Hot Commodities

Hot Commodities: Spring (House) Cleaning

By Ellen Scholl
Thursday, April 7, 2016, 1:08 PM

Following protests spearheaded by powerful Shiite cleric Moqtada al Sadr, Iraqi Oil Minister Abd al-Mahdi announced his resignation at the end of last month, suspending his activities as Minister and delegating responsibility to his deputy.

The resignation was part of a larger transition, long promised Prime Minister Haider al-Abadi, to replace current government officials with technocrats selected based on merit in an effort to transform the Iraqi patronage system and reduce corruption. While the Prime Minister has promised to fight corruption since gaining office, fulfilling his pledge gained new momentum following the Shiite protests. The protesters have been calling for Baghdad to replace party officials, who they view as corrupt, with technocrats, along with demands that the government share oil revenues more directly with Iraqi citizens, namely those in the oil producing regions.

While the Prime Minister announced a new list of cabinet ministers at the end of March, Reuters reports that the government’s candidate to replace al-Mahdi, Kurdish geologist Nizar Saleem Numan, withdrew his candidacy the following day, allegedly because he was selected without the consensus of all Kurdish groups.

The Shiite protesters are not first to point to what they see as inequitable oil revenue sharing between the Iraqi central government and the governorates and regions. The Kurdish Regional Government and the Government of Iraq have been at odds for years over oil revenues, a disagreement which has been exacerbated by low oil prices, falling revenues, and increasing costs to fight the Islamic State.

Skeptical that the changes, and al-Mahdi’s replacement, will make much difference in practice, Charles Kennedy at Oil Price says the shake up comes amid growing instability in the Iraqi oil sector thanks to ongoing oil sharing disputes, security challenges, and governance woes, signifying a potential slowdown in 2015’s fastest growing oil producer.

Club Med

Iraq isn’t the only one suffering from a setback. In Israel, a ruling by the Jerusalem High Court struck down a previously reached deal with U.S. firm Noble Energy and Israel’s Delek Group to develop the Leviathan offshore gas field. At issue was the “stability clause” included in the deal barring regulatory changes impacting the gas industry for ten years, which supporters said was necessary to provide investment stability.

The developments and discoveries in Israel are part of a larger spate of offshore gas discoveries in the Eastern Mediterranean, Many hope the discoveries will incentivize regional cooperation and maybe even serve as a foundation for resolving long-standing geopolitical issues in the region—namely, the division of Cyprus and the animosity between Turkey and Israel.

While things remain in a holding pattern in Israel, Cyprus has announced a third licensing round for its own resources, inviting bids for exploration in additional offshore blocs. The big question is how resources in Cyprus, if produced, will get to market—and more specifically, whether they can reach the lucrative Turkish market.

As Natural Gas Europe points out, gas development in both Cyprus and Israel hinges on the Cyprus question. Any pipeline from Israel to Turkey would need to pass through Cypriot waters, while production in Cyprus would raise the question of revenue sharing on the divided island and economic relations with Turkey, the only country in the world which recognizes the so-called Turkish Republic of Northern Cyprus. Offshore energy production and transport also touches on the sensitive and unresolved issue of where one country’s Exclusive Economic Zones ends and another begins in the Eastern Mediterranean.

However, even Turkey may have something to gain from setting aside its differences, as the specter of increased eastern med gas could help it reduce its reliance on its former friend and current foe Russia. This comes as Politico reports the possibility of reaching a peace agreement in Cyprus is closer than it has been in decades—a development enabled in part by the desire on all sides to profit from the resource potential.

Speaking last month at an energy conference held by the German Foreign Ministry in Berlin, Cypriot Foreign Minister Ioannis Kasoulides said he hoped the Cyprus problem would be solved in the not too distant future, and pointed to the cooperation of Eastern Mediterranean companies as a precursor to political cooperation—and eventual reconciliation—between the “enemies of yesterday” and future “partners of peace.”  

When it Rains...

And when it doesn’t. Already reeling from low oil prices, Venezuela could use some April showers as an El Nino-induced drought has led to both water shortages and an electricity crisis. The water level in the Guri dam, which provides between 50 and 65 percent of Venezuela’s electricity in the form of hydropower, is dangerously low. The Wall Street Journal reports that the situation is so dire that many have resorted to stealing water, which one erstwhile thief explains is “like gold.”

While the drought is certainly severe, many allege corruption and mismanagement have exacerbated its impact. Writing in Foreign Policy, Juan Cristobal Nagel says Venezuelans “must be wondering whether their country’s electricity supply will outlast its incompetent government.” The government, for its part, blames saboteurs and attacks for the outages, allegations for which there appears to be little evidence.

Venezuela is plagued by high electricity consumption thanks to an electricity intensive oil sector and price controls which encourage rampant use. A legacy of government mismanagement has seen demand far outpace supply, exacerbated by the 2007 nationalization of the electricity sector. Sound like a bad situation getting worse? Don’t worryaccording to electricity minister Luis Motta Dominguez, God is on Venezuela’s side. Holy Week was even extended to conserve power.

However, if water levels go lower Venezuela may be in need of a divine intervention, as the dam turbines will be have to be shut off. And then, Negal warns, the “electricity crisis will turn into a catastrophe.”

Arctic Antics

The Arctic has been increasingly on policymakers’ minds as the impacts of climate change slowly open up more of the frozen region for navigation and production—and potential competition. As National Geographic reports, the thawing of Arctic ice from climate change is leading to a “rush to exploit the region’s resources.”

