Oil heading to $90, renewables in Japan & more

It's been a hectic few weeks in the energy markets over the course of which oil prices have acquired a bit of buoyancy. Its something they briefly lost last month following the OPEC+ meeting. Brent crude futures currently sit just a few dollars south of $90 per barrel level, having dropped below $80 in early June. 

While global crude demand permutations haven't materially altered, there is renewed optimism over lower interest rates in key markets. That and higher demand projections in Asian markets, especially India, appear to be supporting prices. This sets the stall for relatively higher crude prices as we enter the first month of the second half of the year. 

All things staying even, the Oilholic would argue there is now a near-term case for $90 Brent crude prices. However, defending price upticks beyond the level would prove tricky, given the fact that crude supplies, especially those of light sweet non-OPEC crude, remain on a solid footing.  

Away from the oil market, yours truly was interviewed by the BBC on Japan's and wider East Asia's renewable energy landscape. The Oilholic spoke about a call by the country's private sector to triple its renewables capacity by 2035. 

This kerfuffle over Japan's future energy mix has been going on since the Fukushima tragedy in 2011, and has been further complicated by readily available and competitively priced LNG. 

Japan continues to trail the G7 in terms of renewables. However, while still using coal as a power generation source, Japan is not expanding usage in the same way as India and China are. Overall, a renewables capacity target in excess of 360GW by 2035 looks very ambitious. However, never discount Japanese ingenuity for getting things done! 

Elsewhere, here is one of the Oilholic's missives from late June on why the world needs to nurture sustainable entrepreneurship for Forbes (click here), and another one on why green hydrogen's fate in a net zero economy hinges on upscaling for Energy Connects (click here).

Finally, on the eve of the UK's general election, here are this blogger's thoughts on how the outcome will impact the country's energy industry. Regardless of whoever wins, looks like UK Energy Inc may be stuck between a rock and hard place! That's all for the moment folks. More musings to follow soon. Keep reading, keep it here, keep it 'crude'! 

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© Gaurav Sharma 2024. Photo: Gaurav Sharma on BBC World © BBC, June 25, 2024. 

Japan’s return to Iranian market ‘complicated’

The Oilholic is back in Tokyo, some 6,000 miles east of London, and is finding Japan Inc. rather content with a crude oil buyers’ market. In fact, if anything, even the relatively higher oil price, has fallen to a third of the level this blogger noted when he was last here (in September 2014).

One outstanding issue – of re-establishing ties with the Iranian market – remains ‘complicated’ to quote analysts and legal professionals in the Japanese capital. Up until 2006, the point of the first wave of stringent UN sanctions on Iran against its nuclear programme, Tokyo enjoyed good ties with Tehran, symbolised first among other things by its stake in the Islamic republic’s Azadegan oilfield. 

However, that was then, and by 2010 matters progressively worsened as the US and European Union moved to impose yet more stringent sanctions on Iran following an escalation of Tehran’s nuclear ambitions, and the West’s wariness of it. 

Subsequently, Japan duly shunned Iran in wake of international sanctions, even if it wasn’t easy for the largest liquefied natural gas importer and third-largest net importer of crude oil and oil products in the world to do so. Following Iran’s return to the international fold and a lifting of international sanctions, unsurprisingly Japan’s government was among the first to follow China in resuming ties with the country’s oil and gas sector, and the wider economy. 

In February, a framework was also put in place under which Tehran would guarantee $10 billion in investment projects financed by the coveted Japan Bank for International Cooperation (JBIC) and insured by Nippon Export and Investment finance. There’s one nagging problem though – the US is yet to fully lift its sanctions on Tehran and that makes Japanese banks, heavily intertwined with American financial system, wary of participating.

Unless commercial banks participate and capital flow mechanisms are established, JBIC cannot finance a project. And in any case an international remittance system needs to work, and major commercial banks, not just Japanese ones, need to resume normal operation before things can get off the ground. Not much of that has happened. 

Experts at law firm Baker & McKenzie’s Tokyo office say the appetite for investment in Iran is definitely there, yet very few Japanese companies have actually signed deals on account of risk associated with falling foul of US sanctions. 

Of course, leading law firms are ever willing to conduct due diligence to protect their clients’ foray into Iran. Furthermore, Washington has lifted sanctions on non-US banks, but nothing is quite so straightforward.

Partial US sanctions require anyone international banks deal with in Iran is not on the US Treasury’s “Specially Designated Nationals” (SDN) roster. The sanctions also cover any company that’s 50% or over 50% owned by an entity or person blocked by the US State Department, even if the company in question is not on the Treasury Department’s SDN roster. 

The only ‘crude’ saving grace is that a stagnant Japanese economy’s demand for oil is at its lowest since 1988, while glut troubled suppliers are queuing up twice over to sell their cargo at discounted prices. Given current oil and gas market permutations, the headache is as much Iran’s to contend with. That’s all from Tokyo for the moment folks. Keep reading, keep it ‘crude’! 

