SP11 Development Gets Under Way

The load-out of Platform 11B’s jacket in the massive offshore South Pars gas field started on April 30 for final installation along Iran-Qatar border. That marks the beginning of development of Phase 11 of South Pars by Iran’s Petropars.

Hamid-Reza Masoudi, CEO of Petropars, had earlier said that recovery from SP11 would begin in July 2021. 

The agreement for developing SP11 was initially signed in July 2017 for $4.8 billion National Iranian Oil Company (NIOC) and a Total-led consortium comprising China’s CNPCI and Petropars. The French firm made necessary preparations and held tenders for the project, but the US’s unilateral withdrawal from the 2015 Iran nuclear deal and re-imposition of sanctions on Iran pushed Total and CNPCI to quit. Given the significance of development of SP11, the project was assigned to Petropars.

Start of SP11 Development

Masoudi said with the load-out of the jacket in Platform 11B, development of SP11 has officially begun.

The agreement for the SP11 development project was initially signed under a buy-back framework in the final years of the 10th administration in office, but due to oil sanctions, any financing of the project was impossible.

Under the Rouhani administration, an international consortium was set up to develop this phase, but the US’s extraterritorial sanctions once more blocked the project.

Total and CNPCI had to pull out of the project for fear of US penalties. President Donald Trump has toughened sanctions against the Islamic Republic, particularly the petroleum industry. However, the Petroleum Ministry has always said the idea is to make maximum recovery from South Pars.

Rasoul Fallahnejad, director of engineering and construction at Pars Oil and Gas Company, has said that SP11 development started later than other phases because development of other phases had already begun and the country was faced with gas supply shortages alongside financial shortcomings.

Why SP11 Wasn’t Prioritized in 2013

When Hassan Rouhani was elected president in 2013, Iran was recovering 280 mcm/d of rich gas from South Pars. In a bid to make up for Iran’s backwardness in recovery from this jointly-owned gas field, the Petroleum Ministry divided the South Pars phases based on priorities so that the phases with higher progress would be prioritized. The objective was to meet winter gas demand and provide necessary finance for other development phases.

Therefore, SP12, SP15 &16 and SP17&18 were prioritized due to the level of progress in their development. SP11 had not been developed sufficiently by that time and the Petroleum Ministry lacked sufficient financial resources for that purpose. Therefore, it was not prioritized.

Finally, in July 2017, an agreement was signed with a consortium comprising France’s giant Total, China’s CNPCI and Petropars. One reason forwarded by the Petroleum Ministry for this agreement was to officially launch the newly-developed model of oil contract – Iran Petroleum Contract (IPC), while using foreign finance and foreign technology for building pressure compressor platforms in a bid to prevent pressure fall-off in this gas field in coming years.

SP11 is being developed to produce 2 bcf/d of gas, or 56 mcm/d of rich gas. NIOC had predicted that the field would experience a pressure fall-off as soon as production starts. Therefore, designing and building gas pressure compression installations was put on the agenda.

The reason for which the Petroleum Ministry insisted on signing this agreement with an international consortium was that in neither of South Pars phases, had gas compression installations been designed and built earlier and Iran had never used best-at-class technologies for that purpose. Therefore, the agreement for SP11 development was signed with international firms with a view to transferring technical knowhow for designing and building gas pressure compression installations.

Mohammad Meshkinfam, CEO of POGC, had said that due to potential pressure fall-off in South Pars in coming years, NIOC would consider designing, building and installation 20 gas compressors in various phases of this gas field. He had also said that SP11 would serve as a model for other phases of South Pars in terms of technology transfer.

However, international parties to the SP11 agreement pulled out due to US threats. But due to the significance of recovery from this field, Petropars volunteered to operate the project for the recovery of 56 mcm/d in the first stage of development.

Rasoul Fallahnejad, who heads SP11 development, said the development of SP11 had started following the exit of foreign companies for protecting Iran’s natural right to extract gas from this phase.

First Well in 2021

Masoudi has said the wellhead jacket of the first top drive in SP11 would be installed in late June if no weather-related problem arises.

He said that drilling would get under way for five wells after the installation of this jacket, adding that recovery from SP11 would start in 2021.

Petropars began preliminary work for developing SP11 in October and Masoudi said it was determined to go ahead.

Platform 11B’s Jacket Installation

Fallahnejad said the wellhead jacket of Platform SPD11B is one of the two jackets envisaged for SP11. Installing SPD11B would allow the drilling of 12 wells along Iran-Qatar border in the Persian Gulf waters.   

He said that after bracing operations and transfer of this structure to the SP11 location, installation of SPD11B by Sadaf would have been done by June to make preparations for drilling.

One day prior to the jacket load-out, Minister of Petroleum Bijan Zangeneh said in a tweet on the occasion of Persian Gulf Day: “Iran is at the height of power in the Persian Gulf thanks to maximum recovery from the South Pars gas field. The Persian Gulf is a national history, an identity for every Iranian and a safe haven for its neighbors.”

Iran is currently recovering more than 700 mcm/d of gas from South Pars which it shares with State of Qatar in the Persian Gulf.

 

Iran Gas Sector Braces for Fast Development

Iran’s gas industry development has over the past six years seen daily growing development with the focus having been on recovery from the giant South Pars gas field. Development of gas industry is racing ahead in both upstream and downstream sectors. Iran’s gas industry train has been overcoming all restrictions in order to reach the final destination, which is maximum recovery from joint fields and replacement of gas with petroleum products. The gas industry hopes to connect all cities, as well as all villages with more than 20 households to the national gas network. In addition to maximum recovery from joint gas fields, processing the already recovered gas would be also instrumental in order to avoid any halt in the development operations.

National Iranian Gas Company (NIOC) Directorate of Production Coordination and Supervision is tasked with coordinating and supervising the affairs of gas refining companies. A total of seven gas refining companies are operating across the country under the authority of this Directorate. The companies receive gas from sources to be refined and fed into trunklines in order to finally reach end-users.

The Shahid Hasheminejad gas refinery (Khangiran) in Sarakhs in Iran’s northeastern most spot, the Ilam gas refinery in western Iran, the Bid Boland gas refining company (the oldest gas refinery in the Middle East), The Sarkhoun and Qeshm refinery in Bandar Abbas, the Parsian gas refinery in Fars Province, the Fajr Jam gas refinery in Bushehr Province and the South Pars Gas Complex (charged with gas recovery from the giant South Pars gas field) are currently processing and refining gas across the country.

Masoud Zardouyan, director of NIGC production coordination and supervision, said: “The gas refineries’ output totals 1 bcm/d.”

He said that in addition to treated gas, a variety of byproducts including condensate, sulfur, ethane, propane and butane were being supplied at the refineries.

He said that the current culture of high gas consumption needed to be modified, adding that gas, a God-given blessing, would have to serve the long-term interests of people and future generations.

13 Refineries at South Pars

Zardouyan touched on Iran’s gas production capacity, saying that 10 gas refineries had become operational in the offshore South Pars gas field area. He said that two more refineries had already become operational, but would be completely delivered to NIGC later on.

He said that Pars Oil and Gas Company (POGC) would also hand over a 13th refinery at South Pars by 2021, which would bring the total number of gas refineries to 13.

Gas Quality Closely Watched

Zardouyan said that refining companies were complying with NIGC’s IGS standard in their production. He said IGC was a strict environmental standard.

He said all requirements for IGC had been fulfilled at refining companies whose production is under close watch.  

As far as byproducts are concerned, the standards are regulated based on the customers and buyers’ demands, while the sulfur content and the purity of products comply with standard levels.

The expression of satisfaction by foreign buyers of products with the high quality of products shows the high level of standards in gas production.

Ilam Refinery Development

Zardouyan said Ilam gas refinery was a strategic facility in Iran due to its location. He said that Ilam refinery’s role in gas supply to western Iran was similar to the Khangiran refinery’s gas supply to northeast Iran.

He said that the gas production spots were located in the southern half the country.

“In our view, the Khangiran storage facility (supplier of gas to the Hasheminejad refinery) in northeast and the Tange Bijar facility (supplier of gas to Ilam gas refinery) in the west are significant sources of gas supply,” the official said.

He added that National Iranian Oil Company (NIOC) had in its primary studies estimated that 10.2 mcm/d of gas would be recovered from Ilam refinery. In phase one, the output was 6.8 mcm/d, he said, adding that gas recovery has been under way at this refinery since 2007.

The second development phase of Ilam gas refinery is put out to tender, which would bring the final production capacity there at 10.2 mcm/d.

Flaring on the Decline

Zardouyan touched on the measures taken to reduce flaring at gas refineries across the country, saying: “The top priority in flaring is environmental concerns, including CO2 and SO2 emissions. The second point is the non-profitability of some varieties of gas that is flared. This issue takes up added significance in South Pars due to the concentration of more production units.”

Efficient Use

Asked about future production from mature reservoirs, Zardouyan said: “The accelerated development of South Pars in recent years has added to the country’s gas production on a daily basis. But the fact is that gas consumption has been increasing at the same pace. Once SP14 is completed development of South Pars would be over and no new development project could be envisaged to meet growing consumption. Therefore, we had better change habits and some uneconomical methods in order to benefit from this national asset in a better way in favor of public, society and future generations.”

Alternative Reservoirs

Zardouyan said gas reservoirs would deplete one day and gas refineries would be out of service.

He said that the Directorate of Corporate Planning at the Petroleum Ministry, NIOC and NIGC were holding regular meetings in order to find alternative gas reservoirs.

 

No Covid-19 Impact on Iran Gas Distribution

Iran has one of the most extended gas pipelines in the region. Last calendar year to March 20, Iran extended its gas pipelines to 37,343 kilometers. Furthermore, 86 gas compressors are under operation while 316 have already become operational across the country.

Saeed Tavakoli, CEO of Iran Gas Transmission Company (IGTC), tells "Iran Petroleum" that Iran managed to distribute about 247 bcm of gas last calendar year at a sustainable rhythm.

Here is the full text of the interview Tavakoli gave to "Iran Petroleum":

How much gas did Iran distribute last calendar year?

IGTC conducted a series of important measures last calendar year (1398), including distribution of about 247 bcm of gas, which was up 8 bcm year-on-year. Moreover, 170 periodic overhauls of compressor units (turbines and compressors), 8,300 kilometers of pigging and 2,886 kilometers of smart pigging were carried out in the same year. We have managed to carry out smart pigging and guarantee sustainable gas transmission despite the US’s withdrawal from the JCPOA and the ensuing exit of many foreign companies.

In terms of safety, volume of installations and equipment, as well as preparedness and reaction under emergency conditions, we are among the top companies in the region.

In 1398, we hit a record 800 mcm/d of natural gas transmission. It has to be taken into account that the volume of gas transmission is proportionate with supply at points of production. Since we witnessed increased output in 1398 with the startup of new South Pars phases, we felt obliged to not let any gas stay at production points. We increased the gas transmission rate and no gas was staid. We maintained 100% gas supply sustainability for three consecutive years at the first month of winter when gas consumption reached its peak. It means that emergency gas transmission installations did not stop working.

How was it possible?

To that end, we set up a maintenance system based on physical assets. For the first time in the country’s gas network, 18 compressors operated without any replacement. Furthermore, through engineering expertise, we managed to have a 50% increase in the nominal capacity of stations and gas transmission pipelines under emergency conditions. We overhauled and monitored our systems during the first half of the year in order to guarantee a sustained gas transmission in winter. Although we were faced with heavy flooding in late March 2019, we had no fire or explosion, nor did we have any reparation in our gas transmission infrastructure or halt in our activities. As mentioned before, one reason for our success was precise reparation based on the network needs. Since our concerns over gas supply during consumption peak are not limited to winter and we also face consumption peak at power plants in summer, we embarked on the transmission network detection from the very beginning and used maintenance systems relying on physical assets to maintain our equipment.

Are there any specific criteria for maintenance?

Naturally, our maintenance of equipment has to be done based on specific indexes. We have also to take into account the fact that we are under sanctions and therefore no foreign supplier or company would help us with maintenance. Therefore, we have taken this factor into consideration and we know that we have to rely on domestic companies. In order to cover the risk, we were exposed to assess domestic companies. We also engage a number of knowledge-based companies and startups and informed them about our needs.

Through a gradual process, we assigned our maintenance and manufacturing tasks to domestic companies. We started with the manufacturing of parts and equipment. When the domestic companies became mature we negotiated with knowledge-based companies and asked them to develop the required equipment. Currently, domestic companies are supplying most of our needs. For instance, some of our required items like filters had been purchased from foreign companies, but now we are manufacturing them all entirely in Iran. So is the case with the oil we use in rotary equipment. Among other important measures we undertook last calendar year, was to use composites with Iranian-engineered formula in repairing our equipment. Until recently we could not carry out immunization with composite for high-pressure pipes entirely in the country and the companies that were active in this sector were mainly commercial and used to import raw materials for composites without transferring in any technical knowhow. Therefore, we conducted research two years ago in this regard and we have now developed the formula for composite manufacturing. That can ensure us that we would not face any problems. In Iran, three companies have been qualified to conduct composite-based repair.

How have sanctions affected the gas transmission network?

Every change would definitely affect Iran’s gas transmission network, but fortunately resilience and more importantly preparedness and reaction to emergency conditions is high at IGTC. We have developed specific plans for all of our reparations and measures. We know quite well that we are under sanctions and technology owners would not provide us with necessary equipment. We had started working on some of equipment which we could not manufacture in Iran and we managed to produce many of them. When the sanctions were toughened and we are barred from the cooperation of top companies our activities did not stop and we continued our work.

Of course, it is noteworthy that the US’s withdrawal from the JCPOA and subsequently the re-imposition of sanctions affected our activity. But we transformed this threat into an opportunity and turned to manufacturing commodities and items which we could not produce through getting help from knowledge-based companies and startups. For instance, we are currently manufacturing most instruments, mechanical and electrical equipment in Iran.

Has the Covid-19 outbreak affected IGTC’s activities?

First of all, I have to acknowledge that the outbreak of Covid-19 caused problems for us in Iran because since two years ago we carry out our annual overhaul in March. This time, it coincided with the Covid-19 outbreak. Naturally, it caused problems to our planning. However, we tried to go ahead with our plans based on schedule. We limited our activities related to periodical technical inspection and visits and carry them out in line with necessary protocols. We had to reduce the number of our staff in order to respect social distancing and health protocols and therefore the work was done with more pressure. However, we managed to carry out our reparation in line with the health instructions of the Petroleum Ministry and social distancing. The number of IGTC staff infected with Covid-19 has so far been very low and we have fortunately lost none of our colleagues over this time.

Has gas transmission volume declined?

No, we have not had any reduction in gas transmission to consumers and the transmission network has been working based on national dispatching needs. In fact, the entire gas produced in the country is transmitted to consumers and the coronavirus has not caused any restrictions to gas transmission.

Covid-19 restrictions seem to continue as Covid-19 is not disappearing any time soon. How will it affect Iran’s gas transmission network?

Our main activity in Iran’s gas transmission network pertains to maintenance of equipment for safe and sustained gas supply. With the Covid-19 outbreak, we also adapted our maintenance and reparation to the coronavirus-related conditions by reducing the time of people’s presence and their risks. As I mentioned before, we are transmitting the whole gas we are producing. There has been no cut to water and electricity supply and we have had no halt in gas supply either.

How have sanctions affected the gas transmission network?

Every change would definitely affect Iran’s gas transmission network, but fortunately resilience and more importantly preparedness and reaction to emergency conditions is high at IGTC. We have developed specific plans for all of our reparations and measures. We know quite well that we are under sanctions and technology owners would not provide us with necessary equipment. We had started working on some of equipment which we could not manufacture in Iran and we managed to produce many of them. When the sanctions were toughened and we are barred from the cooperation of top companies our activities did not stop and we continued our work.

Of course, it is noteworthy that the US’s withdrawal from the JCPOA and subsequently the re-imposition of sanctions affected our activity. But we transformed this threat into an opportunity and turned to manufacturing commodities and items which we could not produce through getting help from knowledge-based companies and startups. For instance, we are currently manufacturing most instruments, mechanical and electrical equipment in Iran.

Has the Covid-19 outbreak affected IGTC’s activities?

First of all, I have to acknowledge that the outbreak of Covid-19 caused problems for us in Iran because since two years ago we carry out our annual overhaul in March. This time, it coincided with the Covid-19 outbreak. Naturally, it caused problems to our planning. However, we tried to go ahead with our plans based on schedule. We limited our activities related to periodical technical inspection and visits and carry them out in line with necessary protocols. We had to reduce the number of our staff in order to respect social distancing and health protocols and therefore the work was done with more pressure. However, we managed to carry out our reparation in line with the health instructions of the Petroleum Ministry and social distancing. The number of IGTC staff infected with Covid-19 has so far been very low and we have fortunately lost none of our colleagues over this time.

Has gas transmission volume declined?

