Easwaran Kanason

Co - founder of NrgEdge
Last Updated: June 3, 2017
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Business Trends
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So President Trump has pulled America out of the shackles of the Paris Agreement. Back in December 2015, 196 countries of the United Nations adopted the agreement, requiring them to tackle climate change through emissions cuts. Under the previous administration, the US was an enthusiastic proponent of the measure, aiming to reduce its emissions by 23-25% through 2025. This week, President Trump, joins Syria and Nicaragua as the three lone holdouts. Syria is in the middle of a civil war. Nicaragua didn’t think the agreement went far enough. Russia supports the agreement. Even North Korea has adopted it!

The logic behind Trump’s decision can be debated ad infinium. In the dramatic ebb and flow of his administration, it now appears that the right-wing led faction has asserted itself over the argument for what is best for America. There have been observations that Trump’s decision was a petulant one in the wake of what he perceived as disrespect as he met the leaders of the European Union and the G7 last week. But whatever the actual reasons, the reality is that the US no longer wants to be bound to the (voluntary) targets.

President Trump wants to free the US to drill for oil anywhere and burn coal as much as it wants, to grow its economy and create jobs. Good news for medium and small-sized drillers, who may now face fewer costly environmental regulations. It is also nectar to the ears of American mining towns, hoping for a return for coal, his strong voter base. The mining towns of the Appalachia  were instrumental in handing Trump the Presidency.

“I was elected to represent the citizens of Pittsburgh, not Paris,” Mr. Trump said, on Thursday, calling the decision a “reassertion of our sovereignty.” Mr. Trump cited disadvantages to US workers and the blocking of the development of “clean coal” technologies as reasons for pulling the out of the agreement, which is aimed at curbing greenhouse-gas emissions, believed to be a key driver of climate change, the Wall Street Journal reports.

But there are some risks associated with this new freedom. What Trump has done will unleash market forces that may minimise any clear economic advantage in the long term. Amongst other things, further increased oil and gas supply in the US, will push crude prices down. OPEC may just decide that it is futile to continue their supply cuts, and revert to a war for market share, driving prices further down again. And there will be so much gas sloshing around America that coal will continue to decline; not because it is a dirty fuel, but because burning it is too expensive.  

Ironically, the heads of America’s largest energy firms (including ExxonMobil and ConocoPhillips) are all committed to it – recognising that energy now needs to include clean energy. American states are in rebellion. California, New York and Washington states – collectively the fourth largest economy in the world – have formed a pact to adhere to the Paris targets within their states. Some 11 American state governors and 71 city mayors  - including Republicans – are defying their President to stick to the Paris climate accord emission standards. Across the pond, the EU has agreed closer cooperation with China to ensure the Paris Agreement does not collapse. However it is worth noting that it will take the US four years to pull out from the already implemented framework, so any effect will be in the long term.

Will the US be no longer a partner in global climate initiatives? It is worth noting that the US is not totally against any future climate accords but just a better deal (for itself). “President Trump said he would begin negotiations to either re-enter the Paris agreement under new terms or craft a new deal that he judges fair to the U.S. and its workers,” the Wall Street Journal reports. In response to the announcement from the White House, recently elected President Emmanuel Macron of France issued a joint statement with the leaders of Germany and Italy saying the accord “cannot be renegotiated, and there is no plan B, as there is no planet B”. This will be a mistake. The US is currently the world’s second largest greenhouse gas emitter, and to exclude it from any future climate discussion would be like ignoring the elephant in room. The world needs real leadership on how it can save itself.

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OPEC And The Current State of Oil Fundamentals

It was shaping up to yet another dull OPEC+ meeting. Cut and dry. Copy and paste. Rubber-stamping yet another monthly increase in production quotas by 432,000 b/d. Month after month of resisting pressure from the largest economies in the world to accelerate supply easing had inured markets to expectations of swift action by OPEC and its wider brethren in OPEC+.