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© Gaurav Sharma 2016. Photo: Tokyo Skyline from Sumida River ferry, Tokyo, Japan © Gaurav Sharma, March 2016.

Why Iran is miffed at (some in) OPEC?

The talking is over, the ministers have left the building and the OPEC quota ‘stays’ where it is. However, one OPEC member – Iran – left Vienna more miffed and more ponderous than ever. Why?

Well, if you subscribe to the school of thought that OPEC is a cartel, then it ought to come to the aid of a fellow member being clobbered from all directions by international sanctions over its nuclear ambitions. Sadly for Iran, OPEC no longer does, as the country has become a taboo subject in Vienna.

Even the Islamic Republic’s sympathisers such as Venezuela don’t offer overt vocal support in front of the world’s press. Compounding the Iranians’ sense of frustration about their crude exports being embargoed is a belief, not entirely without basis, that the Saudis have enthusiastically (or rather "gleefully" according to one delegate) stepped in to fill the void or perceived void in the global crude oil market.

Problems have been mounting for Iran and are quite obvious in some cases. For instance, India – a key importer – is currently demanding that Iran ship its crude oil itself. This is owing to the Indian government’s inability to secure insurance cover on tankers carrying Iranian crude. Since July, EU directives ban insurers in its 27 jurisdictions from providing cover for shipment of Iranian crude.

Under normal circumstances, Iranians could cede to the Indian demand. But these aren’t normal circumstances as the Iranian tanker fleet is being used as an oversized floating storage unit for the crude oil which has nowhere to go with the speed that it used to prior to the imposition of sanctions.

The Obama administration is due to decide this month on whether the USA will renew its 180-day sanction waiver for importers of Iranian oil. Most notable among these importers are China, India, Japan, South Korea, Taiwan and Turkey. US Senators Robert Menendez (Democrat) and Mark Kirk, have urged President Obama to insist that importers of Iranian crude reduce their purchase contracts by 18% or more to get the exemption.

So far, Japan has already secured an exemption while decisions on India, South Korea and China will be made before the end of the month. If the US wanted to see buyers cut their purchases progressively then there is clear evidence of this happening. Two sources of the Oilholic’s, in the shipping industry in Singapore and India, suggested last week that Iranian crude oil exports are down 20% on an annualised basis using November 23 as a cut off date. However, a December 6 Reuters' report by their Tokyo correspondent Osamu Tsukimori suggested that the annualised drop rate in Iranian crude exports was actually much higher at 25%.

Of the countries named above, Japan, South Korea and Taiwan have been the most aggressive in cutting Iranian imports. But the pleasant surprise (for some) is that India and China have responded too. Anecdotal evidence suggests that Chinese and Indian imports of Iranian crude were indeed dipping in line with US expectations.

When the Oilholic visited India earlier this year, the conjecture was that divorcing its oil industry from Iran’s would be tricky. Some of those yours truly met there then, now agree that Iranian imports are indeed down and what was stunting Iranian exports to India was not the American squeeze but rather the EU’s move on the marine insurance front.

If Iran was counting on wider support within OPEC, then the Islamic republic was kidding itself. That is because the Organisation is itself split. Apart from the Iraqis having their own agenda, the Saudis and Iranians never get along. This splits the 12 member block with most of Iran’s neighbours almost always siding with the Saudis. Iran’s most vocal supporter Venezuela, is currently grappling with what might (or might not) happen to President Hugo Chavez since he’s been diagnosed with cancer.

Others who support Iran keep a low profile for the fear of getting embroiled in diplomatic wrangling which does not concern them. So all Iran can do is moan about OPEC not taking ‘collective decisions’, hope that Chinese patronage continues even if in a diminished way and stir up disputes about things such as the appointment of the OPEC Secretary General.

The dependency of Asian importers on Iranian crude is not going to go overnight. However, they are learning to adapt in fits and starts as the last 6 months have demonstrated. This should worry Iran.

That’s all from Vienna folks! Since it’s time to say Auf Wiedersehen and check-in for the last British Airways flight out to London, the Oilholic leaves you with a view of his shadow on a sun soaked, snow-capped garden at Schönbrunn Palace. Christmas is fast approaching but even in the season of goodwill, OPEC won’t or for that matter can’t come to Iran’s aid while the US and EU embargo its exports. Even cartels, if you can currently call OPEC one, have limits. Keep reading, keep it ‘crude’!

© Gaurav Sharma 2012. Photo 1: Empty OPEC briefing room podium following the end of the 162nd meeting of ministers, Vienna, Austria. Photo 2: Schönbrunn Palace Christmas market © Gaurav Sharma 2012.

What prospective Albertan pipelines mean for BC

If a new permit application by TransCanada for the Keystone XL pipeline from Hardisty, Alberta to Port Arthur, Texas does not get approved after the US 2012 presidential elections, attention will shift towards expanding the pipeline network westwards within Canada. If the project does get approved, well attention would still shift towards expanding the pipeline network westwards within Canada.

