It began with a tease. Turkish President Recep Tayyip Erdogan dropped hints that he was going to make a major energy announcement on Friday, 22 August 2020. It immediately set tongues wagging. Hit with a crumbling economy and a major Covid-19 outbreak, Turkey has been in the headlines for the wrong reasons over the year 2020. The new discovery, located in the Black Sea is an opportunity for Erdogan to change the narrative: claiming it as a historic step for domestic energy security and the fruits of an accelerating exploration drive that has put the country at loggerheads with its European neighbour(s).
The details of the discovery are this: some 320 bcm of natural gas located in the Tuna-1 sector of the western Black Sea. The numbers are based on initial estimates from a single well spudded by the drill ship Faith, but is enough to be the largest ever upstream discovery in Turkey, as well as in the Black Sea. Commercial viability has yet to be assessed, yet Erdogan has already set a production target of 2023. This is highly optimistic. The Black Sea region might have great potential, a US geological survey carried out in 2010 estimated up to 122 tcf of natural gas in place but is sorely lacking in current infrastructure. Romania’s Neptun Deep gas megaproject that is 100km north of the Tuna well has already stalled because of logistical challenges; and that infrastructure deficit applies to Turkey too. Bringing this gas to market is more likely to take at least 5 years, possibly up to a decade.
Not that the gas will have to travel far. Rather than earmarking this gas for potential piped exports to Europe (Turkey is already the host of several current and planned oil/gas pipelines connecting Russia and Azerbaijan to EU markets in the west), Tuna gas will be targeted for domestic use. Turkey is a currently major importer of natural gas, reliant on Russia, Azerbaijan and Iran for piped volumes and (increasingly) LNG, particularly from the US, to fill its growing demand. While the Tuna discovery will not be enough to eliminate its total import requirements, it could potentially make a huge dent in the national deficit – which is the source of the country’s current financial woes that have been exacerbated by the weakness of the lira. Which is why Erdogan hinted that the discovery will only hasten its drilling plans.
Turkey has plenty of reasons for doing this, not just political or commercial. It has seen how the east Mediterranean energy renaissance has transformed the fate of its neighbours. Egypt is now a major gas producer, thanks to the landmark discovery of the Zohr gas field. Israel made several mega-finds over the past decade, which inspired Lebanon to investigate its waters as well. Erdogan will be hoping that Tuna can kick off about that same transformative change in his country: as the first in long streak of envisaged discoveries.
But that will take Turkey into uncharted waters. While exploration in the Black Sea has been long on-going, Turkish energy has been recently focused on a different part of the sea. Buoyed by discoveries around Cyprus and abutting Egyptian/Israeli finds, Erdogan has been sending a fleet of drillships to the waters surrounding Cyprus. This brings it into direct confrontation with the EU, since the island of Cyprus is still divided but the only country that recognises the northern breakaway part is Turkey. Through this, Turkey claims to have maritime rights in the area and a legitimate claim to any energy resources. The EU – especially Greece and the Cypriot government – vehemently disagree. In the past, this diplomatic issues was always tip-toed around. But Erdogan has cultivated a more antagonistic relationship with the US than his predecessors, and therein lies the problem. In fact, when Erdogan first dropped his tease, most chatter in the market surrounded not what the discovery is, but where it was; because one in disputed Cypriot waters comes with it a political dilemma with no clear path to be solved.
For now, this time bomb has not yet started ticking. Tuna natural gas in firmly within recognised Turkish borders. But given the speed and verve that the country is harnessing in the eastern Mediterranean, it is only a matter of time. If there is gas in the disputed waters, it will be found. When that happens, Erdogan and his government will have to confront a difficult situation – here is natural gas, but who does it belong to?
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In 2020, renewable energy sources (including wind, hydroelectric, solar, biomass, and geothermal energy) generated a record 834 billion kilowatthours (kWh) of electricity, or about 21% of all the electricity generated in the United States. Only natural gas (1,617 billion kWh) produced more electricity than renewables in the United States in 2020. Renewables surpassed both nuclear (790 billion kWh) and coal (774 billion kWh) for the first time on record. This outcome in 2020 was due mostly to significantly less coal use in U.S. electricity generation and steadily increased use of wind and solar.
In 2020, U.S. electricity generation from coal in all sectors declined 20% from 2019, while renewables, including small-scale solar, increased 9%. Wind, currently the most prevalent source of renewable electricity in the United States, grew 14% in 2020 from 2019. Utility-scale solar generation (from projects greater than 1 megawatt) increased 26%, and small-scale solar, such as grid-connected rooftop solar panels, increased 19%.
Coal-fired electricity generation in the United States peaked at 2,016 billion kWh in 2007 and much of that capacity has been replaced by or converted to natural gas-fired generation since then. Coal was the largest source of electricity in the United States until 2016, and 2020 was the first year that more electricity was generated by renewables and by nuclear power than by coal (according to our data series that dates back to 1949). Nuclear electric power declined 2% from 2019 to 2020 because several nuclear power plants retired and other nuclear plants experienced slightly more maintenance-related outages.
We expect coal-fired electricity generation to increase in the United States during 2021 as natural gas prices continue to rise and as coal becomes more economically competitive. Based on forecasts in our Short-Term Energy Outlook (STEO), we expect coal-fired electricity generation in all sectors in 2021 to increase 18% from 2020 levels before falling 2% in 2022. We expect U.S. renewable generation across all sectors to increase 7% in 2021 and 10% in 2022. As a result, we forecast coal will be the second-most prevalent electricity source in 2021, and renewables will be the second-most prevalent source in 2022. We expect nuclear electric power to decline 2% in 2021 and 3% in 2022 as operators retire several generators.
Source: U.S. Energy Information Administration, Monthly Energy Review and Short-Term Energy Outlook (STEO)
Note: This graph shows electricity net generation in all sectors (electric power, industrial, commercial, and residential) and includes both utility-scale and small-scale (customer-sited, less than 1 megawatt) solar.
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The tizzy that OPEC+ threw the world into in early July has been settled, with a confirmed pathway forward to restore production for the rest of 2021 and an extension of the deal further into 2022. The lone holdout from the early July meetings – the UAE – appears to have been satisfied with the concessions offered, paving the way for the crude oil producer group to begin increasing its crude oil production in monthly increments from August onwards. However, this deal comes at another difficult time; where the market had been fretting about a shortage of oil a month ago due to resurgent demand, a new blast of Covid-19 infections driven by the delta variant threatens to upend the equation once again. And so Brent crude futures settled below US$70/b for the first time since late May even as the argument at OPEC+ appeared to be settled.
How the argument settled? Well, on the surface, Riyadh and Moscow capitulated to Abu Dhabi’s demands that its baseline quota be adjusted in order to extend the deal. But since that demand would result in all other members asking for a similar adjustment, Saudi Arabia and Russia worked in a rise for all, and in the process, awarded themselves the largest increases.
The net result of this won’t be that apparent in the short- and mid-term. The original proposal at the early July meetings, backed by OPEC+’s technical committee was to raise crude production collectively by 400,000 b/d per month from August through December. The resulting 2 mmb/d increase in crude oil, it was predicted, would still lag behind expected gains in consumption, but would be sufficient to keep prices steady around the US$70/b range, especially when factoring in production increases from non-OPEC+ countries. The longer term view was that the supply deal needed to be extended from its initial expiration in April 2022, since global recovery was still ‘fragile’ and the bloc needed to exercise some control over supply to prevent ‘wild market fluctuations’. All members agreed to this, but the UAE had a caveat – that the extension must be accompanied by a review of its ‘unfair’ baseline quota.
The fix to this issue that was engineered by OPEC+’s twin giants Saudi Arabia and Russia was to raise quotas for all members from May 2022 through to the new expiration date for the supply deal in September 2022. So the UAE will see its baseline quota, the number by which its output compliance is calculated, rise by 330,000 b/d to 3.5 mmb/d. That’s a 10% increase, which will assuage Abu Dhabi’s itchiness to put the expensive crude output infrastructure it has invested billions in since 2016 to good use. But while the UAE’s hike was greater than some others, Saudi Arabia and Russia took the opportunity to award themselves (at least in terms of absolute numbers) by raising their own quotas by 500,000 b/d to 11.5 mmb/d each.
On the surface, that seems academic. Saudi Arabia has only pumped that much oil on a handful of occasions, while Russia’s true capacity is pegged at some 10.4 mmb/d. But the additional generous headroom offered by these larger numbers means that Riyadh and Moscow will have more leeway to react to market fluctuations in 2022, which at this point remains murky. Because while there is consensus that more crude oil will be needed in 2022, there is no consensus on what that number should be. The US EIA is predicting that OPEC+ should be pumping an additional 4 million barrels collectively from June 2021 levels in order to meet demand in the first half of 2022. However, OPEC itself is looking at a figure of some 3 mmb/d, forecasting a period of relative weakness that could possibly require a brief tightening of quotas if the new delta-driven Covid surge erupts into another series of crippling lockdowns. The IEA forecast is aligned with OPEC’s, with an even more cautious bent.
But at some point with the supply pathway from August to December set in stone, although OPEC+ has been careful to say that it may continue to make adjustments to this as the market develops, the issues of headline quota numbers fades away, while compliance rises to prominence. Because the success of the OPEC+ deal was not just based on its huge scale, but also the willingness of its 23 members to comply to their quotas. And that compliance, which has been the source of major frustrations in the past, has been surprisingly high throughout the pandemic. Even in May 2021, the average OPEC+ compliance was 85%. Only a handful of countries – Malaysia, Bahrain, Mexico and Equatorial Guinea – were estimated to have exceeded their quotas, and even then not by much. But compliance is easier to achieve in an environment where demand is weak. You can’t pump what you can’t sell after all. But as crude balances rapidly shift from glut to gluttony, the imperative to maintain compliance dissipates.
For now, OPEC+ has managed to placate the market with its ability to corral its members together to set some certainty for the immediate future of crude. Brent crude prices have now been restored above US$70/b, with WTI also climbing. The spat between Saudi Arabia and the UAE may have surprised and shocked market observers, but there is still unity in the club. However, that unity is set to be tested. By the end of 2021, the focus of the OPEC+ supply deal will have shifted from theoretical quotas to actual compliance. Abu Dhabi has managed to lift the tide for all OPEC+ members, offering them more room to manoeuvre in a recovering market, but discipline will not be uniform. And that’s when the fireworks will really begin.
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