No, we have not had any reduction in gas transmission to consumers and the transmission network has been working based on national dispatching needs. In fact, the entire gas produced in the country is transmitted to consumers and the coronavirus has not caused any restrictions to gas transmission.

Covid-19 restrictions seem to continue as Covid-19 is not disappearing any time soon. How will it affect Iran’s gas transmission network?

Our main activity in Iran’s gas transmission network pertains to maintenance of equipment for safe and sustained gas supply. With the Covid-19 outbreak, we also adapted our maintenance and reparation to the coronavirus-related conditions by reducing the time of people’s presence and their risks. As I mentioned before, we are transmitting the whole gas we are producing. There has been no cut to water and electricity supply and we have had no halt in gas supply either.

Sustainable Gas Supply in Northeast Iran

The main reservoir supplying gas to north and northeast Iran is in the second half of its lifecycle. It will naturally face output fall in coming years, highlighting the significance of studying sustainable gas supply obligations in that area.

The Mozdouran reservoir of the Khangiran field has far seen 58% of its capacity depleted. A variety of options including management of extra water production in the reservoir, using separators and wells’ workover are on the agenda for optimal use of this reservoir.

Mohammad-Reza Soltani, director of technical affairs at East Oil and Gas Production Company (EOGPC), has pointed to the Mozdouran, Shourijeh B and Shourijeh D reservoirs in the Khangiran field, saying: “EOGPC mainly receives its gas from the Khangiran field whose gas comes mainly from the Mozdouran reservoir.”

He said that the Mozdouran reservoir had more than 30 active wells supplying 48 mcm/d of gas in cold months of the year.

Mozdouran Reservoir Management

Soltani said due to the increased production of water along with gas, about eight wells at this reservoir are equipped with wellhead separators.

“We can guarantee sustainable production for years by using separators. Furthermore, we need to drill at least one well a year in Mozdouran to keep production levels at 48 mcm/d,” he added.

EOGPC is supplying gas to the Neka power plant, Bonjourd petrochemical plant, the provinces of North Khorasan, Khorasan Razavi, South Khorasan, Mazandaran, Golestan and partly Semnan. That highlights the significance of sustainable gas production by this company.

Soltani said: “Currently with such projects as management of extra production at the reservoir, using separators, carrying out well workover, we are envisaging optimal use of the capacity of reservoirs at Mozdouran.”

Comprehensive Study

Soltani said reservoir data is updated regularly based on new studies.

He touched on the studies carried out by Naft Kish Engineering Services Company in the Khangiran field, saying: “The results of these studies currently under way can increase our level of information so that we would have more precise forecasts about the reservoir conditions in the future.”

The Khangiran field is under study within the framework of comprehensive studies conducted on oil and gas reservoirs. In this regard, comprehensive studies have been conducted on some reservoirs run by National Iranian South Oil Company (NISOC), Iran Central Oil Fields Company (ICOFC), and Iran Offshore Oil Company (IOOC).

Toos, Promising Gas Capacity

Soltani touched on the Toos field in northeast Iran, saying: “Once one well was drilled by the Directorate of Exploration of National Iranian Oil Company in 2009, the Razavi Oil and Gas Company embarked on studies based on the drilling data of the same well and presented a master development plan, but later on this project was off the agenda due to disagreements.”

Then, Petropars started preliminary studies of the project and offered an MDP. Based on estimates, the Toos field is estimated to hold 1tcf of gas.

“Following the NIOC Board of Directors’ approval, formalities are under way for a tender bid,” said Soltani.

He expressed hope that a contractor would be chosen soon for the development of the Toos field after necessary designs, because it is the only known field whose production can make up for the production loss at Khangiran.

The Toos gas field is located 100 kilometers northeast of the city of Mashad and southwest of the Khangiran and Gonbadli fields.

Shourijeh B and D Reservoirs

Soltani also touched on the 1.7mcm/d production capacity of the seven wells of the Shourijeh B reservoir, saying: “This reservoir is more than 60% depleted and a good option would be to use the Shourijeh B gas only in peak shavings. Studies are also under way on the eastern part of this reservoir, which would increase the reservoir output capacity if positive results are achieved.”

The Khangiran field incorporates the Mozdouran, Shourijeh B and Shourijeh D reservoirs, all located around the city of Sarakhs.

In Shourijeh D, as mentioned before, an average 10 mcm/d of gas is injected during the first 8 months of each year in order to allow for maximum recovery in cold months.

Asked about gas injection into Shourijeh-D and gas recovery, Soltani said: “We have already had an injection of 13 mcm/d of gas and the recovery of up to 16.7 mcm/d, which would increase to 20 mcm/d gradually.”

He said that the Petroleum Ministry would be developing Shourijeh-D in order to enhance gas injection and recovery.

Pressure Falloff in Gonbadli

Soltani also spoke about the Gonbadli field, which is located 25 kilometers northwest of Sarakhs and near the border with Turkmenistan.

The daily gas recovery from this field, measuring 21 kilometers long and 14 kilometers wide, is below 1mcm.

Touching on pressure falloff in Gonbadli, he said: “A project was proposed for the establishment of a dehydration unit near the Gonbadli gathering center so that recovery and dehydration would be carried out at low pressure and the produced gas would be used as fuel in Sarakhs and the special economic zone. Extra gas will be also delivered to the refinery. Another proposal would be to displace one dehydration unit. This proposal is less costly and has won the approval of National Iranian Gas Company. Currently, a stabilization and loading of gas condensate project is under way at the Gonbadli gathering center and this project would be key to sustainable gas supply to the refinery.”

MER Needs Reservoir Knowledge

Soltani laid emphasis on knowledge about reservoirs and their optimal management, saying: “Our colleagues at EOGPC are highly sensitive to the performance of reservoirs and they regularly check various indicators and conduct necessary tests on specified dates. Such knowledge and sensitivity is valuable and a must for maximum efficient recovery.”

EOGPC is one of the subsidiaries of ICOFC. It is currently producing more than 62 mcm/d of gas from 63 wells.

Jask Storage Tanks Set to Come Online

The number of coronavirus patients is increasing in the world with hundreds of thousands of deaths. The petroleum industry and its related sectors are also experiencing an unprecedented stagnation with uncertain future. Investment in the petroleum industry has also been on the decline.

Iran’s oil sector is also suffering. However, the Covid-19 impact on Iran may have been less than other nations as Iran is under US oil sanctions, while the Iranian government has weaned its budget off oil revenues.

The main question posed to all oil managers in Iran is about the possibility of implementing oil projects against the backdrop of the Covid-19 outbreak. Most oil projects across the globe have come to a halt under the impact of the coronavirus.

One major project in Iran is for the transfer of crude oil from Goureh to Jask. This project has various sections including the construction of about 1,000 kilometers of pipeline, building five pumping stations, building storage tanks and an export jetty. The pipeline would allow the transfer of 1mb/d of crude oil from the Goureh oil terminal in Bushehr Province to Jask in the Gulf of Oman coasts.

Jask is set to become the second strategically important oil export terminal in Iran. President Hassan Rouhani has recently instructed Minister of Petroleum Bijan Zangeneh to take action for the accelerated completion of the Goureh-Jask oil pipeline.

Ever since Covid-19 broke out in Iran, National Iranian Oil Company (NIOC) adopted protocols to stop the spread of this virus in various sectors of this industry. Therefore, the restrictions caused by the Covid-19 outbreak did not halt the construction of Goureh-Jask oil pipeline.

Reza Dehqan, deputy head of NIOC for development and engineering, has said that special protocols for combating Covid-19 had been provided to entrepreneurs and contractors. He added that compliance with the protocols would be closely watched.

NIOC Priorities

The Goureh-Jask pipeline is one of NIOC priorities for the current calendar year to 20 March. Before the end of the year in March 2021, it is expected to become operational to facilitate the delivery of oil and gas condensate from Goureh to east of the Strait of Hormuz or the Jask region. Furthermore, building 10-million-barrel storage tanks in Jask is a priority for the Petroleum Engineering and Development Company (PEDEC).

Touraj Dehqani, CEO of PEDEC, said efforts were under way to make the project operational with an early capacity of 2 million barrels in the current calendar year to 20 March.

At the beginning of the Covid-19 outbreak in Iran, this project was slowed down. However, numerous meetings were held with regional and local officials with regard to the continuation of the project. The meetings turned out to be fruitful as they did not let any halt in the project.

“By engaging the minimum number of service workers in two shifts during New Year holidays, we saw good progress in this project particularly in the second section,” he said.

All the required materials for this project have been already ordered or are being manufactured. Iranian contractors have also installed their equipment and good progress is being observed in the oil pipeline project.

Since March 2020, welding has been under way in parallel with the delivery of pipes.

7,000 Jobs Created

Over the past one month, numerous meetings have been held with contractors, consultants and manufacturers, which helped accelerate the purchase of equipment needed for pumping stations. According to the latest data, orders have been filed for nearly 50% of commodities and equipment needed in the storage tanks of the Goureh-Jask oil pipeline. The rest will be decided upon over the coming two months.

The important point with this project is that it has been designed full in Iran, while its construction is done totally in Iran. Therefore, 90% of what is needed in this project would be domestically sourced, indicating job creation in this sector.

Currently, nearly 600 persons are working on the site of this project, which would reach over 2,000 in two months. Furthermore, more than 5,000 indirect jobs would be created.

Abdollah Ahmadi, crude oil storage tanks construction manager for the Goureh-Jask pipeline, has said that the project would be fully operational by November 2021. A 14MW power plant is to come online by next March, while a water desalination plant with a capacity of 500 cubic meters a day would be operational when the project would be ready.

Building crude oil storage tanks with a capacity of 30 million barrels on 460 ha of land in the Makran area is part of the Goureh-Jask project. The first phase of this project with a capacity of 10 million barrels is under construction.

Based on NIOC and PEDEC reports, incessant operations are under way for the completion of the pipeline. PEDEC has announced the increased production capacity of the pipeline, while NIOC has announced the imminent commissioning of the early production part of the project.

According to PEDEC, the chain of pipeline production (billets, slaps and even coating materials) would be supplied by domestic companies. The production capacity of these pipelines has recently doubled as the country’s pipe manufacturing capacity is being used completely.

Dehqani said that all required pipes for this project would be delivered by November.     

Based on regular visits by the client, contractors and consultants, despite the outbreak of the novel coronavirus and concomitant impacts on the Iranian petroleum industry, this project would come online in the due time.

Iran OPEC Governor Still Comatose

Iran’s OPEC governor, Hossein Kazempour Ardebili, has slipped into a coma after brain hemorrhage.

As "Iran Petroleum" went to press, no new development was reported on his health condition and he continued to remain hospitalized at the ICT section of a hospital in Tehran.

Kazempour Ardebili survived the June 1981 bombing at the headquarters of the Islamic Republic party in Tehran. He served as minister of commerce from 1980 to 1981. Then he served as deputy minister of foreign affairs for economy for four years before becoming deputy minister of petroleum for international affairs and Board member at National Iranian Oil Company, which he held for five years.

Kazempour Ardebili was appointed Iran’s ambassador to Japan in 1990 and remained in the post for five years. In 1995, he was named Iran’s OPEC governor and remained in this post until the end of the second term of Mohammad Khatami in 2005.

He was again reappointed Iran’s OPEC governor in 2013.  

A key figure in Iran’s petroleum industry, Kazempour Ardebili has protected Iran’s national interests throughout all negotiations.

When he joined Iran’s Petroleum Ministry, oil was traded at $6 a barrel.

2-SP17, SP18 Reliability Index at 99.4%

The director of the 7th refinery of the South Pars Gas Complex (SPGC) has said that the reliability index at Phases 17-18 of the giant South Pars gas field has reached 99.4%.

Hassan As’adi said: “Owing to effective measures taken and precise planning made, the reliability index of SP17 and SP18 of SPGC has reached 99.4%.”

“Given the systemic thinking approach and concentration on planning activities in achieving success in all offices of the 7th refinery, system analysis teams started taking shape at the refinery in 2015,” he added. 

“As the only new refinery delivered to SPGC in 2018, we volunteered to get involved in planning for strategic management at the complex and we experienced growing performance,” he said.

He added that all indexes would continue to grow in the current calendar year.

As’adi said: “The production sector index, particularly in the supply of high-value products like propane and butane, has also seen a significant increase, and the customer satisfaction index has been promoted to 96.53% while the HSE, maintenance and quality indexes have been on the rise.”

3-Efficient Gas Use Blueprint Envisaged

Deputy Minister of Petroleum for Planning Houshang Falahatian said a blueprint was planned to be drawn up for efficient use of gas.

He was speaking at a ceremony to name Ali Mobini Dehkordi as the CEO of Iran Fuel Conservation Organization (IFCO), replacing Mohsen Delaviz.

Noting that the current gas consumption levels were not desirable, he said the planned blueprint for the 2041 horizon, would be soon drafted as a comprehensive law.

He also said that a blueprint for energy supply to the transportation sector within the 2031 and 2041 horizons had been drawn up and sent to Ministry of Industry, Mine and Trade,  the parliament and other relevant organizations for final approval by the Supreme Energy Council and government.

For his part, the new chief of IFCO said: “Given the current potentialities, expectations in the society and the conditions imposed on the country, we will try to adopt a clear framework within IFCO in order to direct quantitative and qualitative objectives.”

Mobini Dehkordi said plans were under way to identify every organization involved with the energy sector in construction industry, mining and transport.

“Today, a new approach dominates management. Management has to emerge under creative conditions and show its efficiency based on circumstances,” he added.

4-South Pars Condensate Loading Capacity Increases

Hossein Azimi, deputy head of South Pars Phase 19 development project, said the gas condensate loading capacity by a newly installed single point mooring (SPM) would reach 7,000 cubic meters per hour.

He said SPM was a common way of loading gas condensate on oil tankers.

SPM is a floating buoy/jetty anchored offshore to allow handling of liquid cargo such as petroleum products for tanker vessels. SPM is mainly used in areas where a dedicated facility for loading or unloading liquid cargo is not available.

 Located at a distance of several kilometers from the shore-facility and connected using sub-sea oil pipelines, these SPM facilities can even handle vessels of massive capacity such as VLCC.

The offshore-anchored loading buoy is divided into different parts having dedicated functionality.

Mooring and anchoring system, buoy body and product transfer system are the main parts of the SPM.

SPM serves as a link between the shore-facilities and the tankers for loading or off-loading liquid and gas cargo.

Azimi said that a foreign company had conducted quality tests on the SBM, adding: “This strategic equipment is a prioritized project of National Iranian Oil Company. The CEO of Pars Oil and Gas Company regularly visits it on a weekly basis.”

He said that the SPM installation would increase the loading capacity of carriers at Pars 2 zone, in addition to increasing operational flexibility and facility of periodic overhauls.

Azimi added that the equipment used for measuring and loading gas condensate would be protected against wearing out, while their level of operability would be balanced in favor of sustainable gas and condensate production.

He said the condensate produced at Pars 2 was being loaded by SPM at SP12.

“The gas condensate produced at these phases is delivered by a joint metering via an offshore pipeline to the SPM for loading,” he said.

Azimi said that the SPM of SP19 would be connected via a 6.2-km-long pipeline to the joint metering, adding: “The initial pipe-laying activities would be carried out by Seamaster vessel owned by the Iranian Offshore Engineering and Construction Company (IOOC), which would be over soon.”

Regarding the schedule set for the installation and operation of the SPM at SP19, he said: “According to estimates, following offshore pipe-laying, the SPM would be launched.”

Petchem Output up 10mt

As a key division of the petroleum industry, Iran’s petrochemical industry has been growing over recent years. In this period, with the toughening of US sanctions on Iran’s oil sector and economy, separate sanctions have been imposed on Iran’s petrochemicals. However, Iran’s petrochemical industry has remained steadfast. 

Iran’s petrochemical industry had tough time in the calendar year 1398; however, President Hassan Rouhani and Minister of Petroleum Bijan Zangeneh regularly heaped praise on the industry.

The petrochemical companies’ contribution to hard currency supply was of great help to the government. It was done in full transparency. Thanks to its round-the-clock efforts, the petrochemical industry is currently in the middle of its second jump.

Minister Zangeneh recently said that Iran would be considering implementing 17 new petrochemical projects for $6 billion. He said 3 of these projects were aimed at supplying raw materials at a rate of 10 million tonnes.

Zangeneh said that petrochemical projects mainly involved methanol, propylene, ethylene and benzene chains.

“Of course, investment in these projects rests with the private sector. But we need to encourage and incite the private sector for implementing these projects because it would activate the downstream sector,” he added.

Zangeneh said that similar to the Petroleum Innovation and Research Fund, a fund has to be established to support development of downstream petrochemical projects.

“If need be, the government will also help. We can help them by reducing the lending rate, guaranteeing market and guaranteeing license,” he said.

Zangeneh’s remarks came against the backdrop of the Covid-19 outbreak in Iran because the petrochemical industry is preparing to inaugurate several key projects, but the present circumstances are delaying the commissioning of projects.

