January 2016: The Long Shadow of Falling Oil Prices

Lydia Powell and Ashish Gupta, Observer Research Foundation

Climate Change

 

The fall in oil prices along with the economic uncertainty over China appeared to be killing the euphoria over the Paris Agreement rather prematurely in January. There was very little news on how man had conquered the complex problem of climate change in a 12 page agreement. On the other hand there was news of falling investment in the solar sector and companies such as Suzlon joining the queue for solar give-aways. The French President’s presence at India’s republic day parade made it necessary that the Paris climate pledges are re-affirmed and hopeful sounding promises are made on a solar alliance led by India and France. These are were in line with what the domestic and international audience hoped to hear but whether it will actually make any difference to the course of climate promises is uncertain. A poor economic climate is not necessarily the best climate for implementing climate pledges.

Conventional Fuels

Oil & Gas

The impact of low oil prices on ONGC started making it to the headlines of business newspapers in January.  ONGC was reported to reduced capital spending by roughly Rs 48 billion and also embarking on sweeping cost cutting measures. The Government for its turn increased excise duty on petrol and diesel to sustain the revenue from petroleum products. The government was also reported to be considering to ease the burden on oil producers. On the other hand news from the downstream players remained positive.  IOC was reported to have begun petrol production from its Paradip refinery.  HPCL was reported to have got environmental approval for its Vizag refinery.  The government also announced plans to add 10,000 new LPG dealers in 2016. While this may improve access to modern cooking fuels outside urban areas, other support schemes may be required to increase access to cooking fuels among poor rural households. Supply may not create its own demand as per Say’s law. Demand for energy is a function of the economic circumstances of the household. There was also news that the Government lost Rs 14 billion in revenue because Cairn was not allowed to export oil. When it comes to oil, no net oil importing country, including the United States allows the export of oil for strategic reasons. India cannot be expected to be an exception to this rule as domestic production meets less than a third of oil demand. The prospect of revenue generation will not trump national security concerns. It was reported that the Indian refining segment would need an investment of at least $ 4.5 billion to produce Euro VI fuel by 2020. Low oil prices may have a say in such investments and it is probably too early to conclude that India’s petroleum is getting cleaner.

Coal

In a meeting held earlier this month the Coal Ministry asked Coal India Ltd (CIL) to ensure that it meets the target of 550 million tonnes (mt) for the current fiscal. CIL was also asked to prepare a roadmap for enhancing coal production by 2020 including the capacity addition from new projects, use of mass production technologies and identification of existing ongoing projects with growth potential. The ministry assured help with environment & forest clearances and also offered assistance with State Government for land acquisition and coordinated efforts with Railways for movement of coal.

CIL achieved a 9.8 percent growth in production in January but this achievement has become a problem for CIL. It does not have adequate space for coal stocks but cola off take is less than expected.

CIL currently has a stockpile of 40 mt. In addition to this, another 34 mt is lying with power plants which takes the inventory to 74 mt. Selling off the additional stock is the only viable solution but unfortunately most of the power plants with contracts with CIL have full inventories and they cannot stock additional volumes. Warmer than expected winter and slow demand growth for power is adding to CILs troubles.

Lower coal prices may not be of help as it will not be able to push the demand instantly. The only option left with CIL is to offer higher volumes through e-auctions but consumers with no dedicated contracts who participate in e-auctions do not generally seek huge volumes. CIL can revise coal production targets downwards but this will invite criticism.

Power

The news on power was not inspiring. Demand for power is slow and distribution companies re bleeding.  On the other hand, distribution companies accounting for over 90% of accumulated losses were reported to have signed up to the restructuring package. One can only hope that this will be the beginning of the end to continued financial deterioration of the sector.

Views are those of the authors                     

Authors can be contacted at lydia@orfonline.org, ashishgupta@orfonline.org

Courtesy: Energy News Monitor | Volume XII; Issue 33

 

Advertisements

Oil Price: Certainty of Uncertainty?

