iran has increased its shipping capacity by purchasing super tankers from China. It also decreased its oil production, which eased the country’s shipping capacity. Beginning with the EU oil embargo in July 2012, Iran had to use some of its tanker capacity to store its extra production while searching for buyers. After it made an adjustment between its production, domestic consumption and average monthly export, this shipping capacity was free to transport crude oil. Increases in Iran’s tanker capacity allowed Iran and its customers to skirt the EU ban on tanker insurance. Iranian tankers could, in some degree, transfer oil to its customers. Market data suggest that China, Iran’s biggest oil customer, imported 593,400 bpd of oil in December. According to Chinese officials, an easing of shipping delays was the reason behind this increase. This could suggest that some of this amount might have been from purchases made in previous months that reached China with a delay.
US Waivers
The US State Department grants 180-day waivers on Iran sanctions to countries that prove they have reduced their Iranian purchases. State Department officials, though, have not insisted on any specific percentages for these waivers. Countries are expected to reduce the average amount of their purchases from Iran compared to previous purchases. These countries can adjust their purchase amount from Iran based on their monthly demand and the available supply in the market. This means they can increase their purchase of oil during high demand season and adjust it during the months when demand is relatively lower.
Senators Robert Menendez, an architect of US sanctions legislation, and Mark Kirk, have urged President Obama to require oil importers to reduce purchases by 18 percent or more to qualify for further waivers. Iranian oil customers are expected to maintain the average of their purchase from Iran at around at least 18 to 20 percent lower than pre-sanctions purchases during each period of 180 days in order to have their waivers renewed. We are therefore expecting the average Iranian oil exports to remain at around 1.1-1.2 million bpd throughout 2013.
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