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 a few days, the bi-annual OPEC meeting will take place on November 30, leading into a wider OPEC+ meeting on December 30. This is what all the political jostling and negotiations currently taking place is leading up to, as the coalition of major oil producers under the OPEC+ banner decide on the next step of its historic and ambitious supply control plan. Designed to prop up global oil prices by managing supply, a postponement of the next phase in the supply deal is widely expected. But there are many cracks appearing beneath the headline.
A quick recap. After Saudi Arabia and Russia triggered a price war in March 2020 that led to a collapse in oil prices (with US crude prices briefly falling into negative territory due to the technical quirk), OPEC and its non-OPEC allies (known collectively as OPEC+) agreed to a massive supply quota deal that would throttle their production for 2 years. The initial figure was 10 mmb/d, until Mexico’s reticence brought that down to 9.7 mmb/d. This was due to fall to 7.7 mmb/d by July 2020, but soft demand forced a delay, while Saudi Arabia led the charge to ensure full compliance from laggards, which included Iraq, Nigeria and (unusually) the UAE. The next tranche will bring the supply control ceiling down to 5.7 mmb/d. But given that Covid-19 is still raging globally (despite promising vaccine results), this might be too much too soon. Yes, prices have recovered, but at US$40/b crude, this is still not sufficient to cover the oil-dependent budgets of many OPEC+ nations. So a delay is very likely.
But for how long? The OPEC+ Joint Technical Committee panel has suggested that the next step of the plan (which will effectively boost global supply by 2 mmb/d) be postponed by 3-6 months. This move, if adopted, will have been presaged by several public statements by OPEC+ leaders, including a pointed comment from OPEC Secretary General Mohammad Barkindo that producers must be ready to respond to ‘shifts in market fundamentals’.
On the surface, this is a necessary move. Crude prices have rallied recently – to as high as US$45/b – on positive news of Covid-19 vaccines. Treatments from Pfizer, Moderna and the Oxford University/AstraZeneca have touted 90%+ effectiveness in various forms, with countries such as the US, Germany and the UK ordering billions of doses and setting the stage for mass vaccinations beginning December. Life returning to a semblance of normality would lift demand, particularly in key products such as gasoline (as driving rates increase) and jet fuel (allowing a crippled aviation sector to return to life). Underpinning the rally is the understanding that OPEC+ will always act in the market’s favour, carefully supporting the price recovery. But there are already grouses among OPEC members that they are doing ‘too much’. Led by Saudi Arabia, the draconian dictates of meeting full compliance to previous quotas have ruffled feathers, although most members have reluctantly attempt to abide by them. But there is a wider existential issue that OPEC+ is merely allowing its rivals to resuscitate and leapfrog them once again; the US active oil rig count by Baker Hughes has reversed a chronic decline trend, as WTI prices are at levels above breakeven for US shale.
Complaints from Iran, Iraq and Nigeria are to be expected, as is from Libya as it seeks continued exemption from quotas due to the legacy of civil war even though it has recently returned to almost full production following a truce. But grievance is also coming from an unexpected quarter: the UAE. A major supporter in the Saudi Arabia faction of OPEC, reports suggest that the UAE (led by the largest emirate, Abu Dhabi) are privately questioning the benefit of remaining in OPEC. Beset by shrivelling oil revenue, the Emiratis have been grumbling about the fairness of their allocated quota as they seek to rebuild their trade-dependent economy. There has been suggestion that the Emiratis could even leave OPEC if decisions led to a net negative outcome for them. Unlike the Qatar exit, this will not just be a blow to OPEC as a whole, questioning its market relevance but to Saudi Arabia’s lead position, as it loses one of its main allies, reducing its negotiation power. And if the UAE leaves, Kuwait could follow, which would leave the Saudis even more isolated.
This could be a tactic to increase the volume of the UAE’s voice in OPEC+, which has been dominated by Saudi Arabia and Russia. But it could also be a genuine policy shift. Either way, it throws even more conundrums onto a delicate situation that could undermine an already fragile market. Despite the positive market news led by Covid-19 vaccines and demand recovery in Asia, American crude oil inventories in Cushing are now approaching similar high levels last seen in April (just before the WTI crash) while OPEC itself has lowered its global demand forecast for 2020 by 300,000 b/d. That’s dangerous territory to be treading in, especially if members of the OPEC+ club are threatening to exit and undermine the pack. A postponement of the plan seems inevitable on December 1 at this point, but it is what lies beyond the immediate horizon that is the true threat to OPEC+.