Lydia Powell and Akhilesh Sati, Observer Research Foundation

The global risks report for 2016 by world economic forum (WEF) was released recently.  Its familiar matrix that ranks risks in terms of likelihood and impact is dominated by environmental, societal and geo-political risks.  Only one economic risk makes it to the top five risks and that too only in terms of impact and not likelihood and it is ‘severe energy price shock’ ranked fifth among risks with high impact. Unfortunately there are no explanatory observations on what an ‘energy price shock’ is and why it is important. We will assume that the WEF report is referring to the price of oil because the price of oil is a bench mark for the price of other energy sources as well as a bench mark for global economic performance. The WEF is expecting to be ‘shocked’ in 2016 probably because its earlier expectations of an oil price spike that is listed among the top five risks in its global risks reports of 2007, 2008, 2009 and 2010 is now looking increasingly unlikely.

The price of oil has always been volatile and uncertain partly because of imbalances in supply and demand and partly because interventions for political, strategic and economic reasons. If we look at oil prices from the period beginning from the early 1900s until now, we can see that the price of oil was relatively stable for the longest period of time from 1930 to 1970. This was a time when the oil industry was completely under the control of western global oil majors commonly referred to as the seven sisters. In this period oil traded within a narrow band of $10-20/bbl in real terms. In 1960 global oil majors regulated 90% of world trade in petroleum. There was a fairly high degree of cooperation between producing and consuming countries mediated by the oil majors.

The stability in the oil market mediated and managed by the seven sisters was disturbed when OPEC attempted to redistribute wealth generated by the oil industry in a more equitable manner in the 1970s. OPEC wanted a higher price for oil but more importantly it wanted a higher share of the price. The Shah of Iran is said to have observed that ‘it was an economic aberration that oil was cheaper than a bottle of French mineral water especially in the light of the fact that oil was used to produce more than 70,000 valuable products’.

We will return to the fact that oil now trades at less than a fifth of the price of mineral water later but for now we will continue to look at the history of volatility in oil prices. OPEC’s intervention was justified from an equity perspective as OPEC (producing) countries received only a fraction of the price of oil.  But OPEC had to pay a huge price for this intervention. The intervention ignored forces of supply and demand and this resulted in reducing OPEC pricing power. It also destroyed demand for oil and facilitated an increase in non-OPEC oil production in the North Sea and other regions. Though OPEC had decided that the price of oil should be just below the price its substitute, it did not realise that the nearest substitute for OPEC oil would be non-OPEC oil. Cooperation between producing and consuming countries broke down and consequently there was a high degree of volatility in prices.

In the 1980s, forces of supply and demand influenced the price of oil to some extent but this did not mean lower volatility in prices. Prices fell dramatically from a high of $105/bbl (in 2014 dollars) in 1980 to $29/bbl (in 2014 dollars) in 1988. It remained within the band of $20-30/bbl (in 2014 dollars) until 1999. From 2000 the price of oil began a consistent trend of upward growth driven by rapid growth of consumption in China and to a lesser extent in India. Oil demand also grew rapidly in west Asian oil producing economies. Speculation and ‘financialisation’ of the oil market was initiated and this increased fluidity in the market. The result was high amplitude volatility in oil prices.  More than 75% of oil resources and 50% of production were with state controlled economies which constrained investment and supply. The dominant presence of state oil companies was a barrier to private risk capital.

image (1)

Source: BP Statistical Review 2015

Peak oil and other related theories gave rise to a sense of scarcity among consumers. This led to a significant increase in stocking and storage by consuming countries. This in turn removed oil from the market and tightened supply. OPEC power declined in this period as it continuously lost market share to non-OPEC production.

After the 2000s the centre of gravity of demand shifted from OECD countries to non-OECD countries. The unprecedented energy demand from India and China behind this shift was perceived to unsettle the global energy order hitherto dominated by the United States. Until the early 2000s, the United States was a large and growing oil market, the ultimate dream of OPEC producers. Oil imports of the United States were equal to the total imports of China and Japan. The United States was the only player others needed to interact with as it had sufficient market and military power to induce change in the energy system if necessary. China and India were thought to be completely different. Their demand was growing at a time when there are perceptions of scarcity in resource availability and constraints on resource use and was therefore seen to be ‘challenging’ rather than ‘driving’ the global market. China and India did not participate in systems such as the International Energy Agency (IEA) that coordinated cooperation among oil importers. The perception of a new ‘energy silk-road’ between oil producers in the Middle East and oil consumers in Asia generated concerns over an ‘unwelcome nexus’ in the industrialized world.

On the other hand trends such as assetisation of oil properties and financialisation of the oil market continued to grow in significance. There were fears that financial speculation was driving oil prices. Though there was a correlation between oil prices and speculation, causation was not established. The build-up of oil inventories by national governments of consuming countries did not have a stabilising effect on the oil market but it did give the concerned governments a sense of energy security and national security.

The historic relationship between crude inventories and crude prices was broken in 2004. Traditionally high inventories implied low prices (as it is doing now in 2016) but between 2004 and 2008 high inventories meant high prices as filled up storages and stocks implied high perceived risk. This reinforced oil price.

Between 2008 and 2009 a period during which a liquidity crisis in the global financial sector was unravelling, crude prices recorded a ‘shock’ which according to some experts was among the biggest on record. In 2001 the spot average price of crude oil was about $32/bbl (Brent dated in 2014 dollars). By 2008 the average price of crude oil was about $106/bbl which fell to about $68/bbl in 2009.

The cause of the spike in oil prices in 2008 and its subsequent fall in 2009 have been widely analysed. The dominant view is that of strong demand for oil led by developing countries confronting stagnating world production constituting what is generally called a ‘demand shock’. Oil production had begun to plateau in rich producing regions such as the United States, Saudi Arabia and the North Sea. Many experts thought that the time had come for the world to come to terms with peak oil. Best-selling books were written on the impending oil crunch. Financial speculation as the cause of volatility in oil prices was also suspected but this view did not receive widespread endorsement from academic studies. In the early stages of the financial crisis, money leaving other asset classes did go into what many believed to be a one way bet on oil price but when the real world of supply and demand caught up with the financial world, oil prices began to fall rapidly. The uncertainty over the impact of collapsing financial markets reduced expectations of growth and consequently expectations on high demand for oil.  On 23 December 2008, the price of crude went down to about $30/bbl.

As the global economy started recovering from the financial crisis, oil prices began increasing. The average price of oil was about $110/bbl in 2013, the highest price achieved since 2010. From the middle of 2013, oil prices started falling and continue to fall. As of February 2016 the price of oil fell below $30/bbl. In general the reasons for this ‘death spiral’ of decline in oil prices are thought to be more specific to the oil market than to the general state of the global economy. During the financial crisis, aggregate demand for all commodities fell which meant that oil price was reflecting the global business cycle. Analysis of the current decline in oil prices shows that it is likely to be the result of changes in the ‘precautionary demand’ for oil associated with shifts in expectations about future oil supply relative to future demand which are specific to the oil sector.

If there are expectations of an economic slow-down in the future, the need to hold inventories reduces which results in a fall in oil prices. The need for inventories can also decline when there are expectations of quick mobilisation of supply in the future (such as US shale production) which could make concerns over oil price spikes and oil supply interruptions irrelevant. The decline in oil prices in the period 2008 and 2009 as well as the decline since 2012 are attributed to oil specific demand shocks. According to one study, if unexpected changes in oil production were the only cause of change in oil prices, crude oil prices should have been in the range of $74/bbl in June 2015. If only changes in aggregate demand (for all commodities and products) affected crude prices, oil prices should have been in the range of $70/bbl in June 2015.  If oil specific demand shocks affected prices then oil prices should have been about $65/bbl. The actual price of oil in June 2015 was about $61/bbl.

In general, studies of oil shocks of the past and the present using vector auto regression models have concluded that oil demand shocks rather than oil supply shocks or aggregate demand shocks have made larger contribution to oil shocks. This is an important conclusion that questions the disproportionate attention paid to oil supply shocks by those who look at the oil price problem primarily as a geo-political problem.

