The US has just rebuffed high-level pleas from the European Union to grant exemptions to European companies operating in and with Iran, underlining America’s hardline stance in implementing its renewed sanctions on Iran. The goal is, according to Treasury Secretary Steven Mnuchin, is to reduce Iranian oil exports ‘down to zero’ to ‘pressure Iran into changing its threatening behaviour.’
In May, Iranian crude and condensate exports totalled 2.7 mmb/d. If the US unwaveringly continues on its stance, that will be a major shock to the market. All across the world, crude buyers are adjusting their habits. Most major European refiners, along with South Korea and Japan, have drastically reduced their purchases. Loopholes had allowed China and India to continue trading with Iran during the Obama-era sanctions, but America’s hardline stance this time appears to be dissuading them – US crude exports to India rose to an all-time high in June as it moves to replace supplies from Iran and Venezuela. Small waivers were allowed under Obama’s sanctions, which was coordinated with the EU, but this new unilateral US move appears to be far, far stricter. At risk is not just global crude oil flows, but billions in investment – Total will now be forced to pull out of the South Pars project, having already spent some US$90 million out of a projected US$2 billion investment. This would leave the South Pars project in the hands of China’s CNPC, but even that is uncertain, given the wide-ranging impact of the sanctions. China and the US are spoiling for a fight, having ramped up trade moves against each other and if China chooses to ignore the sanctions, things could get quite messy. However just recently, Iran announced that Russia is able and willing to get into the ring with an investment close to US$50 billion. President Putin himself affirming this plan with deals of at least US$15 billion being put on offer for exploration, production as well as refining.
Crude prices have been rallying over the last two months, as traders fear the supply-side shock that could arrest the oil’s demand recovery. Quixotically, the Trump administration has balked against this self-inflicted higher level of prices – road gasoline prices in the US are at their highest levels since 2014, making Republicans more vulnerable to dissatisfaction in a crucial mid-term election year. Add to that the outage of the SynCrude facility in Alberta bumping WTI prices up significantly, pulling American fuel prices up to their lowest differential with Brent since late last year. The US is mulling tapping its emergency crude supply to mitigate rising pump prices, but Trump has gone on the offensive instead, accusing OPEC of colluding to keep prices high. But whatever good that OPEC’s deal to raise production levels at its June 22 meeting in Vienna is being neutered by America’s decision to allow Iran no space. Saudi Arabia has said it has spare capacity of some 2 mmb/d, but is reluctant to use all of that. And even if it did, it would not be able to make up for the complete loss of Iranian volumes.
So prices must rise. Morgan Stanley is predicting Brent prices of US$85/b in the second half of 2018. Goldman Sachs thinks prices will definitely rise above US$80/b. And the Bank of America is warning that a complete cut-off of Iranian oil could see prices jumping to US$120/b. That will be a political disaster for the Trump administration, as it battles to keep its majority in both US Houses of Congress. The solution to this is rather simple. Drop, or at the very least soften, its stance on Iranian sanctions. It seems logical, but logic does not always dictate geopolitical decisions.
Countdown to the US – Iran Sanctions
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In its latest Short-Term Energy Outlook (STEO), released on January 14, the U.S. Energy Information Administration (EIA) forecasts year-over-year decreases in energy-related carbon dioxide (CO2) emissions through 2021. After decreasing by 2.1% in 2019, energy-related CO2 emissions will decrease by 2.0% in 2020 and again by 1.5% in 2021 for a third consecutive year of declines.
These declines come after an increase in 2018 when weather-related factors caused energy-related CO2 emissions to rise by 2.9%. If this forecast holds, energy-related CO2 emissions will have declined in 7 of the 10 years from 2012 to 2021. With the forecast declines, the 2021 level of fewer than 5 billion metric tons would be the first time emissions have been at that level since 1991.
After a slight decline in 2019, EIA expects petroleum-related CO2 emissions to be flat in 2020 and decline slightly in 2021. The transportation sector uses more than two-thirds of total U.S. petroleum consumption. Vehicle miles traveled (VMT) grow nearly 1% annually during the forecast period. In the short term, increases in VMT are largely offset by increases in vehicle efficiency.
Winter temperatures in New England, which were colder than normal in 2019, led to increased petroleum consumption for heating. New England uses more petroleum as a heating fuel than other parts of the United States. EIA expects winter temperatures will revert to normal, contributing to a flattening in overall petroleum demand.
Natural gas-related CO2 increased by 4.2% in 2019, and EIA expects that it will rise by 1.4% in 2020. However, EIA expects a 1.7% decline in natural gas-related CO2 in 2021 because of warmer winter weather and less demand for natural gas for heating.
Changes in the relative prices of coal and natural gas can cause fuel switching in the electric power sector. Small price changes can yield relatively large shifts in generation shares between coal and natural gas. EIA expects coal-related CO2 will decline by 10.8% in 2020 after declining by 12.7% in 2019 because of low natural gas prices. EIA expects the rate of coal-related CO2 to decline to be less in 2021 at 2.7%.
The declines in CO2 emissions are driven by two factors that continue from recent historical trends. EIA expects that less carbon-intensive and more efficient natural gas-fired generation will replace coal-fired generation and that generation from renewable energy—especially wind and solar—will increase.
As total generation declines during the forecast period, increases in renewable generation decrease the share of fossil-fueled generation. EIA estimates that coal and natural gas electric generation combined, which had a 63% share of generation in 2018, fell to 62% in 2019 and will drop to 59% in 2020 and 58% in 2021.
Coal-fired generation alone has fallen from 28% in 2018 to 24% in 2019 and will fall further to 21% in 2020 and 2021. The natural gas-fired generation share rises from 37% in 2019 to 38% in 2020, but it declines to 37% in 2021. In general, when the share of natural gas increases relative to coal, the carbon intensity of the electricity supply decreases. Increasing the share of renewable generation further decreases the carbon intensity.
Source: U.S. Energy Information Administration, Short-Term Energy Outlook, January 2020
Note: CO2 is carbon dioxide.
GEO ExPro Vol. 16, No. 6 was published on 9th December 2019 bringing light to the latest science and technology activity in the global geoscience community within the oil, gas and energy sector.
This issue focusses on oil and gas exploration in frontier regions within Europe, with stories and articles discussing new modelling and mapping technologies available to the industry. This issue also presents several articles discussing the discipline of geochemistry and how it can be used to further enhance hydrocarbon exploration.
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Headline crude prices for the week beginning 13 January 2020 – Brent: US$64/b; WTI: US$59/b
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