The Oilholic’s conjecture is that policy debate within Canada is already factoring in a westward expansion of pipelines eyeing exports via the Pacific Coast to China, Japan, India and beyond, whether the Keystone XL pipeline extension gets built or not. When US President Barack Obama did not grant approval to the original Keystone XL pipeline application earlier this year, Canadian Prime Minister Stephen Harper expressed his ‘disappointment’, had a candid conversation with Obama at an Asia Pacific leaders summit and then got on a plane to China.

He has also been to India on a high level mission in recent memory. At the 20th World Petroleum Congress in Doha last year, Indian officials listened intently to what was coming out of the Canadian camp. Canadian Association of Petroleum Producers (CAPP) has already noted increasing interest from Korean and other Asian players as well when it comes to buying in to both crude oil reserves and natural gas in Western Canada. Club it all together and a westward expansion is inevitable.

Central to a westward expansion is British Columbia (BC), the Canadian province neighbouring Alberta, which could become as important in terms of pipeline infrastructure as Alberta is in terms of the crude stuff itself. From the standpoint of a ‘crude’ analogy, the situation is a bit like South Sudan (which has all the resources) and Sudan (which has the infrastructure to bring the resource to market) with a good Canadian fortune of zero conflict or geopolitical flare-ups. Thankfully for Canada and the importers club, Albertans and British Columbians also get along a tad better than their Sudanese counterparts and what is Alberta’s gain could also be BC's gain.

Last year, over a meeting with the Oilholic in Calgary, Dave Collyer, President of CAPP, noted, “As our crude production grows we would like access to the wider crude oil markets. Historically those markets have almost entirely been in the US and we are optimistic that these would continue to grow. Unquestionably there is increasing interest in the Oil sands from overseas and market diversification to Asia is neither lost on Canadians nor is it a taboo subject for us.”

At present, there are five major pipelines that are directly connected to the Albertan supply hubs at Edmonton and Hardisty – Enbridge Mainline, Enbridge Alberta Clipper, Kinder Morgan Trans Mountain, Kinder Morgan Express, and of course the original TransCanada Keystone pipeline.

Of these, the Trans Mountain system transports crude to delivery points in BC, including the Westridge dock for offshore exports, and to a pipeline that provides deliveries to refineries in the US state of Washington. It is the only pipeline route to markets off the West coast and is currently operating as a common carrier pipeline where shippers nominate for space on the pipeline without a contract. Since May 2010, the pipeline has been in steady apportionment.

Excess demand for this space is expected to continue until there is additional capacity available to transport crude oil to the west coast for export according to CAPP. The available pipeline capacity depends on the amount of heavy crude oil transported. (For example, in 2010, about 27% of the volumes shipped were heavy crude oil).

So four more have been proposed via BC (see map above) – namely Enbridge Northern Gateway (from Bruderheim, Alberta to Kitimat, BC, Capacity: 525,000 barrels per day), Kinder Morgan TMX2 (from Edmonton, Alberta to Kamloops, BC, Capacity: 80,000 bpd), Kinder Morgan TMX3 (from Kamloops, BC to Sumas, BC, Capacity: 240,000 to 300,000 bpd) and Kinder Morgan TMX Northern Leg (Rearguard/Edmonton, Alberta to Kitimat, BC, Capacity: 400,000 bpd).

Given that it’s green BC in question, there already are legal impediments as well as a major bid to address the concerns of the Native Indian First Nations communities according to the Oilholic’s local feedback here. Environmental due diligence should be and is being taken seriously on the West Coast. Then there is the spectre of a socialist NDP provincial government or a hung parliament at the next elections in BC which could hamper activity and investment.

Taking in to account all this, realistically speaking not much may start happening before 2015, but there is a growing belief within the province that happen it most likely will and the benefit to the provincial economy would manifold. To begin with jobs, direct construction related to the proposed pipelines and revenues spring to mind. Additionally, there is likely to be a decade long rise in service sector jobs in the province.

Then given that BC has a proven crown agency in Partnerships BC which since its inception has been building generally bankable infrastructure projects; an ancillary social infrastructure boom to cater to what would become a burgeoning Kitimat and Kamloops is also within the realm of possibility.

Over the last ten days the Oilholic has gathered the thoughts of legal professionals, financial advisers, provincial civil servants and last but certainly not the least the average British Columbian you’d run into in a bar or a Starbucks. The overriding emotion was one of positivity though everyone acknowledges the impediments.

Furthermore, many think the pipelines would assist in diversifying BC's economy which is largely reliant on tourism and timber to include yet another key sector without necessarily compromising its green credentials and a record of accommodating the First Nations Native Indian population. That’s all from Canada folks! Yours truly is off to Houston, Texas. Keep reading, keep it ‘crude’!

© Gaurav Sharma 2012. Map: Proposed (in dotted lines) and existing pipelines to the West Coast of Canada © CAPP 2011.