Low oil prices may be the result of reasons specific to the oil industry but this does not eliminate the intrinsic link between oil price and broader global economic phenomena. As  pointed out by Citibank recently, the value of the US dollar, low commodity prices, weak trade, low capital flows and declining emerging market growth are driving a negative feed-back loop that cannot be intercepted and corrected easily. A very brief summary of Citibank’s argument is that the $6 trillion that was once flowing into the bank accounts of oil exporters is shrinking and consequently what was flowing back to the rest of the world as trade and investment through their $4 trillion sovereign wealth fund (SWF) is collapsing. Oil exporters are experiencing a current account deficit for the first time since 1998 which is limiting the extent to which their SWF can underwrite emerging market liquidity. Citibank says that a 4% strengthening of the trade-weighted US dollar and oil price at $50/bbl could partially slow down the negative feed-back loop. According to Citibank, moves in the opposite direction could lead to what it calls ‘oilmageddon’.

Crude Oil Prices ($/bbl)

image (2)

Source: Bloomberg

Many oil industry experts have argued that at $30/bbl oil production from most of non-OPEC regions is unprofitable. However the business reality on the ground is that production cannot be stopped the moment it becomes unprofitable. There is a cost to moth-balling oil production facilities; debt has to be paid off from oil revenues; man-power has to be kept busy and they have to be paid. This means that oil will continue to be produced even when it loses money.

According to Wood Mackenzie (quoted in the Economist) less than 6% of current production fails to recover costs at $30/bbl. This means that 94% of production will continue to produce even when this means making a loss eventually. Around 3.5 mbp of production is said to be losing about $35 per barrel and yet they continue to produce. According to Wood Mackenzie which tracks production and cost from over 2000 oil fields word-wide, only 0.1% or 100,000 bpd of production has been halted despite a year of low prices.

In the last 18 months, oil prices have fallen by 75% from over $110/bbl to less than $30/bbl. If all else in the economy was going well, this should have resulted in a 0.7 to 3.5% boost to growth on the basis of the rule of thumb that a 10% fall in oil prices boosts growth by 0.1 to 0.5 % is valid. The Economist attributes India’s emergence as the fastest growing economy in the world to low oil prices but India was also among countries that the IMF downgraded in terms of GDP growth forecasts. Surprisingly all countries that were downgraded by IMF were oil importers. There are indications of consumer benefit in the form of increased consumption of transportation fuels in the United States and elsewhere but its positive impact on growth may be cancelled out by job losses. Other impacts of ultra-low oil prices include (a) political and social turmoil in oil revenue dependent fragile nations and (b) much lower incentive to reduce the use of fossil fuels. Coal and natural gas are now ‘dirt’ cheap which means that renewables have to compete harder to beat them as sources of power generation.

It is too early to conclude that the petroleum era is about to end. However it is possible to conclude that the petrodollar age may be about to end. Very soon we may treat oil as just another energy source and not the ultimate currency of geo-political and geo-economic wars.

Views are those of the authors                    

Authors can be contacted at lydia@orfonline.org, akhileshs@orfonline.org

Courtesy: Energy News Monitor | Volume XII; Issue 32

Courtesy: Energy News Monitor | Volume XII; Issue 35

 

 

Indian Coal & Power Sectors: Production is not the only measure of Productivity

Ashish Gupta, Observer Research Foundation

The achievement looks quite impressive. However this is unlikely to translate into power generation, given that the country’s power distribution continues to remain illiquid. Discoms are unwilling to buy additional power. No state had signed new power purchase agreements since 2013 and many continue to opt for load shedding. Rajasthan and Madhya Pradesh, for instance, have said they cannot lift any more coal, given their past dues, low power demand, and weak purchasing power.he Indian coal sector witnessed a positive growth during 2015 as imports have been declined and coal production increased. The coal stock at most of the power plants have been increased to 28.25 mt (equivalent to 21 days requirement) as against corresponding level in the last year 11.46 mt (equivalent to only 8 days requirement) which is the critical stock level.

Interestingly, at a time when there is no growth in demand for coal from consumers especially the power producers, the government is looking for ways to liquidate huge coal stocks lying at the collieries. They are asking state power producers to lift that coal on “as is where is” basis by making their own logistics arrangements. The offer makes sense if there is a growth in demand but given the prevailing situation, no power producer wants additional coal.