The commissioning of projects would need only a ministerial instruction. The second phase of Ilam’s olefin, Kaveh methanol, and Phase of Bushehr Petchem. Co. is among projects whose inaugurations in March were delayed due to health instructions.

Behzad Mohammadi, CEO of National Petrochemical Company (NPC) said recently that the second and third jumps in the petrochemical industry would materialize by the balanced and sustainable development of this industry.

In addition to the projects mentioned earlier, the Sabalan methanol, Lordegan petrochemical and Masjed Soleiman petrochemical projects would be also ready to come on-stream in the first half of current calendar year to 20 March.

Petchem Output Jump

The petrochemical industry launched its production jump years ago. Its efforts are bearing fruit now. Throughout the second jump which will continue into 2021, about 27 petrochemical projects would come online to raise Iran’s petrochemical output from the current 66 million tonnes to 100 million tonnes by 2021. In the meantime, infrastructure will be ready for the third jump. Therefore, the third jump will start in 2021 to 2025 and at least 26 projects would become operational and the petrochemical production capacity would reach 133 million tonnes.

Jalal Mir-Hashemi, director of NPC production control, said that infrastructure was ready for an output jump in Iran’s petrochemical industry. He added that in addition to starting up new projects, the idle capacity of some operating plants would be used. Mir-Hashemi said downstream plants would see prosperity.

In the second jump envisaged for the petrochemical sector, Iran’s petrochemical production capacity will rise from the current 66 million tonnes to 100 million tonnes up to 2021, which requires management of feedstock supply for production hike. To that end, for the purpose of management of available feedstock, some projects with combined feedstock have been envisioned for sustainable development and production hike.

Ali-Mohammad Bosaqzadeh, director of NPC projects, said Iran’s petrochemical production capacity would increase in the current calendar year to 20 March with the inauguration of several new development projects. All these projects are planned to come online against the backdrop of the Covid-19 outbreak.

Bosaqzadeh said the petrochemical industry would try its best to benefit from the potential of domestic manufacturers with a view to enhancing the production capacity of new projects significantly.

Noting that the petrochemical industry was currently the backbone of Iran’s economic development, he said: “Injecting resources into production and preventing national resources waste could help the second and third petrochemical jumps materialize.”

Bosaqzadeh said: “A balanced development of the petrochemical industry is on the agenda as a strategy. Development of the downstream petrochemical sector is in full harmony with the policies of resilient economy. Since it prevents crude oil sales it would be of a high value-added. Therefore, completion of the value chain has to be focused upon so that we would take steps towards final products.”

Iran’s petrochemical industry has to distance itself away from selling raw materials and instead move towards higher value-added generation and development of final products in order to contribute to a dynamic industry and powerful economy.

Bosaqzadeh said that various development projects were under way in the Pars Special Economic Energy Zone and the Special Economic Petrochemical Zone as two petrochemical hubs in Iran.

“In addition to these two zones, petrochemical development projects are under way in many provinces in the country. Once these projects become operational, the production chain of many petrochemical products in the country will be completed,” he added.

 

Doroud, Arvand Oil Fields Up for Investment

The Doroud oil field, which is located in Kharg Island and northwest of the Persian Gulf, is among developed oil fields which the Iranian Offshore Oil Company (IOOC) presented to foreign investors within the framework of the new model of oil contracts – the Iran Petroleum Contract (IPC).

Nearly 16 years have now passed since an agreement was signed for the development of the Doroud field. Enhanced recovery from the field has not been achieved despite gas injection since 2008.

According to the Department for Economic and Financial Feasibility Studies of National Iranian Oil Company’s Directorate of Corporate Planning, the investment needed in the Doroud field over four years has been calculated, which would be secured through signing F, EPCF and EPDF deals. The project costs will be recouped over a six-year period from the increase in the crude oil production capacity.

The package of investment for the integrated development of IOOC oil and gas fields has been drawn up in line with Iran’s law on removal of barriers to competitive production and upgrading the fiscal system. It will take effect after the acquisition of necessary permits from NIOC Board of Directors and the Economic Council and signing agreements with investors. This investment package takes into consideration compliance with Iran’s Fifth Five-year Economic Development Plan for the prioritization of development projects including Development of jointly owned oil and gas fields.

Doroud oil field development project is along IOOC-run projects open to investment. IOOC is a leading company in applying ESP to wells and gas lifting in the country. It intends to focus on improving the rate of recovery from hydrocarbon fields nominated for investment.

Over the past four decades, Doroud has been developed twice. It is now ready to undergo the third phase of development.

Doroud is estimated to contain 7.6 billion barrels of oil in place. Due to 33-year recovery from this field and improper injection of water and gas, only 1.5 billion barrels of oil was recoverable from the field. But now due to development activities in this field, the recoverable amount is expected to rise to 2.5 billion barrels.

Currently, Doroud is producing on average 15,431 b/d of oil from its offshore wells and 36,500 b/d from its onshore wells. In 1997, 42 wells were drilled in the oil field. Eighteen offshore wells and 23 onshore wells have been drilled and completed.

The crude oil processing installations are used for treating 100,000 b/d offshore and 110,000 b/d onshore.

About 1.6 billion barrels of oil has been recovered from this field over the past four decades. Oil production from Doroud came to a halt during the 1980-1988 imposed war.

The first wave of enhanced recovery from the Doroud field started in 2002 at the rate of 15,000 to 16,000 b/d. In the following years, production increased as new wells were drilled in this oil field.

When Iran signed an agreement with France’s energy giant Total in 1999 for the development of Doroud, oil was $20 per barrel. Total acquired Elf and Agip to make good investment in Iran. The French company failed to inject gas into Doroud on schedule and the project was halted mid-way. But it must be taken into consideration that over recent years as average oil prices have been at $40 a barrel, the project has been profitable for Iran with a quick rate of return on investment.

Before the gas injection section of the Doroud oil field was launched in Kharg Island, many Iranian petroleum industry experts recommended that due to the unprecedented high pressure gas injection (6,000 psi) into the field and its unknown consequences, the gas injection section be transferred from Total to the client after completion of the water injection and oil production process. In the meantime, the geologically complicated structure of the Doroud field and the location of this oil field in Kharg Island slowed down the pace of drilling in the first years of development of this field as simultaneous onshore and offshore work was tough.

Arvand Awaiting Investment

Until a couple of years ago, development of the oil and gas fields  that Iran shares with neighboring countries had been slowed due to financial and technical impediments in Iran, thereby helping neighboring nations make big gains.

Iran has shifted its focus on the development of joint oil and gas fields located mainly in South Pars and West Karoun. In the West Karoun area, Iran shares oil fields with Iraq. Three West Karoun oil fields recently started production.

The fields shared with Iraq have been proposed to foreign investors for future cooperation. Foreign companies can sign agreement with Iran based on the content of newly developed model of contract – Iran Petroleum Contract (IPC).

Arvand oil field which is located 50 kilometers south of Abadan in Khuzestan Province is one of these fields in question. The field lies at the entry of Arvandroud River and is 42 kilometers long and 13 kilometers wide.

Arvand is estimated to contain one billion barrels of oil in place with a recovery rate of 15%. Arvand also holds over 14 bcm of dry gas and 55 million barrels of gas condensate.

Discovered in 2008, the Arvand field lies along Iran-Iraq border. Drilling had started in Arvand in 2006 for the purpose of estimating the hydrocarbon potential of the formations in the Khami and Bangestan centers.

Four well logging operations were carried out in the Fahlyan formation to prove the existence of oil and gas in that formation. The Fahlyan formation holds light crude oil with API gravity at about 44.

The Arvand oil field is administered by the Arvandan Oil and Gas Production Company (AOGPC) whose production is estimated to reach 1.4 mb/d by 2025.

AOGPC is estimated to have the highest oil and gas production rate in the coming decade. A major facility inside this field is a 165,000-barrel-per-day processing unit. This treatment unit was built by National Iranian Oil Company during years when Iran was under sanctions. A variety of crude oil may be processed at this facility. Thanks to the existence of this treatment facility, the return of investment will be fast. Any investment in the development of the Arvand oil field will have a good rate of return. The short distance between the Arvand field and the treatment facility is an indicator of the fast development of the oil field.

Several years ago, an agreement was signed between AOGPC and the Iranian Offshore Engineering and Construction Company (IOEC) for the development of the Arvand oil field, but the agreement was never implemented due to financial and other problems.

The Arvand oil field is expected to produce 5,000 b/d of oil in the first phase, which would reach 20,000 b/d in the final phase. The investment needed for the development of this field stands at $135 million, which is likely to increase. The API gravity of oil contained in Arvand varies between 39 and 43. The Arvand oil is planned to be delivered to the Abadan refinery.

Iran and Iraq share eight oil fields along their joint border with combined recoverable reserves of 14 billion barrels. The eight fields are Dehloran, Naftshahr, West Paydar, Azar, Azadegan, Yadavaran, Dehloran and Arvand. These fields have different names on the Iraqi side. Nine percent of Iran’s crude oil reserves exist in the fields shared with Iraq.

As recovery from jointly owned fields leads to migration of hydrocarbon, NIOC officials are concentrating on the development of such fields.

Potential for Mansouri & Salman Development

Iran hopes to bring its oil output to over 5 mb/d under its 20-year vision plan through investing in ageing fields. Some of oil fields in Iran are already mature. Their oil has partly been recovered, but cutting edge technologies are needed to extract the remaining oil.

Thanks to existing technologies, it would be possible to raise oil recovery rate from different reservoirs to over 80%.

One of reservoirs that Iran has specifically counted on is Bangestan in the Mansouri oil field. Mansouri was among fields proposed for development under the Iran Petroleum Contract (IPC) model, the restructured model of oil contract.

Over recent years, production from the Bangestan reservoir of Mansouri has been studied by Committee of Advisors at the Directorate of Reservoirs of National Iranian Oil Company (NIOC).

According to NIOC Directorate of Corporate Planning, various scenarios envisaged for enhanced recovery from this field include natural depletion, gas injection and water injection with a view to studying various parameters including output flow and downhole pressure.

This field enjoys very good potential for production and development. More studies are needed in the future to study the Bangestan reservoir of Mansouri field. These studies focus on artificial lifting, hydraulic fracturing and enhanced oil recovery (EOR) methods.

Iran’s petroleum industry, particularly National Iranian South Oil Company (NISOC), over recent years, has focused on the development of Mansouri in order to increase its crude oil output and enhance its processing capacity. The project is 97.5% complete now. The only remaining section from phase 1 of Mansouri field development is the completion of production and desalination plant.

The high rate of recovery from Mansouri has added to the significance of this field. The latest studies indicate that the average rate of recovery from oil fields in Iran is about 28%, while the Asmari reservoir of Mansouri has a recovery rate of 47%, which is indicative of the high potential of this oil field.

The Mansouri field is located 60 kilometers south of Ahvaz (the provincial capital of Khuzestan), 50 kilometers west of Mahshahr Port and 40 kilometers east of Ab Teimour field. Discovered in 1963, Mansouri field started production in 1973.

The first well in the Mansouri field was drilled in 1963 to allow for oil recovery from the Asmari reservoir. Oil production from the Bangestan reservoir began in 1974 after drilling Well No. 2.

After the establishment of the Mansouri production unit in 1979, the processing of the Bangestan oil was transferred from the Ahvaz production unit to the Mansouri production unit.

The Mansouri field is administered by Karoun Oil and Gas Production Company that is the largest subsidiary of NISOC with an output of over 1 mb/d.

The Bangestan reservoir has a production unit with a rated capacity of 75,000 b/d, a desalination unit with a rated capacity of 35,000 b/d and a gas compressor unit with a rated capacity of 30,000 b/d.

Bangestan is estimated to hold 15 billion barrels of oil in place with an output of 60,000 b/d that may be increased to 79,000 b/d. So far, 347 million barrels of oil has been extracted from the Bangestan reservoir.

The average production rate from each onshore oil well has fallen to 2,000 b/d, down from 26,000 b/d recorded between 1970 and 1972. There were a total of 270 wells when Iran was supplying its maximum oil output. There are currently over 1,500 oil wells.

According to the official data, the average oil production rate in Iran stands at 24%, while in many countries it varies between 45% and 65%.

Iranian Petroleum Ministry officials say the average recovery rate from oil fields in Iran stands at around 24%, ranging from 7% in Soroush oil field to 35% in Ahvaz oil field.

Iran targets Maximum Efficient Rate (MER) which means the maximum sustainable daily oil or gas withdrawal rate from a reservoir which will allows economic development and depletion of that reservoir without detriment to ultimate recovery.

If oil is extracted from a reservoir at a rate greater than the maximum efficient rate of recovery, then the natural pressure of the reservoir will decline resulting in a decrease in the amount of oil ultimately recoverable.

MER is also commonly used to denote the rate of field production that can achieve the maximum financial return from the reservoir operation. However, the figures of two rates hardly coincide.

In the 1940s, the average production from Iranian oil wells was said to stand at 18,000 b/d. After so many years, the figure is down to 2,000 b/d.

As Iran's oil wells enter their second half of life, between 330,000 and 350,000 barrels per year of oil is lost in onshore wells.

Therefore, enhanced recovery from mature reservoirs like Bangestan is essential for Iran’s petroleum industry.

Output Hike Possible at Salman

Salman oil field located in the Persian Gulf is jointly owned by Iran and the United Arab Emirates (UAE). The shared offshore field has high-pressure gas layers, too. Discovered about 45 years ago, the Salman field has since been supplying oil.

 It is located in Hormuzgan Province and more specifically 144 kilometers south of Lavan Island.

Due to the existence of about 70% of oil and gas layers of this oilfield in Iran’s territorial waters and its shared status, its development has always been a priority for Iran’s petroleum industry. In the 2000s the platforms of this field that had been damaged during the 1980-1988 imposed war were renovated.

A couple of years ago in Tehran, the Iran Offshore Oil Company (IOOC) nominated Salman along with the Norooz, Dorood, Foroozan and Soroush as candidates for development under the newly developed contractual framework known as the Iran Petroleum Contract (IPC).

In compliance with the Petroleum Ministry’s policy of prioritizing development of jointly owned fields, Salman is the most important of the five fields for development.

Given the history of oil production in the Salman field, it seems that the main objective of Iran’s petroleum industry in such ageing fields as Salman has been to apply cutting edge technology for maximum efficient recovery and enhancing the rate of recovery from these fields.

Despite the high recovery rate in the Salman field, some layers of this field have yet to be depleted. Therefore, it is possible to increase output from this mature brownfield.

Salman contains light crude oil with API gravity varying between 33 and 37. Renewed development of the Salman field allows for increased output. If enhanced oil recovery (EOR) methods are applied, a much higher output is envisioned.

The Salman field incorporates an asymmetric anticline measuring 14 kilometers long and 11 kilometers wide. Geologically, it is composed of three oil production layers dating from the Jurassic and Cretaceous eras.

The Salman field also incorporates a gas layer.

The field was discovered in the 1960s by Lavan Petroleum Company. The first exploration well in this field was drilled in 1956 to allow for production three years later.

According to the latest data, the field has 44 oil and 10 gas wells. Based on studies currently under way, gas production from Salman could rise after making some arrangements.

The field is owned 67% by Iran and 33% by the UAE. There is not precise figure about gas production from Salman whose rate of recovery stands at 51%.

The oil extracted from Salman field is carried to Lavan Island via a subsea pipeline of 22 inches in diameter for final processing on onshore facilities and then exported or stored to feed the Lavan refining facility.

Despite being ageing, Salman still has an acceptable level of deposits. A timely development of this field would boost its output. Five platforms are currently operating in this field.

Among the three reservoirs in Salman, the one located at a depth of 10,000 meters under seabed accounts for 70% of the Salman output. A layer located at a depth of 8,000 feet accounts for 20% of the Salman output and a third layer at a depth of 5,000 feet for 10%.

Salman is estimated to contain 4.5 billion barrels of oil in place. Since 1999 onwards, when a number of oil and gas fields were developed under buyback deals, studies on the Salman field were carried out under the supervision of Petroiran Development Company (PEDCO) and the Petroleum Engineering and Development Company (PEDEC).

The primary processing of crude oil is done on platform before being carried in a 144-kilometer-long pipe for secondary processing, storage and exports to Lavan.

Gas produced from the nine wells in this field is carried to Siri Island via a 36-inch pipeline.

April 20, Unforgettable Day in Oil History

Black Monday will be remembered in global oil trading. As the previous issue of "Iran Petroleum" went to press, the world experienced an unprecedented development in the oil market. In this issue, we review the events that transpired the oil market and brought about a historic fall in the global prices of the black gold.

Crude Oil in Contango

West Texas Intermediate (WTI) crude oil prices were in contango since February when the Covid-19 virus spread across the globe. On April 20, as it approached the expiration date, there was news of oil storage capacity saturation at Cushing. According to official data, up to 10 April, 72% of Cushing’s storage capacity was full, making any further storage impossible by the end of the month.