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In the U.S. Energy Information Administration’s (EIA) November Short-Term Energy Outlook (STEO), EIA forecasts that U.S. crude oil production will remain near its current level through the end of 2021.
A record 12.9 million barrels per day (b/d) of crude oil was produced in the United States in November 2019 and was at 12.7 million b/d in March 2020, when the President declared a national emergency concerning the COVID-19 outbreak. Crude oil production then fell to 10.0 million b/d in May 2020, the lowest level since January 2018.
By August, the latest monthly data available in EIA’s series, production of crude oil had risen to 10.6 million b/d in the United States, and the U.S. benchmark price of West Texas Intermediate (WTI) crude oil had increased from a monthly average of $17 per barrel (b) in April to $42/b in August. EIA forecasts that the WTI price will average $43/b in the first half of 2021, up from our forecast of $40/b during the second half of 2020.
The U.S. crude oil production forecast reflects EIA’s expectations that annual global petroleum demand will not recover to pre-pandemic levels (101.5 million b/d in 2019) through at least 2021. EIA forecasts that global consumption of petroleum will average 92.9 million b/d in 2020 and 98.8 million b/d in 2021.
The gradual recovery in global demand for petroleum contributes to EIA’s forecast of higher crude oil prices in 2021. EIA expects that the Brent crude oil price will increase from its 2020 average of $41/b to $47/b in 2021.
EIA’s crude oil price forecast depends on many factors, especially changes in global production of crude oil. As of early November, members of the Organization of the Petroleum Exporting Countries (OPEC) and partner countries (OPEC+) were considering plans to keep production at current levels, which could result in higher crude oil prices. OPEC+ had previously planned to ease production cuts in January 2021.
Other factors could result in lower-than-forecast prices, especially a slower recovery in global petroleum demand. As COVID-19 cases continue to increase, some parts of the United States are adding restrictions such as curfews and limitations on gatherings and some European countries are re-instituting lockdown measures.
EIA recently published a more detailed discussion of U.S. crude oil production in This Week in Petroleum.
The U.S. Energy Information Administration (EIA) forecasts that members of the Organization of the Petroleum Exporting Countries (OPEC) will earn about $323 billion in net oil export revenues in 2020. If realized, this forecast revenue would be the lowest in 18 years. Lower crude oil prices and lower export volumes drive this expected decrease in export revenues.
Crude oil prices have fallen as a result of lower global demand for petroleum products because of responses to COVID-19. Export volumes have also decreased under OPEC agreements limiting crude oil output that were made in response to low crude oil prices and record-high production disruptions in Libya, Iran, and to a lesser extent, Venezuela.
OPEC earned an estimated $595 billion in net oil export revenues in 2019, less than half of the estimated record high of $1.2 trillion, which was earned in 2012. Continued declines in revenue in 2020 could be detrimental to member countries’ fiscal budgets, which rely heavily on revenues from oil sales to import goods, fund social programs, and support public services. EIA expects a decline in net oil export revenue for OPEC in 2020 because of continued voluntary curtailments and low crude oil prices.
The benchmark Brent crude oil spot price fell from an annual average of $71 per barrel (b) in 2018 to $64/b in 2019. EIA expects Brent to average $41/b in 2020, based on forecasts in EIA’s October 2020 Short-Term Energy Outlook (STEO). OPEC petroleum production averaged 36.6 million barrels per day (b/d) in 2018 and fell to 34.5 million b/d in 2019; EIA expects OPEC production to decline a further 3.9 million b/d to average 30.7 million b/d in 2020.
EIA based its OPEC revenues estimate on forecast petroleum liquids production—including crude oil, condensate, and natural gas plant liquids—and forecast values of OPEC petroleum consumption and crude oil prices.
EIA recently published a more detailed discussion of OPEC revenue in This Week in Petroleum.