Coal India Ltd on the other hand is under pressure to produce more coal because of the mandate to achieve 1 billion tonne target by 2019. The big question is: who will absorb incremental coal production? Coal producers may be hoping for a revival of demand but at this point producing 1 billion tonnes will not be considered an achievement. Even power project developers who had bid aggressively to secure coal mines in the auctions conducted by the government this year are reluctant to mine them. This necessitates re-strategising the whole coal production target. The government must review its current target for coal production and coal auctions in the light of the change in circumstances and divert its capacity to address other concerns of the sector.

Currently, India has a 281 GW installed power capacity but only half of the capacity is utilised. Only half the power generated out of this capacity is actually paid for.  The surmounting T& D losses is burdening the rest of the value chain but nothing has been done to improve the existing system. As per best business practice, for every rupee invested in power generation capacity, roughly half should go towards transmission capacity. Unfortunately, this is not happening in India.  The ratio of power generating investment vs transmission investments stands very low ie 1: 0.30. The reason is said to be statutory hurdles and biased policy framework. Therefore policy makers must ask if incremental coal production is a viable target when positive results can be achieved by simply upgrading the existing transmission infrastructure and moving towards cost recovery from every segment. Sometimes the solution is not a new project but the existing one!

Transport infrastructure is another crucial issue which needs immediate attention. Presently, 50% of the coal is transported through rail but railway routes are saturated. In addition Indian railways run passenger and freight on the same track and difference in speed of two types of trains erodes capacity utilization.The Ministry of Railways has decided to construct new dedicated freight corridors but none of them are near completion stage. The present period of suppressed demand is an opportune time for fixing those long pending commitments and upgrading existing freight tracks as overhauling of the distribution chain will take time. There is no point in having more coal mines when we do not have coal evacuation infrastructure. A long term vision and planning exercise must be carried out along with an efficient implementation strategy, reliable monitoring and review mechanism.

Views are those of the author                    

Author can be contacted at ashishgupta@orfonline.org

Courtesy: Energy News Monitor | Volume XII; Issue 32

 

India’s Energy Security: A Plea for Retrospectives

Lydia Powell, Observer Research Foundation

The concept of energy security as it is used and interpreted in India and elsewhere is based on the epistemological assumption that energy will remain scarce, expensive and unreliable. The energy security strategies of India designed to address these ‘threats’ are therefore offensive in nature as they seek to maximise benefits in relation to other actors (nations). These strategies are not necessarily the direct consequence of these threats but the political interpretations of the treat (a process that is defined as securitisation in international relations theory).  They are essentially non-linear responses to the perceived threats.

Recommendations by government and non-government agencies made in the last two decades towards building an energy secure India are largely responses to the threat of scarcity and uncertainty (in securing energy resources) derived from a wide range of academic theories. The recommendation to build relationships with oil producing countries and the recommendation to make equity investments in energy resources of producing countries (primarily oil & gas and to a lesser extent coal) are derived from realist approaches of international relations theory. The recommendation to invest in institutions such as regulatory bodies is from rational choice theories that argue that norms and regular practices build the basis for stability and security in economic relations. The recommendation to liberalize the sector and allow the market to set the price of energy is derived from liberal economic theories which see the market as the best means of mediating imbalances in supply and demand of scarce resources such as energy. The recommendation to strengthen maritime forces in order to secure sea lanes of transport of energy is derived from critical (non-liberal) theories that see energy primarily as a weapon of national security.

Econometric models that are used for energy planning in India are also based on the premise that energy resources will remain scarce, expensive and unreliable. They forecast energy demand as a function of the growth rate of gross domestic product (GDP) and then proceed to recommend ways and means to secure the scarce, expensive and unreliable energy resources in the light of exponential growth in demand for energy. The underlying cornucopian assumption of uninterrupted growth and progress is embedded in these strategies.

