Hot Commodities

Hot Commodities: The "Mending Fences" Edition

By Ellen Scholl
Friday, October 14, 2016, 10:30 AM

Pipe Dreams Come True at the World Energy Congress

The World Energy Congress, a meeting of over 10,000 participants from over 85 countries focused on energy and hosted by the World Energy Council, convened this week in Istanbul. The opening day of the conference was attended by world leaders from Turkish President Erdogan to Putin to Venezuelan President Maduro, and focused on “embracing new frontiers.”

In addition to embracing new frontiers, Turkey and Russia appeared to put the past behind them and cemented their renewed relationship by signing an intergovernmental agreement on Turkish Stream, a pipeline which would run under the Black Sea to provide Turkey with Russian natural gas. The two countries also agreed to move forward on other projects, including the acceleration of plans for Russian firm Rosatom to build Turkey’s first nuclear power plant, Akkuyu. In President Putin’s first visit to the country since the dispute over the downed Russian plane last year, he agreed to lift import restrictions imposed against Turkish products and move forward with delayed energy projects. Many speculate that Turkey may have gotten the better end of the deal, as reports indicate Russia agreed to a discount on the price of gas it currently sells to Turkey.

The pair also discussed larger security issues, including the ongoing conflict in Syria, where Turkey and Russia support opposing groups and outcomes. President Erdogan needs both Russian and U.S. support for a no-fly zone in Syria, and may see his reconciliation with Putin as leverage in the ongoing negotiations.  

Turkish Stream has drawn criticism from those who perceive it as part of a Russian plan to continue to supply Europe with gas while undermining and eliminating Ukraine as a transit route and thus depriving the country of needed revenue. However, while the initial Turkish Stream project included four strings, or lines (three of which could conceivably supply Europe), according to Natural Gas World the current agreement includes two lines, one to supply the Turkish market and the second to to continue to the Greek border.  

Many, including European Commission Vice-President for Energy Union Maros Sefcovic, have expressed doubts in the past about the project’s necessity and commercial viability. However, Delphine Strauss argues in The Financial Times that the Turkish Stream has little to do with commercial viability and rather is “all about leverage” as it confers geopolitical advantages on both parties, though it remains to be seen whether they are real or simply perceived.

The World Energy Congress also provided a forum for Turkey and Israel to continue their gradual rapprochement. While in Istanbul, Israeli Energy Minister Yuval Steinitz discussed the potential of a pipeline project between Israel and Turkey, marking the first ministerial-level official visit between the two countries in the last six years following the fallout from the 2010 Mavi Marmara incident.

The conference also provided a platform for the so-called President of the Turkish Republic of Northern Cyprus to relate the Cyprus problem and its potential resolution to the potential for improved energy security and energy access in the region. Akinci called for the development of regional gas pipelines and emphasized the connection between gas interconnections and the ongoing talks to end the island’s division. He supported gas development as a potential  “peace project for everybody.”

 

The OPEC Guessing Game  

Meanwhile on the sidelines of the Congress, OPEC members are holding talks in an attempt to iron out the details of an agreement reached last month in Algiers to potentially limit and reduce oil production.

While OPEC did come to an agreement on a production target in Algiers despite low expectations, the agreed-to quota is little more than a promise on paper. In Algiers, countries did not agree to implement ay immediate cuts, but rather to return to the negotiating table and “conduct a serious and constructive dialogue with non-member producing countries” on how to stabilize the market. Loosely translated, they will argue over who has to cut and by how much—not easy questions to answer. And while oil prices did rise slightly on news of the so-called deal, there are several factors throwing the deal’s validity, and expectations it could be implemented, into doubt.

First, while the group provisionally agreed in Algiers to limit output to 33 million barrels of oil per day—amounting to a 160,000 barrel per day decline, to be born ostensibly by OPEC members—Iran, Nigeria and Libya were excused from the reductions. Given that the intended purpose of production limits is to bolster prices, the efficacy of the deal is undermined by reports that these three countries excused from the deal aim to increase production. Reports that planned production increases could amount to a collective 580,000 barrels per day, nearly the equivalent of the approximate 700,000 barrels per day in proposed cuts, would likely anger many countries wondering why they should sell less just to be offset by others selling more.

This is in addition to the fact that OPEC increased output in September amid ongoing discussions to cap and cut production. Furthermore, The Wall Street Journal reports there are discrepancies between OPEC production numbers and individual country data, further undermining confidence that the deal might actually happen, as it relies on member countries collectively agreeing to trust one another to stick to the cuts.

Furthermore, while Russian President Vladimir Putin has signaled his willingness to participate in such a deal at the World Energy Congress, there are doubts such talk will translate to concrete action. While the president of Lukoil, one of Russia’s largest oil firms, said the company will unify behind Russian participation in such a deal, Rosneft CEO Igor Sechin has snubbed the possibility, announcing that far from capping production, Russia’s largest oil company plans to increase output.  Writing in The Financial Times last month, Jack Farchy argues that “new drilling in Soviet-era brownfields makes it unlikely that Russia will help ease the global glut,” pointing to the spate of new investment and drilling by Rosneft.

While Fachy and others are skeptical of the willingness and ability of individual producing countries to abide by a deal or commit to cuts, the larger question may be the efficacy and utility of OPEC in a new era of oil and geopolitics. Writing in Foreign Policy, Emile Simpson argues that the organization is in its death throes, and that the agreement in Algiers “was not a sign of life but a sign of desperation.”