A contango market simply means that the futures contracts are trading at a premium to the spot price. For instance, if the price of a crude oil contract today is $100 per barrel, but the price for delivery in six months is $110 per barrel, that market would be in contango.

Saeed Khoshroo, director of international affairs at National Iranian Oil Company (NIOC), had said: “WTI oil has been facing with limited storage capacity in Cushing and land-locked limitations since years ago. That caused a decline in the quality of WTI oil for a certain period of time. This problem became so serious that Saudi Arabia decided to change its benchmark for pricing its oil in the US market to the Argus Sour Crude Index (ASCI).”

 ASC is heavier and has higher sulfur content than WTI.

On April 20, WTI crude price started trading at $17.73 a barrel. It was fluctuating at a slow pace, but during the final four hours of trading, the prices went sharply down to zero and $-40. The trading was closed with $-37.63. The US’s total crude oil production tops 13 mb/d. WTI is the most actively traded oil derivative on the New York Mercantile Exchange (NYMEX): Around 1.2 million WTI contracts exchange hands daily—equivalent to 1.2 billion barrels of oil per day, around 12 times daily global consumption.

ICE Bwave for Iran Crude

Khoshroo said that Iran was trading no variety of crude oil in any market based on the WTI index. What happened on that black Monday was limited to WTI for May’s deliveries. Iran’s benchmark for crude oil pricing is ICE (Intercontinental Exchange) Brent Weighted Average (Bwave). On April 20, Iran’s crude oil was traded at $20 a barrel and one day after at $17.

Iran’s crude oil trading in Europe’s market based on the ICE Bwave benchmark for delivery in June was at $25.

Trump Action

President Donald Trump said the US was "looking to" add as many as 75 million barrels of oil to the Strategic Petroleum Reserves (SPR).

Trump spoke after a historic day in the oil CL.1, +7.01% markets, in which the May WTI crude contract closed at -$37.63 a barrel, a one-day drop of 306%.

Trump said he was considering the move "based on the record low price of oil," and that the action would "top it out." Speaking at a White House press briefing, Trump said, "we'd get it for the right price."

Iran Least Damaged

Iranian President Hassan Rouhani said oil producing nations, including Iran, have suffered losses due to the global slump in oil prices. However, he said that due to its less dependence on oil revenues, Iran had suffered much less than fellow oil producers.

First Vice President Es’haq Jahangiri also said that the US sanctions against Iran had made Iran prepared to face the current circumstances.

He said that Iran had managed to re-adapt its budget to conditions where no oil money would be injected.

Producers Survival

Iran’s Petroleum Minister Bijan Zangeneh said the oil price slump was unprecedented, adding: “Resolving oil market issues required global cooperation.”

He said: “All oil producers have to cooperate, particularly those with high production cost.” Zangeneh said the Organization of the Petroleum Exporting Countries (OPEC) had estimated the supply surplus to reach 3 mb/d during the first quarter of 2020.

He added that this estimate increased 11 mb/d during the recent meeting of OPEC and its partners, known jointly as OPEC+. The oil market is forecast to experience a 14mb/d supply glut during the second quarter of 2020.

The Iranian minister said the oversupplied market was an immediate consequence of the Covid-19 outbreak, adding that some sort of price war had started in March by some nations, which further intensified and deepened the crisis in the oil market.

Zangeneh had said that OPEC+’s decision to cut 10 mb/d of its output as of May 1, would not be sufficient to restore balance in the status of supply and demand.

Economic lockdowns brought on by the coronavirus pandemic  has urged oil companies to cut output level as global energy demand is declining. The volume of output cut by the oil companies might be equal to the volume that OPEC+ countries have pledged to cut. 

“Some countries may delay the lifting of the lockdown, or a second wave of coronavirus could render our current expectations on the optimistic side,” the organization’s executive director Fatih Birol told Reuters.

Following severe decline in WTI price, ORB price declined and on 22 April fell to $12.22; however, on 24 April tripled and reached $15.23.

Prospects Bleak

While the World Bank stated in its April Commodity Markets Outlook that the global economic shock emanated from the COVID-19 pandemic revised down oil prices and the shock significantly affects developing countries economy. In its latest estimate the World Bank estimated the average price of oil in the current year to stand at $35 per barrel, which is 43% lower than the average price in 2019.

Monthly average crude oil prices plunged 50 percent between January and March. Prices reached a historic low in April with some benchmarks i.e. WTI trading at negative levels.

The downward revision reflects a historically large drop in demand.

Energy prices overall (which also include natural gas and coal) are expected to average 40 percent lower in 2020 but see a sizeable rebound in 2021.

Data from energy analysts at Rystad showed global oil supplies may be 6% less than expected by 2030 due to delay in investments by energy companies in response to falling crude prices due to the coronavirus crisis.

On April 26, Goldman Sachs Group Inc. said the global oil market is on track to test storage capacity limits in as little as three weeks, requiring the shut-in of nearly 20% of global production.

The world has reached an inflection phase in the pandemic where rebalancing is starting to occur, but it will likely take 4-8 weeks for commodity markets to carve out a bottom in demand, Goldman analysts including Jeff Currie said in an April 24 report.

Crude oil building up in storage tanks at record levels means global storage capacity will be tested in the next three to four weeks. Once there’s nowhere left to put oil, drillers will have to shut enough supply to match the demand loss, which Goldman estimates to be about 18 million barrels a day in mid-May.

However, Mohamed Arkab, Minister of Energy of Algeria and OPEC’s rotating president, said oil prices were set to recover with the OPEC+ production cuts and gradual lifting of lockdowns around the world in the H2 2020, when oil prices “will be $40 starting from the third quarter”.

The global economy will not stay paralyzed for too long, and together with the 9.7 m b/d cuts that OPEC and its allies pledged for May and June, these factors are set to lift the price of oil in H2 2020, Arkab told Algeria’s national radio.

Oil Prices Rally

Jun WTI crude oil (CLM20) closed up +$0.61 (+3.08%) at $20.39, Jul Brent crude oil (CBN20) closed up +0.76 (+3.20%) at $27.20, and Jun RBOB gasoline (RBM20) closed up +0.0552 (+7.20%).

The energy complex moved higher with WTI crude oil at a 1-1/2 week high and RBOB gasoline at a 1-1/2 month high. Crude prices recovered all of their overnight losses Monday and moved higher on expectations for a smaller-than-expected build in crude oil supplies at the Cushing hub, the delivery point for WTI futures.

Crude prices had moved lower in overnight trading on robust April crude oil production figures after OPEC crude production jumped +1.73 million bpd, the largest monthly increase since Sep 1990.

The discount on crude for June delivery relative to July, a structure known as contango, tightened to its narrowest in about a month, indicating that concerns about oversupply may be easing. Last week, crude rallied 60% in three days on early signs of recovering demand and the start of output curbs from OPEC+ and other producers.

OPEC production surged by the most in almost 30 years in April as members waged a price war, and kept supplies high even after reaching a cease-fire in the middle of the month. It will take time to work through that inventory.

Riyadh-Moscow Oil Conflict and US Role

Nima Hamedani, Energy Expert

OPEC and its Russia-led partners, known as OPEC+, in December 2016 agreed under a Declaration of Cooperation to cut their oil production as of January 2017 in a bid to restore balance to markets.

More than three years has passed since the agreement was struck between the 23 oil producing nations. The agreement has been through ups and downs over these years. What is marked specifically is the significant growth in US oil production on the pretext of output cut by the Organization of the Petroleum Exporting Countries either involuntarily (sanctions on Iran, natural production falloff in Venezuela and unrest in Libya) or voluntarily (Saudi Arabia).

Keeping oil prices well beyond shale oil production in the United States led to a more than 4 mb/d oil output hike in this country in three years. Therefore, the US has become a leading producer and exporter of oil in the world.

Big profits made by oil company owners have created a powerful lobby in the US, which has been instrumental in US sanctions on Iran and often pressures Saudi Arabia and OPEC to cut output. This influential lobby resorts to political tools and security threats in a bid to become an energy superpower in the world.

US hegemonic policies in the oil market have seriously worried top producers, i.e. Russia and Saudi Arabia. However, the strategy adopted by these two top oil producers seem to be following a divergent path.

Economically speaking, the US is the natural rival of low-cost producers like Russia and Saudi Arabia in the market. Therefore, the pair is naturally expected to cooperate in keeping oil prices low in a bid to drive the US out and guarantee their long-term demand security. However, the events leading to the 8th ministerial meeting of OPEC+ on March 6 showed that OPEC member Saudi Arabia and non-OPEC Russia – both top producers – were seriously divided on how to manage the oil market and how to deal with the necessity of cutting output.

In the March 6 meeting, Saudi Arabia offered further production cut in reaction to the negative consequences of the Covid-19 outbreak for the oil supply and demand, Russia opposed. That was the beginning of a price war between the two oil producers, which slashed oil prices to below $20 in less than a month. It was only after the intensification of the crisis in the oil market following the Covid-19 pandemic that Russia and Saudi

Arabia had to return to the negotiating table. Finally on April 10, OPEC+ agreed on a new cut in oil output.

Some of the events that led to this production cut were of high significance, showing that a new market is being born out of major oil powers, i.e. the US, Saudi Arabia and Russia. There is evidence that Russia has been boosting its economic resilience to low oil prices in recent years and it is reluctant to go ahead with the strategy of output cut within the framework of OPEC+.

That is while Saudi Arabia, despite widespread planning for economic reforms and diversification and arrangements to guarantee oil demand security, does not favor prices below the shale oil production costs due to the costs of security dependence on the US.

Supply Glut and Price-Market Share Equation

Expectations for lower international demand for oil in the future due to the development of such technologies as electric cars and increased investment in renewables along with the international bodies’ repeated call for the application of environmental standards have made oil companies worry about any growth in oil demand even culmination of oil consumption in coming decades. That comes against the backdrop of conditions where shale oil extraction is increasing in parallel with conventional oil production. In fact, it seems that the main issue for oil companies under the present circumstances would be to change the paradigm created in the oil market and the formation of a new order.

Until recently, it was imagined that world oil reserves could not meet growing demand and that oil prices would in the long term take an upward trend. Therefore, oil producers were not generously playing their role. In their view, the costs of finding alternative to crude oil would increase in the long-term.

Under such circumstances, investment in the petroleum industry, particularly in the upstream sector, was on the rise. However, with the emergence of new parameters in the market – shale oil production, reduced costs of renewable energies like solar and wind energy as well as environmentalists’ pressure on companies to reduce fossil fuel production, we have to acknowledge that the old paradigm of oil market shortage has given way to supply glut.

The new arrangements dominating the oil market have had their own repercussions, the most significant of which are expectations of oil price reduction in the long-term and higher market competitiveness and restricted oil revenue for oil exporters. However, reduced oil prices in the long term could prove challenging for the nations heavily dependent upon oil revenues in their state budget and foreign trade balance, not to mention long-term threats to their economic stability.

In the meantime, many crude oil exporters have still significant volume of crude oil reserves that may be used for years. Selling all this oil would require options for guaranteeing the security of crude oil demand in the future and enjoying a good market share. Therefore, oil exporting nations will be torn between the short-term objectives of maximizing oil revenues through supporting higher oil prices and the long-term objectives of oil demand security through preserving their market share.

Oil-dependent Saudi Arabia and Russia are faced with such dilemma. On one hand, guaranteeing long-term oil demand security would require keeping oil prices low and pushing out some disturbing elements like US shale oil, while on the other, due to the significant dependence of these nations on oil revenue, pursuing the strategy of low prices in the short term would be precarious and may bring about political and economic instability in these countries.

In the first look, one may prescribe reducing dependence on oil revenue through fundamental economic reforms and diversification in parallel with making efforts to upgrade oil demand security with a view to maintaining the market share in the long term; however, it is noteworthy that pushing out shale producers from the oil market through keeping prices low for a country like Saudi Arabia would be costly.

In order to maximize its oil revenues in the long-term, Saudi Arabia has taken seriously the possibility of economic and political vulnerability to the US. For this reason, Riyadh changed its oil market management strategy in 2016.

Saudi Arabia; US Ties & Price-Market Share

It would be important to study the relationship between Saudi Arabia and the US in order to shed more light on the link between oil prices and market share for the Saudi.

At present, the petroleum industry accounts for 10% of the US economic growth. It has created about 600,000 direct jobs for Americans, thereby becoming a key sector.

Furthermore, owing to significant oil exports hike in recent years and becoming the largest producer of oil in the world, the US is definitely dreaming of dominating world energy markets.

Given the current slump in global demand for oil, realization of that dream would require higher oil prices and winning a bigger share in the oil market. Under such circumstances, adoption of market share policies and reduction of oil prices by a country like Saudi Arabia would seriously challenge the US petroleum industry. That comes at a time when the US has in recent years minimized its oil dependence on Saudi Arabia or other Persian Gulf oil producers. However, Saudi Arabia has become more dependent on the US for guaranteeing its national security, specially at a time Saudi foreign policy vis-à-vis some

Saudi Strategy for Price-Market Share Management

 

Due to such security concerns, Saudi Arabia seems to have arrived at the conclusion that it would not be able to confront the empowered shale lobby in the US. Saudi has to take this restriction seriously and sacrifice part of its economic interests for preserving this security relationship with the US.

Goldman Sachs, in one of its latest reports, has compared the impact of OPEC+ planned production cut with the impact of price war scenario on Saudi oil revenues in the mid-term.

Based on this report, any continuation of Saudi-Russian price war would have forced high-cost producers like shale oil producers to stop production, in which case Saudi Arabia would win  bigger market share by the end of 2020 in case the oil demand was set to recover. That would serve as a golden opportunity for Saudi Arabia to drive out marginal producers like US shale oil and Canada’s tar sands.

But under the existing agreements, Saudi Arabia is required to bring down its oil production to 8.5 mb/d in May and June and then keep supplying 9 mb/d for the rest of 2020. When compared with 2019, Saudi market share would be down 10%.

It seems that due to the absence of any significant impact by OPEC+ producers on the oil price over the coming two years, restricting Saudi oil production to this agreement would reduce the Saudi’s oil revenues.

Goldman Sachs has forecast Saudi state debts to grow $75 billion over three years due to a decline in oil revenues coupled with a growth in government costs.

Furthermore, Saudi Arabia is forecast to see its hard currency reserves shrink by $330 billion in the first half of 2021 before starting to grow again.

It seems that US pressure has caused Saudi Arabia to lose this opportunity for increasing its oil market share due to security concerns.

Saudi Arabia has pursued at least three main strategies in order to curb the consequences of pursuing the policy of maintaining oil prices at higher levels.

 

Saudi Arabia seems to have planned new policies since early 2015 to finance state costs and change the domestic economic structure. Senior Saudi decision-makers, having understood that oil prices will remain low in the future and state revenues will decline, see any continuation of the government’s expenditure model as a factor of deepening budget deficit; further reducing hard currency income and finally economic recession. Based on such interpretation, Saudi Arabia has initially planned a comprehensive economic reform program, one of whose objectives having been to reduce dependence on oil exports revenues and striking balance into state budget in the 2020 horizon. Rendering government expenses reasonable through upgrading the efficiency of running and development costs, boosting non-oil production capacity and reducing dependence on oil revenue, as well as reconsidering energy commodities’ prices have been among Saudi Arabia’s major plans since 2017. Furthermore, Saudi Arabia, seeking to plug its budget deficit, hopes to attract foreign investment and transfer some assets of big state-owned companies like Aramco to domestic and foreign private sector in a bid to secure its own expenditures and make its own private sector more dynamic and more active. Aramco’s initial public offering (IPO) was a step in that direction.
Having been well informed of the future trend of the oil market and the emergence of a new order under US oil dominance, Saudi Arabia is shifting its focus of investment towards developing the downstream sector of oil and natural gas industries in a bid to save its own market share. Aramco’s Board of Directors must have concluded that the profits of vertical diversification and integration in the refining and petrochemical sector along with boosting natural gas production and its supply on domestic and international markets would be much more than other options like investment for increased oil production capacity. Aramco has invested largely in the downstream (refining and petrochemical) sector both inside and outside Saudi Arabia. Seeking to become a large producer of petroleum products and petrochemicals, Aramco is trying to raise its refining and petrochemical capacity inside and outside the country from the current 5.4 mb/d to 10 mb/d in the mid-term. That, along with integrating activities in the value chain, will result in the diversification of products in the market. Furthermore, since Saudi Arabia’s crude oil production capacity of about 12.5 mb/d has caused the country to have a guaranteed market for a significant portion of its crude oil and stabilize its market share to a large extent in the world oil market. Relying on the estimate that in the long-term, demand for crude oil in the transportation sector will gradually decline and the petrochemical sector will be the key driver of oil consumption growth, Aramco is now targeting the petrochemical market in the world and is determined to become the largest producer of petrochemicals in the world over two decades. Furthermore, Saudi Arabia has ambitious plans for increasing its natural gas production to 230 bcm and become an exporter of natural gas. To that effect, it is seeking investment opportunities in Russia and the US Aramco recently signed a memorandum of understanding with the government of Bangladesh to develop an LNG terminal and plan for $3 billion.
Saudi Arabia’s move to weaken OPEC’s main pillars like the Economic Commission Board and the OPEC Conference and their replacement with new structures belonging to OPEC+ countries, as well as making efforts to upgrade Russia’s role in OPEC’s decision-making procedures show that Saudi Arabia is planning to change the decision-making regime of OPEC, while preserving its international structure. That would weaken the weight of Iran and Venezuela within OPEC, while sharing reduction in the oil production costs and guaranteeing higher oil prices with other oil producing nations, particularly Russia.