Studies on India’s energy security that emerged from the west in the last decade amplified threat perceptions.  The unprecedented energy demand from India and China was perceived to unsettle the global energy order hitherto dominated by the United States. Until the early 2000s, the United States was a large and growing oil market, the ultimate dream of OPEC producers. Oil imports of the United States were equal to the total imports of China and Japan. The United States was the only player others needed to interact with as it had sufficient market and military power to induce change in the energy system if necessary. China and India were portrayed as actors that could not be more different. Their demand was supposed to be growing at a time when there are perceptions of scarcity in resource availability and constraints on resource use and is therefore seen to be ‘challenging’ rather than ‘driving’ the global market. China and India did not participate in systems such as the International Energy Agency (IEA) that coordinated cooperation among oil importers. The new ‘energy silk-road’ between oil producers in the Middle East and oil consumers in Asia was said ‘unwelcome nexus’ in the industrialized world.  Some saw a resource war materialising between India and China primarily in the context of oil.  Studies from the west also argued that India will face a coal crisis around 2020 as India’s geological reserves of coal were supposedly over-estimated.  Strong recommendations arguing for a shift towards renewables and nuclear energy were made probably with the ulterior motive of weaning India away from coal.

Few if any of these threats have materialised. Energy resources are anything but scarce today. The unfolding collapse in commodity prices in general and energy prices in particular make scarcity and high prices inaccurate assumptions. The assumption that oil supply from the Persian Gulf will remain uncertain and undependable is also questionable.  In the past, political turmoil in the region similar to what is happening now on account of the growing power of non-state actors would have sent oil prices sky-rocketing. Now oil prices seem to have developed an inverse relationship with political turmoil in the region: oil prices fall as turmoil intensifies.  Furthermore, taking on India on a resource war is likely to be the last thing on China’s mind today. Lastly India does not appear to be on the verge of a crisis on coal supply as predicted.

The current trends that contradict expectations may reverse or change course but they present an opportunity for India to revisit the underlying assumptions of scarcity and uncertainty that are embedded in its energy security strategies. India’s energy forecasts assume that underlying structural relationships in the economy will vary gradually. In reality discontinuities and disruptive events have changed underlying economic and behavioural relationships. Assumptions about human behaviour may also prove to be inaccurate.  Strategies and forecasts are captive of the time of strategizing but perhaps we do not realise it. The time of strategizing was a time of high energy prices and perceived scarcity. The supply oriented strategies that place energy in the context of scarcity seem to be misplaced in the current context. Strategies of building special relationships with oil producers or those of making equity investments in hydrocarbon resources seem to have contributed almost nothing to reducing India’s exposure to oil price volatility or facilitated a reduction in the oil intensity of its economy. The focus on gross primary energy rather than useful energy appears to have marginalised the importance of energy efficiency. The direct correlation with GDP has given rise to the feeling that any economic activity associated with GDP increases is important irrespective of its contribution to human wellbeing. The strategy of pursuing all possible strategies recommended in the guide books of energy security seem to have achieved little more than scattering India’s resources and capabilities. There is a need to indulge in retrospective analysis of India’s energy forecasts and energy security strategies. But it will not be easy as audits that look into the past to ask “what have we done?” are a threat. No one will want to put money into such an exercise. On the other hand, planning for an unknown and probably unknowable future for the betterment of man is far more exciting. It is also politically viable and will attract funding easily. However we must make an effort to look back if we want to see further into the future.

Views are those of the author                     

Author can be contacted at lydia@orfonline.org

Courtesy: Energy News Monitor | Volume XII; Issue 31

 

Coal Washing: Global Perspective

Ashish Gupta, Observer Research Foundation

Coal preparation technologies play an important role in the electrical power supply chain by providing high-quality fuel for coal-fired utilities and industrial boilers. There are four important stages in coal preparation ie crushing, sizing, concentration and dewatering. Depending on the sizes involved, the coal is crushed, broken or ground. Breaking is commonly used on the largest sizes, crushing on the mid range sizes and grinding is used on the very finest sizes. Grinding or pulverising is normally done just prior to utilisation[1]. There are no hard and fast rules as to what these ranges are. Coal preparation facilities may have different size ranges for similar coals. Sizing is performed to separate coal according to the difference in sizes. Concentration is the heart of coal preparation where actual coal cleaning occurs whereas dewatering helps in removal of surface moisture. Depending upon its type and its utilisation, coal can be subjected to different levels of cleaning. The cost of coal preparation depends on the methods used and also on the degree of beneficiation required. The coal preparation technologies vary from country to country depending upon their requirement and economic viability. The coal washeries global scenario is given below[2]:

image (2)

image (3)

image (4)
Views are those of the author                    

Author can be contacted at ashishgupta@orfonline.org

[1] M. C. Albrecht, Kaiser Engineers Inc paper on “Coal Preparation Process”, Oakland, California