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The increase will be divided proportionally across OPEC+, as has been since the landmark supply deal in spring 2020. Crucially this includes Russia, where the new quota will be a paper one, since Western sanctions means that any additional Russian crude is unlikely to make it to the market. And that too goes for other members that haven’t even met their previous lower quotas, including Iraq, Angola and Nigeria. The oil ministers know this and the market knows this. Which is why the surprise announcement didn’t budge crude prices by very much at all.

In fact, there are only two countries within OPEC+ that have enough spare capacity to be ramped up quickly. The United Arab Emirates, which was responsible for recent turmoil within the group by arguing for higher quotas should be happy. But it will be a measure of backtracking for the only other country in that position, Saudi Arabia. After publicly stating that it had ‘done all it can for the oil market’ and blaming a lack of refining capacity for high fuel prices, the Kingdom’s change of heart seems to be linked to some external pressure. But it could seemingly resist no more. But that spotlight on the UAE and Saudi Arabia will allow both to wrench some market share, as both countries have been long preparing to increase their production. Abu Dhabi recently made three sizable onshore oil discoveries at Bu Hasa, Onshore Block 3 and the Al Dhafra Petroleum Concession, that adds some 650 million barrels to its reserves, which would help lift the ceiling for oil production from 4 to 5 mmb/d by 2030. Meanwhile, Saudi Aramco is expected to contract over 30 offshore rigs in 2022 alone, targeting the Marjan and Zuluf fields to increase production from 12 to 13 mmb/d by 2027.

The UAE wants to ramp up, certainly. But does Saudi Arabia too? As the dominant power of OPEC, what Saudi Arabia wants it usually gets. The signals all along were that the Kingdom wanted to remain prudent. It is not that it cannot, there is about a million barrels per day of extra production capacity that Saudi Arabia can open up immediately but that it does not want to. Bringing those extra volume on means that spare capacity drops down to critical levels, eliminating options if extra crises emerge. One is already starting up again in Libya, where internal political discord for years has led to an on-off, stop-start rhythm in Libyan crude. If Saudi Arabia uses up all its spare capacity, oil prices could jump even higher if new emergencies emerge with no avenue to tackle them. That the Saudis have given in (slightly) must mean that political pressure is heating up. That the announcement was made at the OPEC+ meeting and not a summit between US and Saudi leaders must mean that a façade of independence must be maintained around the crucial decisions to raise supply quotas.

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With the Permian Basin focusing on fiscal prudence instead of wanton drilling, US shale output has not responded to lucrative oil prices that way it used to. American rig counts are only inching up, with some shale basins even losing rigs. So the White House is trying more creative ways. Though the suggestion of an ‘oil consumer cartel’ as an analogue to OPEC by Italian Prime Minister Mario Draghi is likely dead on arrival, the US is looking to unlock supply and tame fuel prices through other ways. Regular releases from the US Strategic Petroleum Reserve has so far done little to bring prices down, but easing sanctions on Venezuelan crude that could be exported to the US and Europe, as well as working with the refining industry to restart recently idled refineries could. Inflation levels above 8% and gasoline prices at all-time highs could lead to a bloody outcome in this year’s midterm elections, and Joe Biden knows that.

But oil (and natural gas) supply/demand dynamics cannot truly start returning to normal as long as the war in Ukraine rages on. And the far-ranging sanctions impacting Russian energy exports will take even longer to be lifted depending on how the war goes. Yes, some Russian crude is making it to the market. China, for example, has been quietly refilling its petroleum reserves with Russian crude (at a discount, of course). India continues to buy from Moscow, as are smaller nations like Sri Lanka where an economic crisis limits options. Selling the crude is one thing, transporting it is another. With most international insurers blacklisting Russian shippers, Russian oil producers can still turn to local insurance and tankers from the once-derided state tanker firm Sovcomflot PJSC to deliver crude to the few customers they still have.

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June, 12 2022