 

Saudi Arabia is fully aware that the policy of collective output cut within the framework of OPEC for guaranteeing oil prices that would overtake shale oil production costs would seriously threaten the Organization’s life in the mid-term. From January 2017 to December 2019, call on OPEC declined by about 3.41 mb/d, while US oil production has grown about 5.7 mb/d over the same period. Furthermore, a review of the mid-term perspective of the oil market from 2019 to 2024 shows that due to the higher growth of oil production in non-OPEC nations, specifically the US, when compared with the global demand for oil, the demand for OPEC’s crude oil will keep declining up to 2024 and the Organization’s share of the oil market will fall from 30.6 mb/d in 2019 to 27.7 mb/d in 2024. This estimate is for the period preceding the Covid-19 outbreak and OPEC+’s latest decision to cut output. The implementation of a three-step production cut up to April 2022 is expected to intensify the trend of decline in the OPEC market share. OPEC+ agreed in its 10th ministerial meeting on April 10, 2020 that its member states – except Iran, Venezuela and Libya – would cut their output in three phases. OPEC+ will adjust crude oil production by 10 mb/d effective from May 1, 2020 till 30 June 2020 and thereafter 8 mb/d to the end of the year 2020 and 6 mb/d till end of April 2022.

In this mid-term perspective, Saudi Arabia, in a bid to keep oil prices at higher levels than US shale oil production while maintaining its market share, may have to weaken other members than Iran and Venezuela.

 

Russia Strategy for Price-Market Share

 

Unlike Saudi Arabia, Russia saw its ties with the US turn sour following Russia’s annexation of Crimea in 2014. The US has since imposed sanctions on Russian oil companies, depriving them of international finance, technology as well as oil exploration and production services. In reaction, Russia has tried its best to arrange its macro-economic policymaking structure so that economic pressures like oil price decline would not force it to forego its geopolitical priorities particularly in the global energy market. Reforming monetary and financial policies and upgrading the national deposit rate have been Russia’s two major economic policies for making its economy resilient to shocks. In 2014, Russia floated its foreign exchange system while targeting a 4% inflation rate in its economy. Russia shut down many non-profitable state-owned banks and cleaned up its banking system. Furthermore, Russia has had a successful financial system performance and managed to bring crude oil prices to below $50 a barrel in its 2019 budget by significantly reducing its non-oil budget deficit. That helped Russia set a financial rule for its annual budget based on the $40 per barrel oil. Based on this rule, any revenue from selling oil above $40 a barrel would be saved in an oil stabilization fund (OSF). This fund will let Russia hedge its domestic economy against low oil prices.

According to Goldman Sachs’ estimates, if oil prices fall below $15 a barrel, Russia would be able to offset its budget deficit for two years by dipping to its OSF. Russian economic officials have also sought to implement the forex rate in a bid to manage any flight of capital following oil price shocks and depreciation of the ruble.

Worries about a production decline in Russian oil reservoirs and lack of sufficient motivation for investment by state-owned and private companies in these fields, as well as restricted access to foreign financial resources due to US sanctions constitute another cause of concern for Russia in preserving its oil output levels. One reason for such investments to be uneconomical stems from the income-based taxation regime governing production from oil fields in Russia. In the production-based taxation system, the basis for levying tax on oil companies has been only their sales revenues. Therefore, the expenditure structure of these companies was not taken into consideration in the taxation regime, which discouraged investment in the petroleum industry particularly new fields and enhanced oil recovery. But since 2019, oil and gas companies carrying out exploration and development activities in Russia on qualifying hydrocarbon deposits have been subject to a new Income-Based Tax (IBT). The IBT is designed to encourage development of low-margin hydrocarbon deposits, including hard-to-recover reserves.

Also, Russian oil and gas companies are permitted to apply beneficial tax rules for non-recourse loans to their affiliates to finance foreign oil exploration projects.

Thanks to these economic reforms and reduced dependence on oil revenue and economic diversification, Russia’s oil production has not been much affected by US sanctions.

Although in 2016, due to the strain caused by oil price declines for a long period of time, Russia agreed to cooperate with OPEC in production cut, this country has in recent years significantly boosted its economic potential and enhanced its economic resilience so as to defeat any decline in oil prices. Russia is fully aware that the continued trend of oil production decline within the framework of OPEC+ would benefit shale oil producers in the US as well as other costly producers like Canada and Venezuela.

A review of comments and analyses by Russian officials and analysts show that in the long term, Russia would be seeking, in partnership with Saudi Arabia, to preserve its market share and prevent the US dominance on the oil market. Russia has realized that this important objective would be realized if it manages to boost its economic resilience to oil price slump and push shale oil producers out of the market partly. Upgrading oil extraction technology in the upstream sector, reforming the tax code from income-based to profit-based, floating the forex rate and boosting national deposit levels have all empowered Russia to impose very low oil prices of about $15 a barrel for two years. Given Russia’s long-term strategy of preventing the US domination on the oil market through keeping oil prices at lower levels and making necessary arrangements for the resilience of its economy to oil prices lower than shale oil production costs, it seems that the tension created between Russia and Saudi Arabia during the March 6 ministerial meeting of OPEC+ would be a beginning for further tensions in the future. Russia will agree to cooperate in cutting oil production only if oil prices would experience a significant decline similar to the March and April ones that brought the prices below $20.

If oil prices recover by the end of 2020 and return to above $40, Russia is unlikely to agree to keep reducing its oil production for 16 months starting in January 2021. Although since the implementation of the Declaration of Cooperation in 2017, Russia has practically shown no significant compliance with output cut and has produced at its maximum levels, it knows quite well that this strategy, along with the elimination of such producers as Iran, Venezuela and Libya, would cause US oil production costs to grow on a daily basis and the US, in partnership with Saudi Arabia, would conquer the oil market. Russia is well aware that its international strength is directly linked with energy trade, particularly oil and gas, in the world. Therefore, the US dominance of oil and gas market poses a vital threat to Russia.

 

Conclusion

 

The trend of falling demand for oil and increased supply of oil in coming decades has imposed the paradigm of oil supply glut on the market. One outstanding feature of this change in paradigm lies in expectations for a decline in oil prices, which would in the short term leave negative impacts on the economic and political stability of oil exporting nations heavily dependent on oil revenue. As a result of this new order dominating the oil market, oil exporting nations have sought to preserve their short-term economic stability through supporting high oil prices and long-term guarantee of oil demand security. To that end, they have had to deal with the policy of market share and lower prices. First, it seems that economic reforms and diversification with a view to reducing dependence on oil revenue and increasing the resilience of low oil prices would empower oil exporters like Saudi Arabia and Russia to pursue their long-term objective of guaranteeing crude oil sales and driving out costly producers in order to maximize oil revenues. However, the increased political power of US shale oil producers and the security nature of ties between Saudi Arabia and Arab nations and the US have caused these countries to not assess as appropriate the adoption of market share policies which would result in weakening the US oil production status in the world although necessary economic reforms have been carried out to reduce dependence on oil revenues.

However, countries like Russia, who have been pursuing a different kind of ties with the US and are opposed to US dominance on energy markets, see the strategy adopted by Saudi Arabia and Arab nations in support of shale oil production growth as threatening.

It seems that Russia’s increased economic power and resilience to lower oil prices in recent years has pushed this country to embrace policies which would help guarantee supply security and its own status in the oil market in the long term, while remaining opposed to any further production cut within the framework of OPEC+. The emerging conformation explained in this article as emerging between Saudi Arabia and Russia would also apply to other oil exporting nations when it comes to their orientation. Many top oil exporting nations have to choose between economic stability and oil demand security at different levels. Cooperation with the US and making efforts to support shale oil production through artificial maintenance of oil prices at levels higher than shale oil production costs, would finally harm all major oil exporters which hold huge reserves. The best strategy under the present circumstances would be further cooperation between oil exporting nations with a view to increasing the resilience of low prices and following up on market share policies in order to drive out marginal producers like US shale oil.

Saudi Arabia’s influential former oil minister Ahmed Zaki Yamani once said: “The stone age did not end because the world ran out of stones, and the oil age will not end because we run out of oil.”

The history of the International Nickel Company (INCO) should serve as a lesson to many oil producing nations in the world now. In the 1950s and 1960s, INCO faced increased demand from Japan and West Europe. It failed to curb prices and artificial nickel dominated the market.

neighbors and the Saudi government’s involvement in political and security instability in the entire Middle East region has made this country more vulnerable than before to security threats.

In the face of choosing between price and market share, Saudi Arabia has been forced to take into account security considerations caused by pressuring US oil industry, not to mention long-term oil demand security and short-term state revenue security.

A recent proof to this fact is emanated from the recent announcement by OPEC+ countries in reducing production. US officials were worried about stagnation in their petroleum industry and they turned to ratcheting up pressure on Saudi Arabia to reduce its oil production. Some correspondence and reports of phone conversations show that US officials had even resorted to the langue of threat. US senators from oil-rich states like Texas, North Dakota, Oklahoma and Alaska wrote letters to senior Saudi officials or held phone conversations with the Saudi ambassador to Washington as part of their efforts to pile up pressure on Saudi Arabia to quit its price war with Russia and restore balance to the oil market with a view to saving the US oil industry. In a bid to prevent recession in the US petroleum industry, US officials pressured Saudi Arabia by resorting to security and economic threats. In the first phase, the proposal of suspending oil imports from Saudi Arabia for a period of one or two months was raised by former US energy secretary Rick Perry.

The shale push comes despite resistance from the oil industry’s most powerful lobbying organization, the American Petroleum Institute, which represents the largest energy groups and opposes any controls on supply.

Among the shale industry proposals are preventing Saudi crude from reaching the kingdom’s large Motiva refinery in Port Arthur, Texas; tariffs on foreign oil; or suspending the Jones Act, which helps make crude shipped by domestic suppliers more expensive than oil delivered on foreign tankers. 

The Motiva refinery with a capacity of 650,000 b/d is the largest refinery in North America. It earns Aramco about $24 billion in annual revenue.

The heads of the American Petroleum Institute (API) and the American Fuel & Petrochemical Manufacturers, another lobby group, wrote to President Donald Trump to oppose restrictions on foreign oil, saying that the ability to buy from around the world, “including those from the Middle East” was a “key advantage for US refineries”.

Some senior Senators in oil-rich states directly or indirectly threatened to annul arms deals with Saudi Arabia. They had earlier demanded that Saudi Arabia exit OPEC and instead cooperate with the US in the oil market management in a bid to avoid such problems for the shale oil industry.

Another US potential tool against Saudi Arabia is the No Oil Producing and Exporting Cartels Act (NOPEC) bill which has not been talked about throughout political pressure on Saudi Arabia.

NOPEC was designed to remove the state immunity shield and to allow OPEC, and its national oil companies to be sued under US antitrust law for anti-competitive attempts to limit the world's supply of petroleum and the consequent impact on oil prices.

NOPEC “amends the Sherman Act to declare it to be illegal and a violation of the Act for any foreign state or instrumentality thereof to act collectively or in combination with any other foreign state or any other person, whether by [cartel] or any other association or form of cooperation or joint action, to limit the production or distribution of oil, natural gas, or any other petroleum product (petroleum), to set or maintain the price of petroleum, or to otherwise take any action in restraint of trade for petroleum, when such action has a direct, substantial, and reasonably foreseeable impact on the market, supply, price, or distribution of petroleum in the United States.”

It also summarizes enforcement parameters as follows: “Denies a foreign state engaged in such conduct sovereign immunity from the jurisdiction or judgments of US courts in any action brought to enforce this Act. States that no US court shall decline, based on the act of state doctrine, to make a determination on the merits in an action brought under this Act. Authorizes the Attorney General to bring an action in US district court to enforce this Act. Makes an exception to the jurisdictional immunity of a foreign state in an action brought under this Act.”

Given Saudi Arabia’s big chunk of money in US banks, estimated at $1 trillion, any enactment of the NOPEC bill would largely harm US-Saudi ties and may even encourage Saudi Arabia to pull out of OPEC.

Such unprecedented events in US-Saudi ties in the oil market show that increased oil production and exports by the US in recent years have not only earned some Americans a big wealth, but also it has strengthened the petroleum industry’s ties with the power system in the US. The owners of major oil companies in the US have over recent years invested heavily in supporting US senior administration officials and Senators in a bid to have sufficient power for swaying oil decisions in the US.

It seems that oil investors’ clout with the US power structure, i.e. shale lobbies, has empowered them under the Trump administration to use political channels for pressuring Saudi Arabia, as well as the United Arab Emirates (UAE) and Kuwait and by resorting to mainly security threats force them to take action in the interests of shale oil producers under the present circumstances. The emergence of this new factor in US-Saudi ties will further complicate the short-term and long-term objectives of Saudi Arabia for maintaining the current levels of oil prices or preserving its market share. In choosing the strategy of low prices, Saudi Arabia has to take into account the fact that it would threaten shale oil production in the US and that the US is the guarantor of its security in the region.

Saudi Strategy for Price-Market Share Management

Due to such security concerns, Saudi Arabia seems to have arrived at the conclusion that it would not be able to confront the empowered shale lobby in the US. Saudi has to take this restriction seriously and sacrifice part of its economic interests for preserving this security relationship with the US.

Goldman Sachs, in one of its latest reports, has compared the impact of OPEC+ planned production cut with the impact of price war scenario on Saudi oil revenues in the mid-term.

Based on this report, any continuation of Saudi-Russian price war would have forced high-cost producers like shale oil producers to stop production, in which case Saudi Arabia would win  bigger market share by the end of 2020 in case the oil demand was set to recover. That would serve as a golden opportunity for Saudi Arabia to drive out marginal producers like US shale oil and Canada’s tar sands.

But under the existing agreements, Saudi Arabia is required to bring down its oil production to 8.5 mb/d in May and June and then keep supplying 9 mb/d for the rest of 2020. When compared with 2019, Saudi market share would be down 10%.

It seems that due to the absence of any significant impact by OPEC+ producers on the oil price over the coming two years, restricting Saudi oil production to this agreement would reduce the Saudi’s oil revenues.

Goldman Sachs has forecast Saudi state debts to grow $75 billion over three years due to a decline in oil revenues coupled with a growth in government costs.

Furthermore, Saudi Arabia is forecast to see its hard currency reserves shrink by $330 billion in the first half of 2021 before starting to grow again.

It seems that US pressure has caused Saudi Arabia to lose this opportunity for increasing its oil market share due to security concerns.

Saudi Arabia has pursued at least three main strategies in order to curb the consequences of pursuing the policy of maintaining oil prices at higher levels.

Saudi Arabia seems to have planned new policies since early 2015 to finance state costs and change the domestic economic structure. Senior Saudi decision-makers, having understood that oil prices will remain low in the future and state revenues will decline, see any continuation of the government’s expenditure model as a factor of deepening budget deficit; further reducing hard currency income and finally economic recession. Based on such interpretation, Saudi Arabia has initially planned a comprehensive economic reform program, one of whose objectives having been to reduce dependence on oil exports revenues and striking balance into state budget in the 2020 horizon. Rendering government expenses reasonable through upgrading the efficiency of running and development costs, boosting non-oil production capacity and reducing dependence on oil revenue, as well as reconsidering energy commodities’ prices have been among Saudi Arabia’s major plans since 2017. Furthermore, Saudi Arabia, seeking to plug its budget deficit, hopes to attract foreign investment and transfer some assets of big state-owned companies like Aramco to domestic and foreign private sector in a bid to secure its own expenditures and make its own private sector more dynamic and more active. Aramco’s initial public offering (IPO) was a step in that direction.
Having been well informed of the future trend of the oil market and the emergence of a new order under US oil dominance, Saudi Arabia is shifting its focus of investment towards developing the downstream sector of oil and natural gas industries in a bid to save its own market share. Aramco’s Board of Directors must have concluded that the profits of vertical diversification and integration in the refining and petrochemical sector along with boosting natural gas production and its supply on domestic and international markets would be much more than other options like investment for increased oil production capacity. Aramco has invested largely in the downstream (refining and petrochemical) sector both inside and outside Saudi Arabia. Seeking to become a large producer of petroleum products and petrochemicals, Aramco is trying to raise its refining and petrochemical capacity inside and outside the country from the current 5.4 mb/d to 10 mb/d in the mid-term. That, along with integrating activities in the value chain, will result in the diversification of products in the market. Furthermore, since Saudi Arabia’s crude oil production capacity of about 12.5 mb/d has caused the country to have a guaranteed market for a significant portion of its crude oil and stabilize its market share to a large extent in the world oil market. Relying on the estimate that in the long-term, demand for crude oil in the transportation sector will gradually decline and the petrochemical sector will be the key driver of oil consumption growth, Aramco is now targeting the petrochemical market in the world and is determined to become the largest producer of petrochemicals in the world over two decades. Furthermore, Saudi Arabia has ambitious plans for increasing its natural gas production to 230 bcm and become an exporter of natural gas. To that effect, it is seeking investment opportunities in Russia and the US Aramco recently signed a memorandum of understanding with the government of Bangladesh to develop an LNG terminal and plan for $3 billion.
Saudi Arabia’s move to weaken OPEC’s main pillars like the Economic Commission Board and the OPEC Conference and their replacement with new structures belonging to OPEC+ countries, as well as making efforts to upgrade Russia’s role in OPEC’s decision-making procedures show that Saudi Arabia is planning to change the decision-making regime of OPEC, while preserving its international structure. That would weaken the weight of Iran and Venezuela within OPEC, while sharing reduction in the oil production costs and guaranteeing higher oil prices with other oil producing nations, particularly Russia.

 

Saudi Arabia is fully aware that the policy of collective output cut within the framework of OPEC for guaranteeing oil prices that would overtake shale oil production costs would seriously threaten the Organization’s life in the mid-term. From January 2017 to December 2019, call on OPEC declined by about 3.41 mb/d, while US oil production has grown about 5.7 mb/d over the same period. Furthermore, a review of the mid-term perspective of the oil market from 2019 to 2024 shows that due to the higher growth of oil production in non-OPEC nations, specifically the US, when compared with the global demand for oil, the demand for OPEC’s crude oil will keep declining up to 2024 and the Organization’s share of the oil market will fall from 30.6 mb/d in 2019 to 27.7 mb/d in 2024. This estimate is for the period preceding the Covid-19 outbreak and OPEC+’s latest decision to cut output. The implementation of a three-step production cut up to April 2022 is expected to intensify the trend of decline in the OPEC market share. OPEC+ agreed in its 10th ministerial meeting on April 10, 2020 that its member states – except Iran, Venezuela and Libya – would cut their output in three phases. OPEC+ will adjust crude oil production by 10 mb/d effective from May 1, 2020 till 30 June 2020 and thereafter 8 mb/d to the end of the year 2020 and 6 mb/d till end of April 2022.

In this mid-term perspective, Saudi Arabia, in a bid to keep oil prices at higher levels than US shale oil production while maintaining its market share, may have to weaken other members than Iran and Venezuela.

Russia Strategy for Price-Market Share

Unlike Saudi Arabia, Russia saw its ties with the US turn sour following Russia’s annexation of Crimea in 2014. The US has since imposed sanctions on Russian oil companies, depriving them of international finance, technology as well as oil exploration and production services. In reaction, Russia has tried its best to arrange its macro-economic policymaking structure so that economic pressures like oil price decline would not force it to forego its geopolitical priorities particularly in the global energy market. Reforming monetary and financial policies and upgrading the national deposit rate have been Russia’s two major economic policies for making its economy resilient to shocks. In 2014, Russia floated its foreign exchange system while targeting a 4% inflation rate in its economy. Russia shut down many non-profitable state-owned banks and cleaned up its banking system. Furthermore, Russia has had a successful financial system performance and managed to bring crude oil prices to below $50 a barrel in its 2019 budget by significantly reducing its non-oil budget deficit. That helped Russia set a financial rule for its annual budget based on the $40 per barrel oil. Based on this rule, any revenue from selling oil above $40 a barrel would be saved in an oil stabilization fund (OSF). This fund will let Russia hedge its domestic economy against low oil prices.

According to Goldman Sachs’ estimates, if oil prices fall below $15 a barrel, Russia would be able to offset its budget deficit for two years by dipping to its OSF. Russian economic officials have also sought to implement the forex rate in a bid to manage any flight of capital following oil price shocks and depreciation of the ruble.

Worries about a production decline in Russian oil reservoirs and lack of sufficient motivation for investment by state-owned and private companies in these fields, as well as restricted access to foreign financial resources due to US sanctions constitute another cause of concern for Russia in preserving its oil output levels. One reason for such investments to be uneconomical stems from the income-based taxation regime governing production from oil fields in Russia. In the production-based taxation system, the basis for levying tax on oil companies has been only their sales revenues. Therefore, the expenditure structure of these companies was not taken into consideration in the taxation regime, which discouraged investment in the petroleum industry particularly new fields and enhanced oil recovery. But since 2019, oil and gas companies carrying out exploration and development activities in Russia on qualifying hydrocarbon deposits have been subject to a new Income-Based Tax (IBT). The IBT is designed to encourage development of low-margin hydrocarbon deposits, including hard-to-recover reserves.

Also, Russian oil and gas companies are permitted to apply beneficial tax rules for non-recourse loans to their affiliates to finance foreign oil exploration projects.

Thanks to these economic reforms and reduced dependence on oil revenue and economic diversification, Russia’s oil production has not been much affected by US sanctions.

Although in 2016, due to the strain caused by oil price declines for a long period of time, Russia agreed to cooperate with OPEC in production cut, this country has in recent years significantly boosted its economic potential and enhanced its economic resilience so as to defeat any decline in oil prices. Russia is fully aware that the continued trend of oil production decline within the framework of OPEC+ would benefit shale oil producers in the US as well as other costly producers like Canada and Venezuela.

A review of comments and analyses by Russian officials and analysts show that in the long term, Russia would be seeking, in partnership with Saudi Arabia, to preserve its market share and prevent the US dominance on the oil market. Russia has realized that this important objective would be realized if it manages to boost its economic resilience to oil price slump and push shale oil producers out of the market partly. Upgrading oil extraction technology in the upstream sector, reforming the tax code from income-based to profit-based, floating the forex rate and boosting national deposit levels have all empowered Russia to impose very low oil prices of about $15 a barrel for two years. Given Russia’s long-term strategy of preventing the US domination on the oil market through keeping oil prices at lower levels and making necessary arrangements for the resilience of its economy to oil prices lower than shale oil production costs, it seems that the tension created between Russia and Saudi Arabia during the March 6 ministerial meeting of OPEC+ would be a beginning for further tensions in the future. Russia will agree to cooperate in cutting oil production only if oil prices would experience a significant decline similar to the March and April ones that brought the prices below $20.

If oil prices recover by the end of 2020 and return to above $40, Russia is unlikely to agree to keep reducing its oil production for 16 months starting in January 2021. Although since the implementation of the Declaration of Cooperation in 2017, Russia has practically shown no significant compliance with output cut and has produced at its maximum levels, it knows quite well that this strategy, along with the elimination of such producers as Iran, Venezuela and Libya, would cause US oil production costs to grow on a daily basis and the US, in partnership with Saudi Arabia, would conquer the oil market. Russia is well aware that its international strength is directly linked with energy trade, particularly oil and gas, in the world. Therefore, the US dominance of oil and gas market poses a vital threat to Russia.

Conclusion

The trend of falling demand for oil and increased supply of oil in coming decades has imposed the paradigm of oil supply glut on the market. One outstanding feature of this change in paradigm lies in expectations for a decline in oil prices, which would in the short term leave negative impacts on the economic and political stability of oil exporting nations heavily dependent on oil revenue. As a result of this new order dominating the oil market, oil exporting nations have sought to preserve their short-term economic stability through supporting high oil prices and long-term guarantee of oil demand security. To that end, they have had to deal with the policy of market share and lower prices. First, it seems that economic reforms and diversification with a view to reducing dependence on oil revenue and increasing the resilience of low oil prices would empower oil exporters like Saudi Arabia and Russia to pursue their long-term objective of guaranteeing crude oil sales and driving out costly producers in order to maximize oil revenues. However, the increased political power of US shale oil producers and the security nature of ties between Saudi Arabia and Arab nations and the US have caused these countries to not assess as appropriate the adoption of market share policies which would result in weakening the US oil production status in the world although necessary economic reforms have been carried out to reduce dependence on oil revenues.

However, countries like Russia, who have been pursuing a different kind of ties with the US and are opposed to US dominance on energy markets, see the strategy adopted by Saudi Arabia and Arab nations in support of shale oil production growth as threatening.

It seems that Russia’s increased economic power and resilience to lower oil prices in recent years has pushed this country to embrace policies which would help guarantee supply security and its own status in the oil market in the long term, while remaining opposed to any further production cut within the framework of OPEC+. The emerging conformation explained in this article as emerging between Saudi Arabia and Russia would also apply to other oil exporting nations when it comes to their orientation. Many top oil exporting nations have to choose between economic stability and oil demand security at different levels. Cooperation with the US and making efforts to support shale oil production through artificial maintenance of oil prices at levels higher than shale oil production costs, would finally harm all major oil exporters which hold huge reserves. The best strategy under the present circumstances would be further cooperation between oil exporting nations with a view to increasing the resilience of low prices and following up on market share policies in order to drive out marginal producers like US shale oil.

Saudi Arabia’s influential former oil minister Ahmed Zaki Yamani once said: “The stone age did not end because the world ran out of stones, and the oil age will not end because we run out of oil.”

The history of the International Nickel Company (INCO) should serve as a lesson to many oil producing nations in the world now. In the 1950s and 1960s, INCO faced increased demand from Japan and West Europe. It failed to curb prices and artificial nickel dominated the market.

Saudi Strategy for Price-Market Share Management

 

Due to such security concerns, Saudi Arabia seems to have arrived at the conclusion that it would not be able to confront the empowered shale lobby in the US. Saudi has to take this restriction seriously and sacrifice part of its economic interests for preserving this security relationship with the US.

Goldman Sachs, in one of its latest reports, has compared the impact of OPEC+ planned production cut with the impact of price war scenario on Saudi oil revenues in the mid-term.

Based on this report, any continuation of Saudi-Russian price war would have forced high-cost producers like shale oil producers to stop production, in which case Saudi Arabia would win  bigger market share by the end of 2020 in case the oil demand was set to recover. That would serve as a golden opportunity for Saudi Arabia to drive out marginal producers like US shale oil and Canada’s tar sands.

But under the existing agreements, Saudi Arabia is required to bring down its oil production to 8.5 mb/d in May and June and then keep supplying 9 mb/d for the rest of 2020. When compared with 2019, Saudi market share would be down 10%.

It seems that due to the absence of any significant impact by OPEC+ producers on the oil price over the coming two years, restricting Saudi oil production to this agreement would reduce the Saudi’s oil revenues.

Goldman Sachs has forecast Saudi state debts to grow $75 billion over three years due to a decline in oil revenues coupled with a growth in government costs.

Furthermore, Saudi Arabia is forecast to see its hard currency reserves shrink by $330 billion in the first half of 2021 before starting to grow again.

It seems that US pressure has caused Saudi Arabia to lose this opportunity for increasing its oil market share due to security concerns.

Saudi Arabia has pursued at least three main strategies in order to curb the consequences of pursuing the policy of maintaining oil prices at higher levels.

 

Saudi Arabia seems to have planned new policies since early 2015 to finance state costs and change the domestic economic structure. Senior Saudi decision-makers, having understood that oil prices will remain low in the future and state revenues will decline, see any continuation of the government’s expenditure model as a factor of deepening budget deficit; further reducing hard currency income and finally economic recession. Based on such interpretation, Saudi Arabia has initially planned a comprehensive economic reform program, one of whose objectives having been to reduce dependence on oil exports revenues and striking balance into state budget in the 2020 horizon. Rendering government expenses reasonable through upgrading the efficiency of running and development costs, boosting non-oil production capacity and reducing dependence on oil revenue, as well as reconsidering energy commodities’ prices have been among Saudi Arabia’s major plans since 2017. Furthermore, Saudi Arabia, seeking to plug its budget deficit, hopes to attract foreign investment and transfer some assets of big state-owned companies like Aramco to domestic and foreign private sector in a bid to secure its own expenditures and make its own private sector more dynamic and more active. Aramco’s initial public offering (IPO) was a step in that direction.
Having been well informed of the future trend of the oil market and the emergence of a new order under US oil dominance, Saudi Arabia is shifting its focus of investment towards developing the downstream sector of oil and natural gas industries in a bid to save its own market share. Aramco’s Board of Directors must have concluded that the profits of vertical diversification and integration in the refining and petrochemical sector along with boosting natural gas production and its supply on domestic and international markets would be much more than other options like investment for increased oil production capacity. Aramco has invested largely in the downstream (refining and petrochemical) sector both inside and outside Saudi Arabia. Seeking to become a large producer of petroleum products and petrochemicals, Aramco is trying to raise its refining and petrochemical capacity inside and outside the country from the current 5.4 mb/d to 10 mb/d in the mid-term. That, along with integrating activities in the value chain, will result in the diversification of products in the market. Furthermore, since Saudi Arabia’s crude oil production capacity of about 12.5 mb/d has caused the country to have a guaranteed market for a significant portion of its crude oil and stabilize its market share to a large extent in the world oil market. Relying on the estimate that in the long-term, demand for crude oil in the transportation sector will gradually decline and the petrochemical sector will be the key driver of oil consumption growth, Aramco is now targeting the petrochemical market in the world and is determined to become the largest producer of petrochemicals in the world over two decades. Furthermore, Saudi Arabia has ambitious plans for increasing its natural gas production to 230 bcm and become an exporter of natural gas. To that effect, it is seeking investment opportunities in Russia and the US Aramco recently signed a memorandum of understanding with the government of Bangladesh to develop an LNG terminal and plan for $3 billion.
Saudi Arabia’s move to weaken OPEC’s main pillars like the Economic Commission Board and the OPEC Conference and their replacement with new structures belonging to OPEC+ countries, as well as making efforts to upgrade Russia’s role in OPEC’s decision-making procedures show that Saudi Arabia is planning to change the decision-making regime of OPEC, while preserving its international structure. That would weaken the weight of Iran and Venezuela within OPEC, while sharing reduction in the oil production costs and guaranteeing higher oil prices with other oil producing nations, particularly Russia.

 

Saudi Arabia is fully aware that the policy of collective output cut within the framework of OPEC for guaranteeing oil prices that would overtake shale oil production costs would seriously threaten the Organization’s life in the mid-term. From January 2017 to December 2019, call on OPEC declined by about 3.41 mb/d, while US oil production has grown about 5.7 mb/d over the same period. Furthermore, a review of the mid-term perspective of the oil market from 2019 to 2024 shows that due to the higher growth of oil production in non-OPEC nations, specifically the US, when compared with the global demand for oil, the demand for OPEC’s crude oil will keep declining up to 2024 and the Organization’s share of the oil market will fall from 30.6 mb/d in 2019 to 27.7 mb/d in 2024. This estimate is for the period preceding the Covid-19 outbreak and OPEC+’s latest decision to cut output. The implementation of a three-step production cut up to April 2022 is expected to intensify the trend of decline in the OPEC market share. OPEC+ agreed in its 10th ministerial meeting on April 10, 2020 that its member states – except Iran, Venezuela and Libya – would cut their output in three phases. OPEC+ will adjust crude oil production by 10 mb/d effective from May 1, 2020 till 30 June 2020 and thereafter 8 mb/d to the end of the year 2020 and 6 mb/d till end of April 2022.

In this mid-term perspective, Saudi Arabia, in a bid to keep oil prices at higher levels than US shale oil production while maintaining its market share, may have to weaken other members than Iran and Venezuela.

 

Russia Strategy for Price-Market Share

 

Unlike Saudi Arabia, Russia saw its ties with the US turn sour following Russia’s annexation of Crimea in 2014. The US has since imposed sanctions on Russian oil companies, depriving them of international finance, technology as well as oil exploration and production services. In reaction, Russia has tried its best to arrange its macro-economic policymaking structure so that economic pressures like oil price decline would not force it to forego its geopolitical priorities particularly in the global energy market. Reforming monetary and financial policies and upgrading the national deposit rate have been Russia’s two major economic policies for making its economy resilient to shocks. In 2014, Russia floated its foreign exchange system while targeting a 4% inflation rate in its economy. Russia shut down many non-profitable state-owned banks and cleaned up its banking system. Furthermore, Russia has had a successful financial system performance and managed to bring crude oil prices to below $50 a barrel in its 2019 budget by significantly reducing its non-oil budget deficit. That helped Russia set a financial rule for its annual budget based on the $40 per barrel oil. Based on this rule, any revenue from selling oil above $40 a barrel would be saved in an oil stabilization fund (OSF). This fund will let Russia hedge its domestic economy against low oil prices.

According to Goldman Sachs’ estimates, if oil prices fall below $15 a barrel, Russia would be able to offset its budget deficit for two years by dipping to its OSF. Russian economic officials have also sought to implement the forex rate in a bid to manage any flight of capital following oil price shocks and depreciation of the ruble.

Worries about a production decline in Russian oil reservoirs and lack of sufficient motivation for investment by state-owned and private companies in these fields, as well as restricted access to foreign financial resources due to US sanctions constitute another cause of concern for Russia in preserving its oil output levels. One reason for such investments to be uneconomical stems from the income-based taxation regime governing production from oil fields in Russia. In the production-based taxation system, the basis for levying tax on oil companies has been only their sales revenues. Therefore, the expenditure structure of these companies was not taken into consideration in the taxation regime, which discouraged investment in the petroleum industry particularly new fields and enhanced oil recovery. But since 2019, oil and gas companies carrying out exploration and development activities in Russia on qualifying hydrocarbon deposits have been subject to a new Income-Based Tax (IBT). The IBT is designed to encourage development of low-margin hydrocarbon deposits, including hard-to-recover reserves.

Also, Russian oil and gas companies are permitted to apply beneficial tax rules for non-recourse loans to their affiliates to finance foreign oil exploration projects.

Thanks to these economic reforms and reduced dependence on oil revenue and economic diversification, Russia’s oil production has not been much affected by US sanctions.

Although in 2016, due to the strain caused by oil price declines for a long period of time, Russia agreed to cooperate with OPEC in production cut, this country has in recent years significantly boosted its economic potential and enhanced its economic resilience so as to defeat any decline in oil prices. Russia is fully aware that the continued trend of oil production decline within the framework of OPEC+ would benefit shale oil producers in the US as well as other costly producers like Canada and Venezuela.

A review of comments and analyses by Russian officials and analysts show that in the long term, Russia would be seeking, in partnership with Saudi Arabia, to preserve its market share and prevent the US dominance on the oil market. Russia has realized that this important objective would be realized if it manages to boost its economic resilience to oil price slump and push shale oil producers out of the market partly. Upgrading oil extraction technology in the upstream sector, reforming the tax code from income-based to profit-based, floating the forex rate and boosting national deposit levels have all empowered Russia to impose very low oil prices of about $15 a barrel for two years. Given Russia’s long-term strategy of preventing the US domination on the oil market through keeping oil prices at lower levels and making necessary arrangements for the resilience of its economy to oil prices lower than shale oil production costs, it seems that the tension created between Russia and Saudi Arabia during the March 6 ministerial meeting of OPEC+ would be a beginning for further tensions in the future. Russia will agree to cooperate in cutting oil production only if oil prices would experience a significant decline similar to the March and April ones that brought the prices below $20.

If oil prices recover by the end of 2020 and return to above $40, Russia is unlikely to agree to keep reducing its oil production for 16 months starting in January 2021. Although since the implementation of the Declaration of Cooperation in 2017, Russia has practically shown no significant compliance with output cut and has produced at its maximum levels, it knows quite well that this strategy, along with the elimination of such producers as Iran, Venezuela and Libya, would cause US oil production costs to grow on a daily basis and the US, in partnership with Saudi Arabia, would conquer the oil market. Russia is well aware that its international strength is directly linked with energy trade, particularly oil and gas, in the world. Therefore, the US dominance of oil and gas market poses a vital threat to Russia.

 

Conclusion

 

The trend of falling demand for oil and increased supply of oil in coming decades has imposed the paradigm of oil supply glut on the market. One outstanding feature of this change in paradigm lies in expectations for a decline in oil prices, which would in the short term leave negative impacts on the economic and political stability of oil exporting nations heavily dependent on oil revenue. As a result of this new order dominating the oil market, oil exporting nations have sought to preserve their short-term economic stability through supporting high oil prices and long-term guarantee of oil demand security. To that end, they have had to deal with the policy of market share and lower prices. First, it seems that economic reforms and diversification with a view to reducing dependence on oil revenue and increasing the resilience of low oil prices would empower oil exporters like Saudi Arabia and Russia to pursue their long-term objective of guaranteeing crude oil sales and driving out costly producers in order to maximize oil revenues. However, the increased political power of US shale oil producers and the security nature of ties between Saudi Arabia and Arab nations and the US have caused these countries to not assess as appropriate the adoption of market share policies which would result in weakening the US oil production status in the world although necessary economic reforms have been carried out to reduce dependence on oil revenues.

However, countries like Russia, who have been pursuing a different kind of ties with the US and are opposed to US dominance on energy markets, see the strategy adopted by Saudi Arabia and Arab nations in support of shale oil production growth as threatening.

It seems that Russia’s increased economic power and resilience to lower oil prices in recent years has pushed this country to embrace policies which would help guarantee supply security and its own status in the oil market in the long term, while remaining opposed to any further production cut within the framework of OPEC+. The emerging conformation explained in this article as emerging between Saudi Arabia and Russia would also apply to other oil exporting nations when it comes to their orientation. Many top oil exporting nations have to choose between economic stability and oil demand security at different levels. Cooperation with the US and making efforts to support shale oil production through artificial maintenance of oil prices at levels higher than shale oil production costs, would finally harm all major oil exporters which hold huge reserves. The best strategy under the present circumstances would be further cooperation between oil exporting nations with a view to increasing the resilience of low prices and following up on market share policies in order to drive out marginal producers like US shale oil.

Saudi Arabia’s influential former oil minister Ahmed Zaki Yamani once said: “The stone age did not end because the world ran out of stones, and the oil age will not end because we run out of oil.”

The history of the International Nickel Company (INCO) should serve as a lesson to many oil producing nations in the world now. In the 1950s and 1960s, INCO faced increased demand from Japan and West Europe. It failed to curb prices and artificial nickel dominated the market.

1-Aker BP Cuts Quarterly Dividend by Two-thirds

Aker BP will cut its quarterly dividend payments by two-thirds due to the COVID-19 pandemic and the fall in crude prices, the Norwegian oil firm said after reporting first-quarter profits that beat expectations.

Earnings before interest, tax, depreciation and amortization (EBITDA) rose to $666 million in the quarter from $539 million a year ago, outperforming a $617 million forecast in a Refinitiv poll of analysts.

“The board has decided to retract the current dividend plan in order to retain financial flexibility and position the company for future value accretive organic and inorganic growth opportunities,” Aker BP said in a statement.

It will pay out $70.8 million in a quarterly dividend in May, one-third of the company’s previously guided amount, and expects to keep the same level for the rest of the year, so that overall payments in 2020 will amount to $425 million.

Aker BP, 30% owned by BP, had originally planned to pay out $850 million this year, including a $212.5 million payment made in February.

The dividend cut following similar reductions by local rivals Equinor and Lundin Energy.

Meanwhile, wind turbine maker Siemens Gamesa said that project delays and supply chain disruptions caused by the coronavirus outbreak would continue to squeeze its profitability after squeezing its margin on second-quarter earnings.

Despite building up a record-breaking order book for equipment and services in demand from companies and countries around the world seeking to limit climate change, its margin on earnings before interest and tax (EBIT) shrank to 1.5% in the January-March period.

That profitability gauge had stood at 7.5% a year earlier.

2-SK Innovation Sees Weak Q2 Refining Margins

SK Innovation, owner of South Korea’s top refiner SK Energy, said refining margins will come under pressure because of a fuel demand slump and a glut of refined products caused by the coronavirus pandemic.

Refiners globally have suffered from a 30% reduction in fuel demand as a result of travel restrictions and lockdowns to curb the spread of the novel coronavirus.

SK Innovation posted an operating loss of 1.8 trillion won ($1.5 billion) in the first quarter, compared with an operating profit of 328 billion won for the same period a year earlier, it said in an earnings statement.

“Sluggish fuel demand is expected to continue due to the COVID-19, and oversupplies are expected to keep refining margins weak in the second quarter,” the company said, referring to the respiratory disease caused by the coronavirus.

Lee Dong-yeol, the head of SK Energy’s corporate planning office, said in a call with analysts that the company planned to run its crude distillation units (CDU) lower to cope with the falling refining margins of jet fuel and gasoline.

Lee also said SK Energy is adjusting the output of jet-kerosene at its CDU’s in response to the plunge in jet fuel margins.

“We are producing kerosene at the minimum level and blending kerosene with (low-sulfur fuel oil). These are the ways we’re responding to market conditions,” he said.

SK Innovation, which has a total refining capacity of 1.115  mb/d at plants in Ulsan and Incheon, ran at 89% of capacity on average in the first quarter, down from 95% during the same period a year earlier, according to the company statement.

“For planned maintenance, we plan to shut down No.5 CDU in the second quarter, and compared to the first quarter, that would cut 150,000 barrels per day of runs,” Lee said.

In March, the company said it would reduce its crude distillation units’ run rates by 10% to 15% because of lower exports and domestic demand.

 

3-Canada's Suncor Energy Deepens Spending Cuts

Suncor Energy Inc deepened its spending cuts, suspended its share repurchase program and cut its quarterly dividend by 55%, hit by a historic plunge in oil prices caused by a feud between Saudi Arabia and Russia and the COVID-19 pandemic.

Canada’s second-largest oil and gas producer produced a total of 739,800 barrels of oil equivalent per day (boe/d) in the first quarter, down from 764,300 boe/d a year ago.

North American oil and gas companies have been curbing output and slashing spending targets amid a collapse in crude prices and drop in oil consumption.

Suncor cut its 2020 capital budget to a range of C$3.6 billion to C$4.0 billion, a C$400 million reduction at mid-point compared to the previous guidance and about 33% compared to the original plan.

The company also suspended share repurchases and reduced its quarterly dividend to C$0.21 per common share from C$0.465 per common share.

The Calgary, Alberta-based company posted a loss of C$3.53 billion ($2.51 billion), or C$2.31 per share, in the first quarter ended March 31, compared with a profit of C$1.47 billion, or C$0.93 per share, a year earlier.

The company recorded an after-tax impairment charge of C$1.798 billion on its share of the Fort Hills assets and against its share of the White Rose and Terra Nova assets.

Excluding one-off items, the company posted a loss of 20 Canadian cents per share, missing analysts’ estimates of a loss of 17 Canadian cents, according to IBES data from Refinitiv.

4- Britain Shown Path to Green Recovery

Britain should use economic stimulus measures to speed a shift away from fossil fuels and take advantage of low oil prices to raise revenues from carbon taxes without hurting consumers, state-appointed climate advisers said.

Their proposals reinforce global pressure on governments to consider the environment as they pour money into their economies at levels unseen since World War Two to counter the impact of coronavirus lockdowns which threaten millions of jobs.

“Reducing greenhouse gas emissions and adapting to climate change should be integral to any recovery package,” the Committee on Climate Change (CCC) said in a letter to British Prime Minister Boris Johnson.

The letter was also sent to first ministers in Scotland, Wales and Northern Ireland by the CCC, a state body set up to advise Britain how to tackle and prepare for climate change.

To support employment, it suggested backing retraining schemes to ready the work force for roles needed to help Britain meet its climate target of net zero emissions by 2050, which parliament passed into law last year.

Working remotely and cycling and walking to work should be made easier, while the government should help people upgrade their homes which could include heat pumps and more energy efficient appliances.

The CCC said the country could raise cash by widening the number of sectors paying for carbon emissions and raising the prices of carbon for sectors which do not bear the full costs of emitting greenhouse gases.

“Low global oil prices provide an opportunity to increase carbon taxes without hurting consumers,” it said.

Benchmark oil prices hit their lowest level in two decades last month, while U.S. crude oil futures last month traded below $0 for the first time in history.

British industry, power generators and airlines pay for their carbon dioxide emissions under the European Union’s emissions trading scheme although Britain has indicated it plans to set up its own scheme following its exit from the EU.

Power generators in Britain also pay a separate carbon tax, but there is no direct carbon levy for sectors such as agriculture.

The CCC, which is independent of the government, is chaired by former environment secretary John Gummer and includes business and academic experts.

A business survey showed that the economy is on course for an unprecedented 7% quarterly contraction after many businesses closed last month to slow the spread of the coronavirus. Stimulus measures have so far mainly focused on supporting them and their employees.

 

5-Plains Takes $3.2bn Charge as Oil Prices Slump

Plains All American Pipeline LP reported a net loss of $2.8 billion in the first quarter, including about $3.2 billion of charges due to the collapse in oil prices as the coronavirus pandemic erodes demand, adding to a market glut.

Plains now expects a 4% decline in volumes on its pipelines to 6.6 mb/d for 2020 compared with a year earlier as oil production growth is set to decline across all shale basins, CFO Al Swanson said during the quarterly earnings call with analysts.

Global oil demand has crashed about 30% as the coronavirus pandemic has restricted travel and movement around the world and a brief price war between Saudi Arabia and Russia flooded the market with excess supplies.

U.S. crude prices plunged to trade in negative territory for the first time in history last month as storage filled rapidly.

Oil producers in the Permian, the largest shale basin in the United States, and in the Bakken have already begun to shut in wells and curtail drilling in response to the price crash.

Production in the Permian is likely to decline by about 15-20% exit-to-exit in 2020, said Willie Chiang, Chairman and CEO of Plains. In May alone, Plains expects about 1 million bpd of production to be shut in the Permian.

Overall, shut-ins are expected to be between 3.5 million and 4.4 mb/d in May across the United States and Canada, executive vice president Jeremy Goebel said during the call.

“We assume June, July for a trough and some activity resumption in the August time period. Some could happen sooner,” Goebel said.

The reversal of the Capline pipeline was progressing as planned, Plains said, adding that the system could not be used for storage while being reversed.

Volumes on Capline, once a major artery for imports and Gulf of Mexico crude used by U.S. Midwest refiners, have declined sharply as the U.S. shale boom pushed inland crude to the East Coast and Gulf Coast.

Still, storage capacity on both ends of the line are being used, company executives said, as the current oil market structure incentivizes storage.

“Where there are opportunities for additional storage, we are fully taking advantage of that for ourselves and for our customers,” Goebel said.

Plains’ charges include a goodwill impairment charge of about $2.5 billion and non-cash impairment charges of about $700 million.

6- Pemex Increased Oil Production, Refining in March

Mexico’s state oil company Petroleos Mexicanos increased crude production to 1.745 mb/d in March, while processing more at its domestic refineries, according to official data seen by Reuters.

Mexico agreed to a 100,000-b/d output cut as part of an initiative by the OPEC+ group to push up plummeting oil prices by withdrawing barrels from an oversupplied market. The cuts will be put in place this month.

Mexico’s energy minister, Rocio Nahle, said the nation would cut output only during May and June.

The reduction is expected to mostly affect newly drilled oilfields while a larger portion of shallow-water production by Pemex, as the company is known, would be used for domestic refining.

Pemex’s crude production has consistently grown this year from 1.724 mb/d in January, including shared oilfields, official figures showed. The company has reported a massive loss of nearly $24 billion in the first quarter and announced a $1.9 billion cut in its investment budget.

Pemex’s crude processing at its refineries rose to almost 600,000 b/d in March from 464,018 b/d the previous month, the official data showed. Pemex said its total production of fuel averaged 717,400 b/d last month.

Meantime, French power producer Neoen SA said it will build Australia’s largest solar farm for A$570 million ($367 million), after lining up a contract to sell most of the power to a state-owned electricity company.

The state of Queensland’s CleanCo has agreed to buy 320 megawatts of capacity from the Western Downs solar farm in southeast Queensland, which will help the state make progress on its target of 50% renewable energy by 2030, the government said.

“As our economy emerges from the worst impact of COVID-19, we need projects ready to go that will create jobs and stimulate spending, especially in regional Queensland,” the state’s treasurer, Jacki Trad, said in a statement.

Neoen, which sees Australia as one of its key growth markets, said it expects to begin construction on the Western Downs solar farm in July, with generation from the project due to start in the first quarter of 2022.

The independent power producer rated the solar farm at 460 to 480 megawatts photovoltaic (MWp) capacity, which would be the largest in Australia, and said CleanCo agreed to buy 352 MWp.

Neoen already has six solar farms, three wind farms and the world’s biggest lithium-ion battery in Australia.

7-India Hikes Taxes on Petrol, Diesel

India has increased its taxes and duties on petrol and diesel instead of passing on the benefit of lower crude oil prices to consumers, as the government moves to raise revenues in an economy that ground to a halt in the coronavirus crisis.

Taxes and duties on petrol and diesel were increased by 10 rupees/litre and 13 rupees/litre, respectively, but the federal government said in a statement that local pump prices would not be affected.

India pegs retail prices of petrol and diesel to moves in the international markets, where prices of fuel have declined substantially amid the slump in global crude oil demand.

Some state governments sharply raised taxes on alcohol in a bid to bolster their own coffers that have also taken a hit amid the nationwide lockdown that began on March 25.

Meanwhile, oil and gas producer Devon Energy posted a bigger quarterly loss as it took an asset writedown of $2.8 billion and said it expects to cut 10,000 barrels of a day in the second quarter as oil prices crater.

The company also cut its 2020 production forecast to between 300,000 to 319,000 barrels of oil equivalent per day (boe/d) from 328,000 to 339,000 boe/d.

The Oklahoma-based company, which has been selling its assets to become a pure-play U.S. oil producer, has cut its annual budget twice in March.

With the oil prices at their lowest in decades due to weak demand as well as a supply glut, it has also put off activities across its portfolio except at its assets in the Permian’s Delaware Basin.

Most shale companies have cut their annual budget, slashed or suspended dividends and reduced jobs as they try to shore up cash.

Net loss attributable to the company rose to $1.82 billion, or $4.82 per share, in the first quarter, from $317 million, or 74 cents per share, a year earlier.

Total production rose to 348,000 boe/d from 313,000 boe/d a year earlier, led by output from the Delaware Basin.

8-Brazil Eyes May Aid Package for Power Sector

The Brazilian government is working to present an aid package for struggling companies in the electricity distribution sector by the end of May, Brazilian Mines and Energy Minster Bento Albuquerque said.

In a virtual speech to industry group Abdib, Albuquerque said under the terms of the potential package, electricity companies would be given access to loans from private and state-run banks to ensure their liquidity. They would then pay the loans back through discounts on electricity tariffs. He did not indicate how large any potential loans would be.

“We’ve begun to work ... with Banco do Brasil SA and other actors in the financial sector, so that we can go about building (a solution),” Albuquerque said, referring to one of Brazil’s state-run banks.

He added, however, that resources were scarce, and the electricity distributors would be competing with companies in other hard-hit sectors of the economy.

Brazilian utilities face surplus energy this year of between 20% and 40% due to the sharp drop in consumption during to the coronavirus pandemic.

Energy distributors say customer default rates have also jumped to 12% from 3% over the last month, Bento said.

Distributors in the nation’s relatively poor north and northeast have been particularly hit, he added.

Companies that operate in the distribution sector in those regions include Equatorial Energia SA, Energisa SA , Neoenergia SA and Enel SpA.

9-MPLX Abandons Permian NGL Pipeline Plans

MPLX LP said it is no longer pursuing a Permian to Gulf Coast natural gas liquids (NGL) pipeline, called BANGL, after a collapse in oil prices and said it will focus on expanding capacity on existing pipelines instead.

The fractionation capacity and export facility associated with the BANGL project have also been deferred.

“We are working with others to optimize existing pipeline capacity ... we are still committed to an NGL solution. It just won’t be the original scope that we had envisioned early on,” Chief Executive Michael Hennigan said during the quarterly results call with analysts.

“We wanted to not commit to that full scope until we were really sure that the volume commitments would be there (and) with what’s happening in the market, the volume commitments are slower.”

Global oil demand has crashed about 30% as the coronavirus pandemic has restricted travel around the world and a brief price war between Saudi Arabia and Russia flooded the market with excess supplies.

U.S. crude prices plunged to trade in negative territory for the first time in history last month as storage filled rapidly.

Oil producers in the Permian, the largest shale basin in the country, and in the Bakken have already begun to slash output and curtail drilling in response to the price crash.

Work on the Wink-to-Webster Permian crude oil project, in which MPLX has a 15% equity ownership, is advancing, the company said during its first-quarter results call.

One hundred percent of the contractable capacity on the pipeline system is covered by MVCs (minimum volume commitments) or long-term contracts, a company executive said during the call.

The line is expected to be placed in service in the first half of 2021.

The Whistler natural gas pipeline project, which is expected to transport about 2 billion cubic feet per day (bcf/d) of natural gas from Waha, Texas, to the Agua Dulce market in south Texas, also continued to progress, the company said.

The line is expected to start up in the second half of 2021.

The company cut its 2020 capital spending target by more than $700 million to about $1 billion.

Net loss attributable to MPLX was $2.7 billion in the first quarter 2020, compared with net income of $503 million for the first quarter of 2019.

10-Saudi Arabia Oil Exports to Drop in May

Saudi Arabia’s crude oil exports in May is expected to drop to about 6 mb/d, the lowest in almost a decade, and domestic refining output is likely to fall as the coronavirus crisis hits demand, industry sources and analysts say.

The world’s top oil exporter will cut crude production by 23% to about 8.5 mb/d in May and June, under a supply reduction pact with OPEC+ alliance to shore up prices hammered by demand destruction due to the coronavirus-related lockdowns.

Saudi crude oil exports for May is expected to be about 6 mb/d, industry sources said, with Asia taking about 4 mb/d. Exports to the United States are seen at less than 600,000 b/d, one source said.

Falling oil output means lower production of associated gas, a byproduct when extracting crude. Gas is used as a feedstock in the petrochemical industry and for power generation.

Saudi Arabia has increasingly sought to generate more power from gas to save crude for exports.

But lower global oil demand means more cheap crude available for domestic use, which could mean burning more oil this summer when power demand soars with the use of air-conditioners.

In 2019, when Saudi Arabia was producing about 9.9 million bpd, it burnt 550,000 b/d of crude in the summer, falling from 700,000 b/d in previous years. But industry sources now expect usage to rise slightly above 2019’s levels.

Broadly, domestic demand for oil and its products was expected to be weaker.

“Overall demand in the kingdom is going to be very weak ... because of COVID-19 and we are going to see lower industrial demand,” said Amrita Sen, co-founder of the Energy Aspects consultancy, adding that low oil prices and budget cuts would drive the Saudi economy into recession.

Saudi refineries, which usually process about 2.4 mb/d of crude, were likely to use less as product demand falls.

Under OPEC+ cuts, Saudi Arabia would likely prioritize output of light oil over heavy oil, said Sadad al-Husseini, an energy consultant and former senior executive at Saudi Aramco.

He said this was because light oil fields tended to produce more associated gas and heavy oil was usually more costly to extract as it tended to come from offshore.

“We should see steady Arab Light, Arab Extra Light, and some Arab Medium supplies making up most of (Saudi) production,” he said.

This could increase the global glut of lighter oil, which is produced in abundance by U.S. shale firms.

Canada's Suncor Energy Deepens Spending Cuts

Suncor Energy Inc deepened its spending cuts, suspended its share repurchase program and cut its quarterly dividend by 55%, hit by a historic plunge in oil prices caused by a feud between Saudi Arabia and Russia and the COVID-19 pandemic.

Canada’s second-largest oil and gas producer produced a total of 739,800 barrels of oil equivalent per day (boe/d) in the first quarter, down from 764,300 boe/d a year ago.

North American oil and gas companies have been curbing output and slashing spending targets amid a collapse in crude prices and drop in oil consumption.

Suncor cut its 2020 capital budget to a range of C$3.6 billion to C$4.0 billion, a C$400 million reduction at mid-point compared to the previous guidance and about 33% compared to the original plan.

The company also suspended share repurchases and reduced its quarterly dividend to C$0.21 per common share from C$0.465 per common share.

The Calgary, Alberta-based company posted a loss of C$3.53 billion ($2.51 billion), or C$2.31 per share, in the first quarter ended March 31, compared with a profit of C$1.47 billion, or C$0.93 per share, a year earlier.

The company recorded an after-tax impairment charge of C$1.798 billion on its share of the Fort Hills assets and against its share of the White Rose and Terra Nova assets.

Excluding one-off items, the company posted a loss of 20 Canadian cents per share, missing analysts’ estimates of a loss of 17 Canadian cents, according to IBES data from Refinitiv.

4- Britain Shown Path to Green Recovery

Britain should use economic stimulus measures to speed a shift away from fossil fuels and take advantage of low oil prices to raise revenues from carbon taxes without hurting consumers, state-appointed climate advisers said.

Their proposals reinforce global pressure on governments to consider the environment as they pour money into their economies at levels unseen since World War Two to counter the impact of coronavirus lockdowns which threaten millions of jobs.

“Reducing greenhouse gas emissions and adapting to climate change should be integral to any recovery package,” the Committee on Climate Change (CCC) said in a letter to British Prime Minister Boris Johnson.

The letter was also sent to first ministers in Scotland, Wales and Northern Ireland by the CCC, a state body set up to advise Britain how to tackle and prepare for climate change.

To support employment, it suggested backing retraining schemes to ready the work force for roles needed to help Britain meet its climate target of net zero emissions by 2050, which parliament passed into law last year.

Working remotely and cycling and walking to work should be made easier, while the government should help people upgrade their homes which could include heat pumps and more energy efficient appliances.

The CCC said the country could raise cash by widening the number of sectors paying for carbon emissions and raising the prices of carbon for sectors which do not bear the full costs of emitting greenhouse gases.

“Low global oil prices provide an opportunity to increase carbon taxes without hurting consumers,” it said.

Benchmark oil prices hit their lowest level in two decades last month, while U.S. crude oil futures last month traded below $0 for the first time in history.

British industry, power generators and airlines pay for their carbon dioxide emissions under the European Union’s emissions trading scheme although Britain has indicated it plans to set up its own scheme following its exit from the EU.

Power generators in Britain also pay a separate carbon tax, but there is no direct carbon levy for sectors such as agriculture.

The CCC, which is independent of the government, is chaired by former environment secretary John Gummer and includes business and academic experts.

A business survey showed that the economy is on course for an unprecedented 7% quarterly contraction after many businesses closed last month to slow the spread of the coronavirus. Stimulus measures have so far mainly focused on supporting them and their employees.

5-Plains Takes $3.2bn Charge as Oil Prices Slump

Plains All American Pipeline LP reported a net loss of $2.8 billion in the first quarter, including about $3.2 billion of charges due to the collapse in oil prices as the coronavirus pandemic erodes demand, adding to a market glut.

OPEC+ Deal Outlook for Market Stability

As oil prices dropped sharply to unprecedented levels in 18 years in  the global markets due to lower demand, outbreak of  Covid-19 and the start of a price war between two leading producers, i.e. Saudi Arabia and Russia, OPEC+ agreed to reduce their production.

Based on this agreement, deemed as historic in terms of output cut, OPEC+ nations would remove 10 mb/d from their production from May 1 to the end of June. Saudi Arabia and Russia have agreed to cut a total of 5 mb/d from their production.  

As soon as news broke out of this agreement, crude oil prices rallied slightly in the world markets, but they dropped soon after.

That has given rise to speculation about the future of the OPEC+ agreement.

Success or Failure

Studying the energy market conditions and the OPEC+ agreement shows that at least several factors are instrumental in the success or failure of this agreement for the return of oil prices to a state of balance:

Success of OPEC+ agreement depends on all members’ compliance with the production ceiling. That is while some countries like Saudi Arabia have in recent years not honored OPEC production quota agreements.
Success of OPEC+ agreement largely depends on the reduction of output by even oil producing nations that have not been a party to this agreement. A prime example is the US. If OPEC+ countries reduce their output while countries like the US, Canada or Australia refuse to join this trend, no concrete result will be achieved because as much as OPEC+ countries cut from their output, shale oil producers may increase their production and hinder any agreement. Therefore, all oil producers including OPEC+ and those outside OPEC+ must comply with output cuts. However, the US is unlikely to be cooperative given its insatiable appetite for winning new markets.
Another effective factor contributing to the success of OPEC+ agreement and restoration of balance to global markets is that consumer nations would be free from the Covid-19 outbreak. The longer the trend of combating Covid-19, the lower demand for oil will be. Under the current circumstances, any decline in oil prices would mean that the 10mb/d output is not sufficient to restore the required supply/demand balance to the market. The Covid-19 outbreak has affected production effectively. Many economic activities have been suspended while social distancing, lockdown and closure of borders to passengers has reduced global demand for crude oil by 20 to 25 mb/d. The International Energy Agency (IEA) estimates that crude oil consumption had been cut by a third due to the closure of biggest economics to fight the Covid-19 pandemic. In the meantime, oil storage that had started weeks ago is nearing saturation. Under such conditions, cutting 10 mb/d from production could not bring balance to oil markets. Therefore, if the trend of anti-coronavirus fight does not yield any specific result, production cut by OPEC+ could not be of any help in restoring balance to the world markets.
Another major challenge to the restoration of balance to world markets pertains to high costs of production cut and return to the previous production levels. Since oil moves to the earth surface at high pressure following drilling of wells, it would not be so easy to stop the production process and it can impose heavy costs on producing nations. Furthermore, producing nations would face tougher conditions if their production levels decline because technically, the process of return to previous production levels would be costly. Such conditions would impose pressure on some oil producers with quite decrepit facilities and their petroleum industry may become vulnerable.

Balance Restoration

The main cause of oil price reduction is the notorious lack of supply and demand in the market. In the past, the oil supply-demand balance was often disturbed due to traditional factors like political, economic and security issues. However, this time it emanates from the Covid-19 outbreak which has degenerated into a global crisis. In fact, for the first time, a factor outside the market has managed to affect the supply-demand balance in the energy sector. However, a recent price war between Saudi Arabia and Russia and the US’s thirst for breaking into new markets, have been instrumental, too.

Despite the fact that the Moscow-Riyadh oil war has subsided to a great extent and the OPEC+ agreement has forced producing nations to cut their output, some obstacles still remain in the way of the return of prices to a point of balance.

Therefore, in the short-term, oil prices are unlikely to return to the point of balance. However, as nations reel from the impact of Covid-10, global markets would move towards balance. The OPEC+ agreement for production cut could not cause any shock in the markets; however, in case of all members’ compliance, it would be able to bring conditions back to the point of balance in the mid-term.

US Oil Output Cut Challenges

The oil price slump in global markets has posed a new challenge to all producers, including the US. Furthermore, in a rare event, the West Texas Intermediate (WTI) base price for delivery in the future went down to the negative territory. US President Donald Trump announced in reaction to the negative oil prices that the government would take this chance to purchase 75 million barrels of crude oil, but the US’s Strategic Petroleum Reserve (SPR) is now holding 700 million barrels and there is no extra capacity for storage.

The negative prices also showed how saturated the market was and to what extent the US economy has slowed down. That has given rise to speculation about the US’s future orientations in the global oil market and acceptance of oil production restrictions.

Double Whammy

OPEC+ oil and energy ministers met through videoconference. Before their talks, Us President Donald Trump had called on Russian President Vladimir Putin and Saudi Crown Prince Mohammad bin Salman to cut their output. The US has called on other nations to cut their production, while its own cooperation with the OPEC+ deal is still in doubt.

On one hand, the US has set its energy strategy based on developing oil and gas exports, thereby seeking new markets. Based on such a strategy, when the power of production and exports by rivals declines, the US would have more space for energy supply. Therefore, any reduction in production by traditional oil producers would be a golden opportunity for the US to win more market shares.

However, global market conditions have become too complicated to let the US benefit from the reduction of output by other countries in its own interest. Due to high costs of shale oil production, the US would suffer even more than other producers from the oil price decline. Shale oil production costs on average $40 a barrel and selling it at a price below this level could not even cover production costs. Therefore, persistence of this trend in the long term could push the petroleum industry and investors in the US energy sector to bankruptcy.

Therefore, the US’s strategy for export development remains fragile. If it decides to insist on its boosting its export volume, the energy price would never return to the point of balance, which would threaten shale oil production in the country. Moreover, in the run-up to November’s presidential election, such an approach would pose a major challenge to President Trump’s reelection bid. Trump is already under pressure due to his mismanagement of the Covid-19 outbreak and the death of many Americans. He is also blamed by rival Democrats for the loss of about 25 million jobs in the US. Under such circumstances, a reduction in oil prices while shale production costs remain high would not only disappoint shale industry owners, but also it would further spread unemployment trend in the US petroleum sector. That would on one hand call into question Trump’s strategy for developing energy exports, while on the other it would cause more discontent. Any decision to reduce shale oil production would make the US more dependent on foreign resources, which would be in conflict with Washington’s strategy of energy independence that has been branded in recent years as a breakthrough by President Trump.

Tough Conditions

Under circumstances wherein the Trump administration cannot benefit from the reduction of oil production by other countries, nor is it able to reduce its own output, it has to take into account the following two points:

First, the US administration would have to adopt supportive policies and present financial packages to the petroleum industry and workers in order to get out of the current situation of the petroleum industry. Based on a plan prepared by the US administration to prevent the closure of drilling rigs and stop job losses in the shale industry, it is to loan these companies.

Second, the Trump administration is required to have a long-term fundamental plan for its important rivals in global markets. The strategy of pushing out rivals like Iran through zeroing oil exports and/or imposing sanctions against Venezuela and fanning the flames of tensions in Libya may in the short term expand the US consumer market; however, the US would need bigger markets like Europe in its export development strategy. Undoubtedly, the US’s main rival in this market is Russia that was recently engaged in an oil price war with Saudi Arabia in order to punish the Saudis and at the same time restrict US oil production.

Energy is set to enter as a new element to the bones of contention between the US and Russia, particularly in the Europe zone. The Americans would have to find a solution for countering Russia’s energy policies.