[2] S. R. Ghosh, Director (Engineering Services) presentation on “Global coal beneficiation scenario and economics of using washed coal” CMPDIL, India

Courtesy: Energy News Monitor | Volume XII; Issue 30

 

 

The Glut Carries Over

Briefing: International Energy December 2015

Lydia Powell, Akhilesh Sati and Ashish Gupta, Observer Research Foundation

Hydrocarbon Markets

The month began with a meeting of the OPEC. Few expected a decision on production cuts even though many members pleaded with Saudi Arabia to cut back on output. There were rumours that Saudi Arabia would agree to a cut of one million barrels per day (bpd) if non-OPEC members such as Russia and Mexico agreed to restrict production. Given that most OPEC members are in serious financial difficulty, it did not materialise but the rumour did spark a momentary spurt in oil prices. One opinion was that even if a decision to reduce production was made it would not have an impact on oil prices as there were vast quantities of oil in storage. In the end there was no agreement on an output cut but OPEC decided to do away with the production target. The main reason was that Iran was expected to come on to the market with a production of over 500,000 bpd. OPEC said that it would work with non-OPEC producers in 2016 to come to a conclusion on production cuts.

On the geo-political front, it was reported that Iran and China were developing an oil relationship and that Iran had agreed to sell 505,000 bpd to Sinopec, China’s largest refiner and a Chinese oil trader in 2016. Observers interpreted this as sign of the growing battle for the Asian market. Some also saw this as a consequence of OPEC losing pricing power and OPEC members resorting to competing with each other for market share. Russia was seen as a formidable competitor for the Asian market. China was reported to be expected to double oil purchases to 70-90 million bpd for its strategic reserve in 2016. This was expected to ease the glut to some extent.

The United States passed the North American Energy Security and Infrastructure Act 2015 an energy reform package that included a repeal on the crude export ban. It would also accelerate LNG export permits and improve the aging electricity infrastructure. As Obama was expected to veto the bill few expected it to be passed any time soon. Some reported that a compromise was expected on the oil export ban between the republicans and the democrats.

OPEC decision added to the downward pressure on oil prices. The currencies of Canada, Russia, Mexico, Columbia, Saudi Arabia, Nigeria, South Africa and Brazil declined against the dollar. US shale production was expected to fall by over 116,000 bpd with the largest losses coming from Eagle Ford. According to some agencies spending cuts by the oil industry was expected to touch USD 250 in 2015. Natural gas prices declined to less than USD 2/mmBtu in the United States on account of over-supply and predictions of a mild winter (Please refer to Data Insight at page no. 6).

Coal Markets

An IEA report suggested that China’s coal consumption may have reached a peak. The slowing economy, lower industrial activity combined with efforts to reduce air pollution contributed to the peak according to the IEA. Overall December remained a flat month for global coal industry as investment in new exploration stagnated.  The Indonesian mining industry found itself in the crosswinds of a global downturn in commodity prices, combined with domestic regulatory challenges that dampened investment sentiment among both local and international mining investors. Mining’s contribution to the Indonesian economy is said to have declined. Negative perceptions of the country’s regulatory environment remain a key challenge for attracting investment in the mining sector.

Indonesia’s benchmarked thermal coal reference price set by the Indonesian Ministry of Energy and Mineral Resources, fell 1.69 percent to USD 53.51 per metric ton (FOB) in December 2015, touching a new all-time record low since the this reference price was started in January 2009.  Indonesian coal miners cut production volumes to avert bankruptcy.

The similar trends continued in Australia where major mining giants have reduced coal production volumes.  Mining companies are rethinking job numbers and capital spending. South Africa too witnessed drop in investment due to low productivity issues in coal mining sector. In order to ensure the survival of coal industry, the country is said to be introducing major reforms.

Views are those of the authors                    

Authors can be contacted at lydia@orfonline.org, akhileshs@orfonline.org, ashishgupta@orfonline.org

Courtesy: Energy News Monitor | Volume XII; Issue 29