While there is a history of cooperation in the Arctic, notably the Arctic Council, and it has remained an area of low tension, many fear new opportunities might stoke ambitions and unleash rivalries. And while many are hailing developments like COP 21 and the divestment movement as the beginning of the end of the fossil fuel era, others are looking to the Arctic, estimated to hold 13 percent of the world’s undiscovered oil and one third of the world’s undiscovered gas, as a new business opportunity.

Just last month, Gazprom Neft produced its 10 millionth barrel of oil from its Arctic Prirazlomnoye field, which Gazprom Neft Executive Director Gennady Lubin hailed as a landmark. The company also revised its production estimates upward following a review which concluded potential peak production is higher than previously thought. Gazprom isn't the only one who sees opportunity through the permafrost—Norway has an oil platform in the Barents sea and Canada conducts mining operations in its Northwest territory.

However, some erstwhile Arctic actors, namely Shell, have found the operational environment challenging, as evidenced by Shell’s fall 2015 announcement that they were withdrawing from their multiyear (and multibillion dollar) enterprise in the Chukchi Sea. Following the withdrawal, the Department of Interior announced it would cancel two planned offshore Arctic lease sales.

As ice melts and navigation increases, oil and gas exploration isn’t the only Arctic activity. NATO recently concluded its 2016 Cold Response training exercise in Norway, based on prepositioning agreements between the U.S. Marines and the Norwegian government. The U.S. recently wrapped up its military ice exercise, ICEX 2016, and two U.S. submarines, the USS Hartford and Hampton, will remain in Arctic waters in early April.

For a deeper dive into the dynamics of offshore hydrocarbons and Arctic security, check out this research paper from the German Institute for International and Security Affairs, which examines whether status quo is moving “from cooperation to confrontation in an era of geopolitical and economic turbulence.”  

 

What to Watch

(East) Africa Rising

A major gas discovery in Tanzania by the Dodsal group could solidify Tanzania’s growing reputation as a major gas player. The discovery in Tanzania’s Ruvu Basin could yield between 2.7 and 3.8 trillion feet of gas valued at between $8 and 11 billion. The discovery is one of a string of finds, including in in Mozambique, Kenya, and Uganda, which have put East Africa on the hydrocarbon map, and one which will bring an addition $300 million in investment to support exploration and production efforts in Tanzania.

However, while gas is good news for East African states, Africa’s oil producers are “crashing hard,” according to Luke Patey in Foreign Policy. Patey says the decline in oil prices is mirrored by declining fortunes in the states which depend on them, like Nigeria and Angola. Power is shifting to countries like Tanzania, which boasts a more diversified economy in addition to gas resources. In particular, Patey warns Nigeria is in an “economic tailspin,” with flagging economic growth, falling revenue, and few resources with which to fulfill anti-corruption promises—and address Boko Haram.

Doha and Riyadh

While East Africa may be home to newcomers to the energy stage, the old energy hands (i.e. OPEC and friends) will meet in Doha April 17 to discuss the details of the potential oil production freeze announced in February. (Who Iraq plans to send to the shindig is anyone’s guess.)

Qatar has invited all major producers to attend the Doha talks, and many are not only receptive to but desperately hoping for a production freeze. In particular, Russia is in dire need of a bump in oil prices, as high costs, an inefficient oil sector, and sanctions have wreaked havoc on the Russian economy. The Russian Minister of Natural Resources has even reportedly stated that Russian oil producer Rosneft would lower output.

However, the big elephant in Doha may be the one not in the room. Iran continues to insist it has no intention to participate in a production freeze, and continues to move forward with plans to increase production. However, Saudi Arabia is not letting go of their market without a fight. The Financial Times reports that the Kingdom has banned Iranian vessels transporting crude from entering their waters, as has Bahrain. While this may be slowing Iranian crude from entering the market, it has yet to change Tehran’s mind on the production freeze, which Riyadh has stated it will not go through with otherwise.

Saudi efforts to block the shipment of Iranian crude may further work at cross purposes to establishing a potential production freeze. According to Charles Kennedy writing for Oil Price, “oil sitting in floating storage off the coast of Iran has climbed by 10 percent this year to 50 million barrels.” Were Iranian to find a way to move this to market—along with high storage inventories around in the world—it would likely undermine any impact, real or perceived, of an agreement to freeze production.

While the countries try to decide on a strategy, others are debating whether OPEC has a future. Writing in Gulf Business, Nasser Saidi questions whether the new oil market dynamics and structure have led to a permanently low demand for oil—and the end for OPEC. Saidi argues that the “oil world that OPEC helped build is defunct” and their purpose as an institution has been “overwhelmed by structural and technological change and innovation.”

OPEC may not be the only dinosaur in the room at Doha. A recent report by The Atlantic Council Global Energy Center asks if these energy market changes also herald “the end of the rentier state.” This came after a five-hour interview in which Deputy Crown Prince Mohammed bin Salman outlined a series of sweeping economic changes intended to prepare Saudi Arabia for a world without oil, including the creation of the world’s largest sovereign wealth fund to “help wean the Kingdom off oil.”

As part of the reforms, the Saudi regime is considering subsidy cuts and privatizing Aramco, a five percent sell off will of which will occur by 2018 according to the prince, as well as the introduction of a Value Added Tax. Atlantic Council author Jean-François Seznec says these measures will change “the relationship between the government and the governed” in profound ways, while Bloomberg calls the reform plans “the biggest economic shake-up since the founding of Saudi Arabia.”

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