Members of the Organization of the Petroleum Exporting Countries (OPEC) earned $404 billion in net oil export revenue in 2015, according to U.S. Energy Information Administration (EIA) estimates. These earnings represent a 46% decline from $753 billion earned in 2014. Although these net export earnings include Iran's revenues, the net export revenue is not adjusted for possible price discounts that Iran may have offered its customers between late 2011 and January 2016, when nuclear-related sanctions targeting Iran's oil sales were in place.
OPEC members' net oil export revenue has fallen as crude oil prices have declined. The monthly average Brent spot price dropped from $112 per barrel (b) in June 2014 to $38/b in December 2015. Based on EIA price forecasts, which are subject to a wide range of uncertainty, OPEC revenue is expected to fall to $341 billion in 2016 before rising to $427 billion in 2017.
OPEC members' 2015 net oil export revenue was at the lowest level since 2004, with significant implications for the fiscal condition of member countries that rely heavily on oil sales to fund social programs and to import other goods and services. In inflation-adjusted terms, OPEC net oil export revenue totaled $606 per person in 2015, down 83% from the 1980 level of $3,500 per person.
The effects of recent declines in net oil export revenue on the economies of each OPEC member state depend on the importance of oil export revenues and the existence of other financial assets. Petroleum exports by OPEC members accounted for between 5% (Indonesia) to 99% (Iraq) of total export revenues in 2015. Generally, countries with sizeable financial assets, such as the Persian Gulf States (Saudi Arabia, Kuwait, Qatar, and the United Arab Emirates), are affected to a lesser degree than other oil-producing countries, such as Iraq, Nigeria, and Venezuela, that do not have large financial reserves.
Although declining crude oil prices have been the main driver behind lower OPEC revenue since mid-2014, unplanned production outages among some OPEC members have also contributed to lower export earnings. A number of OPEC countries have experienced relatively high levels of unplanned outages. Some of these outages are the result of political factors, such as the sanctions-related production shut-ins in Iran between 2011 and early 2016, when roughly 0.8 million barrels per day (b/d) remained off the market. In Venezuela, crude oil production has declined sharply since the end of 2015, as oil service companies have largely stopped work in response to a lack of payment by state-owned Petroleos de Venezuela S.A., and oil production may continue to decline in the near term.
Other unplanned outages have been related to armed conflict and militant activity in countries such as Libya and Nigeria. Libya has struggled to maintain crude oil production and exports since the fall of the Qaddafi regime in 2011, and more recently, opposing factions have clashed for control of the country's oil export terminals. The resulting lack of available oil export outlets has necessitated that most of the country's production capacity remain shut in. In Nigeria, continuing militant attacks since the start of 2016 have targeted oil and natural gas infrastructure, resulting in more shut-in production.
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The UK has just designated the Persian Gulf as a level 3 risk for its ships – the highest level possible threat for British vessel traffic – as the confrontation between Iran with the US and its allies escalated. The strategically-important bit of water - and in particular the narrow Strait of Hormuz – is boiling over, and it seems as if full-blown military confrontation is inevitable.
The risk assessment comes as the British warship HMS Montrose had to escort the BP oil tanker British Heritage out of the Persian Gulf into the Indian Ocean from being blocked by Iranian vessels. The risk is particularly acute as Iran is spoiling for a fight after the Royal Marines seized the Iranian crude supertanker Grace-1 in Gibraltar on suspicions that it was violating sanctions by sending crude to war-torn Syria. Tensions over the Gibraltar seizure kept the British Heritage tanker in ‘safe’ Saudi Arabian waters for almost a week after making a U-turn from the Basrah oil terminal in Iraq on fears of Iranian reprisals, until the HMW Montrose came to its rescue. Iran’s Revolutionary Guard Corps have warned of further ‘reciprocation’ even as it denied the British Heritage incident ever occurred.
This is just the latest in a series of events around Iran that is rattling the oil world. Since the waivers on exports of Iranian crude by the USA expired in early May, there were four sabotage attacks on oil tankers in the region and two additional attacks in June, all near the major bunkering hub of Fujairah. Increased US military presence resulted in Iran downing an American drone, which almost led to a full-blown conflict were it not for a last-minute U-turn by President Donald Trump. Reports suggest that Iran’s Revolutionary Guard Corps have moved military equipment to its southern coast surrounding the narrow Strait of Hormuz, which is 39km at its narrowest. Up to a third of all seaborne petroleum trade passes through this chokepoint and while Iran would most likely overrun by US-led forces eventually if war breaks out, it could cause a major amount of damage in a little amount of time.