However, it could be argued that desperation achieved the intended goal, as oil prices lifted slightly following the announcement. It is also conceivable that this is part of a plan to continually kick the can down the road, telling the market what it wants to hear in order to momentarily stabilize prices and provide relief—or the semblance of it—for the most beleaguered producers, while keeping prices just low enough to keep out U.S. shale and keep consumers buying SUVs.

 

Winners and Losers in the Islamic Republic

While many are wondering if OPEC can hold it together, one OPEC member is wondering if updated U.S. sanctions guidance may enable much-needed (and anticipated) investment.

Last week, the U.S. Treasury Department updated its guidance on the remaining sanctions in place against Iran to allow dollar-denominated deals with entities in Iran not under sanction, even if those firms have minority stakes owned or controlled by an individual under sanction.

The nuclear deal, which resulted in the lifting of sanctions on Iran’s energy sector, raised hopes in that country that western investment would readily follow. It also raised expectations among energy companies hoping to cash in on Iran’s plentiful and cheap-to-produce oil. However, investment has been slow to materialize, due in part to remaining U.S. sanctions—so-called “secondary sanctions”—on investments and business deals with certain groups or individuals.

These sanctions are related to Iran’s support for terrorism, human rights violations, and involvement in Iraq and Syria, and put in place prohibitions on business activity with firms or entities belonging to the Iranian government or entities involved in such activities. This includes the Revolutionary Guards, who have a substantial presence in many sectors of the economy, including energy, and who see efforts to draw in foreign investment by President Hassan Rouhani as synonymous with attempts to push them out.

Since the nuclear deal, Iran has called for $100 billion in foreign investment to boost oil production 21 percent by 2021 and retake the number two slot at OPEC. The country announced a new petroleum contract over the summer to incentivize western companies, but difficult business regulations and lingering sanctions remain a risk. Furthermore, while Rouhani continues to call for foreign investment, namely from western firms, Supreme Leader Khamenei remains skeptical of western capital (and capitalism) and retains veto power over many major decisions. This leaves Rouhani in the uncomfortable position of appearing unable to deliver on his promises that the nuclear agreement would usher in economic growth.

It remains to be seen if the Treasury Department’s clarifications will move the needle. However, an increase in foreign investment could help revitalize Iran’s energy sector, as well as potentially dilute the position of power China currently exercises in the Iranian economy as the premier foreign investor, financier, and energy operator. As Marc Champion argues in Bloomberg, while western companies were shut out of Iran during Western sanctions, China was able to step in as a dominant source of investment, financing, and external influence in the energy sector. And as China continues to solidify its relationships with the region to secure its oil needs, it remains to be seen whether it will try to use these economic means of influence for geopolitical ends.

 

It’s All Fun and Games...

Until the power goes out.

Following Venezuelan President Maduro’s appearance in Istanbul for the World Energy Congress, where he delivered a special address with fellow elected (but not so democratic) leaders Putin, Erdogan, Aliyev, and company, Venezuelans were left in the dark during a soccer match in Merida.

While Maduro was at a conference dedicated to addressing, among other challenges, energy accessibility and reliability, a power cut caused a 22 minute stoppage of play in the middle of this week’s World Cup qualifying match between Venezuela and Brazil, during which the BBC reports that calls for Maduro’s ouster could be heard. The game was supposed to be followed by scheduled protests against the government, as the opposition works to collect the requisite signatures to trigger a referendum on Maduro’s rule.

The President has come under fire in part due to the country’s dire fiscal circumstances, low oil prices, and massive electricity shortages. Just this week, The New York Times reports that the Venezuelan Supreme Court took over budgetary oversight authority from the Congress—further consolidating power in the hands of Maduro and his allies—while the cash-strapped state oil company, PDVSA, has thus far failed to interest investors in its bond swap offer, intended to generate much needed revenue.

 

What to Watch

Things to Keep You Up At Night

While energy has not played a prominent role this election season, several (thankfully) harmless acts of sabotage this week suggest that perhaps security of critical energy infrastructure should be more closely considered by the candidates—along with climate change, energy security, and a host of other issues. Climate activists with the group Climate Direct Action broke into pipeline valve stations across the U.S. this week (a feat which seemed to require not much more than hopping a fence and cutting locks and chains) and shut the valves operating several cross-border pipes, temporarily disrupting the flow of crude oil from Canada to the U.S. The protesters’ stated intention was to raise awareness for climate change and act in solidarity with those protesting the Dakota Access Pipeline

While the pipelines were immediately shut down as a precaution and no accidents occurred, closing the valves on operational pipes can pose environmental and security risks. More importantly, the ease with which the protesters were able to tamper with critical infrastructure is unsettling.

In many areas around the world, from Nigeria to Turkey to Georgia to the Sinai, pipelines have been targeted by insurgents, terrorists, and armies in conflicts. Energy infrastructure often makes for both easy and desirable targets, given the ease of access, the criticality of energy resources and systems, and, in the case of pipeline, the prevalence of opportunity.

While the protest highlights the opportunity for physical attack, the FY 2015 Annual Vulnerability Coordination Report released by the U.S. Industrial Control Systems Cyber Emergency Response Team late last month highlighted energy industry vulnerabilities to cyber attack. The report concluded the energy sector has the most reported major cyber vulnerabilities in the U.S. of the sectors examined—not exactly good news given the confluence of the world’s first blackout-inducing cyber attack in Ukraine and increased Russian cyber offenses directed at the United States.

Topics: