by Timothy Abraham – Photo by Jerry Mathes II
This week’s review looks at OPEC’s efforts in cutting oil production with a particular focus on Venezuela and financial, legal and practical developments in the European energy market.
OIL OUTPUT, OPEC AND BEYOND
OPEC beats oil output cut expectations, according to the International Energy Agency. The November pact to cut global oil supply seems to its target. Subsequently, Brent increased by $1 a barrel rising to $56.73 a barrel by February 10. Cuts in January have been “some of the deepest in the history of OPEC output cut initiatives“, said the IEA. OPEC was aiming to reduce joint members’ output by 1.2m barrels a day. Oil producers such as Russia, Kazakhstan and Oman also decreased their oil production. This oil cut was good news not only for the producers participating in the cut deal: China, US, Brazil and Canada all have benefitted from the increase of the oil price. The IEA said it expects the production of oil to increase in spite of OPEC’s efforts to increase the price of oil, but they mentioned, “The oil market is very much in a wait-and-see mode“.
Russian oil companies increased export supplies via Transneft’s pipeline system by 189 000 b/d in January from a year earlier, and by 114 000 b/d from December’s level, according to data compiled by the Russian Ministry of Energy. Russia is aiming at boosting exports of Urals crude oil for the first half of this year, since prices for Baltic Urals reached their highest in 15 years, despite of promised oil production cuts. As part of the coordinated OPEC / non-OPEC supply cut, Russia has pledged to gradually reduce production by 300 000 b/d between January and June. According to the information posted on the homepage of its Ministry of Energy website, Russia’s Energy Minister Alexander Novak says that the country reduced its oil production by 117 000 bdp in January. At the same time, transit and exports of Russian oil will increase by 5% in January through March, compared to the period October-December 2016, to 2.3 million b/d.
Venezuela is trying to convince OPEC and non-OPEC producers to prolong the output reduction to a full 12 months. Recently Venezuelan foreign minister, Delcy Rodriguez, and new energy minister, Nelson Martinez, have made a number of visits to participants of the current restriction move, namely Russia, Iran, Iraq, Kuwait, Saudi Arabia, Qatar and Oman to discuss ways of stabilizing the oil prices for the long term. The Venezuelan economy is on the brink of collapse now with the current level of oil prices. A 12-month output reduction is expected to boost prices to $60-70/bbl by the end of 2017. PDVSA, Venezuela’s national oil company, is months late with their oil shipments to China and Russia under the oil-for-loan deals. In total Venezuela has received more than $50 billion through credits provided by the two countries. The total worth of the late cargoes to state-run Chinese and Russian firms is about $750 million.
Shipments to China and Russia are critical for PDVSA’s financial health because firms from the two countries purchase about a third of the PDVSA’s total oil and fuel exports. The administration of Venezuela’s president, Nicolas Maduro, has for years relied on credit from the two nations, particularly China, to finance infrastructure and social investment in Venezuela. This isn’t the only way Venezuela shoots its own foot. The CEO of Rosneft and his company are now being roadblocked by legislators who question the legality of a 40% joint venture deal with a PdVSA subsidiary called Petromonagas. Sechin says the deal is legal. Venezuela, which can use all the money it can get, thinks otherwise.
EUROPEAN DEVELOPMENTS
The UK imports its first cargo of liquefied natural gas (LNG) from Peru on February 21. The vessel called Gallina LNG carries about 61,146 metric tonnes of LNG. The tanker will come from Peru via the Panama Canal, which was recently expanded. The demand for LNG is growing worldwide; this has pushed LNG prices up and increased competition between buyers. The supply of LNG is expected to increase by almost 50 per cent between 2015 and 2020. UK LNG imports have decreased in the end of 2016, because Qatar, the largest exporter of the fuel, diverted its supply to Asia. Royal Dutch Shell has a 100 per cent offtake agreement with Peru LNG.
Getting cleaner power plants, gas links and storage built or upgraded in southeast Europe is one of the top priorities in the EU’s energy union. But the coldest winter in a decade in the Balkans exposed that EU’s plans will be difficult to be realized. Freezing weather in the beginning of January caused energy shortages across Southeast Europe, exposing the weakness of the region’s power market, which is dominated by coal-fired generation and hydropower. Greece cut power exports for two days, while Romania restricted flows as rivers froze and one of its nuclear reactors had to be halted after a blizzard damaged the high-voltage line connecting it to the grid. This situation created a typical prisoner dilemma, since every country in the region showed little solidarity with its neighbors. One of the biggest energy exporters – Bulgaria, which normally exports more than 10% of its electricity, cut its outflows for almost a month until 9 February. The EU has prepared a draft proposal for the region that would oblige member countries to develop prevention plans for such energy risks.
Asset manager Actiam with assets over €56 billion supports the sustainable resolution by ‘Follow This’, the activist shareholders trying to make Shell greener. With the resolution, Shell shareholders called upon the leadership to take part in the transition to a sustainable energy supply. They want Shell to set ambitious targets and comply with the ultimate goal of reducing greenhouse gas emissions in line with the agreements in the Climate Agreement of Paris. Actiam, which has an interest of €170 million in Shell, is now supporting the movement.
This is the first time a major shareholder openly supports the action by ‘Follow This’. Actiam did vote in support of the resolution last time which got defeated by 97%. Two other major shareholders, Dutch pension funds PPGM and APG are less positive. PPGM says they do not want to take the place of the executive board as shareholders and will most likely vote against. APG never says in advance how they will vote, but experts say they will most likely vote against. The shareholders meeting will take place on May 23.
Timothy Abraham is a student of the ENERPO Program, European University at Saint Petersburg. He can be contacted via email tabraham @ eu.spb.ru