The risk has already driven up oil prices. While a risk premium has already been applied to current oil prices, some analysts are suggesting that further major spikes in crude oil prices could be incoming if Iran manages to close the Strait of Hormuz for an extended period of time. While international crude oil stocks will buffer any short-term impediment, if the Strait is closed for more than two weeks, crude oil prices could jump above US$100/b. If the Strait is closed for an extended period of time – and if the world has run down on its spare crude capacity – then prices could jump as high as US$325/b, according to a study conducted by the King Abdullah Petroleum Studies and Research Centre in Riyadh. This hasn’t happened yet, but the impact is already being felt beyond crude prices: insurance premiums for ships sailing to and fro the Persian Gulf rose tenfold in June, while the insurance-advice group Joint War Committee has designated the waters as a ‘Listed Area’, the highest risk classification on the scale. VLCC rates for trips in the Persian Gulf have also slipped, with traders cagey about sending ships into the potential conflict zone.
This will continue, as there is no end-game in sight for the Iranian issue. With the USA vague on what its eventual goals are and Iran in an aggressive mood at perceived injustice, the situation could explode in war or stay on steady heat for a longer while. Either way, this will have a major impact on the global crude markets. The boiling point has not been reached yet, but the waters of the Strait of Hormuz are certainly simmering.
The Strait of Hormuz:
Headline crude prices for the week beginning 8 July 2019 – Brent: US$64/b; WTI: US$57/b
Headlines of the week
Utility-scale battery storage units (units of one megawatt (MW) or greater power capacity) are a newer electric power resource, and their use has been growing in recent years. Operating utility-scale battery storage power capacity has more than quadrupled from the end of 2014 (214 MW) through March 2019 (899 MW). Assuming currently planned additions are completed and no current operating capacity is retired, utility-scale battery storage power capacity could exceed 2,500 MW by 2023.
EIA's Annual Electric Generator Report (Form EIA-860) collects data on the status of existing utility-scale battery storage units in the United States, along with proposed utility-scale battery storage projects scheduled for initial commercial operation within the next five years. The monthly version of this survey, the Preliminary Monthly Electric Generator Inventory (Form EIA-860M), collects the updated status of any projects scheduled to come online within the next 12 months.
Growth in utility-scale battery installations is the result of supportive state-level energy storage policies and the Federal Energy Regulatory Commission’s Order 841 that directs power system operators to allow utility-scale battery systems to engage in their wholesale energy, capacity, and ancillary services markets. In addition, pairing utility-scale battery storage with intermittent renewable resources, such as wind and solar, has become increasingly competitive compared with traditional generation options.
The two largest operating utility-scale battery storage sites in the United States as of March 2019 provide 40 MW of power capacity each: the Golden Valley Electric Association’s battery energy storage system in Alaska and the Vista Energy storage system in California. In the United States, 16 operating battery storage sites have an installed power capacity of 20 MW or greater. Of the 899 MW of installed operating battery storage reported by states as of March 2019, California, Illinois, and Texas account for a little less than half of that storage capacity.
In the first quarter of 2019, 60 MW of utility-scale battery storage power capacity came online, and an additional 108 MW of installed capacity will likely become operational by the end of the year. Of these planned 2019 installations, the largest is the Top Gun Energy Storage facility in California with 30 MW of installed capacity.
As of March 2019, the total utility-scale battery storage power capacity planned to come online through 2023 is 1,623 MW. If these planned facilities come online as scheduled, total U.S. utility-scale battery storage power capacity would nearly triple by the end of 2023. Additional capacity beyond what has already been reported may also be added as future operational dates approach.
Of all planned battery storage projects reported on Form EIA-860M, the largest two sites account for 725 MW and are planned to start commercial operation in 2021. The largest of these planned sites is the Manatee Solar Energy Center in Parrish, Florida. With a capacity of 409 MW, this project will be the largest solar-powered battery system in the world and will store energy from a nearby Florida Power and Light solar plant in Manatee County.
The second-largest planned utility-scale battery storage facility is the Helix Ravenswood facility located in Queens, New York. The site is planned to be developed in three stages and will have a total capacity of 316 MW.